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Legal Issues: Licensing & Startups

Peter H. DurantNixon Peabody LLP

pdurant@nixonpeabody.com

April 20/21, 2005Copyright © 2005 Nixon Peabody LLP

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Clients

“We go to market in 10 minutes and

we need to copyright/patent/trademark

our drug/software/surgical technique.”

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Me

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Overview

Learn more than you wanted to know about:

– Ownership/Funding Issues

– Exploiting Your Idea

– Startups

– Licenses

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Bayh-Dole Act (1980)

Applies to federally-funded projects and resulting patentable inventions

Faculty/staff/employees must disclose IP to University and University must disclose IP to government agency

University may elect to take title University cannot assign ownership of IP to third

parties (other than patent management firm)

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Bayh-Dole Act (cont’d) Government receives royalty-free, non-exclusive

license (government use rights only) Preference to small companies as licensees University must share (no set amount) license

fees/royalties with inventors - balance applied to scientific research or education

University cannot agree to royalty rate in advance

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Government License Rights

Unlimited – can hand out on street corner Limited/Restricted – cannot be:

a. disclosed outside Government

b. used by Government for manufacture

c. used by non-Government party

Non-standard rights (becoming more popular)

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Government License Rights (cont’d) Issues

– Is Tech. Data/SW a contract deliverable?

– Developed exclusively at “private expense”?

• If purely private dollars, Government gets limited rights

– Developed with mix of Government and private funds?

• Government gets “Government Purpose Rights” under DFARS but “Unlimited Rights” under FAR

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CREATE ACT (2004)

Avoids “prior art” problem if different employers collaborate in research

Three key requirements to CREATE

– Research must be undertaken pursuant to a joint research agreement

– Research agreement must be in effect on or before the date of the claimed invention

– Research agreement must be broad enough to capture the invention

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Exploiting Your Idea Know what you have (patent? invention disclosure? fundamental idea or

improvement? software? trademark? other?) Understand your ownership rights

– institutional policies differ

– check employment/affiliation agreements

– check funding agreements

Consult with technology transfer office (or reasonable facsimile) on strategic options

Develop a plan

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Exploiting Your Idea (cont’d)

Simple (?) choice– License

– Sell

– Use (start-up)

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Exploiting Your Idea (cont’d)

Roles for: you/your institution/other investors Director/officer; shareholder/investor

Director/Officer

– control

– employment contract

– exit

Shareholder/Investor

– “sweat”/other equity

– control percentages

– voting issues/rights

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Business Entity Formation

Sole Proprietor Partnership Corporation

– C Corp

– S Corp

Limited Liability Company

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Before You Seriously Search for Capital, Know: Which alternatives are feasible for your

business? How will potential investors evaluate your

business? How much money do you need? How much money can your business attract? How long will it take? Can your company run efficiently while you are

on the money trail?

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Early Stage Financing

Personal Savings Credit Cards Family and Friends Retirement Assets (e.g., investment of 401(K)

assets) Governmental Programs (e.g., SBIR/STTR

grant)

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Small Business Innovation Research (SBIR)

Small Business Technology Transfer (STTR)

Program Objectives Using small businesses for innovation Build small businesses to meet federal research

and development objectives Aid economically disadvantaged small businesses Aid minority-owned small businesses

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SBIR/STTR Funding and Structure

Up to $850,000 early-stage funding Selection criteria

– Qualification as a small business

– Degree of innovation

– Technical merit

– Future market potential

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SBIR and STTR Primary Differences

SBIR Principal Investigator (PI) must be primarily employed by the small business

SBIR permits outsourcing of one-third of Phase I and one-half of Phase II awards

STTR requires formal relationship with non-profit research partner

– At least 40% research by small business

– At least 30% research by partner non-profit

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Three Types Later Stage Equity Financing

Private Placement Venture Capital Public Offering

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“Murphy’s Laws” of Capital Formation

It will take longer - much longer - than you think to secure the money

In the end, the amount of money you need will be larger (by multiples) than first anticipated

Prepare yourself: Investors and lenders will not be nearly as impressed with your company, idea or product as you are

Try as you might to avoid it, looking for money will divert senior management from running the business

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Overlooked Traps

Personal tax planning Non-compete issues Conflicts of interest

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IP Licenses

Work Out the Terms

– Term Sheets = Good

– Letters of Intent = Not so good

License Grant (heart of the agreement)

– Most Important Question: a license to whom, to do what, with what, to what extent?

– A license is an extremely flexible and sharp

tool, and can divide and apportion IP in

innumerable ways to achieve parties’ goals

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IP Licenses (cont’d)

Division of Rights (Joint Ownership discussed at March seminars)

– Patents: make (have made), use, offer to sell, sell, import

– Copyrights: reproduce, distribute, perform, display, create derivative works

• Example: right to create and distribute copies of software, but no right to modify

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IP Licenses (cont’d) Licenses – exclusive/non-exclusive

– Limited field of use (industry, product specific, geographical, etc.)

Scope of license

– Use, manufacture, sublicense, distribute, re-seller (VAR)

– Limitations, e.g., exclusive, geographic limits, industry limits

– Consideration/royalties

– Assignment

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Other Important Licensing Provisions

• Training, support, etc.

• Minimums

• Confidentiality

• Assignment

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Termination

“How Do I Get Out of This?”

– Carefully drafted termination provisions critical

– Must consider impact of termination upon IP rights v. ability to use jointly developed technology

– Lawyers aren’t magicians, and can’t always get clients out of bad deals

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Congress shall . . . promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive ___ ___ ___ ___ ___ to their respective Writings and Discoveries. . .

ConstitutionArticle 1, Section 8