CANVIS–Modes of University Invention Engagement

I’ve been working through patterns of engagement specific to university research relationships. As I see it, there are five key areas, which I remember with the CANVIS heuristic. These are

Commercialization
Arbitrage
New Ventures
Internal implementation
Scholarship-science

Science. Let’s look at these. First, science. University research is distinctive in its participation in science without a range of apparatus found in industry settings–no trade secrets, expectation of peer review and independent verification, publication and priority as drivers, heavily grant funded so involved with sponsors rather than investors, and oddly, therefore, libertarian (if not capitalistic) rather than the socialism that typifies both company and government laboratories.

In dealing with science-level relationships, university investigators have to accommodate (and may actively pursue) relationships that participate in scholarly science. Anything that would prevent this (other than an investigator’s own judgment), works against the operation of public science. Thus, any IP management regime that works against public science also will have problems. Further, such IP management would appear to run against an objective of Bayh-Dole–that used “without unduly encumbering future research and discovery.” Much depends on how far one is willing to go with that “unduly” bit. One might argue that simply holding IP without making clear that no one is going to get sued for infringement directly or through a licensee given the right to enforce IP rights is an “undue” encumbrance on future research and discovery. Similarly, treating requests to clear such rights for science and scholarship as an exception to policy rather than its default also may make for an undue encumbrance.

The conventional mode of university IP management these days, however, accumulates patents and copyrights, fixates on commercial transactions, and when these do not occur as desired, there is no recourse to open up the portfolio to be clear on scientific practice. That’s a problem in the current practice. The tech transfer offices generally do not regard it as one, but the moment you are in a lab with inventions and there’s a request from a company for information, you see how it plays–as a commercial opportunity for the TLO first, and only second as perhaps a question of scholarship.

Internal. Next, let’s look at internal implementation. In many research environments, capable organizations are able to implement research findings directly in their work without waiting for a product step. This is especially true of method and system inventions. In these instances, “practical application” happens before productization, or in parallel with it. And it may be that products are never formed. Internal use may represent the entire market for the invention, or alternatively, the invention may come to form part of a standard, platform, or utility that is used without taking a product format. TCP/IP, for instance, for internet communications, is a technology that is critical but not a product. Indeed, it may be that some technologies, were they to be reserved only for product development, would not be used at all, since both scientific evaluation and internal implementation would be disrupted by the delays and overhead of product development.

Internal uses may form a strong industrial marketplace. Sophisticate customization of new technology often takes place in a highly competitive set of niche markets. The advantages of new technologies here may create huge cost savings or other competitive advantages that cannot be adequately indexed by a royalty. How much value is there in a new method that saves a week of development time, or reduces waste in a manufacturing process, or jumps to a new level of accuracy in a quality assurance program? These kind of innovations, which may be “value engineering” or may be innovations within internal value chains, can be valued by the transaction but generally not by a direct measure of the impact on the company. For such relationships, a procurement of services strategy is often much better positioned than any sort of royalty on sales or other activity.

Procurement strategies have other advantages, such as repeat sales, development of efficient master agreements, expansion of relationship to include new and challenging problems deeply embedded in industrial applications, access to robust, real-world data sets and industrial processes, and collaboration with high performing industrial talent otherwise not readily available to the average university liaison officer or faculty member. Because procurement strategies tend to be handled outside technology licensing offices, it takes some creative initiative and diligence to bind procurement and IP strategies into a workable relationship.

Commercialization. Third, we consider commercialization, or the use of patent rights to develop products that may be sold in a marketplace–that is, become the object of commercial activity. Commercialization is a conventional goal of independent inventors and university patent agents. Product sales provides a well established base on which to determine royalties, which in turn determine the value to the licensor of the rights licensed. Commercialization also provides a ready, visible “success story” that combines a product with customer benefits and licensor income.

