I guess this ends up being a little book on Bayh-Dole and secrecy. Perhaps I should have titled it “Reasons Why Bayh-Dole Should Not Be Repealed” and made it blank, but for section headings. Then it might be a best seller on Amazon and I wouldn’t have to do so much work. But alas, work it is. We are not quite done. There is one more article after this one, and then a concluding statement that wraps things up. You can wait for the wrap or read through to see how that conclusion arises.
We have looked at the primary reasons why reporting was required under the original Bayh-Dole–to deal with exclusive licenses and to worry march-in reviews. But there were other reasons as well. Until 2009, Bayh-Dole had the following paragraph at 202(a)(3):
(3) At least once each year, the Comptroller General shall transmit a report to the Committees on the Judiciary of the Senate and House of Representatives on the manner in which this chapter is being implemented by the agencies and on such other aspects of Government patent policies and practices with respect to federally funded inventions as the Comptroller General believes appropriate.
This provision required reporting on the implementation of Bayh-Dole. Invention utilization might figure in such reporting, though it is not clear that the Comptroller General produced many of the required reports. As it is, it does not appear that there is any Bayh-Dole reporting to Congress or to the President. And even if this paragraph was still in Bayh-Dole, it does not get so far as how contractors are behaving under the standard patent rights clauses, but only to how federal agencies are using standard patent rights clauses and enforcing or using or waiving the federal government’s rights under those clauses. Even where Bayh-Dole required reporting, the law was drafted to avoid reporting on the central purpose of the law–to promote the use of inventions made with federal support for public benefit on reasonable terms. Everything else is merely “tone” not “substance.”
In Bayh-Dole’s federal agency licensing provisions, a similar change from “may” to “shall” was made in the reporting provisions. Here’s the original clause at 35 USC 209(f)(1):
(f) Any grant of a license shall contain such terms and conditions as the Federal agency determines appropriate for the protection of the interests of the Federal Government and the public, including provisions for the following:
(1) periodic reporting on the utilization or efforts at obtaining utilization that are being made by the licensee with particular reference to the plan submitted: Provided, That any such information may 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 of the United States Code;
We have the same language that we have seen in 35 USC 202(c)(5). The text was changed in 2000 (Public Law 106-404) and became new section 209(d)(2):
(2) requiring periodic reporting on utilization of the invention, and utilization efforts, by the licensee, but only to the extent necessary to enable the Federal agency to determine whether the terms of the license are being complied with, except that any such report 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 we find the same “may” to “shall” change, but this change comes a full sixteen years after the change to 35 USC 202(c)(5). What practice, if any, was affected by the change in wording? But there’s more, here. Rather than running parallel with 35 USC 202(c)(5), the clause here inserts a restriction on reporting that identifies the purpose: “only to the extent necessary to enable the Federal agency to determine whether the terms of the license are being complied with.” There’s no reporting to determine whether the law is working as proposed, or whether an invention is being worked with public benefits–unless such provisions are made express terms of the license. It’s not clear how “except” is different from “Provided that” other than to make a bit of syntactical strangeness. What is it that “except” works to exclude? Maybe a presumption that reports otherwise would be published? That might well have been the presumption in the original wording–that anything not exempt from FOIA was fair game for public release. But as we have seen with regard to FOIA, if information is exempt from FOIA under (b)(4), then federal law also imposes penalties for the release of that information without the approval of the submitter and Executive Order 12,600 requires each agency to notify any submitter when there is a prospect for the disclosure of such material and seek comment with regard to confidentiality.
The restriction to information to determine compliance with a license also feeds into the nature of the information obtained. That reporting is not the same as the reporting that is typically required in a patent license. Here’s the reporting required by a template NIH exclusive patent license:
- all sublicense agreements
- copies of all patent-related documents
- all matters that come to licensee’s attention that may affect patent matters
- access by federal accountant or auditor to records of licensed products
Article 9 reports
- a commercialization plan
- annual reports on development
- dates for achieving benchmarks and for first commercial sale
- every six months a royalty report with sales volume, net sales, and royalty due
- every six months royalty reports from any sublicensees
Of these reports, one set, in Article 9, covers the provisions in 35 USC 209(d)(2) (bold in original, my paragraphing for readability):
The Licensee shall provide written annual reports on its product development progress or efforts to commercialize under the Commercial Development Plan for each of the Licensed Fields of Use within sixty (60) days after December 31 of each calendar year.
This information is authorized only to the extent that it is necessary to show that the licensee is complying with its commercial development plan. These development plans are a huge issue in their own right, but are part of the cover for granting exclusive licenses. We’ll get to how the cover works in a few paragraphs.
These progress reports shall include, but not be limited to: progress on research and development, status of applications for regulatory approvals, manufacture and status of sublicensing, marketing, importing, and sales during the preceding calendar year, as well as, plans for the present calendar year.
Here we get a mix of authorized information and information that could fall outside what 35 USC 209(d)(2) authorizes–“only to the extent necessary to enable the Federal agency to determine whether the terms of the license are being complied with.” Unless something is required to comply with the terms of the license, it’s not within the agency’s authority to require.
