The value of checking old licences

24-02-2017

Michiel Rijsdijk

A recently published case (December 2016) from the Court of the Hague sheds some light on the legal limitations of licensing agreements. It could result in the payment of a backlog of royalties accumulated over 20 years.

That outcome would highlight how profitable it can be to check compliance with relatively old licensing agreements. 

In 1984 a Dutch foundation specialising in cancer research concluded a patent licensing agreement with an American pharmaceutical company. The pharma company had to pay royalties to the foundation in the form of a percentage of net sales of licensed products. There was a certain discount formula that could be applied under specified circumstances. The application of the formula later became the subject of debate between the parties.

It wasn’t until 2010 that the foundation requested access for its accountant to the administration of the pharma company. The parties then argued about the manner in which royalties had to be calculated, ie, the amount to be paid by the pharma company to the foundation and the applied discount. The foundation believed that the pharma company had wrongfully applied the discount, which had resulted in a sum of royalties paid over more than two decades that was too low.

The foundation requested full compliance with the licensing agreement, ie, payment of the royalties and damages caused by the failure/tort of the pharma company.

"it can be beneficial to check compliance with decades-old agreements. It could result in monetary gains or a useful risk assessment."

The first defence of the pharma company concerns prescription. According to article 3:307 of the Dutch Civil Code (DCC), following the day that the claim concerning the obligation to give, or do, something becomes due and payable, the claim’s period of expiry is five years. On the other side the foundation found article 3:311 of the DCC to be applicable, which would result in a longer period of limitation: five years following the day the creditor became aware of the failure, or in any case 20 years after the failure has occurred.

The court found the difference lies with whether the royalties were not paid as whole (not fulfilling an obligation to do something) or whether not enough royalties were paid (failure in compliance). The latter was the case, meaning that the relevant period for prescription is five years after the creditor became aware of the failure, to a maximum of 20 years after the failure occurred.

By serving the writ of summons in 2011, the limitation period was interrupted. Therefore the period before 1991 will in any case be prescribed (2011 minus 20 years).

This is just the interlocutory judgment; while we wait for the final judgment there are a few practical questions to be raised. There is a chance an accountant will want to see the books dating from 1991 onwards. How does this relate to the legal limitations for the accounting obligation? What about the burden of proof when the books are no longer available? Such practical reasons might limit the financial gains for the foundation.

It seems we ought to wait until the final judgment to find out how the court feels about these subjects. However it already shows that it can be beneficial to check compliance with decades-old agreements. It could result in monetary gains or a useful risk assessment. You never know what you might find.

Michiel Rijsdijk is a partner at Arnold + Siedsma. He can be contacted at: mrijsdijk@arnold-siedsma.com   

Michiel Rijsdijk, Arnold + Siedsma, Court of the Hague, Dutch Civil Code, patent, licensing agreements, royalties, DCC,

WIPR