Oxford case (4): fair university share

This is the fourth of five (or more) articles that focus on detailed issues that arise from the judgment in the case of Oxford University Innovation Ltd v Oxford Nanoimaging Ltd [2022] EWHC 3200 (Pat). A previous article discussed the judge’s conclusions on whether the wording of the university’s IP policy was fair under consumer protection laws. This article  considers whether, even if the policy itself is fair, a university might implement it in an unfair way.

This topic comes up in different ways, including fairness as between the inventors and the university, and fairness as between senior and junior staff; the latter topic will be covered in the next article.

Introduction

Universities typically have policies on revenue sharing of IP royalties, and on equity stakes in spin-out companies. It is sometimes argued that UK universities demand too high an equity stake in spin-outs. Comparisons are made with the practice of US universities. In IP Draughts’ view, it is difficult to discern the objective truth on this topic. The argument is sometimes made by people who have a personal interest in reducing the university’s share, and thereby increasing their own share of the pie. UK universities are said to provide more support to start-up companies than their US equivalents, which might justify a higher share. And UK universities are increasingly offering to take a lower percentage in return for a reduced level of support. IP Draughts was very interested to see the judge tackle this subject.

Oxford’s arrangements for sharing equity with inventors are different to its arrangements for sharing IP licensing revenue. The latter involve a four-way split between inventor(s), department, university and OUI, where the relative percentages change as the amount of revenue increases.

The equity split at the time that the judgment is concerned with can be found here and seemingly started on the basis of a 50:50 split between university and inventors, unless a different percentage could be justified. Oxford’s equity policy has recently changed to a 20:80 split between university and inventors, or in some cases 10:90, as can be seen here.

The judge introduces this topic in the following terms:

8. The thrust of ONI’s case is that Oxford’s approach to allocation of the commercial fruits of such research was unfair to DPhil students and, more particularly, unfair to Mr Jing in the circumstances of the case. More specifically it is said that Oxford’s policies are unfairly weighted in favour of the University and senior academics, who may have contributed less to the detail of the work than more junior researchers or inventors.

9. Cases of this kind involving these kinds of issues in universities rarely come before the courts. None has in this country before this one…

The inventors ask for more

The judge gets into the detail of this subject from paragraph 181 onwards. Mr Jing and Professor Kapinidis tried to persuade Oxford to accept less than 50% of the equity in the company that they had formed to commercialise the Nanoimager – ONI.

181. One of the points that troubled Mr Jing most (and also troubled Professor Kapanidis at the time) was the 50:50 split of equity in ONI between the researchers and the University. ONI contends that there was unfairness about this and the process for reaching it.
182. Professor Kapanidis and Mr Jing were seeking a larger share of equity, including (together) trying to down-play the role the University had in the creation of the designs and up-play Mr Jing’s role. There is a memo from October 2014 (in two versions in draft) which was drafted, inter alia, by them and submitted to the University concerning the equity split. This said that Mr Jing had conceived and implemented the novel ideas in the first Nanoimager prototype “while not a University student and in a very short time”. It said that his innovation “came largely through his previous training and combined with the project we had at Oxford” and that Mr Jing “did not benefit substantially from the Oxford environment”. This draft appeared to have been directed to addressing an aspect of Oxford’s application of its equity split policies to the effect that if a spin out included “significant non-Oxford IP” there might be a basis for a deviation from a 50:50 split (see the reference to this in a later e-mail of 25 October 2015 from OUI to Professor Kapanidis). So I think this was a “tactical” memo which did not reflect the reality. Both Mr Jing and Professor Kapanidis were trying to secure a greater share of equity against the University and, at that point, making common cause to do so, using the fact that Mr Jing had come in from outside as a hook for that argument.
183. In that memo, Professor Kapanidis and Mr Jing made a number of more general arguments to support an equity split that was more favourable to them, including the fact that the University’s request for 50% did not provide sufficient equity to grow the company quickly and drawing attention to the fact that other universities in various countries operated more favourable policies.
184. It urged Oxford to be “more flexible” and sought a split of equity which would have given Professor Kapanidis and Mr Jing 90% rather than 50%. The thrust of their argument was that the University had not contributed enough to warrant a larger share.

185. …In all, the document was an attractively presented work of advocacy from the perspective of entrepreneurial scientists as to why they should take by far the greatest share of equity benefit.

