Bayh-Dole Secrecy, Part 6

Bayh-Dole makes information regarding the use of subject inventions a government secret. It does this in a roundabout way by requiring federal agencies to treat those reports as confidential and as the sort of information that is exempt from FOIA disclosure and on top of that requires federal agencies to agree in each funding agreement not to disclose this information, at least to the extent required by Bayh-Dole.

All this secrecy apparatus is silly. Bayh-Dole could have just specified that invention use reports are not to be publicly disclosed. Bayh-Dole does just this for reports of subject inventions and patent applications in 35 USC 205. It’s no big deal to do. Bayh-Dole could just as easily have included invention use reports there in 35 USC 205, or could have stated simply and clearly at 35 USC 202(c)(5):

Provided, That any such information shall not be disclosed by the Federal agency.

One way to read the silly secrecy apparatus is of course just this way–that all that language and layers of requirements with their inconsistencies and uselessnesses just amount to this simple clear statement. I’m sure many people do read things this way. Another way to read this apparatus, however, is that the intent of Congress was not this simple clear way and the apparatus is evidence of a different intent–if Congress had wanted to write something simple and clear, Congress surely had the capacity to do so. Well, surely may be a bit much. 

In this alternative reading, Congress intends that report information that is indeed exempt from FOIA will not be disclosed, but that other report information may be disclosed. The change from “may” to “shall” reflects a concern that federal agencies should not have any discretion in the matter. Information that is exempt from FOIA disclosure might yet be subject to disclosure as an agency decides. The effort, then, is to make information stick under FOIA’s (b)(4) exemption and for that information remove any doubt as to an agency’s discretion regarding disclosure.

There is a further alternative reading, one I happen to favor, that argues that this whole apparatus is constructed to make it appear that Bayh-Dole forbids disclosure of invention use information as one more way to prevent public oversight of the exploitation of patents on subject inventions by universities and other nonprofits and by the exclusive licensees (often assignees) of patent rights in subject inventions. The reason for the appearance is that it is politically expedient to do by indirection and via slipping things into the implementing regulations what one could not do openly and directly.

Would Congress have passed Bayh-Dole if things had been stated clearly?

It is the policy and objective of Congress that nonprofit organizations should, for inventions made with federal support:

  • strip inventors of their common law rights in inventions;
  • ignore investigators and inventors with regard to how to use these inventions to advance science and the public interest;
  • obtain patents to diminish the public domain, create patent gridlock, and stifle competition;
  • attempt to convey monopoly rights to favored companies, especially those involved in medicine;
  • share in the profits derived from monopoly pricing; and
  • use those profits without publicly accounting for that use.

with the provisio that it is acceptable if only 1 in 200 such inventions ever come into commercial use and the rest are held for possible litigation if industry, without the need for exclusive rights in order to invest the time and effort to use an invention, were to do so without without first paying for a license;

all on the condition that

information obtained by the federal government pertaining to the use of such inventions by nonprofits and their monopoly partners must be a government secret.

That’s what we have got. Yeah, I’ve put it bluntly. But there it is. Is it what Congress intends? Perhaps, if Congress doesn’t move to change things. Of course, if Congress has locked the door and thrown away the keys, then the Bayh-Dole in our brain isn’t the Bayh-Dole Congress thinks it created. If we can’t see what is going on, then Bayh-Dole is a do WTF you want law, and is a recipe for corruption. Hard to see that as “inspired” legislation, unless of course corruption is inspiring.

I know it’s been a long haul, but let’s come back around to FOIA and take a look at the status of the (b)(4) exemption, the one that Bayh-Dole dances around in 35 USC 202(c)(5) as amended. Here’s 35 USC 202(c)(5):

(c) Each funding agreement with a small business firm or nonprofit organization shall contain appropriate provisions to effectuate the following:…

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:

Provided, That any such information as well as any information on utilization or efforts at obtaining utilization obtained as part of a proceeding under section 203 of this chapter shall be treated by the Federal agency as commercial and financial information obtained from a person and privileged and confidential and not subject to disclosure under section 552 of title 5.

Here’s (b)(4):

(b)This section does not apply to matters that are—…

(4) trade secrets and commercial or financial information obtained from a person and privileged or confidential;

The language is similar, but in typical Bayh-Dole fashion, skew, creating ambiguities in interpretation that can then be exploited in creating the implementing regulations. One set of ambiguities for the law makers to adopt, so they will pass the bill into law, and another set of ambiguities for the patent brokers to bake into the regulations and standard patent rights clause, to back their desired pattern of dealing. University patent administrators use this same strategy in writing patent policies–create novel definitions, fail to cite the law accurately, assert the apparatus is a contract, designate the university as the authoritative interpreter of the contract, and let the university tell people what it means by its policy whenever the occasion arises.

