Broken Symmetry

Flogging Tech Transfer? A Reply to David Schwartz

Tech Transfer Tactics provides a valuable service to the group of professionals active in the field, and I have often learned about something new from its pages. It's rare that the editor David Schwartz weighs in with any commentary, so I took a little extra time to digest what he had to say about a recent editorial piece in USA Today, titled "Lucrative inventions pit scientists against universities." The USA Today piece describes an internecine conflict, which is apparently still ongoing, between former faculty-member Renee Kaswan and the University of Georgia over the rights to a successful drug, which Kaswan invented while at the university.

Even without personal knowledge of Kaswan's case, I think it safe to say that something went wrong with the system for both her and the University of Georgia in this instance. Given that, I have had trouble seeing how or why David Schwartz should take exception to the fact that USA Today is calling attention to her case. If universities are doing right by their faculty, then there is nothing to worry about, and people like Dr. Kaswan are not likely to get much traction in arguing that faculty are not getting their due from universities. I certainly don't understand how Mr. Schwartz came to the conclusion that the piece was a "mass media flogging.":

I’m a little guy on the media stage. This e-zine will reach about 200,000 research commercialization professionals around the world — not millions. But I hope I reach a few that will make the effort to set things right, or balance this scorecard just a little bit. Tech transfer professionals have a hard enough job as it is, taking flack from both administrators and innovators while attempting to navigate valuable inventions through a maze of personal, political, legal, and financial hurdles. They are largely unheralded for this yeoman’s work, and don’t complain much about it. But damn it, they don’t deserve to be publicly flogged for their tireless work to bring technological solutions to global problems and help critical research from their labs become useful to the public, rather than sitting in a researcher’s beaker and lab notes.

Now it's true that a good journalist would have taken the time to get the other side to the story here. And it's true that tech transfer professionals have a hard job, and don't get enough recognition for the important work that they do. But I just don't see how this article could be the scourge that Mr. Schwartz makes it out to be. If anything, I think it's useful for calling attention to the important issues of IP ownership that are not even on the table in current debates over patent reform. Who gets what, at the end of the day, is often what matters most in getting people to cooperate toward our ultimate goal of more innovation. Some universities have been more generous than others with their faculty. The jury is still out as to what balance is right for promoting progress.

But there's another definition for "flogging" in English, which seems to fit better the circumstances: "To sell something." Everybody wants readers -- USA Today, Mr. Schwartz, and even I. We all need to be careful about falling into the trap of catering too much to our favorite audience. Even though I agree that USA Today did a poor job of researching its article, I think Mr. Schwartz has gone too far in dismissing the relevance of the Stanford v. Roche case, or of Dr. Kaswans's story. It's true that these are just one case, just one story. But these are cases worth considering. In tech transfer, everybody has a story to tell, and few are formulaic.

For the record, I don't agree that any publicity is good publicity. Bad publicity is indeed bad... but only when it's true.

Um. How is this different from any other kind of secured credit?

Financial engineering "news" from Tech Transfer Tactics:

An emerging paradigm called royalty-based financing — applied to early-stage start-ups — may be another, according to Gregory T. Huang of Xconomy Seattle. The concept is simple. Instead of buying equity in a young company, an investor agrees to receive a percentage of the company’s monthly revenues - but the upside is capped at a limit of, say, three to five times his or her investment.

It's a bond, folks. And people have been making venture loans in Silicon Valley for a long time.

From a Comment on PatentlyO on the Stanford v. Roche opinion

See original here.

Initial title rests with the inventors, and nothing in Bayh-Dole contradicts that fundamental principle, ie, Bayh-Dole does not transfer title of invention from the inventors to anyone else by operation of law alone. It is the University's obligation under Bayh-Dole to control its employees in accordance with the funding agreement at issue, ie, to force them to assign. If the University does not do that, the problem is between the University and the funding agency.

Commentary Worth Reading in view of Stanford v. Roche

From an interview of Dr. Gerald Barnett at the excellent ip-advocate.org, which I just discovered:

Bayh-Dole focused on harmonizing agency patent policies and distributing opportunities to promote inventions to universities across the country. It wasn't directly concerned with innovation, but with using the patent system to promote use of inventions, development of collaborative relations with industry, and support for U.S. small business and U.S. labor.

The law itself hasn't constrained innovation - but the way in which universities have implemented practice under it has had mixed outcomes. In response to the law, many universities established Technology Transfer Offices (TTOs) to act as a central reporting agency and to facilitate the selection of inventions that will benefit from use of the patent system. This mixed a regulatory function (reporting) with an invention management function (patents). The result was pressure to monetize patent rights rather than to create an environment that promoted innovation.

The TTO works great for paperwork reporting, but not so well when you have a diversity of inventions, from biotechnology and nanotechnology and software and composters, moving through a single office. Even if the TTO is well-funded and staffed, you still only have a one in a hundred chance of a monetary success worth talking about.

What universities haven't done well is the use of the patent system to build working relationships with industry, support the development of research and early adopting practice communities, or support inventor-based insights into commercialization directions. For this last bit, TTOs find themselves cornered between processes designed to identify inventions with great "commercial potential" and a demand that everyone get equal treatment. As a result, it's difficult, especially in public research universities, to mobilize resources in support of any particular invention - beyond filing a patent application.

Second, and just as important, many universities also established employment policies that compel inventors to agree to assign their inventions to the TTO. This is a subtle but huge transformation in how invention is managed within the context of university research. A hundred years ago, when Cottrell invented the electrostatic precipitator, he was working with a company, at the University of California. He used the patents to found Research Corporation, which then supported research throughout the country and served as an agent for other faculty who had inventions they felt could benefit from Research Corporation's expertise. The system was voluntary, not compulsory. And it gave rise to the idea of the research foundation, as later established as university affiliated at Wisconsin, Kansas, Washington State and elsewhere.

Bayh-Dole gave universities an incentive to wrap voluntary inventor interests with a process-based policy, anchored in contracting regulations. These were then extended for consistency, if not convenience, to cover all instances of invention, not just those made with federal support. As you know, this move to compulsory claims based on employment, rather than voluntary offer based on recognition of resources, has created tremendous issues.

When you think about it, Bayh-Dole set up a classic struggle between bureaucracy and innovation. After all, innovation threatens institutional norms that bureaucracy seeks to codify. Given the opportunity to do so, institutions - agencies and companies included - inadvertently bottleneck and suffocate bright ideas with process. It turns out that consistency, compliance, efficiency and avoidance of risk are the dominant virtues of a process approach to research innovation. Mobilization for a purpose, risk-taking to achieve an outlier advantage, and preparedness for rare events don't count for much.

A very Drucker-esque view of innovation. Here's an important question for tech transfer offices to consider: given the bandwidth issues they face in addressing the many demands on their time, wouldn't now be a good time to consider working with a private intermediary like the Research Corporation?

In economic terms, the Research Corporation acted as a market-maker in those early days of university patenting. The Bayh-Dole Act seemed to have disrupted that model when a handful of universities were successfully able to patent and license innovations without the help of such an intermediary. But what the last decade has shown, I believe, is that entities like the Research Corporation performed an even more important economic function than the provision of professional (even legal) services. Intermediaries like Research Corporation help close feedback loops between universities and industry that are difficult because of the Prisoners's Dilemma of incentives and the asynchronous time horizons of universities and for-profit industry. Without such intermediaries, the tech transfer market is going to become more and more like the patent secondary market, with its litigation-driven norms and valuations. We need more experienced and culturally sensitive intermediaries to foster transactional norms.

