Free Agency

It has been a year and half since Arundeep Pradhan published his “defense” of the AUTM status quo in Business Week. If one looks at the comments to that article, one finds a string of pearls of insiders commending the author for his fine work in restating the status quo position, damping down any discussion of change–not to Bayh-Dole, not to university innovation practice–and apart from a few independent folks who point out the obvious–that Pradhan’s arguments lack substance (except for the converted)–the consensus has done a good job asserting itself.

I’ve left the free agency issue alone, since there have been better things to do, like smack down AUTM for its totally foolish position on Stanford v. Roche. Now, having looked at the piece again, along with a fine Gallagher bit on YouTube for the previous post, perhaps it’s worth a few comments.

It is difficult to get a man to understand something when his salary depends upon his not understanding it. — Upton Sinclair

One of the origins of the free agency proposal, I believe, was an idea that I put forward in 2007, while director of the technology transfer program at UC Santa Cruz (and responsible as well for industry sponsored research agreements).   The page was on Terapad–now disappeared but still available thanks to the Wayback Machine.  I proposed that if industry wants to work better with universities, then the problem to be solved is how poorly universities work with each other when it comes to intellectual property and the sharing of opportunities.  Each technology transfer office is honed to market its own stuff, and discouraged if not forbidden to market stuff created at other universities.

We never got the IAN off the ground, but I thought it had a chance.  I still do, and perhaps I’ll get the opportunity to do the experiment–probably in a country other than the U.S., given the way anything new gets suppressed by the dominant university types, but I’m still willing to give it a go here, too.   So though I don’t know exactly how the Kauffman Foundation came to propose free agency, I feel a bit of ownership in the idea.  Kauffman did not propose that faculty must own their inventions, or that anything goes–they proposed that faculty could designate an agent for inventions that could be owned by the institution.   Perhaps that’s the problem.  Ownership creates such huge mental claims; ownership drips of possessiveness.  Studies have shown that owners tend to value their goods much more than exactly the same goods that they merely hold for others.  Maybe Kauffman should have proposed that faculty could designate any agent to own, with the requirement they share some portion of their income with their institution, if the institution doesn’t already have a deal with the agent, or something like that.  This sort of thing would have come out in a discussion, had AUTM not worked so hard to squash the idea, berate Kauffman, and huff about how important they are.

Since I wrote the IAN piece, there have been some efforts to co-market technology.  Certainly international depositories such as iBridge (which somewhere, back in the mists of time, along with Flintbox, I also had some small role in developing) bring a bunch of things together in a single searchable database.  But what I was getting at was that while UC Santa Cruz was hardly known for tech transfer (I helped to start the office in 2002), we had better resources to manage software and digital media, as well as open research collaborations, than some of our much better off friends at major research universities in the Bay Area.   But none of them would  think to ask me to help out–oh, sure, the workshop on software or copyright, but not to actually know what they were trying to assemble into a licensable asset.  That was their own lonely problem.  Same thing in reverse.  I had technology that I know folks at Stanford or Berkeley or even San Jose State were in a better position to manage than I was–but even if I wanted to shift control to them, there was no way they were going to accept it.

When I voluntarily moved a case from UC Santa Cruz to UC Irvine because a startup company that we had licensed moved to Irvine, folks were aghast (except for the startup, which was merely surprised).  UCSC folks were pissed–now Irvine will get a share of our licensing revenue.  I had to point out, we didn’t have licensing revenue.  We had patenting expenses.  The goal was to put the company in the best position to succeed, because if it did, then there might even be licensing income, and if there was licensing income, then it would be good that the company was motivated to pay some to the university, not because someone had a shotgun license to its head, but because that’s what you do with business partners who support your efforts.  What does it matter if the money comes in via Irvine or Santa Cruz?  What does it matter if Irvine gets a bit for getting involved?  Apparently, a whole lot.  It’s a crazy kind of possessiveness, even within units of the same university, and even over prospective rather than actual money.

