Licensing Seminar Slides - McCarthy

Cross-Border Series

Seminar Two: International Licensing

International Localisation

Cheryl SlusarchukTechnology Group

Licensing Abroad

• Key Areas of Concern

• Getting $$ out of foreign jurisdiction

• Loss of company name or trademark

• Loss of IP

• copyright and trade secrets in the software

• reseller filing similar patent

• Risk of liability in the foreign jurisdiction

• “UNKNOWN”

Geographic Regions

• Each has unique characteristics:

• North America

• Asia Pacific (at least 3 different sub-regions)

• Latin America

• EU

• Russia and Eastern Europe

Choice of Governing Law

Dispute Resolution

Public Policy – Mandatory Laws

IP Protection

Regulatory Laws

Key Issues

Choice of Governing Law

• Our law / their law

• Potential laws that come into play:

• your law

• law of the local jurisdiction

• if dealing with a European country, EU Directives

Public Policy – Mandatory Laws

• Protects the local country’s businesses & people

• Dealer Legislation

• Mandatory Warranties

• Import / Customs

• Transfer of IP and Improvements

• Bankruptcy / Insolvency Laws

Public Policy – Mandatory Laws (con’t)

• Language Laws – “France!”

• Taxes – “Everywhere you want to be”

• Foreign Exchange / Investment Controls

• Privacy laws (e.g. Differences with U.S., EU Privacy Directive)

Regulatory Laws

• Import Restrictions – Encryption

• U.S. / Canadian Export Regulation

No license, no permit, no entry!!

IP Protection

• IP protection is country specific

• Patents

• Copyright

• Trademarks

• Database rights, moral rights

Dispute Resolution / Enforcement

• Use arbitration

• Injunctive relief to stop using IP

• Breach of confidential info

• Damages for loss of profits

U.S. Specific Issues

David FordTechnology Group

Privacy

• Patriot Act – Canadian data gets covered

• Financial Services / Health – Specific obligations

• Websites – Privacy Policies / COPPA

• State laws – e.g. California and obligation to disclose security breaches

Intellectual Property

• Works Made For Hire

• Moral Rights

Contracting – Practical Tips

• Electronic Contracting – Use splash screens, EULAs

• Warranties – Material and damages not sufficient; opposite from Canada / UK

• Governing Law and Venue – Generally need nexus

Contracting - Practical Tips (cont’d.)

• ADR – Get comfortable; exclude injunctive relief

• Bankruptcy – US Bankruptcy Code 365(n)

• Withholding tax

Fundamental Tax Issues

Brent KerrTax Group

Overview

• License or Disposition

• Withholding tax

• Offshoring

• Transfer pricing

License or Disposition

• Legal substance

• Exclusive

• World-wide

• Fields of use

• Duration

Withholding Tax

$ 75$ 100Net fee received

(25)(33)Withholding tax (25%)

$ 100$ 133Total fee paid-33Gross-up

$ 100$ 100Basic feeNo gross-upGross-up

Fee

CANADAFOREIGN

Withholding tax

• Domestic exemptions

• ITA 212(1)(d)

• 25% withholding tax on royalties and similar payments

• Exemption for certain copyright payments

• Exemption for certain R&D cost sharing payments

Withholding tax

• Treaty exemptions

• US treaty, Article XII

• Tax rate reduced to 10%

• Exemption for certain copyright payments

• Exemption for computer software payments

• Exemption for patents, scientific information, etc.

Withholding tax

• Agreement should contemplate:

• Right to withhold

• Gross-up

• Treaty rate/exemptions

• Foreign tax credit offsets

• Access to information

• Other technical matters

Offshoring

CANADAFOREIGN

sales

License Dividends

Offshoring

• Choice of jurisdiction

• Residence

• Carrying on business

• Transfer pricing

Transfer pricing

• Symantec

• $1 billion assessment March, 2006

• Technology license agreement

• Subsidiary in Ireland

New BC tax incentive

• International Financial Activity Act

Some Pitfalls and Risksin Biotech Licensing

John PearsonLife Sciences Group

Introduction

• The Biotechnology Industry

• $35Billion of U.S. Partnering and Financing in last 12 months

• ½ from Licensing and Partnering Deals1

• 5,000 Companies worldwide

• Some Issues for your licenses with U.S. parties

1 Burrill & Company, BIO 2006

Is Your License Really Exclusive?

• License Agreement – The Licensee bargains for an exclusive license under Patent Rights

“Licensor hereby grants to Licensee a worldwide, exclusive, royalty-bearing license under the Licensor’s Patents to make, have made, use, sell, offer to sell and import Products in the Field.”

• Cooperative Research and Development Agreement –The Parties bargain to jointly own Patent Rights

“All Patent Rights covering inventions jointly made by the Parties shall be jointly owned.”

Answer: It Depends on the Jurisdiction

• U. S. – Each joint owner of a patent can grant a license to another party without accounting to the other co-owners.

• Canada - A co-owner cannot grant a license to another party without the consent of the other co-owners.

Patent Misuse

• What is it?

• Extending the Patent Monopoly Beyond the Statutory Grant

• Combination of Anti-Trust Laws and Patent Misuse Doctrine

• Result: Unenforceability of the License

Examples of Patent Misuse

• Tying arrangements

• tie-ins and tie-outs

• Illinois Tool Works v. Independent Ink (March, 2006)

• Prohibiting the licensee from asserting patent invalidity

• Discriminatory royalties

More Examples

• Post-expiration royalties

• single vs. patent package

• patents vs. trade secrets

• Royalties based on sales of patented and unpatented products

• Price-fixing

• Grant-backs

The U.S. Research Exemption

• Are you are carrying out research in the U.S., or do you own a U.S. patent?

