Tech Transfer eNews Blog

$32M award in Washington U dispute with WARF holds important lessons

By Jesse Schwartz
Published: January 20th, 2021

A detailed article examining the issues that can lead to disputes between research partners, like the WUSTL allegations against WARF, appears in the January issue of Technology Transfer Tactics. To subscribe and access the full article, click here.

Trust is important in any relationship, but too much can lead to one party being woefully uninformed about financial matters — so much so that it costs them tens of millions in royalties. That seems to be what happened in a research and licensing deal between Washington University in St. Louis and the Wisconsin Alumni Research Foundation (WARF), which was recently adjudicated after WUSTL sued WARF for severely understating its share of an invention’s proceeds.

It remains to be seen whether the relationship between the two universities will continue, but a $32 million judgment against WARF will make that difficult.

The dispute began in 2013 when Washington University sued WARF for withholding funds derived from a joint pharmaceutical patent involving a blockbuster kidney dialysis drug. In November 2020, a panel of federal appeals court judges concluded that WARF, the patent licensing arm of the University of Wisconsin-Madison, “actively concealed” information about profits from the patent and must pay at least $32 million in patent royalties owed to Washington University.

In 2018, a district court judge ruled that WARF had misled its WUSTL partners about the value of a patent used for the kidney dialysis drug Zemplar, developed by Abbott Laboratories, and kept 99% of the patent’s royalties to itself, wildly undervaluing WUSTL’s contribution to the invention.

Court records indicate that Abbott has recorded $6.1 billion in sales for Zemplar since its launch in 1998. Washington University received a little over $1 million before the patent expired in 2015, but WARF received $426.5 million, according to court records.

WUSTL became suspicious when some royalty checks amounted to only hundreds of dollars, and WARF responded to their questions by sending a valuation letter “full of misstatements, half-truths and misdirection,” the judges wrote in their opinion. WUSTL only became aware of the small fortune involved after Abbott and WARF sued other drug companies making generic versions of Zemplar, court records show. WUSTL alleged, and the court agreed, that WARF bundled the patent with dozens of others, diluting the amount of money flowing to Washington University.

The judges awarded $32 million to Washington University but ordered the parties to figure out an additional amount for interest. Initial filings with the court indicate that amount could be $14.8 million.

Both universities issued statements after the ruling. James Surber, WUSTL’s assistant vice chancellor and associate general counsel, said the university is pleased with the appeals court’s decision, but remains disappointed by WARF’s refusal to negotiate a fair resolution that had to be resolved in court.

According to WARF spokesman Jeanan Yasiri Moe, the organization is still exploring other legal options. “WARF maintains its stance that it upheld its professional and contractual responsibilities and obligations with [Washington University] and all of the patent holders for more than 20 years,” she says. “Our history of integrity, along with our responsibility to protect [intellectual property] rights, are the driving forces behind any legal action.”

The case is an unfortunate illustration of what can happen when these close relationships are not monitored carefully and the parties do not exercise due caution, says Nathaniel P. Bualat, JD, partner with the Crowell Moring law firm in San Francisco, CA. A cozy relationship can result in one party trusting the other too much, opening the door for abuse of that trust.

“It’s about the asymmetric information that these parties have with licensing agreements and inter-institutional agreements,” he says. “You have one party, either the licensee or the senior party, essentially running the business. They’re the ones selling the patented material or they’re the ones engaging in the licensing agreement, and often they have more information than the other party because they are the ones entering into subsequent agreements and the like.”

Bualat says he has seen situations in which the licensee will allocate monies for different categories of payment, calling some money licensing income and other money royalties, because in licensing agreements the compensation for those categories can be different. Putting money in one bucket instead of the other can result in the university receiving less money from the patent, he explains.

“Sometimes the licensee will use the licensed technology to develop another technology, and the licensor has no knowledge of that,” Bualat says. “There’s this asymmetric problem of one party having far more knowledge and using that to their advantage, against the other party’s interests. It’s something we see a fair amount have and have counseled our clients to be cautious about.”

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