Category Archives: Patents

Building Strong Technology Companies One Royalty Deal at a Time

By:  Robert Benson, Ph.D.

How to write license agreements to ensure monitoring and auditing is as simple as possible.

Team on puzzle pieces

Solving the puzzle of royalty terms need not be complicated. Having a good understanding of the motivations of both parties in a royalty arrangement will help to get a deal where both parties begin seeing profit.

This was the topic of a seminar (“Licensing Compliance – Getting What You Negotiated – Pitfalls and Best Practices”) hosted recently by MATTO (Massachusetts Association of Technology Transfer Offices).  This event was mainly attended by tech transfer professionals from Massachusetts-based academic institutions.

There was a focus on three clauses in licenses that tend to breed complications. Two clauses – concerning combination product and royalty stacking –are responsible for many “difficult-to-audit” agreements and a third clause – which refers to royalties paid by a sublicensee to the licensee on sales of licensed products — makes it difficult for universities to predict royalties from sales. The licensee and licensor generally take opposite sides on these clauses.  To simplify things I will refer to the licensor as the “university” and licensee as the “company”.  These three clauses are all changes from a straight royalty on sales of licensed product, i.e., sales times royalty rate = royalty.

Combination product language refers to a situation where the licensed product is sold as a combination – that is,  at least some of the product’s value and therefore its sales price is due to a non-licensed product or item, An example is a drug (licensed product) sold pre-loaded in a  syringe (non-licensed product).  The company doesn’t want to pay the royalty on the sales price of the non-licensed part of the product.  Combination product language is a solution often suggested by the company and agreed to by the university.  There are lots of ways this can be handled.  The most common is to multiply the sales price by something like A/(A+B);  A being the price of the licensed product (the drug) and B being the price of the non-licensed portion (the syringe) when each is sold alone.  This simple example works well, but what if the syringe is custom-made just for this drug and has no separate price B? There are lots of times where A and/or B (and C and D, as things get complicated) don’t have sales prices that are easily determined.  In such cases having this type of combination product language in the agreement can lead to all kinds of difficulties, including litigation, to determine a fair royalty amount.

Royalty stacking occurs when a product is covered by IP held by more than one party.   For example a medical device may require one license for the device itself and a second license for the software to run it.   This situation would require separate royalties for each license.  The company may argue that under such circumstances the royalties are too high for them to be competitive.  Royalty stacking is one answer; both royalties are lowered as long as both licenses are required.  There are lots of way this can be done too. Typically one royalty is lowered by 50% of the royalty paid to the other licensor, with some limit as to how much the royalty can be reduced.

Companies like combination product and royalty stacking clauses because they lower the royalties.  Universities do not particularly like these clauses for the same reason.  And, in addition to lowering royalties, combination product and royalty stacking can be erroneously calculated (not always by mistake) thus lowering the royalties the university receives by even more.  Companies, too, have the added burden of accurately calculating the royalties, a task made difficult (and expensive) if lots of different products are being sold in different combinations and with different third-party licenses required.

The third issue discussed was how royalties on sales by a sublicensee are passed back to the university.  There are two basic ways this is handled. The first, usually favored by the company, is that a fraction of all payments from the sublicensee to the company be paid to the university.  For example 20% of all payments (with specific exceptions) from the sublicensee to the company will be paid to the university.  The company likes this because it gives them flexibility in structuring the sublicense.  The university usually accepts this type of payment but worries that royalties on sales by the sublicensees may be too low (the sublicense may not even have a sales royalty).  Since royalties on sales usually constitute  the bulk of any money coming back to the university, the university would prefer another approach,  in which the sublicensee pays the same (or greater) royalties on sales as the company and the company passes back to the university the same royalty the company would have paid if it had made the sale directly.

So was there a consensus on how to handle these three changes from a straight royalty on sales?  No — in licensing there is never a consensus because each license is distinctive, and every university and company is trying to accomplish something different with each deal (which is why I don’t usually believe in “express licenses” – a fashionable type of license that some universities are promoting).  However, quite a few attendees  said they would be willing, in some cases, to lower the royalty rate in exchange for dropping combination product and royalty stacking clauses and having a straight pass-through of the royalty on sales by the sublicensees.   If 5% is the usual royalty rate asked by universities, some said that they would accept a straight 3% on sales by the company and sublicensees without any reductions due to combination product or royalty stacking clauses.

I think this solution may work for the company in many situations but not all.  The big advantage is the simplicity of calculating royalties and performing audits and the certainty of the royalty stream coming back to the university from sublicensee sales.

