Does Bayh-Dole Require Reasonable Pricing?

[Revised and extended for clarity]

Short answer: no, but well, sort of, er, actually–yes! but not what you might expect.

In 2005, Norman J. Latker, the key draftsman of both the Institutional Patent Agreement and Bayh-Dole published a critique, along with co-author John H. Rabitschek, of efforts to use march-in provisions to address the pricing of drugs that had been developed from subject inventions. In “Reasonable Pricing–A New Twist for March-in Rights Under the Bayh-Dole Act,” after the usual unsubstantiated claims that the law has been wildly successful, Latker  and his co-author provide a brief history of march-in provisions, from various presidential executive orders to the Institutional Patent Agreements.

Turning to Bayh-Dole, Latker argues that Bayh-Dole “can be considered a codification of the IPA.” Odd as it is to contest the account of the man who wrote the bill, Bayh-Dole is hardly a codification of the IPA. Bayh-Dole might better be described as a distortion of the IPA mashed up with federal procurement regulations. While there is much in common in use of key terms–subject invention, practical application, reasonable, and the like–the regulatory context and definitions vary significantly between the IPA and Bayh-Dole, as do the mechanisms of operation and especially the public oversight.

Consider ownership. Here’s Rabitschek and Latker:

Under both the NIH and NSF IPAs, as in Bayh-Dole, the university had a contractual right to elect ownership to any invention, thereby eliminating the arduous task of justifying ownership after identification of an invention.

The last part is true–both the IPA and Bayh-Dole prevent federal agencies from requiring a contractor to justify its ownership. But the first part is not accurate. The wording slips, so your brain has to be ready for the trick. Under the IPA, a university has a contractual obligation to obtain ownership when the university decides to seek a patent on a subject invention. This obligation was backed by a requirement that a university have a patent agreement with every employee under which the employee promises to assign subject inventions if the university decides to patent the invention. The university, under the IPA, has an option with respect to the federal government’s interest in an invention to acquire ownership. It is the option that the university elects, not ownership. Ownership the university has to obtain via an invention assignment backed by a patent agreement. To make that patent agreement stick, the university must provide consideration. If a university decides to patent a subject invention, then it is obligated to obtain assignment from the inventors.

By contrast, under Bayh-Dole, there is no obligation that an inventor promise to assign inventions to the university. Bayh-Dole does not address ownership directly. It is the standard patent rights clause that deals with ownership. There, universities are required to require employees to make a written agreement to protect the government’s interest–including promising to assign inventions (or license inventions) to the government. There is no contractual right whatsoever for a university to “elect ownership” of any invention. As the Supreme Court made clear, almost as a little lecture for the university folk lacking basic sense, universities, if they wanted ownership, should secure that ownership with a patent assignment. The matter of “electing to retain title” has to do with the disposition of rights as between the university and the federal agency, and nothing to do with how the university acquires subject inventions from inventors.

[This part is still true, even after NIST’s strange revision to the standard patent rights clause’s written agreement requirement–with the NIST revision, contactors are now required to require certain of their employees to make a written agreement to protect the government’s interest that includes a promise to assign subject inventions to the contractor. Those “subject” inventions, however, must be those that the contractor already owns. Otherwise, the inventions are not subject inventions and not within the scope of the NIST-required promise to assign. And if the written agreement, when executed, makes the would-be inventors parties to the funding agreement, then they are contractors, the patent rights clause that applies to them is at 37 CFR 401.9 not 37 CFR 401.14 and they have the same right as any other contractor under 35 USC 202(a) to disclose subject inventions and elect to retain title in those inventions. The university cannot have an interest in such subject inventions as consideration for requiring the written agreement–they have to require the written agreement as a matter of federal contract, so there is no consideration they can obtain from inventors for doing so. And besides, universities routinely don’t comply with the written agreement requirement anyway. So the inventors are not parties to the funding agreement, and their inventions when made–even when made under federal contract–are not subject inventions and are therefore outside NIST’s new and utterly strange assignment requirement.]

