PANELISTS: Chris Northcutt, Chevron Irene Kosturakis, BMC Software, Inc. Jeff Dodd, Andrews Kurth LLP COMMERCIALIZING AND INVESTING IN TECHNOLOGY: A PERSPECTIVE FROM THREE INDUSTRIES ACC HOUSTON GENERAL CHAPTER MEETING May 13, 2014 Copyright 2014 Andrews Kurth LLP Copyright 2014 Chevron U.S.A. Inc. Copyright 2014 BMC Software, Inc. OVERVIEW Information assets including IP and technology are core assets Competitive advantage Continuous development and acquisition Assets to be mined for commercializing whether as part of a core business or separate from core product/service lines (disaggregating IP/technology from products/services) Presentation will focus on trends and techniques of investing in and commercializing information assets Three Industries: Energy, IT, University (Biotech) Differences and Similarities in Investment/Commercialization Techniques Factors in Investing and Commercialization Decisions Structures and Issues with General Applicability to Many Types of Businesses 2 1
Commercializing and Investing in Technology Energy Industry: Chevron Example 3 Chevron Commercialization End User Typical end user is not the consumer, usually within Chevron Chevron Operating Companies identify problems Chevron Technology Companies try to find technical solutions Commercialization Solutions Solutions to problems generally help Chevron operate More efficiently Longer Safer Cleaner 4 2
Chevron Investing Chevron Technology Companies Energy Technology Company Oronite Information Technology Company Technology Ventures Investing Types of Investment Chevron s Technology Companies utilize several types of investments: Direct funding In-kind contributions Know-how / expertise Real-world testing Equity investment 5 Chevron Investing Who Chevron Invests With Universities National Laboratories Industry Collaborations (e.g., Joint Industry Projects) Technology Start-ups Technology Providers/Vendors Service Providers/Manufacturers Investing Types of Investment Chevron s Technology Companies utilize several types of investments Equity Investment Sponsored Research & Development (Passive/Active) Collaborative Research & Development Purchase & Testing of New Product 6 3
Legal Provisions Must Think Through Ahead of Time Confidentiality and Publication Rights There are several reasons our partners may want to publicize Government and public entities Need and desire to publish Desire to let others know of collaboration Desire to keep confidential to preserve competitive advantage The collaboration itself Proprietary information disclosed to partner Results Patentable technology Other confidentiality issues Graduate students at universities Export Controlled Information? 7 Legal Provisions Must Think Through Ahead of Time Independent Research Can the parties look to solve problems through other efforts? Not allowed Okay but only within company Okay even with third parties/competitors Ownership, Commercial Exclusivity, Field of Use There are several models for ownership and commercialization Joint ownership Single owner with license to other partner Exclusive or non-exclusive licenses Rights to sublicense Commercial head-start 8 4
Legal Provisions Must Think Through Ahead of Time Indemnification Other businesses (Stage, contribution, participation/control) Universities and governmental entities/agencies Commercial Provisions Price/Royalty/Fee Tempting to agree to negotiate later Better to negotiate Before the investment is made Before the research is performed Risk profile changes Prevents ill-feelings and mistrust 9 Commercializing and Investing in Technology IT Industry: BMC Example 10 5
Computer Industry Software and Hardware Organic vs. Inorganically Grown Technology Organically Grown R & D investment Co-development Divestment Technology and technical staff Inorganically Grown Merger & acquisition Strategic partnerships for synergistic product offerings 11 Computer Industry Software and Hardware Organically Grown - Legal Issues R & D investment Assignments of IP and confidentiality obligations fully-executed Patent yield directly related to amount of R & D spend Protection of copyrighted works use of copyright legends Protection of brand registration of trademarks globally Co-development Agreement on ownership of technology and IPRs assignment of IPRs in favor of Company Assessment of security precautions Divestment of technology and technical staff Synergistic with goals of Company usually to support clients Must grant a license to technology and IPRs to inorganically grow 12 6
Computer Industry Software and Hardware Inorganically Grown Merger & acquisition Fill a gap in the Company s product line Refresh with a replacement product Expand into adjacent technology and products horizontal Consolidate market share vertical Transform existing business into another business Strategic partnerships for synergistic product offerings Company sells another s product under another s trademark Integrate into a Company product and sell under the Company trademark or a co-brand Allow another to sell under a co-brand 13 Computer Industry Software and Hardware Inorganically Grown - M&A IP due diligence - Legal Issues Assignments of IP and confidentiality obligations fully-executed Existing contracts that would limit the Company s future business Investments by third parties that diminish the value of the assets Open source software licensed under terms that impact the character of the technology, impede its use, affect organically-grown technology Security has been used to maintain value Encumbrances on future business value Tainting concerns Wall off Company developers and managers from evaluating Require residual clauses in NDAs to mitigate risk of misappropriation claims Assets being purchased not allowed to be brought in-house Use intermediaries / consultants 14 7
Computer Industry Software and Hardware Inorganically Grown - Legal Issues Strategic partnerships Company sells another s product under another s trademark or co-brands Trademark licenses Collaboration on filing for protection Trademark guidelines Strategic partnerships co-branding Cross trademark licenses to each other Collaboration on filing for protection Agreement on who goes after infringers of the co-brand Agreement on ownership and use of domain names Taking on obligation to maintain trademark registration or go after infringers 15 Computer Industry Software and Hardware Other Investment and Commercialization Vehicle Joint Ventures Partners join to create and own a joint venture entity Likely in a foreign jurisdiction At least one partner is in the foreign jurisdiction Facilitates local functions on behalf of other owner(s) Each party brings contribution Monetary Technology License joint venture entity to technology and IPRs with a purpose of business that benefits owners Owners benefit in proportion to contribution Owners have obligations 16 8
