Technology Transfer with a University or National Laboratory
 

Technology Transfer with a University or National Laboratory

Posted on 03-11-2016

By: Heather J. Meeker, O’Melveny & Myers LLP.

LEXIS PRACTICE ADVISOR RESEARCH PATH: Intellectual Property & Technology > IP Licensing > Patent Licenses > Practice Notes > University Technology Transfer

Technology transfer is when technology that is developed in academic institutions or national laboratories is made available for development or commercialization. (All discussion of technology transfer within this note applies equally to universities and national laboratories [“institutions”], except as specifically referenced.) With the rise of the US technology sector over the past two decades, more and more universities are turning to technology transfer as a source of revenue and for building relationships with non-academic entities (hereinafter referred to as the private sector or private companies). National (or government) laboratories are required by federal law to engage in technology transfer to state and local governments and the private sector. 15 U.S.C. § 3710 (a). This article is intended for lawyers advising private companies that are contemplating technology transfer deals with institutions or university personnel.

Benefits of Technology Transfer

Private companies enter into technology deals with institutions to get access to the latest technology at reasonable prices, develop relationships with the institution, and cultivate talent for recruitment. Frequently, engineering personnel rotate between the public and private sector. Private companies may find it easier to raise capital to exploit technology developed by a professor with a pedigree from a prestigious institution.

Universities enter into technology transfer deals to generate income for their institutions and to fund research programs. Also, by allowing professors the freedom to work with private companies, universities can retain professors who might otherwise leave academia due to lucrative opportunities in the private sector. Most universities negotiate their technology transfer deals through their offices of technology licensing (OTL), which are administrative offices within universities. OTLs typically gather invention disclosures from professors or other faculty personnel, determine whether to seek patent protection, oversee prosecution of the patent, seek technology transfer partners to commercialize the inventions, and license those patents to interested private parties. OTLs are often staffed by non-lawyer contract negotiators, as well as lawyers.

National laboratories enter into technology transfer deals because they are required to publically disseminate intellectual property funded by taxpayer dollars for the benefit of the public. Most national laboratories have their own licensing and intellectual property departments, which function similarly to OTLs.

The Culture Clash

Negotiating technology transfer deals can be a culture clash. The expectations of lawyers and businesspeople negotiating deals in private settings are very different from the terms that usually prevail in technology transfer deals. Successfully negotiating the technology transfer deal requires you to understand each party’s goals and constraints. The scope of this article assumes that you are familiar with general intellectual property licensing and development agreements.

Dueling Primary Goals

The mission of an institution is to advance knowledge, and thereby benefit the public. But institutions are mostly not-for-profit entities, and therefore cannot commercialize the technology they produce. Therefore, the purpose of the institution in licensing its intellectual property is not solely to make money, but also to cause the intellectual property to be commercialized and benefit the greater good.

In contrast, deals in the private sector are focused on the economic benefit to each side. Therefore, attorneys acting for private parties in technology transfer sometimes mistakenly assume that the motivations of the institution are the same as they would be in the private sector. Due to their distinct motivations, institutions may insist on deal terms that would be unreasonable—or even unheard of—in the private sector (such as refusing to provide warranties or indemnities). Attorneys new to this area often find this frustrating.

Working with Outdated Practices

University technology transfer presents some special challenges. Most university technology transfer programs are built around patent licensing. Universities have long claimed patent rights in inventions developed by professors and assigned to the university. Because the university’s transfer programs were developed to fit an “all-patent” landscape, they are often imperfectly adapted to meet the broader IP landscape. Understanding this history will help you understand the university’s viewpoint when negotiating beyond patent transfers.

Most professors are expected to publish in peer-reviewed journals to gain professorships or advance their reputations. Universities do not claim ownership of the copyright in such materials, even though under the work-made-for-hire doctrine, they would probably have the right to do so.

