Monitoring and Auditing License Agreement

1. Monitoring and Auditing License Agreement David M. Kettner Wisconsin Alumni Research Foundation October 28, 2005

2. Technology Transfer ì î í ë

3. Revenue Generation Licensing Technology Development Commercialization Payment of Royalties Development Liability Protection Patent Activity Monetary Payments

4. Contract Management Infrastructure Implementation Instruments

5. Infrastructure Contract management has to be a priority • Avoid the black hole • Allocate resources to manage the contract • Try to maintain clean hands

6. Infrastructure • Invest in systems to ensure compliance • Data management • Document management • Accounting • Audit your system • Rolling audit • Periodic reviews

7. Infrastructure - Instruments Must be compatible! • Infrastructure must be able to effectively monitor the responsibilities of both parties • Contract obligations must comport to the abilities of both parties

8. Instruments • Development Plan • Development Reports • Auditing Rights • Right to Terminate Development

9. Instruments • License Fees • Set payment dates • Milestones • Consider time and event options • Development Reports • Royalties • Royalty Reports • Auditing Rights Monetary Payments

10. Instruments Liability Protection - Patent Activity • Insurance • Periodic Certification • Patent Filings • Prompt Notice • Right to Review and Comment

11. Implementation • Educate the Licensee • Obligations • Identify administrative contacts • Identify business contacts • Don’t Assume Knowledge • Most licensees lack necessary systems

12. Implementation • Be Proactive • Courtesy notices • Be Consistent • Develop a notice protocol • Follow the notice protocol • Don’t Be Afraid to Contact Licensee • Don’t Be Afraid to Audit

13. Auditing Conducting an Audit is often a balance act: • Business relationship • Contractual obligations Find the balance by: • Being honest; • Identifying objectives

14. Audits - Royalties • Irregularities in reported royalties • Royalty fluctuations • Unreflected market growth • Standard procedure • Set rotation for top licensees • Extensive foreign coverage • Industry expectations • Problematic licensees

15. Audits - Development • Federal Requirements (Bayh-Dole) • Lack of Development • Development Milestones

16. Audits – Contract Language • Tailor to specific technology and/or industry • Key Elements • Scope • Documents and Records • Location • Timing • Auditors • Confidentiality • Allocation of Costs

17. Audits – Contract Language(Continued) Scope • Generally directed to royalty reporting • Avoid narrowing limitations such as “verifying accounting” • Attempt to verify fulfillment of payment obligations • Don’t forget to audit development activity • Typically covers between 3 to 6 years of activity • Avoid creating a “statute of limitations”

18. Audits – Contract Language(Continued) Documents and Records • Ensure all necessary documents are accessible • Sales • Invoices, cash receipts, revenue reports, commissions • Production • Inventory, purchasing, manufacturing • Distribution • Shipping, insurance, taxes • Deductions • Shipping, insurance, taxes, returns, credits, commissions • Development • Lab notebooks, internal job costs, tax credit filings

19. Audits – Contract Language(Continued) Location • Avoid limiting to a single location, if possible • Documents may be in multiple locations • Ensure that all necessary documents and records will be provided at designated location Timing • Generally within 30 days of request • Often no more than once per year • Should be limited to the subject matter of that audit • Don’t forget development may be a different matter

20. Audits – Contract Language(Continued) Confidentiality • Avoid limiting access to the results • Avoid limitations which may preclude use in litigation Allocating Costs • Create thresholds obligating licensee to paying for the cost of the audit

21. Audits – Contract Language(Continued) Auditors • Typically CPAs or attorneys • Should consider experts and employees for development activity • Avoid licensee veto

22. Audits – Implementation • Be honest and identify your objectives • Work with the licensee • Hire a professional auditor • Experts in the area of interest • Financials: CPA • Development: Consultant • Independent • Smooth relationship issues • Provide credibility

23. What does WARF do?

25. Quick Facts - Agreements All numbers are approximate Total Active WiCell Agreements: 681

26. Quick Facts - Obligations WARF Obligations • Average 1.5 obligations per agreement • Patent Filings • New Disclosures Licensee/Company Obligations • Average 3.8 obligations per agreement • Insurance • Development Reports • Fees (license fees, royalties, etc.) WiCell/Recipient Obligations • Average 2.1 obligations per agreement • Annual Certification • Fees

27. Quick FactsObligation Management WiCell/Recipient Obligations • 1430 per year • 119 per month WARF Obligations • 1320 per year • 110 per month Licensee Obligations • 3344 per year • 279 per month All numbers are estimates

28. CMG Mission Statement The mission of the Contract Management Department is to: • Assist in managing the post-execution responsibilities of WARF and WiCell; • Monitoring post-execution obligations of licensees/contractees; • Provide administrative and technical guidance and support to the licensing staff with respect to active WARF and WiCell agreements; • Provide technical guidance and support to the University with respect to intellectual property provisions in University agreements with third parties; and • Manage Record Retention Policy.

29. Contract Monitoring • WARF(WiCell)/Licensee Obligations • Accounts Receivables • Notices and Collections • Technology Updates • Contract Data Entry • Amendment Drafting • Preparing Inventor Distribution Forms • Reviewing and Negotiating UW Agreements • Other Contract Administration Matters

30. Invoice processing • Notice processing • Check Processing • Management of Material Transfer Agreements • Management of Confidential Disclosure Agreements

31. How is WARF Making CMG Successful • Developing new processes for tracking and managing obligations • Automated courtesy noticing on Licensee obligations • Automated invoicing on amounts due • Improve the tracking and noticing on patent filings • Improve reporting and maintenance of WARF obligations • Developed “Welcome Program” for Licensees • Conducting audits of existing active agreements • Develop a protocol for pursuing past due account receivables

32. Collection Protocol Courtesy Notice • Sent at least 30 days before obligation due First Past Due Notice • Sent no later than 35 days past due Second Past Due Notice • Sent no later than 65 days past due Notice of Default and Termination • Sent after discussions with Licensing Manager, but no later than 95 days past due Termination Notice • Sent no later than 5 days after end of cure period Collection Notice • Sent by outside counsel upon request

33. Established Audit Program • Conduct 1 to 3 audits per year • Problematic licensees • Top revenue producers • Odd royalty fluctuations • Last 5 Years: 10 audits • 8 deficiencies • Discovered $5+ million in under-reported royalties • Total cost $350,000

34. Established Audit Program Primary Auditor Sid Rattner McGladrey & Pullen, LLP 20 N. Martingale Rd. Suite 500 Schaumburg, IL 60173 (847) 413-6217 sid.rattner@rsmi.com Secondary Auditor Sandy Kahn Dispute Analysis & Investigations Pricewaterhouse Coopers, LLP One North Wacker Drive Chicago, Illinois 60606 (312) 298-5691 sandra.a.kahn@us.pwc.com