I spent some time working through whether Bayh-Dole requires reasonable pricing. The simple answer is “No.”
Of course, the simple answer isn’t very helpful, or accurate.
Bayh-Dole does not require reasonable pricing by design of those drafting the bill. The march-in procedures, advertised as protecting the public, do nothing of the sort. The march-in procedures are reduced to dealing only with a failure to create the expectation of taking effective steps to “achieve practical application,”or with a failure to make inventions “reasonably available” to the public when a federal agency determines there’s a need. And even then, the procedures were made so complicated (with university patent administrator help) that they could not possibly operate. On top of that, Bayh-Dole makes usage reports optional and secret when they are required.
But Bayh-Dole is a three-tined law. One tine of it–the tine that gets attention in Bayh-Dole compliance training and in standard descriptions of what the law requires–concerns the construction of a standard patent rights clause. This part of the law appears similar to the IPA (though there are all sorts of subtle changes). A second tine involves federal agency management of inventions owned by the federal government. That tine basically authorizes federal agencies to deal in patent monopolies. But the third tine of Bayh-Dole has to do with the patent property right in inventions subject to Bayh-Dole. Bayh-Dole is, after all, a part of federal patent law. This third tine of the law establishes a public covenant that attaches to patents on inventions arising in federally supported research or development–stating a working requirement, a requirement to promote free competition, a requirement to favor US manufacturing, and a requirement to grant rights to the federal government. This tine takes the form of Congressional policy, taking precedence over the executive branch policy anchored by the Kennedy statement of patent policy. Under Bayh-Dole, the policy requirements are made by Congress, in the form of law, rather than by the President, in the form of executive order.
But the Congressional policy-as-patent-law operates in a very different manner than an executive order-as-requirement-for-contracting. An executive order focuses on federal contracts and constrains what federal agencies can require. Congress placed its policy in federal patent law. There, the policy changes what property rights run with a patent on a subject invention. This is a huge difference, but not one that gets pointed out. Thus, when Congress stipulates that its policy is that the patent system be used to promote the utilization of inventions made with federal support, this is not an idle bit of rationalization. Most commentators truncate this policy to “promote the use of inventions”–leaving off “use the patent system….” The point of this policy statement is “the only legitimate use of the patent system is the promotion of the utilization of subject inventions.” Or, another way, “if you obtain a patent property right on a subject invention, you may only use that property right to promote the use of subject inventions–and that goes for any assignee or any exclusive licensee.”
You might wonder, then, how anyone could sue for infringement on the basis of a patent right on a subject invention. And that would be a very good question to ask before setting up a strategy of owning and licensing subject inventions as monopolies. The premise for litigation could not possibly be to prevent use–it would have to be something else about the use that harmed the public, harmed the likelihood that an invention would be used, harmed those that had made a significant private investment to bring an invention into use. Caltech, however, has (arguably) no property right (on its subject inventions) to sue Apple and Broadcom, since it has not made a significant investment to develop the subject inventions upon which it holds patents. But if no one challenges the bounds of the property right for patents on subject inventions, then an owner of a patent on a subject invention can do most anything that any other patent owner can do.
The reason to bring all this up is to get at the difference between how the IPA and Bayh-Dole manage pricing. Neither speaks to reasonable pricing. The IPA requires non-exclusive licenses to have no more than a “reasonable” royalty–but that’s the share that the patent owner takes, not the price at which a product is sold. For all that “reasonable” in the IPA is an authorization, not a limitation. No patent owner of an IPA subject invention has to offer a patent right for license at *less than* a reasonable royalty. That’s the effect of the IPA language, though one might be caught off guard by the construction “make them available through licensing on a nonexclusive, royalty-free or reasonable royalty basis.” For exclusive licenses, the IPA even drops “reasonable.” The implication is that any monopoly price is fair game, so long as product is “reasonably accessible to the public” (to use the language of the Kennedy patent policy).
