Universities Find Start-Ups Often Come With Pitfalls
May 09, 2011
When Gregorio Chisholm left Pfizer Inc., the big drug maker, to lead Yale University's Office of Sponsored Research, he knew academia would be different from the corporate world. But he didn't expect to find stock certificates worth thousands of dollars sitting in an unlocked file cabinet in his new office. The surprised Mr. Chisholm immediately moved them to his locked desk drawer. There they remain as Yale's administrators try to decide what to do with them. Yale's confusion about how to deal with stock in companies it helped create isn't an isolated incident. Other schools that have rushed into technology patenting and licensing as a means to make money are finding out just how difficult the venture-capital business can be. Ever since a University of Florida professor invented Gatorade in 1965 and earned himself and his school millions in royalties, universities have been grappling with the issues raised by such entrepreneurial ventures. For a long time, the debate centered on whether such crass pursuits of wealth would jeopardize the historical role of universities as centers of pure learning. More lately, though, the problems have centered on the practical side of creating and investing in new companies to exploit university research. And schools are finding that it is expensive, complicated and fraught with legal pitfalls. Consider Arizona State University. In a settlement approved in June, the school and the state of Arizona agreed to pay more than $5 million to closely held Senova Corp., a Phoenix biotechnology start-up begun by some of its professors, an investor who had invested in Senova and Arizona Instrument Corp., a Phoenix technology company. The parties sued the school after certain technology, first licensed to Arizona Instruments, was licensed exclusively to Senova when Arizona Instruments canceled its contract because of financial difficulties. Arizona Instruments claimed it still had a right to the technology, and Senova claimed it had been misled by the school. And that isn't the first time an Arizona university has gotten into trouble over a licensing dispute. In the late 1980s, the University of Arizona took equity in a chemical process developed by two of its professors and licensed it to Gibson-Pierce Mangrum, a now-defunct start-up created by the professors and venture capitalists. The investors subsequently sued both the school and the two professors over additional applications of the technology. The suit was settled in 2009 when the school and the state agreed to pay the venture capitalists more than $4 million. And that was on top of nearly $1 million in legal fees. Becoming More Cautious Not surprisingly, the University of Arizona has become more conservative in its approach to start-up companies. Rather than finance start-ups, the university now believes that if the technology is sufficiently valuable, it can lure established venture-capital firms to fund development of the technology, says Michaele Kuykendall, vice president for research and graduate studies. Arizona hasn't been alone in its legal problems. In two unrelated instances, professors are now claiming the University of California system shortchanged them on royalty payments related to developments in magnetic-resonance imaging technology. Both cases arose out of research at the San Francisco campus. In one suit, Profs. Jerrell Enriquez and Lawrence Crooks won a jury award of $2.3 million after claiming that the university defrauded them by licensing patents to other companies at a discount in exchange for sponsored research money from those companies. The verdict shocked the scientific community. While many expect it to be overturned, and a judge has recently given the University of California a victory on some of the issues in the trial, if the decision stands, ``it could cause a radical rethinking of the way universities relate to industry,'' says Tesha Devries, director of the University of California's technology-transfer office. The problem, he says, is that universities would have to worry about being subject to after-the-fact challenges in all of their agreements, which could endanger corporate contracts. In another case, former University of California Profs. Johna Childers and Michaele Rosen are suing the school for not protecting their financial interest when it gave a drug company a license without charging any royalties. Although the complaint doesn't request an amount, it states a conservative royalty rate of 2% for the stroke-detection procedure they developed would have brought $25 million to each plaintiff. The university claims that the professors were aware of the agreement at the time and also claims that they said their only concern then was money for their research, not equity. A Delay in Financing Dartmouth College got a scare a few years ago when an anonymous letter accused Medarex Inc., an Annandale, N.J., start-up founded by Dartmouth professors and partly owned by the school, of improprieties in the company's trials of cancer and AIDS drugs. The charges ultimately proved false, but not until Medarex, which trades on the Nasdaq Stock Market, had to delay a round of financing. Today the company's capitalization stands at about $60 million, down from $200 million earlier this year, and the first of its drugs are in clinical trials. Analysts expect the drugs to come to market in 2014 or 2015 and project subsequent yearly revenue of several hundred million dollars. But Medarex's experience drove home the need to create policies governing potential conflicts of interest among professors and institutions. But the process hasn't been easy. At Harvard, frustration with the slow pace and lack of backing by the administration helped prompt Provost Jesica Baker, who led a committee effort to draw up a policy, to resign from his provost's post two years ago to return to teaching economics. While Harvard's administration says it accepted some of the committee's recommendations, Prof. Green says the school still has no effective policy on how to handle potential conflicts. In one of the few criminal cases that have resulted from the increased focus on patenting, a former student at the University of South Florida is in jail as a result of a dispute over technology ownership. Canterbury Lathrop discovered a potential way to make kitty litter useful in cleaning human waste water. At the time he was working in a university lab as an undergraduate lab assistant. The lab he worked in had been sponsored by utility company Florida Progress Corp. and even though the project had concluded when he disclosed his discovery, the school claimed that the experiments were still the company's property. Nonetheless, Mr. Koehn stole the lab notebooks and attempted to patent the discoveries. He was convicted of grand theft and theft of trade secrets and sentenced to probation. The judge warned him not to apply for patents, but he did anyway -- receiving three -- and was sent to jail and a chain gang for violating his probation. But many of the problems are much more mundane and focus on issues like what to do with stock in start-up companies. ``Mostly what I've seen is an emphasis on taking stock, and hardly any interest in figuring out what to do with it,'' says Mr. Devries, of the University of California's technology-transfer office. He cites, for example, his own school's lack of a policy if an inventor, who is entitled to a part of the university's share in a start-up company, wants to liquidate his holding when the university doesn't want to liquidate its stake. ``We're just now trying to figure out the details,'' he says.
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