The story so far: Bayh-Dole’s secrecy provision regarding reports of invention use was changed in 1984 to make it appear that federal agencies had no discretion in the matter, and that they “shall” treat all information in invention use reports as “commercial and financial” information and as “privileged and confidential” and as exempt from FOIA disclosure. In turn, the implementing regulations impose an additional requirement, that agencies agree not to disclose this information “outside of the agency” or “outside of government” unless with the contractor’s permission (meaning, the contractor must be consulted before any such disclosure by the government–even if information in the report is otherwise public).
Having beaten this matter beyond death, we looked at FOIA in more detail and in particular the exemption at (b)(4), which Bayh-Dole’s amended secrecy provision depends upon, and at the court’s reasoning in the Public Citizen case from 2002, involving a request under FOIA to release NIH royalty rate and income information. The court there found that the requested information was exempt under (b)(4), both because release would cause substantial competitive harm and because release would impair the government’s licensing program. The court found–and I argue expressed a general truth regarding Bayh-Dole, not just with invention use reports but with all matters of public oversight–that “in balancing the public interest in disclosure against the private interest in withholding information, the private interest prevails.”
The Department of Justice, in discussing FOIA’s exemption (b)(4), considers the issue of whether information that is exempt from FOIA is still available to be disclosed by the government. Just because FOIA does not require disclosure, can the government then disclose the information anyway, on its own time, so to speak? Here, things gather some interest. We turn to the federal Trade Secrets Act, 18 USC 1905. As the DOJ puts it, the Trade Secret Act
prohibits the disclosure of much more than simply “trade secret” information and instead prohibits the unauthorized disclosure of all data protected by Exemption 4 . . . . Indeed, the Court of Appeals for the District of Columbia Circuit and nearly every court that has considered the issue has found the Trade Secrets Act and Exemption 4 to be “coextensive.” Thus, the D.C. Circuit held that if information falls within the scope of Exemption 4, it also falls within the scope of the Trade Secrets Act.
18 USC 1905 is a single big, long, hairy sentence. You can read it, but here’s an abridged and reformatted version:
Whoever, being an officer or employee of the United States or of any department or agency thereof . . . makes known in any manner or to any extent not authorized by law any information coming to him . . . ,
which information concerns or relates to the trade secrets, processes, operations, style of work, or apparatus, or to the identity, confidential statistical data, amount or source of any income, profits, losses, or expenditures of any person, firm, partnership, corporation, or association;
or permits any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law;
shall be fined under this title, or imprisoned not more than one year, or both; and shall be removed from office or employment.
Basically, this is FOIA upside down, or “reverse FOIA.” If law does not authorize the release, and the information “concerns or relates to trade secrets” and a bunch of other things that aren’t trade secrets–then the government officer or employee shall be discharged and disciplined. In a note, the DOJ cites a court ruling on the matter:
the Trade Secrets Act “appears to cover practically any commercial or financial data collected by any federal employee from any source” and that the “comprehensive catalogue of items” listed in the Act “accomplishes essentially the same thing as if it had simply referred to ‘all officially collected commercial information’ or ‘all business and financial data received'”
Thus, it matters in an entirely different way whether information is within the scope of
FOIA’s exemption (b)(4). If so, then not only does an agency have no mandate to release the information under FOIA, but also the agency is dissuaded from release by penalty of law. If the information is commercial or financial, and meets the test of “confidential” or “privileged,” then that information cannot be released by the agency without personal penalty. Thus, Executive Order 12,600 from 1987 makes a lot of sense, requiring each federal agency to have procedures to notify submitters of information whenever confidential records are requested, and in particular records that might come under FOIA’s (b)(4) exemption.
