UW’s Fast Start template, another bad bureaucratic idea gone bad, 7

We have been working through the arguments for universities implementing one-size-fits-all licensing templates for their spinout companies, so that all spinouts are treated the same–as if university spinouts are all the same, or should be made to become all the same through a process that university administrators call “negotiation.”

Consider these different university spinout situations.

(1) university employees expressly hired to invent by the university and working under university direction. Under patent law, any inventions produced in such an arrangement are equitably the university’s. Why should these inventors get the same terms as others if they choose to spin out a company?

(2) faculty or student envisions a business idea that has nothing directly to do with any invention they have made at the university. They spin out a company. Why should the university assert any interest in anything they have done that they place in that company?

(3) inventions are made in work that’s been identified by the researchers and the university as for the public. Why should the results of that work be sequestered for the exclusive benefit of any spinout company? And why should the university be complicit in helping the company secure exclusive control?

(4) researchers want to spin out a company that provides public services related to their research that are easier to provide as a company than as a project within the university. Why should the university demand an equity stake in such a company, or a royalty?–all these demands do is raise the cost of providing the service.

(5) researchers spin out a company based on work that they have done with other university researchers who object to the spin out company getting exclusive rights. Why should the university take title to the rights of all researchers and then offer the standard deal via template to the ones wanting the spinout?

(6) researchers want to gain access to SBIR or STTR funding and so they create a company to apply for these grants and subcontract work back to their university lab. Should the university even allow such a spinout (many do)? and if so, why should such a deal look just like any other?

You get the idea–there are all sorts of situations that call for special treatment rather than a single template agreement that makes all spinouts the same, makes a virtue of doing so, and gives as the “intention” to decrease costs, speed up deals (because no review is necessary), and somehow make things better. One imagines then beat down researchers giving up to accept administrative dictates.

Now we get to Dr. Thorp’s account of the FAST-style deal:

When a faculty member holds equity in a startup company, their interests are not completely aligned with those of the university, which can make negotiating licenses cumbersome and strained.

Why would a faculty member have to have interests “completely aligned” with the university? A fundamental of university policy is that faculty have research and publication freedom–the university does not direct their work, does not take a position on it, does not demand that faculty align their interests with the university’s positions. What makes startups somehow an exception under which this fundamental gets to be ignored? What makes the researchers transferring technology to a startup a personal conflict of interest but the university intervening to take ownership and license that same technology to the same startup for a share of the action is not?

We are furthermore not even talking here about equity in a startup that wants a license (or ownership or access or something) to what the faculty member has invented. Any equity in a startup means something bad, apparently. But why? And why is the standard that of the university’s “interests”? Are things better if both the faculty member and university hold equity in a company? No, arguably now it’s worse–because the university has compromised its oversight of research–and that’s bad for the faculty member, who now has no one to defer to if there is an administrative decision to be made that involves the faculty member’s equity position.

But now what of those situations in which a faculty member invents and starts a company (or is offered equity in a company) and wants their invention to be licensed to the company? One way, of course, would be for the faculty member to assign the invention to the company directly, or license the invention exclusively (another form of assignment), or license the invention non-exclusively. This way is direct and in its way really neat. The only rights in play are the ones that faculty member holds. If there are c0-inventors, then they have to come to some agreement on any exclusive license. Otherwise, the deal can be only non-exclusive with the company–and even simpler in its way. There are no background rights of others in the university (or the university’s own claimed rights) that might be implicated. If there’s going to be a fuss over the transaction, it is a fuss between the company and the faculty inventor. If they don’t resolve that fuss, then the faculty member can choose not to do the license, and that’s that. The university does not have to take ownership, does not have assess patentability, does not have to pick a patent lawyer, does not have to file a patent application, does not have to deal with the new company while excluding the inventors from participating in the negotiation.

If the university simply must have a piece of the action, then it can ask for a share of what the faculty inventor makes on the deal. This approach is used by a number of universities in Canada. It’s along the lines of “if you do the deal, you give us 30% and if we do the deal, we give you 30%. An even better way is for the university to save its negotiating for if the company wants to use university space or sponsor research. Then the university might suggest something like “in another scheme of ours, you could compensate us for space or research services with equity rather than cash.” No need to strain the faculty inventor’s pockets then.

But if a university demands ownership of an invention only to assign it using an exclusive patent license to a startup company chosen by a faculty inventor, then one can see how any negotiation could become cumbersome and strained. If the company is essentially the faculty member’s deal, the university ends up getting between the faculty member and his/her company alter ego. What a useless place to demand to be! Even still, the university could do the bright, intelligent thing and act as the faculty member’s agent. In that case, the university aligns its interests with those of the faculty inventor. Doing so was the old style approach using patent development firms. Faculty inventors negotiated assignment of inventions to these firms, and the firms acted as agents for the inventor’s interests. If a patent development firm wasn’t doing what it had contracted to do, then the transaction could be cancelled and the invention (and any patent rights) returned to the inventor.

You can see how this agent relationship gets screwed up when the university takes ownership and licensing in-house, demands ownership outright rather than negotiated for purpose and outcomes, and gives up its neutral status. Now it is dealing with its faculty as if they are employees and cannot act as their agent. Now it has an interest in licensing deals and so cannot provide independent oversight.

