Bazooka or Squirt Gun?: Working through 35 USC 200

Bayh-Dole gets at monopoly pricing through patent law, not licensing restrictions.

Bayh-Dole is a part of federal patent law, not federal procurement regulations. This was a big change from the prior practice, including the Institutional Patent Agreement program. Unlike the IPA program, which operated under an executive branch policy to govern what federal agencies should require or allow with regard to inventions in any funding agreement, Bayh-Dole moved things to Congress. The IPAs were under a Presidential procurement policy that attaches to federal agency contracting. Bayh-Dole is under a Congressional policy that defines the property rights that attach to patents on subject inventions–in addition to placing requirements on federal agency contracting.

I’ll repeat. The former executive branch policy concerned rights under contract. Patents on subject inventions were ordinary patents with contractual liens on their use. The new legislative branch policy is embedded in patent law itself and concerns both the scope of property rights in patents on subject inventions and contractual liens on their use. 

What’s the difference? Most importantly, Bayh-Dole changes patent law. Executive branch policies did not. Bayh-Dole defines a new category of patentable invention, the “subject” invention. And it places specific limitations on the patent property right available for subject inventions. Under the Presidential patent policy, a subject invention was a special class of deliverable under contract. Under the Congressional patent policy, a subject invention is a special class of invention under patent law. Big-time difference.

Under the IPA program within the executive branch patent policy, a subject invention is an ordinary patentable invention made in a funding agreement for which the contractor has decided to pursue a patent. The contractor exercises an option on the rights that otherwise would go to the federal government. In return for obtaining this right, the contractor agrees to limits on the use of the patent. Those limits are a matter of the IPA wording. An IPA patent is an ordinary patent but the patent owner is constrained by a federal agreement, the IPA.

Under the Congressional patent policy–Bayh-Dole–a subject invention is a new category of invention, with a property right subject to the requirements of the Congressional patent policy. The Congressional patent policy is a covenant that runs with the property, regardless of who owns it–inventor, contractor, government, assignee. Patent law makes clear that a patent “has the attributes of personal property” but “subject to the provisions” of patent law (35 USC 261). The Congressional patent policy is expressly provided as provisions of patent law, directed at subject inventions. Thus, the owner of a patent on a subject invention cannot do some things that an owner of an ordinary patent might do, not because the owner of the subject invention has agreed not to do these things, but because those things are simply not part of the property rights that run with a patent on a subject invention. Here is the opening of 35 USC 200:

It is the policy and objective of the Congress to use the patent system to promote the utilization of inventions arising from federally supported research or development

This not merely a non-operative statement of intention–it is a statement as well of policy. If it were merely a declaration of the fact that Congress held objectives, then we could dismiss it as non-statutory. But 35 USC 200 is more: it makes clear it is policy, and it preempts executive branch policy whenever a contractor owns a subject invention.

This policy statement places a fundamental limitation on the patent property rights in a subject invention: A patent on a subject invention must be used to promote the use of the subject invention. There are any number of ways to do this–excluded, however, is use of the patent system to suppress use of the invention. A typical such use of the patent system to suppress use is to threaten or bring a suit for infringement. While there may well be infringement suits that promote use–such as to suppress an ill-made or falsely advertised product–the Congressional policy incorporated into federal patent law requires patent owners to assess whether a possible infringement action promotes use–not merely whether the patent owner has a right to enforce the patent.

The Congressional patent policy is proscriptive, definitive (in the sense of defining the property right). There is no property right to exclude others without first establishing the promotion of use–that is, practical application. An owner of a subject invention with an interest in exploiting infringement litigation must work first to establish use. Use is the condition for patent property rights such as the right to sue for infringement to come into effect. This is very strange to someone used to ordinary patents, which can be used short of antitrust considerations to exclude all use. But a patent on a subject invention must be used to promote use, not suppress use. This is very strange–but entirely reasonable and consistent with long-standing federal policy that the results of publicly funded research should be broadly available to the American public. That isn’t so strange.

In fact, what would be stranger still would be the prospect that despite the federal government’s long-standing policy of making research results available to the public, Congress would reverse that policy and allow university contractors of all institutions the right to create private monopolies of any sort whatsoever, including ones that exclude all uses of an invention (or do so in the hope that a single company will come forward and exclude all other uses while attempting to make a commercial product under at least one of the claims of the patent).

It is the policy and objective of the Congress to use the patent system 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

A patent on a subject invention, furthermore, must be used to promote free competition and enterprise. This Congressional patent policy requirement runs against the use of an ordinary patent, which may be used to exclude competition and prevent independent initiative to use and develop an invention. “Free” competition means more than that others might compete to find other technologies that address the same market need. Such a use of a patent on a subject invention would promote the use of other technologies and would not promote the use of the subject invention itself.