If you want to die of bureaucratic pain, try to negotiate an “inter-institutional agreement” over joint invention rights split between two universities.  The one in Texas demands Texas law, and the one in California demands California law.  It’s a matter of principle.  Texas can’t agree to follow California law.   And that’s just the start of it.  It’s even worse if one tries to do an upfront agreement for, say, a consortium of universities with industry partners.  That ends up with “we each own what we invent and will deal with it solo, but for offering rights to the industry members, and if we co-invent, then we can die of bureaucratic pain working out the IIA”.  No mention of common ground, no means of allowing a university in Silicon Valley to move consortium rights created by a university in Pullman or Stillwater.   No thought with regard to the existence of the consortium and what that might mean for critical mass, early adoption, platform development, network externalities.  No, inventions would be handled as if they were one-offs done in the vacuum of space, and diminished in value because they came with possible obligations to consortium member companies and therefore didn’t have the value they’d have if the university could license to just one company, who could then sue the socks off the others.  Sort of like a furniture maker in an old west saloon hoping there will be a brawl.

Still worse is the idea that without joint invention, and without a contract requirement that folks play nice by agreeing to offer standard terms to consortium members, universities might choose to let one or another lead with rights.  It could happen, despite what some of the commenters on the Business Week apology claim.  I happen to agree with them so far as to say with confidence–I totally believe that you folks lack the capacity to understand how to manage moving technology among universities.  To that extent, you are very right.  It will never happen with you around.   It is not in your interest (as you see it) to even try to understand how to do it.  So I can also see why it makes perfect sense for you to rush to a piece like Pradhan’s, which aims to kill an idea before it grows.

If we look at Pradhan’s argument, we can see that it is loaded from the start.   Bayh-Dole, Pradhan writes, “was to allow universities to own and license to the private sector intellectual property based on their discoveries made with federal funding.”  Bayh-Dole did require federal agencies to allow universities to own inventions, but only those inventions that universities found themselves owning.  The law had nothing to say about any intellectual property other than patents (and plant variety protections).   Finally, there’s this little pronoun “their”.  It’s actually technically correct in the sense that Bayh-Dole’s standard patent rights clause doesn’t kick in until an invention is “of the contractor”.  So, yes, it has to be “their” invention before they are required to do something with it.  But the drift of the opening sketch is that the inventions are rightfully the universities’, and this just isn’t so.

A lot of what’s happening with university IP policies now is about trying to make it so–make it so that when you join a university, you give over all your future creative work to the university administration, which in its sweetness and in deference to dumpy old values like academic freedom and desire to publish, agrees not to make an issue of stuff when it’s worthless, or art, or impractical stuff like that (as they would have it).   Pradhan states as a fact what isn’t.  If there was to be stimulation of the economy from Bayh-Dole, it wasn’t because universities were taking all inventions and holding them hostage until someone pays or the invention dies.  It was that agencies were to let the private sector have first crack at things, for all the purposes set out in 35 USC 200.  That first crack included inventors, universities, university agents, subcontractors, and assignees.  Any of these.

University folks got a big head about it because a chunk of the law is specifically about them (35 USC 202(c), 37 CFR 401.14(a)(k)).  What they haven’t bothered to note is that this special section places restrictions on universities that aren’t on small companies or inventors.  Why is that?  Perhaps because it is the university ownership that is the most worrying part of the law.   That’s the big experiment in the law–it’s not the part that makes the law inspired.  The inspired part is backing the federal agencies out of a compulsory ownership position as a default.  Now the university administrators are working hard to put that compulsory ownership position back as the default, just now within their provincial, selfish, unsharing offices.

The impact that Pradhan finds “staggering” really is, but not for the reason he puts out.  $187b of “impact” in 12 years.   That’s about $15b/year.  Let’s see, maybe 140 research universities that matter–so that’s an “impact” of say $110m a year.  Now, how do these folks determine impact?  Here’s the link to the study by BIO, which acknowledges the contributions of AUTM, of all folks, in estimating royalty rates.   And why?  Because their way of determining “impact” is to take a typical royalty rate, like 2% (or 5%), and use that to multiply the reported licensing income to construct a “base” of sales that are implied (if you follow this) from the income.  Thus, if one has $1,000 in licensing income, and a 2% royalty rate, then that means there must have been $50,000 of sales activity.  Except the $1,000 could be an upfront fee and means nothing for sales, just an expense to the company.

