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Deal with strawberry growers terminated

‘Rock star’ faculty depart to launch private start-up, leave legal quagmire in their wake

This article appeared in the July 2014 issue of Technology Transfer Tactics. Click here for a free sample issue or click here to subscribe.

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When two strawberry researchers announced recently that they were retiring from the lucrative, cutting edge breeding program at University of California-Davis to set up a private company, the protests began quickly and are now the subject of a lawsuit. But it is not the university objecting to the prospect of losing such a major research and revenue source.

The protests are coming from the California Strawberry Commission, an association of strawberry growers and packers who funded research in the university’s strawberry breeding program. In return for that funding, the strawberry farmers received a discount on the strains of strawberries developed in the program. But before plant sciences Professor Douglas Shaw, PhD, and breeding expert Kirk Lawson, PhD, retired from the university, they ended the sweetheart deal with the commission, saying the discounts being provided to farmers were worth far more than the modest $350,000 in annual funding coming from the Commission.

That is not sitting well with the growers, who contend that California strawberry farmers have over the years contributed millions of dollars through assessment payments to the Commission for the development and support of a public strawberry breeding program at UC-Davis. The commission funded the breeding program for 30 years before the current plant breeders were hired, including supporting research, infrastructure (such as a greenhouse), and two years of Shaw’s salary to ensure overlap with the previous UC plant breeders working in strawberries to enable the transfer of knowledge from the former breeders to Shaw.

California strawberry farmers have also contributed tens of millions of dollars to UC-Davis through royalty payments, notes the Commission’s Communications Director Carolyn O’Donnell.

In addition to raising the ire of growers and the Commission, for the university and for other TTOs the prospect of competing against former employees raises some touchy issues surrounding IP rights, although UC-Davis has not taken any action against the former faculty members while it waits to see how they approach the start-up process. For any TTO with star faculty who could leave the fold and drive a significant shift in the marketplace, the case is certainly cause for concern.

Millions at stake

The university has asked an Alameda County Superior Court judge to throw out the lawsuit, contending that the Strawberry Commission has no right to dictate how the research program is run, explains Jacob Appelsmith, JD, chief counsel for UC-Davis. Furthermore, Appelsmith says there was nothing improper or unusual about ending the discount deal with the Strawberry Commission.

The outcome of the lawsuit, and the prospect of a private breeding company launched by former researchers that will compete with UC-Davis’s program, are significant because of the size of the strawberry industry in California. The state produces 90% of strawberries consumed in the United States, with more than half of the fruit coming from patented varieties developed at UC-Davis. Four strawberry varieties were among the top 20 revenue-producing patents for the university in 2012. UC-Davis received about $4.5 million last year from strawberry licensing payments.

The Commission’s lawsuit maintains that the university has indicated that it would enter into a licensing agreement with the current researchers, allowing them to establish a private proprietary program that would compete against the university’s public program. The result, the suit alleges, is that the two researchers, many of their subordinates, research farms and facilities, and the germplasm [including the living plant material and research data necessary to create new strawberry varieties], all developed with the financial support of California strawberry farmers for the past 30 years, would all be redirected to a private program.

While acknowledging the university will continue its strawberry breeding, the Commission says the public program would be at a distinct competitive disadvantage since most of the expertise, facilities and genetic material would be redirected toward the private venture.

“The university thereby seeks to take the fruits — both literally and figuratively — of decades-long research that the Commission funded for the benefit of the California strawberry industry and hand them over to private financial interests,” the Commission’s complaint states.

The Commission contends that its members met with the university administration to discuss ongoing concerns regarding the management, oversight and long-term viability of the public strawberry breeding program. With no movement on those concerns, “the commission filed this lawsuit as a last resort to protect the public strawberry breeding program.”

John Boyd, JD, a partner with the New York City law firm Rimon, notes that the Strawberry Commission may be out of luck if it did not negotiate terms in the original agreement about the discount surviving any funding arrangement. “If the agreement did not protect the commission from an arbitrary or sudden decision to cut them off, that’s on the Commission. They should have negotiated a better long-term agreement,” Boyd says. “Details matter tremendously in business relationships.”

University vows to protect its IP

Though the researchers’ departure will be a setback to the breeding program, administrators at UC-Davis cannot object to them retiring, Appelsmith says. Setting up a private company also is beyond the university’s control, as long as the researchers are not violating intellectual property law or university policies, he adds. However, the chief counsel says it remains to be seen whether the researchers will try to take some of their genetic specimens and other material with them. If they do, that could spark another legal battle.

