[dvd-discuss] More On State Sovereignty and Senate Bill 2031, Leahy's "IP" ProtectionRestoration Act

[Seth Johnson <seth.johnson(at)realmeasures.dyndns.org>]

(A reply, from Fave Farber's Interesting People list,
farber@cis.upenn.edu -- Seth)

-------- Original Message --------
Date: Mon, 08 Apr 2002 19:10:08 -0400
From: Dave Farber <dave@farber.net>


------ Forwarded Message
From: "Jonathan S. Shapiro" <shap@eros-os.org>
Date: 08 Apr 2002 17:45:24 -0400
To: farber@cis.upenn.edu
Cc: darren.lacey@jhu.edu


Dave:

I'ld like to offer a small correction to the previous note
concerning Bayh-Dole and share my own impressions as someone
who is dealing with the consequences of the law.

First, it is telling that Seth Johnson's note doesn't bother
to give a URL for the law itself. Johnson is flat wrong on
some important points and he doesn't really want his readers
to go read the law to find that out. Bayh-Dole is officially
known as "37 CFR 401". The text of the law can be found at:

    http://www.iedison.gov/37cfr401.html

A reasonably clear and non-partisan description of the
origins of the law and the current state of the regulations
was created by the Council on Government Relations (a
university-driven group). Their note can be found at:

    http://www.cogr.edu/bayh-dole.htm

There is a nice set of bullets about midway down explaining
the law in English.

In summary: Bayh Dole was enacted because the government
wasn't generating value from its patents. If you think
*universities* are bad at patent management, imagine how bad
the government is at it. The government goal was to increase
technology transfer. They clearly succeeded. It is not clear
whether Bayh-Dole was the best way to do it. Some of the
evidence gathered by policy researchers that its effects
have been bad both for technology and for universities.


Contrary to what Seth Johnson says, Bayh-Dole does NOT give
the industry exclusive licensing rights to Federally funded
research. The act does three things:

  1. It says that Universities may *elect* to retain title
(i.e. to own) the patent rights on government-funded
inventions.
  2. It requires the universities to make an explicit
decision: if the universities choose to own the rights, then
they *must* patent.
  3. If the university fails to patent, the government
agency *may* patent in the name of the United States.

Item (3), in practice, almost always results in the
technology ending up in the public domain.

While a University is free to set any licensing terms it
wants on patents -- including issuing exclusive licenses --
it is not required to do exclusive licensing. Much depends
on the specific university. The catch lies in Item (2) --
since the universities don't have a budget for patent filing
they tend to get this funding from outside parties, which
tends to lead them to make exclusive licensing deals. While
they *can* walk away, most universities don't. They view the
filing as an opportunity to pull in money from licensees.
This is purely a numbers game -- more patents is better and
the system tends not to examine the relative value of the
patents.



In practice, the Bayh-Dole act encourages Universities to be
greedy-stupid. There are two ways to set up a technology
transfer office:

  1. Office must be self-funding.
  2. Office is underwritten by university with goal of
long-term returns

Most universities, including Johns Hopkins, have gone the
first route. Instead of looking for long-term returns on
research, a self-funding technology transfer office seeks
immediate payout. When a company wants to license the
patent, the self-funding office looks for a flat fee and
possibly a per-copy royalty stream. Generally, the license
is exclusive, because if it isn't exclusive it has no value
(Universities, in practice, do not enforce patents). The
catch? The early value of the patent is generally pretty low
-- it is an unproven technology. A patent that might
eventually be worth millions goes for a one time charge that
is generally tens of thousands of dollars.

The self-funding technology transfer office has a strong
disincentive to patent: filing a patent costs money, and the
self-funding office doesn't have any. This tends to lead to
a situation in which the licensing company is effectively
paying for the filing, which tends to reinforce the
short-term world view of these offices. In order to get the
benefit of the addition to their operating budget, the
University will often license patents at very low prices on
a flat fee basis -- giving up potentially massive returns in
the process. As I say above, this is a numbers game: more
patents means more money. Quantity, rather than quality,
becomes a goal.

A big problem here is that this approach balkanizes the
intellectual property. Once a technology is exclusively
licensed, it cannot be licensed again. Suppose my colleague
comes up with something clever and the university licenses
it out. Two years later I come up with some new application
and we decide we want to do something with it. We can't,
because the previous license was exclusive. This is quite
bad.


A few universities, including MIT (though MIT has gone back
and forth on this) take the long view: they will often
license a patent in return for an equity stake in a new
company, hoping that the company will pay off. These deals
are usually a trade-off: the new company gets a time-limited
exclusivity with an option to extend or some kind of a
flow-through deal on third-party patent revenues. The basic
idea here is that the University is making an investment in
the company (the investment is the cost of the patent
filing), but builds in some means for recovery. The reason
to play is that the university is, in effect, getting
"founder shares" that have potentially large pay-off.
Further, by avoiding purely exclusive licenses, the
university retains the ability to spin out companies that
combine the work of several people.

