JIPEL Vol. 7 – No. 1
What Young Innovative Companies Want: Formulating Bottom-Up Patent Policy for the Internet of Things
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The next wave of internet usage will disrupt a host of different industries, while at the same time opening up so far unknown opportunities to those ready to seize them. Devices and components with an internet address will be joined to each other allowing for large-scale communication embedded in gigantic sensing systems. In this sense, the Internet of Things (IoT) can be understood as a means to connect objects, machines and humans in large-scale communication networks. The IoT merges physical and virtual worlds by interconnecting people and objects through communication networks, sending status updates, and reporting on the surrounding environment. Applications will become more sophisticated, allowing for the emergence of services and product offerings that are beyond our imagination: IoT based toys will accompany children from early age until adulthood, IoT driven medical devices will save the lives of those suffering from a sudden stroke, and clothing with IoT technology built in will allow everything from our shirts to our shoes to customize according to daily fashion trends. Smart homes, smart cities, and even smart countries will become the norm; reducing energy wastage to a minimum. The commercial opportunities associated with the IoT will be substantial. Markets will expand into areas we have not even conceived of, thereby creating new jobs and fostering further competition between the various regions of the world.
Against this background, the European Union has recognized the need to identify a governance framework that will enable it to take advantage of the promising opportunities associated with the IoT, while mitigating risks and adverse effects to the best extent possible. An important aspect of a European IoT strategy consists of adequately addressing the interplay between competition and intellectual property law. Consequently, the European Commission itself considers it necessary to formulate policy guidelines on fair, reasonable, and non-discriminatory (FRAND) licensing. In order to accomplish this, the European Commission (E.C.) launched a series of stakeholder consultations, workshops and published two in-depth reports addressing the potentially anticompetitive effects that standard essential patents could have for the Internet of Things. With the goal of offering further clarity on the licensing conditions for patents that read on standards, the E.C. issued guidelines on FRAND licensing on the 29th of November 2017. While these guidelines are non-binding, the E.C. will nonetheless take advantage of soft law mechanisms so to offer a transparent framework for FRAND licensing. This appears justified given the major patent wars that the licensing of standard essential patents triggered in the telecommunications sector. For a quantitative analysis of the imminent rise in patent litigation in the area of speech recognition, an area closely related to IoT, see for example the below analysis by iRunway; showing a sharp increase in patent litigation since 2011.
Figure 1: Patent Litigation Trend in Speech Recognition Domain (Source: iRunway analysis based on patent data from USPTO and litigation data from RPX)
While it is laudable that the E.C. is taking ownership of a key policy area that will make or break the success of the IoT, it is regrettable that the process preceding policy formulation has been primarily driven by interaction with large corporations and industry associations having significant experience with FRAND licensing. The views, experiences and opinions of European young innovative companies, YICs, are largely missing from the policy development process. Given that young innovative companies are seeking to advance the IoT, the European Commission is hence likely to have missed out on input from those companies, who are doing their best to move the IoT forward. To fill this gap, this study undertook a series of thirty in-depth interviews with young innovative companies active in the European IoT space. In doing so, it hopes to counter policy formulation that lacks grass roots linkages and takes insufficient consideration of the needs of YICs. In doing so, this study is pleased to report that the suggestions made hereby were reflected in the E.C. Guidelines on FRAND.
The study is structured in two main parts. The first part is dedicated to discussing key features of the IoT from an IP and competition policy perspective. The second part presents the findings from the field study undertaken in the summer of 2016. It concludes by urging policy makers to include young innovative companies in the policy process as it finds that there is quite a significant gap between the theoretical conceptualisation of the topic and the practical experiences of YICs.
Identifying a working definition for the Internet of Things is complicated by the fact that the IoT is an umbrella term encapsulating a variety of different technologies. The IoT has been described as “a concept that interconnects uniquely identifiable embedded computing devices, expected to offer Human-to-Machine (H2M) communication replacing the existing model of Machine-to-Machine communication.” It has also been labelled as “[I]nternet-enabled applications based on physical objects and the environment seamlessly integrating into the information network.” More narrowly, the OECD defined the IoT as “Machine to Machine communication (M2M)” and the European Commission describes the IoT simply as something that “merges physical and virtual worlds… where objects and people are interconnected through communication networks and report about their status and/or the surrounding environment.” All of these definitions are fairly vague and it is probably for that reason that they encapsulate the gist of the IoT so well. The IoT constitutes a high growth business opportunity as its application is vast and it bears the potential to transform virtually every sector of the economy. In current IoT markets, it is not yet clear what type of business models will succeed and who will emerge as a market leader. As such, the IoT space has been described as being quite dispersed and driven to a large extent by small early stage companies.
The IoT is a network-based technology, which thrives on multilateral exchange. Similar to telecommunications networks, it constitutes an interconnected eco-system. Such systems can be associated with “network effects.” Network effects are “defined as a change in the benefit, or surplus, that an agent derives from a good when the number of other agents consuming the same kind of good changes.” The more the peculiar software solution of one firm becomes adopted, the more it will benefit this specific firm, making it more difficult for new entrants to see their technological solutions adopted in the market; even if they are of higher technological quality. Network effects enable large-scale access to an interoperable software solution, whose value thrives with additional adoption. The more the IoT solution is in use, the more it becomes known and even more additional users will be attracted to it. At the same time, existing users are less and less inclined to switch to another service provider. Some scholars consequently associate networks with “increasing returns” to “path dependence.” The initial success of one specific IoT solution is often owed to small, random events; yet once it establishes a strong position in the market, it will remain in use, even if better technological solutions are identified. This is because users cannot afford to switch, as they would have to give up the interconnectivity provided by the existing network. Thus the overall effect is to discourage technological innovations as incumbents entrench themselves through network size and technological compatibility rather than technological sophistication.
Once critical mass is reached, usage of the service will grow quasi-automatically and this comes often to the detriment of other service offerings. Furthermore, critical mass allows incumbents to gain significant cost advantages over new entrants who undoubtedly will face significant upfront costs because IoT solutions are complex to design, costly to deliver to the market, and accessibility to the needed know-how is often protected through patents or trade secrets. In addition, incumbents will be in a position to offer complementary services, extensions, add-ons and customer support to further strengthen their dominance in the market, making it more difficult for new entrants. Hence, network effects can reasonably be understood as the “tendency for that which is ahead to get further ahead, for that which loses advantage to lose further advantage.” Consequently, network effects can distort competition and adversely affect consumers.
Adverse implications of network effects can be even more pronounced if interoperability is achieved through standardization and market participants leverage patents to protect their inventions. Standards are dynamic, in the sense that their main function is to ensure a collaborative technology development. Standards do evolve over time. However, the status quo of a technological solution does exist for a given period of time, at least until a new standard is adopted by the market that addresses the same technological challenge.
Patent protections on theses standards, particularly if held by a wide range of market participants, can incite anticompetitive behaviour. To mitigate the kind anticompetitive licensing behaviour that standard essential patents can trigger, the FRAND agreement was introduced. The “FRAND promise is construed according to its core function as an irrevocable waiver of extraordinary remedies” and hence seeks to counterbalance the exclusionary aspects of patent law. Because of the FRAND or RAND (in the U.S.A.) commitment, companies are obliged to license patents on a standard on fair (Europe only), reasonable and non-discriminatory terms, following the IP policies of the relevant standard setting organizations. Hence, the FRAND concept seeks to offer a governance framework for the licensing of standard essential patents. Because these patents can accrue market power to their owner and hence potentially provoke anticompetitive licensing behaviour, it is believed that standard essential patents are warranted different licensing pathway than other patents — namely, they must be licensed in a way that comports with the FRAND framework. Exactly how such a FRAND framework should be applied, and whether the scope of the application should be narrow or broad, is currently subject to international IP policy formulation. If the FRAND agreement offers adequate means to mitigate against risks associated with widely dispersed patent ownership, that will also deserve further policy attention.
A new entrant may need to hack through a host of patents held by many different IP owners, which can lead to an undesired anti-commons effect, whereby existing patents stifle rather than promote innovation and the very purpose of the patent system is undermined. While it is important to note that the IoT does not yet dispose of any prominent standards, nor depend on any particular technology protected through patents, it is quite unlikely that this will remain that way. If the IoT is to evolve from its current state of infancy to a more mature technology field, it will be necessary to establish widely used standards. At this point, contributors to those standards will undoubtedly want to leverage their IP for licensing, sales purposes or blocking third party entry. Although these may be legitimate usages of IP, the licensing of standard essential patents has also been associated with an undesired behaviour known as “holdup.”
The impact of holdup can be particularly pronounced where firms benefit from first mover advantage or where firms have the necessary innovation capacity to capture the patent landscape. It is, however, incorrect to assume that patent holdup would only be an issue concerning “important” patent owners. In fact, each and every standard essential patent owner (SEP owner) could theoretically engage in holdup because its position as a gatekeeper to the standard allows him or her to do so. It is alleged that these patent holders — having claimed an important position in the patent landscape — can charge abnormally high licensing rates to standard essential patent licensees.