Oxford is not persuaded

186. Professor Kapanidis’ evidence, which I accept, is that there was scope for negotiation with the University as to equity share but they were ultimately unable to persuade the University that there should not be a 50:50 split. I had the impression from his evidence at the trial that, although he would have liked more, he did not think the split ultimately agreed was fundamentally wrong.
187. As to equity, the 50:50 split was readily understandable in the circumstances: this spin-out which was the fruit of a University project in the sense that it had been originally conceived of in an Oxford lab by an Oxford professor who had recruited a series of talented individuals to work on it (paid for by research council funding) of whom the most dynamic individual on the detailed aspects of design was undoubtedly Mr Jing. There is nothing in the materials to suggest that Oxford’s mind was closed to considering a different split but, having not been persuaded, the project went ahead with a split of 50% University, 25% each to Professor Kapanidis and Mr Jing.

It has been suggested to IP Draughts that the two founders were not good enough at negotiating the equity split with the university. Perhaps professional investors would have taken a stronger line. Perhaps Oxford was too wedded to 50:50 at that time, and less willing to negotiate than some other universities would have been. This is all speculation, but it is striking to see a new Oxford policy that starts on the basis of a 20:80 or 10:90 split. Again speculating, but perhaps the new policy is more based on politics than objective considerations of fairness.

Detailed analysis

The judge concludes that the 50:50 split is not unfair. He explains his reasoning in greater detail in later sections of the judgment. He is, of course, assessing the issue of fairness by reference to the relevant law on fairness in consumer contracts. As can be seen from the judgment, that law is extensive and nuanced, and doesn’t necessarily follow common-sense notions of what is fair. And the law isn’t necessarily focused on what is fair to the individual, as it sometimes looks as whether the system as a whole is fair.

For most readers (including IP Draughts), the law in this field is of less interest than the conclusions that the judge comes to based on that law.

The judge discusses Oxford’s formula for splitting licensing revenue, and compares it with other universities. He doesn’t seem to have any major concerns about it, though it seems to be difficult to compare like with like as some policies don’t refer to the possibility of the inventors also getting an equity stake in a spin-out company (eg see paragraphs 522-523). In relation to equity shares, the judge considers the argument that Oxford claiming a high percentage has deterred investment in spin-outs, but doesn’t think this argument is supported by the evidence.

The judge then turns to two published articles that are “instructive”. The judge considers these articles in detail and readers may be interested to read his comments in full. The following extracts provide a flavour:

527. The first [article] is by Wong et al Keys to the Kingdom in Nature Biotechnology 33 No.3 March 2015. A number of the numerous authors of this paper are academics at the University. Several are at other leading universities, including in the US, some of which have successful spin out programmes such as Stanford and Harvard. Some authors appear to be affiliated either with technology companies or undertakings concerned with the study of management science and innovation.

531. Although the article contrasts the position in the United Kingdom with that in the US and it is said that in the United Kingdom a typical licensing deal is “a rarely negotiable 50:50 split between the university and the academic bioentrepreneur whereas US interviewees reported universities taking a 5-10% negotiable equity share”, it is at best unclear that the data in the article bears this out. It is also complicated by the fact that these equity shares can ultimately be heavily affected by whether or not there are non-dilution provisions.
532. The article states that US institutions are “clearly” more willing to take a lower proportion of equity than UK institutions. That statement is however hard to reconcile with an adjacent entry in the table showing a number of prominent US universities with guideline participation shares which appeared to be above even the highest percentage in any of the UK university policies the court was shown, in so far as they have guidelines. Moreover, the article does not contain any analysis of the percentage of net licensing income in addition to equity share to which a university researcher (or “bioentrepreneur”) would be entitled under the policy of the university in question. Nor does it go into detail on potentially relevant other provisions which can have a significant impact on equity share over time or any other benefits available from the university. There is nothing in the article which addresses the value of the shareholdings resulting from these shares or any dynamic effects (such as the evolution of equity over time or how well off – relative to the university – a notional bioentrepreneur ends up being after some years of operation of the spin-out under different benefit sharing regimes).
533. It does not seem to me appropriate to compare merely one aspect – headline equity share – of the suite of potential benefits which Oxford and other UK universities may offer a researcher with just a percentage headline of equity share of only some of the United States universities and conclude from this that the University has been acting unfairly or is out of line to the detriment of researchers.
534. The article also compares the equity share taken by selected UK universities. This also shows a wide range from Cambridge (20% – said to be negotiable) to University of Bath (67% – said to be non-negotiable). The majority of UK universities are said to take either negotiable or non-negotiable shares of between 50% and 60%. The article states that Oxford’s 50% share was “negotiable (rarely)” although it is not clear on what material that qualification was based. It appears from one of the footnotes to been based on anecdotal information rather than a systematic survey.
539. However, this material establishes with reasonable reliability that Oxford’s IP Provisions as regards equity split appear prima facie to be somewhere in the middle of the range of the headline shares taken by US universities (effectively ranging from 5%-100%) and are in the cluster of shares around 50-60% taken by UK universities. The material supports Oxford’s case that, as regards equity split, its approach is not in any material respect out of the norm and that to have a policy of a 50:50 split may even have some advantages in getting a deal done. I refer below to other reasons why there may be advantages in that policy approach of which a university may be entitled to take account. This evidence goes nowhere near proving that allocating a greater share to researchers or other investors would produce an overall result in a given case more likely to foster the University’s (or even given researcher’s) objectives, narrow or broad. [emphasis added]

The judge is even less impressed by the evidential quality of the second article.

