It's *Not* Just a Tax, You Know

It’s Just a Tax

I have always wondered where the dismissive argument that non-exclusive licenses are “just a tax” came from. The expression comes up a couple of times in Sally Smith Hughes’s interviews with Niels Reimers, who ran Stanford’s patent licensing 1968 to 1996. Here is one instance. Hughes mentions a criticism of the Cohen-Boyer patent was that recombinant DNA had already been widely adopted in industry before the patent issued.  Did Reimers see that as a “stumbling block”? (My emphasis here and following).

Well, no. I typically like to be at the front end of technology transfer. That is, we approach companies and propose we work together in developing this technology. We’ll file the patent, we’ll exercise the right to exclude others, and we’ll develop it together. Well, when you do nonexclusive licensing, in a way you’re just applying a  tax. But I had no shyness about that here.

In response to Hughes citing Stanford President Donald Kennedy in a press release saying that the Cohen-Boyer licensing effort would “assist the process of technology transfer by making sure lots of players get into the game.  This increases the probability of valuable new applications for human science,” Reimers says:

Reimers. It’s fine that Don said that, but whether we licensed it or not, commercialization of recombinant DNA was going forward. As I mentioned, a nonexclusive licensing program, at its heart, is really a tax . He’s correct in that we were letting every player in on the game. But it’s not an action that made the industry grow. I guess you could say it provided some order. It sort of was a base line, and the industry proceeded from that point. But from a legal point of view, or from what a patent means, or what the license means, it didn’t make the industry grow. A lot of people don’t fully understand all facets of technology licensing, because it is, as I mentioned earlier, a complex mix of business, technology, and law.

Hughes. You are saying that the growth of the biotech industry was not dependent upon this patent?

Reimers. That’s right. Well, you’ve got to turn that around; you mean the license.

Hughes. Yes.

Reimers. It was dependent on what was behind the patent, but it wasn’t dependent on the license.

Hughes. Because the technology would have happened regardless?

Reimers. Would have happened. We were just, in one sense, taxing them. But it’s always nice to say “technology transfer.” [laughter]

The exchange is breath-taking in its candor.  As far as Reimers is concerned, gene-splicing was already happening.  No patents were necessary, no development reserved for a monopoly interest was necessary.  There was no “technology transfer” performed through the licensing arrangements.  But the interview here does not chase down the benefits of a non-exclusive licensing program based at a university.  Reimers accepts that it’s “like a tax” or “really at tax,” meaning “for the money” or “without a particular benefit other than because we could.”  I don’t agree that “tax” is a useful way to characterize non-exclusive licensing.  There’s much more to a university’s use of non-exclusive licenses than the obvious part of the Reimers interview suggests. It’s that bit about “provided some order” that should be considered with greater attention.

The discussion of non-exclusive licensing cuts two ways.  Which direction one takes has to do with an underlying worldview regarding the relationships created around patents in research settings.  In one direction, Reimers uses “tax” as a simile for the Stanford licensing program.  Without the simile, the program that Stanford undertook would be called an assert licensing program.  Industry already has the capability to practice the invention that is being patented, so there’s nothing new to teach, or to “transfer”–thus, at the end of this part of Hughes’s interview, the laughter following the quip that it’s always nice to cover a licensing activity with the idea that it is “technology transfer” even when it is nothing of the sort.

It would appear that Stanford’s decision to open the patent prosecution to industry scrutiny had much to do with the assert licensing program never having to litigate for infringement. There was no surprises–everyone could see what was coming through the Patent Office.  Reimer’s point is that the technology adoption was independent of the need for a patent license.  In this sense, having to pay for a patent license might be construed as a tax.  It might also be construed as a shakedown, or a troll activity.

It’s quite amazing that the NIH allowed Stanford to go after a patent–this was pre-Bayh-Dole, of course.  Perhaps Latker’s the reason for allowing Stanford to do so included Stanford’s willingness to pursue a low-royalty, non-exclusive licensing program rather than offering exclusive rights to a single winner-take-all company.  However, if one is going to look at it this way, a royalty paid on an exclusive patent license is every bit just as much “like a tax” as is a royalty paid on a non-exclusive license.

