Revenue Distribution Policy
- Regent Bylaw 3.10., “Ownership of Patents, Copyrights, Computer Software, and Other Property Rights”
- Technology Transfer Policy, “IP Policy”
Distribution of License Revenue under the University IP Policy
The University’s Technology Transfer Policy (the “IP Policy”) provides for the sharing of revenues received from commercialization efforts (“Gross Revenue”) with Inventors as a way to recognize and incentivize employee participation in innovation and technology commercialization activities. The following policy provides the rules for the relative percentages to be shared with each Inventor where inventions are licensed concurrently, based on transparent, practical, and replicable procedures that can be consistently and efficiently applied across very large numbers of active license agreements that Innovation Partnerships manages on behalf of the University.
All capitalized terms in this document have the meaning defined in the Technology Transfer Policy (see especially Section XI.) unless otherwise noted or required by other University policy, and “license” or “license agreement” refers to any revenue-generating technology commercialization agreement (which includes option agreements and revenue-generating materials agreements).
For Innovation Partnerships license agreements, “Gross Revenues” generally means amounts received by U-M, but is defined in the IP Policy. U-M first deducts Patent Expenses and other U-M expenses such as unreimbursed or expected patenting, legal, collection, or other relevant expenses for the licensed Intellectual Property, as well as the Administration Fee under the IP Policy. Where the license covers Intellectual Property jointly owned with other institutions, Innovation Partnerships will typically enter into an inter-institutional agreement (IIA) that establishes the lead institution responsible for licensing and the allocation of license revenues between or among U-M and the other institution(s). In such cases, Innovation Partnerships will also deduct from license revenue any payments required to be made under the IIA as a Patent Expense as well as any administrative fees provided for in the IIA.
Who is eligible for revenue distribution?
Under the above-noted IP Policy, Inventors are entitled to “the Inventors’ share” of Net Revenues.
The IP Policy provides that license revenue shall be distributed to all involved University Inventors, except as may otherwise be provided.
Inventors may agree to include additional individuals who made important contributions to the inventive work as entitled to receive a share of the net license revenue. Such agreements must be in writing, signed by all University Inventors, and must indicate the percent allocation for all recipients.
If an inventor wishes to permanently redirect that inventor’s share of royalties to the University, an Agreement for the Redirection of Royalty Distributions waiver should be signed by the inventor as well as the department. The inventor should first review the Tax Considerations section of the website and consult a personal tax advisor to understand all tax obligations and ramifications.
How are royalty distributions calculated?
The following process is used for determining how the Inventors’ share is to be divided among the group of Inventors in a license agreement.
Licenses with a Single Inventor
When the Intellectual Property in a license agreement is created by a single Inventor, that Inventor is entitled to the entire Inventors’ share of revenues under the IP Policy.
Co-Inventors and RDP Process
When Intellectual Property in a license agreement is created by two or more Inventors (for example, there is a single patent with joint inventors, or multiple patents each with a different Inventors), the Inventors’ share shall be divided among the Inventors according to a formula that is memorialized in a Revenue Distribution Plan (“RDP”). This policy describes the process for the creation of the RDP for a license agreement.
Innovation Partnerships (a) depends on Inventors and potential Inventors to keep Innovation Partnerships updated as to their contact information so that they may be contacted for inventorship determinations, RDP processes, and revenue distributions; and (b) reminds Inventors and potential Inventors of their obligations under the IP Policy to use their best efforts to provide to Innovation Partnerships the names of all Inventors and persons that might have contributed to the making of Intellectual Property, even if it is expected that such a person may not be an Inventor under the IP Policy.
