As modern drugs become increasingly complex, licensing plays an ever-important role in drug development and exploitation. The market now requires more licences, collaborations and consolidations, making it difficult for negotiators to navigate the market.
As a licence arrangement is usually intended to be a long-term working relationship, it is important it looks to the future of the products and the ownership of intellectual property (IP), and that it strikes the right balance between the rights of licensor and licensee.
Protecting patents and know-how (IP)
Protecting the IP is one of the top issues for licensors. They are likely to carry out extensive due diligence to be comfortable that the licensee is able to protect the confidentiality of the know-how. This is particularly important in jurisdictions where trade secret law and enforcement may be regarded as less developed, including in the fast-growing Asian generics markets.
Clear descriptions of licensed know-how are vital; striking a balance between confidentiality considerations and practicalities of identification.
As a licensee working with the technology is likely to obtain in-depth knowledge of the patented technology, including any weaknesses on validity, the licensor will want as much protection as legally permissible against a patent validity challenge by the licensee. An outright ban on patent validity challenges is likely to be unenforceable under European Union (EU) competition law, but a provision in an exclusive licence allowing the licensor to terminate the licence if validity is challenged is generally enforceable and may have the same effect in practice.
The licensee will wish to ensure that (unless otherwise agreed) the licence does not oblige it to pay royalties in markets where others are free to use the technology without payment. This may involve careful consideration of the definition of the Licensed Products to ensure that this does not go beyond what the licensor can legally protect.
A common approach is to provide that royalties are no longer payable on know-how where this has become part of the public domain through no fault of the licensee and that royalties are only payable on ‘valid’ patent claims. To avoid disputes about validity, the licence will typically provide that a patent claim will be treated as valid provided that it has not actually been invalidated, withdrawn or expired.
Confusion can arise where the scope of a patent claim in a particular jurisdiction varies as a result of changes made nationally or because national courts take different approaches to interpretation (for example, on equivalents).
Payment provisions are becoming increasingly complex, with a variety of lump sum and royalty payments. An important point for the licensee is to ensure that, where the product requires multiple licences and royalty stacking arises, royalties to third parties can be deducted in working out the net sales figure on which royalties are calculated.
In response, the licensor is likely to require a royalty ‘floor’ or minimum value. A particularly important point for the licensor is to ensure that it has the right to inspect and audit the relevant accounts to check that appropriate royalties are being paid on all products made and any deductions from sales figures are in line with the agreed ‘net sales’ definition.
In order to avoid the licence falling into the hands of a competitor, the licensor should seek the ability to terminate the licence on a change of control of the licensee as well as a ban on assignment or sublicensing by the licensee without the licensor’s consent.
In the current market where consolidation and business sales are frequent, the licensee may be reluctant to engage without the ability to sell on as this will inevitably affect the value of the licence to them. So, this is often a hard-fought point.
Allowing third party infringements to go unchecked lowers the value of the licence, so it is important to the licensee to ensure that infringements in its territory are promptly pursued. It may wish to have the right to pursue infringers itself where necessary.
Where the technology is significant, the licensor will wish to pursue a coordinated international enforcement strategy that may be compromised by the licensee going on a ‘frolic of its own’ in a particular country. The licensor may be willing to pay the costs of litigation in exchange for control.
Similarly, the licensor may offer indemnities against infringement claims in exchange for control of any litigation.
Arbitration or court action
It is common for both licensee and licensor to prefer arbitration over court action; mainly for reasons of confidentiality, but also for costs reasons in cases where court action would involve multi-jurisdictional litigation. However, the licensor will wish to ensure that it retains the right to apply for preliminary injunctive relief in relation to IP infringements and breach of confidentiality provisions.
As the UK departs from the European Union (EU), it is important to check any references to the EU in territorial provisions, such as licence grant and sales territories. These may need to be adjusted to make it clear whether the UK is intended to be included.
Where relevant, changes to the wording may be needed to reflect changes to regulatory issues such as applying for marketing authorizations and product liability post-transition period. As a licence agreement is normally a long-term arrangement, the parties will need to consider how Brexit may affect their future trading relationship.
Although there are many uncertainties here, the parties will wish to be aware of potential changes to the rules on parallel trade, which might allow licensors greater discretion in terms of licence restrictions on sales into and out of the UK market post-transition period.
This article first appeared in The Pharma Letter (https://www.thepharmaletter.com/article/essential-issues-for-patent-and-know-how-licensing)