The Expanding Role of Universities in the U.S. Patent System

1. The Expanding Role of Universities in the U.S. Patent System AIPLA IP Practice In Japan Committee January 27, 2004 Pamela R. Crocker Raymond L. Owens Eastman Kodak Company1

2. Development of the University Patent System Early Development • In the 1980’s, the Bayh-Dole Act created in a sense a revolution in the university patent system. [35 U.S.C. 200-212] • Universities, for the first time, gained title to most of the patented technology developed by the universities under Government Grant. • Over time, universities recognized that ownership of patents could provide lucrative income to universities and their staff.

3. Development of the University Patent System Early Development • Several universities (MIT, Stanford, Univ. of California, Univ. of Wisconsin) had some licensing activity prior to the Bayh-Dole Act. • Since the Bayh-Dole Act, their activities substantially increased, and other universities that had little interest in obtaining patents began to develop systems for patenting their research and exploiting their patented technology.

4. Development of the University Patent System The System Today • All major U.S. research universities have established intellectual property policies, have set up Technology Transfer offices, and charged such offices with the responsibility of procuring, exploiting and protecting university patents. • Presently, there are thousands of professionals who manage intellectual property for the universities out of their Technology Transfer offices.2

5. Development of the University Patent System The System Today • Universities, both private and public, are now viewed as incubators of new technology and receive funding from their local state governments and from federal grants to encourage formation of new businesses. • To date, most university-licensed inventions result from U.S. Government funded research.

6. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • University licensing policies vary considerably from most commercial concerns. • More than 50% of the licenses granted by universities are exclusive licenses to small start-up companies.3 These start-up companies often receive funding from venture capitalists.

7. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • In acquiring patents, universities generally engage private patent firms to write and prosecute their patent applications. • There are several major universities that have patent attorneys on their staff, and they may, in certain instances, prepare the patent applications. • For many patent firms, this has resulted in a major increase in business as universities and start-up companies have become significant clients for many patent firms.

8. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • Some University Technology Transfer offices actively pursue licenses and draft license agreements using their own staff and without using outside licensing firms. • Universities often negotiate with their licensees to pay all of the patent prosecution costs.4 • Other universities secure an equity position in a start-up company that has acquired financing, and the universities will receive a share in the royalties.5

9. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • Royalty sharing policies vary among the different universities. • Universities often have a basic patent assignment agreement wherein title to the patents is vested in the universities.

10. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • In order to determine the royalty sharing provisions, one must review the university’s patent policy. • Typically, university inventors receive 30% of revenues earned, after deducting patent and marketing expenses. This percentage is shared by all inventors named on a licensed patent. 6

11. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • The share of royalty paid to the university-named inventors can be substantial. • For example, in fiscal year 2002, the University of California paid out $26 million in royalty payments to 1129 university-named inventors.7 • Some universities can pay their inventors as much as 50% of the income received from licensing.8

12. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • From time to time, there are reports about university professors receiving substantial income in patent licensing royalties, and also receiving multi-million dollar payments when start-up companies are acquired by larger corporations. • A University of California at San Diego professor received more than $18 million as a result of the sale of a start-up company that was based on university research.9

13. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • In most cases, a portion of the received income is returned to the initiating department or laboratory at the university that developed the patented technology.10

14. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • Universities are becoming more aggressive in suing commercial concerns under their patents. • It is not uncommon for universities to assert their patents against private companies and either negotiate a license or institute litigation.

15. Development of the University Patent System Licensing, Royalty Strategies and Enforcement • In the period from 1976 to 1985, the universities sued private companies only about 10 times. In the period from 1996 to 2000, more than 25 lawsuits have been instituted by universities against corporations. • Examples: • Eolas Technology Inc., a licensee of the University of California, sued Microsoft over Internet Explorer. • University of Rochester sued Pfizer Inc. over a widely used pharmaceutical drug. 11

16. Development of the University Patent System Eolas Technologies, Inc. and the Regents of the University of California vs. Microsoft: • Eolas Technologies Inc. is the exclusive licensee of a patent owned by the University of California. • Eolas asserted that its patent covered one specific mechanism used by Web page authors to embed and automatically invoke certain interactive programs. • Although Microsoft asserted that the patent was invalid due to pre-existing inventions, the court refused to let the jury consider the prior art. • The jury rendered a verdict in favor of Eolas and the University of California for $521M on Aug. 11, 2003. Microsoft is preparing an appeal for filing by mid-February.

