University monopoly-monopoly IP practices create betting parlors

Examination of a university intellectual property policy apparatus, such as that of the University of Michigan, is instructive. Rarely does one get the chance to do a close reading of such documents outside of a dispute, and if there’s a dispute, then vested interests are paid to highlight some parts of policy and suppress others. History rarely comes into it. Nor does a knowledge of intellectual property practice, nor does the social realities of how innovation comes about and what university bureaucrats can do to facilitate innovation. All these matters are too far afield to be considered, even if they are vital to the question of why a university should seek at all to have everything of some value done by its faculty pass through the hands of bureaucrats as a pre-condition to public benefit.

A comprehensive, compulsory intellectual property policy typically exists to create a betting parlor for second- and third-rate speculators. In old-fashioned terms, the policy intends to forestall a market by preventing the work of faculty from reaching market. (If the university intended to sell into the same market that faculty work was already reaching, then they would be regrating the market as well. It’s good to have the old terms available, so when old offenses arise anew, one can put a name to them.)

The essential action of a comprehensive, compulsory asset policy is to secure monopoly ownership of faculty output, both intangible and tangible, so that university officials can sell off (i.e., exclusively license) assets to a coterie of investors looking for a speculative situation in which they can use the reputation of the university as cover for reselling their interest at a higher price to less clever investors or to create the appearance of potential disruption in a market that a major player in that market acquires the asset for the purpose of removing the appearance of a competitive threat. A bureaucrat’s thumb in every possible innovation pie.

There may never be an actual competitive issue at the level of technology–the mere persisting appearance of a competing technology, one with “potential” and affiliated with a university’s name is often enough to affect investor and buyer behaviors. University press releases about new inventions are almost always filled with unfounded forward-looking statements about potential that no publicly traded company could write without violating securities law. Given a small percentage change in a large company’s market capitalization is much greater than the cost of acquiring a dump of a small company holding a patent license from a university, acquisition becomes a reasonable alternative. Yes, occasionally there is working technology, and once every 5,000 attempts, something is actually a beneficial, valuable product.

The “success” stories in university (and AUTM) publications are largely accounts of the few–only–inventions that were backed by strong enough science and persistent inventors to make it through the bureaucracy of university management. Most are the result of luck and goodwill rising above management. Most arguably would have been valuable regardless of a university administration insisting on becoming involved. It is an open question, for inventions of substantial value whether university involvement–ownership, patent prosecution, choice of strategy, nature of marketing, choice of partners, negotiation, drafting, post-license management–augmented the value or diminished it.

In any case, the primary effect of a comprehensive, compulsory asset policy is to allow the university to extract a substantial portion of any royalty stream for the university’s use–starting with the survival of the technology licensing operation and the policy apparatus that it deploys to ensure it has a monopoly on the outflow from the university of anything that might be held exclusively for value.

Viewed this way, as a betting parlor for speculators that forestalls a natural, public market for the dissemination of faculty inquiry, a comprehensive, compulsory asset policy is utterly contrary to a university’s public mission. The social purpose such a policy serves is to provide speculators with first access to the work of the faculty. One might say it is a welfare program for second-tier investors. First-tier investors do not depend on university bureaucrats for their livelihoods. Opportunity seeks them out. By contrast, a university’s fixation is on monopoly–first by preventing a market from forming for faculty to offer their findings however they please, and second by withholding the assets the university does come to control for use in exclusive licensing. A university with a monopoly asset policy thus attracts speculators. That is, the value of the assets so held is transformed from the potential for instruction and use to the opportunity to make money on the threat to exclude.

One has to see this behavior for some time to accept that it is actually what is going on, despite protestations regarding public benefit and facilitation of innovation. For each bit of technology covered by an overbroad set of patent claims, a university has a better chance to disrupt a market’s direction–or to offer the patent to a low-life who is eager to do so–than it has in offering to teach people how the new technology operates (if it even does operate).

The intellectual property position–patent, typically–in the hands of a university bureaucrats seeking monopoly licenses is fundamentally a threat to industry and to markets. Not a threat of innovation supplanting fuddy-duddy practice, but a threat in the form of a shakedown based on speculation in patent claims. A patent dispute can easily cost a million dollars to the defendant, just to get through discovery. Thus, for every crappy, patented invention a university acquires, the patent makes the invention worth at least a million dollars against the interests of every player in an area of technology practice that might get close to practicing any of the claims made in the patent.

