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Issues and Trends in the Enforcement and Utilization of Patent and IP Rights Pools by Universities, Foundations, and Other Non-Profit Institutions

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Speaker Edward G. POPLAWSKI
Partner, Los Angeles Office, Sidley Austin Brown & Wood LLP
Commentator TAMADA Schumpeter
Former Fellow, RIETI/Associate Professor, Institute of Business and Accounting, Kwansei Gakuin University


*As per the author's request, this transcript is not for quotation.

My talk concerns the trends in colleges and universities in the United States over the last 24 years with regard to obtaining and exploiting patents and other intellectual property (IP) rights. First, I will discuss the universities' trek to the brave new world of IP exploitation, from the "ivory tower" era prior to 1980 to the new era of patenting and commercializing IP that began with the enactment of the Baye-Dole Act in 1980. Then I will mention some attributes of university IP pools in the United States today, the evolution of IP as a profit center for universities and an imperative for universities to actively develop and manage their IP portfolios, and the increasing amount of patent litigation undertaken to facilitate licensing efforts and to protect the investment made by universities in start-up companies. Finally, I will conclude with some of the ramifications of the new situation that we are in with regard to university exploitation of IP.

Prior to 1980 there were basically three sources involved in the development of technology in the United States, the so-called technology triad: universities, whose mission was to educate students and to perform basic scientific research that would result in various inventions and discoveries; industry, which would take those discoveries and inventions and transform them into actual products and services that the public could buy and benefit from; and the United States government, whose mission was to provide substantial funding and other support for education and scientific research, focused very heavily on certain basic industries such as the defense industry.

What were the IP positions or postures of each of those three triad members prior to 1980? First of all, there was no competition between universities and industries with regard to protecting and developing IP. Secondly, the U.S. government did not really pay attention to protecting discoveries and inventions at universities. Rather, they let them go into the public domain. The rare exception was for intellectual property that flowed from industry sponsored research, when industry would go out and get a patent in order to protect it. Colleges and universities in 1980 followed the basic mantra that the public domain interest prevails and held to the motto "Publish quickly or perish."

Then in 1980 the Baye-Dole Act was passed, ushering in a radical change in the way IP was treated at universities and other non-profit institutions. Prior to passage of the act, university inventions and other discoveries were owned by the U.S. government. Now, however, the Baye-Dole Act permits universities to own, patent, obtain copyrights on or maintain trade secrets on intellectual property, provided that the government receives an automatic license to practice any patents or other protectable IP, and the university takes steps to commercialize it. In fact, if universities fail to do so, the government can exercise what are called "march-in rights," i.e., take back for itself the technology or impose other restrictions. However, throughout the history of the Baye-Dole Act, there have been very few instances in which the government has done this.

To understand why the Baye-Dole Act was enacted, it is necessary to look back at the late 1970s. Inflation and unemployment in the United States were high and there was a general perception that country's competitiveness was in significant decline. The government felt that one way to deal with this problem was to protect the intellectual property, which was being created at great taxpayer expense at universities and colleges and other non-profit institutions, and that protecting it would facilitate greater collaboration among the members of the technology triad.

As for the impact of the Baye-Dole Act, first of all, there was a tremendous explosion in the number of patents that colleges and universities applied for and obtained, particularly in the medical and biotechnology area, and more recently, since the mid-1990s, in the software area.

In addition, colleges and universities were required to form technology transfer and licensing offices, which in turn led to an explosion of venture capital funding in the United States. As inventors at universities became entitled to a percentage of the royalties and other revenues on their own inventions, some decided to go out, get funding from venture capitalists and form start-up companies. These have become some of the biggest companies in the United States today, such as Intel. Another consequence of the Baye-Dole Act is that for the first time academia became somewhat of a competitor to industry.

For about the first 15 years after the enactment of the Baye-Dole Act, the way that universities managed their portfolios was to either license their patents and other IP to large companies or through start-up companies. Litigation was almost unheard of. Initially, colleges and universities lacked a sophisticated approach, basically licensing patents to the first company that expressed interest without first studying the industry and strategically selecting the best way to exploit the intellectual property.

