B. Reach-Through Royalties
1. Trends in the Use of Reach-Through Royalty Provisions
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
in their ability to use reach-through royalty provisions in their license agreements.299
B. Reach‐Through Royalties
1. Trends in the Use of Reach-Through Royalty Provisions
First of all, the Association of University Technology Managers (AUTM) is a coalition of technology transfer managers from around the nation, seeking ways to increase the benefits to universities in the dissemination of their resources. Some commentators have noted that they have a reputation of encouraging universities to hardball negotiate each license agreement, adding in reach-through royalties, milestone payments, and renegotiation options that unnecessarily complicate licenses. Such licenses often become deal breakers and lead to the slow down in the transfer of resources with which the NIH is so concerned. One commentator thinks that the reasons institutions like MIT are so successful is because they realize that only one in 300 of these licenses will ever make them money. Therefore, they are much more focused on the quantity of agreements into which they enter, rather than trying to make millions of dollars on each one. They are much more interested in the ease of the transaction and licensing as many things as possible. Unfortunately, most institutions do not have the same philosophy as MIT. These institutions are the ones that the NIH was most concerned with when promulgating its guidelines.300
Secondly, it has been more than 10 years since the NIH issued its guidelines, yet it is still uncertain what impact they are actually having. In light of the NIH Guidelines, institutions might choose to forgo public funding rather than be restricted in their ability to negotiate licenses. 301 Even the NIH sends mixed signals, saying that institutions may be sanctioned for not following the guidelines, but also saying "It's not “thou shalt,” it’s not
“you must,” it’s “here are some ways to do it.”302 However, it may be more likely that these guidelines are simply ignored and universities and start-ups will just bet on the NIH not sanctioning them. If this is true, then it argues that the NIH Guidelines should be revoked all together. First, they do not have their intended effect on universities and unfairly include
299 Id.
300 Eisenberg, RESEARCH TOOLS, supra note 275, at 231: “[T]he more serious bottleneck to research is the growing burden of negotiating numerous agreements ... . Taken individually, none of these agreements is likely to yield commercially valuable results. Nonetheless, in the aggregate, they create significant administrative delays that slow the pace of research.”
301 Thomas J. Kowalski & Christian M. Smolizza, Reach-through Licensing: A US Perspective, 6 JOURNAL OF COMMERCIAL BIOTECHNOLOGY 349, (July 14, 2000), available at
http://pharmalicensing.com/public/articles/view/963567614_396edffe132c5, accessed at June 20, 2010.
302 Russo, supra note 282, at 10, quoting Barbara McGarey, NIH deputy director of the office of technology transfer.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
small business in the same category. Second, they may not be evenly enforced, thus increasing the likelihood of unfairness depending on how well connected one is to the NIH.
Third, if the guidelines are simply ignored, then none of their potentially positive effects could ever come to fruition. Finally, because of the considerable political clout of the pharmaceutical industry, there is some concern that they might put pressure on the NIH to more strictly enforce the guidelines which they themselves are not required to follow.
A more effective means of achieving widespread dissemination of tools while preserving small business interests would be Commerce Department regulations restricting the use of exclusive licensing and reach-through provisions for non-profit recipients of government funding that does not include private business recipients of SBIR or similar funding.
2. Reach-Through Royalties
As discussed supra, complications arise when awarding damages for patent infringement on research tools that conceivably would have been licensed with reach-through royalties had the parties actually negotiated.303 This is because it is purely speculative as to what the parties would have actually agreed.304 For example, in SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical Corp.,305 the court struggled with the amount of damages that should be awarded because the infringement case was brought before an actual drug had been developed. Not only did the court have to speculate as to what the terms of the license agreement would have been, but they also had to determine the relative probability that a lead compound discovered using the tool would actually ever be commercialized.306 Similarly, in Integra Life Sciences I, Ltd. v. Merck KGaA307 the court suggested that the district court should consider on remand whether reach-through royalties and royalty stacking would have been a factor in a hypothetical negotiation between the parties when assessing damages.
