Because federal research grants provide critical mass needed to support university scientific research, universities establish technology transfer offices (TTO) to conduct commercialization pursuant to the directives of the Bayh-Dole Act of 1980. Such scientific research may be funded in whole or in part by congressionally appropriated R&D funding, now more than $130 billion dollars annually. These funds are administered and awarded by federal grant agencies such as; DOD, NSA, DOA and NIH. When federally-funded scientific research results in commercially-promising new technologies, the research university’s technology transfer office (TTO) initiates their commercialization sequence by patenting them. The TTO must then evaluate the patented subject matter’s (PSM’s) present and predicted market value, then select an appropriate commercialization strategy. The PSM is next presented to prospective investors who themselves must calculate the PSM’s present value, its development cost and duration, and its prospective market value. When the TTO has selected prospectively willing private sector investors it then negotiates an agreement with one or more, pursuant to which the TTO will transfer the PSM’s patent rights and ownership control to the investor, (usually by exclusive license). From that point forward the transferee investor/licensee/owner supervises the PSM’s development, guiding it through various milestones and phases that may require; applied research, continuing developmental adjustments, raising additional supportive capital, continuing market research, prospective manufacture and channels for public distribution. If the PSM is life science related, complex testing and regulatory approvals also must be obtained. Early stage TTO PSM value calculations are more like rough estimates at first, but as commercialization development proceeds, uncertainty risk is reduced enabling more rounds of capital investment. At every developmental milestone, investment must be prudent, especially when the sequence funded by venture capitalists who themselves are funded by other people’s money.
AUTM explains technology transfer (TT) on its web-site here as follows:
Technology transfer is the process of transferring scientific findings from one organization to another for the purpose of further development and commercialization. The process typically includes:
- Identifying new technologies
- Protecting technologies through patents and copyrights
- Forming development and commercialization strategies such as marketing and licensing to existing private sector companies or creating new startup companies based on the technology.
Academic and research institutions engage in technology transfer for a variety of reasons, such as:
- Recognition for discoveries made at the institution
- Compliance with federal regulations
- Attraction and retention of talented faculty
- Local economic development
- Attraction of corporate research support
- Licensing revenue to support further research and education
Ecosystems emerge when the combined actions of independent, interacting agents collaboratively contribute to a blended and productive unity. Although each component contributes its operational productivity and continuity, certain agency components must always operate effectively or the ecosystem’s continuity ends. These agency components are called keystones because like the center stone in an archway, if it is removed the entire structure falls apart. Research university commercialization of promising scientific inventions and discoveries is a keystone contributor to our nation’s innovation ecosystem and thus our overall economy. No two research university innovation ecosystems are alike. Some are more robust than others. But for all of them successful commercialization itself requires three keystone capacities; conducting scientific research, identifying and patenting promising technologies discovered during such research, and attracting private sector investment to continue funding its commercialization.
Early stage innovation funding must cross the proverbial “Valley of Death”, a name given to the quest for development capital after the initial capital of “fools, friends and family” is exhausted and high-risk outside capital must be acquired. The trek across the Valley leads to a number of the “Shark Tank” as the PSM’s development and marketability become less uncertain. Raising additional prudent outside capital becomes more feasible provided the its patented protection is reliable and its term until patent expiry is sufficient to price it competitively. As further milestones are passed larger rounds of added prudent investment become possible. At each investment milestone, because more is invested, patent reliability becomes more important. Some PSM’s require many years to reach their development endpoints, compressing their period of exclusivity and ROI-based endpoint pricing.
Endpoint Pricing and Sale
When a fully-developed product has become commercially marketable it must be priced. Its optimal price will reflect the entirety of its; contributed human and financial capital, time expended, total investment risks assumed, returns on, or failures of, other portfolio investments and projected market demand, including prospective competition. Endpoint pricing analysis is intended to reward capital investors equity with an appropriate return on their investment (ROI) during the patent’s remaining term and possibly beyond patent expiry. Complex pricing issues often arise when the remaining patent term is short. Compressed exclusivity periods drive up pricing, leading to conflicts between perceived societal needs and ROI calculations, especially when the product has breakthrough medicinal attributes. Such tensions often occur poverty prevents access to its purchase. Our patent system is market based as is Bayh-Dole but patent economics are often strained by social policy issues. Our patent system swaps public disclosure to encourage new technology with a patented product’s term of exclusivity which can limit consumer access. One way to mitigate this access issue is to encourage more development. With few exceptions, a PSM’s new technology is made public eighteen months after application for its patent, even if the patent is not granted. Disclosure is intended to enable others to legally work around a patent’s specified scope, guided by the application’s disclosed technology, leading to more rapid and efficient general technological progress. But its virtually automatic release before a patent is even awarded also eases its infringement. Patent policy disputes often are about finding the “right” balance between a product’s exclusivity and its public disclosure. Pricing issues are often subjected to conflicts between socialistic political pressure to expand access and development investment needs to incentivize assuming development risks to some such ROI is viewed as rent-seeking. To capitalists, profits are the appropriate reward for human and financial capital sunk costs and assumed risks. These philosophical tensions often trigger disputes about the two most basic components of commercialization; patent reliability and patent holder pricing prerogatives. Each of which have keystone status in innovation ecosystems. Wherever one stands on the spectrum extending from government control of technological progress and market encouragement, if as a practical matter if private sector investment is deterred by unreliable patents or by government interference with pricing which intensifies as a painted products success increases, political pressure can distort outcomes. Bayh-Dole’s commercialization dynamic requires prudent investment which will dry-up if this patent and political policy issues are not properly balanced. At present, markets provide such balance.
