Bayh-Dole’s Public Covenant, 1

Patents on Subject Inventions Are Not Ordinary Patents

It has been clear since at least the late 1940s that patents on inventions made with federal government support should not be treated like ordinary patents. No one–even the advocates for Bayh-Dole–has publicly claimed that the government should subsidize inventive work and then turn a blind eye to whatever it is that the inventors or the institutions that seek to control inventors might do with patents on those inventions.

The argument then has been that the patent system, as it is set up, is not properly aligned with the public funding of inventive work. Work it however you wish. One angle is that public funding should result in public access, not proprietary controls. Another is that even if an invention deserves a curator, public access should be reasonable, as with a library’s special collection, where we accept a curatorial oversight to preserve the integrity and availability of an old manuscript or an edition annotated by the author. A third is that the federal government should not be issuing patents to itself any more than that the patent system should be exploited by government to hand out favors to buddies or make money for itself. The government should not set up to be in the business of suing its own citizens for practicing stuff that has been invented for their benefit. The patent system permits patent owners to sit on inventions, to exclude all practice of inventions for some personal value (such as selling some other product).

Francis Biddle (1947):

Patents on publicly financed inventions are not ordinary patents.

Inventions financed with public funds should inure to the benefit of the public, and should not become a purely private monopoly of technology which it has financed.

The government should have a broad license to such patents, and these patents should carry a working requirement–either exploit diligently or license non-exclusively:

In other cases, where there is some contribution by the Government, or some relationship between the invention and the employee’s official functions, but where these are clearly insufficient to warrant the assignment to the Government agency concerned…, ownership of the invention should be left to the employee, subject to a nonexclusive, irrevocable, royalty-free license to the Government to make, have made, use and dispose of the invention, and also subject to the obligation on the part of the inventor or his assignee to exploit the invention diligently or to grant nonexclusive licenses thereunder at a reasonable royalty to all applicants.

President Kennedy (1963):

A patent on a publicly support invention is split into government rights and “principal or exclusive rights.” The government’s rights include a broad government license to make, use, and sell (and have made, etc), and this license extends to all the States and municipal governments. In addition, there’s a working requirement with the addition that the government can compel licensing:

Where the principal or exclusive 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 period of time, the Government shall have the right to require the granting of a nonexclusive or exclusive license to a responsible applicant(s) on terms that are reasonable under the circumstances.

Senator Bayh (1979):

Even Senator Bayh described the patent rights available under his new law as “limited”:

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.

Bayh also clearly describes his bill as including a working requirement–this time in the form of requiring the expenditure of “additional private resources.” Even in the description of Bayh-Dole by one of its primary co-sponsors, we are given to understand that patents on publicly supported inventions are not ordinary inventions. There’s a public covenant that runs with patents on subject inventions. An owner of a patent on a subject invention cannot do just anything with such a patent.

Bayh-Dole’s Public Covenant

Bayh-Dole lays out the general public covenant on patents on subject inventions in its statement of policy and objective at 35 USC 200, a part of federal patent law. 35 USC 200 does not merely state the broad purposes of the Act–it also states the policy that everyone must follow in the exploitation of property rights in patents on subject inventions. There are three significant elements to Bayh-Dole’s public covenant in 35 USC 200:

It is the policy and objective of the Congress to use the patent system to

  1. promote the utilization of inventions arising from federally supported research or development
  2. to ensure that inventions made by nonprofit organizations and small businesses are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery
  3. to promote the commercialization and public availability of inventions made in the United States by United States industry and labor
  4. to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions

These four elements form a substantial portion of the public covenant. Bayh-Dole introduces into a patent law a new category of patentable invention, the subject invention–an invention owned by a party to a federal funding agreement and made (“conceived or first actually reduced to practice”) in the performance–in whole or in part–of that funding agreement. The public covenant attaches to every subject invention.

Let’s look at each restrictions on the property rights available for patents on subject inventions.

Practical Application

First, utilization. Federal patent law has no general working requirement. A patent owner is not required to use the claimed invention, nor to license it to others. A patent owner can sit on an invention and troll industry to collect royalties whenever someone happens to use the invention without a license. But for subject inventions, such actions aren’t possible. The patent system is to be used to “promote the utilization” of each subject invention. Think about what that means. How can a threat to exclude others result in “promoting the utilization” of an invention unless the patent owner or licensees are actively using the invention? That is, if a patent owner of a subject invention has no use going, and only has a intention to use, then what standing does that patent owner have to exclude others who are ready to use or are using the invention? None, according to 35 USC 200.

