Royalty-free exclusive licenses under Bayh-Dole?

A question popped up in my WordPress dashboard as a search query–“Is it ok to grant an exclusive royalty-free license under Bayh-Dole?” I thought I’d give an answer.


There’s a bit of a problem, though. Bayh-Dole is a law regarding federal contracting placed in federal patent law. Bayh-Dole dictates what a federal agency must use as a patent rights clause in each federal funding agreement for research, unless the agency can show a reason to use a different clause. So our question becomes whether the standard patent rights clause at 37 CFR 401.14(a) has any restrictions on exclusive licensing.

There are indeed restrictions, but none of them prohibits a royalty-free exclusive license, as long as “royalty” means money. But if “royalty” means “consideration” for a license, then we may have a problem. Here’s the one restriction on exclusive licensing (37 CFR 401.14(a)(i):

Notwithstanding any other provision of this clause, the contractor agrees that neither it nor any assignee will grant to any person the exclusive right to use or sell any subject inventions in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.

An exclusive license to use or sell must require the licensee to make product in the United States. Note that the “manufactured” is not equivalent to the “make” in “make, use, and sell” from the rights of a patent owner. The requirement here is broader–whether or not the product itself is within the scope of the patent on the subject invention, if a product can be “produced through the use” of the invention and then must be “manufactured” to become a product (such as producing a compound using a patented method, and then manufacturing that compound into a product for sale), that subsequent step of manufacturing must be done in the U.S., even if the manufacturing step does not infringe the posi, the patent on the subject invention.

The requirement on the subject invention exclusive licensing, then, requires an agreement by the licensee. Is that agreement part of the “consideration” for the license? Or is it merely a “tie” that’s required by the federal government through its contracting (and not by law, directly), and the posi owner merely complies with the patent rights clause and passes the requirement along? It would appear, based on how the requirement is worded, that this U.S. manufacturing agreement is indeed part of the “consideration” for an exclusive license. This requirement can be waived by the federal government (as most of the clauses in the patent rights agreement are designed so that the federal government does not have to enforce them–they are there for show, to give the impression that something is being done to protect the public interest, but really nothing is required, as is the case for failure to report subject inventions, for failure to pursue patenting, for assignment by nonprofits, for invention use reporting, for march-in, for small business preferences, for use of royalties and other invention-related income by nonprofits).

Bayh-Dole tells federal agencies what they have to include by way of a patent clause in a federal contract, but does not require that federal agencies enforce one lick of it with regard to what a contractor actually does with subject inventions. In this way, Bayh-Dole is worse than the Kennedy executive branch patent policy, which directed agencies to do things unless the public interest indicated otherwise. By contrast, Bayh-Dole directs federal agencies to things even if the public interest would indicate otherwise, and does not direct federal agencies to enforce the terms of the contracts the agencies are required to use.

There is one more element to your question. For a contract to be binding, it must have consideration in addition to offer and acceptance. A license can be granted and not be a contract–that is, a patent owner can offer to permit a given use of an invention, and even offer to make that use exclusive, and a “licensee” can accept that offer. But offer and acceptance does not make the offer binding and enforceable. It’s like offering to meet someone for lunch. The someone says, “sure, let’s meet.” You don’t show up. So sorry–but there was no consideration for the offer. It’s not a contract. Not enforceable. No consideration in an exclusive license means the offerer can change its “mind” so to speak (even though institutions don’t technically have minds, just executives who change *their* minds and attribute the change to the fickle, fictional institutional mind). Courts have called a “royalty” any consideration for a patent license. A royalty need not be in the form of money. (In an early sense of the term, a “royalty” was a share of the gold or silver ore or smelted silver from a mine controlled by the monarch–not money, but metal.) So agreeing to manufacture in the U.S. could be construed as consideration and therefore could make an exclusive license to use or sell binding, even if the licensee does not have to also pay a royalty based on sales.

Of course, Bayh-Dole has nothing to say about exclusive licenses to “make” under a patent on a subject invention. One could offer an exclusive license to “make” royalty free and not have to also obtain agreement with regard to manufacturing in the U.S. So if one wanted, one could offer such a license, and it might be accepted by someone who isn’t worried that the arrangement doesn’t form a proper contract. One could object to a later action by the patent owner to grant rights to others (or to acquiesce in others’ use of the invention) by claiming reliance on the offer. Maybe that would work, but mostly if the patent owner tried to withdraw the offer, and less likely in whether the offer was really exclusive. Maybe there would be “damages” for the failure of reliance. Seems sketchy to me, but then everything is sketchy in its way until a court makes a determination. It’s rather like baseball–is a runner safe or out? It doesn’t much matter what we think we see or what we want–what matters is what the umpire calls (or what the umpire calls after the endless video review by the umpires of umpiring–the appeals courts, as it were).

So there is a limited way under Bayh-Dole to grant a royalty-free exclusive license–make it an exclusive license to “make” stuff. An exclusive license to “use” or to “sell” can be royalty-free, as well, so long as the agreement to substantially manufacture product in the U.S. is not construed as consideration, as a royalty for the license. I think, though, based on how the requirement is constructed in the standard patent rights clause, that U.S. manufacturing is consideration for an exclusive license, and is, technically, a “royalty.”

One more thing, since you have gotten this far. Why would anyone want to grant a royalty-free exclusive license? It hurts the heads of folks who think that a patent is the key to wealth, or at least to making people with wealth pay, or at least having fun (and a livelihood) rigging things to make it easier to make they pay if it ever comes to that).

One might grant a royalty-free (i.e., no money owed) exclusive license because a patent owner wants something done without a requirement for payment. A royalty-free exclusive license might involve making and selling a product in a territory that economically disadvantaged, where the licensee might itself be intending to sell the product at cost, or even to distribute the product for free. So, for a public purpose. The consideration for the license would then be the doing that is enabled by the license.

Broadening out, a patent owner might grant an exclusive license without royalty in any situation in which the exclusive licensee, by diligently working the invention, creates a situation favorable to the patent owner. Making the license royalty-free would indicate that the patent owner has no profit motive in the granting of the license, even if the patent owner might profit in some way by the circumstances that arise when the licensee exploits the patent–maybe the patent owner benefits from offering services that follow the sale of the patented product.

Or, a patent owner might grant an exclusive license royalty-free license because the patent owner has an equity stake in the licensee, and the purpose of the license is to keep cash in the licensee and focus the value proposition on share value. If the value of shares scales as a multiple of net income, then equity is way better than cash payment of a royalty on sales.

Still, it all seems a stretch. I haven’t seen an exclusive, royalty-free license in the wild.


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