Risky Business: Universities and Intellectual Property

Academic institutions and individual professors can profit from patenting faculty research, but they may be endangering the future of science.

By Julia Porter Liebeskind

In 1980 the U.S. Congress gave universities the right to seek patents for scientific discoveries made by their faculty and staff with support from federal funds. The main motive for the legislation, the Bayh-Dole Act (Public Law 96-517), was economic—to facilitate the commercialization of potentially valuable discoveries. Without clear intellectual property rights, firms have few incentives to invest in developing new products. Before Bayh-Dole, the government owned patents stemming from federally funded research; universities could obtain these rights only through an arduous and time-consuming process, and little licensing took place. Bayh-Dole devolved the power both to seek and to own patents to universities and allowed universities the right to license their patents to firms.

The ownership rights of universities were further expanded under Public Law 98-620, passed in 1984. Since the enactment of these two laws, patenting by universities has risen sharply, especially in the life sciences. In tandem with this increase, licensing agreements and revenues have also jumped. Almost all large research universities now have special offices devoted to patenting and, frequently, to licensing and other forms of university-industry technology transfer.

Many people have hailed this surge in patenting and licensing as a great benefit to society. Universities have come to be seen as "engines of economic growth," supplying industry with basic research and new products and processes. Nowhere has this role been more apparent than in the biological sciences, where discoveries made by university scientists have spawned an entire new industry, the biotechnology industry, comprising over a thousand firms and billions of dollars in revenue. On a more altruistic level, increased patenting and licensing has also provided new drugs for previously untreatable diseases, new approaches to managing and reversing pollution, and other socially valuable innovations.

And yet many people worry about the long-term effects of this expanded patenting on the university. In 1984, for example, not long after passage of Bayh-Dole, the American Academy of Arts and Sciences commissioned a report on the effects of granting universities intellectual property rights to the fruits of academic research. This widely read and important report, prepared by Dorothy Nelkin and titled Science as Intellectual Property: Who Controls Research?, made the following observation:

Academic science has been a public resource, a repository for ideas, and a source of relatively unbiased information. Industrial connections blur the distinctions between corporations and the university, establishing private control over a public resource. Problems of . . . proprietary rights are inherent in these new relationships and hold serious implications for both academic science and the public interest.

Many other groups have voiced similar concerns in many other forums. Historically, the university has provided an "intellectual commons" in which the ideas and discoveries of scholars have been made available for the use and benefit of all members of society. Will university ownership of intellectual property rights eventually shrink that commons? Will it undermine its value to society in other ways? In the comments that follow, I discuss three specific areas of concern in this debate: faculty incentives, the conduct of university research, and faculty-university relations.

Financial Incentives

The first concern raised about the growth of patenting is that it will intensify incentives for faculty to work on commercially viable projects. Traditionally, worries about faculty’s interests being swayed by industry funding have focused on grants and consulting. But because most universities share a substantial proportion of the royalty income generated from patent licenses with faculty, patents offer an additional incentive for researchers to pursue commercial projects.

The rules universities use for allocating royalties vary widely. A typical payment scheme gives a first "cut" from royalty income to the university to recompense it for the costs of filing the patent. After costs are recovered, the income is then divided among the university’s technology transfer office, the faculty members listed as inventors, the faculty members’ departments, and other departments in the university. Many of these agreements are generous to faculty, who can receive as much as 50 percent of the total royalty revenue after patent costs are recouped. Indeed, universities often design royalty-sharing schemes to encourage faculty to disclose their inventions.

Some people have argued that profitable patents are so rare that faculty members are unlikely to be influenced by financial considerations when choosing which avenue of research to pursue. Although evidence does reveal that few patents make large amounts of money, some patents provide substantial sums to faculty inventors. Research by David Mowery and colleagues shows that in 1995 the University of California system earned $58.5 million in licensing income (fees and royalties). Of this total, $38.7 million (66 percent) was earned by only five licenses, an average of $7.7 million for each license. At Stanford University total licensing revenue was $35.8 million in 1995, and the top five licenses accounted for $30.3 million (85 percent) of that amount. It can be said, therefore, that despite the small probability of large payoffs, high-powered financial incentives exist for faculty to find "winning" patents.

Increased Secrecy

Patenting also increases incentives for faculty members to keep their findings secret for longer than they otherwise would. Because only private information can be patented, a discovery cannot be published until a patent application is filed. Of course, secrecy has always been part of academic life. Researchers often keep their specific research topics and early findings confidential to prevent others from poaching their ideas. Keeping preliminary findings secret also has the benefit of preventing publication of unverified results. The concern, however, is that patenting may increase the period of secrecy and, sometimes, prohibit publication of research altogether if it is found to have commercial value. Such barriers diminish the intellectual commons, at least temporarily. Excessive secrecy can also hurt the careers of students and junior faculty members who cannot publish their research findings.

To combat this problem, many universities have adopted regulations limiting the time that commercial sponsors can delay publication so that patents can be filed. Little, however, can be done to prevent faculty members themselves from stalling disclosure of their research for their own benefit as potential inventors. Prompt publication of results does, of course, ensure that faculty get credit for their ideas, and it helps them obtain further rounds of federal funding. Patents, because they are not validated by other academics, are not sources of academic credit, even though they may be sources of credit in commercial science. But these academic incentives wane as professors work their way up the university’s career ladder, and as industry funding replaces public research funding.

