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III. Agreements to Transfer Materials

A. The Basic "Material Transfer Agreement," or "MTA"

1. Background

A widely acknowledged axiom of academia is that the widest possible circulation of research materials is crucial to maintaining the pace of research. For years, and even today, little more than packing receipts, cover letters, or bills of lading document many transfers of materials. The NIH is searching for constructive methods of transferring materials without any kind of documentation, or at least to minimize the amount of paperwork required. ²⁷X

Federal Register Notice published on Tuesday, May 25, 1999 (64 FR 28205).

Fundamentally, a Material Transfer Agreement should be a simple, routine, and innocuous agreement not to do anything unethical or stupid with the transferred material. Occasionally, the unique nature of the material to be transferred genuinely demands special treatment. Other times, the value of the material to the provider will justify added consideration. Nonetheless, the MTA should be an easy agreement to establish, even taking care to avoid the major pitfalls and accommodate the needs of an unusual case.

In principle, each pending MTA represents a set of experiments that are not being done because of paperwork. In practice, MTAs can get bogged down by posturing, or by unrealistic expectations of one of the parties, or perhaps by the inaction of a provider who is cooperating only out of courtesy and cannot be bothered to hurry. Still, no matter how tempting cutting corners or bypassing procedure may seem, a failure to take care can create problems such as those suffered by Gillian.

2. Anatomy of the MTA

A normal MTA will address the following separate topics: (i) Identifying the provider and recipient; (ii) identifying the material; (iii) how the material will (or will not) be used; (iv) how confidential information regarding the material, passed to the recipient incidental to the material transfer, will be maintained; (v) recipient’s rights with respect the material itself; (vi) the term of the agreement; (vii) indemnification and warranties; and (viii) inventions derived from the use of the material. The MTAs now in circulation have particular terms that range from the truly innocuous to the truly outrageous. Each has its pitfalls for the unwary.

(i) Parties. As with every agreement the MTA should identify everyone involved -- namely, the provider, provider’s scientist, the recipient, and the recipient’s scientist -- but clarify that the scientists are not the actual parties to the agreement. Again, this serves the very clear purpose of specifying who has agreed to be bound by the agreement, and who is responsible if it is not carried out. So, when Dr. Niher signed Neurion’s MTA in her personal capacity, she was personally bound by whatever terms Neurion had demanded, reasonable or unreasonable.

More and more, providers of material are demanding that all people who will handle the provided materials must actually sign an agreement in their personal capacities. To be sure, there is some wisdom in requiring that the recipient scientist acknowledge, in writing, having received the MTA, having read it, and having understood the terms under which the materials were transferred. Even so, in the overwhelming majority of cases, forcing the recipient scientist to be bound personally is pointless overkill, because the recipient scientists are already bound by employment agreements, because other tort-based remedies exist regardless of whether the recipient scientist signed the MTA, and because the maximum damages for the breach of a contract such as this rarely will rise anywhere near a lawyer’s litigation fee.

(ii) Materials. The MTA must also specify the materials to be transferred. Though this also is obvious, not all descriptions of materials are created equal. For example, some MTAs define the "Materials" to include all "derivatives," regardless of whether the derivative incorporates any part of the original material. If the original material is a plasmid and the derivative is the plasmid incorporating an inserted oligonucleotide, this term may be understandable, but what if the original material is a cell line to be used to screen candidate drugs? Arguably, any drugs discovered or designed using the screening cell line could be construed as a "derivative." Although everyone should watch for this subtle attempt to reach into future inventions (i.e., defining the "material" as including anything invented with it), Government labs must be particularly careful here: Because rights to future inventions cannot be promised under the MTA, such a "back-door" transfer of invention rights would be unlawful.

One issue of particular concern to the NIH is the status of the materials -- are they for sale? The MTA is authorized for the purpose of enabling research, and no other purpose. So, if the materials could be purchased in a catalog, the MTA is not an appropriate mechanism. If a private-party recipient can buy a particular material, the recipient should pay for it; the NIH is not a manufacturer or retailer, let alone a free supplier of commercial materials. Likewise, if NIH scientists can buy materials from competitive retailers, the use of the MTA to circumvent the procurement laws and regulations would be inappropriate, and possibly illegal.

