Thought Experience

Posted on October 1, 2010 by Gerald Barnett

Let’s look back in time, do a “thought experience”. That is, experience thoughts that might help clarify things that don’t appear all that clear for folks in the doing.

In your thoughts, imagine a university faculty member years ago, say, 1975, wants to do research with the US government under a standard grant in which the government claims title to any inventions. The faculty member writes a proposal, and the grant goes to the university. The faculty member makes an invention, reports it to the government, and the government requests title. The faculty member signs a document that conveys title to the government. It’s a standard Patent Act situation. The government claims title, but it does so by the normal means, by asking for it as an obligation of the federal contract or terms of award under which the funding is made available. There is no automagicality. The government when it requests title expects to get it, but it doesn’t pass a law that simply takes title outright, but rather goes through the effort to construe title as a deliverable under the contract. Think of it as a form of respect for due process, and for the social constraints of the transaction.

It might be more efficient to have a law that just strips title and saves everyone the formality. But it wouldn’t respect the transaction. And it would place way more power in the government. And it would appear to violate the US Constitution, which gives the government the right to reserve patent rights for inventors, not for the government. So the government gets its rights by an assignment from individuals, because that’s how the whole patent thing is set up. One can be efficient to the point of destroying the social structure on which everything is founded. Yes, you get a new social structure, but it’s more like fascism, and cedes way too much to a central power as all knowing so better able to manage people’s lives than the people themselves. Sounds sort of good, on paper, if you disregard where the expertise lies in research and innovation systems–it is often at the edges. When folks start talking efficiency I pay attention. It can be good, but they had better have a clear idea what they are saying is wasteful. If the expertise at the edges is the waste, then I’m going to be skeptical.

Back to our historical thought experience. Federal funding, an invention, a request, an assignment from the inventor. There’s no reason for the inventor to assign to the university which then assigns to the government. The university could introduce this step, but it wasn’t needed, Back Then.

Now let’s vary things a bit. The faculty member runs an open lab, typical of university research. That openness kicks up a discussion with a scientist a company and together the faculty member and company scientist invent something within the scope of the federal grant. The company scientist is not paid under the grant and has an obligation to assign patent rights to the company. It’s just a chat at a conference that hits on something. Imagine, then, that there are two co-inventors.

The faculty member reports the invention to the government and the government as usual asks for title. Here’s the rub: the faculty member assigns the rights the faculty member has—an undivided interest in the invention. But the faculty member does not have to assign the company scientist’s rights (or break the company’s interest in the scientist’s rights). That’s not part of the bargain. Nor is it part of the bargain that the faculty member not consult with anyone in industry or run a closed lab or force everyone to agree to the same government claims on title simply for talking with the lab about their work. None of that. Not there. The obligation is not to assign all right to title in the invention to the government, but only the right in title that one has. That’s the deliverable under the grant. That’s what the government requests.

It is a big step to go from the personal obligation of a university investigator to arguing that the investigator had to secure all rights to any invention, that the purpose of the government claim was to have exclusive right to the invention. It was not that way for most government grants to universities (some were different, where nuclear weapons or propulsion systems were involved and the labs were closed and disclosure was not permitted).

Perhaps it’s clear now—the right to title in a federal grant is a personal obligation arising from a personal patent interest, a special performance tied to the rights one has, not a demand that in its potential implications forces the lab to become secretive, bureaucratic, and anal retentive, just so all research inventions made have no external parties holding an interest. Nor is there a mandate for university administrators to step in and force the lab into compliance with such an inferred demand, by preventing publication, requiring subcontracting for every interaction, and demanding confidentiality agreements and commitments to assign patent rights for every visitor or communicant with the lab.

Things change when the university wants to take ownership of title, and the government is willing to allow this. What the university then bargains for, with the government, is the title that the government otherwise would receive. That is, the title that the faculty inventor is prepared to assign as an obligation of the award. That’s an undivided interest in the invention, but not necessarily the entire title to the invention, because the faculty inventor does not control the interests of any inventors external to the award. What the university is able to negotiate is the redirection of this assignment—rather than to the government, to the university, or to a research foundation working with the university and the inventor.

Posted in Bayh-Dole, IP | Comments Off on Thought Experience

Dag Wags Dog

Posted on October 1, 2010 by Gerald Barnett

Stanford v Roche has put some folks into a tizzy. Since the tizzy drives to the heart of Bayh-Dole, it’s worth spending some time with it. For those that have been following my efforts to work through the issues, you understand stuff like retain as in attorney not retain as in water.

For anyone new to this: keep in mind that I think AUTM’s actions in this affair are wrong, shameful, and I am glad I am no longer a member, but I truly do not know how Stanford v. Roche will turn out and whatever I come up with has to do with how I believe the law operations, and how university technology transfer ought to function, and how membership organizations should function when taking public and lobbying positions.

I have good friends at Stanford—er, at least did, maybe still do—and I don’t see why I wouldn’t have good friends at Roche. There is a dispute, there’s a lot riding on it, and we all have to deal with that.

It’s just that I also choose not to be mercenary. I choose not to be in a code of silence. I think speaking out, and being clear about it, matters. University IP management need not be a monoculture. It need not be so afraid that no one can express a point of view at odds with AUTM or the status quo or the consensus or the “best practices”. So here’s to diversity and openness, and a willingness have the discussion rather than to shrink back.

My concern in all this is over whether a leading organization claiming to represent university technology transfer (AUTM) knows its founding law (Bayh-Dole). I don’t think they do. I think they would rather be mercenary about it. They would rather try to ram through a federal pre-emption to prior, valid contracts and transactions and disrupt 30 years of practice–including their own–in the disposition of patent rights than to deal with the realistic lessons and outcomes from a current dispute. Dag wags dog.

Posted in Bayh-Dole | 1 Comment

SG on the scale

Posted on October 1, 2010 by Gerald Barnett

Looks like the Solicitor General has weighed in supporting the effort to get Stanford v. Roche before the Supreme Court. All the lobbying by the universities has paid off handsomely. Now, one might hope, they will learn a powerful lesson, if the Supreme Court really wants to look at this case. From my perspective, the universities are blowing a ton of goodwill and effort on a misplaced concern. Their problem is not with Bayh-Dole or the courts; it is with their own implementation of the law, and with listening too well to people who should know the law, but don’t or won’t. Once paid counsel is on the case, however, we aren’t going to have an intellectually honest discussion as a form of deliberative rhetoric. There will be no conversion experience, no epiphany that they have construed it all wrong. Rather, we get a belabored dispute, in the form of a forensic (backward looking) rhetoric. The idea is, face the future with our backsides by seeing who can snooker the justices about issues in the past.

