Major Negotiating Issues in Industry Research Agreements:
Bases for NC State University's Positions
Intellectual Property Ownership
The University of North Carolina Patent and Copyright Policies and The North Carolina State University Patent and Copyright Policies state:
The University must ensure that its facilities and the results of the work of its employees are applied in a manner which best serves the interests of the public. Likewise, the legitimate interests of a private sponsor who provides financial or other support to research ... must be considered. Constituent institutions should normally reserve the right to ownership of patents on inventions arising out of research....
The NC State Patent and Copyright Procedures contain the following:
As a public service institution, the University has an interest in assuring the utilization of such inventions [made at the University] for the public good. Protection must be provided for at least some of these inventions through patents and licenses to encourage their development and marketing.
To fulfill these basic university policies, ownership of the intellectual property ("IP") generated in the course of sponsored research is required. By owning the IP, the university is able to license it, and through the license agreement require the licensee to meet certain minimum standards for commercializing the technology.
Both the Policies and the Procedures contain provisions permitting other arrangements to be negotiated with research sponsors, and such special arrangements may include sponsor ownership of inventions made by university personnel. Those provisions must be specifically requested by the sponsor and must be approved by the Vice Chancellor for Research, Outreach, Extension and Economic Development. In only a very few circumstances would it be appropriate to relinquish ownership of what would normally be university-owned intellectual property.
For example, once the university has divested itself of ownership of an invention, it has no means to enforce the commercialization of the invention. The strong diligence provisions the university includes in its licenses that ensure that the public is benefited by the invention have no place in a sale. Without contractual diligence provisions, the industrial owner of the technology is free to do nothing with the invention. In many cases, it is to the industrial owner's benefit to shelve new technology for defensive purposes and to protect its already developed technology. While there is nothing "illegal" about the company's action in shelving the technology, there are strong public policy reasons for NC State not to be complicit in that activity.
Legal Reasons:
- The Bayh-Dole Act (35 U.S.C. 200 et. seq.)
is the federal statute which provides the mechanism under
which universities may retain ownership of inventions made
in the course of any research, development or experimental
work supported by a federal contract, grant or cooperative
agreement. Under this Act, any university whose personnel
make an invention in the course of federally sponsored project
may elect to retain title to the inventions. However, by
electing title, the university agrees to a number of conditions
aimed at insuring that the public will benefit from the
commercialization of the invention. Failure to abide by
these conditions permits the federal government to exercise
its "march-in rights" and take over ownership
and/or control of the invention.
In addition, the Bayh-Dole Act contains "... a prohibition upon the assignment of rights to a subject invention in the United States without the approval of" the sponsoring agency. (35 U.S.C. sec. 202 (c) (7)).Of course, Bayh-Dole only applies in instances where federal funds are used in the project out of which the invention arises, but many industry-sponsored research projects and consortia have associated federal funding where industry has leveraged its dollars by adding to an ongoing federal project.
- The Tax Reform Act of 1986 applies to use of facilities built with tax-exempt bonds and has a direct impact on university ownership of IP 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. The general rule is that the tax-exempt status of bonds issued for the construction of research facilities is lost if the facilities are used for private, rather than public, purposes. For example, an arrangement where the university carries out research in a "tax-exempt bond facility" under industry sponsorship costs the bonds their tax exempt status if the university agrees in advance to license any inventions made in the course of research for a pre-determined royalty. The Act and its implementing regulations requires that the IP resulting from industry-sponsored research must be licensed for consideration determined in an arms-length bargain, after the invention is made. Similarly, advance agreement that inventions made by university researchers is owned by the corporate sponsor converts the use of the facility from a public purpose to a private purpose, resulting in the loss of the tax-exempt status of the bonds.
Option/Licensing
Rights Policy Reasons:
For many of the same policy reasons discussed in the previous section dealing with intellectual property ownership, the university is committed to pursuing an appropriate technology transfer strategy for university-developed inventions by means of offering options or licenses to commercial enterprises. The university's patent policies and procedures require (i) that university-owned inventions be made available in a manner which serves the public's interest and, (ii) in the case of inventions made with private support, that the legitimate interests of a private sponsor must be considered.
