First Appellate Division rules ambiguity exists in patent royalties breach of contract case.

In a divided court opinion, the First Appellate Division reversed a lower court ruling in New York Univ. Pfizer, Inc., 2017 NY Slip Op 03464 (May 2nd, 2017) to find that a relevant provision that addressed royalties payments was ambiguous and reinstated the complaint.

Plaintiffs ,NYU, sued defendants, Pfizer, Inc. for breach of contract, specifically, royalties on the sale of a cancer drug, Xalkori®, which NYY alleged was developed in part by the NYU research project with Sugen, company purchased by Pfizer in a later stage.

In 1991, Sugen and NYU entered a license agreement whereby Sugen provided sponsorship for NYU’s research into tyrosine kinase inhibitors (TKR).  As part of the bargain, Sugen would receive an exclusive license to use the NYU’s “research technology”  for development of any drug that resulted from the research.  Furthermore, Sugen agreed to pay any royalties on any sales with respect to the drugs.

In 1996, Sugen was acquired by a third party and thus, a new agreement, Second Amended Research and License Agreement was executed between the parties.  As part of the amended, agreement, NYU agreed to reduce its royalty rates for “the right to royalties in on certain later developed products” and specifically added Section 9 which stated:

“[3] SUGEN Products that are developed based on Receptor targets which were not adopted into drug discovery at the time of the effective date of such acquisition, merger, or joint venture shall be subject to a). a royalty of 2.5% on Net Sales of SUGEN, and/or Corporation Entity, which may be offset by 50% of the royalties paid by SUGEN to third parties (other than MPG), provided that the royalties due to NYU shall not be less than 1.5%of Net Sales of SUGEN and/or Corporation Entity and b). 10% of License Revenues with respect to any SUGEN Product, provided that with respect to such SUGEN Product there exists a Patentable Invention with respect to such target and/or its utility which is derived from or based on the Research Technology, and provided further that such SUGEN Product shall include a product irrespective of whether an IND application is filed with respect thereto within 4 years from the end of the Research Period, or not.”

Between 1999 and 2003, Sugen was acquired by Pharmacia, which was subsequently acquired by Pfizer.  Pfizer further developed PHA-66572 which then led to the development of crizotinib.  Subsequently in 2005, Pfizer filed an IND application…..

In 2007, Japanese scientists discovered EML4-ALK,  a mutated form of “ALK” TKR as a cause for lung cancer.   Pfizer determined that crizotnib acted as a inhibitor to the EML4-ALK receptor and thus amended its IND application to include clinical testing of criztonib.  Eventually, a drug Xalkori® was approved by the FDA and subsequently NYU demanded royalties on all sales.

The Court determined that NYU’s claim to royalties was based on Section 9(3) of the amended agreement and specifically, the language that applied to products not being developed at the time of of the effective date of Sugar’s ownership and also the existence of a “Patentable Invention with respect to such target or and/or its utility which is derived from or based on the Research Technology”.

The majority’s interpreted this provision that the “nexus between the invention and the target need not be direct.”  One interpretation (and expansive, at that) of Section 9(3) was that “any “Sugen Product” containing a “Patentable Invention” “derived” in part through NYU’s “Research Technology” may be the source of royalty payments”.  Thus, the Court took a view that since Xalkori® was developed on a patentable invention, criztonib, there was the requisite nexus between the the receptor and its target

With respect to “non-adopted” targets, the majority held that that agreement was silent as to the application of Section 9(3).  It pointed that only Section 11 of the prior 1996 agreement restricted the targets as those that “identified directly by NYU in the course of the NYU Research Project”.  This provision did not appear to be included in the subsequent license agreement and thus, the majority concluded that if restrictions on targets would have been addressed in the current agreement.

On the other hand, the dissent adopted the contrarian view and concluded that Section 9(3) was unambiguous.  The dissent initially agreed with the majority that Section 8 of the agreement did not apply as Pfizer filed for the IND more than four years after the Research Period ended.  Thus, any relief for NYU stems from the interpretation of Section 9.

Under the dissent’s view, Section 9(3) is unambiguous because the target must have been identified from the onset of the project and since EML4-ALK was not identified, NYU was not entitled to any royalties.  Further, the dissent noted the the EML$-ALK was discovered by the Japanese scientists without the involvement of NYU’s Research Technology.  Most importantly, Pfizer did not rely on NYU’s Research Technology to discover that crizotnib inhibited EML4-ALK.

The dissent also reiterated the lower court’s observation that “Patentable Invention” must be related to the target or its utility and did not include the drug that would inhibit the target.  if the provision was to include any drugs, (1) it would have been included in the agreement, and (2) the provision would be meaningless if the interpretation included drugs.

Finally, the dissent noted that target was not identified prior to the change in ownership of Sugen; not only should the target be identified, it should also be a Patentable Invention and exist at the time of the ownership change; lastly, the dissent noted that it would be commercially unreasonable under NYU’s interpretation of Section 9 since every target subsequently discovered indirectly would be subject to royalty payments.



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