Royalty Interest Investing: Addressing the Out-License Assignability Issue - Legal considerations for effectively managing royalty interest transactions. - BioPharm International


Royalty Interest Investing: Addressing the Out-License Assignability Issue
Legal considerations for effectively managing royalty interest transactions.

BioPharm International
Volume 22, Issue 5


In certain cases, usually as a result of either structural impediments or tax and accounting considerations, a royalty interest transaction is structured purely as a secured financing, rather than a sale with a backstopping position as a secured financing. In doing so, the buyer is able to avail itself of the protections afforded by Article 9 of the Uniform Commercial Code (UCC) in dealing with the seemingly problematic anti-assignment provisions of the out-license. The UCC is a set of laws that are enacted in relatively uniform fashion by each of the states for dealing with the rights and obligations of parties to commercial transactions. Article 9 of the UCC deals with the subset of the commercial landscape consisting of secured transactions (dealing with most types of personal property).

Under the UCC, as a contract arrangement, the out-license is likely characterized as a general intangible. General intangible is defined in Section 9–201 of the UCC and is a catch-all category for collateral (i.e., if the collateral is personal property that doesn't meet the definitions of the other types of personal property subject to Article 9, in most cases it defaults to the category of general intangible.) If an analysis of the out-license demonstrates that the licensee's principal obligation is a monetary obligation, it will be classified as a special type of general intangible known as a payment intangible. This determination is relevant because different sections of Article 9 of the UCC address the anti-assignment problem depending on whether a general intangible is or is not a payment intangible.

The UCC deals with the issue of anti-assignment provisions broadly speaking by permitting the granting of security interests in general intangibles, explicitly including licenses, and other enumerated collateral types and providing that contractual provisions establishing default rights or otherwise prohibiting assignment are ineffective with respect to the granting of a security interest in the subject agreement. This is shown in Sections 9–406 (dealing with payment intangibles) and 9–408 (dealing with other general intangibles) of the UCC.

These provisions do not, however, entitle the buyer to enforce the out-license. Those rights remain with the seller, where the UCC is concerned. In most out-licenses, the licensee's obligations are not restricted to the payment of money. They involve significant undertakings to commercialize the subject IP, to protect the IP and not transfer or sublicense rights therein, and to use the IP in accordance with applicable laws. If these other obligations are sufficiently broad, the better view is that the out-license is a general intangible and not a payment intangible. However, if the licensee's obligations under the out-license consist principally of a payment obligation, then the out-license would constitute a payment intangible.

The relevant distinction under the UCC between a general intangible that is a payment intangible and one that is not is that Section 9–406 deals with security interests in payment intangibles and Section 9–408 deals with security interests in general intangibles that are not payment intangibles. These sections operate in a similar fashion. It should be noted that Section 9–408 also deals with sales of as opposed to security interests in payment intangibles.

To deal with the enforcement rights under the out-license, the buyer in a royalty interest transaction must maintain the continued involvement of the seller because the UCC does not render the anti-assignment provisions void relative to enforcement rights. At a practical level, this is often a highly negotiated issue, particularly in circumstances where all or nearly all of the seller's economic interest in the out-license is intended to be acquired by the buyer.

If the seller has no meaningful retained economic interest in the out-license, it has little incentive to vigorously enforce its rights as putative licensor against the licensee. This problem is ultimately handled either by aligning the seller's interests with the buyer's interests (e.g., creating a concurrent or tail economic interest for the seller) or by specifically negotiating rights of prosecution in the name of the seller for the buyer with appropriate protections, usually in the form of expense reimbursement and indemnification for the seller.


As part of an established and growing source of alternative investing, royalty interest transactions draw on multiple analytical and legal disciplines. In dealing with the legal challenge presented by the out-license, the buyer has both legal protections available from the UCC and common structural techniques for maximizing its rights relative to the out-license in relation to the licensee and the seller and its creditors.

Timothy R.M. Bryant and Jeffrey A. Jung are both partners at McDermott, Will & Emery LLP, Chicago, IL, 312.984.2066,

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