WORKING WITH UNIVERSITIES

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Table of Contents

I. INTRODUCTION ... 1

II. INCUBATORS AND TECHNOLOGY PARKS ... 1

A. Overview ... 1

B. University Based Incubator Programs ... 2

C. International Opportunities ... 3

D. Technology Parks ... 4

III. LICENSING OPPORTUNITIES ... 4

A. University Licensing in the Wake of Bayh-Dole Act ... 5

B. University-Created Intellectual Property ... 6

C. Faculty Startups and Spin-offs ... 7

D. Conflicts of Interest ... 7

IV. SPONSORED RESEARCH ... 7

A. The Role of Sponsored Research ... 7

B. Ownership of Research Results ... 9

C. Publication Rights ... 9

V. WORKING WITH UNIVERSITIES RESOURCES ...11

Disclaimer: The information contained in this chapter is provided with the understanding that the authors and reviewers are not herein engaged in rendering legal or other professional advice and/or services. Accordingly, the information provided in this chapter is for educational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain legal counsel with respect to your particular legal needs. The opinions expressed in this chapter are the opinions of the individual authors and may not reflect the opinions of the law school or any other contributing author. Please note—this handbook has been updated as of May 2013. If you are consulting the handbook, please be aware that changes in the law may occur after this date.

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I.

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Universities today can play a large role in regional economic development, based in part on their ability to assist startup companies through incubators and technology parks and in part through offering new technologies and unique licensing arrangements. The role of universities in technology transfer and early stage business support has evolved over the last twenty years, in part due to changes following the passage of the Bayh-Dole Act, discussed below. While universities have always been viewed as a source of basic scientific, technological and mathematical knowledge, they are now recognized as a

resource for innovative solutions to encourage economic growth and provide new business support.

Specifically, this chapter will examine three ways that a startup business can benefit from working with a university:

 University-supported incubators or technology parks

 University-owned intellectual property (IP)

 Sponsored research

Each strategy for development is discussed in greater detail below, outlining potential benefits and drawbacks.

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A.

Overview

A startup company with its own technology should consider whether a university

incubator or technology (tech) park is a viable option for business success. Through these types of programs, universities are able to provide valuable assistance in business plan development, management guidance, technical assistance, and much more. This assistance accelerates business development so a startup can grow from concept to market

participant much quicker.1

Usually incubators and technology parks offer affordable, flexible space and lease options, reception and telephone answering services, and exposure to a network of business and technical consultants. In addition, these resources can spark relationships between startup entrepreneurs and financial institutions that have access to capital. The overall goal of the facilitating university is to help a new company grow to a level where it can exist

independent of the incubator or the technology park.

1 _{See, e.g., Rensselaer Polytechnic Inst., About the Park, RENSSELAER TECH.PARK, http://www.rpitechpark.com/}

aboutpark.php (last visited Feb. 28, 2013); Univ. at Buffalo, Overview, U.B.OFFICE OF SCIENCE,TECH.TRANSFER,&

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Early-stage startup businesses may receive more benefits from an incubator that incorporates flexible leases and shared services with significant management guidance, business networking, and consulting.2 _{Incubators give new businesses the tools they need} to move from an idea into an actual functioning company. Technology parks, on the other hand, are more appropriate for advanced startups; startup companies that have progressed into the development and commercialization of products and/or services. This is because advanced companies are probably looking for planned communities with buildings

designed for research and development to help extend the business. A community like this that is bound somehow with a university science/research institution would be helpful to any business, especially established businesses.

Ideally, successful startups move out of an incubator within three to four years. Tenants in a technology or research park may choose to remain and play a significant role in

promoting technology-led economic development for the community or region. Although this chapter focuses on university-based incubators and technology parks, information on business-based or technology-based incubators or technology parks is available on New York State Foundation for Science Technology and Innovation, NYSTAR, at

http://www.nystar.state.ny.us under the section entitled NYS Technology Business Development.

B.

