Manitoba’s Bold New Licensing Practice

It’s only a news story, but it shows the continuing set of underlying assumptions about university involvement in innovation. These assumptions just won’t let go. There is a narrative frame around them that squeezes tight. Take a look at this story from the University of Manitoba.

The University of Manitoba is embarking on a new approach to technology commercialization — they’re giving it away.

Well, not exactly.

But instead of hard-boiled negotiations between the university and industry partners on royalties and licensing agreements for intellectual property developed in-house, the university will make the research available to partners with no financial commitment until the company itself starts making money from the technology.

It’s a bold realignment and an attempt to allow innovative work that is going on at the university to get outside the ivory tower.

I’m trying to understand just how this is a “bold realignment.” Back in the day, it was a pretty standard deal–it’s called a royalty-bearing license. One doesn’t pay until one is selling product. While it may be “bold” to return to such a position, it isn’t really a particularly noteworthy thing. There is still a negotiation over royalties to be had–what difference does it make whether payments are due immediately or at some later date?  Surely, that isn’t the biggest issue in a hard-boiled license negotiation, and surely delaying payment doesn’t unboil much of anything. But that’s not the thing that catches my attention.

Consider that the university insists on owning inventions, on licensing them, and on expecting payment. We can work this on two separate paths. On one path, we consider how a university, determined to own inventions, can do anything useful with that ownership position. On the other path, we consider what might happen if the university got out of the ownership business for inventions, and turned its attention to other things it could spend resources on to promote innovation–that is, use of stuff created with the assistance of faculty, students, and staff.

Now the University of Manitoba IP policy has some nice features and some not nice features.  On the nice side, there’s a canonical list of the four situations under which the university can obtain outright ownership of certain intellectual property. (I use “certain” because we will get to that).  U of M claims ownership when an invention is (a) made in the course of employment (specifically, pursuant to (i) the direction of a supervisor; (ii) provisions in an employment agreement; or (iii) in the performance of any administrative duty); (b and c) there’s a written agreement between the university and a creative person that provides for university ownership; (d) the creative person voluntarily assigns; or, finally, (b’ <in a different section of the policy>) where a written agreement with a third party provides for disposition of ownership with the university.

So far, so good. For most else, the policy stipulates joint ownership. Joint ownership gives a faculty (or other) inventor the opportunity to do things non-exclusively, such as moving things to an open environment, and gives the faculty inventor veto power over university exclusive licensing deals. But joint ownership is also not so good from an IP management perspective, as it introduces multiple owners and points of control for execution of agreements. Requiring joint ownership of this sort also requires a documentation step under which this joint ownership is established. The policy resolves this issue by requiring the inventor to transfer entire title to the university if the university is going to be “commercializing” the invention. And this brings up other not so nice features of the policy.

The first not nice feature is that intellectual property is broken up into “Works”–various forms of copyright-based stuff–and “Other Intellectual Property”–which has a dubious definition:

“Other Intellectual Property” means any result of intellectual activity that can be owned by a person (excluding Works) and includes, without limitation, inventions (whether or not patentable), industrial designs, trademarks and integrated circuit topographies, as those terms are defined by applicable legislation and includes Software.

Just what is an invention that’s not patentable? It’s like a folk-lore invention–a thing that may not really be an invention at all, but is called an invention, and therefore a “not patentable invention.” It’s like having “car” defined to be all cars made to be driven, and all cars not made to be driven, which are, really, not cars at all. The “without limitation” bit is lawyer talk for “we haven’t a clue what to put in this list so we’ll list what we can think of and use magic words to say we also mean everything we can’t think of.” There are law cases in the US that read to the effect that if a drafting party makes a list of stuff, and is in a position to have some expertise in making that list, then that list is pretty much what the drafting party gets–and not everything else. This follows from a contract being interpreted against the drafting party.

Here, we have the general statement of “anything that can owned” that is also the “result of intellectual activity.” How strange!  How does “intellectual activity” compare with regular old thinking? What about messing around with one’s hands, making something, such as someone messing around in an electronics lab with a circuit breadboard?  Is that intellectual activity? How about obtaining an internet domain name?  Is that the result of intellectual activity? I guess it doesn’t matter, because technically an internet domain is leased, not owned. In any event, if the result can be “owned” then it becomes part of the definition of “Other Intellectual Property.” That would appear to include data, tangible stuff, and ideas in one’s head, to the extent that one “owns” such things as “trade secrets” rather than merely possessing them as thoughts.

The even less nicer thing about the Manitoba policy is the definition of “commercialization” that threads its way through everything:

2.2.1 “Commercialization” or “Commercialize” means a complex of activities with the goal of financial return.

