5.4.1 Overview

The major objectives of the ERC program include both developing and commercializing technologies to bolster the competitiveness of U.S. industry. To successfully bridge the gap between technology development and commercialization, ERCs must take a holistic, integrated approach to technology (creation, experimentation, development, and implementation) that is unique among NSF-funded organizations. The involvement of industry representatives in goal setting, project review, technology evaluation, and technology implementation is vital to the success of this effort. In addition, if they are to be successful at commercialization, they must have ways to ensure the equitable treatment and ownership of intellectual property (IP) resulting from research by individual researchers, the ERC, the university, and industry sponsors.

Technology commercialization at ERCs is a relatively new yet rapidly expanding art. The process is significantly more complex than it is where technology is developed and commercialized wholly within a single company or at a small business spin-off based on a university invention. The challenge lies in melding a commercially promising research agenda with the often disparate goals of individual industrial sponsors, guiding the resulting work to a point at which industry can use the product, and supporting the commercialization effort through continued close contact between ERC researchers and industry representatives. Both university investigators and industry scientists must understand that their roles will change from advisor to project director as a commercialization effort moves forward.

These challenges are significant, but ERCs are well positioned to take advantage of the considerable experience of industry in generating value from new ideas. The ERC model has a built-in mechanism for maintaining industrial relevance, in the form of periodic project reviews and direction by industry representatives. Because most ERCs are relatively new to technology commercialization, there are few examples so far of directly commercializable technologies that have emerged from their pipelines (although there are some significant ones) . More common is the transfer of ideas, which industry can refine and cultivate into saleable products. Whether such an idea is protected by patent or license depends on the extent to which the ERC or the industry sponsor developed the idea.

Because the potential for commercial success of ideas is difficult to forecast or control, it is important that ERCs and industry forge a more fluid relationship with university administration concerning ownership rights to intellectual property (IP). For industry, one of the main attractions of belonging to an ERC is the potential access to breaking technology that could bring competitive advantage. Indeed, this is the central purpose of the ERC. The role of the university patent office in maintaining strict control of ownership to this technology must be redefined to reflect the considerable financial and intellectual contributions that industry makes to the knowledge acquisition process.

5.4.2 Product Development and Commercialization

In fundamental research, a full understanding of the impacts and ramifications of the work is impossible at the outset. Industry, on the other hand, requires some projected future payoff to justify research funding. Bridging this dichotomy is at the core of the ERC mission. Of course, not all ERC research will result directly in a commercially viable discovery or technology; however, the likelihood of this result is increased by the periodic involvement of industry at critical points in the research planning and review process. This review process is akin to the product development model, which industry has used for many years. Applying this model to university-based research necessarily involves scaling back such things as market reviews and surveys as hurdles that a new idea must clear. What is useful about the model is the scheduled interaction among various stakeholder groups at critical points in the development (research) process.

5.4.2.1 Developing and Maintaining an Industry-Relevant Research Agenda

Developing the research agenda is a fundamental aspect of ERC management and oversight. However, the perspective of industry has traditionally been absent from this process in university research. It is essential that the ERC's research management team recognize the importance of industrial input, consider the opinions of industry representatives in their decisions, and encourage the research faculty and staff to do likewise.

Most ERCs have established mechanisms for including industrial input in formulating new research and overseeing ongoing work. Most often, this opportunity occurs during an annual or semi-annual meeting of the entire industrial members group or some subgroup thereof. Depending on the diversity of interests among this group, research focus meetings can be held during plenary sessions of the meeting or in industry-specific breakout sessions with only those representatives interested in a particular topic in attendance. For projects sponsored by a single member or a consortium of members, only contributors to the project under consideration need attend.

The diversity of interests among members can make a group meeting of them and ERC researchers a challenge in agenda-setting. Keeping these meetings focused on the goal of developing a consensus in the research direction is vital. Time should be set aside for constructive criticism of past work and decisions, if appropriate; but it is the role of the ERC research management team to keep the meetings on track and focused on setting realistic goals that are likely to produce tangible benefits to industry.