In the IPA, for instance, there is no such thing as “march-in.” There is, rather, a burden on the university administrator to demonstrate practical application or non-exclusive licensing or some good reason to hang onto the responsibility. In Bayh-Dole, the burden is with federal agencies to intervene, and only then if they can establish that there is no expectation that effective steps to achieve practical application will be undertaken. Under the IPA, a federal agency could intervene at any time, if doing so was determined to be in the public interest, with thirty days’ notice. Under Bayh-Dole, a federal agency can intervene only if it can show that an invention is not reasonably available to the public, and then only after a potentially protracted set of hearings, determinations, appeals, and litigation.

The advocates for Bayh-Dole spun the IPA intervention rights as “arbitrary”–even though those same advocates also drafted the IPA and the IPA’s interventions are specific to a determination of public interest, not arbitrarity.

Latker then looks at “reasonableness.” He asserts that the IPA requires licensing on “reasonable terms”–but it doesn’t. The IPA does require that any non-exclusive license be offered on a “royalty-free or reasonable royalty basis to qualified applicants.” But there is no comparable “reasonable” wording for exclusive licenses. Instead, the line of unreasonableness is defined by express terms: exclusive licenses can run no more than three years from the date of patent issue or eight years from the date of license, whichever is earlier, and licensee must “use all reasonable effort to effect introduction into the commercial market as soon as practical, consistent with sound and reasonable business practices and judgment.” Once the exclusive period is over, the university has a positive obligation to offer non-exclusive licenses, again “at a reasonable royalty rate not in excess of the exclusive license royalty rate.”

Licenses of any sort must contain “safeguards against unreasonable royalty and repressive practices.” But that provision appears to concern the behavior of invention management organizations, since only a handful of universities involved in the IPA program had their own licensing operations. Further, “Royalties shall not, in any event, be in excess of normal trade practices.”

The most general statement of “reasonableness,” however, is this (emphasis supplied):

The Grantee shall administer those subject inventions which it elects to retain title in the public interest. . . .

All of this is changes with Bayh-Dole. Instead of any statements of how licenses are constructed, Bayh-Dole requires the benefits of the use of subject inventions to be available to the public on reasonable terms. That is, there’s nothing about the terms of the license (other than that exclusive licenses for U.S. sales must require substantial manufacturing in the U.S.–meaningless for methods patents, of course). The shift in focus from the IPA is substantial. In the IPA, the terms concern how a university grants licenses; in Bayh-Dole, the terms concern how the benefits of use are made available to the public. Clearly, pricing is implicated in the reasonable terms by which benefits are made available. But the march-in rights ignore the “reasonable terms” for benefits and instead consider only whether a need has been “reasonably satisfied.” That is, if a need has been “reasonably” met, price does not matter. Compare one clause to get the feel of the difference. The government can intervene:

IPA: . . .  upon a determination by the Assistant secretary (Health and Scientific Affairs) that the invention is required for public use by governmental regulations . . .

BD: if the Federal agency determines that such 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 . . .

In Bayh-Dole, an intervention has to show that the contractor cannot meet the requirements of regulations–as if the issue is supply of product or design of product. This is a huge shift, covered by similar language and so made to look like nothing much has changed. Again:

IPA:  that the public health, safety, or welfare requires the issuance of such licensees

BP: action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees

You can see how the revisions change dramatically what a federal agency can do to address problems with university administration of subject inventions. “Reasonable” in the IPA has to do with the terms of licensing; “reasonable” in Bayh-Dole has to do with availability of product to meet needs. Certainly there’s nothing in Bayh-Dole’s march-in provisions that is expressly about price. As Latker puts it:

A review of the statute makes it clear that the price charged by a licensee for a patented product has no direct relevance to march-in rights.

And here he is indeed right about the law he drafted–that is, Latker is right if the law isn’t really about providing benefits to the public but only making gestures at doing so. According to Latker, there need not be any practical application involved:

Under the law, the university need only take “effective steps,” not achieve practical application.

