Senior Licensing Associate
"Everybody always wants to know what's next. I always
say that what I can imagine is rather dull. What I can't imagine is what
- Arthur Schawlow, Stanford physicist and Nobel Laureate
There seems to be a rapidly increasing need for university technology to be commercialized and permit our industries to remain competitive in the global markets. Yet the road from the university laboratory to the marketplace is rarely a straight shot. In truth, it can be long and winding, marked with detours and confusing signals but despite all the roadblocks, the impulse to turn a bright idea or invention into a practical tool remains strong and intensifies further.
Many of Stanford's successful technology transfers have been told so often that they have become inextricably woven into the fabric of the university's history. It was at a New Year's Eve party in 1981, for example, that Stanford cell biologist Lubert Stryer and U.C. Berkeley microbiologist Alexander Glazer sketched out a joint research plan to use the phycobiliproteins found in marine algae, the subject of Glazer's research, as fluorescent markers, the subject of Stryer's research. Six months later, their invention was perfected and two companies had licensed the technology, which is now an important tool for cancer detection and blood screening, among other things. And this is only one among many such successful tales.
Yet the way the process actually works, and why it works so well at Stanford, is not nearly as well known. So we have taken the opportunity, on the occasion of our 25th anniversary, to reflect on our first quarter century: to describe the systems and processes that have worked for us, to offer a few of the secrets of our success, and to share the stories of some promising new technology transfers emerging at Stanford.
When we celebrated our 25th year in 1995, we had evolved from a one-person pilot program generating $55,000 from a mere three technologies, to a full-fledged, 20-person office managing more than 1100 active inventions licensed to companies all over the world - 220 of which were producing royalty income totaling $44 million dollars.
In truth, we've been lucky. The extraordinary quality of Stanford scientists, the vision of Stanford's administration in the 1970s, the university's location in Silicon Valley and its relationships with industry, and the Bayh-Dole Act of 1980 granting universities the right to the results of their research all have contributed to our success.
But we've made some of our own luck, too, by hiring dedicated and insightful licensing associates, by creating innovative policies and processes rather than following established models, and by actively pursing promising new inventions.
In the process, our organization has become one of the models for university licensing offices. We have made it a practice to offer advice and assistance to our peer organizations around the country and in other parts of the world in hopes of helping other institutions in their efforts. We continue to do so as much as possible, for we believe that the successful transfer of technology from academia to industry is one of the essential elements that fuels our nation's prosperity, and thus ultimately benefits us all.
The Case for Technology Licensing
Should a university undertake the commercial activity of licensing its inventions for financial gain? Is this practice compatible with a university's mission of teaching and research or could it directly conflict with that mission?
These questions have been intensely debated at many universities including Stanford over the past twenty-five years, and Stanford has done a lot of soul searching in the process. Some people believe that a university should never engage in commercial endeavors, while others are all in favor of it - aiming to maximize the monetary return from research. At Stanford, we believed from the beginning that it was crucial to arrive at a compromise gained through dialogue between the various factions.
The pros and cons of licensing inventions
In short, there are three primary arguments against licensing university inventions.
First, it could promote conflicts of interest, tempting faculty to slant their research in the direction of commercial return. In this case, basic research might suffer because applied research tends to be more easily licensed for immediate commercial use. Graduate student researchers might be exploited by being steered into commercially promising projects as cheap labor for sponsoring companies. The university researcher's traditional role to disseminate new knowledge by publication might be subordinated to the secrecy requirements of the patenting process, or to the sponsor's desire to maintain secrecy for competitive advantage - both of which clearly would have a negative effect on the free dissemination of scientific research.
Second, since licensing imposes financial burdens on industry in the form of license fees and royalties, products may become more expensive, diminishing our country's competitiveness.
Third, since most scientific research is funded by taxpayers through federal funding, one might expect that products developed from such research should be available to taxpayers free of charge.
There are, however, many more arguments in support of licensing university inventions.
First, while the federal government has traditionally been the major sponsor of basic research conducted in universities, the current trend is to limit such funding. Universities thus are faced with the need to develop alternate sources of funding or to curtail their research activities. Licensing income can be a critical source of much-needed unrestricted funding.