Bayh-Dole does not even address reasonable royalties in the standard patent rights clause or the march-in provisions. All that shows up as reasonable is “availability” to meet public welfare or regulatory requirements. Nothing at all about price.
But the IPA does address price–it just does so by means of required competition. Either license non-exclusively–allowing companies to compete on price–or license exclusively but only for short duration–three years from first commercial sale or eight years in all. And to keep an exclusive position, one has to show within about six years from the date of the invention report that there’s commercial development. Reasonable pricing under the IPA is pricing in a competitive environment, not government price-fixing or price-guessing or price-complaining. The market decides.
What about Bayh-Dole? In Bayh-Dole, there’s little in the standard patent rights clause that deals with competition. There’s not even an indication that non-exclusive licensing is preferred. There’s a whiff about it in the preference nonprofits are to show to small business licensees (35 USC 202(c)(7)):
a requirement that, except where it proves infeasible after a reasonable inquiry, a preference in the licensing of subject inventions shall be given to small business firms
But even here there’s nothing that indicates that for any one subject invention there might be more than one licensee. And for all that, look at what the universities did to this requirement as implemented in the standard patent rights clause–they undid “reasonable inquiry” into a mess of qualifications that render it meaningless (37 CFR 401.14(a)(k)(4):
It will make efforts that are reasonable under the circumstances to attract licensees of subject invention that are small business firms and that it will give a preference to a small business firm when licensing a subject invention
That would be enough. But what are such “reasonable efforts”? One might think, sending notices to small companies to consider taking a license would be a good start. But there’s no guidance. Instead, notice that “reasonable inquiry” has been replaced by “reasonable efforts”: but now with a string of qualifications:
if the contractor determines that the small business firm has a plan or proposal for marketing the invention
That is, small businesses must produce a plan for marketing an invention (not that most university-affiliated startups prepare such a plan). This is like harvesting free information from small companies about market, about development phases and costs–not to mention the requirement imposes a huge delay and cost on obtaining a license (especially, notice that there’s nothing stated here that the license would be exclusive, so a university might impose the requirement for a marketing plan even for a non-exclusive license, even if all the small company licensee wanted to do was to make and use the invention). There’s more, now qualifying the plan:
which, if executed, is equally as likely to bring the invention to practical application as any plans or proposals from applicants that are not small business firms;
So now we must compare the small business plan with proposals from non-small companies. Hah. As if there are multiple competing proposals at the same time. That could happen–but it generally does not. So there is no basis to license to a small company until there’s also a plan from a big company–and then the small business plan has to be at least “equally likely” to produce a product (not just use, since the plan must involve marketing). If no small company shows up with a plan when a license to a big company is under consideration, then there’s no need to worry small business preferences at all. One might think, too, then that an effort to license to small businesses has to happen before anyone approaches a large company regarding an exclusive license. But there’s nothing like that.
In Science the Endless Frontier, Vannevar Bush discusses small companies:
The benefits of basic research do not reach all industries equally or at the same speed. Some small enterprises never receive any of the benefits. It has been suggested that the benefits might be better utilized if “research clinics” for such enterprises were to be established. Businessmen would thus be able to make more use of research than they now do. This proposal is certainly worthy of further study.
Now that’s a reasonable suggestion–a university ought to consider “research clinics” for small businesses, where new inventions are taught to small business folk with the expectation that they will come away with new knowledge and non-exclusive licenses, royalty free perhaps, even. I expect that nothing like this is actively being considered by university licensing operations these days. But it is still a proposal worthy of further study.
