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Controversies About Rights to confer on a Research Sponsor
A research sponsor is a company that has agreed to fund research at a university or research institute. To persuade the company to financially support the research, the company not unreasonably wants something in return.
What can that something in return be? There is no perfect answer to this question that will always meet all the needs and expectations of both the university and the company. There are a smorgasbord of possible solutions.
Mission and expectations
Whatever solution is selected, it will need to fit in with the mission of the university or research institute, and the expectations that rest upon it. Amongst a university’s missions is to ensure that the products of its innovations contribute to social improvement. And amongst the expectations upon a university, particularly by Government, is that the university’s innovations contribute to the nation’s economic improvement. This mission and expectation are achieved by the university’s commercialisation. Against this background, what rights should a university confer on a research sponsor that is funding research to be undertaken at the university?
Assign ownership of IP to the company?
The company research sponsor might expect to own the IP that arises from the research it is funding, and expect its ownership to be confirmed in the terms of the Research Agreement. If so, its perspective is that the research funds it provides are the “purchase price” for the IP.
When a company seeking research to be undertaken engages another company to do that research, under the terms of a commercial contract, that perspective is correct. The company is indeed paying a “purchase price” and not unreasonably expects to own the IP arising from the contract research. Such a commercial contract research company will propose its “price” on a commercial basis, which will include the direct costs of undertaking the research, indirect capital costs, as well as a commercial profit margin.
A university does not cost its research projects in that way. It’s costing will take into account all direct costs, a modest amount of indirect capital costs (if any at all), and will never take a profit margin into account, which does not sit comfortably in the university environment. The costing or “price” being quite different when a university is engaged, as would be expected, where the ownership of IP will lie will also be quite different.
But the more obstacle to a university agreeing to assign the IP to the research sponsor is that such an assignment does not sit comfortably with its mission of contributing to social improvement, and the expectation that the university contribute to economic improvement.
A university that licenses IP will invariably negotiate diligence obligations upon the licensee. These are obligations that relate to the licensee efficiently travelling the pathway to market, and successfully introducing the product of the IP to the market. In this way the university's mission and the expectations upon it are achieved. The licensee’s failure to meet those diligence obligations will usually (but not draconically) result in the termination of the license, so that the university can license an alternative licensee that can take the products of the IP to the market.
Diligence obligations like this cannot be included in an assignment, since an assignment is a permanent transfer of ownership of the IP. Ownership cannot be “terminated” in the same way that a license can.
Diligence obligations being critical to the university’s achievement of its mission, and meeting the expectations upon the university, the inability to include them in an assignment of IP to a company research sponsor, makes it challenging for a university to agree that the company should own the IP that arises from undertaking the sponsored research.
Using the United States as a benchmark, it is unheard of for a company research sponsor to own the IP that arises from the research it sponsors. Instead, it will be conferred one of the rights set out below.
Grant an immediate non-exclusive license for internal use?
A possible right to confer on a company research sponsor in the Research Agreement is a non-exclusive license to use the IP arising from the research, in its own business, without the right to sub-license.
By doing so, the company research sponsor receives a license immediately to the full extent required for it to exploit the IP in its own business. That may be all that it would ever have sought anyway. An SME that is sponsoring research may well be satisfied with that, and experience is that it often will be.
In this model, the university retains ownership of the IP, and the right to grant a worldwide exclusive license to a commercial partner able to take the products of the IP to the world, which the SME might not have been able to do. The only exception to this worldwide “exclusive” license is the non-exclusive license to the company research sponsor, which only slightly, and perhaps insignificantly devalues the worldwide “exclusive” rights.
Joint ownership of IP?
The suggestion may be made that the IP arising from the sponsored research should be jointly owned, by the university and the company research sponsor.
It sounds an appealing suggestion: the parties jointly benefitting from the research outcomes by jointly owning those outcomes. But this assumes that the benefits of joint ownership are mutual and equal between the joint owners, when that is not the case.
Each joint owner can exploit a jointly owned patent without the consent of the other, and without any obligation to pay a royalty to the other. The company joint owner can therefore exploit, and in doing so realise economic benefits. But the university joint owner does not have the capacity to become a manufacturer and seller of products. Nor would it ever obtain the sanction to do so.
For the university to realise economic benefits, it will have to grant a license to a licensee. But, in most countries a joint owner cannot grant a license without the consent of the other joint owner, which it would be unlikely to give, resulting as it does in effectively consenting to a competitor.
In the United States a joint owner can grant a license without the consent of the other joint owner, but the practical problem is that a licensee would more likely insist on a license granted by all the joint owners or if willing to accept a license from one joint owner only, it is at best a non-exclusive license, since the other joint owner can grant licenses as well. It would be a non-exclusive license with its value severely diminished.
As mutually beneficial as joint ownership sounds, it is in fact not mutually beneficial at all. This was more fully explored in a previous edition of IP Bits Joint Ownership of Patents Does Not Result in Joint Benefits.
Right of first refusal or option to negotiate a license?
For most sponsored research projects, it would be time consuming and burdensome to negotiate a license at the same time as negotiating the research agreement. For many sponsored research projects, research outcomes being uncertain and speculative, the IP that arises may not justify a license being sought.
A right of first refusal or option to negotiate a license defers the question, allowing the research to commence straight away.
The company research sponsor is given a period of time within which to assess the IP arising from the project, and is conferred the right to choose to seek a license, or to decline seeking a license. If it decides that it wants a license, the parties proceed to negotiate the terms of the license. For the duration of the company’s right of first refusal or option to negotiate a license, the university cannot license anyone else, in that way ensuring that the company’s right to a license is secure.
By deferring the question of the company being granted a license, a right of first refusal or option to negotiate enables the relatively straight forward research agreement to be quickly finalised, allowing the research to proceed without delay. The time consuming task of negotiating a license may never occur if the company chooses not to have a license, and is deferred to a later time if the company chooses that it does. Either way, proceeding with the research is not delayed.
Rights of first refusal and options to negotiate are legal, and enforceable, in most countries of the world. This was considered in a previous edition of IP Bits Is a Right of First Refusal or Option to Negotiate Legal?
Immediate exclusive license?
If the research funds that the company will commit are significant, a company might seek to have a license negotiated and finalised concurrently with the research agreement, with both being signed together. Or, the research agreement may be signed, with the fully negotiated license attached as a schedule, with an option to be granted a license, on the terms of the finalised license attached (which is quite different to an option to negotiate).
It would indeed have to be a significant amount of research funds being committed for both the company and the university to be willing to defer the commencement of the project for the 6-9 months that it may take to negotiate both agreements.
There is no one single way forward which is the compelling model for all occasions. On each occasion, different drivers and motivations, as well as the amount of research funds being committed, will influence the parties on which way forward suits them best.