Given this set of issues–(b)(4) exempting from disclosure under FOIA confidential commercial information required to be submitted to a federal agency and 18 USC 1905 establishing penalties for the disclosure of (b)(4) exempt information otherwise–the objective of Bayh-Dole is to specify what information in use reports comes within a (b)(4) exemption. We already know from the Public Citizen case that license agreement royalty rate and income information does. But (take this one slowly) Bayh-Dole’s requirement that the standard patent rights clause reserve for federal agencies the right to require invention use reporting does not necessitate the reporting of any licensing agreement information. All that is mandated is
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
There is no requirement here to ask for details of licensing agreements such as royalty rates or payments made. There is not even a requirement that a federal agency exercise its right to require the reporting. Norman Latker, who I have been told by people who worked with him drafted this stuff, made it clear that things were drafted so that agencies could waive their right to reports and just let private interests sail merrily along as they might. But if there was to be a right to require reporting, that reporting is focused on “utilization.” That’s the same “utilization” in Bayh-Dole’s statement of policy and objective at 35 USC 200:
to use the patent system to promote the utilization of inventions arising from federally supported research or development
And the same “utilization” that motivates the definition of “practical application” at 35 USC 201(f):
The term “practical application” means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.
And even motivates the march-in procedures at 35 USC 203, which are long and bothersome so I’ll just provide just the first condition for march-in:
action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;
Bayh-Dole, though it states as its first matter of policy and objective the use of the patent system to promote the utilization of subject inventions, does not give any reason for the requiring of reports of utilization. The impression left is that invention use reports might lay the basis for a march-in proceeding–and there’s a mighty wall of bureaucracy in the march-in implementing regulations to keep march-in from happening. But more to the point, the first condition of march-in, having to do with the policy and objective worry about “nonuse,” focuses instead on “taking effective steps” to achieve “practical application” and not on practical application itself, unlike either the Kennedy patent policy or the Institutional Patent Agreement, the remains from which Bayh-Dole creates its franken-sausage text.
Consider the Kennedy policy. Here’s the reporting requirement (Section 1(e)):
Where the principal or exclusive (except as against the government) rights in an invention remain in the contractor, he should agree to provide written reports at reasonable intervals, when requested by the government, on the commercial use that is being made or is intended to be made of inventions made under government contracts.
There’s nothing here about stuff being confidential or even deeply commercial–report on use. But why? The next section (1(f)) provides the answer:
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.
“The point of practical application” gets its own definition, just as “practical application” does in Bayh-Dole. And it’s remarkably similar (3(g)):
To the point of practical application–means 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.
Thus, to keep principal rights longer than three years, a contractor had to show that either the invention (i) had got to the point of practical application or (ii) that the invention had been made available for license royalty free or for reasonable terms. If the contractor chose the practical application prong, then he (to use the Kennedy policy style) had to report enough to show (i) the invention is being worked and (ii) the benefits are reasonably accessible to the public. This is necessarily public information. If benefits are reasonably accessible to the public, then there’s nothing that can be confidential or privileged about that fact.
If a contractor chose the non-exclusive license available prong, then the contractor had to disclose the terms–royalty free or reasonable under the circumstances. Non-exclusive licenses–if they are non-discriminatory–end up revealing their terms by the nature of being on offer. Every company taking a license has a pretty good idea what the terms are that other companies have accepted.
Otherwise, the contractor has to make a persuasive case to keep rights longer than three years. If a contractor does not meet at least one of these three thresholds–use, license, or beg–then the government could require the contractor to grant royalty-free non-exclusive licenses. The contractor then acts on the government’s behalf to make the invention broadly available. There is no public interest to be served up to private interests here. This is the information that the government might request, and a contractor would want to supply.
In the original Bayh-Dole, there were reasons for reporting. First, there was a limitation on the term of exclusive licenses for nonprofit organizations:
(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 Funding agreement requirements obtain premarket clearance unless, on a case-by-case basis, the Federal agency approves a longer exclusive license.