But within the last five years, there has developed an imperative at big colleges and universities (MIT, the University of California at Berkeley, Cornell, et cetera) to make IP a profit center. Colleges and universities not only want to recover their costs of patenting and operating their technology transfer and licensing departments through licensing, they want to see it recouped 20- or even 30-fold. Therefore, technology transfer and licensing departments now are composed of sophisticated individuals who have M.B.A.s and aptitudes for specific areas of technology, as well as individuals with Ph.D.s in crucial scientific areas. There is also an increased focus on identifying and aggressively licensing "big hit" patents, i.e., university technology transfer and licensing offices are expected now to critically analyze their portfolios and to identify the big hit IP.

This development is in some sense an emulation of what has already been done in industry. Large corporations, such as IBM and Dow, in the late 1970s, created what were then among the first technology transfer and licensing offices to aggressively license their very large IP portfolios.

Another reason that technology transfer and licensing offices have evolved into profit centers is that there are now many more stakeholders than before. Prior to the Baye-Dole Act, members of the technology triad basically worked independently of one another without competition. Now, after the Baye-Dole Act, there are inventors who, in some instances, teach at colleges and universities and are entitled to 20%-25% of the royalties that the college or university receives on patents that are licensed or litigated. Also, start-up companies want to see a return as well.

It should be noted that looking at the licensing revenues at colleges and universities between 1999 and 2003, a lot of it comes out of public universities.

As of about five years ago, some very large colleges and universities decided they needed to enforce their patents through patent litigation rather than simple licensing. This was firstly because industry played "hardball" with colleges and universities, wanting to either get a royalty-free license, or to get the university to agree to such a small royalty that the university would probably be sued by the inventor for breach of fiduciary duty.

Secondly, some of the universities had valuable patent portfolios that were about to expire but that had not been licensed yet, or had been licensed for such a small royalty that they had not recouped the investment on a truly pioneering invention. University inventors also increasingly demanded accountability.

Furthermore, certain technologies, at least in the United States, are inherently more litigious than others. There tend to be more lawsuits involving biomedical patents than in other areas. More recently, because of the Internet, this is true also for the software area.

Another incentive for colleges and universities to look to litigation is that public universities in the United States are accountable to the state taxpayers in which that university is located. Additionally, there are very tough regulatory requirements on making enough money to recoup the costs of licensing a patent to a start-up company.

What is more, large companies in the United States have created what are called patent-holding companies, such as 3M Development Company and HP Development Properties Inc. Those two holding companies have a stockpile of patents but they do not make any of the products or provide any of the services covered by those patents; they bring lawsuits on them. Again, colleges and universities are following what big companies are doing and similarly suing on their IP.

As I mentioned, colleges and universities began to assert their patents around the mid- to late 1990s. Two example cases are University of Minnesota v. Amylin Pharmaceuticals, which I was involved in, and University of California v. Eli Lilly. It is no coincidence that the technology involved in both of those cases is pharmaceutical technology. Those cases, at least the one involving the University of Minnesota, ended pretty successfully for the university side, which gives others an incentive to do the same.

Moving on to the ramifications of the current university IP portfolio exploitation and development, university inventors and other stakeholders increasingly want to see accountability, namely return on investment. There has also been a significant increase in patent litigation, and that is going to continue. Moreover, there has been very spirited debate in academia and industry and at some government levels about whether the government should be rethinking the Baye-Dole Act.

As for some recent high profile litigation in the United States brought by colleges or universities, let us first look at the case of Cornell University and its subsidiary Cornell Research Foundation v. Hewlett Packard (HP), in which I am lead counsel for the Cornell side. Cornell Research Foundation is the holding company that licenses Cornell University's IP. The case involves a very pioneering patent that was filed in 1982 and is licensed to Intel Corporation. The invention allows a computer processor to process more than one instruction at the same time. What HP did was make their own processors and put them in their servers and workstations, representing billions of dollars worth of sales.

Another case is Columbia University v. Genentech. This is an example of a university wanting to enforce its patent due to declining licensing revenues because it has not exploited the patent previously through licensing, and the patent is about to expire. In general, a company is not going to take a license for a patent that is about to expire, but suing that company for patent infringement could get you six years worth of damages. In this case, Columbia went out and sued Genentech and some other companies over their pioneering patent on a drug manufacturing process because their patent was about to expire.

Another case demonstrates how this trend is further expanding in scope. About a year ago, the University of Texas sued 33 companies, including numerous Japanese companies (Sanyo, Sony Ericsson, NEC, et cetera), for patent infringement on software that enables cell phones to send text messages. This is the first instance in which a university has sued virtually an entire segment of an industry. One apparent reason is that the University of Texas patent is expiring in September 2005. They have also attempted to gain media attention by publishing details of the case on a special website.

