Bayh-Dole Basics, 8: Reasonable Terms Comments-1

This will be longish. It’s a document of the details. In a world where people spout TL;DR for most any issue of substance, and want a sound bite to gulp instead, this ain’t it. Perhaps we can get all brief and political about it later. Here, the effort is to use the details to show how the thinking around executive branch policies and regulations pertaining to invention march-in informs an understanding of Bayh-Dole, so we can get at just what “benefits . . . available to the public reasonable terms” in 35 USC 201(f)’s definition of practical application might mean.

We start our commentary on “reasonable terms” by noting that the public interest apparatus in any executive branch patent policy, regulation, or government contract has not been used–but for the strange, twisted case of Campbell Plastics–and that was a failure to disclose a subject invention in the form of a written “report”–disclosure in all other respects, but someone was out to make a point about proper paperwork being more important than a small company gaining the benefit of a patent for the creative work it had done. So, this stuff is never used. Keep that in mind. Anyone who argues that some part of the public interest apparatus in Bayh-Dole was “not intended” to be used in some way, such as “reasonable terms” was “never intended to be used to control price” is true in the broadest sense because nothing in Bayh-Dole’s public interest apparatus was intended to be used.

R. Tenney Johnson, a career federal attorney who had worked on the Kennedy patent policy, testified before Harrison Schmitt’s senate committee in 1979 that the public interest apparatus in the Kennedy patent policy never needed to be used–no one could come up with an instance in which a contractor played “the dog in the manger”–preventing others from using an invention while not using the invention itself. Dogs in the manger, however, is exactly what many nonprofit contractors now are, with over 50,000 issued U.S. patents on subject inventions, most of them not licensed, and many of those licensed, licensed exclusively and not developed to the point of practical application. Johnson suggested that the public interest apparatus in Schmitt’s patent policy bill competing with Bayh-Dole wasn’t necessary.

Howard Bremer, the long-time patent counsel at the Wisconsin Alumni Research Foundation, made clear in a 1992 talk that his work on Bayh-Dole’s regulation to implement 35 USC 203 march-in was designed to make the march-in procedures unworkable. Again, the public interest apparatus in Bayh-Dole was intended to make a show of protecting the public but never to be used. Not march-in (unworkable procedures, delegated to the federal agencies for enforcement, never used), not US manufacturing (absurdly narrow scope, easy waiver procedure, NIH uses a web site to process all the waiver activity), not restrictions on nonprofit assignment of subject inventions (conflated with assignment of patents–entirely distinct, ignored by federal agencies), not policy requirement to promote free competition and enterprise (ignored or transmogrified into the weak claim that handing patent monopolies based on subject inventions to chosen companies while excluding all others promotes free competition, just not for the subject invention that the law is concerned with).

The parts of Bayh-Dole that are enforced by the federal agencies are the administrative paperwork requirements for disclosing subject inventions (even here, everyone but the Supreme Court in Stanford v Roche ignores the definition of subject invention), electing to retain title (without worrying whether the contractor making the election has actually acquired title), and including a federal funding statement in any issued US patent (which somehow will be a huge help to American innovation). If you go to a “compliance” workshop on Bayh-Dole, that’s the part of the law your nose will be rubbed in.

Thus, keep it in mind that any discussion of “reasonable terms” is already in the category of Bayh-Dole requirements that were never intended to be enforced and so any use of these requirements will meet with objections from the folk who have made it their practice to ignore them but keep up the appearances with the administrative paperwork requirements. Bayh-Dole, the law that is successful because it disables the public interest apparatus that had to be included to induce Congress to approve the law, and for nothing else.

Here’s the march-in standard in the Kennedy (1963) executive branch patent policy that Johnson worked on (section 1(f)):

Where the principal or exclusive (except as against the government) 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 further period of time, the government shall have the right to require the granting of a license to an applicant on a non-exclusive, royalty free basis.

