Bayh-Dole Government License–6: Patenting Costs and Exclusivity

We are still following a webinar panel discussion of the government license to practice and have practiced in Bayh-Dole. The discussion gives us an opportunity to see the gulf between Bayh-Dole’s policy and objectives, and the scope of its government license, and what is presented as conventional wisdom to the university licensing community.

According to the panel, Bayh-Dole’s government license is ambiguous and confusing. This is largely transference–attributing to Bayh-Dole something that is rather more centered in the professionals’ minds rather than in the law. That’s not to say that Bayh-Dole doesn’t have massive defects, as we might expect of any Frankenstein monster made out of the dead body parts of past government policy–just that the government license to practice and have practiced is not one of them. It’s about as clear and direct as anything could be.

What may be difficult for the unprepared, poorly trained mind to grasp is just how broad the government license is. Make, use, and sell, for any subject invention. And have made, have used, have sold. For anything conceived or first tested as part of a project receiving at least some federal funding, even if work on the invention itself was done without federal dollars–separate accounting and chronology are not determining factors. Extended to any party to the funding agreement including those added by assignment, substitution of parties, or subcontract. That’s really broad, and entirely consistent with public access to key developments made in projects that have been pitched to receive federal support.

To illustrate. Imagine that a theater company plans to put on a play. They need money to pay actors, for set design, lighting, sound, theater rental, insurance, workman’s comp, staff. Because you are a wealthy person, they ask you for a donation to pay for set design. In return, you get the benefit of seeing the play performed, paying the ticket price everyone else pays, and getting your name in the playbill as a patron of the arts. So you donate. But then you come to find out that you are excluded from the play and all you get to see are the sets, with permission to make your own sets any way you want for your own, private use and enjoyment. That would suck. It would be a bait and switch. Same would be true if you weren’t excluded, but had to pay a premium for the ticket to be the only one in theater during your performance of the play. That would still suck. That’s how NIST and the webinar folk treat the government license. It’s just for set design, not for the goal of the overall project. It’s just for components 2, 3, and 4, not for the whole device. It’s not at market rates, but at some discriminatory price jacked up by exclusivity.

Another panelist takes up patenting.

“If we pursue patent protection then we’re generally going to try to enter into a license agreement to recover at the very least those costs.”

This is a fundamental issue in university treatment of inventions. The university insists on patenting, and patenting in turn creates a cost–often $15,000 or more per patent application–and that in turn creates a most pointed need to “recover” that patenting cost from licensing income. That need is all the more acute if the licensing office does not have a lucrative patent license providing money from which to draw to pay for “speculative” patent filings–ones where there’s not at least one company standing by ready to pay enough to cover the patenting costs. In university tech transfer offices, % of “recovered” legal expenditures is a big deal. That’s one place that senior administrators look to see how the “investment” in the tech transfer office is doing.

If one doesn’t take a patent position, however, then those legal costs go to nearly zero. It’s just that university tech transfer folks cannot see how to make money (enough at least to pay for their positions!) if they don’t have patent positions from which to work. They have no confidence in copyright, trademark, bailments (used for biomaterials), or instruction or research services agreements to produce revenue. I was fortunate to have a vice chancellor for a boss who made it clear that his metric of success (in money terms) was the total income received by the university from industry–gift, grant, license–didn’t matter: make the total grow and that was the thing. If licensing IP free of charge led to more donations, that was good. If charging for IP brought in money and didn’t cut off sponsored research, do that. Another way of putting it: build many relationships using whatever means available.

If one is restricted to making money from patent licenses, then one has gotta patent license. But even here, there’s a basic principle of licensing: let value follow the things that a customer values. In any IP license, patent license included, value may follow the grant of rights, a broadening of that scope of rights, the structure of payments, ancillary requirements (if imposed by the licensor, may take value out of the deal by adding cost, liability, uncertainty), and services. For instance, a patent license might involve related support services–delivery of a prototype, consulting with inventors, collaboration on patenting strategy, notice of new findings and publications, invitation to workshops or research reviews, placement of licensee employees in the lab or placement of university employees at the licensee. Any of those services may carry value for a customer and may be easier to recover than payment for an IP right.

Here’s an example to illustrate. You are at a university and have acquired an invention, and you’ve done some fool thing like obtain a patent on it. You expect to license the invention and provide assistance to those who take a license. You could work it two ways. First, you could ask people to take a license–non-exclusive, even for a “relatively modest” payment, say, $5,000. And throw in assistance for free. Or you could charge for a workshop, say $2,500, and throw in a non-exclusive license for free. One’s cheaper than the other, but the review processes to decide whether to take the deal are dramatically different.

