Bulletin - Knowledge Commercialisation - May 2011

welcome to the first issue of our knowledge commercialisation bulletin

In this Bulletin we cover Technology Transfer and the Recession, the Entire Agreement Clause, The Bribery Act, Competition Law, Research and the R & D Block Exemption and more.

Technology Transfer and the Recession – Some Top Tips
Entire Agreement Clause – Small but Mighty
The Bribery Act
Competition Law, Research and the R & D Block Exemption
Question & Answer - What is the legal position where research services are provided before a written contract is signed?
Discussion Corner

Technology Transfer and the Recession – Some Top Tips

The recession has impacted on all organisations and industries, but what impact has it had on university technology transfer?

Funding Pressures

Universities now have to navigate their way through a new and more difficult funding environment. Governmental funding cuts coupled with the more cautious and more selective investor has produced a very different funding landscape to the one that existed a few years ago. That is not to say that deals are not being struck and that opportunities and funding are not available. Universities are simply finding themselves in a more competitive environment where the bar for investable innovation and creativity has been raised.

Contractual Disputes

Universities also have to be prepared to respond to the impact the recession is having on existing relationships. The recession has forced technology transfer into a more risky environment and many organisations are re-assessing their priorities and focussing on extracting value from current assets and investments. Consequently, existing contracts are being carefully examined and weaknesses are being exploited.

Insolvency

Insolvency is clearly a big issue during any recession. Reliable royalty streams can start to dry up and existing relationships can disappear overnight.

So what can universities do to mitigate such risks?

Develop a Technology Transfer Strategy

Academic-led technology transfer can occasionally reap rewards. However, putting in place a technology transfer strategy may go some way towards addressing funding pressures. Such strategies should identify priority areas, make use of internal resource and give some direction on the most appropriate routes to market. A natural by-product of a well thought out strategy is that the university will appear more sophisticated to investors and therefore will be much better placed to attract funding.

Diligence

Before entering in to a contract, universities should carefully consider who they are contracting with and how they are willing to contract with them. Do your diligence and build protection into the contract to minimise the impact if a commercial partner becomes insolvent.

If you are not confident that a potential commercial partner is financially stable or will remain so, you should consider licensing rather than assigning IPR to retain control over the university’s asset. You should also consider additional protection such as escrow arrangements and powers of attorney to give the university additional rights and control.

Robust Contracts

Disputes are often aggravated by unclear contract terms and a breakdown in relationships between parties. When negotiating contracts, universities should try to ensure that the parties’ intentions are clearly reflected in the contract’s terms to minimise the chances of confusion later down the line. Often, disputes will be in respect of payment and so careful attention should be paid to definitions and in particular, what IPR is being licensed or assigned; what payments are due and when; and what triggers payment?

You should also ensure that you have strong termination rights and that you build in mechanisms to deal with what will happen on termination.

It is tempting to avoid contract negotiation or to sign off on inappropriate terms so that the relationship can progress quickly. However, this approach often results in issues (many of which are significant) further down the line.

A good starting point is to enter a heads of terms agreement or a memorandum of understanding to reflect the parties’ meeting of minds and which can also be used as a starting point for any legally binding contract.

Contract Management

Once the contract has been signed, don’t put it away in a drawer and forget about it. It is important to be aware of both parties’ obligations under the contract and to manage the contract pro-actively. This will help maintain a good and transparent working relationship and will also allow the parties to react to any concerns or disputes as and when they arise, which could potentially save both parties time and expense.

There are many ways that universities can be proactive to mitigate risk in the current climate. Some of which begin with good internal practices and monitoring, but good management should always be backed up by good legal drafting. If you are unsure if the terms of any contract provide sufficient protection for the university, please feel free to contact Lindsays for further advice.

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Entire Agreement Clause – Small but Mighty

As far as contractual clauses go, an “entire agreement” clause may not be the most eye-catching. Nevertheless, despite its brevity and its usual position right at the back-end of a contract, it can be one of the most important provisions in a contract.

The clause is designed to regulate the remedies available to the parties to a contract and prevent the parties from being liable for any statements or representations (including pre-contractual statements or representations) that are not set out within the four corners of the agreement.

It will appear in a variety of contracts, however, a carefully worded entire agreement clause is of most importance in contracts where there have been protracted pre-contractual negotiations and various parties involved in pre-contractual discussions.

A well drafted “entire agreement” clause is crucial for university contracts given the number of parties that may be involved in contract negotiation. In addition, to technology transfer research office personnel there is likely to be input from academics and possibly students and it can often be difficult to control discussions or indeed get a handle on what statements or representations have been made.

