Bayh-Dole all but mandates Government practice of subject inventions

The Bayh-Dole Act requires contractors retaining ownership of subject inventions to grant a non-exclusive license to the government. Commonly, this license is depicted as a requirement that commercial vendors sell product based on subject inventions to the government “royalty-free”–meaning that the commercial vendor must discount each product by the amount the vendor would otherwise pay to the patent owner. Often the royalty is under 6%, and frequently under 2% in some industries. When the royalty is a fixed amount or an equity stake or involves upfront fees and milestone payments, then there’s no good way to calculate, for any given product, what portion of its price is reflected in a payment obligation to a patent licensor. The discounts available are tiny if incalculable.

But all of this is deeply silly. That’s not what the government license is all about. It has nothing to do with what the government purchases and everything to do with what the government can practice. If we take a look at the Bayh-Dole Act in context, the scope of the government license becomes evident. I’ll argue that Bayh-Dole does more than grant a license to the government–scope to be explained. Bayh-Dole also creates a federal mandate to act on the rights the government has. If Bayh-Dole is a do WTF you want law, that characteristic also applies to both the federal government and state governments.

Let’s start with the Kennedy patent policy and work forward. Bayh-Dole is based on the Institutional Patent Agreement program, and that in turn is based on the Kennedy patent policy and its later revision under Nixon. In the Kennedy patent policy, when a contractor is allowed to retain “principal” rights to an invention made with federal support, the government gets a non-exclusive license:

. . . subject to the government acquiring at least an irrevocable non-exclusive royalty free license throughout the world for government purposes.

The Kennedy patent policy also has a definition of “Governmental purpose”:

the right of the Government of the United States (including any agency thereof, state, or domestic municipal government) to practice and have practiced (made or have made, used or have used, sold or have sold) throughout the world by or on behalf of the Government of the United States.

Under the Kennedy patent policy, the license to the government extends to states and to municipal governments. Furthermore, the license includes the rights to make, use, and sell (including having made, used, or sold).

When President Nixon revised the policy in 1971, there was similar language. First, the license:

Whenever the principal or exclusive rights in an invention remain in the contractor, the Government shall normally acquire . . .

at least a nonexclusive, nontransferable, paid-up license to make, use, and sell the invention throughout the world by or on behalf of the Government of the United States (including any Government agency) and States and domestic municipal governments, unless an agency head determines that it would not be in the public interest to acquire the license for the States and domestic municipal governments . . .

“States” gets its own definition: “the States of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, and the Trust Territory of the Pacific Islands.”

But the definition of “government purpose” is gone. In its place is an expansive statement of the scope of the license, with the by-now expectable walk-back that gives federal agencies discretion to expose municipal governments to suits for infringement by contractors. Okay. But otherwise, the scope of the government license is broad–including states and county and city governments. Further, the rights included in the license are the common law rights of invention–to make, use, and sell. But the term “to practice” is omitted. Instead, in both policies, we have a definition of “to the point of practical application”:

to manufacture in the case of a composition or product, to practice in the case of a process, or to operate in the case of a machine and under such conditions as to establish that the invention is being worked and that its benefits are reasonably accessible to the public.

Here, “practice” is restricted to inventive processes. But clearly in the Kennedy patent policy, “practice” means all three primary rights of invention:

to practice and have practiced (made or have made, used or have used, sold or have sold)

The license to the government is thus broader than the definition of “point of practical application.” The point of the definition of “The Point” of practical application is not merely that an invention is being used, but that in particular situations, the use results in actions–the product or composition is being manufactured, machines are being operated, processes are being “practiced–that result in public benefit. And the public benefit is not merely an assertion or claim–it must be “established.” The burden is to demonstrate that there’s a “benefit reasonably accessible to the public.”

The revived Institutional Patent Agreement program operated under the Nixon version of the federal patent policy–pretty much the same as the Kennedy policy statement, with a few walk-backs to give federal agencies more discretion and to address some of the problems found by the Harbridge House report (which also served to revive the IPA program).

Here’s the IPA on government rights:

(b) The Grantee shall grant to the Government of the United States a nonexclusive, irrevocable, royalty-free license for governmental purposes and on behalf of any foreign government, pursuant to any existing or future treaty or agreement with the United states under each U.S. or foreign patent application it elects to file on a subject invention. The form of the license to be granted shall be as set forth in Exhibit “A'” attached hereto, and by this reference made a part hereof. Any license issued by Grantee shall be made expressly subject to the license to the Government of the United States.

