In recent years, there has been extensive discussion in the tech transfer and entrepreneurial communities about bridging the gap between the universities and other research institutions that are generating new research and the entrepreneurial and commercial interests that might take that research and develop new products. As one commentator has said, a key challenge is that invention does not necessarily lead to innovation. In June, the House Science Committee held a hearing on the implications of the Bayh-Dole Act on this situation: “Best Practices in Transforming Research into Innovation: Creative Approaches to the Bayh-Dole Act.” As discussed in more detail below, at the hearing, witnesses discussed some of the new initiatives in tech transfer offices, such as creating accelerators, finding gap funding and encouraging entrepreneurship by faculty and students. Other ideas included creating standard license agreements that simplify negotiations and the cost of licensing. Whether IP lawyers represent universities and research institutions, inventors, entrepreneurs or funders, they need to be aware of the issues, developments and opportunities in the tech transfer ecosystem as they counsel and advise clients in this ecosystem.
For more than 30 years, the Bayh-Dole Act has enabled America’s universities to retain ownership of federally funded research — research providing the backbone for advancements in medical, energy and many other industry-setting technologies. Enacted on December 12, 1980, the Bayh-Dole Act provides a uniform policy that allows universities and other nonprofit organizations — not the government — to control the intellectual property rights to inventions developed with federal funding. The act encourages universities to collaborate with commercial entities to promote the utilization of inventions created with federal funding, requires universities to file patent applications for inventions they elect to retain, and grants the government non-exclusive licenses to practice the patents throughout the world. One example of the impact of Bayh-Dole is its impact on the biotechnology industry. According to Dr. Todd Sherer, president of the Association of University Technology Managers (AUTM), the “bioscience sector represents an employment impact of 8 million jobs, and 76 percent of biotech companies have a license from a university.”
However, according to the recent 2011 AUTM Licensing Activity Survey, although more than 13,000 U.S. patent applications were filed, 4,700 patents were issued and $330 million in external legal fees were paid in 2011, the total number of active patent licenses and options remained flat and the number of new commercial products created slipped 10 percent from 2010. These statistics are consistent with anecdotal reports from individuals working in the field. Thus, it is not surprising that the House Subcommittee on Technology and Innovation held hearings June 19 to evaluate the status of university technology transfer and mine creative approaches to transforming research into innovation.
What seems clear is that there is a gap between the research institutions that are generating new research and the entrepreneurial interests that have the resources to transform the research into commercial products. Testifying before the subcommittee, Robert Rosenbaum, president and executive director of the Maryland Technology Development Corp., identified two significant challenges to university technology commercialization: insufficient funding for translational research and insufficient interaction between universities and industry.
First, with regard to the lack of funding for translational research, Rosenbaum testified that the “majority of federal funding programs supporting university research are targeted to basic research.” Basic research “is driven by a scientist’s curiosity or interest in a scientific question. The main motivation is to expand man’s knowledge, not to create or invent something. For example, basic research probes for answers to questions such as: How did the universe begin? What are protons, neutrons and electrons composed of? How do slime molds reproduce? What is the specific genetic code of the fruit fly?”
Translational research, however, is used to translate basic research into practical applications, such as finding a treatment for breast cancer. “While a strong policy focus supportive of basic research has served this nation well by creating a wealth of new discoveries, it has ignored the step of commercialization that is required for these discoveries to be translated into products that can benefit the public good,” Rosenbaum testified before the subcommittee
As explained by Rosenbaum, Maryland has created a program called TechStart designed to validate the commercial need for an innovation before excessive dollars are spent on pilot programs or proof of concept projects. Depending on the technology, the program’s participants may evaluate the commercial market size, the competitive landscape, the freedom to operate the invention in view of existing intellectual property rights and the existence of viable distribution channels in order to determine if the research has commercial viability. Only with an affirmative answer is money invested in the translation, or commercialization, of the technology.
Rosenbaum also suggested that in order to address the need for translational research, a portion of the federal extramural research budget could be dedicated for translational research and that traditional basic research programs add a review criterion requiring the applicant to describe the potential commercial application of any newly discovered knowledge resulting from the proposed project.
