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Intellectual Property Rights in Industry-Sponsored University Research: A Guide to Alternatives for Research Agreements sponsor owns the intellectual property through contract or assignment by the university or the investigators. This scenario may apply, for example, when the sponsor has made a substantial investment in the development of the technology that is the subject of the university’s research, when the sponsor is likely to be the only practical user of the resulting inventions, or if the sponsor has provided proprietary information, technology, or material which is the basis of the research. In cases when the sponsor acquires ownership of a copyright or invention, the university retains a royalty-free right to use the intellectual property for any internal research and teaching purposes, and may retain the right to sublicense to investigators for research and teaching purposes. Company ownership of intellectual property resulting from federally sponsored research requires the permission of the federal funding agency. 6 Contract language for “The sponsor owns the intellectual property”—University shall assign to Sponsor, upon request, all right, title, and interest in University Intellectual Property. No sooner than three months following termination of this Agreement, or any extension thereof, the University shall have the right to request that Sponsor make a final decision regarding such assignment. Sponsor shall then make the decision no later than sixty (60) days after the University’s request. Any assignment made by the University to the Sponsor shall include the following conditions: 7 Scenario 3: The university and sponsor jointly own the intellectual property For intellectual property jointly made by employees of a university and an industrial sponsor, under U.S. law, the parties have joint ownership in and the independent right to exploit the intellectual property, unless otherwise agreed. 8 If one party wants exclusive rights to jointly-owned intellectual property, that party needs to obtain the other party’s rights, by licensing or assignment, as discussed in Section IV ., Scenario 3 on page 13. Contract language for “The university and sponsor jointly own the intellectual property”— “Joint Intellectual Property” means individually and collectively all inventions, improvements, or discoveries and all works of authorship, excluding articles, dissertations, theses, and books, which are generated by one or more employees of University and one or more employees of Sponsor in performance of the research under the Agreement. All rights and title to Joint Intellectual Property belong jointly to University and Sponsor and are subject to the terms and condition of this Agreement. 6 35 USC 202 (c)(7)(A); 37 CFR 401.14 (k) Special Provisions for Contracts with Nonprofit Organizations. If the contractor is a nonprofit organization, it agrees that: (1) Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions, provided that such assignee will be subject to the same provisions as the contractor... 7 The assignment might include no conditions. Alternatively, some possible terms include: royalty, diligence, reservation of rights, reversion. 8 For copyrights, and for patents in many foreign countries, the ability to license without accountability to or permission of the other party may be limited.
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Intellectual Property Rights in Industry-Sponsored University Research: A Guide to Alternatives for Research Agreements IV. Rights to Use Intellectual Property Under Different Ownership Scenarios For the purposes of discussing the rights to use intellectual property, the three scenarios used in the previous section are also used here: (1) the university owns the intellectual property; (2) the sponsor owns the intellectual property; and (3) the university and sponsor jointly own the intellectual property. Scenario 1: The university owns the intellectual property Under this scenario, three approaches are described to acquire license rights to use intellectual property. The document then goes on to describe the scope of the license provisions considered within each of these approaches. A. Approaches When the university owns the intellectual property, sponsors may wish to acquire license rights to the intellectual property, including the right to use and the right to make derivative works. These rights may be in the form of an option in which the sponsor can elect a future license, or in the form of a grant of a specific license as part of the research agreement, although these are not mutually exclusive. Three approaches for transferring these rights are discussed below: the option for a license; the grant of a license; and the right of first refusal. Approach 1: Option for a license The research agreement provides for an option period during which the sponsor has the sole right to elect a license, to be negotiated in good faith. While an invention disclosure or filing of a patent application is of significance, many inventions for which applications are filed are never commercialized. Thus, a sponsor will typically have insufficient information at the time of filing to reach an informed decision on whether to commit to a commercial development under a license agreement. One reason for the university to conclude a license agreement, however, is to commit the sponsor to a Contract language for “Option for a license”—University hereby grants to Sponsor the exclusive option to elect any of the following licenses: 9 a non-exclusive, royalty-free license to the University Intellectual Property for any internal research and development purposes a non-exclusive, royalty-free license to the University Intellectual Property without the right to grant sublicenses a non-exclusive, royalty-bearing license to the University Intellectual Property including the right to grant sublicenses an exclusive, royalty-bearing license to the University Intellectual Property in the field of use of ——— including the right to grant sublicenses an exclusive, royalty-bearing license to the University Intellectual Property including the right to grant sublicenses an exclusive, royalty-free license to the University Intellectual Property including the right to grant sublicenses This option shall extend for —— [time] from the disclosure of intellectual property to the sponsor, OR filing of a patent application, OR notice of patent allowance, OR issuance of a patent, OR conclusion of the contract period. Terms and conditions of these licenses are to be negotiated in good faith and agreed upon between University and Sponsor. 9 The sponsor and the university need to discuss which choices are to be included in the research agreement. For example, an exclusive license may negate the need for the grant of a non-exclusive license.
