Most patent legal disputes arise between patentees and third parties, or between patentees and the patent office. But from time to time there are also disputes within a patentee family – because this is what families are like.
By patentee family I mean a group of persons and/or entities who co-own a patent.
One such family is comprised of two French public institutions, namely Université Pierre et Marie Curie (UPMC) and Assistance Publique-Hôpitaux de Paris (APHP), together with an individual, Mr. Julian Itzcovitz, who collectively own European patent application No. EP 2268361 as well as some corresponding foreign applications or patents, directed to a medical device comprising a percutaneous probe, notably for cancer treatment.
Why such an unusual co-ownership? It turns out the invention was jointly made by a neurosurgeon, Prof. Alexandre Carpentier, and by Mr. Itzcovitz who was a private consultant. They jointly filed a U.S. provisional application and then a PCT application claiming the priority of the U.S. provisional. Then, Prof. Carpentier’s share in the patent family was assigned to UPMC and APHP, his employers (in a typical case, the two public institutions would in fact have been the original applicants in the PCT application). On the other hand, Mr. Itzcovitz retained its share, established to be 20%, as he was not an employee.
Under French law, the rules of co-ownership are to be specified in a co-ownership agreement. In the absence of guidelines agreed upon by the parties, article L.613-29 Code de la propriété intellectuelle provides a few default rules. In particular, in terms of licensing, a distinction is made in the article between non-exclusive licenses and exclusive licenses. The default rule is that non-exclusive licenses can be freely granted by each co-owner subject to a compensation to the other co-owners and subject to a right of preemption by the other co-owners.
When it comes to exclusive licenses, the rule is more strict:
An exclusive license can only be granted if all co-owners agree or if a court provides an authorization.
This is a serious constraint indeed. In the present case, although a co-ownership agreement was executed between UPMC, APHP and Mr. Itzcovitz, it does not seem that this agreement contained any provision overruling the unanimity rule set in article L.613-29.
UPMC and APHP planned to grant an exclusive license of the group of patents and applications to a start-up company called Carthera, founded by the inventor Prof. Carpentier. Although the two public entities owned 80% of the shares, this was not quite enough to proceed with the plan, as they still needed the approval of the second inventor Mr. Itzcovitz. But he refused to give it.
Therefore, UPMC and APHP sued Mr. Itzcovitz in front of the Paris Tribunal de grande instance (TGI) in order to obtain the authorization from the court to grant the license without his consent. Carthera, the putative licensee, intervened.
The court defined the scope of its intervention in the dispute as follows:
[…] The court’s authorization is supposed to override an unjustified refusal by one of the co-owners of granting a license contemplated by the other co-owners. It should thus be determined if the reasons set forth by Mr. Julian Itzcovitz for justifying his refusal of the license agreement are serious and well-founded.
Therefore, the court reviewed the draft of license agreement and examined the reasons mentioned by the inventor for rejecting the proposal.
The proposed license was worldwide and covered products for anti-tumor therapy in all organs. Royalties were to be provided in the form of:
- a first lump sum of 73,000 euros to be paid in three installments (I understand that this corresponds to a refund of the expenses related to the various patent applications);
- another lump sum of 80,000 euros due within 6 months of a first marketing authorization in the U.S., and the same lump sum due within 6 months of a first marketing authorization in Europe; and
- a royalty rate of 4 to 5% for products sold in countries where a patent is in force, as long as the patent remains in force, or of 1 to 2% for products sold in other countries, for 15 years.
The draft also included a sublicensing provision, as well as a termination provision in case the licensee cannot or does not exploit the technology or ceases to do so, or is late in doing so.
The disgruntled inventor listed four reasons why the contemplated license was in his opinion bad for business, and the court assessed each of those.
First, the scope of the license was too broad, both geographically and in terms of subject-matter, in view of Carthera’s actual plans, which were to target only the US and the EU, and to focus on brain tumors first, and then at a later stage liver and lung tumors.
Second, Carthera was unable to implement the invention in a timely manner, in view of its clinical trial schedule and its business plan. In fact the subcontractor responsible for miniaturizing the probe was already behind schedule. And Carthera was still a poorly staffed start-up company.
Third, other companies could be interested in implementing the invention but there had been no effort to get in touch with prospective customers.
