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Seventh Circuit Rules in favor of WARF in Licensing Dispute with Xenon Pharmaceuticals

Written by on Thursday, January 14th, 2010

The Seventh Circuit decided last week in favor of the Wisconsin Alumni Research Foundation (“WARF”) in its licensing dispute with Xenon Pharmaceuticals.

As I stated in my Silicon Valley IP Licensing Blog posting on this case, I strongly agree with the outcome in this case and I view this decision as an affirmation of a licensor’s rights in an exclusive license of joint intellectual property.  Had the case been decided differently, I certainly would have had some practical concerns as an IP licensing attorney as to how exclusive licenses to joint intellectual property in collaborations should be drafted.

For another take on this case, you might want to check out PatentlyO, which did not really take a position on the outcome, but provided a little different commentary on the court’s decision.

While this case may not have any groundbreaking precedential value as an intellectual property decision, I think it provides some good practical lessons for anyone drafting or negotiating license and collaboration agreements in the biotech world, whether representing a corporation or working for a tech transfer office at a university, as well as for those who are actually executing the agreements once they are signed.  Clearly, some mistakes were made here that resulted in expensive litigation and will likely result in a costly damage award against Xenon as the loser.

Category: Biotech Deals, Biotech Disputes, Biotech Legal Disputes, Biotech Patent Licensing, Practical Tips, University Tech Transfer  |  Comments Off on Seventh Circuit Rules in favor of WARF in Licensing Dispute with Xenon Pharmaceuticals

IRS Taking Closer Look at Tech Transfer Offices’ Activities

Written by on Friday, October 24th, 2008

The IRS has launched an effort to review universities’ tech transfer office activities, reported Biotech Transfer Week.

The IRS began mailing out compliance questionnaires last week to four hundred (400) colleges and universities.  According to the IRS website, these compliance questionnaires will explore the following:

  • report revenues and expenses from taxable trade or business activities on Form 990-T, Exempt Organization Business Income Tax Return;
  • classify activities as exempt or taxable activities;
  • calculate and report income on losses on Form 990-T;
  • allocate revenues and expenses between exempt and taxable activities;
  • invest and use endowment funds; and
  • determine types and amounts of executive compensation.

Biotech Transfer Week reported on the IRS review as follows:

The questionnaire is not an audit, and schools will not be penalized for refusing to participate, according to the IRS. However, the agency said that it reserves “the option of opening a formal investigation, whether or not the organization agrees to participate in a compliance check.”
The 33-page-long document contains 74 questions intended for all 400 institutions and 20 additional questions applicable only to private organizations. Private nonprofit universities are generally exempt from tax under Internal Revenue Code section 501(c)(3) and, like state universities, are subject to unrelated-business income tax, the IRS said.

It seems apparent that the IRS believes that it is currently losing taxable revenue from technology transfer activities that is going unreported by universities around the country, and that perhaps all universities with a technology transfer office–whether they received a questionnaire or not– would be wise to conduct their own review in parallel to the IRS review, in order to determine what, if any, mistakes in reporting are currently being made by their institutions.

Of course, given the fact universities are typically nonprofit organizations, you might wonder what kind of taxable income exactly could arise at a university.  The IRS website explains this dichotomy as follows:

Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more or gross income from an unrelated business must file Form 990-T. Form 990-T. . . .

The IRS defines “unrelated business income” as follows:

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

  • It is a trade or business,
  • It is regularly carried on, and
  • it is not substantially related to furthering the exempt purpose of the organization.

IRS Publication 598 explains the issue of tax on the unrelated business income of tax exempt institutions.

It will be interesting to watch how the IRS review of technology transfer offices pans out.  As we have previously reported on the California Biotech Law Blog, technology transfer offices often generate tremendous revenue for universities.  Apparently the IRS has been watching the growth of technology transfer offices around the country and wants a larger piece of the action.

The California Biotech Law Blog  will be following this issue as it develops and will keep our blog readers posted on those developments.

Which Universities Have the Most Successful Tech Transfer Programs?

Written by on Tuesday, September 16th, 2008

Forbes published an interesting article last week which named the universities in this country with the most successful tech transfer programs in terms of rate of return (“ROI”), according to a 2006 survey.

At the top of the list was New York University.  Forbes reported as follows:

[New York University] generates $157 million in research-related income on $210 million in research and development (R&D) expenditures–tops the list with a 75% yield. . . . While Remicade has generated the bulk of NYU’s licensing income in the last decade, some 20 other biomedical technologies kick off royalties as well–and 15 more are in clinical trials. . . . Other hot areas include computer science, agriculture and nanotechnology. NYU also takes stakes in start-ups, including Perceptive Pixel, developer of the touch-screen map that CNN uses in its election coverage.

