Bayh-Dole’s Public Covenant, 5

The Necessity of Government Action Under Its Non-exclusive Licenses

Let’s look at two arguments why the government must act on its licensed rights in subject inventions. The first argument has to do with the rhetoric of Bayh-Dole. If the government does not practice under its license, then the license is an empty gesture. The second argument has to do with the nature of competition in the public interest. The government does not compete with private industry in matters of private markets; but the government’s use of inventions it supports in the public’s interest does create a competition with regard to the speed and efficiency with which private industry provides services to government “markets”–to those purposes that the federal government has the authority and obligation to serve. Only if the private sector can deliver goods and services for government purposes more quickly and at less expense and at higher quality than can the government and its own contractors should the private sector have the ability to deliver those goods and services.

For each subject invention for which a contractor elects to retain rights , Bayh-Dole requires that the federal government receive an amazingly broad non-exclusive license to make, use, and sell, and to authorize others to make, use, and sell the subject invention (see 35 USC 202(c)(4)). Subject inventions, in turn, are defined to be any patentable invention (or not patentable plant variety) arising in work supported at least in part by federal funding under a funding agreement and owned by a party to the funding agreement. Funding agreements are defined such that any contractor may add parties to the funding agreement by assignment, substitution, and subcontract of any type–so, assignment of the funding agreement, say, or assignment of obligations with regard to subject inventions, say, or assignment of subject inventions. Just saying.

An invention made in university research that is made part of a larger project to develop a commercial product announced by university formal policy and implemented when the university assigns the invention and delegates obligations to a company develop that product then supports the rest of the development project. Any inventions made in the development portion of the project–“arising in federally supported research or development” are also subject inventions, by the definitions introduced into federal patent law by Bayh-Dole. It simply does not matter what university administrators say or what they agree in contracts with their monopoly-taking company partners. Private agreement does not change the operation of these federal law definitions.

As Bayh-Dole’s implementing regulation on scope (37 CFR 401.1) makes clear, separate accounting is not determinative of whether an invention is a subject invention. If a research project is restricted to only scientific study, then a closely related but entirely independent project to apply results of that study does not result in subject inventions. But if the research project is not restricted to scientific study–the university, for instance, asserts in policy that all inventions will be subject to efforts to commercialize, and the university assigns subject inventions to a “commercialization partner” to undertake such development, then the university necessarily also expands the parties to the funding agreement, and demonstrates that the federal funding of the research part also supports the development part of the greater project. This result happens because of university actions, not merely because the scientific results of the first part of the project prove useful to a commercial developer. This result happens because a university chooses this result, declares this result, and acts to enable this result. The Bayh-Dole definitions of subject invention, contractor, and funding agreement then apply and there is nothing university administrators can then do to disclaim that application. “In whole or in part” under a funding agreement. A federally supported project may support a development project. The federal funding in part supports the development project when those involved in research and development agree to join their projects by assignment, substitution of parties, or subcontract of any type.

The government license is a huge license. Any government purpose. Make, use, and sell. Authorize others, too. Includes states. Includes commercial development supported by research and linked by adding parties to funding agreements. The government can make and authorize others to make products based on all the inventions in such research and development. Holy smokes, Batman!

Why create such an expansive license and then never use it?

Rhetorically, an expansive license suggests a benefit to the government, a public benefit made available in exchange for a monopoly to exploit private investment and profit-seeking. The cost of such a monopoly is that the government may act without interference by patent owners on subject inventions or financial obligation to such patent owners for any governmental purpose.

If the government never acts to make products or authorize others to do so on its behalf for public benefit, there is no public value in the license. It does nothing. It is an empty gesture that hides the actual transfer, without limitation, of patent monopolies to private hands, especially egregious where a pill that might cost $5 to manufacture and sell at a reasonable profit (enough to stay in business and pay workers decent wages and cover for risks involved) is priced at $100 or $500 or more per pill. That’s a difficult enough problem for the private market, but when federal or state governments are paying that $500 per pill, that is activity in the government’s market, not any private market. If the government does not act to authorize manufacture at $5 pill for its own public market, then the government license is wasted and becomes merely a political gesture to expand the private monopoly into areas in which the government has a mandate to act but doesn’t, and instead hands billions of dollars to corporate investors in monopoly-based products.

Thus, the first argument that the federal government must act on its non-exclusive license is that if it does not act when commercial products enter the government’s own market, then it wastes the right and the government use of public money acts as a subsidy for the interests of well-established corporations seeking to enhance their profits with monopolies in areas of public health. Were that made open federal policy, then it would receive no support. If these corporations spend so very much more on development than they do on the original research, so that the original research is just a drop in the overall bucket of expense, then they can afford to pay for all the original research, too. There is no reason whatsoever for public subsidies to enhance their profits. If the government does not act on its license, it endorses the subsidy policy.

Without action under its licenses, it is the policy of the federal government to add to the profits of corporations exploiting public suffering by organizing and paying for the research on which they rely and encouraging nonprofits to obtain monopoly positions on this research and pass these monopolies to corporations, to support monopoly prices, create strategic scarcity, and reward investors for their “risk” positions and universities for being complicit in the scheme.