This requirement was removed in the 1984 amendments that also changed the secrecy requirements for reporting. No exclusive license could run more than five years for a non-small company licensee from the date of first commercial sale or use or from the date of an exclusive license. Thus, to enforce this provision, a federal agency would need to know whether there had been any exclusive licensing by a nonprofit, and if so, whether to a small company or a non-small company, and if to a non-small company, the date of the license–because that date started an eight-year clock on the term of exclusivity; and the date of first commercial sale or use–because that date started a five-year clock on the exclusivity in the license. First clock to finish ends exclusivity. If the government was to enforce this provision, it would need to know at least these bits–licensed? exclusively? non-small company? date. First commercial sale or use? date.
Now look at the implementing regulations in Bayh-Dole for the reporting (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 commercial sale or use, gross royalties received by the contractor, and such other data and information as the agency may reasonably specify.
The first part just repeats 35 USC 202(c)(5). The second part, though, adds language that includes what’s needed to enforce on part of the limit on exclusive licensing–the date of first commercial sale or use. One might also want the date of exclusive license, and whether the licensee was a small business or otherwise. That date is no doubt well within the “such other data and information as the agency may reasonably specify.” One can see, then, that some data is material to enforcement of the conditions of the funding agreement, and other data is “reasonably specified” for other purposes. The reporting clause continues:
The contractor also agrees to provide additional reports as may be requested by the agency in connection with any march-in proceeding undertaken by the agency in accordance with paragraph (j) of this clause.
Paragraph (j) is the implementation of the march-in procedures set out in 35 USC 203, along with an apparatus designed to ensure that they would never operate–and so far that apparatus is holding up fine. March-in can get triggered by any of four specified conditions.
- health or safety needs
- regulatory requirements
- failure to comply with the U.S. manufacturing requirement
In each of these conditions, however, the language is much more nuanced than my itemization. Take health or safety needs:
(2) action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees;
There is nothing here about practical application or benefits available to the public on reasonable terms. It’s just that needs are “not reasonably satisfied” and an action “is necessary” and that action will “alleviate” the needs that the contractor and the contractor’s ilk have not alleviated. And all this depends on an agency “determination” and that determination depends on fact-finding, hearings, appeals, and whatnot so that nothing ever happens.
Here’s government regulations:
(3) action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee, or licensees;
Here, we see the same qualification–the government cannot march in unless the monopoly is not reasonably satisfying the regulations. Pause here. Consider. If the federal government creates a regulation, and there’s only a private monopoly available to satisfy that monopoly, what do we have? A law that we must buy from that private monopoly. The problem is covered by the use of “licensees.” The reality, as we saw in the Public Citizen court’s review of NIH licensing, is that there is almost always only a single “applicant.” Most Bayh-Dole inventions are licensed as monopolies. The use of “licensees” in Bayh-Dole’s third march-in condition leads one to think that non-exclusive licensing is the default. And yet it is not.
Non-exclusive licensing wasn’t the default under the IPA program either. When Congress reviewed university practices under the IPA program, they found a bunch of exclusive licenses and nothing much else. No one had any intention of licensing non-exclusively. “A non-exclusive license is just a tax,” as multiple influential university licensing office directors have been fond to quip, or “If I was told I had to license an invention non-exclusively, I would refuse to manage it” as I heard another university licensing office director tell me. Bayh-Dole is cover to permit monopoly licensing. (If non-exclusive licensing was desired, heck, people would be beating a path to my door, because that’s what I’ve specialized in. We showed over a decade a 3 to 1 return over our operating costs, built extensive networks of industry scientists, and showed that value could be distributed over many assets and not focused into patent monopolies–but that history doesn’t seem to much matter–yet).
Compare this with the Kennedy patent policy march-in (if we can call it that)(1(g)):
Where the principal or exclusive (except as against the government) rights to an invention are acquired by the contractor, the government shall have the right to require the granting of a license to an applicant royalty free or on terms that are reasonable in the circumstances to the extent that the invention is required for public use by governmental regulations or as may be necessary to fulfill health needs, or for other public purposes stipulated in the contract.
There is nothing here that depends on anything that the contractor and its ilk are doing. The agency can just require non-exclusive licensing at will. If there are federal regulations that require the use of the invention, the government can require the contractor to grant non-exclusive licenses. Indeed, if a regulation requires use of an invention, it is arguably necessary as public policy that the invention be available non-exclusively and not via a private monopoly.