The great challenge for commercialization relationships based on university research technologies is often the private investment necessary to develop an invention to the point that it is viable technology. This is often called the “funding gap” or “valley of death”, which for research institutions means that federal and foundation funding that often emphasizes basic research is not available to do development work. Private investment, however, may also not be prepared for the size of the investment or the time required to do the work to prove out, test, and build out a technology into a product format. In many areas of practice, if the product cannot be made within a typical Series A round of venture capital–perhaps $6m–and within a 24 to 30 month window–then it must fall into a successful specialty area (such as biotech) or an area of “bubble” speculation (such as green technology), or it rapidly falls away from investor interest.

Given the range of university research activities, only a few areas can be primed for commercialization efforts. If a university IP policy, however, treats all inventions as if they are to be reviewed for “commercial potential”, the technology licensing office is making a lot of work for itself, is creating expectations that cannot be met, and failing itself to be realistic about the application of the commercialization model to university research relationships. Thus, where a licensing office presents a flow chart for all inventions, without regard to those that actually might benefit from product development, it is doing a disservice to both the inventions that would benefit as well as those that should follow some other model of deployment.

New Venture. New ventures may be based on expertise or rights and form a fourth form of relationship. When an invention is created, it means that there are inventors (and others) with the capability to understand the invention, build on it, use it, and explore applications with it. It also means that there are patent rights available, and potentially other rights, such as copyright, trademark, and rights in data. Any of these intangible assets may form the basis of a start up company or other new venture.

The key to seeing how new ventures differ from product commecialization is recognizing that a new venture exists to do business. While university expertise or patent rights may go into a new venture, it does not mean that the underlying invention will become a product, or even be used within the company. The new venture becomes a means to attract investment and management capabilities, and that combination in turn makes decisions about what to develop. Thus, patent rights and core inventor expertise may serve to build a management team, attract investment, hire scientific and engineering talent, and then develop something else better positioned for market profitability and company value growth.

A technology transfer office that misses the dynamics of this relationship will seek to place diligence clauses in its licensing agreement that aim to require the company to create product within the scope of the licensed patent rights. To do so is largely hopeless. The company typically will have the right to terminate the license, and will do so at the appropriate time. If the company is going to depend on the patent rights as an absolute necessity, then there’s little reason to require this in the licensing agreement, and if the company has to abandon the invention for better positioned efforts, then a diligence clause requiring otherwise merely serves to create uncertainties, drag down company resources, and distract commercial decision-making.

Of course, it is always possible for a licensee to cheat on a licensor, to design around, or to include patented technology without acknowledging, or skewing sales activity to avoid some or all of the negotiated royalty base (such as splitting a sale into product with royalties owed and services that are outside the royalty base, and placing most of the value in the services component).

But the worry about cheating is secondary to the recognition of how a new venture relationship works. For this reason, it is often useful for a licensor to take an equity interest in a new venture, perhaps in lieu of a royalty interest, or in the form of a hybrid transaction, that balances the two forms of consideration. In addition to equity, one might also use share price as an index for milestone payments. Sometimes this strategy is called “shadow equity”. In this approach one gives up holding actual shares (and related potential complications of stock subscription agreements, voting, board positions, and perceptions of organizational conflicts of interest) for a simpler cash interest on the form of “when you have a lot, you share some”.

New venture relationships carry some currency now because they have the attention of economic development officers, who see the addition of jobs and competition for early stage investments as indicators of economic vitality.

Arbitrage. The fifth form of relationship is arbitrage. Simply, arbitrage involves acquiring an interest in a property for less than one sells it for. In the world of patent relationships, arbitrage may take various forms. New ventures may be one, especially where the patent right forms the basis for investment but products outside its scope are built. The patent right itself comes into play only as a token to attract talent.

A patent license with the right to sublicense also suggests an arbitrage play, where a prime licensee may create value by trading on the patent right rather than building a product itself and selling it in the marketplace. Any number of companies might decide to take a license “just in case” something comes of the patent, in which case they do not want to be cut out of the action. This sort of play is based on the potential value of the patent if it were to be licensed such that it was no longer available. One can see that such a deal has little to do with an immediate investment to make product, and everything to do with managing risk for an uncertain future.