However, as the technology boom of the late 1990s and beyond caused the value of copyrightable works such as software to increase greatly, universities started to assert their copyright in such works. But their licensing programs have lagged behind this trend, so licensing non-patent IP from universities can seem like fitting a square peg in a round hole. Even when you get a form software license from a university, it often uses terms like “inventions” and the “results” of development—terms primarily meant to address hard technology and academic research.

Technology Transfers to Professors or Engineers Who Helped Develop the Technology

It is not uncommon for institutions to have special programs that allow for an engineer or professor to leave the institution, form a private company, take a license to the technology developed at the institution, and commercialize that technology. These programs often allow the engineer or professor to return to the institution within a few years if the commercialization is unsuccessful.

Ultimately, these programs benefit a university beyond the licensing income it may receive. Because universities get most of their operational funding from endowments, and endowments are largely composed of alumni gifts, it is important that universities help their alumni become prosperous. Technology transfer is one way to do this. Many graduate students at universities develop technology at the university, and then take a license to it in order to start a private enterprise, become successful, and in turn donate money back to the university. This is one of the unwritten rules of technology transfer and, in part, explains the university’s preference—express or by custom—to license technology to private companies associated with the professor or engineer who developed the invention.

For national laboratories, such programs promote a positive public image. One of the goals for national laboratory technology transfers is to benefit the region, state, or locality in which the laboratory is located. 15 U.S.C. § 3710 (c)(5). Because many engineers from national laboratories leave the laboratory and commercialize their technology by starting local businesses, these programs allow the laboratories to give publicly funded technology back to the community, and simultaneously create local jobs, thereby benefiting the local economy.

Conflict of Interest

Conflicts of interest may arise when a professor or engineer keeps his position at the institution, but takes a financial interest in a private company that is attempting to license technology invented under the aegis of the institution. Because much of the technology coming out of institutions is early-stage, the availability of the professor or engineer who invented it to serve as a consultant to the private entity licensing the technology is essential to commercial success.

However, many institutional conflict of interest policies require licensees to be chosen in a fair, non-preferential manner. Thus, an institution may have to defend, and accordingly must document, its process for choosing a licensee. A private entity wishing to take a license should prove that it is the best choice as a potential licensee by showing it has sufficient funding, technical expertise, and human resources.

The professor or engineer who has a financial interest in the private entity taking a license also needs to abide by the institution’s conflict of interest, moonlighting, or other internal ethical rules. Most institutions require disclosure of the nature of the proposed activities in advance, and professors should be prepared to engage in the necessary process prior to inking any deal.

Types of Technology Transfer Agreements

The following are some basic types of agreements for technology transfers between private companies and institutions:

  • Sponsored research agreements
  • Patent licenses
  • Technology licenses
  • Options to grant licenses
  • Material transfer agreements

Sponsored Research Agreements

In sponsored research, a private company agrees to provide funding or in-kind resources (such as data or equipment) to an institution. In exchange, the private company generally receives a preference to receive a license to the intellectual property resulting from the research activities performed using such resources. That right to negotiate a future license can be either exclusive or non-exclusive, depending on the technology area and the competitive value of the technology. In addition, sponsored research agreements often give the private company the option to non-exclusively license any institution-owned, background intellectual property used in the research activities. Such intellectual property may be necessary to commercialize the results of the research.

Patent Licenses

Institutions regularly license patents to private parties, either exclusively or non-exclusively. Regardless of exclusivity, such licenses are often limited to a defined field of use. These licenses typically have milestones to ensure commercialization of the technology, which helps the institution justify that it is meeting its goals to benefit the public with dissemination of research. Milestones for commercialization may include

  • receiving a baseline level of funding,
  • submitting a product for regulatory review,
  • conducting alpha or beta testing,
  • making a product generally commercially available, or
  • reaching a sales threshold.

These milestones are negotiable, as discussed below. Patent licenses also list the royalty rate for the technology, but in rare cases can simply be lump sum payments.