If the university demands ownership of inventions without allowing any negotiation over what is to be involved, then there’s not much way for an inventor to get the invention back. Here’s the catch-22 for a university inventor. If the university has done nothing with an invention other than spend money on patenting, then an inventor might ask for return of the invention. Reasons university administrators: if the inventor wants rights back, then the inventor must see value in the invention that the inventor is not revealing to us, and therefore the inventor has a conflict of interest and is attempting to manipulate us into giving up our opportunity to profit. Therefore we cannot simply return the invention. We must get full disclosure or we must license the invention to the inventor as if the inventor was going to start a company or do a license. It’s shameful reasoning.

For a great example of this shame, read up on how Yale treated Professor Fenn. Or look at the University of Misery’s mistreatment of Professor Suppes. If, on the other hand, if university administrators determine that there’s no secret value in the invention, then they see no point in wasting any more administrative time working out a complicated agreement that returns the invention to the inventor, and as doing so will just create yet more conflict-of-interest worries, but now without anything to worry over. An inventor cannot win out in this clever policy arrangement. Call it “cumbersome and strained” by the design of university policy. University inventors almost never get inventions back once a university takes ownership and even when they do university administrators add in conditions and requirements–strings attached, plenty of red tape.

There’s more. The point of a negotiation is to align interests of two parties within the scope of the contemplated transaction. This is contracting 101 stuff–a meeting of the minds; offer, acceptance, and consideration. The problem is, a faculty inventor has a mind. A university, as a corporate entity, does not. The university minds involved are university administrators who have offered their minds as proxies for use by the university. But university policy makes it all but impossible for these people to use their minds. To do so, in a negotiation, they would have to argue for exceptions to university policy, back off university opening positions, and align the university’s interests with those of the faculty inventor–and as far as they can see it, that would be arguing against the university’s (their) interests.

And–this is real world, folks–if they give themselves an exception to a policy once, then they cannot turn around and do it again because if they did, that would amount to changing the policy without proper administrative process. Worse, if they give someone an exception to policy at all, that smacks of favoritism if no one else can get that same exception. Moreover, if a faculty member has advocated for the exception for the benefit of his/her company, then that’s a personal conflict of interest in action and has to be opposed. Granting an exception to one would be unfair to all the others. Granting an exception in response to anyone involved in a startup amounts to allowing personal self-interest to influence official university positions. Thus, there can be no exceptions.

“Negotiation” for university administrators means, generally, persuading someone that they have no room to negotiate. Talk about cumbersome and strained. In such policy circumstances, universities are among the worst entities that one could attempt to negotiate anything with. Most university administrators are unable to negotiate–policy won’t let them, and they are generally poorly equipped to handle negotiation. One might say, taking ownership of inventions is, institutionally, one of the worst ways to transfer technology unless the university uses a public license with minimal conditions–FRAND, fair, reasonable, and non-discriminatory. You know, like Stanford did with the Cohen-Boyer patents. Got a voluntary assignment from the inventors. Licensed non-exclusively to everyone at a price so low and conditions so easy that it was a no-brainer for companies to sign up. If your license price is less than the cost to a company of bothering its corporate attorneys, you get your deal without cumbersome or strained negotiations.

If a university demands rather than accepts ownership of inventions, then for a spinout, each invention has to first go to the university (lots of process–proper disclosure, assignment, database entries, patent attorney chosen, application prepared, license drafted [use a template instead!],  and then go to the inventor’s company (“negotiation” with spinout [banning the inventors from getting involved], legal review by the company’s attorney, refusal to consider changes proposed by the company, escalation or sidestepping the university). All that bother and waste energy arises because the university is fixated on taking a financial in every invention opportunity and has chosen awkward way to do it. The problem for administrators, then, is how to make this really bad way of doing things somewhat less bad.

Here’s how Dr. Thorp tried to deal with this institutional problem of negotiation:

When I was a university administrator, we addressed this problem by creating a boilerplate license with standardized terms that could be automatically agreed to when a company was formed. At the University of North Carolina, we called this the “Carolina Express License” and at Washington University, we called it the “Quick-Start License.”

In effect, make negotiation go away. The FAST-start license contract becomes an adhesion contract, no negotiation permitted. The other side must “automatically” agree–because there is no alternative, not because the terms are so favorable to the spinout that no one could possibly have an issue with them.

Dr. Thorp explains the thinking for using a FAST-like template.

The rationale against the boiler-plate license is that every deal is different and needs to be separately negotiated, but that leaves the problem of those additional administrative costs, as well as the risk of damaging the university’s relationship with the faculty entrepreneur. A number of faculty departures over the years have resulted from sour relations caused by these negotiations.

In effect, these templates are required by universities that don’t have confidence in their own licensing offices to get deals done effectively. UW out advertising its FAST-start template apparently doesn’t get that these templates get put in place when a licensing shop can’t otherwise do the work.

Dr. Thorp emphasizes that the university’s administrative costs of separately negotiating each deal is the problem. But it’s not administrative costs that make a negotiation cumbersome or strained so that relationships with faculty inventors are soured and these faculty–your inventors–leave. It’s inability to negotiate. It’s cruddy policy that makes negotiation impossible. The solution would be to change the transfer pathway so it does not involve institutional inability to negotiate and cruddy policy. But no. Instead, the university proposes totalitarian control of the relationship. Faculty inventors and their companies will “automatically agree” because they have no other choice. The university takes their inventions and offers a take-it-or-leave-it deal with any startup company.

For dealing with research invention, it’s a bad administrative idea aiming to address a real problem–that university licensing staff have trouble negotiating and drafting licensing agreements with companies started by its own faculty, staff, and students. But those problems stem from another bad administrative idea–that a university should demand ownership of every invention made by people at the university, and should then license those inventions exclusively.

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