Illusions of Bayh-Dole: “manufactured substantially” 1

Let me show you how empty the Bayh-Dole provision on “Preference for United States Industry” (35 USC 204) is. According to its terms, this provision is the single most important piece of federal patent policy. For convenience, here’s the provision:

Notwithstanding any other provision of this chapter, no small business firm or nonprofit organization which receives title to any subject invention and no assignee of any such small business firm or nonprofit organization shall grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.

However, in individual cases, the requirement for such an agreement may be waived by the Federal agency under whose funding agreement the invention was made upon a showing by the small business firm, nonprofit organization, or assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible.

I have divided it into its two sentences. We will take it apart further in a few minutes. The main points:

  • Section 204 establishes itself as the most important provision of federal patent policy
  • Section 204 as drafted is narrow, ambiguous, and easily circumvented
  • There’s little “preference” for United States industry actually required by section 204
  • Section 204 is useful mainly for political show and bureaucratic nonsense

First, some context

The preference for United States industry was put forward by Senator Bayh as the fundamental premise of Bayh-Dole. The statement of preference for United States industry was in the earliest drafts of the bill, including S. 414. This preference is established in Bayh-Dole’s statement of policy and then taken up in 35 USC 204. While Bayh-Dole asserts that it–the statute–takes precedence over any other statute on matters of subject inventions, section 204 of Bayh-Dole further asserts that it–section 204–takes precedence over anything else in Bayh-Dole. It would appear then that 35 USC 204 sets itself up as the single most important provision in the entirety of federal patent policy pertaining to federal agency contracting and requirements on subject inventions. We might expect it, then, to be pretty darned powerful. And we would be wrong. But 204 is indeed remarkably consistent with how Bayh-Dole has been conceived–make a flourish of being important, but walk the flourish back in the details and procedural implementation.

35 USC 200 states federal patent policy for inventions arising from federally supported research or development. According to section 200, the patent system should be used “to promote the commercialization and public availability of inventions made in the United States by United States industry and labor.” Section 204, the “Preference for United States Industry,” then is an expression of this policy statement. 35 USC 202(c)(8) then (apparently uselessly–it is law, so why does it need to be in each federal contract as well?) requires the standard patent rights clause to include 204. The standard patent rights clause at 37 CFR 401.14 includes 204’s text at paragraph (i) with some alterations that are interesting in their own right, but for a different time.

Working the 204

Let’s work through section 204, starting with the opening gesture:

Notwithstanding any other provision of this chapter

Bayh-Dole asserts that it takes precedence over any other statute (other than later statutes that expressly recite Bayh-Dole, except Stevenson-Wydler, which Bayh-Dole expressly defers to; see 35 USC 210). Section 204 states that it takes precedence over anything else in Bayh-Dole (“this chapter”–Chapter 18 of 35 USC). This precedence apparently includes Bayh-Dole’s statement of precedence in favor of Stevenson-Wydler. Take that however you may. The key point is that this section 204 is certainly the high point of Bayh-Dole, the self-declared most important section of the entire law.

It is not clear, however, exactly what, beyond Bayh-Dole’s own statement of precedence, section 204 is intended to displace. Section 200 carries the policy statement that section 204 follows on. Does 204 eat its parent? Perhaps. Not 201, that’s definitions. 203’s march-in adds further limits, nothing contrary. One of the triggers for march-in is failure to comply with section 204. Section 205 is confidentiality of disclosures and patent applications. Section 206 authorizes standard funding agreement provisions–patent rights clauses. Sections 207-209 concern federally owned inventions. Section 210 asserts precedence of Bayh-Dole over other statutes except Stevenson-Wydler. Does section 204 take precedence then over Stevenson-Wydler? 211 disclaims any immunity from antitrust. Does 204 supply immunity from antitrust in the case of tying exclusive licenses to American manufacturing? 212 excludes educational grants. That leaves 202. Section 202(c) is provisions to be stuffed into any standard funding agreement provision, including by reference 204. Section 202(a) permits nonprofits and small businesses to elect to retain title to inventions they have already acquired. Section 202(b) allows federal agencies to alter the right authorized by 202(a) and the conditions stipulated by 202(c). The remaining provisions of 202 deal with inventors’ ownership of subject inventions their employers regret owning (d); situations in which co-inventors are federal employees (e); and compulsory licensing of a contractor’s background inventions (f). None of those provisions would appear to offer anything contrary to 204’s concerns.

