Licensing Intellectual Property

Licenses to Third Parties

Universities are excellent environments in which to create new technologies and innovations, but aren’t suited to directly commercialize them. Instead, the University licenses its technologies to third parties—generally companies—that work to create new or improved products and services based on University innovations. 

A license is a legal agreement granting some of the University’s rights as the owner of intellectual property (“licensor”) to another entity (“licensee) that has agreed to certain obligations and responsibilities to commercialize the intellectual property. Succinctly, the license gives the company permission to use the University’s intellectual property and identifies all applicable business terms.

The University licenses its intellectual property (patents, software, databases, creative works) to companies or individuals that demonstrate the capability and commitment to develop early stage innovations into commercial products or services.

The terms of the license are negotiated based on factors such as the type of technology, the industry area, the level of development, the time to market, and the licensee’s commercialization plan. The terms should anticipate potential pivots in the company’s strategy to accommodate the market or the product.

Negotiations

The licensing process begins by discussing a term sheet summarizing the essential business terms of the agreement. Below are the types of business terms generally addressed.

• Scope of License Rights: License rights — such as exclusive, nonexclusive, field-of-use limitations, and territory limitations— are established to be commensurate with the licensee’s product development plans and the market. The University’s licensing objective is to obtain widespread use of its technologies through a well thought out commercialization plan.

• License Fee: An initial fee based on the scope of license rights and the University’s investment in the intellectual property.

• Royalties: Your company will be expected to pay royalties when products or services that require the use of the technology are sold or transferred. Royalties can be expressed as a percentage of sale or a fee per selling unit. Royalty rates vary according to the industry, the significance of the invention to the product or service, and the base upon which the royalty is applied (e.g., unit, component, subsystem). Royalty payments may be structured in different ways, such as one-time or recurring fees.

• Sublicense Sharing: Exclusive licenses usually allow the right to sublicense, or authorize others to make, use, and/ or sell the University’s technology to facilitate widespread use. Revenues you receive from sublicenses are also shared with the University.

• Minimum Royalties: Minimum royalty payments are established to encourage diligence in developing and selling products or services based on the technology.

• Patent Reimbursement: Recovery of the costs incurred by the University for protecting the technology in the U.S. and other countries is part of the license. Typically, patent costs that accrue prior to licensing are repaid via a payment plan, while patent costs during the term of the license are paid as they are incurred.

• Performance (Diligence) Milestones: University technologies often require significant additional development before they are ready for the market. You will be asked to provide periodic reports and meet specific milestones in order to retain the license, especially an exclusive license. Milestones are usually industry specific.

• License Compliance: After you license University technology, your Office of Technology Management will manage the license to ensure all terms and conditions are adhered to and the technology reaches its fullest potential. If the terms and conditions are not met, the license may be terminated or revised, in which case the invention may become available for licensing to another company.
   

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License Maintenance And Compliance

An executed license agreement marks the beginning, not the endpoint, of the University’s relationship with a licensee. For exclusive licenses that include pending patent applications, the University and licensee generally collaborate to prosecute patents and identify and execute an optimal patenting strategy. The licensee’s business needs may change over time, and the University may agree to amend a license to make it exclusive/nonexclusive, add or remove IP, or change the licensed field of use. OTM also ensures that the licensee meets its reporting, commercialization, and financial requirements under the agreement, and may connect startup licensees to potential investors, partners, and employees. 

The University views licensing relationships as collaborative, and OTM works with companies to help accommodate the challenges and opportunities they face. In some cases, however, when licensees fail to meet the terms of a license agreement and are unable or unwilling to make a bona fide effort to rectify their noncompliance, the University may exercise its right to terminate a noncompliant licensee. When a license terminates, the technology typically becomes available for licensing to another company.  

Revenue Sharing

When an invention, software or other intellectual property is successfully licensed, or commercialized, the net revenues are shared with inventors and creators. Inventors receive 40% of revenue after deducting expenses (such as costs for protecting the intellectual property), the inventor’s department or unit receives 20%, and the University receives 40%.

Agreed allocations are formalized in a proceeds distribution agreement. The proceeds distribution agreement also addresses the shares among multiple departments or units, using the recommendation of the inventors and the concurrence of the associated departments or unit heads.

Equity from a license is shared with inventors when it is cashed in by the University. The money is distributed according to the proceeds distribution agreement, under the same sharing formula as royalties.

Licensing revenues are considered taxable income. The University reports licensing revenue paid to inventors as income on Form 1099. Your tax advisor can provide specific advice.