By charging these high licencing rates, the patent holders are engaging in the practice of what is commonly called patent holdup. For instance, it has been stated that the holdup problem is particularly severe with mobile telecoms standards because the standards that are adopted are used for a long time and the costs that are associated with switching to an alternative standard are high. Further it has been argued that standards holdup is both a private problem facing industry participants and a public policy problem. Privately, those who will implement the standard (notably manufacturers of standard-compliant equipment) do not want to be overcharged by patent holders. But standards hold-up is also a public policy concern because downstream consumers are harmed when excessive royalties are passed on to them. Given that the IoT can be associated with network effects, it is likely that such adverse effects could occur within the context of the IoT as well.
Adverse licensing behaviour could also occur if licensees stall payment, refuse a licensing agreement all together, or take a license below the fair rate. Such holdout constitutes an equally problematic market practice as it leads to free riding problems associated with technology used. Licensees may also simply engage in a series of offers and counteroffers to further stall negotiations. Such strategic behaviour can erode the incentive to invest in R&D. Both patent holdup and holdout are possible in the IoT context and both can constitute undesired strategic behaviour.
Young innovative companies (YICs) can be particularly vulnerable to adverse licensing behaviour. YICs, which have come to be understood as small, young and highly engaged in innovation, aim “to exploit a newly found concept, stimulating in that way technological change, which is an important determinant of long run productivity.” While it would appear that the very process that drives YICs would quite naturally be associated with patent protection, it has been observed that micro enterprises and SME lack IP awareness.
YICs’ fear above all are the costs associated with patent protection and patent enforcement. From the perspective of YICs, IP is primarily a cost factor that diverts time and attention away from doing business. Studies undertaken by the UKIPO, the IPR Helpdesk of the European Commission, as well as WIPO show that such firms associate IP protection with a tedious, laborious and time-consuming endeavour that offers only moderate support to business because costs associated with enforcement are often unaffordable. For the same reasons, these firms tend to be reluctant to enforce their own patents against infringers, leaving this group of firms with questionable patent proposition. This has led several observers to the conclusion that “deterred by high costs and complicated procedures, YICs tends to lack the necessary skills to take any particular advantage of the patent system.” The UK Government’s Hargreaves Review “IP and Growth,” further highlighted that strategic advice would be needed to help fill this gap stating that “many SMEs have only limited knowledge of IP and the impact it may have on their businesses; they lack strategic, commercially based IP advice; have difficulties identifying the right source of advice and IP management is made impossible due to too high costs.” Hence, cost and time constraints tend to discourage YICs from taking ownership of the patent system. With respect to the particular challenges associated with standard essential patents, it is very likely that the overarching lack of IP competence will overshadow any potential experiences there may be with standard essential patents. Arguably, the lack of IP skills will make YICs more prone to unreasonable licensing requests, while at the same time making them more likely to inadequately respond to licensing requests themselves. Hence, lack of knowledge will risk exposing YICs to anticompetitive IP requests, while at the same time making them more likely to stall licensing engagement payments.
Is there a gap between the way European policy makers and YICs are conceptualising the role of IP in the IoT? To gain further insight into that question, a series of thirty-one in-depth interviews were undertaken with YICs during the course of 2016. In addition, four contextual interviews were carried out. Interviewees were asked to reply to a set of open ended questions, allowing them to discuss their experiences with patents and standards, present their licensing practices and the extent to which they were (if at all) exposed to licensing requests. They were also asked if they feared patent wars similar to those in telecom could occur in the IoT space and what they would expect the European policy maker to do to counter potentially anticompetitive usage of IP, while helping them to take advantage of standards and patents. The issue of software patents was deliberately excluded from the conversations as this was subject to historical policy formulation and not that of current policy thinking. Given the stance taken on software patents in the E.U., the market participants interviewed here would simply not have been in a position to comment on their experience with software patents in the E.U.
The technique applied is known in social sciences as a “semi structured interviewing” process. The techniques give the interviewees space to express their own perspectives and mitigates against biased research results. This approach is somewhat comparable to a study based on focus groups. Such a qualitative research method was considered suitable as it allows us to theorize about what public policy formulation could look like in an emerging field of technology, where policy guidelines are yet to be identified. In addition, this specific research approach offers the necessary insights for a bottom-up approach to public policy formulation.
The target group was identified via LinkedIn. The firms interviewed usually had no specialized lawyer dedicated to IP issues, so the most senior person in the company was interviewed. This was usually the Chief Executive Office, Chief Technology Officer, Chief Operating Office or sometimes one of the investors in the firm. The vast majority of the firms interviewed were early stage firms or start-ups. Only Italian firm ‘S.’ has been acquired by a major technology company. In addition to interviewing a core group of young innovative companies, we also undertook contextual interviews with a financial analyst, a few management consultants specialized in the IoT space, as well as a patent analyst with whom we discussed patent landscapes. Of the 350 people we reached out to, we obtained thirty-five interviews — yielding a response rate of 10%. A sample of thirty-one in-depth interviews with Young Innovative Companies and four contextual interviews is usually considered sufficient to provide meaningful insights. It is recognized, however, that such a qualitative research method, cannot offer “hard facts,” but only views, opinions and impressions. Yet, it is precisely this web of views and opinions that is key in politics. Language is a constitutive element of politics, shedding light on the language of those otherwise marginalized in the political process, which is conducive towards the democratic process. The FRAND debate forms no exception to that.
Table 1 offers an anonymized overview of the interview process. In order to shield the interviewees from potential exposure to patent assertion entities, it was decided not to disclose their identities publicly. The detailed transcripts of the interviews are available only in my private archive.
Of the 31 firms we interviewed, no two firms had the same business proposition or sought to apply the IoT in the same manner. The firms interviewed seek to apply the IoT in areas as vast as fashion, toys, lighting, smart cities, health care, automotive and even social housing. In regards to technology, cloud services, big data, and platforms appear key to many of these early stage businesses. Social Innovation and lean management were other concepts, which were often combined with the usage of the IoT. It was surprising to hear that the majority of the firms interviewed had fairly little start-up capital. In many instances, EU grants were considered too complicated to obtain and if obtained at all, then regional funds were used. Some sought funding in the U.S., as they thought there was more capital available there.
Interviewees confirmed that the IoT was a mesmerizing and also somewhat confusing term: “The IoT is a buzz word just like big data, the market is still very early stage, but I have a feeling that we may be not far away from a break-through in the market.” (K.) This makes it quite difficult to describe the state of the market or capture industry trends. “The IoT market is still in search for adequate applications . . . many solutions are quite simple and they could just as well function without the IoT.” (J.) Overall, interviewees agreed that the market is still very early stage, with many firms still looking for an adequate business model. “The main problem is how to establish the business model around the technology . . . the market is still in a trial and error stage.” (M.) Yet, in spite of the various uncertainties surrounding the IoT, it is seen as a “mega trend” with substantial growth opportunities: “The Iot? I think it is going to happen . . . in up to five years we will be able to talk about billions.” (I.)
Overall, interviewees were sceptical about the prospects for European markets. According to them, the markets for IoT will take off in the U.S. and Europe will eventually follow. “I think we are behind the US with its Silicon Valley and its big tech firms that lead the tech industry.” (A.) “The IoT market in Europe is imagined.” (L.) “The IoT market is something we believe in, but it is not yet established in Europe.” (G.) This should be a wake-up call for policy makers in the EU and set them thinking about what can be done to promote the IoT in Europe.
The YICs interviewed were not able to formulate particularly nuanced views on SEPs, standards, patents or licensing markets. With respect to standard essential patents they were entirely ignorant on the topic and were also not involved in the regulation processes of any of the standardisation organizations. Their experience with patents mainly pertained to difficulties associated with obtaining patents, facing high filing costs, feeling overwhelmed by legal costs and finding information on prior art. “Our patent attorney is ripping us off . . . and we don’t even know if it is really worth it.” (S.)
Alarmingly, many YICs we talked to even doubted that the patent system mattered at all for them. “The technology in this area is moving so fast that by the time you have the patent the technology is outdated. I am not sure patents are really helpful, it is only expensive for a small firm . . .” (S.) It was lead-time advantage and open source software that mattered, rather than proprietary innovation. “When you are in the Savanna and you don’t know if you are the antelope or the lion, what do you do? You run! With IP it is the same. We care about first mover advantage. The IP is so hard to enforce and so costly that we feel we are better off without it.” (F.) Equally, defensive mechanisms associated with IP were entirely ignored. The reason given was that a defence would be too expensive. There was heavy doubt that the patents had a business proposition at all. Also, there was a sense that the value proposition of the firm was to deliver customer solutions or products and there, so many agreed, IP had not really any particular meaning for them. It was products they offered that were valuable, not IP protection. “We have filed a few patents in the US and through the PCT, but we have no business usage for them.” (M.) These findings are commensurate with what has been reported in the literature and underline the need to combine overall IP measures geared towards YICs with the overarching SEPs debate.