Patents and Non-Compete Agreements

Another key portion of the Stanford v. Roche decision from the Federal Circuit relates to California's restriction on the enforceability of non-competes:

Under California law, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Cal. Bus. & Prof. Code § 16600 (2009). Stanford argues that section 16600 voids the VCA because Holodniy conceived the patented invention after departing Cetus, and the VCA violates public policy if it encompasses inventions conceived after employment terminates. Stanford also contends that once Holodniy’s research was published, it became public information, and that Roche’s interpretation of the VCA would prevent Holodniy from using this information in his later clinical studies.

We find no merit in Stanford’s arguments. By the plain language of section 16600, only those contracts that prevent “engaging in a lawful profession, trade or business of any kind” are void. Stanford provides no evidence that the VCA restrained Holodniy from engaging in any profession. Indeed, the record shows that Holodniy freely continued his HIV research at Stanford, publishing articles and using the knowledge he obtained from Cetus to further the science behind the patents-in-suit. Nor does Stanford explain how Holodniy’s assignment of his rights to Cetus prohibited Holodniy from using any public information in his later research. Moreover, California courts apply section 16600 to employment restrictions on departing employees, not to patent assignments.

This illustrates one of the most important sources of social value that patents offer. At least since Lincoln, owning human capital directly has been illegal in this country. But corporations and inventors need some way to credibly commit to each other. (Banks and poor students who want to go to expensive universities have a similar problem, which is solved by making student loans non-dischargable in bankruptcy.) Patents facilitate that bargain -- inventors option off the right to ideas they come up within in a certain period with patent rights, guaranteeing employers that their ideas won't leave with them (as they would if only trade secrets and non-competes were available) when they go to a competitor or retire.

An Inventor's Declaration of Independence?

From the Stanford v. Roche case, decided today:

We have held that the contract language “agree to assign” reflects a mere promise to assign rights in the future, not an immediate transfer of expectant interests. [citations omitted] Therefore, in the [IP agreement with Stanford], Holodniy agreed only to assign his invention rights to Stanford at an undetermined time. Additionally, Stanford’s contemporary Administrative Guide to “Inventions, Patents, and Licensing” states: “Unlike industry and many other universities, Stanford’s invention rights policy allows all rights to remain with the inventor if possible.” J.A. 743. While Stanford might have gained certain equitable rights against Holodniy, see Arachnid, 939 F.3d at 1581 (“[A]n agreement to assign . . . may vest the promisee with equitable rights.”), Stanford did not immediately gain title to Holodniy’s inventions as a result of the CPA, nor at the time the inventions were created.

Note that this result came about under a Stanford policy no longer in effect. Stanford changed its policy so that ownership would go automatically to the university in 1995. Was the change a step forward or a step back for inventors inside Stanford? Is it easier or harder now for groups like Holodniy's to enter into joint research efforts with companies like Cetus?

When organizations increase in complexity, one reaction by management is often to put stricter constraints on the organization. This doesn't work. Both the people trying to achieve the organization's goals and the people who don't care about the organization's goals will simply find ways to work around the constraints. The underlying cause of the problem is that the constraints are too static -- managers have less information than the employees managed about what's happening. That's why other organizations delegate and decentralize authority to the lowest level at which problems can be solved. Within universities, that may be the level of principal investigator.

Another passage from the case could be more cause for contention in the future:

Just as we explained that Bayh-Dole does not automatically void ab initio the inventors’ rights in government-funded inventions, Cent. Admixture, 482 F.3d at 1352-53, we see no reason why the Act voids prior contractual transfers of rights.

This sentence is footnoted: "We express no opinion as to whether Holodniy's execution of [the agreement with Cetus] violated any provisions of the Bayh-Dole Act, or whether the act provides the Government or Stanford some other legal recourse to recover Holodniy's rights. Cent. Admixture, 482 F.3d at 1353."

Under the Bayh-Dole Act, the government does retain so-called "march-in rights." But to date, these rights have yet to be exercised by any federal funding agency, at least to my knowledge. And in any case, the requests for march-in rights to be exercised have not been made to shift funding from one private party (like Cetus) to another (like Stanford), but rather to make a drug for some virulent disease available on cheaper terms than the patent owner wants to make it available.

If there are other private rights of action under the Bayh-Dole Act, then I don't know what they are. Even inventors' rights to reasonable royalty have not been recognized as the basis for a private right of action.

This is an interesting area of law, which is vital to the future health of our economy.

Carol Mimura on the Nuances of Managing IP Rights

Since I recently complained about the culture in technology transfer offices, I thought it only fair to point out that there are indeed a few universities that have developed or are developing a healthier approach to university-industry relations. Carol Mimura at UC Berkeley recently posted a draft book chapter on SSRN:

[Tech transfer] is an ongoing relationship continuum, not just a single transaction. A relationship continuum spans many years. It results from many points of contact, and many engagement types. It is akin to building a pyramid or climbing a staircase, or contributing different sectors of a pie to create a whole. Our networks are essential. We cannot accelerate innovation on our own; rather, our public-private partnerships and product development partnerships demonstrate that we can expedite translational research and bridge funding gaps through creative partnering and flexible contracting.

Success under the relationship model consists of rights transfer and knowledge transfer in both directions (into and out of the university) to enable innovation acceleration, deployment, uptake, and translation. By many measures, the relationship model has borne fruit. By valuing corporate relationships more than any single transaction, utilizing our networks to advantage, and valuing research support as highly (if not more highly) than license revenue, the overall industry dynamic has changed. Cultural and negotiation biases have been reduced, industry and foundation funding have risen dramatically, collaboration types and numbers have increased, barriers to gifting into the university have been lowered, and greater numbers and types of contracts and strategic alliances have been formed. We have also enjoyed reputational gains as a campus that has improved its corporate relations and contracting units.

The high-bandwidth feedback loops established through what Mimura calls a "relationship-based" approach to tech transfer are an example of the integrated complex systems that are a theme for this blog. Like the neural networks of its individual members, the social networks established can learn over time, gradually building up tacit knowledge of the science and engineering problems that pose challenges both to public and private organizations.

A key cultural difference between UC Berkeley's IPIRA and other university tech transfer offices is that Mimura and her team first took the time to learn about the needs of every stakeholder involved in these complex, multilateral agreements. As a result, the deals she has closed -- including the pathbreaking BP-Berkeley deal and the Socially Responsible Licensing Program (SRLP) -- are nothing less than the future of the IP market. Although it might be inconvenient for some market participants to acknowledge, ultimately the highest value of IP rights is realized through the increased collaboration (and hence learning) that they promote.

What is Wrong With Technology Transfer Office Culture?

Jon Sandelin from Stanford University's Office of Technology Licensing published an article in the Summer 2009 issue of an AUTM journal called University-Industry Relationships: Potential Risks. Perhaps unsurprisingly, the article is gated and available only to members. Already in the title you can see where Sandelin comes out on the idea of having more commercial ties with universities. One of the messages repeated on this blog over the past year has been that feedback loops promote innovation. The feedback loops between universities and industry are perhaps the most difficult to forge and maintain of any in our innovation pipeline. We should be promoting these feedback loops aggressively. Unfortunately, the tentative, preening, and antiseptic tone of this article is all too characteristic of tech transfer culture inside top-tier research universities.

