Study Example 1: “Reasonable terms” in Bayh-Dole

Here is Joseph Allen, attempting to make the case that “reasonable terms” in Bayh-Dole’s definition of practical application applies only to licensing terms:

Bayh-Dole adopted many of these terms with their original meaning. Section 203 says that the agency funding the research can require the contractor (typically an academic organization) to license others “upon terms that are reasonable under the circumstances” or can issue licenses itself if the contractor refuses in four specific situations.

That’s sort of correct. But section 203 is not limited to nor focused on “academic organizations.” So “typically” is simply wrong. Bayh-Dole includes small businesses as well and where it wants to focus on nonprofits, it does so, as at 35 USC 202(c)(7).

But what Allen points out is a matter of the remedy for a condition that creates march in, not the condition itself. Sloppy, wrong. Allen bases his argument on a defective history. He imagines that the Biddle report went to Roosevelt in 1947, but Roosevelt died in 1945. From that sloppy beginning, more follows:

As time went on, it became apparent that contractor ownership should be expanded to encourage commercialization,

“It became apparent” is a way of avoiding identifying anyone who actually advocated for expanding contractor ownership to encourage commercialization. “It became apparent” sounds like “it became self-evident” or “anyone rational would agree with such an expansion”–all without evidence. Even in the Congressional debates from 1976 to 1980 the idea of expansion–first in the NIH IPA program and later with Bayh-Dole–was hotly contested and not “apparent” at all.

The starting position for most federal agencies–including all the military departments where the vast majority of federal research contracts were made–was that the government needed only a royalty-free license to inventions. That was also Vannevar Bush’s proposal for the National Research Foundation in Science the Endless Frontier–and there, Bush did not assume that contractors would own, only that whoever owned would grant the government its license.

As time went on, some federal agencies–Agriculture, Public Health Service–asserted ownership of inventions made with their support. In the case of agriculture, the federal government had an interest in developing new technology (fertilizers, tomato-picking machines, tomato varieties that could survive tomato-picking machines) and had no interest in setting up any single company as the exclusive beneficiary of the work. The government developed the invention to the point of practical application and then released the developed invention for all to use. According to the Harbridge House report (1968), which studied government supported inventions patented in 1957 and 1962, the Department of Agriculture had a nearly 100% success rate in developing technology for commercial use–companies did sell product based on the agency’s work, and did not need to have an exclusive position secured by a patent to do so.

It makes sense that the federal government owns inventions for the purpose of making them available to all where (i) the contracts are for development to the point of practical application and (ii) contracts for research and development of a common technology are distributed among a number of contractors and (iii) where the contracts are with nonprofit organizations or contract research organizations lacking the capability or interest to develop an invention. It also makes sense that the federal government not adopt an arbitrary policy that pre-determines ownership and ignores the circumstances and purposes of each particular contracting instance.

Here’s the National Patent Planning Commission’s description (1945):

The time, circumstances, and conditions under which the
Government makes contracts for the pursuit of research or development work by private agencies vary greatly. The contract may be on a-profit or nonprofit basis, and, if the latter, the Government may bear all or part of the expenses involved. The contractor may be an educational institution or may be an industrial firm or corporation. A particular contractor may be selected because of an accumulation of knowledge, experience, and special facilities of peculiar value in a certain field. Existing private research facilities may be utilized, thereby avoiding their duplication by the Government at considerable expense. In some instances the effort involved may be only a further
development and refinement of work already done by the contractor, while in others the contractor may be breaking entirely new ground.

What does the NPPC conclude?

The Commission has concluded that a single uniform practice would be unfeasible and undesirable from the standpoint of the Government. The ownership of inventions resulting from such contracts cannot be fairly determined by an arbitrary or
fixed rule but should be established in each situation in accordance with the applicable circumstances.

The NPPC goes on to recommend that the federal government does not generally need to hold patent rights, does not need to exclude others, does not need to compete with its citizens. The only instance the NPPC identifies for government ownership of inventions is where private ownership “would conflict with national interest.”

