Despite a cautious outlook at the beginning of 2023, the latest data from the Office for Budget Responsibility suggests that the UK economy will avoid going into a recession in 2023.
Unfortunately though, it isn’t all good news - the economy is still expected to shrink by 0.2% in 2023 and the UK business environment, with rising costs and inflation, continues to pose a challenge to life sciences companies. In addition, shipping and logistics-related geopolitical issues are having a knock-on effect on the life sciences industry’s supply chains.
Given the nature of dealmaking within the sector, life sciences businesses are particularly vulnerable to commercial disputes. Yet the current socio-economic conditions are likely to provide fertile ground for an increase in pharma disputes as we head into 2024. Life sciences disputes are often highly technical and frequently centre around regulatory issues, product liability, IP infringement issues, performance issues, delays and royalties.
These disputes are often globalised and can involve parallel court proceedings in a number of countries. As such, disputes are typically expensive and disruptive to life sciences businesses. While there are a number of trends coming to fruition in the UK disputes landscape, life sciences companies may be able to head disputes off at the pass.
European Unified Patent Court
One recent development impacting the life sciences disputes landscape is the newly formed Unified Patent Court (UPC), which will hear cases on the infringement and validity of European Patents along with the new Unitary Patents (UPs), and is set to revolutionise the European patent landscape. The UPC is an international court set up by contracting EU member states, which is intended to create a streamlined procedure for the litigation of patents granted by the European Patent Office through a single court system. Notably the UK is not part of the UPC.
The UPC will effectively provide a “one-stop shop” for patent litigation throughout a large part of Europe, enhancing legal certainty for life sciences companies seeking to enforce their IP rights. In theory, the UPC will make it easier and more cost effective for life sciences companies to litigate patents in the EU. The nature of pan EU enforcement (in participating member states) means that it will be possible for UP owners to enforce their rights by way of a single infringement action at the UPC. In most cases, this will be more cost effective than bringing multiple infringement actions across various national courts. The flip side of this is that a highly valuable patent family which is under attack can also be revoked in the relevant jurisdictions by way of a single validity claim at the UPC. In terms of efficiency, it is currently envisaged that first instance proceedings before the UPC will be concluded in around 12 months which is quicker than most national courts.
While the establishment of the UPC appears to be a broadly positive development for life sciences businesses, it is important to note that the UPC is in its early stages and how well it works in practice remains to be seen. There were predictions that companies in the life sciences sector would only cautiously test the waters with the UPC in its initial stages. With stakes being so high, pharma patent owners may have opted for national litigation in individual jurisdictions in the hope that some judgments would rule in their favour even if others did not. However, since the UPC opened its doors on 1 June 2023, cases involving pharma patents appear to be the most prevalent, suggesting that early case law will be influenced by litigation involving patents in this sector.
In light of the above, one might naturally wonder whether the role of the UK courts will be relegated following the introduction of the UPC. This seems unlikely for a number of reasons, the first being that the UK courts are renowned for being willing to find creative, commercial solutions to parties’ legal disputes. Further, the UK is of course not part of the UPC, and a UP does not cover the UK. Therefore, a separate patent covering the UK is needed by patent owners to protect their inventions in the UK, and actions relating to that patent will need to be dealt with in the UK courts. As life sciences disputes become increasingly complex, parties are likely to seek increasingly pragmatic solutions to their global disputes. In addition, the decisions of the UK courts and the judges that provide them have long been respected by the international community for being detailed and well-reasoned. There is no reason to think that UK decisions will become less influential in the UPC, or that national litigation in the UK won’t continue to play an important role in business strategy for multi-jurisdictional disputes.
Supply chain disruption
In rising to the challenges of the COVID-19 pandemic, the life sciences industry has made major advances in many ways over the last few years. However, it is apparent that the industry’s supply chain challenges remain - from labour shortages impacting manufacturing and transportation to rising costs, four-decade high inflation and raw material shortages. Against this backdrop, we are likely to see an increase in life sciences companies looking to their contracts to understand what happens if they cannot perform their contractual obligations due to circumstances outside their control or if their counterparties say that they can’t fulfil their contractual obligations. This is where “force majeure” clauses come in.
