The banal myth of the necessary institutional monopoly

Louis Rosenfeld wrote an insightful article in Clinical Chemistry on the discovery of insulin “Insulin: Discovery and Controversy.” Three collaborators in the research had a disagreement over inventive contributions to various portions of the work and to settle their disputes gave over the patent rights to the University of Toronto for $1 each.

Here’s the rationale that was made for seeking a patent:

A patent was necessary to restrict manufacture of insulin to reputable pharmaceutical houses who could guarantee the purity and potency of their products. It would also prevent unscrupulous drug manufacturers from making or patenting an impotent or weakened version of this potentially dangerous drug and calling it insulin.

That is, a patent was used to control quality, not to create a monopoly to be sold off to a business partner.

This is a remarkably different argument than the one we commonly see today, that patents are necessary to “call forth private capital” to develop inventions that otherwise would “sit on the shelf.” Here is the first Q and A in a Brown University FAQ (“prepared for Cornell University by the law firm of Wolf, Greenfield & Sacks, P.C.” and reposted on a Rice University server) on the matter:

  1. Why patent something? Isn’t society better served if I publish my research and dedicate it to the public?

The answer to these questions is perhaps counter-intuitive. Experience reveals that if you dedicate your inventions to the public, then chances are your inventions will never find their way into public use. You will have removed the incentive for a commercial entity to make the investment necessary to bring your ideas to practical fruition and into public use. Even after you have demonstrated that your invention works, hundreds of thousands of dollars in product testing and development, production engineering and marketing still may be required before it is available to and accepted by the public. Without the limited period of commercial exclusivity provided by a patent, no company will have the incentive to make these investments and bring the invention from our laboratory into public use.

Here, the idea is that a patent is necessary to induce a single company from investing the money to take the invention from wherever it is in a research setting to a commercial product. More so, that this monopoly must be institutionally controlled. There’s no thought whatsoever here about controlling quality–or even that an invention might be practiced simply because it is useful, and that effort to practice is worth the rewards for that practice. There’s nothing here about the idea that excluding others from the same practice may work against one’s interests–if many companies use the invention, then costs come down, trained people are easier to find, the industry as a whole improves. At least, that’s an argument. But not even in the imagination here.

Finally, even if one thinks only in terms of commercial products rather than industrial uses, there’s still the strangeness that a company must have a monopoly to justify making a product in the first place. The very argument bites its own tail. A company must have a monopoly to invest the money to make a product because other companies would otherwise invest the money to make a competing product even though they wouldn’t have a monopoly. No, it makes no sense in the general case.

Here’s a special case. A company makes a product that takes it lots of effort. Once that product has been made, other companies copy the product at much less cost and cut in on the first company’s market and profits. In such a case, somehow, the patent prevents such “free riders” who don’t pay their own research costs and instead profit from the work of others. Perhaps. But consider: all those competitors–are they making a better quality product? Are they making the product with better features? At a lower cost? Just why are they so able to cut in on the sales of the first company? We have to imagine that the competitors create exactly the same product, using the same methods, for the same market–it’s rather as if the issue is one of copyright not patent. If the competitors create better quality products or products better suited to specific uses or products with different feature sets, then while the patent may give the first company in a chance to recover its development costs, it also keeps the public from access to all the other forms of product that they might prefer.

The “free rider,” then cannot also be an innovator, or if an innovator, must suffer from the same malaise of patenting as the first company. In that case, each “free rider” blocks everyone else from the use of its extensions and applications of the original product. Of course, the original patent blocks the free rider, too. So now there’s a standoff–the original company can’t develop the product in any direction covered by all the free riders, each with its mix of production methods, composition or design, new features, and applications. And the free riders can’t practice the invention patented by the first company. Either the companies work out a cross-licensing arrangement–such as via standards–or they all sit it out, and the first company sells a limited product while other companies look for ways to make invalidate the patent, design around the patent, or make the product obsolete.

For university research, then, a monopoly patent position placed with any single company necessarily turns the rest of an industry against that company and against the university that did the deal and for two decades against the invention subject to the patent and against the inventors who participated in the deal (unless the inventors are willing to be bought to help to design around their previously patented work–which often they are).

Even in the special case where an invention is expensive to develop into a product but easy to copy once that product has been introduced, there are still questions whether excluding competition by patent (rather than by quality, availability, support, features, price, and the like) should matter to university patent brokers. That is, if the money coming into a venture is attracted predominantly by the prospect of a patent monopoly, is that the money one wants to work with? Is that capable money or gambling money? Perhaps it doesn’t matter, so long as the university makes money by selling off patent positions. By contrast, why not license all competent companies and thereby benefit from nearly all of the market rather than a company that might control only a small portion of that market, but have a monopoly on a new product?

Thus, while there is an argument that in some situations, if there is no patent, no one will invest in developing an invention as a new product because the moment they do, others will cut in on their market and they may not recover their own larger investment in making the product than their free riding competitors. But those situations appear to be rare.

