Royalty payments in patent licensing

Key points to take away from recent UK cases on patent licence agreements


Cases concerning patent licences in the English courts are a bit like London buses: you don’t see any for a very long time and then three turn up at once. In this note, we summarise the key take away points that arise from these cases for those engaged in patent licensing.

1. Eteboxagu AB v Cycle Pharmaceuticals Ltd [2023] EWHC 462 (Comm)

This case in the English High Court was in respect of a dispute over the amount of royalties to be paid by a pharmaceutical company (Cycle Pharmaceuticals) on a branded drug product (NITYR) to a company (Eteboxagu AB) owned by a scientist who helped discover the drug. In particular, the case considered the meaning of “gross income” and examined the extent to which the costs inherent to the complex distribution and rebate system necessary to sell pharmaceuticals in the United States can be deducted from revenue before the royalties payable on the relevant product are calculated.

The High Court decided that due to the complex commercial arrangements with intermediaries that are necessary for a non-US pharmaceutical company to access the US market, the ‘gross income’ and ‘relevant revenues’ used to calculate royalties would not be insulated from: (1) the payment of rebates; and (2) the cost of certain distribution partners. These specific costs were considered not to be discretionary marketing tools used by the pharmaceutical company but rather commercial necessities to access the US market.

Key take away points:
  • When negotiating IP licences which enable the supply of drugs or other therapies in the United States, both licensors and licensees should consider the complex distribution and rebate system that exists and will want to check that the royalty provisions operate as intended when applied to the practicalities of the United States market.
  • Licensors that are entering into licence agreements covering the supply of therapies in the United States need to ensure that they specify carefully in the agreement which rebates and costs the licensee is entitled to deduct from the revenue the licensee receives from sales of the therapy in the United States before the royalty is calculated. Licensees will typically only be willing to pay royalties on revenue that is actually received by the licensee after the unavoidable costs of distribution in the United States have been deducted.
  • Be careful when using the term ‘gross income’, which somewhat surprisingly may not be construed as one would expect as meaning ‘before any deductions’. It may be appropriate to define the meaning of ‘gross income’.
2. Oxford University Innovation Ltd v Oxford Nanoimaging Ltd [2022] EWHC 3200 (Pat)

This case in the English High Court involves a dispute the ownership of IP in a single-molecule fluorescent microscope created by a postgraduate student at Oxford University and whether royalties were payable under a licence agreement by Oxford University spinout Oxford Nanoimaging (ONI) to Oxford University’s technology transfer arm.

The Court of Appeal has given the defendant, ONI permission to appeal, and ONI is appealing all aspects of the High Court judgment. The appeal is likely to be heard in January 2024, with the judgment likely to be published later that year.

Key take away points:

Students (including PhD students) are considered to be consumers under consumer protection legislation. In reaching this conclusion, the judge noted that if students did not have the benefit of consumer protection legislation then they would have no statutory protection in their contracts with universities which are usually standard form and issued on a take it or leave it basis.

  • University IP policies which require students to assign IP in discoveries, developments and works they create must be fair. Fair means that there must not be a significant imbalance to the detriment of the consumer (i.e. the student).
  • Universities and other research institutions who take on students should review their equity allocation policies (i.e. the proportion of shares that student inventors may be allocated in the spinout company) and revenue sharing policies (i.e. how revenue realised by the university is split between student inventors and the university) to ensure they are fair as well as transparent.
  • Universities and other research institutions who take on students should consider producing an IP policy guide to include guidance on the policy as well as factors that should be reviewed when equity and revenue shares are agreed. One option could include providing student inventors with the right to have equity and revenue shares decided by an independent expert.
3. AstraZeneca UK Ltd v Tesaro, Inc. [2023] EWHC 803 (Ch)

This case in the English High Court involves a dispute over the interpretation of a royalty clause in a sub-licence between AstraZeneca and Tesaro. The sub-licence agreement included royalty obligations on Tesaro to pay royalties to AstraZeneca for sales of Tesaro’s best-selling anti-cancer drug Zejula (niraparib). The dispute revolved around whether Tesaro was required to pay royalties on all sales of Zejula (i.e. a total sales royalty) irrespective of whether the sale of the product in a particular country would, but for the licence, infringe AstraZeneca’s IP rights. Although the sub-licence was governed by English law, in reaching his decision the judge also considered the United States doctrine of patent misuse on the basis that the United States was a major market for Zejula. In some circumstances, this US law doctrine prevents royalties being charged on products which do not infringe the relevant licensed patents. The judge assessed whether patent misuse would prevent a total sales royalty even though the agreement was governed by English law. Interestingly and with the help of US patent law expert witnesses, the judge considered this foreign doctrine at length. Given a conclusion that  the risk of patent misuse was relatively low in this case, the judge concluded the parties’ intentions should be taken from the language of the agreement, which pointed towards a total sales royalty structure.

After consideration, the judge concluded that the contract was to be interpreted such that royalties were payable on all sales of Zejula, regardless of whether there was infringement of the licenced patents.

Key take away points:
  • When drafting or negotiating licence agreements, be very clear as to when and how royalties are payable, particularly if royalties are only payable on a proportion of product sales.
  • When drafting or negotiating licence agreements that cover exploitation of licensed products in the United States, consider and take account of the United States doctrine of patent misuse. This might influence the fundamental royalty structure agreed by the parties.  Even if a licence agreement is governed by English law: (i) an English judge might still be influenced by the doctrine; and (ii) if the structure of the royalties runs contrary to the doctrine, a licensee might seek to challenge the agreement in the United States courts even if the agreement contains a provision giving exclusive jurisdiction to courts outside the United States.
  • For patents and know-how licences for drugs with a large market share in the United States, minimising the risk of non-compliance with the United States doctrine of patent misuse could involve including a step down in the royalty rate for product sales in a country once the licensed patents in that country have expired or may have been revoked.

Bringing a product to market in the life science sector is a high stakes endeavour, often involving complex patent licences and a myriad of other arrangements with third parties. These three cases, each of which involved a dispute over royalty payments, provide valuable guidance for those involved in drafting and interpreting  complex patent licence agreements. The number of cases so far this year seems to suggest that parties are becoming increasingly willing to litigate licensing disputes, and it will be interesting to see whether the latter half of 2023 continues to provide relevant case law for those engaged in patent licensing.