(Actually, faculty get this idea already, without waiting for punditry to report back. As one top researcher in computer science pointed out to me, she could hold a workshop in her specialty any time she wants and draw 50 people paying a paltry $2,000 to attend. She has $100K any time she wants it, and will clear $80K or more. Explain, she challenged me, how you will take a monopoly position and get me a net $80K in the next three months. Let’s see, I’d have to spend $15K on the patent, have to find a company to take a license with a big upfront payment–$250K or more. And get to sales the next year, with a royalty base north of $5M and more likely $10M. No doubt it is possible. And somewhere pigs grow wings, too. But even if it is possible, look at the difference in apparatus. Faculty member–announces a workshop and invites industry, hires a coordinator (at $40K per year) for a few months to manage logistics, and clears $80K. University–files a patent and shops it to industry, hires licensing officer (at $80K to $120K per year), wrangles through negotiations and legal counsel reviews, and has 1 chance in 200 or worse of getting a deal, let alone anything approaching an $80K return to the inventor.)
Back to the mess made by universities of the small business preference clause:
provided, that the contractor is also satisfied that the small business firm has the capability and resources to carry out its plan or proposal.
So even if the small business figures out how to show up at just the right time and does provide a marketing plan every bit as likely to succeed, the university patent broker still gets to then review the business itself for capability and resources. A little more invasion of the small company. Notice that nothing similar is required of large companies, where capability may be lacking (expertise) and resources might not be committed to developing the invention (even if the company is otherwise flush with resources). But even with this string of qualifiers–marketing plan, equally likely, and a sniff at capability–there’s yet more:
The decision whether to give a preference in any specific case will be at the discretion of the contractor.
That undoes everything. Whatever efforts are reasonable don’t matter. The standard patent rights clause here is utterly contrary to the law. Bayh-Dole states that one must prefer small business licensees unless doing so “proves infeasible after a reasonable inquiry.” Proves–infeasible–reasonable inquiry. There is nothing about discretion of the contractor. But even all this is not enough for the university patent brokers:
However, the contractor agrees that the Secretary may review the contractor’s licensing program and decisions regarding small business applicants,
The march-in that the Secretary of Commerce may initiate if universities ignore the small business preference in any given circumstance is to review the contractor’s licensing program. There is no march-in right to restore any given licensing decision–only to address future licensing practices. Under the IPA, every licensing program–policy and practice–had to be reviewed before the IPA could be approved. It was such a review that would ensure that licensing practices met public interest concerns appropriate to federally supported inventions and not merely the outer limit of anti-trust law, which hardly will ever apply to university exploitation of patents.
Even then, we are not done backing away from any federal oversight:
and the contractor will negotiate changes to its licensing policies, procedures, or practices with the Secretary when the Secretary’s review discloses that the contractor could take reasonable steps to implement more effectively the requirements of this paragraph (k)(4).
The only obligation is that the contractor “will negotiate” changes. The patent rights clause here does not even commit the contractor to making changes. There’s not even a recognition that the Secretary could find that the contractor plainly has not implemented the requirements of (k)(4). The only adverse finding that the Secretary might make is that the contractor “could take reasonable steps to implement more effectively.”
Bayh-Dole, in its standard patent rights clauses, doesn’t anticipate non-exclusive licensing. This is a huge deviation from the IPA, which at least states non-exclusive licensing as the default and builds an apparatus of exceptions with time limits on doing something and a burden on the contractor to justify anything otherwise.
But Bayh-Dole does address reasonable pricing in its statement of Congressional policy–that is, the part of Bayh-Dole that shapes federal patent law rather than the part of Bayh-Dole that shapes federal agency contracting. Bayh-Dole is part of federal patent law. The property rights in patents is a matter of the provisions of the law, as 35 USC 261 makes clear. And the Congressional statement of policy at 35 USC 200 is just such a statement of how the property rights of a patent on a subject invention must be used.
The Congressional policy is that the patent system must be used, if it is used, to promote use (that is, cannot be used to prevent use–which a patent might otherwise do). But even more:
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
This is where the reasonable pricing issue gets addressed–through competition. How do nonprofit organizations use patents on subject inventions to promote free competition and enterprise? Again, this is a fundamental practice question, and one that just any attorney trained in corporate patent practice is ill-suited to address. It is a demanding question, one that requires creative thinking and substantial change in patent licensing practice. While the standard patent rights clause deals with patent claims that can be made by federal agencies and licensing practices, the Congressional statement of policy, placed in federal patent law not federal acquisition regulations, places bounds on patent property rights in subject inventions.
