Technology Transfer Agreements; Don’t Be an Amateur

It used to be that Olympic athletes competed only for the love of the game, unconcerned about professional and commercial success.  So too, it used to be that university professors and government researchers toiled in laboratories for the Common Good, unconcerned about the commercial success their discoveries and talents might yield.

Both of these situations have changed.  The Olympics have gone commercial and professional.  So have the labs.  Universities have discovered that endowments can grow as their own research evolves into a new drug, procedure or computer program.  The Federal Government has discovered that it can retain researchers while reaping more benefits from its grants by allowing the commercialization of discoveries it has paid for.

Maryland lawyers will likely have the opportunity to represent a client involved in the disposition of these discoveries due to the concentration in the region of governmental research facilities and research universities.  Thus, lawyers in the area should have a familiarity with the strategies and basics of handling these matters.

The principal means of allocating rights in discoveries is through a “Technology Transfer.”  While a “Tech Transfer” agreement can relate to any type of license or assignment of intellectual property among any parties, Tech Transfer agreements have become known as -- and this article discusses -- the type of agreement by which a university grants rights in its research to a commercial endeavor.  These agreements are the roadmap of how the discovery gets from the lab to the market.

A Tech Transfer agreement is like any other intellectual property assignment or license, but has a twist.  A “regular” assignment or license of a patent, copyright, trade secret or trademark generally considers only the parties involved.  However, a Tech Transfer must recognize outside interests.  If the Federal Government funded the research, which is a very common practice -- the Government must retain a license to use the technology.  Likewise, when a university exploits the intellectual property, it must consider the rights of the researcher and others at the university, as governed by policies the university probably has in place for all inventions and discoveries.

The Tech Transfer agreement must address the concerns of the university, the researcher, the Government and the entity taking the discoveries to market.  Issues to be resolved in a Tech Transfer agreement include who retains what rights in the discoveries, who directs the future direction of the research and, of course, who gets paid what amount.

The remainder of this article discusses issues a lawyer should address when confronted with a client -- whether a researcher, a university or a commercial entity involved in a Tech Transfer agreement.

First, a bit of history.

Although there has been a recent surge in technology and protection of intellectual property rights, making Tech Transfer agreements more commonplace, the concept of technology transfer is not new. Transferring technology between universities and industry has existed in the United States since at least the 1920’s, when a few universities were commercializing their discoveries.  Technology transfers became of interest in the late 1940’s, when the Manhattan Project proved the value of university research to national defense.  An influential 1945 report to the President titled “Science -- The Endless Frontier” championed the position that university research could be used as a catalyst for economic expansion by increasing the amount of technology available to industry.

The major reason for the current wave of “discovery commercialization” was the Patent and Trademark Law Amendments Act of 1980, or Bayh-Dole Act, which allowed for the transfer of technology between researchers and commercial entities.  The premise of this Act is that inventions created using federal funding should be licensed in a way that promotes their commercial development for the public benefit.  The Act accomplishes this goal primarily by allowing parties developing federally funded technology to retain patents in this research, while retaining in the government a right to use the invention.

Complying with Bayh-Dole

The Act applies to all inventions either conceived or reduced to practice using a federal grant for any portion of the funding. Since most university technology relies on some amount of government funding, applicable university policy must be consistent with the Bayh-Dole Act.

If a researcher using government funds creates an invention, the university must disclose the invention to the government within two months of the university becoming aware of the discovery.  The university then has two years to decide whether or not it wants to retain title to the invention.  If it chooses to retain title, the university must file a United States patent application within one year of this election, stating within the application that the Government has rights in the application.  Within ten months of the U.S. patent application, the university must indicate whether it wishes to file foreign patent applications.

Bayh-Dole also specifies that the university must grant the U.S. government a non-exclusive, irrevocable license to use the invention throughout the world on behalf of the U.S.  The university may license the patent to commercial entities, but the university must give preference to small businesses (less than 500 workers) where feasible, and licensees must substantially manufacture products based on the license in the United States (when feasible).  Generally, the university may not assign its entire right in the patent to a third party.

The government also retains control over assuring that the patent is used efficiently.  The patent-holding university is required to submit periodic patent efficiency reports to the government.  If the patent is not being used within a reasonable time or the use does not meet other guidelines, the government retains the right either to force the university to license a third party, or to take title of the patent itself.

Even with these constraints, Bayh-Dole has generally been deemed a success.  The Act has promoted a substantial transfer of technology from universities through the private sector to the public, with the result being a net benefit to the public.