The long-term technology transfer office requires a team
that is very well educated and can make good decisions about
which patents to file. This is very very hard to do, so
patenting by the University doesn't happen unless some
faculty member wants to pursue an invention. While equity
stakes can be done, the university is invariably a minority
shareholder, which leads to SEC complications for the
startup company. At the end of the day this becomes so
complicated that many universities simply let their faculty
run with things at no charge and rely on donations back to
the University endowment -- no contract, just an expectation
of reasonable behavior. It works surprisingly well for MIT.
Why? The professors gain (in their academic roles) from
those donations.


The results for the University: MIT and other long-view tech
transfer groups do very well. Short-view groups do really
badly. Hopkins, for example, has made essentially no income
for the Engineering school from patents (the medical school
has a long-view tech transfer group, and does quite well).
There is talk of closing the current technology transfer
office and starting over. I don't know how serious that is,
but the revenue results from the office have not been very
good.


As a current university faculty member, my experience with
Bayh-Dole has been mixed. In practice, the person most
likely to take University research and transition it into
industry successfully is the principal investigator (the
faculty member) who creates it -- other scenarios are
possible and sometimes successful, but this is the most
common one. As an inventor, I find that I must now pay my
University for a license to technology that I created that
all of you (the taxpayers) paid for. This is somewhat
ridiculous. Further, I am competing with other companies for
the right to use my own work.

Fortunately, I am dealing with a technology transfer office
that is very well intentioned. It is also fairly young, and
doesn't have a lot of experience with software startups.
Some of what the tech transfer office wants to do fits the
pattern of other businesses, but isn't very workable for a
software company. This is mostly an education problem, and
we are working through the issues.

The one thing operating in my favor is that software
licensing is so bloody complicated. There are no general
guides and one deal does not tend to create a good precedent
for the next one. This leads to a situation where I have a
lot of input into how the deal is getting structured. At the
end of the day the most frustrating thing to me personally
is that the University (and also my lab) will lose if the
tech transfer office follows the self-funding approach of
one time fees.

In fact, I find myself frequently taking the University's
side in order to get a better deal to happen. Hopkins, as a
rule, is more concerned with patent liability than with
income. If I build a strong company, I want the university
(and my department and lab) to benefit. Hopkins has a
self-funded tech transfer office, so this goes against the
grain. At the end of the day, I may be better able to
achieve benefit for the university by not patenting anything
and simply reserving an equity stake (or some comparable
arrangement) for the university in order to bypass the
short-term influence of the self-funding arrangement. We
will have to see how it goes.

In software, at least, the results for the country would
probably be better if nothing was patentable. Software
companies don't need patents to succeed. The key to success
in a software company is visible, continuous leadership on a
technology.


For some faculty members the entire Bayh-Dole arrangement
creates tremendous anger. A few take steps to subvert the
process intentionally. One favorite is to publish in order
to prevent patenting. This can happen for several reasons:

1. The inventor may feel that the taxpayer (including
themselves) is getting ripped off.
2. The inventor may see future applications, and may want to
prevent the technology from getting trapped in a single
licensee. Publication becomes a way to trump bad decision
making in the tech transfer office.
3. The inventor may want to use it themselves.
4. The inventor may have built on prior work that they own,
and may not wish to give the university exclusive rights
over a derivative work.


As a taxpayer, you have already paid for this work, and you
are being deprived the use of the results. If I came to your
door and said to you "Here is the deal: you contribute $5
and I'll give the rights to the results to somebody else",
would you take the deal? Advocates of the law will tell you
"if investors cannot get exclusivity, they won't invest in
the next step of the technology development." This is flat
wrong. Investors invest in lots of things that are not
patentable at all! They do examine the investments more
closely when exclusivity is not available. This is probably
a *good* thing.


At the end of the day, one part of the Bayh-Dole outcome
*is* clear. Universities are not in the intellectual
property management business. They are in the education and
basic research business. Basic research does not lead
directly to products. Over the long haul, the effect of
Bayh-Dole is to encourage universities to foster short term
(and therefore more readily commercialized) research. This
creates a basic conflict of commitment, and it conflicts
with the open atmosphere that has made our university system
successful. It has worked to date because universities have
a tradition of openness and academic traditions take a long
time to change.

However, if you want to understand "how will that
institution/person behave in the future", you need only ask:
"what are the incentives?" People and institutions get it
wrong, but taken overall they try to act in ways that are
good for them (this is why policy has impact). Over time,
the effect of Bayh-Dole will be to move universities out of
the research business and into the technology business.

On the whole, this is bad for the country and the world. One
by one we have lost all of the institutions that created the
basic science of the 20th century. Some of that basic
research had noticeable impact: telephony (Bell), economics
(Nash, Princeton), electronics (various), medicine
(various). Universities will be the last to go, but if
Bayh-Dole and similar policies remain in force the
universities will get out of the basic research business.

Which leaves us to ask: who will do the basic science that
will drive the innovations of the next century?


Jonathan S. Shapiro
Assistant Professor, Department of Computer Science
Johns Hopkins University



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