Sandelin does a good job listing some of the benefits of tech transfer. But consider the "summary of risks" he comes up with:

1. That patenting and licensing by universities may inhibit rather than promote the progress of science and production of innovation
2. Of a loss of public trust in the university and/or its employees
3. Of unfulfilled commitments to research sponsors, students, or the university
4. Of bias when reporting research results or not reporting research findings that would be adverse to the interests of an industry patron
5. Of exploiting the work of students to benefit personal interests of their supervising professor
6. Of adverse and embarrassing reports in the media, whether actual or perceived, that affect the reputation of the university
7. That new discoveries made by university employees are not reported to the university or to a federal funding agency as invention disclosures, but are instead diverted to a company in which the employee has a financial interest

That's it. Wait. That's it?! Of these, only 4 is what I would consider an actual risk to the university. Look at the other six items on this list more carefully. What is really there?

First off, what on earth can he mean by one? If one is true, then why are we even bothering? The tech transfer experiment has been a wild success. As economist Kenneth Arrow noted recently, some of the best work results when academics are asked to work on a problem they've never thought about before. Tech transfer relationships work because universities get data from industry that is as valuable to academics as the theory that industry gets from universities.

Two just shows how little conviction Mr. Sandelin has in the fact that he is doing something important and beneficial for the university and its employees. Why would these people not trust the university if it is doing things that benefit society at large by cooperating and collaborating with private companies? Does he believe making money is inherently evil? If so, why not come right out and say that instead?

Three strikes me as very strange. Isn't the possibility of unfulfilled commitments to research sponsors a risk for the research sponsors? How is that a risk for the university? Similarly, why would students see more industry relationships as a risk? Students need jobs after they graduate, and somebody has to provide work.

Five would be hilarious if it weren't sad because it demonstrates how big a problem negotiating ownership rights is when it isn't done properly upfront. Universities love to ask graduate students to sign a thick contract when they start that gives away all of their rights. Most grad students, of course, never read the fine print and only find out how badly they've been taken advantage of later when somebody makes millions on their blood, sweat, and tears.

Six also makes me wonder. That's not a risk of relationships with industry. That's a risk of dysfunctional relationships with industry. Why would that be a problem for a university like Stanford, I wonder?

So of these seven risks, it is only four, the risk of bias caused by taking money from a particular group, that strikes me as very serious. But that risk is a risk for any institution, public or private, for-profit or not-for-profit. There's nothing really more difficult or challenging about solving that problem at a university. In fact, it's probably easier to solve that problem at universities, where most academics prize their professional reputations far above any particular grant money. Let the researchers themselves be the ones to decide whether it's worth risking their reputation on taking funding from some large corporation. Then just make sure that everybody can lookup and find out from whom researchers are getting their support. That's how we do things in this country.

It's very frustrating to see how backwards the thinking is at what is considered one of the best technology transfer offices in the world.

How the University of California Could Make Up for the $800 Million Budget Cut

As an alumni of UCSD, I am dismayed to see this letter circulating, which comes across as some of the most ungrateful whining that I have heard in a long time. Of all of the people and institutions that have been hurt by this recession, I do not think that academics or students are among the most hurt. And of all the institutions that are truly suffering as a result of the crisis, I do not think that the University of California, much less its most prestigious schools, are among the most hurt. So what's with the swipe at the younger sister schools? The faculty from UCSD, in particular, ought to be ashamed of themselves. Isn't this exactly the attitude they've been fighting at UCLA and UC Berkeley over the last few decades?

As one of the few people who might have a broad enough perspective to weigh in on the economic and political viability of their proposals, I feel an obligation to speak out with my opinion. Putting aside the whining and sibling rivalry, there are a few proposals in the letter that I agree with, and a few that I disagree with. Further, there is a proposal not in the letter that would potentially resolve all of the problems here and do even more to improve UC's relative position with respect to private institutions, which are its main competition.

• Out-of-State Enrollment:
This is a wonderful idea. Having a more geographically diverse student body has provided Stanford, for example, a competitive edge over UC Berkeley for many decades. So the charter won't allow us to imitate Stanford in this regard. Maybe we don't want to go to that extreme anyway. But enrolling more out-of-state students over the short-run would at least be an interesting experiment as well as a source of additional revenue. This should be a no-brainer.
• Generate More Data:
This is the kind of idea you get when you ask academics -- especially from the natural sciences -- to make policy proposals. Sure more data would be great. But it's going to take time and money to generate it, and there are things that could be done now, today, with the information that is already available.
• Redistribute Funds from Weaker Siblings to Stronger Siblings:
Bad idea on so many levels. First, the strength of UC compared with other institutions has been its ecosystem of multiple campuses. Maybe redistributing funds to fostering closer ties among the campuses would be in order, but cutting off the newer campuses while they're still in their infancy would be like pulling the plug on the LHC right before it goes operational. How do scientists, who are always talking about how basic science has long time horizons and needs stable funding, not get this point? How can professors from UCSD try to cut off funding from UC Merced because it's new? Some people at UCSD were part of the founding group of professors there. Where is their shame? If opening UC Merced was a good idea last year, it's a good idea this year. Everybody has to share the burden of budget cuts, nobody deserves to be singled out this way. How dysfunctional.

Now for the creative solution: Technology Transfer. IBM spent $5 billion a year on R&D every year for a decade and managed to squeeze out about $1 billion a year in technology licensing revenue over the same period. That's 20%. What's UC seeing from its Technology Transfer Office right now? Maybe 2%.

Why so low? The answer is because tech transfer is being done by salaried employees who will never be as aggressive or work as hard to make the connections and close the deals that are necessary to make these complex, multilateral negotiations work.

Last year, I made a pitch to a person with strong UC affiliation to startup a private equity fund to do technology transfer with top-tier universities like UC. No dice. The sense is that this would have an adverse effect on university culture. Really? Did AT&T Bell Labs have an adverse effect on Shannon or Mandelbrot? Did IBM's ARC have an adverse effect on Don Eigler or W.E. Moerner?

If UC wants a positive way to deal with its budget crisis, then the best way would be to embrace the rest of the economy, settle its internal squabbling, and start building on its strength -- which is turning out some of the most creative and brilliant artists, authors, and inventors in the world.

One Reason Why the Supreme Court Should Reverse Bilski

Because if firms could patent business methods -- especially financial engineering -- then these types of disputes would be less costly:

Citadel Investment Group LLC, the $12 billion hedge fund firm founded by Ken Griffin, sued three former executives and the firm they started, Teza Technologies LLC, over claims they violated non-competition agreements.

“This is a case of industrial espionage,” Citadel said in a complaint filed today in Illinois state court in Chicago. The firm seeks a court order barring the individual defendants from conducting any business through Teza or related entities that compete with Citadel, for the duration of the agreements.

Patents are the cheapest way to handle disputes over allocation of the products of human capital.

Click on "Trade Secrets" or "IP Ownership" at right for earlier episodes in this series.

The Rights of Employers to Employee's Inventions

One of the more popular posts on this blog is this overview of patent ownership law. In a nutshell, what the overview explains is that in most states, the rights of employers to their employee-inventors' inventions is limited to what was recognized at common law.