The Government’s Reasonable Terms

Now for a second argument on the necessity of the federal government acting on its broad non-exclusive license. The public covenant in Bayh-Dole does not expressly require price controls on inventions used to provide a benefit to the public. Bayh-Dole defines practical application to include providing public benefit “on reasonable terms.” But Bayh-Dole does not provide guidance as to what terms are reasonable. The target of this second argument for government action has to do with the benefit provided to or on behalf of the federal government. The government’s non-exclusive license is Bayh-Dole’s mechanism for addressing the government’s benefit.

We start with “on reasonable terms” and work through the argument from there.

Principles of statutory interpretation argue that “on reasonable terms” cannot be “any terms that the patent owner finds reasonable” or “any terms that the patent owner and a monopoly partner find reasonable”–there would be absolutely no meaning then to adding “on reasonable terms.” Same for terms that involve anti-trust or patent misuse–such badness is covered by other law and so doesn’t come into play here. It’s reasonable to figure that “reasonable terms” must include “price at less than monopoly pricing or in the presence of monopoly scarcity.”

But Bayh-Dole does something clever. It never links up this definition of practical application with anything else in the law. The term limit on exclusive licenses granted by nonprofits based on first commercial sale or use was removed from the law in 1984. Even the march-in rights ignore the definition and speak instead of “nonuse” and “not reasonably available.” So Bayh-Dole does not match up practical application with anything else in the law. Again, Bayh-Dole is a shit of a law, other than for conveying publicly funded inventions as monopolies to pharmaceutical companies and startups hoping to be acquired by or become big pharmaceutical companies (the “biotech” industry).

The history of practical application thinking was that patent owners would develop inventions for public benefit more quickly with investment at a scale not readily available to federal agencies, and mass-produced commercial forms would be more readily available to the public than artisan-created products. (Again, it’s a nonsense argument, but politicians are adept at creating attractive arguments to cover for their desired nonsense. If you don’t already know, listening only to a politician who practices such arts, you never will know.)

The broad public covenant in 35 USC 200 requires patents to be used to promote the use of inventions (including subject inventions), but it does not place any particular deadline on that use. One might work an invention in year 20 of the patent. The march-in procedures gesture at a deadline, but then back off any deadline in favor of nebulousness as “not expected to take within a reasonable time, effective steps.” That is, to preclude march-in all a patent owner must do is make it appear that it will “within a reasonable time” take steps. It doesn’t have to achieve use. Just appear to be prepared to start to try, within a “reasonable” time. And of course, federal agencies don’t have to bother with march-in anyway. There’s no requirement to enforce. And if a federal agency does try to march-in, the time to make determinations, submit written documents, allow for rebuttal, obtain approvals, and execute on a march-in by requiring licensing, waiting for a patent owner to fail to so license, and then have to execute a license thereafter, is itself unreasonable.

We come around then to the role of the government licensing in protecting the public from unreasonable use of subject inventions–including unreasonable pricing. Bayh-Dole is designed on the expectation that there are two markets–a private one and a government one, and that the government obtains good value for the freedom to make, use, and sell products supported at least in part by government funding in exchange for releasing for monopoly exploitation each invention in the private market (subject to other protections of the public covenant). The government has no conditions on the use of its non-exclusive license. It does not have to ask, notify, purchase, or pay. It does not have to make determinations, nor does it have to respond to fussiness that its actions will worry or sadden speculators on the value of patents in the private market.

For most inventions, nothing will happen in any commercial marketplace. We ought not expect that federally supported inventions will be any different, merely as a result of federal funding. We might, however, think that the effect of the public covenant on such inventions, despite the idea that the covenant will do good things, is to suppress such inventions in favor of inventions that do not have the administrative bother and uncertainty and waste of time involved in dealing with subject inventions. Only universities, their nonprofit front organizations, and the pharmaceutical industry appear to love the idea of serving a federal bureaucracy in order to gain ownership of subject inventions. No one else in their right mind wants the public covenant if they can avoid it.

The government license, however, becomes important in two special cases. First, to the extent that the federal government has authority to support research, the government can use its license on behalf of the research community generally–not just the university research community, but all research activity, whether nonprofit or for-profit. The federal government, using Bayh-Dole’s broad government license can establish a “research exception” to patent property rights in subject inventions. The government can authorize under its license the making, using, and selling any product based on subject inventions for research purposes for any research that is for or on behalf of the government. “For” means that the government commissions. “On behalf of” means research that the government does not commission but determines to be in the public interest to be conducted. If the government acted on this portion of its broad license, the research “marketplace” for inventions would not be disrupted by the university trade in patent monopolies. The value of a patent on a subject invention then could not be based on excluding other researchers from using the invention and to develop the invention–making improvements, applications, and the like. Government exercise of this license would meet 35 USC 200’s later addition that the use of the patent system should promote free competition without “unduly encumbering future research and discovery.” Without government action to exercise its license on behalf of research it regards in the public interest, there’s nothing in Bayh-Dole that requires a specific action with regard to “unduly” encumbering future research and discovery. Thus, the government’s action is required on this point to fulfill the stated Congressional objective of the law.

