Federal patent policy for the 21st Century, Part 3

What’s funny (funny “strange” not funny “funny”) is that universities could implement the core of this version of the law themselves, right now, no politics necessary. Yes, there is still all the wasted paperwork to throw around under the current Bayh-Dole Act, but other than that, there’s is still the 35 USC 202(d) to 37 CFR 401.9 pathway that allows inventors to own their inventions and have only limited restrictions on what they can do with any patents they obtain.

Universities could work this approach without a whole lot of effort or expense. First, there’s the usual invention reporting overhead. The university gets a report of a subject invention and dutifully passes that along to the federal agency that funded the work. But instead of demanding assignment from the inventor(s), the university sends a notice to the federal agency that the university will not elect to retain title if the federal agency agrees to permit the inventors to retain title (which they still have at this point), subject only to the standard patent rights clause at 37 CFR 401.9.

That clause reads:

Agencies which allow an employee/inventor of the contractor to retain rights to a subject invention made under a funding agreement with a small business firm or nonprofit organization contractor, as authorized by 35 U.S.C. 202(d), will impose upon the inventor at least those conditions that would apply to a small business firm contractor under paragraphs (d)(1) and (3); (f)(4); (h); (i); and (j) of the clause at § 401.14(a).

Let’s unwrap the requirements:

(d)(1) Inventors have to elect to retain title.

(d)(3) Government can request title for any foreign country in which the inventors don’t file or continue prosecution.

(f)(4) Include a notice of government rights in patent applications.

(h) Comply with requests for reports of invention use.

(i) Require U.S. manufacture in any exclusive license to use or to sell.

(j) The march-in rights that are never used.

Look at that! There’s not even a requirement to grant the government a non-exclusive license! That would be (b). And that’s not in this list. The “government rights” for patent purposes have then to do with the right to obtain title if the inventors don’t elect to retain title and foreign patent rights where inventors don’t pursue patenting.

Otherwise, the only restrictions are to comply with requests for reports, to license the “make” right when licensing exclusively the “use” or “sell” right in the U.S., and the dreaded march-in rights that are never used and so should not cause anyone a lost night’s sleep.

These are very favorable terms. Way better even than those offered to other small business contractors. If you want to have a patent that sings rather than mumbles, this is the patent you want to have out in the wild. Almost a normal patent.

If the federal agency agrees to the deal, then the university declines to elect to retain title (it never had it, anyway, saving paperwork of all sorts), the inventors elect to retain title, and the federal government (having consulted with the university contractor already) invokes 37 CFR 401.9 just as it stands. Nice.

If the federal agency does not agree to the deal, then the university and inventors do the next best thing. The inventors assign to the university (on certain conditions), and the university notifies the federal agency that the university elects to retain title. Now those certain conditions come into play. The university then agrees to assign the invention to the invention management organization of the inventors’ choosing. The inventors work out a contract with that organization prior to any assignment getting made, so the organization that acquires the rights to the invention works for the inventors. Not quite as nice as the 37 CFR 401.9 deal, but gets the job done.

In either case, the university stays out of the financials. It has no obligation to file a patent application or to seek “commercialization” or any of that. It is out the time to send a couple of letters (or emails) to the federal agency. If the agency figures out that either way, the inventors end up directing the deployment of the invention, the agency decision whether to allow inventors to retain rights is simply one of a federal policy determining whether inventors deal direct with their rights or must choose an invention management organization. Big whoop. Once federal agencies figure that out, then it will be strange if they demand that inventors use an invention management organization rather than, say, start a company or license directly to a company or license into a commons or for a standard.

Oh, the money. University administrators have a deep moralizing feeling for money. In the early days, for Research Corporation, the money that didn’t go to the inventor went to the Smithsonian to support research wherever there was good work to be done–or, later, Research Corporation disbursed the funding itself.