Basically, “commercialization” means “money-making.” There’s nothing about developing new products for markets, and certainly nothing about standards or commons, or merely supporting use by industry. This idea of “commercialization” as a friendly word for money-making then sets up the reason for the joint ownership. It’s really about the money–if the faculty inventor hops off to, um, commercialize Other Intellectual Property, then the university gets its 50% after costs.

So really, the Manitoba IP policy is a “the university must make money” policy, or as it would have it, a “commercialization” policy. Now we come to this announcement that the university will accept royalty-bearing licenses. What could be better?

Back then, to the first path: university ownership.  Some thoughts come to mind. What is the university going to do about patenting costs? If companies get a license but don’t have to pay until they start, er, commercializing the invention, then the university could be left holding the patent costs a long time. A company can arrange its affairs so as not to make money from the licensed invention (the company could, for instance, save money by using the invention), and could recover its development costs before it shows any profit. The university will have to figure out whether in granting licenses it will get its patenting costs back, or whether it is willing to write these off in many instances where a licensee uses but does not make money.

A second thought along this path has to do with just how attractive it would be to a company for the university merely to defer its upfront payments and “milestone” fees until the company is making money on the sale of a licensed product. It’s still the same deal, just with the university exposed to its own costs for a longer period of time–and perhaps forever. A company taking a license has plenty of interest in designing around, especially if it doesn’t have to pay until it is selling product under license.  So, the aim at a company may well be to get out from under the license, if at all possible before any payments come due.

The problem in all of this is that the university insists on payment for licensing inventions, and still insists on that payment in the form of royalties on sales. Most of the companies I’ve dealt with really don’t have any desire to pay royalties. They will do it if forced, and in rare instances are happy to do it if it makes their competitors do it too, but if they are going to pay anything, they would much rather pay something up front, once and for all, and be done with it. They don’t want to have to pay royalties with all that doing so entails–keeping track of products that are under license, reporting sales, exposure to audit, exposure to losing the license, and the like. All this apparatus is painful just to think about, from the company perspective. Much better to pay, say, $5K and be done with it, or if it’s a really ace invention, maybe as much as $150K. Somewhere in that range. For startups, for that matter, it may be better to throw some shares of stock at the deal rather than a royalty on sales, or the cash value of x,000 shares at a first valuation event. Anything other than royalties.

Even then, there are other ways for a university to receive “financial return” without charging anything for a license. One could charge, instead, for support services, notice of updates and improvements, data exchange, workshops and training, and research related to the invention. Any of these sorts of things a company might happily pay for, especially if in doing so it avoids paying royalties on sales and dealing with the apparatus of royalty calculation, reporting, and payment.  Of course, these sorts of things are not, technically, “commercialization” of intellectual property.  One could do all these things without any intellectual property at all.  But the university’s definition of “commercialization” is remarkably broad. It would appear that the university could claim 50% of a faculty member’s consulting activity, quite apart from whether there is any statutory IP in play or not. I don’t know if the university does this, but it would appear that the primary purpose of the IP policy is for the university to get money from IP positions (and non-IP positions), regardless of whether it does any of the work or not.  This, despite the chipper statements about encouraging “transfer of knowledge” for the “social and economic benefit of society.”

If the university really wanted to “transfer knowledge” then when it took an ownership position, it could grant a public license, at no charge, ever, for the right to practice the invention.   Isn’t that the whole point, that what gets discovered gets used?  Why should payment enter into it?  The University of Waterloo doesn’t take ownership positions, and finds that it receives as much as it could want from gifts and research contracts from alumni who have started companies or joined companies and want to “give back” to the people who helped them along the way. This “giving back” is quite real, and in many situations, especially ones at universities, may be much more valuable than creating a “duty to owe.” In any event, there is absolutely nothing, nothing at all, that requires social and economic benefits to come only if there are payments made to the university for the right to use “anything that can be owned arising from intellectual activity.”

Consider, then, the second path, by which the university does not take any ownership interest (or joint ownership) in inventions, except under the four basic scenarios. Considering this second path allows one to see just how deeply held are the assumptions that the university’s IP practice is built upon: that stuff must be owned, that owned stuff has to be paid for; that the purpose of owning is to seek that payment; and that in a really bold move the university is willing to postpone seeking payment until a company is making money from a licensed technology. The “stuff” here is scholarship. That is, anything resulting from “intellectual activity,” except for articles and paintings and the like.  The university policy establishes a purpose in aiming to make money from ownership positions rather than services. Any company dealing with the university has to know that this is the formal policy of the university. If the university were out of the picture on ownership, or if the university in taking ownership had some other priority besides making money–like “use = success”–then perhaps things could get along just fine.