Conflicts of Interests

It has long been recognized that faculty who have outside financial interests may bias their research in ways that serve those interests, even at the expense of credibility. For this reason, many universities forbid scientists to receive research grants from companies in which they themselves have ownership or managerial interests. It is often hard, however, for universities to maintain this "Chinese wall," and in some institutions it is crumbling, as scientists find it increasingly difficult to get their research funded by federal agencies. In addition, many faculty have consulting contracts with industry that are entirely ungoverned by the university, under the long-standing agreement that even full-time, tenured faculty are not traditional employees but independent contractors.

If faculty have outside interests as owners or managers of, or consultants to, private firms, they may also shift ownership of certain intellectual property from the university, which would be its rightful owner, to these firms. Incentives to do so are particularly strong where patent rights are narrow, so that the value of a particular invention may lie more in trade secrecy than in patent rights per se. In genetics, for example, commercial value often rests on production processes (such as gene-chip engineering) that cannot be patented, rather than on genes or reagents, which can be. Commercial value can be protected only if these processes are held as secrets by firms rather being published by university researchers.

The transfer of intellectual property and trade secrets by faculty researchers would represent a direct taking from the intellectual commons of the university. But universities may be powerless to prevent the practice, except in the most egregious of cases. One such case resulted in a lawsuit brought by the University of California against Genentech. The university argued that scientists who had left the University of California, San Francisco, to work for Genentech had stolen cell lines from the university that Genentech subsequently used to produce a new biotechnology drug. The case was settled out of court, with Genentech paying the university extensive damages.

Another type of conflict of interest arises when a researcher chooses not to publish findings that will reduce the value of patents that the university has licensed to firms in which the researcher has some financial interest. Patents are known to have a major impact on the stock-market value of new high-technology firms. A faculty member’s wealth may therefore be affected if her research undermines the viability of such a firm’s patents, or renders them obsolete.

Universities can correct for these problems by being more vigilant in regulating the outside interests of faculty members. But some, if not many, universities may be involved in a "race to the bottom" in writing and enforcing intellectual property regulations, because they are anxious to retain talented scientists who may otherwise find more remunerative work in industry. My colleague Amalya Oliver and I, for example, conducted interviews with several scientists in a pharmacology department that had recently hired one scientist from industry and actively and successfully sought to retain two others who had received industry job offers. In order to keep these people, the department had made a series of special deals with its university that allowed its faculty to own or retain ownership in private firms, serve as managers of or consultants to them, and receive research funds from them.

These concessions represent an almost complete breakdown of the distinction between university and industry research. Recognizing that some universities may no longer be policing their scientists adequately, the New England Journal of Medicine now requires all authors who submit articles for publication to state whether they have any financial interest in the outcome of publication. The Journal is finding, however, that many scientists do not comply with its reporting requirements.

Patenting in the life sciences is not the only practice that threatens the credibility of the university and the scope of its intellectual commons. The way that patenting affects faculty incentives resonates across many university departments, including engineering and even music. Moreover, the effects of patenting, relative to other forms of property rights, including copyrighting and trade secrecy, may be getting too much attention. Under current regimes of intellectual property allocation, for example, copyright ownership also accrues to faculty, not to the university that employs them. This arrangement, like patenting, allows faculty members to profit from research that relied on university resources, and it also provides incentives for them to conduct more "applied" research whose results can be used, for example, in trade books or commercial software. Professors can also take advantage of the fruits of their university research in consulting activities. Again, this arrangement provides powerful incentives for faculty to use the university’s resources to conduct applied research that will generate outside income, and to privatize the results of this research for the benefit of a limited number of paying clients.

Threats to Collegiality

Many people worry that as more and more public science becomes governed by regimes of private rights, the progress of science will be threatened. Rebecca Eisenberg found that patenting reduced researchers’ willingness to exchange results and materials, such as cell lines, for fear that their current or future property rights would be diminished in value. In 1984 Eisenberg argued in The Science Business: Report of the Twentieth-Century Task Force on the Commercialization of Scientific Research that patenting would thus result in a "tragedy of the anti-commons," whereby research progress would be significantly slowed.

Amalya Oliver and I found in our research that academics in the biomedical sciences widely perceive that patenting has changed collegial relations in the field. Scientists interested in patenting, for example, may restrict the size of their research teams to minimize disputes over claims to inventions. Some scientists are even reluctant to engage in casual conversation with their colleagues, present new ideas at meetings, or have students or other faculty work in their laboratories on a visiting basis.

Like Eisenberg, we also found that scientists were frequently unwilling to exchange research materials. Some insisted that exchanges take place under contracts specifying both the scope of research that could be conducted on the materials and the allocation of any intellectual property rights stemming from such research. These agreements, called "research material transfer agreements," are commonly used in industry-funded research, but they are now also being implemented in exchanges between faculty, especially when the faculty members involved have private financial interests at stake. This type of "contracted exchange" among academics is beginning to substitute for the more informal, trust-based exchanges that took place before intellectual property concerns became so important in the life sciences.