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Intellectual Property Rights in Industry-Sponsored University Research: A Guide to Alternatives for Research Agreements commercialization of the invention. Both parties’ interests may be substantially met if they can agree on mutually satisfactory commitment, other than commercialization, during the option period. This commitment may consist of continued funding of the research program, payment of patent costs, internal company development, or other considerations, including further funding tied to a patent application or other milestones. The beginning and length of the option period varies widely according to the nature of the anticipated intellectual property and the industry involved. In general, universities want a short option period to enable the university to seek a third party licensee in the event that the sponsor is not interested in a license. The sponsor, on the other hand, would prefer a longer option period in which to assess the commercial potential of the intellectual property. For intellectual property which is a potential product, such as that which may arise from research funded by a pharmaceutical company, the option period generally extends for some period beyond the initial invention disclosure or filing, and may extend beyond the termination of the sponsored research agreement. In some industries, it takes longer to determine the commercial value of the intellectual property. For example, in many areas of technology, a single patent rarely defines an entire product, in which case, the value of a single patent may not be clear until other patents emerge from a company’s patent portfolio. In such cases, an extended option period, perhaps even beyond issuance of a patent, may be appropriate. Intellectual property of these types sometimes arise from research in such industries as petroleum, chemical, and heavy manufacturing, and is typically utilized with other proprietary technologies in actual commercial use. Approach 2: Grant of a license In some cases the research agreement grants a specific license to the sponsor to use the intellectual property and describes the extent of the permitted use, as distinguished from an option which grants only the right to obtain a license at a later time, but no present rights. Often the Contract language for “Grant of a license”—University hereby grants to Sponsor any of the following licenses: 9 a non-exclusive, royalty-free license to the University Intellectual Property for any internal research and development purposes a non-exclusive, royalty-free license to the University Intellectual Property without the right to grant sublicenses a non-exclusive, royaltybearing license to the University Intellectual Property including the right to grant sublicenses an exclusive, royalty-bearing license to the University Intellectual Property in the field of use of ___ including the right to grant sub licenses an exclusive, royalty-bearing license to the University Intellectual Property including the right to grant sublicenses an exclusive, royalty-free license to the University Intellectual Property including the right to grant sublicenses Terms and conditions of these licenses are to be negotiated in good faith and agreed upon between University and Sponsor.
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Intellectual Property Rights in Industry-Sponsored University Research: A Guide to Alternatives for Research Agreements sponsor obtains a non-exclusive, royalty-free license for internal research and development in the research agreement, though more extensive license rights may also be granted in that agreement. 9 Some sponsors may be reluctant to fund research without knowing what effect license provisions will have on the availability and cost of the eventual product. So some license provisions may be defined in the research agreement. However, by including an option for a license in the research agreement, negotiation of most license provisions may be deferred until some time after disclosure of the specific intellectual property. Approach 3: The right of first refusal In practice, when the sponsor elects to take a license, the parties are almost always able to reach acceptable terms for a license agreement for the intellectual property resulting from the sponsored research. If agreement cannot be reached, mediation or arbitration can sometimes be helpful. Occasionally, in spite of these efforts, agreement still cannot be achieved within the agreed upon time. When this occurs, the university has the right to negotiate with third parties. If the university is able to reach agreement with a third party on more favorable terms than were presented to the sponsor, under the right of first refusal, the sponsor has the right to accept such a license offered to a third party. The right of first refusal may be acceptable to a university if it is contingent upon the sponsor negotiating a license agreement in good faith during the option negotiation period. Having the right of first refusal may provide the added level of comfort that a sponsor needs to justify the research investment. However, some universities are reluctant to accept the right of first refusal under any circumstances, because the practical effect may be to impede the university’s ability to interest a third party in a license. For its part, the sponsor may feel that, in the absence of detailed license terms in the research and option agreement, a right of first refusal is needed to reduce the risk that the university will prematurely initiate negotiations with a third party. Contract language for “The right of first refusal”—If Sponsor exercises its option, the parties will thereafter negotiate in good faith to conclude a license agreement within __ [time]. Such negotiations shall take into account factors affecting Sponsor’s ability to commercialize the product profitably, including, but not limited to, terms of any third party license which may be necessary for the manufacture, use, and sale of any product relating to the field, size of market, development time and cost, product performance relative to competing products, and whether the invention is covered by a sole or joint patent. In the event the parties fail to reach a mutually acceptable agreement within the negotiation period, University shall be entitled to negotiate in good faith with one or more third parties a license for any University Intellectual Property and University’s interest in any Joint Intellectual Property. However, upon the conclusion of such negotiations and before any license is granted to any such third party on terms more favorable than were offered to Sponsor, University shall offer Sponsor a license on the same terms. If Sponsor is willing to enter into a license with University on such terms, Sponsor shall be granted the license instead of such third party.
