Pact with the CEO

As technology licensing programs gain more currency in American universities, universities will surely gain more American currency, but will research suffer?


James C. Luh
February 8, 1999 3:40PM (UTC)

The networking technology John Cioffi had invented was showing promise, but it didn't quite fit with his employer's line of business. So with the employer's blessing Cioffi took a leave of absence to start his own company, Amati Communications. Cioffi's employer still owned the relevant patents, but it sensed an opportunity and so granted a license to the technology in exchange for a share of the take. Interest in Cioffi's invention exploded, and in 1997 Texas Instruments bought Amati for $396 million. Cioffi's employer cashed out for $8 million -- and still stands to earn $20 million to $30 million more in future royalties.

Impressive, perhaps, but a modest success by Silicon Valley standards. What makes the story worth noting is just who Cioffi's savvy employer is: not Cisco Systems or Lucent Technologies but Stanford University, where Cioffi is associate professor of electrical engineering. Cioffi started Amati with the blessing of Stanford's Office of Technology Licensing, one of a new crop of university offices staffed with MBAs and engineers and charged with pitching university research to the private sector. These technology licensing offices -- think of them as university marketing departments -- scour university labs for potentially lucrative inventions, shepherd them through the patenting process and ultimately match them with industry buyers who bring the results to market and share their profits with the universities.

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Licensing efforts are succeeding wildly, bringing the nation's top universities hundreds of millions each year. But with corporate cash pouring into academic coffers, some critics have voiced concern that technology licensing could tempt universities to stray from their fundamental mission as teaching and research institutions. Why study the origins of a rare but fatal cancer when a new Viagra-for-women might rake in millions for the scientists? And why should a young professor concern herself with teaching the next generation of software designers when several multimedia companies are encouraging her to pursue a new 3-D rendering platform?

Only a rare few licensing deals bring in numbers as high as Stanford realized from Amati, whose technology is now being used to deliver high-speed Internet access over ordinary telephone lines. But staggering profits from exceptional deals more than make up for the disappointments. Annual surveys by the Association of University Technology Managers indicate license revenues at participating universities grew about 20 percent per year between 1991 and 1996. Moreover, the latest AUTM survey shows that in their respective 1997 fiscal years 132 universities recorded total license revenue of $293 million from some 9,306 active licenses and options. The same survey showed a whopping 33 percent
increase in royalties from 1996 to 1997 going to universities for their
inventions. The lion's share of the revenue goes to a few top research universities -- with University of California at the top of the heap with 61.3 million in revenues from 1996-97 fiscal year -- but it's only a matter of time before all research institutions attempt to compete in this lucrative new field.

Carnegie Mellon University recently received a windfall from the Lycos Web search engine, which grew out of research conducted by Carnegie Mellon professor Michael Mauldin. The university gave Lycos exclusive rights to Mauldin's technology in exchange for royalty payments and a 20 percent stake in the company. On the day of Lycos' initial public offering in 1996, Carnegie Mellon's shares were worth more than $60 million. Carnegie Mellon has since sold some of its stock and, according to the university, the proceeds helped build a $20 million computer sciences building.

Florida State University, another big beneficiary of technology licensing, helped professor Robert A. Holton in marketing his newly patented process for synthesizing the breast cancer drug Taxol. The pharmaceuticals giant Bristol-Myers Squibb negotiated exclusive rights to the process and has so far paid FSU $100 million in royalties.

With the 1980 passage of the Bayh-Dole Act, which granted universities the rights to inventions arising from federally funded research, such licensing deals got a boost from Congress. But the growth of technology licensing is just another adaptation to a rapidly changing research environment that increasingly favors applied research over basic (or what is sometimes called pure) research. While government and corporate sponsorship of basic research has dried up in recent years, corporations have poured money into commercially promising applied research at universities as a cheaper alternative to running their own laboratories.

