Broken Symmetry

Who owns that patent? Has it been licensed?

Non-specialists may be surprised to learn that the answers to these basis questions in many instances remain indeterminate. Susan L. Glovsky provides an excellent post on PatentlyO on the subject:

The time has come to enact national legislation that provides clear record title to patent applications and patents. The value of patents is too great to continue with the present system. Moreover, patents are a federal right and should be addressed at a federal level. A national system would harmonize U.S. law with those of other countries, which generally have a national system for recordation of patent rights. Recently, the Patent Office proposed rules that would require disclosure of any assignee of patent rights. But these rules simply do not go far enough. Legislation is necessary in order to provide a comprehensive internationally recognized system that assures the recordation of patent title, security interests, and other encumbrances through filings solely in the Patent Office.

See also Patent Reform through the Creation of Economic Facts. A few years ago, I suggested here that an econometric analysis of patented features that focused on frequency-averaged measures of sales and manufacturing might be useful as a mechanism for valuing patents. That is way too complicated to be workable right now at least. But with reliable information about ownership and prior licensing of a portfolio available, comparable-based patent valuations would become more feasible for the many market participants who do not come with their own private database of such information.

Highlights of Patent Reform Legislation

Section 3.  First Inventor to File

Summary

Amends 35 U.S.C. § 102 to redefine prior art as anything patented, published, on sale, or in public use before filing, or any patent application filed by another before the effective filing date of the claimed invention.

Eliminates most interference proceedings.  (Derivation proceedings for allegedly copied remain available.)

Effective Date

18-months after the date of enactment, applying to any patent filed or claiming priority to a patent filed thereafter

Practice Notes

Clients have six months after enactment to educate inventors about the elimination of the 1-year grace period, and need to get a patent application on file.

 

Section 4.  INVENTOR'S OATH OR DECLARATION

Summary

Amends 35 U.S.C. § 115 to permit applicants to make a "substitute statement" in lieu of an oath or declaration when an inventor is deceased, under legal incapacity, or cannot be found or reached after diligent effort."

Amends 35 U.S.C. § 118 to permit applicants to apply on behalf of inventors when "the inventor has assigned or is under an obligation to assign."  Until now, applicants were permitted to apply on behalf of an inventor only when the inventor could not be found or reached after diligent effort.

Effective Date

One year after the date of enactment, applying to any patent application filed on or after that date

Practice Notes

Section 4 will streamline the process of obtaining oaths or declarations, a process which under the current rules has been a hassle, especially in locating former employees upon the filing of continuations or divisionals of an original application.

 

Section 5.  Prior COMMERCIAL Use DEFENSE

Summary

This section expands the prior user defense under 35 U.S.C. § 173, currently is available only for business method patents, to all patents.

The prior user bears the burden of showing a prior use of the claimed invention more than a year before the priority date of the claimed invention.  Such prior uses would be a valid defense even if kept confidential.

The defense is personal to the prior user and non-transferable except for transfers of an entire enterprise or line of business, and then only for prior uses at the same site.

The defense is unavailable to prior users when the invention was owned by or under obligation of assignment to a university at the time the invention was made.  There is an exception to this exception for when federal funding was required to reduce the invention to practice.

Effective Date

Date of enactment, applying to any patent issued on or after.

Practice Notes

We expect the prior user defense could be valuable to  defendants in software patent litigations, although the defense is available only to patents issuing after the date of enactment, and we have some concerns with how such a defense would fit within overall case strategy.

 

Section 6.  POST-GRANT REVIEW PROCEEDINGS

Summary

Creates a European-style opposition proceeding, whereby third parties may challenge the patentability of an issued patent in an inter partes proceeding before the PTO within one year after a patent issues.

Like inter partes reexaminations, these post-grant review proceedings will have a preclusive effect on the party who brings them — i.e., that party may not assert either in a civil action or ITC action a defense of invalidity on any ground raised or that could have been raised during the post-grant review proceeding.

Effective Date

One-year after date of enactment, applying to any patents issued before, on, or after that date.

Practice Notes

Based on experience with inter partes reexamination proceedings, we do not expect post-grant review to provide much help for defendants in patent litigation.  Many venues do not grant stays pending reexamination, and in general the PTO is more friendly to patentees than the district courts.  Nonetheless the procedure may be useful in narrow circumstances, such as when a European counterpart has already been rejected in an Opposition proceeding and a U.S. patent issues.

Section 9.  VENUE

Summary

Changes venue from appeals of PTO decisions that are now filed in the District of D.C. to the Eastern District of Virginia, which is closer to the new PTO headquarters.

Effective Date

Date of enactment, applying to any civil action filed on or after

Practice Notes

We generally recommend that appeals be made to the Federal Circuit when that alternative is available, and the PTO has recently taken the position that many issues that have been appealed to the D.D.C. (such as appeal of B.P.A.I. decisions in reexamination) are now subject only to appeal in the Federal Circuit.

 

Section 10.  FEE SETTING AUTHORITY

Summary

Gives PTO fee-setting authority and control of fees subject to limited Congressional oversight.  Please contact us for additional details if you would like to know more about these provisions.

Also gives universities micro-entity status and hence reduced filing fees.

Effective Date

Date of enactment

Practice Notes

Along with Section 22, this was one of the most contentious sections in the bill, since the House Appropriations Committee has never given plenary authority to an Executive agency to manage its own budget.  H.R. 1249 represents a political compromise, which was approved by PTO Director David Kappos and the Obama Administration

 

Section 14.  TAX STRATEGIES DEEMED WITHIN THE PRIOR ART

Summary

Deems tax strategies “insufficient to differentiate a claimed invention from the prior art,” and not indistinguishable from other information available to the public that is relevant to a patent’s claim of originality.

Software that enables individuals to file their income tax returns is specifically excluded from this section — i.e., such software patents would not be deemed invalid merely as a result of this section

H.R. 1249 would also permit the PTO to seek advice and assistance from the Department of Treasury and the Internal Revenue Service to ensure that patents to do not infringe on the ability of others to interpret the tax law and that implementing such interpretations remains in the public domain.

Effective Date

Date of enactment, applying to any patent application that is pending on, or filed on or after, that date, and to any patent that is issued on or after that date

Practice Notes

Clients should contact us if they have concerns about whether particular claims might be deemed invalid under this provision.

 

Section 15.  BEST MODE REQUIREMENT

Summary

Removes as a defense to patent infringement the patentee’s failure to comply with the best mode requirement.  (The “best mode” is currently required in patent applications to describe how an invention should be used)

Effective Date

Date of enactment, applying to proceedings commenced on or after that date.