Commercializing and Investing in Technology University and Biotech Industry 17 Overview U.S. universities now have rich experience in harvesting and commercializing university technology Academic research is large source of U.S. basic research benefitting industry and other end users This Section will cover: Recent data concerning commercialization activities Licensing provisions and practices to address some of the common issues and problems in commercialization Focus on how licensing practices/issues have wider applicability Licenses must be carefully crafted to licensor university s and licensee s objectives. (True for commercial licenses as well.) There is no one size fits all license. (True for commercial licenses as well.) 18 9
Background Academic Institutions are major centers for R&D, basic and applied Most funding comes from the Federal Government Bayh-Dole Act of 1980 transformed university approach to transfer of IP: U.S. universities were allowed to commercialize Federally funded research Bayh-Dole created framework for capturing income streams though federally funded research Royalty sharing with inventors Patenting activity increased dramatically 19 Background: Importance of Federal Contribution 20 10
Background: Technology Area 21 Background: Patent and Licensing Activities 22 11
Background: Commercialization Valley of Death 23 Licensing Lies at the Heart of License terms encourage behavior What does a university want to achieve with commercialization? Common license terms/structure Scope Payments/Royalties/Consideration Commercialization Effort: Best Efforts Sublicense/Transfer Commercialization and Termination Prosecution/Governmental Filings/Infringement 24 12
Scope Lies at the Heart of Licensing Scope is the core of EVERY license Certain key provisions Territory Worldwide? Exclusive/Non-exclusive Crucial issue as to future commercialization Patent Rights / Incidental Rights (e.g., Know How and Bio Materials (e.g., cell lines)) Future Improvements / Developments By University (Resisted except for improvements dominated by licensed patents / improvements within a specified period; Options) By Licensee (Also resisted: Issues with later market success / funding source objections) 25 Scope and Title Title and the Problem of Peripatetic Researcher Language in Assignments/Research As to Prior Employment/Consulting Limited Representations: Knowledge Qualifier/Public Immunity Retained Rights Universities often retain rights for educational institutions (excluding commercial grants/funding and (sometimes) clinical trials) Bayh-Dole Reservation for U.S. government Non exclusive rights to U.S. government March in if not effectively commercialized Other Sources: DOD Example 26 13
Payments and Royalties General Structural Elements Upfront License fee / Minimum periodic fee / Milestone Payments Running Royalty (e.g., on net sales / revenues / product sales) Note stacking risk on other royalties / combination products Definitions e.g., net sales Exit / terminal payments / other consideration (e.g., equity) Tailoring payments to the business and the commercialization objectives Compare start-up vs. established business: Smaller firms are more sensitive to milestone payments / royalties vs. financing / exit payments More frequent terminations of license remarket / market delay risk What behavior do you want to encourage? 27 Know How Crucial role of faculty inventors Embryonic nature of university technology requires ongoing role Key contact point for the R&D staff at the commercial firm How to encourage faculty inventor participation Money helps, of course Securing a claim to a share of university royalties: Verify Faculty may also participate (subject to conflict policies) in firm Balancing academic pursuits with commercialization Publication and co-authorship risk cross border collaboration Co-Authorship with U.S. and Chinese co-authors over 15% knowledge transfer Invention assignment clauses at various institutions Collaboration risks not unique to university setting 28 14
Commercialization: Best efforts Variations on the duty to commercialize: Best Efforts How enforceable would this be?: Licensee commits to using its commercially reasonable efforts and resources in a thorough, vigorous and diligent program of commercializing products and processes based upon or embodying the Invention Ehringer Enterprises v. McData Services (5th Cir. 2011) Texas (and Other Law) Best Efforts Clause Enforceable If It Sets Some Kind Of Goal Or Guideline Against Which To Measure Best Efforts In Ehringer: Here Promotional and Exploitation/Participation Not Specific Enough a Goal or Guideline Also Best Efforts Does Not Impose Extraordinary, Cost-be-Damned Exertions Lesson: Set specific plans and milestones 29 Commercialization: Sublicensing Sublicenses: Background Licensees often need to collaborate with or distribute through others for technical or commercial reasons Universities are concerned about who will be exploiting technology Sublicensing and limitations on sublicensing are heavily negotiated. Issues include, among others: Approval rights? Right to review/approve terms? What license terms imposed through to sublicensee e.g., disclaimers, confidentiality, indemnity? What happens to sublicensee rights upon termination of license? 30 15
Commercialization: Termination Background University concern: shelving or ineffective commercial use Licensee concern: fair shot to commercialize; also funding source issues One Heavily Negotiated Provision: Milestone Termination Provisions Milestone dates as set marks in stages of commercialization (e.g., for a start up: experienced management team, first funding of a specified amount, product development stages, first commercial sale) One Alternative: University ability to propose / force sublicense Does not result in termination but allows University to get licenses in hands of others Triggering events: e.g., commercialization (as defined) within a specified period Compare: Bayh-Dole march-in 31 Protection and Enforcement Who has the primary responsibility / duty to prosecute and maintain patents make and pursue required governmental filings defend/bring infringement suits Participation and consultation rights must be negotiated: note that standing to bring suit may be affected Who pays? (Even if licensee fronts the cost, sometimes the licensee can recoup expenses from royalties/settlements) Actions taken during prosecution, regulatory filings, and litigation proceedings may affect both parties in the future both have vital interests at stake 32 16
Questions? 33 OUR PANELISTS Chris Northcutt Chevron Corporation Senior Counsel 713.372.9104 CNorthcutt@chevron.com Irene Kosturakis BMC Software Chief IP Counsel 713.918.2233 Irene_Kosturakis@bmc.com Jeff Dodd Andrews Kurth LLP Partner 713.220.4736 JeffDodd@andrewskurth.com 34 17