The Government Patent Market for Public Health Inventions, 3

The NIH’s Institutional Patent Agreement program was framed in terms of the Kennedy patent policy. It ignored, however, the Kennedy patent policy distinction between discoveries directly related to public health and other discoveries. It could do so because it set up a primary pathway for management of inventions by a nonprofit that has hosted federally funded research. In this primary pathway, a nonprofit will obtain a patent on each discovery that it chooses to manage and make the invention available non-exclusively, royalty free or on terms that are reasonable in the circumstances. Here’s the template IPA, section VI.(c).

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

The nonprofit “Grantee” is to manage inventions “in the public interest”–not in its own interest. This is the same mandate that federal agencies had under the Kennedy patent policy, except that under the IPA program, the nonprofit had to seek a patent and could not simply publish the invention. The argument made for the IPA program was that nonprofit patent administrators, located closer to the inventors than were federal administrators, and with greater incentives to promote inventions for public use than had federal administrators, could do a much better job than the federal government in promoting the development of inventions for public use and benefit. The nonprofits, the argument went, would do the job the federal agencies were committed to do, but would do that job better than the federal agencies could. That’s the overt, primary point of (c), above. Any patented invention is to be managed in the public interest–not for a private interest–and therefore the nonprofit is to break up the patent monopoly through non-exclusive licensing, even royalty-free licensing. That’s the public interest mandate for the use of the patent system. And that’s the general case, without regard for whether an invention relates directly to public health.

Under the Kennedy patent policy, the IPA program should not have permitted nonprofits to obtain patents on inventions pertaining to public health. It could do so only so far as the nonprofit committed to doing only what the federal agency was required to do if it obtained a patent–manage the invention through non-exclusive licensing, never excluding any qualified applicant, never using the threat to exclude a qualified applicant as a way to raise the price of a license.

The IPA program ignored the distinction between inventions directly related to public health and other inventions. And remember, the IPA was designed by the NIH, building on a program that the Public Health Service had started in the early 1950s and suspended before 1960. If there was any one area that ought to have been directly addressed by the IPA program, it would be inventions that “directly concern public health”–such as inventions made in the area of medicinal chemistry. And yet this is where the IPA agreement is silent. By abstracting to inventions managed by nonprofits in the public interest, the IPA (and the NIH) avoids making obvious that it runs against the Kennedy patent policy and PHS requirements.

The IPA does one more thing that makes clear how this Frankenstein built his monster. Although the primary management pathway in the IPA is for the nonprofit patent owner to administer the invention in the public interest through nonexclusive licensing, the IPA also provides a second path:

except as provided in paragraph (d) below,

Paragraph (d), with a great deal of hand-waiving and qualifications that do not have to apply, provides for exclusive licensing. We will take it step by step.

The Grantee may license a subject invention on an exclusive basis if it determines that nonexclusive licensing will not be effective in bringing such inventions to the commercial market in a satisfactory manner.

Although the primary pathway is non-exclusive licensing, a patent owner can license exclusively if it “determines” that non-exclusive licensing won’t be satisfactory. What might go into such a determination? It would appear nothing more than the patent owner’s determination to grant an exclusive license. What could “in a satisfactory manner” possibly mean here? Satisfactory to whom? To the public, given that the overriding obligation is to administrate inventions in the public interest, not the interest of the patent owner? To the patent owner, with regard to institutional objectives, such as making money from its patent position? To the NIH, based on its policies and regulations? It’s hard to say–one might say it is an empty qualification that allows the owner of a patent on a subject invention to do whatever it pleases–license exclusively or non-exclusively, as it determines.

The reality is, when the IPA program was reviewed by Congress, that nonprofits never licensed non-exclusively. The primary pathway never operated. The only pathway that operated was this paragraph (d)–exclusive licensing. This is perhaps a general truth of bureaucratic drafting: hide the primary intention in a set of what are made to appear to be secondary intentions. The IPA’s paragraph (d) continues:

Exclusive licenses should be issued only after reasonable efforts have been made to license on a nonexclusive basis,

The first part sounds reasonable–try non-exclusive licensing first, and if no one is willing to take a license, then move to exclusive licensing. That’s an interesting default position, if you think about it. A reason to take a non-exclusive license, in such a case, is to prevent the patent owner from moving to exclusive licensing. That is, if the owner of a subject invention is required to offer first a non-exclusive license, especially one that’s royalty-free or for a royalty that does not depend on a threat of exclusion, then anyone in industry can decide whether the invention should be available non-exclusively or whether the owner of the patent can exploit the monopoly power of the patent. The value of the license, then, would reflect the value to a company not to have the invention subject to a monopoly by any one company. For instance, a company may determine that the invention should become a standard or if it were broadly available would grow the market for other, related products. A non-exclusive license, then, would decide the matter. But paragraph (d) does not require an attempt at non-exclusive licensing first. It just puts that in the list and immediately flows on past it:

or where the grantee has determined that an exclusive license is necessary as an incentive for development of the invention