Fourth, the royalties were too low. When Mr. Itzcovitz first received the draft license agreement during the negotiations phase, he suggested a different royalty structure with much higher non-refundable yearly lump sums covering a number of sales, and then a lower royalty rate for additional sales not covered by the lump sums. His analysis was based on the belief that market opportunities for the invention were huge. During litigation, Mr. Itzcovitz filed an expert valuation of the patents / applications. According to the expert, the actual value of the patents based on the potential market was 13,600,000 euros; but this value was reduced to 3,410,000 euros in the event of a limited exploitation by Carthera. Therefore, the loss suffered by his client was 20% of the difference between the two amounts, i.e. approximately 2 million euros. The expert also noted that the royalty rates offered in the license agreement were lower than typical royalty rates in the field.
UPMC and APHP countered the defendant’s analysis by providing their own expert opinion.
The key point in their argumentation was that the invention was still at an early development phase. It was still quite uncertain whether the invention could be exploited and marketed at all. Safety and efficacy trials still needed to be conducted, marketing authorizations needed to be obtained. In fact there was not even a working prototype of the probe – as a side note, the latter argument would certainly be fodder for a third party wanting to challenge the validity of the patents…
In summary, the claimants’ position was that the level of uncertainty was high and that the invention was not ready yet to be on the market. When this was properly taken into account, the contemplated license agreement made perfect sense.
The court was fully convinced by this argument:
In the case of an early license agreement, the licensee needs to finance implementation and development studies, clinical trials and more generally research and development expenses; they cannot take on expensive patent fees before the marketing phase, or they would run out of funding. In the present case, in Mr. Julian Itzcovitz’ proposal, lump sums are requested for the patent co-owners which are to be paid before marketing starts, which would amount to a total of 933,000 euros. As stated by Prof. Galloux, this would result in excluding start-up entities such as Carthera which have to get funded by fundraising in the development process and cannot take on such significant initial patent fees.
As for the typical royalty rates mentioned by Mr. Itzcovitz’ expert, the court deemed that they were not representative of similar economic situations. The overall valuation of the patent family provided by this expert was also deemed unrealistic – still in view of the uncertainty factor.
Turning to the argument that there were other potential licensees, the court held that there was no evidence of their existence. Only Carthera seemed to be a candidate. Having to find another licensee would also considerably delay the implementation of the invention.
Furthermore, the court held that the choice of Carthera as a licensee was relevant since the head of its scientific committee was the main inventor of the patent. There was no evidence that the delay in the development process could be attributed to insufficient skills or efforts.
Said the court:
[…] In this configuration of an invention at an early stage of its development and a license granted to a start-up company, it is normal to provide that the company taking the financial risk of developing the invention should get an exclusive license with a broad scope in terms of geography and application fields. Indeed, it is rational and balanced that, in case the invention is successful in originally limited fields and territories, it should benefit from profits from the exploitation in other fields and territories, either by directly exploiting the invention itself or by hiring sublicensees (as contemplated in the agreement) if it is not able to do so. It should be added that the patent owners will be compensated proportionally to the sales owing to the royalties in the draft agreement.
The court also noted that the patentees did not run any financial risk since all patent expenses would be paid by the licensee under the license agreement.
Finally, there was an undertaking for the licensee to make all reasonable efforts to exploit the invention in the agreement. Should there be a breach of this undertaking, the patent owners would be entitled to legal action against the licensee.
The conclusion was the following:
Therefore Mr. Julian Itzcovitz does not demonstrate that he would suffer a loss due to the license agreement which would justify his objection to the agreement. It is thus ordered that the exclusive license agreement with Carthera is authorized according to the draft submitted to Mr. Julian Itzcovitz on March 20, 2013 […].
As an additional claim, UPMC and APHP requested 10,000 euros of damages due to the delay in the patent valorization caused by Mr. Itzcotvitz’ refusal. The request was however denied because Mr. Itzcovitz had offered a mediation process but the main co-owners preferred to file suit instead.
Finally, Mr. Itzcovitz as the losing party was condemned to pay 10,000 euros in total as a reimbursement of attorney’s and expert’s expenses. This is relatively lenient, as is usually the case with a natural person.
A lot was probably not said in the ruling. There may have been personal grievances which could explain why the relationships got that bad in the co-ownership. That said, on the face of it, the ruling makes a lot of sense. It’s probably in everyone’s interest (including patients) to make a deal giving an actual chance to a new medical technology to be exploited, rather than to be too greedy upfront.
CASE REFERENCE: Tribunal de grande instance de Paris, 3ème chambre, 2ème section, March 20, 2015, Université Pierre et Marie Curie & Assistance Publique-Hôpitaux de Paris v. Carthera & Julian Itzcovitz, RG No. 2013/17374.