HC-2013-000089 - [2025] EWHC 2376 (Ch)

Mr Wynn’s analysis of comparable licences placed primary reliance on the royalty rates set by Merck for transfer pricing purposes for its intragroup licensing scheme, under which Merck licenses the use of its umbrella brand to its subsidiaries. Under that scheme, Merck sets a royalty rate of 0.33% for the use of its brand by subsidiaries in its healthcare division.

That royalty rate was set on the basis of a benchmarking study by EY (the EY benchmarking study), which was prepared in September 2019 for the purpose of determining an arm’s length remuneration for Merck’s intragroup licences, in accordance with the OECD Transfer Pricing Guidelines, following a global rebranding project for Merck’s umbrella brand which had been implemented from 2013 onwards. The EY benchmarking study was in turn the basis for a report by EY entitled “Transfer Pricing Documentation for the introduction of an Umbrella Brand license”, which set out the royalty rates adopted in Merck’s intragroup licences for its umbrella brand (the EY TP report).

The EY benchmarking study and the EY TP report described the following methodology:

EY sought to assess an arm’s length price using the comparable uncontrolled price method, which referenced the amount charged in comparable uncontrolled transactions under similar circumstances. EY was, however, unable to find comparator agreements which dealt only with the licensing of the company name or logo. Instead, it identified a set of four licensing agreements which licensed both the licensor’s name/logo and product trade marks (set 1); and a set of six licensing agreements which licensed only the licensor’s product trade marks (set 2).

Mr Wynn’s first report recognised the limitations of the EY analysis, noting that its conclusions were drawn from calculating differences in the royalty rates between two sets of transactions, in circumstances where the licences in the two sets were not identical. His conclusion was, however, that the EY analysis adopted a “reasonable approach” given the limited information available on licences for umbrella brands in isolation.

Mr Wynn looked at various other types of licences as potential comparators, but concluded that they were not sufficiently comparable to use for present purposes. He therefore considered that the transfer pricing rate of 0.33% applied for Merck’s intragroup healthcare businesses was the most appropriate starting point for his analysis. His conclusion rested on observations that (i) the licences were formulated on the basis of an arm’s length principle; (ii) they had real-world implications in respect of the tax paid; (iii) Merck had an incentive to keep its transfer pricing rate as low as possible given that Germany is a comparatively high tax jurisdiction; and (iv) the rate established was based on the EY benchmarking study.

Mr Wynn’s reply report, after considering Dr Stec’s criticisms set out below, maintained that the 0.33% figure used in Merck’s intragroup healthcare licences was “strong evidence of an appropriate starting point for the rate that would have been considered for the use of the word [Merck]”, and rejected Dr Stec’s criticisms of the comparables approach. Mr Wynn’s expanded summary following the joint expert statement likewise maintained that Merck’s intragroup royalty rate was a reasonable starting point and could be used to inform a “reasoned and supportable assessment”.

Mr Wynn did not, however, simply take the 0.33% rate, but used it as a starting point and applied various adjustments to it. These included a series of discounts to take account of the specific circumstances of the case, including the scale of MSD’s misuses of the Merck mark during different periods, the fact that MSD did not need a licence to use the word Merck in the ways permitted by the 1970 Agreement, and the fact that MSD did not use all of the rights licensed in Merck’s intragroup healthcare licences – most notably it did not use the Merck mark alone on product packaging. Going the other way, Mr Wynn added a potential premium adjustment on the basis of the evidence (discussed above) that Merck would have been unwilling to license the word Merck to a competitor.

Mr Wynn acknowledged that his adjustments were necessarily subjective and uncertain. He therefore expressed the results of his adjustments as ranges applied to different periods, rather than precise percentages. His results also distinguished between the breach of contract claim and the trade mark infringement claim. That led to royalty rate ranges of between 0.13% and 0.47%, depending on the period and the type of claim.

As regards the royalty base, Mr Wynn calculated two sets of figures, one set including non-UK revenues, and a second set excluding non-UK revenues. His final calculations were a damages range of £24.3–46.1m if non-UK revenues were included, and £18.6–35.4m if non-UK revenues were excluded. That was the basis for Merck’s claim of £46.1m at the start of the hearing.