Innovation and Technology Transfer

Technology transfer is often an integral component of innovation. In fact, it is probably the most often thought-of aspect of innovation. Companies seeking relief from the recent economic turmoil have looked at ways that innovation can differentiate them from their competitors and provide greater value to their customers. Developing, licensing and sharing technology, or other forms of creative content, can help drive innovation within the enterprise.

Recently, I attended ITDA’s 360° Seminar, “Licensing and Partnership for Effective Technology Commercialization.” This seminar consisted primarily of a panel of “experts” willing to share their knowledge and expertise about the subject. The audience was comprised primarily of technology and medical device entrepreneurs and early-stage companies, licensing executives from various industries and a smattering of intellectual property lawyers (myself included). Although many forms of intangible assets should have been addressed or at least acknowledged - such as copyrights, trademarks, trade secrets and other forms of creative content - the panelists uniformly addressed only patents. Since many of the issues discussed regarding the identification, registration and licensing of patents is applicable across other forms of intangible assets, it is useful to highlight some of the key points.

The panel was composed of the following four people: Bruce Lund, an entrepreneur and toy and game inventor, Dr. Alan Hauser, an innovation commercialization expert who currently works with Northwestern University’s Technology Transfer Program, Michael Stolarski, a lawyer formerly with Motorola and currently with Howrey, and Jodi Flax Soriano, Director Business Development at Ohmx Corp., a biotech firm.

A discussion of key issues involved in technology transfer (and joint development relationships such as outsourcing, Joint Ventures, strategic alliances and partnerships) could begin almost anywhere. Although I would leave the valuation issue toward the end of the discussion given what I believe to be the superior needs to determine goals, fit and feasibility, this discussion began with the question (paraphrased): when prioritizing your intellectual property (IP) assets, how do you determine the value of your IP?

Bruce Lund, who tends to develop technology in-house and then commercialize it by licensing to toy and game manufactures and marketers suggested that one begin by introducing the technology to the client and asking whether the client sees a particular application or fit within an existing or proposed product line and then let the Client run the numbers (e.g. conduct a market analysis) to determine what the potential market size, share and value are. In my opinion, this is sage advice only if you are an established company with existing client relationships. For a start-up or early stage business, you are better off determining these parameters on your own.

Michael Stolarski, in typical lawyer fashion, suggested that one begin by looking at court rulings. I fail to see how this is truly helpful unless your technology is easily compared to an exiting, known piece of technology. More importantly, Stolarski brought up the “25% Rule.” According to this rule, royalties paid the IP (patent) developer/owner are 25% of the profit margin.

Dr. Hauser suggested that one should used sophisticated financial tools, driven by certain assumptions, comps in the marketplace and marketplace validation. When prompted by an audience member for some suggested resources or places on the Internet where might access some tools or information, Dr. Hauser was unhelpful. My conclusion from this is two-fold. First, Dr. Hauser is a consultant who makes a living by being the go-to person for such information and analyses. Second, perhaps the information and tools are not readily available and an entrepreneur is better served by securing the advice and guidance of a seasoned subject-matter expert.

Lastly, Jodi Flax Soriano provided some very useful insight from the perspective of the entrepreneur. A business can and often does have many different pieces in its IP portfolio. For example, her field – Biosensors - is crowded. Since it is also highly patent-driven, she suggested that one needs to understand the patent landscape. How is this done? By commissioning a patent search firm to evaluate all the exiting patents in the field and “find the white spaces” left open by existing patents. Again, this is a great suggestion for a successful, well-funded company like hers, which originally raised $1MM on an option to license an existing patent.

What I personally like was the notion of the IP Landscape. This can be done with any relevant IP and should be the first step in any innovation strategy. Take a look at what is out there. Determine where the other players have staked their claims. Evaluate the merits of their claims. Look for the “white spaces.” These will be the “open frontier” within which one will have lower operating risks and higher potential to capture market share and sales.

As the valuation discussion tapered, an audience member asked whether the end use of the technology affected royalty rates. Put another way, what is the effect of a technology that is (a) necessary to launch a product or make it marketable, (b) only improves an existing product, or (c) is a category killer?

From the perspective of Lund, their technology is often incorporated into a third-party product. This generally means a smaller royalty. He suggested that the benchmark used is the wholesale price and that the royalty typically runs between 5-10% of that. He also cautioned that this will be affected by industry (e.g. toys v. medical devices) and territory (e.g. U.S.A., North America, global). In addition, Dr. Hauser suggested that operating margin may be a better benchmark than sales.

At this point in the discussion, thoughts (and questions) started turning toward the underlying issue: money. In other words, once licensed, how does an IP licensor ensure that a product is brought to market and that it generates revenue? Both Lund and Stolarski gave some useful input.

First, require contract minimums: minimum production run, minimum amount of sales. Second, set yearly minimums or milestones with an annual review. Tie this to a right to adjust the royalty and/or terminate the relationship and ensure reversion rights. When the parties are unsure about just how much upside potential there is, set escalating royalty rates by volume. Third, require review of annual marketing plans and budgets. Fourth, work with your partner to ensure realistic baselines. Lastly, consider exclusivity which typically commands a premium.

The discussion next focused on the risks of sharing one’s Confidential Information. All parties agreed that it is necessary to share some information with prospective licensors or partners. But how much in enough? Too little? Too much? And what can be done to safeguard that information once it has been shared?

The initial advice was to have the prospective partner/licensor/licensee sign a Non-disclosure Agreement. However, both panelists and audience members pointed out that these are not always airtight and that some, often larger, businesses will simply refuse to sign them. According to Lund, at least in his industry, customers don’t see inside the product, they only see the results. Therefore it would be difficult for a competitor or usurper to backward engineer the exact method of creating the end result. In other words, business circumstances dictate reveals.

Again, the discussion tended to focus mostly on patents and, not only was there some misinformation, but those in the know failed to correct it. Specifically, Lund stated that sometimes after his firm demonstrates a piece of technology, or once it’s viability has been proven in the marketplace, the firm then goes back and files patents on it if they feel it may have more commercialization potential. Stolarski agreed with this approach.

Noticeably absent from this part of the discussion were any caveats regarding the timeframes within which a patent must be filed once it’s been disclosed, nor the effect of the “On Sale” bar, both of which are unfortunately outside the scope of this article.

As a strategic maneuver, Soriano admonished entrepreneurs to look at competitors’ patents, “poke holes in them” and know the competitors’ weaknesses as well as one’s own. Second, she suggested filing provisional patents covering any new inventions that might be necessary to connect-up the Licensor’s technology with the Licensee’s. Lastly, segment the market to understand how your tech fits into your partner’s strategy and entrenched position.

Hauser pointed out that, in academia at least, there is a propensity to talk about one’s research and all its wonderful possibilities. To counter such forces, Hauser recommended having invention disclosures in place to ensure that employers identify and register IP before it’s disclosed.

So what can one take away from this discussion? Although the panel focused nearly exclusively on patents, the tips and strategies apply to all intangible assets and creative content. First and foremost, know your IP and know your market. An effective licensing program requires that the IP owner know the strengths and weakness of its IP and that of its competitors. A strong knowledge of the IP landscape will reveal the strategic opportunities for products, markets and prospective partners. Second, get strategic advice from domain experts. My sense is that this will increase the reliability of the information, decrease the cost of acquiring the information and reduce risks associated with acting on the information. Lastly, proactively identify and protect your IP before you share it with others (or it gets shared without your knowledge).