Parsing Federal Security Agency Order 110-1 (1952)

There once was an active debate around whether the federal government should support research just to support research. Vannevar Bush’s Science the Endless Frontier formed part of this debate, and did a great deal to seal the case for government support for “basic research”–meaning, actually, government-funded research without a procurement purpose; research for the sake of expanding scientific knowledge, not for any institutional or commercial purpose. For such research, Bush advocated for the “free play of free intellects” hosted by universities, where (so he assumed) investigators would be free of institutional influences but supplied with institutional-grade resources (as grants-in-aid) to pursue exploration where they would.

Bush sought to create a government funding mechanism that avoided procurement contracting but remained accountable for outcomes; that provided public money but justified support for individual scientific efforts to discover and characterize new phenomena, new scientific laws, new scientific tools and methods. You know, an endless frontier of new science. Folks got the part about government funding, but they refused to accept the idea that funding for basic research should come without contractual strings or should be focused in a single extra-governmental organization. Thus, subvention funding for basic research became a special case of procurement funding. Instead of funding individuals, attention shifted to funding projects, since it was easier to manage review of proposals for “quality” than to make decisions about who had the potential and ideas to open up new areas of science. It was easier to turn support for science into a bidding process than to seek out talent and push it to new frontiers.

This new competitive proposal review procurement process retained the idea that inventions should be deliverables to the government, so that the government could decide how the patent system should be used in matters of scientific knowledge. The default was that inventions would be dedicated to the public, or if a patent was sought, to be licensed non-exclusively and preferably royalty-free. This default became known as the “government title” approach.

Here’s the Federal Security Agency, in 1952, issuing Order 110-1, dealing especially with Public Health Service grants:

Make inventive advances freely available. One can see how such a policy might be opposed by people who want to create monopolies on advances. In the 1950s and 1960s, areas such as atomic power, rocketry, and wonder drugs were the focus of active research. From an investor perspective, these were the equivalent of land rushes–get there first and stake out a homestead, if not a territory, if not a new nation. From the government perspective, however, it was better if these scientific frontiers were explored and not privatized for monetary gain. How could subvention funding be contributed if it only served to lessen the costs of people intent on monopolizing whatever was discovered. Explorer? Missionary? Trader? Conquistador? What behavior should be exhibited by those that arrived first at a scientific frontier, funded with public money? For the Federal Security Agency, the answer was “explorer” on behalf of all of us.

But the FSA also saw that there were times when federal funding was not the only source of support for research:

The FSA identifies two situations in which patents might be useful. A “patent process” might be used to “foster an adequate commercial development” of a given invention. And if there are multiple funding sources, then the patent expectations of those other sources should be taken into account. Just because the federal government chips in as well should not mean that the government’s default policy of making findings freely available should control the invention. So far, so good. Let’s look at the need to add inducements to create commercial “development” of an invention.

The FSA accepts that “in some cases” a patent might “foster an adequate commercial development.” That is, the perceived purpose of the patent is to produce a commercial version of the invention with private funds. The purpose does not extend to making the producer inordinately wealthy in the effort. In other words, the focus is on an exchange in which just enough private capital is made available to create a commercial product, which then most anyone has access to and multiple manufacturers might make. The original producer prepares a product on behalf of an industry. The role of the patent was to provide the original producer a chance to recover the costs of development, plus a “reasonable” profit before opening the commercial version up for competitive manufacturing.

There is a modest competitive advantage to companies that take a non-exclusive patent license. They may pay a modest (“reasonable”) royalty, but they have access to a market that others do not have. Even if they have competitors–others that have also taken the non-exclusive license–the modest fee may be enough to keep some companies out of the market or delay them until they see that there is a clearly profitable product to be made–at which point they may be well behind the market leaders. If a patent on a research invention is licensed to a company taking this approach, then by non-exclusively sublicensing the patent to the industry, the lead company not only can profit on the activity of the entire market while having to reach only a portion of that market directly, if at all. Thus, there still is a calculus of profit in non-exclusive patent management. It just is not a calculus that monopoly thinking knows how to do–or cares to learn.