Second, these constraints on university research funding come at a time when global competition makes innovation the key ingredient for competitiveness in most industries. American innovation has historically been provided by established industrial companies with large research and development capabilities. Today, however, innovation is increasingly provided by small but dynamic companies established for the sole purpose of developing a new idea or technology. In contrast to the large companies, these emerging companies do not have the cash reserves needed to generate new ideas and technologies in their own research laboratories. Instead, they raise the capital to develop ideas which were generated elsewhere, often in universities. As a result, universities have become an ever-more important source of the new ideas needed by American industry to stay competitive.
Third, licensing often is the only way a new invention will ever become a product. University inventions are typically in the very early stages of development - nowhere close to commercial reality. A licensee thus must be prepared to invest significant resources in further development, product design, applications engineering, and quality testing before bringing it to the market. Unless a licensee is assured of a proprietary position in the marketplace that will enable it to recoup its investment, the company has little incentive to pursue the project.
We should note that there are clearly some inventions that would be developed and widely used if put into the public domain. A good example is the basic gene splicing (recombinant DNA) patents by Professor Stanley Cohen of Stanford and Professor Herbert Boyer of the University of California. This tool gave rise to the entire biotechnology industry, and would certainly have been developed even if Stanford had not pursued patents and offered licenses. However, such a free-for-all might quickly have restricted its widest possible use because some important follow-up applications might have been patented by the first companies working in the field, leaving nothing for others. In this case, we demonstrated that even licensing a basic tool is no impediment to its widespread use if licenses are made available on a reasonable basis. Indeed, by the time the patents expired in 1997, there were over 400 licensees of this invention. In addition, patenting and licensing this important new technology had the advantage that licensees could be held to certain standards and safeguards as a condition of receiving a license.
Fourth, the possibility of a financial return may create some incentive for the academic researcher who will share in the profits. Scientists often are reluctant to spend a great deal of time on non research-related tasks. A financial incentive sometimes encourages researchers to make the extra effort to disclose their inventions, assist with patent preparation, and provide support to the licensing personnel, patent attorneys, and licensees in the evaluation, development, and patenting of the new technology. Often even more important is the fact that shares of all licensing income are paid to the inventor's department and school. This usually enhances a researcher's standing among his or her peers who may benefit from such additional funds.
Other reasons to license university technology include strengthened relationships with industry, which can provide productive cooperative arrangements for researchers; jobs for graduates; and new sources of research funding. Some researchers also find that exposure to real world applications provides them with valuable knowledge and stimulates their thinking in new directions.
The role of universities as seedbeds for industrial and economic development is gaining wide-spread recognition. Stanford clearly has been a special example of this for decades, having contributed significantly to the development of Silicon Valley and, with the University of California, the biotechnology industry. The university has developed and nurtured strong ties with industry, yet it has preserved the academic integrity and freedom that are instrumental to stellar scientific work.
At Stanford, we believe we have demonstrated that the case for university licensing of technology is a convincing one. At the same time, universities must be careful to prevent licensing from interfering with their primary missions of teaching and research. Practical safeguards and controls can prevent conflicts of interest, protect the interest of graduate students and other researchers, preserve the right of free publication, and maintain freedom of inquiry without undue industrial influence. In short, when done right, technology licensing can provide tremendous benefits without causing conflicts of interest.
Some Special Challenges of Licensing University Inventions
While our experience at Stanford clearly illustrates the rich benefits of technology transfer, we have discovered some circumstances and challenges that make licensing university inventions much more complicated than licensing corporate inventions.
The first challenge is the breadth of research in which a university is likely to be engaged. A commercial company generally concentrates its efforts in a relatively limited area, which its licensing personnel understand well. At universities, licensing personnel must comprehend and manage inventions in an enormous range of technical industries. At Stanford, for example, we have licensed inventions in a wide variety of fields, from biotechnology to materials science to computer software to radiology to electronic music.
A second challenge is that academic scientists are far more independent than industrial researchers - yet they must be willing to take on all the same responsibilities. The inventor must be motivated to file an invention disclosure, detailing the history of the invention, co-inventorships, publications, research proposals, sponsorships, and possible applications. He or she will need to work with the patent attorney to provide background material, review drafts, and execute the necessary documentation. And potential licensees often ask the inventor to make additional demonstrations, provide more detailed information and the most recent experimental results, or attend meetings to educate their own people.
A third challenge results from the fact that academic researchers' foremost interest and focus is to gain new scientific knowledge and publish the results of their research as soon as possible. As a result, our experience at Stanford has shown that some inventions can no longer be patented or licensed by the time they are disclosed to us because proprietary aspects of the invention have already been published or presented in meetings.