After the execution of a revenue-generating agreement or receipt of licensing revenue, Innovation Partnerships will prepare and send a draft, or default, RDP (the “Default RDP”) described below to the Inventors for their review. In the draft RDP, each invention will be weighted equally, and within each invention, each Inventor will be weighted equally. However, if the inventors previously proposed unequal contribution shares in a clear, logical, and understandable fashion, these fractions will be used instead. After creation of the Default RDP, Innovation Partnerships may optionally initially share the Default RDP with the lead Inventor(s), who may propose different contribution shares to produce a revised Default RDP. After this process, the Default RDP will then be shared with all Inventors for review and discussion among the Inventors. The Inventors have the right to agree to the Default RDP (making it the final RDP), or to discuss and agree to an alternative RDP that will become the final RDP used in the revenue distribution process.
Innovation Partnerships may facilitate the process of determining the final RDP (as by providing information, data, and examples), but Innovation Partnerships will not participate substantively in the Inventors’ determination.
If the Inventors either agree to the Default RDP or fail to respond in a timely manner, then the Default RDP will become the final RDP that Innovation Partnerships will use for revenue distributions.
If an Inventor proposes revisions to the RDP, then Innovation Partnerships will provide a reasonable period (not to exceed six months unless expressly approved in writing by Innovation Partnerships, though often Innovation Partnerships will set a shorter timeframe) for the Inventors to discuss the issue. If the Inventors agree in writing to an alternative RDP, then this will be the final RDP that Innovation Partnerships will use for distributions. The University expects Inventors to diligently and professionally discuss any default or draft RDPs, including by speaking by video conference if there are any difficulties in arriving at an agreement, as long as the number of inventors and/or availability of inventors does not make this unreasonable. When the Inventors discuss an alternative RDP, they may take into account any factors that they wish, as long as they have some relevance to the research, technology, or patents. If the Inventors agree to an alternative RDP that differs from the Default RDP, then they must memorialize this by clearly, logically, and understandably indicating their agreement, as by an electronic signature. (If the agreement does not indicate that all the Inventors clearly understood the relative fractions or it is not understandable in a substantive way, U-M will revert to the Default RDP.)
To be clear, if the Inventors are unable to clearly agree to changes to the Default RDP, then the Default RDP will become the final RDP used by Innovation Partnerships for all revenue distributions.
Disagreements as to Innovation Partnerships’ application of this and other University policies are appealable under the IP Policy unless otherwise prohibited.
However, if the appeal results in an alteration to an RDP, the result of the appeal will only apply to the distribution of revenues after the date that the appeal is filed.
Use of the RDP
The formula provided in the final RDP will be used to calculate amounts to be paid to each Inventor with respect to the relevant license agreement except as described here.
How is license revenue shared when multiple inventions are licensed?
Some license agreements may grant rights to multiple inventions. These different inventions may have different inventors and will usually be the subject of separate patent applications and/or invention disclosures.
Innovation Partnerships will assume that all licensed inventions are contributing equally to the financial value of the license unless the license specifies otherwise. However, the inventors and/or licensing manager may propose a different weighting for an Invention that is clearly of greater value due to its foundational, or fundamental, nature. This could involve, for example, a patent family that creates a significant freedom to operate barrier for third-party patents or the other licensed patent families, or a patent family that claims a novel composition of matter with many potential applications. The inventors will be offered the opportunity to explore this scenario when they are sent the RDP at the time of license/option execution. Such a change would need to be approved by all inventors in writing.
The specific categories of license revenues and Innovation Partnerships’ general approach for distributing these revenues across multiple inventions are outlined below. In instances where inventions are dropped from a license (including being dropped by abandonment or expiration of all patent rights associated with an invention), those inventions will typically no longer be royalty eligible. If all inventors agree in writing to an alternative royalty-sharing scenario, Innovation Partnerships will honor that request.
License and option fees
License and option fees will be allocated between or among the Inventions that are licensed under the agreement at the time the payment is due. The allocation will be equal for all Inventions unless the Inventors agree in writing to an alternative allocation. Innovation Partnerships may hold option fees until a license has been executed if unreimbursed patent expenses exist or are anticipated.