17. Development of the University Patent System Eolas Technologies, Inc. and the Regents of the University of California vs. Microsoft: • The United States Patent Office on Oct. 30 ordered a reexamination of the patent that is the basis of the patent infringement lawsuit against Microsoft. • The patent office cited the response from the Web community and industry as an "extraordinary situation" that called for a reexamination being initiated directly by the patent office's director.

18. Corporate Involvement with Universities • More than 3800 start-up companies have been formed in the past two decades based on research licensed from universities. These companies are typically in business complexes located in close proximity to the universities. • These numbers appear to be increasing. As reported in fiscal year 2001, 494 companies were formed as a result of university technology transfer.12

19. Corporate Involvement with Universities • Universities are also involved in partnership with federal laboratories and local companies. • States also fund collaboration between private enterprises and universities to establish separate research organizations.

20. Corporate Involvement with Universities • Examples: • NY State provided funding for the Infotonics Technology Center, a collaborative initiative among Kodak, Corning and Xerox, and 14 universities to provide research in photonics and microsystems.13 • In this collaboration, the participating corporations receive a non-exclusive license under patents from Infotonics, but do not receive royalties. A share of the net royalty income will be paid to the university participants in connection with their work on joint R&D projects.

21. Corporate Involvement with Universities • Examples: • Eastman Kodak Company is a Founding Member for the Center For Electronic Imaging Systems at the University of Rochester. • Under this arrangement, Founding Members made a payment to the Center and received an irrevocable, non-transferable, non-exclusive paid up license under the patents. Patent rights are generally owned by the University of Rochester.

22. Corporate Involvement with Universities • Examples: • Microsoft has graciously provided details of their dealings with universities. Because of the extent of their involvement, this information is provided as an attachment at the end of this presentation for your later consideration.

23. Corporate Involvement with Universities • It is becoming increasingly difficult for U.S. companies to enter into negotiated research programs with Technology Transfer Offices of universities. • Most companies, when entering into a research project with a university, are required to give title to patents to the university, and in exchange, receive a non-transferable, non-exclusive paid up license to the patents. • In certain instances, the universities are not willing to grant licenses to the corporate sponsors. In such cases, most companies do not enter into agreements with the universities.

24. Corporate Involvement with Universities • Since Technology Transfer Offices are charged with the responsibility of protecting IP rights of their university, agreements with such organizations generally involve substantial negotiation. • Even simple matters, such as a university requesting a private company to run a test, will require negotiated agreements regarding IP, including Material Transfer Agreements and Non-Disclosure Agreements.

25. Corporate Involvement with Universities • It also appears that many universities in Canada, Europe and Israel are taking the same position as the U.S. universities. • A prudent company must understand the scope of rights that can be negotiated prior to funding university research.

26. Corporate Involvement with Universities • Universities often use professors, students (both graduate and undergraduate), and contractors to perform research that is funded by sponsoring corporations. • Patents are personal property. 35 USC 261. The transfer of ownership interests in patents is generally governed by state law. Courts have held that university patent policies under state law are binding on university employees.14 • Although courts generally tend to recognize university patent policies as binding upon professors and students, universities often do not have any written patent assignment agreements with respect to professors and students.

27. Corporate Involvement with Universities • Students and contractors may believe and act as though they are under no obligation to protect proprietary information provided by sponsoring corporations. • Companies should be aware that their proprietary information may be disseminated to the industry.

28. Conclusion • With the advent of the Bayh-Dole Act, universities have become very active in patent procurement, licensing and enforcement. • From the university/professor point of view, often there is a substantial increase in income. • Small start-up companies are willing to enter into exclusive license agreements with universities since they can obtain seed money from venture capitalists based, in part, upon their exclusive license agreements. • Large corporations with substantial research departments are finding it increasingly difficult to engage in collaborative research with universities. • The relationship between universities and large corporations is becoming more adversarial.