Practice Notes

Best mode defenses are rarely successful, and this Section merely codifies the practical reality that has existed for some time under Federal Circuit common law.

 

Section 16.  Marking

Summary

Allow a manufacturer to write the word “patent” or “pat.” on a product, along with a reference to an internet website that the public can access free of charge to learn more about the specific patent.

Eliminates most liability for false marking

Effective Date

Date of enactment, applying to all cases, without exception, that are pending on, or commenced on or after, the date of the enactment of this Act

Practice Notes

Gives statutory approval to a practice already common among patent owners.  Puts a damper on cottage industry of qui tam litigation for false marking

 

Section 17.  ADVICE OF COUNSEL

Summary

Codifies holding of In re Seagate Technology, LLC, 497 F. 3d 1360 (Fed. Cir. 2007), which held that failure to obtain advice of counsel may not be used to prove willful infringement.

Effective Date

Not clearly specified

Practice Notes

MWE represented Seagate in the appeal that resulted in this holding.  Please contact us if you'd like additional details.

 

Section 19.  JURISDICTION AND PROCEDURAL MATTERS

Summary

Includes general prohibition against joinder of multiple defendants in a single lawsuit for infringement of the same patent by different accused products

Effective Date

Date of enactment, applying to any lawsuits followed on or after that date.

 Practice Notes

Could bring end to what is now a common practice by NPEs.

 

Section 23.  SATELLITE OFFICES

Summary

Requires the Director to establish three or more satellite offices within a three-year window, subject to available resources, to carry out the responsibilities of the PTO

 

Section 26.  PRIORITY EXAMINATION

Summary

Requires that the PTO establish regulations that prioritize examination of applications for products, processes, or technologies that are important to the national economy or national competitiveness without recovering the aggregate extra cost of providing such prioritization

Creates a “Track I” fee of $4,800 that would allow an inventor to receive a “prioritized” examination of his or her patent

 

Paul Graham Offers a Private Solution to Patent Reform

Thought provoking as usual:

The patent pledge doesn't fix every problem with patents. It won't stop patent trolls, for example; they're already pariahs. But the problem the patent pledge does fix may be more serious than the problem of patent trolls. Patent trolls are just parasites. A clumsy parasite may occasionally kill the host, but that's not its goal. Whereas companies that sue startups for patent infringement generally do it with explicit goal of keeping their product off the market.

I like the idea of introducing private solutions. I've personally worked on a few. An underlying problem is that the economics of innovation are quite different for different technologies, so even if the law applied the same way (which is doesn't; claim construction is rarely an issue in claims to chemical compounds), the balance between stronger and weaker patent rights would be different.

It's worth noting that the pledge wouldn't affect any of the litigations I currently work on, or even any litigation I have ever worked on. Patent infringement lawsuits against startups (not founded by non-former employees) are a very recent development, which can be linked to the large-scale aggregation of patents by non-practicing entities over the past ten years.

Bleg to Readers Who Code: Better Way to Claim Software?

Mea Vita offers interesting insight into Apple's development procees:

Before writing any production code, we'd write our unit tests. All software engineers should be taught to write their API unit tests first – it's a good discipline to learn. Next, we coded using WebObjects/Java with Eclipse/WOLips and we always ran the app in debug mode with key break points so that we could step through the code. I've frequently seen too many software engineers, elsewhere, who just code away as if they're throwing something against the wall to see what sticks.

Here's what wikipedia says about unit testing:

Each unit test can be seen as a design element specifying classes, methods, and observable behaviour. ... It is true that unit testing lacks some of the accessibility of a diagram, but UML diagrams are now easily generated for most modern languages by free tools (usually available as extensions to IDEs). Free tools, like those based on the xUnit framework, outsource to another system the graphical rendering of a view for human consumption.

Can any BS readers offer a view on whether or not a claim to units would be easier to construe to determine patentability, validity, infringement than a single-English-sentence claim?

More generally, I often wonder how the practice of claiming chemical structures was first adopted and approved by the PTO. What would it take to get the PTO to require software to be claimed in a new way?

Supreme Court Affirms the Priority of Individual Rights under the Patent Act

Stanford v. Roche decided today:

Since 1790, the patent law has operated on the premise that rights in an invention belong to the inventor. The question here is whether the University and Small Busi-ness Patent Procedures Act of 1980—commonly referred toas the Bayh-Dole Act—displaces that norm and automati-cally vests title to federally funded inventions in federal contractors. We hold that it does not.

As noted in the Sotomayor concurrence, footnote 2 on page 5 expressly reserved the questions that would have been raised by consideration of the Federal Circuit's precedents regarding interpretation of patent assignments. Thus, the guidance on choice of law that seemed possible after oral arguments have been reserved for future consideration. It is notable, however, that even the dissenters (Breyer and Ginsburg) who addressed the Federal Circuit precedent were silent as to the choice of law question.

Patent Reform through the Creation of Economic Facts

This piece by Hernando de Soto on the "Destruction of Economic Facts" caught my eye not long ago:

During the second half of the 19th century, the world's biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. If you wanted to know who owned land or owed a debt, it was a fact recorded locally—and most likely shielded from outsiders. At the same time, the world was expanding. Travel between cities and countries became more common and global trade increased. The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

The patent system is an example of one of these "public memory systems," which has facilitated transactions in intangible (exclulsionary) rights.

The focus of de Soto's attention is on the financial services industry, and in particular on how innovation in financial services has destabilized and undermined the consistence of public memory systems. On his view, this is a root cause of our ongoing recession:

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don't know and can't prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

Go ahead and click through to read the whole piece. His is profound insight. Note one earlier link on BS to a similarly thought provoking piece by de Soto.

What about the patent system? Has the patent system undergone a similar destruction of economic facts over the last twenty years?

Not really. More the opposite seems to be true, in fact. At least since the Federal Circuit was established, and especially lately since patent office records worldwide are now available online, the patent system has never functioned more effectively.

And yet, even with all of these improvements, it seems to me that the patent system has not yet been able to provide enough "economic facts" for the market to transition from litigation to transactional norms in handling the allocation and reallocation of patent rights. In effect, there has been no destruction of economic facts within the patent system because the patent system never created economic facts to begin with.

The production of "economic facts" in the sense that de Soto describes should be the ultimate goal of any patent reform. We have seen many incremental and even discontinuous leaps in that direction over the past few decades. But we are not there yet.

Problems with ascertaining title and encumbrances on title are foundational to any economic facts about patents. The systems for handling these economic facts with respect to real property and even copyright are more highly developed than they are for patents, even though title goes to the very root of how patents are valued now because problems with standing can result in zero returns to enforcement.