That’s nonsense. If there’s no practical application, then Bayh-Dole’s march in provision at 203(a)(1) goes effective. That is, “effective steps” are effective because one can see from the activity that there will be practical application, not that a university has made a show of trying to find a licensee, or has a licensee who is flopping around not producing product and that is somehow good enough for Congress passing a law to put the US back at the forefront of global technology.

According to Latker’s argument, “effective steps: could be, one might suppose, as simple as placing a description of the invention in a published “tech available for licensing” list. But Latker makes his own private definition of “effective steps.” Once an invention is licensed, the licensee

may be considered as having taken effective steps even if no sales of the invention have yet to occur, assuming that the licensee is making some efforts to commercialize the invention

Just “some efforts” is all that’s needed–not practical application, not in any particular time period. Nothing of the sort is in the law. We might expect NIST to harvest Latker’s interpretation and substitute it for any intent of Congress and add a regulation that stipulates that licensing is regardless of terms or development activity or outcomes an “effective step.” Stupid, if it happens.

The march-in provision itself is clear as mud:

has not taken, or is not expected to take within a reasonable time, effective steps

In Bayh-Dole, there is no guidance regarding a “reasonable time.” In the IPA, things take more words but are definite:

The Grantee agrees that if it, or its licensee, has not taken effective steps within three years after a United States patent issues on a subject invention left for administration to the Grantee to bring that invention to the point of practical application, and has not made such invention available for licensing royalty-free or on terms that are reasonable in the circumstances, and cannot show cause why he should retain all right, title and interest for a further period of time

If in three years there’s not practical application, then a university must go non-exclusive or make a case why it should keep control of the invention. That’s a very different take on what’s “reasonable.” If Bayh-Dole indeed were merely a “codification” of the IPA, then “reasonable” in Bayh-Dole ought to have a straight-across meaning from the IPA unless there’s something that expressly counters the IPA’s requirements. But as we have seen, Bayh-Dole is no codification of the IPA.

Latker’s discussion covers the primary points regarding price (citations removed):

With respect to a university patent owner, reasonableness would apply only to its licensing terms and to neither the price nor the availability of the licensed product.

And here we get to the fundamental mischaracterization of Bayh-Dole. Latker makes reasonableness have to do with licensing terms and Bayh-Dole is clear that “reasonable terms” has to do with the availability to the public of benefits of use–that is, Bayh-Dole deals with practical application having been achieved–use, with benefits available to the public–and furthermore stipulates that such availability must be on reasonable terms. For the public, the primary if not essential term, is price.

Reasonableness in Bayh-Dole’s definition of practical application has to do with reasonable terms for the public benefits of use, not reasonable terms for the license. A university could take a 50% royalty and a product might still be perceived as reasonably available and priced, even though the company involved seethes about the deal.

Continues Latker:

Further, in any license agreement, the price of the licensed product is left to the discretion of the licensee.

This has nothing to do with Bayh-Dole nor practical application. Bayh-Dole is patent law, and the standard patent rights clause is a federal regulatory contract. It doesn’t matter what any license agreement does about price–the benefits of use must be made available to the public on reasonable terms or 35 USC 203(a)(1) comes into play–failure to make benefits of use available to the public on reasonable terms: (i) failure to use; (ii) failure to make benefits of use available to the public; (iii) failure to make those benefits available on reasonable terms. This has nothing to do with any licensing terms. Whether price is left to the discretion of a licensee or is established in a license agreement, the government can march-in if the benefits of use are not made available to the public–by whomever–on reasonable terms. In a non-exclusive licensing program, that’s no big deal–march-in just keeps the non-exclusive licensing program open to additional licensees–and only if the licensing terms are a problem (not reasonable), then the federal government can dictate terms that are reasonable–but those “reasonable terms” are a matter of *march-in* not a matter of the terms offered to the public for access to the benefits of use.

Deep breath. Let’s repeat, to show how bad Latker got things.

Practical application:

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.


The term “practical application” means [to make, practice, or operate] under such conditions as to establish that the invention is being utilized and that its benefits are . . .  available to the public on reasonable terms.

