This article appeared in the May 2019 issue of Technology Transfer Tactics. Click here for a free sample issue or click here to subscribe.

If your TTO is not routinely seeking know-how royalties when negotiating license agreements — particularly with faculty start-ups — then you are almost certainly leaving dollars on the table. In some cases, big dollars.

That’s according to a panel of tech transfer leaders speaking at the AUTM annual meeting in Austin, TX, led by Ofra Weinberger, director of licensing with Columbia Tech Ventures and associate VP for tech transfer and intellectual property at Columbia University. She was joined on the panel by tech transfer leaders from NYU, Yale, Mount Sinai, Penn, and Washington University in St. Louis, each of which is benefitting from incorporating know-how into their licensing tool box.

It’s not a simple or easy sell in many cases, but these experts point out that know-how is of great value to many university start-ups and other licensees, and it should be treated as such in licensing negotiations. In some cases — particularly in life sciences with its long time to market and circuitous development path — know-how may be the only royalty-bearing asset that survives once commercialization occurs.

It’s true that licensees may push back, but the panelists presented strong counterarguments that you just might want to keep in your back pocket for your next negotiating session.

A growing component of licensing

At Columbia, Weinberger says, “literally millions of dollars have come back to the university from this category of sales — from know-how royalties.”

That level of success is likely one of the reasons for an increase in know-how licensing, along with a steady increase in the percentage of licensing done with faculty start-ups, where know-how is often a critical factor.

At institutions represented on the panel, the percentage of licenses that incorporate know-how range from a low of 20% to a high near 80%.

“Of our start-ups I would say about 80% to 90% contain a know-how component. Across the board for exclusive licenses, maybe it’s around 70%,” reports Abram M. Goldfinger, executive director of NYU’s Office of Industrial Liaison.

For the University of Pennsylvania, while know-how licensing is “not standard practice,” about 20% of licenses contain a know-how component, says Ben Dibling, PhD, executive director of licensing at the Penn Center for Innovation. Most of those are start-up licenses, he adds.

Yale and WUSTL are in the middle of the continuum. “For exclusive licenses typically about half of those include some kind of know-how component,” notes John Puziss, PhD, director of business development in Yale’s Office of Cooperative Research. Echoing several other panelists, he says “typically these are either start-ups where we know the faculty member is going to be very intimately involved with the company, or with an early-stage collaboration in pharma. Those are typically the ones where we include know-how.”

Leena Prabhu, associate director in WUSTL’s Office of Technology Management, says the OTM refers to know-how deals as “non-patent royalties” and told attendees that “it is standard practice” to request a know-how royalty. After researching the school’s license agreements completed in the past five years, she found that 65% of exclusive licenses contain a non-patent royalty.

Lisa Placanica, PhD, CLP, managing director of business development and licensing for Mount Sinai Innovation Partners, put the rise in know-how as a critical component into sharp focus, describing her review of 10 years of data from MSIP’s exclusive licenses. She wanted to determine whether there had been any trends related to know-how, and what she found “was really remarkable.” In 2009, Placanica discovered, between 20% and 30% of exclusive licenses included know-how, “and in 2018 it was much closer to 80%.”

What changed? As part of a “rebirth” process that began for the office in 2011, MSIP began examining best practices and also signed on with an external law firm. The know-how royalties began to increase based on a simple solution, she explains. “We started to just ask for know-how royalties, so the first step is to just ask, and often times your counterparties will agree to it in some fashion.” The other major shift, she adds, is the increase in start-ups noted by all panelists. “There is a clear correlation between know-how royalties and start-up licensing,” Placanica says.

Making your case

Of course, it often takes more than merely asking to secure a know-how royalty. But as several panelists pointed out, it may be best to focus on the licensee’s own self-interest.

Weinberger described the typical push-back. In negotiations for know-how, “we will hear that ‘nobody else ever asks or insists on or requires know-how royalties. Where are you coming from with this unrealistic expectation? [You have] a lack of understanding of the industry, a lack of understanding of the business model to be insisting on or incorporating know-how royalties into your term sheet,’” she says, mimicking a typical licensee.

