Licensees benefit from the UW reputation, and usually from federal and state funding, university resources, and commercialization support as well. To assure a balance of interests, the UW, its departments, schools, and inventors should share in successes.
Attorneys or business people unfamiliar with licensing technologies from universities are sometimes surprised that UW CoMotion licenses require financial consideration. In the case of startup companies founded around UW innovations, this includes an equity position in the company. To assure a balance of interests, the UW, its departments, schools, and inventors should share in successes.
The UW contribution goes far beyond the costs of patent prosecution, CoMotion infrastructure and staff. UW researchers, even the most independently innovative, benefit from the UW’s reputation in filing for and winning federal research support. They benefit from UW colleagues, graduate students, and a broad research base. They also benefit from Washington State support of our public university and the 150 years of donor contributions to buildings and programs.
And why equity? Startup companies from the university benefit from the UW reputation, which adds both value and credibility to the new business venture. It is hard to predict how a startup will achieve its success, and an equity position preserves the UW’s opportunity to share in that success.
UW licenses may include an upfront fee, equity, maintenance fees, milestone payments, patent cost reimbursement, a running royalty, minimum annual royalties sublicensing fees, and assignment fees. The terms included will vary depending on the business plans of the licensee.
When a negotiator has not licensed from a university before, they sometimes assume that a license will come with a single financial term – one lump payment, or an all equity deal. This does not ensure all parties benefit from successful commercialization of the technology, due to the variety of business models that may be used to generate revenue. In licensing early-stage technologies, the university uses a balance of financial terms to give the licensee maximum flexibility in its business model. If a licensee is confident that a specific business model will be used to generate revenue, the financial terms can be simplified to reflect the narrower business needs.
An upfront fee is included in all licenses unless it is a startup. The upfront fee is usually lower than the upfront fees you would see in a license agreement between two companies, to reflect the early stage of the technology. The fee is included as partial compensation for the value of the intellectual property being licensed and for the benefits that the licensee receives when seeking resources to develop the technology through the association with the university. The upfront fee can range from $10,000 to $500,000 depending on the value of the intellectual property being licensed, the market opportunity, and the investment of resources required to bring a product to market.
Milestone payments are a mechanism to make multiple, lower payments as the technology is de-risked as opposed to a larger upfront payment.
Milestone payments are a financial term more common in regulated industries and with technologies that will take a long time to reach market. Since the value of early-stage technologies can be unclear at the time of licensing, milestone payments associate a schedule of licensing fees with the regulatory requirements that reflect inflection points in the valuation of the company or technology.
Milestone payments can also be used when the parties choose this mechanism in compensation for lower upfront fees as a mechanism to share value as the technology is proven. This decreases risk to the company by allowing payments for the innovation to be spread over time and to be made only as the innovation proves to be valuable, rather than paying for the technology in the upfront fee.
It is a popular mechanism for sharing value when technologies are early stage and still carry significant risk. The milestones that trigger payments are generally a subset of the milestones used for diligence milestones.
Maintenance fees often occur prior to first sale of a product, and are designed to ensure that the company continues to develop a product based on the licensed technology. The license includes diligence milestone dates that are generally several years apart, and maintenance fees encourage companies to actively consider their plans in the interim as the fee becomes due. These maintenance fees may start immediately upon licensing, or for startups, a couple of years after licensing. Typically these fees end when product sales begin.
Net sales are the basis for calculating royalties. The net sales definition defines any reductions from total revenue for a given product a licensee may take before calculating the royalty due under the license. The deductions allowed are directly related to delivering the finished product to the customer, and do not include commissions, development or marketing expenses. These deductions must be easily verifiable, such as shipping or discounts included on the customer invoice. Many of these are industry standard deductions, and due to the accepted understanding of these terms, modifications to this standard language will not be considered if they create uncertainty in how the company will calculate the royalty to the UW, or include non-standard deductions.
