IPTF-id7482952.pdf

The first round of talks gave 15 minutes for presentation and 15 for Q&A. The first presenters were Gaia Bernstein, Tun-Jen Chiang and Carliss Balwin.

1. For Bernstein, user adoption problems are proportional to the novelty and complexity of the hardware in question, and referencing Benjamin, should be resolved with the formation of an office of innovation policy (Bernstein).

2. For Chiang, a patent holder who is the least cost searcher should be under the duty to find potential infringers (Chiang).

3. For Baldwin, modularity increases profits as innovation opens up to third party innovators, but keeps even weakly protected intellectual property hidden. Modularity, akin to object oriented programming, is elaborated more in her paper as follows: Part 1: What is modularity? How do you use it? Part 2: When should you open the innovation space to third parties, and how does IP holder appropriate value?

Part 2 (subroup 1) consisted of Katherine Strandburg, Michael Burstein, Liza Vertinsky and Jorge Contreras.

1. Strandburg discussed the issues associated with collaborative non-firm creative groups with high cost or unpatentable data sets, e.g. the problem of free-riding, and the high transaction costs and low appropriation regimes surrounding such beneficial collaboration. In the Q&A, the audience offered that such consortiums may use contract as regulatory frameworks, but should be concerned with antitrust issues associated with oligopoly and group boycotts

2. Burstein discussed the so-called “disclosure paradox,” positing that in contracting over information, the buyer must know what he’s buying, but the seller doesn’t want to give the information away pre-contract. He thinks that the expansion of IP rights to facilitate commercialization theory would be unfounded. He thinks that economics gives an overly stylized account of information goods. Information is in fact excludable, e.g. tacit knowledge and nonzero exclusion costs, and information is not homogenous (i.e., all value not conveyed with transaction of propositions). Put differently, you don’t have to give away the molecule to contract over what it does. He says negotiations may proceed with progressive levels of disclosure, though underprotection may be a problem in so far as it allows for work abounds. He thinks contracts as negation regulations may be a remedy

3. Vertinsky discussed the difficulty of bringing a fundamental invention to an applied innovation, specifically in pharmaceuticals – so-called translational science. She posits precompetitive collaboration, e.g. sharing drug failure data, as the solution. The problems that arise here are similar to those articulated by Strandburg and Burstein, where patents are inadequate protection for exchange. Her solution is to expand the role of universities in downstream development, including bringing industry experts into a new University department for in-house development, rather than simply facilitating collaboration. (This development as a “creative group”). She posits that this new development arm of the university is allowed to implement IP policies with an eye for commercialization more than could the traditional OTL. Specifically, the OTL licenses the innovation out to this financing and development arm of the University, for post-development licensing to private entities. Her work is being done as a case study on Emory’s current project towards this end.

4. Contreras addresses standard essential patents, patents that must be licensed when it has been deemed an industry standard essential to a “locked-in” industry, under the FRAND (e.g. licensed on fair, reasonable, and non-discriminatory terms) doctrine. Specifically, how is the obligation determined and, once the FRAND obligation is determined but not met, what remedies should be available? And how can FRAND be fixed in light of private ordering?

After lunch the conference convened for a Patent Law and Business Panel with Al Brunett, Chief Patent Counsel, Vecna, Inc.
, Diane Ferguson, Deputy General Counsel, VCE
, Tony Gomes, Vice President and Deputy General Counsel, Citrix Systems, Inc.
, Krish Gupta, Sr. Vice President and Deputy General Counsel, EMC Corporation
, Bart Newland, Vice President and Chief IP Counsel, Biogen.

Gupta discussed what he saw as the biggest bane on innovation today, patent trolls (NPE or non-practicing entities). In discussing his company’s battle with patent trolls, his – successful – strategy was to file for mandamus and severance from the suit, which plaintiff had brought against 96 defendants, on the grounds that infringement of the same patent does not make products “materially the same.” This strategy won at appeal.

