A Market Test for Bayh-Dole Patents

61 Pages Posted: 16 Mar 2016 Last revised: 26 Jan 2017

See all articles by Ian Ayres

Ian Ayres

Yale University - Yale Law School; Yale University - Yale School of Management

Lisa Larrimore Ouellette

Stanford Law School

Date Written: September 18, 2016


The Bayh–Dole Act, which allows patenting of federally funded research, has been praised for driving growth but also criticized for creating unnecessary deadweight loss and contributing to a patent “anticommons.” Much of the controversy stems from Bayh–Dole’s differing effects on different inventions. The dominant justification for Bayh–Dole patents is commercialization theory: the idea that exclusive rights are necessary to bring inventions to market. This theory is convincing for inventions like pharmaceuticals with high regulatory barriers and low imitation costs, but not when exclusivity is unnecessary for commercialization, such as for Stanford’s widely licensed patents on early recombinant DNA technology. The problem is that for many government-funded inventions it is difficult to determine whether exclusive patent grants are necessary to incentivize commercialization.

To solve this difficulty, we propose a “market test” for federally funded inventions at universities and other nonprofits. Before charging significant licensing fees for these inventions, these federal grant recipients would first be required to find out whether firms would be willing to commercialize the invention in exchange for a nonexclusive license with a nominal fee. If a company is willing to commit to developing the invention under a nonexclusive license, then an exclusive license—or a nonexclusive license with high fees—would be contrary to the public interest. More generally, using a formal economic model, we show that deadweight loss can be reduced through an auction that forces bidders to reveal the least amount of exclusivity needed to induce commercialization, that revenue cap bidding is more efficient than duration bidding, and that defensive bidding by firms that consume as well as produce the invention will not increase deadweight loss. We discuss how the market test requirement could be structured and how due diligence milestones and other provisions could be used to discourage gaming.

Keywords: Bayh-Dole, patent, university, commercialization, auction

JEL Classification: H41, H57, O31, O34, O38

Suggested Citation

Ayres, Ian and Ouellette, Lisa Larrimore, A Market Test for Bayh-Dole Patents (September 18, 2016). Cornell Law Review, Vol. 102, No. 2, p. 271, 2017, Available at SSRN: https://ssrn.com/abstract=2748375

Ian Ayres

Yale University - Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-7101 (Phone)
203-432-2592 (Fax)

Yale University - Yale School of Management

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Lisa Larrimore Ouellette (Contact Author)

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305
United States

HOME PAGE: http://law.stanford.edu/directory/lisa-larrimore-ouellette/

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