We are working through the prior federal regulations in an effort to understand the “reasonable terms” requirement in Bayh-Dole’s 35 USC 203(a)(1) march-in condition. In the Kennedy executive branch patent policy, contractors had two primary routes to retain ownership of inventions made with federal support:
achieve practical application in three years from patent issuance
make the invention available non-exclusively on reasonable terms
Other than that, a contractor might “show cause” why, despite failing at 1 or 2, it should still keep ownership. “To the point of practical application” in Kennedy was defined to mean working the invention so that the benefits of use are “reasonably accessible to the public.” Thus, there are two distinct standards–practical application or non-exclusive licensing, both requiring some version of reasonable terms. But the “reasonably accessible” is directed at the public, while the “terms reasonable under the circumstances” applies to non-exclusive licensing. Exclusive licensing and assignment just kick the contractor’s obligations down the road to the contractor’s business partners. There’s no requirement in Kennedy on the terms of exclusive licensing or assignment–because these terms don’t matter to the retention of principal rights by whomever holds them.
To see how this distinction works, let’s return to our comparison of Bayh-Dole march-in with the march-in anticipated by the prior executive branch policies, now including Nixon’s revisions. Let’s first compare Kennedy and Nixon on march-in. Here’s Kennedy:
K: the government shall have the right to require the granting of a license to an applicant on a non-exclusive royalty free basis.
That’s simple. If a contractor can’t do it, then the government requires the contractor to use the most simple option that preserves the contractor’s right of continued ownership of principal rights–grant everyone a non-exclusive, royalty free license. Easy.
Nixon breaks up march-in into two paragraphs–(f) and (g). Paragraph (f) is conditional on practical application:
N(f): the Government shall have the right to require the granting of a non-exclusive or exclusive license to a responsible applicant(s) on terms that are reasonable under the circumstances.
But now the licensing is no longer simple. The license may be exclusive (and so kicks the can down the road with regard to practical application–now the contractor and the new “his licensee” are both on the hook to achieve practical application within three years of patent issuance–but wait–how can that be? the contractor and any “his licensee” have already failed to do that, so now there’s no time limit in the policy for any further march-in. Good golly. The government can march-in, require the contractor to grant an exclusive license, and then has no basis to march-in again. Screwy. We are sure lucky none of this apparatus was ever used. It would be a torpedo exploding in the tube and sinking the sub. Further, the license may now involve “terms that are reasonable under the circumstances”–so the government now has to determine reasonable terms rather than use royalty-free. The government stipulates, then, that the terms it chooses are in fact reasonable terms. “It isn’t us–the government has decided you must pay us this amount–so, no discounts.”
Paragraph (g) march-in does not have anything to do with practical application, but rather with government purposes and responsibilities. Even if a contractor achieves practical application, the government under paragraph (g) march-in can still require licensing to others:
N(g): the Government shall have the right to require the granting of a nonexclusive or exclusive license to a responsible applicant(s) on terms that are reasonable in the circumstances (i) to the extent that the invention is required for public use by governmental regulations, or (ii) as may be necessary to fulfill health or safety needs, or (iii) for other public purposes stipulated in the contract.
Consider the nature of paragraph (g) march in. A company takes an exclusive license from a nonprofit government contractor and achieves practical application–say, makes and sells a product based on the invention. But now the government creates a regulation that requires the public–say, every company–to use the invention in its own production activities. Doesn’t matter that the exclusive licensee uses the invention in the making of whatever product it has made–the other companies cannot comply with the government regulation by buying the exclusive licensee’s product. They must have access to the invention independently of what the exclusive licensee makes. Similarly, just because a company achieves practical application of an invention does not mean that whatever product or benefit is made available to the public has anything to do with health or safety needs–the company could use the invention to make a drug to treat horses, say, and ignore people. Practical application achieved, but paragraph (g) march-in still possible.
Kennedy by contrast is direct. If the contractor-assignee-licensee fails to achieve practical application in three years from patent issue and hasn’t made the invention available on reasonable terms or otherwise shown cause, then the government gets to break up the patent monopoly via non-exclusive, royalty-free licenses. Yes, Kennedy march-in does not deal with the situation in which practical application does not support regulations or public health. But Kennedy insists that such inventions, from the outset, should be acquired by the government and dedicated to the public–so march-in would not be necessary in those situations unless a federal agency granted a petition for exceptional circumstances and the contractor failed to deliver within three years from a patent issuing on the invention.
Nixon worries things, complicates things, narrows them, and puts money back into the procedure.