5.4.2.2 The Changing Roles of Academic and Industry Researchers in Commercialization

As the technology developed in a research project moves from the laboratory to the field, the roles of the project director at the ERC and the industrial sponsor will likely reverse. The ERC researcher at this point moves from directing the project into the advisory role, which had been occupied by the industry representative, and vice versa. In some cases responsibility for scaling up the technology may move to someone in industry who had not been connected to its laboratory development. In either case, the ERC researcher should seek to remain available and involved. In cases in which the ERC researcher has a financial interest in the commercial success of the technology (such as partial ownership of the IP), the incentive for involvement is obvious. The importance of input from the researcher in maximizing the chances of success of the technology (regardless of IP ownership) should not be overlooked, however.

5.4.2.3 Balancing the Needs of Researchers and Industry

Throughout the commercialization process, it is important to balance the needs of industry and the university. Where a university's central missions are teaching and generating knowledge though research and publication, industry is concerned with maximizing financial value. The potential for conflict between the two must be acknowledged and dealt with in a balanced manner. Questions about the nature of confidential information, the length of time a discovery must remain confidential, and how results can eventually be published are usually specifically addressed in the research contract and confidentiality agreement. The terms of these documents are usually negotiated among the ERC, industry legal staff, and the university technology transfer office.

5.4.2.4 Using Commercialization Successes as a Marketing Tool

Successfully commercialized technologies are valuable tools in marketing the ERC to prospective members. To the extent that technological advances cross industry lines, a new process or idea may enhance the appeal of ERC membership to previously underrepresented industries. The ongoing process of market analysis for new membership should constantly evaluate the appeal of new technologies to potential sponsors.

5.4.3 Intellectual Property Rights and Ownership

The treatment of IP generated through industrially funded university research is one of the most challenging and potentially time-consuming issues facing ERC staff. Traditionally, universities in the United States have tightly held ownership rights to intellectual property generated by university research. As company-sponsored research has increased dramatically at universities in recent years, the equity of this policy has been challenged, particularly at universities with institutionalized industry-funding programs such as ERCs. While outright ownership of IP is usually reserved for companies that both give generously to the general research program at the ERC and sponsor individual projects, access to IP through licensing has much broader potential for ERC member companies. An added complexity for ERCs is the formulation of policies to equitably distribute IP and/or licensing rights from research funded by consortia of companies. To avoid misunderstandings and legal problems, policies concerning IP must be explicit in the ERC charter and membership agreement and must be understood by sponsors. These policies are typically negotiated with university administration in an ongoing process, to meet new situations.

5.4.3.1 Agreement with University Administration

All centers work with their university intellectual property officers to comply with university standards on such matters. One now-graduated center (Lehigh's ATLSS center) established a spin-off company partially owned by the university to handle IP issues. A good working relationship with the university IP administrators is important in developing a successful partnership with companies. If a center spans more than one university, clear agreement among the administrations of all the academic partners is essential. Procedures for notifying members of the existence of center-developed IP should be clarified between the center and the university's intellectual property officer. In all cases, IP agreements should accord with regular NSF guidelines, as set forth in NSF Grant Policy Manual 95-26.

A related issue is distribution of royalty income. Most centers use their university's defined split (usually 50-50) between inventor and administrative units. Whether the center negotiates to be part of that split is another important early-stage decision. If the center is not included in the formula, the director can approach the university administration and/or technology transfer office and negotiate a portion of future royalty returns to be earmarked for the center. Because there is no "money on the table" during these negotiations, it may be possible to secure a future revenue stream before the center even begins its research. Taking a long-term view toward self-sufficiency for the center, it is a good idea to be in on that split.

Some ERCs have negotiated more favorable terms with university administration. The Marine Bioproducts Engineering Center (MarBEC, at the University of Hawaii), for example, receives 100% of the university's share of the first $10 million in IP revenue generated from a patent. In addition, MarBEC has arranged for the return of 17% of licensing fees to the ERC. In negotiating such terms, it is helpful to seize the moment when the ERC is funded, to take advantage of the excitement and support generated by the NSF grant to gain IP concessions from the university. However, such IP policies may make it difficult to partner with other universities that may not accept these terms.

5.4.3.2 Membership Levels and IP Rights

Many ERCs have developed "tiered" approaches to industrial associate membership, wherein companies may opt to increase their access to IP or licensing rights on projects they fund in addition to their membership dues in exchange for higher annual dues. The advantages of this system are that the ERC obtains increased annual funding based on the expected future value of IP and/or licensing rights. The details of the tiered membership system must be formulated in concert with the university technology transfer office and existing or prospective members.