Some of the firms we interviewed went as far as to state their discontent with the patent system openly. “In general we don’t like patents . . . we think they are very bad . . . the original idea of the patent was to protect an invention, but in the software space patents have been abused for a long time . . . just look at the patent trolls.” (W.) Patents were also mentioned as a means to slow down businesses and as leaving YICs exposed to threats of litigation. “I don’t like the IP part . . . patents slow things down . . . I would prefer never to file patents. I believe in building a lot of brand capital.” (H.) Even those firms who considered developing a patent strategy, found that costs associated with patent ownership prevented them from taking advantage of the patent system. For example, a Partner at V. presented plans for a patent strategy, but was not able to execute it because of cost constraints. “Patents are expensive and there is no point in patenting if you don’t have the money to defend your patents . . . [s]o, we are waiting.” (H.)
The YIC’s knowledge of European patent ameliorating efforts was no better. When asked about FRAND licensing, they were also completely uninformed and key terms had to be explained first. Following that, firms generally did not feel competent enough to comment. Similarly, the consequences they could be facing in case of patent infringement were unknown to them.
The YICs talked to were not involved in patent licensing and they generally denied having been exposed to patent licensing. If, at all, it was copyright licensing they used. This was however called by all the interviewees “software licensing,” maybe because they were not very IP savvy. This was seen as a fairly straightforward process and nobody found there was a need to discuss this at length. “Software licensing is our business strategy, not patent licensing… our business is to sell the usage of the platform.” (S.) However, interviewees were not exactly sure what the question meant. Only two firms had experience with patent licensing. N. told us that he had been exposed to licensing in another firm he worked for and there they used the out-licensing of patents as a means to manage competition. “Licensing no, not in this firm no, but in another firm, we used patent law suits to slow down our competitors.” (B.) Furthermore, the IoT sector was not considered an industry where patent licenses were needed. “In our industry nobody would want to take a license.” (T.)
The role of patents was however seen in a different light by more established firms. Here, costs mattered less and measures such as licensing did play a role. Both inbound and outbound licensing was critically reflected upon. Such firms were also often part of industry associations such as the IP Europe Alliance or the Fair Standards Alliance. These firms are, however, not directly engaged in the IoT space and hence their input is probably less of relevance here.
Some firms, like the Spanish University spin-off we talked to, had moved their business from producing parts of an Antenna to pursuing an active IP licensing program. They found this strategy more lucrative. (I.) Similarly, the CEO of a Danish software firm confirmed that his company is “now slowly moving from a mere defensive approach to IP to a more aggressive way of managing its IP.” In particular, this firm is interested in establishing a systematic licensing program targeting potential infringers.
However, even those who have an active licensing program in place do not find it an easy business. For example, one Danish inventor explained that it took him nearly ten years to obtain a patent family and that he also attracted significant investments so to obtain licensing revenues from firms that infringed on his patents, but he overall found it to be a very long, complicated and so far not particularly lucrative process. He concluded that “the patent system was a bit ridiculous . . . and that the return on investments in patents is not very good . . . you always have to use a lawyer, but these guys [the firms he was trying to get a license from], they shut down their business and then they open up a new one and you get to start all over again with suing them . . .” (J.) The CTO of the spin-out from the Spanish University was the only one we talked to who felt that the patents the firm had were truly beneficial to their business. His only concern was that licensees can deploy delay tactics and that can become difficult. Otherwise he considered patents an important instrument of monetization.
Additionally, the senior representatives of three SMEs were interviewed. These firms had been approached for taking a license but all of them found the process unhelpful. One firm, for example, criticised that licensing requests were not supported by adequate documentation. Many licensors do not even send claim charts or send them only very late, in an effort to pass on costs from licensor to the licensee. Also, they complained it was very common to receive unrealistically short deadlines for a legally binding reply. This situation is made even more complicated as it is a lengthy and costly procedure to determine whether some patents claimed to be standard essential, really are standard essential: “what is a standard essential patent and what not is essentially gut feeling.” (L.) According to them, it is also very costly and time consuming to negotiate licensing rates. Many times they are forced to accept a license rate simply because costs to counter the argument would be too high. They argued that it is also difficult to determine what an adequate royalty rate is in the absence of an adequately defined framework for licensing standard essential patents.
There was a general sense among interviewees that patent wars as seen in the telecom space could repeat themselves in the IoT space. “Definitely, definitely . . . I think the IoT space is a classic example . . . I would not be surprised if in 2019/2020 we would see these things.” (R.) The only reason, in their view, why this had not happened yet, was because the IoT sector was still too immature. Still, the potential emergence of patent wars is seen in a negative light. Once more, interviewees underlined that the patent system is not equally accessible to small and big players: “it is a downward spinning circle. The more cases you have, the more people will shy away from the IoT because patent litigation is really expensive . . . and then the IoT will only be for the super big ones.” (B.) Nobody expected such patent confrontations to occur any time soon, though: “Maybe in the future, when the markets are more mature, but I don’t think we will see much trolling in the next five years.” (M.)
If patent confrontations were to occur in the IoT space, it is my impression that it would leave most interviewees unprepared. Some even thought that they could not face any patent litigation because they had no patents themselves. “Probably it will happen. But I don’t think about it, but now that you say it . . . yes . . . but since we don’t have an IP for end customers or big scale use, we will not be attacked by trolls.” (A.) Some did not even know what the patent war was or thought that it would not concern them: “What is that? I have never heard of that.” (M.) YICs also felt quite powerless and that they had little to defend themselves with against potential litigation. “They are so big and if they want to break you, they can do that. As a small firm you have no chance to defend yourself.” (N.) The only firm in our sample that was not concerned with patent wars was the Spanish firm that had an active licensing program.
Many of the firms interviewed felt that the patent system would require a radical reform. Under a particularly critical light were the activities of patent assertion entities. “Patents do not help SMEs, the best would be to get rid of them . . . if that is not possible, then we would need a complete reform of the patent systems . . .” (S.) For interviewees making the patent system accessible to YICs meant also making patent enforcement accessible to them. Helping young firms obtain patents, but leaving them without the necessary financial means to protect themselves from litigation, was, according to the interviews, not of great help. “The EC should support smaller firms in enforcement and in a way that they have the right to have a patent and also a right to enforce it.” (J.) Small firms should somehow have a chance to defend themselves and the Government should provide some means to do that. “Any policy reform that helps assure that the patent system is actually used in a way to promote genuine innovation and not in a predatory way . . . that one guy invents something great and a patent troll just buys the patent to sue other people . . . the government should do something to prevent that.” (H.) In that respect, the E.C. was called upon to identify policies that would counter the inequalities between parties, something that would enable small players to level the playing field with large firms. “It would be good to make legislation that would help avoid situations where big companies use patents as a means to shield competition from small firms.” (K.) On a more practical level, there could be more information made available on the role of IP and standards in the context of the IoT.
Interviewees expressed that educational material, websites, really anything that would help to get more acquainted with the issues at stake would be very welcomed and the E.C. should do more in that respect. “What would help is to allow small firms to learn about patents . . . Are there educational materials, websites . . . we could get to learn more about IP?” (T.)
There was also a general sense in the community that open source software should be promoted and that the standard essential patents regime was not particularly fit for the IoT space. Their policy suggestion was to promote awareness about open source software and the role it can play in an IoT driven business. “Patenting software is dead and that is good . . . I would suggest that they spend more time explaining Open Source Software to common people and to business . . . they should find the European version of Open Source Software licensing, make it more common, teach about it and sponsor work to formulate Open Source Software licenses.” (B.)
In that respect it was proposed that the E.C. could identify stimulation funds, however these should be made available with as little administrative burden as possible. “Promote Open Source Software . . . maybe also subsidies for stimulation funds, but in the end it is mainly the established firms that get that and the true innovation comes from the small ones and they don’t access these funds because it is too bureaucratic to get these funds.” (A.) Equally, more training on Open Source could be an alternative to the traditional standard essential patent regime. “Anything the Government can do to assure firms win by conquering markets and not by paying expensive lawyers . . . I would suggest spending more resources in explaining Open Source Software and focus much more on training firms in Open Source Software.” (B.)
The E.C. is eager to approach the role of SEPs in the IoT through the lens of the FRAND agreement. Through this process the E.C.’s goals is provide further clarity of what the FRAND commitment entails. While very important, this aspect is not entirely reflective of the issues raised by the interviewees of this survey. Hence, an additional section was added to the FRAND Guidelines that address the need to raise awareness among SMEs (small and medium sized enterprises) on standard essential patents and the role of the FRAND commitment. This is entirely commensurate with the findings of this study.
Like the findings of Pikethly, Talvela and Nikzad, the survey showed that young innovative firms lack IP awareness and do not understand the role that IP management could play for their firm. A good illustration of this issue is that respondents showed two apparent contradictory views on the IP system. On the one hand side they lacked awareness on IP, on the other hand, they felt that the patent system should be urgently reformed. This suggests that the senior managers in YICs have, at best, a layperson’s understanding of the IP system and it underlines the need for further IP awareness-building campaigns.
The interviewees also had a minimal understanding of standard essential patents and the accompanying FRAND debate, especially the early stage firms. This leaves them exposed to unexpected licensing requests, while depriving them of the opportunity to pursue their own licensing programs. Certainly, standard essential patent owners focus their licensing programs on companies with significant revenues, which is usually not the case of YICs. However, once YICs obtain critical mass, they could be hampered in their growth due to licensing requests they did not expect. If they do reach such a level, these licensing issues will require further policy attention and there will be a need to raise awareness among YICs about FRAND.