Next on the list was Wake Forest University, which had a 41% ROI.  According to Forbes, Wake Forest’s success was due in part to several patents, which generated more than $1 million in licensing revenue and the development of several key technologies, including the V.A.C. System, a mechanical vacuum technology that promotes wound-healing, which was licensed to San Antonio-based Kinetic Technologies, and a virtual endoscopy machine, which was licensed to GE Medical, a unit of General Electric.

Other successful programs included the Stevens Institute of Technology, Ohio University, Brigham Young University, and University of Rochester.

Interestingly enough, the University of California System (which includes all of its various institutions and campuses around the state) only came in fourteenth on the list, even though it reportedly generates more in total revenue from research than all other U.S. universities.  According to Forbes, out of the University of California System’s $48 million licensing program, about $24 million was incurred from royalties paid on a mere five patents.

The full Forbes‘ list of the top 15 most successful tech transfer programs in 2006 is as follows:

1. New York University, $210 million in research expenditures, $157 million in research related income, 75% yield

2. Wake Forest University, $146.3 million in research expenditures, $60.5 million in research related income, 41% yield

3. Stevens Institute of Technology, $28 million in research expenditures, $4.56 million in research related income, 16% yield

4. Ohio University, $24 million in research expenditures, $3.26 million in research related income, 13% yield

5. Brigham Young University, $26 million in research expenditures, $3.07 million in research related income, 11.7% yield

6.  University of Rochester, $355 million in research expenditures, $38 million in research related income, 11% yield

7.  University of Minnesota, $596 million in research expenditures, $56 million in research related income, 9.4% yield

8. University of Florida, $459 million in research expenditures, $42.9 million in research related income, 9.3% yield

9. Stanford University, $699 million in research expenditures, $61.3 million in research related income, 8.7% yield

10. Northwest University, $348 million in research expenditures, $29.9 million in research related income, 8.6%

11. Mount Sinai School of Medicine, $269 million in research expenditures, $20.1 million resarch related income, 7.5%

12. University of Massachusetts, $409.9 million in research expenditures, $27.2 million in research related income, 6.7% yield

13.  University of Utah, $246.5 million in research expenditures, $16.3 million in research related income, 6.6% yield

14.  University of California System, $3.04 billion in research expenditures, $193.4 billion in research related income, 6.4 % yield

15.  University of South Alabama, $20.6 million in research expenditures, $1.2 million in research releated income, 5.9% yield

Category: Practical Tips  |  Comments Off on Which Universities Have the Most Successful Tech Transfer Programs?

Chinese Patent System: Problems and Best Practices

Written by on Wednesday, May 14th, 2008

The Chinese patent system has come under increasing scutiny in the biotech and pharmaceutical industries as China has taken on a more important role in the world market.  In this week’s IP Frontline, Thomas Babel examines the Chinese patent system and answers the question: does the system really protect inventions?  He also offers some best practices for protecting inventions in China.

Babel describes a key problem with the Chinese system as follows:

China, unlike the United States, is a first-to-file system. This means that if two inventors file a patent application for the same innovation, the first to file the application with SIPO will be granted the patent even if the other inventor was the first to invent. In addition, unlike the United States where an inventor has one year from the date of the first public disclosure of the innovation to file for patent protection, public disclosure prior to filing in China is an absolute bar to the grant of a patent on the disclosed innovation, except in very limited circumstances. . . .

The combination of a first-to-file system with a system where a patent may be granted with little or no investigation results in the obvious: patents granted to non-inventors. It is a relatively easy matter, at least as to utility model and design patents, for an interloper to file for and be granted a patent on an innovation created by another person or which has been afforded protection in another jurisdiction, such as the United States. For instance, if a foreign entity has a United States patent but fails to file or register that patent in China, a Chinese company can easily take the innovation and get a utility model patent in China in its own name. The Chinese company then can use its utility model patent to prevent others, including the foreign entity, from producing products in China that incorporate that innovation.

According to Babel, another problem is the full investigations are often not conducted on patent filings.

Babel explains as follows:

Since, realistically, a full investigation has not been made by SIPO, the presumption flowing from the Chinese process presents an unfair advantage to those who improperly obtain patents. Since the burden of proof is on the person challenging a patent to show that the innovation in question is that person’s property, the various evidentiary and procedural hurdles found in the Chinese court system can make it very difficult, and perhaps impossible, to overcome the presumption and prove that an innovation was stolen by a Chinese company.

So what are some best practices to follow when trying to protect inventions in China?