A related issue is that researchers often have close contacts with colleagues in other institutions or industry with whom they collaborate and talk freely about their ideas and work in progress. This can cause problems in determining the actual inventors on a project. In cases in which scientists from industrial companies have enjoyed frequent access to research groups at Stanford, company attorneys have claimed the inventions as well, complicating negotiations to the point where the inventions could no longer be patented or licensed.
In working with academic inventors, it is particularly important to clarify the distinction between co-authorship and co-inventorship. For publication purposes, it is traditional practice to list as co-authors everyone who has worked on a project. In filing a patent, however, only inventors who have made a distinctly inventive contribution may be listed or the patent may not hold up to challenges later. And since Stanford inventors receive a share of all royalty income, it is important to carefully determine each co-inventor's creative participation. Finally, when co-inventors from other universities are involved, an inter-institutional agreement is created that specifies which university will handle the licensing and how the income will be split between the universities.
A fourth challenge is that university inventions typically are far from full-fledged, commercial products. In many cases, their feasibility has not even been proven experimentally when the disclosure is filed. As we mentioned earlier, a licensee must generally spend significant resources and time to develop them. On the other hand, a company taking a license at such an early stage may have a greater competitive advantage and, often, the inventor will cooperate with the licensee in such development. Such a relationship can be beneficial to both, but the university and the inventor must take steps to ensure that no conflict of interest results.
Finally, our primary objective at Stanford has been to get an invention into widest possible use, rather than to seek maximum financial return. In many cases this has meant granting non-exclusive licenses to several companies, instead of a more lucrative, exclusive license to one.
In spite of such challenges, we have demonstrated over 25 years that university licensing can generate considerable financial returns that can be plowed back into research - without jeopardizing academic freedom or scientific independence. Furthermore, as we describe later in more detail, licensing activities can produce great benefits to the public by leading to new products and services, creating jobs by expanding existing or forming new companies, increasing our economic competitiveness, and providing the sponsors of research with a healthy return on their investment.
A Look Back: a Brief History of OTL
A pilot program
Starting a technology licensing office from scratch is not an easy job. At Stanford, it took a man with the vision and imagination of Niels J. Reimers to recognize the possibilities, formulate a realistic plan, sell his idea to Stanford's administration and faculty, line up the necessary financial commitments, and put his plan into operation.
In 1968, Reimers joined Stanford as Associate Director of its Sponsored Projects Office, which had the responsibility for negotiating contracts with research sponsors, including the U.S. government. This office received invention disclosures from researchers, as required by all research agreements, and transmitted them routinely to the sponsoring government agencies.
Because he had been an engineer and contracts manager in a high technology company before joining Stanford, Reimers recognized that many of these inventions might be of commercial interest. And, he believed, if they could be licensed to industry, they might produce a financial return that could support further research. Since the early 1950s, Stanford had maintained an arrangement with an outside company that specialized in licensing inventions from academic institutions to industry. It could choose to handle or reject any invention submitted to it by Stanford - an arrangement that had produced a total return to Stanford of less than $5,000 in more than 15 years. Reimers was convinced there was a better way.
First, he surveyed existing programs in other universities, including the University of California, the University of Wisconsin, and MIT. Many universities generally staffed their licensing offices with attorneys who prepared and filed patent applications, and then tried to license the patents. The results did not seem impressive. Reimers therefore began designing a new model. He judged that there were four key ingredients for success, and he made these the cornerstones of his proposed program. Stanford's Office of Technology would:
He proposed a pilot licensing program in the early summer of 1968. It provided for his own half-time commitment and for a sinking fund of $125,000 for a period of up to 10 years for initial patent, travel, and marketing expenses, and for one assistant. Reimers spent several months presenting his idea and selling it to the university administration, including the president, the school deans, the controller, the directors of development and sponsored projects, and many faculty representatives. (It is worth noting that in the 1960s and '70s, Stanford's administration was significantly smaller than it is today, and he had easy access to all the decision makers.) Once Reimers received full approval, he started operations later that same year.
When the pilot program was reviewed one year later, it had already produced an income of $55,000 - more than 10 times the amount received from over 15 years of licensing through an outside corporation. This easily convinced the university that the program was worth continuing. With the support of then-provost William Miller, the Office of Technology Licensing was established officially on January 1, 1970, with Reimers as its full-time Director and sole Licensing Associate, and one assistant, Sally Hines, who is still with OTL today.