Legal Reasons:
The university's efforts to offer options and licenses are also based on requirements set forth in various laws (also discussed in the "Intellectual Property Ownership" section, above), including the Bayh-Dole Act and the Tax Reform Act of 1986. Under Bayh-Dole, the university is required to seek the commercialization of the inventions to which it has elected to retain title. For inventions developed in facilities or using equipment financed with tax exempt bonds, the Tax Reform Act requires that university-owned inventions be made available to private research sponsors in a certain manner - i.e., in an arms length manner after the invention is made. The university's option and licensing terms found in sponsored research agreements reflect the requirements of these and other laws.
Business Reasons:
In addition to the policy and legal reasons that dictate the university's position on option and licensing rights, there are a number of business reasons behind the university's position on this issue. The standard option/licensing rights include the following:
"SPONSOR shall be free to use any and all results of the RESEARCH subject to the following limitations:
"UNIVERSITY shall grant to SPONSOR an option to negotiate for a royalty-bearing exclusive license to any patent application filed by UNIVERSITY on any INVENTION resulting from the RESEARCH and any patents granted thereon, for an initial option period of sixty (60) days after such invention has been reported to SPONSOR. Sponsor may elect to extend such option for a period not to exceed sixty (60) days from the completion of RESEARCH, provided the SPONSOR reimburses UNIVERSITY for all costs related to the filing, prosecution and maintenance of said patent(s) or patent applications."
Noteworthy points and the business reasons behind them include the following:
- While other types of licensing rights can
be offered a sponsor, royalty-bearing exclusive licenses
are typically the best starting point because exclusivity
is often a requirement of the sponsor; in the event of exclusivity,
the university requires payment of a royalty because it
is fair and reasonable and because it is required by some
of the previously mentioned policies and laws.
- A 60-day option period is provided and
may be extended until 60 days following the end of the research
if the sponsor pays patent costs. It is important to have
a specific period of time so that a decision is made and
the technology is not allowed to stay in limbo. This provision
also requires a sponsor to either invest in a patent application
filed by the university - something which protects both
the sponsor and the university and which often helps to
ensure that inventions with commercial potential are, in
fact, pursued - or to decline to do so within a time frame
which is sufficient to allow the university to seek other
sponsors for a patent application (consistent with other
policies and regulations governing the university's activities
with its inventions).
- The word "option" is very carefully chosen and is far preferable to a term that many people use interchangeably with it - "right of first refusal". Technically, an option simply requires that the university grant the sponsor the first right to negotiate, and the negotiation is to take place in good faith. In an option, failure to conclude an agreement means that the option holder has no further rights, allowing the university to freely pursue other prospective licensees. Under a right of first refusal, after an initial negotiation with a sponsor had failed to produce an agreement, the university could pursue other licensees, but could not enter into an agreement with a third party without first offering the same deal to the original sponsor. This has the effect of severely limiting the university's licensing efforts in a case where a sponsor and the university are unable to conclude a license agreement.
Publication of Research Results
Policy Reasons:
The Board Of Governors' Policy Statement On University Research Relations With Private Enterprise And/Or Publication Of Research Findings states as follows, in part:
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 these and dissertations of graduate students.
The language of the Policy Statement is clear, and speaks to the university's overall preference for openness in its research activities. While the BOG contemplates possible exceptions to the rule, the decision to allow any restrictions on freedom to publish must be approved at the highest levels of university administration. It is logical to assume that exceptions will be rare and will be reserved for extraordinary cases.
Legal Reasons:
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. This is a complex area of law, but some background is necessary to understand its impact on university research agreements. Generally speaking, the law governs any export of any information (very broadly defined) of a technical nature (very broadly defined). Importantly, an "export" is defined to include not only the shipment of property or information to a foreign country, but also the "release of technology or software . to a foreign national in the United States.."
