Bayh-Dole Basics, 8: Reasonable Terms Comments-2

Now we get to government rights under march in.

Here we have complications. In 1968, Norman Latker, NIH’s patent counsel, revived the Institutional Patent Agreement program, under which the NIH (and later the NSF) contracted with nonprofits so that a nonprofit could (was required to, actually) take ownership of any invention made with NIH support when they decided to apply for a patent on the invention. The IPA program was in its way a circumvention around both the Kennedy patent policy and the Public Health Service implementation of the Kennedy patent policy for research directed at public health. The Nixon changes to the Kennedy patent policy are driven by the IPA program workarounds–legitimizing the IPA program, as it were. So let’s look next at how the IPA master agreement handles “reasonable terms,” licensing, and march-in.

The IPA master agreement forms a meta research contract with each nonprofit allowed to participate in the IPA program. That is, the IPA is a research contract without any research that creates the terms and conditions regarding inventions made in any subsequent NIH research contracts with the participating non-profit. Faculty investigators do not get to negotiate the IPA master contract and therefore the NIH and university research administrators were able to effectively negotiate away university patent policies that allowed faculty freedom of research and publication with respect to inventions except if a research contract accepted by the university provided otherwise. Well, the IPA provided otherwise, and cut faculty out of the loop, even at the University of Wisconsin, which long had the strongest protections for faculty independence with regard to inventions–and Howard Bremer at the Wisconsin Alumni Research Foundation was one of the primary actors in the revival of the IPA program–which figures.

When the IPA program was shut down in 1978, there were over 70 nonprofits participating in the program and Latker was working to get the IPA implemented government-wide (and that effort resulted in Congressional intervention that reviewed and then shut down the IPA program as ineffective and contrary to public policy in matters of public health–paving the way for Bayh-Dole to attempt roughly the same thing–a government-wide program that arbitrarily allowed contractors to own inventions made with federal support regardless of the purpose of the funding or the circumstances (such as research in a common area spread across multiple organizations), justified by an apparatus of public protections that were delegated to the federal agencies to enforce or not as they chose. If a federal agency desired to overcome the Bayh-Dole provisions, it had to justify a finding of exceptional circumstances by showing that any different approach to ownership better furthered not its own public mission but rather Bayh-Dole’s stated objectives–an empty but very clever political gesture).

So it will be good to look briefly at the IPA approach to all of this.

The IPA master agreement is specific to nonprofits. It assumes that the nonprofit has no commercial capabilities or operations, so the primary objective of the nonprofit in taking ownership of an invention will be to obtain a patent and offer the invention for licensing. This approach is in contrast to the prevailing federal practice of taking ownership of inventions and either dedicating the invention to the public domain (i.e., not filing a patent application) or obtaining a patent and making the invention available under a non-exclusive, royalty-free license–often not even formally bothered with–and only in rare instances reserving rights in favor of an exclusive license.

The IPA master agreement therefore focuses on licensing–there’s no alternative under which the nonprofit is expected to manufacture and sell product (this becomes a problem for Bayh-Dole when small businesses are tossed in with nonprofits under a “uniform” policy that cannot possibly be uniform because small companies can be presumed not to license unless they are really a front for big companies and nonprofits can be presumed to always attempt to license–and they too may be fronts for big companies).

Section VI of the IPA master agreement deals with the “administration of inventions on which the grantee elects to file patent applications.” Section (a) requires the grantee to obtain assignment of the invention. Section (b) requires the grantee to grant to the US Government a royalty-free non-exclusive license “for governmental purposes” and an Exhibit A provides the form of the license. Section (c) is the first of three sections dealing with licensing. Section (c) establishes a trust relationship and a default of non-exclusive licensing:

The Grantee shall administer those subject inventions to which it elects to retain title in the public interest and shall, except as provided in paragraph (d) below, make them available through licensing on a nonexclusive, royalty-free or reasonable royalty basis to qualified applicants.

The grantee is to administer subject inventions in the public interest–that means that the grantee takes on the role of trustee. The administration of inventions is not to be pursued for the benefit of the grantee. That’s significant, though it is easily poo-poo’d by administrative rationalization that whatever is in the nonprofit’s interest is in the public interest because the nonprofit’s mission is to serve the public interest. But if that were the case, there would be no need for this section (c) requirement, since all IPA master agreements were with nonprofits that had made some commitment to the public interest to secure their nonprofit standing. Any licensing, therefore, has to be in the public interest from the get go.