California is no exception to that rule. My lovely wife today called my attention to a recent case decided by Judge Ware in the Northern District of California holding an employment agreement that "presumed" to retain ownership in all inventions conceived by an employee prior to termination for up to 1 year after leaving the company. Not enforceable! As the Court explains:

[T]he scope of the Assignment Clause at issue here is not limited to inventions that are based on Plaintiff’s confidential information. Rather, the Assignment Clause broadly targets any inventions “relate[d] to” former employees’ “work” with Plaintiff. Such a sweeping provision conceivably encompasses both inventions based on confidential employer information and inventions relating to former Applied employees’ work in the broad field of semiconductor research and manufacturing. Indeed, despite the fact that the Employment Agreements specifically define “confidential information,” the Assignment Clause of those Agreements is in no way limited to situations in which former employee inventions are the product of Plaintiff’s confidential information. (See Kuwayti Decl., Ex. J.) The Court also finds that the Assignment Clause is deficient in that it is not limited to inventions conceived by former Applied employees while employed at Applied. Instead, the scope of the Assignment Clause includes any invention disclosed by former employees, regardless of when or where they were conceived. As such, the Court finds that the Clause “encompasses not only the dishonest employee . . . but also the honest employee who legitimately conceives an idea or improvement following . . . termination.” Armorlite, 340 F. Supp. at 275. Ultimately, the Court finds that the Assignment Clause is overly broad with respect to both subject matter and temporal scope. Since the Court finds that the Assignment Clause touches postemployment inventions, regardless of when they were conceived or whether they were based on Applied’s confidential information, the Clause necessarily operates as a restriction on employee mobility. Accordingly, the Court finds that the Assignment Clause is a post-employment penalty that violates California public policy as codified in Business & Professions Code § 16600.

Some people are going to complain that this makes Silicon Valley less competitive. Nonsense. Inventors have rights too, and the health of Silicon Valley depends in part on companies not overrearching their rights to former employees' inventions.

The case is N.D. Cal. 5:07-cv-05248-JW, styled Applied Materials, Inc., v. Advanced Micro-Fabrication Equipment (Shanghai) Co., et al.

Feel free to contact me if you have questions.

Clearing Bottlenecks in the Innovation Pipeline

From the Tech Transfer Tactics blog:

The scenario is not at all uncommon for TTOs: Resources are never adequate to actively work every invention file, and faculty IP that doesn’t get the attention a researcher wants creates a dilemma for the university. Though the innovations involved may be valuable, if they are dormant too long a decision must be made — either move them to the front burner or give them back to the inventor and give up any claim to future revenues. But what happens if the TTO decides it wants to keep ownership while the inventor, frustrated by a lack of progress, wants the IP signed over?

Click through and read the caveats on the standard "release." Why shouldn't university tech transfer offices behave more like the Federal government does when notified under Bayh-Dole?

Feedback Loops in the Innovation Pipeline

Check out the many feedback loops in this Figure. Notice in particular how the loops connect both adjacent and non-adjacent stages in the cycle, wrapping the pipeline back on itself several times:

Now guess when the Figure in this article was published. Leave your answer in the comments below, and click through here to see if you're right.

How big a slice of the pie do your employee-inventors get?

IPKat reports on a landmark decision in the U.K.:

Only thirty one years after compensation for employee inventors was introduced into UK patent law, and another four years after the compensation provisions were amended in order to give inventors a chance of getting anything, the Patents Court for England and Wales has just made its first compensation order. The case in question is Kelly and Chiu v GE Healthcare Ltd [2009] EWHC 181 (Pat), a ruling of Mr Justice Floyd.

Similar cases have been decided in Japan. Although in most cases, inventors in the U.S. have no similar right, there are provisions under the Bayh-Dole Act that require entities that receive federal funding to share royalties with inventors. But no private right of action has been recognized under that portion of the statue. See the Broken Symmetry overview of the law of patent ownership here.

Patent Ownership: Can state law contracts trump federal property laws?

Last week I attended the University of Texas Advanced Patent Law Institute held at the Santa Clara Hyatt. For those curious at to why UT would be holding a CLE event in Santa Clara, note that program co-chair Mark Lemeley started his teaching career at UT, when he took over the teaching job of former Assistant Commissioner of Patents Larry Goffney.

There were many good panels at this event. Note that an earlier post here on the Quanta decision has been updated with some comments from Prof. Merges on the same. I was also appreciative of the balanced view of the secondary market presented by in-house counsel from Yahoo and Google. Their suggestion was that the bias should be toward settlement except, perhaps, with those parties whose business model is based on the asymmetry in the cost of litigation. If they were to carry through with this suggestion, then their clients should be more amenable to settling cases brought by failed startups that have invested significant time and money into developing new and patented technology. Another presentation by a practicing antitrust lawyer highlighted the aggressive and unmitigated bias of the FTC against non-practicing patent owner Rambus. A friend of Broken Symmetry pointed out that the FTC has established a similar track record in its handling of Schering Plough and Unocal recently.

But the presentation that raised the most interesting legal issue for me was the one given by a panel including John Amster, Co-CEO of RPX Corporation, on developments in IP monetisation strategy. John pointed out in answer to a question about chain of title that it was not sufficient merely to confirm that title had been properly executed and recorded by each successor in chain of title in order to clear title to a patent. In some cases, such as the one described in the article linked, the patents may constitute substantially all of the assets held by a corporation at the time of sale. In such cases, the law of corporations in many states (including Delaware) may require a shareholder vote to authorize the sale of the assets.

Mr. Amster's advice was to get a good corporate lawyer or bankruptcy lawyer involved when a corporation in or near insolvency is the seller of the patents. There are a variety of state laws designed to protect shareholders and creditors that may put a cloud on title to an otherwise properly assigned and recorded patent portfolio. That advice could not be more timely given current market conditions.

The subtitle to this post is meant to point out the somewhat unseemly fact that the willingness of at least some Delaware judges to undo the effect of an otherwise proper assignment and recordation for consideration represents a preemption of federal property law by the state law of corporations. An avoidance of transfer in bankruptcy, because grounded in federal law, does not raise the same problems. But I wonder whether a ruling of the Delaware chancery that an assignment was ineffective because not properly authorized under Delaware corporate law would survive a collateral attack in federal court on the grounds that the federal recording act for patents effectively preempts any question of title. Patent law, because of its monarchical pedigree, has its vestigial limbs of jurisdiction.

The Third Rail in IP Law: Ownership

Via IP Dragon I found this article by Patti Waldmeir about how a new law in China might prevent foreign inventors from obtaining protection in China unless the invention is made on Chinese soil first filed in China:

If the revisions are adopted, foreign companies would have to draft patents in Chinese for inventions made in the country. But because China’s patent regime is so new – dating only from the early years of this century – there are relatively few Chinese-literate lawyers who are experienced in this area.

Substantive IP law can harmonize all it wants.  Unless ownership law harmonizes also, there won't be free-trade in IP.

Trade Secret Lawsuits are Ownership Disputes... How Filing More Patent Applications Might Avoid Some Litigation

WSJ reports that startup LimitNone is suing Google for breach of contract and trade secret misappropriation:

LimitNone, which no longer offers the product, says it worked on gMove as a member of an authorized Google developer program and with the assurance that Google wouldn't seek to build a similar tool itself.

Looks like contracts and trade secret protection weren't the right way to go for LimitNone.  I've been involved with a few trade secret lawsuits, and they are very messy.  People complain all the time about how difficult it is to interpret patent claims, and how poor the patent office is at examining them.  But filing a patent application does do one thing extraordinarily well: it plants a stake in the ground that says: "On this date, our startup knew this much about the technology and thought this part was what was valuable."

With that stake in the ground, the discussion about who did what when gets much simpler.  That's because describing the scope of the trade secret is only the smaller part of what makes trade secret lawsuits messy.  The larger part of the messiness is due to the competing claims between joint developers for ownership of the IP in question.

When a patent application is filed, some questions about validity and all questions about infringement are left to be determined later.  But the process of drafting the application and getting assignments tends to resolve ownership questions earlier, and at the moment in time when they are easiest to resolve.  A good patent lawyer will sit down with the various parties involved with a development effort, make a determination as to who contributed to conception, when, and what each person's obligations were and to whom at that point in time.  A couple hours worth of work can avoid millions of dollars of litigation.