Building on success
For its first four years, the new Office of Technology continued as a two-person operation. We consistently produced income exceeding our operating budget, with each budget dollar initially producing about two dollars of income from licensing. In these first years, we received, on average, over 50 new invention disclosures per year, licensed 28 of these, filed 40 patent applications, and received 19 U.S. patents.
As our workload increased to approximately 150 active inventions, we realized that further growth would be impossible without another licensing associate. As a result, in 1974-75, a second licensing associate was added, first on approval for a limited term; then as a permanent staff member. The office would remain at this staffing level for over five years.
The birth of biotechnology
A pivotal event occurred in 1974, when Niels Reimers read in the New York Times about a new technique called "gene splicing," invented jointly by Professors Stanley Cohen of Stanford and Herbert Boyer of the University of California. He recognized that this was likely to offer a promising licensing opportunity, and persuaded the inventors to let him try to patent it. It wasn't an easy process - there was no precedent for such a patent, and there were prevailing concerns over the safety of recombinant DNA - but Reimers persevered.
By August 1981, OTL started offering special, non-exclusive licenses to the new recombinant DNA technology. While there wasn't an immediate rush of interest, word spread through media coverage and our own intensive marketing efforts, and by the deadline - midnight on December 15 - Federal Express trucks were lined up outside the doors to OTL. When the deadline passed, 73 companies had signed agreements. By the end of that fiscal year, August 31, 1982, license fees from the new DNA technology had produced over $1.4 million in income. It is interesting to note that during the same period, all other technologies licensed by OTL together brought in just $1.1 million. While the percentage of income produced by the recombinant DNA licenses subsequently decreased to about one third of total income for the next several years, it then quickly overtook all other licensed technologies as the biotechnology industry caught fire.
The Bayh-Dole Act
Another significant event took place in 1980, when the U.S. Congress passed Public Law 96-517, the Bayh-Dole Act, which provided that rights to inventions resulting from government-sponsored research at universities would be automatically allocated to the universities. Previously, it had been necessary to petition each sponsoring agency, and while many such petitions were granted, there often were considerable delays that extended beyond patent filing deadlines, preventing many invention disclosures from being licensed. The Bayh-Dole Act also granted the government a royalty-free license for its own use and gave it "march-in rights"- the right to demand that other licenses be issued if current licensees did not serve the market well. It also included stipulations for preference for small businesses. Finally, this act required that inventors receive a share of income, although the share was not specified. In any event, this new law had a powerful effect on university licensing efforts. At Stanford, the number of invention disclosures immediately doubled.
A growing proposition
This growth of new business prompted us to add two more staff members during 1980-81: one new licensing associate and a word processor. The office census remained at 12 for three more years. Then it began increasing slowly, year by year, to a total of 22, of whom 11 were full-time licensing associates. More recently, the number of licensing associates has been reduced to 7, yet today each licensing associate is directly supported by a full-time assistant in order to reduce time spent on routine chores and formalities, and to allow more time to focus on the critical aspects of licensing.
Like that of any enterprise, our performance at OTL is based on the raw material available, the resources we can apply to developing this raw material into products and marketing them, and outside factors we can not control, such as the business climate. Viewed from this perspective, Stanford inventions are the raw material, our licensing skills and efforts are the resources we apply, and the licenses that lead to commercial sales and generate royalty income are the products we generate.
We thus would expect our performance to correlate with the number of invention disclosures, which, in turn, would depend on available funding for research at Stanford, as well as on related factors such as incentives for inventors and how well OTL is known and regarded by Stanford researchers.
In fact, the growth rates of licensing income and of new licenses are significantly higher than that of total research funding. At the same time, the rate of invention disclosures per year has remained rather flat since the Bayh-Dole Act in 1980 and since then has shown only modest growth with considerable fluctuation from year to year.
An increase in licensing income
Much of the income generated by OTL since 1981-82 has come from the recombinant DNA patents jointly owned by the University of California and Stanford, the licensing program for which is handled by Stanford. Still, licensing income for non-recombinant DNA licenses has grown in excess of 15% per year, more than twice the rate of growth of research funding (at 6%). Total licensing income has grown at over 20% per year, more than three times the rate of growth of research funding.
