Key Concept 3: FOIL Technology

FOIL Technology

FOIL is an acronym that stands for “Fragmented Ownership Institutionally Licensed.” Technology that is FOIL is fragmented across institutional owners that then seek to license their portion of the technology for development as a commercial product. FOIL is a crucial concept because the analysis of a “national system of innovation” cannot be conducted by reasoning from any single institution’s purposes and practices in isolation from all the others. If one person runs through an open door, it’s high drama. But if fifty people all try to run through the same door at once, it is either tragedy or slapstick–or both. FOIL is the result of three hundred universities all trying to do the same thing with bits of the same research platforms, but justifying their operations as if each is the only one in the world doing it.

Example: Nanotubes

Consider carbon nanotubes. A search at the USPTO for abstracts in issued patents with “nanotube” and assignee of “university,” “institute,” or “foundation” yields 1227 patents. In the last three years alone, there are 127 more patent applications from universities, institutes, and foundations. We might expect that there on the order of 60 more patent applications by these organizations that have been filed but not yet published.

As a result of all this patenting activity, just about anything relating to a carbon nanotube is subject to one or more patent claims, each controlled by a nonprofit institution that seeks to grant a royalty-bearing exclusive license to create commercial product based on the claimed invention.

In isolation, such an effort sounds reasonable–this is technology transfer using a patent as the incentive to attract needed private risk capital. But in aggregate, the situation is impossible to navigate. Any one company to have sufficient rights, must seek licenses from multiple nonprofit institutions, but each institution has a default of licensing exclusively and demands a royalty. Many institutions in fact now prefer to license exclusively to a closely affiliated startup company. Such licensing means that a company seeking to exploit carbon nanotubes will find the complete package of rights necessary to operate without infringement unavailable.

Distributed Federal Funding

The federal government distributes funding for research across hundreds of universities and research institutes. Patentable inventions in any given area of developing science and technology will arise at many locations. As each organization claims ownership of these inventions and insists on acquiring patents, the emerging technology base fragments into institutional bits of ownership.

In itself, institutional ownership of bits of an emerging research technology base is not a particular problem. The problems arise as a consequence of institutional practices–including licensing from an institution, exclusive licensing, a demand for commercialization product, and royalty stacking.

Institutional Licensing

The first problem in institutional licensing involves the mere fact that an institution is offering the license. While a patent license might be as simple as “We agree not to sue you for practicing an invention we own,” no institution would willing offer such a license. Instead, patent licenses run to 30 or more pages of legally technical terms and conditions. The volume itself would be navigable were it not that often the drafting is ineptly done–these are nonprofit institutions, after all, and often their legal services are not equipped to manage patent licenses for emerging areas of technology. Instead, university licensing offices rely on template agreements, modified for particular circumstances. Often these template agreements have been drafted for biotechnology transactions and modification for other areas of art creates a jumbled, inconsistent mess.

But it is really worse than that. Institutions are risk-averse, and so an institutional patent license will demand that the licensee indemnify the institution for anything that might go wrong, even though product liability generally does not follow patent licenses. Thus, prospective licensees have to be prepared to take on liability obligations for institutions, even when those obligations appear to be non-specific and possibly phantoms. As a licensor seeks to transfer all risk to a licensee, the licensee might begin to doubt that the licensed technology is all that it is cracked up to be, and that the licensor may not be prepared to stand behind the claims made regarding the licensed technology.

It gets even more worse. Universities routinely attempt to isolate the licensed rights to preclude granting any rights in background inventions, related inventions (that might work around the licensed invention), or improvements. In the case of Xtandi, UCLA held back from informing Medivation about a second series of compounds that were directed at the same area of biological activity, leading Medivation to believe it was getting (and paying for) an exclusive license to all the compounds that UCLA had identified. But no, that was not the case. Thus, a commercial licensee is exposed to institutional gamesmanship with regard to other inventions that might affect a licensee’s freedom to develop a licensed invention. It’s one thing to grapple with the challenges of a competitive commercial environment, but it’s another when one’s supplier of technology (or at least permissions in technology) cannot be relied upon to disclose and provide access to whatever additional rights may be necessary for the company to succeed.

These concerns would be greatly reduced if universities used non-exclusive licensing on fair, reasonable, and non-discriminatory terms. But they don’t.

Exclusive Licensing

Universities have generally adopted exclusive licensing of patents as their default method of operation. For each invention they acquire, universities adopt the goal of finding a “commercialization partner.” They have repeated for decades the idea that a non-exclusive license is “just a tax” and that the only true value in a patent is that it acts as an incentive to attract private investment to develop a commercial product. As licensing directors at universities once observed, “If I was told that I had to license an invention non-exclusively, I would refuse to manage it.” Thus, their default licensing model is the exclusive license. For inventions arising from research tools and methods, exclusive licensing means that industry is prevented from using these inventions while a university hunts for a single company to turn an invention into a product for sale–“commercialization.”