All of the issues that have been addressed lately, including Therasense yesterday, will help move us incrementally closer to a world in which patent rights transact without litigation. But a focus on the creation and maintenance of a "public memory system" -- a source of "economic facts" about patent valuation -- will get us there quicker.

At the end of the day, valuing patent portfolios is not more complex than the valuation of collateralized debt obligations, currency derivatives, or interest rate swaps. The difference is that those intangibles have (or at least had) a foundation of "economic facts" to facilitate transactions.

Federal Circuit Upholds District Court Interpretation of Contract Assigning Non-exclusive Licenses

The Rembrandt Techs. opinion includes the following diagrams of chain of title and licensing of the asserted patents:

At issue was the question of whether the assignment of the licenses from Old Rockwell to New Rockwell were valid, such the sublicense from New Rockwell to Conexant was sufficient to exhaust the patent rights.

Transferability of licenses presents thorny choice of law issues in many cases because different states have different presumptions when it comes to the validity or enforceability of any kind of restrictions (encumbrances, covenants, or licenses) on personal property. Compare Cadtrak Corp. with Superbrace.

There is nothing in the Opinion to indicate what law was applied in interpreting the relevant contracts.

Split within Federal Circuit on Federal Preemption of State Law in Ownership Disputes

[Below is the text of a case note submitted by me to the MWE IP Update Newsletter, which is recommended reading for anybody interested in keeping up with new developments in patent, trademark, copyright, and trade secret law. Eventually, they should have it up in blog format. In the meantime, I'll "crosspost." -MFM]

Last November, a split panel of judges on the U.S. Court of Appeals for the Federal Circuit vacated a district court finding of infringement by generic drug maker Navinta on the grounds that the plaintiff Abraxis had not properly transferred ownership of the asserted patents prior to the filing of the complaint. Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Nov. 9, 2010) (Gajarsa, Linn for the Court) (Gajarsa, opinion) (Newman, dissenting). The recent per curiam denial of petition for rehearing by the Court en banc was occasion for the delivery of spirited opinions concurring (Gajarsa, Linn, and Dyk) (Gajarsa, opinion) and dissenting (O'Malley, Newman) (O'Malley opinion). Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Mar. 14, 2011). Although without consequence to the original panel decision, the concurrence and dissent from rehearing en banc expose a subtle, but potentially momentous difference in opinion on the choice of law for interpretation of patent assignments.

The problem with title arose from a series of mergers and asset acquisitions carried out in relatively quick succession. In chronological order, the inventors assigned ownership to Astra Lakemedel Aktieboag ("Astra L") and AB Astra. AB Astra then merged into AstraZeneca AB ("AZ-AB"). Astra L and AZ-AB later (in late 2007) assigned ownership to their parent, AstraZeneca ("AZ-UK"), but not before plaintiff Abraxis had entered (on April 26, 2006) into an Asset Purchase Agreement ("APA") with AZ-UK. Thus, even at closing on June 28, 2006, when AZ-UK made a present assignment of its ownership to Abraxis in an IP Assignment Agreement included in the closing documents, AZ-UK did not have legal title to the patents, which had not yet been assigned to AZ-UK by its subsidiaries Astra L and AZ-AB. When the oversight was corrected in late 2007, Abraxis had already filed its complaint against Navinta.

Although patent law is often thought to be exclusively federal, in fact many disputes over patent ownership turn on common law rules of contract and property that, at least since Erie v. Tompkins, have been considered state rather than federal. Notwithstanding that history, the panel majority at least have recognized limited federal preemption of state law in interpreting contracts of assignment. Unfortunately for Abraxis, the APA provided only that AZ-UK "shall cause" the assignment of ownership to Abraxis. In accordance with the precedent of DDB v. Techs. (Fed. Cir. 2008), Federal Circuit law applies to the interpretation of such an assignment, and Federal Circuit law holds that such an assignment does not operate as a present assignment of rights, but rather as a promise to assign in the future. The dissent from the panel opinion by Judge Newman, and the dissent from rehearing en banc by Judge O'Malley (joined by Judge Newman), argue that the application of New York state law by the district court (which upheld Abraxis's claim to ownership) was correct, and that the majority was overextending the reach of federal jurisdiction.

Interestingly, the precise rule of law invoked by the panel majority is now under consideration by the Supreme Court in Stanford v. Roche. In that case, the Federal Circuit vacated a judgment against Roche because the inventor had made only a promise to assign to Stanford. The Supreme Court agreed to review the decision because of the questions it raised about whether the Bayh-Dole Act (which permits transfer of title of federally funded inventions to universities) trumped common law rules of property. The Federal Circuit decision applied the rule of DDB without comment on the preemption of state by federal law. The Supreme Court decision in Stanford v. Roche could, therefore, have a substantial impact on the advice given clients in transactions requiring assignment of ownership, even in non-Bayh-Dole settings.

Practice Note: In advising buyers in a merger, lawyers should make closing contingent upon clear documentation of chain of title from any subsidiaries to the seller, so that a present assignment at closing includes all the bargained-for rights. Stay tuned for the Supreme Court opinion in Stanford v. Roche.

FTC issues Report on the Patent System

From the FTC press release:

A new Federal Trade Commission report recommends improvements to two areas of patent law policies affecting how well a patent gives notice to the public of what technology is protected and remedies for patent infringement. The report, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition, emphasizes that the patent system and competition policy share the goal of promoting innovation that benefits consumers.

Available here. My letter comment posted here was cited in a few places in the report. In general, I like what I'm reading. I'm disappointed that the report wasn't issued sooner given the imminent passage of reform legislation. Kudos to the authors for completing such a formidable task.

Chicago Innovating in Technology Transfer

From the UChicagoTech blog:

One of the biggest challenges to early stage innovation is that it most needs experienced advice when it is least able to attract it, says Alan Thomas, director of UChicagoTech, the University of Chicago’s Office of Technology and Intellectual Property. “A structural problem in Chicago is that at this embryonic point there have been very few resources to turn to,” he says.

...

Start-up ventures are more likely to thrive when advised by multiple mentors with proven skills and experience. “Collectively we are stewarding discoveries flowing from between a billion and a billion and half dollars per year of basic research,” Thomas says.

Thomas and his team have a more clear-eyed view of the landscape than some of the more established tech transfer offices. The potential weak points I see in the plan are (1) that mentors won't have enough skin in the game to do more than provide very early and general advice; and related: (2) adverse selection resulting from more experienced inventors and mentors never opting into the program. Both might be alleviated if they can get a handful of high-profile anchor tenants signed up immediately. Still, it looks promising, and I look forward to hearing more as the plan is implemented.

Square Cofounder an Omitted Coinventor of Patent Apps Owned by Wash. U. Professor?