Additionally, some commentators note that some firms may just infringe on the research tool patent, hoping that they will not get caught, and that they will not have to pay damages unless they actually develop something marketable.308 For these reasons, some
303 Ware, supra note 269, at 286 (discussing SIBIA).
304 Id.
305 SIBIA Neurosciences, 225 F.3d at 1354 (rev'd on other grounds).
306 Id. at 84
307 Merck KGaA, 331 F.3d 860, 871 (Fed. Cir. 2003).
308 Rai & Eisenberg, supra note 265, at 298 n.49; Eisenberg, RESEARCH TOOLS, supra note 275, at 233–34;
Walsh & Cohen, supra note 266, at 42 (stating that University researchers regularly infringe on upstream research tools, but firms are reluctant to pursue infringement actions because of the prohibitive cost of a lawsuit relative to the amount of compensatory damages, as well as the bad publicity one might incur by suing a non-profit institution); Walsh & Cohen, supra note 266, at 44–45 (noting that infringement by
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
have suggested a modified research exemption for research tool damage liability.309 Such an exemption would mean that it would be unnecessary to pay for licensing unless you produce something marketable. At that point you would be liable for damages if you failed to pay.310 Here again the court would be required to speculate as to the amount of such damages.
However, the problems of speculation might be alleviated if reach-through royalties became an industry norm.311 The marketplace itself would dictate what is normally reasonable for any given license agreement.312 Because it is unlikely that courts will be able to completely avoid the issue of reach-through royalties when determining cases like SIBIA there is an additional reason to encourage small businesses to continue using reach-through licenses, rather than try to ban them completely.
Unfortunately, the Federal Circuit has recently reiterated its interpretation of a narrowly construed experimental use exemption. In Madey v. Duke Univ.,313 the court ruled that Duke University could not rely on the common law experimental use exemption as a defense to Madey’s patent infringement claim simply because it was an academic institution.314 The court stated that the exemption should be “limited to actions performed for amusement, to satisfy idle curiosity, or for strictly philosophical inquiry. On remand, the district court was instructed to see if Duke’s use of the patented inventions could be viewed as furthering a legitimate business interest and therefore did not qualify for the research exemption defense.315
In light of the court’s narrow construction of the common law experimental use exemption, any broadening would need to be achieved through legislative action. If a formal research exemption were passed, Congress could at the same time set statutory damages as an alternative to compensatory damages for researchers incurring liability through commercialization, thus alleviating some of the difficulty courts may have in assessing damages for reach-through licensing provisions.316
private firms is pervasive, and that many firms wait to see if the research looks promising before seeking a license if necessary).
309 Mueller, supra note 262.
310 Eisenberg, GENOME, supra note 264, at 217; Mueller, supra note 262, at 55.
311 Ware, supra note 269, at 282.
312 Id.
313 Madey v Duke University, 307 F.3d 1351 (Fed. Cir. 2002).
314 Id. at 1363.
315 Id. at 1362
316 Mueller, supra note 269, at 62.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
3. Reach-through Licensing Provisions for Small Biotechnology Firms
In 1999 the NIH published guidelines restricting the use of reach-through licensing by recipients of NIH grants.317 These guidelines apply not only to non-profits and universities, but also to private companies receiving NIH funds. This includes all small businesses receiving grants from the NIH. Since most large companies do not receive NIH funds, small businesses are put at a disadvantage in this respect, especially when one considers that the market for research tools is the lifeblood of these small companies. Reach-through licensing is a way for these companies to value and market tools that may or may not lead to the development of other commercial products. Thus, many small biotechnology companies rely on reach-through license provisions to market the research tools, which are their main source of income.
Because of the complex nature of the interest problems facing reach-through licensing of research tools as mentioned at section A, it is difficult to formulate a solution that would be amenable to all the parties involved. However, the most equitable solution may be to promulgate regulations limiting the use of reach-through royalties by non-profits and universities while allowing their use by private companies whose primary goal is commercialization. This section continues the discussion at section A and offers a proposal that provides for the concerns of small businesses whose survival depends on being able to accurately value their tools. The two aspects for NIH Guidelines and new regulations are proposed as bellows.