The membership system in multi-institutional ERCs presents an added level of complexity. Here, membership rights often reflect the least common denominator. For example, one university may be able to offer companies better access to intellectual property than other universities in the center can. But it is important for the center to present a single criterion of industry benefits, reflecting the consensus of all the partner institutions. Variations can be addressed internally, so as not to confuse the member companies. It is therefore imperative that negotiations between the multiple institutions of the center be started as early as possible, because the development of an agreement suitable for all institutions can be very time-consuming. Once the institutions have agreed upon the center's IP policy, a memorandum of agreement (MOA) should be developed and signed by all member institutions for documentation and reference.

CASE STUDY: Membership rights and intellectual property management vary widely from center to center, reflecting the customs of the universities and industries involved. UWEB has a single membership status and a single membership fee. However, early joiners received a substantially discounted founder rate by joining during the center's first two years, while late joiners (after the first five years) are subject to substantially higher fees. These fees are the same otherwise, regardless of the size of the company.

Although larger companies enjoy a substantial advantage from the single fee schedule, this structure enabled UWEB to enroll a total of 33 members in its first two years, with a stable core of about 25 that have maintained continuous memberships for the life of the consortium. Their long-term sponsorship has let UWEB develop a cohesive and interactive stable of participants. It also helps attract new sponsors, despite the higher fees charged in later years. The core group has supported UWEB as it built a track record of industrial productivity as testimony to encourage new memberships. The detriment to smaller companies is compounded by this fee structure, and only large corporations are expected to become sponsors in the later years of UWEB. However, several small organizations have belonged since the first two years, and UWEB accommodates them in other ways, especially sharing the costs of industry initiatives such as Small Business Innovation Research (SBIR) grants and National Institutes of Health (NIH) Bioengineering Partnership Grants. These other sources of leveraged funding are of great benefit to the companies and to the university.

Another aspect of UWEB's "one size fits all" approach to sponsorship are the intellectual property rights enjoyed by all sponsors. Small companies enjoy the same IP rights as large ones. This is of definite benefit to the smaller companies. Although some ERCs that have multi-tiered membership structures allow much lower rates for small companies, they do so by removing some or all IP access. While doing so is acceptable in some industries, it was deemed inappropriate at UWEB, most of whose members are in the medical device and medical diagnostics industries.

The business models of small, highly entrepreneurial companies tend to rely on capture and control of intellectual property, especially in the biotechnology and biomedical areas. Many such companies are founded on exclusive ownership of their core technologies, by either invention or license; shared access and shortages of resources combine to make participating in R&D consortia difficult for them. Still, small companies often can act quickly to adopt fundamentally new technology. Therefore, the best chance for involving these firms is with highly fundamental IP, which start-ups are more inclined to tackle at the earliest stages. UWEB has found that its larger sponsors (5,000-10,000 employees and $1-10 billion in revenues) capitalize on fundamental discoveries in only a handful of cases in which a powerful discovery directly affects their product lines. Such cases are maintained for use in the consortium, while the more ancillary, fundamental inventions that have a less-obvious commercial application are cleared through the consortium for small companies and spin-offs to adopt.

Nevertheless, the ideal model for an R&D consortium is for members to share all IP equally on a nonexclusive basis. Furthermore, a paid-up commercial license for any technology would most easily be distributed by having the membership fee be substantially higher to accommodate a return on the ERC's investment. With a high enough fee, even royalty-free, paid-up, nonexclusive commercial licenses can be designed so that the fee structure makes the entire program self-sufficient.

However, such models are inappropriate in the biomedical arena, and most universities shun them. There are cases in which a "big hit" could end up being given away for the same price as less substantial inventions. In reality, it is the substantial margin from the sum of all the "little hits" that offsets any "giveaways." Although the math is easy to calculate, many universities-especially state-sponsored ones-are restricted from playing this fast and loose with state assets. The officials of any university are subject to great criticism, and although the rights to cold-fusion, for example, couldn't be given away for free today, in 1989 substantial sums of money were being considered.

To balance these forces, UWEB adopted its uniform-fee policy. Early joiners also stand to benefit from securing IP rights as they evolve from the launch of the consortium, and some of the most prominent licensing activities at UWEB stem from the first round of projects funded. UWEB is able to keep the company interest separate, and any company can seek an exclusive commercial license. Restricting the license to narrow product categories separates these interests. If one or more companies want to license the same invention for the same product categories, then the University of Washington (UW) will grant them commercial license on a co-exclusive basis. In such cases the UW agrees not to allow other companies to license the invention for this purpose. (UWEB's IP system is outlined more fully in Section 5.4.3.4.)

