Mongeon SeminarsThe Information you need – When you need it!

Presentation to Innovation Fund; Patent Agent and

Commercialisation Trainees

Marcel D. Mongeon

Intellectual Property Coach

Outline

The TT Process How Patent Agents can work within the TT

process The Licence Agreement

Preparing patents for Licences Considerations for start-up companies

Valuation Issues The patent agent’s role

Technology Transfer

Definition: Moving research results into practical use

Note that money is not required But it helps!

Intellectual property a key component of this process Secures advantage to those who will invest in

process

Key Steps in TT Process

Disclosure Early valuation

Includes market assessment IP assessment

IP protection Marketing Licensing Monitoring

IP Protection

Because of ‘invention’ aspect of most early-stage results, patent are predominant mode of protection

Don’t forget alternate protections: Copyrights Trade-marks Plant breeders rights

Patent Process

12 month provisional period Formal application (SA alone or PCT) Paris Convention – 12 month deadline PCT deadlines – 30 months from priority

date (up to 42 mos. in some countries) Grace periods

Back to the TT Process

Early assessments What should be assessed before IP

protection? Suggest:

Freedom to Operate Clear ownership rights Clear inventorship rights

Ownership rights may be tricky with private company involvement

Inventorship

This is area where patent agent will provide crucial advice

Internal person may be better placed to answer tricky questions about contributions to issue

Who conceived? Reduced to practice? Need to understand cultural context of

each situation

Biggest Challenge Relating to Inventors

They won’t understand the process Initial need to collect information (i.e. Prior

and other cited non-patent art) Who is going to do this? Not you!

Preparing claims Need to explain what the purpose of claims is

and how they need to be supported The office action process

Not a scientific or peer review process

Meeting Inventors

Need to meet inventors directly Don’t rely on disclosure alone Also have commercialisation managers

present so they understand process and objectives

Discussion of Prior Art

Search for prior art and discuss why it would not be obvious to modify it into your claimed invention

Have early discussions with inventors about prior art

If the invention is not a significant advance over prior art, have frank discussion with inventor re obviousness.

How to Draft for Prior Art

Expand your disclosure - include comparative results, unsuccessful experiments, etc

Try add some functionality to link claim elements in a manner different from the prior art

The application review process

Ensure inventor and commercialisation manager have both read application

Ask inventor: Have we captured the invention? What have we missed?

Ask commercialisation manager: Have you reviewed the claims? Can you licence the claims?

Prosecution of Application

Ensure continuous communication of each step with commercialisation manager

They in turn should communicate with inventor

Give notice of costly upcoming steps Ensure you are communicating the total

costs and getting agreement to proceed

Office Actions

From some offices, office action process may be difficult

Consider telephone or in person interviews Consider taking inventor with you in some

cases

The Licence Agreement

Many examples of licenses and agreements available Sources:

www.10kwizard.com http://www.sec.gov/edgar.shtml

Actual form of clauses not important, content is

Clause by clause review doesn’t deal with language but the concepts

Preliminary Issues

Business Terms - Use of a term sheet or Memorandum of Understanding

Reviewing the first draft Associated Documents

Recitals

Not legally binding Statement of background and intentions Good place to identify problems such as

conflicts of interest

Definitions

What should be defined; avoided Capitalize defined terms External references to other material Consistency among agreements Reference appendices for variable

information Watch for ‘cut and paste’ definitions

Grant of License

Exclusive versus non-exclusive Transferable versus non-transferable Field of use / Territory Right to sublicense Use of Technology Grant of License to an affiliated company Cross-licensing Improvements

Grant Backs

Reservation of certain rights by the Licensor

Non-commercial purposes

Sublicensing

Right to Sublicense Control over Sublicensing Approvals: consent versus notice, timelines Flow through provisions: indemnity, royalties What happens in the event of default of the head

licence (comfort letters) End licenses (often attached as an appendix) Obligation to submit copies of licences

Royalties

Fully paid up Licenses Royalties based upon gross,

net or product sales Royalty “reach through” on sublicences Minimum royalties (creditable?) Milestone payments Interest on over-due amounts Stacking provisions Abeyance of payment pending results of

infringement action

Patents

Management may pass from licensor to licensee over time

Issues of control, report, consent and abandonment

Who pays? Who is the assignee? Obligation to mark or label licensed

products

Indemnity

Use and scope of an indemnity Limitation on amount of claim

Representation and Warranties

Who wants them Who should give them What does a Licensor warrant?

Different types of licensors What can you actually control?

Ownership; non-infringement

Disclaim technology “fitness for purpose”

Confidentiality

Permitted circumstances of disclosure What constitutes “confidential information” Importance of confidentiality for trade

secrets or know-how

Accounting Records

Report of activities with respect to exploitation of the technology

Frequency Right to audit Accounting standards

Terms and Termination

Term of the license Events of termination

Automatic (insolvency) Curable breaches

Termination process Consequences to sub-licensees of

terminating the head licence

Insurance

Public liability or product liability insurance Absolute need for both in most

circumstances Indemnity vs. Insurance

Proper Law of the Contract

Proper law of the contract Attornment clause

Assignments of Intellectual Property

Once property is transferred, cannot normally get it back

When might IP be transferred? Does institution continue to use it as part of a

research program? Does IP build or improve existing IP? Is there know-how or confidential information

involved?