When the number of parties involved and the number of separate chains of correspondence (often originating from different sources within the university) are considered, it is easy to appreciate the potential risk faced by a university for representations made during the course of pre-contractual negotiations and the importance of effectively excluding liability for these.

The main components of an entire agreement clause are:-

• A clear and unequivocal statement that the agreement represents the whole agreement between the parties.
  
• The clause must contain an acknowledgement by the parties of non-reliance on any pre-contractual statements, discussions, representations or assurances in reaching agreement.
  
• An express waiver of all rights and remedies other than contractual remedies.
  
• Where any documentation, such as a pre-existing non-disclosure agreement or side letter, is to remain in force following execution of the contract, a specific carve out of the relevant document(s) is required, clearly identifying the document and the extent to which it is to remain in force.
  
• It is not possible to exclude or limit your liability in respect of fraud or fraudulent misrepresentation and therefore the clause must not be capable of being interpreted as an attempt to exclude such liability; this could result in the whole clause being struck down by the courts if challenged.

Case law provides some alarming illustrations of situations where a party has become liable for a claim which it thought had been excluded under a contract. Accordingly, particular care should be taken when reviewing or preparing an agreement to ensure that all pre-contractual representations and statements have been effectively excluded.

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The Bribery Act

The Bribery Act 2010 (the “Act”) is expected to come into force later this year and, although it will mainly affect corporate organisations, there will also be some implications for public bodies which are worth noting.

The Act creates the following four bribery offences:

• attempting to bribe someone;
  
• accepting a bribe;
  
• bribing a foreign public official; and
  
• failure by a commercial body to prevent bribery.

An important point to note is that the Office of Government Commerce will likely be publishing updated boilerplate standard clauses relating to the prevention of corruption which will take the provisions of the Act into account. Public bodies should ensure that the updated clauses, or something similar, are reviewed and included in their contracts as appropriate.

Public bodies may also wish to consider the consequences of a supplier being found guilty of a bribery offence and how they would wish to deal with this. The prosecution of a major supplier would be highly embarrassing, but in some cases, the consequences of immediate termination of the contract may be even more devastating.

Another controversial point in relation to the Act is that it prohibits improper “advantages” or “rewards” of any kind and has the potential to catch even legitimate activities such as corporate hospitality and gifts. During the passage of the Act, the Government’s Representative said that it is only intended to catch corporate hospitality which is “excessive” or “unreasonable”, however given that no guidance has been issued as to what would cross the line of “reasonableness”, it is advisable for public bodies to have a policy in place for employees to follow in this regard.

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Competition Law, Research and the R & D Block Exemption

The very mention of the words “competition law” is often met with a lot of groans and head scratching. This is understandable as it is a highly complex area of law. However, university technology transfer/research office staff should be aware of the potential impact of competition law on their work.

Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits organisations from entering into agreements which may affect trade between member states and restrict competition within the European Market. Any anti-competitive provisions in contracts will be void and unenforceable and could result in fines being imposed by the Office of Fair Trading and the European Commission.

Traditionally, universities have resisted marketing their goods and services, and so could not have been considered to be “undertakings” for the purposes of Article 101(1) of the TFEU and so the TFEU would not generally apply. However, it is increasingly common for universities to market their research facilities and therefore it is likely that they will constitute "undertakings" for the purpose of Article 101(1) of TFEU. Consequently, it will be necessary to consider whether a university R&D agreement is problematic from a competition law perspective.

The fact that university R&D promotes a university’s objective of pursuing research and promoting knowledge leads many to believe that competition law does not impact a university’s research activities. However, where a university is collaborating with, or providing research services to a commercial organisation, the commercial organisation will want to ensure that it gets a good return on the results of the collaboration/research. To that end the commercial organisation is likely to wish to include provisions in the corresponding agreement which may restrict competition, bringing Article 101(1) of the TFEU into focus.

In recognition of the need to encourage collaborative research within the EU, the R&D block exemption was introduced to create a “safe harbour” for R&D agreements that fall within it.* Consequently, an R&D agreement, which would otherwise fall foul of Article 101(1) of the TFEU, may be “saved” by the R&D Block Exemption if certain conditions are met.

The scope of the R&D block exemption was expanded on 1st January 2011. One of the main changes to the R&D block exemption is that previously it only covered agreements where the parties to the agreement worked together on the R&D. Now, it covers agreements whereby one party is funded by another to carry out the R&D.

