Here are five ways to use a patent:
- Nonuse Don’t practice the claimed invention and exclude all others
- Troll Don’t practice, demand payment if others practice the claimed invention
- Flip Don’t practice, and exclusively license, assign, or sell the patent
- Practice Practice the claimed invention while excluding all others
- Share Practice and allow others to practice the claimed invention
Each of these methods has its own variations–some with significantly varied effects. Let’s look at each of these approaches and consider university patent management practices. The first three patent uses involve non-practice. We have looked at Nonuse and Troll. Now it’s time for Flip.
The third form of non-use involves flipping a patent to a new owner and receiving payment for making the flip, from the patent-dependent activity of the new owner, or both. A flip may involve the assignment of a patent, the sale of the patent, or an exclusive license to the patent. There may or may not be any transfer of the underlying invention–a flip focuses on the transfer of the patent right rather than the technology.
As with nonuse and trolling, there are a number of ways that a flip can be done, and a wide variation in outcomes. In a simple flip, a patent is sold to a new owner, who obtains the “entire right, title, and interest” in the patent. The prior owner, after the sale, has no standing with regard to the patent and needs permission of the new owner to practice the claimed invention. But the prior owner typically receives a lump sum payment for the patent. That payment reflects a negotiated value based on a perception of the future value of the patent. It’s not so easy, however, to get at whose perception of future value is in play. If the prior patent owner demands a price that reflects the full value of the patent to the potential new owner, then why would the new owner purchase the patent?–all the new owner could possibly do is recover the purchase price from exploiting the patent (or the underlying invention, or both). The price of the flip, then, tends to reflect the value a market places on the asset, based on the position of the seller, not the buyer.
This is a tough lesson for university administrators, who tend to think patents can be hugely valuable, and then aim to extract what they take to be a “fair share” of that huge value without considering the flaws in their reasoning, the risks in exploiting an invention, changes in markets and technology, and alternatives that the potential buyer has or might develop. One tends to get what others are willing to pay, not what one thinks a patent is worth. A shift in the ownership of a patent therefore may change the position of a patent in a market, and that in turn may change what people are willing to pay. The transfer of ownership of a patentable invention from an inventor to a university might increase the value of the patent to the extent that a university represents an organization better able to handle liability and licensing. But the transfer of ownership of the same patent to a research foundation or other patent management agent might increase the value of the patent even more than transfer to a university, especially if the patent management agent has more money available to secure foreign patent rights, hire more adept licensing professionals, and develop working relationships with target industries–and have a greater willingness to litigate infringement and breach of contract. Further, still, however, a patent may have yet greater value in being transferred to a company already embedded in an industry, in a competitive position, and not needing to shop the patent around. Within a company, a patent has greater value than if licensed from an agent or university–if for no other reason than the company does not have to pay royalties and account to the licensor for the disposition of the patent (or the claimed invention).
A sale of a patent necessarily involves the assignment of the patent to a new owner. But assignments can take place without a sale, and assignments can also impose conditions on the new owner. Consider three situations. One situation, called a grant back, is typical of assignments in industry. A patent owner assigns a patent subject to a grant back of a non-exclusive license to practice the invention. The new owner of the patent has the right to decide whether to maintain the patent (pay the maintenance fees) and the right to litigate infringement or grant licenses, except with regard to the prior owner of the patent, which gets a license outright (though typically with limitations–for internal use and not sale, say, or with no right to sublicense). Clearly, here is a condition on assignment that follows ownership, and typically such conditions are drafted so that they follow any subsequent sale of the patent by the new owner.
