University Patent Policy for Effective Technology Transfer, 10: Exclusivity compared

Now let’s look at a university that defaults to seeking an exclusive patent licensee instead. That comparison is even worse for leading with a patent license vs research review. There are way fewer folks out there in the technical world hungering after new technology because it is patented. The moment one moves to an exclusive license default, one has greatly reduced the possible opportunities to transfer technology. One also positions the university as a potential litigator for infringement set against everyone who does not get that one exclusive license on offer.

Scenario 3:

University posts a new invention on its web site as a “technology available for licensing” and as a default practice holds the invention for exclusive licensing.

This situation 3 is the common practice in the Eat and Fart model of university licensing–assemble a vast, indiscriminate “portfolio” of inventions, hold them for exclusive licensing opportunities, and wait for someone to show up (or “market” the invention to “industry” in various ways, such as listing the invention as a “technology available for licensing”).

Exclusive patent licensing is a low-volume, slow-transaction process with a limited potential “market” for licensees. Add to that a demand for “commercialization” of each invention for such exclusive licenses, and it is no surprise at all that there is no rush to license most inventions held by universities. As for university patent policy, choosing a default approach that has few takers, takes a long time to find even one taker, and often takes months to negotiate a license contract does not create the prospects for effective technology transfer.

But exclusive patent licensing is not built for effective technology transfer. In the Eat and Fart model, all that’s needed is one lucrative licensing deal every twenty years to make the whole operation a financial success. Really, all that’s needed is an appearance that licensing success is just around the corner to persuade university leadership to fund the licensing operation. The mere prospect of lucrative licensing income is enough to spring a university “investment” in patent licensing. And for that, it is easier to explain to university leadership that if there’s even one lucrative patent license–even if at another university–then with diligence and a policy that requires university ownership of all inventions, there will surely be more lucrative patent licenses.

Universities reporting fake metrics of technology transfer (such as through AUTM’s annual survey or their own annual reports with “success stories”) is not so much to deceive the public or industry as it is to deceive sources of funding for operations–university administrators, trustees, and in the case of public universities, state legislators.

The fake reporting on metrics is not so much to persuade the public that eat and fart is successful–the public has no oversight or right of appeal, so they don’t matter–but just to persuade university leaders to allocate the money for the operation–either as subsidy or as a share of licensing income. Don’t expect anyone to out and admit that the metrics are intended to deceive. Administrators train themselves not to think that way. Instead, the conscious motivation is to put the best face on things, to emphasize the positive, as if repeating a few select positive bits often enough will make the general case come true. That would all be fine and good if the broader data of actual practice was available to everyone. But that data is not available. It is kept secret. Bayh-Dole, even, requires federal agencies to keep such data secret, and therefore universities must also keep the data secret. If the universities published their reports on the status of subject inventions, then federal agencies would have nothing to keep secret and–and this is how logic works for these folks–that would frustrate the purposes of Bayh-Dole, so universities must keep their data on licensing practice secret. Secret data and selective reporting = situation ripe for deception and malpractice.

The practice lesson, then, for university patent policy is to require all licensing practice information to be openly available. What inventions have been licensed, and in what way. If a university technology transfer program is an extension of a library, then it is reasonable that a university need not reveal who has checked out technology or what technology they have checked out–but any time the university assigns an invention (assignment, sale, exclusive license of all substantial rights)–that assignment should be publicly reported as well.

Now let’s look at this scenario 3. It has similar properties to the second scenario–leading with non-exclusive patent licensing, but with some variations. An exclusive license expects the licensee to reimburse the university’s patenting expenses, past and on-going. And an exclusive license expects (often) a substantial upfront payment as a license-issue fee or as an advance against future royalties. These payments–patenting costs and upfront fees–rule out most small and mid-sized companies, who are less likely to have some $50,000 or more sitting around with nothing better to do than to pay for exclusive access.

A university exclusive license does one other significant thing: it assigns the invention to the exclusive licensee. An exclusive license of all substantial rights conveys the invention to the licensee. A clear indication of such assignment is that the exclusive licensee is granted the right to enforce the licensed patent. Only the owner of an invention has this right. University template exclusive license agreements routinely grant the licensee the right to enforce the licensed patent–the licensee owns the invention. Another clear indication can be found, often, in the license grant clause, where a university reserves a license to practice the invention for educational and research purposes. The university would not need to reserve such a license–from the exclusive licensee–if the university expects to still own the invention once the license has been executed.

