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Monitoring and Auditing License Agreement

Monitoring and Auditing License Agreement. David M. Kettner Wisconsin Alumni Research Foundation. October 28, 2005. Technology Transfer. ì. î. í. ë. Revenue Generation. Licensing. Technology Development. Commercialization. Payment of Royalties. Development. Liability

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Monitoring and Auditing License Agreement

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  1. Monitoring and Auditing License Agreement David M. Kettner Wisconsin Alumni Research Foundation October 28, 2005

  2. Technology Transfer ì î í ë

  3. Revenue Generation Licensing Technology Development Commercialization Payment of Royalties Development Liability Protection Patent Activity Monetary Payments

  4. Contract Management Infrastructure Implementation Instruments

  5. Infrastructure Contract management has to be a priority • Avoid the black hole • Allocate resources to manage the contract • Try to maintain clean hands

  6. Infrastructure • Invest in systems to ensure compliance • Data management • Document management • Accounting • Audit your system • Rolling audit • Periodic reviews

  7. Infrastructure - Instruments Must be compatible! • Infrastructure must be able to effectively monitor the responsibilities of both parties • Contract obligations must comport to the abilities of both parties

  8. Instruments • Development Plan • Development Reports • Auditing Rights • Right to Terminate Development

  9. Instruments • License Fees • Set payment dates • Milestones • Consider time and event options • Development Reports • Royalties • Royalty Reports • Auditing Rights Monetary Payments

  10. Instruments Liability Protection - Patent Activity • Insurance • Periodic Certification • Patent Filings • Prompt Notice • Right to Review and Comment

  11. Implementation • Educate the Licensee • Obligations • Identify administrative contacts • Identify business contacts • Don’t Assume Knowledge • Most licensees lack necessary systems

  12. Implementation • Be Proactive • Courtesy notices • Be Consistent • Develop a notice protocol • Follow the notice protocol • Don’t Be Afraid to Contact Licensee • Don’t Be Afraid to Audit

  13. Auditing Conducting an Audit is often a balance act: • Business relationship • Contractual obligations Find the balance by: • Being honest; • Identifying objectives

  14. Audits - Royalties • Irregularities in reported royalties • Royalty fluctuations • Unreflected market growth • Standard procedure • Set rotation for top licensees • Extensive foreign coverage • Industry expectations • Problematic licensees

  15. Audits - Development • Federal Requirements (Bayh-Dole) • Lack of Development • Development Milestones

  16. Audits – Contract Language • Tailor to specific technology and/or industry • Key Elements • Scope • Documents and Records • Location • Timing • Auditors • Confidentiality • Allocation of Costs

  17. Audits – Contract Language(Continued) Scope • Generally directed to royalty reporting • Avoid narrowing limitations such as “verifying accounting” • Attempt to verify fulfillment of payment obligations • Don’t forget to audit development activity • Typically covers between 3 to 6 years of activity • Avoid creating a “statute of limitations”

  18. Audits – Contract Language(Continued) Documents and Records • Ensure all necessary documents are accessible • Sales • Invoices, cash receipts, revenue reports, commissions • Production • Inventory, purchasing, manufacturing • Distribution • Shipping, insurance, taxes • Deductions • Shipping, insurance, taxes, returns, credits, commissions • Development • Lab notebooks, internal job costs, tax credit filings

  19. Audits – Contract Language(Continued) Location • Avoid limiting to a single location, if possible • Documents may be in multiple locations • Ensure that all necessary documents and records will be provided at designated location Timing • Generally within 30 days of request • Often no more than once per year • Should be limited to the subject matter of that audit • Don’t forget development may be a different matter

  20. Audits – Contract Language(Continued) Confidentiality • Avoid limiting access to the results • Avoid limitations which may preclude use in litigation Allocating Costs • Create thresholds obligating licensee to paying for the cost of the audit

  21. Audits – Contract Language(Continued) Auditors • Typically CPAs or attorneys • Should consider experts and employees for development activity • Avoid licensee veto

  22. Audits – Implementation • Be honest and identify your objectives • Work with the licensee • Hire a professional auditor • Experts in the area of interest • Financials: CPA • Development: Consultant • Independent • Smooth relationship issues • Provide credibility

  23. What does WARF do?

  24. Quick Facts - Agreements All numbers are approximate Total Active WiCell Agreements: 681

  25. Quick Facts - Obligations WARF Obligations • Average 1.5 obligations per agreement • Patent Filings • New Disclosures Licensee/Company Obligations • Average 3.8 obligations per agreement • Insurance • Development Reports • Fees (license fees, royalties, etc.) WiCell/Recipient Obligations • Average 2.1 obligations per agreement • Annual Certification • Fees

  26. Quick FactsObligation Management WiCell/Recipient Obligations • 1430 per year • 119 per month WARF Obligations • 1320 per year • 110 per month Licensee Obligations • 3344 per year • 279 per month All numbers are estimates

  27. CMG Mission Statement The mission of the Contract Management Department is to: • Assist in managing the post-execution responsibilities of WARF and WiCell; • Monitoring post-execution obligations of licensees/contractees; • Provide administrative and technical guidance and support to the licensing staff with respect to active WARF and WiCell agreements; • Provide technical guidance and support to the University with respect to intellectual property provisions in University agreements with third parties; and • Manage Record Retention Policy.

  28. Contract Monitoring • WARF(WiCell)/Licensee Obligations • Accounts Receivables • Notices and Collections • Technology Updates • Contract Data Entry • Amendment Drafting • Preparing Inventor Distribution Forms • Reviewing and Negotiating UW Agreements • Other Contract Administration Matters

  29. Invoice processing • Notice processing • Check Processing • Management of Material Transfer Agreements • Management of Confidential Disclosure Agreements

  30. How is WARF Making CMG Successful • Developing new processes for tracking and managing obligations • Automated courtesy noticing on Licensee obligations • Automated invoicing on amounts due • Improve the tracking and noticing on patent filings • Improve reporting and maintenance of WARF obligations • Developed “Welcome Program” for Licensees • Conducting audits of existing active agreements • Develop a protocol for pursuing past due account receivables

  31. Collection Protocol Courtesy Notice • Sent at least 30 days before obligation due First Past Due Notice • Sent no later than 35 days past due Second Past Due Notice • Sent no later than 65 days past due Notice of Default and Termination • Sent after discussions with Licensing Manager, but no later than 95 days past due Termination Notice • Sent no later than 5 days after end of cure period Collection Notice • Sent by outside counsel upon request

  32. Established Audit Program • Conduct 1 to 3 audits per year • Problematic licensees • Top revenue producers • Odd royalty fluctuations • Last 5 Years: 10 audits • 8 deficiencies • Discovered $5+ million in under-reported royalties • Total cost $350,000

  33. Established Audit Program Primary Auditor Sid Rattner McGladrey & Pullen, LLP 20 N. Martingale Rd. Suite 500 Schaumburg, IL 60173 (847) 413-6217 sid.rattner@rsmi.com Secondary Auditor Sandy Kahn Dispute Analysis & Investigations Pricewaterhouse Coopers, LLP One North Wacker Drive Chicago, Illinois 60606 (312) 298-5691 sandra.a.kahn@us.pwc.com

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