Inventors would own more, were it not for noncompliant Bayh-Dole practice

I saw this tweet this morning:

I agree Inventors should own more, but institutions were/are the heart of Bayh-Dole that (arguably) enables IP-driven startups… this is bc many/most PI inventions would go into a black hole without tech transfer officer asking them for invention disclosures…

It was a reply to someone suggesting inventors ought to own their inventions at universities. The idea behind this response is that if it were not for university ownership and tech transfer services, these inventions would all go to waste in a “black hole.” Inventors at universities are unworthy to own the inventions they make. University administrators are so much more worthy. Certainly the black hole imagery is richer than merely gathering dust on a shelf. But there’s somewhat more to it, so I thought I would discuss.

In my over 20 years in tech transfer, inventions of any use don’t go “into a black hole” if a university fails to demand ownership. Sure, they may not get used–but 95% of patented inventions don’t get used anyway. One should not have a shocked face. But even in this context, the university demand to own everything is an even bigger, blacker black hole.

Consider. Universities hold over 120,000 US patents they have acquired in the Bayh-Dole era from over 400,000 inventions they have claimed. Over 50,000 of these patents cite federal funding. These numbers are staggering. But where is the outputs? The new products, the economic development, the innovation? Universities won’t even report these outputs. Instead, they report proxies that just aren’t relevant–the number of inventions reported, the number of patents, the number of licenses. These metrics reflect the activity of licensing offices, but stop short of results. No one reports how many of those university inventions, patented or not, are actually being used. License deals don’t necessarily transfer any technology–they can be just rights speculation, much like a music label buying up rights to some band’s next album–getting those rights doesn’t mean the band is going to record a next album, but there’s money to be made speculating that they will, and it will be a monster if they all pull together as a team, as it were.

The stark reality is that university ownership is where inventions go to die. The black hole, around which swirls–slowly, at an administrative pace–the dust and gases of administrative red tape, patent paywalls, fussy compliance, and distractions about future money.

University ownership and reckless patenting is often terribly disruptive to the research and scholarly environment at a university. The prospect of future royalties splits research
teams into haves and have-nots. I have seen researchers fall out over $50–because, if it were $500,000 it would be totally unfair, and that’s a principle. Teams get split, too, by ownership of inventions–recognition, even work assignments. The grad student assigned to bottle washing and cage cleaning doesn’t get the same opportunity to work on the inventive bits–seems unfair, once you get what’s going on. In the case of one startup, a grad student who had been recruited to the department came to me–her faculty advisor had started a company and had not included her. “I don’t really care about that,” she said (and I paraphrase), “but I have just lost all my advisor’s time–he will be off with his startup not working with me on my research. Why the heck did I choose to come here?”

University ownership and assertion of patent rights drives apart academic collaborators. Why help out that research at university X when all the new things end up owned by X? It’s even worse for company interactions. Some companies tell their scientists not to read the academic literature–doing so just poisons their well, setting up a claim of willful infringement if the company scientists happen to use something that appears in a publication but which the university–without any notice–has gone off and obtained a patent on. In one case, a major Bay Area company pulled its financial support from a university’s school of engineering. “Why are you pulling out?” the dean complained. “Well you just designated our main competitor as your preferred company partner–why shouldn’t we pull out?” Pipelining IP to just one company is a sure way to turn all the others in the same field against you, or at least have them be wary. If they aren’t wary, that’s a good sign that they don’t think your research is worth a bean and they are involved only to compete from rescuing the best and the brightest from your swamp. But no one talks much about whether university research is relevant to anything technical, let alone innovative, that might be of value to companies or professionals.

A few studies, such as those by Stanford’s John Ioannidis, argue that most academic clinical studies are flawed, and even when they are not flawed, they are mostly not clinically useful. That’s a big elephant for this room, too.

University ownership of inventions and patents, tied to a default practice of offering (or at least hoping to offer) exclusive licenses creates a stand-off with the company world and a strange relationship with other research organizations. Look at CRISPR–a multi-million dollar battle between UC and MIT over patent rights. What a waste–more like gangs fighting for territory than an effort to create a platform for, er, broad use.

University ownership is a black hole. The black hole. What’s owned by a university will be used by no one. That’s almost generally true. If a university owns, and insists on trying to find an exclusive licensee, then what are all the other companies to do who don’t need or want exclusivity, or don’t expect to be the exclusive licensee? They will have to design around, ignore, obsolesce, obtain patents that disrupt lines of development or application, and generally undermine that exclusive position to the extent that it represents a threat to competition. You see it, don’t you? An exclusive licensing premise drives everyone else away from university collaboration, away from the inventions a university owns. Makes university research even less relevant to industry, prevents platform and standards development, disrupts early adopters, denies graduating students opportunities to work in industry settings (only at the company, if ever, that gets an exclusive license) with what they have learned in their university research. Out of the blue and into the black. My my, hey, hey.

Somewhere around 2/3rds of university IP work doesn’t involve Bayh-Dole. About 1/3 is not even patentable stuff–software, curriculum, data, services, know-how, tangible stuff. Another 1/3 non-federal inventive stuff. The figures vary from university to university. But that’s a good starting point for expectations.