Bayh-Dole establishes a standard for utilization. That’s 35 USC 201(f):

The term “practical application” means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.

Parse it without the baggage: to meet the definition of practical application, a patent owner (and any licensees) must be able (i) to demonstrate (“to establish”) that the invention is being used and (ii) its benefits are available to the public (iii) on reasonable terms. Use alone is not sufficient. The use has to be demonstrable, the use has to result in public benefit, and that benefit has to be available on reasonable terms. There would be no need to place “reasonable terms” in the definition if any form of availability might serve. For inventions that are “commercialized,” the fundamental reasonable term is price, since price is the essence of any product offered for sale, i.e., “commercialized.” If a patent owner of a subject invention has not met the standard of practical application, then the patent owner does not have standing to litigate infringement. How so? Because the patent property right is not an ordinary right. 35 USC 200 constrains it to be used to promote use. Unless the litigation promotes use, there’s no property right to enforce.

Think of it another way. If 35 USC 200 doesn’t alter the property rights that arise with patents on subject inventions, then the policy of Congress doesn’t mean anything. It’s not even a wish list. It’s simply drapery to cover the disposition of publicly funded inventions without a public covenant. Why draft a new section of patent law that makes it appear there’s a public covenant for patents on subject inventions when there’s not?

The requirement for invention use is echoed in the fourth element of the public covenant, providing the federal government with rights to deal with nonuse or unreasonable use of subject inventions by the patent owner or anyone else. Nonuse is clearly directed to the working requirement of the “utilization” element. But for the federal government’s new rights, as provided by Bayh-Dole, the government would not have the right to address nonuse. These new government rights are set out in a number of places in Bayh-Dole–in the standard patent rights provisions, in the march-in procedure, and especially in the government’s non-exclusive license to practice and have practiced.

Provisions required to be included in any standard federal funding agreement include a requirement that if an owner of a subject invention fails to report subject inventions, or fails to elect to retain title, or fails to file a patent application, or maintain a patent, then the federal government can request title to the subject invention. The federal government has the march-in rights of 35 USC 203. It’s just that the march-in requirements were designed not to operate and are set up to appear to be a form of government “taking” of private rights, when the government already has that right in federal law. And the government can deal with nonuse by exercising its own broad rights through its nonexclusive license to make, use, and sell, and have others make, use, and sell the subject invention for any government purpose. While that license does not provide freedom for the government to set up as a commercial enterprise, it does allow the government to acquire whatever it needs for its purposes. Consider weapons systems. The government can authorize anyone to build whatever subject invention the government needs built, and sell that part to other government contractors to assemble into a shiny new jet fighter. But consider also prescription drugs in the “war on disease.” The federal government can do the same thing for all its medicare and VA patients. Those are considerable markets, and the government has the right to authorize the manufacture and sale (to the government) of prescription drugs based on subject inventions without using march-in procedures.

The “unreasonable” use prong of the federal government’s rights also deserves a mention. The government already has the right to deal with patent misuse–that’s what antitrust law is about. Bayh-Dole even calls out antitrust law and makes it clear that nothing in Bayh-Dole operates to waive antitrust issues. So the “unreasonable” use in Bayh-Dole has nothing to do with antitrust or patent misuse or anything else that the federal government already has rights regarding. No, the “unreasonable use” must have to do with use that violates the public covenant set out in 35 USC 200. It’s just that finding the controls on unreasonable use means digging into the abstractions of the march-in procedures in section 203, and then realizing that these procedures are set up not to operate.

Free Competition and Enterprise

Now let’s look at free competition and enterprise. This element of the public covenant has two components. How can the patent system promote free competition? That’s not just competition but free competition. Here, “free” surely doesn’t mean “without charge,” since Bayh-Dole contemplates the paying of royalties and earning of income relating to subject inventions. Free must mean “liberty.” But here we face a challenge, since the mindset of advocates of patents on publicly funded inventions is fixated on the importance of the patent monopoly. A patent monopoly, the mantra goes, is essential to attract private risk capital. Put bluntly, people with money won’t spend it on anything new unless they get a monopoly on it first. Put coldly, this is stupid nonsense betrayed by history. The very fact that Apple and Broadcom can use some stupidly clever Caltech invention (so Caltech asserts) without a Caltech license shows that folks with money are more than willing to spend their money without a monopoly patent right.