Keep in mind claims can be much broader that the technology that presents as an invention. I can invent a way to shoot raisins out of a straw and draft claims that will disrupt anyone trying to develop a rapid way of implanting a drug under the skin. Functional equivalents, abstract all the elements, keep the prosecution open to re-write the claims in a continuation. I’ve seen patents where the invention that first presented fundamentally was not patentable (did not work), but the claims were sufficiently clever that other things developed by others that did work infringed the patent. Drafting broad claims to a narrow invention is the proud work of the patent attorney best serving the client. One attorney all but apologized to me when a patent issued without an office action challenging any claims. Perhaps the claims were not sufficiently broad to be contested, he worried. It is not the patent attorney’s fault for broad claims. What matters is how the university conducts itself when it has those claims.

Mostly those claims are useful for shaking down an industry rather than teaching it or contributing to it. The vision of big money from patent speculation typically comes after an invention has settled in. Most university inventions, given the lemming-like behavior induced by federal grant policies, are “in the air” by the time they are reported. Wherever industry is headed, get there two years early and file. Wherever the federal RFPs are headed, get there two years early and file. It is a race that if one team does not come up with the next variation, another one surely will within a few years. These are less low-hanging fruit than root vegetables. One just walks around and pulls them out, whether mature or not. An engineering team in an industry lab can produce fifty patentable variations on a theme a year. University teams typically don’t have this productivity, because a university licensing office gets overwhelmed by such a flurry of invention reports from a single lab and treats the lab as a problem.

The combination of a comprehensive, compulsory asset policy combined with a default expectation of seeking exclusive licensing partners changes the landscape for the public reception of faculty-developed research findings, tools, data, and insights. Let’s call it monopoly-monopoly practice.

Leading companies generally do not stand in line to bid for an exclusive license. Why? First, because the standard terms of an exclusive license requires creation and sale of a commercial product, places a premium royalty on that product, and prohibits the participation of the licensed rights in any standard or commons. Furthermore, an exclusive license, if it does not result in a product, carries greater liability for default as well as exposure to antitrust claims, that a company with market power took an exclusive license (by paying a premium, even, for it) and then prevented the licensed technology from coming into use or onto the market, in favor of the company’s own products.

An exclusive license opens the company up to audits, to surrendering information regarding development strategies and technology, to claims that any other technology under development in parallel that might be similar is actually derived from the licensed technology, to indemnifying and insuring the university for any and all risk, and to burdensome financial demands that may escalate over time, even if the technology proves unworkable. And here’s the thing–many university “technologies” turn out to be unworkable; the research does not replicate, the publications are defective, the research itself is defective, an outlier gets published and is the subject of the patent (with expansive claims to cover legitimate results, if anyone ever gets any). Why would any company in a leading position dip into this swimming pool with floaters?

So the effect of this policy combination is to put off major companies. Small and mid-sized companies often do not have the resources to afford even the negotiation with a university. Negotiating a patent license with a university can run a company $10K to $20K in attorney time, plus the license itself will require a payment of another $20K or more for the university’s patenting expenses, plus another $5K of time to audit and fuss over the university’s patent bill paperwork to tease out all the unreasonable or unrelated expenses that the university has included. An easy $50K endeavor, and it may take three to six months, to get a difficult, invasive relationship to manage, with restrictive terms, aiming to take a quarter of the company’s pre-tax profit from any eventual product. Small companies are warned to stay away from such deals.

So universities operate their licensing program on threats. One threat is that one company will get an exclusive license and all others will be excluded–not just from practice of the invention, not from being able to create their own products using the invention, but also from sponsoring research at the university in the same area (why do it, if the rights are with a competitor?), or even gaining the benefit from hiring graduates who have trained with the technology but now cannot practice it at their new company because to do so would be infringement. But only one company can get any given license. A university licensing office typically won’t even commit to granting additional licenses to improvements (beyond those that arise from managing the patent prosecution of the originally licensed invention–continuations, continuations in part, divisionals, re-issues, and the like).

A second threat is that if some company in the industry won’t take the license, then the university will license to a patent troll, or become one itself. Would you rather the university sue you ten years from now for infringement, or will you take an exclusive license now and stand ready to sue the rest of the industry? It’s a devil’s choice. Neither option is any good.