Technology Licenses

Technology licenses are agreements where the institution licenses its technology, such as software, data, or product designs, to a private company. These agreements are similar to patent licenses; however, most institutions license technology and patents under separate agreements.

Options to Grant Licenses

Institutions often enter into options to grant licenses in exchange for a fee. These are particularly common as an adjunct to sponsored research agreements, or as an accommodation to a professor or alumnus who is seeking funding for a start-up company. Much of the IP coming out of institutions is early-stage. Options allow companies to evaluate the viability of technology within their businesses with minimal risk or expense, before taking a full patent license.

It is common for options to require, as a condition of maintaining the optionee’s rights, that the optionee meet certain business or technical milestones. However, these milestones are generally easy to negotiate. They are similar to those in a patent license, but usually more rudimentary, such as proof of concept or achieving certain minimum levels of funding (such as angel, bootstrap, or Series A funding).

The typical term for an option is six to twelve months, but can vary depending on the technology area and level of research and development required to bring the product to market. Because the option does not grant the right to sell products commercially, payments for options tend to be lump sum payments.

Materials Transfer Agreements

Sometimes a private party provides materials—usually biological materials such as cell lines or reagents—to institutions for research, or vice versa. A materials transfer agreement is very similar to a non-disclosure agreement, but covers the limited use of physical materials rather than (or in addition to) information. Typical terms cover length of time for use, and how to handle and dispose of materials. These terms are often negotiable. Particularly in the biological sector where the use of materials leads to derivatives that may be patentable, materials transfer agreements are becoming increasingly complex and, at times, resemble joint development agreements, with their attendant complexity in negotiating ownership of intellectual property resulting from the activities under the agreement.

Typically Negotiable Terms in Technology Transfer Agreements

Institutions almost always contract using their own forms of agreement, and are resistant to revisions. Therefore, it is best to choose your battles and focus on the terms that are typically negotiable.

When negotiating with institutions, remember:

  • You may be negotiating with non-lawyer, contract negotiation specialists who are authorized to use template forms that have been pre-approved by the institution’s attorneys. You may need to engage in an initial round of discussions with the contract negotiator, escalating any unresolved questions to an attorney. It may take time to get an answer from the attorneys, as they may be slow to answer because most are public servants whose time is stretched thin.
  • Requests to change the institution’s boilerplate will make the negotiation long and difficult.
  • The non-negotiable terms are those the institution needs to maintain its tax status and comply with the law.

If you are negotiating an agreement with an institution, you should consider focusing on the following provisions:

  • Royalty rates
  • Change of control terms / assignment
  • Commercialization
  • Buyouts
  • Patent prosecution
  • Publication review

Royalty Rates

Institutions have guidelines for how much they should charge for technology in license agreements. The rates are generally expected to be reasonable, and a reasoned argument to the institution that royalty should be lower is often successful. These royalty rates are typically starting royalty rates based on the broad technology area, so there is usually room for negotiation.

Keep in mind that the institution is unlikely to understand the specific economics of your client’s business model, and you may need to explain how a royalty will or will not fit within your product’s price point and profit margin. For example, if you represent a startup company, it may be possible to negotiate a tiered royalty rate that increases as the company grows, or have royalty payments deferred for a few years to allow for growth. A well-reasoned explanation of why a particular royalty rate does not fit the company’s business model should yield a more favorable royalty rate.

You should also be prepared to explain what should and should not be included in your royalty base. While the royalty rate is generally negotiable in technology transfer agreements, the royalty base is less so.

Some licenses are lump sum, up-front payments, with no running royalty. This is most common where auditing and accounting would be difficult, or for older, less commercially valuable technology for which it is easier to determine a value up front.

Change of Control Terms / Assignment

Most private companies are heavily focused on exit strategies. To monetize their initial investments, they need to engage in corporate transactions like mergers, asset sales, or financings that provide their investors with liquidity. Assignment provisions can restrict the ability to do this, by prohibiting assignment of the agreement to a successor entity, or defining a change of control as a breach of the agreement.