Milestone payments due upon achievement of specific performance benchmarks
Milestone payments that relate to a specific Invention(s) (for example, a clinical milestone for a specific drug that is the subject of a single patent and/or discrete set of licensed Inventions), will be allocated entirely to the Inventions directly involved in the achievement of that Milestone (in the relative proportion of the relevant Inventors in the final RDP for the relevant Intellectual Property). Milestone payments that are not clearly attributable to a distinct Invention will be allocated across all then-licensed Inventions.
Minimum annual royalties and license maintenance fees
As these payments relate to all of the inventions associated with the license, they are allocated across all Inventions that are licensed at the time the payment is due.
These royalties are typically due quarterly for “net sales” (gross sales less certain exclusions) made in the previous quarter by the licensee, its affiliates, and (in most cases) sublicensees. Where attribution to specific Invention(s) is possible, running royalties will be allocated to the Invention(s) that covers the product being sold. When multiple Intellectual Properties contribute to a licensed product, the assumption will be made that all relevant Intellectual Property rights contribute equally to the value of the licensed product.
Royalties on sublicense income
Sublicense income includes all consideration received by the licensee in connection with the grant of a sublicense, except (in most cases) royalties due on net sales by sublicensees, which are subject to the royalty on net sales required to be paid by the licensee. As with the other types of license revenue, where attribution to specific Invention(s) is possible, the payment will be allocated to just those Inventions, and where it cannot be so attributed it will be allocated across all then-licensed Inventions.
Equity (e.g. received in lieu of a cash license fee)
Most license agreements with a startup company will provide for a license fee to be paid in the form of equity in the company. Sometimes our license deals call for the transfer of equity in other situations (e.g., when a license is amended to add new inventions or rights or as the result of anti-dilution protection). This allows the company to preserve its limited funds for product development. The equity is managed as described in the IP Policy. The equity typically is not liquid (is not easily sellable or is not sellable at all) until the company is more mature (there is a realistic market for the securities that U-M holds) or the company is sold (U-M must transfer its securities along with all other shareholders for certain consideration). Prior to such an “exit” event, the company will often have received millions of dollars in private investment. That investment, and the later value of the company stock at the time of one of those exits, will be based in part on the commercial prospects for the company’s technology portfolio including inventions licensed both in an original license as well as inventions added via an amendment to the original license. And, some inventions may have, in the meantime, been dropped from the license due to a lack of development or clinical success, even though the earlier prospects for those initially licensed inventions presumably would have affected early investment in the company, the company’s willingness to enter into a license with U-M, and/or the amount of equity that the company was willing to transfer as part of the license agreement. In view of these facts, it is the policy of the University to distribute the proceeds from the sale of the equity holdings equally across all inventions that were included in the license agreement over the course of the lifetime of the license.
Changes to Licenses Causing Revisions to RDPs
Sometimes changes to license agreements or inventorship can lead to circumstances requiring revisions to an existing RDP. Where there is such a change, the same process described above will generally be used to alter the RDP.
RDPs generally will only be revised as to future distributions if one of the following circumstances arises:
- A new inventor or invention not previously included in the intellectual property in the licensed portfolio is added, for example when Innovation Partnerships adds new patent rights or copyrights to the agreement by formal amendment. Sometimes it is necessary to correct the inventorship of patents or applications; this will trigger an RDP revision when (i) a new inventor is added who was not previously named in the licensed portfolio or (ii) an inventor is removed from all patents in the licensed invention portfolio.
- All the inventors agree of their own accord in writing to a revised RDP (where the percentages bear some relevance to the research, technology, patents, or underlying agreement).
- A patent or patent application within an agreement is either abandoned or dropped from the agreement and Innovation Partnerships determines there is clear evidence that those rights were significant under the circumstances.
Inventors should alert Innovation Partnerships if they believe any of the above circumstances have arisen that may require an RDP revision. Where there is a new process to alter the RDP, Innovation Partnerships generally expects that there would be some deference to the figures in the prior RDP, with the understanding that new Inventors not present at the time of the first RDP did not have a say in the discussion of first RDP. For clarity, later added Inventors are not entitled to a share of licensing revenues received prior to their addition to the license.
