Equity Policies and Ownership Policies, Part III

Part I is here.  Part II is here.  Part III follows below.

The policies of the form of 1962–dealing in equities, diverse, open, advocating the use of external invention management agents, if a university had a policy at all–supported the apparent success of university invention management leading to the passage of the Bayh-Dole Act.   Something happened after that to change everything.  It wasn’t Bayh-Dole, but it was because of Bayh-Dole.  Multiple misrepresentations of Bayh-Dole created an environment that allowed administrators and attorneys working for them, and contracting with them, to transform the university approach to inventions, creating the grasping, overloaded, process-heavy, expensive, ineffectual, monoculture of university technology transfer that we now endure.

  • It was claimed that Bayh-Dole applied to universities.  It does not.  It applies to federal agencies, and establishes protocols for the use and tailoring of a standard patent rights clause.  Anyone can see this who traces the flow of control from 35 USC 200-212 to 37 CFR 401 to 37 CFR 401.14(a) to 2 CFR 215.36(b).   University obligations are a matter of federal contract, not statute.
  • It was claimed that Bayh-Dole vested title of federally supported inventions with the university (or gave a first right to claim title, or a right of first refusal, or prevented assignment to anyone other than the university… or whatever, so long as the university gained ownership without negotiation).  Not so.  The Supreme Court confirmed in Stanford v Roche that Bayh-Dole did not secretly or implicitly change federal patent law to vest inventions with universities.
  • It was claimed that to comply with Bayh-Dole, a university had to have a patent agreement that required employees to assign to the university.  Not so.  Any agreement between a university and its research personnel is entirely distinct from the provisions of the standard patent rights clause, under which universities (and other contractors) agree to require that their research personnel make a written agreement (the (f)(2) agreement) to protect the *government’s interest* in inventions they make.  That agreement is joined to the patent rights clause, and thus to the funding agreement.  It is a federal agreement, made on behalf of the government, not the university-as-employer.
  • It was claimed that Bayh-Dole mandated (or intended, or was to encourage) commercialization.  Thus universities had to take title in order to seek companies and investors willing to make and sell products.  Bayh-Dole does not make such a mandate.  It seeks to use the patent system to promote the use of inventions.  Commercialization is only one of any number of means to that end.   It is “practical application” that gets a definition in the Act.
  • It was claimed that Bayh-Dole provided special benefits to universities.  It does not.  The provisions pertaining to universities and other non-profits are more restrictive than for small businesses or for inventors acting on their own with agency approval.   These restrictions (paragraph (k) of the standard patent rights clause) indicate a distrust of university management, not a special favor.

The misrepresentations were multiple, repeated, insistent, and given as authoritative.  These misrepresentations, which are still active in university policies even two years after the Supreme Court decision in Stanford v Roche made it abundantly clear the university claims were wrong, changed the course of university support for research innovation and started a chain reaction that has been copied around the world, as country after country has been led to believe that what the United States did was strip its university inventors of their rights to inventions and hand those rights, in a stroke of genius, to bureaucrats with a charge to chase money from speculative investors.   In addition to the debasing of the academic environment, undermining public support for university work, disrupting interactions with industry, and creating a generally anti-inventor environment, the changes instituted an architecture that is fundamentally at odds with the requirements of the effort.

The effect of the misrepresentation was to make changes to policy and to practice.  Policies shifted from equity to ownership.  Faculty were told this was required by law for federal grants, and since the federal government thought it was such a good idea, the practice should be extended to all inventions, so that inventors not using federal funds would not be excluded.  Inventions were “marketed” for “commercialization” whether the inventors wanted this or not, and exclusive licenses were signed even when research or free enterprise would have been better served by non-exclusive licensing.  University administrators “took over” “technology transfer” and turned it into a “process.”

First, the move from equity to ownership.  This move eliminated the equity apparatus–the independence of equity from ownership, the establishment of circumstances, the review by peers, the recommendation of a return to the university, the lack of need to get worked up about the legal complexities of patenting and licensing–and replaced it with an ownership culture based on demands, compliance, and mostly implicit threats (to employment, to capability, to character).   This move also eliminated the range of options for addressing equity and replaced them all with one–the university owns, but shares proceeds, if it ever gets any, with the inventors according to a set schedule.

