Royalty stacking and managing the risk of IP infringement in biotech product development - is the 'cure' more dangerous than the 'disease'?
With the growth of patent filings in the biopharmaceutical industry, organisations from big pharmas through to startup biotech companies are required to navigate a minefield of intellectual property protection to develop a product which is free from the threat of patent infringement proceedings.
The significant risk that the development of a product, or the ability to freely sell a product in the open market, may be compromised by patent infringement proceedings can greatly affect the ability to attract investment or funding for product development and to secure licensing partners. Funders consider it too risky to commit to a product pipeline which may be closed down by infringement litigation.
What Is The Solution ?
It has become common for organisations involved in drug development to take many patent licences in an attempt to ensure the product is sold free of the threat of injunctions and litigation for patent infringement.
The intended outcome is that both product development and sales can proceed with the comfort that all relevant patents have been licensed, minimising the known risk of injunctions and litigation to an acceptable level.
However, the licensing of patented technologies that affect the product can come at a cost and is often a potential burden for licensees seeking to commercialise a product in the biopharmaceutical market.
As licensors try to achieve the maximum return on their patent rights, it is common that each of the licensors will require the payment of multiple royalties in exchange for the grant of the licence. This is what is commonly known as royalty stacking.
The consequences of paying separate and multiple royalties on each of the patents affecting the product can be devastating for the biopharmaceutical product pipeline. The multiple claims for royalties all stacked together as part of the cost of commercialising the product is likely to hinder the innovation process rather than promote it.
It is important for the biotechnology and pharmaceutical industries to manage royalty stacking so it does not act as a cost hurdle to new product development.
On the flip side, licensors will continue to want to maximise the return on the licensed patented technology.
Royalty Of Set/Anti-Royalty staking Clauses
The usual way to deal with the complex issue of royalty stacking is to include a royalty offset clause. Such clauses operate to reduce the royalties payable to a licensor in the event the licensee is required to licence patents from other third parties in order to take the product to market.
In order to avoid the risk of dispute between the licensee and licensor as to the royalties payable to the licensor, the anti-royalty stacking clause should be clear and detailed about:
- The circumstances in which the deduction can be made, for example, the deduction will only apply to royalties payable in respect of such rights which would, in the absence of a license, be infringed by the licensor's technology.
- The extent to which the third party royalty payments are to be deducted and the control the licensor has over the third party licence entered into by the product developer.
- The basis of the deduction including calculation as well as from what source - royalties or net sales.
- Whether the anti-stacking provision will include a floor below which the licensor's royalty may not be reduced or whether the licensee will be required to reach a ceiling of stacked royalties before reductions or credits for royalties occur.
- Whether the anti-stacking provision is only accepted by the licensor on the basis that the royalty rates of all other licensors are reduced proportionately in response to third party licences or whether all parties share the royalty reduction equally.
In order to limit the risk of royalty stacking operating as a financial obstacle to the product development pathway, it is important to ensure your commercial arrangement does not just include a 'boiler plate' royalties clause. These clauses need to be carefully worked through. Whatever the agreed position, clear drafting of the royalty stacking or anti-royalty stacking provision is essential. Any form of uncertainty in the commercial agreement, in relation to the payment of royalties, may cause either or both parties to be 'out of pocket'.
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