Here we get a restatement of “bringing such inventions to the commercial market in a satisfactory manner.” But now the exclusive license is “necessary as an incentive.” That is, no one would develop the invention unless there’s a patent monopoly as an “incentive.” Again, how does one determine that a monopoly is “necessary”? One might think that one would have to offer a royalty-free non-exclusive license, especially where no development is necessary, as with research tools that already have been demonstrated to work productively. If there are no takers, then offer a royalty-bearing non-exclusive license–that ups the ante because some companies might not be willing to pay a royalty (or could not afford it), and that would limit the competition in development. If that doesn’t work, then one might consider exclusive licensing as “an incentive” for development of an invention. We are back to the Kennedy patent policy’sd concern for “private risk capital”:

The public interest in a dynamic and efficient economy requires that efforts be made to encourage the expeditious development and civilian use of these inventions. Both the need for incentives to draw forth private initiatives to this end, and the need to promote healthy competition in industry must be weighed in the disposition of patent rights under government contracts.

Here we have a statement of public interest: encourage development, offer incentives for private initiatives, and promote competition. We can move through these in order. The basic argument made by advocates of the IPA program was that universities could do a better job encouraging use of inventions than could the federal government. Perhaps so. But also, perhaps, inventors and investigators could do a better job than universities, or industry organizations or professional organizations could do a better job than either universities or inventors; or perhaps in some cases, a specialized invention management organization could do the better job. If universities can do a better job getting the word out about a new discovery–great, then do it, and make sure everyone who wants to use the discovery can do so, and has help from discoverers and inventors when they need it. No need for patent monopolies here.

Now, what about drawing forth private initiatives? The purpose of identifying inventions made with federal support is to deal with the prospect of patents. If there were no patents, invention would not figure. But patents create a property right, and allowing key results of public investigations turn into private property–or institutional property–is worth paying attention to. “Drawing forth private initiatives” is a general phrase. If people had wanted to limit the focus to “using patent monopolies to attract risk capital to develop commercial products,” they could have written something specific.

We might then conclude that there are more ways to draw forth private initiatives than trading on patent monopolies. One might hold an all day workshop, for instance. Before you laugh, consider that an all day workshop to present an important invention plus a briefing on the state of the technology and continuing research might draw 50 people willing to pay $2,000 for the opportunity. They each walk away with a royalty-free non-exclusive forever license to any patents, and the university takes in $100K. Now Stanford reported that 287 inventions out of 6,400 in 36 years made $100K cumulative over nearly two decades on the patent licensing model.

We might then put the money-making proposition somewhat differently. Are there enough people in industry willing to pay $2K for an all day briefing on this invention and on-going research, plus a royalty-free license to any patents to justify filing a patent application? If even ten people pay $2K, the university has paid for its patent work. And holding a workshop a year for three years–about the time for a patent to issue–might net $250K, all without charging a dime for a patent license. That’s more than most university inventions ever make, even at a place like Stanford. Further, a workshop is akin to instruction–something a university is expected to provide, and utterly unlike a patent licensing program threatening infringement if companies don’t pay up–something universities are not expected to do but do anyway. A workshop series, then, might be a great way to draw forth private initiatives without having to think once about an exclusive license. But if university administrators think first about an exclusive license, holding such a workshop is not even remotely possible.

Without taxing one’s brain, one can come up with other such ways of drawing forth private initiatives while offering non-exclusive licensing, even royalty free. Proposing an industry standard, for instance, or creating an open innovation project that attracts contributions of technology and funding, or forming a research consortium, or placing graduate students as industry interns to teach the invention, or creating a newsletter that industry engineers can subscribe to and stay updated on the invention and the research around it, or offering customization work. Any of these things might draw forth private initiatives–no exclusive licensing needed.

There’s a third element that’s listed as part of public interest in the Kennedy patent policy: the need to promote healthy competition. This need is to be in balance with the incentives. Competition suggests that more than one company has access to an invention–and that in turn requires, at some point in the life of the patent, non-exclusive licensing. One way, then, to achieve a balance between incentives and competition is to license exclusively for only a short time–say, three years–and after that open up access to all qualified companies. Some major corporations have followed this approach with their own patent portfolios. Proctor and Gamble, for instance, had a policy of licensing new inventions one year after the patent had issued–their reasoning was it was better to have the competition using the company’s inventions than to be developing their own inventions and blocking the company. Tesla, similarly, has opened its patent portfolio to all, arguing that anyone using the company’s technologies is going to contribute to the overall rise of the electric car industry, and that in turn will help Tesla.