So we might say that 204 prevents federal agencies from changing 204 as part of their patent rights clause modifications, precludes antitrust complaints tying American manufacturing and exclusive licenses, and supersedes any interpretations based on Congress’s statement of policy and objective in 200. This is, in its apparatus, one heckuva important provision in Bayh-Dole. Section 204’s statement of precedence is a clear gesture toward the clause’s political importance. We are not in the backwaters of Bayh-Dole. This is the front and center stuff.

The next part of 204 states the scope: (i) small business firms or nonprofits or assignee of either (ii) which receive title to any subject invention. (In Bayh-Dole, a subject invention is a patentable invention owned by a contractor and within scope of the federal funding agreement, and contractor is defined as any party to the funding agreement, and parties to a funding agreement includes parties added by assignment, substitution of parties, or subcontract of any type):

no small business firm or nonprofit organization which receives title to any subject invention and no assignee of any such small business firm or nonprofit organization

It is worth noting that 204 does not use “contractor” here–a term Bayh-Dole defines–but rather repeats “small business firm” and “nonprofit organization.” Again, there’s material there, for another time. Notice, too, that assignees are included with the small businesses and nonprofits–not with licensees. We will come back to this point soon.

Next, the requirement–a general prohibition that will be walked back with exceptions, generalities, qualifiers, and waiver. No small business or nonprofit

shall grant to any person the exclusive right to use or sell any subject invention in the United States

On its own, this is a general prohibition. It follows from Senator Bayh’s Senate floor description of Bayh-Dole in its early draft, S. 414:

This bill will allow universities, nonprofit organizations, and small businesses to obtain limited patent protection on discoveries they have made under Government-supported research, if they spend the additional private resources necessary to bring their discoveries to the public.

I have added the emphasis. Patent rights on subject inventions are not ordinary patent rights–they are “limited” in a variety of ways, one of which being this restriction in section 204.

The Dedication Arguments

There have been arguments that federally supported inventions should be made available to practice by all citizens, on reasonable terms. One version of the argument is that the federal government, having in essence issued a patent to itself, has exhausted the right to exclude others; another version is that the federal government satisfies the purpose of the patent system by publishing each invention it owns in the patent literature, and has no need for the right to exclude others or to profit from granting licenses; another version is that the federal government has no good reason to sue its own citizens for practicing what the government has supported and acquired on their behalf.

These arguments established the default for federal government ownership of inventions. The counter argument that there were times when a private patent monopoly was necessary for the development of an invention to the point of practical application was routinely advanced as a rare exception to the general practice of dedicating federally owned inventions to the public, or granting royalty-free non-exclusive licenses if necessary to control quality, preclude misrepresentation, counter monopolistic control of improvements, or protect a domestic market from unfair foreign competition.

The Institution Patent Agreement program, begun in the early 1950s, suspended in the late 1950s, revived in 1968, and shut down for good in 1978, proposed exclusive licensing as a possible exception to a general practice of non-exclusive licensing. When Congress reviewed the IPA program in the late 1970s, it found that there was virtually no non-exclusive licensing–almost all of the licensing was exclusive.

Similarly, the Kennedy patent policy established in 1963 and renewed with slight modifications under Nixon in 1971, proposed that most patents on inventions supported by federal money should be dedicated to the public, and private patenting should be permitted only with limited rights, for a limited duration, when doing so would “call forth private risk capital” to develop inventions to the point of practical application and bring products to the public more quickly than would be done otherwise. The contractors identified for this privilege were ones that had established capability and a commercial position in a non-governmental market. That is, they weren’t just contractors providing services to the government–they were companies doing independent commercial business that the government also contracted with to produce and adapt products for government purposes. Any other contractor had to petition the government to acquire control of patent rights for non-governmental purposes. Agencies did not have to grant any such petition, and the duration of the review process for such petitions, depicted as delay, was used to attack the review practices of federal agencies. Had agencies only immediately refused most such petitions, we may have found ourselves on a much more productive pathway with regard to federal patent policy.

