Illusions of Bayh-Dole: the bathos of university practice, 3

We are working through a report of a workshop discussion of Bayh-Dole’s “manufactured substantially” requirement in 35 USC 204. Actually, it’s not really a requirement–more like a gesture. It’s incredible what the workshop panel folks can’t get right about the law. Of course, it doesn’t matter, since the law isn’t enforced, so we might expect loose practice. But for the sake of working things through carefully, just for the delight in finding things out, lets continue. We have been discussing the logic of the march-in procedures in response to non-compliance with 35 USC 204. The government can march-in and require compulsory licensing–non-exclusive, “co-exclusive” (whatever that means), or exclusive.

Wait. The federal government can require an exclusive licensee to grant an exclusive license. How would this work? One way would be as a sublicense–the exclusive licensee would have to grant an exclusive sublicense to use or sell the invention to a company who agrees to manufacture substantially in the United States. If the exclusive sublicense excludes the exclusive licensee, then we are back to the previous condition and the exclusive licensee might resist this move by downgrading its license to nonexclusive, making the federal march-in moot, since section 204 no longer applies. If the exclusive sublicense does not exclude the exclusive licensee–so both may use or sell–then again, section 204 no longer applies because the licensing is in effect non-exclusive. The existence of multiple exclusive licenses = non-exclusive licenses.

Even so, there is still a problem. The licenses we are discussing are exclusive to use or exclusive to sell (or both). But someone has to be legally able to manufacture product in the United States–that means either the owner of the subject invention or a licensee. Further, the ability to manufacture in the United States must be unencumbered by patents held by yet others. That is, if someone outside the sphere of the owner of the subject invention and its exclusive licensee controls patents that prevent the practice of the subject invention in the United States, then absent a deal with that patent owner, no one can manufacture in the United States.

If the government’s remedy is merely to grant a different exclusive license to use or sell, it’s an entirely empty gesture if that new licensee has no right to manufacture in the United States. The government would have to appropriate the exclusive right to make the invention in the United States. But that leads to another dead end: if the government grants the exclusive rights to make, use, and sell, then the government in effect has assigned the invention to the new licensee–and the new licensee-assignee then has no obligation to manufacture in the United States, per section 204, making the government’s gesture again entirely empty. It does not compel in manufacturing in the United States–quite the opposite, it eliminates section 204 preference for United States manufacturing. So the government would have to grant only a non-exclusive right to make the invention or would have to grant to other “responsible applicants” the right to make so that the “responsible applicants” desiring to use or sell could source their products from licensed American manufacturers. That’s a bit of a big ticket.

One more variation. If the “responsible applicant” willing to manufacture in the United States is not competitive with foreign manufacturing, then the original exclusive licensee has little to worry about letting the deal go non-exclusive. And if United States manufacture is competitive, then the exclusive licensee would do well to work with the owner of the subject invention to secure the right to make the invention as well, so that again section 204 no longer applies.

What’s the point? Isn’t your head feeling hopelessly cluttered by now? Mine sure is. I don’t like spending my time this way, either. Here’s the point–almost any way you cut it, the remedy in section 203 to the manufacturing preference in 204 makes no sense, does nothing to respond to foreign manufacture. At each turn, a licensor and exclusive licensee can respond to render section 204 inapplicable. The reality is, other than for an extremely strained fact set, there’s no action that a federal agency can take under section 203 march-in that would result in United States manufacture instead of foreign manufacture. Waiver is merely a bureaucratic bowing to an authority that has nothing to add but more bureaucracy to invention management.

Despite the assertion Schwartz reports, march-in for noncompliance with section 204 is in fact not a real possibility and the only thing that should be taken seriously is not making a show of ignoring compliance.

What if the licensee hasn’t determined a manufacturing location yet, as there is significant development to be done?  When should we submit for a manufacturing waiver?

You can apply for a waiver once they think they’ve identified a location, but if that changes down the road, you’ll need to submit another application because you won’t be able to amend your prior application.  So, it’s really up to the licensee as to when they want to do this.

By now you are on to this. If the licensee has not agreed to United States manufacture, they cannot be an exclusive licensee without a waiver. It is not up to the licensee.

Section 204 does not contemplate granting exclusive licenses to use or sell in the United States with a later agreement or waiver to manufacture in the United States. It’s just not there. Grant a non-exclusive license or assign the invention and avoid section 204 altogether. Or, one can follow Schwartz’s advice and violate section 204, figuring that you can come into compliance later. That’s the attitude–violate and comply later, if necessary. That, too, is so typical of university Bayh-Dole practice. A compliant practice is to get the agreement, grant the exclusive license, and then, if the licensee decides to source product outside the United States (or at least a substantial portion of the product to be used or sold) go after the waiver or adjust the terms of the license (make it an assignment, make it non-exclusive). An agreement does not mean forever. It just means get the agreement to have the right to grant the license, and then adjust things later if the agreement must be altered.

And the answer to the question everyone asks, because Bayh-Dole is so happily ambiguous:

Could you please touch upon how the TTO and licensee can understand what “substantial” means with respect to manufacture, and whether a waiver is needed to be applied for?

