An article by Jens Krogstad in USA Today, reposted at Innovation Daily, has the headline “Universities struggle with falling invention royalties”. Well, no kidding. The big biotech window of investment was 1980-1995. Aging patents in university portfolios are expiring everywhere, without much to replace them.
Look at the University of California portfolio on page 20 of the FY2011 annual report (page 22 of the pdf). Here are the “top 25” inventions in terms of licensing revenue, out of a portfolio of some 5,000 US patents. The dates in parentheses are the dates of disclosure, not patent issue or first license. Of the top 10 inventions, 8 were disclosed in 1992 or earlier. Thus, one can expect the associated patents are set to expire. That represents over 25% of UC’s total licensing revenue. And the top money-earner is a one-off payment, so that’s not continuing either. Inventions for which patent applications were filed in the second half of 1996 or 1997 will be expiring in the next five years. UC could see its patent licensing income drop from $182m to under $80m, unless it comes up with “big hit” replacements.
A similar thing is waiting to happen at the University of Washington, where the entire operation has been floated for 25 years by the Hall patents, which are set to expire in April 2014. UW’s income will fall sharply unless something else steps up paying $10m or more per year.
Why the drop off? Patents expire, and with them licensing deals. But that’s not the problem. The problem is that the time between “big hit” deals, even at the largest schools, is on the order of decades. At WARF, four major technologies and ten patents account for the majority of income over 80 years. One every 20 years.
At Stanford, Kathy Ku reports in Developing University-Industry Relations: Pathways to Innovation from the West Coast:
Out of 6,400 inventions in thirty-six years, only three of them were “big winners,” defined as having generated $50 million or more in cumulative royalty revenue. Of the 6,400 inventions, 16 have generated $5m in cumulative revenue; 53 have generated $1m or more in cumulative revenue; and 287 inventions have made $100,000 or more. (22)
That’s 3 “really big hit” inventions in 36 years. University of Washington has had two such hits in 30 years–and both at the start of that period. The deal is, even at the big schools, the big hits tick off at about one a decade–and that has not changed with Bayh-Dole, with the ramp up in university licensing staff, with the demand for ownership of all inventions, even with the expansion to claim ownership of software and anything else that might have monetizing value. What we see is the production of more “noise” and the burying of “signal”. No wonder it now requires serious effort to manage all the incoming invention reports.
Here’s the problem with David Mowery’s conclusion (p. 267) that “biomedical inventions appear to be among the most consistently profitable inventions in licensing transactions.” Professor Mowery would sharpen his point by taking into account that once an invention is “profitable” it can stay that way for its patent lifetime. For a university patent portfolio, one will see “financial success” for a decade or more, but only from a handful of inventions in the portfolio. In fact, the whole idea of a “portfolio” is a rhetorical fiction. It’s really not a portfolio at all. It is a few inventions doing what they ought, and a bunch that have been claimed in an effort to make them fit a “model” that doesn’t work the way administrators want. While there certainly is more activity–more inventions being reported to the university, more patent applications filed and patents issuing–it is not at all clear that such activity results in more licensing income, more products on the market, or improved economic activity enhanced by university research expertise.
Even if one wanted to study the impacts, it would be difficult to do so, because the Bayh-Dole Act exempts university reports of utilization from FOIA, and universities for the most part do not report any outcomes but the “success stories”–and increasingly, they only report the “potential for success stories” because, well, it’s a whole lot easier to write about a potential success as if it has already happened then to wait and see what actually comes of a bit of discovery.
What does become evident, however, is that university administrators have fundamentally misconstrued the circumstances under which faculty inventions have come to have value, and have built an administrative system that aims to implement this misconstrued and, therefore, misconstructed model. The argument is not that there are not times that a university might license a patent for substantial value–clearly, this has happened and will continue to happen–but rather that there is no benefit in throwing more and more inventions at this effort, and in fact there appears to be great damage. The model that produces big hit licenses has been, historically, largely voluntary, highly selective, collaborative with industry, non-exclusive, and opportunistic. Attempting to push many inventions through an institutional licensing bottleneck damages not only the inventions but also the model, and as well damages the bottleneck itself–the very idea of university-controlled licensing.