This section (c) also sets a default–licensing in the public interest will be non-exclusive, royalty-free or on a “reasonable royalty basis” to “qualified applicants.” Anyone who is “qualified” then should expect to be able to receive a license either free or for a “reasonable” royalty. In this the IPA master agreement follows the Kennedy patent policy and lays the foundation for Nixon revisions. Kennedy provides non-exclusive licensing as an alternative to a contractor’s own efforts to bring an invention to the point of practical application. Kennedy doesn’t stipulate that “applicants” must be “qualified,” however, and requires only that the licensing is “royalty free or on terms that are reasonable in the circumstances.” It’s clear in both Kennedy and the IPA that the primary consideration involved in “terms” was the financial consideration for the license–the royalty, technically, is the consideration paid for a license. If not royalty-free, then on terms–a royalty–that is reasonable.

The IPA master agreement focuses on just the licensing because nonprofits were not expected to make, use, and sell products based on the inventions they took ownership of. The IPA master agreement then turns to exclusive licenses in section (d). We will run through (d) sentence by sentence to show how the IPA master agreement slips the Kennedy patent policy and sets up Nixon revisions which then lay the foundation for the Federal Procurement Regulation implementation which serves as the basis for Bayh-Dole.

(d) The Grantee may license a subject invention on an exclusive basis if it determines that nonexclusive licensing will not be effective in bringing such inventions to the commercial market in a satisfactory manner.

The nonprofit can decide to license exclusively if it doesn’t think non-exclusive will be “effective” or “satisfactory.” That’s an easy exception to the default. More exceptions:

Exclusive licenses should be issued only after reasonable efforts
have been made to license on a nonexclusive basis,

If this part were stand-alone, it would be a significant first step–the invention would have to be offered non-exclusively on a royalty-free or reasonable royalty basis and only if no one took a license could the nonprofit move to exclusive licensing. But no, the non-exclusive licensing is but one of three preconditions. The next two are easier workarounds:

or where the grantee has determined that an exclusive license is necessary as an incentive for development of the invention

That is, where the patent monopoly matters as “an incentive”–“is necessary” means that the invention will not be developed without the patent monopoly. But here we see the introduction of “development.” In the first instance, it is only a matter of “bringing the invention to the commercial market.” Now it is about “development” of the invention. These are, in the abstract, different things. Development is not even just the action of “bringing an invention to the point of practical application”–development may include improvements and extensions rather than just getting an invention into practical use with benefits reasonably accessible to the public.” Thus, the IPA master agreement provides for exclusive licensing even when non-exclusive licensing might result in commercial market use. The IPA master agreement authorizes the exclusion of commercial market use in favor of “development.” That’s puzzling in the abstract, but makes perfect sense if the purpose of the IPA program is to convey to pharmaceutical companies patent monopolies in federally funded inventions without permitting pharmacists or upstart companies to have shared access to newly invented compounds and methods. And given that’s what the IPA program did, we can do more than infer that this was its purpose–it was certainly its result.

And a third condition:

or where market conditions are such as to require licensing
on an exclusive basis.

In other words, if pharmaceutical companies want exclusive licenses, then that’s what they will have to get. There’s significance here, with regard to the Kennedy patent policy and later with Nixon–and Bayh-Dole pulls language directly (and selectively) for this text.

Exclusive licensing pushes the first prong of the Kennedy requirement–the contractor must either (i) take effective steps or (ii) must license non-exclusively. With “effective steps,” the policy includes not only the contractor but “his licensee, or his assignee.” The licensee is singular–it is an exclusive licensee (so, the contractor and licensee both have rights) or assignee (the new owner controls, but may have financial obligations to the previous owner or other obligations undertaken in the assignment transaction). Under the first prong in Kennedy, the contractor (and anyone the contractor conveys at least exclusive rights to) has three years from patent issue to take effective steps to bring the invention to the point of practical application–use with benefits reasonably accessible to the public. Here in section (d), the IPA template provides guidance with regard to prong (i) and its much tighter conditions for retaining control of the patent monopoly.