Against this backdrop, the FRAND guidelines will very likely be accompanied by tailored awareness-raising measures that allow YICs to adequately familiarize themselves with the peculiar challenges associated with standard essential patents. The nature of the FRAND agreement deserves further policy attention, but so does its practical applicability. This aspect was given adequate consideration in the FRAND guidelines. If young innovative companies have not even heard of FRAND or standards essential patents before, it is highly unlikely that they will be prepared to formulate smart strategies as licensees or licensors. Nowhere are these concerns included in the current policy debate. The European Commission and even National Patent Offices are actively working towards raising IP awareness and enhancing the understanding of IP among young innovative companies. However, so far this has not been approached from a FRAND perspective. Adaptations are sorely needed in light of the risk of patent wars spreading to the IoT.
Lastly, there is a dire need to assume governance responsibilities and identify a mediating structure between the inherent tensions prevailing between the exclusionary features of patent law and the open, collaborative nature of the Internet of Things. The interviews showed that the patent system cannot be viewed in isolation and the benefits of other innovation strategies, such as the promotion of open source software, need to be weighed against the further advancement of the patent system. Many of the firms we talked to found an open source strategy more effective than a patent strategy. They also thought that the open architecture enabled by open source was more befitting of the nature of the IoT.
Certainly, such statements need to be read with care, but at present too much policy formulation is occurring in isolation. What the IoT needs is a cross-functional, horizontal policy formulation, rather than policies developed in vertical silos. This can only be achieved by bringing all actors in the IoT space into the debate. Therefore, I urge policy makers to study further how IP can be promoted as a tool to promote openness rather than as a means of segregation.
Annex: Table 1 – Overview of Interviewees
 See, e.g., Ian Hargreaves, Digital Opportunity: A Review of Intellectual Property and Growth, at 14-15 (2011) (U.K.), https://www.gov.uk/government/publications/digital-opportunity-review-of-intellectual-property-and-growth.
 See The Internet of Things, Eur. Comm’n (last visited Sept. 4, 2017) https://ec.europa.eu/digital-single-market/en/policies/internet-things.
 See Communication from the Commission — Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, 2011 O. J. (C 11) 55; Chryssoula Pentheroudakis & Justus A. Baron, Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases, JRC Science for Policy Rep. (Nikolaus Thumm ed., 2017); Tim Pohlmann & Knut Blind, Landscaping study on Standard Essential Patents, IPlytics (2016), http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=8981;
Pierre Reégibeau, Raphaêl De Coninck & Hans Zenger, Transparency, Predictability, and Efficiency of SSO-based Standardization and SEP Licensing: A Report for the European Commission (2016) http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=9028&lang=en;
Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, Public Consultation on Patents and Standards – A Modern Framework forStandardisation Involving Intellectual Property Rights (2015), http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=7833;
European Competitiveness and Sustainable Industrial Policy Consortium, Patents and Standards: A Modern Framework for IPR-Based Standardization (2014), http://ec.europa.eu/DocsRoom/documents/4843/attachments/1/translations.
 Directorate-General for Internal Mkt., Indus., Entrepreneurship and SMEs, Communication from the Commission on Standard Essential Patents for a European Digitalised Economy, Ares(2017)1906931 (2017), https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-1906931_en.
 See, e.g., Lea Shaver, Illuminating Innovation: From Patent Racing to Patent War, 69 Wash. &n Lee Rev. 1891, 1933 (2012); Thomas H. Chia, Fighting the Smartphone Patent War with RAND-Encumbered Patents, 27 Berkeley Tech. L. J. 209, 210, 239-238 (2012); Jeff Hecht, Winning the laser-patent war, 12 Laser Focus World 49, 49 (1994); Sonia Karakashian, A Software Patent War: The Effects of Patent Trolls on Startup Companies, Innovation, and Entrepreneurship, 11 Hastings Bus. L.J. 119, 122 (2015); Tim Bradshaw, Smartphone patent wars set to continue, Financial Times, May 28, 2013, available at https://www.ft.com/content/3eda6296-b711-11e2-a249-00144feabdc0.
 Aditi Das, Ashish Gupta, & Bhargav Ram, Speech Recognition Technology & Patent Landscape, iRunway, (2015), at 26, available at http://www.i-runway.com/images/pdf/iRunway-Speech-Recognition-Patent-Landscape.pdf.
 LexInnova, The Internet of Things: Patent Landscape Analysis, (Nov. 2014), available at http://www.lex-innova.com/resources-reports/?id=33.
 William H. Dutton, The Internet of Things, (June 20, 2013), https://dx.doi.org/10.2139/ssrn.2324902 (quoting William H. Dutton et al., A Roadmap for Interdisciplinary Research on the Internet of Things: Social Sciences’, addendum to Internet of Things Special Interest Group, A Roadmap for Interdisciplinary Research on the Internet of Things. London: Technology Strategy Board (January 5, 2013), https://dx.doi.org/10.2139/ssrn.2234664.
 Organisation for Economic Co-operation and Development [OECD], Machine-to-Machine Communications: Connecting Billions of Devices at 7, OECD Digital Economy Papers, No. 192 (Jan. 30, 2012), http://dx.doi.org/10.1787/5k9gsh2gp043-en.
 The Internet of Things, Eur. Comm’n, https://ec.europa.eu/digital-single-market/en/policies/internet-things.
 See Raph Crouan, Why are SMEs the single most important element in our Alliance for IoT today?, Eur. Comm’n (Nov. 20, 2015), https://ec.europa.eu/digital-single-market/en/blog/why-are-smes-single-most-important-element-our-alliance-iot-innovation-today; ‘Internet of Things’ has huge potential for SMEs, Knowledge Transfer Ireland, http://www.knowledgetransferireland.com/News/‘Internet-of-Things’-has-huge-potential-for-SMEs.html; The Business Drivers and Challenges of IOT for SMEs, IOTUK, https://iotuk.org.uk/the-business-drivers-and-challenges-of-iot-for-smes/; The business drivers and challenges of IoT for SMEs. https://iotuk.org.uk/the-business-drivers-and-challenges-of-iot-for-smes/.
 S.J. Liebowitz & Stephen E. Margolis, Network Externalities (Effects), https://www.utdallas.edu/~liebowit/palgrave/network.html.
 See Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8.2 J. Persp. 93 (1994).
 See Joseph Farrell & Paul Klemperer, Coordination and Lock In: Competition with Switching Costs and Network Effects, in 3 Handbook of Indus. Org. 1967 (Mark Armstrong & Robert H. Porter eds., 2007).
 Pierson Paul, Increasing Returns, Path Dependence, and the Study of Politics, 94(2) Am. Pol. Sci. Rev. 251, 251-67 (2000); see also Kenneth J. Arrow, Increasing Returns: Historiographic Issues and Path Dependence, 7(2) Eur. J. of the Econ. Thought 171, 171-80 (2000).
 See Vernon W. Ruttan, Induced Innovation, Evolutionary Theory and Path Dependence: Source of Technical Change, 107(444) The Econ. J. 1520, 1520-29 (1997); Robert W. Rycroft & Don E. Kash, Path Dependence in the Innovation of Complex Technologies, 14(1) Tech. Analysis & Strategic Mgmt. 21, 21-35 (2002); Arthur W. Brian, Increasing Returns and Path Dependence in the Economy, 46 (1994).
 See Venkatesh Shankar & Barry L. Bayus, Network Effects and Competition: An Empirical Analysis of the Home Video Game Industry, 24(4) Strategic Mgmt. J. 375, 375-84 (2003).
 William B. Arthur, Increasing Returns and the Two Worlds of Business, 74(4) Harv. Bus. Rev. 100, 100-09 (1996) (emphasis added).
 Joseph S. Miller, Standard Setting, Patents, and Access Lock-In: Rand Licensing and the Theory of the Firm, 40 Ind. L. Rev. 351, 378 (2007).
 See Dan Hunter, Cyberspace as Place and the Tragedy of the Digital Anticommons, 91 Calif. L. Rev. 439, 439-519 (2003); Sven Vanneste et al., From “Tragedy” to “Disaster”: Welfare Effects of Commons and Anticommons Dilemmas, 26 Int’l Rev. of L. and Econ. 104, 104-22 (2006); Clarisa Long, Patents and Cumulative Innovation, 2 Pol’y 229, 229-46 (2000).
 See, e.g., U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (2007) (addressing ‘hold up’ in the context of standard setting).
 Philippe Chappatte, FRAND Commitments – The Case for Antitrust Intervention, 5 Eur. Competition J. 319, 326 (2009).
 Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, Standard Setting Patents and Hold-Up, 74 Antitrust L. J. 603, 608 (2007).