The neat thing about using the Smithsonian to distribute funds is that there were no conflicts of interest all the way along. The inventors passed work to Research Corporation which focused on getting patent rights and putting them into play, and after covering costs plus 40% plus royalties to inventors, the rest went to an organization dedicated to funding research throughout the country. Didn’t matter where something was invented. Didn’t matter how something was licensed. Only mattered that the money should go to doing things that mattered. Gosh, that makes sense. And thus, was politically dead on arrival at the doorstep of university administrators.

University administrators hated this arrangement, apparently, because they felt the money should come back to them, that they and not the Smithsonian should get to spend the money on research. Thus, the affiliated research foundations, one each for a university, and later, TLOs to do the licensing directly from the university, with all the awful overhead and legal baggage that university attorneys and risk managers could throw into the mix, like putting needles in Halloween candy. Oh, and you want great industry collaborations do you when industry comes knocking on your door?

Two arguments dealt with money that inventors made from patent administration. The first was from equity of the circumstances. It was straightforward in theory and gummed up in policy practice. The straightforward part was that if a university put special resources into helping an inventor develop an invention, then the university ought to have something back if the invention became a commercial success. Thus, there were committees of faculty formed to consider the circumstances and decide what, if anything, a university had done that would create an equitable claim to a share of the upside–a portion of licensing income, or a non-exclusive license, or ownership, or nothing at all.

All this got gummed up by university administrators trying to pre-state what constituted “significant use of resources.” Was it $1,000 of help? Was it secretarial assistance? Was it a special authorization to use facilities? Did it cover work leading up to an invention or only development of an invention once it had been made? Endless gyrations in search of something bureaucratically consistent so favoritism and political advantage could be thwarted and especially to prevent the exercise of judgment, which is notoriously fickle compared to arbitrary procedures that any administrative underling can “process” without thinking.

Having gummed things up, so that the policy on equitable interest based on circumstances varied from university to university so nothing was “uniform” (imagine the problems of joint invention!), administrators eventually wore down to the idea that the best solution was to simply claim everything and create a policy that gave back an arbitrary portion of whatever money might be made–and mostly that meant nothing mostly ever and nothing much otherwise. The truly terrible thing in this development was that universities got in the habit of claiming everything, and thus had to manage everything, and thus had substantial costs that they never previously had had if they claimed only a financial interest in successfully licensed patents.

The other financial claim arose later, most visibly at MIT and then at the University of California, and then Stanford. That claim was based on the idea that patents = research dollars. There is a form of this inherent in the Research Corporation model, and in the affiliated research foundations, that patent licensing might generate royalties that would be shared with the institutions (under, say, a claim to equitable interest). But this new financial claim went further, and was rather different: universities needed more money for research, and patent licensing could get them that money, and better to do that licensing directly than rely on inventors to decide whether to patent, who should manage the invention, and whether any money ever “came back” to the university that hosted the inventive work.

The new financial premise was that patent royalties would fund university research. Thus, there was something moral about seeking royalties, rather than something merely equitable about receiving a return for helping out if ever there was money to share. Seeking royalties enabled research that was in the public interest. Thus, patenting and licensing for money enabled research in the public interest. Patenting and licensing wasn’t to promote use or to make research available in a socially thoughtful way–it was to make money anyway anyhow but for research (after administrative costs, of course). Not for education generally, not for public service (noticeably cut out of Bayh-Dole, just to make sure!)

Once you are on this road, then invention ownership is a precursor to patenting (as much as possible) is a precursor to licensing (especially exclusively, to clear the decks to license exclusively the next patent) is a precursor to royalties and so research gets funded. If there is an actual product (toothpaste! tomato picker! cancer drug!), so much the better. But the biggest claim is that more research will produce more inventions will produce more patents will produce more money for research. A wheel in the sky that keeps on turning. More research enhances the reputation of the university, attracting more state and federal funding, more research dollars, more faculty, and all of this activity becomes the basis for a further claim of economic impact, of research “as an industry”–competing for grant dollars and spending a lot of that money locally.