This is a welcome expansion, particularly in light of the regularity with which industry engages the university sector to carry out R&D for the purpose of devising products or processes for commercial exploitation. It is thought that, as a result of the expansion of the block exemption, many more university collaboration/research agreements will be exempt from the prohibition in Article 101(1) of the TFEU.

It should be borne in mind however, that, despite the existence and expansion of the scope of the R&D block exemption, there are still so-called “hardcore” restrictions that apply, which would result in the R&D agreement being regarded as anti-competitive. Such “hardcore” restrictions include price fixing; market restrictions; and restrictions on parties to conduct independent research.

The message to take away is that if a clause “feels” unfair, consideration should be given to the impact of competition law and the terms of the R&D block exemption. If you are unsure of the impact of EU and UK Competition Law on any current or future R&D agreements, please contact Lindsays for further advice.

*There are a number of Block Exemptions which may be relevant to research agreements; however, this article focuses on the R&D Block Exemption.

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Question & Answer

Q: What is the legal position where research services are provided before a written contract is signed?

A: Unsurprisingly, technology transfer/research offices often find themselves in this situation. Academic staff often pressure their technology transfer/research office to allow them to provide research services to third parties before the relevant contract has been finalised and signed. Protracted negotiations can lead to a delay and the pressure both internally and externally to get started can be significant. In addition, it is not uncommon to discover that research services have been provided and completed before a contract has even been contemplated.

Generally speaking, research contracts do not require to be in writing and can be formed through the actions and correspondence of the parties. Moreover, in Scotland, verbal contracts are valid (albeit it is more difficult to prove their existence). For a Court to determine that a contract exists there must be consensus between the parties on the essential terms of the contract and an intention to create legal obligations. Where pre-contractual negotiations are marked “subject to contract”, no contract can be inferred as this demonstrates a lack of intention to be legally bound prior to written agreement. Whether a contract does exist is not clear cut and will turn on the individual circumstances of each case. Indeed, case law provides examples of different Courts ruling in opposite ways when presented with the same facts.

The most significant danger for universities where there is no underlying contract is liability. As universities are recipients of public monies and therefore accountable in this regard, a research contract will or indeed should, almost without exception, have limitation of liability provisions and explicit exclusions of warranties in relation to third party IP and warranties guaranteeing a particular end result or research outcome. Where there is no underlying contract, it is substantially more difficult to exclude liability and warranties which would usually be excluded in written contracts and therefore there is a danger that such warranties are implicit and that the university’s liability is unlimited. Academic staff may be more motivated to ensure that a written contract is in place if there is an understanding that personal liability may also be an issue.

In terms of remuneration for the services provided, in the absence of conclusive evidence to show a different figure or payment structure has been agreed, the Court will impose a reasonable fee. For university contracts this is perhaps a less significant risk than in a commercial contract where profit making is key, however, it does cause a degree of ambiguity and uncertainty which the university may find unacceptable.

Where disclosure of proprietary or confidential information and know how forms the basis of the transaction, it is of even greater importance to ensure a water tight non- disclosure agreement is in place before such information is disclosed. Where disclosure is unavoidable before an undertaking is in place, there are ways to seek to minimise the risk such as backdating the NDA and obtaining warranties that the obligations contained in it have not been breached in the period between the commencement date and the date of signing. This, however, is a method of minimising the risks, not protecting against them.

Given the number of issues, it is crucial to ensure (to the extent possible) that a written contract is signed before the research services commence. Often, educating academics in relation to the issues can be a useful risk management strategy in this regard.

If you have any questions which you would like covered in future Bulletins please let us know.

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Discussion Corner

With Universities feeling the pressure of the current financial climate and political change, they are being forced to think and act more like private enterprises. This leads to the question…should they be privatised?

There are many arguments for and against the privatisation of Universities and the reality of facilitating a change from a public to a private organisation would require substantive restructuring. What we are seeing at the moment is Universities thinking and acting more like private organisations, but ensuring that they act within the constraints that come with public funding. Is this a satisfactory strategy?

We would welcome any views.

If you would like to discuss any of the issues raised in this Bulletin please contact a member of our team.

If there are any topics which you would like to see covered in our future Bulletins or you require additional copies sent to you by post or email to distribute to your colleagues or clients, please email marketing@lindsays.co.uk .

This newsletter has been issued by Lindsays on the basis of publicly available information, internally developed data and other sources. Whilst all reasonable care has been taken to ensure the facts stated and the opinions given are correct, Lindsays does not accept any responsibility for its content and advise that specific advice should be sought regarding the topics covered.
© Lindsays 2012