29. Footnotes 1 The views expressed herein are solely those of the authors and do not necessarily represent the views of the Eastman Kodak Company. 2 See, for example, the Association of University Technology Managers, a non-profit association having more than 3200 members. [www.autm.net/index_ie.html] 3 For some interesting statistics for the University of California Technology Transfer Program, see www.ucop.edu/ott/ars/ann02/ar02.pdf. 4 Examples of license agreements are set forth on the website for Virginia Tech Intellectual Properties, Inc., at www.vtip.org/forms-and-links.htm. 5 For example, Universal Display Corporation has collaborated with Princeton University and the University of Southern California. See www.universaldisplay.com/about.php. 6www.vtip.org/myths. 7www.ucop.edu/ott/ars/ann02/ar02.pdf. 8 See, for example, www.rochester.edu/ott/policies. 9 The San Diego Union-Tribune, October 26, 2003. 10 See, for example, MIT’s policy at http://web.mit.edu/tlo/www/guide.4 and the University of Rochester’s policy at www.rochester.edu/ott/policies. 11 249 F. Supp. 2d 216; 68 U.S.P.Q.2d 1424 (March 5, 2003). 12www.autm.net/index_ie.html 13 www.infotonics.org 14 Chou v. University of Chicago and Arch Development Corp., 354 F.3d 1347 (Fed. Cir. 2001); University of West Virginia Board of Trustees v. VanVoorhies, 278 F.3d 1288 (Fed. Cir. 2002).

30. Microsoft’s Dealings With Universities • Microsoft engages with universities in a variety of different ways, for example, through collaborative research efforts, specialized faculty and student forums and grants. Many of the various types of interactions are noted below. • Particular attention is paid to the ownership of intellectual property rights developed from university collaborations. Corporate researchers, in their prior academic careers, have become accustomed to the open and frequent exchange of ideas with others in the research community. That rich exchange of ideas is important and valuable to the development of new innovations but can be a challenge to balance with the IP interests of an industrial research lab. Microsoft uses various frameworks within which such collaborative efforts occur. Depending of the level of collaboration envisioned, it might be fine to just exchange information at a high academic level without any specific framework. There are countless such collaborations occurring between Microsoft researchers and university faculty and students at any given time. In cases where joint inventions could be made, or code written or exchanged, we typically want to describe up front how the parties will deal with these IP matters. For instance, the university collaborator may be set up as a visiting researcher or intern and paid for their time, or become a consultant for the period during which joint IP is likely to be developed. Another possibility is to work with the university on a collaborative research agreement. The simple and quick access by the researchers to such frameworks for defining collaborative efforts is key to a successful effort (where success is defined by productive innovation and ownership of the resultant IP is understood by Microsoft and the university). We spend a great deal of time educating the researchers about the need for these frameworks and how to access them with a minimum of effort or time on their part.

31. Microsoft’s Dealings With Universities (cont’d) Exemplary Programs through which Microsoft Interacts with Universities: • Faculty Summit is an annual event hosted by Microsoft that brings together faculty partners from various universities to present examples of collaborative research and discuss, through various forums and seminars, improved approaches for interaction. Last year’s Faculty Summit included 340 attendees representing 115 universities in 11 countries. • Microsoft tries to partner with the most influential universities in the world. Currently about 200 universities in 39 countries. • $500M cash and in-kind sponsorship in the last 5 years (lab grants, research grants, fellowships, etc). • Microsoft hosts dozens of doctoral and post-doc researchers every year. • Each Microsoft Research laboratory has a Technical Advisory Board comprised primarily of university faculty. • Sponsors, for example, of the Learning Experience Project at Brown University, Cornell Theory Center, UCSD ActiveCampus Project, Cornell Inking Technologies, MIT Games in Education.

32. Microsoft’s Dealings With Universities (cont’d) Exemplary Programs through which Microsoft Interacts with Universities: • Technology Workshops—20 in the last year. • Participate in 80+ academic advisory boards, e.g., Industry Advisory Council, Dean’s Advisory Council. • Internships • Last year 915 undergraduate • Nearly 250 PhD interns worldwide • Fellowships • 12 per year for 2 years each • Programming contests for students • Imagine Cup 2003—100K+ students participated