University-Based Incubator Programs

University-based incubator programs are business development services that focus on giving new businesses access to resources and exposure that most startups would not be able to easily procure on their own. Because young companies are less likely to be

profitable, incubator programs can benefit a developing company by3_:

● Alleviating business costs through discounted space and facilities;

● Encouraging income through exposure to venture capitalist programs;

● Offering counsel;

● Providing direction based upon successful business models

University-based incubators can have a great impact on startup companies because the programs maintain ties with three important groups: entrepreneurs, students, and research faculty at the universities themselves. Specifically, university-based incubators can provide companies with access to well-equipped laboratories, extensive libraries, powerful computer systems, and subject experts from the faculty.4 _{Moreover, a university} setting can offer a workforce of knowledgeable students with whom internships or part-time job opportunities can be arranged. Often the fledgling businesses share human resources such as receptionists, secretarial and janitorial staff, and office equipment. Finally, university-based incubators can provide real-world examples for students to apply

2 _{See Univ. at Buffalo, Overview, supra note 1.}

3 _{See Univ. at Buffalo, Programs & Services, U.B.OFFICE OF SCIENCE,TECH.TRANSFER,&ECON.OUTREACH,}

http://www.research.buffalo.edu/stor/incubator/prog.cfm (last visited Feb. 28, 2013).

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academic knowledge to real business problems and foster an introduction to entrepreneurship early in a student’s professional career.

Under New York law, a university-based incubator must offer low-cost space, technical assistance, support services, and educational opportunities to New York-based businesses who apply to the incubator.5 _{To be classified as a university-based incubator, a necessary} label if an incubator tenant wants to receive tax credits, the incubator facility and the entity “must act in partnership with an accredited post-secondary college or university located in the [State].”6

For information on university-based incubator programs in New York State, go to

http://www.nystar.state.ny.us/incubators.htm. For more information about incubator programs in general, go to National Business Incubator Association at www.nbia.org.

New York State currently has over eighty (80) incubators and technology parks.7 _{New York}

incubators have more than 600 tenants, and employ over 4,000 workers.8 _{Of all the} incubators in New York, about one-third have university/college associations, and about

one-fourth are high-tech companies.9

C.

International Opportunities

Incubators can also provide “soft landings” for foreign business. In today’s global economy, many companies are expanding into international markets. A foreign company entering the US market for the first time will likely need the special services an incubator can offer to assist with the transition. Those services can include:

 Language translation

 Language training

 Domestic market research and entry assistance

 Access to capital and potential funders

 Intellectual property protection assistance

 Help meeting government regulations

 Help with import/export laws

 Patent assistance

 Help obtaining business and driver’s licenses

 Cultural training

 Immigration & visa assistance

 Housing assistance

5 _{See N.Y.TAX LAW § 606 (McKinney 2013).} 6 _Id.

7 _{NYSTAR, Technology Incubators & Co-Location Facilities, EMPIRE STATE DEVELOPMENT, http://esd.ny.gov/}

nystar/TechnologyIncubators.asp (last visited Feb. 28, 2013).

8 _Id. 9 _Id.

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Some incubator programs also provide services for US companies to “soft launch” into foreign locations.

D.

Technology Parks

Technology parks are office communities that cater to entrepreneurs with support, and are usually affiliated with universities.10 _{The difference between a tech park and an incubator} is that tech parks offer a more permanent option for growing businesses. Incubators are only available to startups until their business is established. Usually tech parks strive to provide forums for park tenants to interact with the hosting university.11

The services, connections and partnerships can be vital to the continuing growth of the companies in a technology park. For example, the Tech Garden in Syracuse, New York provides early-stage technology companies with a competitive edge both in getting off to a good start as well as driving accelerated growth in the form of strategic relationships and connections in other parts of the state.12

Startup companies should look into whether a technology park is a viable option for the business because such locations can offer more than just a physical site. Technology parks are often fully integrated knowledge-based communities that provide services,

partnerships, and many amenities to support the success of companies and their employees. Tech parks also attract diverse technologies, which reflects the varied strengths of the university.

For more information on technology parks in New York, go to www.nystar.state.ny.us. For information on technology, or research, parks generally, go to the Association of University

Research Parks at www.aurp.net.

