Building a Business > Intellectual property

Nature Biotechnology  20,  91-92 (January 2002)

License and collaboration agreements: Protecting your most valuable asset

*Patrick Duxbury is a partner at Wragge & Co., Birmingham, UK (patrick_duxbury@wragge.com), and Diane Mellett is general counsel at Cambridge Antibody Technology Group, Cambridge, UK (diane.mellett@cambridgeantibody.com).

Successful dealmaking will rely heavily on effectively exploiting your intellectual property rights.

Intellectual property (IP) rights, particularly in the form of patents, are the crown jewels of the biotechnology and pharmaceutical industries. They are the assets that form the foundation of most businesses in the sector and require significant time and money to ensure they are properly protected. These may be obvious statements, but it is amazing how often these precious assets are not properly dealt with even at the basic level of filing appropriate patent applications before public disclosure is made. However, even if the process of initially securing protection is handled well, the process of exploiting those assets is often less well managed and leaves many traps for the unwary.

In an age when only a few large pharmaceutical companies can afford to bear the huge costs involved in taking a drug all the way to market, licensing and collaborations are central to the way in which biotech and pharmaceutical companies exploit their IP. The benefits and risks associated with such transactions are generally well known, but issues relating to the IP—which is at the very heart of these deals—are often not dealt with or dealt with inadequately. This article looks at some of those issues and how they might be addressed.

Defining the IP

The intellectual property rights that each party brings to the transaction are sometimes referred to as "background IP". It is of critical importance that each party's background IP is identified clearly. A clear definition of what each party is offering will avoid disputes in the future about what was and was not included in the transaction and will also help to define what new IP may have been created as a result of the parties' relationship.

Listing the registered rights should be easy, but where the IP involved includes know-how, it can be more difficult to be precise. The fact that know-how is involved is often used as an excuse to leave definitions vague. This is a recipe for potential disaster going forward. You do not want to find that, inadvertently, you have given away IP because you were unable (or unwilling) to define what you owned clearly at the outset.

Creating new IP and improvements

Most relationships, whether in the form of relatively simple licenses or more complex research and development collaborations, will result in the creation of new IP. That new IP could be an improvement to the background IP supplied by each party or could be completely independent of it. In each case, the agreement governing the relationship needs to clearly identify what rights each party will have over this new IP (sometimes defined as an "improvement" or "foreground IP").

When the relationship is in the form of a relatively simple license, it is not uncommon for the owner of the IP to want to try to secure ownership of any improvements made by the licensee to the licensed technology. The issue for licensors is that this causes potential problems, particularly if the agreement is going to be subject to the EU competition law regime. There is a fundamental friction between IP ownership (which does of course generally give a monopoly right and which by its very nature is therefore anticompetitive) and competition principles which are generally intended to promote competition rather than restrict it.

In the EU, various attempts have been made to reduce this friction both through the Treaty of Rome and by the implementation of various sets of rules, commonly known as block exemptions. The basic idea is that if you draft an agreement that would otherwise be considered by the European Commission to be anticompetitive (in accordance with the rules set down in one of the block exemptions), you will not be in breach of EU competition law. However, the block exemptions are far from perfect. As an example, the block exemption that applies to patent and/or know-how licenses (the Technology Transfer Block Exemption Commission Regulation 96/240/ EC) specifically prohibits any attempt in an agreement to force a licensee to assign to the licensor IP rights in improvements to the licensed technology that the licensee may develop. This is a very difficult concept for those not well versed in competition law to grapple with. The consequences of entering into an agreement which does not comply with European competition law is that the agreement (or at least the anticompetitive parts of it) may not be enforceable; furthermore, of course, there is the possibility of fines, etc.

The effect of competition law in IP transactions is beyond the scope of this article. However, the point above highlights the need to ensure that transactions are constructed in such a way that they comply with relevant competition law, particularly when important issues such as ownership of IP are at stake.

In the context of genuine collaborations, it is not uncommon for the parties to agree that the newly developed IP will be jointly owned. That in itself requires careful thought. The laws relating to joint ownership can be very different from country to country. In the UK, joint owners are quite restricted in what they can do and generally need the consent of the other owner. The position in the US is quite different. Hence, the parties will need to consider what rights each will have to exploit the new IP, whether those rights will be limited to particular geographical territories or fields of use, and to what extent each party will require a license from the other to use the other's background IP. If the parties are commercial entities, it is not unusual to see the IP being divided up on the basis of geographical market or fields of use. If, however, one of the parties is a research institution, it would be more usual for the "commercial" party to be the one that is entitled to exploit the IP, with the research institution being granted a license to use the IP for further research purposes.

