Making the Grade: Negotiating IP Licenses with Academic Institutions

November 04, 2016

By Samuel A. Waxman & Michael Vargas

Many industry analysts believe that one of the key drivers of the oft-commented upon life sciences M&A boom of the last few years is the downward trend in research and development (R&D) spending by biopharmaceutical companies. The combined annual R&D budget of the top ten industry spenders has steadily hovered around $70 billion since 2009, and just about every one of these major players has recently had to overhaul its R&D function since then by laying off or reorganizing its employee workforce, closing down underperforming facilities or, at the very least, narrowing the scope of laboratory research. Despite the continued pressure faced by these companies to maximize spending and improve efficiency, one core R&D tenant has remained unchanged during this period: biopharmaceutical companies must continue to replenish their product pipelines and are going to be judged by the public markets based on their robustness. This has resulted in a search for cheaper, more promising pipeline products and has led to a renewed focus on early stage candidates developed outside of pharmaceutical laboratories by means of academic licensing.
Opposite prospective licensees in an academic licensing transaction (i.e., the biopharmaceutical company and/or other investors) are the technology transfer offices of the academic institutions (TTOs). TTOs are under similarly increasing pressure to serve as profit centers for budget-constrained universities, and industry demand from prospective licensees has led to life sciences intellectual property (IP) being the primary driver of TTO profits among the top-performing research institutions. In fact, a recent Nature Biotechnology analysis showed that among the 10 U.S. universities with the highest gross licensing revenues, life sciences IP was responsible for approximately 90% of the total gross revenues for the TTOs of these institutions.
Although it may appear that both prospective licensees and TTOs have well-aligned interests in making sure that these early stage candidates become profitable as quickly and efficiently as possible, academic licenses are much harder to negotiate than one might expect given occasionally competing interests between the parties. Below are certain of the unique challenges and considerations that prospective licensees face when seeking to partner with universities and other research institutions in academic licensing transactions.

Understanding TTO Dynamics

Unlike traditional corporate licensors, TTOs are unique negotiating partners in the licensing field. TTOs are designated profit centers for their respective universities, but they also often view themselves as an extension of the universities’ non-commercial educational mission. Moreover, while TTOs technically represent a single academic institution, the reality is that these offices act as the front line for many smaller, often competing, interest groups within the academic institution, namely, individual principal investigators (PIs), particular labs within the university, and specific departments or colleges. This is partially driven by the fact that academic institutions typically split licensing royalties among PIs, their departments, and the institution itself, with the precise nature of the split varying from institution to institution. As a result, TTOs have the unenviable task of receiving and balancing feedback from various interested parties within the university while making sure that such feedback does not create an unfavorable precedent for future licensing transactions that the university wishes to participate in.

Not surprisingly, in order to balance the varied interests of these stakeholders, most TTOs tend to be culturally conservative and intently focused on adhering to their form documents, which most institutions readily have available given the sheer volume of academic licensing transactions. TTOs are generally reluctant to deviate from these forms in any substantive way, even if such deviation may be merited in any one-off transaction. In fact, deviation from these form documents often requires prior approval from the university general counsel or other senior institutional leaders.
As a result, one of the main sources of resistance in negotiating academic licenses (in fact, quite possibly the main source of resistance) is each TTO’s reluctance to negotiate any provision that may conflict with the applicable provision of such TTO’s form documents. This is especially true with respect to the provisions further discussed below. That being said, depending on the complexity of the underlying transaction and the leverage that each party brings to the table, prospective licensees should be aware that there may indeed be substantial room for negotiation notwithstanding the underlying TTO policies.
Representations and Warranties

Legal due diligence in academic licensing presents a different set of considerations from a typical licensing transaction. Given that the underlying IP is often extremely early stage, detailed chain of title diligence is of paramount importance. Inventorship and ownership in the academic licensing context is not often as simple as there being one individual in one lab working for one institution. Rather, a PI will frequently initiate his or her research at one institution but finish it at another. It is also possible that the IP may have resulted from a collaboration between multiple institutions, meaning that the underlying IP would be jointly-owned. When such collaboration occurs, an inter-institutional agreement will traditionally set out how the jointly-owned IP will be managed, which will correspondingly affect the scope of the license being negotiated and therefore should be reviewed in detail. In addition, institutions often have contractual obligations to one or more sponsors who fund the research (i.e., industry sponsors, foundations, etc.). The underlying research sponsorship agreements often dictate the terms under which the resulting IP can be subsequently licensed and will therefore also inform the scope of the license being negotiated.
The foregoing means that for any particular item of IP being licensed, it is extremely important to understand who has relevant rights to the underlying IP and identify what restrictions apply to such IP. In a typical corporate licensing transaction, these chain of title concerns are alleviated by including robust representations and warranties that address, for example, due authority, title, non-contravention and no-conflict. Academic institutions, however, take a conservative (or depending on one’s perspective, an aggressive) approach to representations and warranties in an attempt to limit potential litigation risk: TTOs will traditionally demand an “as is, where is” approach in keeping with most institutions’ form documents. That being said, a review of publicly available licenses granted by top licensing institutions (as determined by the Association of University Technology Managers Licensing Activity Surveys) reveals that sophisticated TTOs are occasionally willing to include these basic, but important, representations and warranties in academic licenses. Given the complexity of assessing inventorship and ownership in early stage product candidates, prospective licensees would be well served to obtain such basic representations and warranties in the underlying license agreement being negotiated.

