Key Concept 5: Public Covenant

A Limitation on a Patent Property 

A patent public covenant is a restriction or obligation that runs with a patent property, creating requirements not arising otherwise from federal patent law. The expectation of such a covenant is that the restriction or obligation better shapes a patent property to achieve desired effects–faster use of an invention, or development of an invention, or availability of an invention.

Similar to a restrictive covenant in real estate, a public covenant may restrict the ownership rights of a patent owner and may as well create positive obligations for that patent owner. A public covenant on a patent is a requirement imposed by a government or other organization that limits what a patent owner may do with the patent right.

According to federal patent law (35 USC 261), a patent has the “attributes of personal property” but those attributes are “subject to the provisions of this title”–that is, of federal patent law. A public covenant places restrictions on the property rights of the patent owner. A public covenant placed in federal patent law restricts the patent property right directly, creating a new category of patent. A public covenant placed in an agreement with anyone coming to own an invention or having exclusive rights in an invention shapes by federal or private contract the rights of the patent owner or any assignee or exclusive licensee.

A public covenant may be established by the federal government or by a patent owner by policy. The covenant may be placed in law or in a research agreement or in a license. Once the covenant is placed, it follows the ownership of the underlying invention, including the patent on that invention.

Kennedy Patent Policy Public Covenant

The Kennedy patent policy (1963) established a public covenant with regard to patents on inventions made with federal funding. The covenant created executive branch policy that fedreal agencies were to follow. Here’s the statement of the public covenant for federal agencies:

Government-owned patents shall be made available and the technological advances covered thereby brought into being in the shortest time possible through dedication or licensing and shall be listed in official government publications or otherwise.

While an owner of an ordinary patent has no obligation to make the patent available or even to use the invention covered by the patent, the federal government imposed a public covenant on all government-owned patents–make them available through dedication and licensing to develop the inventions quickly.

The Kennedy public covenant required federal agencies to include the covenant as a matter of federal contract when contracting for research and development services. When a federal agency allowed a contractor to hold “principal rights” in an invention made with federal support, the Kennedy public covenant required that the contractor had three years of exclusivity from the date of patent issue:

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. 

In the Kennedy public covenant, as a condition of patent ownership contractors agree to develop within three years of the issue of a patent each invention or license the invention so that it will be used, or make the invention generally available. Otherwise, the contractor agrees to grant royalty-free licenses when the government requires them. Contractors also agree to report on the commercial use of inventions made with federal support which they control with their patents. Finally, contractors agree that they will not use their patent right to exclude the government (federal, state, and municipal) from using patented inventions made with federal support–the government’s use, by federal agreement, lies outside the patent property right that a patent owner obtains.

Federal agencies imposed these requirements as part of funding agreements with contractors. As you can see, the requirements extend beyond the contractor to any licensee or assignee. The public covenant follows the patent, by contract.

IPA Public Covenant

The Institutional Patent Agreement program (1968) restarted by the NIH (and under the Kennedy patent policy) implemented a public covenant through a master agreement with each participating nonprofit institution. The master agreement required contractors (called “Grantees”) to undertake various obligations with regard to inventions made with federal support. But here’s the basic public covenant:

The Grantee shall administer those subject inventions to which it elects to retain title in the public interest

That is, the patent owner must consider not its own interest, but the public interest, in the management of inventions. The covenant continues:

and shall, except as provided in paragraph (d) below, make them available through licensing on a nonexclusive, royalty-free or reasonable royalty basis to qualified applicants.

We might recognize, then, that at least one meaning of “public interest” is that a patented invention is licensed non-exclusively for no more than a “reasonable” royalty. Paragraph (d) referred to above pertains to exclusive licensing. It is the trick in the IPA program to allow universities to push monopoly rights to drug companies. In addition to an apparatus for determining that non-exclusive licensing won’t work, the public covenant requires

Any exclusive license issued by Grantee under a U.S. patent or patent application shall be for a limited period of time and such period shall not, unless otherwise approved by the Assistant Secretary (Health and Scientific Affairs), exceed three years from the date of the first commercial sale in the United States of America of a product or process embodying the invention, or eight years from the date of the exclusive license, whichever occurs first, provided that the licensee shall use all reasonable effort to effect introduction into the commercial market as soon as practicable, consistent with sound and reasonable business practices and judgment.

Note that there is no anchor for three years from patent issuing, as required by the Kennedy patent policy. Instead, it’s three years from first commercial sale, or eight years from the date of the exclusive license. (And the NIH can approve extensions.) There are additional requirements as well, that follow exclusive licensing, such as:

Any license granted by the Grantee to other than the Government of the United States under any patent application or patent on a subject invention shall include adequate safeguards against unreasonable royalty and repressive practices.

While this bit sounds good, it is in fact designed bombast, since the issue for a licensee selling product is not a concern with “unreasonable royalty” but rather “unreasonable pricing.” Nonetheless, it’s clear there’s a public covenant at work, even in such a clever workaround of the Kennedy patent policy. As required by the Kennedy patent policy, the government (federal, state, municipal) is granted a license to practice and have practice each invention made with federal support that a Grantee patents.

