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About

Editor-in-Chief,   Anatole Krattiger

Editorial Board

Concept Foundation

PIPRA

Fiocruz, Brazil

bioDevelopments-   Institute

CHAPTER NO. 11.9   Problems with Royalty Rates, Royalty Stacking, and Royalty Packing Issues
Editor's Summary, Implications and Best Practices

Krattiger A, RT Mahoney, L Nelsen, JA Thomson, AB Bennett, K Satyanarayana, GD Graff, C Fernandez and SP Kowalski. 2007. Editor’s Summary, Implications and Best Practices (Chapter 11.9). From the online version of Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices. MIHR: Oxford, U.K., and PIPRA: Davis, U.S.A. Available online at www.ipHandbook.org.

© 2007. A Krattiger et al. Sharing the Art of IP Management: Photocopying and distribution through the Internet for noncommercial purposes is permitted and encouraged.

Editor's Summary

Virtually all products developed now using biotechnology, genetic engineering and chemistry are technologically complex and incorporate many different inputs. This alone complicates R&D efforts. But, as if this were not enough, there is also the added consideration of the relevant IP rights, held by third parties, which may be attached to these many inputs.

For example, a vaccine might be identified and tested using proprietary research tools with IP rights owned by several companies. Later, the vaccine might be produced using patented recombinant techniques and proprietary DNA sequences. Transformation vectors might be owned by others. Production of the vaccine might employ a proprietary cell line. The vaccine might be packaged with one or more proprietary adjuvants, and then be delivered using a patented device. Hence, when the vaccine is ultimately “ready for use,” it will likely be subject to royalty obligations to several different companies or “licensors”. This results in a dilemma, as the various licenses involved can combine to impose aggregate royalty obligations of 6-20%, or more, of the selling price of the product. There will also be separate reporting and accounting obligations to each of the licensors. Similar problems arise in agriculture where a genetically engineered crop might be made using proprietary varieties, vectors, gene sequences, and research tools … each with IP rights owned by different entities.

The chapter discusses two scenarios that can arise when multiple royalty rates are hanging on one product: royalty stacking and royalty packing:

  • Royalty Stacking A biotechnological product might have multiple patents attached, and thus require multiple licenses in order to make, use, or sell the product. For example, a product may require separate licenses for use of research tools, gene sequences, expression vectors, cell lines, adjuvants (and, sadly, the list can go on and on). Thus, from the prospective of the organization making the product, the multiple royalty demands should be “stacked” together to determine the total royalty burden for R&D and commercialization of the product. Because royalty stacking can involve so many third party IP holders, efficient production of, and timely access to, a product may be inhibited, and possibly truncated.
  • Royalty Packing With some biotechnologies, it may be necessary to bundle one technology with other technologies. This requirement could be imposed by the licensor, but also could be imposed by best practices within an industry or by a health ministry. For example, in order to facilitate broad administration, a vaccine might be required to be administered simultaneously with several different vaccines that are proprietary to several companies. In this situation, the royalties imposed on each of the proprietary products that are administered will be “packed” together. Royalty packing may cause a significant increase in the aggregate cost of the several packed products.

The chapter then presents several techniques to manage royalty stacking and packing:

  • Royalty Ceiling A licensee may seek a “ceiling” for royalties in agreements it makes with licensors. For example, the licensee might establish a ceiling of 6% for combined royalties on product sales. In turn, if the stacked royalties exceeded 6%, then each of the licensors would agree to have the royalties they are to be paid reduced on a pro rata basis so that the total royalties due to all of the licensors would equal 6%.
  • Royalty Floor A licensor may seek a “floor” below which its share of the royalties may not be reduced. For example, if additional technologies are required to develop and/or commercialize a product, a licensor might agree to have its royalties reduced on a pro rata basis, but not below a specified floor; for example, the license requires royalties of 5% but will permit reduction if additional licenses are required provided that royalties due will never be less than 2% per unit sold.
  • Variable Royalties Licensees and licensors also might agree to have “variable royalties” which are conditioned on the importance of the technology in relation to the creation of the product. In other words, a proprietary technology with a more important role in the product’s R&D would demand a higher royalty; for example, the owner of proprietary antigen (specific and essential input) would receive higher royalties in a vaccine raised against the antigen than the owner of a proprietary expression system (generic and nonessential input) for expressing the antigen.
  • Royalty Alternatives Finally, alternatives to royalty bearing arrangements can also be considered; these include lump sum payments and patent pooling. Such alternatives show that management of royalty stacking and packing does not necessarily require royalty streams. For example, a lump sum payment for use of a research tool may be an optimal way to disseminate and exploit a patented technology. Some technologies may be best assembled in patent pools that provide either free use of, or fixed price access to, the technologies. Patent pools can thereby facilitate R&D using a variety of proprietary technologies without the need to negotiate licenses.

