Venture-backed companies in search of intellectual capital have become increasingly interested in seeking out collaborations with respected universities. After all, U.S. universities received an estimated 5,500 intellectual property (IP) licenses last year, up from just a handful in 1980. No matter how attractive such collaborations may seem, however, it is important that both companies and investors monitor the partnerships carefully to avoid common IP pitfalls.
United States patent law is relatively kind to inventors who publicly disclose their inventions prior to filing a patent application. Investors usually may file a patent application within one year after publicly disclosing the invention, without a loss of patent rights. But patents should protect not all inventions. For example, many businesses protect critical portions of their IP by maintaining the secrecy of their inventions. Indeed, for some technologies (particularly software and some biologics inventions), trade secrets may provide the most practical approach. However, trade secret strategies directly clash with virtually all universities’ “academic freedom” policies, which require that faculty members be able to publish and collaborate in their fields. In development collaborations with universities, the most that can be negotiated is a 60 to 180 day “delay period,” which permits a company to assess whether the technology is worthy of patent protection. However, long-term non-disclosure is prohibited by most universities’ policies.
Most universities with significant technology transfer programs will take the steps necessary to secure patent protection under U.S. law, if patent protection is available. However, in addition to waiving trade secret rights, academic freedom policies can create land mines for foreign patent rights. Under most foreign patent laws, public disclosure can act as a complete bar to patentability.1 Although applicable patent treaties will allow a foreign patent application to “tack” onto the filing date of a U.S. patent application, the foreign patent application must be filed within one year of the U.S. patent application. Beyond that one-year period-or in cases where public disclosure occurs prior to the filing of a U.S. application-foreign rights may be lost. Unfortunately for companies seeking to license existing technology, universities often are unwilling to incur foreign patent expenses where an immediate licensing opportunity for the technology is not apparent. As a result, foreign rights already may have been forsaken by the time an industry collaborator becomes aware of a university licensing opportunity. Therefore, a survey of jurisdictions in which patent protection remains available may prove critical in deciding whether or not to proceed with licensing and commercialization.
Where Was It Invented?
Virtually all universities will require their employees to sign invention assignment agreements, which will transfer rights to any inventions made in the scope of faculty employment to the university. As a result, the university generally holds title to any university-developed patents. However, faculty members who develop technology outside of their relationship with the institution (either before joining an institution or while moonlighting) may contest the institution’s IP rights. Additionally, some universities, through omission or oversight, have failed to obtain valid invention assignments from inventors like graduate and undergraduate students developing technology using university labs. In the case of patented technology, the consequence of such failures can be dire: The IP will be owned jointly, and neither joint owner can exclude the other from commercialization efforts (which can severely diminish an invention’s commercial value). Although companies typically resolve such situations by negotiations with “rogue inventors,” joint ownership may have the effect of increasing the cost of a licensed technology to the licensing company. A related problem arises in the context of extra-mural academic collaborations (that is, inventions resulting from collaborations among faculty at different universities). Although formal arrangements between universities often resolve issues of ownership and designate one university as a “lead institution” to handle commercialization negotiations, collaborations that occur “under the radar” may create challenges to IP rights.
As universities are unwilling to expose their endowments to any risk, university technologies are generally licensed “as is,” with limited assurances concerning things like the validity of licensed patents or whether a technology can be used without infringing a third party’s rights. Because many university technologies are often in the early stage of development, companies are well advised to complete “freedom to operate” reviews (such as a search of published and issued third-party patents to determine whether third-party licenses must be obtained). To accommodate this concern, university licenses will typically include “anti-stacking” provisions with respect to royalties, which reduce the royalty owed to the university to the extent that royalties must be paid to third parties. However, these anti-stacking provisions are usually capped at 50% of the amount paid to the third parties. For early-stage technologies, the cumulative effect of royalties required to reach commercialization of a product can significantly alter the economics of product development.
Under a federal statute enacted in 1980-commonly known as the Bayh-Dole Act-universities retain ownership of any patents developed using federal funds, but the U.S. government retains an interest in the intellectual property. The government interest includes a “march in” right (a right to terminate the university’s patent rights and those of any licensee) if the technology is not adequately commercialized, among other things. Moreover, the government is provided a royalty-free license to develop the technology for government purposes. As an estimated 90% of all university research is government funded, the Bayh-Dole Act affects a majority of all university-industry collaborations. In most instances, these rights co-exist harmoniously with the university technology-transfer process, and the “march in” right remains more of a theoretical problem than a real one. However, if a company’s business model contemplates that a portion of its revenue will be derived from sales to the federal government, the retained right can have a devastating effect. Similarly, university license grants often reserve rights for the university “for compassionate non-commercial uses.” The retained rights theoretically can pose problems for certain types of IP, such as compounds for HIV-related drugs.
Often, collaboration with university faculty members is equally or more important than the technology licensed from a university. However, typical university policies can significantly complicate those relationships. Although policy implementation varies, faculty members are typically limited to consulting arrangements that do not use university facilities (whether in the form of laboratory equipment or cheap graduate student labor) and do not interfere with the faculty member’s teaching and research responsibilities or take precedence over his or her obligations to the university. For example, faculty members are typically permitted no more than “one day per week”-sometimes loosely construed-of consulting services.2
If a faculty member is an inventor of a technology licensed to a business, the faculty member’s participation in the equity of the business is often significantly constrained. For example, some universities’ policies preclude direct equity ownership in a startup licensee. In these cases, the inventor’s participation is usually limited to a derivative interest in equity received by the university. Many universities, however, have no restriction on equity received for consulting services rendered by faculty, although under some circumstances excessive consulting equity may create problems for the faculty member. There typically are no equivalent restrictions on cash compensation. This can make consulting arrangements between startups and faculty expensive.
Academic technology transfer offices generally, but not uniformly, resist “channeling” technology to industry, such as the process of obtaining a right to future inventions by a particular faculty member or from a particular lab. However, universities also have an interest in supporting their research efforts. To that end, a sponsored research agreement (SRA) may make access to improvements easier and prevent competitors from accessing follow-on inventions to block a company’s IP development.
When collaborating with universities, it is prudent to keep in mind that, under the Bayh-Dole Act, a university’s technology transfer office is generally the only party authorized to speak for the university with respect to licensing. Faculty members may have considerable influence, but they cannot dictate terms or availability of a license.
As university technology is often very early stage, a company can take the necessary time to evaluate university IP without committing to upfront licensing fees or license maintenance fees by obtaining a low cost three- to six-month licensing option. In SRAs, particular care should be taken with respect to the ownership of materials and equipment purchased in connection with the research. Generally, IP rights may be transferred, but tangible property, such as expensive equipment, may remain the property of the university. Additionally, SRAs may require negotiation with additional, sometimes diverse bureaucracies in the university.
Jeffrey P. Donohue is an attorney with the Boston office of Kirkpatrick & Lockhart LLP.