Illusions of Bayh-Dole: “manufactured substantially” 4

Previous articles in the series are here, here, and here. The series continues here and here.

There’s a simple point to make about Bayh-Dole’s section 204 requirement that exclusive licenses to use or sell products based on a subject invention in the United States include an agreement by the licensee that those products will be manufactured substantially in the United States. The section 204 requirement does not apply to the making, using, and selling of a subject invention by the owner of the invention. Any for-profit company, then, owning a subject invention, is exempt from what is put forth as the foundational requirement of Bayh-Dole, the very essence of what Sen. Bayh claimed that the law was all about, restoring American technology leadership. For that leadership, one would think, Americans would not be licensing their research inventions to the rest of the world for their happy use without somehow having products based on those inventions made in America.

In this sense, Bayh-Dole ought to be a law that expects American companies to make in the United States products based on subject inventions and export those products to the rest of the world–not to take out patent positions globally, license to foreign companies to manufacture products, import those foreign manufactured products, and sell those foreign manufactured products in America. But that’s exactly what Bayh-Dole permits when done by the owner of a subject invention. Bayh-Dole makes a meaningless flourish about United States industry and labor and goes off and does something else.

And here’s the simple point. Since section 204 is specific to exclusive licensees to use or to sell in the United States, it does not apply to owners of subject inventions. That means that when a university assigns a subject invention under the heading of granting an exclusive patent license, the assignee has no obligation under section 204 for its own exploitation of the invention. As numerous courts have held, an exclusive license to the substantial rights in an invention constitutes an assignment. It doesn’t matter that the written document is labeled “exclusive license.” One can license a patent exclusively and in doing so assign the underlying invention if the “license” conveys the exclusive rights to make, use, and sell. With that transfer of ownership comes the right to enforce the patent, which only the owner of an invention may do. Nearly every university patent license that’s exclusive is also an assignment of the invention on which the patent (or patents) is based.

See the result? When universities exclusively license patents on subject inventions, they also invariably assign the related subject inventions. The “licensees” of the patents are “assignees” of the subject inventions. They do not hold exclusive licenses to use or sell product based on a subject invention–they hold ownership of the subject invention. They are assignees. They can manufacture wherever they want. Section 204 does not apply so long as they do not grant exclusive licenses to use or to sell in the United States.

Bayh-Dole does include a requirement on assignment of subject inventions specific to nonprofits. According to 35 USC 202(c)(7)(A), when a nonprofit assigns a subject invention, the assignee is “subject to the same provisions as the contractor”:

(A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions (provided that such assignee shall be subject to the same provisions as the contractor)

Read carefully, since the logic is tangled in that style that is consistently Bayh-Dole. Nonprofits cannot assign without federal approval except to an invention management firm. In any case, however, the assignee is subject to the same provisions as the contractor. That means that the assignee is subject to this same 35 USC 202(c)(7) set of clauses, including this provision (A) that restricts assignment. Otherwise, of course, there’s an easy workaround to the nonprofit restrictions–the nonprofit assigns to an invention management organization and that organization is then not restricted by the nonprofit requirements, and that’s that for all those nonprofit requirements.

There are two arguments that demonstrate that (c)(7)(A) does apply to everyone that receives assignment of a subject invention. First, it’s right there in the law–“such assignee shall be subject to the same provisions as the contractor”–and that’s a nonprofit contractor, and so those same provisions include the nonprofit-specific requirements of (c)(7). Second, the requirement is implicit in Bayh-Dole’s definition of a “funding agreement.” The second sentence of the definition extends the definition to “any assignment, substitution of parties, or subcontract of any type.” An assignment of a subject invention made under the standard patent rights clause necessarily must extend the funding agreement–and with it the patent rights clause of that funding agreement–to the assignee. The patent rights clause follows any assignment retains the form that applies to the original contractor. That’s the necessary result.

Why does this all matter? When a subject invention is assigned, so the argument presented in Bayh-Dole goes, the new owner must behave as a nonprofit is required to behave–sharing royalties with inventors, deducting from income earned with respect to the subject invention only those expenses incidental to the administration of subject inventions, and using the balance to support scientific research or education, all the while favoring small businesses in licensing transactions and being restricted in any subsequent assignment of the subject invention (as in an “exclusive sublicense”). The assignee, then, even if a for-profit, must comply with the public interest requirements of (c)(7)–whatever profits there are must go to scientific research or education–and profit here is any income earned less only the administrative costs of managing subject inventions.

If a for-profit wants ownership–exclusive right to make, use, and sell–then it must also embrace devoting all income less allowable administrative costs to the specified public purposes. It can gouge the public all it wants (price controls are not built into Bayh-Dole), but all that money is public money. People who want the NIH to march-in on successfully commercialized drugs based on subject inventions bark up the wrong tree. They should demand that the federal government enforce the (c)(7) clause everywhere a company holds an “exclusive patent license” that’s also an assignment of the subject invention.

If a company acquires the rights of ownership–an enforceable monopoly–then dedicate all income earned with respect to the subject invention (less the allowable expenses) to the specified public purposes.

If a company does not want to use income for public purposes, then it must insist on less than all substantial rights–it must give up its monopoly position with regard to making, or using, or selling, and it will have no right to enforce the patents under which it is allowed to practice the subject invention. There’s no particular need for the federal government to “march-in” to make happen this break up of the monopoly in a subject invention. The break up should come about because most for-profit companies do not care to devote all their income from a given product to specified public purpose. A company might agree to do  little penance of corporate social responsibility with a splashy donation for poster kid sake–sure–but certainly not dedicate to charitable purposes “any royalties or income earned . . . with respect to subject inventions.”

If NIST wanted to enforce Bayh-Dole (and that’s a big if), then NIST would undertake an audit of university exclusive licenses, starting with those to biotech and pharma companies. For every exclusive license that is in legal fact an assignment of a subject invention (look for “make, use, and sell” and check whether the licensee has the right to enforce patents–it takes about a minute per license), NIST should demand an accounting from the assignee of the “royalties and income earned.” And then demand that all such income after allowable expenses, be dedicated to the specified public purposes. Folks who want to use Bayh-Dole to address the exorbitant prices for prescription drugs in the United States might start with 35 USC 202(c)(7) enforcement of nonprofit requirements rather than with 35 USC 203 march-ins that were designed never to operate.

One last nuance of this thought about section 204’s nonsense. For for-profit companies that receive federal funds for research or development, section 204 simply doesn’t apply unless the company goes off and grants an exclusive license to use or to sell in the United States. The company can source manufacturing wherever it pleases, and sell however it pleases. Section 204 doesn’t operate in almost all circumstances of normal business practice. Furthermore, for-profit company contractors are not bound by (c)(7)’s nonprofit requirements, and so for-profit companies can assign subject inventions without any restrictions. Thus, if a for-profit desires to convey exclusivity, rather than doing diddling prissy exclusive licenses to use or to sell that run afoul of section 204, the for-profit merely assigns the invention and gets on with it.

If we turn up the snark to make things clear, Bayh-Dole’s section 204 says,

“If you ride a unicycle and wear a clown suit while singing ‘Dixie’, then you have to use or sell product manufactured substantially in the United States unless you get a waiver because you tried and couldn’t or you didn’t bother to try. Otherwise, you can do anything you want.”

And this, my friends, is what has restored America to its position of global leader in technology. Inspired. Brilliant. How far down that rabbit hole did you fall before you realized that it was just a friggin’ deep hole with stupidity at the bottom?


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