Unlike more traditional business transactions between two or more for-profit companies, research and development between a for-profit company and a non-profit institution or academic research organization comes with its own rule book. The intersection of two bodies of legislation dictates the behavior of such institutions when engaging in R&D activities on behalf of a for-profit sponsor; the tax laws and regulations surrounding 501c3 non-profit charitable organizations, and the Bayh-Dole Act. It is under these guidelines that institutions like Massachusetts General Hospital or Harvard University must operate. Thus, a comprehensive understanding of both bodies of regulations and the interplay between them is critical if the parties are to be successful in implementing an R&D collaboration and/or Sponsored Research Agreement.

Generally speaking, in order to retain the tax benefits that come with a 501c3 designation, a non-profit organization must avoid conferring a benefit to private individuals or groups. Instead, the benefits derived from such an organization must be delivered to the public, with any private benefits being no more than “incidental.” Factors that relate to the magnitude of a private benefit include exclusive dealings with a for-profit company, and negotiating favorable terms with a for-profit at the expense of the non-profit. Prior to the passage of the Bayh-Dole Act, any inventions that were funded with federal money would be owned by the federal government. As such, the passage of Bayh-Dole incentivized academic research organizations (“AROs”) to engage in research and bring their inventions and results to market, as they were able to own and protect inventions stemming from federally-funded grant money. These inventions have added over $1 trillion to the U.S. economy, and brought more than 153 drugs and vaccines to market. [1] [2] While the economic benefits are clearly important, so too is the emphasis placed on research by Bayh-Dole’s requirements. Under Bayh-Dole, the timely dissemination of research findings cannot be adversely affected by agreements with commercial entities, and portions of the royalties generated from such agreements must be put toward the purpose of furthering scientific research and education. With a 501c3 operating under the legislative mandate of Bayh-Dole, it becomes apparent that entering into a research agreement with an ARO or medical center brings with it a unique set of circumstances that must be accommodated. Let’s take a closer look at how this dynamic impacts the key terms of a research agreement, such as those relating to intellectual property, publication and confidential information, and risk allocation.

Intellectual Property

In the context of a research agreement, the provisions dealing with the ownership and freedom to use intellectual property (“IP”) are some of the most important. More specifically, they determine what rights a sponsoring company has to inventions arising from the research, what stake in any inventions is retained by the ARO, and which party will bear the costs of protecting and filing for IP rights. As such, clear language relating to ownership is vital. Generally speaking, ownership of something is typically given to the person who pays for it, and intuitively this makes sense. However, for AROs operating under the requirements of Bayh-Dole coupled with the obligations of a 501c3 organization, this intuition becomes less applicable. Instead of ownership simply following the exchange of money, title must be retained by the ARO. Under Bayh-Dole and its emphasis on ensuring commercialization of federally-funded inventions, the ARO must either elect to retain title to the IP for the purposes of commercialization, or relinquish rights to the IP to the government. As such, outright assignment to a sponsoring company is not permissible, particularly due to the fact that AROs will not guarantee that the research wasn’t supported by federal funding, a topic that will be discussed in greater detail later in this post.

Moreover, where a for-profit company could freely elect to outright assign its IP, AROs are not granted such leeway due to their status as a 501c3. While assignment would allow for an ARO to fulfill its obligation to publicize research findings and commercialize inventions under Bayh-Dole, assignment of IP would amount to a grant of a private benefit. In order to overcome this, AROs would have to sell the IP rights at a fair market value (“FMV”). Failure to offer IP rights at such FMV would likely be considered to be beyond the allowable “incidental” private benefit. However, determining the FMV comes with its own set of challenges. Much of the research and IP coming out of academia is very early and rudimentary, at least from a commercial standpoint.  So how does one evaluate the potential for success of a risk-heavy, yet to be validated therapeutic compound that has at least another 10 years of clinical development before it is ready for market approval, if it ever is at all?  One study by Tufts found that out of the 1,442 compounds followed, 1,158 didn’t even make it out of clinical testing[3]. With such a high rate of failure and huge investments ranging in the hundreds of millions of dollars over the course of a drug candidate’s pre-market life, valuation of that asset is exceedingly difficult, if not impossible. This inability to determine a FMV compounded with the 501c3 implications of outright assignments of IP means AROs operating under Bayh-Dole are left with licensing as virtually the only viable mechanism for the commercialization of research with sponsoring companies.

A typical sponsored research agreement between a sponsoring company and an ARO will establish the guidelines of the research project that the two parties wish to collaborate on. In addition, these agreements will include terms relating to the ownership and usage of IP resulting from the research. In consideration of the funding provided by the sponsoring company, sponsored research agreements typically grant a non-exclusive right to the sponsoring company to use the research data and/or inventions for internal purposes. This allows the sponsoring company to use the results of the research non-commercially within the company. In addition to this noncommercial license, sponsored research agreements will also provide the sponsoring company with an option to take an exclusive license to the resulting IP for commercial purposes, satisfying the requirement of the ARO to bring federally-funded research and products to the market. Further, when these options are exercised and result in an exclusive license, royalties and milestone payments are made to the ARO that are in-line with industry norms and are tied to the success of the product over time, allowing for a more accurate valuation and avoiding the appearance of conferring an impermissible private benefit. These options to an exclusive license are not indefinite. Typically, the ability for a sponsoring company to negotiate an exclusive commercial right to the IP stemming from research is limited to a specified time period after the discovery or creation of such IP. These limitations are in place to ensure that the IP is given ample opportunity to be further developed and taken to market as opposed to just “shelved”, as the latter result would run afoul to Bayh-Dole’s purpose of bringing federally-funded inventions to the public. Last but certainly not least, under the terms of a research agreement it is also customary that in order for the sponsoring company to gain these exclusive rights, they must agree to pay all patent costs related to the inventions derived from the sponsored research.

