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.