On November 27, 2018, after a nearly five-year roller-coaster battle in court, Washington University in St. Louis won a damages award of $31.6 million. This award stemmed from underpaid royalties linked to Zemplar, a successful drug used to treat kidney dialysis patients, against its partner Wisconsin Alumni Research Foundation (WARF) for a breach of a 1995 inter-institutional agreement between the two universities (“IIA”).
The focus of the dispute was on whether WARF undervalued the contribution of technology that had been jointly developed by researchers at Washington University and WARF, which was later protected under U.S. Patent No. 5,597,815 (the “’815 Patent”), in determining Washington University’s share of licensing royalties over the life of the IIA. Specifically, under the IIA, Washington University granted WARF the exclusive right to negotiate, execute, administer, and enforce license agreement(s) on behalf of Washington University and WARF. In exchange, WARF agreed to make annual payments to Washington University for its share of the income from the license agreement(s), in accordance with the following terms:
However, while the 15% administration fee and 33 1/3% royalty share were clearly stated in the IIA, there was no specific metric provided in the IIA on how to determine the “income” received when the ‘815 Patent was licensed as part of a broader patent portfolio. Rather, the language within the IIA gave WARF the sole authority to assign relative value when a license included the granting of “rights under other patents and/or other proprietary rights to which WARF owns a part of or all right title and interest,” or when other licenses that “may be directed primarily to other invention subject matter or technology than that contemplated in this Agreement.”
In July 1998, the ‘815 Patent was added to a bundle of IP rights previously licensed to Abbott by WARF (the “Abbott license”), with the first payment to Washington University in November 1998. During the trial in March 2018, Washington University told the court that “of the $426 million in royalties taken in by WARF due to the ‘815 patent, [Washington University] had been sent slightly over $1 million” since 1998[>6]. The reasoning behind why the payments to Washington University were only a fraction of the total royalties WARF received was summarized in an April 2001 letter from WARF:
Over the next decade, Washington University continued to receive its allocated 0.274% share of the royalties, as discussed in the 2001 letter. The current dispute stemmed from a subpoena served by Hospira to Washington University in late 2012 in connection with a patent infringement lawsuit filed by Abbott involving the ‘815 Patent. In compiling documents responding to the subpoena, Washington University discovered the following:
In December 2012, Washington University questioned the relative value WARF assigned to the ‘815 Patent in comparison to the other two WARF-owned Zemplar patents in the Orange Book in light of the above discovery. Not being able to resolve the issues, Washington University filed the lawsuit seeking damages under breach of contract, breach of implied covenant of good faith and fair dealing, and breach of fiduciary duty on December 26, 2013. Although the district court ruled that the implied covenant of good faith and fair dealing required WARF to “exercise its authority to assign relative values fairly and in good faith,” the court sided with WARF that the suit was time-barred under the applicable statute of limitations, given that the IIA was entered in 1995 with the first payment in 1998, and granted summary judgment to WARF in January 2016. The lawsuit was later revived in July 2017 on appeal when an appellate court concluded that “the express terms of the contract do not answer” the question “as to whether WARF and [Washington University] intended that the ‘815 Patent would be revalued if it became clear that the value originally assigned to the ‘815 Patent was insufficient to fairly compensate [Washington University] under the 1998 Agreement.”
The $31.6 million damages award from the November 27, 2018, decision came more than 20 years after the two universities entered the IIA, nearly five years after the lawsuit initiated by Washington University, and more than two years after the expiration of the ‘815 Patent. It may still not be the end of the long-running dispute, as “WARF is reviewing the decision,” according to its spokeswoman.
With the benefit of hindsight, the issues in this dispute provide some tips for universities and research institutions involved in inter-institutional agreements to consider.
First, similar to a license agreement, parties to an inter-institutional agreement commit to a long-term relationship that is mutually beneficial. Therefore, it is crucial to maintain constant communications with collaborating partners about all active inter-institutional agreements to ensure that the parties are on the same page during the life of the agreements. As shown in this case, the communications should focus not only on the expressed terms, such as the term that gave WARF the sole authority to assign value in 1995, but also on the nonexpressed terms, such as whether the parties intended to have the value reassessed when the surrounding situation changed to ensure fair compensation. For example, while it may be difficult initially to determine the value of one patent out of a portfolio of licensed patents, the parties may negotiate about whether to revisit the issue periodically and/or according to certain trigger points.
Second, it is critical for the parties to ensure that issues are identified and addressed in a timely manner. Washington University’s initial court loss due to being time-barred is a reminder of the potential consequences of failing to do this. The 1995 IIA included only a clause for the record-keeping of costs and income from licensing activities by the lead institution; however, the AUTM Model Inter-Institutional Agreement includes language for the nonlead institution to examine the books and records, as well as an option to add an audit clause that enables nonlead intuitions to audit the lead institutions’ books and records related to key royalty-sharing provisions. This auditing ability may help parties ensure compliance as well as identify and bring issues that may not have been foreseen at the time of the agreement to the forefront for discussion.
Finally, being able to resolve issues early may save costs for all parties involved. Putting aside the litigation costs, the long-running dispute in this case meant that Washington University missed the opportunity to use the $31.6 million cash flow from the IIA in the years in which they were due. It also caused a potential cash flow problem for WARF, to the extent that all royalties from the Abbott license had already been distributed.
In summary, inter-institutional agreements are common among universities and research institutions, as they enhance collaboration and the opportunity for the commercialization of developed technology. Active management and constant communications are the key to a win-win relationship for all parties involved.