Service Inventions in the Public Sector Mr. Arnon Ikan, Senior Deputy Accountant General

1. Service Inventions in the Public Sector Mr. Arnon Ikan, Senior Deputy Accountant General Ministry of Finance February 2006

2. The Goal Regulating the activity for transferring knowledge and technology stemming from governmental research bodies to the private market, by creating an economic and legal infrastructure that will enable the transfer of intellectual property rights from the Government to the private market, while protecting the State's interests.

3. The Existing Statutory Situation: Under the Israeli Patents Law Service invention - an invention by an employee who invented it in consequence of his service or during his period of service with a given employer. Under the Israeli Civil Service Regulations An express obligation applies to the employee to report a service invention to the Director General of the Ministry and to an Inventions Committee which is meant to discuss and determine the inventor's rights, with the approval ofthe Patent Advisor.

4. The current problems 1. The State does not take advantage of the intellectual property rights that were created in the framework ofthe Government - protection and/or realization of its commercial potential. 2. A lack of interest on the part of employees to inform their employerabout their inventions coupled with an interst in publishing the research. 3. The absence of a government infrastructure for handling intellectual property causesundesirable phenomena: a loss of the commercialization potential of knowledge.

5. The Result • The knowledge is not protected and is not realized and, as a result, the public interest is harmed on two levels: • 1. On the broad public level: • Direct loss of revenues (from royalties) by the State and the • Governmental research body. • Harm the potential of the devolpment of the invention. • Harm to the potential to develop production or development enterprises that are based on the knowledge and that will constitute a basis for growth, employment, attracting foreign investments and increasing the State’s revenues from taxes.

6. 2. On the Governmental Level: • A drain of information to the private market (by publishing • or by transferring informationon a corporate basis) in a • manner that is neither institutional nor controlled. • Harm to the Government’s revenues potential. • A negative incentive that leads to a governmental brain drain. • Harm to the ability to recruit high caliber manpower.

7. On the other hand, there are a number of risks in regulating activity for the commercialization of Government knowledge: • Growth in the scope of the investment in applied research at the expense of basic research. • An incentive to employees to perform research at the expense of the primary objective that theyare responsible for (for example: public health) Research that has no commercial potential at a given point in time Research that has an immediate business potential

8. Use of State budgets for applied research, with the main beneficiaries beingthe private bodies and the researchers. • Involvement of civil servants in business activity is liable to lead to a built-in conflict of interests. • A fear of entering into business risks, with the unvolvment of the State. Therefore, in the framework of regulating the activity, the risks must be reduced to the bare minimum.

9. Why work to change the status in light of the concerns described above? The advantages that were detailed above. Comparative sources from developed countries in the west, led by the US. 3. A reduction in the incentive to engage in improper activity by means of commercializing the knowledge in various channels.

10. Comparative Sources

11. Activity aimed at transferring knowledge and technology from the Government and public sectors to the private sector is currently being performed in many countries, in various frameworks. • This policy has yielded an increase in the revenues of the research institutions, based on the registration of patents and the opening of many startups that have made a major contribution to the local economy.

12. The Situation in the US – the Bayh-Dole Act • Passed in the 1980 as an amendment to the Patent Law. • Intended to create incentives for business activity without State involvement by: • transferring ownership of the results of research from the State to the research institutions. • Imposing responsibility on the research institution to do everything possible in order to commercialize research with economic potential.

13. Result: • It became evident that this decision was one of the most significant causes of the growth in the American GNP in the last decades. • Between 1993 and 2000, a total of 20,000 patents were registered and over 3,000 new companies were founded. The revenues from the bodies in2002 alone stood at around $1.3 billion. • The average annual growth in revenues from the issuing of licenses to federal research laboratories is over 10% per annum.

14. Results among the otherOECD countries • In Germany the revenues of governmental research institutions totaled around €66 million in 2001 (747 patents were accepted, 555 licenses were issued and 37startups were founded) • In Australia the revenues from the commercialization of government and public-owned knowledge and technology was estimated at around €100 million in the year 2000 (498patents were accepted, 417 licenses were issued and 47 startups were founded) • In Canada the revenues of governmental research institutions totaled around $33 million in 2002 (172 patents were accepted, 362 licenses were issuedand 49 startups were founded)

15. Existing Activity for the Commercialization of Public Knowledge in Israel (Universities and Private Hospitals)

16. Background: • At universities and private hospitals in Israel, business • activity aimed at transferring knowledge and technology to • the private market exists, by means of: • granting the proprietary right to commercialize the knowledge to a business company that was set up for the purpose. • determining rules for financing the company’s expenses. • formalizing agreements for the distribution of the revenues that are created between the institution and the researcher.

17. The method of commercialization at universities and private hospitals in Israel: Research Institution Researcher Commercialization Company Private Market

18. The Agricultural System The Agricultural Research Administration (Vulcani Institute)

19. General Data • Was set up in 1921 as an “experimental agricultural station”. • The Institute performs around 70% of all agricultural research in Israel. • It conducts around 700 applied studies per annum. Most of the research staff is alsoengaged in training. • Net budget – around NIS 165 million. NIS 140 million of which consists of salary expenses and NIS 25 million for purchasing. In addition, around NIS 60 million income-dependent expenses, stemming from external sources offinancing.