540. The second article relied on by ONI is by a journalist, Mr Mark Mardell, in the New European for 22 January 2021 entitled The Inside Story of the Oxford Vaccine. The focus was a wide-ranging interview with Professor Sir John Bell, Regius Professor of Medicine at the University. He is a major figure in medical research in this country with considerable experience in commercialisation of academic and other research. He was reported in that article as having said that universities were trying to “skim” (to use the reported words) as much as they can out of the system including 40% of the equity which he is reported as saying “doesn’t leave much for anyone else”. While Professor Sir John’s views, if the article completely reflects them, are entitled to the greatest respect, I am not satisfied that this article, which is not a peer reviewed paper or even an article written by him, presents a sufficiently complete account even of his own views, let alone a survey of the views of other senior scientists at the University or elsewhere whose opinions are entitled to equal respect. Professor Sir John is reported as being a strong supporter of university spin outs and as having expressed the view that “the most exciting, interesting, innovative, game changing science is not happening in universities but small companies”. That may be true in some academic disciplines but he may well not have intended that to be taken as reflecting the position across the board. Another, unnamed, senior academic is reported in that article as having said that, in contrast, he was not a “big fan of spin outs because they pull academics out of the university into companies and they may move away from their research” with “financial drivers” distorting their “direction of travel”. It is clearly not for this court to act as an arbiter in this important policy debate.
541. However, none of this material, taken as a whole shows that it was out of line, unreasonable or unfair for Oxford to have a guideline (but negotiable) equity split for its spin outs and that this should be 50:50 researchers: university.

Many factors affect fairness: Oxford’s practice is fair

The judge goes on to consider many other factors that may affect fairness, including:

• acting in a way that supports the university’s charitable objectives
• universities’ need to demonstrate “impact”, and
• not overly encouraging commercial activity at the expense of the university’ core mission of academic research.

He concludes:

557. Returning to more concrete points, on the material provided, for a university such as the University to take 40%, 50% (or whatever significant) percentage share of equity in one of its spin outs in respect of a research project undertaken as part of its work (as a general rule or more flexibly) and/or to provide for a share of benefits to go (directly or indirectly) to those who may not have worked directly on the licensed patents but who worked on the overall project, a university is not being “greedy” (to use the language of one of the documents relied on by ONI) or inappropriate. The University could reasonably take the view that this way of sharing the benefit from what might, in part, be a serendipitous advantage among a wider pool of deserving beneficiaries including future students, was more in line with its charitable objectives and/or was more in accordance with fulfilment of it overriding mission and (as I have hypothesised above) may in a given case even be more beneficial for the researchers themselves than taking a smaller share.
558. Save in cases of extreme and obvious unfairness or situations in which a university actively seeks to “rip off” researchers (which the situation in the present case obviously is not), a court should respect the policy choices a university has made with respect to allocation of benefits in this area. That is particularly so if those policies appear prima facie reasonable, properly thought out and not materially out of line with what is done in other similar institutions.
559. I therefore accept Oxford’s argument that its general benefit sharing policies were not out of line with those of other institutions when the issue is properly examined, including with regard to the scope for differences in reasonable policy choices the University could make.

In other words, it is not appropriate for a court to try to second-guess a university’s decisions on the appropriate splity of equity in spin-out companies, provided those decisions are made in what IP Draughts would call good faith (though he is not using this term in the specialist sense it is used in consumer law).

What’s not to like?

The judge then looks at the benefits that the inventors have received, which reinforce his conclusions that Oxford has not been unfair.

562. Taken as a whole, I therefore do not find that there was any unfairness in the way in which Oxford allocated benefits under its IP Provisions as between researchers and University, including as to share of royalties and share of equity. The outcome as regards benefit sharing in this case has been that those most involved in the project and key designs, Professor Kapanidis and Mr Jing, have received substantial equity shares in a successful spin out and substantial royalty streams and so has the University which supported this work for years (with Dr Crawford receiving more modest benefits) ensuring that the benefits from a programme of work of which this was one fruit are spread more widely. That, to my mind, is not unfair: the reasonable response to such a scenario is not a complaint but: “what’s not to like?”

The next article will look at the individual treatment of Mr Jing, particularly in relation to revenue sharing, and whether this was unfair.