Nixon narrows the conditions on which march-in can compel licensing. Under Kennedy, the march-in compulsory licensing happens because an invention has not been developed to the point of practical application within three years or, otherwise, been made available on reasonable terms. That’s it. The idea is that either the public benefits from use or has access to use for itself or the government makes that access happen royalty-free–open innovation or public license as we might call it now. But Nixon completely redoes this by restricting march in to (i) for public compliance with government regulations; (ii) necessary for public health and safety needs; and (iii) anything required by the contract. The Kennedy focus on practical application or public access is disappeared. In its place is a restriction of march-in to specific public purposes. If there’s nothing specific in a funding agreement, and no government regulation in play, and no necessity for public health or safety–well then, screw the bother of march-in. Under Nixon, there’s no march-in merely so that companies that want to practice an invention that’s not been developed to the point of practical application within three years–so the companies presumably could purchase in product form what they needed. Nope. They are screwed over for the term of the patent.
It may be that when provisions of a law are not meant to be used–and never have been used–that government lawyers grow complacent in drafting. So long as stuff looks good to the uniformed, they can draft most anything they want, even really stupid stuff. The obvious thing for federal agencies to have done under Nixon was to stipulate in each funding contract the whole range of public purposes to be achieved by use of any invention claimed by the contractor and thus gain the benefit of (iii) for the public as it was under Kennedy. I am quite sure nothing of the sort ever happened.
Furthermore, the Nixon-defined march-in license may now be exclusive–that’s a huge change, depending on how far “exclusive” goes toward excluding the licensor (that is, toward assignment). If march-in can force an exclusive license, can the government unilaterally void an existing exclusive license (or assignment) and hand that the exclusive rights to another company? That sounds unreasonable. A reasonable interpretation is that the government would march-in on the furthest removed bit of the licensing chain–the licensee if there is one, or otherwise the assignee if there is one, and if none of these, then the contractor-owner. But none of that is made apparent in the wording, which makes it appear that the government could unilaterally void a chain of rights because it determined that some weak link in the chain was responsible for failing to achieve practical application. Proposal–the language was added to make it appear that march-in was itself in most common activities potentially unreasonable and therefore should not be used. Second proposal–the folks drafting the Nixon modifications (some worked then on Bayh-Dole)–were not competent drafters and just screwed up.
In the Nixon march-in license, the restriction to royalty-free is removed. That means that the government can compel a much more restrictive license than royalty-free non-exclusive. Get your mind around that–a restriction removed results in the prospect of much more restricted access to a federally supported invention that isn’t getting used. It’s an upside down world created by lawyers. And now there’s money in play when the government marches in (calm down, though, since the government never marches in–this is just bogey monster stuff). The argument made for the change was that royalty free could be “reasonable in the circumstances” so royalty-free remained an option–but now the government would have to make a determination about that–more complication. How does one show that royalty-free is the term “reasonable in the circumstances”? Otherwise, march-in is now remarkably altered: the government now in compelling licensing also decides what the “reasonable compensation” should be for the licensing–the “royalty-free” is the financial term that’s removed–so we are looking at compensation. Now march-in has the form: “If you don’t achieve practical application then the government can compel you to license and dictate what licensees have to pay you.” That’s pretty heady. “You aren’t making money on that invention, but the government is here to help by finding you licensees and deciding what your reasonable compensation for licensing ought to be.” This is a big complication in march-in. And it’s also in its way bizarre. The federal government is transformed from liberator to panderer of inventions. No wonder that Bayh-Dole follows Nixon here:
BD: to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself
Bayh-Dole is even more obtuse. Now we have “partially exclusive” licenses–what the heck is a “partially exclusive” license and regardless, why is the distinction needed? Why not just provide for the government to require licenses–it doesn’t matter whether the license is nonexclusive, exclusive, partially exclusive, sole, or chicken salad. The point of march-in is that the patent monopoly gets broken up and distributed upon the failure of the contractor-assignee-licensee to achieve practical application. The point of Bayh-Dole march-in, however, is a convoluted mess having to do with expectation of effective steps and the like.
More craziness: Bayh-Dole adds “responsible” as a qualifier to “applicant”–not only now must companies “apply” for a license rather than simply accept a public offer of reasonable terms–but someone must determine that an applicant is “responsible.” How does that work? To see, take a look at the bureaucrazy of the federal licensing guidelines that implement Bayh-Dole for federally owned inventions at 35 USC 207 and 209. And if the contractor-assignee-licensee refuses to grant licenses on the government’s terms to the government’s screened “applicants,” then the government can grant those licenses. Oh my. How does that work? The invention is not owned by the government, so Bayh-Dole’s federal licensing regulations don’t apply. And the government’s license under Bayh-Dole’s standard patent rights clause is to “practice and have practiced for or on behalf of the United States”–that’s not broad enough to cover practice of an invention for any other purpose, such for or on behalf of a company. What happens here? Does the government’s license just expand to include an implied right? If the government demands compensation, does that compensation then come to the government rather than to the contractor-assignee-licensee? Is march-in then a matter of “The government demands to find licensees willing to pay you but if you are so stone-cold-stupid that you refuse payment, then the government will license anyway and pocket the money itself.” That’s a hell of a different sort of march-in than Kennedy.
In a way, we are so fortunate that the federal government has never used Bayh-Dole march-in. It would be like turning on a garbage disposal installed upside-crossways. We’d have sewage everywhere.