Institutions employ a variety of mechanisms for the recovery of patent expenses. The culture of the institution heavily influences preference with respect to technology licensing terms, as well as institution royalty distribution policy. Even within a single institution, there may be differences in approach for specific licenses or technologies, depending on the parties to the agreement or the value of the property.
With careful planning, it is possible to implement mechanisms that complement each other.
Where patent expenses are recovered directly through reimbursement from the licensee, the institution may establish rules to identify the extent. The terms may apply to an entire technology family, or individual patents within a family, and may include restrictions with respect to type of expense, amount of expense, or date of expense.
The success of this approach is dependent on whether the institution tracks expenses at a level of detail sufficient to codify these rules. Properly implemented, the institution is able to readily identify the amount billable to the licensee based on the expense incurred, process invoices based on those transactional amounts, and demonstrate payment that recovers those expenses.
This requires some consideration of the nature of the license agreements executed by the institution, and how detailed the inclusion and exclusion criteria are for reimbursement.
Where patent expenses are not fully recovered through reimbursement, the institution may take funds from royalty income. This can be accomplished either by diverting royalty income prior to distribution until all outstanding expenses are recovered, or by diverting a percentage of royalty income.
In the former, royalty income would be automatically re-categorized until expenses are fully recovered, then the balance would follow normal distribution policy.
In the latter, the royalty distribution formula would reflect the portion being diverted, at least until expenses have been recovered.
When modifying the distribution formula, an important question to ask is whether diversion of royalties for an individual technology family would continue indefinitely, or would cease once all expenses related to that family have been recovered.
These mechanisms are not mutually exclusive, however implementation requires some modeling to ensure that sufficient data is collected in order to process the rules, and the rules are applied in the correct order.