But getting push-back doesn’t have to mean getting pushed around. “We try to craft win-win agreements,” Goldfinger says. He points out to those across the table that “including know-how means we can freely share our ideas and thoughts with the company so that we’re not creating boundaries, knowing that it’ll be a win-win agreement if they benefit from the know-how and ultimately we’ll benefit from it as well.”

Puzis also focuses on the competitive advantage having access to know-how can give a company. In many cases, he says, there is a considerable lag in when research is completed and when it gets published — a time period when access to know-how can be critical. In that period, “you the licensee are going to be the only party that has access to that so you’re getting a head start on the competition,” he stresses.

He also points out that there’s plenty of data and information that will never get published — “the secret sauce in how the experiments were made to work in the first place,” which can be important information for later development. And of course, he tells licensees, “you’re going to benefit from the input that the faculty inventor is going to have as you work with them in developing the technology.”

That’s a point Goldfinger stresses as well. “Just to brainstorm about future things you might do with it, having access to our scientists talking with you on a regular basis, being on your [Scientific Advisory Board], having continual meetings with the person, all enable you to be much more likely to be successful than if there’s just strict walls of IP boundaries,” he says.

Yet another argument has to do with international sales of a product that the university may have only patented in the typical major markets. As Weinberger points out, the licensee, by virtue of that patent, may have worldwide dominance despite the fact that the patent only applies in select countries. In that case the licensee may have what amounts to a global monopoly, “so it’s another reason and another argument to include why you should have a know how royalty,” she argues.

Know-how in life sciences deals

TTOs that focus on life sciences technology have even better reason to insist on know-how royalties, since the patents they license at an early stage of development, in many cases, will have little life left at the point of product introduction, and often will not even be part of a final drug’s formulation, several of the panelists noted.

“Typically university IP is early stage — it is what I call a breakthrough kind of patent filing,” explains Prabhu. “And the patent filing strategy is discordant or not well aligned with the commercialization strategy. The timing is not right … and the patent is very close to expiration when the product is ready to hit the market.” Particularly with start-ups, she adds, sometimes “the product that hits the market may not be covered by the initial early stage university filing. So in these scenarios, just from an ROI standpoint, the university has given the licensee the first mover advantage, and for that rationale alone a know-how or a non-patent royalty becomes extremely critical.”

Goldfinger agrees. “Drug discovery is one of the ones where it’s most crucial, where we might have developed a target and developed assays for doing drug discovery around the target, but we don’t have the end composition of matter. Ultimately the company is probably going to get their own patents on the composition of matter, which will give them exclusivity, but they’re more likely to get that because they had access to our know-how early on,” he says.

In addition, with start-ups many universities are offering deferments on patent costs and other financial help, which provides leverage for the know-how negotiation, Prabhu notes. “In most of our start-up licenses, those are back-end loaded deals,” she comments. “We don’t have up front payments for our start-ups because most of our start-ups are cash-strapped and you would rather that they use their money for their R&D purposes rather than pay the institution.” While the university is happy to help with favorable terms, there should be a quid pro quo of sorts when it comes to know-how. “Because of the favorable deal structure the university should get a non-patent royalty rate,” Prabhu insists.

Despite all these rationales, Weinberger says, licensee may simply claim they don’t need the know-how you’re offering, and that it has no real value to them. That’s when she pulls out her trump card. “What Columbia will do is we will then turn to the licensee and say, ‘OK fine, if you do not want our know how, will not be using our know how, do not value our know how, then you should be comfortable inserting a warrant into the license agreement that you will not be using, receiving, or using any Columbia know how.’ Very often we end up with a know-how royalty.”

Defining know-how

Putting a definition that specifies what that know-how is into a license agreement is another challenge, given the somewhat amorphous nature of know-how. It’s an issue TTOs have dealt with in a variety of ways.  

At Penn, Dibling says, “we really do draw a boundary around what that know-how is. We schedule it, and we articulate how we are going to transfer that to the licensee. I know that isn’t the practice across the board, but from our standpoint it’s defined, it’s scheduled. We need to know what it is — what is being transferred to the licensee.”