Royalty stacking provisions can be inserted into license agreements, crediting some portion of the “third party royalties” against the royalties otherwise due to a research institution. There are many variations in such clauses, but a typical clause might read as follows:

“If the COMPANY is required to pay royalties to third parties for patents required to develop, manufacture, or sell the LICENSED PRODUCT, then COMPANY may credit 50% of the total third party royalties paid in a calendar quarter against the royalties otherwise due to INSTITUTION under paragraph xxx above for that calendar quarter; provided, however, that in no event shall the royalties paid to INSTITUTION for the LICENSED PRODUCT in that calendar quarter be less than half of the royalties that would be paid under paragraph xxx above in the absence of such credit.”

Royalty stacking and packing are serious licensing issues that any organization involved in IP management and technology transfer should preemptively plan for and manage. Although challenging, there are licensing strategies that can overcome these hurdles, and facilitate product R&D and commercialization. This chapter provides a clear analysis of the problem of unwieldy royalty stacks, and then shows how to reduce these stacks to a manageable level.

Key Implications and Best Practices

Given that IP management is heavily context specific, these Key Implications and Best Practices are intended as starting points to be adapted to specific needs and circumstances.

For Government Policymakers

  • Provide adequate support to public sector institutions so that their technology transfer offices can establish licensing capacity commensurate with the complexities of modern biotechnological products and processes. They will need to be able to identify the layered complexity of inputs in biotechnological products, determine attached third party IP rights, and then manage licensing so as to not be overwhelmed with royalties. This will require investments in physical, institutional and human capacity. It is a good investment in the future.

For Senior Management (university president, R&D manager, etc)

  • Ensuring that an institution’s technology transfer office has the resources and personnel to implement adequate licensing strategies represents an investment in the future of the institution. In the case of royalty stacking and packing, this will require trained licensing professionals who can foresee potentially complex licensing scenarios and plan by assembling licensing alternatives and appropriate license clauses.

For Scientists

  • The products, arising from your program’s R&D efforts, which might eventually be commercialized, will invariably embody numerous technologies, including components and processes that might have IP rights attached that are owned by others. This can create complex IP management and licensing issues as these products approach commercialization. Therefore, as early as possible, it is critically important for you to establish and maintain a solid line of communication with your technology transfer office in order to let them know what you are using in your R&D, where it came from, and whether there might be third party IP ownership issues involved.

For Technology Transfer Officers

  • Realize that products incorporating biotechnological inputs, whether methods, research tools or components, will invariably be complex, such that the final product or process incorporates many inputs.
  • Recognize that each of these inputs might have IP rights attached that are owned by third parties and that might therefore, ultimately, impose stacked, or packed, royalties
  • Develop a coordinated licensing management strategy, complete with template license clauses, that will preemptively address royalty stacking and packing.
  • Royalty stacking and royalty packing are relevant to both in-licensing and out-licensing. Be aware of the difference and contingencies, and plan accordingly.

Krattiger A, RT Mahoney, L Nelsen, JA Thomson, AB Bennett, K Satyanarayana, GD Graff, C Fernandez and SP Kowalski. 2007. Editor’s Summary, Implications and Best Practices (Chapter 11.9). From the online version of Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices. MIHR: Oxford, U.K., and PIPRA: Davis, U.S.A. Available online at www.ipHandbook.org.

© 2007. A Krattiger et al. Sharing the Art of IP Management: Photocopying and distribution through the Internet for noncommercial purposes is permitted and encouraged.