We now get three sentences that pile up the administrative complexity. The complexity signals that here the IPA master agreement is making its own policy and it takes some doing. Long first sentence:

Any exclusive license issued by Grantee under a U.S. patent or patent application shall be for a limited period of time

This is a policy innovation from Kennedy. Remember we have the contractor, his licensee, and his assignee. The IPA master agreement prohibits assignment except to the federal government or to an approved nonprofit patent management organization–so we are left with exclusive license, but only for a limited time–except:

and such period shall not, unless otherwise approved by the Assistant secretary (Health and Scientific Affairs), exceed three years from the date of the first commercial sale in the United States of America of a product or process embodying the invention, or eight years from the date of the exclusive license, whichever occurs first,

So the limited time is a default that an assistant secretary at NIH can override as desired. Default is earliest of three years from date of first commercial sale or eight years of exclusive license. But one wonders why these defaults would ever come into play unless a licensee was in the NIH’s doghouse for other reasons. If a patent monopoly has already been determined to be “necessary,” then forcing a license to go non-exclusive would be as much as destroying the possibility that the invention would ever be developed. If the patent monopoly was necessary, and a company licensee has relied on that monopoly to develop the invention, then losing that exclusivity means no one will develop the invention–right? we are following the logic of the policy. If going non-exclusive does not destroy the prospect for development, then exclusivity was not necessary in the first place.

We will push the logic a bit. One might argue that the premise of the IPA master agreement here is that exclusivity is needed only for a limited time. Once a company has “developed” an invention and has three years of sales, then others may have the opportunity to “develop” the same invention. But why? If exclusivity is necessary to development, then why would anyone else jump in non-exclusively after someone already has a three-year market lead and it might take five or ten years to field a second product version of the same invention and even then one has the chance only to share a market rather than have all of it to oneself? It doesn’t work out.

Refinement. The initial “development” is undertaken with greater uncertainty. There is no assurance that a product will be possible. Thus, the patent monopoly is important. But once a product has been made, the uncertainty is much less, and thus others will jump in, even with established competition and even for a much smaller upside. Things still don’t work. First, the initial “development” may involve inventive work of its own. The exclusive licensee will hold proprietary rights in those inventions, and can exclude all others–so their development work, when they can legally do it, will involve its own uncertainties as the new entrants attempt to develop around the proprietary developments of the initial exclusive licensee. Still a bunch of uncertainty.

To manage the uncertainty, the nonprofit contractor would have to be required to reach through in the exclusive license and demand a right to any inventions made in the development of the invention with the right to sublicense to licensees of the original invention. That’s not in the IPA master agreement. But that’s just what one would have if one built a development commons–and so companies participated in development to the point of practical application, and then having established a common platform, they competed on other matters, such as efficiency, scale, quality, formulations, methods of delivery, combinations with other products, price–just not on access to the foundational “technology”–the invention and its “development.”

If the problem with an invention is that it is uncertain whether it is really all that useful–that it will work at all for its intended purpose, then we might argue first off that it’s not yet patentable. Second, if use has been established in some narrow sense (as for research purposes, or for DIY professionals) but it’s uncertain whether the invention can ever be a product, then the “development” is a matter of not of developing the invention but of developing the manufacturing methods and machinery to make a product at scale, with sufficient efficiency that sales minus cost equals a profit worthy of the attempt.

Consider the difference between pharmacists preparing a medicine prescription based on a formulary and a company anticipating the prescription and manufacturing a standard product that meets a large share of the likely prescriptions–enough to deter pharmacists from the opportunity to prepare the prescription themselves. A policy of exclusive license for “development” is in essence a policy to displace pharmacist preparation to a doctor’s specification with a commercial effort–if the profit is there–to produce a commercial product version that covers many cases. The rest of the cases become unserved or make-do with some less than optimal dosage of the commercial product. Of course, some compounds and methods might be so complicated or sensitive than only a specialized (and perhaps costly) infrastructure of equipment and trained staff can prepare the medicine at all. But even then, pharmacists might contract with organizations that maintained such resources to fulfill their orders, rather than act simply as distributors for commercial end product.

No matter where we chase this idea of development, we don’t end up with a compelling reason for a necessary exclusivity based on patenting the original discovery. We might see that a nonprofit desires exclusivity because it perceives a better paying proposition (but that runs against the IPA master agreement insistence that the nonprofit will administer the invention in the public interest). We might see that pharmaceutical companies or speculative investors might insist on exclusivity–and in their “market” that would make exclusivity “necessary” or “market conditions” require exclusivity. But that all raises the question of why that particular market has been chosen. Why not choose a “market” of companies and professionals that do not demand exclusivity–collaborators and competitors alike who are happy to work in conditions under which core technology is common, even shared, and advantage comes from other factors?

Nothing much works by way of logic in assessing exclusivity in patent licensing of nonprofit-held inventions except accepting that the logical driver is to move inventions as patent monopolies from federal funding to pharmaceutical companies, using nonprofits to launder the work and do the deals beyond the easy reach of public oversight.

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