It may well be that this vision of “calling forth risk capital” (as the Kennedy patent policy from 1963 puts it) is unworkable. That no company is willing to be caught halfway and make merely a reasonable profit over develop costs and letting competitors come in–that would split the market and lower prices from monopoly to reasonable. In short, being halfway about things, altruistic as it sounds, would destroy the value of a patent monopoly at just the point at which that monopoly starts to get interesting. This, then, is the argument underlying the attacks made on the government policy of controlling patentable inventions and either “dedicating” them (to use the Kennedy policy term) or “licensing” them–but mostly non-exclusively and royalty free.

The FSA 110-1 order splits invention management into two categories–one category to be managed by the “grantee” and the other by the government. It’s worth examining each. Let’s see how 110-1 does it.

We are dealing, first of all, with grants-in-aid, primarily for biomedical research. Each funding arrangement must provide that inventions will be promptly reported. That much is easy–other than that either those doing the inventing have to be parties to the agreement, or the grantee institution has to obtain the agreement of those doing the inventing that they will report inventions to the government. So either the potential inventors sign the contract with the government or agree separately with the government or agree with the grantee institution that they will report inventions. In universities, this sort of thing was handled by a policy statement that stipulated that everyone would comply with the conditions of any extramural contract. It’s just that policy statements are one thing, and having a written commitment confirming one’s obligations is another.

The second element in each funding agreement involves the disposition of inventions made with federal support. The head of the “unit” responsible for the grant can reserve the right to decide on each invention when it is reported, or the disposition of inventions can be left to the grantee, following the grantee’s policies on the matter. FSA 110-1 then provides guidance on each of these options. Here’s the scheme:

In this contracting scheme, the agency unit head can approve a funding agreement that allows the grantee’s policy to control or can reserve control for the federal agency. In either pathway, the grantee can end up controlling an invention, but the two pathways have different conditions.

If the funding agreement allows the grantee institution to control outright, then the funding agreement must consider the grantee’s policies and practices and make any changes that are needed to assure that any inventions made will be “made available without unreasonable restrictions or excessive royalties”–this, regardless of whether the grantee controls or allows inventors to control the invention.

 

However, if the agency controls and then determines that the grantee may control, the grantee must dedicate the invention to the public or license a patent on the invention royalty free, non-exclusively.

In either case, it’s clear that some form of public covenant follows grantee control of inventions made with federal support. A public covenant with regard to inventions–because of the possibility of patents–has been a continuous theme in federal support for research, both in procurement in dealing with for-profit companies and in subvention in supporting the work of investigators often hosted by universities and other nonprofits operating with an overt commitment to the “public interest” over profits.

The other two options are that the agency controls, or that grantee patent policy allows inventors to control:

If the inventor controls, FSA 110-1 is silent on the matter, other than that grantee institution policy must provide for a government nonexclusive license and that the invention must be made available without “unreasonable restrictions” or “excessive royalties.” There’s nothing in FSA 110-1 about how these elements of federal public covenant reach to individual inventors. Even the practice of having principal investigators countersign funding agreements does not get at the commitments of any other participants in a given research effort. And a policy statement that inventors must comply with the terms of any extramural funding agreement only goes so far to reach those inventors with regard to things the university can affect, such as access to resources and continued employment. What’s needed, obviously, is some sort of patent agreement with the university, or a patent agreement with the federal government–or a limitation on the patent property right itself.

Otherwise, if the grantee institution policy is to allow the inventor to control each invention (as was the University of Wisconsin practice until about 1969–and even after, with some bother), then the inventor could do pretty much anything: blow the patent rights by publishing, patent and sell the patent, patent and license, whatever. Essentially, then, there was no federal public covenant at that point, and any limitations on patent monopoly speculation (such as suing for infringement or trolling or preventing all use or charging monopoly rents) were a matter of personal choice of the university personnel doing the inventor. While such personal choices appear to have followed public covenant practices in many cases, there was no law, regulation, policy, or agreement that required inventors to follow public covenant practices. They just did.