 See, e.g., U.S. Dep’t of Justice & U.S. Fed. Trade Comm’n, supra note21 (addressing hold up in the context of standard setting); Mark A. Lemley & Carl Shapiro, Patent Hold-up and Royalty Stacking, 85 Texas L. Rev. 1991 (2007); Carl Shapiro, Injunctions, Hold-Up, and Patent Royalties, 12 Am. L. & Econ. Rev. 280 (2010). For a critique of Lemley & Shapiro, see Einer Elhauge, Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?, 4 J. Competition L. & Econ 535 (2008); John M. Golden, “Patent Trolls" and Patent Remedies, 85 Texas L. Rev 2111 (2007); Vicenzo Denicolò, Damien Geradin, Anne Layne-Farrar, & A. Jorge Padilla, Revisiting Injunctive Relief: Interpreting Bay In High-Tech Industries With Non-Practicing Patent Holders, 4 J. Competition L. & Econ 571 (2008); Peter Camesasca, Gregor Langus, Damien Neven, & Pat Treacy, Injunctions for Standard-Essential Patents: Justice Is Not Blind, 9 J. Competition L. & Econ 285 (2013); James Ratliff & Daniel L. Rubinfeld, The Use and Threat of Injunctions in the RAND Context, 9 J. Competition L. & Econ 1 (2013).
 Gregor Langus, Vilen Lipatov & Damien Neven, Standard-Essential Patents: Who Is Really Holding Up (and When)?, 9 J. Competition L. & Econ., 253 (2013); Damien Geradin, Reverse Hold-Ups: The (Often Ignored) Risks Faced by Innovators in Standardized Area The Pros and Cons of Standard Setting, (Nov. 12, 2010) (paper prepared for the Swedish Competition Authority on the Pros and Cons of Standard-Setting).
 Michael J. Meurer, Controlling Opportunistic and Anti-Competitive Intellectual Property Litigation, 44 B.C. L. Rev. 509 (2003).
 Dirk Czarnitzki & Julie Delanote, Young Innovative Companies: The New High-Growth Firms?, 1 (Ctr. for Eur. Econ. Research, Discussion Paper No. 12-030) (2012).
 Robert H. Pitkethly, Intellectual Property Awareness, 59 Int’l J. Tech. Mgmt. 163 (2012).
 Robert Pitkethly, UK Intellectual Property Awareness Survey 2006, Chronicles of Intellectual Prop., http://breese.blogs.com/pi/files/ipsurvey.pdf; Preliminary Report, Intellectual Property Awareness Survey 2015 (Feb. 11, 2016), https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/500211/IP_awareness_survey_2015.pdf.
 See IPeuropeAware, Promoting the Benefits of greater knowledge and effective management of European SMEs & Intermediaries, https://www.dpma.de/docs/dpma/conclusion_paper_ipeuropaware.pdf; European IPR Helpdesk, https://www.iprhelpdesk.eu/ambassadors (last visited Dec. 1, 2017).
 Intellectual Property Office, From Ideas to Growth: Helping SMEs get value from their intellectual property (Apr. 3, 2012), https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/316116/ip4b-sme.pdf; Competitiveness and Innovation Framework Programme, IP Awareness and Enforcement Modular Based Actions for SMEs, http://www.obi.gr/obi/portals/0/imagesandfiles/files/abstract_en.pdf.
 Ian Hargreaves, Digital Opportunity: A Review of Intellectual Property and Growth (May 18, 2011), https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32563/ipreview-finalreport.pdf.
 Patents for software? European law and practice, Eur. Pat. Off., https://www.epo.org/news-issues/issues/software.html (“Under the EPC, a computer program claimed “as such” is not a patentable invention (Article 52(2)(c) and (3) EPC). Patents are not granted merely for program listings. Program listings as such are protected by copyright. For a patent to be granted for a computer-implemented invention, a technical problem has to be solved in a novel and non-obvious manner.”).
 See generally Margaret C. Harrell & Melissa A. Bradley, Data Collection Methods: Semi Structured Interviews and Focus Groups, RAND Nat’l Def. Res. Inst., at 27 (2009); Siw. E. Hove & Bente Anda, Experiences from conducting semi-structured interviews in empirical software engineering, Software Metrics, 2005, at 3.
 See, e.g., Mark Manson, Sample Size and Saturation in PhD Studies Using Qualitative Interviews, Forum: Qualitative Soc. Res., Sept. 2010, at 3, 9 (citing several major works recommending between 20-50 interviews and finding an average of 31 among studies included in analysis).
See Florian Kohlbacher, The Use of Qualitative Content Analysis in Case Study Research, Forum: Qualitative Soc. Res., Jan. 2006, at 13.
 On an anonymized basis and subject to prior approval the transcripts of the interviews are available upon request.
 IP Europe Alliance, About Us, IP Europe,, https://www.iptalks.eu/ (last visited Nov. 9, 2017).
 Robert Pitkethly, Intellectual Property Awareness, 59 Int’l J. of Tech. Mgmt. 163 (2010); Juhani Talvela, How to Improve the Awareness and Capabilities of Finnish Technology Oriented SMEs in Patent Related Matters, ResearchGate, June 2016, available at https://www.researchgate.net/profile/Juhani_Talvela/publication/316735577_How_to_Improve_the_Awareness_and_Capabilities_of_Finnish_Technology_Oriented_SMEs_in_Patent_Related_Matters/links/590f8bbea6fdccad7b126a31/How-to-Improve-the-Awareness-and-C; Rashid Nikzad, Small and medium-sized enterprises, intellectual property, and public policy, 42 Sci. & Pub. Pol’y 176, 178-179, 183 (2014); Robert Pitkethly, UK Intellectual Property Awareness Survey 2010, Intell. Prop. Office (2010), available at http://www.ipo.gov.uk/ipsurvey2010.pdf.
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Since in the last quarter of the 20th Century, the United States patent system has been in a state of flux, influencing not only patent law but the incentives underlying invention and patent ownership. A series of legislative acts and judicial decisions, beginning in 1980, have affected the ownership, scope, and duration of patents. In 1980, the Bayh-Dole Act enabled academic institutions to patent inventions created from federally-sponsored research. In 1994, Congress extended the maximum duration of a United States patent from 17 to 20 years for certain patents, increasing the monopolistic value of patent protection. And in 2011, the America Invents Act shifted the patent system from a first-to-invent standard to a first-to-file system. These changes have impacted all inventors but especially those at academic institutions, where research is a multi-billion dollar industry; perhaps relatedly, these changes have coincided with historic increases in patent activity among academic institutions.
This patent activity is not necessarily unexpected, inefficient, or objectionable. After all, academic institutions are charitable organizations and intended to promote the public good of innovation, among other things. Many academic institutions, especially research universities, rely on significant federal investment to support research that promotes the dissemination of knowledge, disclosure of new knowledge, and importantly, innovation. In theory, the patent system could do even more to encourage academic institutions to invest far greater resources in innovation.
However, university patent activity has important economic and normative implications. The patent system uses private economic incentives to promote innovation. Accordingly, it creates an incentive for universities to overinvest in patentable innovation and limit access to innovation, in order to internalize private economic value. This is especially troubling because universities may use publicly-funded research to generate patentable innovations for private gain. Thus, concerns about transparency and efficiency arise when considering the extent from which universities may ultimately derive private monetary benefit from public investment, especially given that universities lack the capacity to bring an invention to market. That is, as a non-practicing entity, in order to internalize the economic value of their research, universities must acquire patent protection over their inventions. However, because they do not have the capacity to bring their inventions to market, universities can and do use public funds to produce research yielding patents that are worthless or, worse yet, transfer their patents rights to patent assertion entities rather than practicing entities, producing externalities and inefficiency in the patent system.
While the purposes of the patent system are manifold, these sorts of behaviors undercut the argument that patents contribute to innovation. Thus, there is a founded concern that academic institutions have responded to patent incentives in ways that may actually limit access to innovation. Yet, this concern is not the only cause for unease about inefficient responses to patent incentives. For example, most of the patent infringement actions heard in a handful of district courts that have been described as engaging in forum selling—being a friendly forum for cases filed by patent assertion entities that choose the forum based on its pro-plaintiff bias. Many observers are concerned that the concentration of patent assertion activity in certain district courts has increased the cost of innovation.
Similarly, there is legitimate concern that universities contribute to cost and inefficiency by: (1) using public funds to support research that results in often useless patents; or (2) providing the instrumentality for non-practicing entities to increase the cost of innovation. That is, universities may participate in driving up the cost of innovation by aggregating patent protection for inventions that are likely to have little market value or that they cannot bring to market and must transfer, even to other non-practicing entities. This article is the first in a series of papers to investigate the relationship between universities and the patent system. In particular, this article addresses whether universities can be said to aggregate patent protection for their inventions systematically or monopolistically, which may indicate their role in increasing the cost of innovation. The discussion and results, below, suggests that academic institutions have responded to patent policy changes not in a manner consistent with firm behavior, by accruing property rights when incentivized by patent policy changes to do so, but also by strategically holding out in order to reap greater monopolistic benefit under anticipated patent regime changes, which may have exacerbated the problem of increasing the cost of innovation.
The purposes of the patent system are several, but the primary purpose is to promote technological innovation, or rather, to "promote the Progress of . . . useful Arts, by securing for limited Times to . . . Inventors the exclusive Right to their respective . . . Discoveries." While some scholars have questioned the efficiency of the patent system, and other scholars have suggested that it may only provide efficient incentives in some industries, conventional wisdom assumes that it is generally efficient, providing a net public benefit by encouraging investment in innovation. In any case, while the patent system has always provided essentially identical incentives to inventors in all industries, the demographics of patent applicants and owners have changed over time. Originally, many patent applicants and owners were individual inventors, but for quite some time, the overwhelming majority of patent applicants and owners have been both for-profit and non-profit corporations. An increasing number of those corporate patent applicants and owners are academic institutions.