“The researchers do not have the right to take anything with them without the university’s agreement and permission, and that we intend to enforce if they attempt to do otherwise. The plants, patents, the intellectual property, all of that is university property,” Appelsmith says. “The researchers have some arguments of their own to dispute that, which we do not believe are valid. They believe that they have the right as researchers to have property rights in these plants and the intellectual property for further developments once they leave. Our position is that they do not.”

Shaw and Larson receive royalties from the use of the strawberry lines, and they would continue to do so after leaving the university. Neither the researchers nor the university has filed a lawsuit or petition addressing the intellectual property rights and what can be taken, but Appelsmith says the parties are discussing their different viewpoints.

UC-Davis may have set itself up for trouble when it first made the agreement with the Strawberry Commission, says Christopher F. Wright, JD, a shareholder at the Pennsylvania-based law firm of McCausland Keen & Buckman. He is also the former associate general counsel to the University of Pennsylvania and first director of legal affairs for Penn’s Center for Technology Transfer.

Giving discounts in return for funding is an unusual arrangement, he says. The standard deal is to offer a first option to take a license on commercially renewable terms. Saying “You can look at it first, but you have to pay” is a radically different business transaction from saying “You give us funding and we’ll give you discounts,” Wright explains.

“Locking in discounts can make the party dependent on that savings, and then you can expect some resistance when you try to take it away,” he says. “If I were the strawberry growers, I’d be upset. I put the money in all these years, structured my business with those discounts in mind, and now the discounts have evaporated.”

The university is in mediation with the Strawberry Commission to settle the lawsuit, Appelsmith says.

Non-compete not always the answer

The departing researchers may be completely within their rights to set up a competing company, but the issue of what they can take with them is less clear, says Wright.

It is not known whether UC-Davis required a non-compete clause, but Wright suspects it did not because the university is not objecting to the stated plans for a private company. Many private companies would require a non-compete clause for employees, Wright explains, but universities often do not because the faculty see it as a breach of traditional notions of academic freedom.

“Rock star researchers like these two at UC-Davis are treated like sports free agents. If someone dangles enough money in front of them or they see the opportunity to form their own company, they jump ship, and that can send out some interesting ripples,” Wright says. “If the key IP that’s behind their research is patent-based, that typically is going to be owned by the university, which at least gives it a foothold in the discussion about future commercialization. But if the key IP is confidential or proprietary information inside the head of the professor, not protected by patent rights, the university has nothing to go on.”

If the university does require a non-compete clause, it should be accompanied by a confidentiality agreement, advises Boyd, who previously served as chief IP counsel at publicly traded biotech companies and at the U.S. Patent and Trademark Office examining patent applications for inventions.

“Emphasizing the importance of keeping information confidential makes it more likely that you can enforce your non-compete clause,” Boyd says. “Non-competes are often restricted or not enforced by the courts, and a strong emphasis on confidentiality throughout the agreement can help show that you were concerned with protecting your IP from the beginning.”

University researchers typically publish their research and disseminate their findings broadly, so that pre-empts any argument that that information rises to the level of a legally protected “trade secret,” Wright explains.

The solution often is an inter-institutional agreement (IAA) that helps both the university losing the researchers and the school or company that lured them away.

“The old university owns the patented technology, but the new university [or company] owns the commercial development of that technology, so they often need each other to move forward,” Wright says. “That’s a really interesting contract to negotiate. No one is happy but they have to enter this de facto partnership, usually with the new university running the show and the old university stuck in the back of the station wagon. There are a whole lot of hurt feelings and awkward discussions.”

Peter F. Corless, JD, a partner with the Boston office of the law firm Edwards Wildman Palmer, specializing in patent law, also notes that the UC-Davis situation is unusual because the researchers intend to compete with their former employer. Prominent researchers jump from one university to another all the time, he says, but it is rare to see them step away from the school and then compete directly with what used to be their program.

“If you’re in tech transfer, this isn’t something that’s going to come across your desk very often,” he says. “But it is reason to consider beefing up your agreements with anyone entering the university, to mitigate the potential problems in the future.”

Contact O’Donnell at 831-724-1301; Appelsmith at 530-754-6295 or jappelsmith@ucdavis.edu; Corless at 617-517-5557 or pcorless@edwardswildman.com; Boyd at 212-363-0270, ext. 225 or john.boyd@rimonlaw.com; and Wright at 610-341-1026 orcwright@mkbattorneys.com.


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