Free Competition and Reasonable Pricing of Products Based on Subject Inventions

I have argued that the Bayh-Dole Act establishes, for inventions made with federal support at universities, a principle of patent exhaustion. We might call it a “first use” exhaustion of patent rights. Since the express, statutory purpose of the Act is to use the patent system to promote the utilization of subject inventions, then when this purpose is achieved, the Act places limits on what a university owner of a patent on a subject invention might do. If the university has not licensed the patent before use begins, then the university is limited in what recourse it has. It has no basis in the Bayh-Dole Act to then exclude those uses, merely because the development of such use did not require a license, nor an exclusive position, to induce the private interests to practice the invention.

That Bayh-Dole states its objectives expressly means something. So is the fact that Bayh-Dole is placed in the federal patent statute. The preamble has meaning. That meaning is to place a limit on what the owner of a patent on a subject invention can do with it. If the patent system is not needed to promote utilization, then the law is satisfied. If the university owner of a patent on a subject invention fails to license the invention to companies before they practice the invention, then it loses the right to demand such licenses. It’s a race against time, against “patent use exhaustion.”

One might say that the statement of objectives made expressly in the Bayh-Dole Act prohibits university trolling of industry with a patent on a subject invention. Otherwise, there’s no point in even reading the objectives, even though they are part of the statute. There’s a principle of statutory interpretation that argues no part of a statute should be, as Larry Eig puts it, “construed as ‘mere surplusage'”:

A basic principle of statutory interpretation is that courts should “give effect, if possible, to every clause and word of a statute, avoiding, if it may be, any construction which implies that the legislature was ignorant of the meaning of the language it employed.” The modern variant is that statutes should be construed “so as to avoid rendering superfluous” any statutory language: “A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant….”

Let’s consider another aspect of Bayh-Dole that also depends on utilization. Utilization is given a formal definition in Bayh-Dole in the form of “practical application.” The definition is straightforward (at 35 USC 201(f)):

(f) The term “practical application” means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.

In addition to supplying verbs matched to the use of different forms of patentable subject matter, the definition constrains the meaning with two conditions–a) that the uses are such that they establish that the invention is “being utilized” (there’s that “utilization” from the Act’s objectives) and b) that the invention’s benefits are available to the public on reasonable terms. As with the statement of objectives, we should read the definition to give meaning to each part of this definition. In many ways, this definition communicates the purpose of Bayh-Dole–use that benefits the public on reasonable terms. Much should depend, then, on what constitutes a public benefit and what constitutes reasonable terms.

Let’s focus on reasonable terms. The statement of objectives for Bayh-Dole includes a reservation of government rights so that the government may “protect the public against nonuse or unreasonable use of inventions.” “Unreasonable use” of inventions might uses that do not result in a public benefit; but also, such use may be such that the benefits of the invention are not available to the public on reasonable terms.

The March-In provisions of Bayh-Dole are one response to the problem of nonuse or unreasonable use. A federal funding agency has the right, under the Act, to require the university or its assignee or exclusive licensee to grant licenses, or grant the licenses directly, if the agency determines that:

(1) action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;

(2) action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees;

(3) action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee, or licensees; or

(4) action is necessary because the agreement required by section 204 [substantially manufactured in the U.S.] has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of its agreement obtained pursuant to section 204.

In these cases–failure to “take effective steps” to achieve practical application or require exclusive licensees to manufacture substantially in the U.S.; not reasonably meeting health or safety needs or federal regulations for public use–the federal agency may “march-in.” But these march-in procedures, nice as they sound, are designed to fail. First, they depend on a federal agency determination–if a federal agency doesn’t care to make a determination, then the march-in provisions will never come into play. Second, the federal agency’s determinations that might trigger march-in are limited to these four: not working hard enough to develop, not supplying adequate product to the public, not making enough product to allow people to comply with federal regulations, or not requiring product to be substantially made in the U.S.