When a product is developed based on technology licensed from UW, the company generally pays a percentage of each sale, or a dollar amount for each sale, to the university as part of the payments under the license. Royalties are most often a percentage of the net sales; net sales are defined as the total sales amount minus agreed-upon deductions. Royalties are the most common mechanism to share success between a licensee and licensor. Royalties are the most effective way to reach a fair balance of value to each of the licensor and licensee given the early stage of university innovations when licensed.
Minimum annual royalties are used to ensure the licensee remains committed to maximizing the dissemination of the innovation, including actively marketing it, for the life of the license.
This is a minimum amount that the company commits to paying each year in running royalties in exchange for the license. It often will start low as the company builds its market size. The goal is to ensure the company continues to appropriately market the product, and does not let the innovation languish following first product introduction.
Sublicensing consideration is the revenue received by the licensee from licensing the UW’s intellectual property to another party to develop, rather than developing, marketing, and selling a product themselves.
Increasingly, companies do not anticipate taking a product all the way to market themselves, but rather expect to transfer the rights they have licensed from UW by entering into a sublicense with another party to finish development. This is a different business model and requires a different level of investment on the part of the company. It requires less investment and derives more of its profits directly from the University-licensed intellectual property, rather than a model that anticipates the company developing and selling products directly. The Sublicensing Consideration paid to the University is a percentage of the total non-royalty income received by the company in return for the sublicense of University intellectual property. This percentage will decrease as value added by the company’s technology development increases. This consideration is separate from the royalties due to the University from sales made by either the company or a sublicensee.
Acquisition consideration is the revenue received by a company for selling its rights in the University intellectual property, or for selling all of its assets. In particular where the university license includes equity, the license consideration will also includes a percentage of the acquisition consideration if the company is sold prior to reaching any milestones or receiving investor funding. This fee is stepped-down as the company adds value to the technology, going to zero once the company achieves substantial operations or when the company has received Series A funding.
Some companies may choose to be sold to an existing company very early in their life, rather than begin the research and development necessary to bring a product to market. While companies need flexibility to make appropriate strategy choices, exiting very early through sale of the company is a different business model requiring less investment than developing a technology through to product introduction. This is particularly problematic where the university could have done a direct license of the technology rather than the start-up acting as a broker. This fee is negotiated to ensure all parties receive appropriate benefit based upon contribution to the total value.
Startups from the university benefit from the UW reputation, which adds both value and credibility to the new business venture. The UW contribution goes far beyond the costs of patent prosecution, CoMotion infrastructure and staff. UW researchers, even the most independently innovative, benefit from the UW’s reputation, its broad research base, and its faculty and graduate students.
It is hard to predict how a startup will achieve its success, and equity preserves the UW’s potential benefit as the startup grows. If the start-up is successful, proceeds from the equity are added to the 150 years of contributions from UW donors and from Washington State to enhance the quality of UW research and entrepreneurship.
The UW’s license agreement includes a number of standard non-financial terms that are based on university mission and policies and state or federal law. For background on the philosophy behind university licensing practices, we recommend the Association of University Technology Managers guide Nine Points to Consider in University Licensing and the National Academy guide Managing University Intellectual Property in the Public Interest.
The university designs its license to ensure intellectual property encourages investment in a technology to take it to market while allowing the licensee broad discretion in the steps to accomplish this goal. As standard practice to balance these two goals, universities retain control of the patent prosecution for the university invention, include diligence milestones for the development of the technology, and require the licensee to indemnify the university and to mark products to give notice of any protected intellectual property (patents, copyrights, trademarks) that is included.
The choice of law for any license with the University of Washington will be the laws and courts of Washington State. The UW is a state agency.
As a public university, we also give notice that any confidentiality provisions are limited by the Washington State Public Records Act. If federal funding supported the development of the technology, then there will be additional requirements from the Bayh-Dole Act.
The University has a different mission and role in technology development than a company. The licensing process is greatly facilitated, including reducing legal time and associated expenses, by familiarizing yourself with the terms that are important to the university.
The mission of the University is research and education. University technology licensing is an important channel for producing impact from university research, but it must complement and support the research and educational missions. Technology licenses cannot introduce risks that would potentially consume time and resources beyond the benefits of licensing.