A third threat is that the university will place rights exclusively with a shell startup and make a show for a time of economic development and potential for innovation. The shell startup will go after SBIR/STTR funding, competing with local entrepreneurs (and often out-competing them), but after the money is gone, the husk of the company, with its exclusive patent license, will be available for “investment” by vulture capitalists–investors who see the potential to troll industry or to fluff the company to be acquired by less clever investors, who will see it to its grave, covered by their bits of wealth thrown into the same dark hole. Universities report how many companies they have “started”–this is a metric of how hard they are swamping the early stage investment marketplace in their region in competition with regional early-stage companies seeking investment. The number of university companies started is typically a measure of how much the university is undermining local investment.

The people who are attracted to a university with this configuration of monopoly-monopoly practice are the clueless, the clever, and the desperate. The desperate are forced into the situation against their better judgment. They don’t have the time and money to fight it off, and they need help. Some inventors and entrepreneurs get drawn in by the vision of soon wealth and the happiness of being poster children for what is often a university signature program–see the excellence, see the potential, see the benefit just around the corner from our research programs (so, now provide more funding and do not ask whether that potential is ever realized). Entrepreneurs get drawn in by the marketing, by the statements of public mission. But most get a dismal experience. I’ve been on the back side of enough deals (I use back side with a full sense of its undertones, so to speak) to see the horrible level of drafting, of negotiation, of communication coming out of university orifices, er, offices of technology licensing.

There is a class of clever investor, however, that thrives in this world. They see the university bureaucracy as a competitive barrier to entry that keeps out the established companies and leading investors, and prevents the faculty from going to these sources of support directly. For the clever investor, speculative monopoly is the sweet spot. So, take a license and troll. Take a license in a startup, go through the motions, and then troll. Take a license, start the company, and then sell it off to the less clever, or to an established company if the startup can be made to look like a threat. All of these ways of dealing can make money–without ever developing anything for market, just by speculating on the ability to flip the rights (in a company) or asset the rights (against the industry) or make the rights in the investors’ hands (or their startup) appear to represent a threat (to a leading company).

A university monopoly-monopoly practice facilitates the market for speculative monopolists. That is the fundamental social fact of such policies. It is not what the policy claims about itself, but what it actually does, that matters. These policies fundamentally change the market for faculty findings, faculty expertise, faculty instruction, faculty inventions. They do not promote or facilitate the market that was there–pre-Bayh-Dole, for instance. Rather, they foreclose that market and encourage a different one, one of factors, of intermediaries between the university and industry that do not act as agents for technology transfer but as agents for speculative monetization. The asset–a patent right–gets used as the subject of bets, and money gets made by the smarter or luckier better, and lost by others. The university stands to make money no matter what, by providing into this new betting market a volume of often volatile, sketchy inventions masked by the reputation of the university.

There are plenty of legitimate companies that deal with universities, and even deal with university licensing programs. Most research sponsors don’t want to be forced to take an exclusive license, nor to commit to “commercialize” any invention that might arise in the research. Many larger companies want only a non-exclusive license–but paid up, royalty-free, without any further exposure to university administrators. There are plenty of decent faculty members and entrepreneurs that work with universities, too. Out of necessity they deal with the licensing office. In some cases, the licensing offices have really good people in them–and good meaning capable, expert, in addition to dedicated and thoughtful. But there is a lot of bad practice out there, too, backed up by demonstrably garbled, bungled policy. People cannot be said to be rushing for the opportunity to work with a licensing office when policy and administrative whim compel them to do so. It’s easy to lose the point, so I will repeat it: the double monopoly practice at universities is attractive to speculators and companies that work in speculative industries, such as big pharma; it is not attractive to most companies, to most faculty, and to most entrepreneurs. It works against most innovation. People use it because, as a monopoly on policy, they have to.

It is not what the university says about its licensing operation. It is what the operation actually does, what it creates as social fact. And what a monopoly-monopoly practice creates is a speculative betting parlor that makes money for the university (at times, sometimes even lots of money) but transfers little technology, builds few meaningful relationships, and results in next to no innovation or economic vitality based on innovation. It creates a world based on the gambling life, sucking away the social value of a university in the eyes of the public and of industry, in exchange for a few big payouts at the craps table.

 

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