The march-in provisions, however, are directed at the rights the federal agencies retain in subject inventions to deal with nonuse and unreasonable use. These provisions do not address what the first stated objective of Bayh-Dole requires–that benefits are available on reasonable terms. The march-in provisions are about nonuse and lack of availability and domestic manufacture. “Reasonable terms” is distinct from these concerns, and is not about what a federal agency might determine, if it bothers to determine anything. “Reasonable terms” is a general matter for the operation of the Act, not a matter for federal agency license rights.

Consider the broader idea of patent law. In a 1941 report to a government committee looking into the “concentration of economic power” in the U.S., Walton Hamilton gives an account of how the General Court of Massachusetts dealt with inventions in the 1640s–before there was a U.S., or a federal patent law, obviously. Massachusetts granted one Joseph Jenks a patent on a grass-cutting machine, with the restriction that the commonwealth reserving the right to “restrain the exportation of such manufactures, and to moderate the price thereof if occasion so requires” (20). Clearly, here at least, there was some concern that the monopoly created by a patent could also create incentives for the patent owner to charge prices that others might consider excessive–gouging. In the absence of competition, the question arises–what limits the price a patent owner can extract for a monopoly product? One answer is that the patent exists at the pleasure of the state, for its benefit. Hamilton appears to take this position.

William Ballard, a patent attorney, took on Hamilton and the idea that patents were being abused to “concentrate economic power” in the hands of corporations. (See Bursler’s review of There is No Mystery about Patents). According to Ballard, once one has a patent been granted, the patent owner can do anything the owner wants with the patent–the owner can, therefore, choose to prevent all use of the invention for the entire term of the patent. Thus, in Ballard’s view, one can patent inventions to prevent any use, in addition to exploiting the invention with monopoly control or licensing the invention to others and using the monopoly position to harvest rents from all users. If we separate this third option into an exclusive license (which in effect transfers the monopoly for a share in the benefits of the monopoly) and non-exclusive licenses (which permits broader use), we have four options: no use, exclusive use, exclusively licensed use, and broadly licensed use. For Ballard, any of these options is fair game for the patent owner.

The “progress of the useful arts” is advanced, one would surmise, by the publication of the invention, not necessarily by the spread of use during the term of the patent. In the cases of non-use, exclusive use, and exclusively licensed use, the incentive of the patent system is to design around the patent–to find another way to do the same thing, or to find something that does something even better, or, in desperate situations, to challenge the validity of the patent. With non-exclusively licensed patents, the issue becomes one of whether licenses are non-discriminatory and reasonable. But if the terms are reasonable, then the license is mostly the matter of the bother of licensing, the overhead of reporting royalties, and the like. Some people argue that if a patent owner offers a non-exclusive license for some nominal amount, and a company ignores the offer and infringes, the patent owner should expect to receive only the license fee that was proposed. So, if the patent owner proposed a friendly fee of $2,000 a year, then a company could infringe for a decade and owe only $20,000–hardly a fly’s breath compared to the costs of litigation. In such instances, the cost of litigation may be a much greater penalty than actual damages.

Of course, those “some people” might also be out to lunch on this point.

Perhaps it is too much of a generalization to say that patent attorneys have little interest in arguing that patents are a privilege, not merely a property–that they “have the attributes of personal property” (as the federal law puts it)–not that they *are* personal property. Here’s the whole sentence (from 35 USC 261):

Subject to the provisions of this title, patents shall have the attributes of personal property.

One would think that if patents are “subject to the provisions” of the patent law, then it is not merely that they are personal property that is programmed to exclude. They also may be granted in the service of the state, and not merely the state to be guided by the invisible hand of feral, unsupervised self-interest.

More directly, when the Bayh-Dole Act was introduced as part of the “provisions of this title,” it placed limitations on the private exploitation of subject inventions. For subject inventions, one might read 35 USC 261 as “subject to the express objective of using patents to promote the use of federally supported inventions, patents on subject inventions shall have the attributes of personal property.” That is, if the patent does not promote use, it does not have the attributes of personal property. This reading would exclude entirely Ballard’s idea that a patent owner can use the patent to prevent all uses of the claimed invention. For subject inventions, this option is not available. Nor would the option of licensing a subject invention exclusively to another, who prevents all uses. This sort of nonuse is dealt with directly by Bayh-Dole.