It is odd, however, to invoke a comparison between a patent royalty (“any consideration for a grant of rights”) and a tax, which is government-imposed.  If the federal government required everyone to pay a fee to use what had been invented in government supported research, then perhaps the tax analogy would be stronger.  But here it is a university deciding to require a payment or face exclusion from practice.  It does not matter whether a university decides to exclude nearly everyone by choosing to pursue an exclusive relationship, or excludes only those that won’t pay–it’s still a payment being required.

The Payment Urge

Here is what is odd about it.  A non-exclusive license does not require payment at all. It is not necessary for a university to demand payment of money as a condition for the practice of research discoveries.  Nothing about patent law requires payment.  Nothing in the charters of universities requires payment.  Nothing having to do with innovation or regional economic development or public benefit or national competitiveness requires payment.

Where does this urge to require payment arise?

We may differentiate between (1) an invention, which may be patentable; (2) a decision to seek to develop an invention as a commercial product; (3) an opportunity to make money developing an invention; and (4) an opportunity to make money trading on the patent right.  These four elements can be related, but they do not have to be.  An inventor might choose not to patent, and may help any and all who wish to understand what has been developed, and not charge for doing so.  There would, of course, be no patent and no opportunity to exploit that patent.  Alternatively, one might file a patent application and flip the patent rights to an investor, who in turn intends to plump the rights further and flip them on to still other investors–a typical intention behind university startup companies.  In such a scenario, there is no intention of creating a commercial product–posturing about it, sure–but no intent to carry through with a product. In this alternative, the patent right becomes the most important thing.

In yet a third alternative, university administrators construe it as an obligation to take ownership of patents (perhaps in the belief that they must do so to comply with federal law, or perhaps to save the public from the greed or ineptitude of inventors, or to comply with their own patent policies).  In such a situation, everything other than the patent is an afterthought.  The requirement is, get a patent. Then comes the fuss about how to recover the costs for doing so. Ah, yes, we could license the patent for money.  In all of this, however, there is little regard for actually making money from a new commercial product.  That’s there, of course–everyone says that this is what innovation is, and why patents should be obtained, but the actual operative decisions are based on something else–the demand for the patent comes prior to a decision to try to make money, and for very different reasons.

Other than as an urge, there is little to require university administrators to take patent ownership, demand commercial development, and demand payment.  Love of money, or love of money-seeking.  But even if the root of the practice is money, why would university administrators choose something costly, complicated, irritating, damaging to reputation and programs, fraught with liability, and generally unworkable over other approaches, such as, say, fund raising, sponsored research, and football?  One possible explanation is that people were told that federal law required them to do these things–which is what happened with Bayh-Dole.  Even Niels Reimers repeats the mantra in his interview with Sally Smith Hughes:

In 1980, I was involved with lobbying the Bayh-Dole bill through Congress. That then gave universities automatic rights, first option to rights, in all inventions created with government money.

As the Supreme Court ruled in 2011, Bayh-Dole did nothing of the sort.  Bayh-Dole gave universities (and other assignees) the right to retain ownership of inventions, should they come to obtain that ownership.  There is nothing about automatic rights or a first option or a right of first refusal to obtain ownership.  The standard patent rights clause is between the government and the university–it has nothing to do with the inventors and their ownership of inventions under US patent law.   The government and a university do not contract to strip faculty and students of their inventions, their personal property.  If they were to do this, it would be a form of eminent domain taking, requiring due process and just compensation, neither of which has been happening for the vast majority of inventions made with federal support.  A class action lawsuit would appear to be in the cards, waiting to be dealt out.

All Bayh-Dole provides is a requirement that federal agencies accept a standard patent rights clause (unless they can show reason otherwise) that provides a pre-approval for an assignee of an invention made with federal support to retain ownership of that invention. As for the extension to inventors, that’s the (f)(2) clause requirement in the standard patent rights clause, which requires university contractors (and others) to flow down to their research employees a requirement to protect the government’s interest (not the university’s interest).  A demand by a contractor of its employees for assignment of patent rights does not comply with (f)(2) of the standard patent rights clause.  A contractor might make such a demand, but it is not responsive to the specific action required of the contractor under (f)(2).