Second, consider Bayh-Dole. Under the standard patent rights clause authorized by Bayh-Dole, nonprofits may assign US rights in a subject invention only if the conditions of the standard patent rights clause are also transferred:
Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions, provided that such assignee will be subject to the same provisions as the contractor;
It’s worth noting that there is no restriction in Bayh-Dole on the assignment of patent rights in subject inventions in jurisdictions outside the U.S. For U.S. rights, the assignment of a patent on a subject invention, then, must also carry with it the same requirements in the patent rights clause of the federal funding agreement accepted by the contractor, the university. Any new owner of rights in a subject invention must step into the role of the university owner, subject to the same requirements that attend to a subject invention, whether from patent law, Bayh-Dole, or the standard patent rights clause. The “entire right” of “right, title, and interest” necessarily includes “the entire right as defined by patent law, Bayh-Dole, and the standard patent rights clause.” So the new owner obtains a patent, but also that patent carries with it obligations that otherwise would not pertain.
A similar condition on the use of patents is inserted into federal funding agreements involving grants made to universities (2 CFR 215.37). The “property trust relationship” clause stipulates that if a university acquires a patent or patent application or other intangible property using federal funds, that property “shall be held in trust by the recipient [i.e., university] as trustee for the beneficiaries of the project or program under which the property was acquired or improved.” The role of trustee is unlike that of mere owner of a property. A trustee has a duty to the beneficiaries that overrides any self-interest the trustee might have in the property.
If all a university had to do to avoid this property trust relationship clause was to assign the patent or patent application or invention to some other entity, then this clause would function merely as an inducement to make such assignments, using moralizing language rather than being direct about it. But an alternative, and better, reading of the clause is that a university, once it has become a trustee, must in any assignment of the property acquired, preserve this requirement for the new owner to take on the role of trustee. There should never be, in any such chain of ownership, a patent owner who is not a trustee working for the beneficiaries of the federally funded project or program.
It is worth noting that universities do not have to use federal money to acquire inventions from their personnel. For a great many years, they relied primarily on voluntary arrangements, and often directed those arrangements to external agents such as research foundations, who made their deals with the inventors and often as well with the inventors’ universities, too. But as universities moved to make assignment compulsory and hunted around for the rationale to do so, they adopted methods used in corporations–including as a condition of employment (though faculty are hardly employed for research purposes) and as a condition of use of resources (although faculty are granted access to those resources, often, without any such constraint).
The problem for federal funding is that the federal government pays the university both for the salary of the investigators and for the use they make of resources. The university takes federal money for employment and use of resources, but makes employment and use of resources the conditions under which assignment of inventions is required. Thus, it is clear that the university is indeed using federal funds to acquire its rights in such inventions. Were the assignment voluntary, and the consideration the diligence in obtaining patents, seeking licensees, and sharing royalties, then the university would not end up in a trustee position (though the elements of the standard patent rights clause would still apply).
But in most situations, university administrators have chosen not to follow this route. As a result, most federally supported inventions, in addition to their Bayh-Dole requirements, also come to university ownership with a property trust relationship. It’s just that university administrators ignore this fact and refuse to accept that their decision to require assignment carries consequences. Of course, given that the federal government also ignores this clause, university administrators figure that they can get away with it all, that the law doesn’t matter unless it serves their interests. Perhaps they are right. Perhaps law is just mostly fluff, until someone with money or power needs it. The irony is that university administrators can be such prisses about following regulations–ready to discipline anyone who violates regulations–but ignore whatever they please when it comes to their own actions. Perhaps it takes more integrity than their pay grade.
Let’s take a look, then, at how conditions can follow assignments made under policy at American universities. American universities typically in policy demand assignment of inventions–often without regard to patentability or value or connection with the actual “business” of the university. They claim to make assignment a condition of employment, or of the use of resources, or a matter of association with the university, or a remedy for a standing suspicion of conflict of interest. However, along with this demand for assignment, university policies also lay out a range of obligations that the university must fulfill once it has ownership of rights to an invention (and hence, the patent rights): the university will share royalties with the inventor; the university will seek to transfer the invention to industry, to be “commercialized”; the university may waive its interest in an invention if it chooses not to file a patent application or seek to “commercialize” the invention.