If the federal agency retains the right to control an invention, it has three options under the policy:

  1. The agency can waive the invention, so that whether the grantee or inventor controls, it does not matter–the invention is insubstantial and a patent will not matter for federal policy purposes, or the federal contribution to the development of the invention is so little that no federal covenant should apply to the invention.
  2. The agency can assign the invention to a patent management agent for development and licensing, including for only a limited time. The government essentially contracts out the effort to make the invention available via patent licensing and states any conditions on that effort in the management agreement rather than in a research funding agreement.
  3. The agency passes control of the invention to another federal agency.

This is the policy cascade, then, introduced by FSA 110-1. It’s a basic division of the flow of control for patents on inventions made with federal support, especially in biomedical research. At the basic level, the grantee or agency head controls. If the grantee, with a federal public covenant not to be a monopoly ass. If the federal agency, with the option to permit the grantee to manage, but only for dedication or non-exclusive royalty-free licensing, to waive (in which case, the federal agency asserts no public covenant), to assign to an invention management organization, or to defer to another federal agency’s management.

Nothing about this option set has much to create confusion or uncertainty for any faculty investigator or university research administrator. If the funding agreement stipulates that the university may control, then it’s all a matter of internal policy and practices, but for the endorsement with regard to restrictions and royalties. If the funding agreement stipulates that the federal agency controls, then the university is only in the picture if it wants to coordinate the public release of the invention or if the agency waives the invention as insubstantial.

There’s really no pressure on uncertainty of title by university patent brokers. If the agency controls, then there’s no option for a university to patent the invention anyway and try to beg back control of the invention from the federal agency, such begging generally accompanied by delays and uncertainties. If the agency holds control, then it is up to the agency to choose a patent broker and go from there–if brokering is what the agency decides to do rather than dedicate the invention to the public domain. At best, a university patent broker might make the case to be the patent broker selected by the federal agency–but that would be a transaction entirely outside the funding agreement and wouldn’t be addressed by FSA 110-1, which concerns the provisions of a funding agreement.

It is only as federal agencies adopt a patent policy practice under which an agency controls but it could allow a university to act as a patent broker under the funding agreement that “title uncertainty” comes into the matter. If the federal government separated invention management from patent brokering, universities would not have created such deep institutional conflicts of interest. If a university, in managing an invention, was either given the mandate upfront to follow its own policies on the matter, including limitations on restrictions and royalties, or would make inventions available royalty-free, then the institution would have little in the way of institutional conflict of interest–especially if the prevailing policy was to allow inventors to manage their inventions (and that was the case at most universities in 1952). But if a university is given the opportunity to decide between dedicating an invention to the public and attempting to monetize a patent on that invention to generate income (for whatever pressing reason–research support, administrative slush, to encourage more inventors fueled by envy and the Porsche effect to participate in patenting efforts), then there will be plenty of opportunity for institutional conflicts of interest as administrators choose between making things available and trying to make money from making things available via a patent monopoly.

The IPA program from 1968 to 1978 formalized the FSA 110-1 policy for biomedical research by making the grantee controls pathway the default pathway and expanding the language that set out the federal public covenant that followed inventions under grantee control–while at the same time undermining that federal public covenant by legitimizing exclusive licensing, lengthening the term of exclusive licenses beyond what executive branch patent policy allowed, and giving the federal agency–NIH–the ability to waive the term limit on exclusive licenses. It was this ability to waive a contract term that couldn’t be waived as an executive branch policy requirement that opened the door to the Bayh-Dole strategy of producing expansive statements of a federal public covenant but displacing those statements to a federal contract in which the federal agency has the right to waive or refuse to enforce any actions that fail to abide by the federal public covenant. Thus, Bayh-Dole gives the appearance that there is a federal public covenant, but does not provide the means of public oversight or accountability or a requirement that the federal agency enforce the terms of the contract that it is required to use as a default.