Failure of IP Owner

If owner of IP fails, how to recoup ownership?

Likely not possible May be potential of bonds secured by IP

assets Can be very tricky area

Drafting Patents for Licensing

Easiest licences are of specific claims Can you embody licence terms for some

fields of use in claims? E.g. of inclusion material Ability to draft separate claims for separate

fields of use Always ensure a “picture claim” in the

patent relating to main product under licence

Start-up Company Licences

Usually little difference in terms except royalty

Royalty may be paid up and in form of shares

May also be hybrid models of cash and shares May defer cash or have cash convertible into

shares

Assessment Issues

Two most important assessment or valuation questions are: Patentability Freedom to Operate

Both can be done early before large patent expenses accrue

Patent Searching Support

You have tools and skills to conduct patent searches

Consider: State of the Art Freedom to Operate Patentability

Each has its place and you can assist

DIY Patent Searches

With many patent resources online, inventors want to do patent searches themselves

Usual challenges: Not keeping records (US IDS) Limiting to the wrong databases Key-word vs. classification searching

Providing a Value

Frequently asked: What is my IP worth?

Or, you need to explain to someone that their IP is worth something other than their expectations

Examples: Start-Up Companies

Start-up Companies

e.g.: VC invests $20M in seed capital in company based on technology; subsequently company generates $50M on an initial public offering (IPO)

What is value of technology?

Valuing Start-ups Conclusion

Depends on each individual negotiation Only real determinant is post dilution

percentage left Some suggestion that technology value

may be as little as 1 or 2% pre-IPO

Technology for Defensive Uses

Technology will be added to portfolio to enable some other technology or to overcome ‘patent thicket’

Good situation is ‘patent pooling’ e.g. of MPEG pool Future of bio: Patenting to permit use; e.g.

SARS

Traditional Valuation Means

Rules of Thumb Usually based on specific industries May be confused with comparable rates

Most used Rule of Thumb: The Razgaitis Rule aka The Rule of Quarters

Need to be able to analyze what is the ‘incremental’ margin before G&A

Rule suggests that ¼ of that increment should be licensors

In practice see anywhere from 10 to 50% Best suited to clear commercial products

Example of Rule of Quarters

Before After

Sales– $100 $200

CGS – $50 $70

Margin – $50 $130

G&A – $20 $20

Net profit $30 $110

Incremental Margin $80; therefore, royalty would be $20 or 10% of Sale Price

Rule of Quarters in Practice

How to price the royalty? The realities of the target industry More information on this: LES

Another Rule of Thumb

The 50% Rule: At point of product introduction, 50% of total

risk remains IF inventing org brings product to introduction

stage, entitled to 50% of profits Therefore, if commercializing org does part of

product introduction entitled to more than 50% of profits

More a starting position for discussions

‘Standard’ Royalty Rate

Some industries have ‘standard’ rate Shrink-wrap software in 25 to 50% range Some types of pharmaceuticals

What is the base? Stacking royalties problem

How to get information on comparable rates? Colleagues Subscriptions to Newsletters

Using Comparable Rates

More similar deals is better But are the deals the same?

Industry segments; Margins; Use of IP Licensing terms: exclusive; non; options

Risk analysis What is usual risk profile of our technologies?

Compared to industrially-generated technologies? Certainty analysis

Similar to risk but one component separate: certainty of measurement

Acquiring Information about Comparables

Internet: Publicly-filed information like SEC and SEDAR information www.sec.gov (look for EDGAR)

Court and other public records http://pacer.psc.uscourts.gov/

Specialty information www.10kwizard.com www.fda.gov

Company’s own websites and competitors

The Georgia Pacific1 Factors

Leading Fed Ct decision Court established factors to consider in establishing a

‘reasonable’ royalty 15 Factors include:

Existing royalty rates for licensor and licensee Exclusivity; territory; field of use Practice in licensing; relationship between parties;

potential related sales Duration and term of patent

1: Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers, 318 F. Supp. 1116, (S.D.N.Y. 1970), modified, 446 F.2d 295 (2d Cir. 1971).

‘Scientific’ and ‘B School’ Approaches

Discounted Cash Flow (DCF) and Net Present Value (NPV)

Real options theory Auctions But first some arithmetic!

Precision and Valuation Estimates

What are assumptions that go into a DCF or NPV calculation? Market size Percentage of market Product price Royalty Rate Discount (interest rate)

How precise is any of these five assumptions?

Rates in Reality

Discount rate is market driven AUTM TTM (Part X, Ch. 2)

Low risk rates (known product): 15 to 20% New product, known manufacturing ability:

25% to 35% New product, new manufacturing, known

business: 30% to 40% New business, product ready (no R&D): 40%

to 50% New business, product needs R&D: 50% to

70% and up Q: for three examples, what discount rate?

Auctions

Theoretically, the best way to obtain the highest value

Depends on exposure to largest number of potential buyers

In patent field: Ocean Tomo – Summer 2009 IP Catalogue

online Prediction: will become a larger force as

business understands IP better

Conclusion

We have covered: The TT Process Licensing Agreements Valuations

Questions?

Marcel D. Mongeon

+1 (905) 390 1818

+44 (0) 1905 70 1818

marcel@mongeonconsulting.com