What does “free” add to “competition”? It is a principle of interpretation that words in statutes should mean something. If there’s a reasonable meaning, then that meaning should be considered ahead of claiming that a word is “surplusage” or a mistake in drafting. “Free” might mean “without charge.” But that does not appear to be a meaningful usage here. “Free” may also mean “without restriction”–as in “free speech” or “liberty.” That makes more sense in the context of a policy on the nature of patent rights in subject inventions. To promote competition free of restrictions imposed by patents, a patent owner on a subject invention might license non-exclusively to all qualified applicants–what is called a FRAND approach–fair, reasonable, and non-discriminatory. Or, alternatively, a patent owner might use a patent to prevent others from obtaining improvement patents and blocking the public availability of the subject invention under the owner’s own patent. In this usage, the patent on the subject invention is used to open up a commons, stronger than the mere public domain, within which there is greater freedom (“free”) to practice the subject invention. Both of these approaches are strongly represented in early university patent policies and practices, and both are set out as defaults in the IPA program template agreement.

A similar analysis can be made for “free enterprise.” Enterprise is a project, an initiative, a venturing forth. A patent that promotes use and free competition may also promote the progress of enterprises, quite apart from any competition. Enterprise may be collaborative, for instance, or not for profit, and thus not competing with firms that are for-profit. To use a patent to promote “free” enterprise is to make an invention available for use in new venturing, whether for profit or not for profit.

To use the patent system to promote “free competition and enterprise” then may be understood to mean that the property right in patents on subject inventions extends only so far as to permit fair, reasonable, and non-discriminatory licensing (royalty free or for a reasonable royalty); and to use a patent to exclude others as a way to mitigate claims made by others to proprietary rights that would block public availability and use of the subject invention; and to make the subject invention available to new initiatives, whether for-profit or non-profit, without regard to the purpose (whether to study the invention, improve upon it, use it, or develop commercial product based on it). In simple terms, the patent is to be used to promote competition as well as new initiatives (and industries) in the absence of competition. It’s not an “or” here–not either “free competition” or “free enterprise.” Both. No ordinary exclusive license can do that unless the patent property right available for licensing is remarkably narrow.

There is a disparaging saying in the university licensing community that “a non-exclusive license is just a tax.” The saying is used to rationalize exclusive licensing, to make it appear that non-exclusive licensing is somehow contrary to the public interest and exclusive licensing is something moral and justified. This saying is nonsense both in meaning and in implication. Under its logic, an exclusive license is also just a tax. If the purpose of the license is to facilitate transfer and use of an invention, then any demand for payment for the right to use is, essentially, a tax–especially when the entity demanding payment has no actual equity in the invention, having obtained it expressly to exploit the patent right. A university or patent broker has no actual need to use the invention. The university or patent broker wants to use the patent. The statutory purpose of the Congressional patent policy is to define those appropriate uses of that patent–that is, the scope of the property right in patents on subject inventions.

without unduly encumbering future research and discovery

Patents on subject inventions are to be used so that they do not “unduly” “encumber” “future research and discovery.” The requirement here is of some interest, as it allows that patents on subject inventions may “duly” encumber future research and discovery. There are proper encumbrances and improper encumbrances of research. What is an encumbrance of research in the context of patent rights? An encumbrance is a restriction or requirement–it clearly is not an exclusion or stoppage. Thus, we might conclude that an owner of a patent on a subject invention has no property right by which to prevent further research and discovery. It is not that a patent owner must license for such use, but that the patent owner has no property right to restrict such use. But research may be controlled or restricted, if done so properly and not to excess. Publication might be delayed to allow patent applications to be filed, for instance–though the delay of publication is not a patent right, especially in regards to an invention for which no patent has issued.

The point of using a patent to encumber future research and discovery is place requirements on that research. One might require research permitted under a patent on a subject invention to be published, for instance, rather than remain secret. That would not be an “undue” encumbrance, entirely in keeping with making an invention available for public use. One might also require that any patents obtained on future research conducted within the scope of the patent on a subject invention also be made available in the same fashion for further research. This is the basic transaction of a patent commons or a research consortium. The encumbrance on future research is that its results are made available to the receiving community in the same manner as the original invention has been made available. Share and share alike. In a world of property rights with some expectation of exploitative behaviors, this principle is enforced by the use of property rights. A recursion on rights to prevent rights from undermining a desired use of rights, if you follow (and it’s important at this point that you do, or you will never see the social constructions possible that enable some forms of research and discovery–precisely the forms that patent law here gives special attention to).

