OF RECORD

Preamble

The Patent Policy in effect until January of 2005 assigned ownership of Inventions derived from consulting activities to the University.  At times, this policy prevented our faculty from consulting for companies who had legitimate ownership interests in a particular developing technology.  The policy was modified in January of 2005, to allow faculty in some limited circumstances to consult for an outside entity that required assignment of resulting inventions.  Payment for such consulting was to be in cash and was intended to reflect the fair market value of the work performed, rather than the value of the invention to the outside entity.  The following guidance is intended to clarify the circumstances in which such consulting is permitted under the Revised Patent Policy.

Guidance on the Revised Patent Policy
with Regard to Consulting

Effective January 1, 2005, the University enacted the Patent and Tangible Research Policies and Procedures of the University of Pennsylvania (the “Revised Patent Policy”).  The Revised Patent Policy confirmed the long-standing principle that “[f]aculty members contemplating entering into consulting agreements shall ensure that their obligations under the Patent Policy are not compromised and the University’s rights are protected.” Article 3.2. Under the general consulting policy, faculty members shall avoid intellectual property provisions that preclude them from assigning any inventions that arise out of their consulting to the University.

Article 3.4 of the Revised Patent Policy, entitled “Exception to the General Consulting Policy,” created a limited exception to the general policy.  Article 3.4 addresses situations where an outside entity would not allow a faculty member to consult unless the faculty member agrees to assign any resulting invention to the entity. Under Article 3.4.1, a faculty member may be permitted to consult under an agreement that assigns such rights away from the University, but only if specific conditions are satisfied and the University reviews and approves the arrangement in advance.

One of the conditions in Article 3.4.1 was that the consulting faculty member “…must be compensated in cash rather than equity…” Article 3.4.1(3).  This restriction was necessary to ensure that Article 3.4.1 would provide a narrow exception to the general consulting policy and would not undermine a faculty member’s primary commitments and obligations to the University.  In the absence of this restriction, Article 3.4 would have created an incentive for faculty to use consulting agreements to transfer intellectual property and inventions to entities outside of the University, in return for financial interests in those entities. Such alignment of the faculty member’s financial interests with those of the outside entity, through an equity interest, would circumvent one of the principles of the University’s patent policies, that revenue derived from  faculty inventions  be shared among the faculty, their departments and schools, and the University.

Article 3.4.1(3)’s purpose is to limit the exception to situations in which the consulting compensation is fixed, reflects the fair market value  of the consulting performed, and does not vary according to the value of inventions assigned to the company.  One form of variable compensation is stock or stock options in the outside entity.  Variable compensation may also take the form of a product development or royalty agreement in which the faculty member’s consulting is rewarded with a percentage interest in the sales or revenues of the product or invention.

Compensation in the form of a royalty on the product or invention is, for these purposes, indistinguishable from compensation in the form of equity in the outside entity sponsoring the consulting.  In each case, faculty would be encouraged, through consulting agreements, to assign inventions away from the University, a result at odds with the basic principles underlying the University Patent Policies. Such a fundamental change in University policies was not intended by the January 2005 Revision.

Faculty are therefore advised that the reference to EQUITY set forth in Article 3.4.1 shall include any form of contingent or variable compensation based on the product or invention created during the consulting. Any questions in regard to this issue should be addressed to the Vice Provost for Research.

Faculty are also reminded that qualification for an exception in Article 3.4 requires prior disclosure to their Chair and Dean.  Deans may approve a request for an exception after appropriate consultation.

—Ronald Daniels, Provost
—Perry Molinoff, Vice Provost for Research