University administrators will deny that their exclusive licenses are assignments, but courts reviewing such transactions rule that they are. This assignment practice also has a profound effect on technology transfer. Once an invention has been assigned, the university is not available, as a matter of contract, to assist anyone else in using the invention. One might go so far as to argue that the university also has a good faith contractual obligation–based on the license contract in which invention ownership is conveyed–not to attempt to design around the assigned invention or help anyone else do so. Neither of these restrictions that the university voluntarily takes on in granting an exclusive patent license improves the prospects for effective technology transfer.

As a matter of university patent policy, then, we should expect to see a prohibition on exclusive patent licensing that includes assignment of inventions. The university, not some assignee company, should be responsible for enforcing patent rights. If a university administration is uncomfortable setting up to sue every company that might use a given invention but for one chosen company, then the university administration should be just as uncomfortable assigning an invention to just one company and letting that company set up to sue every else. It may well be that offering an exclusive license is the only (or best) way to attract companies that are ready to sue the rest of an industry to prevent widespread adoption of an invention in favor of a to-be-developed commercial product, but effective technology transfer does not involve giving such preferences.

The difficulty in “commercialization” of an invention further limits the sort of companies that show up in response to university offers of exclusive licenses. Prospective exclusive licensees know that universities will insist on commercialization rather than, say, development of an open standard or cross-licensing to create a commons or free sublicensing to create an opportunity for widespread use. Thus, prospective licensees will commit to commercialization–but they will use wording such as “reasonable commercial efforts” rather than “best efforts” as the standard of diligence. They will make an effort, but not a heroic effort. If they fail–and that’s the most likely outcome–then they have three ready options: 1) flip, 2) pyramid, 3) troll.

In a flip, the exclusive licensee acquires the patent rights in anticipation of flipping those rights to someone else. The exclusive licensee might spend some money to develop the invention–perhaps build a prototype or gather some test data. Then sell itself or offer an exclusive sublicense to another company that is willing to pay more for the patent rights than the exclusive licensee owes the university.

In a pyramid scheme, the exclusive licensee attracts another round of investors based on having obtained the exclusive license. The original investors then gain a return based on the valuation of the company in subsequent rounds of investment. No product may ever be produced, or no product covered by the licensed patent, but that does not affect the ability of the original investors to turn a profit selling equity to later investors. Universities deal with this practice by demanding a share of the equity in the company rather than by insisting that the company must get to commercial sales of licensed product, where the university expects to receive a royalty on sales. In so doing, universities contract against technology transfer in favor of patent speculation in an investor pyramid, with each set of new investors being led to believe that a product is just around the corner.

In a troll situation, the exclusive licensee “monetizes” the assigned invention. Rather than make a commercial product, the company enforces its patent against others in industry that practice anything that comes within the scope of any of the patent’s claims. This “monetization” or trolling acts as an insurance policy for investors. If they cannot make a product, then they can still recover their investment by litigating others that have made a product. From a technology transfer perspective, such monetizing runs directly against technology transfer. Patent holders who troll benefit without technology transfer. An exclusive patent license, however, sets up just such behavior. An exclusive patent license conveys rights but it may not actually transfer much technology.

Exclusive licensing focuses on the idea that inventions require expensive development before they can be used. There are instances in which this is true, but it is not true in general. Many inventions can be used without significant development costs–even if not in a mass-production form or for a generalized consumer. And even when inventions do require expensive development–a new form of rocket engine, for instance–it is not the general case that no one will spend that money unless they have exclusive rights to the invention. Some people with money won’t spend without exclusive rights, but other people with money often do spend without exclusive rights. Instead, they create a shared platform, each putting in a portion of the costs. Or they create a standard, and contribute to that standard so that everyone has access. In some cases, they spend their money for the entertainment value of developing something new–as technologists do, playing with stuff. In other cases, they spend money because they believe it serves a public purpose to do so–as non-profit foundations do to address public health issues.

It’s then a special, special case to find that an invention requires expensive development before it can be used and the only people with money willing to fund that development insist on having exclusive patent rights. What sort of invention is that? It’s difficult to imagine. Something that is valued so little for its societal impact that foundations and governments won’t fund development. Something lacking in shared interest so that companies are not willing to work together to build a platform or commons or standard based on their various contributions to development. From the looks of it, the invention would have to be, coarsely, something mediocre.

