The article below appeared in the May 2009 issue of Technology Transfer Tactics. Click here to subscribe.

Still, she continues, post-license compliance is a hard sell in many TTOs. “It’s not a metric on which you are typically judged,” notes Byrd, who specializes in royalty audits. “So it’s easy to adopt the attitude, ‘If it’s not broken, then why spend the money to fix it?’”

“Doing deals is what’s fun,” notes Orin Herksowitz, VP of intellectual property and technology transfer with Columbia University’s Science and Technology Ventures. “A lot of people would rather just sign the deals and collect the cash. It’s less fun to put information into a database, or extract terms. But if you don’t follow through on the post-contract compliance, your collections will only be as good as your willingness to read those PDFs each and every quarter.”

To drive home her point, Byrd presented a slide showing that only 19% of reports she examined contained completely accurate information, and more than 50% of those examined involved underpayments in excess of 10%. “Many terms and agreements have a clause that says if you reach that 10% threshold, the licensee pays for the cost of the audit,” she points out.

For an effective compliance effort, Byrd recommends what she calls “a tiered approach” to the process. The tiers are as follows:

Tier A: Do nothing. “You’ll be okay 19% of the time,” says Byrd, tongue firmly planted in cheek.

Tier B: Analysis. This process, which takes between two and five hours, is done “just to make sure things make sense,” Byrd offers. If something looks ‘funny,’ proceed to the next tier.

Tier C: Desk Audit. You can do this on your own, says Byrd, noting it will take between eight and 24 hours. “Try to find information that corroborates or refutes your suspicions — check out the licensee’s website, press releases, SEC filings, and so on. You can find quite a bit of information.” If your findings indicate your concerns have some validity, proceed to the final tier.

Tier D: Full Site Audit. “This usually means hiring someone else to do it,” says Byrd.

Find problems early

Angela Hodge, assistant director of accounting for the Office of Technology Commercialization at the University of Texas at Austin, believes in identifying potential compliance problems early on — especially with new licensees. “I review [license terms] before they’re executed, because the payments due us might be uncollectible,” she says.

Hodge uses accounting and business students to help with compliance monitoring. “They review the terms and note any standard fees we should receive,” she says, adding that she has “active” payment calendars for licensees already paying fees, and “outlook” calendars for fees coming due. “It can be hard to determine when milestones trigger payments,” she concedes, “and payments for annual maintenance fees and so on may be offset by royalties and can’t always be captured, so this a short-term fix.”

For a clearer picture of what’s going on, Hodge has contracted with Invotex to help with desk audits. “They have a template you can use that addresses more than just accounting; there is also important information to enter about the licensee,” she explains. The templates are filled out by interns and overseen by accounting, Hodge adds.

Inventors can also be a valuable resource when completing the templates. “They can tell you what’s going on in the market, which is invaluable,” she notes. “You also want know if something has been commercialized — otherwise nothing is due.”

When delinquency reports are required, the job is outsourced to law firms, who review the legal terms and financial obligations, says Hodge. “We’ve created a form that is e-mailed to the licensee,” she notes. “This is not for the faint of heart; you’ve got to know what you’re doing and be prepared to answer why you’re doing this.” Hodge handles the money matters, she adds, while the licensing director handles the licensing issues.

New process installed

For Herskowitz, the key to improving compliance at Columbia has been implementing standardized processes — which were not in place when he came on board there in 2006. “We spent a few months talking about what the process should look like,” he recalls. “We also did a desk audit with Invotex, which was a great primer for us and helped us think about what we wanted to build into our process.”

The only real way to impact near-term revenues, Heskowitz says, was to look at current licensees carefully and see if they were acting in good faith. Columbia hired an outside firm to review existing licenses. “They categorized where we were — the start date, the end date, milestones, and so on — and we got back a fully catalogued report,” he recalls.

To become more proactive, Herskowitz developed an annual “check in letter” that goes out annually to all active licensees. “The letter will come from me,” he explains. “I’ll tell them how much we are enjoying our collaboration, and then ask them to perhaps review a specific clause and confirm with us that they are in compliance.”

His office also conducts routine reviews on the top 25 licenses once every few years. “We may extend that to the top 50,” Herskowitz offers.

As evidence of the new approach’s effectiveness, he points out that Columbia has not had to conduct a full audit since starting the process. “We’ve been able to resolve most [comliance issues] by asking our license officer to reach out to the licensee,” he notes. “When you review the matter with them, most of them come around.” If necessary, follow-up letters come from him. “We’ve also retained a collection agency,” says Herskowitz. “There’s a very clear chain of expectations set in.”

Still, he continues, it can be difficult — but important — to balance that toughness with the service mission of your office. “We try to be forgiving with these companies,” says Herskowitz. “We tell them we’re willing to work with them, and we’ve even helped some of them get additional financing if they’re having problems.”

Herskowitz agrees with Byrd that faculty will notice if you’re not conscientious about compliance. “You lose a lot of credibility when faculty complain and you do not follow up,” he notes, “So it’s important, if only as a service to your faculty, to try and get better at licensing compliance.”

Contact Byrd at 410-824-0142 or jbyrd@invotex.com; Hershkowitz at 212-854-1242 or oh2120@columbia.edu; and Hodge at 512-471-6601 or ahodge@otc.utexas.edu.