My hope remains that the justices prefer not to be snookered and can read law as well or better than anyone, and have something considered to say about things. What they might say is that while the issue the universities are concerned about is clearly very concerning to them, it really has nothing to do with this case, so find a better case. There is always hope! In the meantime, I will work to lay things out again, so at least there is a map to an alternative view of the law and practice from the perspective of university practice.

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A Template in a Teacup

Posted on September 28, 2010 by Gerald Barnett

Templates are a staple of licensing. They range from past agreements to form book illustrations to model agreements to standardized agreements for specific transactions. One starts with templates to build agreements for specific situations by versioning for local circumstances. There is a push back from this versioning by the folks on either end of the deal that have to manage it relative to their other obligations.

What we want to look at is how templates come to be used as standing offers, and what that means for negotiation, efficiency, consistency, and effectiveness. This will take some effort.

A simple question is: why does each license deal need to be different when there’s so little gained by that and so much added work to keep track of each of those little details?

Is the devil in the details, or are the details simply devils?

One way to get at this is to try to standardize complicated agreements so that whatever the details, they stay put. In this approach, one pushes negotiation toward getting the other party to accept one’s terms. Take our deal. It’s an argument on the merits, in the form of a negotiation. The give and take is the giving of reasons and taking of time rather than giving ground and taking other offered ground in its place. Sponsored projects offices have used this approach for years, sending out a template agreement and then working to explain why apart from funding dates, amounts, the investigator, and statement of work, the rest of the arrangement should stay as close to the template as possible.

Another way to get at this is to reduce the number of details one has to pay attention to and which become subject to variation. This approach is harder for administrators to deal with. Once a detail becomes known, it is difficult to pretend it isn’t there. Thus, administrative documents tend toward more detail, more complexity, rather than less. A handshake deal is almost by definition an abuse of authority, an ethics violation, and totally unacceptable.

A third approach is to improve the sophistication of managing agreements. In this approach, the important template is the license management template, not the license itself. In an information age, complexity is not a particular issue, so long as there is an ontology for the information. If things can make it into a spreadsheet, it doesn’t much matter if royalties are reported monthly, quarterly, semi-annually, or annually. It’s just a number 12, 4, 2, 1 tied to a reporting requirement. In this approach, so long as areas of variation are identified, the management template takes care of the details. What one aims for in negotiation therefore is not to defend a position but rather to get at objectives. Rather than getting an indemnification clause in exactly one way–which may not actually be so good a thing–one aims to manage the overall exposure to liability created by the licensing relationship.

One might see from these three approach rather different areas to invest one’s resources in, and what that does for negotiation. In the standardized agreement approach, the resource goes into administrative directives and training to get people to keep deals in the straight and narrow. In the simplification approach, the effort goes into establishing a minimum set of requirements and expecting that issues not addressed will be dealt with if and when they arise within the good faith expectations of an existing relationship. In the sophistication of management approach, the effort is to understand where variation in licensing is expectable and rig for it, so that it doesn’t present a problem.

Of these three approaches, the standardized agreement offers the greatest attractions to management. A stable agreement text limits the need for review, minimizes the administrative overhead, and does not rely on judgment or good faith as elements of relationship. The deal is on paper in a workable way, and that should be good enough for most everyone. If someone wants it another way, they can negotiate at their peril–meaning, they can ask but may not receive.

The standardized agreement challenges the idea that there is a need for negotiation. If the other party sees the reasoning behind the agreement, they will acquiesce in its wisdom. Whatever the urges to do things differently, they are outweighed by the likelihood that no one is willing to make changes to the standard language. In short, a template that cannot be disturbed, a standard agreement too fragile to be changed, a template in a teacup.

A standard agreement is a template made into a standing offer. The added kicker is that the offer is take-it-or-leave-it. Negotiation isn’t part of the relationship. One might ask, is that the kind of relationship one is driving for in a technology transfer arrangement? Is the deal faceless, generic, pre-determined? Or is it random, anything goes? Or something else? Just what is it, socially, that a university licensing administrator thinks is going on? And what do they project to innovation partners?

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Grail is a bit much

Posted on September 27, 2010 by Gerald Barnett

I’ve been working through the Carolina Express license again, given all the attention folks are giving it. For the most part it’s another exclusive patent license, biased toward biotech conventions and assuming Bayh-Dole conventions, with the usual warts. What is worth noting?

It’s an exclusive patent license with sublicensing, sophisticated (or complicated, take your pick) terms with regard to sublicensing and royalties. Notably it includes a pipeline to all patents “covering the Invention”. It is limited on indemnification and insurance, includes pre-publication review for some reason, compulsory sublicensing, allows the university to terminate for non-practice of licensed rights, and includes two-way confidentiality.

In terms of scope, the university commits all its rights to an invention–including forward rights. This is notable in an exclusive license and a real advantage to a start up company as the scope is broader than just the patent family arising from a particular lab’s invention, or from a particular lab’s inventors working in the area of the invention. Future inventions elsewhere in the university that might read on the practice of the invention are included. Thus, a later invention at the university that gives rise to patent rights that would prevent the exploitation of the invention in a given embodiment, those rights are bound up in this license (“its use or manufacture”). Thus if the original invention was for a composition of matter, and a second lab figured out a better way of making that composition of matter, the patent rights in the second invention are within the scope of the exclusive license to the start up. One might expect the scope of an exclusive patent license to depend on the scope of the patent rights licensed, not the invention. However, this is very favorable from the licensee’s point of view.

In terms of consideration, the license is distinctive in its use of pre-valued shadow equity and stepped annuities, along with fixed royalty rates and sublicensing royalties. In a typical negotiation, there might be a trade off between equity and royalties, or other forms of consideration, such as royalty buy downs. While the shadow equity is very low–0.75% of various measures–it may be a challenge to calculate, and in any event it’s pretty easy to see one’s way around it. Sell the company to a successor before much has gone on.

