The document outlines the technology transfer (TT) process, detailing the roles of patent agents and considerations for licensing agreements essential for start-ups. It discusses the importance of intellectual property protections, assessing ownership rights, and drafting claims while addressing the complexities of licensing arrangements and valuation issues. It also emphasizes communication among inventors, commercialization managers, and patent agents throughout the process to ensure effective patent management and licensing strategies.

1. Presentation to Innovation Fund; Patent Agent and Commercialisation TraineesMarcel D. MongeonIntellectual Property Coach

2. OutlineThe TT ProcessHow Patent Agents can work within the TT processThe Licence AgreementPreparing patents for LicencesConsiderations for start-up companiesValuation IssuesThe patent agent’s role

3. Technology TransferDefinition:Moving research results into practical useNote that money is not requiredBut it helps!Intellectual property a key component of this processSecures advantage to those who will invest in process

4. Key Steps in TT ProcessDisclosureEarly valuationIncludes market assessmentIP assessmentIP protectionMarketingLicensingMonitoring

5. IP ProtectionBecause of ‘invention’ aspect of most early-stage results, patent are predominant mode of protectionDon’t forget alternate protections:CopyrightsTrade-marksPlant breeders rights

6. Patent Process12 month provisional periodFormal application (SA alone or PCT)Paris Convention – 12 month deadlinePCT deadlines – 30 months from priority date (up to 42 mos. in some countries)Grace periods

7. Back to the TT ProcessEarly assessmentsWhat should be assessed before IP protection?Suggest:Freedom to OperateClear ownership rightsClear inventorship rightsOwnership rights may be tricky with private company involvement

8. InventorshipThis is area where patent agent will provide crucial adviceInternal person may be better placed to answer tricky questions about contributions to issueWho conceived? Reduced to practice?Need to understand cultural context of each situation

9. Biggest Challenge Relating to InventorsThey won’t understand the processInitial need to collect information (i.e. Prior and other cited non-patent art)Who is going to do this? Not you!Preparing claimsNeed to explain what the purpose of claims is and how they need to be supportedThe office action processNot a scientific or peer review process

10. Meeting InventorsNeed to meet inventors directlyDon’t rely on disclosure aloneAlso have commercialisation managers present so they understand process and objectives

11. Discussion of Prior ArtSearch for prior art and discuss why it would not be obvious to modify it into your claimed inventionHave early discussions with inventors about prior artIf the invention is not a significant advance over prior art, have frank discussion with inventor re obviousness.

12. How to Draft for Prior ArtExpand your disclosure - include comparative results, unsuccessful experiments, etcTry add some functionality to link claim elements in a manner different from the prior art

13. The application review processEnsure inventor and commercialisation manager have both read applicationAsk inventor:Have we captured the invention?What have we missed?Ask commercialisation manager:Have you reviewed the claims?Can you licence the claims?

14. Prosecution of ApplicationEnsure continuous communication of each step with commercialisation managerThey in turn should communicate with inventorGive notice of costly upcoming stepsEnsure you are communicating the total costs and getting agreement to proceed

15. Office ActionsFrom some offices, office action process may be difficultConsider telephone or in person interviewsConsider taking inventor with you in some cases

16. The Licence AgreementMany examples of licenses and agreements availableSources:www.10kwizard.comhttp://www.sec.gov/edgar.shtmlActual form of clauses not important, content isClause by clause review doesn’t deal with language but the concepts

17. Preliminary IssuesBusiness Terms - Use of a term sheet or Memorandum of UnderstandingReviewing the first draftAssociated Documents

18. RecitalsNot legally bindingStatement of background and intentionsGood place to identify problems such as conflicts of interest

19. DefinitionsWhat should be defined; avoidedCapitalize defined termsExternal references to other materialConsistency among agreementsReference appendices for variable informationWatch for ‘cut and paste’ definitions

20. Grant of LicenseExclusive versus non-exclusiveTransferable versus non-transferableField of use / TerritoryRight to sublicenseUse of TechnologyGrant of License to an affiliated companyCross-licensingImprovements

21. Grant BacksReservation of certain rights by the LicensorNon-commercial purposes

22. SublicensingRight to SublicenseControl over SublicensingApprovals: consent versus notice, timelinesFlow through provisions: indemnity, royaltiesWhat happens in the event of default of the head licence (comfort letters)End licenses (often attached as an appendix)Obligation to submit copies of licences

23. RoyaltiesFully paid up LicensesRoyalties based upon gross, net or product salesRoyalty “reach through” on sublicencesMinimum royalties (creditable?)Milestone paymentsInterest on over-due amountsStacking provisionsAbeyance of payment pending results of infringement action

24. PatentsManagement may pass from licensor to licensee over timeIssues of control, report, consent and abandonmentWho pays?Who is the assignee?Obligation to mark or label licensed products

25. IndemnityUse and scope of an indemnityLimitation on amount of claim

26. Representation and WarrantiesWho wants themWho should give themWhat does a Licensor warrant?Different types of licensorsWhat can you actually control?Ownership; non-infringementDisclaim technology “fitness for purpose”

27. ConfidentialityPermitted circumstances of disclosureWhat constitutes “confidential information”Importance of confidentiality for trade secrets or know-how

28. Accounting RecordsReport of activities with respect to exploitation of the technologyFrequencyRight to auditAccounting standards

29. Terms and TerminationTerm of the licenseEvents of terminationAutomatic (insolvency)Curable breachesTermination processConsequences to sub-licensees of terminating the head licence

30. InsurancePublic liability or product liability insuranceAbsolute need for both in most circumstancesIndemnity vs. Insurance

31. Proper Law of the ContractProper law of the contractAttornment clause

32. Assignments of Intellectual PropertyOnce property is transferred, cannot normally get it backWhen might IP be transferred?Does institution continue to use it as part of a research program?Does IP build or improve existing IP?Is there know-how or confidential information involved?