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Intellectual Property Rights in Industry-Sponsored University Research: A Guide to Alternatives for Research Agreements B. Scope Regardless of which of the above approaches to acquiring a license is utilized, consideration of the scope of the license is the same. Below is a discussion of possible provisions to be considered, including provisions for exclusive and non-exclusive licenses, royalty rates, field of use, and inclusion of a full license agreement. 1) Exclusive and non-exclusive license provisions Exclusive licenses are especially important in some industries, such as pharmaceuticals, biotechnology, and chemicals, whereas they may not be as important to others, such as electronics and automobile manufacturing. If a technology is of general use or limited value, or if it is a small part of a large system, the sponsor may choose a non-exclusive license. Sponsors often expect non-exclusive rights to inventions resulting from sponsored research to be royalty-free, but companies are generally willing to pay royalties for exclusive rights. In some industries, pharmaceuticals, for example, if a sponsor is granted a non-exclusive license, the university may have difficulty interesting other licensees. Some potential licensees may not be willing to spend large sums of money developing a product using the intellectual property that the original sponsor chose not to develop, but could subsequently use royalty free or market in animproved form. If the sponsor elects a non-exclusive, royalty-free license to use the intellectual property solely for research purposes, the university is still able to grant an exclusive license to a third party for commercialization of the intellectual property. If the sponsor takes an exclusive license, the university must retain the right to use the intellectual property in its own research and instructional programs.
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Intellectual Property Rights in Industry-Sponsored University Research: A Guide to Alternatives for Research Agreements 2) Royalty provisions Generally, royalty provisions are not included in research agreements. 10 When they are, the sponsor often will agree to a range of royalty rates, deferring determination of the actual rate. The pre-specification of royalty rate— or a range of rates—does not preclude discussion of other financial considerations during negotiations of the license. Royalty rates are influenced by a number of factors including the potential market size and profitability of the licensed product, the potential cost of commercialization, the obligation to pay royalties to more than one licensor-holder for the product, the value added to the product by the university invention, and the degree of exclusivity granted by the license. The field of research, type of invention, size of the research project, prior or background rights, stage and type of research being carried out, and the nature of the potential intellectual property, also may affect the rates. Royalty payments may be capped on a cumulative, percentage, or annual basis. The royalty base will require definition and may be based on: net sales, net earnings, bulk manufacturing costs, number of units, products, processes, value added, and profits. No contract language is provided here for royalty provisions because these and other variables must be considered. In the case of copyrights, universities may expect companies to pay royalties for using software, for some other types of copyrightable material, and for derivative works if the software is not considered part of the “deliverables” in a sponsored project. (See the definition of derivative works in footnote 15 on page 17.) If royalties are to be paid for derivative works, the basis and extent of this obligation may be further defined in subsequent license agreements or in the initial research agreement depending on the specificity of other intellectual property terms in the agreements and the preference of the parties. 10 Under Title XIII Tax-Exempt Bonds and the House and Senate amendments to it, tax-free status of public bonds may be adversely affected under certain conditions, particularly for pre-negotiated royalty rates with exclusive licenses. Because of its complexity, competent tax advice may be necessary. See the Conference Report to the Tax Reform Act of 1986, II-683ff, especially II-685-6 and II-689.
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Intellectual Property Rights in Industry-Sponsored University Research: A Guide to Alternatives for Research Agreements 3) Field of use provisions Licenses to intellectual property may limit the sponsor’s license rights to specific fields of use. The license may allow exclusive or non-exclusive use within specific fields. In many instances, the sponsor may wish to obtain a license for all fields of use. The university, however, may be concerned about the ability of the sponsor to fully commercialize the licensed product in every possible field of use. In fact, such full development is an ideal rarely realized in practice. Market size, development costs, and other factors often make the development of an invention for particular applications or markets unprofitable. Contract language is generally included that commits the sponsor to use “commercially reasonable efforts” to develop the invention within the field of use. The sponsor may develop certain applications or markets through sublicensing or joint ventures. Contract language for “Field of use provisions”—[See contract language for option for a license and grant of a license on pages 7 and 8, respectively, where fields of use may be specified.] For certain types of products, such as pharmaceutical, a broad field of use may be critical to commercial success. For instance, successful commercialization may ultimately depend on the later discovery of a new medical use for a compound that was not considered commercially valuable during the original negotiations. Alternatively, a drug may have multiple uses that collectively make the product sufficiently profitable to justify undertaking the research. The sponsor may not be willing to gamble resources on a subset of possible applications. At the very least, the sponsor will likely feel that competitors should not benefit, at the sponsor’s expense, from the research it has sponsored. A compromise acceptable to both the university and the sponsor may be to include all fields to which the sponsor will devote “commercially reasonable efforts.” Contract language for “commercially reasonable efforts”—“Commercially Reasonable Efforts” means efforts and resources commonly used in the _____ (e.g. pharmaceutical) industry for a product at a similar stage in its product life of similar market potential taking into account the establishment of use of the product in the marketplace, the competitiveness of alternative products in the marketplace, the proprietary position of the product, the likelihood of regulatory approval given the regulatory structure involved, the profitability of the product and alternative products, and other relevant factors. 4) Inclusion of full license agreement as an appendix In many cases both the university and the sponsor are reluctant to negotiate a full license as part of the research agreement because it is time-consuming. However, some sponsors insist on it. When the parties have sufficient information about the probability of intellectual property resulting from the research, as well as its likely commercial value, a full license agreement may be
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