Research Licensing Corner: License Agreement Trumps Patent Law

If patent law says that a joint owner of a patent does not have to pay royalties to its co-owners, but a license agreement says it does, who wins?

The license agreement, according to the federal Seventh Circuit Court of Appeals. (Original decision available here by entering case number 08-1351.) It recently affirmed a trial court’s order for Xenon Pharmaceuticals to pay $300,000 in royalties to the Wisconsin Alumni Research Foundation (“WARF”).

Xenon and WARF had jointly filed for a patent on a cholesterol-lowering enzyme called Stearoyl CoA Desaturase (“SCD”). WARF made Xenon an exclusive licensee of WARF’s patent rights, and in exchange, Xenon promised to commercially develop SCD and pay WARF a percentage of any product sales, royalties, or sublicenses under the WARF license.

Xenon then entered a sublicense with Novartis, but tried to get clever on WARF by saying that under the rule of concurrent ownership in Section 262 of Title 35 of the US Code, it did not have to pay any royalties to WARF, because Section 262 said, “each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention… without the consent of and without accounting to the other owners.”

WARF then sued Xenon, and replied that Section 262 was prefaced by the phrase, “In the absence of any agreement to the contrary…” which the license agreement obviously was.

The trial and appellate courts both agreed that Xenon’s argument was too clever by half, and ordered Xenon to pay WARF $300,000 in royalties on Xenon’s revenues from the Novartis sublicense.

An interesting sidelight in this case: Xenon also claimed sole ownership of a set of therapeutic compounds arising from SCD, claiming that the WARF researcher who worked on the project had assigned his rights to Xenon via an invention assignment agreement. However, unlike Stanford’s invention assignment agreement, WARF’s assignment agreement had beaten Xenon to the punch, successfully transferring its researcher’s patent rights to WARF, so there was nothing left for him to assign to Xenon.

Takeaway: in a collaborative research arrangement that may result in a patentable invention, it is critical for the parties to draft a license or other agreement addressing development rights and revenue sharing, or else Section 262 will allow every party to strike its own separate deal.

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