If a company wishes only to make and use an invention for its  internal operations, that company is rejected in favor of any company willing to attempt commercial development and sales (for which it will need a monopoly position). Thus, companies generally do not expect to receive non-exclusive licenses from universities unless they sponsor research (by which they may negotiate at least a non-exclusive license, if they agree to pay the university’s patenting costs). If a company requires only a non-exclusive license and does not have an interest in committing to developing a product for sale, then it may as well write off the chance to get that license. It would do better to design around the university’s patent than seek a non-exclusive license.

Even if an institution is willing to offer a non-exclusive license, that offer usually takes place long after the institution has attempted to secure an exclusive license. The delay in offering a non-exclusive license is often fatal to the currency of the invention and the opportunity to take up the testing, use, and development of the invention while it is still under study in its originating university lab. With increasing frequency, universities offer non-exclusive licenses as settlements for infringement suits brought against industry years after a university has ceased active efforts to secure an exclusive license (or the exclusive licensee has failed as a business). Thus, implicit in the exclusive license default is a threat to enforce the patent against all others–anyone who would use the invention for research purposes, in DIY operations without the need for a commercial product, or in product sales years later, after the university has refused to start with a non-exclusive, FRAND default license offer.

The mere institutional default of exclusive licensing ensures that already fragmented ownership remains fragmented for the life of the patents–on the order of two decades. Exclusive licensing practiced by only one institution offers a big financial incentive–one patent owner gains royalties while all other producers of inventive work place their technology in the public domain or license royalty-free. But if each institution behaves in the same way, expecting an exclusive license, then FOIL technology is the collective product of the universities’ licensing practices. The universities, by adopting a self-interested exclusive licensing default create the conditions under which the platform of emerging research technology is unavailable to industry for two decades or more.

Royalty Stacking and Other Problems with Multiple Licensors

Royalty stacking presents another problem for FOIL technology. Even if a company manages to obtain the ten or so exclusive licenses it needs (I once encountered a company that had managed to secure twenty such licenses), each institution will insist on its reasonable royalty–even if that royalty rate is only 2%, ten licenses means 20% of the product sales is directed to royalties stacked on top of each other.

Royalties cannot be stacked or most products will not be financially viable. But collapsing royalties into a single envelope, so those ten institutions each have a share of a 2% set-aside for royalty payments is rife with problems of its own. The first institution in and the last institution that holds out will make claims that their inventions are worth more than the others. It will take a firm and perhaps aggressive company negotiator to back down multiple institutions and establish royalties within a workable envelope.

There are any number of other problems with multiple licenses. Each institution requires indemnification, but in its own way, with its own language. Each institution requires the contract to be interpreted under the laws of its state, and in a jurisdiction convenient to it. Each institution requires payments on its schedule, with audit privileges on its terms, with sublicensing according to its requirements. There is no single license document that multiple institutions will willingly accept in place of their own template agreement. Even if licensing officers might be willing to do so, legal counsel, risk managers, and other university officials will often not permit it. Licensing FOIL technology represents a huge, expensive, slow to resolve mess.

Bayh-Dole’s Effect

To the extent that Bayh-Dole is credited with increasing university efforts to patent research inventions and commercialize them through exclusive royalty-bearing licenses–and this is the argument that is repeatedly made–then it is Bayh-Dole that has created FOIL technology where before university research inventions were largely public domain or available on FRAND terms. We might then look to see those industries have fared that rely primarily on new engineering–circuits, apparatus, software– rather than on unique classes of chemical compounds for the development of new products. We might find that Bayh-Dole–as transmogrified through collective university patent practices–has delayed the uptake of research technology by twenty years.

To limit the development of FOIL technology, institutions must limit the scope of their interest in inventive work–so that much more such work moves into the public domain, and for the inventions that do become institutional property, the default must be non-exclusive licensing, as it was for the federal government before Bayh-Dole and outside the IPA program. In such non-exclusive licensing, a primary purpose of the patent is to control quality and safety, so that companies do not create defective or unsafe products and to mitigate efforts to corner the market for new research and development involving the invention.

In this approach, the purpose of a patent is not to divert access to speculative investors seeking to maximize the return on their investment, but rather to companies that recognize the utility of an invention and are prepared to use it and develop it, provided there are not significant obstacles to their access to the invention.

To adopt a non-exclusive licensing default, however, universities will have to abandon compulsory invention ownership policies and return to voluntary participation. If inventors wish to seek exclusive commercial positions, then it may be that they will have to secure the financing to that end on their own, without the use of institutional funds. The result? Many fewer exclusive positions arising in basic research; less fragmented research technology platforms; greater ease in acquiring technology for use across institutions active in a given line of research; greatly reduced FOIL technology.



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