You would never know this from reading university technology transfer literature about how “the process” works or by reading university patent policies. The program that has been created, and has become almost monoculture, is one of claiming ownership of inventions outright, demanding disclosure of everything, and attempting to “market” inventions to industry, with a strong default preference for exclusive deals. Where companies do not come forward to take such an offer, university administrators have turned to the venture community, and when that has failed, almost in desperation, they have sought state “gap” funding to make up the difference. In short they have attributed a debilitating property of their own conception of “marketing” patents the “marketplace” itself, as if the market is responsible for the shortcomings of their approach, requiring the government to step in provide the funding for a proposed relationship that companies and investors fund unattractive.
Now there is also a reality about “gap” funding–any new venture knows the challenge of raising funds–whether from family and friends or through institutional investors. But that is not the “gap” funding we are dealing with here. Here, we are dealing with an institution insisting that its model of “marketing” is fundamentally sound despite 100 years of contrary evidence and seeking money to purchase appearances, in the hope that if the process is somehow prolonged from disclosure, assignment, marketing, license, and startup, that if the startup is also funded by the state, at some point–poof–it will become a gazelle company, grow rapidly and filthy lucre will be had by all, and especially the university administration. It happens this way just often enough that administrators cannot give up trying. The attraction of the “big hit” is tremendous.
David Mowery is spot on when he points out that the patenting of university inventions was growing well before Bayh-Dole, and in many ways Bayh-Dole was a response to that growth. Mowery (and co-authors) also points (see p. 7, note 5) but that the claims made for the failings of government patent management “overlooked” the fact that many of the patents held by the government were defense-related–weapons systems stuff that did not have a commercial market, and one might think, there were good reasons for there not to be a commercial market in such stuff. The passage of Bayh-Dole in many ways is not the pivot point in the university technology endeavor that many have made it out to be. It was a pivot point of a sort, as it gave rise to the outright claim universities have made for ownership of federally supported inventions and the technology licensing practices built on that claim. But that was not the critical pivot, which took place earlier. Bayh-Dole merely gave administrators a federal statute to back an agenda they already were pre-disposed to follow.
The critical pivot point was the perception among university administrators that if patents from time to time might produce relationships that in turn produce money for research, then there will necessarily be more money from more relationships if universities own everything and turn the effort to produce money into a system. That idea appears in the early 1960s, as we find with the 1963 University of California patent policy, which replaced the 1943 policy under which assignment of inventions to the University was “optional”:
This little bit of prose, the urging of “further use of inventions as a source of intramural funds for research,” appears to be the kind of thing that folks wanted. Remember, this is before the glut of federal research dollars swamped out other sources of funding for faculty research projects. The issue that remained was just how to “further use” inventions to raise money. The idea that UC administrators latched onto was to claim ownership of faculty inventions, and create a process of deciding which ones might prove to be a “source of intramural funds”. The use of the patent system to create funds for research goes back to Frederick Cottrell, who invented the electrostatic precipitator and started Research Corporation in 1912, with support from industry, to do just that. WARF soon followed suit but restricted its funding interest to the University of Wisconsin. Other research foundations followed WARF’s model and a scattered network of dedicated, or if you wish provincial, patent licensing operations were created. The shift to internal licensing was apparently started by MIT, and by 1963, UC had also caught the bug.
The early inventions that became financially valuable were, for the most part, the result of acts of generosity and insight by their faculty inventors. The move of the administrators was an effort to regularize this activity into a process, and to expand the catchment of inventions to populate this process. The idea was, faculty would report everything, the University would claim broadly, review carefully, choose selectively, and generate the desired revenue. The University’s claim to take ownership would be released for what was not chosen.
Spin ahead to the present, where this approach, which already has the weakness of institutional process, becomes something akin to a sales model, in which everything is taken, and some “make it and some don’t” so that “winners pay for losers”. It may be that this is so–but in the reality of university patent licensing, the issue is just how many losers get paid for, and what happens to those “losers” as a result.
Another factor comes into the picture in this process of processifying invention management by university administrators, and that is the coincidence of the biotechnology revolution and the passage of the Bayh-Dole Act. Biotech came first, by a few years, but it is where universities found substantial new ground for patent licensing. In essence, a window of competitive investment opportunity opened up just as universities were making moves to accommodate Bayh-Dole, one of which was to change their patent policies to claim ownership of inventions made with federal funds, if they didn’t have a claim on all such inventions already. From 1980 to about 1992, there were deals in biotech to be done, and income to be had. Then the window mostly closed, and while there were still deals around, it was not the same, and this situation is now reflected in university patent holdings and licensing–lots of biotech patents, and apparently (we can’t know for sure) a heck of a lot of them unlicensed or exclusively licensed into moribundity.
