Big news in the UK university sector today, with the publication of a 101-page document titled University Spin-out Investment Terms (USIT) Guide 2023. The Guide can be found at https://ten-u.org/news/the-usit-guide
The Guide is the product of work done in collaboration between leading UK universities’ technology transfer offices (TTOs) and leading venture capital firms, with the support of lawyers from solicitors’ firms Goodwin Proctor and Taylor Wessing (including IP Draughts’ colleague and fellow speaker on the UCL IP Transactions course, Adrian Toutoungi, unfortunately miscredited as Andrew Toutoungi in the Guide).
The Guide is an initiative of TenU, a collaboration of leading universities in the USA and Europe, including Cambridge, Edinburgh, Imperial, Manchester, Oxford and UCL. It draws on the experience of Orin Herskowitz of Columbia University, who led the efforts of certain US universities to produce something similar. The present document has a clear UK focus, and in places makes clear that certain terms, though familiar in the USA, are not common in the UK.
The Guide offers a “landing zone” of best practice across investment and licensing terms in spin-out transactions. It aims to make negotiations quicker and easier, and to help develop an ecosystem of spin-out activity, involving universities, TTOs, investors and their advisers.
These are ambitious and laudable aims. Overall, IP Draughts thinks the Guide is an impressive piece of work, which will support those aims. The text acknowledges that the Guide is likely to require periodic updating. IP Draughts offers the following high-level suggestions for the first update.
- Signpost each recommendation more clearly, with a big obvious label or a numbering scheme.
- Be more explicit about areas where the drafters were not able to reach agreement. For example, at various points the text mentions different points of view among universities on whether IP should be assigned to a spin-out or merely licensed. IP Draughts would have like to see this point given its own section in the text, with the arguments for and against (including the impact of insolvency laws on any university attempts to recover assigned IP) enumerated.
- Focus more on the legal issues that affect commercial terms, perhaps grouping the legal issues together. The Guide devotes a page to the National Security and Investment Act 2021, but there are many other areas of law that need to be considered, some of which are hinted at or mentioned very briefly. They include charity law (in relation to the university’s need to demonstrate what the Guide calls “impact” but is actually a wider issue than the REF meaning of this term), subsidy control (which was called State Aid when the UK was part of the EU), restraint of trade (eg in relation to non-compete clauses), competition law (eg on licensing back of licensee improvements), and tax liabilities (eg why in a UK context a recognised share option scheme may be preferable to immediate vesting of shares to management).
The document is packed with useful information. Inevitably, in such a comprehensive document, there are places where an individual practitioner has a different perspective. A few examples of points of detail that jumped out to IP Draughts are:
- The explanation of different mechanisms for the IP owner to obtain payment in relation to sub-licensee activities could have been clearer. A newcomer to the detail of net sales and net receipts might be baffled by the explanation of hybrid mechanisms for obtaining some revenue via net sales and other via net receipts. Some examples might have helped.
- The Guide discusses the benefits of a university having a right to appoint a director, including the opportunity for career development of TTO staff, but doesn’t mention the risk of personal liability for that staff member as a director, if the spin-out company runs out of money and trades while insolvent. In some cases, this might tip the balance towards appointing an observer rather than a director.
- There were some very specific recommendations in relation to liability clauses in licence agreements, the basis for which was not stated. Although the Guide stated elsewhere that universities were risk averse, and that no warranties should be given as to the confidentiality of know-how, it recommended that liability caps should not apply to any indemnities given by the university, or to breach of confidentiality obligations. There was also a reference to time-limiting liability obligations, which was not clear. Some of these recommendations seemed to IP Draughts to be against the university’s interests, and if they were a considered compromise by the TTOs and investors who together wrote the Guide, he would have expected this to be made clearer.
These are details, though, and the big picture is that the Guide should be very useful and help to streamline negotiation of spin-out terms.
Mr Pettifog
Mark Anderson
Paul Maclennan
Stephen Brett
Victor Warner
IP Draughts 
Thanks t. Interesting comments from a company/licensee perspective. My view is that companies should accept that when they license from a university, they cannot have all the protections that they might get from a commercial licensor, because a university has different objectives and needs, underpinned by eg charity law. Perhaps this is an argument for creating a new NRDC-type organisation that takes an assignment of all university IP and then both licenses and sues infringers on a more commercial basis.
Definitely a useful document, partly because it highlights the areas of discussion/dispute that exist in every case.
IP ownership is less important than exclusivity and enforcement provisions, and many factors will dictate whether ownership is more suitably retained by the university or spin-out. It is due to the enforcement point that I want to comment on the reservation of rights section. Ownership directly provides enforcement rights, as does an exclusive licence in the UK, so control of enforcement can be determined by the contract where the licence is exclusive. Rights to enforce differ by country – in some any licence will do.
Reservation of rights to conduct academic research and teaching in the same field and territory as that covered by an exclusive licence may make the licence “sole”, not exclusive. If the licence is not exclusive, the spin-out does not have enforcement rights and this cannot be provided by contract. Only the university, as owner, would have enforcement rights. Damages in enforcement proceedings go to the party who has standing to sue, and the university’s damages will not be equal to that of the spin-out. There was also a point on agreeing distribution of damages, which does not appear to take this into acccount.
Reservation of rights may be determined by the existing statutory exemptions to infringement, which in the UK should cover certain research, not all. Teaching per se is not an infringing activity. Alternatively, the scope of the exclusive licence could be drafted in such a way that no written reservations are required. I suggest some work needs to be done to ensure the generally agreed terms do not endanger the rights that are required to enforce the patent.
Finally, once the patent is published, there is no damage to future IP by teaching related to the invention covered, however, if know-how is also licensed to the spin-out, which may support future IP, then disclosing such information by teaching would be a public disclosure and prior art against future patent applications. It also appears from the document that universities want their academics to carry on as before once the spin-out has been created, where elsewhere, non-compete clauses would be accepted as a necessity.
There will always be a disconnect when it comes to maximising the needs of a business (control, competition, secrecy and IP development) with the needs of the university to share its knowledge and compete for fee-paying students.