Sue U.

“What business are we in?” Christie Hefner—president, chair, and CEO of Playboy Enterprises from 1988 through 2009—challenged attendees at the 2012 annual meeting of the Association of University Technology Managers (AUTM), being held just outside of Disneyland, to ask themselves this deceptively simple question. While Playboy’s business no doubt would make Mickey Mouse blush, Hefner’s question to those on the front lines of the university patenting and licensing community bears studied reflection by a much wider audience. Indeed, it provides a surprisingly useful and cheeky inflection point for all universities engaged in the complicated and often costly business of commercializing faculty research.

Examples of university innovations changing the world for the better are legion and often well known. Yet university leaders  don’t always appreciate the implications of enforcing the patents that enable research universities to disseminate, through their licensees, technological game-changers invented on their campuses—everything from new drugs to diagnostic medical tests to everyday household utilities like WiFi.

For universities and their faculty inventors, the money at stake can be substantial. In 2010, American research universities received more than $1.7 billion in licensing revenues from their patents and helped create more than six hundred start-up companies based on faculty inventions. Top earners like Northwestern University, New York University, and Columbia University brought in well over $100 million each in revenue, although most universities’ returns were far more modest. The potential for windfall profits, however, understandably tends to capture the imaginations of technology-transfer professionals and their bosses, even though some demur from talking publicly about revenue generation. As one director of a university’s licensing program told me, “We don’t talk about the money. It’s not about the money, but trust me, [my boss would] like me to bring several million dollars a year more into the university.”

But bringing in millions through patents invariably requires university leadership to confront what a patent is: an authorization to sue for infringement. Patents confer the right to exclude others from using a given invention, without the patent holder’s permission, for a twenty-year term. Permission, of course, costs money— something universities perpetually need. Universities seek patent rights in order to attract the private-sector investments necessary to bring inventions out of laboratories and classrooms and into the marketplace. While many university patents are licensed nonexclusively— that is to say, for nominal rates to more than one company within a given industry—anticipated “home runs” tend to be licensed exclusively, to only one company, so that substantial private-sector investments can be offset by the supranormal profits that come with being the only company to offer the next big thing.

Legal scholars think of a patent license as an implicit promise not to sue. Licensees, which are profit-maximizing companies, don’t pay fees and a percentage of their income streams to universities out of the goodness of their corporate hearts. They make those payments because they respect a university’s ownership claim to a particular technology they would like to commercialize. Companies that believe a university is unwilling to enforce a patent through filing an infringement lawsuit are unlikely to pay the university to license the patent. In this sense, as law professors James Bessen and Michael Meurer have written, any patent’s value “flows from patent litigation or, more typically, the threat of litigation.” The same rationale holds true once the patent is licensed. The university and its licensee both can jeopardize their economic returns by failing to pursue infringers.

Playing for Keeps

While AUTM tracks licensing revenue and dozens of other relevant metrics in its yearly survey of universities, no organization pays attention to aggregate university involvement as plaintiffs in patent-infringement lawsuits. Official records of these activities can be obtained only through exhaustive legal research. My own research revealed more than sixty universities’ participation in more than 280 patent-infringement lawsuits since 1973 (the first year for which moderately reliable records exist), with substantial growth since the year 2000. A cursory review of these cases, brought by universities alone or in conjunction with their licensees against any number of big-name companies, might raise the question posed by Hefner: what business are universities in? While potential responses are many, few would likely rush to say, “suing patent infringers,” even though history shows that such litigation is more than an isolated or rare occurrence for several prominent research universities.

The University of California, for example, has participated as a plaintiff in at least seventeen patent infringement lawsuits. UC grabbed headlines in 2007 when it received $30.4 million through settling a lawsuit it had brought with its licensee, Eolas Technologies, against software giant Microsoft. The university claimed its patent provided it with ownership over the “interactive Web”—essentially the Internet as we know it. Microsoft decided to settle the case rather than continue to fight to overturn the $521 million jury verdict UC and Eolas had received. Complicating the matter for the university from an image standpoint was the fact that Eolas, a spin-off company founded by the patent’s faculty inventor, is not actually in the business of making anything. This led some detractors to label the company a “patent troll”—an entity that sues others for patent infringement as its sole business activity, something the patent law permits.