Patent accumulators may work an arbitrage relationship in the form of a “troll” that takes a set of patent rights into a practicing marketplace and makes an assert play, offering a license in exchange for royalties with the implication that refusal will lead to patent infringement litigation. But a patent accumulator can also work an arbitrage relationship using a mutual fund approach, licensing bundles of patent rights on the strength of the value proposition for the bundle combined with the ease of acquiring it, rather than the particular value to the licensee of any one patent within the bundle. Again, the value of the patent rights as a product becomes the source of income, rather than the deployment of an underlying invention as product.

When a technology licensing office committed to a commercialization or new venture model fails to move a given patent right, it often shifts over to a recovery mode, in which it is willing to consider arbitrage, if for no other reason than to recover the costs of obtaining the patent.

It should be pointed out that arbitrage, while the source of significant licensing income, is generally incompatible with university research politics and norms, as it sets up potentially strong adversarial positions with companies that may otherwise be strategic partners in research, student placement, and public advocacy for higher education. Furthermore, arbitrage has a much lower threshold for litigation, and litigation is costly, uncertain, and time consuming. Universities often are not set up for this kind of work, whether directly or when joined as a necessary party to litigation brought by a licensee.

And if it must be pointed out, the primary goal of much university research is that it is used by others. If one then brings suit against users, with the threat of preventing that use if the users do not pay up, it takes some explaining to everyone just how it is that the university is caught up in trading success for money. Yes, there is cheating. Yes, the university deserves its fair share. Yes, it has inventors with hungry mouths at home. But even still, it is a tough thing to get right.

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Given these five areas of activity, one might think that a university needs five distinct forms of IP practice, addressing the central themes of each. One may file patent applications based on any of these models, but each will have potentially very different financial models, time frames for returns, metrics for success and performance, and outcomes.

A science-based practice will ensure patent rights are broadly available for all research evaluation, research “on”, and potentially research “with”, regardless of the tax standing of the receiving organization.

An internal implementation program will emphasize collaboration and instruction, and will set up for industry-based consortia, open innovation, and widespread sharing of technology, with a goal of creating platforms and standards. Revenue may come from sponsored research, membership agreements, workshops, and licensing of ancillary materials (such as software, materials, reference books, demonstrations, and the like).

Commercialization might set up much like it does now, but with key differences. Inventions would not necessarily be reviewed for commercial potential unless deliberately placed in this channel. Investigators seeking strong support from scientific or industrial communities may wish to withhold inventions from commercial plays until other avenues for promoting use have been explored. This, even if an invention also might have commercial value.

Similarly, new ventures activities, which are popular at the moment, might be altered to consider the interests of other modes of deployment. Often there is a license or start up question, but less frequently is there a science or start up issue, or perhaps more importantly, a science *and* start up review. In some areas of art, enabling widespread practice must lead new venture investment, as a kind of network effect that creates value through visibility and proven application. Thus, one might find that in some areas, it is essential to future new venture (or product commercialization) efforts that there is already a robust set of scientific and internal industry users and uses.

Arbitrage presents a more difficult case, as it relies heavily on trade in the prospective rights and the use of litigation to rein in undesirable behaviors. For arbitrage deals of most sorts, it may be best for a university to find an exit, such as by working with a patent aggregator or focused invention sourcing or auction organization. By moving the rights entirely onto such a platform, the university can exit the decision making and still be the beneficiary of a financial interest in the success of the patent within such a model. Rather than attempting to commercialize an invention and resorting to arbitrage as a last resort, a university might move this decision earlier in the decision tree, based on investigator interests, the general profile of the invention, and the available resources to manage the invention, especially if directed at industries with a poor record of engaging in patent in-licensing. By visibly moving to an earlier decision, a licensing office might motivate industry advocacy for a sharing model, such as internal implementation, as something along the line of prior user rights protection against future claims, generating its own arbitrage market by making express the intent to engage an expert, well resourced agent.

These are some ideas that shake out from a review of the relationships available to a university looking to management IP rights in inventions. It is worth emphasizing how efforts to push all inventions through a simplistic version of commercialization can readily be seen as not serving other important areas of activity in the research enterprise. Not only does the conflation of inventions into a single model hammer these other relationships but also it adds to the noise, the inefficiencies, and unrealistic expectations that present the typical patent licensing office with its day-to-day challenges.