Generally, where there are (a) minor changes to a license agreement, (b) there are no new Inventors added through the addition of new Intellectual Property to the license, and (c) no Inventor (nor Innovation Partnerships) promptly suggests that a revised RDP is or may be required, then distributions made by Innovation Partnerships will not be revisited.
Generally, the RDP will not be revised upon the abandoning of individual patent applications (particularly a continuation or divisional application); in most cases, the rights will not be considered “significant” unless there was a corresponding reduction in licensing terms.
Where these rules do not specifically address a situation or there is ambiguity under the facts, Innovation Partnerships will resolve the situation within the spirit of these rules.
What if I have a joint appointment with another institution?
The University has agreements with affiliated institutions such as the VA Hospital and Howard Hughes Medical Institute that may provide for an inter-institution allocation of license revenues for inventors with a joint appointment at U-M and the other institution. In most (but not all) cases, the allocation to the other institution of a share of the net receipts attributable to the joint appointee inventor will depend on the existence of some support from the other institution for the research that resulted in the invention. Inventors are encouraged to indicate any joint appointment relationships on the invention disclosure form to enable Innovation Partnerships to determine what obligations (if any) might exist with respect to the other institution.
In situations where the license covers inventions that are jointly owned with other institutions, Innovation Partnerships will typically enter into an inter-institutional agreement (IIA) that establishes the lead institution responsible for licensing and the allocation of license revenues between or among U-M and the other institution(s). In such cases, Innovation Partnerships will also first deduct from license revenue any payments required to be made under the IIA as well as any administrative fees provided for in the IIA. In cases where multiple inventions are licensed, but only a subset are co-owned, the co-owner’s share is calculated based on the revenue allocated to the joint invention(s) and deducted only from the revenue being distributed on the joint files.
What if I leave the university or my departmental appointment changes?
Faculty inventors whose employment at the University ends will continue to be entitled to their personal inventor’s share.
Faculty inventors who change their appointment to a new U-M department will not affect the department, school or college distribution, which will continue to be distributed in accordance with the original affiliations at the time of disclosure.
If an inventor passes away while license revenues are still being received, the inventor’s personal share will continue to be paid to the inventor’s heirs. To the extent permitted by law, an Inventor’s royalty share will flow to the Inventor’s heirs after death, and U-M will to the extent permissible pay the owner of the royalty stream upon reasonable proof of entitlement to the royalty stream (e.g., a court order or will). If U-M makes a diligent attempt to find the heirs of an Inventor but is unsuccessful, after one year, that deceased Inventor’s royalty stream automatically reverts back to U-M without any further action on the part of any heir or estate of the Inventor.
Innovation Partnerships Procedures for Distributing Net License Revenue Payments to Inventors
Timing of Royalty Distributions
Innovation Partnerships will endeavor to process the initial distribution of license revenue within 120 days after receipt. Certain circumstances may prevent Innovation Partnerships from distributing license revenue according to this schedule. These circumstances may include, but are not limited to: potential or pending legal action, questions, or bills; insolvency or bankruptcy of the licensee; disagreements with the licensee; expected or potential expenses associated with the license.
Because of the inherent cost of distributing funds or license revenue receipts of less than $5,000, Innovation Partnerships may hold revenue until the accumulated total reaches $5,000. To the extent permitted by law, an Inventor’s royalty share will flow to the Inventor’s estate after death, and U-M will to the extent permissible, pay the owner of the royalty stream upon reasonable proof of entitlement to the royalty stream (e.g., a court order or will).
Because inventors continue to be entitled to their personal share after leaving the University, it is important that Innovation Partnerships be timely informed of all address changes to ensure that future payments are received.
Innovation Partnerships Procedures for Distributing Net License Revenue Payments to the Department, School or College, and University Administration Shares
University entities receive net license revenue distributions via an internal funds transfer executed by Innovation Partnerships during the first quarter of the fiscal year following receipt of revenue.