IP is not an Asset: Patents and Inventors Need to Stick Close

Earlier this week, Peter J. Wallison argued that conventions in fair value accounting may in part be the cause for the recent bubble markets.  Specifically, Wallison pointed to the convention (implemented under FASB 157) that requires assets to be carried at "market" values, even when those assets are not being held for trading purposes.

Almost any scientist or engineer would immediately have recognized the truth of this argument.  Our understanding of any system -- chemical, electrical, mechanical, or financial -- will be limited in part by the accuracy of our tools of measurement.  When one considers how FASB 157 required banks to report the values of MBSs, CDOs, and CDO^2s on their balance sheets far above what the banks would themselves have been willing to give away for the same assets, one understands how the financial markets quickly lost track of the intrinsic value backing the securities traded.

This wisdom has direct relevance to the secondary markets for IP.  Most of the firms now in the secondary markets for IP have taken the view -- and are conducting their businesses -- as if IP were an asset.  This is because IP does bear some characteristics of an asset.  Namely, like real and personal property, IP can be protected through exclusive rights.  The analogy to property has thus come to dominate our understanding of the nature of IP.

Although accountants often treat IP as an asset, IP is not a commodity.  IP is more like equity, although it is not like other equity.  IP is a limited exclusive right to human capital (namely, to inventors' time solving a technological problem).

Maybe part of the reason that Abraham Lincoln understood the importance of patent law is because he understood that human capital cannot be owned.  The photograph shows the Emancipation Proclamation, whereby Lincoln did more for the cause of freeing human capital than many other men together have done in the course of human history.  Lincoln loved the patent system because he understood that it too could lead to more freedom.  Scientists and engineers work best free from the immediate demands of business people and customers.  The idea of a patent system carries within itself the promise of more innovation and more freedom.

POSTSCRIPT: Please note that I do not believe that inventors are literally enslaved right now.  There are obviously huge differences between the enslavement of millions of black Americans and the metaphorical enslavement of inventors who are now forced to do work other than inventing because of the broken patent system.  I do, however, believe that making people more free leads always to a multiplicity of unanticipated social benefits.

Stranded R&D

In 1980, Congress passed the Bayh-Dole Act.  Overnight with its passage, universities and government-funded R&D labs gained a comparative advantage in funding R&D.  Universities and government labs have a cost advantage in that many had already spent tens of billions of dollars setting up research labs for non-commercial purposes, including teaching and curious exploration.  Many scientists and engineers found the prestige of academia, and the increase in professional freedom it promises, a compelling offer.  The result has been a gradual shutting down of corporate R&D labs, and an expansion of industry collaboration with scientists and engineers now employed by universities and government labs.

Many people think of the Bayh-Dole Act as an unmitigated success story.  Several multi-billion dollar technology companies that are now household names (such as Genentech and Google) started in graduate school research labs.  Many inventors are happier in the more collaborative environment that academia offers.  Collaboration is an under-appreciated driver of innovation.

Unfortunately, so far universities have underperformed private benchmarks for the successful transfer of technology.  Despite spending almost an order of magnitude more on R&D (about $50 billion), the AUTM reports only about a factor of two more revenue from R&D (about $2 billion) than does IBM (about $1 billion on about $5 billion in R&D) over an overlapping period from the mid-nineties to the mid-zeroes of the present decade.  Although it is tempting to attribute the difference in returns entirely to the diversion of R&D funding into pure science (an attribution that ought to silence the Bayh-Dole critics who favor pure science), it is important to remember that there was a net inflow of the most productive researchers from industry into academia over the same period of time.  This concentration of the brightest minds of science and engineering within academia would probably have led to a faster increase in returns from R&D if there weren't something else going on.

And there is something else going on.  The costs of licensing and litigation of patents has skyrocketed over the same period of time.  The biggest reason for increasing costs has been the inelastic supply of patent lawyers relative to the exploding demand for their services.  Unlike patent prosecution, which can be done by non-lawyer patent agents and examiners, patent licensing and litigation are services that require a state bar license (and the three years of ABA-accredited law school that this usually requires).  Law firms are struggling to meet demand by increasing starting associate salaries (patent boutiques started the chain reaction in both instances over the past ten years), but the corresponding increase in associate to partner ratios at most law firms (necessary to keep profits-per-partner high and retain top partners) has led to a decline in the quality of services overall.

It is worth noting that many technology transfer offices are staffed by non-lawyer scientists and engineers with formal or informal business training.  Many of these employees are probably undervalued by the legal services market because of their lack of state bar credentials.  Seeing the value, university tech-transfer offices and other government and private firms not constrained by state bar requirements are scooping these types of employees up.  Non-lawyers will probably play a growing role in R&D funding and technology-transfer going forward, even in providing "legal" services.  The investment banks (such as Altitude Capital) and venture capital funds (such as Intellectual Ventures) that have recently entered the secondary market for patents are early signs of this trend.

The result of these macroeconomic trends in R&D is a market in which many startups and smaller companies are realizing only a fraction of the intrinsic value of their R&D.  Technology is stranded in later-stage startups and other small private companies that are not eligible for further venture capital financing, acquisition, or IPO.  Problems in the credit markets and the passage of the Sarbanes-Oxley Act have further exacerbated the problem for these companies in the acquisition and IPO arena.  In effect, the United States is piling up a vast, invisible junkyard of stranded R&D that could be socially valuable if placed into the hands of the right owners.

As the returns to investment in R&D decline, so too do the number of jobs available for researchers outside academia.  This is a problem that is vital to the health of the U.S. economy within its global environment.  If current trends continue, there will be more Ph.D. engineers living in China than in the U.S. by 2010.  The number of U.S. patents issuing to foreign entities is already nearly equal to the number of patents issuing to the U.S.  If the U.S. were to strengthen its patent system, we would be far better positioned than any other nation in the world to bring the power of market-based incentives to bear on the problem of attracting the most talented human capital -- the single most important problem we face in our long-term prospects for economic growth.

People are starting to recognize these problems.  Recently, the Brookings Institute has called for the government to setup a National Innovation Foundation.  But aren't the market-based incentives of a strong patent system a better way for the government to encourage R&D funding?  Although a handful of firms, including Intellectual Ventures, Ocean Tomo, and other new entrants are struggling to meet immediate needs, the inventors and startups most in need cannot afford to hire anyone to answer the lobbyists hired by the large corporations that are net payers of patent licenses (when forced to pay at the end of protracted litigation).

Although the big picture of innovation is so large and complex that it is difficult for most people to understand, the solutions are actually simpler and easier than most would imagine.  First, the patent laws should be reformed in ways that would promote private settlements of disputes over patent infringement rather than litigation.  Some recent changes to the patent law have been beneficial in this regard, and some detrimental.  Unfortunately, the Supreme Court's recent holding in Medimmune makes it harder than ever for inventors to get to the table with large corporations without ending up in litigation.  And after Mercexchange, startups and independent inventors do not have the threat of an injunction to keep licensees at the bargaining table when those startups and inventors have failed to find funding to themselves commercialize the technology.  Neither of these by themselves is fatal.  The threat of injunction was no doubt abused by opportunistic speculators from time to time over the past few decades.  But not in decades has it been more difficult for investors in R&D to see a return through patent licensing.