• Section 271(e)(1)

“It shall not be an act of infringement to…use…a patented invention…solely for uses reasonably related to the development and submission of information under a Federal law which regulates the…use…of drugs.”

Merck KGaA v. Integra Lifesciences I, Ltd.(June 2005)

• Phase of the Research - Now pre-clinical as well as clinical work

• Scope of the Research

• Result of the Research

• Research tools?

Create

• Why it was necessary

• How it affects your research collaborations and CRADAs

International Financial Centre

• Not a pitfall, but an Opportunity

• International Financial Activity Act - 2006 Amendments

• Biotech is now included!

How Does It Work?

• International licensing of patents by B.C. Biotech companies

• Selling related goods or services to NR

• $8,000,000 Provincial income tax break

• Patents include:

• microbiology

• chemistry

• research tools

Biotechnology Licensing:International Royalty Structures

and Strategies

Paul ArmitageLife Sciences Group

Structures and Strategies - General

• Territorial considerations heavily influence royalty structures in biotechnology licenses

• Patent, no patent and competition in local markets

• Different royalty rates for patent vs. non-patent countries

• Royalty term: expiry or step-down of royalties as patent protection ceases on a country-by-country basis

• Reduced royalties where generic and other competition exists locally

Structures and Strategies – General

• Tiered royalties based on sales within geographic areas

• Different royalties for major and minor markets

• U.S. and EU vs. “rest of the world” (ROW)

• Profit-sharing

• “Profit-share territory” plus “royalty territory”

Example #1: Novartis – Anadys Pharmaceuticals, June 2005

• Exclusive, worldwide license by Anadys to Novartis for Anadys patents and know-how for the treatment of Hepatitis B and Hepatitis C, with an option for other infectious diseases


• U.S. market – royalties or optional profit share: tiered royalties based on net sales OR profit share if Anadys opts to co-promote sales in U.S.

• Upon exercise of co-promotion rights in U.S., Anadys to pay 35% of Novartis’ commercialization costs in the U.S. to date of exercise of option, and parties thereafter to share commercialization costs in the U.S. on the basis of an Anadys/Novartis split of 35%/65%

• Profit share based on an Anadys/Novartis split of 35%/65%


• ROW (i.e., outside of U.S.) - royalties: tiered royalties based on net sales (at different rates than U.S. royalties)

• Royalty adjustments:

• Royalties reduced on a country-by-country basis if:

• No licensed patent in a particular country

• Competitive product exists in a particular country, and sales drop by greater than a certain percentage from one year to the next


• Royalty adjustments: (cont’d)

• If a license to a third party patent is required in a particularcountry, the cost of the third party license is deducted from royalties

• Restrictions on royalty adjustments:

• Royalty reductions for third party licenses and local competition are capped at a maximum, cumulative amount

• No combining of royalty reductions for (1) local competition, and (2) lack of licensed patent in local country


• Royalty term: royalties payable on a product-by-product and country-by-country basis until the later of (1) expiry of the last patent in a particular country, and (2) set number of years from first sale in a particular country

• Full text of agreement available at:

http://www.sec.gov/Archives/edgar/data/1128495/000093639205000247/a11717exv10w38.txt

Example #2: Shire Pharmaceuticals and New River Pharmaceuticals, March 2005

• Collaboration for worldwide development and commercialization of New River’s compound for the treatment of attention deficit/hyperactivity disorder (ADHD)

• Two agreements entered into simultaneously: (1) U.S., and (2) ROW


• U.S. market – profit share:

• New River primarily responsible for obtaining regulatory approvals of ADHD products in the U.S.

• Shire solely responsible for commercializing products in the U.S. after regulatory approvals obtained, except that New River may opt to co-promote up to 25% of sales efforts in the U.S.


• U.S. market – profit share: (cont’d)

• Profit-share based on net sales in U.S. minus commercialization expenses in U.S. and certain clinical trial expenses

• Profit-share for first product (meeting certain conditions): Shire/New River 75%/25% for first two years, 50%/50% thereafter (different profit-share formulas used in different situations and for subsequent products)

• Development expenses shared at different percentages based on whether the expenses are specific to the U.S. or also have worldwide application

• “Net sales” amounts are reduced by the cost of third party licenses necessary for commercialization

• Profit-share term: for so long as the product is being sold in the U.S.


• ROW - royalties:

• Shire primarily responsible for obtaining regulatory approvals and solely responsible for commercialization of products in ROW

• Shire’s development obligations commence after FDA approval is obtained in the U.S., and development and commercialization obligations apply only to “Major EU Markets” (i.e., France, Germany, U.K., Italy and Spain)

• Shire bears all its commercialization costs in ROW


• ROW - royalties: (cont’d)

• Royalty structure (“low double-digit royalty”):

• Major EU Markets: tiered royalties based on net sales

• All other ROW markets: flat-rate royalty based on net sales

• Royalties reduced on a country-by-country basis if generic product is sold in local market

• No royalty reduction if no licensed patent in particular country


• ROW - royalties: (cont’d)

• Royalty term: royalties commence upon first commercial sale of a product in a particular country and expire on a country-by-country basis upon the later of (1) expiry of the last patent in a particular country, and (2) set number of years from first sale in a particular country

Full text of agreements available at:

http://www.sec.gov/Archives/edgar/data/936402/000095010305001377/ex1002.htm

http://www.sec.gov/Archives/edgar/data/936402/000095010305001377/ex1003.htm

Questions?

[email protected] GroupDavid Ford

[email protected] GroupCheryl Slusarchuk

[email protected] Sciences GroupJohn Pearson

[email protected] GroupBrent Kerr

[email protected] Sciences GroupPaul Armitage

Documents

Licensing Seminar Slides - McCarthy