There is no way to know from the AUTM figures how much is an earned royalty on sales and how much is from other things–patent expense reimbursements, upfront payments, annual payments, milestone payments, shadow equity payments, realized equity income, litigation settlements, factoring of future royalties, sublicensing income, or sales made offshore or by companies based outside the US.   To make the number even bigger, the BIO study adds together licensing income and sponsored research income “due to prior licenses”.   So we are dealing with an upper bound of reported income, and the deal is to pick a multiplier based on a typical royalty rate, and call that the impact.   Divide by 50 (a 2% royalty–about right for biotech) and we get about $2m in licensing + research per university per year.  (If one looks past the top five or ten university tto’s, expect the numbers go down pretty fast–the average has next to nothing to do with national activity–it’s only an aggregate contribution using a national base for scope).

Anyhow, this $2m per year of activity is spread across the entire licensing portfolio, not just inventions made in the period 1996-2007.   For instance, the Hepatitis B vaccine licensed by the Washington Research Foundation is from 1980-81.   The University of Washington could have done no licensing at all in the 1996-2007 period and it still would have come out looking like it had made something like $160m in licensing from WRF payments to UW for managing Hep B and related work.  It is of some interest that a major licensee of the WRF is GlaxoSmithKline, a UK-based company.   That’s about “$8b” of “impact” (or about 4% of the total) in the figures that Pradhan finds staggering.

How much more is there like this?  How many of the universities’ licensees are US companies?  We will  never know, because the universities don’t report this kind of information.  You would think, if most licensees contributing to the big numbers were US, they’d be reporting that.  I expect they have things to hide.  No matter here.  Even with these figures, if we take a university patent portfolio to have even 100 patents in it, then we are seeing 2/100 or about $20,000 per year per patent and its related research.   The price of a few display ads in a trade journal.  What a faculty member can make consulting one day a week at $1,000 a day.   Staggering.

What Pradhan is not going to talk about is the impact of centralized, institutional-ownership policies and the inventions that are not licensed, or worse, are licensed and not developed.  That’s the vast majority of the inventions claimed by university administrators.  Every invention that’s patented and is not in the hands of someone putting technology in play is a barrier.  The outpouring of primarily US patents held by universities represents a huge new barrier to entry for those seeking to use academic research to develop new technology.  No estimate of a multiplier based on a simplistic estimate of royalty rates and the nature of license income can possibly account for the effect of such barriers.  You would have to know where to look.  HP being sued by Cornell.  Or GE being sued by Washington.

One can work through the other statistics that Pradhan recites and find them full of holes.   It’s not that university tech transfer operations are under-performing, but that they are deeply flawed for the innovation environment we have–and had.  That the folks at AUTM don’t want to deal with innovation that they can’t control is understandable.  That they want to suppress discussion of alternatives to the model they have built up as the The One is also understandable.  I don’t see why, however, anyone should be ready to listen to them any longer.

A free-agent system is where university research started.  It is what created Research Corporation, the idea of university research foundations, laid the foundation for the National Science Foundation and federal extramural funding for basic science (done, by many early definitions, without an interest in commercial development, and in some, if there were patents, then it was never basic), and that in turn led to the Bayh-Dole Act, and the growth like mushrooms of university technology transfer offices.  The arguments supporting technology transfer are based on non-Bayh-Dole inventions–Cohen-Boyer, Axel, Hall–and university policies without, generally, compulsory ownership claims.

Thus it is simply ignorance of history for Pradhan to assert that “such as system would create serious conflict of interest and personal benefit issues….”  Nonsense.  What Pradhan’s argument exposes is how deeply inventor-loathing AUTMites have become.  It was free agency that gave rise to the argument for university tech transfer.  (Washington at one time had five possible agents, including itself, in its policies).  No matter, now the conflict of interest is that university inventors might make money without sharing enough of it with university administrators.  Not a problem if they graduate first, or leave with their good ideas before they invent.  Not a problem if the invent first, and then get hired.  Not a problem (until recently) if they invented on their own time, such as in consulting or in starting a company.