Nothing in Bayh-Dole makes tech transfer easier, go better, or be less costly. No one jumps with joy that an invention disclosure has shown up identifying federal support. Bayh-Dole–at least as practice has developed citing Bayh-Dole–is just prissy deadlines for meaningless compliance. Even the law firms and research compliance audit firms worry only these administrative fussinesses–how soon must an invention be disclosed to the government? What is the proper wording for the government rights citation in a patent application? How soon must one file an election to retain title? To file a patent application? (Even NIST gets this last bit wrong, having not bothered to read Bayh-Dole for the last decade.)

No one asks whether all the tech transfer effort has resulted in timely practical application–use with benefits available to the public on reasonable (competitive) terms. No one asks whether product improvement and applications in various fields have taken place in a reasonable (competitive) time. No–companies with patent monopolies seem to wait a decade or more before working on the roll out of some new patented improvement to replace the expiring patent bits still left in a once-new product. No one asks whether supply meets public needs. Dates of first commercial sale or use. Nope. Is the pricing of product reasonable? Nope. Is the university properly using income earned with respect to subject inventions? Nope. Has a university flowed down the nonprofit patent rights clause (with its restrictions on the use of income earned) in exclusive licenses that grant all substantial rights in a subject invention? Nope. No one advises universities to get these things right. No one even audits university reports of subject invention utilization to see that they are even accurate and backed by documentation.

In my experience, the best university tech transfer has involved work that has had no federal funding and has been made available non-exclusively. Federal funding–and Bayh-Dole–are a dead weight on technology transfer. Federal funding means that one has to constantly compete for more of that funding. One estimate puts the number of hours to prepare a grant application at 170 hours. Now do ten to get one. Folks with federal funding cannot afford to be all that interested in technology transfer. They will dutifully report inventions to show compliance, and they may even feel the lure of royalties, but their heart is in making a good show of their current grants and getting set up for the next ones. Bayh-Dole just makes any effort to transfer all that much more difficult. There is no advantage in finding (i.e., being impulsive enough, or thick enough, to demand to own) an invention is subject to Bayh-Dole.

As for startups, university practice is mostly parasitic, not catalytic. Universities make inventors assign to the university and then make them beg–through proxies for “ethics” appearances–for rights back. In these cases, nothing *transferred*. The inventors know their inventions. They are not transferring anything to themselves. What they lack is a bureaucrats’ approval to practice what they have invented in any context other than at the university. Seems like a restraint of trade, or a non-compete requirement disguised as a patent policy. The university takes ownership so that it can use that ownership to demand a piece of whatever pie the startup might get, and in demanding ownership, and insisting that the startup take an exclusive license, the university makes it all that much more difficult for the startup to start.

When a university intervenes in a startup effort, it creates a poison pilled license agreement that puts off investors and is set up to require payment of the university’s patent work, which is often more expensive than if the startup did its own patent work. As one director of patenting at a major university told me–we don’t care how much the patent work costs. The licensee will just have to pay it. Their patenting work ran easily 50% higher than it needed to be. Missed deadlines, requests for extensions, defective first drafts, fussing through office actions. Whatever. The startup gets what amounts to a forced loan on its patenting costs (since the university pays but then demands direct repayment rather than recover its expenses from a royalty on sales)–but those payment terms are often a crappy deal for the startup.

Behind all this poor practice and poor outcomes, university claims about Bayh-Dole are often deeply wrong, to the point of malpractice. University patent officials and their legal counsel should know better, but really don’t want to know better. And that hurts startups as well. Let’s look at some of the problems.

Bayh-Dole does not give a university any right (or mandate, or first option, or conditional vesting) to own inventions made in federally funded work. See Stanford v Roche. If a university does not acquire title to an invention, the funding agency has no right under Bayh-Dole to take title. Bayh-Dole preempts that right. Reagan’s 1983 patent policy change (drafted by Latker, who also drafted Bayh-Dole) extended that preemption to all funding agreements, not just those involving nonprofits and small businesses. If a university IP office declined to take ownership of an invention made in federally funded work, the inventors could assign or license to their startup directly. All the elements–equity, royalties, conditions, patent work–would be addressed without passing through university administrators’ hands, at a university administrators’ pace.

The motivation for universities to force assignment of inventions, only to exclusively license those inventions back to the inventors (which amounts to another assignment, no matter a document is labeled “exclusive license”) is to take a piece of the action before there is any action. Doing so takes energy from the system. Instead of dealing directly with their startup, inventors (and any other founders) have to first assign rights to the university, and then they have to negotiate the rights back, now with all the strings and risk aversion of an institution attached. Startups can take months to negotiate a license with a university. One company CEO visited the university I worked for, had got twenty licenses from various universities in order to have relative freedom to operate. If I remember right, he said it took him a couple of years. That, he said, was his competitive advantage. No one else was likely to have the time and luck to get licenses out of those same universities. In another situation, the startup negotiation took so long and cost the company so much in attorney time just to battle the university’s default license document that one of the members of the company’s board complained publicly. And turns out that board member was also a university regent. So the technology transfer director was resigned and the office renamed and reorganized with the idea that somehow that would speed up negotiations. Hah! The university insists on flying a 747 of a license document to go a half mile that could be walked with a wagon in ten minutes. But somehow this is pitched as “helping” to start new companies.