Second, the move to ownership created the very need for services that universities generally lacked and faculty often did not require.  Rather than use available invention management agents, universities found themselves forced (or forcing themselves) to come up with the personnel and funding to manage the volume of reported inventions, the processing of these inventions, and the effort to find commercialization deals for them.  Not only did this move to ownership deprive inventors of a wide range of choices–including allowing a sponsor of research (such as the federal government) to manage their inventions–but it also disabled the connections inventors (and other investigators) might have personally.   In some licensing shops, technology managers were told not to talk to inventors, but to industry.  In others, which made a big show of working “closely” with inventors, inventors found themselves doing all the work, but then not being able to make the key decisions, or even to get action on their inventions.

Third, the move to ownership changed the management architecture from agent-based to portfolio-based.  In an agent-based model, each invention is taken under management with a commitment to provide service responsive to that invention.  Sports agents work on this model. If you represent an athlete, then you work to get that athlete signed to a contract.  Attorneys work on such a model.  If one takes on a client, then one provides services to that client.  One does not accumulate athletes or clients into a portfolio and then declare success if one or two have good outcomes.  In an agent model, there is no “funnel” of clients so that only a couple have to be serviced to make it all good.  Clients that are not serviced go somewhere else.  If there is a growing  “funnel” of potential clients, at some point one exceeds one’s carrying capacity and starts trying to find only the clients that will really matter–the ones in the sweet spot for the services one is capable of.  One certainly does not need *more* potential clients if the additional ones are not in that sweet spot.   Instead, one learns to be selective.

University administrators maintained the agent appearance, but quietly adopted a portfolio model for managing work and reporting their results, a model reflected in the structure of AUTM’s annual survey of licensing.  Had universities adopted agent reporting, then for each invention that was claimed, the report would have shown invention’s status, its expenses, its income, and the impact of its university management.  That has, to my knowledge, never been done.

In an equity approach, only the inventions that are acted upon for patenting come forward for discussion.  In an ownership approach, all inventions are dealt with, even though only a few are worth the discussion.  In an equity approach, the successful inventions are considered for their circumstances of development and support.  In an ownership approach, such information is suppressed–the model itself takes credit for any success.  In an equity approach, the important inventions stand out and things that do not progress are of no account to the institution.  In an ownership approach, the mediocre dominates and the system cannot differentiate exceptions that are based on potential badness from those that are based on potential goodness:  exceptions are contrary to policy, challenge local authority, and bother the senior administrators with what appears to be failures to manage, to cooperate, and accept uniform management.

It is in this latter difference that the ownership approach shows how different it really is from the equity approach.  In the ownership approach, the dominant claim to administrative control is based on a condition generally unrelated to the invention circumstances–such as employment, or use of facilities, or involvement in sponsored research.  The royalty sharing set in policy–a petrified version of one outcome of an equity discussion–allocates the same inventor share for an invention that was made as the result of an express requirement of one’s formally defined duties with a big supplemental budget to do it as it does for an invention that was made without any institutional support whatsoever but happens to be in the same field as the one an inventor was hired to teach in.   From an institutional equity position, these two situations are utterly unlike one another.  The equity outcome under an ownership approach–that the university asserts ownership and shares proceeds (if there ever are any, which most often there are not) in exactly the same way is coarsely, blatantly inequitable.

The consistency demanded of a compulsory system, in which the institution asserts a right to ownership and imposes a payment scheme on inventors, is opposed to equity.   Were it the case that inventors chose university ownership, and did so voluntarily, and inventors with very different circumstances opted for uniform treatment, then equities are satisfied, but only because individuals have made a choice to that effect.   Indeed, that a university, if it is to be an invention management agent for its own employees, adopts a uniform schedule for sharing proceeds is a useful tool:  a uniform schedule means that everyone knows what everyone else’s deal with the university is–no transaction to assign an invention is secret, no politics or favoritism gets in the way.  It’s a take it or take it to someone else kind of deal, a way of managing the potential for institutional conflict of interest.