Even Bayh-Dole, in its provisions for management of inventions owned by the federal government makes the traditional show of depicting exclusive patent licenses as a special case that may be used only if doing so is “reasonable and necessary” (among other requirements–see 35 USC 209). But here, too, the statute is drafted to make it appear that one pathway (non-exclusive licensing) will be frequent, and the other pathway (exclusive licensing) will be special case, a rarity.

Federal practice, however, does not follow appearances, especially in areas such as biomedicine where non-exclusive licensing would be otherwise be indicated as a matter of public health and encouragement of multiple sources and formulations of new medicines. Instead, private monopoly control of new classes of compounds from which to create mass-produced commercial product is the norm, endorsed by the federal government. The role of Bayh-Dole is to make this private monopoly subsidized by public money appear virtuous by involving research universities and charitable nonprofits as the middlemen to create and convey patent monopolies to the patent medicine industry. Everything we discuss with Bayh-Dole circles back to the persistent agenda, which arose not just with pharmaceutical companies but also with patent counsel for the NIH and with attorneys representing universities and university lobbying groups such as AAU and COGR, and later SUPA/AUTM and APLU.

The Federal Ownership Parallel to 204

Even the requirement for preference for United States industry is watered down in the provisions regarding federal licensing of inventions. Here’s 35 USC 209(b):

(b) Manufacture in United States.—A Federal agency shall normally grant a license under section 207(a)(2) to use or sell any federally owned invention in the United States only to a licensee who agrees that any products embodying the invention or produced through the use of the invention will be manufactured substantially in the United States.

Section 207(a)(2) authorizes the federal government to grant exclusive licenses, including the right for private parties to sue for infringement (which entails, in practice, assigning an invention to the private party under the cover of granting an exclusive license)–perhaps the single most damaging change wrought by Bayh-Dole to federal patent policy. There is no statement of precedence in 209(b), as there is in 204. Nor is there a “preference” in the heading. The requirement is reduced to “normally,” as if the stipulated practice is just a “guideline.” Section 204 could have been made the law of the land for federal agencies as well as for contractors, but Bayh-Dole does not do that.

The Qualifications of 204

Keep in mind the qualifications present in section 204.

The section 204 general prohibition on the right to grant exclusive licenses (to be walked back with qualifications) is limited to grants of the right to use or the right to sell.

There is no requirement to prefer United States manufacture when licenses are non-exclusive or sole (a non-exclusive license done once, a non-exclusive license ending a program of non-exclusive licensing). And if all substantial rights–make, use, and sell–are licensed exclusively, then the license acts as an assignment, and the prohibition does not apply. The prohibition applies only to limited exclusive licenses–either to use or to sell.

The restriction is further limited to the United States.

Exclusive licenses to use and sell may be granted for the subject invention in all foreign jurisdictions without requiring US manufacture. Easy circumvention: grant an exclusive world wide right to make and sell, but for the US, where the right to sell is nonexclusive. Don’t grant any more nonexclusive licenses in the US, or, any nonexclusive licensee to sell in the US will have to buy from the foreign manufacturer. Essentially, the licensing circumvention creates a licensed dealership sales network selling foreign manufactured product.

The restriction applies only in the case of licensing an invention.

A patent owner enjoys a monopoly created by the patent. A patent owner may use exclusively and sell exclusively without any constraint to use United States manufacturing. Thus, a university can assign a subject invention to a foreign company, which then may enjoy a monopoly in the United States–including the exclusive rights to use and sell–without any encumbrance with regard to US manufacture. Similarly, a small business owner of a subject invention can move offshore or be acquired by a foreign firm and exploit its US patent monopoly while manufacturing outside the US.

Part 2 of this article is here.

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