Because technology transfer licenses often cover core technology, it is crucial that they survive corporate transactions, and the successor retain the license. Institutions are usually more forgiving about such terms than private parties—a change of control or assignment is almost always possible without breach of the agreement, if it is correctly drafted. However, the more sophisticated institutions may demand a fee to transfer the license in connection with such a deal. As a starting position, it is a good strategy to ask for the ability to assign your rights under the agreement without the institution’s prior approval. Where the institution insists on pre-approval, you should request that such approval not be unreasonably withheld or delayed.

Commercialization

Institutions usually insist that the licensee make a commitment to commercialize the licensed IP. These covenants can be distressingly vague. However, most institutions accept reasonable proposals of commercialization. Because commercialization milestones are usually specific to the licensed technology, this provides a great opportunity for negotiating attainable commercialization milestones.

In lieu of a general covenant to commercialize the technology, you should propose commercialization milestones that reflect the company’s current (and conservative) business plan. Typical commercialization milestones include

  • receiving a baseline level of funding,
  • submitting a proposed product for regulatory review,
  • conducting alpha or beta testing,
  • making a product generally commercially available, or
  • reaching a sales threshold.

Institutions tend to be forgiving about a licensee missing its commercialization milestones. You should advise your client that if it misses a milestone, it should promptly request a waiver or extension. Most institutions grant such waivers or extensions because they prefer to give a licensee more time than to go through the expense of relicensing the technology.

Buyouts

Many institutions will consider a buyout option for licenses. For instance, if you have negotiated a patent license at a 2% running royalty, the institution may agree to cap the royalties at a set amount. As a corollary, if the licensee ever wants to eliminate ongoing royalty obligations that cause it accounting or budgeting headaches, it can buy out the license by paying the difference between the royalty cap and royalties paid to date. In the long run, this can be advantageous to your client for two reasons:

  • If the licensed products are very successful, capping the royalty will save the licensee money in the long run.
  • When the licensee undergoes an exit transaction, the acquirer can dispense with the obligations of the license by paying the buyout amount.

A buyout term is generally not included in standard agreements, so if you want it, you must ask for it. In such cases, to streamline the negotiation process, you should ask if the institution has an acceptable buyout provision to offer. Writing your own is fine, but you may find that the institution or laboratory will only use “preapproved” language, and your redrafting may slow progress. An experienced contract negotiator will know what the institution’s lawyers are likely to approve.

Patent Prosecution

Most institutions insist on maintaining control of patent prosecution for inventions that arise from their research, even if the patent license is, or will be, exclusive. This differs greatly from private transactions, where it is common for an exclusive licensee to control patent prosecution.

Institutions generally demand that their own counsel conduct patent prosecution, but require exclusive licensees to pay the associated fees. For non-exclusive licenses, it is common for inventors or the licensees to split the fees equally.

There are at least two ways to structure prosecution fees:

  • The fees are due upon notice to the licensee (non-prosecuting party) that fees were incurred.
  • The fees are deducted from licensing revenue as a credit.

If commercialization is uncertain, it may be advantageous to negotiate for fees to be recouped from licensing revenue. While fees for patent prosecutors for institutions are usually modest, the institution will likely have different interests from the private licensee. In particular, institutions may draft the patent in a way that favors patent issuance over a broader scope of patent. If you are negotiating an exclusive license and the institution controls prosecution, you should ask for terms requiring the institution to disclose prosecution documents prior to filing so they can be reviewed by the licensee’s patent counsel, and to undertake reasonable consideration of the resulting comments prior to filing.

Publication Review

In sponsored research agreements, most institutions insist on the unfettered ability of professors and staff to publish academic papers about their work. This can conflict with the private company’s interest in keeping intellectual property confidential. However, most institutions agree to give a licensee the ability to review any paper prior to publication and to make changes necessary to avoid disclosing information that would interfere with patent prosecution or confidentiality concerns.