Academics have always pursued patents on their inventions with varying degrees of success. But academic institutions did not meaningfully enter the patent business until the early 20th century, and even then, they did so only tentatively. In 1925, the University of Wisconsin at Madison created the first university patent office, the Wisconsin Alumni Research Foundation, an independent charitable organization created in order to commercialize inventions created by University of Wisconsin professors. Similarly, in 1937, MIT formed an agreement with Research Corporation, an independent charitable organization, to manage its patents. Many other schools followed MIT’s lead, and Research Corporation soon managed the patent portfolios of most academic institutions.
Before the Second World War, academic institutions engaged in very limited patent activity, collectively receiving less than 100 patents. But during the war, many academic institutions adopted formal patent policies, typically stating that faculty members must assign any patent rights to the institution. Gradually, some academic institutions began creating their own patent or “technology transfer” offices. But by 1980, only 25 academic institutions had created a technology transfer office, and the Patent Office issued only about 300 patents to academic institutions each year.
Since then, patent law has increasingly encouraged patent activity at academic institutions. Until 1968, each federal agency that provided research funding to academic institutions had its own patent policy. Some provided that inventions created in connection with federally funded research belonged to the federal government, others placed them in the public domain, and a few negotiated institutional patent agreements with academic institutions, allowing them to own patents in those inventions. In 1968, the Department of Health, Education, and Welfare’s introduced an Institutional Patent Agreement, allowing for non-profit institutions to acquire assignment of patentable inventions resulting from federal research support for which the institution sought a patent. However, this policy was not uniformly applied. As such, in 1980, under pressure to respond to the economic malaise of the 1970s, Congress passed the Bayh-Dole Act, which enabled academic institutions to patent inventions created in connection with federally-funded research. Specifically, the Act provided that, with certain exceptions and limitations, “a small business firm or nonprofit organization&rdquo could patent such inventions, if the organization timely notified the government of its intention to patent the invention and gave the government the right to use the invention. The Act placed certain additional requirements on nonprofit organizations, providing that they could only assign their patents to an organization whose primary function is to manage inventions. Additionally, the nonprofit organizations must share any royalties with the inventor and use the earned royalties only for research or education. The limitation on assignment was intended to encourage academic institutions to assign their patents to charitable organizations, like Research Corporation, but in practice, it led many of them to compete over federal funds only to produce patentable inventions with little value or to assign their patents to patent aggregators or &ldquopatent assertion entities.&rdquo
At about the same time, the scope and duration of patent protection began to expand. First, the Supreme Court explicitly expanded the scope of patentable subject matter to include certain genetically modified organisms and computer software. Then, in 1982, Congress created the United States Court of Appeals for the Federal Circuit, which has exclusive jurisdiction over patent cases and has adopted consistently pro-patent positions. In 1984, Congress expanded the patentability of pharmaceuticals. In 1994, Congress ratified the Uruguay Round of negotiations which created the World Trade Organization and extended the maximum duration of a United States patent from 17 years from the date of issue to 20 years from the filing date, marginally increasing the value of a patent. And in 2011, Congress passed the Leahy-Smith American Invents Act, which amended the Patent Act by, inter alia, moving from a first-to-invent to a first-to-file patent system.
All of these changes in patent protection caused an increase in overall patent activity, across all types of inventors.
That said, academic institutions played a role in the growth of nationwide patent activity directly related to the dramatic increases in patent applications and grants between 1980 and 2010. In response to these policy changes, many universities adopted a research model under which federal grants and other public funds were directed at the development of patentable inventions and discoveries, enabling the universities to obtain patents and claim a private benefit. By 1990, more than 200 academic institutions had created technology-transfer offices, and the Patent Office was issuing more than 1,200 patents to academic institutions each year. In 1995, universities received over $15 billion in research grants from the federal government, a figure that would more than double—$35.5 billion—by 2013.
Ironically, while some of the patents granted to academic institutions proved extremely valuable, the overwhelming majority of them are worthless. Most of the technology-transfer offices created by academic institutions produce little revenue when compared with expenditures, and many actually lose money. In 2013, the median value among universities reporting revenues from their technology transfer offices was a mere $1.57 million; moreover, less than 1 percent of all patent licenses for patents held by universities and their technology transfer companies generate revenues reaching or exceeding $1 million.
The prevailing theory of patents is the economic theory, which holds that patents are justified because they solve market failures in innovation caused by free riding. In the absence of patents, inventions are “pure public goods,” because they are perfectly non-rivalrous and nonexcludable. Neo-classical economics predicts market failures in public goods, because free riding will prevent marginal inventors from recovering the fixed and opportunity costs of invention. Under the economic theory, patents solve market failures in innovation by granting inventors certain exclusive rights in their inventions for a limited period of time, which provide salient incentives to invest in innovation.
Patents may also cause market failures by granting inefficient rights to inventors and imposing transaction costs on future inventions. In theory, patent law can increase net economic welfare by granting patent rights that are salient to marginal inventors and encourage future inventions. In practice, however, patent law may grant rights that are not salient to marginal inventors and discourage future inventions. For example, patent law may cause market failures by discouraging marginal inventors from investing in innovation.
The American patent regime has precipitated “arms race” and “marketplace” paradigms, both of which elicit firm behavior. In the first instance, the benefits of patent protection incentivize innovators to aggregate under the auspices of the firm model, thereby reducing the marginal cost to each innovator of producing patentable technology. The marketplace paradigm encourages innovation, or at least innovation likely to result in patent protection. Both paradigms, however, are subject to the results of the perverse incentives that the patent regime provides, specifically that of patent stockpiling and the rent-seeking behaviors of non-practicing and patent assertion entities.
The right to exclude is perhaps the most important stick in the bundle of patent protection rights and may have the effect of stifling rather than promoting innovation. As the ubiquity of non-practicing and patent assertion entities in the patent market become commonplace, patent holdup, patent litigation, and patent thickets are common features of the modern patent marketplace.
From the perspective of the theoretical literature, innovation depends upon innovators receiving the benefits of their innovation; the regime that allocates these benefits to the innovator and thereby incentivizes innovation is the most efficient. For universities, a majority of which relied on federal funding to support research and development of patentable innovation during the 20th Century, the patent regime did not substantially encourage universities’ entry into the patent market until the passage of the Bayh-Dole Act in 1980. Descriptive research in this area suggests that the Bayh-Dole Act—which allowed universities to patent inventions developed in connection with federally-funded research—increased the number of university participants in the patent market. Some scholars have also attributed university technology transfer and patent title aggregation as being rooted in the Bayh-Dole Act.
However, these developments point to the fact that universities may be responding to policy interventions—such as the extension of the duration of patents in 1995 and anticipation of the America Invents Act—and, in turn, affecting the patent landscape. Examples of these responses include shifting investment in research and development toward innovation sectors that are more likely to receive patent protection, particularly those with high renewal rates, and because the US Patent and Trademark Office (PTO) derives more revenue from these sectors, it has the incentive to grant applications from high renewal rate sectors. Additionally, researchers have noted that the patent regime does not privilege economic development through technological transfer, and may account for both the increase in patent litigation from non-practicing entities, such as universities, as well as rise in rent-seeking behaviors in patent licensing.
University technology transfer forces academic institutions to make uncomfortable decisions about licensing and litigation. Many academic institutions have responded to this ethical dilemma by assigning their patents to patent assertion entities in order to obscure their relationship to those patents and avoid the obligation to enforce them. Despite universities’ status as charitable organizations, as patent owners they have a financial incentive to support their research and development enterprises by competing for federal grants, even if it results in patentable inventions for which there is little economic value and limit the use of the knowledge they generate by securing patent rights regardless of whether these inventions have economic value. Either of these scenarios exacerbates the cost of innovation.
In response to the changes in the patent law system between 1980 and 2011, especially the Bayh-Dole Act, academic institutions increasingly adopted a research funding model under which federal research grants and other public funds were focused on the development of patentable inventions. As previously observed, the total number of patents granted by the Patent Office steadily increased, and so did the percentage of those patents granted to academic institutions. Soon, participants in the patent law system began expressing concerns about entities that decreased the efficiency of the patent system by merely owning and asserting patents, rather than practicing them. Of course, academic institutions that own patents are non-practicing entities almost by definition, as they exist to create and disseminate knowledge, not produce commercial products. Even more troubling, many academic institutions assign most or all of their patents to patent assertion entities, the paradigmatic patent trolls. As a result, the way that academic institutions use patents presents a risk of creating “patent thickets that entangle rather than encourage inventors,” which is in tension with the charitable purpose of those institutions.
But how did these patent thickets sprout from the soil of the university? The behavioral theory of the firm may help explain why academic institutions responded to incentives created by changes in this way. Unlike neoclassical economics, which uses individual actors as the primary unit of analysis, the behavioral theory of the firm uses the firm itself as the primary unit of analysis. As a consequence, the behavioral theory of the firm provides better predictions of firm behavior with regard to output and resource allocation decisions.