At roughly the same time, another revolution was taking place, also led by university research. That was the internet, a complex of computing, networking, and software capabilities and standards that have revolutionized communications and destroyed, rather quickly, the typewriter. There were inventive things all over the place, but the software part of the internet was still in iffy territory both for patents and copyrights. In any event, universities did not participate as patent owners in the development of the internet, and things did just fine without such participation.
By operating in-house licensing offices and hiring almost exclusively for “biotech” licensing expertise, universities locked in not only an area of interest but also what they took to be the operating models that “worked” during a time of competitive investment. They then sought to extend these “models” and in doing so they created a follow-on period of speculative investment, for the late comers, the patent trolls, the wannabes. The train, however, had already long left that station. The result is a massive accumulation of patents in biotech, and university IP policies and licensing personnel devoted to trying to clear inventory, with hundreds of more inventions reported at many institutions each year.
As a result, it has been next to impossible for universities to change course, to adapt, to extend their activities. To change course would be to abandon hundreds of thousands–if not millions–of dollars in patent work; to adapt would be to change operating models after having hired personnel suited for one; and to extend activities would be to spread staff thin and take them out of their areas of specialty. To extend activities also tended to mean: use the same approach that “worked” for biotech for everything else.
I use “worked” in quotes because the approach that did “work” was largely voluntary, selective, collaborative with industry, personal, and opportunistic. The approach that was implemented was by way of contrast increasingly compulsory, comprehensive, aloof from industry if not antagonistic to industry, institutional, and process-bound. The two approaches could not be much further apart. And yet the institutional approach is represented as the one that Bayh-Dole was passed in response to. Yet the institutional approach is nothing of the sort. Bayh-Dole was passed in response to a wide range of practices, most of which worked because they were not the institutional version! The shining examples of university inventions in biotech, even, were non-exclusively licensed.
As a result, university IP offices baked into policy and into practice a model that never was widely practiced, that “worked” almost by coincidence in a sputtering kind of way for a narrow bit of biotech licensing in a brief period of active investment that then passed. University administrators fixated on biotech and the “model” they had worked out, and have spent the past 25 years trying to make something work that wasn’t the model that did “work” but was a nice administrative substitute that seemed like it should “work,” too.
Instead, the universities should have been looking for breakthrough areas of technological interest, windows of investment by industry, and used open IP policies to promote selectivity and institutional collaboration to help industry gain access to expertise. That would have been an approach supported by history and by the conditions that gave rise to the early biotech patent licenses.
As a result of this misconstrued and misconstructed approach, universities managed to miss a number of windows of investment opportunity: the stand-alone software window, the web window (but for CMU, Stanford, and MIT, and bits and pieces elsewhere), the social media window (Facebook was at Harvard, but not in its tech transfer office), the mobile window, or the mobile app window. The universities contributed to the destruction of the nanotech window, are missing the 3d printing window, are having a rough time with the clean tech and energy windows, and do not see a rare-earths window, a natural gas window, or a big data window. Some of these windows involve patents, some not; some involve commons and standards, and others proprietary development. But no matter–the university IP offices are fixated on biotech because, well, for a long time it was biotech that was the “success” area of the portfolio, but really it was just a few points of, mostly, faculty generosity that kept giving and giving, masking two decades of unproductive efforts to “do it again, this time as a process, this time for even bigger bucks, this time we’ll stick it to industry, start our own companies, be our own venture capitalists.”
The universities, in tying up all inventions this way to try to make a once a decade model produce many times year, have cut off the flow of open technology into commons–into the development of ad hoc technology platforms that foster relationships and develop standards–and it is these platforms, relationships, and standards from which a great many technology opportunities for commercialization arise. There is no short cut by leaping over this natural history of networked, non-market engagement. All one can do is limit it, prevent it–and doing so is also a source of “value”–if by “value” one means keeping from people what they need to be successful. A premise for a working, distinctively university-based approach to research-originated innovation is that universities build intermediary intangible assets that in turn spring opportunity. The intermediary intangible assets need not be institutionally owned, and some, such as centrality in a network, aren’t owned at all.