Allen, some more:

so shortly before his death in 1963, President Kennedy issued a Presidential Memorandum which also required the contractor to license others if “effective steps” weren’t being made to develop government-funded inventions to “the point of practical application” (emphasis added).

Allen omits that Kennedy placed a three year time limit on exclusive rights, and that the definition of “to the point of practical application” included that benefits were “reasonably accessible to the public.” Allen also omits that as an alternative, the contractor could make inventions “available royalty-free or on terms that are reasonable in the circumstances”–that is, non-exclusive FRAND licensing. And the government’s march-in right under Kennedy was to require royalty-free licenses.

Allen’s fantasy history continues:

President Nixon expanded on the Kennedy policy in 1971, adding that if the invention was not being commercialized, the government would compel that it be licensed “on terms that are reasonable under the circumstances.” (emphasis added).

Nixon didn’t change the condition–it wasn’t commercialization, it was “practical application.” A contractor could use and provide benefits without commercialization–for instance, by granting a FRAND license.

Note that the underscored terms were associated with successful development and terms of the license, not with a product’s price.

All true but those aren’t the terms that figure in Bayh-Dole’s definition of practical application, and if an invention is made available royalty-free terms, then whatever the price might be, it is set in circumstances of competition or standards, not by the choice of a holder of a patent monopoly. This is the heart of the corruption brought about by non-enforcement of Bayh-Dole and selective misreading by folks like Allen.

Allen then discussions 35 USC 203(a)(1), the “first trigger”:

However, the first trigger– which is the subject of the debate—only applies to the contractor or assignee, not the licensee. 

If a licensee acquires all substantial rights in an invention, the licensee is an assignee of the invention. 35 USC 203(a)(1) applies to practical application–if the contractor or assignee grants licenses (ones that stop short of assignment), it does not matter what the licensee(s) do–the requirement to achieve practical application rests with the contractor or assignee and cannot be transferred under a license. Thus, licensees don’t matter, nor do the terms of any license.

So, this language means that the university is trying to find a licensee to develop the invention, otherwise the government can march in to do so.

Not at all. Totally wrong. The first “trigger” is whether there is practical application–benefits of use available to the public on reasonable terms. Nothing to do with the terms on which a subject invention is licensed exclusively to any company, nothing to do with terms on which a subject invention is on offer for license, nothing to do with the mere fact that a contractor has expressed the hope that someday a company will show up and request a license. The language means, if there’s no practical application and there’s no expectation that anything will happen soon to achieve practical application, then there ought to be march-in. “Trying to find a licensee” is about as far as one can get from “taking effective steps.” Or, another way, trying to find a single, exclusive, paying licensee is obviously an ineffective step–because nothing has happened.

Bayh-Dole’s march-in is not specific to universities or nonprofits. It is a general requirement that includes small companies and, with Reagan’s extension, all companies. Companies have absolutely no need to grant licenses to achieve practical applications. It’s what they do anyway, or they shouldn’t bother to own a subject invention. (Nothing in Bayh-Dole authorizes the use of the patent system to exclude use–the express standard at 35 USC 200 is to use the patent system to promote use.) This language means that if the owner of a subject invention fails to achieve practical application, the government can compel the owner to grant licenses. The language has nothing to do with the government helping a poor university find a paying customer for a patent right.

“Trying to find a licensee” furthermore has nothing to do with “taking effective steps.” Trying to do something that has not got done is not an effective step. If a university holds ownership of a subject invention and has not achieved practical application and has not licensed the invention to others that have achieved practical application, then there are no benefits from the use of the invention available to the public on reasonable terms–not at any price. And that’s *unreasonable*–it is an unreasonable use of ownership by the university. With Allen’s strange interpretation, a federal agency could not march-in for nonuse if a university owner of a subject invention had the invention listed as a “tech available for licensing.” For all that, universities as a matter of general practice don’t even offer terms for their subject inventions until someone shows up and inquires–so even if Bayh-Dole were to focus on licensing terms, university practice would still fail. It’s obvious–if a university hasn’t found its Prince Charming company and hasn’t achieved practical application itself within three years of a patent issuing, then it should offer the invention to all royalty-free, non-exclusively. That was the Kennedy approach. Makes some sense.