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Building a Strong Life Science Company by Avoiding These 5 Common Patent Pitfalls

By:  Peter Kim, Principal – Irvine Pointe Advisory, LLC

King Leonidas

Make sure that your intellectual property is strongly guarded by following these simple steps.

Let’s imagine you came up with a great idea.  You hired a great patent attorney, who interviewed you in detail.  After a few weeks, he emails you the patent application, and asks you to review it before he files it with the U.S. Patent and Trademark Office.  What exactly are you supposed to be checking for when reading a patent?  What is the simplest way to read a patent?  What are the 5 most critical pitfalls in patent drafting?  I’ll give you a hint: most of your time should be spent reviewing the “claims” section.

To infringe a claim or not to infringe a claim:  That IS the question
Why is the claims section important?  A patent claim is a “checklist” for whether someone has copied your invention (i.e. a checklist for infringement).  In a patent lawsuit, the patent claims are what the court and the lawyers will be reviewing, to see who’s right.  Here’s the surprise to most inventors: in order for someone to infringe your patent, they must be copying everything in a patent claim.  “Fairly close copying” doesn’t count.  If someone copies 50% of a patent claim, they are NOT infringing.  If someone copies 75% of a patent claim, they are NOT infringing.  If someone copies 90% of a patent claim, they are NOT infringing.  That’s why it’s so important to get the patent claims right.  The good news is that you can include multiple claims in a single patent.  And someone needs to infringe only one of the claims.

How to review a patent: Tips for the inventor
When I read a patent, I start with the claim section before anything else, because it’s so important.  The claims are the last section of a patent, so start from the back.  I always start with reading the independent claims.  (If an independent claim is not infringed, then it’s impossible that the dependent claim is infringed.  Dependent claims reference a different claim; independent claims do not reference another claim.  Dependent claims can be important if an independent claim is “invalidated” due to prior art.)

Here are the 5 common pitfalls to patent claims:

      1. Claim has multiple ‘actors’
        A claim is like a checklist for infringement.  But the checklist should only be applied to one infringer at a time.  If the claim was a screenplay of a movie, there should only be one “actor” in this movie.  This is important because if the infringement requires multiple entities, each will blame the responsibility on the others.  The law makes it very difficult to sort out these ensemble infringement issues (e.g. contributory infringement or inducement).  This is one of the most common pitfalls in a patent, and also the easiest mistake to correct.  Make sure the claim describes the activity of a single infringer.
      2. Claim is unnecessarily long
        A claim should be as long as it needs to be, and not any longer.  Why?  Because proving infringement requires that everything in the claim has been copied.  A longer-than-necessary claim means that proving infringement is longer and more complicated than it needs to be.  If the claim seems to have many unnecessary details in it, work with the attorney on figuring out if any of the details can be moved to a dependent claim.  Ask whether someone could infringe your patent with a shorter version of the claim, and if that shorter claim still covers your invention.  Make sure the claim is not excessively long.
      3. Claim would be invisible or undetectable in the ‘real-world’
        A claim should describe things that would be visible and detectable in the ‘real-world’ (i.e. can be reverse-engineered from the product or service).  It might take some hard work to detect, but the infringement shouldn’t be invisible.  Examples of invisible features might be software code, or a secret manufacturing process.  If you file a lawsuit for infringement, the court requires solid evidence when you file the lawsuit.  Stated differently, the court will not let you file a lawsuit as a ‘fishing expedition’, in order to guess at infringement.  Make sure the claim describes infringement that can be seen or detected.
      4. Claim uses unusual words that are not well defined somewhere in the patent
        A claim should use simple plain and understandable language, whenever possible.  However, there are some situations when a patent attorney must use an unusual word because it’s being used with a very specific meaning.  If you don’t understand any of the words in a claim, look in the rest of the patent to see if there is an explicit definition or list of examples.  If you explicitly define the words in the patent, the court will give your own definition deference.  But if you don’t define it, the court will decide the meaning during the lawsuit.  Make sure the claim uses understandable and well-defined language.
      5. Claim describes a different idea than what the inventor discussed
        Every invention begins with an important idea.  An inventor should work with a patent attorney to capture that idea in a patent.  And a great patent attorney will provide input on how to focus the idea in the most beneficial way.  But ultimately, the claim should describe the idea that the inventor and attorney have discussed.  If the claim describes something different, there may have been a miscommunication along the way.  Make sure the claim describes the idea that you discussed.

In summary…
One of the most important jobs of an inventor is to read the patent application before it is filed.  These 5 patent pitfalls are very simple to watch for, and don’t require any special legal or technical training.  Spending an hour reading the patent claims will save you countless time and money in the courtroom later on.  And if you make sure these 5 items are covered, most of the hard work of reading a patent has been accomplished.