You can see how Bayh-Dole distorts this idea into one that prevents the government to march in when there’s a private monopoly–the private monopoly has to be shown to not “reasonably satisfy” the requirements or alleviate the health needs. And “other public purposes” is reduced to “health or safety needs.” Any other “public purposes”–even those expressly stated in a funding agreement or statement of work–are eliminated by Bayh-Dole from the march-in conditions. Nasty minded stuff from nasty minded folk. Oh, no, I mean smart drafting by patent brokers making sure pharma gets its monopoly pricing on publicly funded inventions. Oh, I didn’t mean that. I meant carefully drafted provisions that strike a balance between the private incentives that enable commercial products to be developed from early-stage, high-risk federal research and the need for federal action in the rare but possible case that private initiatives are not adequate, without giving rein to arbitrary and capricious government actions that would undermine efforts to attract private investment. Er… you know what I mean.
This part of the Kennedy patent policy is one of the evil bits covered by the bland “certainty of title” rhetoric. How can a university hope to make a pile of money if its monopoly can be toppled by federal agency whim about health needs? Thus, in Bayh-Dole we find in the standard patent rights clause reporting provision the supply of reports in conjunction with march-in. While reports on utilization have to do with starting a clock on exclusive licenses, reports on the “reasonable satisfaction” of public needs have to do with whether a march-in action can succeed. This reporting was added to Bayh-Dole in 1984 at the same time that 35 USC 202(c)(5)’s secrecy provision was changed from “may” to “shall.” Why was the march-in reporting stuffed in with utilization reporting? Why not put that reporting as part of discovery in the march-in procedures at 35 USC 203? It’s hard to say. Instead, we get a conflation of reports that are needed for compliance with term limits on exclusive licenses granted by nonprofits to non-small businesses with reports requested so that nonprofits offering exclusive licenses can self-incriminate their deals. The secrecy protection here aims to prevent march-in from being used to divulge company information–but also divulging the terms on which nonprofits have created and participate in private monopolies. And it is only private monopolies that are at risk here. If a university has licensed non-exclusively on reasonable terms, then any company can take a license, and march-in means only that more companies take licenses, perhaps on even more reasonable terms.
The march-in provisions in the Kennedy patent policy and in Bayh-Dole are rather odd for another reason. I’ll mention it here and hope to develop it later, as needed. In addition to march-in, both the Kennedy patent policy and Bayh-Dole require the contractor to grant to the government a non-exclusive royalty-free license “for government purposes.” The Kennedy patent policy defines “governmental purposes”:
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.
That’s one heck of a broad license–not just the federal government but pretty much any governmental body in the U.S. has the right to make, use, and sell for its governmental purposes. Here’s Bayh-Dole (35 USC 202(c)(4)):
With respect to any invention in which the contractor elects rights, 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
There are odd things about this license. Federal agencies obtain the license to “practice and have practiced” (which still must carry the sense that the Kennedy patent policy gave these words–make, use, sell, have made, have used, have sold) but that the agency may do so on behalf of the United States. That would appear to mean something broader than the agency or even the federal government. The United States are, literally, the states. And whatever else might be construed as reasonably intended by Congress. One might think that Congress intended the scope that the Kennedy patent policy gave the narrower term “Government of the United States”–that is, any government within the United States, or perhaps, omitting “Government” the breadth of purpose is broader still.
But the most odd is that that Bayh-Dole version of the license fails the symmetry of the Kennedy patent policy. There, the scope of the licensee and the purpose of the use for the licensee are identical. In Bayh-Dole, the federal agency gets a license, but for an indefinitely broad scope. It would appear, at the very least, that the federal government could authorize the production of a therapeutic drug patented as a subject invention not only for its own use (such as for patients covered by federal insurance programs) but for the use of states and municipal governments that also might have obligations to support the health care needs of citizens.