20. Background • In recent years the Agricultural Research Administration has worked to commercialize the research knowledge that it has accumulated,in line with its principal goal of promoting agriculture in Israel, by means of a TTU division that is engaged in the commercialization of knowledge vis-à-vis outside parties. • Over the past two years the Administration has operated an experimental mechanism for the payment of royalties to researchers who are civil servants, under a special permit. The model is based on the Sliding Scale principle, i.e. a rankingof the scope of payments to researchers as a function of the magnitude of the royalties that are received from the commercialization of the knowledge.

21. Percentage of royalties for the research team Volume of Annual Revenues net of Expenditures 100% Up to NIS 10,000 30% n NIS 10,000 - NIS 150,000 20% NIS 150,000 - NIS 400,000 10% NIS 400,000 - NIS 1,000,000 5% Above NIS 1,000,000 The Royalties Model • The above is for each research project separately and is calculated on an annual basis. • In any case, the royalties will not exceed two yearly pensionary salaries for each researcher.

22. The Health System - Government Hospitals

23. Background • Government research studies performed within the health system are generally performedin the framework of health corporations affiliated with hospitals. • The studies are performed by researchers who are physicians, a large percentage of whom are civil servants whose jobs consists primarily of providing health servicesto patients at the hospital. • Extensive research with practical potential is carried out at government hospitals. • This research constitutes the principal need for regulating the activity • in terms of its inherent economic potential.

24. Breakdown of the Principles for Regulating the Activity for the Commercialization of Knowledge at Hospitals: • Separating the management of research from the hospital’s regular activity - will be managed by the health corporation. • The State will give the research body or health corporation authorization to conduct and sign on its behalf any activity that will promote the economic potential of the asset. • The research activity will be financed by the commercial utilization of the knowledge products, donations and research grants. No use will be made of a budget or revenues from current activity. • 4. Each research project will operate as a closed financial economy, and will maintain a separate accounting system on an accrued basis. • A control and reporting procedure for the intellectual property will be determined, in accordance with principlesthat will be decided upon.

25. 6. Research at medical centers will be conducted in two separate groups: A. Applied research – to which the intellectual property rules will apply B. All other research, including clinical trials – to which the intellectual property ruleswill not apply It will be possible to redefine a given research project, during the period, as applied research, provided a “fine” is paid for doing so. 7. The health corporation is permitted to make commercial use of the products of the research and the intellectual property rights, including by way of contractual arrangements with outside bodies (private or public) and on condition there is no conflict of interests between it and the outside body.

26. 8. Activities aimed at the utilization of intellectual property rights will be performed only through the issuing of licenses. A committee headed by the Accountant General will approve the setting up of a jointstartup in special cases. 9. A mechanism will be determined that will make it possible to grant the intellectual property rights to the researcher. 10. Disputes between employees, the health corporation, the hospital and the Ministry of Health in the domain of intellectual property will be adjudicated by a committee to be set up for the purpose.

27. What has been done to date and future trends

28. The handling of the matter of regulation by the government: • A steering committee was set up, headed by Mr. Arnon Ikan, Senior Deputy Accountant General and representatives from the Ministries of Finance, Justice and Science and a number of subcommittees for handling regulation of the subject in the governmental sector – the steering committee submitted its recommendations to the Accountant General recently. • The steering committee is engaged in three main areas: The agriculture system, the health system and the defense establishment. • An inter-ministerial committee was set up to regulate accounting reporting and recording of intellectual property assets.

29. What has been done to date • On August 9, 2005, in the framework of the Arrangements Law for the year 2006, the government approved a decisionto regulate intellectual property in the governmental health system. This decision includesall the principles that were agreed upon by the steering committee. • Government decision AG/122 dated September 13, 2004 on the subject of intellectual property stipulates thatthe products of knowledge, including intellectual property, that are created by a person who is not a civil servantand at an institution that is not a government institution and is not a health corporation, will be owned by the institutionwhere the research was conducted. The decision included rules for the commercialization of the knowledge and the royaltiesthat the State will receive.

30. Determining the guiding principles for handling intellectual property in the framework of BOT projects. • The preparation of framework documents for handling all the issues pertaining to intellectual property that constitutethe basis for the teams’ discussions. • Holding joint meetings with representatives of the relevant systems (agriculture, healthand defense) in the framework of the work teams. • A knowledge center at the government that spearheads the domain and coordinates all the knowledge that is accumulatedin this area. • A model for the payment of royalties to the research teams in the agricultural system (Vulcani Institute) is being operated.

31. Work Plan • 1. The Agriculture System: Formulating the accounting reporting requirements – early 2006. • 2. The Health System: Formulating the principles of the model – has been completed. • Formulating amendments to the regulations, laws and the Civil Service Regulations – early 2006 • 3. The Defense Establishment: Formulating the principles of the model – during 2006. • Formulating amendments to the regulations, laws and the Civil Service Regulations – the end of 2006 • 4. Accounting reporting and recording of the intellectual property assetsat all government ministries - January 2007

32. Thank You