The license in Attachment A reprises this statement of rights and expands it to include the patent family that might derive from a given subjection invention. More importantly, the license adds the definition of governmental purpose from the Kennedy patent policy:

The Licensor, in consideration of the premises and other good and valuable consideration, hereby grants and conveys to the United States Government a royalty-free, nonexclusive and irrevocable license for governmental purposes . . . under the aforesaid patent application, and any and all divisions or continuations, and in any and all patents or reissues which may be granted thereon during the full term or terms thereof. As used herein, “governmental purpose” means the right of the Government of the United States (including any agency thereof, state or domestic municipal government) to practice and have practiced (made or have made, used or have used, sold or have sold) throughout the world by or on behalf of the Government of the United States.

So under the IPA program, the standard is that the federal government receives a license on behalf of itself, its agencies, states, and municipal governments.

But now look at what happens in Bayh-Dole. Same person drafts Bayh-Dole as drafts the IPA, so we’re not looking at people who don’t understand what’s going on. Here’s the Congressional statement of policy and objective on the matter (35 USC 200):

to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions

That’s a different sort of statement regarding scope. The scope is defined to be “sufficient” rather than general–and “sufficient” with regard only to “the needs of the Government” and to “protect the public against nonuse or unreasonable use.” That is, the scope here is of the form of “no more than is needed” for these two purposes, and not a general form license that relieves the federal government (and the rest) of any claims of infringement in the primary rights of the patent obtained by the contractor. That appears to be a huge change.

Here’s how it then plays out in 35 USC 202(c)(4):

the Federal agency shall have a nonexclusive, nontransferrable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world

The license is restricted now to the federal agency on the other side of the federal funding agreement. The license retains the phrase “practice or have practiced,” but now without any definitional guidance. It’s the same phrase as we find in the Kennedy patent policy and in the IPA, but now without the explanations that the scope applies to a range of governments–federal, state, and municipal–and to all the primary rights of invention–make, use, and sell, plus the “have” combinations.

Here’s how the license plays out in the standard patent rights clause (37 CFR 401.14(a)(b)):

With respect to any subject invention in which the Contractor retains title, the Federal government shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world.

About the same, with “any” replaced by “the.” Unlike the IPA program, however, there is no template license that lays out the particulars–all patents in the family, all forms of government, all principal rights of the invention.

The question arises, then: what’s the scope of the government license required by Bayh-Dole? Because the license requirement itself arises within a federal funding agreement, we must follow things out–what is the mutual understanding of the standard patent rights clause in the funding agreement? What would the contractor and federal agency reasonable have agreed upon? And that’s not the end of it, because the license itself is of the form of a unilateral contract (as it is in the IPA template)–what is it that the contractor intends to grant, and is that grant compliant with the requirements of the standard patent rights clause? Clearly, if the federal agency accepts the license (or at least does not challenge it), then what guides our interpretation of the words?

Bayh-Dole retains the wording from the definition of “to the point of practical application” but changes the sense of the definition by making it “practical application”–that is, the definition now appears to follow the general concept of “use” rather than actions necessary to meet a condition beyond use–manufacturing, say.

But there’s no other statements with regard to the definition of the Government. It appears from Bayh-Dole that the government license is restricted to the federal agency that provides the funding. But the standard patent rights clause ignores the statute and expands to “the Federal government.” But “the Federal government” is clearly not the same thing as the “Government of the United States” from the Kennedy patent policy and the IPA. It appears, rather, to be more like the Government in the Nixon patent policy.

Compare.

Kennedy and IPA:

the Government of the United States (including any agency thereof, state, or domestic municipal government)

Nixon:

the Government of the United States (including any Government agency) and States and domestic municipal governments

Bayh-Dole

the Federal government

In the Kennedy and IPA versions, the Government includes state and municipal governments. In the Nixon version, the Government includes federal agencies, but states and municipal governments are distinct from the “Government.” In Bayh-Dole, all we have is “the Federal government.” There’s no reference to federal agencies, though Bayh-Dole includes a definition of federal agency–“any executive agency as defined in section 105 of title 5, and the military departments as defined by section 102 of title 5.”

5 USC 105 has this to say about executive agency:

an Executive department, a Government corporation, and an independent establishment.

Each of these elements gets is own definition. 5 USC 101 lists “Executive departments.” 5 USC 102 gives the “military departments”–Army, Navy, Air Force. No, no “Marines.”

5 USC 103 defines a “Government corporation”:

a corporation owned or controlled by the Government of the United States

There are a number of such corporations.

5 USC 104 has this to say about “independent establishment”

(1) an establishment in the executive branch (other than the United States Postal Service or the Postal Regulatory Commission) which is not an Executive department, military department, Government corporation, or part thereof, or part of an independent establishment; and

(2) the Government Accountability Office.

Apparently the USPS isn’t within the scope of the Government license in Bayh-Dole. But Amtrak is. Who would have thought?