The American patent was created with the purpose of giving inventors an incentive to publish inventions that otherwise would remain trade secrets. In exchange for publication, an inventor receives a limited right to exclude others from practicing the invention. The patent does not supply the only incentive for an inventor to seek to use or develop the means to manufacture product–such incentives are in general already present. The right to exclude others permits the inventor to enjoy the benefit of exploiting the invention without others appropriating the invention for their own purposes.

Anticipation of that monopoly enjoyment is not necessarily a deciding factor of whether anyone else would adopt the invention if they were allowed to. Any number of companies might choose to adopt without any need to have an exclusive position in the invention–because patents don’t matter, or because the invention will be more profitable if a standard, or because the adopting companies already have sufficient positions by which to compete and exclude others if necessary–their brands, for instance, or trade secrets, or skilled employees, or systems of distribution, or even their own patents that cover the parts of a product that they care about.

There’s also the cognitive dissonance involved when we turn to university research. First we are asked to accept the proposition that an inventor should be entitled to a monopoly on his or her invention. So far so good. That’s the patent system. Now, however, we are also asked to accept the proposition that a university should have the right to strip inventors of their rights to inventions so that the university can enjoy the monopoly on the invention, in place of the inventor. Why would we accept that proposition? Why should university administrators get to benefit from a monopoly? Why should they have the right to exclude all others (including the inventor) from practicing any invention?

Think about it. A faculty member is appointed at a university. The university puts out the idea that it provides resources to faculty so that they may teach, do research, and provide public service. The claim is that university research is open, is published, and taught, and that people benefit as they learn and adopt new knowledge. There is no apparent interest in trade secrets. There is an expressed interest in making new knowledge–including inventions and discoveries–available to all. But now we are told that the university must establish monopoly positions on what the faculty discover or invent, and must make money from selling licenses not to any qualified company, but to only one company for each invention, on the claim that only one company will adopt the invention because all companies insist on having a monopoly position before any one of them will invest to create a new product.

How often is that true? Perhaps in the pharmaceutical industry. Where else? Hardly no where. Even in industries like automobiles or computer technology, the value of common platforms and standards matters more than having every company holding a monopoly piece of what everyone needs to operate. Further, once a set of companies each have such pieces, if another company shows up with a monopoly position, the incumbent companies have no incentive to license their pieces collectively to the new monopolist, only to be excluded from the practice of the new technology. Instead, the upstart with a monopoly will be blocked until it cross-licenses and chooses to compete on things that don’t block the entire industry.

Even in venture capital, where folks look for the “unfair advantage,” the patent monopoly is among the least interesting. As Guy Kawasaki has it, use the “p-word” in one sentence, “Patent applications have been filed” or something to that effect. Don’t dwell on patents as the key to getting investment. Patents are unreliable–they might not issue, they might be easily invalidated, they might lack the proper scope, the product eventually developed might fall outside those initial patents, the industry might push back and require the monopoly to be relaxed, it might be strategic to allow the invention to become a standard or to be cross-licensed to gain access to proprietary technology one could otherwise never afford.

So why should a university, given to open publication and academic freedom, suddenly become all grasping when it comes to inventions? Is it really the thrall of this special case, that in some situations, no one will spend any money unless there’s a monopoly available? Is it really expanding this special case to make it appear that all cases have this property? Or is it a mindset that insists that all cases must have this property or, in spite, there won’t be any licensing?

Here’s how the mental scam works. Universities should have ownership of inventors’ work because inventors will squander the opportunity to make money, or because inventors will take advantage of the opportunity to make money when they shouldn’t do so. Thus, the university acts, somehow, in the public interest, as a representative of the public, to protect the public from indifference to patents and from private exploitation of patents. This action has nothing whatsoever to do with even the special case of the necessary monopoly.

If a monopoly is necessary, then universities could instruct inventors on how to achieve that monopoly (and could provide assistance to inventors as needed). Inventors could license companies directly (using attorneys of their own choosing, or an invention management agent). There is absolutely no compelling reason for university administrators to intervene, if the issue is the importance of a monopoly to the public benefit of research inventions. Inventors can do such things as well as anyone, and the patent system was set up on the premise that inventors should have the choice when to seek patents and the choice about how to exploit patents once they have them.

The reasoning by which university administrators take ownership of inventions is more a repeated and confirmed impulse, not any logic at all. The foundation for the impulse is that universities need money for research, and patent licensing can supply that money. That’s where the University of California committee was in 1960, but even they argued that dedicating patents to the university should be voluntary. And now, when universities are floating in federal money so much that they build new facilities to better compete for more of it, the argument for research money fades. By the time the apparatus of patenting and licensing has taken its share, there’s only slush money left over, often gobbled up by administrators and never used for other than the most minor of research efforts.

Royalty money is so unimportant that though the income is reported as a success, there is almost never a public accounting of how it is used. When UCLA sold its share of future royalties in Xtandi for hundreds of millions of dollars, it announced it would create a fund and invest the money to make more money.

By selling the royalty interest and prudently investing proceeds, UCLA seeks to provide stability and minimize risk associated with the volatility of the pharmaceutical industry marketplace.