New licenses on the rise
The number of new non-DNA licenses signed every year has grown at 7% per year, almost the same as the growth rate of research funding (6%). This might indicate that our performance is limited by the available raw material, i.e. invention disclosures. However, total new licenses have increased at almost twice that rate, at 11% per year, which suggests that we have improved our performance, completing more license agreements with a fairly constant supply of inventions.
A snapshot of our performance today
The following summary provides a view of our current performance:
In our fiscal year 1995-96, we signed 136 new licenses, 92 of which were non-DNA licenses. During this time, we filed 83 U.S. patent applications and received 53 U.S. patents.
Total income in 1995-96 amounted to over 10% of the university's total research funding of $373 million (excluding the Stanford Linear Accelerator Center). Non-DNA income alone represented over 3% of total research funding. Income per licensing associate amounted to over $6 million ($2 million per associate for the non-DNA portion of income). At the same time, OTL's expense budget has decreased to less than 5% of its total income. Today, each dollar spent produces over $20 in total income, of which $7 is non-DNA income.
These numbers produced meaningful benefits to the university. For example, distributions of licensing income to the School of Medicine amounted to more than $5 million for the year, with equal amounts going to the appropriate departments in the school. In addition, we contributed $3 million to a newly-established OTL Research Incentives Fund, which provides research funding to Stanford faculty for interesting projects.
A reasonable return on investment?
The Stanford research community produces one invention disclosure for every $2 to $2.5 million of research funding. For the last 15 years, we have received an average of three to four new invention disclosures every week, for a cumulative total of more than 3200 disclosures. Of this total, we have licensed over 800 inventions (plus over 400 licenses for the DNA patents alone), approximately one in four. Of these 800, about one-third produce income, but of these, only 22 inventions produce at least $100,000 per year.
These figures suggest that we spend a lot of time and effort on many unproductive inventions while reaping significant income from only a small fraction of all inventions disclosed. Yet should we change our charter to avoid spending time on so many non-productive invention disclosures? If our only objective was to make as much money as possible, the answer clearly would be yes. While we endeavor to maximize licensing income in order to generate as much unrestricted funding as possible, there are some important reasons why it is our policy and practice to explore the potential of all invention disclosures.
First, and perhaps most important, since university inventions are generally far ahead of the state-of-the-art of industrial practice and commerce, it is difficult to make meaningful value judgments so early in the game. By concentrating only on the easily perceived winners, we would invariably make some critical mistakes. The original patent and license for FM Sounds provides the perfect example. For four years, between 1971 and 1975, we tried to interest U.S. companies in Professor John Chowning's invention - an algorithm that would eventually revolutionize the electronic music industry by creating a new kind of music synthesizer. Finally, an engineer from Yamaha understood the potential of this invention, and the company was granted an exclusive license to manufacture a synthesizer based on the algorithm. Even so, Professor Chowning spent another seven years collaborating with Yamaha to develop the invention before it could be marketed. No one would deny that this was time well spent, however, for FM Sounds carries the distinction of being the second most lucrative invention ever licensed by OTL.
Second, as a department of the university, we feel obligated to lend our services to all members of the Stanford community - researchers, faculty, staff, and students - who have inventive ideas that might be commercialized.
And finally, by quickly discarding inventions with dubious commercial potential, we might well discourage other researchers, resulting in a greatly reduced flow of invention disclosures and the likelihood that we would miss the next great invention.
Financial gains are not the only measure of success, however. Stanford's Office of Technology Licensing has become a model for many other institutions; we have advised and assisted other university licensing offices, and seen many of them adopt our model.
We have also been instrumental in the development of new technologies and companies by recognizing the potential of important inventions and promoting them - even in cases in which the inventors themselves were skeptical. We have made it possible for start-up companies to acquire licenses by flexibly and creatively tailoring license agreements. In some cases, we have encouraged inventors to set up their own companies and informally advised them on business strategy and venture capital funding. We established the OTL Research Incentives Fund and, most recently, we established a Graduate Fellowship Fund into which will go proceeds from the sale of equity in companies obtained as part of licensing deals.