A good example, he says, is a manufacturing protocol. Goldfinger cites data, materials, reagents, and software as potentially included in know-how, but he also says “ideas” can be a big component of know-how that’s not so easy to put on a schedule or list.

“We try to keep it as broad as possible from the inventor’s lab. We do try to document what we’re giving, but we don’t limit it to only what’s documented at the time we give it. Because a lot of times it’s a free flowing exchange of ideas and we don’t want to be limited in what we’re giving,” Goldfinger observes.

Dibling insists, however, that know-how be nailed down more specifically. “While we appreciate there may be a free flow of information, particularly between the university and a faculty-founded startup company, we really want to understand exactly what it is in the way of information and data that is being transferred to the party,” he says.

WUSTL takes a similarly detailed approach, defining know-how in “two buckets,” Prabhu says. “One is tangible research material. We also have a second bucket which is technical information. We like to have an exhibit that outlines clearly what this is. Know-how royalty or non-patent royalty is never an afterthought. It is up front and center when you discuss with your licensee. It’s also helpful to sometimes have a sit down meeting with your inventors to clearly understand what falls within the patent scope and what falls outside of it. That conversation goes a long way in justifying why your institution needs a non-patent royalty rate.”

At Yale, the concept of know-how that’s not easily scheduled out is dealt with by employing the concept of “meaningful involvement,” Puziss states. This is of particular utility with faculty start-ups.

“Ideally you would be able to categorize or catalogue every piece of information that has gone from the lab to the start-up company. But then you’re depending on the faculty to actually sit down and create a list, and here’s the entire package and nothing more after the effective date of the license. In reality if you’re launching a start-up company with a faculty founder, they are going to be very intimately involved with that company from the beginning,” Puziss explains. “It’s impossible to catalogue every piece of information that goes to the company, yet you want there to be a free flow of information because that’s how the company is going to succeed.”

That’s where the term “meaningful involvement” comes into play as a part of the license. “From the time that the company is founded, as long as that faculty member has some relationship with the company — whether they are consulting, they’re on the SAB, they’re a board member, doing sponsored research, have some material under an MTA — whatever that is, during that period we are both acknowledging that there is this free flow of information, the company is benefitting from it. They agree that any product or service that’s developed during that period of time, while the faculty member is meaningfully involved, they are going to pay a know-how royalty on anything they develop…. The quid pro quo is they are going to get this free flow of information and we’re also granting improvements,” he says.

Tracking compliance

Defining know-how may be difficult, but tracking use of know-how in an eventual product can be next to impossible. But there are ways to ensure you get credit for know-how, the TTO veterans say.

One option is to focus on a type of end product that would by definition be based on the licensed know-how.

“Particularly in biotech, we’ll try to divine what a know-how royalty-bearing product is based on the end result of what the product is rather than having to prove here’s where the exchange took place,” Goldfinger states. “Say we’ve discovered a new target and we have assays around the target and a lot of information about it, we’ll just say ‘any compound that inhibits or targets that target is a royalty bearing product.’”

That definition can prevent disputes down the road, he adds, by eliminating the licensee’s ability to claim that it developed the product without the benefit of the licensed know-how. The royalty percentage might need to be trimmed a bit to get the licensee’s agreement, but he’s happy to “give up a little bit on the percentages to avoid disputes.”

Puziss has tried that approach with only limited success “because sometimes companies will say ‘well, we might not develop this particular modulator that your faculty described — we might just go back to the drawing board and discover something else.’ One approach Yale has used particularly with start-ups “where there have been extensive discussions prior to the license and prior to launching the company, we sometimes include a clause that basically says, ‘the licensee agrees that commercially material use of licensed information or know-how has already occurred prior to the effective date.’”

Another option is to require notification of any patent applications filed by the licensee, something Columbia has incorporated into some agreements, particularly those involving start-ups, Weinberger reports. By requiring that notice, “at least we’re notified and we have an opportunity at a pretty early stage to join the discussion and kind of think about whether we agree that it is an invention that was developed solely at the company,” she says.