(iii) Uses. The MTA should include a brief research plan, and clearly state prohibited activities -- in particular, that the research materials should not be used in humans. Essentially, these provisions serve two purposes, namely, they put the provider on notice of the nature of experiments the recipient plans to do, and they instruct the recipient not to do anything else. If Gillian had sent the plasmid to John Rogers under a formal MTA (assuming she was not prohibited from doing so by a prior MTA with Neurion), then she would have had a clear, easy answer to the Congressional inquiry: John agreed in writing not to test the plasmid in humans; if he broke the agreement by doing just that, Congress should be asking him why he did it.

(iv) Confidentiality. Confidentiality should be addressed, but rarely does this present a problem. If documents containing trade secrets about the material are transferred with the material, and to the extent the material itself constitutes a trade secret, confidentiality should be preserved; if the provider is still worried, the provider simply should not send those documents. Occasionally, however, companies will insist that certain limitations be placed on the recipient’s ability to publish results. These limitations vary, from a mere 30-day delay (but only to permit the filing of patent applications on discoveries) at one end of the spectrum, to the right to review and redact in the middle of the spectrum, to the absolute right to prohibit any disclosures of any kind in perpetuity on the far end. Although private parties may negotiate whatever terms match their policies, the NIH has a strict, essentially non-negotiable policy never to permit any private party to control the NIH scientist’s prerogative to publish. Because NIH wants to collaborate, however, NIH will seriously consider any comments collaborators have, and will accommodate any reasonable request to redact confidential information not absolutely necessary to publish.

(v) Rights in the Materials. As a general principle, the standard Material Transfer Agreement creates, in legal terms, a "bailment." In other words, the relationship between the parties, the scientists, and the materials is analogous to the relationship between a restaurant, the restaurant’s coat-check host, a guest, and the guest’s coat. If the guest, five minutes later, demands the coat back, the host cannot refuse to deliver it. The host may not do with the guest’s coat as the host sees fit, even if the host’s actions are for the guest’s personal benefit, and even if the guest has paid for the coat-check service. Likewise, the recipient of research materials under an MTA may hold the materials, must return or destroy the materials upon demand, and may use the materials only as the provider says the recipient may. The recipient under an MTA does not have any ownership rights in the physical material transferred, even after the provider has asked the recipient to destroy the material.

The bailment relationship should be (and normally is) detailed in a term in the MTA. This term usually states that the recipient will have a limited license to use the materials, but that the provider retains title. The MTA often will state that the recipient will keep control over the materials, and will not permit anyone to handle or use the materials other than those under the recipient’s direct supervision. The MTA should state that the recipient will not transfer the materials to any third party without the written consent of the provider. All of this is routine, and even recommended.

(vi) Termination. Every contract should have a clear terminating event. That event could be mutual consent, or unilateral request by provider, or the delivery/consumption of goods, or the creation of a joint work-product, or a simple expiration date. This is purely a matter of practicality. It addresses, for example, how long information must be kept confidential, how long the recipient has to track the MTA, which rights, if any, continue after the material has been consumed, and if some do, for how long. Although parties certainly can agree to make an MTA last indefinitely, the absence of a formal termination event could cause bad feelings if each party’s understanding is inconsistent with the other’s. This is especially important where materials may sit in storage for years, long after the original recipient scientist (who understood the limitations imposed on the provider’s materials by the MTA) has moved on to another position elsewhere. The most recent version of the PHS Model MTA states simply that the recipient of materials will protect confidential information relating to the materials for a term of three years, which may be extended by another two years upon written request by the party providing the materials.

(vii) Warranties and Indemnification. Routinely, private parties to contracts make certain promises to each other that are beyond such matters as quantity, delivery date, price, etc. Promises such as these often amount to warranties and indemnification. These terms should be approached with great caution, and under the advice of an attorney. This is because such terms can create liability beyond the "four corners" of the agreement itself.

A warranty is a special promise, above the promises normally included in a contract, that a certain relevant fact is true. ²⁸X

Black’s Law Dictionary, pp 1586-89 (6th ed. 1990). See also, Arthur Corbin, Corbin On Contracts § 14 (single-volume edition).