The demand for ownership and control to feed an institutionally run speculative monopoly process model works *against* the universities’ own broader interests to get technology into public use. The speculative monopoly model says, “we make money when the speculative monopolist makes money”. That means the default is to hold each invention in the hope that a monopolist will someday show up, if not to take a license, then to fund a company. While championing the need for venture capital (or seed capital, or angel capital, or gap funding, or bridge funding), the universities make it much more difficult for capital to operate, with all the university overhead and red-tape, the demand to be involved in every deal, and the ever-present fixation on the money.
Making assignment compulsory swamps a university office with a huge volume of inventions that it claims, for which there is no other alternative. And the volume itself is not the only problem: the wide range of inventions works against the narrow constraints of the conventional licensing model, which is built on the premise of a running royalty on sales or the huge growth in the value of equity in a startup. Outside of these two options, there are many ways for technology to be deployed, used, developed, and even for money to be made–all of which do not depend either on a leap to commercial products or a big hit investment in a startup.
Making assignment compulsory also masks a critical element of the old model, the real working model, and that is the important signal of inventor self-selectivity. When an inventor brings an invention forward, and requests assistance, this is an important sign that there’s something of potential value, the inventor believes the university is a match to help to develop that value, and the university has resources and expertise that are desirable. With a compulsory model, this signal vanishes. Assignment is a duty. It’s all noise, no signal. A voluntary approach reveals other signals as well. Inventor generosity, for one. That is often overlooked, but it is very real, and material to breakthrough relationships. In an optional model, a university is offered an opportunity to assist because the inventor wants the university to benefit. It is a choice made by the inventor. That choice frames a great deal about how subsequent efforts are undertaken. When an invention is demanded, the inventor has no such gesture available. It is the university that dictates back a “share” of any income–and it is typically a small share compared to the university’s own take, and compared to the starting point, where the inventor owns what she or he has invented. That’s the opposite of a voluntary approach, where the inventor offers to the university a share.
For a university approach to intellectual property to be workable, it has to be agile, selective, diverse, and opportunistic. This cannot happen with policy that claims ownership or practices that assume, against university norms and the history of IP practice, that a speculative monopoly licensing model must be the default, just because it “worked” (didn’t, much) in biotech.
The University of Washington, for instance, is presently on its way to spending nearly $100m over five years in an all-out effort to make a compulsory, comprehensive speculative monopoly licensing model “work”. The express aim is to make a lot of money quickly by flipping startup companies to willing speculators. UW will need that money, since its big hit patent income runs out in a little over a year. So far there is little to show for all the effort but costs. Meanwhile, the effort has tied up scholarship that cannot be practiced without the permission of administrators, and has disrupted informal and consulting collaborations with industry. Even if money is made–and there is always luck, even in heavily bureaucratized institutional systems–there is still the repression of faculty initiative and engagement, the blocking of efforts to contribute to platforms of methods and tools and artifacts that form the basis for a lot of opportunity, commercial and otherwise. It’s not workable. It’s not worth it.
The federal government no doubt wants to see impact from the $60b or so it spends on university research each year. So would we all. However, at some point enough is enough. Research cannot be “an industry” in the sense that it is a chronic entitlement that goes to those best organized to “apply” for funds. The credential for re-application for funds, from both institutions and investigators, needs to be in the form of impacts. This does not mean commercial products and filthy lucre for everyone, but rather outcomes that matter. Nor can we live on the confirmation bias of a few “success stories” while the actual metrics of what is happening remain suppressed. Finally, we may as well abandon the fiction that it is a university’s job to “commercialize” scholarship, or even just the inventive parts of that scholarship. Commercialization is an industry matter. It may be that faculty should be allowed to move more freely into industry to pursue their interests.
The role of the university, as an institution, is to provide an environment that allows the independent pursuit of ideas, discovery, technology. Some of it will be silly, and some won’t work, and some of it will be immediately useful. But the university purpose is not to withhold rights in order to be paid, but to be provided with resources, to benefit in recognition of the value it provides in supporting independent expertise, in providing training, in providing a neutral ground where new things can be assembled and validated to advance scholarship, to support practice, and in some cases, maybe a click a decade per institution, do something that results in substantial income–because people want the university to be involved, to be recognized, not because administrators went way out of there way to create process by which they systematically demand that recognition by withholding IP rights.