Michigan State University Patent Dispute Illustrates Changes In Technology Transfer

In Technology Transfer Author: Robert Finn An ongoing legal battle between Michigan State University (MSU) and the entities contracted to administer several of its highly lucrative patents has raised concerns among intellectual-property experts. These observers fear the dispute may cause a crisis in confidence among investors-and may further wrap inventors in red tape-in the rapidly burgeoning field of university technology transfer. NO NEED: MSU's Frederic Erbisch contends his school can handle patents without outside help. The conflict centers on an attempt by MSU to wrest control of patents for cisplatin and carboplatin-two cancer chemotherapy drugs-back from the organizations to which the patents had been assigned: Research Corporation (RC), a nonprofit, tax-exempt foundation based in Tucson, Ariz., and Research Corporation Technologies Inc. (RCT), a nonprofit but tax-paying company, also of Tucson. The legal imbroglio illuminates the changing nature of university technology transfer. In recent years, an increasing number of universities-including MSU-have set up internal units to market their own intellectual properties, rather than contracting with outside entities such as RCT. As Lee W. Rivers, executive director of the Wheeling, W.Va.-based National Technology Transfer Center (NTTC), a United States government program to commercialize federally funded research, notes, "[Within] the last five years or so there's certainly been more interest from universities in deriving revenues from licensing technologies." This is certainly true of MSU. Says Frederic H. Erbisch, director of MSU's Office of Intellectual Property: "Since we started operating as a full-time office [in 1992], we feel that we can manage most of our inventions ourselves." RCT sought to have its patent feud settled by arbitration, but in April MSU filed suit in U.S. District Court for the Western District of Michigan in an attempt to block arbitration, contending (among other things) that RC improperly transferred to RCT the administration of the cisplatin and carboplatin patents and that RCT misused its share of the proceeds. In its lawsuit, MSU alleged, as stated in U.S. District Judge Benjamin Gibson's opinion, "breach of contract, injunction, reformation, accounting, unjust enrichment, and interference with contractual relations." MSU sought to cancel its contracts with RCT on that basis, but Gibson in August sided with RCT, agreeing that the case should be settled by arbitration. The stakes are high. Licensed by Bristol-Myers Squibb Co. of Princeton, N.J., and sold under the brand names Platinol and Paraplatin, the drugs have so far returned royalties of more than $85 million to RCT and approximately $80 million to MSU. The inventors-Barnett Rosenberg, a professor of biophysics at the time of the invention, along with two postdocs, a technician, and a graduate student-also receive a combined total of 15 percent of the proceeds before expenses. RC was founded in 1912 by Charles Doolittle Walcott, secretary of the Smithsonian Institution, and Frederick Gardner Cottrell, a scientist, philanthropist, and inventor of the electrostatic precipitator for controlling industrial air pollution. They established the organization to assist in the commercialization of university inventions, using the proceeds from licensing the resulting patents to fund scientific research. In 1950, MSU contracted with RC to handle its technology transfer. The university assigned RC the rights to cisplatin in 1970 and carboplatin in 1979. In the early 1980s, the Internal Revenue Service ruled that RC's technology-transfer functions constituted an "unrelated trade or business" prohibited to private charities. In response, RC created the nonprofit but tax-paying RCT in 1987 with a $35 million loan from its endowment, which currently stands at $103 million. RC also transferred to RCT the administration of all its patents. RC continues to make grants for scientific research totaling $4 million to $5 million annually out of the proceeds of its endowment, but RCT currently makes no such grants. The crux of one of MSU's objections, as stated in the lawsuit, is that the university signed on with RC with the expectation that RC's portion of the proceeds would be used to fund scientific research. But RCT does not fund research, and in fact acts more like a venture capital firm. Last February, Percy Pierre, MSU's vice president for research, wrote to RCT president Gary Munsinger, giving nine months' notification of termination of the existing contract (later reduced to 90 days), and suggesting a restructuring of the university's contractual relationship with RCT. Pierre suggested that "a revised contract could incorporate a sliding scale for revenue sharing, with RCT retaining a higher percentage of revenue during the initial years of an invention's life and a declining percentage in later years." In response, RCT asked for arbitration, as provided for in MSU's existing contract with RC. In the April suit, MSU argued that the contract providing for arbitration was made with RC, not RCT. MSU charged that it was never properly informed of, and never approved, the transfer of its patents from RC to RCT. In August, however, Judge Gibson found