Hans H. Feindt, Ph.D.Chief, Monitoring & Enforcement Branch
Office of Technology TransferNational Institutes of Health
U.S. Department of Health & Human Services
License Monitoring / Auditingby NIH
FLC MAR – 9/20/2006
OTT’s mission is to evaluate, protect, monitor, and
manage discoveries, inventions, and other intellectual
property originating in the FDA and the intramural
research programs of the NIH’s 27 institutes and
centers.
http://ott.od.nih.gov
NIH Office of Technology Transfer
FY2005 Statistics for OTT
• New invention disclosures received 388
• New U.S. patent applications filed 186
• New U.S. patents issued 66
• License agreements executed 313
• No. of active licenses ~1300
• No of licenses paying royalties 841
• Total royalties collected $98.2 MM
Types of NIH Licenses / Agreements
• Exclusive / Co-exclusive Patent Commercial
• Non-exclusive Patent Commercial / Internal Use
• Biological Materials – Commercial / Internal Use
• Software – Commercial / Internal Use
• Commercial Evaluation
• Inter-Institutional Agreements
• Memoranda of Understanding (MOUs)
Office of theDirector, OTT
Division of Policy
Division of Technology Development & Transfer
Division of AdministrativeManagement
Cancer Branch
Infectious Disease Branch
General Medicine Branch
Monitoring & EnforcementBranch (MEB)
Technology TransferService Center
NIH OTT - Organizational Chart
What is Monitoring?
• Reviewing license obligations for compliance
• Collecting overdue royalty payments
• Performing royalty audits
• Reviewing progress reports
• Addressing other royalty issues • Identifying and settling patent infringements
• Settling license disputes
Why Monitor ?
• Assure licensee is complying with license terms
• Determine what licensee is doing with the technology
• Assure all technology users are licensed
• Determine if any royalties are overdue & collect them
• Determine if royalties have been properly paid
• Assure all licensees are treated fairly
• Assure inventors are treated fairly
NIH Licensee Obligations• Royalty payments
• License execution fees• Minimum annual royalties• Milestone payments• Earned royalties• Sublicense considerations• Patent costs
• Reporting obligations
• Commercial development progress reports• Milestone achievement notification• Sales & earned royalty reports• Sublicensing notification & request for approval• License assignment notifications & request for consent• Notification of license termination
• Return or destruction of licensed materials
License Compliance Review
• Are royalty payments up to date and accurate?
• Are sales & earned royalty reports correct?
• Are progress reports up to date?
• Have performance benchmarks been met?
• What is licensee doing with the technology?
• Have new patents issued or existing patents expired?
• Has the license expired?
• Have any sublicenses been granted?
Examples of Non-compliance
• Failure to pay royalties owed by due date
• Failure to submit obligatory reports by due date
• Underreporting sales of licensed products
• Errors in calculation of earned royalties due
• Failure to report Benchmarks/Milestones achieved
• Failure to achieve Benchmarks/Milestones on time
• Failure to submit sublicense agreements for review
• Failure to seek consent for license assignment
Other Reasons for Non-compliance
• Incorrect or outdated licensee contact information
• Failure to notify NIH of changes (name / address)
• Turnover of company personnel / inadequate staffing
• Merger / acquisition / license assignment
• Financial difficulties
• Technical problems stalling development
• Misunderstanding or disagreement about license terms
Options for Achieving Compliance
• Inform / educate licensee of their obligation(s)
• Set deadlines for receipt of royalties / reports owed
• Negotiate amendment to restore license to compliance
• Threaten or impose “additional royalties”
• Suspend other licensing until owed royalties are paid
• Threaten with debt collection, credit bureau reporting, & excluded parties listing
• 90-day notice of license termination
Tools/Resources Used in Monitoring
• TechTracS Database
• Communication with licensee (phone / e-mail / letter)
• Progress and sales reports submitted by licensees
• Press releases, information on company websites, SEC filings, etc.
• Information provided by licensees or inventors
• Legal advice from NIH Office of General Counsel
• U.S. Attorney’s Office located near licensee
TechTracS Database - Overview
Address Book
Tech Transfer
Action/Work Order
Patent
License Application
Royalty Admin
Monitoring
Infringement
Prosecution Admin
CRADA
• Relational Database
• Modular design – integrated system
• Customized tables for data entry & data view
• Data entered in one table may be used in others
• Customized business rules for handling data & generating new data points (e.g. follow-up dates)
• Variety of search, selection, relate, find by, and query features
• Custom and pre-formatted reports may be generated
• Electronic documents may be attached to recordsMarketing
TechTracS Database – Overview
Monitoring
Benchmark Terms
Sales Reports
Progress Reports
Monitoring Log
Sales Reports
Financial Terms
Distributions
Related Lic. Appl.
Royalty IncomeRoyalty Income
Technologies Invoice Contact
Financial Terms
Sublicenses
Lic. Application Log
License Terms
Actions
Applicant Info.
Royalties License Applications
Royalties Log
Distributions
License Recap
Technologies
Performing Royalty Audits
• Desk audit or audit by outside firm?
• Identifying licenses for audit by outside firm
- Annual earned royalties > $100,000- History of late or variable payments- Sales reported differ from that reported by others
• Royalty Audits must include:
- Gross sales by product number - Testing of gross sales by invoice comparison - List & review entire licensed product line - List & review of all countries where product is sold - Review of adjustments made to obtain net sales
Royalty Audit Findings
• Licensee errors (deliberate or inadvertent?)
- Some forms of product assumed to be exempt - Sales in some countries assumed to be exempt - Certain types of sales assumed to be exempt - Claims in pending patents assumed not to apply - Royalties paid on wholesale not retail price - Royalties paid on transfer or imaginary prices - Additional payments for product not included - Improper deductions taken from gross sales - Product specifications not understood
Royalty Audit Costs
• Average audit by outside firm costs about $25,000
• Cost Factors
- Complexity of license agreement - Distribution/promotion agreement complexity - Multiple sublicensees selling licensed product - Location of accounting records - Cooperation of licensee’s accounting staff
Collecting Overdue Royalties
• Find responsible person at licensee
• Establish reason(s) for non-payment
• Settle any problems/disputes holding up payment
• Use an effective collection letter
• Follow-up frequently until payment is sent • Verify receipt of payment by bank
Identifying Potential Infringements
• Complaints from licensees
• Inventor complaints
• Routine web searches
• Biotech / pharma press releases
• Review of FDA information
Settling Patent Infringements
• Investigate and establish that product infringes
• Get the infringer’s attention and offer to license
• Forgive interest/penalties for prompt settlement
• Remind them of potential for shareholder lawsuits
• Notify distributors/customers of infringement liability
• Initiate infringement suit
Settling License Disputes
• Investigate licensee’s complaint in detail
• Separate contract law from patent law issues
• Offer a compromise solution if dispute is valid
• Seek outside opinion if dispute persists
• Offer a solution consistent with outside opinion
• Discuss offer in person, if necessary
• Amend license to correct the problem; collect royalties
• Or - terminate license; collect unpaid royalties
Impact of Monitoring Efforts
Total FY2005 Royalty Collections for NIH = $98.2 MM
Monitoring & Enforcement efforts brought in :
• $4.9 million in collection of overdue royalties• $2.5 million from new agreements & settlements• $0.4 million from 3rd party audits
= $7.8 million (7.9% of total FY05 royalties)