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University-Industry Engagement Advisor

Legal disputes with university start-ups often traced to poor contracts


By Jesse Schwartz
Published: December 12th, 2018

Tech transfer offices focus so much on encouraging faculty entrepreneurs and fostering their start-ups that the need for carefully constructed legal agreements can be seen as just a necessary formality among friends.

Big mistake. That can lead to legal disputes down the road that will turn the convivial relations you hope for between the university and its faculty start-ups into an adversarial ordeal.

Legal disputes for TTOs have mostly focused on patent infringement, but with more of their work now involving start-ups and equity investments, universities are increasingly finding themselves pitted against their own faculty own spinouts.

Case in point: the University of Waterloo in Ontario, Canada, is facing off with a start-up staffed by alumni and students, funded by the school, and housed on the campus. Salient Energy is focused on commercializing a clean-energy technology invented on campus, but the university is suing it in Ontario Superior Court, saying it is the sole owner of the relevant IP.

The university wants the rights to the IP so it can license the technology to the U.S. Department of Energy’s Argonne National Laboratory, which it says funded the research that led to the start-up. The school says Salient misappropriated the school’s business opportunities and engaged in “malicious and high-handed conduct” that showed reckless disregard for the university’s interest in the IP.

The lawsuit calls for $600,000 in damages, an amount that would likely bankrupt the six-person company, not to mention the loss of the IP on which it depends. Salient’s response to the lawsuit called its allegations baseless and noted that the University of Waterloo encouraged the start-up it is now trying to undercut.

The lawsuits can go in both directions. In California, Stanford University is being sued by MedWhat, a company providing a medical and health assistant that can automatically provide a contextual answer to questions posed in natural language.

MedWhat’s lawsuit against Stanford and its StartX fund claims fraudulent use and abuse of convertible notes by venture capital investors in Silicon Valley. The company alleges that a minority group of its investors used in bad faith a convertible note to gain access to the startup’s private information, including technology, business model, customer information, market strategy, and the product and technology roadmap. Then, when MedWhat achieved a financing milestone that would trigger conversion of the note, the investors refused to comply.

The start-up alleges that the investors were actually backing a competing company, Sense.ly, and used that information for those competing interests, while claiming all along that they were only interested in owning equity in MedWhat and assuring its financial success, according to the lawsuit.

These and other disputes like them beg the question: How can TTOs and their legal teams prevent this kind of trouble? Much of the potential for legal disputes comes from the fact that universities, by necessity, employ in-house legal counsel that often use boilerplate agreements with start-up companies, says K. Lance Anderson, JD, an attorney and chair of the pharmaceuticals and biotechnology practice group with the Dickinson Wright law firm in Austin, TX. He represents companies involved in such disputes.

Universities standardize their agreements for consistency and efficiency in managing large portfolios. Start-ups, on the other hand, often are limited in the quality and quantity of legal services they can afford. That can be a bad combination.

Both parties might accept those limitations more readily because they see each other as collaborators rather than adversaries, he explains.

“I represent these companies when the dispute arises, and when I look at the agreements I see bad decisions that were made just because the company didn’t know how it could or should be done,” Anderson says. “The two parties have this mentality that they’re on the same team so they go bounding down the road hand in hand, and it’s only later they realize certain things were not addressed.”

A detailed article on preventing legal disputes between universities and their start-ups appears in the November issue of Technology Transfer Tactics. To subscribe and get the full article, plus access to the publication’s 11-year archive of best practices and success strategies for TTOs, CLICK HERE.

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