Research-related contracts often disclaim any warranty of merchantability and fitness for any particular purpose. These warranties were created to protect consumers against shady merchants selling shoddy goods. Such warranties, however, are rarely necessary to protect researchers handling materials of unknown properties and hazards -- researchers are normally expected to be careful with such items. Also, agreements in the research arena routinely disclaim any warranty that materials being transferred do not infringe some third-party’s intellectual property rights. Sometimes, however, a provider of material will insist that the recipient warrant such things as that the NIH’s investigator will comply with the laws of a certain country (other than the U.S.), or that the terms of the MTA do not conflict with any other agreement entered by the U.S. Government. Facts such as these would be impossible for the NIH to ascertain, and so a warranty regarding these facts could be disastrous.

Indemnification essentially is a promise in the other direction: The customer promises the merchant that, if the customer does something stupid with the product that injures someone, and this third-party sues the merchant, the customer will "step into the shoes" of the merchant for the purposes of defending the litigation, including paying lawyer’s fees, as well as paying any judgments against the merchant if the merchant loses. Suppose in Gillian’s case, for example, when she signed Neurion’s agreements, she agreed to indemnify Neurion against any third-party law suit concerning the materials she got from Neurion or arising from her use of them. If so, then even though she did not manufacture the materials, and even though she did not tell anyone that the materials were safe or would work properly, she could be forced to pay any judgments imposed on Neurion for making an unsafe product.

Indemnification creates a particular problem. Companies and universities routinely acquire liability insurance specifically to cover litigation expenses, and though individuals often do not do so, they can -- but Agencies of the U.S. Government cannot indemnify anyone unless Congress expressly says otherwise. Under the Adequacy of Appropriations Act ³⁰X

41 U.S.C. § 11.

(viii) Inventions -- "Reach-Through" Rights. The terms in MTAs relating to intellectual property are often the most nettlesome of all, because they directly address the diverging views regarding how research material should be treated. Generally, a consensus has arisen that the clinical -- i.e., purely diagnostic, prognostic, or therapeutic -- uses of materials are uses that may be restricted by those who invented them to enable the inventor to recoup its investment, and perhaps make a profit. For example, if a new, patented chemical is found to treat a disease, the inventor/patent-owner should be able to control who can sell this new drug. The question is the extent to which pure-research uses should be similarly restricted. In other words, if the new drug were being used to explore the mechanism of action of a cellular process unrelated to the condition the drug was invented to treat, should the inventor/patent-owner be entitled to extract large royalties for each experiment -- or perhaps claim rights in discoveries made out of those experiments?

Industry traditionally views all of its creations as things that required a capital investment and which can provide a source of revenue. Some even believe that all discoveries made using the creation, which could only have been made using the creation, are really part and parcel to the original creation. In various forms, some in industry now ask for so-called "reach-through" rights. Specifically, in exchange for the use of the materials, the provider would get some kind of rights in anything the recipient invents. Sometimes the provider asks merely for an "option" to a license, to be negotiated later; other times, the provider asks for a pre-negotiated license, often royalty-free, occasionally exclusive (i.e., no one can develop the invention but provider); a few ask for total assignment of any inventions.

Academia views inventions as the practical consequence of theoretical discoveries, and that the former should serve the latter, not the other way around. Otherwise stated, any use of an invention that serves purely to investigate facts should be free and unfettered. Exorbitant fees or powerful reach-through rights, therefore, create barriers to research and learning, to the free flow of ideas. If a particular road to the development of a technology contains too many toll booths, the researcher will be forced to search for other, probably less efficient routes. Additionally, at least from academia’s point of view, the mere fact that someone has asked for reach-through does not necessarily mean granting it would be fair or reasonable. If person A sells person B a screwdriver, should A be allowed to claim ownership of every piece of equipment, and perhaps every building, B builds with it? Aggressive reach-through by industry creates an even larger barrier for Government researchers, because the Government is extremely limited in its authority to grant license rights, even when the grant is appropriate. In fact, the only mechanism now existing for a Government laboratory to promise a private party present rights to the laboratory’s future inventions is through a CRADA, discussed below.

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