Not surprisingly, as a result of this increased patent enforcement and attention on the part of colleges and universities to make IP a profit center, the relationship between industry and universities has become more contentious and wary. Some companies have adopted the strategy of trying to countersue universities for patent infringement. Others are rewriting their sponsored research agreements in order to make it difficult, if not impossible, for the college or university to sue for patent infringement.

Interestingly, public universities in the United States are basically constitutionally immune from patent infringement litigation unless they waive immunity, such as in the Florida Prepaid case before the Supreme Court. As for private universities, if a university is practicing technology covered by a company's patent only for purposes of pure research and development, it is immune from lawsuits for patent infringement. However, things are more complicated now as universities do not simply engage in scientific research. This was evinced by the deliberations on immunity that the court had to make in the Madey v. Duke University case.

At the same time, large companies with very large patent portfolios are pushing for changes in the U.S. patent laws that would be very detrimental to universities and also to small companies. One such change is in the area of permanent injunctions in patent cases. Under U.S. law, if the patentee wins a patent lawsuit it virtually automatically gets a permanent injunction with very few exceptions, such as national security or a health emergency. Big companies want to change the law to basically create a presumption that requires a high level of irreparable harm to be demonstrated in order to get a permanent injunction.

Additionally, industry is trying to get the government to assert more control over universities obtaining patents and other IP. Under the Baye-Dole Act, the U.S. government takes a hands-off approach towards university IP, letting the university exercise its own discretion as to which inventions to file and obtain patents on, who to license the patent to, and who to sue. This is a very contentious area now and some want to amend the act to provide that agencies can restrict colleges and universities from obtaining patents on technologies for which it would be more in the public welfare for the university not to seek a patent.

Another argument from industry is that universities do not make products or provide services and should thus not be able to sue. Some are demanding that U.S. patent laws be amended so that a college or university can sue for patent infringement only if it makes, uses or sells the patented product. On the other hand, the very essence of the longstanding U.S. patent laws is that in order to get a patent and protect it, you do not have to make or sell anything.

My conclusions are that, firstly, the profit-center approach to IP at colleges and universities is ingrained in academia and is going to stay. Secondly, there is going to be an increasing amount of tension, as we have seen, between industry and academia over IP matters. Patent litigation is going to continue to increase, but colleges and universities are still going to be very cautious because industry is hitting back. Lastly, I foresee many more legislative battles forthcoming.

Questions and Answers

Q: Has this trend had any effect on the types of new findings that are being patented? Also, has there been any effect on collaboration between universities and colleges?

A: First and foremost, colleges and universities are looking more critically at whether they should seek to patent basic discoveries such as the human genome. That has occurred in part because the National Institutes of Health and other agencies have put pressure on the colleges and universities, and that trend is going to continue. On the other hand, it is often very difficult to identify whether an invention or discovery actually fits within the category of basic research. The current tension between industry and the universities has also increased the level of collaboration between universities, a fundamental reason for that being that universities feel the need to band together and create a united front. Through my Cornell litigation, I am also finding that there is more sharing of information between colleges and universities as to the underlying strategic issues with regard to whether a patent should be enforced by way of litigation.

Q: Are actual research projects running into difficulties when, for example, universities have different policies on the treatment of IP?

A: I have not seen any significant amount of disagreement between universities themselves as to collaborations on basic research. What I have seen is instances where a professor doing research at one university compels his university to pressure the other university not to patent the technology. Oftentimes, that inventor has some type of relationship with a company from whom he or she gets a lot of research funding.

Q: Regarding the profit-center approach, are university technology licensing offices actually profitable after covering their costs such as for experts and lawyers?

A: Certainly the top universities all have profitable IP portfolios. I think that many other colleges and universities do not operate at a large profit, mostly due to the unsophisticated way they treated intellectual property in the first 10-15 years after the Baye-Dole Act. It is only within the last five to seven years that they have developed this sophistication, and it is going to take time before they are able to turn their technology transfer offices into profit centers. As far as litigation goes, if the right patent is selected, the return could be tremendous.

Q: Some economists claim that the quality of university patents declined after the Baye-Dole Act, observing that such patents are cited less than in the past. What do you think about that?

