Business people negotiating licensing contract

Evaluating Commercial NERFs: 20 Factors to Consider

“That's all managing is: just coming up with the right questions and getting the right answers.”
Jack Welch

Do you remember how much fun it was to dunk your NERF® basketball or make a one-handed catch with your NERF® football? Remembering the many epic NERF® battles you had as a kid probably brings a smile to your face.

If you are a technology transfer office (TTO) professional, the phrase “NERF battle” is no longer a happy place. TTOs must consider a wide range of critical and complex factors when evaluating an industry sponsor request for a fully paid-up no-cost commercial license aka, a non-exclusive royalty free license (NERF).

Before you negotiate a NERF with a sponsor, consider and evaluate these questions:

  1. Is a NERF required to accommodate the sponsor? It may take several years to determine whether an invention is useful in their product line. The sponsor may be willing to take an option to the invention with a reasonable fee that reflects the unknown value of the invention. If you don’t know the answer to this question, either ask the sponsor or begin negotiating without including a NERF.
  1. What is the amount and frequency of SRA (sponsored research agreement) funding? Is this amount significant for the field of research? For example, a project with multi-year funding of 150K+ with extensions is more impactful than a one year project and may justify granting a NERF.
  1. Is this research early stage (e.g., concept just being developed) or late stage (e.g., path to commercialization is relatively fast)? If the latter, is the research better suited for inclusion in an applied research center? Whether the research is performed in or out of an applied research center, if the intellectual property developed is likely to be commercialized relatively fast, granting a NERF may not be fair and reasonable to the academic institution. In these situations, the pedagogical value vs. the sponsor investment should be weighed carefully.
  1. Is the SRA in a high priority area of current and future research like biotechnology or advanced materials? If the institute is establishing a leadership position in a particular area of technology like Covid-19, an SRA including a NERF might be an appropriate vehicle for meeting the institute’s goals.
  1. What is the likelihood of future funding from the SRA funding partner or through other sources, e.g., federal agencies, private foundations or companies? If there is a strong likelihood the SRA including a NERF will lead to additional funding from federal agencies, it increases the research revenue streams and long-term value of the SRA.
  1. Is there an Institute-level relationship with the SRA funding partner? Most universities look at the relationship with the sponsor and the amount of money in the sponsored research contract before agreeing to a NERF. These relationships are formalized through existing master agreements and large gifts.
  1. Is there potential for IP rights in non-competing fields of use? If the research has broad commercial licensing appeal and the institute is able to limit the range of inventions or field-of-use, there is a stronger likelihood the NERF will not impact the licensing potential of resulting inventions to non-sponsoring parties.
  1. Is there likely to be joint IP that includes researchers from the sponsoring company? If the answer is yes, absent other terms in the SRA to the contrary, providing a NERF has no impact because the sponsoring company will be able to practice the joint IP under its own rights to the IP as a co-inventor.
  1. Does background IP exist, and will such IP provide majority over foreground IP? Background IP includes existing patents, provisional applications, disclosures filed with the Office of Technology Transfer, or trade secrets that must be filed prior to contract being signed. Background IP will typically be indicated in the contract. Even where the SRA includes a NERF for foreground IP, it cannot be practiced without a license to the background IP.
  1. Is there background IP to be licensed to Rensselaer (for research purposes) that may impact foreground IP? If a sponsor company holds background IP that must be licensed to practice foreground IP, gaining the research funding may have more value than the foreground IP and granting a NERF deemed acceptable.
  1. Is there a written policy by the sponsor on open source or non-exclusive royalty free (NERF) licensing? Attempting to negotiate away from a NERF where the sponsor company requires such terms under an internal policy can be very difficult. Often, such situations required a careful review of all the information available to determine whether there is inherent value aside from royalties that justify granting the NERF.
  1. Is the sponsor requiring research activity exclusivity?  Most Universities will not grant exclusivity beyond the PI and will only consider PI exclusivity for a reasonable period of time. This will not preclude the PI from seeking federal and/or state funding in this area.
  1. Will the SRA have an impact on students, their thesis research, or providing opportunities for employment post-graduation? Many institutions are strategically focused on developing relationships with industry and the resulting employment opportunities for their graduates. Depending on the sponsor company, more latitude may be given with respect to granting a NERF.
  1. Will the investigators (PI, co-PI) have a financial conflict of interest with the sponsor?   Are they involved as a consultant, founder, or director of a sponsor providing funding through a federal SBIR or STTR grant? Consulting with the sponsor on unrelated research areas would not create a conflict; however, such a relationship would still be required to be disclosed in annual conflict of interest reporting; in such cases, a conflict of interest management plan must be developed, and all federal regulations must be followed. If the research relationship will be complicated to manage, granting a NERF may not be favored.
  1. Is this a pharma technology? Most universities will not agree to a NERF for pharmaceutical technologies because the long revenue potential is too great.
  1. Does the NERF hinder the ability of the faculty member, post-doc, or students working on the project to start a company around the technology? In these situations, faculty buy-in is the triggering event for NERF’s. If all other negotiation tactics have failed and the sponsor still wants a NERF, the institution needs to reach out to the faculty member to discuss the ramifications of the NERF. Specifically, that the NERF hinders the ability of the faculty member, post-doc, or student working on the project to start a company around the technology. Start-up formation is a major driving factor for many institutions, so this may be a serious consideration.
  1. Is the institution focused on being “industry friendly”? Some institutions are open to doing commercial NERFs. This is part of their strategic plan and they want to be viewed as quick and flexible on terms with the goal of securing additional industry sponsored research.
  1. Does the sponsor hold a dominating patent position in the given area of technology? Is the NERF limited to inventions dominated by these patents? If the IP is very specific to the sponsor or they own most or all the background IP related to potential inventions, it is unlikely the university will be able to find another licensee. If the IP generated is likely to have commercial value, but only to the sponsor company, granting a NERF is not recommended. If a NERF is required because of other factors, no patent filings should be undertaken.
  1. Will the institute receive fair consideration for the NERF? This may include the reimbursement of patent expenses, license fees, overhead expenses, facilities and administrative reimbursements and bonanza clauses.
  1. Does the sponsor require sublicensing rights? Universities do not usually grant sublicense rights because those rights compete with the University’s efforts to license the invention and result in the University losing control of its own IP.

Tradeoff for Commercial NERFs

Technology Transfer Managers should perform some level of due diligence to determine what the tradeoff is for the commercial NERF versus licensing the potentially resulting technology. This allows the institution to better compare the opportunity cost and have data to ultimately back up its decision.

Each institute approaches commercial NERFs differently depending on the goals of the organization. It’s important to have a keen understanding of the university strategy and how other intangibles, such as strategic partnerships, which may include employment and internship opportunities for students, can influence the decision outside of compensation.

Bruce Hunter is the Executive Director of the Office of Intellectual Property Optimization (IPO) at Rensselaer.