The threshold for 35 USC 203(a)(1) march in is that practical application has not been achieved and is not likely to be achieved:

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;

No matter who is actually making, practicing, or operating, the contractor or assignee holds the rights in the subject invention and the government can march-in against those rights if the benefits of use are not available to the public on reasonable terms. Nothing here about the benefits of use being made available under license to selected companies–that’s not “available to the public” unless *anyone can get a license*–that is, the licensing terms are such that they are reasonable to anyone, not just to companies, or big companies, or venture-backed startups not even arm’s length from a university–reasonable if you wanted to acquire rights in the absence of use providing benefits.

If the contractor or assignee fails to achieve practical application and is not likely to do so ((i) use (ii) make benefits available to the public (iii) on reasonable terms), then the government can march in and

require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances,

Those terms that are “reasonable under the circumstances” are not the “reasonable terms” by which benefits of use are available to the public. The march-in terms are licensing terms. The march in is triggered when the public benefit terms are not reasonable. March-in requires licensing or more licensing, and licensing on reasonable terms if there has been no licensing or the licensing has been on terms that are not reasonable. But those licensing terms are not the public benefit terms, though better licensing terms (or new licenses, or licenses at all) may have the effect of meeting the practical application standard, so the public benefit terms are reasonable.

Get it? If public benefit terms aren’t reasonable, then the government can require licensing on reasonable terms. But the licensing terms are not the public benefit terms. So simple only lawyers and political operators and the willfully ignorant could mess it up. Seems Bayh-Dole attracts these bugs to its porch light.

For all that, a patent licensor can indeed dictate selling price–but not resale price. In the absence of specific knowledge of a desired price, a licensor could require that a price remain within a given range or lower than a monopoly might otherwise permit, such as “priced consistent with products of comparable form not subject to a patent monopoly.” Or a licensor, in a flip of profit-seeking expectations, might reward an exclusive licensee setting a low price and penalize a licensee’s higher price, such as by changing the term of exclusivity. Thus, it is not true in general that the price is “left to the discretion of the licensee,” though that may be a common practice. One might argue that the licensing of subject inventions might involve uncommon patent practices.

Furthermore, if the license agreement were to specify a minimum sales price, this might constitute a violation of the antitrust laws.

This is a non-issue. The issue is whether the licensor may specify a maximum sales price–that is, protects the public interest and requires a licensee to push the price down, even if doing so results in a loss of income for the licensor.

The typical license agreement includes a “due diligence” clause, so if the licensee is not adequately achieving commercialization, the university can terminate the license and seek other licensees.

But commercialization is not a goal of Bayh-Dole. Practical application is, and practical application for many inventions can be achieved without a commercial product or the development that a commercial product entails. If one is developing only for one’s own use, many issues involved in defining features and establishing production resources and maintaining quality control are by-passed. And contrary to Latker’s blithe treatment of termination of licenses, termination is not so easy and uneventful. An exclusive licensee with substantial investment in the license (payments up front, for instance, or equity) and/or development will fight efforts to terminate.

Furthermore, it may not be at all easy to find another licensee, the university having terminating on one company, others may not be ready to jump in and find out if they will be treated in the same manner. And, on top of that, if a company has been involved in development for some time, it may have developed its own patent rights in improvements and variations that would block any other development efforts. The reality is, once a university has granted an exclusive license, in all but the rarest situations, if the first licensee fails, no other licensee will be able to attempt the development during the term of the patent and any related patents held by the initial licensee.

Latker argues that there’s nothing in Bayh-Dole that requires reasonable pricing, despite the use of “reasonable terms” in the definition of practical application:

Even if “reasonable terms” is interpreted to include price that does not necessarily mean that patented drugs funded by the Government must be sold at reasonable prices


there is no evidence that Congress intended there to be a reasonable pricing requirement in Bayh-Dole.

There is not much evidence that Congress intended anything by Bayh-Dole other than to tie a ribbon around the bill as a parting gift for Senator Bayh.

Latker explains:

If Congress meant to add a reasonable pricing requirement, it would have explicitly set one forth in the law, or at least described it in the accompanying reports. That a new policy could arise out of silence would truly be remarkable.

