It’s not often that the reading of a royalties clause in a drug development and licensing agreement puts one in mind of hits from times gone by.
It was around 1964 that the Rolling Stones told us that time was on their side. In the late 80s, Cher expressed a universal angst with her wish to turn back time. And of course, who can forget the fact that Paul McCartney believes in yesterday.
So how did we get here?
A History of Patent Royalties
While in Australia inventors of new technologies can obtain royalties for the use of patents after the patent has expired, this is not the case in the US. In the 1964 decision Brulotte v. Thys Co., the United States Supreme Court held that a patent owner cannot receive royalties for a patent once that patent has expired. The decision stemmed from the Court’s disapproval of monopolising conduct, stating that:
A patent empowers the owner to exact royalties as high as he can negotiate with the leverage of that monopoly. But to use that leverage to project those royalty payments beyond the life of the patent is analogous to an effort to enlarge the monopoly of the patent by tieing [sic] the sale or use of the patented article to the purchase or use of unpatented ones… the exaction of royalties for use of a machine after the patent has expired is an assertion of monopoly power in the post-expiration period when, as we have seen, the patent has entered the public domain.
Therefore, in the United States, it’s difficult to impose a royalty on goods sold under an expired patent; but that doesn’t stop folks from trying.
Time After Time: A Royalties Clause in Action
The royalties clause which gave rise to the above pop song musings sits in an agreement submitted to one of our clients who is looking to take a license to commercialize a patented drug compound; the clause provided that:
Royalties under this clause are to be paid for the longer of:
- the last to expire of the patent rights;
- the last to expire of any applicable periods of orphan drug exclusivity; or
- ten years from the first commercial sale of licensed product.
So far, so good. You would think that if the patents ran out as the last of these three events, then there’d be no more royalties payable.
But no, the clause further provided that:
Any royalties that are due under this Agreement during the royalty term but after the expiration of the patent rights, shall be a deferred royalty for the period from the effective date until the start of the royalty period during which no royalty shall have otherwise been due.
Do you see the trick? It’s a clever attempt at doing what Cher could only wish for and that is to turn back time to circumnavigate the rule in Brulotte.
This wording says that any royalty you pay for a sale that you made after the patent expired will be, in effect, a royalty for a sale that you made before royalties were payable.
The clause turns back time, or at least it seeks to; it deems a royalty paid today to have been a royalty paid for a time when royalties were not otherwise payable. This time shifting looks to restructure their whole arrangement by making a royalty free period a royalty paying period.
But is it legal?
Brulotte was recently reconsidered in the US case of Kimble v. Marvel Entertainment, LLC, where the United States Supreme Court decided to not overturn Brulotte. Despite this, the Court noted that there avenues to practically bypass this limitation. The court noted that despite Brulotte, parties are still free to:
- defer payments for pre-expiration use of a patent;
- tie royalties to non-patent rights; and
- make non-royalty-based business arrangements.
Going forward then, it seems like there may in fact be life after love for patent royalties. Stay tuned for episode two for the treatment of patent royalties in Australia.
If you require assistance with any aspect of a patent or patent application, contact the team at FAL IP.
The contents of this article does not constitute legal advice and should not be relied upon as such. If this article pertains to any matters you or your organisation may have, it is essential that you seek legal and relevant professional advice.