University patent administrators tried the same thing in the Stanford v Roche situation, except the Supreme Court ignored the ploy and interpreted the law on its terms and with an effort to make the wordings throughout mean something reasonable and consistent (both internally and with standing law and precedent). Although the Supreme Court rejected the university claim that Bayh-Dole was some sort of vesting statute, the university administrators didn’t give up the method. The same approach is being used now to persuade NIST to turn the (f)(2) written agreement requirement from a delegation of duties and rights into a classic patent assignment clause, even though there is no authority in Bayh-Dole for such a thing and the Supreme Court ruled that Bayh-Dole did not disturb common law on this point. We find the same kind of ambiguity at work, as well, with the secrecy requirements and with any number of other provisions in Bayh-Dole. Call it the rule of law to permit the rule of patent brokers.

With this in mind, let’s take a look at FOIA’s (b)(4) exemption. FOIA came into effect in 1967. The Department of Justice has published periodic commentaries on FOIA that summarize legal decisions and provide guidance for federal agency practices. I can’t begin to get at all the nuances here, but perhaps a broad brush will suffice. Exemption (b)(4) has gone through a series of interpretations by the courts and the executive branch. The primary issue has concerned what constitutes “confidential” information. According to the DOJ, early practice assumed that information was confidential if

(i) the government promised confidentiality or
(ii) the information was of a kind not generally made public

This practice was displaced by the 1974 case National Parks & Conservation Association v Morton. In this case, the court set out two tests (and suggested a third). Release of the information would:

(i) impair the government in obtaining such information in the future or
(ii) cause harm to the competitive position of the submitter

These tests are known as the “impairment prong” and the “competitive harm” prong. A later case, Critical Mass Energy Project v NRC, in 1992 restricted the National Parks two-prong test to only those situations in which the submitted information was required. For information submitted to the government voluntarily, the Critical Mass court set out a new standard, that information was “confidential” for (b)(4) if it was of the form customarily not disclosed to the public. The burden was on the federal agency possessing the information to demonstrate that the information requested under FOIA was of this nature–the burden was not with either the requester of the information or the submitter of the information. The court also argued that federal agencies did not have an obligation to so conduct their affairs as to maximize the amount of information made available under FOIA. If they chose, they could conduct their affairs to minimize their exposure to FOIA by taking advantage of exceptions such as those in (b)(4).

There is then a set of basic issues pertaining to information in the form of reports of invention use: first, is the information required or provided voluntarily. Second, if the information is required, then if it is released, will it impair the government in obtaining such information in the future or cause harm to the competitive position of the submitter?And, of course, in all of this we must remember that (b)(4)’s exemption depends as well on the information being properly “commercial” or “financial” in nature.

With regards to “competitive harm,” we find that the likelihood of harm must be “substantial,” suggesting some sort of weighing of public disclosure and harm. We also find that the purpose of disclosure is not relevant–that is, that the public might benefit from the disclosure. Courts have found competitive harm may result from release of detailed financial information, actual costs, profits, labor costs, selling prices, shipping names, market share, volume of sales, unannounced and future products, raw research data to support applications for new drugs. As one court ruled:

other than in a monopoly situation, anything that undermines a supplier’s relationship with its customers must necessarily aid its competitors.

The DOJ materials identifies only one case that gets close to university licensing situations, Public Citizens Health Research Group v NIH (2002). There, the requester sought

1) NIH revenues from royalties based on NIH inventions for both intramural and Cooperative Research and Development Agreement (“CRADA”) research, and 2) records concerning the percentage of sales that NIH received as royalties, both for the period of 1996-1998.

The requests also involved more detailed information concerning each invention licensed. Johnson & Johnson intervened to object to release of this information by the government. The NIH argued for impairment:

Defendant argues that the release of this information would substantially impair the competitive position of the licensees and would impair the effectiveness of the licensing program.

The court then looked to the Federal Technology Transfer Act, which we cited in a previous article:

No trade secrets or commercial or financial information that is privileged or confidential, under the meaning of section 552(b)(4) of Title 5, which is obtained in the conduct of research or as a result of activities under this chapter from a non-Federal party participating in a cooperative research and development agreement shall be disclosed.