How does an exclusive license promote free competition? That’s the question that a university licensing office has to have a meaningful answer to. Any other answer is simply not acceptable. Even though the Secretary of Commerce cannot “march in” on university licensing practices for small businesses, the patent law itself is restricted by Bayh-Dole for university licensing of patents on subject inventions. The implication of the Congressional policy statement is that the use of the patent system on its own, for just any invention, does not necessarily promote free competition and enterprise. Otherwise, there would be absolutely no need to state the obvious, nor would there be any meaning given to this part of federal patent law. That can’t be the proper interpretation of this statement of Congressional policy as a matter of patent law.
One way to promote free competition is to license non-exclusively. Another is to limit the term of any exclusive license. Another is to limit the field of use for any exclusive license. Yet another is to reserve rights for any use that doesn’t involve sale–so if someone can make and use an invention for their own use, they aren’t obligated to wait for an exclusive licensee to get around to making a product that even then might not fully implement all that’s possible with the invention. Any of these ways might be ways to use the patent system to promote free competition. Full-term exclusive licensing for all meaningful fields of use is not. There is nothing in such licensing that promotes free competition. There is no property right in patents on subject inventions that supports such exclusive licensing.
For that matter, an exclusive license that grants substantially all rights, even rights limited by territory and with a reservation of rights for nonprofit use, is an assignment, not an exclusive license. Standard university templates for exclusive patent licenses–allowing sublicensing, giving the licensee the right to sue for infringement–are assignments, not exclusive licenses, and courts have held as much. For nonprofits, Bayh-Dole limits such assignments to organizations that manage inventions unless there’s federal agency approval.
Further, if there is any such assignment, the nonprofit obligations under the standard patent rights clause must also transfer to the assignee–so, requirements for small business licensing, sharing royalties with inventors (regardless of what the university itself does), and using any profits after expenses for managing subject inventions (and not other expenses) for scientific research or education. Such terms of assignment would likely prove unacceptable to a monopoly-inclined company, and the company would therefore have to settle for some license that is less than an assignment or request approval from the federal agency, which could then require, say, reasonable pricing. Not as a march-in, but as a condition of an exclusive license that amounts to an assignment, an exclusive license that otherwise leaves no room for free competition that would produce market-based pricing rather than monopoly-based pricing.
That’s where the pressure point is for price controls under Bayh-Dole–in the Congressional policy statement that frames the limits of the property right in patents available for subject inventions. The march-in provisions for the standard patent rights clause have nothing to do with this part of Bayh-Dole. It’s a matter of federal patent law, not federal contracting. Folks are looking in the wrong place to try to use the march-in provisions. The march-in provisions were designed not to work. The place to deal with reasonable pricing is to insist that Congressional patent policy be followed–that is, that any use of the property rights in patents on subject inventions must promote free competition. That is the only use of the patent system that is allowed in this matter.
With free competition comes (one hopes) reasonable pricing. And that’s where to hammer university licensing that creates the monopoly positions that result in high drug prices. Shared development also has the potential to reduce the overall costs that are involved in drug development. There used to be much more such shared work. The base compounds were not patented. Specific applications might be. But even here, why does there have to be a profit motive to alleviate human suffering?
One might, then, consider taxing university patent income on all licenses for patents on subject inventions that fail to meet the Congressional standard–the university should not enjoy the benefit of a share in monopoly pricing. The university should not have a profit motive here, even if companies might. But better–shut down such licensing practices. Bayh-Dole is a law that has never been enforced. That’s a problem with a law, any law. Time to enforce the law. That would be a good start to fixing it.