Before we start, those who know me should not get their hopes up. This post is not a roundabout way of announcing that I have popped The Question. No need to go and buy a hat. Instead, I was revisiting royalty stacking provisions earlier when I came across the notion of a wedding cake clause.
Read on (please):
A royalty stacking clause is used where a single product is covered by a number of different patents owned by a variety of separate owners (for example, because a range of patents are combined together into one product or because various patents are used in the manufacture of the product). The licensee will need a series of different licence agreements. The risk for the licensee is that the accumulation of royalties that must be paid will eat away at the licensee’s margins and make it entirely unprofitable for the licensee to make or sell the product. Obviously, if this happens, nobody is happy because no product is sold. Royalty stacking clauses protect the licensee by allowing the licensee to reduce the amount payable to the licensor in the event that the licensee has to pay several different royalty streams.
Licensors must approach these clauses with caution. In fact, there are two aspects that licensors should be aware of.
- First, they reduce the amount the licensor receives. There is a risk that an unscrupulous (or commercially astute, depending upon how you look at it) licensee can use the stacking provisions to reduce the royalty commitment to zero. The licensee could enter into arrangements with third parties that involve payments calculated to squeeze out the licensor. To guard against this, the licensor can push for a minimum threshold which imposes a floor below which the level of royalties will not fall. So, where a licensee is required to take a licence from a third party in order to make the Product, the royalty stacking clause might read: “the Licensee may deduct from royalties due under this Agreement on [the Product] 50% of royalties actually paid by the Licensee to such third party but in no event will the royalties paid to the Licensor be less than 50% of the amount due under clause X”. (There are other formulae for reducing royalties, but this is a commonly-encountered clause.)
Second, the licensor should ensure that the clause only applies to arrangements that come into force after the commencement of the licensor’s agreement. Licensors should not be foxed into allowing the licensee to recover past expenses.
Just in case you needed convincing, these clauses can have a significant commercial impact. In 2005, Cambridge Antibody Technology and Abbott Biotechnology settled an argument over the scope of a royalty stacking provision in a licence relating to Abbott’s HUMIRA drug (HUMIRA is adalimumab to those in the know – a prescription medicine used in the treatment of arthritis and Crohn’s Disease). The provision allowed Abbott to reduce royalties payable to CAT by 50% of the amount of any royalties paid to third parties “in order to license rights needed to practice or have practiced the technology claimed in the Patents”. Abbott took a wide view and argued that this meant that Abbot could deduct third party royalties in respect of technology used in the development of HUMIRA. CAT took a narrower view, arguing that Abbott could only deduct royalties that Abbott had to pay to enable Abbott to use the CAT technology. CAT won the argument in court and Abbott appealed. Frustratingly (for lawyers), the case never reached the Court of Appeal as the parties settled, reputedly on the basis that Abbott paid CAT US$255 million.
And the wedding cake?
A wedding cake royalty provision is completely different to a royalty stacking clause. Wedding cake provisions create a royalty stream where the royalty rate decreases as the sales increase – so the first £1million will carry a royalty rate of 5%, the next £1million will carry a royalty rate of 3% and so on. A tiered effect that somebody somewhere felt was reminiscent of a wedding cake. Obvious, really.
And finally, a challenge. There is no prize other than the warm glow of satisfaction that you will get from being right. Whose wedding cake is this?