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

The last issue for determination is what, if any, discount is required to reflect the time value of money in relation to the payment of the licence fee at the date of the hypothetical negotiation.

Dr Stec’s approach was to assume that the licence fee would have been paid as a lump sum at that date, and he therefore discounted the expected cost savings back to that date using MSD’s weighted average cost of capital (WACC). For a 2010 negotiation date he used a WACC of 8.50%, which was MSD’s WACC at the end of 2009. Mr Wynn agreed with the principle of applying a discount rate, in order to identify a lump sum at the date of the hypothetical negotiation, but he considered that the appropriate discount rate would be a risk-free rate.

In his cross-examination of Dr Stec, Mr Brandreth suggested for the first time that the notional licence could have been structured as an annual payment, rather than as a lump sum at the date of the hypothetical negotiation; and contended on that basis that no discounting would be required. Again, however, I do not think that it was appropriate to introduce this point, without any foreshadowing, in the cross-examination of Dr Stec. While Dr Stec agreed that in principle a licence fee could be calculated as an annual payment, neither he nor Mr Wynn had considered in their expert reports (including the joint expert report) whether this would have been a realistic commercial option for Merck and MSD in the circumstances of this case.

Mr Brandreth submitted that the court should not be constrained by the views expressed by the experts when making findings about the commercial terms which could reasonably have been included in the notional licence. That might have been correct if there was a basis for such findings in the other evidence before the court. In the present case, however, the only evidence regarding the terms of the notional licence is the evidence of the two experts, Mr Wynn and Dr Stec, neither of whom considered the possibility of an annual licence fee. There is therefore no evidential basis whatsoever for a finding that the notional licence might plausibly have been structured as an annual payment rather than a lump sum.

In those circumstances the correct approach is to assume that the notional licence fee would have been paid as a lump sum on 1 January 2010. On that basis, as Mr Wynn agreed, it is necessary to apply some sort of discount to the inflation-adjusted cost figure. The remaining issue is what discount rate is appropriate. That breaks down into two separate questions. The first question is whether to use MSD’s WACC or a risk-free rate. The second question is what specific rate should be adopted.

On the first point, I agree with Mr Wynn that discounting on the basis of MSD’s WACC is not appropriate. As Mr Wynn explained, the WACC of a company is an appropriate discount rate for the overall future cash flows of a company, to take into account the market risk inherent in the calculation of those cash flows. While Mr Wynn accepted that there was some uncertainty in respect of MSD’s avoided costs, in the notional licence fee negotiation, that uncertainty was not comparable to the uncertainty of future cash flows arising from, for example, the expected future profits from a particular drug. In principle, therefore, any discount should be calculated on the basis of the appropriate risk-free rate rather than MSD’s WACC.

In Mr Wynn’s cross-examination, it was suggested to him by Mr Hollingworth that the risk-free rate in 2007 was about 5.25%. His position was that the discount rate should not be materially higher than the risk-free rate. On that basis, MSD submitted in its closing submissions that the minimum discount should be 5.25%. That did not, however, take into account the position (agreed at the time of the oral closing submissions) that the date of the hypothetical negotiation should be taken to be 1 January 2010. Mr Wynn was not asked about the 2010 risk-free rate in his cross-examination. In his second report, however, he commented that the Bank of England base lending rate was 5.25% at the start of the trade mark infringement period (March 2007) but fell to 0.5% by the start of the breach of contract period (January 2010). On that basis, Merck’s submission was that if a risk-free rate was adopted on the basis of Mr Wynn’s evidence, then the appropriate rate to take for a January 2010 licence fee negotiation date should be 0.5%.

MSD’s response, in Mr Hollingworth’s closing submissions, was that Mr Wynn’s comment related to the Bank of England base lending rate. That was, however, not the risk-free rate in January 2010. This point was then the subject of further brief written submissions following the hearing.

In those submissions, MSD reiterated its position that the Bank of England base lending rate was not the risk-free rate in January 2010. Rather, it said that the appropriate risk-free rate should be taken by reference to the UK 10-year Treasury bond rate in January 2010, given that the notional licence would have covered a period of 10 years. That rate was 4%. Merck’s response was that the only evidence before the court as to the risk-free rate in January 2010 was Mr Wynn’s comment regarding the Bank of England base lending rate; and that the court should therefore take that figure in the absence of any other evidence on the point.

MSD’s post-hearing written submission on this point is, in my judgment, the correct approach to adopt. As MSD pointed out, Merck’s position throughout the trial had been that the notional licence should be considered for the period from March 2007 to July 2020. That position was reiterated in Merck’s written closing submissions. That was the period covered by Mr Wynn’s analysis of economic benefits and was the agreed period in the experts’ joint statement. Mr Wynn’s cross-examination had proceeded on that basis, and the economic benefits figures set out in MSD’s written closing submissions were also calculated on the basis of a March 2007 licence fee date (albeit that MSD’s position remained that those calculations were conservative in favour of Merck, since it contended that there was no basis for any claim prior to 1 January 2010).

As set out at §116 above, Merck’s position on the start date of the notional licence only changed in Mr Brandreth’s oral closing submissions. That concession removed the dispute between the parties on this point. But the agreed licence start date must then be reflected in the quantification of the licence, including the discount rate.

Mr Wynn’s comment regarding the Bank of England base lending rate was clearly not intended to provide evidence about the risk-free rate in January 2010. It was, rather, simply a comment about the low interest rates prevailing at the time. There is therefore no evidence before the court as to the risk-free rate in January 2010.

I do not, however, consider that this is a matter that requires expert evidence. The risk-free rate is the expected return demanded by investors on an investment with no risk of loss of the principal. The standard way of assessing that is to use, as a proxy, the yield on the bond issued by an AAA-rated government of the same currency as the investment, over the same period of time as the investment. In the present case, an appropriate assessment of the risk-free rate in January 2010 was therefore, as MSD submitted, to look at the 10-year UK Treasury bond rate at that time. Merck conspicuously did not offer any other basis for the identification of the risk-free rate, other than its reliance on the 0.5% figure in Mr Wynn’s evidence, which I have rejected.

The appropriate discount rate to use is therefore, in my judgment, the 4% risk-free rate identified by MSD.