Do these developments constitute evidence that the granting of proprietary rights exerts a chilling effect on ongoing research? Even though patents do not prevent university researchers from using patented inventions in their academic research (patents only prevent others from using patented inventions for commercial purposes), scientists may lose interest in pursuing particular avenues of research if the commercial benefits of that research will accrue to existing licensees.

Impact on Governance

The drive for patenting also has repercussions for the relationship between faculty members and university administrations. The current norm of shared governance may, for example, be pushed in the direction of increased centralization of power in university administrations, or toward greater vesting of power in faculty hands. If we set aside the implications of such governance changes for the wider university community, either of these shifts in the balance of power has the potential to remedy—or to exacerbate—the challenges that patenting presents to the credibility of the university.

The need for the university to regulate the professional conduct of faculty members suggests that power may move away from the faculty toward university administrators. As I have already noted, increased oversight would ideally apply not only to those faculty involved in patentable research, but also to any faculty currently involved with industry.

One area of particular concern is consulting, which has heretofore been unregulated by universities. A growing body of evidence, much of it focused on faculty members involved in drug trials, suggests that consulting may significantly influence the reporting of research findings. It appears that faculty members may suppress negative findings if they fear that reporting such evidence will reduce their chances of obtaining more remunerative work in the future. Some universities are reviewing their policies on faculty consulting with an eye toward closing this loophole of accountability.

Of course, if such regulations are to serve their intended purpose, administrators will need to be increasingly involved in monitoring faculty activities, a role they have so far largely avoided. It will be difficult for university administrators to maintain credibility and foster the practices of open science through effectively designed and enforced regulations, while at the same time protecting the faculty’s academic freedom and independence.

From the faculty perspective, researchers may worry that universities are pressuring them to vest more and more of their intellectual capital into the private domain. Many public universities have a mandate to facilitate the commercialization of research. In addition, most are hungry for cash, and patenting and licensing is one way they can raise revenue, even if their final share of the profit is relatively small.

At the outset of the biomedical revolution, a few universities effectively "sold off" licensing rights from entire departments or schools to individual firms. In 1982, for example, the medical school of Washington University in St. Louis made a broad agreement with Monsanto, giving it the first right to take out exclusive licenses on the results of research conducted within the school. In 1992 the Scripps Institute made a similar agreement with Sandoz. Both of these agreements were controversial. The latter resulted in congressional hearings, after which Scripps was forced to renegotiate the agreement, greatly curtailing Sandoz’s rights to license.

This "sell-off" model of allocating university rights to private corporations has not proliferated. Yet most universities require their faculty members to disclose patentable inventions made during the course of research that used university resources. Such requirements remove a faculty member’s discretion to commit her invention to the intellectual commons, should she wish to do so. Similarly, a faculty member has no power to influence the way in which university patents based on her inventions are licensed. This centralization of power over the registration and disposition of patents could lead university administrators to behave like corporate executives if pressures to commercialize inventions become more important than preserving the intellectual commons.

Credibility at Risk

Universities have existed for more than eight hundred years. It was not until the early nineteenth century, however, that the first large, state-funded research universities were founded. Today, the university’s contribution—provision and dissemination of knowledge essential to culture, science, medicine, commerce, and government—is widely viewed as being critical to society. As I noted at the beginning of this article, because the results of university research are published, the university provides an intellectual commons where the ideas and discoveries of scholars are made available for the use and benefit of all members of society. The university is also seen as an essential element of effective democracy, which can function only when the members of a society are well informed, and where there are open forums for debate.

As the role of the university in society has become more important, so has the question of its institutional legitimacy, especially in regard to the credibility of the knowledge that it creates and disseminates. The creation of knowledge within universities is understood to be a social process involving both individual research that leads to discovery of new information and the testing and contesting of that information by others within the academy, which has often been characterized as a "marketplace for ideas." It is this latter process of public validation that transforms information into credible facts or knowledge.

Concerns over credibility led to the establishment of the tenure system at the beginning of the twentieth century. The idea was that faculty could produce credible knowledge only if they had complete freedom of inquiry and discourse. Freedom of inquiry fosters greater variation in the generation of ideas, and more far-reaching contests in the validation process. A related area of concern is university funding. Observers have long worried that the dependence of universities on outside funding—from both the government and industry—distorts the direction of research and, more surreptitiously, influences what knowledge is or is not disseminated to the public.

It is clear that the rush to patent discoveries made by university scientists poses a new threat to the credibility of the university. The practice raises concerns that academic freedom and the proper conduct of scientific research will be undermined by commercial motives, both those of the firms that fund research and of the university scientists positioned to profit handsomely from licensing revenues, consulting fees, and equity investments.

These concerns have evoked, and will continue to evoke, various regulatory responses by universities and other bodies that want to maintain the university’s ability to produce and disseminate credible knowledge for the benefit of all in society. The impact of these new regulations will reach far beyond the life sciences to embrace all areas of inquiry in which intellectual property rights become important.