Let’s say that these mediocre inventions do indeed exist. Fine. Now consider the difference between (i) identifying an invention as mediocre and offering an exclusive license to those wealthy investors who only invest in mediocre inventions if they can get exclusive patent rights and (ii) offering an exclusive license to any invention. In this second case, the wealthy investors who would invest in mediocre inventions will also gladly invest in non-mediocre inventions, if given the chance. Indeed, non-mediocre inventions have,  on the face of it, much greater value–everyone wants to use them, and can use them, and can develop them without any single company controlling everyone else. In this case, the patent right enhances apparent value of the invention–people bid against the exclusive proposition of the license. It is worth more to keep people off an invention who want it than it is to keep people off an invention who don’t want it and can’t use it anyway.

For the Eat and. Fart model, all that matters is that some inventions are made valuable by patent rights. For Eat and Fart, offering exclusive patent rights raises the value of non-mediocre inventions, so that people will pay a premium to prevent the invention from becoming generally practiced. That is, people will pay a premium–and the university will accept that premium–to use patent rights to limit technology transfer of the invention. The Eat and Fart model uses patent rights to increase the value of the license deal rather than to encourage broader use of the invention. By defaulting to exclusive licensing, the Eat and Fart model conflates mediocre inventions (suitable, perhaps, to its methods) and non-mediocre inventions that would be used and/or developed without exclusive rights on offer. The exclusive license increases the value of the license deal–but it does so at the expense of effective technology transfer for all inventions that would be used or developed without exclusive rights.

There is a simple approach to separate mediocre and non-mediocre inventions. Offer an invention with a free, non-exclusive patent license. If after three years from the date of issue, no one has bothered to take such a license, even when asked to do so, then one likely has a mediocre invention and one could withdraw the offer of a free, non-exclusive license and shop patent exclusivity to investors who are drawn to that sort of deal.

University patent policy for effective technology transfer, then, would require a default offer of a non-exclusive patent license for any invention acquired by the university. Free or FRAND. Better if thrown in with an offer of services that do a better job of establishing transfer relationships and moving technology in those relationships, but non-exclusively rather than exclusively, and for a charge that peer technology groups would consider to be fair and reasonable for the service. In such a setting, the “value” of a given invention is not in how much someone might be induced to pay to acquire exclusive rights to it, but in how much a university might “make” by having many groups acquire and use the invention, and continue their relationship with the university over a number of years.

In the exclusive license deal, the net present value of the invention is transferred to the net present value of the license contract by which the invention is conveyed to an investor-developer. That value scales as a function of the right to exclude and the pricing and market that the investor-development can command, if it ever produces a product. In the non-exclusive license deal, the net present value of the invention is distributed across multiple users over periods of years with repeat transactions for related technologies. That value may scale more quickly and with more long-term benefits for a university–and with much more effective technology transfer–than does the value of an exclusive license, on the rare cases that they happen. In the non-exclusive instance, the value of the patent is not to increase the amount paid for access. In the exclusive instance, the payment scales to reflect the value of being able to deny people access. Call it prevention of free-riders or imitators. Call it suppression of competition. Call it institutional favoritism. Whatever you call it, exclusive licensing defaults work against effective technology transfer.

Any university patent policy focused on effective technology transfer should insist that the default licensing position is non-exclusive for at least three years from the date of patent issue. If there’s been no licensing in that time, then consider an offer of exclusivity. Even then, the offer of exclusivity for commercialization should be restricted to only the right to sell, and not include exclusive right to make or to use. That way, anyone who does choose to use the invention (technology transfer) can do so without dependence on commercialization choices and product function compromises and monopoly pricing. By restricting exclusive licenses, if offered, to “sell” only, a university patent policy also precludes the university from assigning inventions and giving over the responsibility for how to deal with “infringement.” In technology transfer, infringement is the goal. Infringement means use, and use means that technology transfer’s work is done. A university patent policy that’s effective for technology transfer will work to limit the possibility that a user of the invention will be exposed to a claim of infringement.

Even the exclusive sell right raises issues. If others infringe this sell right, then it’s clear that they–the infringers–were willing to develop the invention without exclusive rights. More so: they were willing to develop the invention even with the threat of infringement. If the invention owner does not sue to suppress sales and instead settles for granting non-exclusive licenses and receiving compensation set by the court, that exclusive position becomes, in practice, just another–very expensive–form of non-exclusive licensing with a convoluted negotiation before a judge. That in turn raises the question why an exclusive license was necessary after all–the exclusive license just provides a company with the opportunity to collect rents on the use of the invention by others, and pay some portion of those rents to the university. While this is a way for the university to make money and pay for its licensing operation, it’s a lousy approach to technology transfer, and any effective university patent policy will forbid it.

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