The IC also encourages these reports to include information on any of the Licensee’s public service activities that relate to the Licensed Patent Rights.
Note the change in language–“also encourages”. This information is not authorized as required by 35 USC 209(d)(2) and hence is “encouraged”–or, voluntarily submitted. For FOIA purposes, such information falls outside the National Parks prongs and becomes voluntarily supplied information that’s generally confidential under the Critical Mass analysis if it is information of a kind that’s not normally made public, and so is more readily excluded from FOIA by (f)(4). What’s a bit odd here is that public service activities are often the kind that a company advertises to the public–it’s the rare company that doesn’t crow about these things and helps the public in secret. It’s also something that a federal agency might want to disclose beyond government.
If reported progress differs from that projected in the Commercial Development Plan and Benchmarks, the Licensee shall explain the reasons for these differences. In the annual report, the Licensee may propose amendments to the Commercial Development Plan, acceptance of which by the IC may not be denied unreasonably.
Here we go on the cover. After all that about a plan (which is required by Bayh-Dole at the new 209(f), with the same wording aiming to exclude the plan from FOIA requirements), the licensee can propose changes to the plan and the “IC”–Institute or Center–cannot “unreasonably deny” the change. So basically once there’s an acceptable plan, most anything else is also possible. If granting a license was a competitive bidding situation, changes to a plan–something used to induce the government to award the contract–could not be so readily changed, at least not without rebidding the contract. It comes then as something of a concern to see the plan requirement so easily set aside by change language largely under the control of the licensee. Sure, there are commercial contingencies to deal with–that’s clear enough–the problem is with the plan being a kind of cover to make it appear that the government was justified in granting the license. Oh, except that the plan is secret too. We the public should be comforted to know that there was a plan, but what that plan was initially and what it not unreasonably transmogrified into is not to be disclosed.
The Licensee agrees to provide any additional information reasonably required by the IC to evaluate the Licensee’s performance under this Agreement.
And a catchall, but with the switch from “compliance” (“being complied with”) to “performance,” which is not quite the same thing. A license can comply with the terms of a license and not necessarily “perform” all that well. The basis of reporting is not, according to 209(d)(2) to “evaluate” licensees, but only to determine whether the license is in compliance. Evaluation is more along the lines of what a federal agency does in a performance-based contract with an award bonus for happy performance. That’s not what is going on here.
Once we have moved through the various reporting requirements in Article 9, we encounter the following at the end of Article 9 (bold in original):
All plans and reports required by this Article 9 and marked “confidential” by the Licensee shall, to the extent permitted by law, be treated by the IC as commercial and financial information obtained from a person and as privileged and confidential, and any proposed disclosure of these records by the IC under the Freedom of Information Act (FOIA), 5 U.S.C. §552 shall be subject to the predisclosure notification requirements of 45 C.F.R. §5.65(d).
There are some more oddities here. First, the scope is only those plans and reports required by Article 9–so the reporting outside Article 9 is on its own. Second, it’s only information that’s “required”–so the information on public service activities, which is not required but rather “encouraged,” does not come within this provision. Third, there’s the qualifying “to the extent permitted by law” that makes one wonder just what information is subject to the “treatment” that then brings the information under the FOIA (b)(4) exemption.
What’s not here, of course, is an express promise by the NIH not to disclose the information. That is, either the information is exempt from FOIA under (b)(4) or it’s not. If exempt, then 18 USC 1905 kicks in and NIH officials face fines and prison time for releasing information unless there is a law authorizing the release. No need to agree not to release for that. If not exempt, then agreeing not to release the information is not the determining factor. We are back to a National Parks analysis for information required to be disclosed. And if even just possibly exempt, then the NIH has to notify the licensee regarding possible disclosure, and from there it is a matter of whether or not the information really is within (b)(4)’s exemption. If not possibly exempt, well, then the NIH cannot just technically “treat” the information as “commercial and financial” and “privileged and confidential” and so boo-hoo (that’s not in there, literally, of course), it’s going to be information that’s disclosable under FOIA regardless of the markings on the plans and reports.
It is notable that the NIH exclusive license template makes a gesture toward marking things “confidential” that Bayh-Dole only has traces of in its implementing regulations–here’s 37 CFR 401.8, again:
(b) In accordance with 35 U.S.C. 202(c)(5) and the terms of the clauses at § 401.14, agencies shall not disclose such information to persons outside the government. Contractors will continue to provide confidential markings to help prevent inadvertent release outside the agency.
Of course, here in 401.8 all we have is a gesture that suggests that contractors for other reasons are to mark information as confidential, but that marking information is not required for the operation of 202(c)(5)’s effort to exclude information under FOIA’s (b)(4). And it’s true that (b)(4) doesn’t come out and require confidential markings. The standards in National Parks have to do with the likelihood of substantial competitive harm for information not normally released to the public and the likelihood that release of information could impair a federal program from getting reliable information in the future. Information might not be normally released to the public and still not be marked confidential. Conversely, however, information could be marked confidential and still be of the sort that the submitter does provide to the public, or would be obligated to disclose to the public (in the case of a public university) under state public disclosure law.