The stepped annuities kick in at year 3 and step in year 6, with a higher rate for clinical products. The annuities are creditable against sales, which is a nice gesture, but also start to tax the company once things have progressed to year 3. If one wanted to be very favorable, one might ask $1000 up front and run strictly on net sales royalties. The stepped annuities guard to some extent against non-operation, but if development of Licensed Products is slow,then the annuities provide a kick in the pants. Given non-payment is a material breach, it will be essential that the company get financing (or sales) quickly. Any reasonable Series A round will not see the annuities as a significant expense. It’s not clear from the license whether an annuity is due for each product in development or just for the category if there’s a product under development in it. It’s also not clear whether the annuities are subject to the royalty stacking reductions applicable to the royalty rates, since they are creditable against those rates, one might think this is so.

The patent reimbursement is also rather different. The company is obligated to pay all the university’s patenting costs, but these aren’t due until 30 days after the first year of the agreement, and the university sets an upper limit–one of the few things that has to be negotiated. Patenting expenses can be pretty steep, so this may be where the company croaks, if the university has already run up a big bill before the company gets formed. One might otherwise aim for a structured reimbursement that recognizes this situation, or take more equity as an offset and eat the patent costs. After one year, patent expenses are invoiced monthly for payment. Monthly means a lot of pass-through paperwork for the university and company, and creates more work for everyone than does, say, quarterly invoicing. Anyway, it’s take it or take something else, so one might ask if it is worth dealing with.

We could wade through more of this. The confidential information provisions are broad rather than directed narrowly at patent application information, there’s no CREATE Act protection for exchanges that might result in new inventive subject matter, and export control might be triggered in ways the agreement doesn’t appear to contemplate and for which it has patched a weak indemnification rather than accepting its own compliance obligations.

In short there’s nothing really different about this agreement other than that it pre-states consideration blind of any inventions, offers a substantial pipeline to future inventions, and chooses some things for emphasis and others not, with a typical set of infelicities, omissions, and special demands.

Royalty rates of 1% and 2% are typical in some biotech realms, but these are low rates for other areas of patent licensing and should be attractive to any non-clinical company, so long as it is intending to sell. One might note that the agreement requires an effort to sell, so no point in using this agreement if all one wants to do is use the invention to make something else to sell.

Holes in the deal include failure of the university to require indemnification for inventors or students, who may not be employees. In the case of inventors they may end up being former employees. In the case of students, they may not be employees at all. As well, there appears to be some oddness with regard to claims by third parties of infringement based on the licensed rights. It doesn’t appear that would be the focus of risk, but there it is. One also might hesitate at the compulsory sublicensing and the termination clauses. Sublicenses survive regardless of standing with termination of the prime. That’s rather generous, but there are reasons to handle that differently. The university is exposed on patenting costs–it runs as a bank for a year, but obligation by the company to pay those costs doesn’t come due until after the first anniversary, so there’s time to terminate the deal and not owe anything. Pretty nice from a start up point of view. Some oddness as well having to do with infringement litigation, especially the bit that the attorney general apparently can pre-empt whatever, which might make these clauses unreliable.

What makes it a grail? I don’t know. It is a standing offer to companies with a university employee (or student) as founder, and if someone doesn’t take it, then one is back to negotiating. Given that the agreement appears unsuited to a lot of non-biotech start ups, where sale is not necessarily the goal of the founding invention, it would appear in those cases, it’s business as usual. I guess I’d rather have a focus on getting start up deals done rather than putting so much emphasis on a blind leading offer that’s largely unexceptional but may be unworkable.

What makes things interesting is that a public university has come out and published a patent license agreement, and more than that, made it a standing offer. If one takes it, then there’s no trade secret in the deal–everyone knows the financial terms. That’s pretty interesting. The license agreement is at points retentive and at others generous, and at others ambiguous. I don’t think I’d like someone in my lab taking the deal for an invention I made and they didn’t, especially if I didn’t care to be in cahoots with the start up. But if I wanted to run with something pre-approved, all that’s needed is a business plan. One wonders why even that.

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The Most Efficient License

Posted on September 27, 2010 by Gerald Barnett

The most efficient license is to take whatever is offered. The next most efficient is to dictate the terms and ignore everyone until someone takes your deal as is. Either way, the point of efficiency is not to be bothered. There are ways to get a deal done quickly, or effectively. Efficiency doesn’t lead one to how to do this. Efficiency in licensing is a cruddy starting point for building relationships. Still, it is good to be efficient. It’s just not as good as other things.

Yeah, efficient friendships, efficient idea creation, efficient prayer. Just get on with it. There’s something so utterly simplistic about it, it hurts. Why, if innovation could just be more efficient, then well it would be less wasteful, and it would be simple, and it would be manageable. From this one might believe that people want efficient movies, efficient novels, efficient church services, efficient play, efficient research, invention-making, invention-reporting, and especially efficient licensing for money, lots of money, money, money.

Right, uh-huh.

The problem for licensing lies in the dichotomy of efficiency vs. waste. Sure, value engineering is a good thing. Take unnecessary steps out of the sequence. Make work stations better designed. But all this depends on knowing what to do and how to do it and being in control from start to finish. Take buying a winning lottery ticket (since that’s what patent licensing largely is). One can be more efficient about buying tickets–having one’s money out, already knowing what sequence of numbers to choose. But the efficiency of winning is dictated by odds. One might improve one’s odds (such as perhaps buying a lot of tickets for a single drawing), but not one’s efficiency.

Or take third down efficiency in football. How often does a team convert a third down play into a new set of downs? One can look at “efficiency” here. Some teams, statistically, do it “better” than others. But even with a knowledge of efficiency, there’s no way to reason from the statistic to how to play the game. There’s not even a meaningful connection between all third down plays and getting another set of downs… it is just a correlation. Winning a game does not mean improving the efficiency on third down. One might win games by not getting to third downs very much at all, and doing more work on first and second down plays. The point is, one cannot reason from efficiency to anything meaningful about practice if one doesn’t control everything about practice. Efficiency at this point is just an accidental waste product of accounting statistics. A coach of a football team learns nothing from an efficiency measure for third down.

