Exclusive licensing in Bayh-Dole, Part 2: The Lost Requirements

Part 1 of this two-part series discussed the difference between exclusive license and assignment, and why Bayh-Dole’s wording on the one remaining restriction on exclusive licensing was worded as it was–“exclusive right to use or sell.” Let’s look at how things were at the start, before the 1984 amendments. When Bayh-Dole was first passed, the statement of policy and objective had the following:

It is the policy and objective of the Congress . . .

to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise . . . .

There used to be a portion of Bayh-Dole that was specifically responsive to this objective, at least for nonprofit organizations–that had to do with exclusive licensing. When Bayh-Dole was passed into law, it required that the standard patent rights clause must, for nonprofit organizations, contain:

(B) a prohibition against the granting of exclusive licenses under United States Patents or Patent Applications in a subject invention by the contractor to persons other than small business firms for a period in excess of the earlier of five years from first commercial sale or use of the invention or eight years from the date of the exclusive license excepting that time before regulatory agencies necessary to obtain premarket clearance unless, on a case-by-case basis, the Federal agency approves a longer exclusive license.

A fundamental limitation on the term of exclusive licenses.

If exclusive field of use licenses are granted, commercial sale or use in one field of use shall not be deemed commercial sale or use as to other fields of use, and a first commercial sale or use with respect to a product of the invention shall not be deemed to end the exclusive period to different subsequent products covered by the invention.

With the typical Bayh-Dole walk-back to distinguish fields of use packed into a single exclusive license (where “field of use,” for a license to be exclusive and not an assignment, must involve either +make +use -sell -import; or +make +sell -use -import) and to distinguish that exclusivity can run separately for separate products–a distinction that’s as clear as mush, given that there’s no guidance whatsoever about what distinguishes one product from another. How much change is needed before something is a subsequent product? Is it just later in time? Or is it somehow fundamentally different, even if in the same “field of use.” Oh, it doesn’t matter, really, since these things got deleted in 1984.

But the deletion of this section does affect Bayh-Dole’s statement of policy and objective. What does it mean now for Congress to promote free competition and enterprise using Bayh-Dole, a part of federal patent law? When the restrictions on exclusive licensing of patents on subject inventions were still in place, Congress’s strategy was clear–the exclusivity of patents on subject inventions (for large companies obtaining rights from nonprofits) is exhausted when the purpose of the patent has been served by practical application plus a bit more time–in many cases well before the term of the patent expired. In Bayh-Dole as it was originally approved, patents on subject inventions were different. Their term of exclusivity was conditional on achieving the purpose for which they were granted to inventors at nonprofits who were allowed to assign these inventions for management. The property right in patents on subject inventions was thus not the same as ordinary patent property rights.

Here’s how it all worked (and to some extent, still does). What’s the purpose of a patent on a subject invention? 35 USC 200, again:

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 . . .

So now we can see how patents are to be used: get inventions developed to the point of practical application, allow those that do the development work a few years to enjoy a benefit that may be exclusive, and then open the opportunity up to competition. That’s the public covenant that runs with patents on subject inventions. Them patents are abynormal patents, according to federal patent law.

The case is ever more clear for nonprofit organizations, who don’t, on the face of it, have a profit motive for being involved in patents. Of course, almost anyone outside of government involved with patents these days (and many within government) have become conditioned to think that patents = wealth and seeking that wealth is more important than any other use a research invention or a patent on a research invention could be put to. Such thinking leads to the bizarre claim that innovation comes from nonprofit wealth seeking at the expense of any other purpose. Bayh-Dole appears to anticipate just such a temptation by packing in a special section that limits nonprofit owners of patents on subject inventions even more than small businesses–restrictions on assignment, on use of royalties, on sharing royalties with inventors.