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While university-based research may result in a scientific and commercial interest, universities are rarely in the position to take such results to market.13 _{If a university} develops a product that has profit potential a startup company may wish to exploit that potential and will often come up with a specific, practical process or application for such research and wish to commercialize the results. If a startup company wants to use or commercialize a previously developed university technology, it can often negotiate a license to that technology with the university’s technology transfer office. Many

universities now have technology transfer offices dedicated to identifying research which has potential commercial interest and to develop strategies for how to license and market the resulting technology. Usually, licensing opportunities present in two different

10 _{Briggs & Watts, supra note 10. See, e.g., Rensselaer Polytechnic Inst., supra note 1.} 11 _{See, e.g., Rensselaer Polytechnic Inst., supra note 1.}

12 _{About Us, THE TECH GARDEN, http://www.thetechgarden.com/about-us/ (last visited Feb. 28, 2013).} 13 _{Mary Margaret Styer, Jack Kerrigan, & Andy Lustig, A Guide Through the Labyrinth: Evaluating and}

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scenarios: joint ventures between the university and the startup, or faculty startups, (sometimes called spin-offs).

Universities must usually work through technology transfers because federal regulation mandates that inventions developed as a result from federally-funded research must be dispersed for the public good.14 _{This is done through license agreements in which the} university permits a company to use all or part of the protected technology in exchange for some benefit—like costs, fees, and royalties—based on commercialization of the product.15 When contracting with a university, startup companies should consider the obligations considered under federal mandates like the Bayh-Dole Act.

A.

University Licensing in the Wake of Bayh-Dole Act

Under the Bayh-Dole Act, inventions that result from federal funding through non-profit businesses may remain under the not-for-profit’s ownership even though the product was invented through federal monies.16 _{Many universities are not-for-profit organizations, and} many receive federal funding for research and development. Because universities may retain ownership over their inventions, universities may also contract with third parties for a license over the invention. This gives third parties an opportunity to develop the

invention so it can be put into market. In effect, the Act encourages research and development of new inventions.

The federal government, however, retains “march-in” rights to license the invention to a third party, without the consent of the patent holder or original licensee.17 _{These rights} would typically be exercised when the government determines the invention is not being made available to the public on a reasonable basis, in other words, to issue a compulsory license.

The law specifically allows universities and other non-profit entities to retain the title in a federally funded “subject invention.”18 _{A subject invention is an invention that was}

conceived or created under a funding agreement.19 _{A university may only retain title if it} complies with the funding agreement, which obligates the university to report on any invention developed under the agreement within a reasonable time after the invention’s discovery.20 _{To qualify under this Act, universities must also}21_:

14 _{35 U.S.C. § 200 (2006).}

15 _{Id. See e.g., Rensselaer Polytechnic Inst., Frequently Asked Questions: What is the Bayh-Dole Act?, OFFICE OF}

TECH.&COMMERCIALIZATION, http://www.rpitechnology.com/?action=static&page=ResearcherFAQ #17 (last

visited Feb. 28, 2013).

16 _{35 U.S.C. § 202. This is a change in the law. Typically when something is invented as a result of government}

funding, the government gets to claim ownership over the invention.

17 _{Id. § 203.} 18 _{Id. § 202.} 19 _{Id. § 201(3).} 20 _{Id. § 202.} 21 _{Id. § 202(c).}

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 Elect, in writing, to retain title within two years after disclosing the invention;

 File a patent application before the statute of limitations;

 Agree that the federal government will “have a nonexclusive, nontransferable,

irrevocable, paid-up license to practice or have practiced on its behalf throughout the world;”

 Give periodic reports on the use of the licenses;

 Give credit to the federal government for funding the invention in the patent

application;

 Generally prohibit assigning any rights over the invention without government

approval;

 Share royalties with the original inventor;

 Use profits up to an amount “equal to 5 percent” of the facility’s annual budget on research, development, and education.

B.

University-Created Intellectual Property

If a business is interested in developing university-owned intellectual property, it will need to negotiate a license agreement with the university. When an invention is first disclosed to a university, the university will evaluate the invention, and decide whether it wants to retain rights to the invention or surrender it to the federal government according to the Bayh-Dole Act. In the vast majority of cases the university will choose to retain the invention, but the cost of patenting the item in order to protect the invention will loom in the background of this transaction—hence, the license.

Licensing an invention to an entrepreneur allows the university to benefit by

commercializing the product because the institution can contract to collect royalties from the license. It is possible, though, that a license may never produce a profitable product, and royalties are only as good as the products profits. The terms of the licensing

agreement must be negotiated so nothing is set in stone until the parties come to an agreement.