Typically Non-Negotiable Provisions in Technology Transfer Agreements

While certain provisions in technology transfer agreements with institutions are negotiable (as discussed above), several provisions are rarely negotiable, including

  • IP ownership,
  • indemnities,
  • publication and confidentiality, and
  • gross royalty calculations.

IP Ownership

Most institutions categorically refuse to assign any IP to a company in any type of technology transfer agreement. This makes sense when you consider the institution’s non-profit status. Royalty income, and particularly royalty income from patent licensing, is excluded from taxation. IRC § 512(b)(2), Rev. Rul. 73-193, 1973-1 C.B. 262

Assignment of intellectual property assets to private companies, on the other hand, may not be exempt. As such, assignment is inconsistent with the institution’s non-profit status. See I.R.C. § 512(a)(1). Thus, many institutions only agree to license out their intellectual property.

Also, the institution’s mission is to allow the public to commercialize technology. If a licensee sits on the technology, this mission is thwarted. If the intellectual property were assigned to the company, it might never reach the public. As a result, institutions prefer to license out technology with commercialization milestones as a “way out” in the event that a licensee does not commercialize their technology.

Indemnities

Most institutions refuse to grant any indemnity to licensees for intellectual property infringement. In fact, they usually insist that the licensee indemnify any such claim, even if the infringement is based on materials or technology provided by the university. No matter how unfair this may seem, you will not win this battle. IP claimants do not usually sue non-profits, so the risk may be less than it would be for a private licensor.

In some cases, the institution may require the licensee to obtain and maintain during the term of the license (and a reasonable time after termination) insurance covering general liability and patent infringement claims. The institution may want to review such policies, and even request to be named as an additional insured.

Publication and Confidentiality

Institutions are usually very resistant to designating information arising from sponsored research as confidential. They consider it inconsistent with their mission to educate and to disseminate information. Focus on negotiating terms that require pre-publication review as described above, under Publication Review.

Gross Royalty Calculations

Institutions may insist on a royalty basis that includes products shipped (rather than sold) or gross amounts collected. This shifts the risk for collection to the licensee, who must pay for all units regardless of whether it provides discounts or writes off bad debts for those sales. You should be prepared to explain to the institution the economics of your business, and focus on adjusting the royalty rate rather than the royalty basis, as discussed above under Royalty Rates.

University IP Policies

Understanding the IP policy of a university will help you determine which elements of the license are negotiable and which are not. Most universities post their IP policies publicly on the Internet. Most of the IP policies are similar in substance.

The most common terms are:

  • The university claims no copyright interest in academic papers published by professors.
  • The university claims no trade secrets. (This is seldom expressly set forth in the policy, but is true by implication: Universities usually reserve for professors the unfettered right to publish the results of research, which is consistent with the universities’ mission of disseminating information.)
  • The university claims patent rights for all inventions developed by professors, except for those developed (1) outside the scope of their academic work and (2) without substantial use of university funds or resources. (Examples of non-substantial use of resources include use of university e-mail addresses. Conducting work at university facilities is likely considered substantial use.)
  • Professors are required to disclose any inventions created in the course of academic activities to the university office of technology licensing (OTL). The OTL reviews the disclosure and decides whether to seek patent protection. If the OTL opts not to prosecute a patent, it may allow the professor to do so.

For sample IP policies, see Stanford’s IP Policy, University of California’s IP Policy, Carnegie Mellon’s IP Policy, MIT’s IP Policy, and University of Illinois’s IP Policy.i

National laboratories may or may not make their IP policies publicly available.

University Incubators

Some universities supplement OTLs with programs to incubate start-up companies. An incubated company is initially located on the university campus, often with access to university laboratories and equipment, eliminating expenses that might normally limit the company’s success.