Where does UWEB fit on the spectrum of ERC IP architecture? Two points are critical. First, it is a "closed club," in which access to research and intellectual property is for sponsors only. The UW, in the UWEB Sponsorship Agreement (which is identical for every sponsor organization), requires that that all companies performing research within the scope of the UWEB Consortium must become sponsors. Eventually, the research is always published, but sponsors have early access and first rights of refusal for all IP. Although any company or research organization is invited to join the ERC at any time, only sponsors receive the technology alerts, invitations to the annual Industry Symposium, and special publications, including immediate access to the annual report to NSF and all final and interim UWEB project reports. This arrangement is unusual, but is highly attractive to the biomedical companies that join UWEB.

Second, UWEB's efforts in patent management are also at the far end of the spectrum for ERCs. It is considered essential that the consortium control its own destiny as much as possible. Such control would have been difficult to attain without proven success over two or three years using a step-wise and measured approach. The UWEB model is currently being adopted for new R&D consortia at UW-fortifying further the mission of ERCs to have a major impact on the university culture.

5.4.3.3 IP in Relation to Funding Source

Treatment of IP rights varies depending on the source of the funds that generated that research.

• Core ERC Research-
  As with most university intellectual property, IP generated from ERC core research is not normally subject to ownership by industry, although industrial members may enjoy preferential licensing rights to this technology over non-associate companies. Industrial associates may enjoy the right of first refusal on licensing or may receive a discount in royalty fees compared with non-associate companies for IP generated from ERC core research. It is important in working with core IP that all members be treated equally in the licensing process.
• Research Funded by a Single Company-
  IP resulting from research funded by a single company may be subject to partial (or full) ownership by the sponsoring company, depending on prior agreement between the ERC, the university administration, and the company. Some ERCs confer ownership of IP from sponsored research to the sponsoring industrial associate member based on a premium level of membership (see Section 5.4.3.2). In other cases, the magnitude of the sponsored project may entice the university to partially relinquish IP ownership. Another option here is for the university to retain IP ownership but grant a free (or reduced cost) license to the sponsor for use of the technology.

Another option with emerging technology is to grant a non-commercial site license to a sponsor in order that the technology may be further proven in an unaffiliated lab.

• Research Funded by a Consortium of Companies-
  IP ownership and licensing rights are further complicated by the involvement of several companies (a subset of members) in funding work as a consortium. An important distinction to note is that these consortia are funding a project in addition to paying normal membership dues to the ERC. In this case, it is crucial that all members of the consortium have equal access to the technology and equal rights for IP ownership or use through licensing. Contractually, it may be most expedient to execute separate though identical contracts with each company, acknowledging the involvement of other companies that in many cases will be their competitors. A model for equitable treatment of companies is presented in the following subsection.

5.4.3.4 A Model for IP Technology Transfer

The University of Washington Engineered Biomaterials (UWEB) center has formalized a model for technology transfer among their industrial associates group, as outlined in the following case study.

CASE STUDY: Technology transfer at UWEB follows the "Technology Alert" system. The process begins with the internal filing, by a UWEB investigator, of an invention disclosure with the university's Office of Technology Transfer. This document is authenticated to verify the source of funding and the identity of inventors. A confidential summary, describing each invention, and a short description of its background and potential use is sent simultaneously by courier to each UWEB sponsor.

Sponsors are presented with such UWEB Technology Alerts several times a year. They must sign an Election to Obtain a License for any and all inventions disclosed to them in which they may be interested. These elections are not binding on the company, but if a company fails to elect in the required period (three months), it relinquishes any rights of refusal they have to that invention as UWEB sponsors in good standing. During and after this window of opportunity, the sponsors are notified, without identifying the electing companies, if other sponsors have elected to obtain a license with a complete summary after the close of the window. All first rights are managed through this election process.

