Bayh-Dole Basics, 8: Reasonable Terms Comments-4

We are working through the details of prior treatments of what becomes “reasonable terms” in Bayh-Dole’s definition of “practical application.” This definition in turn becomes the threshold for federal agency march-in under 35 USC 203(a)(1)–the first of the four march-in conditions. One of the precursors to Bayh-Dole march-in (Latker said Bayh-Dole was based on it), is the Institutional Patent Agreement program revived (by Latker) in 1968. Using the IPA, the NIH could contract with nonprofits to circumvent Public Health Service policies on inventions and feed inventions to the pharmaceutical industry packaged as patent monopolies, using nonprofits as the intermediaries. Genius, if that is what one thinks ought to be done.

The IPA master agreement asserts that the nonprofit must administrate subject inventions in the public interest, should default to non-exclusive licensing, but then walks back that default with various easily adopted excuses, and then spends a great deal of effort on laying out the requirements for exclusive licensing–much like Bayh-Dole does for the exclusive licensing of federally owned inventions (and strangely what Bayh-Dole does not do for contractor-owned inventions).

Section (e) of the IPA master agreement deals with other terms of nonprofit licensing. Section (e), too, is strange:

(e) Any license granted by the Grantee to other than the Government of the United States under any patent application or patent on a subject invention shall include adequate safeguards against unreasonable royalty and repressive practices. Royalties shall not, in any event, be in excess of normal trade practice. Such license shall also provide that all sales to the U.S. Government shall be royalty free.

Why is this provision strange? The provision itself has to do with how a nonprofit’s licenses must be constructed. One would expect to find a requirement that the nonprofit’s licensing terms are reasonable in the circumstances. But that’s not what the provision worries. Instead, it requires that the license include “safeguards” in the event that the licensee–not the licensor–sublicenses the invention. The nonprofit must include language against “unreasonable royalty:” and “repressive practices.” What the heck? First, consider unreasonable royalty. If the nonprofit is licenses non-exclusively, then there’s no point in allowing non-exclusive licensees to sublicense. And if they were to sublicense by asking an unreasonable royalty, it would not matter, since the nonprofit could provide a license with a royalty that was reasonable in the circumstances, per section (c). If the nonproft licenses exclusively, and the licensee turns around and grants non-exclusive licenses, then the whole “development requires exclusive patent licenses” thing blows up. The licensee then is just doing what the nonprofit was required to do in the first place, per section (c), but is charging an unreasonable royalty, and the nonprofit has breached the IPA master agreement.

Now for “repressive practices.” What could that possibly mean? For a non-exclusive licensee, nothing. A non-exclusive licensee has no right to enforce a patent and so there’s really nothing a non-exclusive licensee could do to “repress” anything. What about an exclusive licensee? There are two cases. In one, the exclusive license conveys all substantial rights in the invention–and so acts as an assignment of the invention. Such assignments are prohibited by the IPA master agreement in section VII–a nonprofit is permitted to assign only to a nonprofit patent management organization, and only then on the condition that the assignee is subject to the terms and conditions of the IPA master agreement–so the assignee would not be subject to this condition on licensees because it would be in the position of the nonprofit, and would have to flow down the requirement of this section (e) in whatever licenses it granted.

It’s strange, then, that section (e) applies to the licenses a nonprofit grants and not to the nonprofit itself in what terms it has on offer for any license it grants. It ought to be the nonprofit that has policy safeguards in place to prevent it from requiring an unreasonable royalty or engaging in repressive practices (such as suing for infringement, say, when it otherwise has not granted any licenses). Section (e) ought to apply to the nonprofit, and by assignment to any assignee, and not to the nonprofit’s licensees. Strange.

What falls through the cracks here? While the nonprofit has a clear obligation to make the terms of any non-exclusive license “reasonable in the circumstances,” it has no such obligation with regard to exclusive licenses. The restrictions on exclusive licenses in section (d) have to do with the term of exclusivity, and even there the deal can be constructed to string the term out to nearly the full term of the patent with the only uncertainty being whether the NIH will approve an extension (and why wouldn’t it?). There’s nothing in section (d) requiring the financial terms or any other requirements of the license to be “reasonable.” Nor is there anything in either section (d) or section (e) that requires an exclusive licensee to offer commercial products based on the subject invention to the public at reasonable price–unless one understands “repressive practice” to include price. But that’s a stretch. Asking a high price might place a product out of reach of many potential buyers, but that in itself does not make the high price “repressive.” The only provision of the IPA master agreement that gets at price is the general admonition that the nonprofit administrate each subject invention “in the public interest.” That admonition might well include safeguards on price–but clearly Norman Latker and Howard Bremer felt no need to make public pricing an express concern of the IPA master agreement.

