Over the past few years there has been a notable shift in the way universities and research organisations have approached commercialisation of their intellectual property. Some have had the budget and focus to establish in-house capacity. Others have sought to complement in-house skills with external collaboration and more recently we have seen movement towards full outsourcing of IP commercialisation services. This article gives an overview of some of the issues that usually appear in the course of negotiating an IP commercialisation outsourcing arrangement.
It is important to understand why a university would wish to outsource its IP commercialisation capacity. Usually this is because the university does not wish to allocate resources and funds to the degree it considers is necessary to attract appropriately qualified people to perform the IP commercialisation services. The benefits of IP commercialisation could also be insufficient to outweigh the allocation of such resources. In many ways this is a recognition that the market in Australia for provision of such skilled services is relatively small and that the people with these skills will be more attracted to working with organisations which have a pipeline of IP commercialisation deals.
A full IP commercialisation outsourcing arrangement would be expected to contain the following fundamental components:
- the service provider provides personnel to the
university. These personnel work on site at the university
but remain an employee of the service provider;
- the employee's engagement is structured along
lines which include a significant incentive component;
- the service provider will usually be providing similar
services to other clients so as to leverage data that it
holds having conducted other IP commercialisation deals and
being able to cross-fertilise technologies from various
There are a range of options open to the parties to establish structures to facilitate this outsourcing arrangement. In essence the appropriate structure will be dictated by the following issues:
- the ability of the service provider to control and access
the commercialisation rights in the university's
- the desire to achieve appropriate tax effectiveness in
dealing with commercialisation revenue and expenses;
- the ability of the university to secure value created
around the intellectual property (whether this be
commercialisation revenue or shares).
It is not unusual for a trust to be formed to act as a 'middleman' between the university (which owns the IP) and the eventual party expected to commercialise the IP (which may well be a spin off company or some other commercial enterprise). Alternatively there may be a simple service arrangement between the service provider and the university.
Notwithstanding the structures that may be adopted there are a common set of issues which the parties would be expected to address during negotiations.
There will be a range of costs that the service provider will incur in providing the services (employment costs, IP protection costs, travel costs etc). From the perspective of the university it is important that its financial exposure is managed, usually through caps being placed on the amount that may be spent without its prior approval. The university should consider any 'profit margin' imposed by the service provider on such cost items.
The service provider would be expected to make its most significant profit through a success fee. This is ultimately a matter of commercial negotiation for the parties. However an important question will be: 'When does the service provider cease to be entitled to a fee for the work that it has undertaken that may have contributed to the ultimate commercialisation of the intellectual property, even though such a commercialisation deal may not have been concluded until the end of the outsourcing agreement?' This is important for the university, because every opportunity in which the service provider continues to claim a stake will potentially be a 'disincentive' for any successor contractor that the university may engage.
Ultimately the success of an outsourcing arrangement will depend upon the quality of the personnel engaged to perform the services for the university. It is critical that such people have the ability to engage with the university personnel and build strong relationships based on trust. Ultimately the very fact that the university is outsourcing its capacity means that it is relying upon the service provider's experience to find and keep such people. Nonetheless there is a role for the university to be involved to some degree in the recruitment of those people, if only to manage any risk that the university's reputation may be harmed by the act or omissions of those individuals. Successful performance will also depend on ensuring that the appropriate incentives are in place for the service provider and the relevant on-site personnel. This comes down to structuring the remuneration packages for both the individuals and the service providers. From the university's perspective the key risk here is to ensure that its own budget is not blown out by such structures without commensurate financial return to the university.
A typically difficult issue for the parties to agree upon is any key performance indicators (KPIs) to be placed upon the service provider, especially if they are to have contractual consequences (such as termination rights and damages). Such KPIs are a common component of outsourcing arrangements for most other services and are usually aligned through mechanisms such as service credits and the like. The scope and nature of such KPIs can vary significantly. Ultimately they need to balance matters which are within the service provider's reasonable control and be an influence on the behaviour of the service provider and its personnel.
Management of performance is also highly dependent upon the information flow between the parties. Any IP commercialisation outsourcing agreement should have a strong reporting regime preferably undertaken regularly and guided by a template report that covers the key types of information that a university would expect to receive in order to manage the service provider's performance, including commentary around the strengths, weaknesses, opportunities and threats for each commercialisation prospect.
Conflicts And Reputational Risk
There will always be potential for a conflict of interest for the service provider where it has multiple clients with multiple technologies. The clients may have competing interests and the technologies may also be competitive to one another. This presents advantages by enabling a cross-licensing arrangement to be established for the benefit of all parties. It also may result in the expectations of the university not being met due to the service provider failing to do its utmost to commercialise the intellectual property. Ultimately the contract needs to establish a regime for notification of such conflicts of interests and clearly set out a process for how such issues may be resolved.
The university may also be concerned about the identity and capacity of a potential commercialisation party. For example would the university be comfortable if a decision was made, as an extreme example, to grant rights to an organisation that had links with terrorist interests? Again this calls for a balance between the university being able to prevent such arrangements occurring and the service provider having enough discretion to be able to control the commercialisation process.
The university always needs to look forward to what might occur at the end of the relationship with the service provider whether or not the end was due to the agreement being terminated or merely because the contract has reached its expired term. The university should have reserved the ability to obtain all appropriate information relating to the commercialisation opportunities.
Use Of IP
Notwithstanding the commercialisation, a university will ordinarily expect to retain certain rights to deal with the intellectual property. This may be for the purposes of its own research and education services. This needs to be balanced with the service provider's desire to be able to offer unencumbered intellectual property to potential commercialisation parties.
The usual debate will be held around risk allocation issues such as warranties, indemnities and the like concerning intellectual property, information exchange between the parties and representations made to the broader market. In essence the fundamental principle should apply that the party that is in the best position to manage that risk should bear that risk. Similarly, the parties will undoubtedly debate the cap on the service provider's liability under the agreement. Ultimately this would require the university to have undertaken a risk analysis (that assesses the likelihood of the various risk events against the potential adverse consequences). There is no 'one fits all' approach to this issue. For example there are some risks that would be expected to be uncapped such as loss or liability arising from personal injury or death, damage to tangible property and fraudulent conduct.
There are many other issues which arise during the course of debating a full IP commercialisation outsourcing arrangement. The key is for the research organisation to be fully aware of various risks arising from the arrangement, balance them with the rewards it expects to achieve and have a clear understanding of the relevant importance of these matters so appropriate weight can be given to various issues during negotiations with the service provider.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.