But here Bayh-Dole’s public covenant requires free competition. How does free competition come about with a legal tool that starts with the grant of a private monopoly in exchange for publication of an invention’s details? Again, there is no need whatsoever for Bayh-Dole to mention this point if all that Congress intends is that people have the opportunity to use the patent system rather than the government using the patent system. For that, all Congress would have to state is that it is their policy and objective (as a matter of patent law) that the federal government should not use the patent system unless the federal government has first given inventors the opportunity to use the patent system. But for that, there’s no point in adding a public covenant on top. The patent system would be good enough. Here, then, “to promote free competition” cannot possibly mean “to file patents and monopolize opportunities created with public support however one wishes.” And it doesn’t add anything to add a working requirement–that doesn’t address the promotion of free competition either.

How does one promote free competition using a patent property right with a working requirement and a broad government license? Here are some obvious ways. First, royalty-free non-exclusive or at least FRAND licensing–fair, reasonable, and non-discriminatory licensing. The argument that was made was that the federal government was too remote from both inventors and the marketplace to deal in patents. Middlemen–patent brokers, technology transfer professionals–could do both jobs better than could the federal government. Middlemen would cozy up to inventors and help them draft patent applications and they would cozy up to industry and let everyone know that new inventions were on their way.

Sounded good. All Bayh-Dole advocates had to do to sell the idea was to make the federal government look bad and suppress the details of the ugliness that was university-based patent administration. The federal licensing rate was therefore spread across all defense-related inventions that the contractor-inventors had declined to patent and became 4% instead of the 23% in biomedical inventions. And the university/foundation licensing rate of 4% in biomedical inventions made with federal funds (in the IPA program) was folded into the foundation licensing rate of 25% to 33% across all inventions. Political bluffing with quant is so easy. Add in the pharmaceutical industry firing away about how the federal government was blocking commercial development of the drugs that would save American citizens and you can see how the package deal was put together.

Middlemen were not doing better than the federal government. It was pretty much even up. Furthermore, no one bothered to ask whether approach might do better than university-affiliated middlemen? That is, the comparison was always between the government and university middlemen. Even if middlemen did better than the government, why stop there? The Harbridge House report (1968) found that federal contractors that owned inventions and had commercial experience did way, way better than companies that had to take a license or organizations that had no commercial experience. Why use middleman, then, to license inventions. If folks were serious about encouraging use, why not place the inventions directly with companies? And why not use specialist middlemen for that purpose–ones with expert knowledge of a given industry? Licensing patents from organizations that don’t know a lick about industry use would appear to be the single worst way to promote the use of the inventions. Yet in a bluff political comparison with the federal government, doing so was made to look, um, better.

At least a royalty-free or FRAND distribution allows anyone to have access. But non-exclusive strategies also have other uses. For instance, non-exclusive strategies may be used to develop standards. Why the patent? To enforce the standard, so that no one misrepresents it or tries to break the common agreement among standard participants. Similarly, a patent can be used in a non-exclusive licensing program to curate the invention, so that the early adopters develop and use the invention with assistance from the licensing organization (or the inventors, or both) and thus establish the invention’s pragmatic usefulness before licensing is opened up to less qualified companies wanting to get a piece of the action. Early products then start out with decent quality. That was how the University of Toronto, for instance, managed insulin, where manufacturing quality made all the difference.

A patent monopoly also may be used to protect a developing commons. A company could gain access to the patented invention on the condition that it licensed back improvements for use in the commons or at least didn’t assert infringement against any other user of the inventions in the commons. This was a popular early argument for university-held patents. A university, not having a profit motive (this was truly early), would defend a broader public interest and ensure that no one company could patent a necessary improvement and then block all public access and benefit to the original invention by means of a secondary patent. The original patent created a standoff–play nice or we don’t play at all. Such standoffs don’t get a patent trolls, but they do create incentives for people to do what is often in their best interest anyway, and that is to contribute to the development of cumulative technology platforms and compete on things other than patent monopolies. That is, “free competition” turns out to be competition that’s not encumbered by a fragmented set of patent monopolies, so that there are more monopolies in play than there is technology. Free competition is free of patent monopolies, made free by breaking up patent monopolies. When the number of patent owners exceeds the available opportunity to put new things together in useful ways, then we get gridlock for twenty years, not technological innovation.

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