A university is primarily a research and educational institution. Technology transfer is a secondary mission for a university. Accordingly, any contracting university will usually attempt to avoid all potential liability that may arise out of a license agreement. The university will typically refuse to provide any warranties on the licensed IP; it will be licensed “as is.” In addition, the university will also insist that the licensee indemnify the university against any liability that may arise from the licensee’s commercial use of the licensed IP. Furthermore, the university will probably insist that a licensee maintain extensive insurance coverage, and that the university be named in the policy coverage to insulate the university from any potential liability arising from the agreement.

A university is typically interested in the prompt and diligent development of any licensed IP. This interest is governed both by the requirements in the Bayh-Dole Act’s, and the university’s independent goal of adding value to the results of research and making a return on IP investment. Universities might also be concerned that their licensed IP will be

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set aside for the development of a competing product. Therefore an agreement will likely have a section stipulating milestones that the licensee must reach in a timely fashion with respect to marketing the licensed IP or a cancellation clause.

C.

Faculty Startups and Spin-offs

A faculty startup is a new company established to do further research on or to

commercialize a faculty-created invention or other form of IP, which is licensed from the university. Faculty startups can be equally beneficial to the faculty and the university. Faculty members have a strong economic interest in developing and commercializing their invention. Furthermore, established industries may be less interested in pursuing the commercialization of university-created IP, because of its early development stage while faculty and students working on the project will have a better understanding of its potential. Therefore, it makes sense that a faculty member would want to keep his/her invention in the university setting as technology transfer.

D.

Conflicts of Interest

Conflict of interest issues will inevitably arise in the startup context and will need to be addressed by the parties involved. These issues typically occur when company-sponsored research is done in a university lab by a professor who also has a financial interest in the company, or when a professor who has a financial interest in a company is involved in collaborative research with the university. The professor in either of these instances is prejudiced because of his involvement with the business or because of his profession. This conflict presents a problem for true objectivity in research. Most universities require that conflicts like these be reported before any license or federal funds are given to develop the IP.22

A financial interest is significant if it amounts to more than $10,000 in annual income, or involves equity that is greater than $10,000 or five percent of the outstanding equity in a

company.23

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Role of Sponsored Research

If product development is in the early stages, a startup business may ask a university to sponsor research to assist in early development. Startups should also consider pursuing Small Business Innovation Research grants from the federal government in conjunction with a sponsored research agreement with a university. The Small Business Innovation Research/Small Business Technology Transfer Program (SBIR/STTR) is a funding program

22 _{See e.g., Conflicts of Interest: Federal Regulations, UNIV. OF CAL.,SAN FRANCISCO, http://or.ucsf.edu/}

osr/coi/laws/fedregs.html (last visited Feb. 28, 2013).

23 _{Grants & Funding Frequently Asked Questions, NAT’L INSTS. OF HEALTH, http://grants.nih.gov/grants/policy/}

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that encourages small businesses to explore their technological potential for profit.24 These awards give small businesses a financial edge to seriously research and develop their technology.

In order to participate in the SBIR/STTR program, small businesses must meet the eligibility criteria. SBIR participants must25_:

 Be independently owned and operated by an American citizen or permanent

resident (at least 51% ownership);

 Be a for-profit business;

 Employ the principal investigator;

 Employ less than 500 people;

Additional information regarding SBIR can be found at http://www.sbir.gov/applicants. Additional information about working with government is provided in Chapter 7 of this handbook.

Working with universities is a great way for a company to develop and/or acquire IP because it is cost effective, and the company can identify exactly what it wants according to a statement of work. The research project may be directed to general research and

development, or it may be targeted at a more tangible need to develop new products for commercialization. For example, the New York State Foundation for Science, Technology and Innovation provides an inventory of research and technology centers for small businesses.26

Typically, a private sponsor is seeking exclusive control over all developed IP when he or she sponsors a small business research and development project. Universities, however, are bound by policies that sometimes prohibit this type of agreement. Therefore, a potential sponsor should look into university policies and federal regulation when considering this course of action.

