Addressing an intersection between patent and contract law, the U.S. Court of Appeals for the Seventh Circuit affirmed a lower court’s holding that defendant Xenon Pharmaceuticals (Xenon) breached a license agreement by failing to pay plaintiff Wisconsin Alumni Research Foundation (WARF) a share of the fees received for sub-licensing the jointly owned patent subject to the agreement. Wisconsin Alumni Research Foundation v. Xenon Pharmaceuticals, Inc., Case Nos. 08-1351, 06-3901 (7th Cir., Jan. 5, 2010) (Sykes, J.).

In 2000, WARF and Xenon entered into a sponsored option agreement that gave Xenon an exclusive option to license any technology resulting from research projects jointly sponsored by Xenon and the University of Wisconsin. In 2001, WARF and Xenon jointly filed a patent application relating to the cholesterol-lowering enzyme Stearoyl CoA Desaturase (SCD), at which time WARF and Xenon also entered into an exclusive license agreement, giving Xenon an exclusive right to make, use and sell patented products under the joint patent application within the field of human health care. Under the exclusive license agreement, Xenon agreed to pay WARF a percentage of any product sales, royalties or sublicense fees it received. In 2004, Xenon gave Novartis Pharma AG (Novartis) a license to the technology covered by the joint patent application. WARF demanded a percentage of the sublicense fees from Xenon under the terms of the exclusive license agreement, but Xenon refused, claiming it could license its undivided interest in the joint patent application without regard to the agreement.

The Seventh Circuit, citing Rail-Trailer Co. v. ACF Indus, noted that under the provisions of 35 U.S.C. § 262, “each co-owner [of a patent] is at the mercy of the other in that the right of each to license” is independent. However, the statutory rule is “subject to an important exception: joint patent owners may vary their rights by contract.” Pointing out several provisions in the exclusive license agreement that undermined Xenon’s contention that § 262 gave it the right to freely license its portion of the interest in the patent application without accounting to WARF, including one that required Xenon pay WARF a share of the fees derived from any sublicense, the Seventh Circuit held that Xenon “cannot avoid paying royalties or sublicense fees to [WARF] simply by labeling the Novartis transaction a ‘license’ rather than a ‘sublicense.’”

Practice Note: WARF’s appeal was originally filed in the U.S. Court of Appeals for the Federal Circuit. In a non-precedential opinion, the Federal Circuit determined that it lacked subject matter jurisdiction because the dispute did not arise under the patent laws, notwithstanding inclusion of the Bayh-Dole Act, 35 U.S.C. §§ 200 et seq. in the complaint.