Presentation made on July 29 2009 in Centurion, RSA to attendees from Innovation Fund, DST and other related people. The presentation paid specific attention to the interaction between patent professionals and the technology transfer process in publicly-funded research institutions..

1. Presentation to Innovation Fund; Patent Agent and Commercialisation Trainees Marcel D. Mongeon Intellectual Property Coach

2. Outline The TT Process How Patent Agents can work within the TT process The Licence Agreement Preparing patents for Licences Considerations for start-up companies Valuation Issues The patent agent’s role

3. Technology Transfer Definition: Moving research results into practical use Note that money is not required But it helps! Intellectual property a key component of this process Secures advantage to those who will invest in process

4. Key Steps in TT Process Disclosure Early valuation Includes market assessment IP assessment IP protection Marketing Licensing Monitoring

5. IP Protection Because of ‘invention’ aspect of most early-stage results, patent are predominant mode of protection Don’t forget alternate protections: Copyrights Trade-marks Plant breeders rights

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

7. Back to the TT Process Early assessments What should be assessed before IP protection? Suggest: Freedom to Operate Clear ownership rights Clear inventorship rights Ownership rights may be tricky with private company involvement

8. Inventorship This is area where patent agent will provide crucial advice Internal person may be better placed to answer tricky questions about contributions to issue Who conceived? Reduced to practice? Need to understand cultural context of each situation

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

10. Meeting Inventors Need to meet inventors directly Don’t rely on disclosure alone Also have commercialisation managers present so they understand process and objectives

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

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

13. The application review process Ensure inventor and commercialisation manager have both read application Ask 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 Application Ensure continuous communication of each step with commercialisation manager They in turn should communicate with inventor Give notice of costly upcoming steps Ensure you are communicating the total costs and getting agreement to proceed

15. Office Actions From some offices, office action process may be difficult Consider telephone or in person interviews Consider taking inventor with you in some cases

16. The Licence Agreement Many examples of licenses and agreements available Sources: www.10kwizard.com http://www.sec.gov/edgar.shtml Actual form of clauses not important, content is Clause by clause review doesn’t deal with language but the concepts

17. Preliminary Issues Business Terms - Use of a term sheet or Memorandum of Understanding Reviewing the first draft Associated Documents

18. Recitals Not legally binding Statement of background and intentions Good place to identify problems such as conflicts of interest

19. Definitions What should be defined; avoided Capitalize defined terms External references to other material Consistency among agreements Reference appendices for variable information Watch for ‘cut and paste’ definitions

20. Grant of License Exclusive versus non-exclusive Transferable versus non-transferable Field of use / Territory Right to sublicense Use of Technology Grant of License to an affiliated company Cross-licensing Improvements

21. Grant Backs Reservation of certain rights by the Licensor Non-commercial purposes

22. Sublicensing Right to Sublicense Control over Sublicensing Approvals: consent versus notice, timelines Flow through provisions: indemnity, royalties What 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. Royalties Fully paid up Licenses Royalties based upon gross, net or product sales Royalty “reach through” on sublicences Minimum royalties (creditable?) Milestone payments Interest on over-due amounts Stacking provisions Abeyance of payment pending results of infringement action

24. Patents Management may pass from licensor to licensee over time Issues of control, report, consent and abandonment Who pays? Who is the assignee? Obligation to mark or label licensed products

25. Indemnity Use and scope of an indemnity Limitation on amount of claim

26. Representation and Warranties Who wants them Who should give them What does a Licensor warrant? Different types of licensors What can you actually control? Ownership; non-infringement Disclaim technology “fitness for purpose”

27. Confidentiality Permitted circumstances of disclosure What constitutes “confidential information” Importance of confidentiality for trade secrets or know-how

28. Accounting Records Report of activities with respect to exploitation of the technology Frequency Right to audit Accounting standards

29. Terms and Termination Term of the license Events of termination Automatic (insolvency) Curable breaches Termination process Consequences to sub-licensees of terminating the head licence