Where efficiency matters in football might be in the footwork. Learning a blocking stance or how to manage a five-step drop. There, it’s muscle memory. It’s repetition to eliminate bumblingness. Doing something again and again until it becomes efficient–if you are practicing properly, then what’s efficient is also potentially effective. Then again, one can be smooth as one might be with the footwork and be bowled over by someone with more strength or more speed or more determination. So much for being efficient. It’s only a piece of the action. It can provide an advantage, but only in the context of the overall situation. One might say, efficiency becomes important when you know what to do and are in complete control of doing it from start to finish. Like moving your feet, but not like feting your friends.

An efficient licensing activity has to know its goals and how to get there. But it cannot control the entire process. One has to decide whether waste is the biggest problem one has, and if so, whether the waste is in the organization’s response to a proposal for a licensing relationship, or in the relationship itself. If the latter, then setting a licensing agreement with fixed terms is a great way to do it. Take it or leave it. Like open source software licensing. But if the problem is in the organization, and how it forms relationships that are not commodity, then making things efficient has to do with review processes, delegation of authority, and priorities for forming relationships. It doesn’t have to do with the particular terms of the agreement.

If one isn’t going to take whatever is offered, and isn’t going to impose terms until one finds a taker, then the deal is inherently wasteful. But there are reasons for being wasteful, if by that we mean taking the time to be responsive to the needs in building a technology development relationship rather than conceiving of such relationships as commodity activities.

When I hear about a new, efficient licensing program, I’m looking to see teamwork, delegation of authority, great use of judgment, and ability to respond to the working needs of one’s business partners. I’m not looking to see another take-it-or-leave-it standard exclusive patent license trying to turn one’s research outputs into commodity relationships.

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Issues with Faculty Startups

Posted on September 25, 2010 by Gerald Barnett

Some years ago, we were asked, why not just take a set %–like 5%–of equity in research startups, and make it a standard patent license without any running royalties on sales? Wouldn’t that be even simpler? At the time, it was not easy for a lot of public universities to hold equity directly. And it’s not necessarily the best of things for them to do now, given institutional conflict of interest, problems in managing early stage equity portfolios, and issues related to registration rights, board seats, public disclosure, and the like. Now some of the equity rules have moderated for universities. Is it a good thing? Is it simpler?

Let’s say one wanted to go this direction. Why make it a set percentage of equity? Why not let the faculty founders set the percentage? After all, whatever the % that is set upfront, it can always be diluted in rounds of investment, assets can be transferred to another organization via sublicense, and other things that could shift value away from the university’s position. If the university is not going to be an active investor, this is just too easy to do. So one might reach the idea that one may as well just let faculty founders donate equity, or cash, as they see fit, when they see fit.

A couple of things come up. First, universities can’t pay patenting costs with equity in start ups. They need to see cash somewhere along the line. As soon as one adds in patent cost reimbursement, things start to get a lot less simple. There needs to be coordination of patent prosecution–what claims, what countries, what law firm, what oversight on billing, what supervision of inventor time?

Second, the thing about donation is, without consideration, there’s a license to the rights, but no contract that makes the license enforceable. So there needs to be something in the way of consideration.

We can take the cascade further. Why should the university hold the invention? Why control the prosecution? Why not let the company own the patent and control the prosecution directly? Wouldn’t that remove a layer of bureaucracy that doesn’t add any immediate value? At best, university ownership of the patent rights makes the university operate as a start up bank, fronting the money for patenting, hoping for repayment sometime downstream. If patenting goes to foreign national phase, the cost can run well into the hundreds of thousands.

Thus, one asks, why not *assign* the patent rights to the company? There are a couple of come-backs. Some states make it impossible by law to assign patent rights. And some folks believe that Bayh-Dole doesn’t allow it. To the first, there are ways to do this. To the second, Bayh-Dole allows assignment to any organization that has a primary function in managing inventions. So if the start up establishes such a function, then it can receive an assignment. One might also ask whether Bayh-Dole supersedes state law. If Bayh-Dole says that a patent right in a subject invention can be assigned, then perhaps it can, under federal law.

We can take it even further. Why worry about licenses, assignment, or stock subscription agreements? Why not let faculty inventor-founders to assign their rights directly to their start ups? Just skip the whole technology transfer crowd, administrative overhead, expenses, risks, spin, and bitterness?

Again, under Bayh-Dole, this can happen. Inventors can be delegated with the authority to elect to retain title on behalf of the university. The inventor can then on behalf of the university assign that election of title to the start up, on the condition that the start up has a primary function to manage the invention. The company then undertakes to follow the requirements of Bayh-Dole. It may companies wouldn’t want to follow those requirements–but then in leaving those obligations with the university, one can construe payments from the company in addition to consideration for the license, and repayment of patenting expenses, to be for the services associated with Bayh-Dole compliance. To my knowledge, no university charges its licensees for Bayh-Dole compliance services, nor prices out the cost of these services, nor recovers those costs as real expenses incidental to managing subject inventions. Something for university auditors to look into. What a money bag full of holes!

Where do we get to, other than that things are complicated in the general situation, and that one standard *license* doesn’t necessarily show up as effective as an assignment, or foregoing assignment altogether and letting inventors do this? First, that even if one university can put together an “express” license for their faculty start ups, it doesn’t necessarily translate into advantage for the next university or its inventors or its collaborators. Second, that there are even more direct ways to do things than taking ownership, filing patents, then licensing to someone who repays and accepts the standard requirements. Third, that there are reasons why a start up might want the relationship with the university–as a bank, for access to additional resources, for name recognition, for raising funds.

But through all of this, the discussion ignores the distinctive reasons why inventions arise in university research. That is, sponsored research intends beneficiaries other than the university. The leaders of this research are the faculty investigators, who may not be the inventors. The purpose of a start up is to further the goals of the research, not simply to make money for inventors or investors or the university. Why shouldn’t the faculty investigators have a role in what happens with IP? And who, if the investigators don’t care, ought to care next? Why shouldn’t that be the sponsors rather than the university? And if the university, why the technology transfer office rather deans or local community leaders?

Just thoughts here, trying to lay out the issues rather than simply rationalize one approach.

Posted in Bayh-Dole, Technology Transfer | Comments Off on Issues with Faculty Startups

Exclusive "Express" Start up Licenses

Posted on September 25, 2010 by Gerald Barnett

There’s some press chatter around about “express” licenses. Here and here and here.