Universities want their licensees to demonstrate that they are actively developing the licensed innovation to move it to the market or to patients. The goal is to deliver impact from university research, and these milestones enable the university to require that licensees are doing that.
University technologies are licensed at a very early stage. If a licensee is tying up rights in a technology, the university needs to be able to verify that the technology is actually being developed. The diligence milestones are based on the licensee’s plan for development. If the licensee stops developing this technology, then the university has an opportunity to seek another partner to commercialize this technology.
Understandably, not every original licensee of a university technology proceeds to develop it into a marketable product. Large companies sometimes decide a licensed innovation is no longer a priority, and start-ups may pivot in response to market feedback or may be daunted by the hurdles of starting and growing a business. The UW usually works with struggling licensees but also considers relicensing the innovation to another company prepared to invest resources and continue development.
If federal funding supported the development of a technology, then there will be additional requirements from the Bayh-Dole Act such as having language in the license to ensure that the licensee is in fact developing the technology.
For unlicensed technologies, the university oversees the filing and prosecution of any patent applications. Once a technology is licensed, CoMotion seeks guidance from its licensees prior to incurring expenses in patent prosecution, and licensees have the opportunity to opt out of participating where they don’t see value. The licensee has the final say in how patent prosecution is managed unless the desired action would compromise the value of the intellectual property. Because the patents are protecting the intellectual property of the University, it is critical that UW ensure applications are not dropped, or prosecuted without sufficient diligence. UW also has reporting obligations where the invention arises from federally funded research.
The UW oversees the protection of its intellectual property, but does so in consultation with its licensees. For startups in particular this provides several benefits.
The standard language for patent prosecution is as follows: ‘“University, in consultation with Company, shall determine in which countries University will file, or cause to be filed, Licensed Patents. University shall request patent counsel to inform Company of the status of the prosecution of the Licensed Patents, including delivering to Company written and electronic communications from all patent offices and foreign counsel, and University shall consult with the Company on the prosecution of the Licensed Patents. Company’s suggestions and requests regarding patent prosecution will be reasonably considered and included unless detrimental to University’s intellectual property rights.”’
As universities, our core activity is research and education. We do not have the controls, revenues, or insurance needed in order to provide more than very limited representations. We make no warranties, and we require indemnification.
The intellectual property developed at the UW stems from research and educational programs, not from a product development effort. While technology licensing is an important channel for producing impact from research, it cannot compromise the primary mission of research and education.
The University does not have control over what the final product would be. Due to the early stage of the research and the company’s initial business plan, at the time of licensing we may not even have a full description of what the ultimate product is conceived to be. In almost all cases, that vision changes over time as the company proceeds through development and manufacturing.
Thus, the University cannot warrant that the technology licensed is fit for any given purpose, or that the company will not have to acquire additional intellectual property rights to be free from infringement claims. The University makes this lack of representations and warranties explicit, and also requires the company to release the University from any claims.
The University makes this lack of representations and warranties explicit in the following standard disclaimer:
“University disclaims and excludes all warranties, express and implied, concerning licensed intellectual property and each licensed product, including, without limitation, warranties of non-infringement and the implied warranties of merchantability and fitness for a particular purpose. The University expressly disclaims any warranties and makes no representations that any licensed patent(s) will be approved or will issue; concerning the validity or scope of any licensed patent; or that the manufacture, use, sale, lease or other disposition of a Licensed Product will not infringe a third party’s patent or violate a third party’s intellectual property rights.”
“For itself and its employees, Company hereby releases University and its regents, employees, and agents forever from any suits, actions, claims, liabilities, demands, damages, losses, or expenses (including reasonable attorneys’ and investigative expenses) relating to or arising out of (i) the manufacture, use, lease, sale, or other disposition of a Licensed Product; or (ii) the assigning or sublicensing of Company’s rights under this Agreement.”
The standard indemnification language is as follows:
“Throughout the term of this Agreement and thereafter, Company shall indemnify, defend, and hold University and its regents, employees, and agents harmless from all suits, actions, claims, liabilities, demands, damages, losses, or expenses (including reasonable attorneys’ and investigative expenses), relating to or arising out of the manufacture, use, lease, sale, or other disposition of a Licensed Product, including, without limitation, personal injury, property damage, breach of contract and warranty and products-liability claims relating to a Licensed Product and claims brought by a Sublicensee.”