Thus, university patent policy functions in the same manner as an assignment with conditions. The policy creates an implied assignment agreement, as if the inventor-owner of the patent right had negotiated these requirements as a condition of making the assignment. In fact, this idea is a remnant of a time when inventors (and universities) did just that, when making assignment to a research foundation or other invention management agent. The conditions of the assignment were embodied in management agreements and might involve obligations to both the university and to the inventor. The purpose of such conditions was to ensure not only diligence in dealing with an assigned invention but also to shape the possible uses that an invention management agent might make of any resulting patents. The idea was that a university-developed invention should be managed in a distinctive manner, not like just any patentable invention held privately, whether by an inventor personally or by a for-profit corporation. Thus, assignment carried with it conditions. Once university administrators decided to take everything in-house, and to take short cuts with process, they replaced the conditions that inventors or universities might put on others with conditions that administrators were willing to place on themselves. As one might expect, university administrators tend to have low standards and thus have managed to remove much of the requirements for diligence, reporting, accountability, and remedies that they would be ready to place on others (and do place on others, as we will see).
Now here is an important distinction in practice. While Bayh-Dole requires that the conditions on the contractor–the university–must follow to any assignee of the patent in the U.S., at least, universities do not do the same thing with their own policy requirements. They do not necessarily require any assignee of the patent to manage the patent according to the same conditions that the university’s own policy stipulates as the conditions of assignment constructed on behalf of the inventors, the broader university “community,” and the general public. As with the property trust relationship, what is the point of university policy statements with regard to patent management if all a university has to do to avoid them is to assign a patent to some other organization? One would think (wrongly, as it turns out) that a university, once it has established the requirements upon which patent assignments are to be made, would be required by its own policy (and the implied contract with inventors for their assignments) to impose them on any future assignee, whether research foundation or company. If a university claims it obtains patents to dispose of them in the public interest, then any assignee ought to be under the same obligation, just as the university is. But no.
Now let’s consider the exclusive license. It might be somewhat surprising to find exclusive license listed with sale and assignment, given that a license suggests a right of contract rather than of title. True enough. But the matter is not one of naming, and what names suggest, but rather of what a given instrument does. A document labeled “exclusive license” may well function as an assignment. In copyright law, this situation is made express–a transfer of ownership is defined to include exclusive license:
A “transfer of copyright ownership” is an assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright or of any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but not including a nonexclusive license.
Copyright law is not patent law, of course, though they share the same Constitutional origin, but the usage here establishes the concept–an exclusive license to any statutory right is a transfer of ownership of that right. In patents, the situation is not so much different, though it lacks the outright statutory definition. Here’s what the Federal Court of Appeals stated in Vaupel Textilmaschinen v Meccanica Euro Italia (944 F.2nd 870) in 1991, a case involving infringement of a method of “making woven labels for garments” (emphasis supplied):
The patentee or his assigns may, by instrument in writing, assign, grant and convey, either, 1st, the whole patent, comprising the exclusive right to make, use, and vend the invention throughout the United States; or, 2d, an undivided part or share of that exclusive right; or, 3d, the exclusive right under the patent within and throughout a specified part of the United States. A transfer of either of these three kinds of interests is an assignment, properly speaking, and vests in the assignee a title in so much of the patent itself, with a right to sue infringers; in the second case, jointly with the assignor; in the first and third cases, in the name of the assignee alone. Any assignment or transfer, short of one of these, is a mere license, giving the licensee no title in the patent and no right to sue at law in his own name for an infringement.
Here is the relevant bit of federal patent law (35 USC 261)(emphasis here and the next bit supplied):
Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States.
As the Court in a more recent case put it (Prima Tek II v. A-roo, 222 F.3rd 1372)
Section 261 recognizes, and courts have long held, that an exclusive, territorial license is equivalent to an assignment and may therefore confer standing upon the licensee to sue for patent infringement.
