Business > Commercialization > Essential Terms

“Essential” Terms

“Essential” terms are terms that are either non-negotiable or strongly preferred terms because of State law, Federal law and/or the academic mission and policy of the University.  Specifically, Sponsored Research Agreements and Patent Licenses will implicate both Ohio and Federal legal issues that require certain results. 

The following identifies several essential terms, explains the basis as to why the terms are essential or non-negotiable and identifies the required or preferred result.  The terms are grouped by the basis as to why they are essential: 
  • Ohio Law (Arbitration, Indemnification, Disclaimer, Choice of Law, Confidentiality, Sovereign Immunity, Initial Ownership, Other Terms Explicitly Barred by Ohio Law)
  • Federal Law (Export Control, Patent Marking, Bayh-Dole)
  • University Mission (Reservation of Rights, Milestones, Ownership)

Ohio Law

Ohio law codifies “invalid terms and conditions” barred from certain contracts with the State effective September 30, 2021. ORC § 9.27. The law applies to any state agency or instrumentality of the state, including, but not limited to, Ohio universities. The law specifically enumerates nine (9) terms that “a contract entered into by the state for procurement of goods or services shall not include….” Id. (emphasis added). Per 9.27, “if a contract contains a term or condition described in division (B) of [9.27], the term or condition is void ab initio, and the contract containing that term or condition otherwise shall be enforceable as if it did not contain such term or condition.”

The analysis below applies to all contracts, whether for procurement of goods/services or not. Any citation to R.C. 9.27 means the term is explicitly barred by State law for procurement contracts.
  1. Arbitration
A State university generally may not agree to binding arbitration as to monetary damages under Ohio law. ORC § 9.27(B)(2).  Under the Eleventh Amendment, States and State entities generally have sovereign immunity from lawsuit unless that immunity is waived by the state or the state consents to be sued.  Ohio has waived its immunity and consented to suit only if the action is brought in the Ohio Court of Claims.  See ORC § 2743.02(A)(1).  In particular, the consent granted by Ohio is “to be sued, and have its liability determined.”  Thus, Ohio has consented to have its liability determined only in the Ohio Court of Claims.  A binding arbitration determines liability outside the Ohio Court of Claims, and is thus inconsistent with Ohio law. 

Result:  State universities will not agree to binding arbitration.
  1. Indemnification
A provision requiring the state to indemnify another person is barred by Ohio law for procurement contracts. ORC § 9.27(B)(1).

Further, a provision requiring indemnification by the State is also likely unconstitutional under Ohio law as thoroughly explained in OAG Opinion 96-060.  The Ohio Constitution (Article II, Section 22) and Ohio Revised Code require that any appropriation or financial obligation incurred by the State specify a maximum dollar amount and limit that obligation to the duration of the current biennium (2-year fiscal period).  Indemnification clauses typically create a contingent liability that is uncertain as to amount and time and, as such, may occur beyond the biennium. 
Example:  Patent licensee requests that a State university indemnify it for any infringement claims arising from the use of the patented technology.  An infringement lawsuit could be filed against the licensee at any time it is making or selling the technology and could be for nearly any amount.  The requested clause therefore creates a contingent liability that is both monetarily and temporally indeterminate.  That clause is prohibited by the Ohio Constitution.

Result:  State universities will not agree to indemnify third parties and will often request a provision requiring the company to expressly acknowledge that the agreement does not provide that company any right or claim to indemnification by the State university.
  1. Disclaimer of Warranties
A State university will not warrant that the licensed technology is free from the rights of third parties for much the same reasons discussed above with respect to “Indemnification.”  If a State university warrants that the licensed technology did not infringe any patents, trademarks or copyrights owned by third parties, then that State University is essentially agreeing to indemnify its industry partner if that partner is sued for, e.g., patent infringement.  For similar reasons, a State university will make no representations or warranties as to the merchantability or fitness for a particular use.  Aside from the legal restrictions, Licensee is the party responsible for manufacturing and selling the products in the marketplace and is thus in the best position to control the quality of the product/services.  Rationally, Licensee should and will bear the risk of those actions.