Since many universities share licensing royalties with inventors, (and the Bayh-Dole Act explicitly mandates that revenue must be shared with researchers), many of these corporate deals are turning academics into moguls. With researchers pocketing as much as a third of net proceeds, the potential for personal gain is enormous by nonprofit-sector standards. MIT distributed more than $4.6 million to inventors in its last fiscal year alone.

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Could the spread of such arrangements change the very nature of university research? Even Donald Kennedy, former president and professor of biological sciences at Stanford University and enthusiastic proponent of such deals, admits that it's difficult to imagine that licensing revenue doesn't weigh into university and faculty research decisions at all. "It's hard to tell," Kennedy says, "but I suspect there has been at least a modest effect of that kind."

Dianne Rahm, director of the graduate program in public administration at Iowa State University, conducted a survey of academics at top research institutions in 1993. Among respondents who had transferred their research into industry products, 44 percent said their universities rewarded patenting activities and 55 percent said they had felt pressure to adopt an applied-research focus in their work.

But the licensing deals that have raised the hackles of critics are those that grant exclusive rights to single corporations. Since the Bayh-Dole Act originally was designed to give the public more access to the intellectual property developed on university campuses -- by making it available to businesses -- such exclusive arrangements seem to undermine the very laws that make them possible. Proponents argue that exclusive licensing is often the most effective way to deliver technologies to the public -- i.e. in the form of purchasable products and services. But should corporations be allowed to reap monopoly profits from the results of taxpayer-funded research? One Boston Globe report last year cast a harsh light on the handling of an anti-clotting drug called ReoPro, which earned millions each for the biotechnology company Centocor, the State University of New York and a SUNY researcher, but nothing for the National Institutes of Health, which funded the drug's development.

Rahm speculates that license revenues going to individual researchers and specific departments will create a reward system that will warp the internal politics of universities. "Once you start doing that, then you've got winners and losers in the university," she says. "Because certain departments and certain disciplines are entirely cut out of that arrangement, and others are entirely written into that arrangement."

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Rahm warns that as the university moves toward a model where just a few star departments thrive as pockets of excellence, the very landscape of intellectual inquiry changes.

"What I worry about is some universities going too far trying to make money, make deals," says Niels Reimers, a pioneer of the marketing-based approach to university licensing. "They've got to realize they're nonprofit entities." He maintains that university research administrators need to manage conflicts of interest carefully -- even when that means forsaking income. Though he won't name names, he said he's seen alarming cases of crossed boundaries at a few universities.

Reimers believes that universities can do a lot to keep their licensing programs clean. All licensing activities should be open to public scrutiny, and every deal that goes through should pass a simple test. "Whatever is done," he says, "you've got to be able to say, This is really in the interest of the public."

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Yet Reimers, like other proponents of technology licensing, emphasizes that even with its dangers, the benefits of technology licensing far outweigh the potential for harm. Such programs, Reimers maintains, can create funds for basic research or nurture ideas that might otherwise languish in laboratory basements.

As an example he offers his own story. The licensing program he orchestrated in the 1973 invention of DNA splicing earned more than $200 million in royalties for Stanford University and the University of California at San Francisco. Moreover, he maintains that the invention and Stanford's stewardship of the patent are widely credited with giving birth to the entire biotechnology industry and stimulating its early growth.

Yet once the motivation behind university research comes into question, the whole of the university's teaching and research mission grows suspect. Are universities molding students into tomorrow's scholars or today's worker bees? If relationships between certain corporations and certain universities become entrenched through years of dealmaking, will the lines between nonprofit scholarship and for-profit research become hopelessly muddied? Will universities continue to nurture the pursuit of knowledge for its own sake, or will curiosity need a corporate sponsorship in order to survive?

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Even among its boosters there is a growing sense that such technology licensing will lead to a host of new challenges. While Kennedy doesn't regret Stanford's licensing activities during his tenure as president and even wonders whether his administration was too
cautious, he's quick to advocate chariness: "I think this is an area in which quite a lot of caution is not a bad idea."


James C. Luh

James C. Luh is a freelance writer living in New York.

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