Babel recommends the following:

[C]ontractually prohibit any Chinese company with which the United States inventor is dealing from filing a patent application related to any innovation found in the product it is producing for its United States customer, and/or to obligate such Chinese company to recognize that any innovation found, discovered, and/or created during the parties’ relationship is the property of the United States customer. This language can help if the Chinese company tries to seek protection of an innovation owned by a United States company. Chinese courts do have a relatively good record of enforcing contracts.

Another alternative is to require arbitration of patent disputes. The Chinese court system recognizes and will enforce arbitration decisions. Arbitration allows parties to adjudicate their disputes without having to adhere to the archaic and problematic evidentiary rules of the Chinese court system. There are a number of organizations located in Beijing and Hong Kong which can render arbitration awards that will be enforced by Chinese courts. Two of the more recognized organizations are the China International Economic and Trade Arbitration Commission in Beijing and the Hong Kong International Arbitration Centre. Many of the arbitrators employed by these organizations are Western trained, which helps to further avoid many of the archaic evidentiary and procedural rules found in the Chinese court system. Therefore, it is advisable to insert an arbitration provision in any contract with a Chinese company.

While I have not handled many transactions in China to date (although several of my clients are in the process of moving into the Chinese market, so this is likely to change in the near future), Babel’s advice is in line with what I typically advise clients who are doing business in Asia.  It is important to contractually protect intellectual property in any business relationship, and in doing business overseas, it is always a good idea to provide for the resolution of disputes by binding arbitration to the extent possible.  I typically try to steer clients toward arbitration in countries where the system of law is based on the English system, since the U.S. legal system is similarly based on the English system of law, but in the alternative, I like the idea of using Western-trained arbitrators.

Category: Biotech Patents, Practical Tips, Private Sector  |  Comments Off on Chinese Patent System: Problems and Best Practices

Stanford, UC Representatives Offer Insights on Licensing with their Universities

Written by on Friday, August 3rd, 2007

The Silicon Valley Chapter of Licensing Executives Society ("LES") recently sponsored an event in whch representatives from Stanford and the University of California ("UC") offered tips on licensing with the Stanford and UC systems.  Katharine Ku of Stanford University and Viviana Wolinsky of Lawrence Berkeley National Laboratory each gave an excellent presentation, outlining their respective university’s policies and procedures, as well as some of the issues of concern currently facing each organization.  Nader Mousavi of Wilmer Hale, which hosted the event, also participated.

What were some of the insights on their employers’ respective licensing programs that the two speakers shared?

Regarding the issue of exclusive licensing terms, Ku indicated that Stanford prefers fixed terms of exclusivity.  In contrast, Wolinsky indicated that UC is generally more willing than Stanford to agree to exclusive licenses that run for the full term of the patent.

On the issue of royalty rates, the speakers agreed that the range often runs from 3 to 6 % of net sales.  Wolinsky shared that the UC system is willing to consider royalty stacking, if this is brought up in the negotiations, and that UC may be willing to reduce the royalty rate on each license to half of what would otherwise be agreed to. 

On the issue of sublicensing, the speakers agreed that a royalty based on net sales from sublicensees is the current standard for UC and Stanford license agreements, replacing the once-common standard of a royalty based on sublicense income (which, in all honesty, I have never seen used in the licensing negotations I have been involved with).  The panel advised that in cases where sublicense income is used as the standard for the sublicensing royalty rate that the following should be excluded: research and development payments, equity, patent reimbursements, other research and development materials and equipment, and the fair market value of cross-licenses. 

The speakers highlighted an important distinction in how UC and Stanford prefer to handle patent prosecution in exclusive licenses.  The UC position is that the university controls all patent prosecution, whereas the preferred Stanford position is that the licensee controls all patent prosecution.  In both cases, the universities require that the exclusive licensee pays for the costs; however, UC prefers that the licensee reimburse UC for the patent prosecution costs, whereas Stanford prefers that the licensee pay the costs directly.

How do the universities deal with patent enforcement?

Ku indicated that Stanford’s default position is that Stanford has the right to enforce the patents, and that the licensee can step in if Stanford declines to enforce the patents.  Ku further stated that if the licensee enforces the patents, any damages recovered should cover costs first and then the balance should be treated as net sales/sublicense income. 

In contrast, Wolinsky stated that UC’s default position is the same as Stanford’s position, except that any damages recovered should go to the party bringing suit. 

Both Stanford and UC require university consent prior to any settlement, and provide the right to name the university as a party for standing.

How are Stanford and UC dealing with the recent MedImmune v. Genentech decision?

UC is taking the most unforgiving position on this issue.  According to Wolinsky, the position is that UC is drafting language into the license to state that if a licensee disputes the validity of a patent, the patent terminates.

In contrast, the Stanford position is a little more tolerant: Stanford is drafting language into the license to state that if a licensee disputes the validity of a patent, the licensee has to pay all costs.

