Letter from UGTI founder

ALEKS MEHRLE

President of UGTI

Promoting the growth of a high-technology economy requires intelligent cultivation of the interface between university research and the private sector. Universities and institutes account for both a disproportionately high percentage of early-stage research (as compared to the private sector) as well as educate and groom the next generation of innovators and technology entrepreneurs. 

 My post this week identifies three areas critical to the development of a healthy university/institute research and industry confluence in Ukraine and makes a recommendation for improvements in each area.

 Priority Area #1 – Lay the Foundation for a Knowledge Economy

 High levels of public spending on university research are an important factor in promoting science and technology development because in the usual 3 to 5-year industrial product time frame, the private sector faces significant obstacles in cost-effectively developing competitive products based on nascent technology. By contrast, governments are in a unique position to invest large sums of capital without expecting or requiring an immediate and direct return on their investment. Once the new technology proliferates, the governments’ and the nations’ payoff comes in the form of new jobs, new wealth and a society improved through technological innovation. 

 Fortunately, funding of research and development of high-technologies is not an exclusively government function. Private investors, independent researchers, corporate budgets and well-staffed corporate labs have long-since contributed to the invention and commercial proliferation of new technologies. Despite the relative absence of domestic funding for Ukrainian scientists, Ukraine is in many respects well-position to secure funding from foreign sources. However, establishing large corporate research centers in Ukraine requires a significant commitment of time and capital. In the short-term, a more feasible scenario involves utilizing foreign private equity to finance innovation at Ukrainian universities and institutes and forging joint ventures between western companies and Ukrainian talent in science and technology as well as capacity in manufacturing. 

 With its population of highly trained scientists and the ability to offer comparative cost advantages that would help western companies compete on cost with those in Asia Ukraine should prove an inviting destination. From the Ukrainian perspective, an influx of foreign direct investment directed toward contracted research and development and manufacturing would offset the Ukrainian government’s inability to sufficiently fund scientific research and lay the foundation for a full-cycle knowledge economy in Ukraine.

 Ukraine’s commitment to enact legal, economic and political reform since the Maidan Revolution has improved the conditions for foreign direct investment in Ukrainian science and technology but there remains a long way to go. Often overlooked when discussing the need to increase investment is the critical importance of reforming intellectual property laws and increasing domestic respect of compliance with those laws.

 Recommendation #1 – Continue Intellectual Property Law Reform and Education

 Intellectual property rights are the lifeblood of any high-technology venture because they protect initial and often substantial investment in research and development by providing legal protection from unauthorized use by competitors. Beyond protecting initial investments of time and capital, a strong patent also enables the patent holder to profit from an innovation through licensing agreements or by commercializing the invention. As such, the potential for the Ukrainian science and technology community to secure financial support in the form of foreign direct investment is tied to the willingness of Ukraine’s government to improve patent protection and enforcement mechanisms and also the ability of universities, research institutes and commercial entities to educate the students and staff on the importance of securing intellectual property protection for their inventions and respecting the intellectual property rights of others.

 Priority Area #2 – Protect the University / Institute Researcher’s Ability to Innovate

 While providing a strong system of patent protection and enforcement must be a priority for the Ukrainian legislature there are limits to the extent of protection that should be afforded. Until recently, the long-settled experimental use exception protected the ability of university researchers in the United States to study and experiment on patented inventions or processes without violating the rights of the patent holder. The experimental use exception grew out of an opinion by United States Supreme Court Justice Story in the case of Whittemore v. Cutter. Justice Story believed that, “it could never have been the intention of the legislature to punish a man who constructed such a machine merely for philosophical experiments, or for the purpose of ascertaining the sufficiency of the machine to produce its described effects.”[1] 

 Historically, “ascertaining the sufficiency” of inventions has largely been the province of university researchers, whose role it has been to “understand and tinker with the very latest and now often patent-protected technology to develop yet further new developments.”[2]  effectively eliminates the exception and threatens to disrupt the flow of technology from university labs to commercial markets. Madey v. DukeThe United States Federal Circuit Court decision in

 The controversy in Madey began with a dispute between Duke University and the former director of its free-electron laser laboratory, John Madey. When Madey, who owns two critical patents relating to the free-electron laser, resigned from Duke, he sued the University to prevent continued use of his patents.

