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When Is A Reach-Through License Appropriate
Many current biotechnology developments are research tools that enable a drug developer to discover a drug product. Examples of research tools include high throughput screening technologies and other assay methods, cell lines, monoclonal antibodies, reagents, animal models, clones and cloning tools, laboratory equipment and machines, databases and computer software.
Since the research tool’s patents may not claim the products ultimately developed using the research tools, creative licensing structures are necessary to adequately compensate the creators of research tools. In many cases, the value of a research tool is not merely the cost that went into its development. Rather, it includes the value to the drug developer for access to the research tool that helps the drug developer to identify and develop the pharmaceutical product. However, given the potential value of the products that may result from use of the research tool, up-front access fees or subscription licenses alone may not adequately compensate the research tool owner for permitting the licensee to use the research tool. Moreover, a development-stage biotechnology company may not have sufficient financial resources to pay up-front access fees, and pharmaceutical companies, despite adequate financial resources, may not wish to pay a large subscription fee for a tool that may or may not ultimately yield valuable future discoveries. Accordingly, licenses that create “reach-through” royalties are an alternative strategy for compensating research tool developers.
A reach-through license creates royalties to the research tool developer on the sales of products that are discovered or developed through use of the research tool, even though the patented invention is not incorporated into the final product, i.e., the manufacture, use and sale of the final product does not infringe any patents claiming the enabling tool. The recent proliferation of reach-through licenses has created controversy, with proponents arguing that reach-through licenses create incentives to further research tool development, while opponents claim that reach-through licenses extend the patent rights of the research tool owner, inhibiting dissemination, freedom of use and ultimately research and product development.
NEGOTIATING REACH-THROUGH ROYALTY PROVISIONS
When licensing a patented biomedical research tool, both the patent holder-licensor and tool user-licensee should consider the following:
Field of Use: Internal Research Purposes. A typical reach-through royalty license grant includes the right to practice the licensed patents to create, identify and/or develop compounds and pharmaceutical products comprising the compounds. In such case, the field of use is essentially limited to internal research for the purpose of discovering such pharmaceutical compounds, but the field of use usually does not include the right to use the tool for any other purposes or to sublicense it.
Therapeutic Uses of the Tool. Since some research tools may also have therapeutic or diagnostic uses (for example, monoclonal antibodies), the parties may agree to an expanded license grant or field of use that also permits the licensee to develop and commercialize the research tool itself. In either case, the license grant and fields of use must be thoughtfully drafted to reflect the parties’ intent.
Definition of “Licensed Products.” The definition of royalty bearing products generally covers all products that result from the use of the research tool (for example, “any pharmaceutical product that contains a compound that was identified by the use of the research tool that would, but for the licenses granted, infringe a valid claim of a licensed patent”).
Royalty Stacking. Consider flexible royalty payment schemes such as royalty stacking provisions and sliding-scale royalty rates, to avoid scenarios where the end products are subject to such prohibitive multiple royalty payments that the tool user has little or no incentive to further develop and commercialize the pharmaceutical product.
Royalty Term. In reach-through license arrangements, the compounds that are identified or developed by the practice of the patent rights claiming the research tool will comprise pharmaceutical products, which will take many years of clinical developments before they are commercialized. In addition, the pharmaceutical product is likely to be covered by a number of other patents that have a longer life than the patent on the enabling technology. Accordingly, the parties may consider a fair and equitable royalty term that extends beyond the expiration of valid claims covering the research tools, while carefully considering the patent misuse doctrine and antitrust implications of such extended royalty term.
Patent Misuse and Antitrust. Antitrust and patent misuse may be implicated whenever a patent owner seeks to expand the economic benefit beyond the scope of the patent grant. Accordingly, reach-through licenses must be structured to comply with antitrust and patent misuse prohibitions. Consult with counsel on the appropriate scope of reach-through rights necessary to overcome antitrust and patent misuse concerns.