Confidential Information

As discussed earlier, Bayh-Dole requires that the disclosure of research findings cannot be adversely impacted by such sponsored research agreements or similar contractual arrangements. In light of these legislative requirements, it is important to remember the mission of an ARO.  In furthering its charitable purpose, an ARO is keen on ensuring that results and discoveries of research are publicly disseminated. As such, AROs must include certain provisions in their sponsored research agreements that allow for the retention of rights to use the research or invention for academic and research purposes within the hospital and throughout the academic community. More specifically, hospitals and the doctors performing research have an obligation as a charitable organization to disclose their findings through peer reviewed publications. This charitable purpose can be problematic for sponsoring companies looking to remain competitive by seeking to keep the research confidential until it can be protected through patent or other IP rights.  It is understandable for the sponsoring company to want to prohibit public dissemination of the research they just paid for prior to securing IP rights; or worse, having the results of the research go to a competitor.  A sponsoring company may also fear that its own confidential information it provided to the researchers during the term of the research agreement will be disclosed through these publications. This results in a balancing act within the publication section of the agreement. The researchers retain the right to publish on their findings and results while the company is given a grace period to review such publications and remove the company’s confidential information or further delay the publication in the event of patent filings.

Risk Allocation

A third unique aspect of collaborating with a 501c3 that is regulated by Bayh-Dole is the reluctance of such an organization to take on risk. This restriction is manifested in sponsored research agreements through sections relating to indemnifications as well as representations and warranties. Typically, a research agreement between two for-profit entities is free to allocate risk via mutual agreement of the parties. However, AROs are not in the business of bringing products to market and are therefore reluctant to take on the risks associated with commercialization, such as any harm that may come to a commercial user of the developed product. Instead, since the sponsoring company will be the player utilizing the IP or research results for commercial purposes, AROs do not hesitate to allocate the risk accordingly. In addition, AROs do not “rep & warrant” the sponsored research itself, the soundness of material or research results being provided, or make any assurances relating to the integrity of the IP or results they are licensing out. They give no guarantees that such IP is valid or that it won’t infringe another third party’s IP and will even go so far as to disclaim any assurances of this nature by affirmatively denying all of the implied legal guarantees of this sort[4]. If AROs were forced to give these reps & warrants in their contracts with industry players, there would be a “chilling effect” on publishing the discoveries of the research, as AROs do not have the resources to conduct freedom-to-operate searches before every publication. Finally, AROs operating under Bayh-Dole will not rep & warrant that federal resources were not used during the production of the licensed research even though the federal government is not a party to the sponsored research agreement. This becomes relevant in sponsored research agreements if a sponsor is looking for assurances that they would have complete freedom-to-operate. Due to the vast amount of funding coming from the federal government, researchers who often conduct several projects at once, and the comingling of private and public funds, an academic can never really claim with a high degree of certainty that no federal resources were used either directly or indirectly in during the course of any particular research project. This is especially true considering federal funds are often used to purchase equipment and lab supplies that can be used for many research collaborations. As such, AROs are unwilling to make any guarantees that the federal government has nothing to do with the IP arising from sponsored research.

Conclusion

Research agreements between AROs and the sponsoring companies seeking to collaborate with them must abide with certain regulations. However, the benefits gained from being a party to cutting edge research at its infancy are greater than the obligation to comply with these rules. While these circumstances can result in agreements with terms that vary from what two for-profit organizations would negotiate, it is important to remember that many of the same key outcomes are obtainable. A sponsoring company can gain the commercial right to exclusively practice IP stemming from such research, and they can protect their confidential information. Still, the requirements of Bayh-Dole and the status as a 501c3 organization does require some flexibility on the part of the commercial partner. An understanding that AROs are mandated to further their academic and charitable mission through research publications and teaching, that they cannot confer a private benefit to an organization or individual, and that there is a certain level of risk that they cannot be responsible for helps to bridge the gap between non-profit academics and sponsoring companies.

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[1] http://www.nejm.org/doi/full/10.1056/NEJMsa1008268

[2] https://www.bio.org/articles/academic-industry-patent-licensing-contributed-118-trillion-us-economy-1996-0

[3] Joseph A. DiMasi, Henry G. Grabowski, Ronald W. Hansen, Innovation in the pharmaceutical industry: New estimates of R&D costs, Journal of Health Economics, Volume 47, 2016

[4] Under contract law, there are two implied warranties; a warranty of merchantability, and a warranty of fitness for a particular purpose. These warranties, respectively, give implied assurances that the contracting party is providing a product/service that meets a minimum level of safety and quality, as well as falls within the standards of a particular industry. Both implied warranties can be waived by the terms of a contract.