We were using this sort of approach a decade ago to manage non-exclusive licensing programs for specific projects. The idea is, for a given technology base, use a stable agreement so everyone gets reasonable, non-discriminatory access to what you have. Open source licenses such as the BSD and GPL are obvious examples. Our variations allowed recipients to negotiate from the standard agreement 1) to meet their local conditions 2) to offer something back to the project and 3) to improve the standard relationship for everyone. A take-it-or-leave-it approach doesn’t do this, and is only more efficient in that you don’t care about anticipating early relationships and only will deal with folks willing to take what you are offering.

The recent efforts, however, concern a take-it-or-leave-it approach to exclusive licensing, in the context of start up ventures, and appear to be directed at ventures started by faculty inventors as founders. The virtue that’s claimed is that one license will serve the needs of all, and that this is more efficient than forming a mutually negotiated arrangement. This is billed in press releases as a major advance. For the life of me, I can’t see how.

If university affiliated start ups were all the same, with the same technology needs, funding requirements, operating models, and markets, then perhaps one would consider standardizing an exclusive licensing relationship. Even then, why would one make a template standard into a non-negotiable? One way to try to do this is to make the deal so bland, so devoid of obligation, that most anyone will take it. I don’t think even this is possible.

It is as if the technology transfer folks construe company formation as their production activity, and inventions are some generic commodity that is shoveled out in lump quantities. The only issue is price and that’s set as a low-ball royalty rate.

Put another way. The criticism of university management of patents is that their programs are overall not living up to their claims and are generally unproductive. I am not saying that’s a legitimate criticism (for another time). The claim is, it takes too long to get a license. So rather than put more resources at licensing relationships, apparently the response to the criticism is to withdraw to a standard license, as if eliminating negotiation is the same thing as speeding up coming to agreement. Then, make a virtue of it.

An exclusive patent license forms a significant relationship. That relationship is more than a thing of commodity price, like buying a refrigerator, or even a car. One must have the mind of a bureaucrat to think of one’s invention portfolio management as a production activity, where the primary effort is to take costs out of the system–even when the problem is that one for the most part has no productivity. “Hey, we are not producing–let’s take some costs out of the system and see if we can step up our efficiency of not producing!” What might that say about how such organizations view as their responsibilities with regard to research inventions?

When one looks at exclusive licenses to start companies, there a plenty of things to consider. It isn’t something simplistic. Among other things, one needs to look at the bundle of rights (not just patent rights), background rights, know how, rights to future inventions, the role of faculty inventors in the company, supervision of graduate students, stock subscription arrangements, control of patent prosecution, company diligence, scope of rights, handling of infringement, remedies for breach, insurance and risk mitigation, publication review, confidential information, management of any Bayh-Dole obligations, company operating model and flexibility, reservation of rights for education and research. Is the problem of slow university spin out formation really making fixed terms for each of these matters (and more), and then asking everyone to accept them? Or is it having the smarts, focus, and review to anticipate and work through these expeditiously? That is, is an express license a decision not to provide adequate resources, or is it a great advance in forming spin out relationships?

Let’s look at it another way. These express licenses are directed at a university’s own inventors who wish to start a company. Apparently they are not offered to others. But there is an easy work around–just have the inventors start the company, take the express license, and transfer the company to the entrepreneurs and companies that may want it. If the express agreement prevents this transfer, or forces a negotiation, then it’s a poison pill. All it is doing is postponing the substantive negotiation, presumably to a point where the company has greater dependency on the licensed rights. A university might be thinking, if we can get the faculty inventors hooked on a seemingly favorable standard license, then we can bully things up when the inventors realize they need some responsiveness to some of all those other matters that are set in stone in the express deal.

Take it further. Faculty start ups often don’t have significant investment out of the gate. They have seed funding, perhaps, but the series A financing is yet to come. That’s where investors take a hard look at what a company has, and how their investment is going to work. If there’s a license for core technology, the investors have to look at how that license operates, and whether it is worth getting involved. The license may represent an asset (a relationship with a solid university partner) or a liability (an uncertain or risky or unworkable set of terms). Should one renegotiate the license? Design around the technology? Or find something better to invest in? The university expectation must be that the license is perfect for all time, and the investors in series A, like the faculty inventor-founders, should take it or leave it.

After all, if there is no negotiation before the license deal, why should there be after it is signed? And if there can be negotiation after the deal is signed, why not before? Perhaps you get the picture now, if it wasn’t obvious from the outset.

The upshot of this bit of excitement about express licensing is that it’s apparent at least some universities construe patent licensing as a production activity. They see their job to take costs out of the system. To flip it around, they see forming a negotiated relationship as a waste of time. For them, this may indeed be true. It’s just a question of whether that’s what where one wants to be.

There are ways to rationalize an express license approach. That by setting the terms up front, all university inventors get the same deal. That by making a standard deal, all terms are always public. That by having a set of terms up front, investors can decide on the value without having to ask. That by making the terms so sweet and bland, no one really cares to object.

Let’s look at fairness. Treating everyone the same makes sense if all university inventors have the same technology, in the same industry, at the same point in time, with the same operating model. But they in general don’t. So the moment there are substantive differences, a uniform set of terms creates disparities. The deals then are not consistent in impact or support or responsiveness. They are only administratively the same. They are administratively convenient. The deals are fair as long as the next start up situation looks like the last one. It’s just not going to be fair in general.

Let’s differentiate express licensing from other approaches. An express license is not merely publishing a preferred template for exclusive licensing to start ups. Nor is it starting with a template and versioning it for each start up as it presents. Nor is it the same thing as setting up a public auction open to all. Nor is it having multiple templates from which an inventor-entrepreneur may choose. Nor is it establishing a core set of terms from which negotiation can vary, or not, depending on the situation.

Rather, an express license is a adhesion contract–take it without negotiation. It assumes that the term that matters is the royalty rate, and if that’s low enough, all the other matters can be endured. If all an exclusive patent license to a start up means to a university is price, then an express license says, “we don’t even care about that.” Of course, even a pre-set royalty rate by itself is meaningless–since it is the royalty base that matters, as well as the incentives for the company to bring its activity within this base. It is the full relationship that provides those incentives, not simply a % of sales, if there even would be sales as the primary use to which the start up puts a licensed invention.

Here is a positive point. An express license acts as a backdoor university inventor choice policy. The inventors can start a company and take the deal, or leave the invention with the tech transfer office to try to license to industry. May as well put that in policy. What the express license says is: we will file a patent, pay the costs, so long as you take this deal and repay those costs along with taking these other standard, as bland as we can make them obligations.

