Patents and Public Returns: Should the Government Get a Share of University Royalties?

Introduction: Who Should Benefit?

The central policy question is deceptively simple: when university research is federally funded, should taxpayers share directly in the licensing revenue that flows from resulting patents? This question has gained traction in light of Secretary of Commerce Howard Lutnick’s recent proposal that the federal government claim as much as half of university licensing revenue. With tens of billions of dollars potentially at stake, the debate extends beyond accounting, implicating how universities structure their technology transfer operations, how startups emerge from academic labs, and how the United States sustains long-term innovation policy.

Bayh-Dole: How the System and Incentives Work

The modern framework begins with the Bayh-Dole Act of 1980. Before Bayh-Dole, patents arising from federally sponsored research typically remained in federal hands. In practice, agencies rarely licensed these patents, partly because the government lacked the infrastructure, incentives, and industry relationships to move early-stage discoveries toward market use. As a result, many discoveries were simply shelved, with minimal commercial conversion. Bayh-Dole shifted ownership to universities on the theory that local institutions, with their stronger ties to faculty inventors, private partners, and regional innovation networks, were better positioned to partner with industry and drive commercialization. In exchange, the government received march-in rights, requiring universities to grant third-party licenses under specific conditions.  

Under the current approach, royalties from licensed patents are not windfalls. Federal regulations require that revenues first reward the inventor, then be reinvested in research and related institutional support. Technology transfer offices and universities use these funds not only to cover the high cost of patenting and maintaining a portfolio, but also to seed new projects, recruit and retain faculty, and support startup formation. In short, the statute reflects a bargain: taxpayer support funds discovery; universities secure patents with the intent to commercialize; TTOs foster translation into the market; and resulting revenues sustain continued innovation.

The Case for a Federal Cut

Lutnick’s position rests on an equity rationale: if taxpayers underwrite the science, it seems natural they should share in downstream profits. Politically, the idea has appeal; imagine earmarking federal patent revenues to shore up Social Security or reduce the federal deficit. A persistent public perception challenge remains, wherein universities may appear to capture all financial rewards of taxpayer-funded research, leaving the public with only indirect or deferred benefits.

Why Universities Push Back

Universities counter that revenue-sharing would function less as fairness and more as an innovation penalty. TTO economics are already precarious: patent prosecution, compliance, and licensing negotiations are costly, and most offices operate at a loss. Nationally, only a handful of blockbuster deals account for the bulk of licensing revenue; the median institution nets very little. Typical royalty streams are in the range of 3–5% of product sales, and even those modest returns are highly uncertain.

If a significant portion of these limited funds must be diverted to the federal government, universities may reduce their investment in technology transfer altogether. The result would not be leaner public coffers, but fewer partnerships, slower licensing, and diminished translation of early-stage science into usable products. The deeper policy trade-off is clear: a symbolic taxpayer return may be gained at the cost of disincentivizing the very commercialization Bayh-Dole was designed to promote.

The Venture Capital Analogy

The innovation cycle offers a useful comparison to venture capital. Venture funds typically operate on a 10-year horizon before investors see meaningful returns. Universities are positioned even earlier in the pipeline, closer to “pre-seed” than Series A, with longer timelines and higher attrition rates. Expecting quick or predictable returns from such activity misunderstands the cycle. Policymakers seeking short-term recoupment risk imposing expectations fundamentally at odds with how innovation matures.

Universities as Engines of Local Growth

Critically, the value universities deliver to the public is not confined to royalty checks. Startups and spinoffs emerging from campus labs create jobs, stimulate local economies, and catalyze regional innovation clusters. In many cases, the tax base expansion and community benefits outweigh the benefits derived from licensing income. University technology transfer is typically part of an institutional public service mission designed to diffuse knowledge and strengthen ecosystems, not as a mechanism for financial profit.

Alternative Paths for Public Benefit

Policymakers could leverage other approaches to ensure public benefit. Alternatives to revenue-sharing include:

• Price or access requirements for products built on federally funded inventions;
• Broader licensing mandates, such as encouraging non-exclusive or open licensing;
• Expanded public reporting to improve transparency around licensing outcomes; or
• Form licensing consortia based on regional proximity or technological expertise, in order to leverage economies of scale for smaller institutions

Still, all approaches carry risks. Price controls may chill investment, for example, and mandated openness may slow translation into viable products; non-exclusivity may dull corporate interest; but these approaches remain within the spirit of Bayh-Dole, which is to balance innovation incentives with public accountability.

Legal and Implementation Challenges

From a legal standpoint, Bayh-Dole provides no authority for mandatory federal revenue recapture. Any such scheme would require statutory reform or voluntary agreements with universities, both politically fraught. More significantly, the uncertainty generated by such changes could destabilize partnerships with industry and venture capital, who prize predictability when investing in early-stage technologies.

Conclusion: Searching for a Middle Path

The debate, at its core, is a balance between fairness to taxpayers and incentives for innovation. But framing the issue as a binary – either universities keep all revenues or the federal government reclaims a large share – misses the nuance of the Bayh-Dole system. Modest adjustments, such as improved transparency or targeted reforms, could address public concerns without undermining commercialization.

In practice, diverting licensing revenue to federal coffers would neither meaningfully fund national programs nor accelerate innovation. It would risk undermining the fragile ecosystem that turns federally funded discoveries into products, startups, and regional growth. The more durable path forward lies in reinforcing Bayh-Dole’s original bargain: empowering universities to commercialize for the public good, while ensuring that accountability and access remain central to that mission.