Because of these broad definitions, we start from the premise that allowing any non-citizen access to technical information is an export, and is therefore illegal unless somehow excepted or excused under the Act or the Regs. The principal exception on which universities rely is in the Regs. at 15 CFR 734.3(b)(3)(ii) which says that technology which "arise[s] during, or result[s] from fundamental research" is not subject to export controls. Fundamental research is defined at 15 CFR 734.8 and specifically includes "university based research."
There are a number of qualifications that must be met for university based research to meet the definition of fundamental research (and therefore be exempt from export control), but for our purposes the key clause is at 15 CFR 734.8(b)(5):
University-based research is not considered "fundamental research" if the university or its researchers accept (at the request, for example of an industrial sponsor) of other restrictions [i.e., other than prepublication review to protect patent rights and sponsor-provided proprietary information] on publication of scientific and technical information resulting from the project or activity.
The practical effect of falling outside the scope of fundamental research is that no non-citizens could participate in the project except in cases where the university is able to determine that the particular technical information being transferred can be exported to the country where the university researcher/student holds citizenship. Clearly, the only realistic way to deal with the situation is to be sure all university research qualifies as fundamental research, which requires that there be no restriction on publication of the results of the project (other than for protection of patent rights and sponsors' proprietary information.
Finally, the Tax Reform Act of 1986 contains provisions that essentially prohibit proprietary research in facilities built 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.
Indemnification
The university, 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, and that there are no exclusions or "policy limits" on the 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 that the Attorney General has expressed, in writing, the opinion that the university may not enter into an indemnity agreement. The AG's opinion appears to rest on a couple of legal theories. First, is the doctrine of "sovereign immunity."
The basis for this sovereign immunity is the 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 agrees to be liable. When we replaced the king with our state governments, the state government became "the king" for purposes of sovereign immunity. Our state has agreed to be sued for torts by enacting the NC Tort Claims Act, and our courts have held that by entering into a contract, the state 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 basis for the prohibition on indemnification agreements rests in our state Constitution and its provision that only the General Assembly can pledge the state's "full faith and credit." A promise to indemnify is essentially a promise to act as the insurer of the other party to the indemnity. The indemnification "insurance policy" is without limit and without exclusions and deductibles. Thus, 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 other state official who signs an indemnity agreement the power to levy taxes on the citizens of the State.
A related basis for the prohibition on indemnity is the state's constitutional and statutory prohibition on any agency's ability to commit funds beyond the presently budgeted biennium. That is, our entire state budget is set on a 2-year basis, and no commitment of funds not in hand or in already in the biennial budget can be committed. An open-ended indemnity violates this stricture, and is for that reason beyond the authority of any state official.
A final, important item to note in regard to indemnity: When the university says it will not indemnify another party, it is NOT saying that it cannot be held liable for any 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 Tort Claims Act when the negligence of its employees results in injury or damage.
Confidentiality
Often, the university is asked to keep various aspects of a research project "confidential." The sponsor may want the university to maintain silence with regard to one or all of the following: (a) the results of the research; (b) the sponsor's trade secrets or other proprietary information; or (c) the existence of the agreement itself or its terms.
Generally, the university can and will agree to protect the sponsor's own proprietary information, i.e., that which the company brings to the table. Anything beyond that is generally impossible. One of the chief reasons the university cannot agree to confidentiality for the agreement and its terms is that the contract is a public record under the NC Public Records Act. That Act makes an exception for "trade secrets" of a party contracting with the state under certain circumstances; otherwise the agreement and all documents, etc. created by university employees in carrying it out are public records and cannot be kept secret.
With regard to the research results, even if those are not public records, the university may not agree to maintain secrecy, primarily because of the requirements for openness in research discussed under the Publication section, above.