30. Insurance Public liability or product liability insurance Absolute need for both in most circumstances Indemnity vs. Insurance

31. Proper Law of the Contract Proper law of the contract Attornment clause

32. Assignments of Intellectual Property Once property is transferred, cannot normally get it back When 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 Owner If owner of IP fails, how to recoup ownership? Likely not possible May be potential of bonds secured by IP assets Can be very tricky area

34. Drafting Patents for Licensing Easiest licences are of specific claims Can you embody licence terms for some fields of use in claims? E.g. of inclusion material Ability to draft separate claims for separate fields of use Always ensure a “picture claim” in the patent relating to main product under licence

35. Start-up Company Licences Usually little difference in terms except royalty Royalty may be paid up and in form of shares May also be hybrid models of cash and shares May defer cash or have cash convertible into shares

36. Assessment Issues Two most important assessment or valuation questions are: Patentability Freedom to Operate Both can be done early before large patent expenses accrue

37. Patent Searching Support You have tools and skills to conduct patent searches Consider: State of the Art Freedom to Operate Patentability Each has its place and you can assist

38. DIY Patent Searches With many patent resources online, inventors want to do patent searches themselves Usual challenges: Not keeping records (US IDS) Limiting to the wrong databases Key-word vs. classification searching

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

40. Start-up Companies e.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 Conclusion Depends on each individual negotiation Only real determinant is post dilution percentage left Some suggestion that technology value may be as little as 1 or 2% pre-IPO

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

43. Traditional Valuation Means Rules of Thumb Usually based on specific industries May be confused with comparable rates Most used Rule of Thumb: The Razgaitis Rule aka The Rule of Quarters Need to be able to analyze what is the ‘incremental’ margin before G&A Rule suggests that ¼ of that increment should be licensors In 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 $20 Net profit $30 $110 Incremental Margin $80; therefore, royalty would be $20 or 10% of Sale Price

45. Rule of Quarters in Practice How to price the royalty? The realities of the target industry More information on this: LES

46. Another Rule of Thumb The 50% Rule: At point of product introduction, 50% of total risk remains IF inventing org brings product to introduction stage, entitled to 50% of profits Therefore, if commercializing org does part of product introduction entitled to more than 50% of profits More a starting position for discussions

47. ‘Standard’ Royalty Rate Some industries have ‘standard’ rate Shrink-wrap software in 25 to 50% range Some types of pharmaceuticals What is the base? Stacking royalties problem How to get information on comparable rates? Colleagues Subscriptions to Newsletters

48. Using Comparable Rates More similar deals is better But are the deals the same? Industry segments; Margins; Use of IP Licensing terms: exclusive; non; options Risk analysis What is usual risk profile of our technologies? Compared to industrially-generated technologies? Certainty analysis Similar to risk but one component separate: certainty of measurement

49. Acquiring Information about Comparables Internet: Publicly-filed information like SEC and SEDAR information www.sec.gov (look for EDGAR) Court and other public records http://pacer.psc.uscourts.gov/ Specialty information www.10kwizard.com www.fda.gov Company’s own websites and competitors

50. The Georgia Pacific1 Factors Leading Fed Ct decision Court established factors to consider in establishing a ‘reasonable’ royalty 15 Factors include: Existing royalty rates for licensor and licensee Exclusivity; territory; field of use Practice in licensing; relationship between parties; potential related sales Duration and term of patent 1: 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’ Approaches Discounted Cash Flow (DCF) and Net Present Value (NPV) Real options theory Auctions But first some arithmetic!

52. Precision and Valuation Estimates What are assumptions that go into a DCF or NPV calculation? Market size Percentage of market Product price Royalty Rate Discount (interest rate) How precise is any of these five assumptions?

53. Rates in Reality Discount rate is market driven AUTM 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 up Q: for three examples, what discount rate?

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

55. Conclusion We have covered: The TT Process Licensing Agreements Valuations

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