Second, if the government is going to provide funding to solve these problems, that funding might best be used to lower the barriers to entry for the practice of patent law.  For scientists and engineers, especially those who understand business, the opportunity costs of wages are probably much higher than the costs of a law school education.  Public funding of scholarships for scientists and engineers who intend to study law would over time decrease the transactions costs associated with patent licensing, and gradually decrease the amount spent on litigation as it becomes easier and easier for opposite parties to reach agreement on differing valuations of a technology.

Third, institutional investors should consider allocating a larger share of their funding to hiring more employees for their technology transfer offices now, and later for investing in private equity funds that specialize in R&D investment.  The technology transfer offices are now overwhelmed by the demands on their time in many cases.  As a result, they tend to focus on the biotech and pharmaceutical inventions that are likely to provide the largest payouts, ignoring the many other areas of R&D that could nevertheless have a transformative impact on our society.  In terms of private equity investments, over the short-term the lack of licensing revenue is going to impede the returns for these funds.  But restarting the R&D engine of economic growth is going to require the public and private sectors to work together.

These are complex problems that it will take teamwork to solve.

Update: Silicon Valley never fails to disappoint in its farsightedness.  Jaisen Mathai, Michael Arrington, and Stu Phillips are all groping around the edges of the problem.

Update 2: I was recently asked whether the figures for IBM and AUTM include capital gains from equity.  The answer is no, neither do.  I have seen no evidence and have no reason to believe, however, that the AUTM should be seeing larger returns from equity on its R&D than IBM.  So the larger point about relative efficiency in technology transfer seems still to be sound.

Every Patent Affects Two Different Markets

There are two different markets relevant to every valuable patent. First, there is the market for the R&D work that results in the patent.  Prices in this market are set by the opportunity costs for the time of scientists and engineers who are capable of theorizing about and experimenting with the technology.  Second, there is the market for the claimed products or services that the R&D work opened up.  The second market is the one that everyone naturally thinks about.  In fact, our whole nation has had a blind spot for the first market for a long time because corporate R&D divisions were serving that market very well until the Bayh-Dole Act was passed in 1980.  Most universities have not been able to consistently match pre-product funding with the flow of R&D produced by their faculty.  One former R&D employee from Apple and Microsoft blames Silicon Valley, saying "Silicon Valley forgot how to do R&D."

Within the law of antitrust, one can observe how this blind spot is affecting the outcome of litigation.  The essential facilities doctrine of antitrust law has been applied in an inconsistent way because most judges don't see that there are two different markets.  R&D work almost always has natural monopoly characteristics.  But patents covering valuable R&D should not therefore trigger the essential facilities doctrine.  Lots of R&D work needs the barrier to entry that only legal exclusivity can provide in order to recover even a reasonable profit.  Yet if the same patented R&D is valuable because the claims cover a product, the production and distribution of which have natural monopoly characteristics, then applying the essential facilities doctrine to require the patent owner to make licenses available on a non-exclusive basis might make sense.

Consider two concrete examples.  Example 1:  I patent R&D claiming a new type of telephone.  The essential facilities doctrine should not be invoked to require me to license others to sell the patented telephone.  Producing telephones is not a natural monopoly because the total average costs are not always declining.  Note that this is true even though the telephone demonstrates network effects.  Example 2:  I patent R&D claiming a new type of telephone network.  The essential facilities doctrine probably should be invoked to require me to license others on a non-exclusive basis who need to use the telephone network for their own products or services to be valuable.  Building telephone networks is a natural monopoly because the total average costs are always declining.  In both cases, the crucial question is whether the second market has natural monopoly characteristics.  The first market almost always will.

In some cases in the past, when the essential facilities doctrine has been invoked against patent owners, judges have decided either to let the patent owner maintain full exclusivity or to deny any compensation.  Better would be for judges to let most patent owners do whatever they want, but require compulsory licenses in the subset of cases in which the actual product or service sold has natural monopoly characteristics.

Those with an extraordinary interest in reading more can wade through this paper.  But know that I am no longer enthralled with the idea of applying the reverse doctrine of equivalents in patent law or the Feist originality doctrine from copyright law to the same effect.  Too much potential for mischief.

A Concise History of the First-to-invent Rule of Priority in United States Patent Law

For years I've been meaning to polish up this paper and try to get it published.  But diminishing marginal returns have this way of slowing you down.

Anyway, here's a link to the post on SSRN.  Maybe it will be interesting to some of my blog readers.

In a nutshell, I believe that the first-to-invent rule was an unintended consequence of (a) the federalist form of government we adopted and (b) natural rights theories that were prevalent among the founding generation.

It's time to get rid of the rule.  Interferences are usually a waste of time and money.  I like the proposed first-inventor-to-file amendments.

Rebundling Ownership and Control of Patents

On Friday I attended a panel on the "State of the Legal Profession" held at Stanford Law School.  The panel was well-designed, with a variety of perspectives from lawyers in-house, at law firms, in academia, or in public interest.  It's hard to get six lawyers to agree on anything, but it seems that everyone more or less agreed that the traditional law firm business model is not holding up well in the 21st century.

There are many reasons for this, one of which -- the inaccuracy of the billable hour as a metric for the value of legal services -- I've discussed in a previous entry.  Another reason that was obvious after hearing the panelists is the relatively inelastic supply of talent graduating from law schools every year.  That pool of talent hasn't grown much in decades, even as the demand for legal services has exploded.  Public interest advocates are seeing more and more people opt for pro se representation in court or no representation in transactions (see, e.g., subprime mortgage lending).  Law firms are raising salaries higher and higher to attract talented associates, but also increasing leverage (i.e., the ratio of associates to partners) in order to continue attracting talented partners (profits-per-partner being a key metric for partners in deciding where to work).  Meanwhile in-house counsel is facing increasing pressures from company management to keep down the costs of legal bills as global competition narrows the margins on products and services.  Another time I may elaborate on how some big law firms are beginning to resemble a Ponzi scheme in this regard.  And anyone keeping tabs on the credit market knows how ugly deleveraging can get.

So what can be done?  There's no choice for now but to get more efficient with the supply of talent that we've got.  My earlier post gave a suggestion for how more efficient incentives could reduce costs for certain kinds of transactional work.  But it didn't elaborate on how rebundling of ownership and control is capable of solving a whole class of principal-agent problems in legal services.  A similar solution could be used by many companies to reduce the costs of procuring and enforcing patents.

The basic contractual framework for accomplishing this is simple, although the practical execution is difficult, requiring human capital with a high-level of expertise in three different, (now) weakly-overlapping professional disciplines.  Instead of paying a law firm by the hour (or paying a high fixed-rate) to prosecute patents, clients could pay a much lower (or zero, or negative) fixed-rate for their work, and then give them a slice of any future royalties earned on the portfolio.  Lawyers who (a) believe in the value of their services, (b) understand the technology patented, and (c) believe in the prospective value of the market that the patents are meant to cover should be willing to accept lower rates in exchange for a slice of future profits.  The trouble is that there just aren't that many lawyers who understand law, technology, and venture capital investing.  And the ones that do (think of senior partners at big law firms) generally are too comfortable with the status quo.

Not every company is going to feel comfortable with doing things differently, especially if the current system is meeting their needs.  Nonetheless the potential is there for forward-looking clients and entrepreneurial patent lawyers to innovate on the traditional business model, and maybe even lead the way into a better model for legal services in every market.

UPDATE: Thanks to IPKat I have learned that the French bar is in the middle of a protracted struggle to keep scientists and engineers out.  Not surprising, but comforting to know that we're not the only ones with this problem given the implications that our excessive domestic regulations have for the United States in competing in a global economy.

