A sense of proportion–3

Prior to federal funding becoming the dominant source of university research funding, most universities operated their invention policies with a review committee that made recommendations to the university president with regard to particular inventions. The volume of invention reporting was sufficient low that people could consider possible a committee review. But with even a small uptick in the volume of inventions reported, committees were simply not workable. They would have to meet daily if not weekly, they would have to have technical, business, and legal knowledge from across the whole gamut of university research, they had no idea what to do if they said “no” to taking on any given invention, as “no” appeared to waive the whole invention policy apparatus. By the early 1980s, university invention review committees at a research university of any size were unworkable.

Instead, university administrators worked with Research Corporation to streamline reporting of inventions directly to Research Corporation. Research Corporation worked in the 1970s to create “technology transfer offices” at universities to help inventors recognize inventions and report them to Research Corporation for review. Thus, there were on many campuses people who knew something about inventions, how to document them for management review, and how to get them to Research Corporation or some other agent. These people were motivated to get invention agents to pick up reported inventions for management–each one represented the prospect of licensing income–and therefore of continued employment for the administrators involved. Conversely, each invention that was not adopted by an invention management agent meant the loss of the effort to get the invention fully documented and the prospect of having to waive the opportunity to make money for the university back to the inventor.

Things got worse as the volume of reported inventions increased–in part by the expansion of research funding, expansion of research into areas that had not otherwise been considered for patenting, in part by the efforts of people to get inventors to recognize and report their inventions, and in part by the expansion of the scope of patent law to include life forms and software. As the volume of inventions increased, the patent agents necessarily had to become more selective. They said no more often–the invention was not well documented, the invention was sketchy, the invention wouldn’t be of interest to industry, the invention wasn’t patentable, any patent on the invention would not prevent workarounds, any patent on the invention would be nearly impossible to enforce, the market was too small or too antagonistic to patenting to be worth the effort–any number of reasons to say no. And with each “no” the university patent policy problem got worse.

Rather than waive all the “no” inventions back to the inventors, universities picked up on the university-based licensing office approach pioneered by the University of California, MIT, and Stanford. At California and Stanford, at least, their patent policies made inventor assignment of inventions to the university voluntary unless required by law or contract. An inventor would have incentives for university management–a patent, no costs to get it but time to help with drafting the application, someone else doing all the marketing and contracting, and on top of that, the prospect of a share of royalties–perhaps millions–if the invention did get licensed and turned into commercial product. If electrostatic precipitators, Vitamin D and warfarin, and gene-splicing could earn millions in royalties being licensed non-exclusively, think about the return for exclusive patent licenses. Where a non-exclusive licensee might pay a royalty on product actually sold, an exclusive licensee would pay as well for the freedom from competition and could price at patent monopoly rates for having the only product on the market that practiced the licensed invention.

It’s just that when university administrators adopted exclusive licensing as an overlay to a federal research effort based on spreading the work around–by region, by university, by investigator–they also fragmented emerging areas of new science and technology into institutional owned bits of invention. Unlike companies, that had a long history of dealing with each other and working out patent positions to prevent stalemates, universities had no such history to guide them in dealing with patents they owned. Each licensing office aimed to get deals for itself, for the financial benefit of the university–and of course for public benefit, as well, if public benefit had to be anything other than the financial benefit of the university, which was after all committed to the public benefit, so more money for the university was a public benefit–was more needed?

Even jointly owned inventions created huge headaches for university administrators in the form of “interinstittional agreements” in which the joint management of inventions was wrestled to the ground–who would manage the patenting and who would pay and with what review and approval by the other university, and the marketing of inventions, and the licensing, and splits on any licensing money, and what to do if there was infringement, and governing law–can you imagine the disagreements as lawyers for a public university in one state reject interpreting a contract under the laws of another state, as demanded by lawyers for the joint owner public university in another state? (I once attempted to resolve such a dispute by suggesting the laws of the state of Hawaii, with at least one trip to inspect the laws directly to be undertaken by those responsible for negotiating the agreement–but lawyers from both universities rejected that and we ended up not specifying governing law at all.)

The commitment to exclusive licensing carried with it contractual stipulations that precluded sublicensing, cross-licensing, dedication to standards, giving stuff away, royalty-free licensing, and indifference to infringement. At the same time, such exclusive licensing terms ignored the problem of royalty stacking–of any company hoping to use or deploy a technology built from multiple sources being able to afford to pay the royalties demanded by five, ten, even fifty patent holders (a ink-jet printer may involve 50 patents, an automobile, perhaps 300). If all the royalties stack, the price of the product might double or triple. Thus, again, even in exclusive licensing efforts, one has to confront collaboration with other patent holders to enable a product to be made, used, and sold. The venue for the collaboration just changes from being upfront, as with open innovation or standards formation, to being involved in a weird gamesmanship of trying to gain leverage against the other patent holders that some poor company must negotiate with in parallel to obtain freedom to practice.

There has been a more concerning upshot from university adoption of exclusive licensing. Rather than deal with patent stacking, university administrators license exclusively instead to speculative investors via startup companies. The startup company then carries with it an exclusive license, which acts as a poison pill to make it difficult for the company to be acquired without renegotiating the license so the acquiring company can cross-license or contribute to standards or go indifferent to the patent rights–anything to avoid having to force each product to an accounting with regard to the university’s financial interest. As a result, startups taking university exclusive licenses (they pretty much have to) then work to get out from under the scope of those licenses–attract investment, say, and then build a different, non-infringing product. In one case, a company with an exclusive license from a university simply shed its skin–created a new company, transferred all assets but for the university license into the new company, and then sold itself as the new company, leaving the dead skin of the university license behind. In another case, a startup with a university exclusive license granted an exclusive sublicense to an alter ego company to get the license and invention out of the way and then went to work on a different product.

A commitment by universities to exclusive patent licenses as the default means then that emerging research technologies are fragmented with no easy way to put the pieces back together. Companies would rather design around or even infringe without knowing it than to attempt to negotiate with universities for a license. In other words, that university patent, combined with an exclusive licensing commitment, provides strong incentives for industry not to use the invention, to undermine it, to make it obsolete, to invalidate the patent, to exclude it from standards.

In these ways, that university patent, when combined with an exclusive licensing practice, does not protect the invention at all–it damages the invention, in the hope for a financial return. While speculative investors–ones happy to “monetize” the patent rights by trolling industry users for infringement if their startup is not acquired by a company willing to pay to get the patent and license out of the way–might find university exclusive licenses attractive, most companies operating in most industries don’t. The exceptions are some portions of the biomedical industry–and in particular pharmaceutical companies (because their business model has been built on patent monopolies) and biotech companies (because their investors imagine selling out to pharmaceutical companies and will need exclusivity to sweeten the deal, and if that doesn’t work out, having as an insurance policy the right to monetize the patent rights by trolling the industry, turning the carrot into a stick).

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