That pay-for-a-license offer goes legal, which asks whether the license is necessary or could the patent be designed around, or is there an alternative? If the license is necessary, then there’s all the more reason to take a careful look at it to ensure that it include all the rights that might be needed. Even then, does the license create unacceptable liabilities?

The pay-for-a-workshop offer goes to professional development, which asks if the workshop is in line with expectations and involves receipt of confidential information. If it’s in line with expectations and there’s nothing confidential, then approval is easy. That approval doesn’t change if as a bonus, one comes back with a royalty-free, paid-up, non-exclusive license. Nothing to bother legal about.

Deals that go to legal can take time. Deals for workshops don’t. A research contracting specialist for one major technology company told me, I paraphrase, “if a contract has to go to legal, we assume the deal is dead.” A computer science faculty member told me, I paraphrase, “I can announce a workshop in my area of specialty and have 50 attendees paying $2,000 next month. Now, how soon will I see $100,000 from my share of royalties from your licensing work?”

Most university licensing operations are happy if they get even one company interested in a patent license. That’s one reason they are so hot on offering (even insisting on) exclusive licenses. That one company is the only one that is ready to pay anything, and so may as well make the offer exclusive and get the company to pay the university’s patenting costs. Anything else that ever gets paid is gravy. Once one begins to think this way, there’s no choice but to pursue an exclusive patent license every time, even when Bayh-Dole’s policy and objectives (and other provisions) require otherwise. By contrast, if one can get even ten people to attend a two-day workshop on a new invention thought to have “commercial potential,” paying $2500 each and getting in the process a free patent license, one has got enough to cover the patenting costs and more.

It’s a simple question then: are there ten or fifty people in the world interested enough to attend a workshop where this new invention is demonstrated and taught, and that if you attend you walk away with a free license, and if you want a year’s work of help, that’s available, too, for a fee? If no one is interested in the workshop, then why again are you taking a patent position? To exclude people who do not care that they are excluded?

You can see how the decision to get a patent leads to a need to recover legal costs which in turn leads to a fixation on exclusive licenses as the way to do it. However, there are plenty of alternatives in which the patent license does not carry the primary value in the relationship and in these alternatives, it is much easier for a company to agree to a relationship from which a paying proposition can be created–if payment is indeed a necessary adjunct to the transfer of technology from a nonprofit acting in the public interest. By breaking a transfer relationship into a rights component and a services component, a university can lead with a deal that can have a quicker review and a greater likelihood of attracting the interest of multiple companies. More money, faster money, more beans than all but the most lucrative exclusive patent deals, the kind that happen about once a decade at the most elite universities, and once if ever at anyone else that finds a way to get lucky. To fixate on lucrative exclusive patent licenses is to adopt a compulsive gambler’s mindset in a casino where the odds favor the house.

Our panelist continues:

“I will mention, though, we’ve seen–you know it does create a market uncertainty for the licensee because they’re anticipating they are going to be able to license or sell this to the federal government. Meanwhile the federal government could technically have another company that they work with who can have access to the patented invention and not work with licensee so we find that it does create a little bit of uncertainty.”

It’s a useful point. Why should a company take a license, let alone an exclusive license, if the federal government can authorize anyone it wants to “have made” products based on the subject invention? The response must be to put the company in a position to do a better job with sales to the government because it has a working relationship with the licensor. The value in the relationship does not depend on the license, but on services. To attribute the value to the patent when it must come from services is to do what we might call creative mis-accounting. To advertise that income as the result of patents when it is the result of services and the patent has been taken out of play by the Bayh-Dole government license is to mislead people about the role the patent has played.

The “market uncertainty” referred to by the panelist is “free competition.” From the federal perspective, it is “open bidding” that gives everyone the opportunity to compete for federal contracts. From a Bayh-Dole policy perspective, an exclusive license is absolutely unnecessary. The prospect of government purchase is often–nearly always–sufficient to motivate anyone to make whatever investment it needs to in order to sell product to the government. The best way to manage any residual uncertainty is to get into a procurement contract that follows the “have made” path. Then the negotiation is for the cost to develop, make, and deliver a specified product. What is in play? The readiness and capability of the contractor to do the work and deliver on time, on budget, with acceptable quality and features. If the contractor chooses the sales path, it must then develop the invention on prospect and then negotiate price–with the risk being that the government gets into a “have made” contract with another company long before the contractor gets done.