 At trial, the Court determined that the experimental use exception did not apply because Duke University’s continued use of the laser furthered the University’s business objective to educate and enlighten students and faculty. This narrowing of the experimental use exception in the US stands in contrast to the approach taken by countries such as Japan and Germany that statutorily protect its equivalents. From the perspective of Ukraine, it could also represent an opportunity to create a research and development environment in which US researchers and companies could leverage Ukraine’s strength in science and technology and relatively low-cost R&D to experiment under the protection of an experimental use exception and advance the state of the art.  

 Recommendation #2 – Codify an Equivalent of the Experimental Use Exception

 By codifying an equivalent of the experimental use exception Ukraine stands to benefit in two discrete ways. First, funding scientific research and development in Ukraine would become particularly appealing to U.S. companies, researchers and investors in that it would provide them with a means to circumvent the restrictive Madey rule. Second, Ukraine is likely to further its hopes of achieving European integration by creating an intellectual property law scheme that conforms to European practice by recognizing the experimental use exception.    

 Priority Area #3 – Encourage Academic Technology Transfer  

 For its ability to coordinate activity at the crossroads between government funding, university research and the private sector, The Economist has called the Bayh-Dole Act of 1980, “the most inspired piece of legislation enacted in America over the past half-century.”[3] The Act codifies what is known as academic technology transfer. 

 The process of academic technology transfer as a formal concept originated in a report entitled ‘Science - The Endless Frontier’ written by Vannevar Bush for the President of the United States in 1945.[4] At the time, “the success of the Manhattan Project had demonstrated the importance of university research to the national defense” which hinted at “the value of university research as a vehicle for enhancing the economy by increasing the flow of knowledge to industry through support of basic science.”[5] However, technology transfer from universities to industry was only made practicable 35 years after Mr. Bush’s report, with the passage of the Bayh-Dole Act of 1980. 

 Before Bayh-Dole, “although taxpayers were footing the bill for 60% of all academic research, they were getting hardly anything in return”[6] because “the fruits of research supported by government agencies had belonged strictly to the federal government.”[7] This created a situation in which the federal government held patents on 28,000 technologies, but fewer than 5% of these were ever developed into commercial products.[8] The private sector was unable to commercialize products based on these patents because “nobody could exploit such research without tedious negotiations with the federal agencies concerned.”[9] Companies also found it nearly impossible to acquire exclusive rights to a government-owned patent. Without the protection provided by exclusive rights to a given patent, “few firms were willing to invest millions more of their own money to turn a raw research idea into a marketable product.”[10]

 The Bayh-Dole Act of 1980 freed the backlog of once federally controlled patents by empowering universities to commercialize their government funded research through licensing agreements with the private sector. The Act gave the private sector access to once federally controlled patents by transferring “ownership of an invention or discovery from the government agency that had helped to pay for it to the academic institution that had carried out the research.”[11] This allowed universities to offer third parties exclusive licensing agreements for the commercialization of technologies whose discovery was facilitated by government funding.

 In adopting the Bayh-Dole Act of 1980, legislators hoped that “stimulation of the U.S. economy would occur through the licensing of new inventions from universities to businesses that would, in turn, manufacture the resulting products in the U.S.”[12] Hindsight has proven this to be a sound public policy decision.

 Recommendation #3 – Codify an Equivalent of the Bayh-Dole Act

 Considering Ukraine’s long-term aspirations and potential to become a Knowledge Economy capable of providing public support for science and technology initiatives the government should act at present to create a mechanism for transferring technology developed at Ukrainian universities and Institutes to the commercial marketplace. The Bayh-Dole Act in the United States is a blueprint for this effort. 

[1] Whittemore v. Cutter, 29 Fed. Cas. 1120, 1121 (C.C.D. Mass. 1813). 

[2] Stephen B. Maebius & Harold C. Wegner, Ruling on Research Exemption Roils Universities, Nat’l L.J. (Dec. 16, 2003) at C3

[3] The Economist, Innovation’s Golden Goose, Dec. 12, 2002, https://www.economist.com/science/tq/displayStory.cfm?Story_id=1476653

[4] Council of Government Relations, The Bayh-Dole Act: A Guide to the Law and Implementing Regulations, (Sept. 1999) available at https://www.ucop.edu/ott/bayh.html

[5] Id.

[6] The Economist, supra note 3

[7] Id.

[8] U.S. Government Accounting Office (GAO) Report to Congressional Committees entitled “Technology Transfer, Administration of the Bayh-Dole Act by Research Universities” (May 7, 1998).

[9] The Economist, supra note 3

[10] Id.

[11] Id.

[12] Council of Government Relations, supra note 4