Techcrunch reports:

In or about February 2009, Mr. McKelvey contacted his friend of 20 years, Mr. Robert Morley, Jr., to help build a prototype magnetic card reader that could be plugged into a cell phone input jack. Mr. Morley, a professor at Washington University, had previous experience working with magnetic card readers.

Over a period of several days, working in Mr. McKelvey’s glass studio and Mr. Morley’s laboratory at Washington University, Mr. McKelvey and Mr. Morley exchanged ideas regarding the design of the prototype card reader.

Square is one of the hottest startups in Silicon Valley, backed by Khosla Ventures GP (and former Facebook and YouTube CFO) Gideon Yu, and cofounded by Twitter cofounder Jack Dorsey. A recent hire was Keith Rabois, an early PayPal exec who had a successful exit at Slide most recently. Keith was also an IP litigator back in the day.

Based only on the allegations in the complaint, it looks to me like Square has a potentially viable claim for co-inventorship and co-ownership here. I got curious to see just how deep the rabbit goes by looking up to see whether Morley had any federal funding for his research at Wash U. His CV doesn't show any recent federal funding, which is lucky for him, since whatever he might get from Square in resolving this dispute could escheat to Wash. U. depending on how Stanford v. Roche gets decided.

Ron Conway on the Patent Licensing Business Model

RC: I would never invest in a company that was a basket of patents and then made a business of litigating with people. I think that is ... I want to say "slimy," but I don't want to be that bad. I just think that's a really difficult way to think you're going to add value and make a return on investment.

Via O'Reilly Radar

Kudos to Kappos

I'm an unabashed fan of this:

So imagine the courage and leadership necessary for David Kappos and his team to look at the revenue from selling these products, and to say ‘No, that’s wrong. The President's Open Government Directive makes it clear that these should be public goods, available without fee or favor; bundle them into the bulk downloads’.

Via O'Reilly Radar

Valuing Patented Features of Complex Systems Using Frequency-Averaged Measures of Demand

[Submitted today in response to this call for papers. -MFM]

ABSTRACT

Thanks to the ubiquity and integration of digital computers, each consumer of a product or service now produces a digital stream of data. Bundled together, these streams of data record how particular products or services, including any patented features, are valued by actual consumers in different geographical regions and in different windows of time. Most relevant to patent royalty calculations are the histories of transactions for a particular product or service. These transactions eventually show up in financial statements, which permit top-down estimates of value, such as revenue or gross margins. But alternative metrics drawn from these streams, such as change in the frequency of transactions before and after the introduction of a patented feature, also permit bottom-up estimates of the value of patented features. Demand can also be estimated using metrics for customer engagement, such as the frequency and length of visits to a particular website or the conversion ratio of number of independent visits per completed transaction. In some cases, analyses of these data permit calculation of a more reliable lower bound for the marginal value of a patented feature to a complex product or service. More generally, time-frequency analyses of data on consumer behavior complement existing methods for calculating lost profits or reasonable royalties, and can help resolve questions about the marginal value a patented feature adds to a complex or highly integrated product or service.

The Damages Apportionment Problem for Complex Systems

Under 35 U.S.C. § 284, “[u]pon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” Famously, the Southern District of New York laid out a “comprehensive list of [fifteen] evidentiary facts  relevant, in general, to the determination of the amount of a reasonable royalty for a patent license” Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y.1970). The thirteenth in this list is “[t]he portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.” Id.

When Georgia-Pacific was decided in 1970, Jimi Hendrix was still performing, the Internet was known only as ARPANET, and access to information about cutting edge research and development usually required national security clearance. Four decades later, instead of secrets about national defense leaking to the press through a former first lieutenant in the Marine Corps with high-level security clearance, an Australian hacker is leaking them to the Internet. Instead of a carefully choreographed ballet of contractors producing a 747, a globally distributed swarm of programmers continuously releases new features and combinations of features in an effort to attract a stable base of users. Consumers depend upon producers – producers who compete vigorously with each other to make the sales necessary for their own survival – to cooperate in the development and adoption of industry standards that are necessary for complex, integrated systems to exist at all. The Federal Circuit put it well in describing one of the most commercially successful productivity software products as “an enormously complex software program comprising hundreds, if not thousands or even more, features.” Lucent Technologies, Inc. v. Gateway, Inc., 580 F. 3d 1301, 1333 (Fed. Cir. 2009). The Federal Circuit found “it inconceivable to conclude, based on the present record, that the use of one small feature … constitutes a substantial portion of the value.” Id.

Most lawyers agree with the Federal Circuit that the base for calculating royalties should be discounted to adjust for the value that other features contribute to a product. Other features may include features themselves covered by other patents (not owned in common with a patent-in-suit), or features not easily protectable through patents (such as the durability of parts, precision of manufacturing tolerances, or the timely availability of the product or service at a requested order volume). Moreover, what feature or features were sufficient or necessary to the completion of a sale may vary from customer to customer, or even for the same customer over time. In most cases, it is indeed inconceivable that any single patented feature could be responsible for the entire revenue (much less profit) generated by a complex or highly integrated product or service.

On the other hand, the very fact that an infringer has chosen to implement a patented feature rather than a non-infringing alternative is strong evidence that the patented feature most likely contributes some finite value to the product or service. That value, in turn, is ultimately reflected in the revenue and profit generated by the sale of the complex product or service that includes the patented feature.

[Discussion of economic case for patents, focusing on the potential social benefit of granting property rights in easily appropriable innovations in markets with high barriers to entry. Exclusionary rights permit supracompetitive prices in proportion to inelasticity of demand for patented innovations. Thus, measuring inelasticity of demand is core problem for patent valuation in general, and for damages apportionment in particular.]

Measuring the Price Elasticity of Demand

The Federal Circuit has acknowledged that price elasticity is at the core of the problem of patent valuation. The opinion in Crystal Semiconductor v. Tritech Microelectronics, 246 F. 3d 1336 (2001) is particularly instructive, although it deals specifically with price erosion. In Crystal Semiconductor, the Federal Circuit explained the economic theory of price elasticity:

For example, if substitution of a product were impossible and the product were a necessity, elasticity of demand would be zero — meaning consumers would purchase the product at identical rates even when the price increases. This very rare type of market is called inelastic. On the other side of the spectrum, if any price increase would eradicate demand, elasticity of demand would be infinite — meaning consumers would decline to purchase another single product if the price increases by any amount. This very rare type of market is called perfectly elastic. Markets typically have an elasticity greater than zero and less than infinity.