Result:  State universities will include a provision disclaiming various warranties.
  1. Choice of Law
Ohio law should govern agreements with State universities.  First, a State university is an institution operated pursuant to authority conferred by the state of Ohio.  Second, any lawsuit against a State university seeking monetary damages for breach of the agreement must be brought in the Ohio Court of Claims.  ORC § 2743.03.  It is strongly preferred and recommended that the Ohio Court of Claims apply Ohio law.

Result:  State universities will include a provision specifying that the agreement is governed by Ohio law without regard to choice of law and conflicts of law principles.   
  1. Confidentiality
A confidentiality provision in an agreement with a State university must account for Ohio public records law.  See ORC § 9.27(B)(7). State universities are subject to public records requests under Ohio law.  See ORC § 149.43.  The duty to comply with public records request cannot be limited by Agreement.  It is important to note, however, that with respect to commercialization, a key set of documents are exempted from a public records request: “Intellectual property records”.  See id. at § 149.43(A)(1)(m).  Intellectual property records refer generally to non-financial and non-administrative records that are not publicly disclosed and that were produced or collected by faculty or staff of a State university in the conduct of research, regardless of whether that research is sponsored by the State university or private concern.  See id. at § 149.43(A)(5)

Result:  State universities will include a term in any Confidentiality provision stating that their confidentiality obligations are subject to applicable law including Ohio Public Records law. 
  1. Sovereign Immunity
As discussed above with respect to Arbitration provisions, under the Eleventh Amendment, States and State entities generally have sovereign immunity from lawsuit unless that immunity is waived by the state or the state consents to be sued.  Ohio has waived its immunity and consented to suit only if the action is brought in the Ohio Court of Claims.  See ORC § 2743.02(A)(1); ORC § 9.27(B)(3).

Result:  State universities may include provisions explicitly stating that (a) nothing in the agreement waives sovereign immunity; and/or (b) the Ohio Court of Claims is the only venue where licensee can sue the University for a breach of the Agreement.  Such terms serve to memorialize Federal and Ohio law.
  1. Initial Ownership of IP
Ohio law specifies that State universities in Ohio own all rights to and interests in any inventions resulting from work performed (1) at a facility of the University; (2) by a State University employee acting within the scope of their employment or (3) with funding, equipment or infrastructure provided by or through the University. See ORC § 3345.14(B).  A State University can waive its ownership rights under this statutory provision, but the statutory provision is the default. 
Example:  An industry partner contracts with a State university to use a State university’s testing facilities.  The default under Ohio law is that the State university will own any IP generated from the use of those facilities even if it is the industry partner performing the work.

Result:  An industry partner that is, e.g., using State university facilities to perform its own testing or leasing space from a State university needs to be cognizant of Ohio law governing IP ownership.  State universities will typically agree to reasonable terms as warranted by the circumstances.
Additional Terms Prohibited by Ohio law

In addition to the foregoing, the following terms are explicitly barred from relevant contracts by R.C. 9.27:

(4) A provision that requires the state to agree to limit the liability for any direct loss to the state for bodily injury, death, or damage to property of the state caused by the negligence, intentional or willful misconduct, fraudulent act, recklessness, or other tortious conduct of a person or a person's employees or agents, or a provision that would otherwise impose an indemnification obligation on the state.

(5) A provision that requires the state to be bound by a term or condition that is unknown to the state at the time of signing a contract, that is not specifically negotiated with the state, that may be unilaterally changed by the other party, or that is electronically accepted by a state employee.

(6) A provision that provides for a person other than the attorney general to serve as legal counsel for the state or for any state agency, unless allowed for under the process set forth in section 109.07 of the Revised Code.

(8) A provision for automatic renewal such that state funds are or would be obligated in subsequent fiscal years.

(9) A provision that limits the state's ability to recover the cost of cover for a replacement contractor.

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Federal Law

  1. Export Control
Various Federal laws and regulations impose restrictions on the exportation of certain technology (“Export Control Laws”).   Export Control laws impose significant penalties for violations, including civil penalties up to $500,000 per incident and criminal fines and imprisonment for willful violations.