Also addressing the need for research directed to commercially viable innovation, the University of Michigan expanded the funding resources available for early-stage technologies and new start-up opportunities, including providing several translational funds that allow technical validation for emerging discoveries, according to testimony of Ken Nisbet, executive director of technology transfer at Michigan. “One example is the Coulter Translational Fund for promising biomedical projects, created via a matched endowment from the Coulter Foundation,” Nisbet testified. “In addition to the translational funds, the university is reinvesting tech transfer revenues into an internal ‘gap’ fund that is generously matched with funds from the state of Michigan to address market validation and commercial-readiness issues.” Clearly, identifying commercially viable research is a key to increasing the number of new commercial products produced by the universities and marketed by industry.
The other challenge identified by those testifying before the subcommittee was the insufficient interaction between universities and industry. Rosenbaum suggested that this challenge is created primarily by the difference in corporate and university cultures. “This is compounded by issues related to intellectual property, publication, conflict of interest and other issues that are rooted in public policy, e.g., Bayh-Dole. The cultures at universities and those in industry are well entrenched and would require policy changes that create strong incentives to have an impact.” The Maryland Industrial Partnerships Program (MIPS) has implemented a program to address just this challenge — to promote collaboration between commercial enterprises and a university research lab. Under MIPS, the state provides matching funds to the dollars invested by the company on a sliding-scale basis. Depending on the size and maturity of the company, the state will provide between 50 and 90 percent of the cost of the project. Rosenbaum testified that MIPS has resulted in thousands of new jobs, billions of dollars in revenue and at least one public company.
The University of Michigan is also addressing this challenge by forming broader research agreements with innovation partners like Procter & Gamble, Dow and Ford and now provides up-front license terms for future inventions that may be derived from industry-sponsored research, according to Nisbet.
The University of North Carolina at Chapel Hill has also implemented a program that would provide up-front license terms for start-up companies — the Carolina Express License Agreement. According to Catherine Innes, director of the Office of Technology Development, the Carolina Express License Agreement is a “one-size-fits-all” approach to licensing technologies to UNC start-up companies. Because many “innovations arising from university research are simply too nascent and pose too many technical risks to be licensable to larger firms until more data on efficacy can be obtained,” UNC decided it needed to foster a robust start-up pipeline. In order to support this objective, the university focused on finding ways to make the license process for start-up companies faster, easier and more transparent so that the money a company did have could go toward getting the company up and running, not negotiating a license with the university.
As explained by Innes, the license is an option for all start-ups with a UNC faculty, student or staff founder whose management team and business plans have been approved by the university. Key licensing provisions include: no up-front license fees in exchange for a cash payout to UNC equal to 0.75 percent of the company’s fair market value at the time of merger, stock sale, asset sale or initial public offering; six-month delay in obligation to begin repayment of patent costs; optional payment plan to spread patent cost reimbursement over four years; a 1 percent royalty on all products requiring Food and Drug Administration approval based upon human clinical trials (and a 2 percent royalty on all other products); and provisions to make products available on a humanitarian basis in developing countries.
Innes noted that the important element of the license is that it is non-negotiable because it has already been negotiated. Specifically, the up-front license terms were negotiated by a committee that included local law firms that serve as business counsel for most start-ups in the area. “It is important to recognize that by eliminating the need to negotiate a license for each new start-up, these firms were forfeiting significant revenue they would have otherwise been paid. Their rationale was altruistic in part, but they also recognized that by fostering a larger and more vibrant start-up community … [they] would generate long-term gains that could greatly exceed any short-term losses,” Innes testified.
While this model requires that the university be willing to settle for a fair, rather than the most lucrative, deal and gain the support and buy-in of those negotiating on behalf of the start-ups, two-and-a-half years after its inception, UNC has launched 19 start-up companies and all but three used the Carolina Express License. Prior to the license, UNC started three companies per year. Thus, although it remains to be seen whether this idea could be implemented in larger legal communities, it is certainly an idea worth exploring.
There is little doubt that universities and other research institutions provide fodder for innovation. As lawyers working in this ecosystem, we need to be aware of the new opportunities for collaboration that are developing between research and industry and assist our clients in finding additional creative approaches to bridging the gap that exists. •
Nicole D. Galli is a partner in the intellectual property department of Benesch, Friedlander, Coplan& Aronoff. She is resident in the firm’s Philadelphia office and can be reached at email@example.com.
Amanda Miller is an associate at the firm and represents clients in a range of intellectual property matters, particularly patent litigation and prosecution matters. She is experienced in preparing patent applications relating to pharmaceutical, bio-medical, chemical and mechanical inventions