The court found that this requirement, which involves a (b)(3) exemption based on statute depends on how (b)(4) is interpreted. This is the same situation we find for Bayh-Dole, except as I have shown at length, and to the disadvantage of the horse’s carcass, Bayh-Dole does not out and require non-disclosure, but instead requires agencies to treat information as “commercial and financial” and as “privileged and confidential” and as exempt under FOIA. Treating information in this way is not the same thing as a requirement not to disclose it. While an agency has no apparent discretion with regard to “treating,” there appears to be substantial uncertainty regarding the difference between “treating” information and not disclosing that information. By “treating” information, can an agency make that information “commercial”? “confidential”? Answer, maybe not. The problem arises in large part because the change from “may” to “shall” left the rest of the “may” language intact–where it made reasonably good sense (at least for Bayh-Dole drafting standards).

With the substitution of “shall,” however, things fall apart so much that it isn’t even clear what Congress intended by making the change. Sure, one can come up with arguments, but that is just the point–nothing is clear, other than that the change appears to direct federal agencies where before they apparently had discretion and were permitted to do things that with the change are required. It’s just that it is not clear what those things are. One can jump to the idea that those things are to exempt information from FOIA, but that requires compliance with FOIA and not just making things up about the nature of the information obtained. Or one can argue that the change was to make clear that if information met a FOIA exemption, then the federal agency was required not to disclose (and yet the law doesn’t come out and say even that–just that the information is to be exempt from FOIA, which, well, is the law anyway). A court has authority to decide these things, but a court won’t act without a case and jurisdiction. Thus, law advances only when people disagree, and then the advance depends on the cleverness of the arguments and the competence and adventuresomeness of the court. The rest of us wait and whistle, as it were.

The court then works through (b)(4).

The terms “commercial” and “financial” should be given their ordinary meaning, and records are “commercial” if the submitting party has a commercial interest in them.

So licensees have a commercial interest in the terms of a patent license and in the money they have paid for that license.

Even though the final royalty rate is arrived at through negotiation, Freire Decl. ¶ 12, this does not alter the fact that the licensee is the ultimate source of this information.

And information developed in negotiation is considered “obtained from a person” and so meets that aspect of the (b)(4) exemption. The court then turns to whether the information is “confidential.” The court finds that the information in the license is “required,” since no license will be issued if the licensor submits no information, and thus the two-prong test of National Parks come into play.

From there, the court finds that release of the requested information would cause competitive harm because the director of the NIH’s technology transfer office says it would, citing her experience and letters from various NIH licensees. This part of the case is rather odd. While it’s clear that companies don’t want to reveal what they pay in royalties, it’s not clear how this information becoming public is likely to cause competitive harm. No amount of insisting that it likely will rises to the level of evidence–though obviously a court says that insisting is evidence if it comes from someone with better credentials than someone insisting that it isn’t evidence.

The deeper problem is that of the mechanics of a licensing program. If the license to the patent is exclusive, then there is no immediate competition and we have a “monopoly situation.” Maybe some competitor might pitch a higher royalty rate for a future NIH invention and thereby beat out a potential licensee whose past payment practice has been disclosed–but first one has to believe that there might be actual bidding for an exclusive license to an invention. In my experience, this almost, nearly never happens. Of course, we will have to compare my credentials with yours (assuming your experience differs) before we can expect a court to decide who is right. Silly us. But no matter, the NIH in this case admitted as much:

However, for most technologies the market operates with only one interested participant. The vast majority of NIH inventions require active marketing by the OTT and it is often the case that the OTT has but one firm interested in licensing a specific technology.

The NIH reported that for the “fiscal year” 2000, 43 out of 45 exclusive licenses “had no competition.” We get here, too, some interesting use data:

In 2000, NIH had “approximately 2000” inventions “available for licensing.” 45 were licensed exclusively. 253 “applications” for non-exclusive licenses, with only 31 inventions licensed to more than one “applicant.” So the count of non-exclusive licensing could be anywhere from 32 (with one “application” for one invention and multiple for the other 32) to 253 less 31 or 222 inventions (at least 31 had more than one “application” and thus at least 62 applications must go to 31 inventions, leaving at most 222 other inventions–and likely much fewer as some non-exclusive license programs must have involved more than just two licenses). We can’t get a rate of commercialization for any given year’s worth of inventions, but the overall rate leading to commercial products would appear to be 45 of 2000, or 0.2%, or, being as expansive as possible with non-exclusive licenses, 13% max, and likely more like 5%–and these are just licensing rates, not the rates at which commercial products reach the market.

