Tag Archives: intellectual property

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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Developing Opportunities in the Life Sciences: A Birds-Eye Review

Bald Eagle Soaring

Keeping a Birds-Eye view of the opportunities shaping the life sciences will allow you to develop effective strategies while keeping your head out of the clouds.

By:  Michael Kaiser

A brief preface: although the developing opportunities listed below refer to the life sciences, they can be adapted to the specific needs of other industrial sectors as well.

1. New Frontier: Stem Cells, Bioinformatics, Genomics, and Proteomics

a)  Stem Cells
c)  Genomics
d)  Proteomics

(See descriptions of a), b), c) and d) under “General References and Additional Reading”)

The high R&D cost of these “New Frontier” opportunities demands exposure and experience in dealing with academia, scientific personnel and the highest levels of corporate savvy and investment sources; their ultimate value more than merits the effort.

2. Biomaterials
Biomaterials include implant prosthesis, biochips, nanotechnology, fiber optics for minimally invasive implant or corrective surgery and biochemical suturing. They represent a valuable business opportunity for improving human health and a significant contribution in reducing healthcare costs.

3. Intellectual Property
This is a critical solution in protecting nascent opportunities in high-technology sectors. When the topic of intellectual property is discussed, one cannot but bring to mind the title that Kevin Rivette and David Kline came up for their book on the subject: “The Rembrandts in the Attic. Unlocking the Hidden Value of Patents”.

The potential legal implications of violating a patent requires the assistance of expert counsel in areas such as innovation, field of use, royalties, head-of-agreement terms, etc. Although being an expensive process that can negatively impact the financial resources of a biotechnology start-up, legal IP expertise also serves the purpose of prosecuting copy-cats.

4. Competitive Advantage
Competitive advantage: the key challenge and opportunity in commercial transactions and outcomes; its success lies in the axiom “Understand your competition as well, if not better than thyself”.

No company, be that a startup or established corporation, can afford the absence of competitive strategies. Skills in knowledge management and data mining are useful in the planning of corporate strategies in addition to the regular update of marketing e-commerce and social media tools used in the competitive analysis that precedes a successful commercialization. A clear understanding of information transfer technologies, e-commerce and sales and marketing tools is now an essential requirement in competitive analysis.

5. Entrepreneurship and Structure
Ideally, the entrepreneur enjoys and thrives while working in an innovative, fast-paced environment. However, the reality of the economic marketplace suggests that equal attention should be given to the role of ‘intrapreneurs‘, those executives who implement a formal corporate-like structure to reflect the vision of the entrepreneur’s initiative in a manner that conveys a more established and organized company image to investment sources.

6. Globalization
This one is the quintessential opportunity for any business sector and not just for a selected few because it implies an in-depth knowledge and understanding of the socioeconomic and political factors affecting the conduct of business in different regions. Just like we refer to startup companies, we can also refer to growing national economies, e.g., the BRIC countries.

The liberalization of world trade and the integration of regional markets such as the EU, NAFTA and ASEAN dovetail with organizations such as the WTO and GATT. Paradoxically, in the process of lowering trade barriers the pendulum has swung too far and we see an increase in protectionism by both industrial countries and newly industrialized ones. Furthermore, the fact that the Internet became an effective communications facilitator in no way replaces the unique value of face-to-face personal contact in all endeavors of business, sciences and humanities.

7. Mergers and Acquisition; Strategy and Technology Evaluation
The impact of IT has accelerated the process of consolidation and integration in the life sciences, particularly in those cases where a large pharmaceutical concern and a biotechnology company with a valuable technology platform are concerned. Shareholders, institutional investors and venture capital companies have much higher expectations, with a short time horizon, for a return of their investments.

Therefore, the cost of M & A’s requires a thorough analysis of corporate synergies, innovative financial instruments and fundamentals, experienced investment bankers and financial institutions, assessment of net present valuation and internal rate of revenue, evaluation of technology and future corporate strategy, top management succession, and ability to transfer technologies across corporate and international boundaries.


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