The Prima Tek II Court proceeds to examine various conditions necessary to establish standing to sue for infringement, which in turn depends on whether a patent license agreement “transfers substantially all rights.” Reservation of a “veto” right in sublicenses, for instance, has not detracted from a finding that there was a transfer of substantially all rights.
Let’s look at one more case, this one involving an exclusive license from a university. In 1991, the University of Washington granted an exclusive license to Sharplan Lasers for a patent covering an aspect of laser scalpels. Here’s what that license included, according to the court. The right
(1) to “make, have made and sell” products world-wide covered by the University’s patent rights;
(2) to grant one or more sub-licenses to make, have made, use and sell licensed product(s) covered by UW’s patent rights;
(3) to bring suit in its own name, or if required by law, jointly with UW, for infringement of the licensed patent rights including the right to sue for past infringement of the licensed rights;
(4) to enjoin infringement and to collect damages, profits and awards of whatever nature recoverable for infringement;
(5) to settle any claim or suit for infringement of the patent by granting the infringing party a sublicense for the patent.
The court then concludes:
The transfer of these interests by UW created more than a “mere license” in Sharplan. Indeed, the agreement’s terms give Sharplan the right to make, have made, use and sell patent products as well as to bring and settle infringement suits on its own.
The court then considers the rights that UW reserved for itself:
(1) A personal right to make, have made, use and published licensed products of the patents “for purposes of scholarly research by or on behalf of UW only, and for no other purpose;”
(2) A “right to practice under the patent rights and to use and distribute to third parties the licensed products for its own noncommercial research purposes;”
(3) “No settlement, consent judgment or other voluntary final disposition of the suit may be entered into without the consent of UW, which consent shall not be unreasonably withheld;”
(4) In the event that a declaratory judgment action alleging invalidity or noninfringement of any of the patent rights is brought against Sharplan/Laser, “UW, at its option, shall have the right within thirty (30) days after commencement of such action, to intervene and take over the sole defense of the action at its own expense.”
The court then concluded that the license involved the transfer of significant rights in the patent and that it involved an assignment of those rights. It’s not how a document is labeled but what it does that matters.
Consider in this context a template exclusive license agreement posted by UC Davis. The template license grants an exclusive license (with possible territorial and field restrictions), with the right to grant sublicenses and to sue for infringement , reserving to UC publish technical data; make, use, and import (but not reserving the rights to have made or sell) the invention for “educational and research purposes”; and “allow other educational and non-profit institutions” to do these things. Clearly, the UC template follows the same lines as the UW exclusive license to Sharplan, and functions as an assignment of substantial rights in the patent. While the document is labeled “exclusive license” it operates as an assignment.
Here’s a similar exclusive license template published by the University of Maryland. It grants an exclusive license but for federal government rights, permits sublicensing and the right to sue for infringement, and reserves only the right to “use the Licensed Invention(s), Licensor Information and Patent Rights for (i) obtaining funds from any source for additional research, (ii) research, (iii) teaching and (iv) noncommercial purposes.” One expects that “noncommercial purposes” means the university does not reserve any right to sell anything under the licensed patent rights. Essentially, this template, too, contemplates making an assignment of patent rights under the heading of exclusive license agreement. One finds similar patterns in templates posted by AUTM (using a University of Rochester license) and other universities. Perhaps because no one has bothered to challenge the practice, so it persists and has grown complacent.
It is worth noting again that the standard patent rights clause authorized by Bayh-Dole forbids assignments of rights in subject inventions without federal agency approval except to “an organization which has as one of its primary functions the management of inventions.” One might argue, then, in situations in which a company is faced with an infringement suit brought by an exclusive licensee of a university-owned patent on a subject invention, that if the license is actually an assignment and the university has not received federal approval, then the university has violated federal law and the assignment is void.