Once there is a fixation on ownership, however, it is difficult for an administrator to let go the thought. They reason: but if the university doesn’t own, then the faculty inventors will own, and they will do all sorts of bad things with their ownership–they are gullible, greedy, indifferent, and inept. Rather than thinking, “gosh, we are all that way” or “how can the university help folks with their scholarship?” the administrators then think that the way to solve the problem is by taking an ownership position. In the case of Manitoba, it’s a joint ownership position with an assertion of a right to half the income, regardless of the circumstances under which the invention was made. The administrators by doing so create a lot of the problems for the university that they must then try to solve with bold new programs.

For all that, there really is no good evidence that university inventors are so loathsome as administrators and their IP policies would have us believe. Yes, it is true that most folks don’t have a good grasp of IP practice. But neither do we have a good grasp of small engine repair, long-term investment strategies, and the design of table lamps. For these sorts of things, we rely on folks who do these things for a living or who are good at it. The same is true for IP management. A faculty member does  not have to manage the IP alone–just as with other things, one finds capable people to assist. In more general terms, this is what Andrew Hargadon calls forming a “breakthrough network”–finding the next person who will help.  In other situations, this is the “first call list.”  One could ask: how good is the first call list for university faculty who have done something important with their scholarship?  Of course, the self-interested IP administrator could answer, “That’s easy–they just call me.” But it really does not hold up that all breakthrough networks must run through a bureaucratic office in a university.  Worse, in making it a matter of policy that this has to be the case, a university in effect aims to prevent the creation of a diversity of such networking around IP. All that has to stop in favor of the university taking over. In the case of Manitoba, of course, the university only half takes over, but that’s enough to increase the overhead, the bother, the compliance, and the take-aways to make the whole activity a lot less inviting. This, despite the policy statement about encouraging “creativity and innovation within the University community.”

Imagine, then, that the university takes no ownership position, does not demand any share of financial return but for the recovery of its costs in supporting certain work, when that is a condition of its participation. In such a setting, the university can be an advocate, assistant, and mediator of interests without inserting its own financial self-interest into the activity, nor worrying about the liability or competence of its own administrators asked to pursue that self-interest. In such a setting, the university can help creative folk build their networks, find a diversity of qualified people to assist, and reach out into the community for the connections that might lead from discovery to practice–whichever way that that arrow points.

In such a setting, there is still plenty of opportunity for a university to “make money” or, er, commercialize stuff–by offering timely courses in newly discovered stuff, by providing research and consulting services, and by partnering with the community to apply for grants. Of course, if things are really going well, talented students, staff, and faculty will also want to work there, and as students graduate and get jobs or start companies, they will reach back to help, and request help from, the people who they have worked with. Even where the university does come to have an ownership position, it does not have to turn itself into an IP bully, or even a bully that defers payments until a company is “making money.” Instead, a university can accept payments because a licensee proposes to pay. Yes, it does happen. In fact, in most university licensing deals, the licensee already has decided to pay. That’s the primary reason why a university gets anything at all from its licensing transactions. It is the company, the licensee, that needs the contract, and for there to be a contract, there has to be consideration. Without a contract, the license is merely the gesture of the university and not an asset of the company. This is a tough lesson for university administrators who think that they should be playing the troll or at least pretending to be a corporation themselves, when they are not.

The great challenge in dealing with IP in a university environment is not to somehow implement corporate-style IP management. This is not a matter of “running more like a business.”  The great challenge rather is to use IP to promote the purposes of university scholarship, that is, aligned with what instruction and inquiry require to be effective. For that, one has to challenge the conventional uses of IP, the money-making, the idea that IP “protects” an invention or discovery. “Protects” itself is a foolish term applied to university scholarship of the “Other” variety–the inventive stuff. There is no need to “protect” university inventions. There may be a need to “promote” them–that is, teach them, support them, and help others to use them. And for this IP can indeed play an important role. But it is a markedly different role than that proposed by licensing folks trying to get the university to change its policies and its ownership and money interests so they can adopt corporate-like strategies of licensing.

In all of this, of course, the proof will be in the doing. Let’s see if there is a big change in the innovation outputs arising from the transactions that the University of Manitoba contemplates. Let’s see what comes of it, just like we are still waiting on the well publicized UNC “Express License” and the Glasgow “Easy Access IP” strategy.  However, so long as the university is claiming ownership, and then trying to undo the problems that ownership plus a greedy streak creates–the policy processes, the pile of disclosed inventions to be “processed”, the patenting expenditures, the licensing apparatus, the “marketing” effort, the CYA to explain why so little gets licensed and even less results in anything new in practice or product–it will take more than “bold” initiatives that make variations in the licensing terms.  Check back in a year, and we will have our answer.

 

 

 

 

 

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