In any case, the government-purpose license is sufficiently broad that the government does not need to use march-in to obtain rights to make, use, or sell a patented subject invention–it already has those rights in an unqualified license. It does not have to pay a royalty, and it can commission private practice of the invention to create what it requires. So why the march-in? What purpose does it serve? Here’s the deal.
March-in is a means for permitting a contractor to retain principal rights to the invention, while acting under the direction of the federal government to serve a private, non-governmental market. One might think of march-in as a restriction on the scope of rights in a patent rather than as a punishment for a monopoly failing in its purpose. Rather than by-passing the monopoly, however, the government has the option of pushing private business activity through that monopoly. Thus, if the government marches in and requires a contractor to grant non-exclusive licenses on reasonable terms, the contractor still stands to make money from those licenses (unless, the reasonable terms are less than the cost to execute the licenses). Think of it–if a hundred companies require a non-exclusive license, and the government’s idea of reasonable terms is $10K a year, then we are talking a march-in that results in $1m a year for the remaining life of the patent. That may not be the tens of million a year that a university administrator might lust after, but it’s also not chump change. And if the federal government says that a 0.1% royalty on sales is reasonable, and there are 10 companies covering the same market that a monopolist hoped to have for a 1% royalty, then the university is going to see the substantial income–less of course, because pricing will be competitive not monopolistic, but still a nice penny here and there.
But if the government goes off and commissions others to make, use, and sell, then there are new development costs and the like, and delays, and limits to the market for the government-commissioned version. We can see, then, that even in Bayh-Dole, there are two implicit markets. A private market, which the owner of the patent on the subject invention controls (conditionally), and a government market, which the government controls by virtue of its government purpose license. The public interest issue is just how much freedom the federal government should give any particular monopoly, especially when that monopoly purports to serve the government’s market as well as the private market. When much of a market for a therapeutic drug based on federally funded research is in fact within the government’s market (through such things as Medicare), then the question is why the government does not exploit its own license. After all, that license allows it to be a free rider on the drug.
Bayh-Dole claimed to solve “title uncertainty” with a new “uniform” government policy on subject inventions. And Bayh-Dole aimed to prevent march-in from ever happening, though it needed the appearance of march-in to get the law passed at all. But what Bayh-Dole failed to do was address “government license uncertainty.” All it could do was mess with the language (to reduce clarity, to create ambiguity) and hope that federal agencies weren’t bright enough to use the rights they were granted. Those rights, if used, so the implicit argument must go, would dampen the enthusiasm at universities to favor the creation of private monopolies around these same inventions. And if the purpose of public policy is to create private monopolies, then it is true that the federal government should hold off on using rights it has acquired–even if those rights do not depend at all on march-in. But that same public policy insists that the federal government–and state governments and municipal governments–should have the benefit of an outright license to all subject inventions claimed by universities for their use in the government market. Even if the federal government holds off on march-in to intervene in the private market controlled by a patent monopoly on a subject invention, the federal government has a positive obligation to exercise the licenses it has obtained under Bayh-Dole’s standard patent rights clause whenever the cost of obtaining goods and services covered by patents on subject inventions–POSIs–exceeds the cost of making (and, as needed, selling) those inventions for the government market.
While Bayh-Dole may be interpreted to keep a contractor’s invention use a government secret, the government should be using that secret information it obtains to determine not so much whether to march-in, but rather whether to exercise its non-exclusive license to practice and have practiced. The government has within Bayh-Dole the ability to create a competitive environment for contractor-owned subject inventions, even when a contractor defies Bayh-Dole and preserves monopoly practices and pricing in the private marketplace. Where the government has obligations with regard to such inventions (such as paying $88 a pill rather than $5 a pill for Xtandi), the government must act to create the competition–at least for the government market–that in turn challenges monopoly pricing in the private market. While that pricing may persist in the private market through government indifference to the regulatory framework on patent property rights in Bayh-Dole, there is no reason why the government must pay out 10x or more to acquire goods and services for its use in the government market.
This is a study in ten parts. Here are the links.