This was the basic exchange: contractors could obtain rights to subject inventions, but on the condition that they used patents to promote use and accepted this as the primary role. When use was achieved (“practical application” in Bayh-Dole), then the patent owner had five years from first sale or use or eight years from the date of the exclusive license to benefit from an exclusive deal, if the nonprofit had chosen to do an exclusive deal.

The whole premise that a nonprofit might not do an exclusive license, of course, is silly. When Congress looked at university and nonprofit practice under HEW’s IPA program, they found that nearly all the licenses were exclusive, and most were unproductive and in any event with no better outcomes for commercialization than the federal government”s patent management practices–and the federal government wasn’t even trying to commercialize inventions and did not have or need to have a profit motive. Everyone knew nonprofits would try to do exclusive licenses. Bayh-Dole limited the ways nonprofits could go wild with exclusivity: nonprofits could not assign patents on subject inventions to just anyone, anyhow, and when they did assign, the nonprofit requirements had to follow the assignment.

When Bayh-Dole was passed into law, Congress traded non-federal ownership of federally supported inventions for a restriction of only five years of exclusivity from the date of first commercial sale or use. Or eight years max–whichever came first. And with extra time for regulatory approvals for that eight years max. That, in effect, was the term of a patent monopoly on a subject invention. The deal was–universities can own subject inventions, but they get only eight years of exclusivity once they license their inventions or five years from first sale. Abynormal patents on subject inventions. You would never know it listening to the folks crying about attacks on the patent system by people who question the high price of prescription drugs invented with federal support.

Bayh-Dole required (and still does) the standard patent rights clause to permit federal agencies to obtain reports regarding “utilization” of subject inventions (35 USC 202(c)(5)):

The right of the Federal agency to require periodic reporting on the utilization or efforts at obtaining utilization that are being made by the contractor or his licensees or assignees….

The actual reporting requirements in the standard patent rights clause exactly parallel the wording of the original limitations on exclusive licenses (37 CFR 401.14(a)(h)):

The Contractor agrees to submit on request periodic reports no more frequently than annually on the utilization of a subject invention or on efforts at obtaining such utilization that are being made by the contractor or its licensees or assignees. Such reports shall include information regarding the status of development, date of first commerical [sic] sale or use, gross royalties received by the contractor, and such other data and information as the agency may reasonably specify.

The reason for requesting the date of first commercial sale or use is clear–it established the term of exclusivity for any exclusive license. A patent on a subject invention is an abynormal patent. While a normal patent has a 20-year run from the date of application (and 17 years from the date of issuance at the time Bayh-Dole came into law), a patent on a subject invention had only an eight-year life as an exclusive right, once it has been exclusively licensed.

By amending out the restrictions for nonprofits on exclusive licensing, the university patent industry fundamentally changed Bayh-Dole to make it appear that patents on subject inventions are just ordinary inventions to be owned by moralizing institutions. The appearance–without knowing any history or having an eye for detail–is that a subject invention is just an ordinary invention with a big administrative fuss around extra reporting. Why report an invention to a federal agency when it gets reported to the government as a patent application? Why worry about reports on utilization when there’s no time limit on development, use, or exclusivity? Why worry election to retain title? Isn’t filing an application sufficient evidence of interest?

Despite these changes in appearance, there’s nothing to indicate that the intention of Congress with regard to Bayh-Dole also changed. Bayh-Dole is still a part of patent law. Subject inventions are still a distinct category of invention within patent law. The basic mandate still stands: use the patent system to promote use of subject inventions, not to delay use or prevent use; and nonprofits should promote free competition in their management of patents, not suppress it.

How is suing for infringement promoting the use of inventions? How is licensing exclusively for the term of the patent promoting free competition? These are questions at the heart of Bayh-Dole. In its original form, Bayh-Dole supplied clear answers. Now those answers have been murked by amendment. But the intention and the mandate remain. The problem is that now we have to make a case for them, rather than point to express guidance in the law. But not to make a case–that is to ignore the clear policy and objective of Congress. Just because an amendment removes a particular does not mean that the amendment removed the intent, too.

