Industry-Sponsored Research Week

Automatic licensing in industry-sponsored research: Does it pay off?

By David Schwartz
Published: April 16th, 2019

“The jury is still out” on automatic (pre-negotiated) licensing in industry-sponsored research, said a trio of attorneys who comprised the panel for a session entitled “Automatic Licensing Initiatives: How they work and how they are working,” at the recent AUTM 2019 conference in Austin, TX.

Universities that have used such models either in a programmatic or an ad hoc approach, they noted, have generally not been able to demonstrate significant increases in revenue through the generation of new sponsored research, which would theoretically offset lost revenues from future royalties that are typically foregone in such deals. However, they added, both faculty and sponsors involved in pre-negotiated licenses “love it.”

Even so, at the universities which employ automatic licensing, the pre-negotiated agreements represent a relatively small percentage of their total agreements.

The automatic licensing deals in most cases are seen as a way to attract more industry sponsors, who increasingly want to limit lengthy negotiations around IP terms. The deals offer potential corporate sponsors a research agreement with a pre-defined, upfront license fee that is often a percentage of the total research expenditure or a flat fee, sometimes with a “bonanza” clause that kicks in if licensed products reach a threshold of sales, at which point royalties would accrue to the university. In general, sponsors like the approach not only because of reduced negotiating time, but because they can predict their costs and not get hammered later by what they might perceive as an overly burdensome royalty rate.

“There have been pressures for a ‘friendlier’ approach [to agreements in industry-sponsored research], noted Kate Donohue, associate general counsel at the University of Pennsylvania. “When I started representing institutions for sponsored research (about 20 years ago), they never granted a company more than an option to license,” she said. “You might have gotten non-exclusive royalty free research that only a license might have, or sometimes commercially non-exclusive royalty free. But even that I consider an erosion of the traditional approach — and they definitely did not get a commercially exclusive royalty free license in the sponsored research agreement.”

Also, she noted, in a traditional license agreement you would only license technology that existed; improvements were not automatically rolled into the agreement. “If we gave an option at all it would have been on commercially reasonable terms to be determined later,” said Donohue. “Sponsors did not like this; they like to know what they’re getting into when they fund research. They asked either for the license to be built into the research agreement or attached to it. This is difficult from a tech transfer perspective because you do not get royalties from it, and it is usually granted without strings.”

A growing number of universities are offering programmed automatic licensing, she continued, in which the institution has formally adopted a licensing program, gone through all of the approvals, it’s been marketed, and it has a name — for example, the University of Minnesota’s MN-IP program. “Ad hoc is when it happens on a one-off basis; you may not even be aware that it’s going on at your institution,” she said.

An ad hoc deal involving pre-negotiated IP terms might occur when there’s enough money on the table, Donohue noted. “For example, if the sponsor will give you $50 million to fund a gene therapy program but wants [specific] terms for any IP that comes out of it, you’ll listen to them and [probably] meet the requirements.” When there’s a really big deal you might have gotten the tax office involved, she added, since pre-negotiation can call your non-profit status into question — and it’s important to make sure the tax implications are well understood and dealt with.

But you might not have thought of the tax impact when it comes up under a routine MTA if you grant rights to the material provider to IP that does not exist yet. “There can also be license agreement improvements language we’ve seen where sponsors constantly try to change the patent rights definition to include existing rights as well,” she noted.

This can even happen where federally funded research is involved, she continued. “[Sponsors] will tell you lots of universities have told them you can’t do this with federally funded research, but that they’ve used it at other institutions [with federally-funded research],” Donohue shared. “They can slide in this language where you least expect it, so be aware.”

An in-depth article on automatic licensing in industry-sponsored research appears in the April issue of University-Industry Engagement Advisor. For subscription information, CLICK HERE.

Posted under: University-Industry Engagement Week

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