Chris Gallagher has been working tirelessly to make universities aware of proposed rule-making and legislation that might adversely affect their efforts to transfer technology for private development. He points to a discussion draft in the House Judiciary Committee that proposes to amend the America Invents Act to make it more difficult for patent trolls to go after possible infringers. Section 285(b) of the draft amendment might wake university licensing folks up (my emphasis):
§ 285. Fees and other expenses
(a) AWARD.—The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust.
(b) RECOVERY.—If a nonprevailing party is unable to pay reasonable costs and other expenses awarded by the court pursuant to subsection (a), the court may make the reasonable costs and other expenses recoverable against any interested party joined pursuant to section 299(d).
The discussion draft then proposes this new section, 299(d):
(d) JOINDER OF INTERESTED PARTIES.—
(1) JOINDER.—In a civil action arising under any Act of Congress relating to patents, the court shall grant a motion by a party defending against an allegation of infringement of a patent claim to join an interested party if such defending party shows that the party alleging infringement has no substantial interest in the patent or patents at issue other than asserting such patent claim in litigation.
Consider, then, a university that licenses exclusively to a company (or research foundation) that then launches a series of infringement actions against an industry (as is happening). Under the proposed amendment, a defendant could cause the university to be joined to the action if the only substantial interest the university has is asserting the patent claim in litigation. How would a university show that it has any other “substantial interest”? Would it work to argue that such litigation is “in the public interest” because a university is acting always “in the public interest” and so therefore everything it does must be in the “public interest” including litigation to make money? I doubt it.
Universities commonly refuse to assign inventions to others for management or development. The typical instrument is an exclusive license, or at least that is what the paperwork is titled. A document labeled “exclusive license,” if it acts as an assignment, is an assignment. In the case of copyrights, the law defines an exclusive license as an assignment. One reasons universities cite for insisting on an exclusive license is that the Bayh-Dole Act (they say) prohibits assignments to companies. This, of course, like other convenient mis-statements of Bayh-Dole, is not true: first, because Bayh-Dole does not control the disposition of inventions made by faculty with federal funds–the standard patent rights clause in each funding agreement controls; second, because neither Bayh-Dole or the standard patent rights clause has any such restriction. Here is the language of SPRC (k)(1):
(1) Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions, provided that such assignee will be subject to the same provisions as the contractor;
A nonprofit can assign inventions with or without agency approval. If without approval, the assignment must be to an organization that has a “primary function” in management of inventions. That’s a pretty low standard. Any company that has an intellectual property office likely meets the standard. If the company is a startup, arguably the intellectual property management function is the only primary function that the company has until it can raise the money to develop a product (or at least appear to develop a product so the first investors can sell the company off to the second investors, who are more taken with prototypes rather than descriptions of prototypes). Even if a company does not meet this low standard in SPRC (k), the federal agency can approve assignments anyway.
Note the compliance issue. If a university grants an exclusive license to a company that does not meet the standard stated in SPRC (k)–that the company’s invention management function is not a “primary” function–and the exclusive license functions as an assignment, then the transaction breaches SPRC (k) unless there is agency approval. The title on the paperwork does not defend the university from the breach–if the university personnel do not know that a paperwork title does not control designation, that’s negligence not a defense. If they cannot recognize an assignment, that too is negligence not a defense.
Now let’s come back around to the proposed amendment. University exclusive licenses often include a provision that permits the University to be joined to an infringement action. There are often various bobs and dodges about it, but the general thrust is that the University agrees that it may be joined. To do otherwise would “reduce the value of the transaction” to the licensee; that is, the university does it for the money. In the case of the proposed amendment, however, it is not a matter of contract but of court order. A defendant would be able to force the University to be joined to the infringement action on the basis of a new requirement, and if the defendant prevails, it can seek recovery of its expenses–which could be substantial–from the University if the company or foundation bringing the action is not able to pay. Yes, an insurance clause in an exclusive license agreement may add some relief, provided it has sufficiently high limits, remains in force, covers the university as a co-insured, and covers infringement actions and not just general business liability and product liability.
If the amendment becomes law, a defendant could run through a narrow corridor and get at a university licensor for the costs the company has incurred to defend itself. A university might find itself arguing that that exclusive license really was an assignment, and that it does not have a royalty interest in any outcome of litigation and only wanted a gift of funds at the discretion of the licensee’s–no, um, not that, assignee’s–board, and anything otherwise should not be construed as a duty to pay. At that point, it would be too late.