These universities almost always require that the incubated company provide them with an equity position in the company.

In return, the incubated company receives entrepreneurial training and extensive guidance from university professors, advisors, and staff. The terms for these arrangements do not fit any standard model. For example, the equity requirement is virtually unheard of in licensing with national laboratories, and rare in conventional patent licensing from universities. Notably, the incubation agreement typically gives ownership to any jointly developed IP solely to the university, and provides the incubated company with a licensing right. More and more universities are developing incubators in an effort to participate in the start-up economy. If you are advising an incubated company, or a party investing in one, make sure your client understands this important difference between university and private incubator settings.

Use of University Personnel as Consultants

If your client is interested in engaging professors and graduate students for consulting work, you must consult their university’s intellectual property and moonlighting policies. Most private companies require that any consultant assign to the company the intellectual property created within the course of performing the consultant’s duties for the company. However, university personnel may not have the authority to make such an assignment, in which case the company will not own the intellectual property.

When analyzing this situation, it is essential to determine whether the potential consultant is an employee of the university. Most university professors are employees of the university. Graduate students are also usually employees of the university; it depends on the nature of the grants and fellowships they receive to fund their studies. Other categories of university workers, such as visiting lecturers or visiting scholars, may or may not have employment relationships with the university.

The university intellectual property policy governs the intellectual property rights that the university claims by virtue of this employment relationship, either under default intellectual property law (such as work-made-for-hire), or through an assignment agreement. Moonlighting policies relate less to intellectual property than to the employment status of the consultant. Most universities allow their professors to work one day a week for private companies. This works out to four to five days per month. Violation of this policy could result in a professor’s termination.

You should ensure that a potential consultant understands the university’s policies prior to entering into an agreement with a private company. Many consultants do not understand their universities’ policies, so you should be extra diligent in finding and reviewing the policies on your own. Do not rely on what others tell you about these policies. You may also insist that the consultant engage counsel to explain the policies. Remember that as counsel for the private company, it is not ethical for you to advise the consultant.

Government-Sponsored Research

Much of the technology development done by institutions is funded, directly or indirectly, by government research programs. If you enter into an agreement with an institution that includes research to be funded by a government entity, such as an agency of the U.S. government, you must consider how that affects your client’s rights.

Government-sponsored research contracts are long and complicated. The institution may ask you to agree to all of the terms of the associated research contract, even if your company is involved in only a small part of the research project. A complete analysis of the issues in such cases is beyond the scope of this note; however, you should understand that most government research projects allow the U.S. government “march-in rights,” which allow the government to exercise a non-exclusive license in any intellectual property created during the research project.

In practice, these rights are very rarely executed and are seldom perceived as substantially interfering with the goals of a private company in participating in the research. Further, many governmentsponsored research agreements require a preference for U.S. industry in commercialization of any intellectual property developed from the research. Such “made in America” preferences are very different from what you would expect in deals with private licensors. Also, keep in mind that if your client is performing research as a subcontractor, it may have to make an express election to own the intellectual property arising from the research within two years of disclosure.


Heather J. Meeker is a partner in O’Melveny & Myers’ Silicon Valley office. Assistance provided by Lauren Jaeger.


1. Stanford’s IP Policy: https://doresearch.stanford.edu/policies/research-policy-handbook/inte llectual-property/inventions-patents-and-licensing University of California’s IP Policy: http://www.ucop.edu/ott/genresources/genguidance.html Carnegie Mellon’s IP Policy: https://www.cmu.edu/policies/documents/IntellProp.html MIT’s IP Policy: http://web.mit.edu/policies/13/13.1.html University of Illinois’ IP Policy: http://otm.illinois.edu/sites/all/files/files/ippolicypaperformatted.pdf

LEXIS PRACTICE ADVISOR RESEARCH PATH: Intellectual Property & Technology > IP Licensing > Patent Licenses > Practice Notes > University Technology Transfer