Bayh-Dole Public Covenant

Bayh-Dole, too, has its public covenant. But Bayh-Dole is a part of federal patent law, so its public covenant is also part of federal patent law, not merely executive branch policy implemented by funding agreements and required to be passed through licensing agreements and assignments. Here’s the basic statement (35 USC 200):

It is the policy and objective of the Congress to use the patent system to promote the utilization of inventions arising from federally supported research or development;

This statement is in federal patent law. It forms a public covenant on all inventions made with federal support–regardless of who owns the patents on these inventions. Patents on these inventions are to be used to “promote the utilization” of inventions. There is no “working requirement” in federal patent law. An owner of an ordinary patent can refuse to use the underlying invention and refuse to let others use the invention. But an owner of a patent on a subject invention has no such rights. The patent right in a subject invention must be used to bring the invention to “practical application” (to use the defined term in Bayh-Dole). It is not quite that the patent owner must “work” the invention–practice it; rather, the patent owner must use the patent right to “promote” the use of the invention. There are ways to use a patent right to promote use–license the invention non-exclusively so it is available to all, for instance. Or one might license a patent exclusively to a company to develop a product based on the invention, where the patent is necessary to justify the development effort. But making a distinction between what’s “necessary” and what’s “desirable” is all but impossible.

For universities taking ownership positions in inventions made with federal support, the public covenant in essence requires licensing–and not just licensing to make money for the university, but licensing that results in practical application–use with public benefits on reasonable terms. Suing for infringement, to exclude use or even to collect royalties for infringement, also is limited by Bayh-Dole’s public covenant. A patent owner has to show how it is that the litigation promotes the use of the invention. One might exclude use by one company to enable the use by another company. But it’s difficult to see how suing to exclude use by one company is permissible when there are no other companies licensed to use the invention. Similarly, even suing to obtain royalties for infringement must pass the policy test in federal patent law that the patent is to be used to promote use, not to make that use more difficult or more expense.

Bayh-Dole’s public covenant continues:

. . .  to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery;

Not only must a patent be used to promote utilization of inventions made with federal support (and not for other uses) but also inventions must be used in a manner to promote “free competition and enterprise.” This is very strange wording. How are inventions to be used–as distinct from patents on these inventions–so that the use promotes “free competition and enterprise”? One would expect here “…that patents on inventions acquired by nonprofit organizations and small business firms are used in a manner . . . .” With such a reading, we might expect that the public covenant is to license inventions non-exclusively, or if exclusively with a shorter term than the life of the patent, or licensed only for the specific implementation of an invention that a company brings to practical application, not including all other variations that the company has declined to develop and other companies might develop.

But the policy specifies inventions. Thus, when a patent owner licenses a patent on a subject invention, that owner must establish conditions so that the use of the invention under the license promotes “free competition and enterprise.” It is a mystery, perhaps of bad drafting or perhaps of ambiguity by design. We also don’t know what the word “free” adds to “competition” (and to “enterprise”) but we might posit that “free” means, in the context of this statement in federal patent law, “free of barriers that might be created by exclusively licensing a patent on a subject invention for its entire term, or by not licensing the patent at all.” In this reading, a patent owner is obligated to license a patent on a subject invention so that, before the expiration of the patent, multiple companies have the opportunity to use and/or develop the invention–“free” of restrictions imposed by a patent property right carrying this portion of the public covenant.

One further element of the public covenant:

to promote the commercialization and public availability of inventions made in the United States by United States industry and labor . . .

This element is addressed in 35 USC 204, requiring U.S. manufacturing (if possible) for nonprofit-owned patents on subject inventions that the nonprofit licenses exclusively for use or sale in the United States. In this portion of the public covenant, it is clear that commercialization is not the only thing to be promoted–“public availability” of inventions is also expected. “Public availability” of inventions is distinct from commercialization. Thus, an owner of a patent on a subject invention must distinguish between licenses for commercialization and licenses for use. The public covenant mandates both kinds of licenses. 

A non-exclusive license might readily address both, but an exclusive license to commercialize that excludes public availability of the invention outside of commercial channels violates the public covenant expressed by Bayh-Dole–and runs outside of the patent owner’s property rights under federal patent law. What is the consequence? It would appear that a failure to make inventions made with federal support “publicly available” amounts to “patent misuse.” Any exclusive commercialization license with a grant of rights drafted so broadly as to preclude making and using other than in the form of commercial products ought to expose the patent itself to invalidation. It’s just that no one has thought to try this approach.

Bayh-Dole also establishes a standard patent rights clause that makes certain aspects of the public covenant expressly matters of federal contracting. Some of these reprise requirements in the public covenant, such as the requirement for United States manufacture when an exclusive license is granted to use or sell in the United States. Others were removed soon after Bayh-Dole was passed, such as limitation on the length of any exclusive license granted by a nonprofit organization to other than a small business. Yet others restrict nonprofit organizations from assigning subject inventions without also conveying to the assignee the obligations of the nonprofit organization under the standard patent rights clause. These obligations include restrictions on the use of money from the exploitation of a subject invention (including royalties) and a requirement that royalty income must be shared with inventors.

Regardless of the standard patent rights clause implementation of specific elements of the public covenant, the public covenant placed by Bayh-Dole in federal patent law reshapes the patent property right of patent holders.

 

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