that the contract did not prohibit assignment of the patents to RCT; that MSU was, in fact, informed of the assignment; and that federal law "favors arbitration where the parties have agreed to it." Linda K. Hopkins, author of Licensing Law Handbook 1994-1995: Federal Government Intellectual Property Guide (Chicago, Clark Boardman Callaghan, 1994) speculates that MSU probably fought so hard to settle the matter in the courts rather than by arbitration because it anticipates rough sledding before an arbitrator. "My guess is that MSU is going to have a hard case to prove," she says. "They may have decided that they'd have a better chance in a courtroom . . . especially if they were thinking they could get a jury trial on this." Michael Odza, publisher of the industry newsletter "Technology Access Report" and a longtime observer of the tech-transfer scene, doubts that MSU's real motives have to do with the fact that RCT does not support basic research. "I think the reason is the money," he comments. "I think that as MSU decided it could form its own tech-transfer office, it decided that it would like a slightly larger share of the revenue stream from its two most dramatic inventions. This would go a long way toward carrying that office through its first few years until it has its own revenue stream." THE WAY IT'S DONE: University of Cincinnati's Norman Pollack believes that RCT does not "take any more than anybody that I'm aware of who does the same thing." "RCT takes a pretty large chunk [of the two MSU cancer drugs' revenues], but they don't take any more than anybody that I'm aware of who does the same thing," says Norman M. Pollack, director of intellectual property at the University of Cincinnati. RCT handles one of Cincinnati's patents. "It's a question that always arises with respect to an agent in any transaction. Before the fact, it always sounds reasonable, because they're going to get you something you couldn't have otherwise. But when it's all over with, there's a tendency for people to say that the agent is taking too much." SCIENTISTS IN THE MIDDLE: Lee Rivers of the National Technology Transfer Center notes that faculty who develop inventions do not want to "get caught in some kind of battle between a giant university and a giant corporation." Some tech-transfer observers questioned by The Scientist express concern over MSU's actions. "My feeling is that a deal is a deal is a deal," states Rivers of NTTC. And Katharine Ku, director of Stanford University's Office of Technology Licensing, comments: "Based on the limited information I know, it seems to me if Michigan negotiated that agreement at the time, they should stick with it. When there's a big winner, if you don't want the group that took the chance to get the upside, you only want them to take the downside, I don't think that's fair." RCT administers one of Stanford's many patents. Others cite the potential for a crisis of confidence if such disputes become common. Says Hopkins: "The last thing university technology offices need is an impression that they're sort of a sea of red tape and court battles that is going to frustrate the commercialization of these products." And Rivers notes that individual scientist/inventors could become concerned, as well. "I think it would be an unpleasant situation for the researchers," he observes. "I don't think they want to get caught in some kind of battle between a giant university and a giant corporation." Whatever MSU's motives for seeking to renegotiate its contract with RCT, John P. Schaefer, president of RC and chairman of the board of RCT, defends the way RCT uses its share of the proceeds. "RCT's business is the development of technologies that come out of university research programs," he says. "RCT invests in developing projects. It's applied research rather than the kind of basic research that Research Corporation has traditionally funded. Furthermore, Research Corporation's board of directors voted over a year ago now that when the corpus of RCT builds up to a certain level, they're prepared to make a commitment to funding research. These programs have yet to be defined, but there is a commitment there." Schaefer adds: "Research Corporation Technologies does technology transfer for universities and other charitable organizations assuming all of the up-front risks. We assume the expenses for filing, for commercializing, and most of the projects we take on are not profitable. If we were to, say, recover just some multiple of costs and turn over the remainder to any particular university, the program just would not be economically viable." "We do it at no charge to the university," Timothy J. Reckart, RCT's general counsel, points out. "We take all the risk of evaluating and patenting and marketing an invention. A lot of inventions come through. You have to be a clairvoyant to decide which ones are going to have some value. . . . So there's a high level of cost associated with the evaluation and attempted commercialization of these inventions, and not many of them make any kind of money." "The business of technology transfer is harder than it looks from the outside," notes Odza. "It's not easy to do from the position of a foundation or a university. It's helpful to do tech transfer from the position of a somewhat separate, somewhat business-like