But what about the condition on utilization of inventions stated in Bayh-Dole–that of “benefits available to the public on reasonable terms”? This would appear to map as well directly into 35 USC 261–for subject inventions, if the benefits are not available to the public on reasonable terms, then the patents involved do not have the attributes of personal property. That might mean, perhaps, that title to the patent is revoked for such situations; there is then no right to exclude until the situation is corrected. Such a condition, unlike march-in conditions, does not require a federal agency to get around to making a determination. If someone wanted to argue that a patent monopolist was charging unreasonable prices for products based on a subject invention, then one would not go to march-in provisions and appeal to a federal agency to expand the scope of its authority to worry about price rather than availability. One would go to 35 USC 261 and argue that the patent owner has exceeded the limits of the property right in the patent.

For subject inventions, in particular, this argument is supplemented by the apparatus introduced into patent law by Bayh-Dole. One might argue that even if Ballard and others are right that patent owners have an unlimited right to charge what they want, or prevent all uses of an invention to which they own the patent, this is certainly not true for subject inventions. If the statement of objectives in Bayh-Dole mean anything, if the definition of practical application means anything, if the new category of subject invention means anything, then the owner of a patent on a subject invention does not have unlimited property rights in the invention. Not only must the owner use or license others with encouragement to use–in either case with public benefits on reasonable terms–but also the owner loses the personal property right if the owner and others don’t use, or use without public benefit, or use without public benefit on reasonable terms. For this last formulation, a high price for a monopoly product would be in line for review regarding reasonableness.

In the case of availability (a march-in issue), price could become an issue if it interfered with availability–that so few could afford the product that it simply was not sufficiently available, even if there was plenty of product inventory. In the case of reasonable terms, however, availability is not the issue. The issue is whether the terms of availability–and that includes, clearly, price–are “reasonable.” There are all sorts of lines of argument over what constitutes “reasonable” pricing for a subject invention. It may be worth observing that one idea of a “reasonable” price is the price that would be arrived at in a competitive marketplace, where multiple companies sought to provide similar products. Thus, if the price charged by a patent owner or exclusive licensee exceeds the price that a competitive market would settle on, then the price is unreasonable. If we look back at the express objectives of Bayh-Dole–again, made a part of patent law–then we find

to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery

This objective, too, functions as a “condition of the title” and places a limitation on the bounds of a subject invention’s attributes of personal property. This objective appears to endorse the idea that a reasonable price is one that would come about if there is “free enterprise and competition.” To ignore this provision is to argue that there is no meaning Congress putting objectives for Bayh-Dole in the law–that they are puffery, a rationalization for the law’s existence, not actually having anything to do with the law itself as enacted. What a strange law, that it has a section devoted to a statement about Congress’s official feelings when passing the law that has nothing to do with the law! I don’t believe it. Or, more to the point–I argue that’s a misreading of Bayh-Dole as a part of patent law.

Bayh-Dole does place limits on the pricing of products based on subject inventions, and it does not have to do with march-in procedures or appeals to federal agencies to make limited determinations on availability. It does have to do with the interplay of the statement of objectives and the definitions added to federal patent law by Bayh-Dole with respect to patents held privately on subject inventions. There, the property rights of patent owners are constrained, and when a patent owner exceeds the conditions of the law, then the patent owner also exceeds the boundaries of the property right and has no right to enforce the patent until the condition that violates the boundaries is corrected. If an exclusive licensee of a patent on a subject invention prices product at monopoly rates, not at competitive rates, then, according to Bayh-Dole and federal patent law, the patent does not have the attributes of personal property and the patent cannot be enforced. The result: “free competition and enterprise” restores competitive market pricing.


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