University ownership makes it virtually impossible for inventors to work with tech startups – university greed and red tape destroy investment incentives

[Gerald, “Inventors would own more, were it not for noncompliant Bayh-Dole practice,” Research Enterprise, 3/10/23, https://researchenterprise.org/2023/03/10/inventors-would-own-more-were-it-not-for-noncompliant-bayh-dole-practice/, accessed 7/17/24, GDI-JCR]

The motivation for universities to force assignment of inventions, only to exclusively license those inventions back to the inventors (which amounts to another assignment, no matter a document is labeled “exclusive license”) is to take a piece of the action before there is any action. Doing so takes energy from the system. Instead of dealing directly with their startup, inventors (and any other founders) have to first assign rights to the university, and then they have to negotiate the rights back, now with all the strings and risk aversion of an institution attached. Startups can take months to negotiate a license with a university. One company CEO visited the university I worked for, had got twenty licenses from various universities in order to have relative freedom to operate. If I remember right, he said it took him a couple of years. That, he said, was his competitive advantage. No one else was likely to have the time and luck to get licenses out of those same universities. In another situation, the startup negotiation took so long and cost the company so much in attorney time just to battle the university’s default license document that one of the members of the company’s board complained publicly. And turns out that board member was also a university regent. So the technology transfer director was resigned and the office renamed and reorganized with the idea that somehow that would speed up negotiations. Hah! The university insists on flying a 747 of a license document to go a half mile that could be walked with a wagon in ten minutes. But somehow this is pitched as “helping” to start new companies.

The university deal also changes priorities for the startup. It has to comply with all the elements of the license contract, which often runs to 30 or pages, single spaced. Universities have finely evil practice of asking startups for a business plan, ostensibly to verify that they have a capacity to operate and therefore are worthy of a university license. But then the university incorporates by reference that plan into the license contract, making the plan itself part of the contract with the university. The startup cannot change its plan, then, without the permission of the university. License agreements are also set up so that a breach of the agreement results in the cancellation of the license, and that means that at the breach (maybe if not “cured” in 30 days), the startup is infringing the university’s patent and could get shut down. That’s a great way to get risk-taking investors on board, don’t you think? So the priority for a startup, just getting going, is to comply with the university’s license demands, making sure the university is going to get paid by doing everything “right.”

University licenses also add a threat of audit, with penalties for any payments that the company might have shorted the university. Audit, of course, requires the company to reveal its books and all sorts of privileged or confidential information to the university, which then has to be trusted to handle that information with care, which is made all the more difficult, or at least uncertain, if the university is public and subject to state public disclosure law. Audit provisions also may create a whole procedure for when audits can be conducted, with what sort of notice, who can be chosen to do the audit, what sort of confidentiality the auditor will have, penalties for underpayment, how interest on underpayment will be calculated, and on and on.

University licenses also demand indemnification. The university sees itself as a deep pocket and does not want to be that pocket. So the startup must indemnify the university for any claims that might be made regarding the invention or its use. Oh, and the indemnification must be backed up by the startup taking out insurance naming the university as a co-insured, for the specified limits, with the university receiving a copy of any insurance document to show that the insurance policy meets the university’s requirements and is paid up and in good standing, and on and on. A startup then must work through provision after provision in the license agreement in this way, spending its time and energy on feeding administrative angst that has gathered itself into a template agreement that covers the deal with every bit of wording that would give the university the upper hand in any dispute. And don’t bother asking about dispute resolution provisions, or jurisdiction, or what happens if the company gets bought, or worse, if the university goes after a piece of equity to hedge its bets that the licensed invention won’t work out. Just what you need first thing to get a new company with new technology up and going.

If universities simply must have a financial bite out of every startup, then they could skip the ownership and licensing fuss, and instead ask that their inventors share some of what they receive personally from the company. Doing so is still a racket, but shifts the shakedown from the license to approval to engage in “outside” activities–something of a conflict of interest or ethics in public service thing. Sure. Needs to happen. But happening there does not get in the way so directly of the company.

It remains, however, that a university getting paid off by a startup has nothing to do with advancing the prospects for the startup to succeed. No one goes “Oh, this startup has a big hurking university license chained around its neck, so it is certainly more likely to do well!”