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Keeping the Patent Wolves at Bay: Three Tips for Protecting the Heart of Your Startup

Grey Wolf

Don’t venture into the ‘wilds’ of commercialization without the protection of rock-solid patent protection. The tips here will insure that the time, effort and cost of doing this will be well worth it.

By:  Andy Golden, Ph.D.

I know several inventors and patent attorneys who have breathed a sigh of relief after realizing that a patent has missed an opportunity to impede their commercialization path.  For example, the patent claims of a prior art patent may contain unnecessary limitations on design or implementation; despite the absence of a preceding prior art landscape.

Although some patents are obtained merely to check a box or promote technology, most are intended to exclude competition from an invention space.  So why spend $10,000 to $100,000 for a patent that does not exclude competition?  Here are three tips for keeping the wolves at bay:

1.  Choose carefully 
Patent attorneys are not commodities so find a good one.  I usually find patent attorneys through the good recommendations of their peers.  Similarly, I have seen several companies benefit from auditing their current patent firm with a second firm.

Select a patent attorney who has the technical background to quickly understand your invention in detail, as well as its role in your business plan.  Understanding the invention is critical for drafting effective claims, enabling the invention and minimizing ‘design-arounds’.  Moreover, time is money and the quicker the patent attorney grasps your invention, the less you spend on patent drafting.

  • Years ago, a research group wanted to patent two inventions earmarked for two academic manuscripts.  The process in the first paper was used in the second to form a material for tissue engineering.  However, the second paper did not require the first, and the first was broader and more valuable than its application in the second.  De-conflating the inventions in the patent application, among other things, wasted many hours and thousands of dollars.  A weak patent application was submitted just before the deadline and then abandoned five years later.

2.  Tear down that wall
Don’t throw the invention over a wall – a good patent requires collaboration with the patent attorney.  Transforming technical details and business objectives into a legal document is an interdisciplinary process.  In particular, the inventor/scientist/engineer must actively participate in identifying novel elements and technical ‘design-arounds’ for protection, so that technically savvy competitors cannot pursue them.  It’s impractical (and costly) to expect the patent lawyer to understand your invention space as well as a specialist who has lived and breathed in the space for years.  A kickoff meeting can be an effective venue for brainstorming potential claims and ‘design-arounds’ with the patent attorney before documentation and billable hours accrue.  Here are a few questions that might lead to anticipation of technical ‘design-arounds’:

  • What are the ways in which you might practice the invention?
  • How might a competitor or potential licensee practice or design around the invention?
  • How might your invention evolve during the R&D process, production scale-up, or post-market surveillance?  In other words, what risks remain and how might they change the course of the product?
  • How might the patent benefit future product lines or adapt to a changing market?
  • What entities are the focus for infringement?  What entities are not the focus (e.g. a medical practitioner or a customer)?

In truth, it is often unlikely that the innovator can anticipate and prevent every creative design-around, but she/he can anticipate much of the low hanging fruit.  The lawyer should capture these technical and legal ‘design-arounds’ in the patent application.

3.  Keep your eyes on the bottleneck
Align your patent application with business objectives.  Focus on identifying the commercially valuable bottlenecks.  These bottlenecks are your invention – not the product that embodies merely an example of the bottlenecks.  Then, instead of describing each component of the product with equal weight and consideration, focus the patent application on protecting the valuable bottlenecks and associated ‘design-around’ risks.  Taking a stab at this in a detailed patent disclosure for the lawyer can improve the final patent application and sometimes reduce the billable hours required for drafting.

  • Theoretical example: An academic group develops a new label-free biosensor for potential use in drug discovery.  The main commercial advantage is that the label-free biosensor is not a destructive test, so, for the first time, the cells can be monitored for days, providing higher quality data.  At the kickoff meeting, the team decides the key bottleneck is long-term monitoring of cells for this particular cell assay.  In contrast, the label-free biosensor is a minor bottleneck; it is treated as one of several possible ways to achieve long-term monitoring, as other companies could conceivably develop labeled tests that are similarly nondestructive.  Although the patent does include claims on the biosensor, it focuses and expands on enablement and valuable embodiments of long-term monitoring, such as previously undetectable cellular events, data analysis, and methods to exclude dedifferentiated cells.

In brief, some people say that a good patent lawyer “gets into the head” of the inventor to extract the invention.  A counterargument is that with good collaboration and alignment of the patent application with business objectives, this may not be necessary.

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