A force majeure clause is often found in commercial contracts, including a variety of contracts that life sciences companies enter into, to excuse one or both parties from performance or to suspend performance, where unforeseeable circumstances prevent them from performing their side of the bargain. The term has no specific legal definition under English law, so you have to look at the specific contract wording to establish whether the particular factual and legal circumstances and their effects amount to force majeure in each case. Life sciences businesses having difficulty fulfilling their contractual obligations should check their contract terms sooner rather than later and take advice if necessary to make sure they protect themselves. A force majeure clause will usually only be effective once notice has been served in accordance with the terms of the contract. All too often parties fail to serve notice that the force majeure event is in operation and in doing so can lose the benefit of the clause.
Fixed costs regime in the UK Court
A new fixed recoverable costs regime has been introduced in the UK courts for claims with a value of less than £100,000 which are issued on or after 1 October 2023 (with some limited exceptions). In practice, the new rules mean that the amount of legal costs that a winning party will be able to claim back from the losing party will be fixed and calculated by reference to the amount claimed not the amount of costs incurred. The aim of the new regime is to increase the predictability of costs to facilitate earlier and more frequent settlement. There is, however, a possibility that this could backfire. Often, the fear of unknown cost consequences drives parties to settle prior to trial. Knowing that costs are fixed at a certain level may actually give parties the confidence to pursue claims all the way to trial, safe in the knowledge that (provided they have acted reasonably throughout the proceedings) even if they lose, their costs are unlikely to exceed a fixed amount. Further, the new regime means that, even if a party to litigation succeeds at trial, the costs it is entitled to recover are likely to be considerably less than the costs incurred in bringing/defending the litigation. In light of this, life sciences companies may wish to consider introducing new contractual terms into their agreements to increase costs recovery in the event of a dispute subject to the fixed costs regime and/or the inclusion of mandatory arbitration or other alternative dispute resolutions mechanisms.
Class actions
Another risk area for life sciences companies is in the growing field of class actions, which are typically large scale and high value. The types of claim pursued in this way include competition claims, data breach claims, shareholder claims, commercial contract, consumer/product liability claims and ESG claims. Life sciences companies could, theoretically at least, face any of these types of claim. We are seeing an increased appetite amongst funders and claimant lawyers to pursue group redress claims and class actions. That said, this may be somewhat dampened by the recent Supreme Court decision in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28. The Supreme Court held that litigation funding agreements (LFAs) which entitle funders to payment based on the amount of damages recovered are Damages-Based Agreements (DBAs). All DBAs must comply with the Damages-Based Agreements Regulations 2013, failing which they will be enforceable. This puts litigation funders in a tricky position – not least because the DBA Regulations are notoriously difficult to comply with.
It remains to be seen whether the PACCAR decision will give rise to a reduction in class action claims, as a result of a lack of funding. There is however no doubt that the decision in PACCAR is likely to bring about a period of reflection for funders. In any event, life sciences companies should check whether their insurance policies cover class actions and seek legal advice as early as possible if a class action is anticipated.
Digital Markets, Competition and Consumers Bill
Looking ahead, the Digital Markets, Competition and Consumers Bill (the bill), which was introduced into Parliament in April 2023, is set to significantly change the enforcement of consumer protection law in the UK. The bill is likely to come into force in late 2023 or early 2024 and would mean that breaches of consumer protection law could lead to eye-watering fines of up to 10% of group global turnover. In addition, the courts will have the power to order companies to pay affected consumers compensation. As such, many life sciences companies who previously took a “risk-based approach” to compliance with consumer laws will need to reassess their position. The bill is set to introduce new merger control thresholds where one party has either a 33% or greater share of supply of goods or services of any description in the UK or a substantial part of it, and UK turnover exceeding £350m.
The new thresholds are likely to catch a wider range of corporate transactions in the life sciences sector. While there may be amendments to the bill before it comes into force, the bill is not anticipated to change substantively and so life sciences companies should familiarise themselves with the proposed changes early on so as not to get caught out.
First published in International Clinical Trials, November 2023, pages 81-83. © Samedan Ltd
Catherine Penny