One can see a number of similarities with Bayh-Dole’s 35 USC 203(a)(1) treatment. Let’s do a line-by-line discussion to highlight the details. This is, after all, federal law so we might as well treat the words as carrying meaning rather than just pointing to whatever it is that Bayh-Dole advocates say the words were intended (by some mysterious deity of federal law) to mean. I’ll use

“K”      for Kennedy (1963),
“IPA”  for the Institutional Patent Agreement (1968),
“N”      for Nixon (1971),
“FPR” for the Federal Procurement Regulation implementation of Nixon (1975), and
“BD”   for Bayh-Dole (1981).

The march-in provision in both Kennedy and Bayh-Dole starts off with a conditional:

K: Where the principal or exclusive (except as against the government) rights in an invention remain in the contractor,

BD: subject invention in which a small business firm or nonprofit organization has acquired title under this chapter

We see in this initial change the introduction of language in Bayh-Dole that makes it appear that somehow Bayh-Dole includes a mechanism for acquiring title to inventions, when it does not. Sloppy drafting? Clever addition of ambiguity to be later exploited? There is no need for anything after “subject invention” in Bayh-Dole’s treatment. However, that additional language does create the idea that there are at least two distinct forms of subject invention–one form is the subject invention acquired by a small business firm or nonprofit organization “under this chapter” and the other is a subject invention that has not been so acquired.

A subject invention (owned by a contractor) but not acquired by the contractor can be only an invention owned by its inventor who has been made a party to the funding agreement and therefore is, by the definitions in Bayh-Dole, also a contractor. Since inventors own their inventions without having “to acquire” them, the march-in requirement appears to exclude application to inventors who own their inventions. These inventions, however, since they also are subject inventions, are then handled under the inventor patent rights clause at 37 CFR 401.9. Anyway, that’s a little side comment.

K: the contractor, his licensee, or his assignee

BD: the contractor, an assignee or exclusive licensee of a subject invention

Bayh-Dole specifies that licensee must be the “exclusive licensee” of a subject invention to be exposed to march-in. The addition of “exclusive” doesn’t make much sense. “His licensee” is singular. There is only one. It doesn’t matter whether the license is labeled exclusive, sole, or non-exclusive. If there’s just one–“his licensee”–then that one licensee is exposed to march-in for failure to achieve practical application. Bayh-Dole needlessly restricts things to “exclusive” licensee. But more: the point of march-in is forcing whoever is marched-in upon to grant licenses–contractor, assignee, (exclusive) licensee. Any or all of these might be in play at any one time. A contractor-owner of a subject invention might assign that invention to another (“assignee”), and that assignee might grant a single license (“licensee”). Now, there’s no practical application and (in another universe, because in this one this sort of thing never happens) the government decides to march in. Who does the government compel to grant licenses? Well, it cannot be the contractor because the contractor has no rights to grant, having assigned (though may still have an interest in the invention–such as a right to a financial share of upside or a right to recover title in event of the assignee’s decision not to exploit the invention or failure to exploit the invention). The assignee could be forced to grant further licenses, but that might break the contract it has with its licensee. The apparent choice, then, is the last position in the cascade of rights–the (exclusive) licensee is compelled to grant one or more licenses, breaking up (finally) the patent monopoly.

The logic of march in is, if a patent monopoly does not lead to practical application, then the patent monopoly should be broken up. The Kennedy patent policy gave the contractor-assignee-licensee three years from date of patent issue to achieve practical application or explain why the patent monopoly shouldn’t be broken up–about six years overall. According to the Harbridge House report (1968), many federal contractors who owned their inventions and had experience in the area of the invention achieved practical application within this time frame. Inventions made by experienced users and arising in the context of use are likely to get used, while inventions made by those without experience and not in a context of use (say, at a nonprofit and not directed at research applications) are not so likely to get used. For the first, the patent is not so important, because the user is in a position, often, to use the invention within the context of existing infrastructure and investment. For the second, the patent would be important only if the nonprofit intended to convey the invention to a company that was not immediately prepared to use the invention–that is, the licensing would be directed away from the company of the first case–one that would be immediately ready to use the invention. Of course, the invention could be so far “out there” that no one is prepared to use or develop the invention–in which case we might ask whether anyone will show up to do so in the twenty year term of the patent. If not, then there’s no point in wasting money on a patent to exclude no one. And, if one wastes money anyway, we might ask what’s the point of marching in if, like Major Tom on Mars, there’s no one to take a license if you did.