A: I think that the IP portfolio of a college or university, or for that matter of a company, is only as valuable as the effort they put in to ensure that patents have sufficiently broad scope and are strategically exploited. There are many examples of companies, as well as colleges and universities, in the United States that have indiscriminately applied for patents. What you need to do therefore is to compare, for example, IBM and Dow with Columbia and the University of Minnesota, or the University of Houston with various small companies in the United States that have not done anything with their patents.

Q: Compared to industry patents, how is the quality of university patents?

A: Before the Baye-Dole Act, the value of university patents was basically zero. Now they are worth millions of dollars. But that is still not at the same level as industry. You also have to consider, though, that licensing revenues do not capture the value that is created when a university forms a start-up company. There are very large companies in the United States that took a portfolio of 10-20 patents from a university and now have market capitalizations in the billions of dollars, such as Broadcom or Cisco Systems.

Dr. Tamada: I think that it is an issue of adverse selection. Given that universities do not make any products, they do not have enough knowledge to strategically apply their patents. That has made some of their portfolio management inferior to that of industry.

Q: Do you know of patents that have been granted in nonscientific or non-engineering areas, for example, in a social science?

A: That is very uncommon. There are a few inventions in the software area involving Internet search engines or Internet auctions that were made by inventors with technical backgrounds with the help of those who had some nonscientific knowledge.

Q: What are your thoughts about the impact of the politics within universities, such as the fact that science and engineering departments are becoming more powerful?

A: There are two categories of individuals in the academic community when it comes to applying for patents. Some university professors are entrepreneurs and in favor of property rights; and they also believe that they should be compensated for their efforts when they create something that goes beyond the scope of their everyday work. There are others who are quite satisfied to get research from industry and who have a vested interest in continuing to get that research, so they prefer not to see the university apply for patents.

Q: What is the situation surrounding the possibility of patenting public policy?

A: I think it is first debatable whether public policy is a good idea. As an analogy, if I package my idea in a computer software program I can get a patent as long as the software has some degree of practical utility. That would be the appropriate test to apply. The ultimate question would be whether that public policy has practicable utility and that could be debated for a long time.

Q: Is there any movement towards outsourcing management of IP to outside businesses in the case of universities that are underutilizing their IP?

A: In the United States there is a business for just about everything if somebody thinks they can make money at it. Venture capitalists have set up businesses that will obtain IP portfolios, such as from a university, and take on the obligation to go out and license or sue on those portfolios. I am not aware of anybody that offers an all-encompassing IP management service. That is very difficult because a typical college or university has a diverse array of technology and institutional knowledge that must be carried over.

Q: Have any business schools tried to patent their business models?

A: No matter where a business method comes from, under U.S. law, if you package it in software, and if it has practical utility, is not obvious and is something new, then you can get a patent. The problem in the U.S. patent system, particularly in the software area, is that there has been a great lack of quality control over the examination of patents. That is because unlike in the mechanical and electrical arts, the patent office did not have a great amount of prior art. Most of it is on the Internet, so you have to go and look for it, and it is in areas that you would never expect to find it.

Q: Is there any movement to create a code of conduct for universities and other non-profit organizations explaining their rights and obligations with regard to IP?

A: There are certain large federal funding agencies that are basically trying to come up with a so-called best practices approach in terms of when and whether to seek patent protection on a particular area of technology. This is going to be totally voluntary unless there is some amendment to the Baye-Dole Act. I think universities and other non-profit organizations in the United States will be cooperative as long as these agencies do not try to grab back the ownership of the IP and prevent their licensing. Also, state governments that fund research are looking to their universities to get IP on that research and to protect it. A primary example is the legislation that was passed last year in which the California state government basically gave US$10 billion of taxpayers' money to its universities to do stem cell research and to protect it.

Q: How is the Baye-Dole Act policy evaluated in the United States?

A: The Baye-Dole Act has been tremendously valuable in stimulating and creating incentives for innovation in the United States. It has dramatically enhanced the competitiveness of the United States, as exemplified by the large number of start-up companies that have been formed in California, all of which benefits the economy. As far as the litigation goes, my view is that universities basically track what is already happening out there in industry with a slight delay of five years or so. At some point in time, market forces are going to establish the right kind of checks and balances, as we have seen throughout the history of patent litigation in the United States over the past 30 years. So I believe in market forces, coupled with the right amount of restrained public policy initiatives.

Q: Apart from Johns Hopkins v. Cellpro, are there any other cases where march-in rights have been exercised?

A: That is the only one I am aware of because it is a very exacting standard.

*This transcript was compiled by RIETI Editorial staff.

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