Again, in Europe at least, R&D collaboration agreements do have the "benefit" of a specific block exemption (Commission Regulation 2659/2000). However, in our experience it is quite difficult to draft agreements that fall squarely within the parameters laid down by that block exemption, even though it was updated at the beginning of this year to take into account previous criticisms.

Prosecution and maintenance of rights

Usually, the owner of the IP will accept an obligation to prosecute and maintain any IP that is registered. It is also common to include a provision under which, if the owner of the IP decides that it does not wish to continue prosecuting or maintaining a patent, it will offer that patent to the other party on a first-option basis.

The position with newly created IP is more complex, particularly if the parties agree that they are to own the IP jointly. They will need to agree, on a case-by-case basis, whether or not patents should be applied for, in whose name they should be registered, and who will be responsible for the costs of prosecution and maintenance going forward. The costs can, of course, be very significant, particularly if worldwide protection is sought. In particularly complex collaborations, the parties may want to establish a joint steering committee which will have responsibility for deciding on such matters, with an escalation procedure in the event of dispute.

Infringement proceedings

It is extremely important that the parties decide at the outset which of them will be responsible for taking action against infringers of the IP in question, or defending proceedings taken by other parties. Generally, a licensor will wish to have the option to decide whether or not it wishes to take or defend proceedings, and only if it decides not to take action will the licensee be able to step in. In either case, the parties need to agree on who will bear the costs of the proceedings and to what extent any damages that may be awarded—either for or against them—will be split. In the case of newly created IP, the parties will often agree to decide jointly what proceedings should be taken and to share the costs and any damages awarded equally. The agreement might also provide that a party can decide not to get involved in proceedings—in which case it will be open for the other party to take or defend the proceedings in question, bearing any costs and retaining in full any damages awarded.

Intellectual property warranties

Most well-advised licensees will make sure they get some form of warranty protection from the IP owners. At the very least they will require a warranty that the IP being licensed does not infringe the rights of a third party. This may be limited to the knowledge of the owner or may be absolute. However, it is very unusual indeed for a licensor to give any sort of comfort, whether by warranty or otherwise, that the IP in question is valid. The question of validity is often dealt with as part of the commercial terms, so that if a patent that is the subject of a license is subsequently declared invalid, there may be a mechanism for repayment of any monies already paid by the licensee and/or a reduction in the royalty rate to the extent that the license continues. It is important for the licensee to ensure that it is not obliged to pay monies to the licensor in circumstances where the patent has been declared invalid or has expired.

Royalty stacking

Royalty stacking occurs when the IP necessary to get a product onto the market is owned by several different parties, all of which demand a royalty payment from the ultimate seller of the product in question. This may occur because there are overlapping patents in relation to the particular product that are owned by different parties, or because the product required several different technologies to get it to the stage of being sold commercially (for example, a vaccine plus adjuvant). Whatever the reason, the company responsible for selling the product has to ensure that the various royalty streams payable to each owner do not make the product too expensive for the market. In order to avoid this, quite complicated provisions will need to be built into the relevant licenses, providing for the royalty of each respective owner to be diluted to the extent that further IP needs to be licensed in before the product gets onto the market.

Termination

This is often one of the most difficult areas to deal with properly. The parties do not generally wish to consider termination and its consequences at a time when all they can see is the potential success that the project will bring. Nonetheless, it is fundamentally important that the parties decide at the outset what the consequences of termination will be. It is particularly problematic in the context of collaborations when new IP has been created. For example, what rights will each have to use the new IP following termination, and to what extent is ongoing use of that IP reliant upon background IP? Will each party be prepared to allow the other to continue using background IP, even though their relationship may have terminated in acrimonious circumstances? Will those ongoing licenses be royalty-free, perpetual, worldwide, or limited to particular fields of use or geographical markets? All of these questions need to be answered and dealt with in the agreement.

Conclusions

The potential problems, when dealing with IP in any licensing or collaboration transactions, are particularly acute in the litigious biotechnology and pharmaceutical industries. If you do not deal with the IP adequately, the consequences can be far-reaching and potentially fatal if you are a small company. One way of minimizing the risk is by making sure that those responsible for exploitation are well briefed on the issues and understand their importance. In particular, they must be prepared to say "no" if the cost of the deal, from the IP perspective, is too great.