Of course, the public claim is that research creates public benefits through innovation–but that is secondary, and in reality few university administrators give a rat’s ass about innovation. They don’t track their own patent holdings for innovation, let alone practical application. They don’t report their record of patent licensing if they do track it. They report activity and money and want these to stand as proxies for all that public benefit that should flow as a result of this patent for research dollars engine.

The theory is fine in a strange sort of way. Actually, patents generally are used commercially only about 5% of the time. Present university patent practice is pretty awful by comparison–about 1/10th the rate. Even if a university licensing practice is good enough to recover its own expenses, unless it has a huge “hit” deal (once every thirty years or so), it provides little research money for the university. It exists to line its own nest, mostly.

Once federal funding for research expanded and became accepted (it wasn’t at first, often), the need for patent royalties to fund research vanished. There really is no need for royalty income to fund research. Mostly, when the royalty income is small, it gets broken up into administrative slush funds. No one can tell you where last year’s two million in royalties went as far as research goes, or what that research has produced. And if there is a big hit, then the money gets swept up for some huge building project for more research (which will then have to be supported from other funds, somehow) or put into an investment fund, the proceeds from which (at 5% of principal or so) get splashed around as slush funds again.

But if a university wants money from this approach to patent dealing, it has four good ways to get it. First, the university can do deals with invention management organizations, so that if an inventor chooses such an agent, the agent agrees to pay a share of its proceeds (after paying the inventor whatever the inventor has negotiated). That’s simple. Second, the university can demand a share of whatever the inventor receives. If an inventor licenses royalty-free, there’s nothing to fuss over. But if the inventor is making millions (once every decade or so), then the inventor shares with the university or quits (share or leave!). Again, we are dealing with subject inventions, so universities have no skin in the game other than being grasping. Third, the university can play nice, be helpful, and hope that inventors making millions gift money to the university. They often do, and quite generously. But university administrators hate uncertainty, don’t like that some inventors give non-uniform amounts, and don’t like to wait around for inventors to get really rich, and find it hard to be that nice for that long. Fourth, the university can operate a really fine invention management organization, one that an inventor might choose.

Let’s look at that dynamic for a moment. In the best case, inventors retain their invention rights under 37 CFR 401.9. Now they choose to use the university’s TLO. There are no conditions on how they assign rights, so they can negotiate any deal they want. A university can of course institute a policy of not negotiating, and adopt an arbitrary take-it-or-leave-it approach. But that tends not to bring in the quality inventor with the quality invention. Rather, it brings in the indifferent or desperate inventor–not the best for running a high-performing TLO, but perhaps a public service along the lines of the soup kitchen. In this scenario, a TLO ends up working for the inventors, as an agent under contract. That’s interesting. Many TLOs will reject this approach, but it is the one that historically was way more productive than anything university administrators have thought up since.

Alternatively, if the federal agency in its policy wisdom refuses to allow inventors to retain rights, then the inventors assign to the university and the university lets the inventors designate whomever they want to manage their inventions. If the inventors choose the university, again, because they have choice, they also have the opportunity to negotiate the terms. University administrators have the opportunity to demand arbitrary terms. And university inventors then have the opportunity to take their invention elsewhere. But if the TLO is good, and the university offers favorable terms, then the TLO gets business, the inventor is happy, and despite the fact that in this pathway Bayh-Dole burdens the TLO with more restrictions than it would have with a 37 CFR 401.9 pathway, it’s still mostly workable.

Thus, this new Bayh-Dole Act can be implemented without any statutory rulemaking by Congress or by NIST. The same goes for the more robust socially demanding patent policy I outlined in Part 1. As long as inventors have a choice, a TLO can be required by policy to offer a public research license, a public non-exclusive use license, and limit the impact of any exclusive license in preference to greater competition and access to research inventions. All this can be done now, by any university administration that decides to do it, and abandon the awful, ineffective, monopoly-creating portfolio approach that most everyone attempts now. All that’s missing is the will to do it.

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