Lilly breached a contract by not paying royalties on big-selling diabetes meds, court finds

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Eli Lilly will face a trial to determine how much in damages it owes Research Corporation Technologies, a judge wrote. (simpson33/iStock/Getty Images Plus)

Eli Lilly has generated billions of dollars from its diabetes drugs over the years, but now the company could be on the line for serious damages by failing to pay royalties on those medicines.

In federal court in Arizona, U.S. District Judge Scott H. Rash ruled that Lilly breached a contract it originally entered in 1990 with Philips Petroleum to license "certain yeast expression technology for research and commercial purposes." Lilly agreed to pay a 2% royalty on sales of end products or reagents that resulted from the license, but now it's facing claims from another company that it has failed to do so.

In 1993, Phillips sold the technology to Tucson, Arizona-based Research Corporation Technologies. That company brought a lawsuit in 2016 alleging Lilly hasn't paid up on its end of the deal.

In the case, Lilly has argued its diabetes drugs are not the "end product" because they weren't a direct result of RCT's technology. Instead, Lilly's drugs are a product of an enzyme called carboxypeptidase-B—which itself is made with the RCT system—and other ingredients. For its part, RCT argued that its technology is critical in producing Lilly's diabetes drugs.

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Also at issue is a 2001 sublicense Lilly inked with Sandoz to produce carboxypeptidase-B with the technology in question. RCT argued that if Lilly would have shared information about that sublicense in a timely manner, that "would have triggered a discussion about the royalties owed to RCT.”

After reviewing the arguments, Rash ruled that Lilly's diabetes drugs are in fact the "end products" covered in the agreement and that Lilly "breached its reporting and royalty payment obligations." The court will determine the amount of damages Eli Lilly owes RCT at a trial, the judge wrote.

A Lilly representative said the company "strongly" disagrees with the decision and will "vigorously continue to defend our positions." The suit doesn't affect Lilly's ongoing production or distribution of its medicines, he added.

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Lilly has been a top diabetes player for many years, so the trial could trigger a big payout for RCT, likely subject to appeals.