The word “technically” in the panelist’s comment belies a mindset that expects monopoly dealings. The government license is not a matter of a technicality–it is at the heart of the Bayh-Dole exchange: contractor gains exclusive rights while the federal government has the right to make, use, and sell and authorize others to do so on its behalf. Bayh-Dole recognizes there are two markets: the government-led market and a non-government-led market. Whatever the “commercial” potential of a given invention, that potential must be evaluated only with regard to the non-government-led market. If the government-led market only “technically” exists, then the expectation is that the government won’t act on its license, and will instead wait for the non-government-led market to provide, at whatever price it will set, choosing whatever it wants to make rather than what the government wants to “have made.”

In essence, “technically” here signals a mindset that does want the government to lead a market in which it contracts to get the work done that it judges to be in its (and the public’s) interest. In a variation on the “What’s good for GM is good for America,” this “technically” ends up expresses the idea that “What’s good for university patent licensing professionals is good for the federal government.” And what university licensing professionals want is income, and they think the way to get there is by patent monopolies, and for that, they have to ignore Bayh-Dole, and the best way to do that is to claim the law is vague, confusing, and full of technicalities that would work out best if they didn’t operate.

Our panelist has a much clearer expression of the situation later, in response to a change in the scenario in which a company decides they don’t need a license to practice a given subject invention for the government. Here, she makes more sense:

“Patent filings are really important for our university as they are for all. We have a five-year strategic goal that includes increasing the number of patents and we recognize that that is an indication of entrepreneurial activity and successful tech transfer activity.”

This is conventional practice, but it makes no sense. Patents are a function of budget, as another panelist has just stated. They are not a sign of entrepreneurial activity when taken out by a university. A patent may be a sign of entrepreneurial activity when taken out by an individual inventor, but even only then when the inventor is engaged in entrepreneurial activity, such as starting a company or working with companies to develop an invention. Otherwise, for the inventor as for the institution, a patent is evidence that someone has been led to spend $15,000 for a piece of paper. That’s risky, even compulsive, but it is not entrepreneurial.

Certainly, a patent has nothing to do with “successful tech transfer activity” except in a strangely bureaucratic meaning of getting more patents, which in turn is a function of getting more budget to be led down a path to $15,000 pieces of paper. “More patents” is a lousy metric. “Patents on work for which patents and public-directed management are indicated” makes sense. And that means the metric of interest is selectivity–a technology transfer program is “successful” with regard to patenting when it patents those things that its management is directly suited for in the public interest and does not own or patent what is not so directly suited. Another way of putting it–every patent obtained by a successful technology transfer program gets used to advance a public purpose–to promote use of an invention, to create a collaboration, to involve small companies in federally supported research or development, to promote free competition, to encourage US manufacture where before there was none. Many universities have most of their patent portfolio unlicensed–80% at even elite research universities. That’s a metric of a failure to be selective. It is a sign of portfolio building, not taking on only that work that one can complete.

We then get this, which makes perfect sense:

“On the flip side, in these types of cases, we really don’t need to secure patent protection and this technology is going to see an impact regardless. Additionally we’re really not going to get our money back for investing in the filing, so we often will not do it in this case.”

Despite the case itself being *rare*–companies don’t show up saying they don’t need a license at just the time you are thinking about whether you should file a patent application, so the “often” is quite strange usage–it does make a lot of sense not to file a patent application if the only use will be government use and companies don’t want to deal with you and your licensing. What’s odd is that our panelist does not appear to have heard what the other panelist just said about forming a relationship with the company and offering an option for non-government use of the subject invention to create a relationship and perhaps one day the invention will  morph into something with a non-governmental market.

The logic of getting one’s money back is also odd. In an investment environment, one takes the risk of not getting money back in exchange for the opportunity to get in early to ventures in which one may get many times one’s money back. The game is to get deals with bigger upside than the risk of loss. If one looked only at getting one’s money back for each deal, one would never invest. One wouldn’t even be a good loan officer. For a nonprofit, the logic here is even a bit worse. If patenting is done in the public interest, then getting one’s money back is not a consideration. The patenting is done anyway. Same with lending books from a library. The public service is that the book goes out and gets used, not that there’s some angle by which the user can be charged to recover the cost of the library–in which case a library would target gullible rich people. If one argues that the university won’t patent when it cannot expect to get its money back, then it is patenting for the wrong reason, and licensing for the wrong reason. The sentiment sounds prudent, but the logic is entirely off. A university should patent because doing so advances its ability to make an invention useful (and the like), not to improve its ability to get its money back from patenting.

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