The structure of the ownership approach also puts pressure on the nature of any sharing of licensing income.  In an equity approach, that sharing is based on a finding of what is fair based on circumstances.  One pays back because one received support leading to the opportunity for success.  On review, the university is rewarded for being a good partner in the run up to the patent activity.  If there is an assignment of patent rights, it is negotiated.  The consideration for the assignment is part of the equity discussion.  However, in an ownership approach, the consideration for the assignment is baked into existing conditions–employment, use of usual facilities, participation in sponsored research.  Any sharing of proceeds arises from the largesse of the institution.  Sharing is presented as a perk, as “better than how industry does it.”

Sharing, furthermore, is required as one of the restrictions under the Bayh-Dole authorized standard patent rights clause, but there is no guidance in that clause for the extent of the sharing.  Given the role of equity in university policies at the time, one might think that the expectation was that the sharing would be *equitable* but university administrators have instead made a virtue out of the idea that the sharing is *unresponsive to circumstances*.   That is, sharing of invention proceeds under federal funding agreements, in an ownership approach, is not consideration for the assignment of the invention.  That sharing is a stipulation of a contract under which the university has agreed to share; thus, the sharing cannot also be a bargained for benefit made in any agreement with inventors.   The nature of the restriction on sharing then becomes evident in the standard patent rights clause.  The restriction is there to prevent a university from by-passing the equity discussion entirely and treating federally sponsored research as if it were university-assigned employment.

The misrepresentation of Bayh-Dole turns the sharing provision on its head.  Rather than emphasizing the importance of making an equity determination in light of the circumstances of federal rather than university support, the misrepresentation of Bayh-Dole, taken as gospel truth, argues for replacing that equity determination with an ownership claim and an institutionally initiated sharing.  The effect is to dismantle the agent status of the university in taking ownership, eradicate any obligation to the inventor to manage the invention, and in particular to manage the invention according to the wishes and interests of the inventor, and to change the basis of consideration from sharing to employment or other generic condition.

I have argued elsewhere that the university claim to inventions based on the “course of employment” rather than on the “scope of employment” does not hold up, especially where “employment” for faculty does not have anything to do with preparing work for the benefit of the employer, under the direction of the employer.  That is, faculty, students, and staff at a university are not *employed* in their research by the university, as the university administration does not control their work.  The university could prevent such research, and can support such research, but it is not the employer of such research, and for good reason:  the independence of the faculty is not only a strength in research but also a cornerstone of the separation of inquiry from institutional controls, whether governmental, religious, or corporate.

The model created through the misrepresentations of Bayh-Dole has been anything but a godsend to university research-based innovation.  Now that the misrepresentations have been made clear–and in particular by the Supreme Court–it is essential that universities revisit the idea of institutional control of creative work, especially when that control is premised on institutional profit-seeking.  The existing model is built on a premise of authority, not equity.  The existing model promotes the mediocre, suppresses the rare, represses personal initiative, creates liabilities and raises costs, taxes and delays and weakens the strong, and promotes its own importance, rather than that of the people it purports to serve.  The metrics reported for this ownership approach do not show a success of technology transfer or innovation but rather the successful growth of a bureaucratic parasitism on the possibility of success.  The number of patents granted to universities is a measure of institutional expense and and tracks the disruption of the research and practice commons; the number of licenses granted is a measure of the proliferation of a particularly pernicious kind of monopoly run by nonprofits and state governments seeking rents from industry; the amount of licensing income is a measure of what speculators are willing to pay to keep research findings from general usage in favor of their own interests.  The number of startups is a measure of how much investment has been diverted to speculation that trades on the reputation of the university.