The restriction on the term of exclusive licenses was no doubt necessary to get Bayh-Dole passed. The restriction tracked (sort of) the Kennedy patent policy requirements as implemented in Institutional Patent Agreements (my emphasis):

Any exclusive license issued by Grantee under a U.S. patent or patent application shall be for a limited period of time

That is, for less than the full term of the patent

and such period shall not, unless otherwise approved by the Assistant secretary (Health and Scientific Affairs), exceed three years from the date of the first commercial sale in the United States of America of a product or process embodying the invention,

That’s three years from date of first commercial sale in the U.S. (not five).

or eight years from the date of the exclusive license, whichever occurs first,

Eight years overall, regardless of whether anything has been sold in the U.S.

provided that the licensee shall use all reasonable effort to effect introduction into the commercial market as soon as practicable,

That is, a nonprofit in licensing an invention made with federal support has to require diligence on the part of an exclusive licensee. The IPA makes a big deal over the prospect of non-exclusive licensing, even royalty-free. But this is all for show. The IPA was created as an end run around federal policy to serve the interests of the pharmaceutical industry. It just happened that the pharmaceutical industry found ready allies in the patent brokers working for universities inventions. Again, it’s no ordinary patent when it is on an invention made with federal support.

The IPA continues . . . with Latker’s usual drafting technique to offer the appearance of a public purpose and then walking it back:

consistent with sound and reasonable business practices and judgment.

That is, a licensee has to be diligent, but only in a prudent way. What was the worry? That a licensee could sit on a license for a while, allowing other things to work themselves out–such as milking a current product for all it’s worth before introducing something that would make that product obsolete. Why introduce a better drug when you are making a fine profit on one already on the market? The idea behind allowing nonprofit ownership of federally supported inventions was to push new products into service without trying to milk things for as much money as possible.

More . . .

Any extension of the maximum period of exclusivity shall be subject to approval of the Grantor. Upon expiration of the period of exclusivity or any extension thereof, licenses shall be offered to all qualified applicants at a reasonable royalty rate not in excess of the exclusive license royalty rate.

In the IPA, a nonprofit had to offer non-exclusive licenses after the term of exclusivity had been exhausted. And in the IPA, it was three years from first commercial sale + no time added for regulatory approval + diligence in getting things to market. You can see how Latker, ever the clever patent attorney, backed off the IPA requirements for Bayh-Dole.

By way of comparison, here’s the Kennedy patent policy from 1963 on exclusive licenses:

Where the principal or exclusive (except as against the government) rights in an invention remain in the contractor, unless the contractor, his licensee, or his assignee has taken effective steps within three years after a patent issues on the invention to bring the invention to the point of practical application or has made the invention available for licensing royalty-free or on terms that are reasonable in the circumstances, or can show cause why he should retain the principal or exclusive rights for a further period of time, the government shall have the right to require the granting of a license to an applicant on a non-exclusive royalty free basis.

Three alternatives: show “effective steps” within three years from the patent issuing or license non-exclusively or “show cause”–make a persuasive argument why the federal government should not step in and grant royalty-free, non-exclusive licenses.

The IPA was supposed to comply with the Kennedy patent policy. It didn’t really. The same patent attorney who drafted Bayh-Dole (Latker, while working for the NIH) also drafted the IPA (while working for the NIH), and the tracks are there–instead of three years from date of the patent issuing (Kennedy) the IPA has three years from the date of first commercial sale (Latker) and Bayh-Dole had five years from the date of first commercial sale (Latker again). It is easy to slip things to one’s advantage when working with greater knowledge with regard to the details than those who review your work.



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One Response to Exclusive licensing in Bayh-Dole, Part 2: The Lost Requirements

  1. Pingback: Exclusive licensing in Bayh-Dole, Part 1: Licenses and Assignments | Research Enterprise

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