The recent decision of the Third Circuit Court of Appeals in In re Mallinckrodt PLC, No. 23-1111 (3d Cir. Apr. 25, 2024) serves as a stark reminder that agreements to pay future royalties must consider the payor’s potential future bankruptcy, no matter how remote the risk may seem at the time of contracting. Fortunately, there are simple measures legal counsel can employ to protect against the payor’s future bankruptcy and ensure the right to receive future royalties is not swept away in bankruptcy.
In 2001, Sanofi sold Mallinckrodt the rights to its Acthar Gel medication in exchange for a $100,000 upfront payment, plus a perpetual annual royalty of 1% of all net sales over $10 million. Mallinckrodt developed the drug into a major commercial success achieving sales of nearly $1 billion per year by 2019, resulting in millions of annual royalties paid to Sanofi. Unfortunately, unrelated opioid liabilities drove Mallinckrodt into bankruptcy. Once in bankruptcy, Mallinckrodt took the position that the Sanofi royalty was an unsecured obligation which could be discharged, meaning that reorganized Mallinckrodt could continue to sell Acthar Gel following bankruptcy without paying royalties. The Third Circuit agreed and affirmed the Bankruptcy Court’s ruling that the royalty agreement was not an executory contract, and that Sanofi’s right to future royalties was an unsecured, contingent claim that could be discharged.
After reaching its conclusion, the Court noted that a different transaction structure would very likely have led to an entirely different result for Sanofi, noting that:
To protect itself, Sanofi could have structured the deal differently. It could have licensed the rights to the drug, kept a security interest in the intellectual property, or set up a joint venture to keep part ownership. But it chose not to do so. Instead, it sold its rights outright, leaving itself with only a contingent, unsecured claim for money. And under the Bankruptcy Code, that claim is dischargeable.
While the Court’s guidance is of no comfort to Sanofi, it is valuable advice for the rest of us. But it’s not quite as simple as the Court makes it sound. Exclusive licenses have been recharacterized as sales in some instances, and the court’s proposed structures have other legal ramifications besides bankruptcy.
If you are contemplating a disposition of intellectual property for consideration that includes future payments, or are party to one you think may be susceptible to bankruptcy risk, please contact us today. Murtha Cullina LLP has the Intellectual Property and Bankruptcy attorneys to evaluate your specific situation and provide tailored advice to protect your legal and financial interests.
If you have any questions about this decision, please do not hesitate to contact Intellectual Property attorneys Andy Corea at acorea@harrisbeachmurtha.com and Richard Basile at rbasile@harrisbeachmurtha.com or Bankruptcy attorneys Daniel Cohn at dcohn@harrisbeachmurtha.com and Jonathan Horne at jhorne@harrisbeachmurtha.com.
