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Licensing technological developments funded by public money
24 June 2009, News

Like other universities around the world, South Africa’s institutions of higher learning have a focus on research and study which can result in the creation of marketable new technologies. But when technological developments emerge as the result of the investment of public money, what becomes of them? This is a question that government sets out to answer with the promulgation of new legislation which provides a framework for the commercial exploitation of this sort of intellectual property.

Draft regulations dealing with this issue have been gazetted (Government Gazette 32120) under the Intellectual Property Rights from Publicly Financed Research and Development Act 51 of 2008 (the Act). Once a new development has resulted, the individuals involved in the research and the university itself, have an interest in enabling its commercial exploitation; government, too, has an interest as it stands to gain in terms of tax income on sales which may result from that exploitation.

However, universities are not geared towards commercial exploitation but rather are focused on the research and possible development aspect. This necessitates the identification of a suitable partner which has the market reach and capability to take the new technology, develop it into a commercially viable product or service and then market that product or service as broadly as possible in order to generate an income from it.

That partner needs to be chosen very carefully; indeed, the Act sets some conditions which must be fulfilled when choosing that partner, including a preference for a local organisation. While historically, South African institutions have often tended to opt for an international partner, government appears to be clamping down to some extent on the practice. The Act tells us that it is necessary to look local first, since with the transfer or exclusive licensing of intellectual property rights to a foreign organisation, some of the taxable royalties and developmental opportunities may leave the country too.

In this regard, approvals may be required from Treasury as well as from the National Intellectual Property Management Office of the Department of Science and Technology. The difficulty is that the selection of a local partner may mean severe limitations in the potential market reach for the technology. That may be addressed through licensing the technology to several partners, but this is not an ideal solution; exclusive agreements are preferable from a commercial aspect, despite the Act pushing for non-exclusivity. The reason is that the partner will typically have to invest substantially to ready the technology for revenue generation and to market it; it will therefore look for some sort of guarantee such as exclusivity to ensure that its risk results in a return.

Structuring royalties

The next issue which arises is how to structure royalties in terms of the licence agreement. Experience advocates the payment of an upfront fee with recurring royalties on sales generated in due course. The reason is that there should be an opportunity cost which in turn places a pressure on the partner to make the most of the opportunity. If there is no risk, there is little incentive for the partner to immediately turn its attention to development and commercialisation of the technology. The university, government and individuals involved in the discovery of the new intellectual property should then enjoy an ongoing share in the success of its commercialisation.

Furthermore, the licensor (the university/government/individuals) should exercise some control by way of an agreed business plan with which the licensee (partner) takes the technology to market. This is another guarantor of the sustained effort of the partner to generate revenues and profits from the development of the technology. In terms of this, objective milestones should be put in place against which progress can be measured, failing which certain consequences could result, including the potential loss of exclusivity. Failing this, the partner may license the technology only to shelve it as the result of commercial decisions to develop other opportunities first. If it is an exclusive partnership, this can result in the technology becoming worthless. Simply put, there should be adequate ‘carrots’ (incentives) and ‘sticks’ (punishments) to keep the partner motivated and performing.

Assuring further development

Since universities are public institutions and the lecturers and researchers working there are subsidised to do their work – and incentivised to publish their findings – a dichotomy arises in terms of which the partner has an interest in maintaining secrecy around the technology it has acquired, while the lecturer will likely seek to continue publishing papers.

The licence agreement therefore has to deal with this dichotomy effectively, making provision for exclusivity on the licensed technology and allowing for continued research. In terms of this, the licence agreement must include exceptions on exclusivity to allow continued research and the publication of subsequent findings; these clauses must provide for how the university will publish and how it will be incentivised.

Leading on from that is how new uses for and improvements to a licensed technology will be handled – do they accrue to the same licensee or can the university use them as it wishes? This has to be considered by the licensor and licensee in the licence agreement at well.

The bottom line is that the licensing of publicly funded technological developments is a complex and sensitive issue as it has a number of vested interests which must be carefully considered in a fair and balanced licence agreement which provides for the optimal exploitation of the technology for both public and private commercial benefit and that such licensing is compliant with the applicable regulatory frameworks.

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