Great effort has been made to rationalize the ownership approach as necessary, beneficial, well intentioned, efficient, consistent, protecting public interests and inept faculty from themselves, and a remarkable success.   The approach itself, however, is a failure.  That is, the policy, expectations, default practices, and accounting are a failure.  It is a work of taxidermy–the outside looks remarkably lifelike, while the insides have been largely replaced–a working, living system is now wire and stuffing with the primary attribute of now being consistent, if not entirely predictable and manageable.  This is not a criticism of the individuals who have chosen to work within the technology transfer programs at universities.  They are in general diligent, good-hearted folks.  I count many as friends and colleagues.  But the system itself is devastatingly bad, no matter the good intentions, the hard work, the dealing with the complexities that a compulsory invention ownership system brings to university life.   Folks within the system, who owe their jobs to it, don’t generally want to speak out.  I understand that.  I know a number who would speak out, given the opportunity, if they could without threat of retaliation from their employers.  If the system is going to change, faculty will have to want to change it.  Clark Kerr argues that change in universities typically comes from the outside.  The faculty are great at filtering change, not so good at proposing it.  Perhaps that is why there are faculty “senates” and not faculty “houses”.   Thus, it is up to companies, and foundations, and associations, and governments, and just plain old public folks to come up with proposals for change that faculty can consider, filter, and adopt as alternatives to what they have been served up, which is not doing them or the rest of us much good at all.

Revising Bayh-Dole at this point would help, but merely repealing the law would leave the damaging ownership policies in place.  One revision that would make a great difference would be for the standard patent rights clause to make the (f)(2) agreement for universities have special properties, such as forming a direct arrangement, in the form of a subcontract for invention rights only, between the agency and the research personnel involved in a given grant, so that (i) all demands by a university for ownership or financial interest are set aside; and (ii) the decision whether to seek an agent, and what agent to use, rests with the investigators and inventors.  In such an environment, the university would agree, as a condition of the federal funding, that it had no equity in any invention made with federal support.  That would be a good start, building on the Stanford v Roche decision and in light of the university administrative behaviors involved in creating the misreading of Bayh-Dole, the elimination of equity-based policies, and the contempt for the Stanford v Roche ruling.

There are, of course, any number of non-legislative ways to develop alternatives to the ownership approach.  Some have a long history and proven track record.  Others, responsive to present circumstances, await implementation.   The starting point, however, is to return to an equity approach for inventions made at universities, and build out from there.

University patent policy should be directed at limiting administrative ownership claims, not expanding those claims.  Patent policy should disclaim administrative ownership of inventions not expressly contracted for, not voluntarily assigned, and not subsequently developed with the use of resources beyond those normally available in the academic environment.  Policy should forbid administrators from inserting institutional ownership claims in sponsored research agreements.  Such ownership conditions should only be present at the request of the sponsor or the faculty investigators, and if made at the request of the sponsor, then with the concurrence of the faculty investigators.   Such a policy may require university inventors to use an agent if they seek a patent on their inventions and propose to exploit that invention for profit; the policy may establish protocols for determining equity in any such invention, if an agent is used that does not already have an arrangement acceptable to the university.  Such a policy can even be varied, as decided by the faculty of a given school or department, through their own governance, such as to prohibit patenting by a faculty in areas that that they determine are contrary to their ethical standards and public mission.

Such an approach to patent policy provides freedom to innovate, addresses equity issues when they matter, provides a sound basis for institutional involvement in creative work, and shifts the focus from bureaucratic authority, convenience, and demands to one of openness, faculty governance, and opportunities.  Rather than pursuing administratively attractive hairball approaches that take everything and hold what cannot be forced back out, universities could, and can, pursue support for innovation that focuses on the impact of research for the general population (if for no other reason than to refresh the imagination), the research community (to advance study, not merely reputations), in the practice community (including government, where people may use without having to buy products), in industry (where products may be developed for in-house use and not sold along with those developed for commercial sale), and as well among investors and entrepreneurs (looking to make a big return on a risk-controlled stake).  To serve such varied interests, no policy based on administrative control of everything can possibly work–and certainly not one fixated on institutional control for the purpose of making money from patent licenses, er, “commercialization in the public interest.”  To serve varied interests, in an open university setting, one must have freedom to innovate.  For that, the controlling concept is equity, not ownership.


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