In order to create a research project, the parties will need to negotiate a sponsored research agreement. This agreement will outline the scope of the research to be performed, the compensation to be paid, the general terms of IP ownership, research deliverables, and other contract terms. The points of friction that will invariably arise will most likely be the ownership and licensing rights of developed IP, and publication rights.

24 _{The SBIR Program, SBIR/STTR, http://www.sbir.gov/about/about-sbir (last visited Feb. 28, 2013).} 25 _{SMALL BUSINESS ADMINISTRATION,SMALL BUSINESS INNOVATION RESEARCH (SBIR)PROGRAM 17 (2012), available at}

http://documents.scribd.com.s3.amazonaws.com/docs/6c90n43wxs1wmoxi.pdf?t=1351707349.

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B.

Ownership of Research Results

The Bayh-Dole Act prohibits the university from assigning to a private sponsor the title to intellectual property developed in a program using federal funding.27 _{If a school is not} interested in IP, the IP must be transferred to the government, not a private sponsor. Because funding for university research typically comes from multiple sources, most universities take the position that federal funds are normally involved in every project, thereby making the Act applicable. Therefore, as a practical matter, a university will never agree to assign IP to a sponsor, even a private one. The sponsor will need to negotiate an option to license the research results once they are developed.

Certain kinds of industrial sponsored research, or an agreement to certain terms in the research agreement, can destroy the tax-exempt status of bonds that finance the buildings in which the research is conducted. Generally, unless research facilities were not

constructed with tax-exempt bond money, the university may not give an exclusive license to a private sponsor and pre-negotiate the royalty rate for any license to the resulting IP.28 Universities can, however, give sponsors the right to negotiate for a license first at the time the technology is ready for licensing.

C.

Publication Rights

Universities are forums for the academic community to share knowledge, usually through publication. In general, private sponsors will want to keep any sort of finding under wraps until he or she can secure property rights in that item. Because of this, private sponsors and university goals often conflict. The resolution for this type of conflict is usually a delayed publication. A typical delayed scheme postpones publication for sixty (60) days, but can go as long as ninety (90) days for patentable findings.29 _{In order to prevent} confusion and ensure notification, this type of provision should have its own section in a sponsor agreement.

In addition, universities also have to contend with export control regulations. Export controls are the rules limiting the transfer of technology because of national security and foreign policy concerns. In short, these rules prohibit certain technology from being sold or transferred to particular countries, citizens of specific countries, or for specific uses.30 This becomes a problem because many universities have a large portion of foreign

students. If a research project at a university involves technology that is subject to export

27 _{35 U.S.C. § 202.}

28 _{See I.R.C. § 501(c)(3) (2006).}

29 _{See e.g., Berkeley Research, Policy Guidelines Governing Openness and Freedom to Publish, UNIV. OF CAL.,}

BERKELEY, http://vcresearch.berkeley.edu/research-policies/policy-guidelines-governing-openness-and-freedom-to-publish (last visited Feb. 28, 2013). This would give the sponsor sixty to ninety days to get a provisional patent.

30 _{See generally U.S. Export Controls on Information, Commodities, and Services, COLUMBIA UNIVERSITY,}

www.columbia.edu/cu/compliance/docs/international_research/Keylawsandregulations/index.html (last visited Feb. 28, 2013).

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controls, students from certain countries could be barred from the project. “Fundamental research” is excluded from this prohibition. Fundamental research is “basic and applied research in science and engineering, where the resulting information is ordinarily

published and shared broadly within the scientific community.”31 _{Most research done for a} university will fall under this exception unless the research is transferred from a private sponsor to the university and the private sponsor claims publication prohibitions outright, or the university accepts publication restrictions at the outset of taking on the research project.32

There are many ways in which a fledgling company may profitably work with universities and, in many cases, obtain rights to unique IP or valuable know-how. It will be important to negotiate a carefully considered agreement that takes into account the needs of all parties

31 _{15 C.F.R. § 734.8 (2013).} 32 _Id.

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National Business Incubator Association

www.nbia.org

New York State Foundation for Science Technology and Innovation (NYSTAR)

www.nystar.state.ny.us

Small Business Innovation Research/Small Business Technology Transfer Program (SBIR/STTR)

www.sbir.gov

The Association of University Research Parks

www.aurp.net

University based Incubator Program Information http://www.nystar.state.ny.us/incubators.htm