Crystal Semiconductor, 246 F.3d at 1359 (italics added). In other words, the market value of a patented feature should be tied to its effect on price elasticity, and price elasticity can be estimated by reference to the relative rate of sales at different price levels. The Federal Circuit went on to rule that the patentee in Crystal Semiconductor had failed to show sufficient evidence of whether or how much the rate of sales would have declined as a result of a price increase. Id. at 1360-1. It is enough for my purposes, however, to note that the Crystal Semiconductor case provides a legal precedent for the use frequency-averaged measures of the value of patented innovations, such as relative rates of sales.

Top-Down Estimates from Time-Averaged Revenues and Profits

The approach to estimating price elasticity described in Crystal Semiconductor requires the use of revenue and profit figures, which would typically be derived from financial statements. Financial statements provide a highly compact summary of the entire history of transactions that occurred among a company and its many stakeholders, from the purchasing of capital equipment and parts from suppliers, to the payment of labor for design and assembly, to the actual payments of cash from customers for delivery of the final product. Thus, financial statements provide a good foundation for what I will call “top-down” estimates of the value of patented features.

[Discussion of the information architecture of financial statements: Income and cash-flow statement record time-integrated flow of revenue and expenses; balance sheet records snapshot in time of assets and liabilities. The information architecture of financial statements lends itself to optimization of time-averaged measures of efficiency in increasing sales, decreasing costs of sales. Trends in sales or costs of sales are visible only after two or more periods have elapsed.]

Top-down estimates of the value of patented innovations are most appropriate for valuation of products or services that are protected by a single patent. Top-down estimates provide only a ceiling on valuation when multiple patents cover each product or service sold in the transactions that ultimately result in the financial statements from which the top-down estimates are drawn.

Frequency-Averaged Measures of Productivity

Every time-averaged measure of profitability has a frequency-averaged counterpart. In practice, experienced investors and managers use both to develop a picture of the health of an organization. For example, in addition to gross margin – a time-averaged ratio of profit to revenue – experienced investors and managers also track inventory turnover – a frequency-averaged ratio of costs of goods sold to average inventory. A company with high gross margins but dropping inventory turnover is unlikely to maintain its margins going forward. Conversely, low margins with increasing inventory turnover signals that higher margins might be available in the future. [Discuss analogy to driving without a tachometer.]

Inside large corporations, managers don’t wait until the end of the quarter to spot trends in supply or demand for a particular good or service. Rather, managers monitor daily reports about order and inventory volume to ensure that the supply of products and services stays synchronized with customer demand.

Bottom-up Estimates from Frequency-Averaged Measures

The stream of data that management uses for frequency-averaged measures of productivity provides the basis for alternative, bottom-up estimates of demand for patented innovations. Bottom-up estimates derived from frequency-averaged measures are useful in valuing patents on innovations introduced as features of an existing product or service, or in valuing patents on products or services that are sold as a bundle with many other products or services. Bottom-up estimates may also be helpful in putting a more reliable floor on the minimum value of a patented innovation. A variety of techniques may be used to produce bottom-up estimates using frequency-averaged measures. I give two as examples: Fourier analysis of a time-series of transactions and A|B testing of a web service.

Sales of a particular product are recorded as a time-series of transactions, each of which is associated with a particular price. Within a particular window of time, one can count up the number of transactions and the total sales. The former is a frequency-integrated measure of sales, the latter the time-integrated measure of revenue. Focussing on the former, we can see how the frequency of sales changes within different same-width and different-width windows of time. Most relevant to patent valuation, we can look at how the frequency of sales changes before and after the introduction of a new patented feature. If frequency increases even as price is held constant or decreased, the patented feature probably increased the demand for the product or service.

Because frequencies change seasonally, many web services rely upon a more direct method for testing demand for a feature, called A|B testing. Using A|B testing, managers can watch how actual consumers interact in real-time with a web service that includes slightly different features. It is conceivable that A|B testing could be used in some cases to demonstrate that a patented feature is less desirable than an existing version of web service, effectively resolving some disputes that cannot be resolved using only top-down estimates of value. [Discussion of A|B testing, Google Analytics, Optimizely, &c.]

Does patenting strategy improve after a buyout?

According to a careful empirical study by Lerner, Sorenson, and Stromberg, the answer is yes:

Our main finding is that firms pursue more influential innovations, as measured by patent citations, in the years following private equity investments. Firms display no deterioration in their research, as measured either by patent “originality” and “generality,” and the level of patenting does not appear to change after these transactions. We find some evidence that the patent portfolios become more focused in the years after private equity investments. The increase in patent quality is greatest in the patent classes where the firm has been focused historically and in the classes where the firm increases its patenting activity after the transaction. The patterns are robust to a variety of specifications and controls. Collectively, these findings are largely inconsistent with the hypothesis that private equity-backed firms sacrifice long-run investments. Rather, private equity investments appear to be associated with a beneficial refocusing of firms’ innovative portfolios.

Via the Harvard Law School Corporate Governance and Financial Regulation blog (actually "forum"). (Am I wrong or does their name keep getting longer-winded?)

Korean Sentry Gun, U.S. Patent Pending

From Tech Reviews:

South Korea’s military has deployed machine-gun-toting robots along the heavily fortified border with North Korea, and a related promo video delivers more shock and awe than Kim Jong-Il singing the blues.

From the published U.S. patent application:

Note the correspondence address. A colleague of mine is prosecuting the application.

Wise Observations on Patenting by FTC Commissioner Rosch

From a speech given in May 2010 to the Computer and Communication Industry Association:

But one should be careful not to conclude from these studies that patents offer no benefit in high technology industries. That is because patents can have benefits beyond merely stimulating and disseminating new technology. Patents can also help to commercialize inventions. Specifically, patent rights can facilitate relationships between inventors and entities with established marketing and development capabilities. Patents can make information a tradable commodity through the use of licenses. Absent patent protection, inventors might be less willing to discuss their inventions with other firms for fear of misappropriation.

The ability to transfer inventions to other firms allows startup companies to focus exclusively on technology development and to avoid the added complexity of vertical integration. We often see in the biotech sector, for example, large, established companies acquiring promising startups once their new drug or device reaches later-stage clinical trials, which can be expensive and time consuming. To put it simply, patents facilitate specialization in invention itself.

To make the point even sharper -- the ability to transfer inventions permits inventors to work with multiple entities, thereby permitting the growth of human capital to compound both spatially and temporally.

Thoughts on Bilski

The majority opinion breaks in favor of inventors and patent owners. On the whole, this was a good day for the patent system. Chief Judge Rader got to keep the machine or transformation test, but not its status as the sole test for eligibility. Business methods are not categorically unpatentable, although the particular result here cuts against patenting particular trading strategies. But not many investors who make money trading have any incentive to spend that money patenting their strategies.