Did Bayh-Dole End Corporate R&D?

Thirty-years ago, many large corporations had entire in-house divisions devoted to R&D.  Think of IBM's Watson and ARC Labs, AT&T Bell Labs, and Xerox PARC.  Since that time, these R&D labs have greatly diminished in size or disappeared altogether.  At the same time, the pace of innovation in the United States has not been slowed.  Assuming that R&D is necessary for innovation, it's very important for us to ask what happened.  Where did the R&D go?  The Bayh-Dole Act is a prime suspect.

The fundamental economics of R&D changed overnight with its passage on December 12, 1980.  Because of their academic role in teaching and publishing basic research, universities have a cost advantage to corporations in performing early-stage R&D.  Think of the many federal grants that go to fund universities.  Even without the grants, corporations can't offset the costs of R&D against undergraduate tuition dollars by requiring their researchers to stand in front of a classroom for a few hours per week.  Once universities were permitted to take title to their R&D, many corporations gave up on building a top quality R&D division, and instead started sponsoring research at universities in exchange for patent rights.  Hence the explosive growth in university technology transfer in parallel with the disappearance of many corporate R&D labs.

Check out the following graph, which is shown in this highly recommended article by a former Chief Economist to the European Patent Office:

The author asserts that funding of academic R&D is promoting later funding of private R&D, the idea being that funding of academic research generates ideas for a pipeline that eventually results in new products and services.  Something like this is probably true in the U.S., although those in technology transfer at universities would caution that there exists a very real gap between early-stage R&D funding and venture capital financing.  But it would be worth knowing if part of the "industry-financed R&D" isn't going to universities -- if even a part of it were, it could explain most of the correlation.

Overall, corporate R&D spending hasn't decreased since Bayh-Dole.  What used to be spent on an in-house division is now spent on sponsorship of university research and the acquisition of intellectual property from smaller companies.  The few exceptions to this rule (Google labs?) seem to be for companies that have trade secret protection as a viable alternative to patenting as a durable means for maintaining competitive advantage.

Overview of Patent Ownership Law

After the recent post on DDB, it seemed useful to share some information about patent ownership law with readers interested.  The law of patent ownership in the United States is an interesting mix of state and federal, common law and statute.  Here's a brief summary for anyone interested.  I haven't checked to see what's happening legislatively at the state level since I wrote this a couple years ago.

Overview of Patent Ownership Law

Unlike some foreign nations, in the United States only a person may apply for a patent.[1] That person is the inventor or discoverer of what is claimed in the patent.[2] Thus, the chain of title to any patent in the United States always begins with an inventor. Because of this disputes over patent ownership logically divide into two categories. In the first category are disputes over the origin of the chain of title. Disputes over the origin of the chain of title are usually about whether a person was properly named or omitted as an inventor, which in turn is a matter determined by judicial interpretation of federal statutes. In the second category are disputes over transfers in the chain of title. Disputes over transfers of patent title sound either in the law of contract or the law of tort,[3] and so are almost always a matter of state law.   (But note that DDB held that federal can apply when the  issue is raised as part of a standing analysis.)

A. Defining Inventorship

Although by statute, applications for patent must be made by “the inventor,”[4] the patent statute does not itself specify what acts constitute inventorship. On the contrary, the statute adds flexibility to the concept of inventorship by expressly providing that an invention may be the work of more than one person. Under 35 U.S.C. § 116, two or more persons may apply for a patent jointly, even when they did not work together physically or contemporaneously or contribute equally to every invention claimed. In addition, 35 U.S.C. §§ 116 and 256 permit both the Patent and Trademark Office Commissioner and federal courts to correct errors in the naming of inventors. The error of incorrectly naming a person who is not properly an inventor is called “misjoinder.” The error of incorrectly omitting the name of a person who is properly an inventor is called “nonjoinder.” The group of persons who are properly named is called either “the co-inventors” or “the inventive entity.” Inventorship is an important issue in patent ownership disputes because of the rule in the United States that co-inventors are co-owners, each capable of granting a license to third parties for use of the patented invention without the consent of other co-owners.[5]

The act of inventing has been considered “a mental result” in the United States since at least the 19th century. “The machine, process, or product is but [a] material reflex and embodiment” of a patentable invention.[6] Recently the Federal Circuit (which has appellate jurisdiction over almost all patent appeals)[7] has held that “[c]onception is the touchstone of inventorship, the completion of the mental part of invention.”[8] The classic definition of conception is “the formation in the mind of the inventor, of a definite and permanent idea of the complete and operative invention, as it is [t]hereafter to be applied in practice.”[9] “Conception is complete only when the idea is so clearly defined in the inventor’s mind that only ordinary skill would be necessary to reduce the invention to practice, without extensive research or experimentation.”[10] But interestingly, the inventor need not know that her idea will work for conception to be complete.[11] “The discovery that an invention actually works is part of its reduction to practice.”[12]

In accordance with these rules, for purposes of joint inventorship, “the qualitative contribution of each collaborator is the key — each inventor must contribute to the joint arrival at a definite and permanent idea of the invention.”[13] As a practical matter, joint inventorship is determined by considering whether a collaborator contributed to the conception of any claim of the patent. Even a single claim is enough to confer the status of co-inventor, and hence co-owner.[14]

B. Transfer of Patent Ownership

The second category of ownership disputes covers all disputes over patent transfers. But within the second category, the most common disputes are between an initial owner (i.e., as we have seen, the inventor) and an initial transferee. Often, the inventor has a pre-existing relationship with the initial transferee, for example, as a consultant or employee. When that is the case, the transfer may form consideration for a pre-existing contract between the inventor and the transferee, such as a consulting or employment agreement. Federal courts have long held that inventions may be the subject of transfer prior to patenting, and when such pre-existing agreements are in place the dispute is no more than a simple claim for breach of contract.[15] The more interesting case for purposes of this paper arises when the inventor and initial transferee have a pre-existing relationship but there is no express contract in place. These are the cases for which a common law of patent ownership developed in England and the United States.

Before giving a summary of that common law, it will be useful to say briefly what kinds of transfers may occur. A transfer of patent rights must be either an assignment or a license.[16] The inventor may make one of three categories of assignments: first, of the whole patent right, including the exclusive right to make, use, and sell the invention throughout the United States; second, of an undivided part or share of that exclusive right; or third, of the exclusive right under the patent within a particular geographical region.[17] Any transfer that does not fall within one of these three categories “is a mere license, giving the licensee no title in the patent, and no right to sue at law in his own name for an infringement.”[18]

Turning back to the common law of patent ownership, let us assume to begin with that the inventor and initial transferee have a traditional employee-employer relationship. Even when there is no express agreement between an inventor and her employer, courts may nonetheless find that an implied-in-fact contract exists.^[19] Three generalized factual scenarios may obtain when there is no express agreement between an employer and an employee-inventor: (1) the employee-inventor is employed to do research and development, (2) the employee-inventor is not employed to do research and development, but is acting within the scope of her employment or using her employer’s resources, and (3) the employee-inventor acts outside the scope of his employment and uses her own resources.

In scenario (1), courts almost always find the employer to be owner of the invention.^[20] “When the purpose for employment … focuses on invention, the employee has received full compensation for his or her inventive work.”^[21] In scenario (2), the employer may have an implied-in-law royalty free nontransferable license (also known as a “shop right”) if the invention was made using employer resources or by an employee acting within the scope of his employment.^[22] The employee, however, retains title to any patent.^[23] Employed inventors do not lose their right to be named inventors simply because they are employees.[24] In scenario (3), the employee has complete ownership of the patented invention, and her employer must take a license,^[25] or otherwise pay for whatever rights the employer uses. There is no statutory limit on what the employee-inventor’s compensation might be in scenario (3), and no compulsory license to the employer. In general, when there is an employer-employee relationship, courts have a tendency to assign the invention to the employer, the rationale being that the employee’s paycheck is consideration for her inventive work.