In flip transactions, then, a university acquires patent rights from its inventors and conveys these rights exclusively to another organization–sometimes an invention management organization, and sometimes a corporation. The transaction may be labeled an assignment but usually is labeled an exclusive license. AUTM duly reports exclusive licenses (as counted and reported by universities) but does not track at all assignments nor differentiates exclusive licenses from assignments. I would bet that AUTM officials would not want to make visible to the public any such distinction.
In a way, a patent flip is a form of arbitrage–sell for more than you have paid for an asset by shifting the marketplace from research to commercial activity. For universities, the arbitrage shift might also be from activity that would use an invention (such as research at many organizations) to activity that speculates on the future value of patents (such as might interest investors rather than investigators). There are various strategies for setting the value of the transaction–call it sale, assignment, exclusive license. One can estimate future income from activity under the license, less inflation and the risk of not succeeding and arrive at a net present value. One can negotiate a running royalty on sales or an equity interest in the licensee, or both. Or one could license for research funding, access to technology, promotional benefits. Universities tend not to license for non-monetary consideration because administrators worry that they will face lawsuits from inventors upset that there’s no royalty or reduced royalties to share. That was, in fact, one of the key issues in the case of Singer v The Regents of the University of California, where a court found that the university had traded a reduced royalty for a sponsored research agreement with a patent licensee for MRI technology.
Our concern here, however, is less with the structure of payments as with the other consideration that may go with the transfer of a university patent to another–that is, with the conditions that a university imposes on itself, declares to the public (and the public relies upon), or accepts as part of contracting for research (including Bayh-Dole and other federal grant requirements). If these conditions last only so long as a university owns a patent, but can be cast off simply by conveying the patent to another entity (for money), then these conditions don’t mean much of anything. If, however, a university must pass along these conditions with the transfer of ownership, then the assignee or exclusive licensee–the new owner, if only for a time–must also handle the invention according to the university’s public interest obligations.
Thus, in an exclusive license that’s really an assignment–that is, a flip–it is not merely a matter for university administrators to determine that a potential exclusive licensee is “qualified” to “commercialize” a given technology covered by a university patent. And it’s not enough that the exclusive license contract require “fair consideration” (as the University of California’s licensing guidelines for technology managers puts it). And it’s not sufficient that the university reserve rights for educational or research use. To meet its obligations, whether self-imposed, contractual, or otherwise, the university should have to include conditions in its transfer that limit what an assignee can do with the patent rights. For instance, one might expect to see a restriction on nonuse, a prohibition on trolling, and a requirement that these condition follow any exclusive sublicense or transfer of the licensing agreement.
It will be argued that imposing such conditions would reduce the value of the exclusive license–companies, so the argument goes, will be less willing to pay for a right that carries these conditions. But consider the consequence of such an argument. If the added value the university receives is based on granting another organization the freedom to do the very things that a university claims it acquires patents to prevent, then the university expects to maximize its profits by permitting those very things it claims it should not permit. It’s not just a matter of reasoned logic–it’s a matter of betrayal of the public trust, breach of contract, and a lack of integrity. But no matter. University administrators do not evidence a great deal of concern for the effect of flipping patents, as they assert (and many must actually believe) that flipping patents is in the public interest, no matter how its done, because, well, it’s done by a university and universities must act in the public interest, and so whatever the university is made to do must therefore be in the public interest.
Without careful drafting to flow over university requirements for public beneficial deployment of an exclusive patent right, a flip may not result in the benefits of the invention becoming available to the public on reasonable terms. A flipped patent without controls may be used for speculation (sell it to others for more for it than it cost to acquire); may be used for investment (start a company and sell the company along with patent rights to the next set of investors); to keep something out of the hands of others (nonuse, make a show of trying to develop or develop only limited parts of the invention); to gain a leadership position (pay to prevent others from controlling; make them come to you or spend extra to design around); or to attack industry use (trolling). If a university permits such activity under an exclusive license, then whatever its own policies might say about public benefit are fluff, not substantive.