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University Position on Key Terms in Research Agreements

Updated: 07/8/2011

Fact Sheet

Publication of Research Results

Policy: It is central to the university’s mission that it must remain free to publish the results of investigations carried out by its faculty, staff and students. The Board Of Governors’ Policy Statement On University Research Relations With Private Enterprise And/Or Publication Of Research Findings states:

Any agreement that involves the joint use of university facilities for proprietary purposes, or that purports to restrict faculty or students from publishing freely the results of their own work, shall be reported in writing to the President prior to its execution. No agreement, however, may interfere with the publication or oral defense of research thesis and dissertations of graduate students.

Legal: The Export Administration Act (50 U.S.C. 2401, et seq.) and the Export Administration Regulations (15 CFR Chapter VII, subchapter C, Parts 730-774) govern the export of technology from the United States. Though the statutes and regulations are complex, in general the law requires the university to exclude non-citizens (faculty, staff and students) from participating in any research project where university-generated results are not freely publishable by the university’s researchers. The only way to avoid this outcome is to apply for export licenses for each affected project from the U.S. State Department or the U.S. Department of Defense, depending on the nature of the research. Of course, there is no guarantee that the university would be successful in getting the license and the government may well choose to grant licenses for foreign nationals from some countries and not others.

In addition, the Tax Reform Act of 1986 contains provisions that prohibit proprietary research in facilities built or renovated with tax-exempt bonds. In essence, the law says that if an organization carries on research in a facility built with the proceeds of tax exempt bonds and if that organization agrees with the sponsor of the research that the results of the research will not be published, then the research is done for a "private purpose." The consequence of using this sort of facility for a private purpose is that the bonds lose their tax-exempt status.

NOTE: The university’s insistence on its right to publish results does NOT mean that  it will not delay  publishing for a limited time in order to permit the filing of a patent application.  Nor does it mean that the university  insists on the right to publish the sponsor’s confidential information. The university routinely agrees that it will not publish any confidential information that the sponsor provides to the project. This promise of confidentiality is made in a manner that is consistent with the NC Public Records Act at GS 132-1.2 and with appropriate exceptions that are common in industry-standard confidentiality agreements.

Ownership of Patents

Policy: UNC and NC State University Policy provide that the university owns patents developed by university personnel using university resources. These policies are on the web at: http://www.ga.unc.edu/publications/admin_manual/chapter_v.pdf (UNC Policy Manual) and http://policies.ncsu.edu/policy/pol-10-00-01 (NC State Patent Procedures). While there is the possibility for making exceptions to the general rule, this is only done in clearly extraordinary circumstances and that exception must be approved by the Vice Chancellor for Research and Graduate Studies.

This policy ensures that patents developed using university resources are reserved for the public good. If the university gives up ownership, it has no means to require the commercialization of the invention or benefit from investment of the university resources used during development. Further, if the sponsor does commercialize the invention after acquiring ownership, the university and its inventors would not share in the economic benefits realized by the sponsor.

Legal: For federally-sponsored research, the Bayh-Dole Act (at 35 USC 202) prohibits the assignment of university rights to any third party, including an industrial "co-sponsor," without approval of the federal agency that supported the research.

The Tax Reform Act of 1986, as it applies to use of facilities built or renovated with tax-exempt bond proceeds, has a direct impact on university ownership of patents developed under industry sponsorship. Under this federal law, the university and its bondholders incur serious problems if the university agrees to assign patents to research sponsors. This law provides that the tax-exempt status of bonds issued for the construction or renovation of research facilities is lost if the facilities are used for private, rather than public, purposes. Any arrangement where a research sponsor owns university-made inventions is defined as a "private purpose."

The Act requires that patents resulting from industry-sponsored research must be owned by the university but may be licensed for consideration determined in an arms-length negotiation after the invention is made. While it would be possible to have arrangements for transfer of ownership of inventions made in facilities that are not constructed or renovated with bond money, the university’s policy is to avoid creation of two classes of research facilities and, thus, two classes of researchers.

TSA Exception: The university acknowledges that special provisions will apply for Testing and Service  Agreements (TSAs). These agreements, which may be used when the university is using its unique capabilities to provide services that do not involve research (e.g., where industry-standard testing or analysis is applied to sponsor materials or where the  protocol is created by the sponsor), then the sponsor is entitled to own inventions made by university employees if (a) the invention is an improvement to the sponsor’s pre-existing technology and (b) the invention results from carrying out the sponsor-generated protocol.

Option/Licensing Rights

Policy: NCSU is committed to pursuing an appropriate technology transfer strategy for university-developed inventions by offering options or licenses to commercial enterprises. The university’s goals are (a) for university-owned inventions to enter the stream of commerce to serve the public good and (b) to meet the legitimate needs and interests of the research sponsor. This is achieved by granting research sponsors an option to obtain a royalty-bearing exclusive license to all inventions made by university inventors in the course of a sponsored research project.