Of course, the primary pathway presented by the IPA template–non-exclusive licensing–is an obvious method of promoting competition. But the IPA works hard to carve out ways to avoid non-exclusive licensing without saying as much. Here’s the third element of the IPA’s backtracking from non-exclusive licensing in paragraph (d):

or where market conditions are such as to require licensing on an exclusive basis.

This is a catch-all. What are “market conditions” for a new invention? That’s a tough one. And what market conditions “require” exclusive licensing? And for what purpose, again? If the “market” is the market for new inventions, then this clause in effect says, “license exclusively if that’s the only way to get someone to pay for a license.” That is, if companies will only use the invention if they get it for free, then there’s not really a market for the invention. To make a market, then, withhold the invention and seek to license exclusively. The value of the license then becomes the value of withholding the invention from all other companies.

Alternatively, the “market” could be a market in which a product version of the invention might be sold. But for most inventions, there is not a single market. Even for therapeutic compounds, one might distinguish between a veterinary market and a human market. Or one might find that markets vary by country or industry. So just what “market” does the IPA template paragraph (d) intend? The IPA is written to be ambiguous. A university patent broker can decide what “market” and with that, can decide to license exclusively because in whatever market the patent broker has targeted, that’s what the broker thinks that the company targeted for a license wants. If the target company requires an exclusive license, then, well, gosh, then an exclusive license is required under those “market conditions.” That’s about as technical as we can get. Anything goes. But it takes a bunch of handwaving in paragraph (d) to make sure no one really figures out what’s going on.

Paragraph (d) continues with another apparent protection for exclusive licensing:

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.

This sounds protective at least. The problem is that the limited time provided by the Kennedy patent policy is three years from the date of patent issue, not three years from the date of first commercial sale or date of the exclusive license, whichever is soonest. The switch here changes things dramatically. If a contractor has three years from the date a patent issues, then the contractor has to work quickly to get an invention into use and demonstrate practical application. But the way the IPA has it, if the contractor is a nonprofit, the contractor can wait for the entire term of the patent to do any licensing or promote use. In fact, the IPA here announces that a nonprofit can sit on a patent for as long as it wants, not licensing to anyone, not using the claimed invention. But it sure looks like what is happening is that nonprofits are limited in how long they can license exclusively. Funny how clever bureaucratic minds can be–funny sad, not funny funny.

The limit on exclusivity has moved from the contractor (here, the Grantee) to the exclusive licensee. It’s the exclusive licensee that has the clock ticking–three years from the date of first commercial sale or three years from the date of the exclusive license. Now think about this–why would a company rush to take that exclusive license? Why not cut a deal with a nonprofit for, say, an option on an exclusive license and then wait to exercise that option just when a commercial product is ready to go on the market? That way, the company gets the full length of the permitted exclusive license. So this part of paragraph (d) gives nonprofits the freedom not to license at all, and not to license in any hurry, and gives companies that would take an exclusive license incentives not to license in any hurry either.

There’s one more bit of walk back in the IPA’s paragraph (d):

Any extension of the maximum period of exclusivity shall be subject to approval of the Grantor.

The maximum period of exclusivity isn’t a maximum at all. The NIH can extend the exclusive period to be as long as it wants. In essence, the IPA announces that the NIH can permit nonprofits to grant exclusive licenses for the full term of the patent, and be in no rush to do so, and companies, too, can be in no rush. Yet we would think that paragraph (d) is full of protections for the public in the case of exclusive licenses.

Here’s the capper:

Upon expiration of the period of exclusivity or any extension thereof, licenses shall be offered to all qualified applicants at a reasonable royalty rate not in excess of the exclusive license royalty rate.

We are back to the appearance of non-exclusive licenses, even if the NIH doesn’t feel the need, ever, to disapprove of extensions thereof. The prospect that the NIH could limit extensions thereof if it wanted to might feel reassuring, but look what the IPA does–it doesn’t say that subsequent non-exclusive licenses will be royalty free or on a reasonable royalty basis. Rather, the IPA says that non-exclusive licenses won’t be any more expensive than what someone has just paid for an exclusive license. That is, the IPA permits licensing non-exclusively at the rate of an exclusive license. That’s crazy nuts, unless the NIH intended to permit crazy nuts non-exclusive licensing rates like this, which is what it appears they wanted. It would be understandable to require that the royalty rate for the company paying for an exclusive license be reduced to the royalty rate offered for non-exclusive licenses, or even to require that non-exclusive licensing be offered on fair, reasonable, and non-discriminatory terms–but the IPA does none of these things. Instead, it permits (in the form a requirement) non-exclusive licensing at exclusive licensing rates. Incompetence? Intentional? Perhaps both. With a foundation such as this, how could Bayh-Dole be anything other than a monster-clown?

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