All universities retain the right to continue to make and use any technology for their own internal, non-commercial research and educational purposes to ensure licensing doesn’t interfere with the core mission of the university.
Universities are open collaborative research communities. Although we license the rights for commercial development of a technology, we have to preserve the technology’s role in ongoing research and education. This is critical to maintaining and advancing the University’s mission and to encouraging the development of inventions that serve the public good.
This reservation of rights is expressed in the following standard language:
University reserves all rights not expressly granted to Company under this Agreement. University retains for itself and other not-for-profit organizations an irrevocable, nonexclusive license to make, have made, and use products, processes, and other subject matter covered by the Licensed Patents in the Field of Use for academic research, medical, instructional, or any other academic purpose.
Expressly included within this University reservation of rights is the right (i) to use the Licensed Patents in sponsored research or collaborative research with any Third Party but only to the extent no such Third Party is granted any rights to the Licensed Patents or to commercialize Licensed Products, (ii) to grant material transfer agreements to materials whose composition of matter is covered by the Licensed Patents where the use of such materials is restricted to academic research, medical, instructional, or any other academic purpose, and (iii) to publish any information included in the Licensed Patents or any other information that may result from University’s research.
The University licenses, rather than sells, intellectual property created at the UW. It does not assign ownership in IP to the company. Standard language will include a license to intellectual property created at the UW with rights and obligations included in the license to advance the interests of both parties, including the UW’s interest in ensuring the technology reaches customers or patients.
Consistent with the practices at peer institutions, the University licenses, rather than sells, intellectual property created at the UW. It does not assign ownership in IP to the company.
The UW wants to ensure that the company fulfills its obligations under the license agreement. If the company stops developing and “shelves” the licensed technology, the University wants the technology returned so that it can re-license it and ensure maximal public impact and benefit. If the company does not fulfill its contractual obligations under the license agreement, the University, as the owner of the intellectual property, has far greater ability to enforce these obligations than if the intellectual property had been assigned.
Standard language will include a license to intellectual property created at the UW — not assignment of the intellectual property — with rights and obligations included in the license to ensure the interests of both parties are advanced.
Yes, all companies licensing from the UW are required to have Comprehensive General Liability insurance, product liability insurance, and as applicable, clinical trial insurance.
To ensure the company can meet its obligations to indemnify the University, the company will be required to hold industry-accepted levels of insurance for the term of the agreement, or for as long as the licensed innovation is in use, whichever is longer. For clinical trial insurance, the term is three years beyond the end of the clinical trial.
The university reports to its stakeholders that a license has been signed and names the technology and the licensee. We do not provide more specific details in our standard reports, but by law, we may need to release portions of the license agreement if a request is made under the Public Records Act.
As a state agency, the UW’s commitment to confidentiality is qualified by the Public Records Act, as described in the following standard language:
University is an agency of the state of Washington and is subject to the Washington Public Records Act, RCW 42.56 et seq., (“Act”), and no obligation assumed by University under this Agreement shall be deemed to be inconsistent with University’s obligations as defined under the Act and as interpreted by University in its sole discretion. If University receives a request for public records under the Act for documents containing Company Confidential Information, and if University concludes that the documents are not otherwise exempt from public disclosure, University will provide Company notice of the request before releasing such documents. Such notice will be provided in a timely manner to afford Company sufficient time to review such documents and/or seek a protective order, at Company’s expense utilizing the procedures described in RCW 42.56.540. University shall have no obligation to protect Company Confidential Information from disclosure in response to a request for public records.
Public records requests for information that is proprietary to our licensees is rare, and for the few occasions it does happen, the university has processes in place to ensure that information released under a request and does not compromise the licensee’s competitiveness. We want to ensure your information is safeguarded to ensure that the intellectual property licensed from UW has the greatest impact on the public by leading to successful products, treatments, and services.