Patents are not self-enforcing. If a patent is infringed it must be enforced in Federal District Court, a complicated and expensive endeavor. Efficient infringement is a business model practiced by large, well-resourced firms with well-established access to a PSM’s addressable target market. All markets are circumscribed by limited numbers of participants limiting a PSM’s continued marketability and relevance. The efficient infringer uses the patented technology of an under-resourced inventor to timely become more deeply established in that market while simultaneously depriving the inventor of first-mover status, timely distribution and a significant number of potential customers within that market. In highly competitive IT markets the very possibility of efficient infringement often deters initial investment in certain PSMs cancelling commercialization even before it can begin. Once commercialization has been completed infringer retaliation for bringing enforcement proceedings and their cost it also may deter patent enforcement. Because permanent injunctions are not available to non practicing patent holders such as universities and pure licensors, to whom guilty infringers may be ordered to pay owe monetary damages later, patent holders often are unable to deter the superior financial and legal resources of infringers and are thus deprived of their patent’s protective exclusivity. HR 9’s and S 1137’s Innovation Act cost–shift sanctions and added enforcement costs add further financial risk to undertaking any such enforcement. The 2011 America Invents Act (AIA) has added post patent grant proceedings by which patents can be nullified. Inter partes review(IPR) is the most commonly used post endpoint nullification process. It also is expensive. “Efficient “infringers weigh the patent holder’s capacity to timely enforce her patent with the economic benefit of infringing and presently deploying the patented technology. Bottom line economics encourage such infringement. If the patent holder asserts her patent in court, IPR fails to nullify the patent, and the court finds that the patent has been infringed, “reasonable” damages are awarded. They are hypothetically calculated by being no less than what the infringer would have paid the patent holder if it acted lawfully with the patient holder’s permission and did not infringe. In some sectors, especially those governed by the time/technology limitations of Moore’s Law infringement is the more economically efficient course of action. And if the target market area is highly competitive and one firm does it, they all must do it.
Innovation Incentive Alternatives to PSM Commercialization
Governments incentivize innovation because emergent inventions and discoveries based upon congressionally appropriate R&D funding contributes to the public good, by creating the economic benefit of new growth and jobs, and new defense, more productive engineering and/or medical technologies. Commercialization of such discoveries is necessary if the taxpayers whose taxation primes innovation’s basic science pump hope to partake in commercialized benefit by accessing its resulting public goods. Our patent system shares the cost of innovation through an innovation ecosystem that relies on public investment to support (otherwise prudently uninvestable) basic scientific research. When promising commercial results emerge from scientific probing for scientific truth, profit-driven partnerships supported by private sector funding potentially able to be commercialized, first by first attracting support from high-risk investors like angel and venture capitalists. As a PSM’s commercialization development proceeds, uncertainty is reduced. Then added financial support becomes more available. Left-leaning activists who distrust markets periodically argue that patent policies enabling exclusivity are too reliant on a market dynamic that limits patented product access to those who can afford to pay for it. Exclusivity they charge enables pricing to exceed their version of reasonable ROI, which they say is rent-seeking. They thus distrust Bayh-Dole’s market-based distribution system of PSMs directly or indirectly funded by tax-payer dollars. Wherever possible they would replace Bayh-Dole’s market-driven commercialization dynamic with central government preselection of research focus and research funding through prizes or open source dividend systems. In effect their approach would substitute government supervised and managed commercialization wherever possible. This inevitably leads to industrial policy, centralized decision-making. It also requires raising sufficient new revenue to provide financial incentives. There are areas of progress that are commercially too remote to attract private investment. But in product classes that require massive investments in development, private sector investment is more desirable. There are edge areas where discounts are given to under resourced buyers in need the cost of which is subsidized by overall product pricing. In areas where health issues and health insurance dynamics are prevalent, predictively striking the “right balance” among these variables is difficult at best and virtually impossible when early stage TTO commercialization takes place.