The Stevens concurrence is the most interesting part of the Opinion for me. The Supreme Court ought to try to articulate theory to guide the lower courts in drafting rules and applying them to unprecedented facts. I agree with him there.

But I disagree with his attempt to deny the historical case for patenting of business methods. For example, he calls the patenting in England of life insurance contracts a clerical error. More categorically, he cites Judge Dyk with approval:

[I]t does not appear that anyone seriously believed that one could patent “a method for organizing human activity.”

To get there, Stevens (and Dyk, and those who join them) have to distinguish patents from other sorts of privilege granted by the English monarchy at the time. But what is the basis for that distinction? Stevens is guilty of the same crime as the majority for not saying.

In fact, exclusive rights were granted to particular methods for organizing human activity on a routine basis at that time in England. Like patents of invention or importation, these grants of exclusive rights took the form of open letters or charters from the sovereign. Among these were charters for the Massachusetts Bay Colony, for example. Patents and corporations share a common historical origin. More words from Justice Stevens on their similarities and differences might have been useful in supporting the distinction. Perhaps Judge Dyk will have a say on remand.

The Separation of Ownership and Control of IP at Universities

Listening to a bit at the beginning of the House testimony on commercialization of university research, I was struck by one panelist's remark about the problems with separating ownership and control of property.

He's right about that being a problem, but doesn't seem to see that the status quo is almost the worst case scenario. Before Bayh-Dole, there was no separation of ownership and control because there was (in effect) no ownership. Patent rights were mostly ignored.

If instead faculty and student inventors had ownership, encumbered only by a shopright and some share of prospective royalties for overhead to the university, then again there would be no problem with separation of ownership and control.

It is only in the status quo that we really suffer from this problem. The panelist who made this remark clearly meant that tech transfer offices had ownership, and thus should also have control. What he does not seem to grasp is that this control is only an illusion. Faculty inventors are free to come and go from the university, to disclose or not, to cooperate or not.

Many of the biggest strategic mistakes in business are opportunity costs, costs not of doing the wrong thing, but of not doing the right thing. How many more invention disclosures, patents, and jobs would exist today if the people who best know the ideas had more control of the commercialization of their ideas?

PTO Commissioner David Kappos on University Tech Transfer

Available here:

The methodologies universities use to facilitate IP transfer are currently in flux, as traditional models evolve and new best practices emerge.

Universities on the cutting edge of this field realize that the long accepted choice between maximum diffusion of innovation and maximum revenue capture is a false choice. Put simply, universities need not sacrifice their societal obligation to disseminate knowledge in exchange for research funding. In fact, when executed well, diffusion-focused technology transfer generates more net aggregate funding, not less.

Now, royalty generation from university innovation will continue to play a role in the commercialization life cycle. But it will synergize with diffusion-focused tech transfer. And we will see less conflict between the models, because astute university innovators realize that when royalty generation comes into conflict with diffusion, it inhibits the fundamental mission of educating researchers and conducting research to produce breakthroughs that create American jobs and economic opportunity. Astute university innovators are already working to a better end.

Via Tech Transfer Tactics. I couldn't agree more at this level of generality. Now let's see whether the theory gets put into practice with more inventor and industry-friendly institutions.

AUTM Letter to OSTP on Commercialization of University Research

The AUTM letter is as good as the AAU letter was bad. Although the proof-of-concept centers cited in the letter have not been the unmitigated success that the letter suggests, the AUTM at least has acknowledged the problem, its scope, and identified the categories of solutions that seem to be providing limited success. It will be interesting to see what the OSTP does with the feedback it received from this RFI. I'm skeptical that the AUTM will get the additional funding that it wants from the federal government. But perhaps a structural change that would open up new sources of private funding might be in the offing.

Recommended reading.

AAU Responds to OSTP on Commercialization of University Research

The OSTP extended the deadline for responses to its RFI, and at least part of the reason may have been because of this letter, posted by the Tech Transfer Tactics blog.

The introductory remarks, sadly, play right into the obsolete cultural norm I excoriated in my own letter. Specifically, the AAU says "increased commercialization must not come at the expense of our universities' primary education, research, and public service missions." Why does the AAU think that increased commercialization would come at the expense of these things when there is overwhelming evidence that increased interaction with industry promotes all three?

The AAU then states mysteriously that "It is, in fact, these [public service?] missions that have led to universities' most important contributions to economic development, job creation, and technology commercialization." Huh? Unless I misunderstand the argument, the AAU is saying that we should not promote commercialization at the expense of teaching, research, and public service because teaching, research, and public service are the best way to promote commercialization. Do you want more commercialization or not?

The AAU is abundantly clear, however, on the importance of maintaining unencumbered ownership of its IP. The only sentence that appears underlined and in boldface in their entire letter states: "The current legal framework for university technology commercialization, as set forth by the Bayh-Dole Act of 1980 and implementing regulations, is effective and needs to be maintained."

A flat denial that any improvements could be made to the overall Bayh-Dole framework is an embarrassment to their cause. (Note: the letter actually does say that improvements could be made, but without explaining what improvements, by whom, how, or why. I consider this equivalent to denial.) The only reasoning they offer here (namely, that a one-size-fits-all solution isn't likely to work) seems to cut against their stance since Bayh-Dole does apply to every university the same way!

Let's turn to the numbers they cite from the AUTM, of which they seem proud. They're proud, of course, because their benchmark was tech transfer before Bayh-Dole. According to the AAU (citing the AUTM), fewer than 250 patents issued to universities annually before Bayh-Dole, whereas 3,280 issued in 2008.

Number of patents is a poor measure of innovation, but even by that measure this is nothing to boast about. Over a decade ending in the late 1990s, IBM invested about $2 billion per year into R&D and produced approximately 3,000 patents per year. The AUTM, by contrast, had over ten times that much (over $20 billion per year). Nobody expects AUTM members to be as efficient as a public corporation. (Not that that is such a high bar either.) But couldn't the AUTM have at least done 20% of what IBM did?

Part of the explanation for the discrepancy is right in the intro to the letter: "[I]t is important to recognize that the transfer of new knowledge from universities to the public domain and marketplace occur through a wide range of mechanisms, including publication and the movement of people both into and out of our institutions. (My italics.) Yup, that's right, your patents are headed out the back door.

The rest of the letter is a mixed bag. The AAU seems to have felt obligated to offer affirmative suggestions since it rejected the need for a change to Bayh-Dole. Thus, it blames a "focus disproportionately on revenue generation as opposed to moving new knowledge into the public domain for the public good." (What public good does knowledge do that nobody cares about?! Again, the premise is that making money is mutually exclusive with research and teaching.) This argument is incoherent.