I don’t think the TTO should be construing what “substantial” means.  I think construing that statute is really a legal opinion, and it’s up to the licensee to get that legal advice from their counsel.  If they feel like their manufacturing is not substantial, then there’s a section in the application that talks about the percentage produced outside the U.S.  And maybe they can have you put in an application just to be on the safe side.  And if they decide for themselves that they don’t need to put in the application, then they bear the risk because if it’s deemed that they’re not compliant down the road, there’s this possibility of march-in rights.  It’s a tricky issue.  I think it’s one, really, for the licensee and their lawyer to figure out.

“Manufactured substantially” is multiply ambiguous. Does it mean that some product is manufactured in the United States and some product is manufactured abroad, but “substantially” more product to be used or sold in the United States is manufactured in the United States? Or does it mean that the United States proportion of each product manufactured is “substantially” more than the foreign proportion? Or does substantially mean something more like “in nearly its entirety”? And of course there are questions about the scope of manufacture–does it include filtering and testing, production of every component, packing? or just final assembly?

The NIH can’t even figure it out. Here’s what they ask for on their waiver form:

identify the part or percentage of products arising from the invention that would be manufactured outside the U.S.

It could be either!–manufacture most product in the U.S. or manufacture most of each product in the U.S. Or, “substantially more” product or more of each product. For any of this, the exclusive license has to have the licensed right to manufacture or the invention owner has to do the manufacturing or the patent owner has to grant at least one U.S. manufacturer the right to make product the exclusive licensee to use or sell can use or sell.

The way section 204 is set up, the invention owner has to be ready to manufacture product in the United States or must grant at least one American manufacturer the right to manufacture product. Clearly section 204 compliance cannot possibly be solely the responsibility of the exclusive licensee to use or to sell. Just can’t.

The answer Schwartz reports here then is deeply awful. The idea then is that the patent owner should have no idea what it is that the exclusive licensee is agreeing to. Just demand compliance with the magic words and let the licensee drift, even though it is to be the licensor that must seek a waiver. Here’s the implied chain. The licensee does whatever it does, and if the federal government objects, then the licensee has to come wiggling back to the university to beg the university to seek a waiver. Well, that’s some way to do business.

It is true, however, that it’s likely that licensee does bear the primary risk. If the federal government were to actually use 203(a)(4) march-in and require the invention owner to grant additional licenses to sell or use “on terms reasonable under the circumstances,” the licensor would receive that reasonable payment–and no doubt do better than before. And if you accept this point, then you also should be wondering why the heck universities would ever do exclusive licenses to use or sell. Why does section 204 even exist? It’s total nonsense presented as the government’s gift to American industry, when it’s no more than a middle finger.

If the government marched in and required additional licensing, the former exclusive licensee would have to deal with competition unless it took the appropriate precautions. Of course, competition is not that big a deal. Competition speeds sales cycles. Competition prepares markets that market leaders can then appropriate. Competition relaxes scrutiny for anti-competitive behaviors. Competition can validate high price points. Competition is not the end of the world, certainly. But then, the presence of competition would undermine the oft-repeated claim that no one will touch an invention that isn’t “protected” by a patent monopoly. Still, why would anyone take an exclusive license to use or sell an invention and expect to any “development” at all without a right to make the invention? You see, section 204 is unbearably stoopid. For anyone to take such a limited interest in an invention, someone else would have had to the development work. Whoever holds the manufacturing rights. And the owner of a subject invention has no restrictions on granting the exclusive right to “make.” It’s just that if there is no authorized American manufacturer, then there’s absolutely no point in granting an exclusive license to use or sell in the United States.

An exclusive licensee to use or sell is a rare thing in university licensing. I doubt any university in recent times (following the retreat of the continental glaciers) has granted such an exclusive license–make and use, maybe, make and sell, maybe but sell or use without the make right–why? when? Who would be dumb or desperate enough to take such a deal? Universities grant either non-exclusive licenses (usually when forced to by the terms they grudgingly accept in research agreements) or an exclusive license to the substantial rights of the invention–an assignment.

Section 204 of the Bayh-Dole Act is a professional illusion. There are no exclusive licensees of just the right to use or sell. It doesn’t happen. But if there are such licensees, lurking in some Tasmanian forest, the appropriate action to take is to secure an option on a license to manufacture in the United States, even if one doesn’t need it, and if not that, then a requirement that the exclusive licensee will get the most favorable terms from any manufacturer licensed by the owner of the invention, regardless of where that product is manufactured.

Schwartz is the reporter. It’s not his responsibility to figure out whether what he has transcribed is goofball or wise. He’s done a great service by making visible university advice about section 204 compliance. And here’s the most helpful thing in the entire article:

Where should I go to find an application?

A waiver application must be submitted to the applicable funding agency or agencies, and generally can be submitted online through iEdison, the federal government’s online tool for reporting under the Act. (

Application form can be found here.

For a complete list of agency contacts, click here.


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