This part is fun, because Latker did the drafting and Congress would have had to think in detail here and add its own wording. But if “reasonable terms” includes reasonable pricing, then Congress was not at all silent–rather it was comfortable that reasonable terms, being a more general term, includes price, availability, quality, and any other considerations in the public’s benefit in the use of a patented subject invention.

Latker insists that the only concern for march-in was the non-working of an invention–that an invention was not being used by a patent owner, assignee, or exclusive licensee:

Thus, it does not appear that Congress intended that there be any change in the application of march-in rights by the agencies, which prior to that time focused on the non-utilization or non-working of federally funded patented inventions, as is evident from the previous discussion of the history under the Presidential Memoranda and the IPAs.

Here again, Latker is not accurate. As we have seen, the IPA indeed makes express requirements for competition by limiting the term of exclusive licenses and allowing the federal government a broad right to intervene and require or grant non-exclusive licenses. The matter of price need not be taken up expressly in such provisions–the presence of competition, licenses available to all qualified applicants, and an absence of collusion all contribute to an expectation that pricing will be “reasonable.” Where there is arm’s length competition, there is no need to specify a “reasonable” price.

Latker argues that it is difficult to specify in Bayh-Dole what might be a reasonable price. Here, too, he is correct. But that is not the problem. The problem has to do with exclusive licenses that have the effect of granting a monopoly such that there is no prospect of competition for up to two decades.

Reasonable pricing may be considered to be a function of competition. There are two forms–competition with local use and competition for sales. Either or both may be used to create the conditions for reasonable pricing. And there is a basis for this requirement in Bayh-Dole’s statement of Congressional “Policy and Objective” at 35 USC 200:

It is the policy and objective of the Congress…

to promote free competition and enterprise without unduly encumbering future research and discovery

It is difficult to see how exclusive licenses, especially those that are really assignments, promote free competition and enterprise or avoid encumbering future research and discovery. 35 USC 200 sets the policy bounds for the property rights in patents on subject inventions. These property rights are not the usual patent property rights. The burden is on the “subject patent” owner to demonstrate that a particular pattern of dealing is consistent with the Congressional policy placed in federal patent law.

What dealing would meet the requirements of 35 USC 200? First, a general public license for all uses of a subject invention–to make, have made, and use the invention without further formalties, for no royalty or for a “reasonable” royalty. The rights to sell, offer for sale, and import may be reserved for exclusive licensing, if that is the licensor’s choice.

Second, a FRAND–fair, reasonable, and non-discriminatory–licensing approach for the commercial rights–sell, offer for sale, and import–which may be preceded for a time by an exclusive relationship regarding these rights, provided exclusivity is necessary to develop the invention to the point of practical application and the term of exclusivity is sufficient to provide for a recovery of that investment with interest, market conditions willing. Again, the term of exclusivity might be lengthened if the licensee prices product near what the price would be in the presence of competition, so long as the licensee is meeting demand with acceptable quality and service.

Latker, insisting that reasonable pricing is not a function of Bayh-Dole, points out that the NIH withdrew a reasonable pricing clause from its cooperative research and development agreements in 1995. The director of the NIH concluded that the NIH “has neither the mandate nor the authority to be the arbiter of drug affordability.” While the NIH director’s conclusion as to the NIH’s role may be true, it does not address whether 35 USC 200 itself limits any “subject patent” owner’s property rights to those that do produce “reasonable terms” for the public benefits of subject inventions.

Rabitschek and Latker propose eminent domain, government license, or the use of regulations to address pricing. But it appears that Bayh-Dole indeed does address pricing–it’s just that the requirements are not in the march-in requirements but rather in the 35 USC 200 statement of Policy and Objective. Compliance with reasonable terms language is a matter of federal patent law specific to subject inventions, not simply march-in, hit-or-miss (and very non-uniform) federal agency judgment. The key to it all is that an owner of a subject invention must restrict exclusive licenses so that they do not function as covert assignments. In this way, the licensor creates the conditions for “free competition and enterprise” and thus for reasonable pricing–at least pricing that does not depend on a patent monopoly.

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