The AAU do make a good point about state policies, however. Some state universities face a huge disadvantage to their local private counterparts (what's up, California?). But other states seem to give public universities a leg up on their private competition, if for no other reason than local alumni don't provide a reliable source of revenue for private endowments.

Then, of course, there is the bogeyman of conflicts trotted out again. I have commented on this point many times before, and so won't repeat what I have to say on this again here. Suffice it to say that if you don't see commercialization as mutually exclusive with teaching and research, than conflicts no longer seem fatal. Transparency and accountability are the tools for handling conflicts, not isolation and (feigned) independence.

Still I would be remisss if I didn't praise the AAU for this modicum of sense that creeps in at page 5:

The human capital aspect of technology transfer is often undervalued, but it is a fact that the students our universities educate and the faculty who conduct our research are usually the most effective means through which translation and technology transfer occurs. For example, many of the most successful university-industry interactions are based on the education and training of students who have the specific skills to meet industry needs, or on relationships that top-notch faculty members have with particular companies. These interactions do not center on intellectual property (IP) at all. Therefore, as new models for commercialization are developed, an emphasis should be placed upon fostering new interactions, relationships, and linkages, both formal and informal, that help to facilitate these efforts. Education and training must also be considered to be major components of such models.

Right. So how again would amending Bayh-Dole to give faculty and students more input into how and when IP is commercialized make tech transfer less effective?

UC Davis Chancellor Katehi on the Future of University and Industry Relationships

From an excellent report and interview by Gene Quinn:

That’s where I’m going to when I speak about public/private at the early stage where people who have the knowledge and interest come and make an assessment. They assess and they look at the landscape intellectually speaking. Considering there are 10 institutions they can even do it in a way that gives them an economy of scale....

And they could bundle together, that’s what we’re trying to do with the Department of Commerce. To tell them what’s the point of going for one patent individually and then cutting the cost of one patent instead of having many in the same area together as a bundle. Because then the research the discovery that they’re doing in the department of commerce and the PTO can be the same. You don’t need to do 5 different independent discoveries for 5 similar things. A lot of patents are in areas and they are interrelated and every time there is a whole new wave of patents there is new discovery with a different examiner and that’s why the cost is very high. So somebody could come and bundle them and then send them.

There are many good reasons for universities to start bundling IP by subject matter. I wish I'd been there to hear her talk. Something I didn't see mentioned is that most (at least research) universities already have organizations setup to manage resources over the time horizons necessary for successful industry collaboration. Endowment offices routinely sign 10-year or longer contracts with private equity funds. Universities already have the personnel and resources they need to transform the way they manage industry relationships. With people like Katehi leading, it's just a matter of time.

Commercialization of University Research

[Submitted today to the OSTP. -MFM]

The Office of Science and Technology Policy (OSTP) explains in its Request for Information (RFI) that “the Administration is interested in working with all stakeholders (including universities, companies, Federal research labs, entrepreneurs, investors, and non-profits).” I write to share my experience as a person who has been in the shoes of five out of six of these stakeholders. In addition to having worked as paid research intern at Pacific Northwest National Laboratory, I have worked as a research and teaching assistant at the University of Chicago, a CFO for a consumer Internet venture capital fund in San Francisco, and as an entrepreneur. At present, I practice patent law at the law firm of Drinker Biddle & Reath LLP, representing a mix of small and large clients, from individuals to large multinational companies, in both transactions and litigation relating to intellectual property. Notwithstanding all that, the views expressed here are mine alone, and should not be attributed to any of institutions with which I have been or am associated.

The most important and difficult problem for commercialization of university research is the financing gap between curious exploration and venture capital startups. Because new businesses provide the only sustainable mechanism for the United States to create jobs and wealth, this is also the most important and difficult problem for the United States to solve in its long-term bid to compete in the global economy.

If we want to increase the flow of inventions from our universities and laboratories into commerce, then academics must have more contact with — and inevitably, more dependence upon — people in commerce. No intangible or inanimate thing can create. Although intellectual property rights can and do facilitate multilateral agreements among universities, researchers, and industry, we must never forget this basic fact of nature.

Given that fact, one might ask the following: What is the biggest obstacle to increasing communication between universities and industry? Although there are many practical answers to this question, on my view the ultimate answer is cultural. An obsolete cultural norm is at the core of our difficulty in promoting technology transfer.

This obsolete cultural norm holds that academics must be independent from and disinterested in the consequences of their research. This norm is an ideal, which has never been realized in practice. But even as an ideal it is obsolete.

Louis Menand, in his recent treatise, The Marketplace of Ideas, explains how this cultural norm coevolved with the specialization of academics into departments and professional schools, each of which was self-regulated and, to an approximation, autonomous from the rest of the university. As a result, academics had been sequestered, both from each other and from the rest of society.

More recently, a norm of cross-diciplinarity, or interdisciplinarity, has emerged within the research university. Many academics have come to appreciate the benefits of communicating with and learning from colleagues in other departments and schools. Whereas specialization and sequestration led to stable consensus and uniform doctrine, cross-disciplinarity has brought about a Cambrian explosion in new theory. Although, like anything new at a university, cross-disciplinarity has its critics, they are few.

Transcendent University Culture

My primary purpose in writing is to point out that the next logical step in the evolution of research universities is for this cross-disciplinarity to extend through the equally artificial walls that separate research universities from the rest of our economy. If we can accept that disciplinary boundaries are artificial, and that research can have both disciplinary prejudices and credibility, then we can accept researchers as a part of commerce, and researchers that have both economic interests and academic reputations.

For our system to change, the plurality of stakeholders must recognize and embrace this new conception of what it means to be an academic. To preempt the most common objection, we must not assume that more and more frequent communication with industry entails irreconcilable conflicts of interest. Conflicts of interest can be grave. But prohibiting close relations between academics and entrepreneurs is the clumsiest and costliest way that conflicts can be addressed. More importantly, research universities already have highly evolved mechanisms for dealing with conflicts of interests, which fellow faculty have a strong interest in regulating in order to preserve their own reputations.

I therefore earnestly encourage the OSTP to bear in mind the extensive negative influence of this obsolete cultural norm in evaluating the merits of the various proposals for reform of the technology transfer system. In my remaining remarks, I give a brief answer to Part I of the RFI.

I have nothing to say about Part II of the RFI except that prior to reading this RFI, I had never heard of the NSF Engineering Research Centers Program. Upon looking them up on the Internet, I realize this is because none are located in Silicon Valley, where I have spent the bulk of my professional life. Silicon Valley is also the startup and patent capital of the United States, and perhaps the world. One might justly wonder why, besides a need to appease special interest groups, a POCC had not been located here. Private POCCs, such as Paul Graham’s Y Combinator, seem to have flourished only in the technological fields where intellectual property rights are weakest.