Other than the misrepresentations of Bayh-Dole, it would appear that the motivations are love of money, envy of other universities’ “big hit deals,” and a desire to emulate superficial features of those deals, so that a pre-Bayh-Dole non-exclusive licensing program such as Cohen-Boyer, in which the inventors are recruited to the effort, industry is consulted prior to filing, the patent prosecution is open, and licenses are granted non-exclusively, becomes a compulsory ownership demand, industry is not consulted prior to filing, patent prosecution is secret so that issued patents might blindside possible industry targets, and licensing is generally expected to be exclusive.  How different can things get?

We may differentiate between a license, which is a promise not enforce the patent right with respect to the licensee, and a contract, in which a promise is made enforceable.  A license need not be contractual–it may be revocable.  If one is going to rely on the license, then it is good practice to want the license to be part of a contract.  It is the licensee that needs the contract, not the licensor.  This is true both for rights, and for payment.  If there’s no contract, then a licensor can revoke the license, and then the licensee is exposed to a claim of infringement.  Yes, there are defenses.  But good practice is to do business without presuming on defenses.

A contract requires offer, acceptance, and consideration. The meeting of minds is in the offer and acceptance, and the transfer of a thing of value, for good value, is the subject of this agreement of minds.  There has to be consideration.  When a licensee wants a license that’s enforceable, the licensee has to offer consideration.  Consideration may be monetary, or it may be in the form of duties, or it may be provision of something else of value, such as a grant of rights under the licensee’s patents–a cross-license.

Even if Bayh-Dole were construed to require universities to take ownership of inventions and license these inventions to industry, there’s surely nothing in Bayh-Dole that requires the licenses to take the form of contracts, or to require payment.  These things–contracts and payments–are licensee-side issues, not federal mandates or university necessities.  It is industry making the offer, not the universities.  This reversal of expectations is just what is entailed in Congress’s objective that the patent system gets used to promote the utilization of federally supported inventions–not money-making for speculators in league with universities, not exclusion of everyone else so a winner-take-all attitude comes to dominate, not a running battle between university patent owners and companies, including all the worst behaviors of patent trolls, defection on research partnerships, and gaming the system in the hope for more money.  It is industry making the offers, and universities doing the accepting. It may not sound right to the standard industry-trained patent executives ears, but that’s the implication of Bayh-Dole–and its greatest challenge.  Rather than trying to imitate “corporate” practice, or even “independent inventor” practice, universities should be initiating a different sort of patent management practice–the complement, if you will, of corporate practice.

Another Take on Non-exclusive

If “it’s like a tax” supposes that a university imposes a requirement of payment on companies, then there’s another way of considering non-exclusive licensing. This is the route taken by open-source licensing, by standards licensing, and by commons licensing.  In these environments, non-exclusive licensing is used to create something of value–a social, political, and legally enforceable environment in which there is access for everyone willing to offer their commitment of consideration to the commons.  In this environment, the commons does not “tax” anyone–those participating in the commons have chosen to contribute to it, and by doing so, they make their contribution–and the benefits of the commons–binding promises.  One might say that in a commons approach, IP rights are used to preclude the use of IP rights for a winner-take-all approach to a given area of activity–whether research, practice, a new product, or a market.  A commons may be share-and-share-alike, or no-commercial use, or non-assert against commons members; a commons may restrict demand for payment or threats to exclude, may make payments and license terms “fair, reasonable, and non-discriminatory,” and may allocate any income produced by the commons to the governance of the commons and furthering the common’s objectives.