In February, a jury in Texas invalidated UC’s “interactive Web” patent in a subsequent infringement lawsuit brought with Eolas against prominent technology companies Google, Apple, Amazon.com, Yahoo, and Sun Microsystems, among eighteen other household names, including Playboy. Many in the technology community lauded the outcome as a comeuppance for what they saw as UC’s overreaching and involvement with a patent troll. World Wide Web inventor Tim Berners-Lee, who testified at trial in favor of the many defendants, tweeted that the verdict was a “good thing.” While the university did not officially comment on the lawsuit’s outcome, presumably some within the UC system felt disappointment over the loss of an opportunity to reap handsome financial returns on research investments and a patent the university deemed legitimate.

In a similar, more staggering loss in February 2011, a federal appeals court invalidated a patent co-owned by New York University and Centocor Ortho Biotech. NYU and the biotech firm had alleged that the blockbuster arthritis drug Humira, manufactured by Abbott Laboratories, infringed their patent. While the jury agreed with them, the appeals court reversed the finding by invalidating the patent. The jury had awarded $1.67 billion to the plaintiffs—to date the most damages ever awarded by a jury in a patent-infringement case.

Courtroom wins and losses such as these raise important public interest questions for higher education scholars, administrators, and governing boards. From the university’s perspective, litigating patents may advance the university’s research interests and result in substantial revenues. But what about from the taxpayer’s perspective? Or that of students and faculty whose scholarly work is not patentable? All other factors being equal, does a university that sues companies for having allegedly eroded its proprietary rights jeopardize its graduates’ job prospects at those companies? What about the ability of its faculty to receive sponsored-research funding from the aggrieved companies, or for the institution successfully to solicit donations from their employees and executives? What effect does such activity have on lawmakers already inclined to second-guess a university’s request for increased appropriations in the face of state budget deficits? More fundamentally, what message does such activity send to the public about the business universities are in?

Apple Management

Since the 1980s, as Derek Bok, Sheila Slaughter, Larry Leslie, and others have noted, universities have increasingly pursued revenue-generating activities, particularly when these involve their faculty’s intellectual output. This focus is perhaps inevitable in the light of growing resource constraints. Universities, after all, are the wellspring of many groundbreaking and patentable ideas, and policy makers have long since set in motion the necessary internal levers and policies to capitalize on them. Lawsuits over the ownership and authorized dissemination of these ideas are therefore in one sense unsurprising. But comfort with the increasing prevalence of assertive university litigation over patents should not blind us to the activity’s consequences. Pursuing litigation typically requires appreciable out-of-pocket costs—a patent-infringement lawsuit with less than $25 million at stake on average costs a party $2.7 million to take through trial—and can lead to considerable indirect costs. Economist Scott Shane and business professor Deepak Somaya found a significant decrease in the number of new patent licenses executed by universities in years following a university’s involvement in patent litigation, the apparent explanation being that involvement in litigation drains resources that otherwise would be focused on licensing technology.

Other indirect costs may be harder to quantify. One story of a litigation tail perhaps wagging the commercialization dog involves Ziagen, an antiretroviral drug that slows the spread of HIV, and the University of Minnesota, which owns patents for the drug. The predecessor to GlaxoSmithKline—the pharmaceutical company that makes Ziagen—initially refused to license Minnesota’s patents when it marketed the drug, which led the university to file an infringement lawsuit in 1998. The parties settled a year later. In the years since, the university has received more than $350 million in running royalties from the settlement, accounting for more than 90 percent of its revenue from technology transfer during that period. But with the drug’s patents soon expiring, the university faces what its technology-transfer professionals recognize as a “patent cliff” that has them in search of inventions and deals that might soften the inevitable drop in income. Habituation to a revenue stream can be difficult to break.