How much of a royalty?

If you can manage to get know-how into a license agreement, how you determine the royalty rate is often a function of the rate you receive for patent royalties, typically a step-down percentage of what you negotiate for the patented asset.

Most of the panelists use a 50% step-down figure as a typical starting point, though it may depend somewhat on the type of know-how. Mount Sinai’s Placanica pegs it between 25% and 50% of the patent rate “depending on the technology that’s being licensed and the know-how that’s being provided.” In some cases, she says, “I will divvy up the know-how into different value buckets. So if it’s a small molecule program and I know we are providing a lot of unpublished data that will aid the company’s development efforts, that is more valuable IP or know-how than say maybe an assay” being used for screening purposes.

As for the term, it’s generally in line with the patent license term. “We usually have the longer of patent life, regulatory exclusivity, or certain time period from the first commercial sale on a country by country basis, which is anywhere from 10 and 15 years, depending on how well we’re able to negotiate that,” Placanica says.

Similary, Puziss says, the term for know-how related to a therapeutic product would extend throughout regulatory exclusivity, while in software or engineering the term is “usually from 5 to 15 years after first sale.”

Distribution of know-how royalties

Another key issue in licensing know-how is how those royalties get distributed — a tougher task than with more clearly defined patent royalties. The most important requirement no matter how it’s done, says Goldfinger, is to get agreement from the researchers involved ahead of time.

“The faculty member would list who’s involved with getting the know-how, and others would presumably have an opportunity to comment if they felt that wasn’t accurate” he says.

“We had one license where we generated over $100 million in know-how royalties, not patent royalties, and there was ultimately an agreement signed by 20 different people that are all sharing. And they were all scattered around the world by the time it came to be. And we basically said we’re not going to make any distributions until everybody agrees.” It took around two years to get that agreement done, but the process is much preferred to getting in the middle of a dispute among angry scientists, he stresses.

Dibling takes a similar tack at Penn. “We’ve had situations where we had significant amount of dollars flowing into the institution by virtue of a license to know-how — it wasn’t royalties but it was significant milestones — and we employed a very similar approach which was tied to getting agreement among the individuals that we felt might have been involved in creating that know-how. We distributed it to them as if they were inventors under the [IP] policy,” he explains.

Planning for competition

While the panelists generally take a fairly hard line on know-how, one argument made by licensees is often met with a more accepting attitude — the prospect of competition eating into a know-how bearing product’s market share, with the royalty potentially putting the licensee at a disadvantage.

“Often in the negotiation what we are told is ‘you’re calling it a royalty but we’re seeing it as a tax, and a tax that is being applied only to us, your licensee. In the event that there is a competing product in the marketplace that does not have to pay a royalty, we are going to be disadvantaged,’ Weinberger relates. “We are sympathetic to that, although we feel strongly that our know-how is critically valuable in helping the company get to the market faster and with a more viable product, and perhaps amplifying or expanding the IP in the patents that have been licensed to them and creating their own patents over time. But in that specific scenario of a directly competing product coming to the market and capturing a certain percentage of their market, then we will modify our know-how royalties. I think that’s an important accommodation that is justified and reasonable and important to keep in mind,” she says.

Prabhu says WUSTL has accepted the same argument. “We have in the past agreed to stepping down on the non-patent royalty rate if the sales are cannibalized by generic competition,” she notes.

It’s a fair concession, Placanica points out, since your initial push for know-how royalties may focus on exclusivity. “Sometimes a licensee will argue [that] patents give me exclusivity, but your know-how doesn’t give me any type of exclusivity,” she says. The counter often holds that without product competition the licensee has exclusivity by default. “If there is product competition that reaches a certain level, you can give them some royalty relief — that’s a way to counteract their concern.”

Contact Weinberger at ofra.weinberger@columbia.edu; Goldfinger at abram.goldfinger@nyumc.org; Dibling at bdibling@upenn.edu; Puziss at john.puziss@yale.edu; Prabhu at l.prabhu@wustl.edu; and Placanica at lisa.placanica@mssm.edu.