If the university is not going to file the patent, or is not going to offer the express license to all faculty inventor-founders, then it’s not really much of an express license. It’s just the deal for those that are willing to take it. That’s who you offer it to. Everyone else, if they wouldn’t take the deal, but want something else, you don’t offer it to. That’s pretty much what one program says about their express license. Just a different form of selectivity. So everyone gets the same deal, but only if it is offered to them. But if the deal is offered to all faculty inventor-founders, then it does represent something of a commitment to file patent applications.

Why claim an invention and then not file? Most university patent policies say, at that point, you have to hand the rights back to the inventors, or in the case of Bayh-Dole, to the government. One might think, what an express license does is shift where the unfairness to the faculty inventor-founders might come into play.

One might think of other ways of making relationships between a university and a start up work better. This, just by way of context. One way might be to not claim the invention from the faculty inventors in the first place. Another might be to let the faculty inventors propose the deal, as that will reflect on their commitment to their colleagues rather than their resistance to university administrator self-interest. A third might be to have standard template agreements with a number of invention management firms, so that if a university inventor-founder chooses to work with one of those firms, the university part of the deal is largely in place. But in such circumstances, no one would have to force the inventor-founder to use such a firm, and no one need force the firm to take the template without negotiation. That is, then it’s not an express license. It’s just building relationships before you need them.

Think of that–rather than trying to do a deal fast each time as if it is a deal with unknowns who will take your offer, why not build relationships with organizations that you anticipate will work with you in the future–companies, foundations, venture funds, incubators, and the like? For that matter, why not with one’s own faculty? Why should those relationships be dictated by policy rather than negotiation? And why should the negotiation always trail the opportunity? And why then should it be a virtue to trail the negotiation, but with a take-it-or-leave-it deal to try to make that trailing not be so dramatic?

One might also consider committing the resources necessary to do a great job of managing start up dynamics. That is not trivial. It is not something to simply factor in among a bunch of other things you hold a tech transfer program to. Oh, also do start ups. It takes a ton of work, hiring folks with some pretty special skills, paying for it, staying attentive to progress, and being patient on the results. Signing a bunch of deals with start ups doesn’t the start ups prosper or that the university-side work is done when the ink is dry.

One may also go further (back, actually, in time) and get the start up activity out of the university altogether. This is particularly important for public universities. Their regulatory and review systems are generally not set up for start ups. There’s not much point in trying to navigate all the bureaucracy that’s available to be misapplied and distorted and delayed and gamed politically. An express license must find a pre-negotiated path through the bureaucracy. It’s not so much about pre-negotiating with the *start up* but rather with all the review thumbs in the pie that otherwise create uncertainty about how quickly a deal can move, and what kind of jerking around of terms and conditions might show up when things come back from legal counsel or risk management or senior administration.

So one might make an express license be the *assignment* of the patent position (university’s or inventor’s) to an outboard organization, like a research foundation or other invention management firm, and let the foundation negotiate the terms with the start up, outside of the regulatory misfit within the university. There one would have a simple university deal–this patent right to the foundation (or other management firm) in exchange for this sharing of proceeds, after deduction of costs, with this kind of diligence. Those sorts of arrangements have been in place for years. The faculty inventor-founders in those cases negotiate with someone other than their employer, or with the state. Whether it makes sense for a research foundation to make a standard, can’t negotiate offer to university faculty-founders returns us to whether a standard offer reflects common conditions or is just a convenience for not having to think, anticipate, and support.

For all that, one could split licensed rights into reserved and commercial rights. For internal use rights (make/have made/use), the university could offer a general public non-exclusive license to all users in the state at no charge. For some nominal fee, like $1000, companies could register their interest in obtaining rights to sell. That would mean *no formalities* to get going. If a start up then wanted the right to sell, or the exclusive right to sell, that would be the focus of any negotiation. But the company could be operational any time it wanted. Since most university start ups are not going to be selling product right away, and frequently when they do, the product they create does not benefit from the rights originally licensed, the approach means anyone can start up based on research discoveries, and if they don’t need to sell, never have to negotiate a license.

All this means for the university is that it doesn’t have a way to extract substantial licensing payments from the company. But then, the express licensing advocates justify their approach by saying it’s not about the money. So why should it matter how it is not about the money?

There are reasons to get on with improving university involvement in technology transfer. Improving licensing capability is part of it. Express licensing for non-exclusive situations is part of it.

However, express meaning take-it-or-leave-it for university faculty inventor-founder companies isn’t going to hold up generally. In practice, it will narrow to a particular class of start ups (like biotech ones aiming to sell out later) with a particular set of investors (who see the deal as known and sweet) and not with others. At that point, what was claimed as general purpose will in practice be more along the lines of sweetheart transactions for one’s friends, and something else for those who aren’t. That is, repeating deals that one has done in the past by working with partners who know those deals and are willing to repeat them.

So let’s see how it goes, as faculty inventor-founders taking the express deal look for funding, and whether their companies have to renegotiate the license later, or design around what was licensed, or use their inventions inside the company and sell something else, outside the take-it-or-leave-it royalty base. The way I see it, express exclusive licenses will have to be offered to everyone, not just faculty, and for all that, will have to permit negotiation ahead of the deal and after it, and at that point, we are back to where we are now.

Posted in Technology Transfer | Comments Off on Exclusive "Express" Start up Licenses

The Room at the Bottom

Posted on September 23, 2010 by Gerald Barnett

Feynman made a famous talk on studying the small things of physics, arguing there was “plenty of the room at the bottom” for research. The same may be true for university research and technology transfer relative to markets, industry, and commercial potential. I will put it in the form of a story.

Some time in the late 1960s or early 1970s, research policy vocabulary switched from “research intensity” to “high tech research”. University research moved upmarket, to inquiry requiring expensive equipment, using exotic materials, in custom labs. Status was given to supercomputers and supercolliders. Policy aimed to position research upmarket from existing projects, providing a sort of premium science that could be done only with a substantial investment in technology. Military research explored neutron bombs while medicine sought to create artificial hearts (sort of), artificial ears (quite well) and artificial retinas (still working on that one). Engineering pursued nanotechnology and bioengineering. Physics worked on nuclear energy. Premium science, if we might call it that, comes from centers of excellence put together to justify expensive instrumentation, lab facilities, and computation technology, which in turn provides something of a monopoly position for research that can only be performed if you have it, and that in turn gives one a national competitive advantage over nations that lack that instrumentation, those lab facilities, that computation technology.

