Opinion ID: 1463107
Heading Depth: 3
Heading Rank: 2

Heading: Sublicense Fees

Text: After concluding that Xenon granted Novartis a sublicense in the jointly patented technology, the district court held that Xenon violated the terms of the Exclusive License Agreement by failing to pay the Foundation a share of the sublicense fees. Xenon argues that it is not obligated to make payments to the Foundation until products are actually brought to market and sold as a result of the sublicense. Because no products have yet been sold, Xenon claims it does not owe the Foundation anything. Again, we disagree. The Exclusive License Agreement requires Xenon to pay the Foundation license fees, milestones, and royalty payments as soon as they are received. [4] Section 4 of the Exclusive License Agreement, titled Consideration, lays out the payment details and schedule. Subsection (B)(i) of that section states: For all Products sold directly by Xenon, Xenon shall pay to [the Foundation] ... a royalty calculated as a percentage of the Selling Price of Products.... (Emphasis added.) It goes on to specify that royalties are earned on either the date the product is actually sold, the date an invoice is sent, or the date the product is transferred to a third party for promotional reasons  whichever comes first. The next subsection  the provision most relevant to this dispute  states: For all Products sold by Xenon sublicensees, Xenon shall pay to [the Foundation] a percentage of any license fees, milestones, and royalty payments received by Xenon as consideration for the sublicense granted to such sublicensees under Section 2B. The percentage shall remain fixed at a rate of ten percent (10%) for years one (1) and two (2) of this Agreement and seven and one-half percent (7.5%) thereafter until this Agreement is terminated. Because both subsections begin with the phrase [f]or all Products sold  (emphasis added), Xenon argues that it does not owe the Foundation any payments for the Novartis sublicense until products are actually brought to market and sold. We agree with the district court that Section 4, read as a whole, requires payment of the Foundation's share of the sublicense fee independent of any actual sales of products. The apparent point of the prefatory phrase [f]or all Products sold in each of the two subsections governing payment is to distinguish between payments required when Xenon commercialized the technology itself and payments required when Xenon issued a sublicense to a third party to do so. In the former circumstance, the payment due the Foundation is a royalty based on products sold; in the latter circumstance, the payment due the Foundation is a specified percentage of the sublicense fee Xenon receives, plus milestones and royalties. Because the Novartis transaction falls under the second subsection, payment is due on receipt of a sublicense fee, not on the occurrence of product sales. This reading of the payment provision is the most plausible for several reasons. Although both subsections use the same introductory phrase, the first subsection also says that payment is due upon actual product sale while the second subsection  governing sublicenses  does not include similar language. Instead, the second subsection states that Xenon owes the Foundation a percentage of any license fees and milestones, in addition to royalty payments, stemming from any sublicense. As the district court noted, sublicense fees and milestone payments are not contingent upon a sale; they are paid immediately or on an ongoing basis by a licensee or sublicensee in exchange for the right to make sales of products developed in the future. Finally, the parties agree that it generally takes about 15 years to bring a drug product to market. Yet the Exclusive License Agreement specifies that Xenon must pay the Foundation 10% of any license fees, milestones, and royalty payments received during the first two years of the agreement and 7.5% thereafter. This provision would make little sense if no payment was required on a sublicense until a product was brought to market. Accordingly, the district court properly concluded that Xenon breached the Exclusive Licensing Agreement by failing to pay the Foundation its share of the fee from the Novartis transaction. [5]