Pradhan also posits that “it would be inappropriate for the university to handle technology from outside inventors”.  Why is that?  “Because a university’s mission is to serve its faculty”.  Sounds like soylent green to me.  It makes no sense.  A university is its faculty.  It’s mission is to serve the public through instruction, research, and service.  If it handles an invention in order to do that, fine.  Who cares where the invention comes from.  In the Organic Act of 1868 that established the University of California, the secretary of the Regents was commissioned to go out into the world and work with the great scientific societies (and the Patent Office!) to identify plants and technology of value to people of California, and bring it back for development at the university (see Sec. 16 if you are reading along at home).  What a great form of technology transfer, to find cool stuff and bring it in for the benefit of the people and industry of the region.  But Pradhan thinks that’s all bad now.  How narrow!  Now it’s all about pushing patents out to make money.  That’s the only way tech transfer can “serve faculty” and that’s the only way that research inventions can come to be developed, if this AUTMite model has its way.

Pradhan argues that universities have “strong incentives to license inventions”.  What he means here is making money by taking ownership positions, as early and comprehensively as possible in the course of research, without regard for informal collaborations, without regard for alternative management protocols.  Pradhan points out three common complaints of the linear model implementation:  lack of funds for product development, lack of early stage venture funding, and faculty with “competing priorities”.   He doesn’t point out that these are all attributes of a non-selective, compulsory, process-bound ideological approach to innovation.  These are symptoms of under-performing offices in a poorly conceived approach to research innovation.   Universities with bureaukleptic policies take ownership of inventions too early and thus suppress development interest; raise barriers to investment by demanding to be on the licensing end (if not equity end) of new initiatives, where they put all sorts of poisonous requirements–indemnification and insurance requirements, trip-wires that terminate the license, demands that technology be developed without sharing or cross-licensing or dedication to a standard–nothing that anyone would read and go–whew, these folks really are great to have around!

Pradhan ends his defense with a paen to Bayh-Dole.   He praises it for creating the university technology transfer office, with its compulsory ownership and its onerous licensing and its once-a-decade big hit deals that give a few folks a gold bug.   The Act came into existence in a time of free agency for university inventors, and universities have exploited the Act to rid themselves of free agency while pointing to that past time as if those successes were the result of the present autocratic “system”.   What Bayh-Dole did not adequately anticipate was the degree to which universities would distort their policies to “capture”  money interests in inventions even when doing so rendered the spark of the invention worthless.  No wonder university technology transfer in such a regime is so difficult, complex, unproductive.

I do agree with Pradhan that if Bayh-Dole is to be modified, it needs unbiased discussion.  That would exclude AUTM members, in a heap, because they are clearly the ones who cannot afford to understand what is going on, and what they are doing to American research innovation.  Pradhan wants help fixing the stale linear model that has expanded to try to take inventions early and often, and put them into a process of extracting money for rights–even when being offered back to the inventors when it’s clear the university cannot do anything with them!   The funding gap (“valley of death”) as experienced by university technology transfer offices is an artificial construct arising from a failed approach to ownership, collaboration, positioning, and product definition.  It’s merely a conflation with the actual funding gap that entrepreneurs face.  No amount of money can fix the university-created sort.  What Pradhan wishes for is more government handouts, more foolish investors, and faculty who stop serving the public long enough to help the university make its dull-witted IP model work.

There are still sparks of possibility in university technology transfer offices.  A good sign is to find one without any AUTM members (or at least only AUTM members who pay their own dues), no party ideologues trying to defend what can’t be defended.  Another good sign is that the office didn’t sign on to the vesting statute amicus briefs in Stanford v. Roche.  A third good sign is that the office resists the compulsory outcomes of ownership even if that’s the stated default in policy, by exploiting its freedom to waive its claim, and to release rights without demanding payment.

Tech transfer offices on their own are a cool thing.  I enjoyed my time working in them.  But the system being imposed now makes sense only to those whose salary depends on not understanding the broader picture of innovation.  Free agency was the way it was, free agency built the idea of technology transfer, free agency will win out over the bureaucrats.  How long will the government, or the faculty, allow the present compulsory, illogical, poorly reasoned scheme to continue to dominate innovation research?



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