Regarding other issues in the news, both Ku and Wolinsky indicated that the universities were very concerned about the prospect of patent reform, particularly with respect to the proposed changes to the "First to File" Rule.  Ku and Wolinsky also stated that both systems were now adding export control language to their NDAs as well as licenses.  Finally, with respect to sponsored research, Ku indicated that the Stanford policy is that the university is declining to set a royalty rate for inventions arising out of sponsored research, whereas Wolinsky indicated that UC continues to agree to a royalty rate range.

All in all, Ku and Wolinsky gave a very informative presentation on current licensing policies at their respective institutions.  After attending this presentation, however, I now find myself wanting to hear more from other universities on their current policies and procedures on licensing.  So, I am formally issuing an invitation into the blogosphere to any other universities who would like to share information to prospective licensees on their current licensing policies, procedures, and negotiating strategies: please share with us any insights on licensing at your schools, and this blog will gladly provide you a platform to publish that information to the biotech and licensing community.   I welcome your commentary. 

Category: Biotech Deals, Biotech Patent Licensing, Practical Tips  |  Comments Off on Stanford, UC Representatives Offer Insights on Licensing with their Universities

Key Issues to Consider in Biotech Licensing

Written by on Monday, May 28th, 2007

I happened across an article this weekend on biotech licensing, which I would recommend to any readers who are contemplating licensing negotiations in the near future.

The article, "Biotech Patent Licensing: Key Considerations in Deal Negotiations," was written by Jeffrey P. Somers, an attorney at the Massachusetts firm of Morse Barnes-Pendleton, PC.  I thought Jeffrey did did an excellent job of capturing the essence of biotech licensing and the issues that must be considered in drafting and negotiating a biotech license. 

Jeffrey’s article addresses five topics of interest: (i) field of use restrictions; (ii) the multi-purpose compound; (iii) special issues related to non-exclusive licenses; (iv) the payment term; and (v) rights to the drug master file upon early termination of the license.  His article also provides practice tips related to each of the topics. 

While Jeffrey issues a disclaimer in his article that his background is in representing the pharmaceutical company and that he is therefore biased toward that perspective, this article should be informative to both sides of the negotiating table. 


Category: Biotech Deals, Practical Tips  |  Comments Off on Key Issues to Consider in Biotech Licensing

Dilemma of the Reasonable Royalty Rate

Written by on Sunday, December 11th, 2005

If you missed the recent blogpost by Stephen Albainy-Jenei, What’s a Reasonable Royalty Rate?, I urge you to check it out. Stephen addressed the question I know that many transactional lawyers like me struggle with: what exactly is a reasonable royalty rate in any particular transaction?

While Stephen acknowledges that Organizations like the Association of University Technology Managers (“AUTM”) and the Licensing Executives Society (“LES”) publish lists and statistical analyses of royalty rates, Stephen says of those publications:

Granted, using an established royalty rate shown in certain guides sounds good since these are derived from prior actual licenses for comparable products. The rates in the guides come from negotiation and paid by a sufficient number of licenses. As with reasonable royalty, an established royalty rate derives from the outcomes of willing parties licensing without the threat of a suit, or resultant from litigation. These rates are reflective of the profitability of industry segments. Correspondingly, what might pass muster for an established royalty depends upon the definition of a market segment. Commodity items tend to garner a relatively low royalty rate, just shy of 3%, consumer goods 5%, while software garners around 7-8%. But generalities don’t tell you anything about your particular deal.

So, if you can’t rely on particular guides to tell you what is reasonable, how do you ever really know what is reasonable? Stephen says to this point:

A reasonable royalty rate is often based on economic sense by utilizing a financial model which relates the investment required to develop a therapeutic technology to the income generated by such technology. What does that mean? It means you have to have a good business plan in place before you can talk turkey on royalty rates. And I don’t mean those wildly inflated fluffy business plans that companies create showing revenue in colorful logarithmic growth charts to impress potential investors. No, I mean a real, down-to-earth, cold shower type of business plan that takes into account all of the pain and suffering that could be encountered along the way.

Stephen shares with us some examples, but in the end, he seems to come back to the fact that the reasonable royalty rate is a somewhat amorphous concept, which is, of course, is basically how most of us have been answering the question when it is posed to us. We give the classic “it depends” answer, which is sure to drive the non-lawyer public nuts everytime they hear it. Still, Stephen has some interesting royalty rate negotiation insights that he shares in his blogpost, which are quite helpful, so even if he provides no definitive answer to the issue, I would definitely urge you to take a look at it.

Category: Biotech Deals, Practical Tips  |  Comments Off on Dilemma of the Reasonable Royalty Rate

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