Following the elections, the follow-up time is variable, depending on the maturity of the invention. If the research is fairly complete, then all sponsors that have elected to pursue the technology are presented with an Option Agreement to sign, which legally secures there interest and commits them to commercial development. These options are renewable for a second year, by which time commercial licenses are to be signed to maintain the sponsor's rights. If further research is needed at UWEB to bring the invention to a level of clarity or reduction to practice, then option agreements are delayed. Any company at any time may enter into a noncommercial site license, for use of a UWEB invention for internal research, and most do so at the time that option agreements are secured. Other companies forego commercial licensing rights and enter solely into noncommercial site licenses at standard rates, even though they "passed" on their first rights of refusal, and cannot later use the invention for commercial purposes. Overall, the key to this complex solution to a difficult set of issues is to provide flexibility and exclusivity as desired and needed by the sponsors.

UWEB's IP management strategy involves challenging and even changing the culture at the university. The University is consistently ranked high in the nation for capturing IP revenue. Although its systems for technology transfer are mature by any standards, the management of licensing in an ERC posed a substantial challenge to the UW also. What has evolved is based on the general principle that "What's good for UWEB is good for the UW." With this starting point, it became necessary for the UW to grant greater control of patenting to the ERC itself, with a full return of costs and a share of revenues. The principle is simple, but coming to terms with the university required some years of operation. UWEB's technology alert system was a new step at the UW, and once it acquired a proven track record it allowed the ERC to negotiate with the UW. The next step was to establish a patenting system that was under the control of UWEB. UWEB sponsorship fees are used, in part, to pay for patenting inventions from UWEB-supported projects. Decisions about expenditure of these monies are the responsibility of a Patenting Review Committee that makes recommendations to the UW. This committee consists of four members of the industrial advisory board, two members of the UW Office of Technology Transfer, and the UWEB Director of Industry Relations.

In this way, the UW has direct industrial input into its patenting decisions. Over time, this relationship between the UW and UWEB has acquired a proven track record. The final step in the ERC-UW relationship is the negotiation of the sharing of excess revenue, beyond cost recovery for patenting. This revenue is derived from licensing fees and royalties. With this system, the capture of IP revenue is expected to become an important component of UWEB's self-sufficiency model. To minimize risk, the recovery of patenting costs is expected to be complete for a given invention following the signing of option agreements, regardless of actual product development.

5.4.4 Patenting

Due to the significant costs involved in applying for patent protection for IP, most universities have full-time staff and/or a committee that decides if an idea, design, or process is worthy of patent application. Committees of this kind may include university administration, legal staff, ERC research staff, and the ERC industrial liaison officer. At some ERC universities, patent application costs are paid through sponsorship dues. This approach guarantees that adequate funding will be available to pursue patents on worthy IP before the generation of any royalties or licensing fees. Obviously, such receipts should replenish this account when they become available.

In determining the merit of an idea, process, or potential product, the advice of the university technology transfer office should be sought early in the process. Disclosure of the IP at the earliest possible date is important in establishing and protecting the rights of the inventor and university.

5.4.5 Lessons Learned: Intellectual Property and Commercialization

• A significant reason many companies become ERC industrial members is the potential for early access to valuable ideas and/or processes. ERCs must recognize this value and provide equitable access to technology for members.
  
• The development of commercially valuable technologies is enhanced by close cooperation of ERC researchers and industry representatives. Early and periodic involvement of industry in setting and refining the research agenda is important.
  
• ERC researchers should remain involved in commercialization efforts even after the technology has been handed over to industry.
  
• The needs of university faculty to publish and the needs of industry to maintain confidentiality are frequently at odds. The details of confidentiality periods and publication must be specified in the research or membership contract.
  
• There are many approaches to sharing IP ownership among inventors, the university, and companies (sponsors). It is important to work with all stakeholders to arrive at an equitable agreement that is well understood by all participants, and that includes the ERC as the originating unit.
  
• It is wise to negotiate special overhead rates on memberships and royalty revenue splits with the proper university administrators in the early weeks of the center, while enthusiasm for the center is high.
  
• In multi-university ERCs, discussions leading to the development of an IP arrangement suitable for all partner institutions should begin as early as possible.
  
• Much of the knowledge developed at an ERC is not appropriate for intellectual property protection. However, with early access to this knowledge and the opportunity to influence the direction of fundamental research at the ERC, members have many opportunities to implement this knowledge into leveraging their R&D and commercial developments. Thus, without the obvious tracking of commercial development through licensing of intellectual property, ERCs must struggle to document the flow of knowledge into the U.S. technical markets. Testimonials and other evidence for this knowledge-to-market flow are important for an ERC to track and understand in order to validate the success of the ERC model.

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