Had Bayh-Dole retained the FSA 110-1 basic division and allowed federal agencies to specify for each funding agreement whether the grantee or the agency would control patent rights, and offered no opportunity for a nonprofit grantee to seek to beg back rights, then there would have been much less opportunity for institutional conflict of interest in decisions to manage patent monopolies for institutional financial gain–and there would still have been “title certainty” for inventions arising in research that a federal agency determined could be managed by the grantee institution’s patent policies and practices. If those policies and practices varied from federal expectations, then it was a simple matter to stop offering those institutions a funding agreement that permitted their policies and practices to control.

Beneath all this apparatus–pretty simple in FSA 110-1 and convoluted in Bayh-Dole beyond the ordinary ability of anyone to read coherently–remains the fundamental question of what role patents should have in research committed to the public interest and supported by federal funds in the form of grant-in-aid or subvention. Should federal money carry with it a public covenant that limits patent practices? Or should federal money ignore such limits and allow the perception that it is a subsidy to fuel an industry in private speculation on the future value of patents taken out on publicly funded research?

My thought is that this question has a simple answer: federal funding should carry a public covenant. The patent system is problematic enough for general invention and commercial activity. But the patent system has its place. However, for research conducted at nonprofit organizations and intended to benefit the public, and funded by public funds, it is necessary that there’s a public covenant so that the effort to explore and discover and present for public use is not converted into an effort to create patent monopolies to be presented to speculators on the premise of the value of future public use. Anyone taking an interest in a patent on a federally supported invention–a posi–should accept the public covenant that runs with that invention, and more so should accept the purpose for that public covenant and not try to do everything possible to keep that covenant from operating or being enforced. To do otherwise is to repudiate the justification for federal subvention funding in the first place.

Because turtles ride on the back of other turtles, there is a yet deeper question: should the federal government provide subvention funding for research? This is the question posed and answered by Vannevar Bush. His answer, however, was not simply “yes”–but “yes” with an apparatus (a quasi-independent citizen-directed federal research agency) about how such research would be authorized. For Bush, the patent issue was simple–leave it alone but for a royalty-free license to the government for its own use. But for Bush, writing in 1945, universities were still a place where the “free play of free intellects” could take place without institutional claims on patents resulting from such activity. Inventors–faculty, mostly–would own their inventions, and in the area of biomedical research, faculty at leading universities favored policies that precluded patents on medical discoveries, or permitted patents only to mitigate private monopoly patent practice. Thus, it was easy for Bush to recommend that the federal government’s public covenant be limited to a nonexclusive license.

Today, we don’t have the same situation. University administrators have come to believe that “commercialization”–by which they mean in practice “monopoly monetization of patent properties”–is a mandate that must be attempted on each and every invention made by those working at their university, and this attempt is itself “in the public interest” and so no federal patent covenant is necessary or will be acknowledged. In this way, we find that there is virtually no university patent licensing office that complies with the fundamentals of Bayh-Dole–not with how inventions are acquired, not with the commitments inventors are to make, not with limitations on exclusive licensing, not with promoting free competition and enterprise, not with achieving practical application–use with benefits available to the public on reasonable terms.

Bayh-Dole compliance consists in the formalities by which universities establish their ownership claims to subject inventions, not with the practices by which university administrators aim to deploy patent properties to achieve public benefits. Under Bayh-Dole, despite the heavy apparatus that makes it appear otherwise, a patent on a subject invention is just an ordinary patent, to be used speculatively to generate income as others bet on its future value as an asset that can be “monetized”–by sale to others, by claims of infringement, and even by a royalty on the sale of products. Under Bayh-Dole nonuse is an acceptable outcome, especially if enforced nonuse creates additional “value” for patents on other inventions that now might be more desired for patent speculation.

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