Nixon amended the Kennedy patent policy in 1971. One purpose of the changes appears to have been to legitimize the IPA master agreement–to make the IPA master agreement conform with executive branch policy, best to change the executive branch policy. The primary changes (for our purposes) introduced in the Nixon revisions are:

(1) The government march-in for failure to achieve practical application or license non-exclusively on reasonable terms is not restricted to non-exclusive royalty-free licenses–the government can require exclusive licensing as well, and can require licenses that are other than royalty-free–so the government can compel a contractor to accept payment from licensees. What an odd use of government power.

(2) Government march-in for regulatory or health and safety matters is expanded to include the prospect of exclusive licensing–again, very strange–and adds that march-in can be based on “other public purposes stipulated in the contract.”

(3) The contractor may be allowed to retain a royalty-free non-exclusive license–revocable if an agency “determines that some degree of exclusivity may be necessary to encourage further development and commercialization of the invention.”

This item (3) continues our theme of strange. Life through the eyes of patent attorneys drafting federal invention policy is strange. Look at the language–it’s not that the agency determines that exclusivity is necessary to development and commercialization–it’s that “some degree” of exclusivity is necessary. That “some degree” would have to be “all” if the contractor did not retain a non-exclusive license. Makes no sense. Then look at “may be” and “encourage”–it’s not that exclusivity is necessary to development–it is that exclusivity might be necessary to encourage development. We are talking about how to encourage here, not how to develop and commercialize. Coarsely–sweeten the deal for people who for business reasons would not otherwise develop or commercialize. That is, encourage a bad business decision or invite speculators who don’t necessarily care about business decisions so long as they can “add value” and sell to other speculators. The abstract language covers for practice coarsenesses such as these.

(4) The government, if it acquires ownership of an invention, may license exclusively.

This is quite huge. If the government can issue patents to itself and then license those patents exclusively, it is in effect setting up a second, shadow patent office–issuing patents a second time, but now not to the inventor but to a favored company. It’s one thing to sole source manufacturing for government purposes–that’s done under a contracting process. It’s another thing to hand the exclusive right to manufacture to a private firm for up to 17 years (at the time), independent of any government contract. In a government contract, the government negotiates the consideration for performing the work. In a shadow patent office grant of exclusivity, the government may give up price control and end up having to purchase product at whatever the government’s franchisee charges. If the government in the deal is to receive a royalty, this amounts to a kind of money laundering between federal accounts–one agency pays for the product and the Treasury receives the royalties without designation for use–Congress gets to decide.

We may add that the Nixon revisions don’t repeat any of the IPA master agreement requirements on licensing.

(5) Delegates to the Administrator of General Services the authority to issue regulations that implement (and therefore also interpret) the policy statement.

This delegation prompts the apparatus of the Federal Procurement Regulation, which in turn lays out a standard patent rights clause and related procedures that lay the groundwork, along with the IPA master agreement, for Bayh-Dole–Bayh-Dole, that Frankesteinian monster stitched together from pieces of executive branch policy, regulatory implementation, and agency master agreement contracting, and brought to life as a statute placed into federal patent law where it preempts any other law (but for Stevenson-Wydler and any future law that expressly references it) whenever a contractor obtains title to an invention made under federal contract.

The Federal Procurement Regulation implementation of the Nixon patent policy was finalized in 1975–just four years before the Bayh-Dole Act began slouching toward its Bethlehem. Since the Kennedy patent policy, there has been a continuous effort to change its effect to permit exclusive licensing of federally supported inventions in areas of public health. The NIH led this effort. First, the IPA program, which the NIH expanded to include the NSF. Then the Nixon revisions allowing exclusive licensing by the federal government and aiming to legitimize the IPA program and make it government-wide, so the NIH’s patent pipeline to pharma would also hold for health-related research sponsored in all other federal agencies. The NIH’s effort to make the IPA program government-wide was blocked in 1978 and the IPA program shut down. The next year, Latker at the NIH drafted Bayh-Dole and its advocates beat back a competing bill sponsored by Sen. Harrison Schmitt.

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