The next chapter
We believe the future looks bright, despite the fact that the expiration of the recombinant DNA patents in December, 1997 caused a dramatic loss of over $30 million in revenues per year. Our aim is to keep other sources of income growing at a reasonable rate until the next new "blockbuster" technology emerges to make another great contribution. We likely will have to change some of the ways we do business, for example, by taking more equity in growth companies as part of licensing agreements, by creating new mechanisms to further develop promising inventions before licensing them to industry, by improving licensing processes, and by making use of evolving information sources and new means of dissemination, such as the Internet. Still, in our own tradition of developing systems and processes that are as innovative as the ideas we market, we are confident that we are up to the challenge.
Taking an Invention to Market
Universities have typically organized their technology licensing efforts around administrative or legal models. In the administrative model, licensing efforts are typically assigned to administrators who are expected to fit licensing into a wide range of administrative responsibilities. The legal model, on the other hand, reasons that licensing is really about securing patents for inventions; in this model, licensing offices are generally staffed by patent attorneys.
At Stanford, the model that Niels Reimers created assumes instead that successful licensing hinges on the successful marketing of inventions, while patenting and administrative functions can be effectively handled by outside patent attorneys and support staff. We therefore look for licensing associates with degrees in science or engineering, as well as some industry experience - preferably in marketing - and prior licensing experience. They must be able to communicate effectively with academic researchers, executives and scientists in industry, patent attorneys, and government officers of sponsoring agencies. They must also be able to work independently, be effective deal-makers, and be capable of managing a project from beginning to its successful conclusion.
Licensing associates at Stanford thus are assigned complete responsibility for specific inventions, subject only to general guidelines and policies. We believe that such decentralization of the decision-making process is a critical component of successful technology licensing. Indeed, we have observed that highly centralized models, in which even routine decisions are subject to review and approval by university committees, deans, and vice presidents, can cause serious delays in the process and even prevent successful deals.
While it has always been our practice to assign responsibility for a disclosure to a single licensing associate, we have instituted some pathways for improved inter-associate communications. For example, groups of associates and assistants have been drawn together into teams, which meet weekly to discuss interesting or unusual cases, voice concerns or problems, share noteworthy developments, and lend one another support. In addition,the licensing staff meet each month to briefly review the status of all active licenses in active negotiation. With seven licensing associates handling a total of over 1100 active inventions, effective inter-office communication can be challenging, but these methods have proven to be effective ways of keeping everyone apprised of important information.
The licensing process at Stanford is comprised of several phases, from receipt of an invention disclosure to license and commercial use. We have outlined these phases below in order to provide a glimpse into how the Stanford model works.
Disclosing the invention
The process of licensing starts with an invention disclosure. Such disclosures are typically required by all research sponsorship agreements, including those sponsored by governmental agencies. Researchers fill out a one-page form detailing the title of the invention, inventorship, sponsorship of the research, dates of conception, reduction to practice, and publication (if any) or other public disclosures. This is accompanied by any available descriptions of the invention, such as manuscripts of publications or reports to sponsors.
Every invention disclosure that arrives at OTL is assigned to a licensing associate who manages the disclosure through the following steps.
Evaluating the invention
During this phase, the licensing associate must become thoroughly familiar with the invention in order to understand its novel aspects and potential applications. The inventor can usually provide much of this information, but the licensing associate also seeks input from outside sources - both within and outside the university - often under a confidential disclosure agreement. Typically, we need to discern the uses and applications of the invention, its relationship to existing technology, competitive advantages, novelty, likely markets, and companies active in the field that might be interested in licensing. This process of information-gathering starts immediately after the original invention disclosure is received, usually before a patent application is filed.
After this initial evaluation phase, the associate will approach potential licensees, telling them generally about the invention without giving away any secrets, for example, by explaining what it can do without telling exactly how it does it. We have found that it is important to offer examples of likely benefits in order to get serious interest. Those companies interested in evaluating the invention then are offered a confidential disclosure agreement, giving them the right to evaluate detailed and complete information on the invention but prohibiting them from making any commercial use of it.
Sometimes an inventor may have a preference for a particular company or even an aversion toward a company interested in taking a license. We always seek an inventor's input, and will gladly follow his or her preferences when possible. However, it is our responsibility to make sure that other legitimate interests are safeguarded, including the interests of the sponsor, the co-inventors, the graduate students working for an inventor, and the University. For this reason, Stanford's policy is to assign autonomy in the licensing process to OTL. The licensing associate is thus the decision maker, supported by the Director of OTL, and subject to all guidelines, policies, and official approval processes that apply.
