I’ve been working through the Carolina Express license again, given all the attention folks are giving it. For the most part it’s another exclusive patent license, biased toward biotech conventions and assuming Bayh-Dole conventions, with the usual warts. What is worth noting?
It’s an exclusive patent license with sublicensing, sophisticated (or complicated, take your pick) terms with regard to sublicensing and royalties. Notably it includes a pipeline to all patents “covering the Invention”. It is limited on indemnification and insurance, includes pre-publication review for some reason, compulsory sublicensing, allows the university to terminate for non-practice of licensed rights, and includes two-way confidentiality.
In terms of scope, the university commits all its rights to an invention–including forward rights. This is notable in an exclusive license and a real advantage to a start up company as the scope is broader than just the patent family arising from a particular lab’s invention, or from a particular lab’s inventors working in the area of the invention. Future inventions elsewhere in the university that might read on the practice of the invention are included. Thus, a later invention at the university that gives rise to patent rights that would prevent the exploitation of the invention in a given embodiment, those rights are bound up in this license (“its use or manufacture”). Thus if the original invention was for a composition of matter, and a second lab figured out a better way of making that composition of matter, the patent rights in the second invention are within the scope of the exclusive license to the start up. One might expect the scope of an exclusive patent license to depend on the scope of the patent rights licensed, not the invention. However, this is very favorable from the licensee’s point of view.
In terms of consideration, the license is distinctive in its use of pre-valued shadow equity and stepped annuities, along with fixed royalty rates and sublicensing royalties. In a typical negotiation, there might be a trade off between equity and royalties, or other forms of consideration, such as royalty buy downs. While the shadow equity is very low–0.75% of various measures–it may be a challenge to calculate, and in any event it’s pretty easy to see one’s way around it. Sell the company to a successor before much has gone on.
The stepped annuities kick in at year 3 and step in year 6, with a higher rate for clinical products. The annuities are creditable against sales, which is a nice gesture, but also start to tax the company once things have progressed to year 3. If one wanted to be very favorable, one might ask $1000 up front and run strictly on net sales royalties. The stepped annuities guard to some extent against non-operation, but if development of Licensed Products is slow,then the annuities provide a kick in the pants. Given non-payment is a material breach, it will be essential that the company get financing (or sales) quickly. Any reasonable Series A round will not see the annuities as a significant expense. It’s not clear from the license whether an annuity is due for each product in development or just for the category if there’s a product under development in it. It’s also not clear whether the annuities are subject to the royalty stacking reductions applicable to the royalty rates, since they are creditable against those rates, one might think this is so.
The patent reimbursement is also rather different. The company is obligated to pay all the university’s patenting costs, but these aren’t due until 30 days after the first year of the agreement, and the university sets an upper limit–one of the few things that has to be negotiated. Patenting expenses can be pretty steep, so this may be where the company croaks, if the university has already run up a big bill before the company gets formed. One might otherwise aim for a structured reimbursement that recognizes this situation, or take more equity as an offset and eat the patent costs. After one year, patent expenses are invoiced monthly for payment. Monthly means a lot of pass-through paperwork for the university and company, and creates more work for everyone than does, say, quarterly invoicing. Anyway, it’s take it or take something else, so one might ask if it is worth dealing with.
We could wade through more of this. The confidential information provisions are broad rather than directed narrowly at patent application information, there’s no CREATE Act protection for exchanges that might result in new inventive subject matter, and export control might be triggered in ways the agreement doesn’t appear to contemplate and for which it has patched a weak indemnification rather than accepting its own compliance obligations.
In short there’s nothing really different about this agreement other than that it pre-states consideration blind of any inventions, offers a substantial pipeline to future inventions, and chooses some things for emphasis and others not, with a typical set of infelicities, omissions, and special demands.
Royalty rates of 1% and 2% are typical in some biotech realms, but these are low rates for other areas of patent licensing and should be attractive to any non-clinical company, so long as it is intending to sell. One might note that the agreement requires an effort to sell, so no point in using this agreement if all one wants to do is use the invention to make something else to sell.
Holes in the deal include failure of the university to require indemnification for inventors or students, who may not be employees. In the case of inventors they may end up being former employees. In the case of students, they may not be employees at all. As well, there appears to be some oddness with regard to claims by third parties of infringement based on the licensed rights. It doesn’t appear that would be the focus of risk, but there it is. One also might hesitate at the compulsory sublicensing and the termination clauses. Sublicenses survive regardless of standing with termination of the prime. That’s rather generous, but there are reasons to handle that differently. The university is exposed on patenting costs–it runs as a bank for a year, but obligation by the company to pay those costs doesn’t come due until after the first anniversary, so there’s time to terminate the deal and not owe anything. Pretty nice from a start up point of view. Some oddness as well having to do with infringement litigation, especially the bit that the attorney general apparently can pre-empt whatever, which might make these clauses unreliable.
What makes it a grail? I don’t know. It is a standing offer to companies with a university employee (or student) as founder, and if someone doesn’t take it, then one is back to negotiating. Given that the agreement appears unsuited to a lot of non-biotech start ups, where sale is not necessarily the goal of the founding invention, it would appear in those cases, it’s business as usual. I guess I’d rather have a focus on getting start up deals done rather than putting so much emphasis on a blind leading offer that’s largely unexceptional but may be unworkable.
What makes things interesting is that a public university has come out and published a patent license agreement, and more than that, made it a standing offer. If one takes it, then there’s no trade secret in the deal–everyone knows the financial terms. That’s pretty interesting. The license agreement is at points retentive and at others generous, and at others ambiguous. I don’t think I’d like someone in my lab taking the deal for an invention I made and they didn’t, especially if I didn’t care to be in cahoots with the start up. But if I wanted to run with something pre-approved, all that’s needed is a business plan. One wonders why even that.