It is the policy and objective of the Congress to use the patent system to promote the commercialization and public availability of inventions made in the United States by United States industry and labor

We will discuss one further restriction on the patent property right arising from subject inventions. Patents are to be used to promote (i) the commercialization and (ii) public availability of inventions (iii) made in the United States by United States (iv) industry and (v) labor.” It is important in reading this requirement to recognize the extended restrictive phrase–the inventions that are the subject of this clause are ones made in the U.S. by U.S. companies and U.S. workers. Inventions might be made in other countries by other workers–that is not the burden here. Commercialization means generally the process and activities by which a new product is made and offered for sale. That is, in addition to promoting the use of a subject invention, promoting free competition and enterprise arising from access to a subject invention, and encumbering some research and discovery in reasonable ways, a patent owner also is limited with regard to the creation of commercial products and their sale. The patent must promote, not prevent, the creation of commercial products. Thus, unless one is going to do the development and selling directly, one must license the right to sell and offer for sale, and must in granting that right also insist that the licensee produce and sell the product as a condition of the license. That’s the general case. Here, there’s that restrictive phrase. The requirement on the patent property right extends only to the U.S. One is free to use a patent on a subject invention to prevent the import of products made by other than U.S. industry and labor.

Elsewhere in Bayh-Dole, there are specific requirements regarding exclusive licenses granted for U.S. commercialization. These requirements (at 35 USC 204) have the effect of making clear that the owner of a patent on a subject invention has no obligation to license exclusively for the U.S. either for use or for commercialization, but if the owner does do so, then the owner must “prefer” a U.S. company or obtain federal agency approval based on a two possible reasons to grant an exclusive license otherwise–they tried and couldn’t find anyone willing, or there’s no one available who could do it. Thus, this requirement on the property right is one of “preference” and federal agency approval.

A similar federal agency approval is available in the matter of exclusive licenses offered when the owner of a patent on a subject invention is a nonprofit (at 35 USC 202(c)(7)). The issue concerns the distinction between an exclusive license and an assignment. In copyright law, by way of comparison, the statute defines an exclusive license as one of the means by which ownership of copyright may be transferred. With regard to patents, courts have ruled exclusive licenses to be assignments when substantially all commercial rights have been licensed. Reservation of rights for nonprofit or government use is not sufficient to alter this determination. Nor is a territorial restriction (such as an exclusive license for the U.S. only). Thus, a nonprofit patent owner may grant only a limited exclusive license–one that does not carry substantially all commercial rights–unless one gets federal agency approval and the assignee accepts the same conditions on licensing and use of royalties as the nonprofit patent owner has.

The effect of this distinction regarding exclusive license and assignment further restricts the patent property right for nonprofit owners. The nonprofit owner has no property right to transfer to others without transferring the entire obligation that runs with a patent on a subject invention. That is, a broad exclusive license carries with it not only the patent property limitations of Bayh-Dole but also the express restrictions on licensing and use of royalties. To comply–and to be within the scope of the patent property rights established by Congressional patent policy–a nonprofit owner of a patent on a subject invention must break up exclusive licenses–for fields of use, between use and commercialization, for the creation of specific products. A nonprofit owner of a patent on a subject invention simply does not have the property right to grant a single exclusive license that encompasses all the meaningful commercial rights of the patent–for use by companies, for development and sale of product by companies, with the rights to sublicense and to pursue infringement or settle infringement claims.

So where do we get to? To understand Bayh-Dole, one has to take the Congressional statement of policy and objective as it stands, as part of federal patent law, defining the property rights available for a newly defined category of patentable invention–the subject invention. The property right available substantially limits the ability of a patent owner to exclude use, to license exclusively (in the case of nonprofits), and to refrain from commercialization. An owner of a patent on a subject invention may not sue for infringement of a patent under which there has been no practical application by the patent owner or by the owner’s licensees. The owner of a patent on a subject invention simply does not have the right to exclude use when the property right expressly is granted to promote use. A similar requirement holds for commercialization.

In essence, an ordinary patent is a bazooka–it can cause real damage if fired. A patent on a subject invention is more like a squirt gun–good for some fun and watering plants, but not so good for creating monopolies or speculating on the future value of suing infringers.

The way to get at monopoly pricing of products derived from subject inventions is to confront the scope of the patent property right that has been used to claim the monopoly. Bayh-Dole requires free competition and in doing so disables monopoly pricing. There is no need for march-in regarding price, nor are Bayh-Dole’s march-in procedures designed to authorize such use. But Bayh-Dole does limit the patent property rights in subject inventions. It’s a matter of challenging owners of patents on subject inventions for subject patent misuse–attempting to extend the scope of the patent beyond its statutory grant, beyond the Congressional patent policy established for subject inventions.

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