Newland talked about the idiosyncrasies of bio/pharma IP, specifically how one patent can keep a billion dollar drug from being worth nothing. He also discussed the first to file provision in the new patent law, replacing the old firs to invent standard, and its implications on predictability and certainty in IP law.

Brunett talked about the cost and quality of patents, both of which he called “unconsciousabl[ly]” bad.

Gomes discussed the paradigm shift in patent markets, where patents have become assets to be invested in, and as a derivative investment for that matter, where the value of the patent isn’t necessarily tied to the value of the underlying technology. Further, companies are being taken over, getting power on the board, holding the patents and redirecting the corporate strategy to be an NPE.

Next round of talks were from Lucas Osborn, Ted Sichelman and Andrew Torrance.

1. Osborn analyzed issues relating to “Offer to Sell, an offer outside the US for sale inside the US which may infringe a patent. His position is that an offer to sell should include advertisements and other solicitations.

2. Sichelma says the optimal patent scope is dependent on whether you think commercialization requires more than just the disclosure of the novel idea, or need more in order to reach commercialization, how much patents increase transaction costs for innovation, among other factors.

3. Torrance gave data on the grounds on which patent applications are rejected based on industry area.

The Technology Adoption Problem

Established corporations (hereafter firms) make decisions about when and which technologies to adopt to increase revenues and stay competitive. The types of technologies they adopt are diverse, from information technology infrastructures that facilitate communication and customer service to manufacturing equipment that increase output and precision. The process a firm undergoes in deciding which technologies to adopt can be complex, but has been modeled by McCardle.[i]

McCardle posits that when a firm is faced with a technology adoption decision it will first estimate that technology’s potential profitability. Let this estimate be denoted p, to be contrasted with the technologies’ actual profitability p*. From this starting point the firm will undergo a process of (not costless) information gathering in order to increase the precision of its initial profitability estimate.

Information is gathered until p passes the firm’s preference-based upper or lower bound of profitability signaling adoption or rejection, respectively. As gathered information increases the precision of the estimate, the thresholds narrow. Put differently, an imprecise but high p value and a precise, but more modest p value may both trigger adoption. If information is exhausted or too costly, a decision will be made based on the estimate and its precision.

The Real Options Solution

Firms may gather information about external R&D products through two means. First, the firms may continually seek information from, in this case, the University and faculty inventor. Second, the firm may engage in a real options contract.[ii] Purchasing a real option creates the right but not the obligation to make a larger purchase (the technology license) at some future time. When a firm has internal R&D, the option is created through internal R&D investment. When R&D is external, e.g. already completed in the University, the option is purchased through contract. A small options payment gives the firm an options period, characterized by the resolution of exogenous and endogenous uncertainty, over which the license decision may be made.

The options contract creates a different framework than the straight forward pay-for-information scenario. Under both the options framework and pay-for-information scenario exogenous uncertainty is resolved through information exchange and waiting. However, only under the real options framework are endogenous uncertainties resolved through in-house (firm) evaluation. This allows the firm to discover and evaluate the costs of developing the technology to interface with its infrastructure or sales goals. Accordingly, the options framework allows the firm a high degree of precision in estimating the profitability of a nascent technology without substantial sunk costs.

Implications for the University

This process is often further complicated, as Lippman and McCardle note, because firms may evaluate more than one technology at a time. [iii] Accordingly, from the perspective of the University, it is important to establish a high initial profitability estimate, or demonstrate a high likelihood of an increase in p through technology-infrastructure interfacing during the options period.

Further, the University should recognize that pursuing the options contract may attract licensees where there would not have been under the sunk-cost licensing framework. Not only could this increase University revenues, but may diversify the pool of firms that idiosyncratically develop the nascent technology and explore its potential.

There may be, however, drawbacks to the options contract. First, when the options period expires the firm must either license the technology or abandon the associated research. The firm may decide to abandon the license but, with intimate knowledge of the innovation, invent around the University’s patent. Second, where there are not high sunk costs, licensing firms may be more incentivized to prematurely abandon the development of a technology.