Enter a new species of apple developed at the university. The university decided to release the apple, branded the SweeTango, as a “managed variety” rather than an “open release,” which would have allowed anyone to grow it without payment to the university. Prior to Minnesota’s commercialization of the new apple, no university had ever released a managed variety of apple in the United States. Under this structure, the university selected an exclusive licensee that requires anyone wishing to grow the apple to join a consortium it has established, hubristically named “Next Big Thing.” Smaller growers in Minnesota not included in the consortium may grow limited numbers of the new apple but cannot sell them commercially except directly at farmers’ markets, in local grocery stores, and at farm stands. Growers outside of Minnesota cannot grow the new apples at all unless they join Next Big Thing.

The university’s decision to offer the SweeTango apple as a managed variety upset many small growers in Minnesota. Some viewed the university as playing favorites within their industry and upending its mission as a land-grant institution historically charged with identifying and disseminating useful agricultural advances to all Minnesotans without undue concern for profit. As one small grower told an author writing for the New Yorker this past fall, “The university has become our competitor, and they have a great advantage, because they’re the only ones that have this new apple everyone is bragging on.” A lawsuit brought in 2011 by various small growers against the university settled early out of court, but not on terms that substantively changed the university’s handling of SweeTango’s release. Unquestioned in media accounts is the extent to which the university’s experiences with the lawsuit over Ziagen, its munificent settlement, and the substantial patent cliff the settlement created informed the university’s decision to manage strictly the new apple’s release.

None of this is to suggest that universities should never litigate patents. To the contrary, the larger point is that occasionally they may have to—as they become what Arizona State University president Michael Crow calls “comprehensive knowledge enterprises,” increasingly depended on to spur regional economies and help create jobs. Their Cold War approach of stockpiling patents in hopes that licensees will come calling while would-be infringers retreat is rightfully on the decline. As policy makers aim to align university research agendas more closely with those of for-profit actors, what once could be described as university-centered “technology push” is being transformed into industry-driven “market pull.”

As part of this transformation, however, administrators and policy makers need to consider that furthering the concepts of commercialization, entrepreneurialism, and innovation at some point may require unabashed and unapologetic patent enforcement. Patents do not come with their own police forces, and universities hesitant about enforcing their rights may find that inactivity invites only further infringement, undermining the very commercialization partnerships they seek. This reality must be counterbalanced against the real money that litigation costs as well as the harder to quantify, and perhaps more invidious, changes it can bring to the university’s internal culture and the external trust of the public.

All constituents would benefit from frank conversations concerning the awkward but inescapable reality that patent ownership is not inherently a public service. How universities choose to use their patents matters more. The University of California underscored this premise in March, when it announced it had adopted new patent-licensing guidelines that may help ensure that new medicines and other inventions based on its faculty’s research are more accessible and affordable in the developing world.

How research universities approach their potential involvement in patent-infringement lawsuits similarly reflects their fragile balance of mission and money through patents. For each university the path forward will vary, but all the paths promise to be perilous. While university patents unquestionably can and should be used for the public good, the uncomfortable fact remains that patents at their core represent private property rights that take occasional threats and assertive litigation action to maintain. Universities unwilling to make those threats, and to sue infringers when warranted, waste resources seeking patents in the first place.

Administrators facing tight budgets may soon confront this very dilemma: either the university must stand by its patents for the sake of their revenue potential and industry relationships that further the university’s research mission or it must stop engaging in the costly activity of patenting. For better or for worse, universities that are serious or strive to be serious about commercializing research are unlikely to disown their intellectual offspring. It is the nature of the business they find themselves in. 

Jacob H. Rooksby is assistant professor of law at Duquesne University School of Law. His research focuses on intellectual property and higher education. His e-mail address is [email protected].