Negotiating a license agreement
If a company is seriously interested, the next step is to begin negotiating a license agreement. If the full value of the invention is still not well understood or cannot easily be defined in a meaningful way, the associate will review prior license deals in order to develop a proposal. In some cases, the prospective licensee will come to the bargaining table with a clear idea of the deal it expects.
Negotiations may be complicated by the fact that companies often expect clauses in the licensing agreement that are considered reasonable in commercial dealings, but unacceptable to universities. For example, potential licensees may request a guarantee that the invention does not infringe on any outside patents, require that the university keep all information about the license confidential, or demand first rights to future inventions in the same field. We never accept such provisions at Stanford, because we do not have the capability to determine whether competing patents exist; we cannot prevent researchers from talking freely to other researchers or publishing scientific papers; and we cannot commit future inventions that may be made by other inventors or under different sponsorship.
Licensing associates are free to be creative in negotiating each license. A typical license agreement requires some up-front license issue fee, some earned royalties on products sold, and often minimum annual payments to keep the license in operation. In some cases, there are provisions for milestone payments or for issuance of company shares (equity). And the licensee almost always reimburses the university for all patent expenses, particularly in the case of an exclusive license. Yet these are just the general guidelines. Our objective is to arrive at a mutually beneficial license agreement, i.e. a win-win deal, so the licensing associate may propose a variety of options. For example, a start-up company usually has limited cash, so we might minimize the license issue fee in return for a higher earned royalty or a deferred milestone payment or some equity in the company.
Taking an option
In some cases in which a company may believe a license is premature, it may want to negotiate an option, reserving the right to a future license. This can be especially attractive if the invention is far ahead of its time; for example, if even the experts in the industry cannot judge its feasibility, or potential uses and markets, or the time frame and resources needed for its commercial development. We generally obtain a commitment for reimbursement of patent expenses incurred during the option period.
Patenting the invention
At Stanford, we typically apply for a patent only if there is a good indication that the costs will be recoverable, either from a licensee or in return for an option. This rule is not absolute, however, since we may decide to file a patent application on inventions that we consider extremely important, even if no license deals or option agreements are in negotiation as yet. This was the case with the Cohen Boyer gene-splicing invention.
If it appears important to patent an invention, the licensing associate typically initiates patent filing during negotiations with potential licensees, usually making patent applications available to the negotiating companies under a confidential disclosure agreement. Because we handle all patent activities through outside patent attorney firms, the licensing associate can select the best qualified patent attorney for each case. The inventor is usually needed to provide detailed information and current experimental results in order to get the best possible application drafted and filed, and later to provide answers to the patent examiner's questions.
We should note here that not all Stanford inventions are patented even after they are licensed. For example, it is not usually necessary to file a patent for biological materials when the cell line producing the biological material is controlled by the researcher. In this case, the license agreement simply forbids transfer of the material to any other parties and requires its return or destruction should the license be terminated.
Other non-patented technologies we license include software that is under copyright, as well as emblematic ware carrying Stanford logos and trademarked symbols for use on products such as t-shirts and baseball caps.
Managing the relationship
Once licensing negotiations are concluded and a license agreement is executed, the licensing associate remains responsible for the future of the licensing relationship. This entails monitoring the licensee's performance, receiving reports and royalty payments, and overseeing the distribution of funds to the inventor, the inventor's department, and the inventor's school - according to Stanford's formula.
In some cases, the licensing associate may contact the licensee to share new information, discuss lagging sales performance, urge sub-licensing, or discuss improvements. In the last few years, we have also started to verify royalty reports and payments through audits of selected licensees by independent accounting firms. The results have demonstrated that there are often inadvertent discrepancies, and that licensees usually are eager to improve their internal processes in order to live up to their contractual obligations. Initiating and monitoring such auditing is at the discretion of the licensing associate.
Finally, perhaps years later, if vital circumstances have changes, the licensing associate may re-negotiate the agreement, or part of the agreement, in the interest of sustaining a mutually beneficial relationship.
At Stanford, we have found that our focus on marketing inventions and successfully negotiating licensing agreements means that we sometimes neglect after-the-fact monitoring and administrative tasks. As a result, we have implemented systematized procedures such as automatic invoicing and tickle reminders of forthcoming deadlines or milestones. In addition, a full-time licensing assistant provides each licensing associate with much-needed support.
