Tech transfer: risky business

It can be a risky decision. Transferring your hard-earned inventions or technology to another party should not be undertaken lightly, but more and more institutions are doing it.

In 1980 the US passed the Bayh-Dole Act, or the Patent and Trademark Law Amendments Act, which helped to kick-start a spike in technology transfer activity. The act allowed academic and non-profit institutions to claim ownership of federally funded inventions for the first time.

In the years that followed, tech transfer activity increased, as reflected by the membership numbers for the US-based Association of University Technology Managers (AUTM). In 1979, the year before the act was implemented, AUTM had 113 members, but by 1989 the number had grown to 800 and to more than 2,000 by 1999.

The act allows for the transfer of exclusive control over many government-funded inventions to businesses for further development and commercialisation. What followed was the introduction of various tech transfer offices around the US and beyond, helping institutions to transfer their knowledge and know-how.

In the EU, Regulation No. 316/2014 recognised the potential benefits that tech transfer could bring. It also outlined updated guidelines centring on agreements between businesses and institutions and recognised licensing as pro-competitive “in most cases”.

The regulation, known as the technology transfer block exemption regulation, created a safe harbour for licensing agreements concluded between companies that have limited market power.

The attraction of a tech transfer agreement is no secret. In its 2014 “Highlights” report, which provides details of licensing activity, the AUTM reported a growth in US-based tech transfer activity.

“This year’s ‘Highlights’ show that even while federal research funding continues to decline, academic licensing and startup activity are nonetheless growing substantially and continue to play an important role in the economy,” the report said.

The 2014 report revealed gains in the number of startups formed (up 12% from 2013); the number of licences retained by AUTM member institutions (up 17%); and the economic impact of tech transfer activities, as shown by metrics including net product sales (up 27.2%).

However, despite the encouraging figures, mistakes can creep in, particularly if the agreement has not been fully thought through.

Three-pronged approach

Daren Orzechowski, partner in the sourcing and technology transactions practice at law firm White & Case, says parties should first consider three key proposals.

“Before agreeing anything, you need to consider what you are getting, why you are doing it, and what you are providing. Ensuring you understand these aspects will underline how you approach the deal and architect it further down the line.

“Often you see examples of people who rush into deals without a clear answer to the questions; the ‘what’ and ‘why’ are very important,” he says.

Robert Gruetzmacher, founder of TechIAConnect & Associates, a tech transfer consulting firm based in Philadelphia, says there are other things to consider, first and foremost the credentials of the potential partner.

“Are candidate licensees reliable and knowledgeable about licensing arrangements, and do they have a history of entering into such arrangements?” he asks, adding that a background check to ensure candidates have previously performed well under such arrangements could be useful.

He tells WIPR that parties should first establish whether an agreement between potential licensees and licensors should be exclusive or non-exclusive and whether, if an IP portfolio is included, it could be the basis for a stand-alone separate business.

He says a licensee should also establish whether it will need to acquire rights in order to practise “foreground IP”—IP generated during collaboration on research and development (R&D)—as opposed to “background IP”, which is generated before R&D collaboration.

Ground rules

Gruetzmacher was one of a panel of speakers at the Licensing Executives Society’s 2015 annual meeting in New York in October.

During the meeting Gruetzmacher and other speakers discussed the range of IP rights that can be negotiated during a tech transfer agreement, including how to identify the authorised government, university and corporate stakeholders, and get the IP rights needed to further commercial goals.

“The IP should be specified in the agreement along with the relevant know-how transferred (if appropriate). This should also include future IP that could be subject to a grant back,” Gruetzmacher says.

He tells WIPR that IP owners and licensees should all establish a “manager” for the agreement in order to handle all business, technology and legal matters.

Orzechowski adds. “One of the things I always tell people is to really think about different scenarios. Often people will go into a deal not knowing exactly what they want, and the more complicated it is, the longer it takes.”

"Both parties should establish at the outset whether there will be other opportunities to enter into licensing arrangements or an opportunity to form partner relationships."

He warns that an agreement is “just a piece of paper” and is only the beginning.

“Before you get into this and engage lawyers or tech transfer officers you have to understand what your potential partner’s technology rights are. You should look at it and say ‘this is what matters based on my experience’. Only then do you sit down with a counsel and begin to articulate and say ‘okay, here is my shopping list’.”

As with any agreement involving the transfer of IP or information, these deals are not without risks.

One of these, says Orzechowski, is the chance of unwittingly falling into a copyright or patent infringement dispute.

“If you have a deal where people are developing a technology that does not come with a patent or copyright to cover it then you need to talk about risk allocation,” he says.

“You should establish whether non-infringement protection or an indemnification agreement is included in the deal. Sometimes people fall into an infringement situation after an agreement but without any bad-faith intent.

“They may not have stolen anything, but through the technology just acquired they may have happened to fall into the parameters of somebody else’s patent claims. If that happens, how do you deal with it and what do you do?” Orzechowski asks.

By taking on technology or an IP portfolio, there is an assumption that the contents will eventually be beneficial. But of course there is a risk that they may not turn out as first expected, or the licensee may not be as savvy as it claimed.

As Orzechowski explains, it’s not always guaranteed to work out.

“Just because you have the technology it doesn’t necessarily mean you will get the desired result with it.”

Targets

To counteract this, Gruetzmacher and Orzechowski say, there should be thresholds or targets put into an agreement, particularly ones that will benefit both parties.

“One way to do this could be for a company to stipulate that an indemnification agreement will not apply until you reach a certain threshold,” says Orzechowski.

“That way, the smaller company can then say if the technology is bad and I am wrong, I’m never going to be fined more than a certain amount. Perhaps the amount I got paid or something similar.”

What would happen if the original IP or technology owner decided it wanted its technology back?

For Gruetzmacher, there should also be agreeable termination provisions which could result in IP rights being granted back to the original owner.

Orzechowski thinks this may be hard to achieve.

“If you part ways with a technology and assign it to someone else, that’s typically it. You get compensation and the buyer walks away with it.

“That said, there have been deals where people have put reversionary rights in. For example, somebody takes over something but then the seller or licensor can turn round and say ‘you took this technology and didn’t commercialise it or do well with it’.

“You could set certain targets before a licensing deal to ensure targets are met or make sure that the technology is used in a way that meets expectations,” he adds.

We’ve heard about when things might go wrong, but what about when they go right? When something is a success, the chances are both parties will want a repeat performance.

Gruetzmacher says both parties should establish at the outset whether there will be other opportunities to enter into licensing arrangements or an opportunity to form partner relationships.

The financial implications of any deal will be at the forefront of many minds but, as Orzechowski explains, there could be potential benefits other than monetising technology, including PR gains.

“Saying ‘we worked on this technology with this partner’ could be used as a marketing or branding tool. By contrast, you could put the technology back out there in the public domain and say ‘we’ve done as much as we can with this technology and we think another party can do a much better job’—that could also work and help you find the next deal.”

The ability to share access to technology, knowledge and IP is clearly an attractive prospect, and the rise in tech transfer activity is testament to that.

But if parties go into a potential agreement with all guns blazing and without a clear idea of what they want, it can cause unnecessary headaches further down the line.