Biotech Licensing Caselaw Update – 2024 Year in (Brief) Review
Last year was a surprisingly big one for legal decisions impacting the biotechnology transactions and licensing space. Given that most biotech deals are subject to confidential alternative dispute resolution, it is unusual for disputes over those deals to be resolved publicly, much less resolved in a way that allows attorneys to incorporate their teachings into daily drafting and negotiations. In 2024, however, there were four cases of particular note that impacted three areas of our practice.
Extension of Government’s License Rights under Bayh-Dole
In February 2024, the Federal Circuit held, in University of South Florida Board of Trustees v. United States, that the federal government’s license under the Bayh-Dole Act can apply retroactively to inventions that were conceived and reduced to practice prior to the date that funding was received from (or even granted by) the federal government for the work that led to the invention. Condensing the facts at issue in this case, USF’s faculty started a project prior to applying for funding for that project from the NIH; ultimately, USF accepted funds from the NIH for work that its faculty performed prior to the date that the grant was actually awarded by the NIH for the project, thereby infecting all inventions from that project. On its face, this holding suggests that a university or other third-party service provider can encumber IP that it creates for a customer, even after ownership of that IP has been transferred to the customer.
While the holding initially appears to have far-reaching and disastrous consequences, USF’s case suffered from several bad facts that somewhat mitigate its impact. In particular, the Federal Circuit’s holding was based partly on the facts that USF took minimal steps to restrict the reach of the government’s rights and, in certain instances, took actions (after creation of the IP at issue) that actually affirmed the government’s rights. With that in mind, when a biotech company engages a university (or any other third-party service provider) for the performance of services, the contract should clearly prohibit the counterparty from accepting funds from any other source (including the government) for the same work. Further, if a biotech company becomes aware that third-party funds have been accepted for any of its projects, then the biotech company should be very careful not to take any actions that affirm that third party’s rights to IP that the biotech company should own outright.
Post-Expiration Patent Royalties
The Third Circuit, in August 2024, clarified the Supreme Court’s patent misuse doctrine with respect to royalties for post-expiration use of patented inventions. As brief background, the Supreme Court previously established that royalty obligations are unenforceable due to patent misuse if they are calculated based on practicing a patented invention after expiration of the applicable patent that claimed that invention. This doctrine, in practice, usually impacts biotech licenses in one of two ways: (1) patent-only licenses generally terminate upon expiration of the licensed patents; or (2) if the license involves both patents and know-how, then the royalty rates in the license are reduced after expiration of the licensed patents.
In Ares Trading S.A. v. Dyax Corp., however, the licensor was able to enforce post-expiration patent royalties against their licensee because the royalties were not calculated based on sales of infringing products. The licensor’s patents claimed a process for target identification, which would not be infringed by the drug that was ultimately developed to bind to that target. Thus, when the licensee agreed to pay royalties on sales of its drug, the royalty obligation was held to be enforceable even after expiration of the licensed patents because the royalties were not calculated based on infringing activity.
Interestingly enough, even though the Third Circuit did take a narrow view of this portion of the Supreme Court’s doctrine that would seemingly benefit licensors in the future, the Court left a window open for licensees by implying that the licensee in this case pursued the wrong basis for patent misuse in its lawsuit. Instead, the licensee in this case likely should have asserted that its licensor improperly enlarged the scope of the licensed patents by tying the royalties to non-infringing activity. Accordingly, it still remains to be seen if royalties after expiration of licensed patents are unassailable.
Commercially Reasonable Efforts
In September 2024, the Delaware Court of Chancery released two memorandum opinions, in Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc., and Fortis Advisors LLC v. Johnson & Johnson, that analyze distinct approaches to "commercially reasonable efforts," a common standard in the biotech industry. On the one hand, Alexion’s definition required efforts "typically used by biopharmaceutical companies similar in size and scope to [Alexion]," whereas J&J was obligated to use efforts "consistent with [its] usual practice . . . with respect to [comparable] priority medical device products." While distinct definitions, they each had fatal flaws that ultimately resulted in the Court holding that Alexion and J&J both breached their respective CRE obligation.
With respect to Alexion, the Court could not find a comparable biopharmaceutical company to use in its analysis, which allowed the Court to invent a hypothetical company against which it compared Alexion’s acts. That hypothetical company gave the Court significant leeway in its interpretation of the standard, essentially permitting the Court to construe the remainder of the CRE definition in the way that best fit its theory of the case. J&J’s efforts, in contrast, failed to meet CRE because the required comparison was to a "priority" product, which heightened the standard that J&J had to meet. The Court’s analysis frequently pointed out that J&J’s efforts were not aligned with such a product (but implied that J&J’s efforts would otherwise have been acceptable for a non-priority product). Thus, both holdings provide important guidelines for drafting definitions of "commercially reasonable efforts" in the future.
Conclusion
Looking ahead to the remainder of 2025, one case that we are watching is a shareholder lawsuit against BMS out of the Delaware Court of Chancery that was filed in December 2024. In Shareholder Representative Services LLC v. Bristol-Myers Squibb Co., the shareholders of a company acquired by BMS allege that BMS used a deceptive patent prosecution scheme to avoid paying $450 million in milestone payments. So, if we are lucky, we will get a useful holding that can be incorporated into the obligation to pay biobucks for achievement of milestones that is a part of most of the biotech deals that we draft and negotiate on behalf of our clients.
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