Legal Aspects Relating To Biotech Patents And Contracts

Article by Ben Rapinoja and Kristiina Laiho

The value and success of most research and development (R&D)-oriented biotechnology companies largely depends on the results of the company’s projects. Particularly in the field of genetic engineering, R&D requires considerable high-risk investments by the venture capital and private equity industry, and thus, securing intellectual property (IP), biotech inventions and existing technology, as well as careful drafting of technology licensing and collaboration agreements is of paramount importance for biotech companies. Patents are often the only relevant and effective means of intellectual property protection.

Due to extensive networking among biotechnology companies, research organisations and other partners in the same cluster, the relevance of patents in business planning and strategic alliances is increasing all the time. Thus, successful licensing and collaboration arrangements command intense legal, scientific and business scrutiny.

It is sometimes difficult to make a distinction between a licence agreement and a collaboration agreement. Collaboration agreements usually provide terms and conditions for an arrangement where the contracting parties are jointly conducting certain R&D activities while a licence agreement more closely relates to a grant of certain existing IP rights. Often, collaboration agreements also contain cross-licensing of IP rights and data produced by the collaboration. Licence agreements, however, also contain elements of co-operation and shared business activities of the licensor and the licencee and thus the characteristics of these two contract types are easily mixed.

In order to conclude clear and easily interpreted contracts, the parties have to also understand the complexities and characteristics of patents and IP rights as the legal backbone for any biotech business and R&D activity.

The basic principle of patent law should always be kept in mind when assessing biotech patents and companies. A patent for an invention does not automatically authorise its holder to implement or exploit the invention, but merely entitles the patent holder to prohibit third parties from exploiting it for industrial and commercial purposes. There are several restrictions and prohibitions in force in Europe concerning the monitoring of biotech R&D and the use or commercialisation of the R&D results, especially with regard to public health, safety, environmental protection, preservation of genetic diversity and certain ethical standards.

The EU Directive 98/44/EC on legal protection of biotechnological inventions has confirmed the principle that biotech inventions which are new, involve an inventive step and are susceptible of industrial application shall be patentable, even if they relate to a product consisting of or containing biological material or a process by means of which biological material is produced, processed or used. According to the Directive, biological material which is isolated from its natural environment or produced by means of a technical process may become subject to a patentable invention even if it is present in nature.

Biotechnology and genetic engineering have an impact on a broad range of industries and thus legal protection of inventions is of critical importance. By protecting inventions, patents actually provide practically the only legal protection available for venture capital and private equity investments facilitating competitive advantages. In sum, patents have an increasingly important role in the venture capital and private equity industry.

Licensing arrangements within the biotechnology and life sciences field have become extremely complex. It is always of utmost importance to define and describe the object and scope of the agreement as well as the subject matter of the agreement. Especially with regard to technology, know-how or IP rights as the subject of a specific licence, the scope of the licensed rights should be defined clearly and without any room for misinterpretations in order to avoid any shortcomings, disputes or patent infringement claims. Should the licence include know-how, drafting of the definition can be especially demanding.

In addition, provisions regarding the field of use and territory clauses are items which require special attention and can very often become subject to one of the most intensely negotiated parts of the whole contract. Furthermore, the parties need to define which pre-existing IP rights are being licensed and whether any new rights deriving from future improvements will be included in the licence. Any possible restrictions by competition law should also always be considered carefully. Both parties should always question whether the relevant terms and conditions have been taken into account and whether the wording of these terms is drafted in an unambiguous way. The same principle of diligence applies also to the appendices and schedules of the contract in question. Definitions, even if diligently drafted, are likely sources of conflict if used inconsistently.

Provisions concerning the grant of a licence are highly material in biotech agreements. Grant of licence terms set out the rights of the licencee and often contain restrictions and limitations imposed by the licensor on these rights. In case of exclusive licences it is important from the licencee’s point of view to ensure that the licensor agrees not to exploit the licensed technology. In practice, there is often confusion over the terms "exclusive" and "sole", as the term "sole" means usually that both the licencee and the licensor may exploit the licensed rights.

Exclusivity provisions can be combined with provisions regarding field of use and territory so that the licencee may have an exclusive licence, e.g., for drug development for certain indication in Europe and a non-exclusive licence for another indication in the USA. In addition, exclusivity can also be defined subject to certain conditions, e.g., if the licencee does not meet the agreed commercial or scientific milestones, the licence can be converted from an exclusive licence into a non-exclusive or sole licence. An exclusive licence restricts the licensor’s own right to exploit the technology, and thus small R&D-oriented biotech companies with only very few drug candidate projects should carefully consider whether or not to grant an exclusive licence.

Licence and collaboration agreements often contain various performance obligations for the parties, of which payment obligations are the most important ones. Payment obligations in relation to licence agreements consist of a licensing fee and/or annual payments of a licensing fee, eventual milestone or up-front payments and other research payments as well as royalties depending on the chosen business strategy of the licensor and agreed revenue model. All payment terms require clear and concise calculation principles and timetables. Otherwise there is a great risk that parties will face disputes regarding the right calculation formula and payment obligation.

The representations and warranties given by the contracting parties are significant especially from the liability point of view. Furthermore, liabilities of a contracting party are also defined by the choice of law provisions. The key question is, whether the contracting party has knowledge of the governing law and what advantages it may gain by choosing otherwise. Even though choice of law may often appear as a minor detail at the end of an agreement, it is the choice that eventually determines how the agreement should be interpreted or whether certain clauses are deemed valid or not.

IP protection in the field of biotech and life sciences will continue to provide an incentive in generating new investments in companies exploiting new technologies and developing stimulating products and services for the healthcare and pharmaceutical industries. In particular, the human genome and results of the Human Genome Project will serve as a fundamental basis for the development of important new drugs and diagnostical applications in the life sciences sector.

Currently all patent systems within the European Union include exceptions to patent protection allowing certain research and experimental use of biotech inventions. The traditional precondition of full disclosure of the invention described in the patent application brings into the public domain important information that would have been otherwise kept secret and confidential. Biotech companies should take all these aspects into account when negotiating and drafting agreements in order to safeguard their legal and commercial interests.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.