The university deal also changes priorities for the startup. It has to comply with all the elements of the license contract, which often runs to 30 or pages, single spaced. Universities have finely evil practice of asking startups for a business plan, ostensibly to verify that they have a capacity to operate and therefore are worthy of a university license. But then the university incorporates by reference that plan into the license contract, making the plan itself part of the contract with the university. The startup cannot change its plan, then, without the permission of the university. License agreements are also set up so that a breach of the agreement results in the cancellation of the license, and that means that at the breach (maybe if not “cured” in 30 days), the startup is infringing the university’s patent and could get shut down. That’s a great way to get risk-taking investors on board, don’t you think?  So the priority for a startup, just getting going, is to comply with the university’s license demands, making sure the university is going to get paid by doing everything “right.”

University licenses also add a threat of audit, with penalties for any payments that the company might have shorted the university. Audit, of course, requires the company to reveal its books and all sorts of privileged or confidential information to the university, which then has to be trusted to handle that information with care, which is made all the more difficult, or at least uncertain, if the university is public and subject to state public disclosure law. Audit provisions also may create a whole procedure for when audits can be conducted, with what sort of notice, who can be chosen to do the audit, what sort of confidentiality the auditor will have, penalties for underpayment, how interest on underpayment will be calculated, and on and on.

University licenses also demand indemnification. The university sees itself as a deep pocket and does not want to be that pocket. So the startup must indemnify the university for any claims that might be made regarding the invention or its use. Oh, and the indemnification must be backed up by the startup taking out insurance naming the university as a co-insured, for the specified limits, with the university receiving a copy of any insurance document to show that the insurance policy meets the university’s requirements and is paid up and in good standing, and on and on. A startup then must work through provision after provision in the license agreement in this way, spending its time and energy on feeding administrative angst that has gathered itself into a template agreement that covers the deal with every bit of wording that would give the university the upper hand in any dispute. And don’t bother asking about dispute resolution provisions, or jurisdiction, or what happens if the company gets bought, or worse, if the university goes after a piece of equity to hedge its bets that the licensed invention won’t work out. Just what you need first thing to get a new company with new technology up and going.

If universities simply must have a financial bite out of every startup, then they could skip the ownership and licensing fuss, and instead ask that their inventors share some of what they receive personally from the company. Doing so is still a racket, but shifts the shakedown from the license to approval to engage in “outside” activities–something of a conflict of interest or ethics in public service thing. Sure. Needs to happen. But happening there does not get in the way so directly of the company.

It remains, however, that a university getting paid off by a startup has nothing to do with advancing the prospects for the startup to succeed. No one goes “Oh, this startup has a big hurking university license chained around its neck, so it is certainly more likely to do well!”

Then there is the Bayh-Dole patent rights clauses, which have their own special fuckery, but which universities manage to fuckery up even more. A superclusterfuckery, as it were.

Bayh-Dole authorizes patent rights clauses to memorialize what the statute requires federal agencies to require of contractors unless they can justify requiring something else. The Secretary of Commerce, delegating things to NIST, has produced three patent rights clauses–one for nonprofits, another for small businesses (conflated into a single clause, 37 CFR 401.14) and one for inventors treated as small businesses (37 CFR 401.9). Inventors get the best deal. Nonprofits have the most restrictions. If you want university inventors to succeed, which patent rights clause should they get?

Universities taking ownership brings inventors under the worst Bayh-Dole terms, and their startup too. Bayh-Dole requires the nonprofit patent rights clause to follow any assignment of a nonprofit-owned subject invention (35 USC 202(c)(7)(A). An exclusive license of all substantial rights in an invention is a form of assignment. So foisting an exclusive license from a university on the startup gives the startup the worst deal available under Bayh-Dole. Sigh.

One more layer. The standard patent rights clause requires universities to make certain of their inventive employees parties to each funding agreement. (It’s the requirement at 37 CFR 401.14(f)(2)–it flows down responsibilities under the funding agreement to the inventors in the form of a written agreement to protect the government’s (not the university’s) interest in subject inventions). Universities, per Bayh-Dole’s definitions, are to give inventors standing as contractors (35 USC 201(c)–a party to a funding agreement is called a contractor) with their own best inventor patent rights clause. But universities refuse to comply.

University Bayh-Dole practice is run as a racket. University administrators love Bayh-Dole, but they violate the law routinely, glibly. Apparently enough of them loot the store that no one in the university has the guts–or a couple of hundred thousand dollars for legal fees–to stop them. In this sense, AUTM by leading them on becomes something of a racketeer itself. If universities complied with Bayh-Dole and their standard patent rights clause, their inventors would in general own the inventions they make in federally funded work, and would be subject to the best Bayh-Dole deal. Inventors, made parties to the funding agreement by their universities compliance with the nonprofit patent rights clause could then retain title under 202(a) like any other contractor, and could license to their startup without any university shakedown or delays or distracting, grasping nonprofit license.

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