The tendency is reversed, however, when the inventor has taken definite steps toward ending the employer-employee relationship,[26] or has specifically reserved intellectual property rights to herself up front.[27] Thus, courts have a tendency to leave ownership with the inventor when the inventor has left to start a new firm, or was hired only on a consulting basis.

In concluding this brief overview of patent ownership law, it is worth noting that in addition to the common law on patent transfers there are some state and federal statutes that govern transfers of patent ownership in certain limited circumstances. In particular, there are some states that limit the enforceable scope of contractual assignments of patent rights from employee to employer to what would be implied at common law. In other words, in some states an employee-inventor cannot assign to her employer what her employer would not otherwise be entitled to at common law.[28] In addition, mirroring the state statutes that apply restrictions to private contract, there are at least two federal and several state statutes that apply restrictions on ownership of inventions by government employees or employees working under government contract with a particular agency.^[29] For example, the statute applicable to the National Space Program declares that “[w]henever any invention is made in the performance of any work under any contract of the [National Aeronautics and Space] Administration” and the employee was either “assigned to perform research,” or was acting within the scope of employment and using government resources, “such invention shall be the exclusive property of the United States.”^[30]

            Last but not least, under the Bayh-Dole Act of 1980, inventors employed by a not-for-profit organization or small business firm that has entered into a funding agreement with the federal government are entitled to separate compensation for inventions made during their employment.[31] Most major universities in the United States, both public and private, now have an office dedicated to acquiring patent rights for research done at the university, and with licensing those patent rights for commercial development.

 

---

[1] See, e.g., 35 U.S.C. § 102 (“A person shall be entitled to a patent unless …”).

[2] See 35 U.S.C. § 101.

[3] Typically, a plaintiff would bring a tort claim of trade secret misappropriation or unfair competition if patent title were still inchoate (i.e., if a patent had not issued), and a breach of contract claim (either express or implied) otherwise.

[4] See 35 U.S.C. § 111(a)(1).

[5] See Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341, 344 (Fed. Cir. 1997).

[6] Smith v. Nichols, 88 U.S.112, 118 (1874).

[7] Almost all because in 2002 the Supreme Court ruled that the regional circuits have jurisdiction over appeals involving patent infringement counterclaims that would not appear on the face of a well-pleaded complaint. See Holmes Group, Inc. v. Vornado Air Circulation Sys., Inc., 535 U.S.826 (2002). For the twenty years between 1982 and 2002 the Federal Circuit’s appellate jurisdiction was entirely exclusive.

[8] Burroughs Wellcome Co. v. Barr Lab., Inc., 40 F.3d 1223, 1227 (Fed. Cir. 1994).

[9] Hybritech Inc. v. Monoclonal Antibodies, Inc., 802 F.2d 1367, 1376 (Fed. Cir. 1986) (citing 1 Robinson on Patents 532 (1890)).

[10] Burroughs Wellcome Co. v. Barr Lab., Inc., 40 F.3d 1223, 1228 (Fed. Cir. 1994).

[11] Id.

[12] Id.

[13] Id. at 1229.

[14] See Ethicon, Inc. v. U.S.Surgical Corp., 135 F.3d 1456, 1460 (Fed. Cir. 1998).

[15] See, e.g., Gayler v. Wilder, 51 U.S. 477 (1850).

[16] See CMS Indus., Inc. v. LPS Int’l, Ltd., 643 F.2d 289 (5th Cir. 1981).

[17] See Waterman v. Mackenzie, 138 U.S. 252, 255 (1891).

[18] Id.

[19] See, e.g., Teets v. Chromalloy Gas Turbine Co., 83 F.3d 403 (Fed. Cir. 1996)

[20] Id.

[21] Id. at 407 (citations omitted).

[22] See, e.g., Banner Metals v. Lockwood, 3 Cal. Rptr. 421 (Dist. Ct. App. 1960). Supreme Court precedents include United States v. Dubilier Condenser Co., 289 U.S. 178, 187 (1933) and Solomons v. United States, 137 U.S. 342, 346 (1890).

[23] See Wommack v. Durham Pecan Co., Inc., 715 F.2d 962, 965 (5th Cir. 1983) (“The inventor retains a valid patent.”) However, the existence of a “reverse shop right,” i.e., an employee’s implied right to make, use, and sell an invention made within the scope of his employment to others has been rejected by at least one court. See Mainland Indus., Inc. v. Timberland Mach. & Eng’g Co., 649 P.2d 613, 618 (Or. Ct. App. 1982) (holding for plaintiff when defendants conceded that no precedent exists for applying the “shop-right” doctrine in favor of an employee and the facts did not warrant application of the doctrine).

[24] See Lipscomb’s Walker on Patents 331 (1986). There is an analogy here to the moral right of attribution found in civil law jurisdictions, and more recently, under the Visual Artists Rights Act in the United States. See 17 U.S.C. §106A.

[25] This is the scenario in which no contract implied-in-fact or shop right has been found. Thus, the cases cited for scenarios (1) and (2) are generally applicable to scenario (3).

[26] See Koehring Co. v. E.D. Etnyre & Co., 254 F. Supp. 334 (N.D. Ill. 1966).

[27] See, e.g., Lone Star Steel Co. v. Wahl, 636 S.W.2d 217 (Tex. App. 1982); see also John Mohr & Sons, Inc. v. Jahnke, 198 N.W.2d 363 (Wis. 1972); Jamesbury Co. v. Worcester Valve Co., 318 F. Supp. 1 (D. Mass. 1970).

[28] Eleven states have passed such statutes, including California, Delaware, Illinois, Kansas, Minnesota, Nevada, North Carolina, North Dakota, South Dakota, Utah, and Washington. See

Del. Code Ann. tit. 19, § 805 (West 2003) (enacted 1984); 765 Ill. Comp. Stat. 1060/2 (West 2004)(enacted 1983); Kan. Stat. Ann. § 44-130 (West 2003) (enacted 1981); Minn. Stat. § 181.78 (West 2004) (enacted 1977); Nev. Rev. Stat. § 600.500 (West 2004) (enacted 2001); N.C. Gen. Stat. §§ 66-57.1 to 66-57.2 (West 2003) (enacted 1981); N.D. Cent. Code § 34-02-11 (West 2003); S.D. Codified Laws § 60-2-10 (West 2003); Utah Code Ann. § 34-39-1 to 34-39-3 (West 2003) (enacted 1989); Wash. Rev. Code § 49.44.140 (enacted 1979). The North and South Dakota statutes appear broader, but have been interpreted to apply the same restraint of contract made express in the other statutes. See Keller v. Clark Equipment Co., 715 F.2d 1280, 1287 (8th Cir. 1983) (interpreting N.D. statute); Rural Pennington County Tax Ass’n v. Dier, 515 N.W.2d 841, 846 (S.D. 1994).

[29] For federal statutes, see 42 U.S.C. § 2457 (NASA) and 42 U.S.C. § 5908 (Department of Energy). For state statutes, see Conn. Gen. Stat. Ann. §§ 4-61a.

[30] 42 U.S.C. § 2457(a). These are, of course, the same common law exceptions that we’ve seen all along.

[31] See 35 U.S.C. § 200 et seq.