The great challenge is whether the inventions that arise in such national monopolistic labs actually matter to the lines of development taken by industry or community. This is the challenge to technology transfer that positions for premium science. One has to take inventions in high technology and construct a scenario in which these get used. This is the great claim of federal policy. It is a grand hope. It is a worthy hope.

Not only that, these inventions have to get used so that patents on them generate licensing income, and that licensing income then is used as a proxy for success. In other places, I’ve worked through how it’s easy to slip from use of invention to patent arbitrage and assertion to generate money without doing much of any transfer or seeing research inventions actually used, and still make money, and still claim success.

The roadmaps for technology products tend to move upmarket—more advanced features, better cost engineering, premium price points. The move in US research aimed to support leadership positions. Universities put emphasis on fundamental research that was much more tightly bound to the technologies of inquiry. The change might be characterized as the move from the International Geophysical Year in 1957-58, which aimed to get scientists out observing, and the efforts of the 1960s to build the Saturn V rocket, to the emphasis on super computers, networks, biotech, and the like. Science transmogrified with the increase in government funding and a shift from international science to national technology development.

University technology transfer comes into this picture in the 1980s finding its source of inventions in high tech science–mostly biotech–and its job to move this premium science to premium industry positions. It can do this because there is a speculative investment bubble going in biotech at the same time, and technology transfer planners conflate the bubble with their patent licensing approach. It appears that they can make the approach systematic (for efficiency) and apply it to all fields (for scale) and implement it in policy (to be fair and consistent) and implement across all institutions (to make it standard). That’s pretty much what has happened. To buy into it means to accept that the little biotech bubble of 1980 to 1992, with a VC move into biotech from semiconductors and an IPO market, represents an instance of a general case of standardization rather than an instance of a local case of lucky adaptation.

University technology transfer offices seeking to take premium science into premium market positions with patent rights have had to deal with two key features of this policy of premium science. First, tech transfer must deal with the market leaders who are able to support their own research endeavors. The Microsofts, Ciscos, HPs, Intels, IBMs, and Xeroxs, and also the Johnson & Johnsons, Bristol Meyers Squibbs, and more recently the Amgens and Genentechs. These companies expect collaboration not trolling. University IP is supposed to be like a power up, not a tar pit or ghost. University technology transfer models have had a tough time with this interface. They truly don’t want to be a tar pit or ghost, but they also want industry leaders to pay for inventions in premium science as if these inventions are not in an existing roadmap, as if industry wouldn’t have known or gotten there eventually without the university inventions. But this is largely not the case. Most premium science inventions are simply in the halo of upmarket inventions that companies paw through routinely looking for something really distinctive, and on which they cross-license in bundles to focus competitive assets on other things, such as distribution channels, service, brand, and the like. So outside of a local set of biotech relationships, especially in 1980 – 1992, universities have had a rough time licensing premium science inventions to industry leaders.

Second, technology transfer offices, in part as they find it rough going licensing to industry leaders, have shifted toward start ups, especially those with venture capital investors. Some decades ago, venture capital meant mounting an effort to go public and define a new industry or revolutionize an existing one with a roll up play or a transformative technology. In the past decade, however, things have changed. VC funds now spend more time later in the life of companies, working a new product onto a mainstream technology roadmap, just a few product revision cycles ahead, to be enough of a nuisance or point of leverage that one can get acquired and cash out the investment. It may be that at that point, the technology that led the investment is abandoned.

Neither of these situations–dealing premium science to industry leaders, or shopping that science to venture backed startups– matches up well with the historical position of the university research foundation, which routinely acquired patent rights from independent inventors, as in the days of the growth of television, or the electrical industry, or automobiles. The foundation approach is a legacy treatment of research IP, and it would make sense for universities to try to adopt it when Bayh-Dole came into effect.

The great misfortune for everyone is that folks adopted it right when there was a speculative IP bubble in biotech and folks mistook that local circumstance, which ran for just over a decade, for the appropriateness of their operating model. Rather than attribute their licensing success to the matching of a research opportunity to a special state of a special market, the tech transfer officers believed they had found a generally effective strategy and sought to establish the strategy in IP policies and expand operations to include all other areas of research activity.

Thus, university technology transfer offices were remarkably ill prepared for the software speculative bubble that took place alongside the biotech bubble, the later internet investment bubble from 1995 to 2002, or the nanotech bubble, which universities inadvertently helped to wash away before it got established, and the energy and cleantech investment bubbles we are seeing form today. Instead, universities have for the most part stuck with biotech and biomedical, and with their operating model to license to industry leaders or startups. If there is a change at all it is a move to adopt start up efforts over conventional patent licensing, and there to seek out a venture capital model that has been largely not active in early stage technology investment for a decade. Open innovation, crowd sourcing, cross-licensing, and standards are not part of the routine operations of university technology transfer offices.

Which is odd. Since one would think that universities would have the most to gain from these models, and the least to lose for developing them. We find instead that university technology transfer offices are among the most conservative of all IP practices that touch on research matters. For offices publicly dedicated to innovation, they present as remarkably incapable of it in their own approaches to their work.

We find then, that upmarket directed high tech inventions generally wait for industry roadmaps, as a sort of powerup. That is, research inventions do not for the most part start something, but rather are there as needed as work on a roadmap sweeps by.

The challenge in either of these two approaches is that they start from high tech positions—that is, beyond the premium margin positioning of existing industry product. The idea is, the inventions with the greatest commercial potential will be upmarket, will require significant development, and will therefore benefit from a monopoly position afforded by an exclusive patent license. That is, to be successful, not only do high tech inventions have to be on a roadmap or capable of starting a premium roadmap, they also have to work against competitive pressures at the high end. In essence, they aim to compete with the existing best money positions the leading companies have.

The technology transfer rationale is simple: spend resources on the best inventions with the best chance of making the most money through patent licensing, and define that as success.