What the agreement should say

As in any agreement, parties to a Tech Transfer agreement have divergent views of what makes an agreement beneficial to them.  The university/inventor would prefer to retain title to the discovery, license rights to use the discovery, and supply information and technical assistance (for a fee) to the user.  Conversely, the developer/user would prefer title to the invention to be assigned (not licensed) to it, with technical assistance at a minimum (or at least a minimum fee).

Any agreement would include basic contract principles as well as provisions respecting the various intellectual property concerns.  The agreement could be in the structure of an assignment, a license, or a joint venture. In any structure, the agreement should address the important provisions discussed below.

Be careful in the Recitals that unless it is certain a party owns all rights being transferred, such ownership is not stated definitively.  The phrase “Party A owns all patents” may be seen as a representation by party A or an admission by Party B, when in fact neither party intended such promise or admission.

The granting clause should clearly outline the intellectual property rights to be transferred.  Each patent, copyright, trade secret and trademark, should be addressed.  They can each be granted in different ways, or all in the same manner.  The section should address whether each aspect of IP is being assigned or licensed; whether the grant is exclusive or not (for licenses); the geographical areas covered; and whether there are limits on the type or quantity of the use that the grantee can make.

Payment for the grant can be a flat fee, or based on sales, production, or other measurable aspects of the deal.  Universities often receive advances which are later applied against a running royalty.  Royalty rates vary depending on the efficacy of the invention, the proposed market, the breadth of use allowed and any other portion of the agreement.  There is no “set” or “usual” rate.  Compensation can also be in the form of stock issued at the time of the transaction, or stock options.  The payment provisions should also consider who will pay the underlying inventor and who will pay the continuing fees for registering the patent and maintaining the registration.

In a license, the issue of quality control always arises.  Sometimes these provisions can be extensive in which the development must pass through a series of reviews with the university, with the opportunity for the university to suggest or demand revisions to the product.  Sometimes the university will let the developer run with the project with little or no oversight.

The grantor will always want to make as few representations and warranties as possible about the effectiveness and ownership of the technology.  The grantee will always want strong promises that the product will work as described and will not infringe on the rights of any third party.  Good negotiations determine where this issue is resolved.

Any agreement must focus on indemnification and allocation of risk.  Risk of loss always poses a prickly situation.  The invention developed by a researcher often is related to health or medicine.  If the product works properly, everyone benefits.  If the product malfunctions or does not work as expected, plaintiffs look for liability in what might have been a tragic accident.  It is not surprising that universities attempt to gain adequate assurances of protection -- either through confidence in the product, insurance, indemnification, disassociation from the product, or all of these.  Avoiding the risk of loss is one reason why the university might want to assign all rights out of its control, so the university cannot be said to have any connection with a product that later malfunctions.

In an exclusive license, the scope of performance is always an issue to the university.  The university must have some assurance that the licensee is working hard and making the most out of the rights.  Common methods to hold the licensee’s feet to the fire are minimum sales levels, minimum royalties, or adherence to a specified development or marketing plan.  Divergence from these goals can be a breach that would allow the university to find a new developer.  “Best efforts” clauses also work to some degree, but unless well-defined, they become less definite in measuring performance than a set threshold.

Because of ongoing development by the research team and the developer, confidentiality clauses are also essential to protect the secrecy of the technology being transferred, and all of the background information that may not be specifically transferred.  The degree of sensitivity of the technology dictates whether and how the parties must mark the information, where it must be stored, who can review it, and what employees and agents must sign separate confidentiality agreements.

The parties’ activities likely will advance the science already discovered, and the Tech Transfer agreement must address who retains the rights in any technology which evolves out of the progress.

Non-competition can also lead to serious discussions and the parties should determine how, if at all, they wish to limit the rights of either party to deal with third parties on similar technologies.

Both parties have to decide how personal the relationship is with the other side, and whether assignments and sub-licenses of the technology or the agreement itself is allowed.

When patents are involved, there are special considerations.  Be wary of extending royalty payments beyond the term of the underlying patent, charging royalties that unfairly discriminate against certain groups, inserting clauses that prohibit a licensee from challenging the validity of the underlying patent or attempting to extend the underlying patent to prohibit actions of the grantee beyond that allowable by patent law.  These actions may violate law and/or public policy.

Any agreement must also consider the international nature of the proposed use.  In the United States a patent can be applied for within a year of first disclosure; in other countries, however, the right to protection is usually lost if the disclosure is made before filing for the patent in that country.