UCLA will hold its share of the proceeds in a broadly diversified portfolio managed by the University of California’s office of the chief investment officer. Based on the pool’s average annual returns, UCLA anticipates it will receive approximately $60 million annually until 2027.

Of course, that was a gross violation of Bayh-Dole’s standard patent rights clause, which requires nonprofits to use licensing income for “scientific research or education” and not for “investment pools that will earn money that can be used by higher education.” But Bayh-Dole is that sort of do WTF you want law where the words don’t really matter and what’s “implied” does matter.

Another truism urge is that university ownership is required by Bayh-Dole, that Bayh-Dole “all but mandates” commercialization. Of course, Bayh-Dole does not require university ownership and does not mandate commercialization. That’s all a crock, but crock that continues to be repeated by people who know better and people that don’t.

Thus, even if universities don’t make much money on inventions, they should take ownership of inventions and seek patents because the federal government tells them to, so they dutifully obey, even though it is a “high risk” activity and folks shouldn’t expect much. But this account runs counter to that of the need for research funds, and still has nothing to do with necessary monopolies. The government could require universities to own inventions and expect that universities, unlike speculators, might make the inventions broadly available, offering licenses to any qualified companies, protecting the public from companies that would produce poor quality products or deceive the public with regard to the nature of the product or its proper use.

Finally, the claim of commercialization, that to be used and the public to benefit from that use, first there must be a product. This, too, is not true in the general case. Almost all inventions made in university research can be beneficially used without a commercial product first–if not in use in research than use in industrial settings or use by the public generally. In fact, product ideas often arise from an inspection of research or popular or industrial uses. The commercial opportunity arises as readily from the fact of use as it does from the idea of future potential use. Even commecialization does not depend, in general, on a necessary monopoly to induce investment that otherwise will never happen.

We return, then, to the idea that a necessary monopoly taken and held by a university to be licensed exclusively to a company willing to preserve that monopoly is an urge, a dodge, a scam repeated so often that it has become a mantra. It’s an unlikely event, with atypical partners. It has an affinity with patent trolling, but is the converse. Where the patent troll licenses after use, and non-exclusively, the university llort licenses before use, and exclusively. But the university llort transaction, when it fails to produce a product, is set up to become the troll–to “monetize” the patent, as the expression has it, so that the llort speculators can recover their investment. Both methods figure to turn industry into the adversary, the mark, of the university patent official.

Bayh-Dole has been used to make this scam sound legitimate, that it has a federal endorsement, that it is a wild success. But Bayh-Dole does not do what its advocates say it does, as the Supreme Court made clear in Stanford v Roche, where the necessary monopolists came out in force and got a beat down from the Court. Even Senator Bayh came out in favor of necessary monopoly, putting inventors last in line to have anything to do with their inventions.

There is no reason that universities must compel inventors to give up their patent rights. Inventors can work with attorneys and invention brokers without the involvement of university middlemen. There is no reason that universities must use patents to exclude use when “success” is that there is use. There is no reason that universities, even if they obtain ownership, must use patents to create a necessary monopoly. Many companies will invest to make products without an exclusive position obtained from the university. And universities don’t need licensing money for research and often don’t even run a net positive and when they do, that net positive isn’t worth accounting for. Once every two decades there may be a big hit, but then the money is diverted, and meanwhile hundreds to thousands of inventions sit behind university paywalls, unlicensed, unused. In the Bayh-Dole era, there may be 30,000 or more such inventions. Every unlicensed patent on a research invention is a barrier to use.

The necessary institutional patent monopoly is a myth created by patent brokers to create a livelihood. The impetus was to circumvent federal patent policy and feed pharmaceutical companies with monopoly positions. From there, the scam spread by generalizing that all companies would benefit in the same way that the pharmaceutical companies did, and all inventions were early stage as compounds identified in medicinal chemistry were, and that all products were in their nature drugs, hard to move through regulatory approvals to become products and relatively easy to copy once they were on the market. However true these claims are for pharma, they are not true almost everywhere else. The Harbridge House report made clear that industries had at least six different attitudes to patents, and few companies saw patents as essential.

Harbridge House also noted that the worst outcomes came when contractors owned patents but had no commercial experience or when contractors licensed patents with no prior experience. Universities end up as among the worst possible intermediaries in the management of inventions–they lack commercial experience and they insist on licensing rather than assigning rights, and therefore insist as well on the conditions that offer the least likelihood of success in the development of products. A university exclusive license places restrictions on what a licensee can do–no cross licensing, no movement to other technology, no dedication to a standard, no free sublicensing.

When you see a claim that all inventions require patents to be used, don’t believe it. When you see a claim that universities are an essential step in a commercialization process, reject it. When you see a claim that Bayh-Dole vests ownership with universities or that universities must take ownership to comply with Bayh-Dole, denounce it. When you see a claim that commercialization is necessary for the public to benefit from university research, oppose it. When you see a claim that the present necessary institutional monopoly practice has been wildly successful, demand evidence–which you won’t get. You’ll get a spout of statistics that have nothing to do with the claim, and show instead how many people have staked their livelihoods on perpetuating the scam.

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