The difference, of course, is that if there’s a lingering patent with no invention use, then those attracted–eventually–to the use of the invention may also be repelled by the patent and the expectation of being required to (i) take an exclusive license; (ii) pay all the patenting costs, plus upfront fees, plus royalties; (iii) develop a commercial product (rather than, use internally, as for research or production). Conversely, the moment there is the prospect of such interest in a lingering invention, there will be those then most attracted to the patent on the invention–speculators, middle-men aiming to use the patent to “extract value” from any emerging interest in the invention. Whether these speculators take the form of patent trolls (wait until there’s use of the invention, then sue) or venture capitalists (start a company and create disruption until acquired) or technology transfer professionals (make a show of offering the patent for exclusive license, playing one interested company off any others but more likely attracting a speculator with a front company hoping to sell to venture capitalists or at least to a state-run seed investment fund). What people who object to march in for such lingering inventions really object to is the disruption of this lingering invention economy of trolling, speculating, and making a show of trying to find licensees who end up, often, being trolls and speculators. Without a troll/speculation patent economy, why, so the argument goes if you unroll it, the public will never realize benefit from all those federal research dollars. It’s only stupid if you bother to think about it.

Now here’s how the Kennedy patent policy and then Bayh-Dole pin the threshold for march in:

K: has taken effective steps within three years after a patent issues on the invention to bring the invention to the point of practical application

BD: has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use

As you can see, Kennedy has a firm date–three years. That’s nice and crisp. Get things done, and keep your patent monopoly. Good job. Otherwise, the government has the right to compel royalty-free non-exclusive licensing–open the invention to all, and don’t make anyone pay to gain access.

Bayh-Dole originally had something similar for nonprofits–five years from date of first commercial sale or eight years from the date of an exclusive license, but that time threshold was removed by amendment three years after Bayh-Dole went into effect, before it could ever come into play. The remaining provisions, then, of march in are watered down to the point of being the weakest tea possible. The threshold in Bayh-Dole policy is “utilization.” The definition that matters is “practical application”–use with benefits available to the public on reasonable terms. March in surely should trigger when practical application has not been achieved–nonuse or unreasonable use, as Bayh-Dole’s statement of policy at 35 USC 200 has it. But no. Bayh-Dole makes march-in trigger on a federal agency’s “expectation” that the contractor-assignee-licensee won’t take “effective steps” to achieve practical application in a given field of use. There are many elements here that may easily fail: the agency may choose not to form an expectation, the agency’s obligation is only to assess whether “steps” may be taken “in a reasonable time”–it’s the “steps” that require a reasonable time, not practical application–and whether those steps will be “effective.” Wrap all that up in a tangled procedure that has a strong whiff of eminent domain rather than remedy for breach of federal contract commitments and one has all the makings of a march-in provision that will never operate.

The Kennedy patent policy then adds other conditions under which the contractor might retain control of the patent–something Bayh-Dole eliminates:

K: 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 further period of time

BD: [nada]

Under Kennedy, a contractor has three ways of retaining principal rights in an invention made with federal support–achieve practical application within three years, show cause, or make the invention available for licensing on published terms that are royalty free or reasonable in the circumstances. I’ve added the “published” part–but that is necessary–how could anyone assess a contractor’s making an invention available if the contractor does not provide the terms up front? Note that standard university licensing practice is not to reveal the terms until there’s a negotiation. The published template licenses do everything except reveal the substantive terms–fees, royalty rate, and the like. And universities have argued (as in the Public Citizen v NIH case) that such substantive terms should be kept confidential. Thus, university practice runs against the expectation of the Kennedy patent policy–it must be a relief for such university administrators that they don’t have to put a price on each invention they offer for license or if the price isn’t free have a burden to show that such pricing is reasonable in the circumstances.

Next we get to government rights under march in.

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