The scope of a license to the “Federal government” would appear to include at least the “Federal agencies” defined by Bayh-Dole. But does the license grant also include states and municipal governments? For a crucial provision drafted by the federal government for its purposes, the non-exclusive license to the government in Bayh-Dole is vague to the point of malpractice, where it drafted by an attorney in the service of a company. Bayh-Dole repeats verbatim elements from the Kennedy patent policy, such as the definition of “practical application.” Why not specify the government’s rights with the same clarity and scope as we find in the Kennedy and Nixon patent policies as well as in the IPA.

If there is a need to “clarify” the implementing regulations to Bayh-Dole (as NIST contemplates doing), then here’s what’s needed. Insert into the license requirement at 37 CFR 401.14(a)(b) the following:

 With respect to any subject invention in which the Contractor retains title, the Federal government  Government of the United States (including any agency, state, or domestic municipal government) shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced (made or have made, used or have used, sold or have sold) for or on behalf of the Government of the United States the subject invention throughout the world.

This clarification works within the authority of Bayh-Dole. The provision at 35 USC 202(b) stipulates that Federal agency “shall have” a license:

the Federal agency shall have a . . . license to practice or have practiced for or on behalf of the United States any subject invention throughout the world

“Federal agencies” are the agencies that can create funding agreements that must carry the standard patent rights clause. But these Federal agencies obtain a license (“shall have”) that is government-wide and invention-wide. The license is not just to permit a single federal agency–the one that provided the funding–to practice the invention. Any part of the “United States” participates in the license. The “United States” is not just the “Federal agency” nor even just the “Federal government”–it is the “United States.” That means at least the constituent states of the union are included in the Bayh-Dole required government license. Making express this scope reduces the likelihood of confusion.

The standard patent rights clause replaces “Federal agency” with “Federal government.” The difference is that in Bayh-Dole, the government obtains the benefit of the license, but in the standard patent rights clause–part of a federal funding agreement between a federal agency and a contractor–it is the federal agency that “shall have” the license on behalf of the “Federal government.” The “Federal government,” in turn, may practice or have practiced “for or on behalf of” the United States–that is, the federal government, the states, and domestic municipal governments–just what the Kennedy and Nixon patent policies provided for, what the IPA program provided for.

A similar argument pertains to “practice and have practiced.” It is clear there are the general phrases to describe “made and have made, used and have used, sold and have sold.” So let’s add those back in expressly, to make it clear that these rights are all caught up in “practice and have practiced.”

Now we get to the stunning news. Under the government license required by Bayh-Dole and the standard patent rights clause–even as things stand now–the Government has a right to practice and have practiced any subject invention on behalf of the United States.

Practice means “make, use, sell” and “have made, have used, have sold.” The federal government and any state government has this right of practice. It does not depend on march-in procedures. It is an outright grant, a fundamental condition of permitting contractors to retain rights in subject inventions. That means that the federal government can make and sell drugs based on subject inventions, the federal government can create corporations or control corporations for this purpose, and any state may also do the same. Thus, if we want to get at the high prices for patented medicines that are subject inventions, the place to start is with the government-purpose license. It’s broad, its unconditional, and it includes the rights to make and sell, and to contract out for these services to be provided to the government by others. No march-in needed, no negotiation of drug prices needed. Just get on with it.

There’s one thing about non-exclusive licenses. Unpracticed, they make the rights of the licensor a monopoly–not by function of the patent law, but by failure of the licensee to take up and use the rights that have been granted. We might argue that the beneficiaries of government purpose licenses have an obligation to use those rights when doing so will serve the public interest–even if that service might interfere with the profits anticipated by commercial concerns or university patent brokers. If the point of federal research to address matters of public interest is to get inventions into use with public benefits on reasonable terms, and the various federal and state governments have the unconditional right to do so, then it would appear that there’s an obligation for them to practice and have practiced every subject invention within their areas of responsibility. Innovation might start, then, with the government that has contracted for it. Bayh-Dole does not merely permit a government license, it requires it. And if the Congressional intent–the policy and objectives–is that subject inventions get used, then that use is incumbent not merely on the contractor, not merely on any assignee or exclusive licensee, but also on the government as a special licensee of all the principal rights of each subject invention.

We might state, generally, that Bayh-Dole obligates the federal and state governments to practice subject inventions when doing so is within their mandate to address matters of public welfare. That means making, using, and selling products as necessary.  The private sector may deliver similar goods, but only if in doing so they meet requirements for both availability and reasonable terms. The march-in procedures involve the failure of a contractor or assignee or exclusive licensee to meet certain terms. But the grant to the government has no such limitations. Time to get on with it.

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