One can see how much of the information provided to a patent licensor by a licensee for contract compliance might be considered confidential, even privileged. That information is touchy not only because it might reveal or allow others to infer its business operating parameters and plans but also because that information might be used to determine whether the licensee is complying with the contract. For ordinary patent licensors and ordinary patents, this is enough to end the discussion that information exchanged in this way should be considered confidential and not ordinarily released to the public.
But we aren’t dealing with ordinary patents, and in the case of the government, not with an ordinary patent licensor. If the government is the licensor, and both the terms of the license and the information regarding compliance are kept secret, then how can anyone determine whether the government is granting legitimate licenses, and if legitimate whether the government is enforcing the terms? These two issues go together. One might even come to have the terms of the license (but for, maybe, the actual royalty rate and the dates for milestones to be reached) and still have no idea if those terms reflect the actual relationship that’s permitted by the government. The government could ignore the terms and let the licensee do whatever it wants–miss milestone dates (restructuring not unreasonably denied), under-report and underpay (no requirement to audit), price at monopoly rates (oops, that’s usually expected, if not desired!), and the like.
Indeed, this is what Norman Latker advocated for the government’s activities with regard to its side of the standard patent rights clause authorized by Bayh-Dole. The government is required to insert the standard clause into every federal funding agreement, but the government is not required to enforce any of it. That is, because Bayh-Dole is a law that specifies terms to use in a funding agreement and not a law that requires the federal government to enforce the actions required of contractors by those terms. Bayh-Dole is designed to be a law of do WTF you want, as long as federal agencies don’t bother to enforce anything of substance. Very clever.
In comparison to the requirements for federal patent licenses, university patent requirements for federally funded inventions carry even less accountability. There’s no requirement that a university receive a “plan” for technology development (though some universities do require such a plan–and then use it to make the plan a contractual obligation under the license rather than as a tool to assess whether the proposed approach represents a better capability than other possible approaches). There’s no requirement, either, that a university licensee must report whether the plan is working or even be allowed to proposed changes to the plan. Thus, a university may, on the one hand, demand a plan and then insist (contractually) that the plan be followed or terminate the license (if not also sue for damages); and on the other hand, a university may not get any plan at all and rely entirely on general statements of “best efforts” (or more likely “reasonable commercial efforts”–and there’s a whole world in there about what these sorts of terms might mean). Not only is there no accountability for a university’s licensing behavior, but there’s no protection for a company-licensee’s exposure in looking to work with an invention made with federal funding.
It might take some work to imagine what a company-licensee of a POSI faces. The POSI is not an ordinary invention–there is, apparently, a public covenant with regard to the proper uses of the patent to promote the use of the invention–with public benefit available on reasonable (i.e., not patent monopoly) terms. But if there is no accountability to the public for this covenant by the university licensor, then the public covenant can be used to make the patent deal harsh for the company-licensee–not a mutually beneficial agreement. The university-licensor uses the presence of “public benefit” to make harsh demands on the licensee–the licensee must pay up, the licensee must carry all risk, the licensee must follow its plan into the unknown or else, the licensee must sell product for maximum return. Even patent trolls, bless their stone-cold purposeful hearts, don’t demand so much (mostly because even patent trolls recognize the value of non-exclusive dealings: non-exclusive means to encompass the whole market of use, not just a “favorite” company within that market).
Thus, there is a bait-and-switch, a distortion, a corruption that goes on when a university acts on a POSI without public accountability. What ought to be a mutual effort to encourage use, to discover opportunity, and to create a value that’s shared with the public on terms that show a discount over a monopoly position ends up becoming a private alliance to exploit the patent right to create maximal value from a monopoly, with the “public benefit” realized as the royalty payment to the university, as an emblem of the public. Do you see the shift? The university, claiming to represent the public interest, demands/takes deals that may well attack the broader public interest by extending the monopoly represented by the POSI rather than breaking the POSI monopoly up through licensing (to create competition, to promote free enterprise, to keep future research free of encumberance).
Thus, the university adopts a moral claim, and then uses that moral claim to direct the primary value of the activity to the university. The typical means to do it is to seek out a “commercialization partner” willing to exploit a shared monopoly, at monopoly prices. This partnership, university licensing officials claim, represents the greatest public benefit to arise from federally supported research inventions. That is, what’s good for a monopoly shared by a university is good for the public. The purpose of university patent management, in this view, is to convert a patent monopoly into a commercial monopoly. This effort is characterized as “commercialization” and ascribed to Bayh-Dole as a mandate of federal law and policy. Thus, the effort is confirmed, rhetorically at least, as moral, legal, and necessary. It’s a great illusion. And coming from nonprofit organizations that have a long history of operating with a claim for public mission and public benefit, the illusion is all the greater.