While much of the technology transfer between universities and industry involves the transfer of high-tech intellectual property, this is not the entire technology transfer universe.  Trademarks can be licensed as the main item under consideration, or as the ancillary add-in to give stature to the final product.  This first type of trademark licensing does not pose much of an issue for the university; a university uses its marks, the marks become worthy of merchandising, and the university enters into licensing agreements with parties to produce licensed merchandise.  There is little risk of exposure for the university in this type of licensing arrangement.

The more sensitive area is where the grantee of patent rights wants to ride on the coat-tails of the university’s prestigious name and announce to the world that the rights came from the university.  Trademark law dictates that one cannot, without permission, use another’s name to show endorsement, sponsorship or affiliation.  Universities take great care in deciding which particular words a grantee may use to show the relationship between the parties.  Parties often fiercely negotiate whether, where and how a university’s name, logo and emblem can be used, and which precise words (“in connection with”, “affiliated with”, “endorsed by”, “with developments from”) most accurately reflect the true nature of the relationship between university and grantee.

Philosophical considerations

While the Bayh-Dole Act opened the door for commercial exploitation of university research, some would argue that there is no screen in place to keep the bugs out.  The practice of universities commercializing their research has been in place for the better part of the last century, although most academic researchers have until recently eschewed exclusivity in protecting the intellectual property rights inherent in their discoveries.  The psyche of an academic researcher has been to make their discoveries publicly known (“publish or perish” is their credo) or to use intellectual property law as a means of prohibiting third parties from creating a monopoly based on the discovery.  Some universities had policies discouraging professors from seeking patents or otherwise protecting the intellectual properties surrounding the professors’ discoveries.

Most universities’ perspectives on academic-commercial alliances have changed dramatically in the last few decades.  In the recent times of decreased research funding combined with increased pressure to expand departmental budgets, many academic institutions have turned to corporate ventures as a means of salving these problems.

The primary concern on the academic side has been that mixing commercialization with academic research will entice university researchers to abandon their core focus of searching for knowledge and focus instead only on commercially promising technology.  Universities believed corporate funds would “sully’ the hands of the institution.

Another concern of academics has been that the drive to commercialize products will lead researchers to restrict access to their research, and to withhold announcement of early discoveries until after a commercially feasible product has been developed (“Publish early and perish” could be the warning of those who want to withhold information).

A third concern is that industry backing will pressure researchers, either consciously or unconsciously, to report on research in a way that favors their sponsors.

Over the last few years, there have been several reports of undue influence upon research studies by the corporate backers of certain studies.  These have included allegations ranging from pressure to report positive results to pressure to falsify test data.  One company went so far as to bring a claim for defamation against researchers publishing a report unfavorable to the corporate product under examination.  Some corporations even structure Tech Transfer agreements to gain control over the release of unfavorable study reports, allowing the corporations to postpone such releases.

As with any discussion, this one has two sides.  Corporations have asserted that ventures between academic and commercial entities benefit the schools search.  Another position advanced by corporations is that corporate-academic relationships provide personal benefits to research professors, thus enticing them to stay at a university when they might otherwise leave for the private sector.  Corporations also believe that the interaction with industry allows universities to keep their fingers on the pulse of industry.  This allows schools to better prepare their students for life after graduation.

Corporations see as positive the influence of corporate money on the focus of university research. They say that the financial influence provides incentive to universities to focus on research that will be beneficial to society as opposed to esoteric research with little practical application.  This argument finds support in the premise of the Bayh-Dole Act.  By holding a stake in research, corporations have a vested interest in seeing inventions progress from the laboratory to the marketplace as quickly and efficiently as possible.

In grappling with these issues, universities and research facilities have gone to great lengths to set out policies and procedures for all of their Tech Transfer activities.  A lawyer dealing with these entities should be aware of the regulations and rules used by each entity.  Many of these guidelines are posted on the Internet, such as (University of Maryland Office of Technology Commercialization); http: //˜ott/ Johns Hopkins University Office of Technology Transfer); (University of Maryland, Baltimore County Office of Technology Development); and (National Institutes of Health (NIH) Office of Technology Transfer).

The proliferation of Tech Transfer agreements combined with the regional concentration of governmental research facilities and research universities make it increasingly likely that Maryland practitioners will come in contact with these agreements.  By becoming familiar with the issues particular to Tech Transfer agreements, a practitioner can move a client beyond the rank of amateur and can be seen as an olympic-class lawyer who is seemingly “Citius, Altus, Fortius” than the adversary.

Ned T. Himmelrich co-wrote this article with Jonathan M. Holda for The Maryland Bar Journal Volume XXXIV, Number 6, November/December 2001.