For the NIH Guidelines, the largest problem in the controversy surrounding reach-through royalties is that each of the players involved has competing interests. Thus, the interests of biotechnology companies must be balanced with those of large pharmaceutical companies, universities, and non-profits. Ultimately, any solution must promote widespread dissemination of biomedical resources for the public good, while keeping in mind the various goals of the entities involved.
Although the NIH Guidelines were issued with the noble purpose of encouraging the widespread dissemination of research tools, they must be eliminated and replaced with a more equitable and effective means of achieving that same goal. The provisions in the guidelines restricting the use of reach-through royalties are best applied to universities and non-profits, not to biotechnology firms, which depend on their intellectual property as their lifeblood. Contrary to the NIH’s view, biotechnology firms that are recipients of federal funding do not and should not have the same mission as universities and non-profits, and should not be treated as though they do. Biotechnology firms rely on reach-through royalties
317 NIH GUIDELINES, supra note 283.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
as a fair way to value their proprietary research tools. Furthermore, they are not as susceptible to the bogging down of transfer agreements as universities are because it is in their best interest financially to make sure the deals go through. This is in contrast to a university that has numerous sources of income. Small businesses should be encouraged to commercialize as much as possible, as was the original intent of the Bayh-Dole Act.
The NIH Guidelines should be eliminated because they are not equally enforced. There is no set procedure for imposing sanctions, and the guidelines do not have the force of law.
Additionally, the NIH does not have the resources to sanction every violator. This is a formula for the irregular and potentially unfair enforcement of the guidelines. More troublesome is the possibility that large pharmaceutical companies may use their political clout to put pressure on the NIH to start cracking down on violators. With political pressure also comes the concern that enforcement will not be fair.
Some suggest that there should be fewer regulations altogether and that the negotiating parties should be free to decide what they would like in their license agreements. According to this view, not only should the NIH Guidelines be done away with, but nothing should be put in their place. The market would dictate the terms of license agreements. But this argument is deficient for several reasons. The NIH Guidelines are not all bad. They intend to encourage the dissemination of resources by the use of non-exclusive material transfer agreements. Their intent is ultimately for the public good by increasing innovation. The problem is that they are not working, and that they have unnecessary negative effects on small businesses. The absence of any regulation at all, however, would put small businesses at the mercy of the much more powerful pharmaceutical industry. Some have observed a practice of pharmaceutical companies already offering miniscule lump sum fees.318 This could be because they believe that small businesses and universities will take them in light of the NIH Guidelines. Only when small companies absolutely require reach-through royalties do the large companies agree.319
Other commentators suggest that the NIH be given more power to regulate patent licenses under Bayh-Dole.320 Professors Arti Rai and Rebecca Eisenberg argue that the use of non-exclusive license agreements such as AUTM's model material transfer agreement should become the norm.321 But, there are several problems with this solution as well. First, Professors Rai and Eisenberg focus so much on the issues surrounding universities that they fail to consider whether giving the NIH more power will completely disable emerging businesses because of its unwillingness to differentiate between the academic missions of
318 Kowalski & Smolizza, supra note 301, at 9.
319 Id.
320 Rai & Eisenberg, supra note 265, at 310.
321 Id. at 301
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
universities and the commercial nature of biotechnology firms. Second, while non-exclusive licenses make sense for research tools that are significantly upstream to be of general applicability in a variety of research products, the same may not be true for a downstream tool that only a few labs are interested in studying to begin with. Reach-through royalties make significantly more sense for such downstream tools. Furthermore, it may be virtually impossible to value a tool at the outset of a project, especially where any commercialized discoveries would not have been made but for the use of the research tool.322
One idea is to promulgate a regulation that compromises by saying that upstream tools must use upfront licensing fees, while downstream tools may use reach-through royalties.