I expect that university licensing folks running certain kinds of practices–ones I might call sloppy practices–will be understandably concerned. There are things in the amendment that one would have a good reason to question, even without carrying a sloppy patent licensing program around. But requiring universities to have skin in the game if they are going to support infringement litigation for the money is in general a good thing. If universities are going to contract with a foundation or company so that it can litigate infringement rather than use the patent system to promote invention use (rather than patent use), then universities should expect to feel the bite when those actions prove unfounded.
There is more to it, however. Universities would not have to worry this issue if they ran better conceived patent management shops. Rather than attempting to be active participants, which presently is the dominant language–pro-actively “commercializing” “technology”–university patent management offices might reconsider and adopt passive programs–advisory to inventors as to options, permitting direct assignment by inventors to agents (which may be ones approved by the university), and obtaining from those agents some portion of what the agent retains after expenses without any involvement whatsoever in the agent’s transactions. In such a case, the invention management agent is not an agent of the university, but of the inventors. It is in the transaction between the inventors and the agent that the university comes to be a beneficiary. As for foundations acting as agents, they could adopt by-laws that require the foundation to make a gift each year of a portion of the foundation’s earnings from the management of the university’s inventions. Since the foundation pays the inventors a share of whatever it is the inventors have negotiated, the university is relieved of handling that paperwork, as well, and can snap up the gifted funds like ducks chasing bread on the pond.
One might say that this bit of the proposed amendments to the AIA go after sloppy university practices. While there may be other reasons to disagree with the amendment, one should not also allow that disagreement to defend sloppiness. University administrators have made the case for active management–that the university will go out and make money from inventions; that the university will demand ownership of inventions as a condition of any rationale that will get the university ownership–employment, use of resources, participation in research, working under the auspices, collaborating with anyone, fogging a mirror; that the university will litigate, and allow others to litigate, for infringement to protect the “value” of the university’s inventions in its profit-seeking.
The consequences of this administrative attitude, or syndrome, regarding active profit-seeking, are substantial. There is unrelated business income tax. There are questions with regard to non-profit standing and authority to act within one’s charter. There is the loss of goodwill and political standing. There is the compromise of university standing with regard to values and priorities–to sue or to use–a simple play on spelling, but capturing the core of the technology transfer challenge. These sorts of issues are slow developing, because they involve the erosion of a deeply placed anchor of trust. It takes a great deal of exploitation, falsehood, negligence, breach, and bad faith to persuade popular opinion, companies, courts, alumni, legislators, and finally, senior administrators, that the university’s moral–and financial–compass is broken. So the badness will go on, as long as administrators are given “the benefit of the doubt”–meaning, something that looks bad is probably only made to look bad by folks who want the university to look bad. That sort of denial-by-past-trust may be convenient, but it does not give one a free pass on culpability in the activity.
It may well be that from any number of directions, the decision to adopt active profit-seeking from patents demanded from inventors will come home to roost at universities. For those that are “successful”–there will be lawsuits challenging their nonprofit or tax-free standing. For those that litigate–there will legislation to force them to be financially on the hook. For those that spend massive amounts chasing profits to no good effect–there will be audits. For those that try to turn institutional conflict of interest into a virtue–there will be a loss of public support, whistle-blower actions, lawsuits, taxes, and fines.
University administrators would do well to revisit immediately the foundations of their patent administration. If they do so, they will find that it is time to rework patent policy, not to make it tighter, but to put it on an entirely different course, serving a different set of beneficiaries, and for a different purpose than to make a lot of money doing lucrative deals predicated on the willingness to litigate infringement purely for the money. Where that administration is active, it must be tied to university work–teaching, research–not profit-seeking: creation of standards, provision of access, promotion of use. Otherwise, patent administration should be passive, directing those that have an interest in commercial development to take their work outside the university and recognize the equities in the circumstances of university (and public) support for their work. If the university benefits from such commercial activities, it is because those involved choose that the university should benefit. That is a tough lesson, and one that bureaucracies hate. People support a university because they want it to succeed, not because it holds a gun to their heads. And a patent may be used as a gun. In matters of innovation supported by research, it is the impact of the work, not the cash value of patents, that matters. When a university administration recognizes this, and allows others to determine the university’s benefit from inventive work, rather than administrators taking it upon themselves to claim their share by compulsion and arbitrary assertion, then patent policies will be documents that underwrite a renaissance in creative university work.
There are uses of the patent system that promote the use of inventions. Bayh-Dole challenges universities to find and develop those uses. So far, university administrators have not, for the most part, shown themselves up to the task, and they and their institutions will suffer the consequences. Unfortunately, they will not know what hit them, and will say it is bad luck, or ill-minded folk who merely do not want them to succeed or want to give the university a black eye. It is not that at all. It is their own choices and actions that will convict them. The amendments to the AIA are only an advance warning sign.