We might ask, are there other places to look for innovation, other than this premium position? For instance, Clayton Christensen in The Innovator’s Dilemma describes situations in which innovation comes from beneath, from products that perform less well than those at the premium position, but which carry other traits that are desired, and therefore are able to displace the premium products. These innovations are not the best technology with the best rights with the best margins. They do not present as beyond the cutting edge. Rather, they present as good enough, with the prospect of getting better. The netbook is a recent instance. But so, in its way, is Facebook. As technology, there is nothing to it. As a place for research, at the outset, there was none. Facebook did not benefit for government-funded high tech university research. It was low tech, ignored, created by students—dropout undergraduates no less—at the same institution that brought us Microsoft 30 years previously, also started by dropout undergraduates.

Eric von Hippel has set out how innovation in various industries varies in its sources along a value chain. Sometimes innovation happens with suppliers, sometimes with the manufacturer, sometimes with distributors and value added resellers, and sometimes downstream with users, post acquisition. It may then be striking to see that most university research supported by industry is with manufacturers, even where they are not historically where innovation in value chains has come about. One might point to Amazon, an on-line retailer, producing an early e-book reader, the Kindle, which has come to dominate a technology category and given position to technologies that advance displays suited to reading books. That is, moving to a premium point in technology may come about through other routes than research inventions and their patents.

We can then point to a class of innovation at the low end, not necessarily low technology, but innovation created by other than leading manufacturers, off of their premium roadmaps, in areas where exclusion by patent plays no particular role in adding value, but which may provide a slight advantage in getting something into play, relative to the interests of the leading manufacturers and their road maps. In essence, the patent plays a defensive role relative to premium positioning—while allowing others following a similar pathway to practice—even the market leaders, if they choose to create products that compete with their own upmarket offerings.

In the low end, or just good enough, area, technology transfer has a decidedly different role. Here, the selection is not for inventions that support patent licensing with commercial potential at premium positions, but rather those inventions that have the capability of working underneath and in different price models from the existing high end. In this area, one finds that while with reference to the high end products the work starts as low tech, one quickly may find that to improve performance, research is necessary—often basic research, off the beaten path, that presents challenges every bit as important to advancing the state of the art as those presented in high tech research settings. It’s just that it’s not seen as high tech, and often does not receive nearly the governmental or industry support.

Take for instance the Open 3d Printing project. It has focused on how to 3d print with simple materials. How to go back in time, picking up on techniques and knowledge that were abandoned years ago–in some cases centuries–but that become important once again in the context of 3d printing. Looking for simple materials does not put one on the ground for patentable inventions in new compositions of matter. It is decidedly low tech work, as far as premium science goes. And yet it approaches scientific and engineering questions that are genuine, challenging, and worthy of research intensity. It is just that no one in technology transfer can really afford to care because the project does not generate patentable inventions suggesting a premium upmarket monopoly. Instead, the market appears to be selling design files for interlocking love hearts for Valentine’s day, something that doesn’t look like much of a commercial licensing opportunity for patent officers.

Yet Open 3d Printing is positioned in the midst of a renaissance of local fabrication, akin to what happened when electricity changed the economy of scale for large factories, and when desktop computers allowed local software creation without dependency on mainframe computers. The innovation happening in the 3d printing practice community does not show up as a major market, and does not show up as premium science, and yet it appears to have tremendous potential to transform community, industry, and research roadmaps.

Can 3d printing allow us to print houses? Can we use 3d imaging to extract and print a digitally accurate reproduction of a fossil or archeological artifact without ever digging the thing out of the rock? Can we print multi-layered materials like nacre?

The thought then can be summarized that there needs to be technology transfer services operating at the low end, the just good enough to better efforts, and not only at or beyond the high end of existing markets. We need technology transfer where there are no markets at present, and may not be markets in the future. How patents and licensing and the like play out at the low end would appear to be remarkably different from their high end counterparts. It is a primary opportunity for universities to occupy this arena with policies and resources. If they don’t, then federal policy needs to be modified to give incentives to individuals, foundations, and companies to be active here. It just may be that the low end is a better driver of innovation, economic development, and new jobs than premium science and upscale, high margin, monopolistic products.

There is room at the bottom. That’s where a lot of the new and interesting initiatives in community live. That’s where a kind of expert inquiry is productive–much more like the inquiry of agricultural extension or research intensity than the inquiry of high tech premium research for premium market positions. This sort of engagement, a research-with-others that is both collaborative and competitive, is an important contributor to an overall policy of university innovation. In the room at the bottom, the university as corporation is not the start of each new thing, nor is an invention the key marker of opportunity, nor is the patent right the motivation for investment. The inventions are still there, the patents may be obtained, but the practices of innovation around them are dramatically different from that of the standard model of university licensing, the linear model of research to product, and the idea that science-based invention is the necessary start of community innovation.

One might say, the room at the bottom is where all the objectives–and the greatest potential–of Bayh-Dole, not just the narrow version of commercialization of high end products for lots of patent licensing income which rarely happens, are met.

Posted in 3D Printing, Bayh-Dole, Technology Transfer | 1 Comment

The Meat of It

Posted on September 13, 2010 by Gerald Barnett

As I reread the 40+ university amicus brief, I tried to understand what would cause such mass hysteria among such a usually undemonstrative group. Clearly, they believe something they do is under attack, or Bayh-Dole is, and they got out the tabors and pitchforks to stop it. Well, actually, just lawyers and money. But it sounds better to think of the lawyers as tabors and pitchforks.

Here is what I think is the meat of the matter: what of the personal right of a future inventor to obligate rights to his or her personal future interest before there is any federal funding?

The folks want to worry this. It’s not actually relevant to the Stanford v. Roche case, because the fact set there doesn’t support it. But the case apparently provides a platform to try to deal with this issue.

The tabors and pitchforks want to construe Bayh-Dole as an invent for hire statute and want federal funding conditions to cancel any outstanding agreements pertaining to university ownership. These are not represented as policy arguments on their own merits so much as patches for what is viewed as a dangerous gray area of Bayh-Dole. That is, they are fixes to a perceived problem. Tabors and pitchforks are not asked to evaluate the fixes on their own terms as public policy. That’s what I have been pointing out: these are bad public policy, bad university practice policy, bad implementation of patent policy. And these don’t fix the problem. And it’s not a problem. And this is the wrong place to be so wrong about it anyway. Whew.

Posted in Bayh-Dole, IP, Sponsored Research, Technology Transfer | Comments Off on The Meat of It