Legal: The discussion of the Bayh-Dole Act and the Tax Reform Act of 1986 from Fact Sheet 1 is also relevant to this issue.

Business: While other types of licensing rights can be offered a sponsor, royalty-bearing exclusive licenses are typically the best because exclusivity is often a requirement of the sponsor. An exclusive license gives the sponsor essentially the same rights to practice an invention that it would have if it owned the invention. The differences are: (a) it must pay the university for using the invention (usually royalties), (b) to keep the license, the sponsor will be required to demonstrate that it is using reasonable diligence to develop the invention and bring it to market, and (c) the university will retain the right to continue to practice the invention for its own academic, non-commercial, purposes. This last point is important because if the university did not retain this academic license, the university would have to obtain the sponsor’s permission to continue to do research that involves use of the invention.

Indemnification

NCSU, like all agencies of the State of North Carolina, has a firm policy, rooted in law, against entering into indemnification agreements. To "indemnify" or "hold harmless" another party means that the indemnifying party is essentially an insurance company for the party being indemnified. There are no exclusions or "policy limits" on an indemnity obligation. The party indemnifying another must provide or pay for the other party’s legal defense regardless of whether the indemnifying party is in any way at fault. The university does not have, and is not allowed to purchase, liability insurance to cover such an indemnity obligation.

Aside from the obvious business reasons for not indemnifying another party, there are legal reasons, too. The principal basis for the university’s position is rooted in the doctrine of "sovereign immunity." The modern concept of sovereign immunity is based on an old common law theory that "the king can do no wrong" and can only be found liable in "his own courts" to the extent he voluntarily consents to be liable. When we replaced a monarchy with our state governments, the state government became "the king" for purposes of sovereign immunity. North Carolina has agreed that it may be sued for torts by enacting the NC Tort Claims Act. In addition, our state courts have held that by entering into a contract, the state implicitly agrees to waive its immunity to the extent its breach of the contract causes damage to the other party. To go beyond those limits entails a waiver of the state’s sovereign immunity and only the General Assembly has that authority.

Another legal basis for refusing to indemnify another party rests in our state Constitution and its provision that only the General Assembly can pledge the state's "full faith and credit." Because a promise to indemnify is essentially a promise to act as the insurer of the other party, then if (a) an indemnity is signed, (b) injury occurs, (c) damages exceed the university's ability to pay, and (d) the indemnity is found to be enforceable, then whoever signed the agreement has pledged the state's credit--that is, the legislature would have to raise the money the university employee promised to pay--essentially giving every state official who signs an indemnity agreement the power to levy taxes on the citizens of the State, which would be an absurdity.

A final, important item to note in regard to indemnity. When the university says it will not indemnify another party, it is NOT attempting to avoid liability for its wrongdoing or breach of contract; it is NOT saying that it cannot be held liable for injury or damages it causes. The university may be sued for breach of contract just like any private party that breaches its agreement and the university may be held liable under the NC Tort Claims Act when there is a finding of negligence of an employee which results in injury or damage.

Arbitration

The Attorney General advises the university that "binding arbitration clauses and other administrative mechanisms for resolution of disputes not generally available under the laws of this state…" are "contrary to public policy…and are, therefore, void." Even though this language is unambiguous regarding "binding" arbitration, the university is flexible in reviewing and proposing alternative language aimed at resolving disputes short of litigation. Thus, we are amenable to mediation, mandatory pre-litigation conferences, non-binding arbitration, etc.

Governing Law

This issue relates to contract clauses which dictate which state’s law will govern the interpretation and enforcement of the contract. The North Carolina Attorney General's Office has given the university written advice that it is contrary to the public policy of North Carolina for the university to be bound by the law of another state. This advice appears aimed at protecting the state’s sovereign immunity, especially in tort claims. We prefer to have our agreements governed by the law of North Carolina, but can consider accepting an agreement that is silent on the issue of choice of law.

Forum Selection

This refers to clauses that designate where any litigation arising under the contract must take place. N.C.G.S. §22B-3 provides:

Except as otherwise provided, any provision in a contract entered into in North Carolina that requires the prosecution of any action or the arbitration of any dispute that arises from the contract to be instituted or heard in another state is against public policy and is void and unenforceable. This prohibition shall not apply to non-consumer loan transactions or to any action or arbitration of a dispute that is commenced in another state pursuant to a forum selection provision with the consent of all parties to the contract at the time that the dispute arises.

Even without this statutory provision, the university would be unwise to agree in advance to litigate disputes in foreign jurisdictions. While forum selection can be decisive in determining the outcome of litigation, it is even more important in determining whether litigation is even feasible. The expense and inconvenience of a remote venue makes it impractical to pursue or defend all but the most significant claims.