Ownership of Improvements

The license grant provision in a typical academic license in the life sciences field is fairly straightforward; the licensee gets broad rights within a particular territory to (i) certain registered IP listed on a schedule to the license agreement or (ii) any IP that emanates from a list of invention disclosures. In other words, a licensee typically obtains a license to the output of a single PI or a single lab that has developed the IP being licensed. Given the general reluctance of TTOs to include representations and warranties in academic licenses, this means that careful due diligence of the other work being done at the same institution is the best (and often only) protection against there being other relevant, potentially superior IP developed by the same institution that the licensee is not receiving a license to and that could thereby impede licensee’s freedom to operate.
The existence of potentially relevant or superior IP is tied to one of the thorniest issues that prospective licensees will encounter in negotiating academic licenses: which party will own future improvements to the underlying IP being licensed. Academic institutions strive to minimize any obligation to license future improvements, an obligation traditionally found in corporate license agreements. From the TTO perspective, any obligation to do so would bind a faculty member’s research program to the licensee, thereby inhibiting his or her ability to receive corporate and other research funding and his or her ability to collaborate with scientists employed by companies other than the licensee (and perhaps even to collaborate with other academic scientists). TTOs are also concerned that if the licensed IP rights reach inventions made elsewhere by the university, researchers who did not benefit from the licensing of the underlying IP may have their economic opportunities restricted as well. Tax laws of certain jurisdictions may also restrict universities from granting present licenses under patents and other IP covering inventions that may arise in the future. Under such laws, universities may grant such rights only when any future IP is identified and its value can be assessed.

Notwithstanding the foregoing, prospective licensees should try their best to negotiate broad rights to future improvements, particularly when due diligence has flagged that there may be relevant or potentially superior IP arising from a different part of the institution. This is especially true if the prospective licensee has been unable to negotiate sufficiently broad representations and warranties. At a minimum, prospective licensees should consider advocating for a broad license to (i) improvements emanating from the same PI or lab that developed the IP being licensed, and (ii) inventions that are covered by the licensed patents since, in each case, these improvements cannot be meaningfully licensed to a third party within the licensee’s exclusive field of use anyway. As a fall-back, prospective licensees should also consider negotiating preferential rights to future improvements in the form of a time-limited option or “most favored nation” status.

Diligence Obligations

From the TTO’s perspective, as well as the perspective of the prospective licensee, a well-crafted license agreement is one that incentivizes the licensee to develop and commercialize new products as quickly and efficiently as possible, ensuring that all parties receive a fair and appropriate share of the economics along the way. As noted in the AUTM Technology Transfer Practice Manual, “[n]o one wants to grant a license simply to see a technology collect dust on a shelf.” Traditionally, almost all TTO form documents ensure that the IP is being diligently developed and commercialized by the prospective licensee by including contractual diligence obligations that the licensee must meet; failure to do so often results in a breach of contract claim, loss of exclusivity, licensor’s ability to terminate the license, and other contractual remedies. These diligence obligations routinely take the form of both general requirements (e.g. a “reasonable efforts” standard) as well as specific milestones that must be met within a designated time period. For pharmaceutical products, these diligence obligations are often in the form of clinical trials milestones and, for other products, diligence milestones might include the development of the first prototype, first commercial sale, and other relevant time periods. Sometimes diligence obligations also take the form of financing milestones (typically with startup companies) or IP registration milestones (i.e., issuance of the first patent underlying the technology). For example, a typical diligence clause prospective licensees may encounter in the academic licensing context, as taken from the AUTM Technology Transfer Practice Manual, is as follows:

Because the invention is not yet commercially viable as of the Effective Date, Licensee will diligently develop, manufacture, and sell Licensed Product and will diligently develop markets for Licensed Product. In addition, Licensee will meet the milestones shown in Appendix A, and notify Licensor in writing as each milestone is met.

While it is highly unusual for a licensee to avoid diligence obligations altogether, a great deal of care should be taken by prospective licensees to ensure that the diligence obligations align the interests of all parties so that the risk of costly disputes over economics can be mitigated (such disputes have become increasingly common in the academic licensing context and can take years and significant resources to resolve). While a generic efforts standard, such as in the example set forth above, may seem like an appealing way to avoid an otherwise contentious negotiation over the scope of appropriate diligence obligations, recent litigation in the contingent value rights context in M&A transactions illustrates that vague terms such as “diligent efforts” and “using such efforts and employing such resources normally used by persons in the pharmaceutical business” can be the source of unnecessary (and costly) dispute. Even where the diligence clause references a specific development plan negotiated in the future, should the parties wish to mitigate litigation risk, the best approach would be for all parties to define what “diligent efforts” actually entails in the four corners of the underlying license agreement, including by making reference to the specific development plan if applicable.
Conclusion

As discussed above, negotiating an academic license provides for unique challenges and considerations that a prospective licensee would be unlikely to face in the corporate licensing context. Given the occasionally competing interests of the many stakeholders within an academic institution and the sheer volume of life sciences IP licensing transactions that institutions undertake each year, TTOs can often be fairly conservative and hard-line counterparties to negotiate against (and given the circumstances, it is not difficult to see why). Notwithstanding, prospective licensees can find some relief in the fact that although they may find themselves in an uphill battle with the TTOs in negotiating provisions that would otherwise be commonplace, there is indeed substantial room for negotiation and sufficient work-around to keep a prospective licensee’s product pipeline flowing.

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