The effect is economy-wide – university patent thickets and rent-seeking impede innovation

[Christopher J. Jr., et al. "The Hidden Cost of University Patents." Berkeley Business Law Journal, vol. 21, no. 1, 2024, pp. 203-249. HeinOnline -tm]

Applying a firm behavior approach to analyzing university activity in the patent space, we have discovered evidence that universities act rationally, if inefficiently. That is, they respond to economic incentives, as any firm would. As expected, universities started patenting innovations produced by their researchers and began to license or sell those patents to businesses.159 They also engage in transactions as a firm would. They created technology transfer offices to manage their patent portfolios and policies. Inevitably, those technology transfer offices became institutional fixtures that had to justify their existence by producing revenue or other activities. Most of what they did was require researchers to ensure the patentability of their research and file as many patent applications as possible. These effects are arguably attributable to the passage of the Bayh-Dole Act.

Today, every research university has a technology transfer office that is a putative source of revenue, when in fact, few produce revenue at all.160 In reality, they are another part of the academic enterprise, with the unfortunate addition of reduced access to information. Because technology transfer offices are centered around patents rather than research, they are encouraged to prioritize control rather than openness and sharing.It would be notable if technology transfer offices were wildly profitable because their profits would reflect nothing more than a double tax on innovation. Every time a university patent generates revenue, that's the sound of the public paying twice. But the reality is arguably worse. Only a tiny minority of technology transfer offices are profitable, because many university patents are of little value. Most technology transfer offices are a net cost, and most university patents do nothing but impede future innovation. The majority of university patents are never commercialized. Indeed, many are sold to patent aggregators, which use them to extract rents from actual businesses.

In any case, the premise of the Bayh-Dole Act was always questionable, and its history only makes it look more so. It never made sense for the government to fund research directly, then fund it again indirectly via patents, and the ostensible justification is weak. Businesses exist to make money. Only in limited circumstances would a business decline to implement an innovation because it did not have a patent.

When acting alone, universities behave as any rational firm would. They use their research subsidy to patent and use their patents to litigate. Our research shows that the Bayh-Dole Act created perverse incentives and, in so doing, raised larger problems than previously realized. It was supposed to encourage innovation by imposing transaction costs on innovations, which does not seem especially clever. Unsurprisingly, it did not work. Rather than encouraging innovation, the Bayh-Dole Act created some of the densest patent thickets and gave ammunition to patent trolls.

While innovators have been dealing with patent trolls for a while now and have figured out how to avoid or counter them, the Bayh-Dole Act and university patents introduce an additional problem: rent-seeking.

Our research suggests that the Bayh-Dole Act turns universities into potential rent-seekers, and the problem may be expanding.161 We observe that when universities invest in research (and thus in patents), they invest even more in patent litigation.162 In other words, universities are turning themselves into rent­ seekers. It makes economic sense. They used to outsource these activities (e.g., by assigning patent rights to litigation-happy third parties). Eventually, they realized it was inefficient and brought it in-house.163

This result is not only inefficient from an economic perspective; it is also inconsistent with the charitable purpose of universities. 164 Instead of using government grants to fund research, universities are using government grants to fund litigation.16s And it couldn't have been more predictable, because universities are merely responding to incentives that would cause any firm to make the same decision. Of course, universities are firms, and we increasingly encourage them to act like firms. So, we should not be surprised.

But it is bad innovation policy to encourage universities to pursue patent profits rather than public welfare. And it is wrong. Universities are charitable organizations because we believe their educational purpose benefits the public. The government subsidizes universities directly by giving them grants, but it also subsidizes them indirectly via charitable tax exemptions and deductions. Universities should earn those indirect subsidies and should not act inconsistently with their charitable mission. The entire purpose of the Bayh-Dole Act was to enable universities to reduce access to their innovations by patenting them. It was always a questionable idea, but it has proven to be even worse in practice than in theory. And as discussed throughout this article, there is mounting evidence that we should question the efficacy of the Bayh-Dole Act.