Answers to Questions from Part I: Promising Practices and Successful Models

What do all promising practices and successful models of technology transfer have in common? High-bandwidth feedback loops between the university and industry, promoted by fast, easy negotiations with technology transfer offices over intellectual property rights. To be more specific, the most successful models seem to be subscription-based, nonexclusive licenses of intellectual property, sometimes sweetened for the university with backended payments, such as warrants or reach-through royalties.

If this model works, then why is it not the rule at most universities? The ultimate answer is that given above — namely, that university culture often forces faculty and students to choose between the university and industry. The proximate answer is that most universities handle technology transfers on a case by case basis. With limited administrative resources, inventors avoid the hassle either by ignoring their intellectual property rights or leaving to pursue them without interference by the university.

The latter claim might sound incredible, but even rough estimates show that universities now realize only a fraction of the potential value of their research through licensing or spinoffs of their intellectual property. Top research universities that employ thousands of researchers who publish thousands of papers file only a few hundred invention disclosures with their technology transfer offices. The same universities spend billions on buildings and equipment, pay only modest salaries, and see only about 2 or 3 percent come back through licensing revenue. Comparison against for-profit benchmarks suggests that this percentage could be doubled, tripled, or quadrupled with no additional capital expenditures. Public universities ought to pay attention to these numbers, given the impending credit crisis for many state and local governments.

Aside from an obsolete cultural norm of autonomy, plain envy prevents many universities from implementing subscription-based, nonexclusive licensing of university intellectual property. Whereas the most obvious compensation structure for technology transfer offices would be commissions based on the number of nonexclusive licenses closed, the total compensation paid successful employees would be too high a multiple of the average university employee salary to be tolerated by other employees. Many university endowments have effectively sidestepped this envy problem by physically and legally dissociating themselves from the rest of campus, and by hiring private investment managers. These are viable options, albeit politically unpalatable given the people already employed within most universities. Perhaps only the federal government has the authority necessary to bring about the large-scale radical changes necessary.

We have a host of spectacular successes, both old and new, to strengthen our resolve. The Stanford Electronics Research Laboratory spawned a host of semiconductor companies — so many that the area in which they were (and are) located is now known as Silicon Valley. Nonexclusive licensing of the Cohen-Boyer patent by Stanford’s then-nascent Office of Technology Licensing gave birth to Genentech and a biotechnology industry in both Northern and Southern California. More recently, the MIT Media Lab has given birth to a host of digital technologies, including the electronic ink in display technology used in the Amazon Kindle, and predictive analytics drawn from massive amounts of real-time location-specific data.[1]

What these successes have taught us is that when universities are easy to deal with, investors will risk money, and entrepreneurs time, to complete the customer discovery work necessary to identify commercial opportunities. There is no one-size-fits-all answer to the question of how research can be commercialized. Rather, commercializing research is an iterative process of asking and answering that question over and over again. Nobody bothers to ask when it’s none of their business.

Freedom to Discover and Invent

The lasting legacy of the cultural and institutional reforms prescribed here will be freedom. More freedom for faculty and students to do what they do best, which is discover and invent. Should universities open to industry, faculty and students would remain free to leave the university whenever their passion for business overtakes their passion for research. Streamlining licensing of intellectual property rights will only add to their freedom an ability to diversify into multiple sources of information and potential applications by partnering with a diversity of entrepreneurs and investors.

---

[1] See "Need a Cab? Analysis Shows Where to Find One," New York Times, April 2, 2010 available at http://www.nytimes.com/2010/04/03/nyregion/03icab.html (describing products from MIT Media Lab spinoff Sense Networks).

Why Research Universities Should Start Offering their IP on a Subscription Basis

Over the past several years, I have heard many complaints (from graduate students and faculty on the one hand, and venture capitalists or licensing excecutives for large companies on the other) about the difficulties associated with negotiating licenses or sponsored research agreements. One might naively imagine that such agreements are routine, at least at research universities. Many have a staff of technology transfer employees whose job it is to facilitate these agreements.

But the agreements are not usually so easy to close. In fact, the agreements are so difficult that (at least in places like the Bay Area) the easiest solution for faculty or students intent on seeing their ideas comercialized is to leave the university, either temporarily or permanently, to launch a startup or consult with an established company on a new product or service.

The biggest loser is the university. Or at least that's true if you believe that there is no need to worry that greater university-industry relationships will somehow corrupt university culture. Therein lies the rub. The fact is that many people both within and without the university believe that academics should be independent from the allegedly corrupting influences of commerce.

Nevermind the hypocrisy inherent in holding that view but, at the same time, encouraging faculty to compete for federal grant money that is distributed based on political values that are directly or indirectly influenced by the same corrupting commerce. Focus on the key premise: Does an increased flow of information back and forth between university and industry hinder the growth of knowledge.

The answer to that question must be no. Facts are gathered proactively in response to practical problems. It is these facts that form the basis for academic theory. Academics can collect them on their own, and should be encouraged to do so. But there is no way that academic institutions can keep up with the scale of production of data already ongoing outside the academic system. University-industry collaborations are the future of our global economy, and the university must adapt to the new reality in which the polite fiction of academic independence can no longer be respected. Academic independence -- to the extent that it ever existed in research universities -- has been replaced with dynamic balance, detente.

Which brings us back to the original problem. Suppose the top-tier research universities, whose endowments (not coincidentally!) are often significant portions of the top-tier venture capital funds were to demand that each of those venture capital funds pay an annual subscription for (say all non-biotech or pharma) university intellectual property on a non-exclusive basis. Exclusive deals would remain subject to negotiation. The funds would go primarily to preparation and prosecution of patent applications.

Imagine the collaboration that might result from the lowered transactions costs of collaboration. The alignment of interests between the university and its industry subscribers now permits seamless communication without concern of loss of patent rights or trade secrets. Inventors have better feedback on what, if any, applications are worth filing from industry, rather than from other faculty or from tech transfer office employees alone.

The endowments see reduced expenses -- no more patent prep and pros fees -- and additional income (in whatever is leftover from the subscription fees). Inventors are more likely to stay at the University rather than leave. Only the venture capital funds and companies that aren't paying for the IP that now goes out the back door have something to complain about, and then only initially. In a new equilibrium, a portion of the University becomes a kind of Bell Labs for the economy. Renegotiated employment agreements with star inventors bring billions of capital gains to the University directly, rather than indirectly through the venture capital funds, which charge at least 20% in carried interest plus fees.

But you have to believe that it would be good for faculty and students to talk more with engineers and scientists in industry. For the time being, most people don't.