The field of organizational economics emerged in 1937, when Ronald Coase observed that firms emerge when the external transaction costs associated with markets exceed the internal transaction costs of the firm. Coase’s theory of the firm was revolutionized in 1963, when Richard Cyert and James March provided a behavioral theory of the firm, observing that firms consist of competing coalitions with different priorities responding to different incentives.
In the context of funded research, university patent activity can be read as the result of strategic firm decision-making regarding patent output and resource allocation decisions. In fact, the way that patent policy has bent toward rewarding university patent activity through conferral of rights is a direct result of lobbying and decision-making efforts by these universities with lawmakers—evidence of the bidirectional interaction between universities and external influences. The behavioral theory of the firm suggests that academic institutions have responded to incentives created by patent law in a manner consistent with firm behavior. Though heterogeneity of university patent activity does exist, at most intensive research universities, where decisions are made two ways—with executive administrators setting strategic goals for research which are then implemented at lower management levels—intense competition exists between intensive research universities to vie for patent rights and thus profit maximization.
Increasingly, these universities have centralized and ceded title in patents to their foundations and technology transfer offices. As non-practicing entities, universities bear the transaction costs of developing patented inventions, but they transfer the transaction costs of bringing the invention to market to intermediaries—and get paid for doing so. As a consequence, the goal of a university is to satisfice rather than maximize results; firms typically focus on producing good enough outcomes, rather than the best possible outcomes, as a function of compromise among internal coalitions with different priorities.
Thus, one could view increased activity immediately after the implementation of a policy conferring greater patent rights not as a random but as a very rational, profit-maximizing response. However, this activity presents issues when the firm actor is a university. Because academic institutions are necessarily non-practicing entities with strong incentives to assign their patents to patent assertion entities in order to extract their economic value—yet the research from which a patentable invention derives is funded largely by public, federal investment—the gray area which universities occupy through their patent activity makes clear that, while they might not be “patent trolls” as Mark Lemley argues, they certainly feed the patent trolls.
This article aims to provide evidence of that very point. As scholars, like Jacob Rooksby, have observed: “[t]he accumulation, use, and enforcement of intellectual property by colleges and universities reflects choices to engage in a system that . . . takes knowledge and information that is otherwise subject to . . . public use and restricts it, by attaching private claims to it.” The result of these restrictions produced by universities’ firm behavior through their patent activity and transfer carries real consequences for innovation. While the effects of these consequences are uncertain, the inputs are fairly clear: the prospect of wealth-maximizing motivates activity in university technology transfer. Yet, the relationship between universities’ wealth-maximizing foray into patent acquisition and its connection with patent policy changes, as well as the explanatory theoretical framework of the behavioral theory of the firm for this very sort of activity, have not been established heretofore. In the sections that follow, this article makes this connection with supporting empirical analysis.
While academic institutions have responded to patent incentives in a manner consistent with firm behavior, the optimal firm response does not necessarily produce the optimal social outcome. Organizational economics predicts that firms will respond to external incentives by satisficing results consistent with the consensus of internal coalitions. As a consequence, firms may or may not respond to patent incentives in a manner consistent with the patent system’s goal of maximizing innovation. It follows that if academic institutions exhibit firm behavior in relation to patent incentives, they may satisfice internal coalitions at the expense of social welfare. In the context of university patent activity, this behavior could take the form of the pursuit of patent acquisition not because it is a wealth-maximizing or an economically efficient activity but simply because the regulatory conditions are preferable to pursue patent acquisition.
This study asks whether and how changes in patent law have affected the patent activities of academic institutions. Specifically, it asks two questions:
To what extent do universities change their patent acquisition strategy in response to changes in patent law?
To what extent do different kinds of universities respond differently to changes in patent law?
To answer these questions, this study analyzes data on the population of academic institutions that were granted one or more patents between 1969 and 2012 in order to determine the impact of policy changes on university patent activity over this time. Notably, while future papers in this series may engage with such questions, this article does not determine whether academic institutions have responded to changes in patent law in a way that increases or decreases net social welfare. But it can help explain how academic institutions have responded to patent incentives and whether their responses are consistent with firm behavior, laying the foundation for future exploration of whether and how universities may play a role of increasing costs to innovation.
This study relies primarily on a valuable, albeit limited, dataset compiled by the PTO, which records the total number of patents granted per year to each educational institution in the United States between 1969 and 2012. Because of limitations with this data—for example, the data contain only one measured variable, the total number of patents granted to an institution in a calendar year—this dataset had to be merged with other datasets to include more explanatory variables for each institution observation over the same length of time. Specifically, this study relied on the available data from the Classifications for Institutions of Higher Education, a Carnegie Foundation Technical Report, which was produced in 1973, 1976, 1987, 1994, 2000, 2005, and 2010. Because the first three published Carnegie Classification reports—1973, 1976, and 1987—have not been digitized, the use of this data required the authors to hand-code the classification for each observation utilized in the analytical sample.
From the merged dataset, consisting of the full population of higher-education-affiliated institutions that had been granted a patent between 1969 and 2012, an analytical sample had to be drawn from this population to focus on the main university participants in the patent market: research universities; doctoral-granting universities; medical, health, and engineering specialized institutions; and to a lesser extent, comprehensive universities; liberal arts colleges; and other specialized institutions, including schools of art, music, and design, as well as graduate centers, maritime academies, and military institutes. Due to the paucity of observations in the following subgroups, 31 observations from two-year colleges, corporate entities, and spin-off research institutes were dropped from analysis, preserving 591 university observations. Additionally, given that the University of California system does not differentiate patent activity by institution, choosing instead to have reported patent activity in the aggregate in the PTO dataset, it was removed from the analytical sample.
Because the Carnegie Classifications attribute most administrative units to the parent institution, this study took the same approach, collapsing administrative units, foundations, other organizational entities, and former institutions on the current parent institution. However, each observation that received a separate classification from its parent institution in the Carnegie Classifications was preserved as a separate observation from the parent institution. The process of collapsing on parent institution reduced the total number of institutions observed from 590 to 366 school observations, each with 44 year observations.
It should be noted that the data are limited by two important factors: (1) a lack of explanatory covariates; and (2) a small sample of higher education institutions relative to the overall population of higher education institutions. In the first instance, because the year observations for each institution comprise a 44-year span, it is impractical to match each institution-year observation with rich, explanatory covariates over that time. Not even the Integrated Postsecondary Education Data System (IPEDS) collected comprehensive data on universities before 1993. As such, the Carnegie Classifications serve as a proxy for more detailed information about each institution during a span of years for which data is virtually impossible to find. Given that the Carnegie Classifications categorizes schools on the basis of its federal funding for academic research, production of doctorates, institutional selectivity, enrollment, and degree programs, the Carnegie Classification for each school makes an ideal proxy for a more complete set of explanatory covariates.
As for the size of the analytical sample relative to the population of institutions of higher education receiving a Carnegie Classification since 1973, this population consisted of 1,387 universities—not counting theological seminaries, bible colleges and two-year colleges—while the analytical sample used in this study comprises 366 universities—26.39 percent of the population. However, because this study analyzes university patent activity relative to patent policy change, the analytical sample size is necessarily limited to only those universities that have been granted a patent. As such, the analytical sample used in this study can be viewed as representing a nearly complete picture of the population of academic institutions that have successfully engaged in patent activity between 1969 and 2012.
Research universities and doctoral-granting universities dominate patenting activity and receive an overwhelming majority of patents granted to academic institutions.
However, just under half of the analytical sample is comprised of research universities and doctoral-granting universities, which the Carnegie Classifications consider separate but component parts of its doctoral-granting institution category. The average patent totals for research universities dominate all other classification of institution and are over four times as large as the average patent total for doctoral-granting universities. While comprehensive universities account for the largest proportionate classification in the sample, the average patent total for comprehensive universities is among the smallest in the analytical sample. In fact, it is followed only by the smallest classification in proportion and average patent total—other specialized institutions. Medical, health, and engineering schools, while small in number, maintain considerable average patent totals, nearly doubling the patent totals of liberal arts colleges which account for about the same proportion of institutions analyzed in the analytical sample. Across all categories, universities that entered the patent market before the passage of the Bayh-Dole Act buoy patent totals. As such, given their high level of patent activity, the spline regression model results below will especially highlight early entrants as well as research universities, doctoral-granting universities, and medical, health, and engineering schools.
This study employs a spline regression approach to identify how universities reacted to changes in patent policy at key points in time between 1969 and 2012. This method is very similar to using a difference-in-differences approach to compare the activity differences between two series of years separated by a point, or knot, in time, where the intercept and slope vary before and after the knot. Spline regression modeling necessitates that the location of the knots be set a priori in order to produce estimates of the non-linear relationship between the predictor and response variables. Doing this requires defining an indicator variable, using it as a predictor, but also allowing an interaction between this predictor and the response variable. The analytical model employed in this study is as follows:
Thus, the expectation of the total number of patents granted to school i (PATi) in year t (yrt) is a function of: (1) a vector of the factors attendant to school i in year t as proxied by its Carnegie Classification (CCit); (2) a dummy variable for whether or not the school engaged in patent activity before 1980 (EEi); (3) a school fixed effect (Si); (4) the year indicator variable (yrt); (5) a dummy variable for the location of the indicator year between the critical spline knots (kc, kc-1); (6) the interaction of the indicator year and the dummy variable for its location between the critical spline knots; and (7) the random error term (eit).