Result:  A State university will include a provision in the Agreement that requires Licensee to comply with all applicable Export Control Laws.
  1. Patent Marking
Under Federal patent law, marking a product with the number of the patent(s) that cover that product is constructive notice to potential infringers.  35 U.S.C.  § 287(a). In litigation, that constructive notice entitles the patentee to a longer damages period and thus, potentially,  a higher damages award.

Result:  A State university will require licensee to mark the licensed products with the licensed patent number(s) that cover those products.
  1. Bayh-Dole (Patent Rights In Inventions Made With Federal Assistance)
Some State university inventions are made using funds from the Federal government.  Those inventions are governed by, inter alia, the “Bayh-Dole” Act.  35 U.S.C. §§ 200-212. The requirements of Bayh-Dole may impact the agreement in several ways. 

(a)  Ownership.  Under the Bayh-Dole Act, State universities have an option to take title to these types of inventions.  See 35 U.S.C. § 202(a).   If the State university does take title to these inventions, it is prohibited from assigning title to third parties without the approval of the funding agency. See 35 U.S.C. § 202(c)(7)(A).   
Example:  A State university obtains a patent based on work funded by an NIH grant.  Federal law prohibits the State university from assigning those patent rights to an industry partner without approval of the funding agency.
Result:  Under Bayh-Dole, State universities may be precluded from assigning IP rights absent federal agency approval. 

(b)  Milestones.   Under Bayh-Dole, the Federal Government may “march in” and require the State university to license to designated contractors if there is a failure to take “effective steps to achieve practical application of the subject invention” in a field of use.  See 35 U.S.C. § 203(a)(1).  Thus, if the license falls under Bayh-Dole, it is important that the State university’s licensee is progressing toward commercialization.  Importantly, even if the license falls outside of Bayh-Dole, the State university still has a significant interest in requiring the licensee to progress toward commercialization.  See Essential Term No. 13 below.

Result:  State universities will require its patent licenses to achieve milestones to ensure progress toward commercialization.  The specified milestones are negotiable and dependent on the circumstances of the agreement.

(c)  Government License.  Bayh-Dole provides that with respect to any invention in to which the State university elects to take title, “the Federal agency shall have a nonexclusive, nontransferrable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world . . . .”  35 U.S.C. § 202(c)(4).

Result:  A patent license from a State university may include a provision informing licensee that the Federal Government may have certain rights in the Licensed Patent pursuant to Bayh-Dole.
  1. Scope of License for IP Derived from Research Using Facilities Funded With Tax-Exempt Bonds
State universities routinely finance new facilities with tax-exempt bonds (“Supported Facilities”).  In order to maintain the tax-exempt status of those bonds, a University can’t allow “private business use” of the Supported Facilities.  In the context of Industry-University collaboration, sponsored research agreements can result in private business use unless the agreement falls within the “safe harbor” provided by the IRS.  See IRS Revenue Procedure 2007-47.  For corporate-sponsored research, the IRS safe harbor allows the University to license the technology at a competitive price determined at the time the license or resulting technology is available for use.  Id. at 6.02.  For an industry or federally-sponsored research agreement, the IRS safe harbor entitles the sponsors to no more than a non-exclusive royalty free license to use the product of any research.  Id. at 6.03(4).

Result:  State universities will limit the scope of the license grant to conform to IRS regulations when Supported Facilities are used to perform sponsored research.

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University Mission

  1. Reservation of Rights
All universities must retain the nontransferable right to continue to make and use any technology for its own internal, non-commercial research and educational purposes.   This is critical to maintaining and advancing the university’s educational mission and to encourage the development of inventions that serve the public good.

Result:  State universities will reserve the right to use technology for non-commercial research and educational purposes.
  1. Milestones
The State of Ohio is committed to commercializing research and development done at State universities.  Thus, even if the license does not fall under Bayh-Dole, State universities will still require the licensee to meet negotiated milestones.

Result:  The patent license will include a milestones provision.  
  1. Ownership
In the context of patent licenses, it is generally the policy of State universities to retain patent ownership rights.  State universities are more flexible with respect to ownership in the context of sponsored research agreements focused on applied research or simple testing agreements.

Result:  In the context of a patent license, State universities will typically not assign any patent ownership rights.  For a sponsored research agreement, State universities may agree to assign ownership of IP rights as the circumstances warrant.