The court concludes

Thus, it is beyond dispute, that, for the majority of NIH technologies there is only one (and sometimes zero) firms interested in obtaining a license.

What’s odd then is the implicit conclusion that because only a single company or no company at all is interested, the license offered must be exclusive. The idea is that because a given invention is so unattractive, the only (best, first, primary, default) way to get companies interested is to offer a monopoly deal. That’s the logic. There is no consideration to the idea that many of the inventions are inherently uninteresting to companies, or to the idea that many of the inventions are only parts of greater wholes and an exclusive position works against those wholes, or to the idea that the inventions would be much more desirable if licensed for a simple fee rather than an invasive claim on sales or other business activity. One might observe that the withholding of information regarding the government’s terms on offer–with the expectation that these terms are uncertain, subject to government running up the price if there’s a hint of “value,” might be the single most limiting factor in the lack of licensing activities for a research portfolio.

If, by contrast, the license is non-exclusive, then the issue in public disclosure is whether different licensees have negotiated different rates for the same invention. If the scope of rights is the same and the structure of the deal the same, then–wow–we have a discriminatory licensing practice going on, and no doubt there would be some hot collars–but among the companies getting the rawer deal. The question that arises is whether a government agency should be in the business of discriminatory licensing practices, and whether confidentiality then is just a cover for favoritism. While an agency’s behavior has nothing to do with what constitutes a (b)(4) exemption, it does suggest a federal audit. That is, if a federal agency does not announce the basic terms for a non-exclusive license to a given invention, then we might start with a presumption of favoritism and question whether the “competition” among licensees is at all “fair.” If one’s competitive advantage involves, shall we call it, influence peddling and the like, how far should a court go in turning a blind eye to it? I suppose that depends on how adverturesome the court happens to feel.

The court looks at various arguments advanced on the idea that a royalty rate alone cannot reveal much at all about a company’s financial particulars, but the court rejects these on the basis, essentially, of the preponderance of credentialed witnesses. Given that a royalty rate is often not the only form of consideration for a license, it’s difficult to understand how a royalty rate–especially those for pharma–could possibly be used to get at underlying financials. Given, too, that (in my experience), university licensing royalty rates for pharma were almost always in the 0.5% to 2% range, that one company paid 1% for an exclusive license and another 1.25% tells one next to nothing. What were the upfront fees? the milestone payments? the stock or warrants? the sublicensing deal? the research funding? the grant backs? the indemnification and insurance? the reimbursements for patenting costs? the royalty buy-down? the diligence? the socially responsible terms? The royalty rate, as bare information, tells next to nothing. But when technology licensing officers testify, they can bend reality most any way they wish–especially if they have credentials.

The court thus rules that royalty rate information comes within the (b)(4) exemption on the competitive harm prong:

As a result, this Court concludes that the release of negotiated royalty terms of contracts for both CRADA and intramural research would cause substantial competitive harm to submitting companies, and are therefore exempt from disclosure under exemption 4 of the Freedom of Information Act. Simply put, the Court finds that there is actual competition present and that there is the substantial likelihood of competitive harm if the withheld information was to be released.

The court then goes on to consider the impairment prong–that the government would be impaired in obtaining this information in the future if it were subject to public disclosure.

Essentially, Defendant contends that its ability to fulfill its statutory mandate under the Bayh-Dole Act would be seriously deterred by the release of the royalty information to Plaintiff.

The court considers this proposition, finds that program effectiveness is a legitimate concern under the impairment prong, and after a brief pause to dismiss arguments otherwise, concludes that

if the royalty information were disclosed, the effectiveness of Defendant’s licensing program would be impaired.

Citing such statements from NIH as

“it would seriously impair OTT in carrying out its public health responsibilities, since NIH would cease to be an attractive or viable licensor of patented technology.”


“licensees will not negotiate with NIH without an expectation that the financial terms of the licenses will remain confidential.”

These assertions may well be true, but only in the context of exclusive licenses (that is, monopoly situations) and non-exclusive licenses that played favorites and thus were discriminatory. In the case of exclusive licenses, the matter is one of monopoly, which changes the nature of any competitive analysis. In the case of non-exclusive licenses, the competitive harm experienced by a favored licensee would be that of having to compete fairly rather than with the advantage of a government agency choosing a favorite on the basis of willingness to pay (or any other strange basis for favoritism).

