technology

From Clifton Leaf’s “The Law of Unintended Consequences” (Fortune: 19 September 2005):

For a century or more, the white-hot core of American innovation has been basic science. And the foundation of basic science has been the fluid exchange of ideas at the nation’s research universities. It has always been a surprisingly simple equation: Let scientists do their thing and share their work–and industry picks up the spoils. Academics win awards, companies make products, Americans benefit from an ever-rising standard of living.

That equation still holds, with the conspicuous exception of medical research. In this one area, something alarming has been happening over the past 25 years: Universities have evolved from public trusts into something closer to venture capital firms. What used to be a scientific community of free and open debate now often seems like a litigious scrum of data-hoarding and suspicion. And what’s more, Americans are paying for it through the nose. …

From 1992 to September 2003, pharmaceutical companies tied up the federal courts with 494 patent suits. That’s more than the number filed in the computer hardware, aerospace, defense, and chemical industries combined. Those legal expenses are part of a giant, hidden “drug tax”–a tax that has to be paid by someone. And that someone, as you’ll see below, is you. You don’t get the tab all at once, of course. It shows up in higher drug costs, higher tuition bills, higher taxes–and tragically, fewer medical miracles.

So how did we get to this sorry place? It was one piece of federal legislation that you’ve probably never heard of–a 1980 tweak to the U.S. patent and trademark law known as the Bayh-Dole Act. That single law, named for its sponsors, Senators Birch Bayh and Bob Dole, in essence transferred the title of all discoveries made with the help of federal research grants to the universities and small businesses where they were made.

Prior to the law’s enactment, inventors could always petition the government for the patent rights to their own work, though the rules were different at each federal agency; some 20 different statutes governed patent policy. The law simplified the “technology transfer” process and, more important, changed the legal presumption about who ought to own and develop new ideas–private enterprise as opposed to Uncle Sam. The new provisions encouraged academic institutions to seek out the clever ideas hiding in the backs of their research cupboards and to pursue licenses with business. And it told them to share some of the take with the actual inventors.

On the face of it, Bayh-Dole makes sense. Indeed, supporters say the law helped create the $43-billion-a-year biotech industry and has brought valuable drugs to market that otherwise would never have seen the light of day. What’s more, say many scholars, the law has created megaclusters of entrepreneurial companies–each an engine for high-paying, high-skilled jobs–all across the land.

That all sounds wonderful. Except that Bayh-Dole’s impact wasn’t so much in the industry it helped create, but rather in its unintended consequence–a legal frenzy that’s diverting scientists from doing science. …

A 1979 audit of government-held patents showed that fewer than 5% of some 28,000 discoveries–all of them made with the help of taxpayer money–had been developed, because no company was willing to risk the capital to commercialize them without owning title. …

A dozen schools–notably MIT, Stanford, the University of California, Johns Hopkins, and the University of Wisconsin–already had campus offices to work out licensing arrangements with government agencies and industry. But within a few years Technology Licensing Offices (or TLOs) were sprouting up everywhere. In 1979, American universities received 264 patents. By 1991, when a new organization, the Association of University Technology Managers, began compiling data, North American institutions (including colleges, research institutes, and hospitals) had filed 1,584 new U.S. patent applications and negotiated 1,229 licenses with industry–netting $218 million in royalties. By 2003 such institutions had filed five times as many new patent applications; they’d done 4,516 licensing deals and raked in over $1.3 billion in income. And on top of all that, 374 brand-new companies had sprouted from the wells of university research. That meant jobs pouring back into the community …

The anecdotal reports, fun “discovery stories” in alumni magazines, and numbers from the yearly AUTM surveys suggested that the academic productivity marvel had spread far and wide. But that’s hardly the case. Roughly a third of the new discoveries and more than half of all university licensing income in 2003 derived from just ten schools–MIT, Stanford, the usual suspects. They are, for the most part, the institutions that were pursuing “technology transfer” long before Bayh-Dole. …

Court dockets are now clogged with university patent claims. In 2002, North American academic institutions spent over $200 million in litigation (though some of that was returned in judgments)–more than five times the amount spent in 1991. Stanford Law School professor emeritus John Barton notes, in a 2000 study published in Science, that the indicator that correlates most perfectly with the rise in university patents is the number of intellectual-property lawyers. (Universities also spent $142 million on lobbying over the past six years.) …

So what do universities do with all their cash? That depends. Apart from the general guidelines provided by Bayh-Dole, which indicate the proceeds must be used for “scientific research or education,” there are no instructions. “These are unrestricted dollars that they can use, and so they’re worth a lot more than other dollars,” says University of Michigan law professor Rebecca Eisenberg, who has written extensively about the legislation. The one thing no school seems to use the money for is tuition–which apparently has little to do with “scientific research or education.” Meanwhile, the cost of university tuition has soared at a rate more than twice as high as inflation from 1980 to 2005.