In such an environment, one might say that participants are paying because they choose to pay, not because they are “taxed” or “threatened.”  There is nothing about such an environment that is “like a tax” other than that something is paid–and certainly something is not being imposed on anyone.  If such a thing were simply “like a tax” so also would be, say, paying to see a play or concert, or giving to a public radio station in order to get that great Rick Steve’s Europe Boxed Set.  In a world where everything is free, I supposed being expected to pay might be “like a tax.”  But it is not a tax. The analogy is not workable, is not useful.  In a commons approach, payment might be part of the transaction to join, but that payment is part of what provides the commons with resources.  An open source commons might not concern itself with payment and operate on a donation and share-alike basis, which works as well.  In any case, one might say that the purpose of the commons agreement–non-exclusive, whether involving payment or some other consideration–is to establish the commons.  If there is a payment, it might be construed as recognition that it is better for there to be a commons–a social structure not owned by anyone, for the benefit of those willing to participate–than for there to be a winner-take-all monopolist holding patent rights.

In this one might see a subtle difference in the use of patent rights.  In the “just a tax” mindset, the purpose of licensing is to make as much money as possible, imposing payment under threat of infringement litigation on all those who would use a research discovery in any way.  In the “commons” mindset, the purpose of licensing is to ensure that everyone who wants access indeed has access, and no one is available to “buy out” control of that access. One might say that in the commons approach, one pays to prevent a monopolist from imposing a “tax”-like charge on use.  The similarity is that both are payments.  And that is about the end of the similarity.  In the commons approach, one does not try to “maximize” the “economic value” of the patent right; rather, one asks for a payment that meets the expected costs to manage the commons on behalf of everyone.  Some commons, such as those in open source, are pretty much self-managing. Others rely on donations, some of which come from large corporations.

There may not be a huge upside in managing such a commons, but then again, one might ask whether the purpose of the university should be to seek out huge upsides in areas that have been committed to a social collaboration–and competition–that does not operate on such upsides.  We take a similar view of things such as water and electricity, which are regulated as utilities and have common value, and we consider it unethical for anyone to manipulate the market for such things in order to run up the price in order to maximize the “economic value” of holding a monopoly.

Thus, while Reimer’s usage is that a non-exclusive license is “like a tax,” other usage in the wild is that a non-exclusive license “is just a tax.”  The slip between the simile and a statement of fact is huge.  It is not a change in the description of payment, but rather belies a different mindset of the speaker.  The assumptions in the “is just a tax” claim are that a non-exclusive license does not serve technology transfer, and that there is no benefit in the non-exclusive license exchange, and that such a “tax” is not desirable. The mindset might be described as “we will go to a non-exclusive licensing regime if we are forced to it, but we would rather grant an exclusive license to a company to support development.”  The non-exclusive regime then shows up as a patent assert or troll activity, after an exclusive licensing effort has failed.

A Defective Mindset Ruining Federal Policy

My argument is that this whole mindset–the exclusive license preference, the patent assert fall-back–is defective.  It’s not part of the Bayh-Dole objectives, it’s not aligned with university mission, it does not contribute to technology transfer.  It is, in fact, a huge failure in federal research innovation policy.  Statements along the lines of “exclusive licenses are necessary to attract private investment, without which all these discoveries will merely sit on the shelf and not be used” are foolishly made.   Perhaps one out of a thousand university-hosted inventions might follow such a course.  Most such inventions do not require an exclusive license, do not even require a patent.  Practice will happen, or not, for other reasons.

Indeed, the mere presence of a patent without an absolutely clear line of access on reasonable, simple, non-invasive terms may be a strong barrier to adoption, to practice, to development, to innovation.  It is entirely possible to argue that the Bayh-Dole Act has given rise to a substantial domestic barrier to university-based innovation.   It’s not that the Bayh-Dole Act mandated erecting such a barrier as federal policy–it did not.  But agents within universities exploited the Bayh-Dole Act to “change university culture” from open to closed, from service to payment, for extension to exclusion, from trustee to conflicted by self-interest, from support to speculation.  This change is depicted as being “more entrepreneurial” and “more like a corporation.”  These are half-truths, at best.  One might better call them rationalizations for the destruction of an infrastructure for research built on confidence, personal initiative, and social regulation. That infrastructure was not without its own flaws, but the move to destroy it was not based on fixing its flaws, but on exploiting its vulnerabilities.