The second area for government exercise of its license is also critical to the public covenant’s concern for the management of free competition, enterprise, and reasonable terms of public benefit. Private investment in the development of subject inventions for commercial sale is necessarily predicated on the fact that the government has a license and will exercise its rights also to make, use, and sell product embodying each subject invention or made through its use.

This point is essential. It is not that the government merely has the right to act if the patent owner fails to act. Nor is it that the government has the mere right to “use” an invention and so cannot be charged the value of a “royalty” in the price it pays to purchase commercial product based on a subject invention (a nonsense argument that university administrators routinely make in their illusory world). Rather, the point of the use of a government license, the essence of its value, is precisely where commercial product has been created. Where that product is available to the public on reasonable terms in the private market, the federal government has the right to make, use, and sell (and authorize others to do so) for the government market–everywhere that the government otherwise would pay for the product in the private market, whether for its own use or the federal government (or any state government) pays on behalf of others (such as, say, cancer patients). Bayh-Dole does not say, “Private investment will only be made in subject investments if the federal government never acts on its broad license.” Bayh-Dole does not say, “The success of the law depends on the federal government never acting on its broad license–the license is there for show, and to be used only in situations that never affect the value that a patent owner may extract from each subject invention.”

Because Bayh-Dole does not say these things, it is essential to see that if the federal government does not act on its broad license, then federal policy is exactly these things that Bayh-Dole does not say. The argument for commercial production of product based on subject inventions is that doing so will be faster, cheaper, and better than if the federal government does this development itself or leaves development to the wandering winds of private initiative unguided by the sweaty thumbs of institutional bureaucrats–on the argument that institutional bureaucrats working at universities are better than institutional bureaucrats working for the federal government (even when, historically, this argument is untrue–the federal bureaucrats were just as good, in the day, though perhaps now, under Bayh-Dole we might have to say, with regret, that they are just as bad).

Furthermore, Bayh-Dole does not say, “The government cannot use its licensed rights until private speculators have recovered the full cost of all activities that they bill to the income stream of a successful product based on a subject invention.” There’s nothing in Bayh-Dole that stipulates that the essence of Bayh-Dole is that government inaction must protect speculative return on investment before the government can act in the public interest. Or, put another way, the public interest in the government providing a medication to the patients it is responsible for far outweighs the public interest (if it is that) in propping up the profits for a corporation riding a billion dollar a year monopoly medication. The government’s license demands that the government act rather than refrain from acting in such cases–as soon as a commercial product is available that the government will purchase for the use of those participating in the government’s market, the government must consider exercising its license to have that product prepared on its behalf, and if the cost to do so is less than that of paying for the commercial product obtained from the private market, then the government necessarily must act to obtain the product in the government market.

That’s the essence of Bayh-Dole. That’s the fundamental exchange–institutions may keep ownership of subject inventions in exchange for a public covenant on those inventions that limits private patent property rights in those inventions and provides the government with the freedom to act in the government market with regard to those inventions and any products developed from those inventions in a greater project created by the parties to a federal funding agreement. The government’s freedom to act in the public interest is not discretionary. The government must act, or it alters the essence of Bayh-Dole. It turns Bayh-Dole into a license to be predatory on public needs while the government responsible to address those needs stands idly by and even pays 20 to 100 times what it should for the product that is produced on its watch, and to which it has rights.

If the government can get product from the private market faster, cheaper, and better than doing or commissioning the work itself, then we are good. It makes sense for the government to rely on private markets, so long as the government is not dependent on a sole commercial source that might fail for mission-critical things, such as defense weapons and drugs to treat acute disease or injury. But if the terms for access to a product in the private market exceed by far the cost to the government to commission the manufacture of the product for sale on behalf of the government, then the government of necessity must act on its license. That’s the fundamental reason for the license to exist at all, with the scope it has, with the freedom from all bureaucracy, strange as that is for Bayh-Dole. If the price available to the federal government (and those acting on behalf of the federal government) is less than comparable with what the federal government can commission itself, then the government has a good reason to participate in the private market and pay the going price. As soon as the price exceeds this threshold, then the government’s license compels the government to act in the public interest and supply the product itself and through companies prepared to manufacture and sell the product on behalf of the government.

In a significant way, the public covenant in Bayh-Dole fails when the federal government fails to act on its non-exclusive license, both for research uses and for the replication of commercial products where the patent monopoly fails to deliver products for government use and on behalf of the government at a price less than or comparable to the government’s own actions under its license can produce.

The essence of Bayh-Dole’s public covenant, then, is that the federal government must act on its broad non-exclusive license to support research and to provide products at the cost of manufacturing and distribution without taking into account any research or development costs associated with the products in the exploitation of the private market for these products. Let all other elements of Bayh-Dole’s public covenant fail to be enforced, the government’s own license cannot fail without the government itself failing to meet its public obligation. The federal government must exercise its license rights for every commercially available product based on a subject invention when the price of that product exceeds the price the government can produce the product for itself or by authorizing production on its behalf.


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