Even where the university can agree to keep the sponsor's confidential information secret, there are several exceptions that must be written into the agreement. For example, the university will not agree to maintain silence regarding information which:
- is already known to the university or the public at the time of the disclosure;
- becomes publicly known without the wrongful act or breach of the confidentiality agreement by the university;
- is rightfully received by the university from a third party on a non-confidential basis;
- is independently developed at the university by anyone who has not seen the sponsor's confidential information;
- is published in the necessary course of the prosecution of patent applications based upon inventions developed pursuant to the sponsored research agreement; or
- information required to be disclosed by operation of law or court order.
Please reference our Confidentiality Agreements page for more information.
Export Control
In the Publication section, above, there is extensive discussion of the US export control laws and regulations. Another aspect of these laws that affects university research agreements involves the initial transfer of a sponsor's confidential information to the university. If the university agrees to maintain the sponsor-provided information in confidence, the export regulations state: "The initial transfer of information from an industry sponsor to university researchers is subject to the [export control laws and regulations] where the parties have agreed that the sponsor may withhold from publication some or all of the information so provided." (15 CFR 734.8(b)(4))
Based on this, the transfer of information from the sponsor is probably considered a transfer to a "US entity" and, therefore, not an export. If a non-citizen is involved in the project the university would be making an export when it provides the non-citizen with access to the sponsor's technical information. This would mean that either (a) non-citizens may not work on the project if doing so gives them access to the sponsor's confidential information, (b) the university must determine that the export is allowed because of the nature of the technology and the country to which it is being exported, or (c) the university must procure from the US Department of Commerce a license permitting the export.
Because none of these three options are particularly palatable, the university endeavors to avoid the problem by having the sponsor agree in the research agreement that the initial transfer of information is not just a transfer to the university, but also to each person working on the project (naming each person and his/her nationality in the research protocol or in an attached schedule). The purpose of this is to put the onus on the sponsor for determining if the export to any non-citizens on the project is appropriate under the law; this is something the sponsors are much better equipped to accomplish.
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 Administrative Code, at 1 NCAC 5D.0508(c), provides that "All contractual agreements will be governed by the laws of North Carolina unless prior approval has been received from the Attorney General's Office." The provision in question appears to protect the state's sovereign immunity, especially in tort claims. The university has no choice but to request AG approval before entering into any agreement that calls for the law of another state to govern. We prefer to have our agreements governed by the law of North Carolina, but are generally willing to accept an agreement that is silent on the issue of choice of law.
It is in the university's best interest to keep requests to the AG for exceptions to situations where there is no other way to get the agreement signed, and where there is virtually no risk of litigation.
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 in this section, 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.
Payment Clauses
Payment clauses are negotiated in accordance with instructions received by the Office of Contracts and Grants. OCG has recently requested that the Standard Research Agreement be changed to a fixed price agreement with certain preferences as to how payments will be made.
OTTIR has prepared a clause creating a fixed price agreement that should improve efficiency of process. If sponsors request monthly payments instead of quarterly, OTTIR can make this change without checking with OCG if the sums are large (over $15K). If the sums are smaller and the time period short, OCG prefers that we not agree to monthly payments.
Please see attached proposed payment clause.
Proposed Change to Research Agreement Payment Terms to Replace Clause 4. of the Standard Research Agreement*
Fixed Price Research Agreement
FINANCIAL SUPPORT
For support of the Research, Sponsor agrees to provide the sum of $____ U.S. Dollars. (Sponsor initial the desired payment option):
___ Full payment upon execution of this Agreement.
___ Quarterly in advance, with first payment due upon execution of this Agreement.
___ 90% upon execution of this Agreement, 10% withheld until receipt of final report.
If no payment option is checked, full payment will be due within 30 days after execution of Agreement.
Sponsor's Billing Address:
PAYMENT
To make payments electronically call Peggy Watkins at (919) 515-8007 for information.
Or, make checks payable to North Carolina State University and mail to:
Jane Christopherson Accounts Receivable Specialist Office of Contracts and Grants 1 Leazar Hall, Box 7214 (919) 515-8015
- This has been approved by OCG but only to be used in the Standard Research Agreement, not for the Standard MOA 15K or under.