Grounds for termination
Scope of termination
Effects of termination
Life sciences collaboration and licence agreements have evolved to combine the drug discovery capabilities of a licensor (often a biotech) with the development and commercialisation capabilities of a licensee (often a large pharmaceutical company).
When drafting these collaboration agreements, the focus is often on the collaboration itself. However, drug development is a very risky endeavour, and disappointments can happen even among the most promising products in a company's development pipeline. Careful consideration should therefore be given to the termination provisions in these agreements (including the grounds, scope and effects of termination) and the impact on key markets, such as the United States.
Life sciences collaborations may need to be terminated for a variety of reasons – for example:
- a negative outcome in a clinical trial; or
- the licensee's failure to diligently develop the licensed product.
The agreements covering these relationships address these industry-specific issues as well as more standard provisions (eg, termination for material breach).
Termination by licensee for convenience
The licensee often has the right to terminate the collaboration agreement for convenience by giving prior written notice. Termination for convenience "at any time" is not uncommon. However, licensors may want to delay such termination, for example, until after the licensee has achieved certain development milestones (eg, completed a specified clinical trial) or until a fixed date. The duration of prior written notice can range from one to several months or even years, depending on the stage of the product's development or commercialisation (eg, to account for the necessary transition period). Termination for convenience is not usually available for the licensor.
Termination by licensee for cause
In some instances, licensees may also have the right to terminate the collaboration agreement for specific causes – for example:
- therapeutic efficacy; or
- IP issues with the product.
Termination for cause typically has a shorter notice period than termination for convenience (allowing for a swifter exit) and may reduce the licensee's responsibility for certain transition costs.
Termination by either party for breach
Both parties are typically able to terminate for the other party's material breach, such as:
- a failure to pay material milestones or royalties when due; or
- a material breach of diligence obligations (eg, a failure to meet the obligation to use commercially reasonable efforts to develop or commercialise the product).
The breaching party is generally able to cure the breach within a given period before the other party is allowed to terminate.
In some instances, licensees can limit the licensor's termination right to only situations where specific performance and monetary consideration are not suitable remedies. Also, because termination may not be a desirable remedy for a licensee, licensees sometimes have the right, in lieu of termination, to reduce certain payment obligations under the agreement if the licensor materially breaches.
Termination by licensor for licensee's failure to meet specific diligence obligations
In certain circumstances, even if a licensee is meeting its obligations to diligently develop and commercialise, a product still might not actually be developed and commercialised (eg, if it is not commercially reasonable for the licensee to do so given the cost to conduct the necessary clinical trials). In such a situation, there would be no right to terminate for material breach, but the licensor might still want the ability to take the product back. Therefore, the parties sometimes agree on specific diligence obligations, such as the licensee's obligation to:
- conduct certain clinical trials;
- receive regulatory approval; or
- have a first commercial sale by certain dates (which may be extendable upon payment of a fee).
If such obligations are not achieved, this would trigger a licensor termination right.
Termination by licensor for patent challenge
The licence may provide the licensor with the right to terminate if the licensee or any of its affiliates or sublicensees commences a legal action challenging the invalidity, enforceability or scope of any of the licensed patents. The licensor will usually have the right to immediately terminate the agreement or the specific licence granted under the challenged patent. Because the licensee does not control its sublicensees, if a sublicensee triggers this clause, it might be able to cure by terminating the applicable sublicence agreement. A common exception to this termination right is if the patent challenge is made as a defence in a lawsuit brought against the licensee.
Termination by either party for safety
Both parties may have the right to terminate the collaboration agreement if there are significant safety concerns with the product. However, particularly when the licensee controls the products and has been bearing the costs of development and commercialisation, it may resist giving the licensor this termination right. There may be a mechanism for reviewing the safety issues and aligning on appropriate remedies before the termination right is triggered.
Termination by either party for insolvency
Both parties are usually able to terminate upon written notice for the other party's insolvency. However, as mentioned above, termination is often not satisfactory for a licensee. Depending on the country in which the licensor is organised, local law may provide some protection to the licensee if the licensor goes bankrupt. Section 365(n) of the US Bankruptcy Code, for example, allows the licensee to elect to retain the licence or terminate.
Depending on the grounds for termination and the scope of the licence, a collaboration agreement may be terminable in its entirety, with respect to a given country or region or with respect to a single product.
Termination in entirety
In most termination scenarios, a collaboration agreement may be terminated in its entirety (ie, with respect to all rights and obligations, other than those expressly designated to survive termination). In some circumstances, however, a licensor's right to terminate may be limited to the territory or product that triggered the termination right.
Termination of territory
If the licensee has the right to exploit the licensed technology in more than one geographic area, it may want the option to terminate the agreement on a country-by-country basis. For instance, if the development of products outside of the United States becomes too expensive or commercially undesirable, the licensee may want to continue the agreement in the United States while terminating its rights and obligations in the rest of the world.
If the agreement includes diligence obligations that are specific to a given country or region, the licensee may want to limit the licensor's right to terminate for breach of those obligations to that country or region (rather than in its entirety).
Terminating the collaboration agreement in less than the entire territory could lead to multiple companies commercialising the same product, so consideration should be given to any ongoing need for coordination.
Termination of product
Similar to termination of the licensee's rights in a certain country, when the collaboration agreement covers more than one product, the licensee may want the right to terminate on a product-by-product basis and the licensor's right to terminate for breach may be limited to the product at issue.
In addition to the survival of provisions such as confidentiality and indemnification that apply in most commercial arrangements, the effects of termination in collaboration and licence agreements need to address ongoing activities and the potential reversion of the product to the licensor.
Wind-down or reversion
Depending on the basis for termination and the preference of the licensor, clinical trials and other ongoing activities relating to the terminated product may be wound down (eg, if the termination was due to safety reasons) or could be transitioned to the licensee. The allocation of costs for such wind-down or transition is a negotiated point, with the cost burden sometimes shifting depending on which party was at fault.
If the licensor intends to take over activities for the product after termination, the licence agreement may provide for the transition of the product to the licensor, including:
- an assignment or licence of:
- intellectual property;
- regulatory approvals; and
- other documentation controlled by the licensee;
- the transfer of ongoing clinical trials;
- the ongoing supply of product by the licensee to the licensor for some transitionary period; and
- the transfer or assignment of product-specific agreements (eg, agreements with contract research or manufacturing organisations).
In some circumstances, the licensee will receive a reversion royalty in consideration for the rights licensed or assigned to the licensor as part of the transition. Given the complexity of such a transition, a separate transition agreement may be entered into after termination.
Right to dispose of inventory
If the licensor does not have the right or obligation to acquire any remaining inventory of product, the licensee may have the right to sell off its remaining inventory for a limited period after termination (with royalty payment obligations to licensor typically surviving).
Treatment of sublicensees
There are various ways in which sublicence agreements are handled on termination of the corresponding collaboration agreement:
- the sublicence agreements could automatically terminate;
- they could survive as direct licences with the licensor (if the sublicensee was not in breach); or
- they could terminate but with the sublicensee having the right to negotiate a direct licence.
Before entering into a life sciences collaboration and licence agreement, the impacts of a potential termination should be carefully considered, including the grounds for, scope of and consequences of termination. While a carefully crafted termination provision can help ensure that the parties are adequately protected and prepared for divorce, there might still be a need for a separate transition agreement that addresses the challenging task in greater detail.
For further information on this topic please contact Anat Polyachenko or Oren Livne at Baker McKenzie by telephone (+212 626 4100) or email ([email protected] or [email protected]). The Baker McKenzie website can be accessed at www.bakermckenzie.com.