The test for upstream versus downstream would be a “but for” test. That is, a research tool is considered downstream if the commercialized product would not have been developed but for the use of the research tool. The problem with this idea is that it may be very difficult to prove “but for”, especially in situations where the tool is not used for drug discovery, but for other purposes such as safety trials.323
In other contexts, transparency is often a viable solution where there are competing interests at work. In an ideal situation, holders of research tool patents could be made to list their technologies and terms in a repository. While they would still be able to demand reach-through royalties, the transparency would ensure that competition would drive prices down. However, because of the unique nature of research tools, this solution would only work with upstream tools, not downstream ones. The problem is that downstream tools are one of a kind, and cannot be substituted by someone else's product. For example, if you wanted to conduct a project using a receptor implicated in Parkinson's disease, you cannot use a different target receptor for that same project.
For the new regulations, the Commerce Department should issue regulations that allow small businesses to continue using reach-through royalties regardless of whether they are recipients of government funding. These regulations could at the same time restrict the use of reach-through royalties by universities and non-profits in a manner that is consistent with the original intent of the NIH Guidelines. These regulations would have the force of law, and should include procedures ensuring that they are fairly enforced. Such regulations would have the advantages of reducing many of the bottleneck issues that concern both pharmaceutical companies and the NIH, and they would provide relief for smaller biotech companies by affording them the full benefits of the Bayh-Dole Act. Thus, they could potentially embody a compromise that both pharmaceutical companies and biotechnology companies can live with. Universities, while not being able to freely negotiate as many
322 Kowalski & Smolizza, supra note 301, at 3.
323 Ware, supra note 269, at 279.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
exclusive license agreements as they may like, would actually benefit by ensuring the widespread dissemination of resources, and increasing the number of license agreements that are executed, thus increasing their chances of profiting. At the very least, if such regulations cannot be promulgated, the NIH should amend their guidelines on the dissemination of research tools such that small business recipients of SBIRs or STTRs are not subject to the restriction against reach-through royalties.
Additionally, Congress should pass a statute formalizing a broad construction of the experimental use exemption for biomedical patents as outlined by Janice Mueller.324 Professor Mueller likens such an exemption to the equivalent of the Fair Use Doctrine in copyright law.325 Such an exemption would have the effect of promoting the free dissemination of research tools for research purposes, thus achieving many of the goals outlined in the NIH Guidelines. Under Professor Mueller's model, using a tool for research would incur no liability, but if a marketable product was discovered using the tool, the party would be liable to the research tool's patent owner.326 Damages could be assessed using reach-through royalties, but in instances where that is not feasible, statutory damages could be awarded.327
The combination of Congressional expansion of the experimental use exemption coupled with Commerce Department regulations that implement the goals intended by the NIH Guidelines, while still permitting reach-through royalties for businesses, strikes a balance between competing interests. Universities benefit from the broadened exemption for their research activities. Pharmaceutical companies would not necessarily be harmed by a broadened research exemption; there is evidence that they are reluctant to pursue most infringements by universities because of the prohibitive cost and potentially bad publicity.328 Small biotechnology companies benefit by still being able to negotiate reach-through royalties in their license agreements. Government interests are furthered both by promoting the dissemination of scientific knowledge and resources, while also protecting the biotechnology industry.
C. Reach‐Through Claims
Inventors, with increasing frequency, have been trying to avoid reach-through licensing problems by working the reach-through provision into the patent claims themselves.329 This
324 Mueller, supra note 262.
325 Id. at 42.
326 Id. at 54.
327 Id. at 62.
328 Walsh & Cohen, supra note 266, at 42.
329 Kunin et al., supra note 272, at 619.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
means they can circumvent fruitless negotiations with pharmaceutical companies that are reluctant to enter into reach-through license agreements because the reach-through provision is already a part of the patent. For instance, an inventor patenting a receptor may claim the gene sequence, the receptor itself, and a method for screening for ligands of the receptor.
However, as of late, they also might try to patent as yet unidentified ligands for the receptor,
However, as of late, they also might try to patent as yet unidentified ligands for the receptor,