While it is relatively easy to measure OTL's performance in direct financial terms, it is more difficult to characterize the less tangible benefits of technology licensing. Nonetheless, technology licensing has provided such valuable benefits - not only to Stanford and Stanford inventors - but also to industry generally, to the Silicon Valley and the Bay Area specifically, to the government, to the national economy, and to the general public.
Stanford obviously derives direct financial benefits from licensing technology generated by its researchers to industry. OTL's 1995-96 income of $44 million dollars represented over 10% of total research funds spent by Stanford. Moreover, licensing income typically has no strings attached, and can be used for pioneering research that might be difficult to fund otherwise.
Licensing activities also can lead to close relationships between researchers and companies that not only license the inventions, but often provide research sponsorship or outright gifts and grants for basic research as well. Such relationships benefit Stanford students, too, and can lead to job offers for graduates. Finally, the world-wide recognition OTL has received for its leadership in the licensing of university technology has contributed to Stanford's reputation and renown.
Stanford inventors profit directly by receiving a one-third share of all net royalties received on their licensed inventions. Many inventors choose to sign their share over to a research account, thus lending their own financial support to basic science and research. Inventors also have said that the successful licensing of their inventions contributes to their work by providing meaningful feedback and evaluation from the corporate and industrial worlds.
Industry is well aware of the benefits of licensing university technology. Companies gain access to the newest scientific advances by some of the world's most talented scientists and engineers. Indeed, many companies owe their very existence to technology generated at universities. Stanford research has produced many hundreds of such spin-off companies, and several dozen more are formed every year.
Silicon Valley/Biotech Bay clearly has been nurtured by Stanford research, becoming perhaps the primary high technology area in the world. As other areas aim to create similar technological "hothouses," Stanford's leadership and, in several cases, direct support, have benefited many companies in a variety of geographic areas.
The U.S. Government, which pays for approximately 85% of research at Stanford, is another significant beneficiary. Indeed, in the current political climate in which politicians increasingly favor cutting funding for scientific research, research is sometimes portrayed an expense without much return. In fact, the taxpayer's investment in Stanford research has produced an enormous return - one that greatly exceeds the government's investment. The following estimates illustrate this.
Tax revenues from licensed Stanford technology
Licensing income in Stanford's 1995/96 fiscal year amounted to $44 million dollars. If we assume an average royalty rate of 1%, this corresponds to a business volume of approximately $4 billion dollars. We know that the recombinant DNA business alone is worth $4 billion, not including use by and sales to the government (which has a royalty-free license); therefore we can add another $500 million dollars, representing the business volume corresponding to $12 million dollars of non-DNA licensing income calculated at a conservative 4% royalty rate.
That business volume represents the work of perhaps 40,000 employees, if we calculate one employee per $110,000 of business. If each employee pays an average of $7,500 in federal taxes, the revenue to the government is $300 million. The taxes that business pays on its $4.5 billion (at 1/3 of 10% PBT) adds another $150 million, for a total federal tax revenue of $450 million. This represents almost 1.5 times the government's funding of research at Stanford.
Tax revenues from Stanford technology used without license
Furthermore, in contrast to licensing income, which ceases after patent expiration (a maximum of 17 years), taxes are paid as long as a technology is used by businesses and their employees. For example, the government continues to receive taxes paid by employees and businesses on the more than $4 billion dollars of recombinant DNA products, even though the patent expired at the end of 1997.
Taxes also are paid by employees and businesses on income from:
While income from these sources is not reflected in the above estimates, it definitely contributes to the government's return on investment through direct federal taxes. Indeed, in view of these benefits the government derives from its investment in Stanford research, it is hard to imagine another $300 million investment that would produce such a significant return in tax revenues, in addition to the other tangible and intangible benefits to the government's own operations and to the lives of its citizens.
Finally, we, the public, may be the greatest beneficiaries of all. Technology licensing creates new products, which in turn create new jobs. It leads to new companies, which also create new jobs, and contributes to the prosperity of existing companies, often providing avenues into new endeavors and new markets. It generates products that improve our health and well-being, it produces medical advances and progress in environmental monitoring and technology, and it improves our military defense technology. Listed below are just a few examples of Stanford inventions that have shaped our lives:
Given such a wide range of inventions, we don't believe it is an exaggeration to suggest that Stanford ideas and technologies have played a significant role in shaping the world we live in today. At OTL, we're proud to have played a part in helping to transfer the technology from laboratory to marketplace.© 2000 Stanford University