Behind all of this then is the premise that a monopoly licensing program is essential for the NIH to “carry out its public health responsibilities.” This part is nonsense. The NIH could license non-exclusively on FRAND terms and reveal those terms publicly as an essential part of its practice. Companies that took the deal would know that this was the same deal taken by others. There would be no competitive harm in having that information, because whatever the underlying financial practices for any given company, those financial practices would be independent of any negotiation with the government. Stuff would stay in Las Vegas, so to speak. And if the royalty rate was 0%, or was not based on sales at all–an annual fee of $1,000, say–then no information about the underlying business model would be discernible from the fact of such payments.

Even in the case of an exclusive license, royalties do not have to be based on sales. An annual fee, a fee based on diligence and milestones, a fee based on publicly announced figures. Any of these strategies could support an exclusive relationship that did not have to be kept secret in order to exist.

Of course, the federal government has no immediate need for royalty income from licenses anyway. The money is tiny compared to federal budgets, and as far as I know, the money doesn’t even stick with the NIH but goes to Treasury, where it forms a dewdrop on a flower overhanging the ocean. Back in the days of the Kennedy executive branch patent policy, the government had no profit motive in dealing in patents. Its established purpose was the public welfare, not its own income from posturing to serve that welfare. The government also had no mandate to play favorites, and choose one company over others to hold a monopoly–not for pricing, not for competing with others for government contracts, and not for becoming a monster with regard to other companies who for whatever reason were not the government’s pet in the moment.

One might even wonder what the NIH’s conflict of interest is in both conducting continuing research on a compound (or choosing not to) and having a stake in the fortunes of a company seeking multi-billion dollar annual profits from that compound based on a monopoly position. The money might not matter to the government, but the visibility of the deal might well be used to promote the idea of monopoly-based government licensing.

One might then argue that public disclosure of royalty rate information would not impair anything more than the ability of the government to form secretive, discriminatory monopoly deals based on sales. 

Far from “impairing” a government program, public disclosure might improve that program, and even tend to “de-corrupt” it. But of course taking the discussion this direction goes deep into the heart of Bayh-Dole assumptions–that the government failed to create monopolies that gave speculators that required monopolies an advantage over all other ways of using or developing technology for use or making products, and that Bayh-Dole decreed as law of the land (in Bayh-Dole’s implicit, never actually stated way) that no federally supported invention should reach public use without first becoming a monopoly offered by bureaucrats to a favored company and its speculating investors. The secrecy provisions in Bayh-Dole (and the National Technology Transfer Act) are conveniently broad enough to ensure that this approach–of institutionally created monopolies–operates in the dark.

Here’s the conclusion of the court:

The Court concludes that in balancing the public interest in disclosure against the private interest in withholding information, the private interest prevails.

That, then, is also the bedrock foundation of the Bayh-Dole Act, supported by the secrecy provisions. The same theme echoes throughout the provisions of the Act. Anywhere there is the prospect of a public interest–whether in disclosure, benefits on reasonable terms, preference for small business, U.S. manufacture, approval for assignment, protections against non-use, and secrecy–Bayh-Dole and its implementing regulations take the side of the private interest prevailing. This is the “inspired” part of Bayh-Dole, that the role of public institutions is to safeguard monopoly private interests against the public spiritedness and initiative of faculty inventors (the inventor-loathing part) and to negotiate a share of speculative money and in a handful of cases a 1%  or so share of profits from monopoly-priced products among the institution, its hapless inventors. This share, kept secret, is the crumb of public interest in Bayh-Dole, and the majority of that share, on a daily basis, goes to the livelihoods of the patent administrators (I almost wrote bureauklepts) that keep the monopoly licensing program alive and insist that it is identical with serving the public interest. In the most wonderfully apt way of soylent green, monopoly licensing programs done in the dark do serve the public interest… to the private monopolist.

What remains is for public policy to openly endorse this premise, since in practice that is what has happened. What public policy does not contest, is public policy.

This is a study in ten parts. Here are the links.

1 1984 amendment from “may” to “shall”; roots of reporting in IPA

2 Bayh-Dole’s focus on use; regulations on reporting

3 1984 amendment in detail; connection between reporting and march-in

4 FOIA 552(b) and Bayh-Dole 202(c)(5)

5 37 CFR 401.8; Bayh-Dole circumvents FOIA

6 FOIA 552(b)(4); Public Citizen v NIH

7 18 USC 1905; Kennedy patent policy march-in; Bayh-Dole march-in

8 Comptroller General reporting; federal agency licensing 209(d) and secrecy 

9 Open access records case; distinguishing sensitive info; royalty reporting

10 Public enterprise or scam? public reporting essential; puffery

This entry was posted in Bayh-Dole and tagged , , . Bookmark the permalink.