Academic journal article Santa Clara High Technology Law Journal

Improvements for Handling Improvement Clauses in IP Licenses: An Analytical Framework

Academic journal article Santa Clara High Technology Law Journal

Improvements for Handling Improvement Clauses in IP Licenses: An Analytical Framework

Article excerpt

In 1985, Amgen was a fledgling biotechnology company just four years old. (1) Faced with a dilemma common to many start-up biotechnology companies, the company had two promising drugs, Epogen[R] and Neupogen[R], but was cash strapped and did not have nearly enough money to develop the two products. (2) To make its financial situation worse, Amgen was burdened with the prospect of a costly patent battle with Genetics Institute over the commercialization of its Epogen product, a promising new recombinant protein product called erythropoietin alfa (EPO) useful for treating various forms of anemia. (3) As a consequence of these pressures, Amgen did what many biotechnology companies faced with such prospects do: it forged a deal with Ortho Pharmaceutical, a subsidiary of Johnson & Johnson. (4) In return for a much needed cash infusion of $10 million dollars, Amgen granted Ortho exclusive worldwide rights to sell EPO while retaining its own rights to sell EPO for the kidney dialysis market in the United States. (5) Following the deal, Ortho launched its EPO product under the trademark Procrit[R] in the United States for the larger non-dialysis market and Amgen launched its Epogen product for the dialysis market. (6) At the time, the deal was a lifesaver for Amgen, but it also deprived the company of approximately two-thirds of the market for its Epogen product. (7)

Fast forward to 1998. Amgen's Epogen product, used to treat anemia associated with chronic renal kidney dialysis was its lead product with 1997 sales of $1.16 billion. (8) However, as a result of the 1985 agreement, Amgen was deprived of the more lucrative non-dialysis market. (9) Thus, in order to capture that market, Amgen developed a new improved version of EPO, a hyperglycosylated analog of EPO known as NESP, (10) which Amgen claimed had a threefold longer half life than the original EPO product, giving the analog the potential advantage of less frequent dosing. (11) Amgen then executed a legal strategy in which it claimed that NESP was not covered by the 1985 license agreement with Ortho. (12) If such argument were successful, Amgen would have access to the lucrative worldwide non-dialysis market, estimated to be at least $1.35 billion in 1998. (13)

Ortho disputed Amgen's interpretation of the 1985 agreement, contending that NESP was an improvement covered by the agreement to which it had exclusive rights outside the dialysis market. (14) The case went to arbitration, and, in 1999, an arbitration panel in Chicago ruled that Amgen had exclusive rights to NESP and that the new analog was not an improvement covered by the 1985 license to Ortho. (15) In addition to giving Amgen access to the lucrative market for EPO, the decision sent Amgen's stock price surging 23%. (16)

The Amgen/Ortho case study highlights the critical importance of considering improvement clauses in licenses of patents and copyrighted works. Absent a more refined improvement clause, the two companies were left to battle whether the original licensing agreement governed NESP. As this case illustrates, although the focus of the particular agreement may be for the existing work, as time passes, the work's improvements may prove the most important to both the licensee and licensor.

This article addresses the current legal issues surrounding improvements in copyright and patent law, pointing out why improvement clauses can be critical, and providing an analytical framework for determining how to handle improvement clauses in licensing agreements. As considered here, emphasis is given to improvements made by a licensor; however, this general discussion is equally relevant to improvements made by a licensee, which are typically governed by grantback clauses. In Part I, the article provides some legal background on copyrightable and patentable improvements and discusses the present use of improvement clauses. In Part II, the article turns to case law and other sources to illustrate the importance of improvement clauses. …

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