Lab Budgets

A post over on Techno-L caught my eye. It asked if anyone had dealt with cost recovery for business and lab costs in dealing with licensing income. A number of responses lay out the party line on what patent licensing income is supposed to be: a windfall, extra money, or something to be fought over without any compelling claim. And every bit booked as a cost is an administrative take-away from inventors and departments. More munchies for the licensing office. There’s another way to look at it.

The conventional approach to royalty sharing practices derive from assumptions about patent licensing. So long as folks are fixated on a technology commercialization model in which patents are licensed for the creation of products that pay a royalty, a royalty sharing schedule will look like a division of windfall, and it will appear at best to be the place where inventor interests and administrative claims finally stalemate out. Under Bayh-Dole, a university could allocate all income to costs incidental to the management of federally supported inventions and have nothing left for administrators to spend. (Note: payments to inventors are expressly part of the “costs incidental” in Bayh-Dole).

The treatment of a “share to the lab” in this formulation is as a *share of the windfall*. In most royalty sharing schedules I’ve seen (and I’ve read a lot of these over the years), the lab share is the smallest portion. The idea is, patent income is a dividend, and the lab should be recovering its costs through grant funding, not royalties. There are assumptions here that ought to be looked at more closely, but it’s nigh unto religion, so we’ll just note it. The problem for administrators is, oddly, that they *don’t like to see a lab so well off that it has a lot of money*. Why is that? It’s a religious thing.

A better implementation for lab costs comes, often, from university copyright policy. In copyright-based works, there is a recognition of on-going efforts to manage, configure, develop, and support what is being “transferred” for broad use. In these settings, one sees that the grant support to the lab is typically to build out and validate a work (software, database, training materials, simulation, etc), but not to maintain it or develop it for various platforms. The licensing income therefore forms a critical element in the transfer dynamics. It is how an emerging community collectively supports work it needs to have done to maintain the usefulness of the work. This income supports activity outside the scope of most grants, and directly related to transfer. It is also directly related, therefore, to the mission of the university to publish, teach, and provide public service. The treatment of this income is distinct from the “commercialization” issues of making a work into a product for mass consumption. One may have only 50 recipients, but each willing to pay $1K a year to ensure there’s someone working on things everyone needs so each recipient doesn’t have to hire to do that.

University copyright policies frequently allow the recovery of such deployment and continuing costs. What remains after these costs may be treated as “royalty” income. This discipline may then be brought back over to the patent-based approach. We can then challenge the assumption that all income from patent licensing should be treated as windfall. If a lab is incurring continuing costs related to the transfer of technology (licensor-side costs, what a concept!), then the lab *should* be writing a budget against licensing income for those costs. Consider the audit in which a lab is found to be shifting investigator time under a grant to transfer activities that are outside the “planned and committed” scope of work. In such an audit, the university administration and tech transfer office could be seen as putting pressure on grant budgets to subsidize, improperly, transfer activities.

For what it’s worth, I have yet to see AUTM take up licensor-side costs as evidence of pro-active technology transfer and public service (not in their metrics), or the mechanisms by which universities should account for the time of grant-funded employees working on transfer matters. Apparently the deal is, the inventors should work on these things on their own time, not university time, because they stand to share personally in any licensing income. Seems very limited and undeveloped, really. But then, so is the university implementation of patent licensing for “commercialization”.

In a lab-based transfer approach (as distinct from the step where a TLO has to be interposed as the “agent”), a lab has the ability, in parallel with the technology transfer office, to write a budget for its transfer-related expenses. These should be addressed before income is declared available for “royalty sharing”. This is *not* the same as a set % going to the lab. And it is *not* a matter of changing the royalty sharing schedule. And it is *not* a matter of inventors “gifting” back some portion of their share to their lab. It’s a matter of accounting for licensor-side expenses to support the public service of being involved in the transfer of technology, not merely the arbitrage of rights.

When we have implemented project budgets, we have made them annual, based on a statement of work that involves work realted to the transferred assets and outside the scope of any grant funding. We deal with issues pertaining to program income, and this varies by federal agency and private sponsor. We set a maximum for such budget, over which the matter is reviewed between the dean or chair, the project director (often a PI), and tech transfer. We’ve found that $500K is a nice limit, as it is enough that it’s a significant amount but not so much that it starts to kick up administrative envy. We use a participation agreement to make it clear that all participants in the project see that there is an anticipated charge against income to support lab work. In my experience, these arrangements have been regarded as a positive step. In a few instances, people not involved have claimed that having such a process available pressures lab participants to give up their personal interests. One has to manage such things. The way we did this was by allowing the lab budget to fill as a % of income available. So one takes a tech transfer % (like 15% or 20%) and the lab then can take the remaining 85% until the lab budget is complete for the year, or some lesser amount (like 75%), with the remainder going to the royalty schedule. In this way, royalties can be distributed around as usual while the lab budget also is being filled.

That’s the gist of it. If there are interinstitutional agreements, then an appropriate response is to build a research commons that involves the investigators from the institutions involved, and allow them collectively to identify a project budget, and share the remainder as royalties per the IIA, so administrators get some action. Within the shared project budget, the investigators can decide how to best allocate funds among the work groups. If they can’t agree, then obviously these funds can be split in some administrative way, or in a worst case, each institution creates its own support budgets for its own labs, and then folks work like busy bees to fork development, fragment what was developed to go out in one piece, and generally work skew from each other just when they have an opportunity to do something at scale. But such is the pull of provincialism.

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