Spline knots were set at 1981 (k1), 1996 (k2), and 2010 (k3) to account for: (1) the passage of the Bayh-Dole Act in 1980, which incentivized universities to engage in patent activity by giving them title to inventions produced from federally-funded research; (2) the expansion of the patent protection duration from seventeen to twenty years in 1995; and (3) the introduction of the America Invents Act, which would pass into law in 2011 and change the right to the grant of a patent from a first-to-invent standard to a first-inventor-to-file standard. The final spline knot was not set at 2012 for two reasons. First, because 2012 was the final year of observation in the data set, the spline regression model would not tolerate a post-2012 slope prediction without post-2012 data. Additionally, setting the knot at 2012 would not account for the possibility that universities may have begun reacting to the policy before the effective date of the policy change, as this particular policy change was in the offing for several years before its eventual passage.
From a theoretical perspective, the decision to specify the analytical model with year-after-the-intervention spline knots is defensible on the grounds that it allows an additional calendar year for universities to react to the policy intervention. However, to test the sensitivity of the model and the decision to set the spline knots one year after the policy intervention, the model was specified in multiple formats to include spline knots on the year of the policy intervention, one year before the policy intervention, and two years before the policy intervention. This sensitivity test was undertaken to ensure that the differences in slopes and intercepts throughout year observations were not evidencing a secular exponential curve. Although the year-of-the-intervention slopes and intercepts bore marginal similarities to the results discussed below, which are modeled on year-after-the-intervention spline knots, there were significant differences between the year-after-the-intervention slopes and intercepts reported below and those for year-prior- and two-years-prior-to-the-intervention. Thus, the year-after-the-intervention spline knot specification used in this study is preferable to other specifications, because it rules out the potential threat of secular trends.
To analyze the effect of the patent policy changes on university patent activity, the regression model provided in the section above was used to calculate both the intercept before and after the policy intervention as well as the slope before and after the policy intervention. Given that the model employed a fixed effect by institution, the regression results reported below can be interpreted as providing an estimate of the intercepts (I) and effects, or slopes (E) pre-intervention, as well as the marginal intercept shift and slope change after the intervention for universities in the analytical sample. In the first regression table, Table 2, the results compare early entrants to non-early entrants, demonstrating stark differences between the two groups.
Notably, the early entrants engaged in patent activity at a modest but steady rate, adding minimally to yearly patent totals and averaging 2.67 patents granted annually by 1980. In 1981, the intercept at this spline knot jumped by an average of nearly one and a half patents in a single year, with an accelerated slope adding to the average growth by three-quarters of a patent every year thereafter to 1994. By 1995, the intercept spiked again, this time by an additional 4.76 patents granted annually for early entrants, with even further accelerated slope gains to 2010. Finally, in 2011, thought they came close, the estimates lacked statistical significance at the p<0.05 level but indicated an added intercept bump and positive explosion in slope. The non-early entrant estimates, though mostly consistent with the statistical significance of the early entrant estimates for the same periods, pale by comparison. The direction and statistical significance of the results for all early entrants are fairly consistent with estimates for the effect of policy changes at the 1981, 1995, and 2011 spline knots among early entrants in the research and doctoral-granting universities classifications.
The results provided in Tables 3 and 4 describe patent activity among early entrant research and doctoral universities, respectively. As Table 3 indicates, research universities achieve the greatest orders of magnitude of increased patent grants at the regression spline knots. Slope changes among this group are statistically significant (or very closely approaching significance in the case of the 1995 spline), illustrating the differential response within group to the various policies while mitigating the influence of secular trends.
Doctoral-granting institutions maintained relatively flat—until 2011, when the slope dramatically and significantly changed—but exhibit consistent growth in patent activity around the spline knots.
Table 5 compares the activity among these two early entrant groups in terms of patents granted. Before the passage of the Bayh-Dole Act in 1980, research universities engaged in steady, relatively flat rates of patent activity, averaging about four patent grants per year. In 1981, the intercept for research universities increased by an average of about two patent grants, significantly adding an average of more than one patent grant per year thereafter. In 1995, the research university intercept jumped over seven units but had a relatively stable slope before and after this time. While the limited data after 2011 do not tolerate statistical significance, research universities and doctoral-granting universities may have undergone another upward intercept shift, but more importantly, may have also undertaken a momentous slope shift, relative to all other slope shifts observed by category, in the years since 2011.1>Among early entrant comprehensive universities, only one spline knot approaches statistical significance—the knot at 1995—but even it represents a modest increase from preceding patent activity.
Likewise, the statistical significance of the specialty institutions’—including primarily medical, health, and engineering schools—spline knot estimates is only present around the 1981 spline knot. Yet, the results clearly indicate a considerable bump at the 2011 spline knot, despite the lack of statistical significance at that spline or the 1995 spline.
It is likely that these two groups of institutions—comprehensive universities and specialty institutions—demonstrate relatively little change with the passage of new patent policy for a couple of reasons. First, their numbers are few, especially when compared with research and doctoral-granting universities. Second, and perhaps more important, their missions are very different from research universities. Thus, these universities may not respond to the same incentives in the same way as research and doctoral universities simply because research resulting in a patent may not be an institutional priority for many of the schools in the comprehensive and specialty institution categories.
Notwithstanding these results for the comprehensive universities and specialized institutions, the statistically significant slope and intercept differentials, while controlling for explanatory covariates, indicate the strong presence of university patent activity responses among research and doctoral universities to patent regime changes at the years represented by the spline knots. There is considerable evidence that, among these two categories of universities, the passage of the Bayh-Dole Act in 1980 provided considerable incentive, and elicited considerable effect, on the engagement of major universities in patent acquisition. The shrinking but still significant effect at the 1995 policy intervention, which extended patent duration to 20 years in some but not all patents, may be direct evidence that, because this policy change was not as major a shift in the conferral of rights to universities, it did not elicit the same magnitude of response. However, the anticipation of the passage of the America Invents Act triggered a massive shift in university patent acquisition, perhaps because universities were concerned that their inventions could be scooped under the new first-inventor-to-file standard.
This behavioral pattern suggests a rational, profit-maximizing response—the result of strategic firm decisions regarding patent output and resource allocation decisions—to increase patent activity immediately after the implementation of a policy conferring greater patent rights. However, because universities do not bring these patents to market themselves, and so many of these patents are sold to patent assertion entities, the increase in university patent activity has the effect of contributing substantially to the patent thicket.
This study asks whether universities exhibit patent activity consistent with firm behavior. The results of the spline regression models suggest that research universities and doctorate-granting universities increase their patent activity in direct response to incentives created by changes in patent law but may also strategically hold on to pursue patentable inventions until after the policy provides them more robust patent rights or protection. Most notably, across all university types, the Bayh-Dole Act accelerated patent activity once universities could take title in inventions produced from federally-funded research. As illustrated in the regression models and Figure 1 in the Appendix, this Act may have even incentivized research universities to disengage in patent activity prior to, and scale up patent activity just after, the passage of the act, in anticipation of the benefit that would be conferred upon them once the act had passed into law. As the patent protection duration expanded in the mid-1990s, the growth of patent activity at most universities in the analytical sample increased marginally, indicating another firm response to the patent law regime changes. Finally, preliminary results and the figures in the Appendix indicate that the anticipation of the America Invents Act may have had the largest impact in the rate of patent activity to date, evidence of a university patent activity response to protect current research against a more liberalized granting process.
These responses, evincing a move toward patent aggregation by universities, may have lasting impact not only on the patent marketplace but also on innovation. Yet, patent aggregation, in and of itself, is not necessarily problematic. However, the symptoms of patent aggregation, such as patent hold-up and rent-seeking licensing behaviors, are detrimental to the promotion of innovation. Moreover, competition for federal funds that leads to the production of patentable technology of little economic value could evince another market inefficiency to which universities may substantially contribute.
This study—the first in a series investigating how universities make decisions about their intellectual property, and whether these decisions redound to the public good—demonstrates that research universities, doctoral granting institutions, and specialized institutions respond strategically to patent policy changes in ways that carry profound consequences for innovation and the public good. It is clear that changes to patent policy are necessary to incentivize universities to reap the benefits of research and development of patentable technologies while promoting innovation.1> 1>* * * 1> Appendix
 Patent and Trademark Law Amendments (Bayh-Dole) Act, Pub. L. No. 96-517, 94 Stat. 3015, 3019 (1980).
 See Leahy–Smith America Invents Act, Pub. L. No. 112–29, 125 Stat. 284, 285 (2011).
 See generally Stuart W. Leslie, The Cold War and American Science: The Military-Industrial Academic Complex at MIT and Stanford (1993); Christopher P. Loss, Between Citizens and the State: The Politics of American Higher Education in the 20th Century 224-25 (2012).