entity. And that's what [RCT has] done. By all accounts they've done a pretty good job. They have happy customers. They have repeat business." RCT's 1994 annual report lists 213 research institutions and nonprofit laboratories with which it works, ranging alphabetically from Alabama Agricultural and Mechanical University and the University of Alabama, Birmingham, to Yale and Youngstown State universities. Representatives of California State University, Long Beach; Stanford; and Cincinnati expressed satisfaction with RCT's services when contacted by The Scientist. More and more universities are setting up their own tech-transfer offices, notes Odza, but they face a daunting task. "There's a very definite threshold of investment that any organization has to make in order to make a success of tech transfer," he explains. "You have to hire experienced people, you have to take a chance, spending fairly significant sums of money on patent expenses here and overseas. "And then you have to wait. Once you've actually negotiated some licenses, the first royalties don't start coming in typically for five to seven years from the time of the invention. There's a pretty long learning curve and revenue curve that you have to climb." The individual campuses within some state university systems, such as the University of California and the University of Wisconsin, have responded to this challenge by establishing joint technology transfer offices that serve the entire system. "The advantage is you leverage the resources," Rivers points out. "There's an economy of scale that would occur if you pool your efforts. But universities are pretty independent entities, even when they're part of a total system, and they get parochial, with good cause. [Problems can arise] if somebody doesn't think he's getting his fair share of the effort, or if more priorities are given to the other school." MSU seems to have made quite a bit of progress along those learning curves. Erbisch's office now has three professionals (one of whom works half-time) overseeing an estimated 100 to 150 patents. Erbisch says that his office manages all those patents with the exception of seven or eight administered by RCT. Given the expertise of his office's professionals, asserts Erbisch, "most of the time we wouldn't [use an outside company]. We might occasionally engage a consultant in an area where we don't have enough expertise, and we think that someone that's knowledgeable in a particular field might be able to help us. But I don't think we need a company such as RC/RCT anymore." Erbisch declines to comment on MSU's dispute with RCT. NTTC's Rivers, who managed the intellectual property office at the University of South Carolina before taking his present job, notes that the value to a university of managing its own intellectual properties goes beyond maximizing royalty revenues: When a university markets inventions and discoveries, it establishes contacts with companies that may then choose to fund other university research, and the effort gives the university a role to play in local and regional economic development. No matter how the argument between MSU and RCT plays out, Odza expects more such quarrels to arise. He calls these "an inevitable consequence of the success of tech transfer. As the amounts of money involved go up, there will be disputes over them." Rivers expects that in negotiating contracts with RCT and similar companies, universities will take the lesson of the MSU dispute to heart: "Universities will try to structure a deal they can get out of." And James R. Brett, director of the office of university research at California State University, Long Beach, points out that if such disputes become commonplace, there could be broad economic consequences. "The whole process is so complicated that we're involved with lawyers immediately," he says. "We begin to lose the point of this. If the process of moving ideas out of the university into society gets bogged down, the whole country gets less competitive." Given the level of the revenues involved, the outcome of the MSU case is likely to bring more attention to the world of technology transfer. Odza notes the judge's decision to order arbitration was reported in the Wall Street Journal, in an article entitled "University Challenges Action of Charity: Suit Seeks to Void Patent Transfers to Separate Entity" (J.R. Emshwiller, Aug. 16, 1995, page B2). "It's kind of ironic to me that the Wall Street Journal headline put the emphasis on the greed of RCT, when it seems to me that the dispute was driven by what could be as easily characterized as the greed of MSU," he says. In any case, MSU's quarrel with RC and RCT is not likely to end soon. Explains Schaefer, "We have just gotten a list of possible arbitrators and a panel of three has to be chosen. I think there are lots of legal proceedings that will have to take place, and I suspect it will be quite a few months before we actually get down to the arbitration itself." Robert Finn, a freelance science writer based in Long Beach, Calif., is online at finn@earthlink.net. (The Scientist, Vol:9, #21, pg., 1,4-5 , October 30, 1995) (Copyright © The Scientist, Inc.)

Michigan State University Patent Dispute Illustrates Changes In Technology Transfer

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