The very premise of a university holding patent rights differs from that of a company holding patent rights.  A company’s patent right starts with exclusion.  A university’s research programs do not share that same starting point.  University research starts with personal initiative and negotiated collaborations.  It is competitive, personal, can be petty, can be altruistic, but it is not conducted under institutional controls, for the benefit of the institution.  If a university administrator thinks that it is a really keen idea for the university to take ownership of patent rights and hold them for the benefit of a monopolist interest (that is, an exclusive license) so that the university can be complicit in the added value of the monopoly, then the university is violating its own charter and public mission.  It is destroying itself in the popular imagination of what a university is, why it should have public support (even if a private organization), and what it represents by way of hope for the future. Companies come and go.  Universities have lasted for hundreds of years.  There is a reason why acting “more like a university” means to be adaptable, to keep to a public mission, to allow the periphery of scholars to lead.  It also may include financial discipline, reasoned actions, and a desire to be an independent source of comment on the claims made by companies, by governments, and by the press.  A university may not be perfect, but it is less imperfect striving to be “more like a university” than it is trying to play at being a “for-profit corporation.”

If a university becomes the owner of a patent right, in the commons mode it has to license non-exclusively.  Here Reimers is mostly right–no one will take a non-exclusive patent license until there’s a patent issued.  Those that do take non-exclusive licenses up front tend to be research sponsors.  These companies ask for a royalty-free non-exclusive license to be exempt from a university’s patent licensing program.  What they typically want is a non-assert commitment, not even a license.  (Of course, other sponsors want not merely an exclusive license–they want assignment of all patents, as if a university were simply a contract research organization.  It might be that a university could consider operating that way, but to do so, it needs to push its indirect cost and profit stack towards 120% of direct charges.  That would be a going industry rate, and might make it worth assigning patent rights in exchange for running at a net positive instead of the present losses in the conduct of research. )

The University Commons Imperative

One upshot of Reimer’s observation is that if no company has taken an exclusive license by the time a university-owned patent issues, then the university should put the patent out for non-exclusive licensing, with the goal of recovering patenting expenses–so, maybe a target of $20K total.  That might be $1K a company.  No big upside, and a refusal to turn troll. That might inspire confidence from companies and be easily workable.   Of course, a university could also simply get out of the patenting business altogether, and refer faculty and student inventors to various invention management agents.  A university could contract with these agents to share in big upside deals, and to ensure that the agents treat faculty and student inventors decently, sharing royalties, reporting activity, and conforming to expectations.

In this second approach, the commons approach, a university holds a patent position on behalf of an industry rather than on behalf of a lucky monopolist.  The university takes the patent position so that there is no winner-take-all with regard to the rest of an area of practice–not for companies, not for practioners (the would-be customers of some future commercial product), not for research (which might also improve, or apply, or develop around any given invention).   The commons approach is not simply a fluffy feel-good version of innovation, where the monopolist, tight-fisted exclusive licensing program is realistic and effective.  It’s actually the other way.  The commons approach is the hard-nosed thing, the thing not flattered and happily deceived by smooth talking patent attorneys and alumni calling for the university to jack the licensing terms to make a ton of money.  The commons approach gains value through the spread of participation, not in the monopoly sale of a commercial product.  The commons approach preserves the distinctive university role as arbiter of discovery rather than self-interested pursuer of monetary returns from discovery.  The commons approach has more board-room presence, more innovation potential, and more imaginative reach than an exclusive licensing regime will ever have.

Cohen-Boyer non-exclusive licensing was not “really a tax”–it was “really a trustee” and the value of the patent was based on participation, not sales of a monopoly product.  There are university deals, of course, based on exclusivity, and some few of these deals have made very good money.  But we are talking about 1 in 1000 inventions, the rest being held hostage to an exclusive mindset about making money–a mindset that thinks that anything else is “just a tax.”  It is time for universities to revisit, and embrace, non-exclusive programs of licensing that create commons–social assets of great value to research, to practice, and even to speculative, competitive investment.

[updated 12/12/13 to call out Reimers’ statement about “a kind of order” provided by non-exclusive licenses]

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