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This is a tale of two license agreements that were negotiated at about the same time, and how one licensor fell into a royalty trap, and the other avoided it.

The two licenses were almost identical. The result of one significantly benefitted its licensor, and the result of the other significantly disadvantaged the other licensor.

Both licensors were universities (one Australian and one not Australian).

Both deals were done in 2015 (all years mentioned are not the actual years but are used to illustrate the royalty trap).
 

The existing IP in each deal was a PCT application which had a priority date in 2013.

In Deal #1 the licensee was a US global pharmaceutical company. In Deal #2 the licensee was a large European biotech company.

In both deals the license agreement was negotiated concurrently with a research collaboration agreement under which the licensee paid significant research funds.

In both cases the FTE rate payable under the collaboration agreement was the foreign rate, which was much larger than the Australian rate.

Under each Collaboration Agreement the research work would be undertaken solely by each research organisation licensor. No contribution to the research by the pharma or the biotech company was anticipated.


Deal #1 provisions about ownership of IP

The Collaboration Agreement in Deal #1, as submitted by the pharma provided that the IP arising under the Collaboration Agreement would be owned by the University.

Pharmaceutical companies are normally relaxed about the ownership of IP, knowing that they can secure the rights they need in a license.

The License Agreement in Deal #1, as submitted by the pharma, described the Licensed IP as being:

1. The IP in existence as at the date of the License Agreement, with customary detailed descriptions of pending patent applications, etc, and
2. The IP that was to arise under the Collaboration Agreement.


Deal #2 provisions about ownership of IP

The Collaboration Agreement in Deal #2, as submitted by the biotech company provided that the IP arising under the Collaboration Agreement would be owned by the biotech company.

No contribution to the research by the biotech company was expected. But its first pass on the issue of ownership in its first draft of the Collaboration Agreement provided it was to own the new IP. It’s rationale was that it was “paying for” the IP to arise under the Collaboration Agreement with its research funding.

The License Agreement in Deal #2, as submitted by the biotech company described the Licensed IP as being only the IP in existence as at the date of the License Agreement.


Deals #1 and #2 provisions about Term and duration of royalties

Royalties were payable on products sold that but for the license would infringe a licensed patent – the customary infringement test.

The Term in each License Agreement was defined as expiring upon the expiration of the last to expire granted patent encompassed in the Licensed IP.


Ownership of IP under the Deal #2 Collaboration Agreement

The negotiation of the License Agreement with the biotech company licensee in Deal #2 presented one touchy issue.

The University licensor felt, as many universities do, that as a matter of principle, a university that undertakes research should own the IP that arises from that research.

The University wanted the same outcome as was presented by the pharma in Deal #1, namely that the University would own the IP arising under the Collaboration Agreement and would license both its existing IP as well as the new IP.

The biotech company insisted that it must own the IP that it was paying for, arising under the Collaboration Agreement.

It insisted and insisted. It wore down the university. The university conceded that the biotech company would own the IP.


Deal #1 and Deal #2 – New IP

Fast forward a few years. In both deals, new patentable IP arose under the respective collaboration agreements. In each case a provisional application for the New IP arising under the Collaboration Agreement was filed in 2017.


Deal #1 – Duration of royalties

In Deal #1 the Licensed IP was:

1. The IP in existence as at the date of the License Agreement, with customary detailed descriptions of pending patent applications, etc, and
2. The IP that was to arise under the Collaboration Agreement.

The duration of royalties was to be until the expiration of the last to expire patent encompassing any of the Licensed IP.

As the Licensed IP included the patent that was filed in 2017 which encompassed the IP arising under the Collaboration Agreement, royalties would be paid until 2037 (2017 plus 20 years).

(Disregarding the likely term extension of a pharmaceutical patent).


Deal #2 – Duration of royalties

In Deal #2 the Licensed IP was only the IP in existence in 2015, whose priority date was in 2013.

As in Deal #1 the duration of royalties was to be until the expiration of the last to expire patent encompassing any of the Licensed IP.

As the Licensed IP was only the IP encompassed in the 2013 patent application, royalties would be paid until 2033 (2013 plus 20 years).

(Again, disregarding the likely term extension of a pharmaceutical patent).


Which licensor would you rather be?

In both cases the licensed IP was first filed in 2013.

In Deal #1 royalties are payable until 2037.

In Deal #2 royalties are payable until 2033.

Which licensor would you rather be?

In future licenses the university in Deal #2 more firmly negotiated the ownership of IP under its Collaboration Agreements where the collaborator was not making any research contribution, but only funding the research.
 

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Postscript

Fast forward a few more years.

After COVID I learned that the European biotech company had granted a sub-license to a pharmaceutical company.

It is a fair assumption that the term of that sub-license would be until the expiration of the last to expire patent.

The result: the biotech company receives royalties from the sub-licensed pharma until 2037, but it only pays royalties to its university licensor until 2033.

 

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Conclusion

Watch out if you are considering conceding the ownership of IP to a company that is funding research, but not actually contributing to the research. Consider the impact of the concession on other terms of the agreement. In this case, conceding ownership of IP to the company resulted in significant tail end royalties being sacrificed.

 

 

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