Sean M. O'Connor, Using Stock and Stock Options to Minimize Patent Royalty Payment Risks after MedImmune v. Genentech, 3 N.Y.U. J.L & Bus. 381 (2007), https://digitalcommons.law.uw.edu/faculty-articles/207
New York University Journal of Law and Business
This Article proposes a more or less functional equivalent mechanism to a patent royalty stream through the use of stock and stock options in the licensee. The stock would coarsely track the overall fortunes of the licensee, while the options could be more finely tuned to vest and become exercisable upon events and milestones that would have been used for payments in a traditional license fee plus royalty stream licensing deal.
There may be problems of liquidity, of course, during the period where the licensee is still privately held and thus has no ready markets for its stock. But even this could be dealt with to some extent by redemption rights or put options on the stock held by the licensor. The real value of what may seem to be a complicated replacement for the relatively straightforward royalty stream licensing arrangement is that the stock compensation system would consist of value and rights fully conveyed to the licensor upon the execution of the license agreement. Thus, any subsequent challenge to the patents and adverse finding against the licensor would not jeopardize the licensor's expected returns where the licensee successfully commercializes the underlying patent.
Part II of the Article provides a taxonomy of license arrangements and then analyzes the complicated history of judicial debate over licenses and doctrines such as licensee estoppel and assignor estoppel. Part III discusses MedImmune and its implications, showing the need for a solution to minimize the new risks to royalty payments presented by MedImmune.
Finally, the proposed solution to use stock and stock options to allow licensees to convey over to Licensor all of the equity positions required so that Licensor can exercise these in a manner that tracks the fortunes of the company is discussed in detail in Part IV.