33. Failure of IP OwnerIf owner of IP fails, how to recoup ownership?Likely not possibleMay be potential of bonds secured by IP assetsCan be very tricky area

34. Drafting Patents for LicensingEasiest licences are of specific claimsCan you embody licence terms for some fields of use in claims?E.g. of inclusion materialAbility to draft separate claims for separate fields of useAlways ensure a “picture claim” in the patent relating to main product under licence

35. Start-up Company LicencesUsually little difference in terms except royaltyRoyalty may be paid up and in form of sharesMay also be hybrid models of cash and sharesMay defer cash or have cash convertible into shares

36. Assessment IssuesTwo most important assessment or valuation questions are:PatentabilityFreedom to OperateBoth can be done early before large patent expenses accrue

37. Patent Searching SupportYou have tools and skills to conduct patent searchesConsider:State of the ArtFreedom to OperatePatentabilityEach has its place and you can assist

38. DIY Patent SearchesWith many patent resources online, inventors want to do patent searches themselvesUsual challenges:Not keeping records (US IDS)Limiting to the wrong databasesKey-word vs. classification searching

39. Providing a ValueFrequently asked:What is my IP worth?Or, you need to explain to someone that their IP is worth something other than their expectationsExamples:Start-Up Companies

40. Start-up Companiese.g.: VC invests $20M in seed capital in company based on technology; subsequently company generates $50M on an initial public offering (IPO)What is value of technology?

41. Valuing Start-ups ConclusionDepends on each individual negotiationOnly real determinant is post dilution percentage leftSome suggestion that technology value may be as little as 1 or 2% pre-IPO

42. Technology for Defensive UsesTechnology will be added to portfolio to enable some other technology or to overcome ‘patent thicket’Good situation is ‘patent pooling’e.g. of MPEG poolFuture of bio: Patenting to permit use; e.g. SARS

43. Traditional Valuation MeansRules of ThumbUsually based on specific industriesMay be confused with comparable ratesMost used Rule of Thumb:The Razgaitis Rule aka The Rule of QuartersNeed to be able to analyze what is the ‘incremental’ margin before G&ARule suggests that ¼ of that increment should be licensorsIn practice see anywhere from 10 to 50%Best suited to clear commercial products

44. Example of Rule of Quarters Before After Sales – $100 $200 CGS – $50 $70 Margin – $50 $130 G&A – $20 $20Net profit $30 $110 Incremental Margin $80; therefore, royalty would be $20 or 10% of Sale Price

45. Rule of Quarters in PracticeHow to price the royalty?The realities of the target industryMore information on this: LES

46. Another Rule of ThumbThe 50% Rule:At point of product introduction, 50% of total risk remainsIF inventing org brings product to introduction stage, entitled to 50% of profitsTherefore, if commercializing org does part of product introduction entitled to more than 50% of profitsMore a starting position for discussions

47. ‘Standard’ Royalty RateSome industries have ‘standard’ rateShrink-wrap software in 25 to 50% rangeSome types of pharmaceuticalsWhat is the base?Stacking royalties problemHow to get information on comparable rates?ColleaguesSubscriptions to Newsletters

48. Using Comparable RatesMore similar deals is betterBut are the deals the same?Industry segments; Margins; Use of IPLicensing terms: exclusive; non; optionsRisk analysisWhat is usual risk profile of our technologies? Compared to industrially-generated technologies?Certainty analysisSimilar to risk but one component separate: certainty of measurement

49. Acquiring Information about ComparablesInternet: Publicly-filed information like SEC and SEDAR informationwww.sec.gov (look for EDGAR)Court and other public recordshttp://pacer.psc.uscourts.gov/Specialty informationwww.10kwizard.comwww.fda.govCompany’s own websites and competitors

50. The Georgia Pacific1 FactorsLeading Fed Ct decisionCourt established factors to consider in establishing a ‘reasonable’ royalty15 Factors include:Existing royalty rates for licensor and licenseeExclusivity; territory; field of usePractice in licensing; relationship between parties; potential related salesDuration and term of patent1: Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers, 318 F. Supp. 1116, (S.D.N.Y. 1970), modified, 446 F.2d 295 (2d Cir. 1971).

51. ‘Scientific’ and ‘B School’ ApproachesDiscounted Cash Flow (DCF) and Net Present Value (NPV)Real options theoryAuctionsBut first some arithmetic!

52. Precision and Valuation EstimatesWhat are assumptions that go into a DCF or NPV calculation?Market sizePercentage of marketProduct priceRoyalty RateDiscount (interest rate)How precise is any of these five assumptions?

53. Rates in RealityDiscount rate is market drivenAUTM TTM (Part X, Ch. 2)Low risk rates (known product): 15 to 20%New product, known manufacturing ability: 25% to 35%New product, new manufacturing, known business: 30% to 40%New business, product ready (no R&D): 40% to 50%New business, product needs R&D: 50% to 70% and upQ: for three examples, what discount rate?

54. AuctionsTheoretically, the best way to obtain the highest value Depends on exposure to largest number of potential buyersIn patent field:Ocean Tomo – Summer 2009 IP Catalogue onlinePrediction: will become a larger force as business understands IP better

55. ConclusionWe have covered:The TT ProcessLicensing AgreementsValuations

56. Questions?Marcel D. Mongeon+1 (905) 390 1818+44 (0) 1905 70 1818marcel@mongeonconsulting.com