It also means that the terms of the license are conducive to commercialization, including monitoring the licensee to ensure they are trying to develop the invention in good faith.

Allen imagines that the 203(a)(1) condition becomes effective only if a poor university fails to find a licensee. The definition of practical application does not depend on licensing. Nor on effective steps. It depends on use with benefits available to the public on reasonable terms. If there’s no use, then there are no benefits of use available. If there is use, however, and the benefits are not available to the public on reasonable terms, there’s still no practical application and march in under (a)(1) applies. It matters not one lick on what terms a university has licensed an invention. If there’s no practical application, then the owner of the invention can be forced to grant licenses. Of course non-exclusive licensees would not be the target of such march-in. Of course an assignee would, as would an exclusive licensee of all substantial rights–because such a licensee is also an assignee of the invention.

Whatever the terms of any compulsory licensing might be, it has nothing to do with merely trying to “develop the invention in good faith”–it has to do with making the benefits of use of the invention available to the public on reasonable terms. “Good faith” also ahs nothing to do with “effective steps.” Otherwise, just by being pious, an owner of a subject invention could prevent march-in. At that point, march-in would be worthless. Oh, wait. Presumably, practical application is what any license, whether government compelled or otherwise, must require of any licensee. Rather–it is what any licensee must commit itself to achieve to prevent the (a)(1) march in condition from coming into play. Keep in mind that 203(a) allows the federal government to void existing licenses and compel the grant of an exclusive license to the company of its choosing. It’s a nasty clause, that way, unlike Kennedy, which requires non-exclusive licensing, royalty-free, and unlike Nixon, which requires non-exclusive licensing on terms reasonable in the circumstances with the provisio that royalty-free is included as a reasonable possibility.

Allan imagines a scenario in which a university grants an exclusive license to a company and then must “monitor” the company for its “trying to develop” the invention. This, Allen supposes, is a “term” of the license “conducive to commercialization.” In what bizarre world is monitoring of development work by a nonprofit under an exclusive patent license conducive to a company’s efforts to develop something new into a commercial product? Think about it–the nonprofit would have to have a means in the license to itself march-in on the licensee. That march-in would have to have at least the standard as 35 USC 203(a)(1). That is, the license terms could not be merely “commercialization”–they would have to insist on actual use of the invention with benefits available to the public on reasonable terms. Furthermore, if the standard was simply attempting to grant licenses, why, the licensee could claim the same thing–that it was trying to sublicense the invention but gosh hadn’t found a taker, but making the try surely is an “effective step.”

This is just so stupid it’s hard to write about. If a university adopts exclusive licensing terms that allow the licensee to be pious about its development and not use an invention at all, nor make benefits of that use available to the public, nor make those benefits available on reasonable terms, then right there that should be a basis all on its own for federal march-in. Such a license would be an utterly unreasonable use of the subject invention under 35 USC 200 and would not indicate that the university had taken effective steps under 35 USC 201(f)’s definition of “practical application.” Even if the company licensee *paid* the university for terms that allowed it to be pious and not use or develop the licensed invention (this happens all the time with startups, where the university receives an equity interest and therefore is necessarily conflicted about whether it is more concerned with the company becoming valuable or with the licensed invention getting developed to the point of practical application).

Allen, more fanciful history:

The critics first claimed that “reasonable terms” in the preamble referred to a product’s price. However, they clearly apply to the terms of a license, so they moved on. They then seized on the definition of “practical application” in the law, which says that the invention is being utilized and its benefits are “available to the public on reasonable terms.”

Whatever the unquoted critics might have done, Allen conflates the compulsory licensing requirement with a condition that triggers the requirement. If a contractor or assignee fails to achieve practical application–benefits available to the public on reasonable terms–then the government may march in and compel licensing on reasonable terms. Entirely distinct issues. The government licensing does not have to dictate price–but the government’s responsibility to act on march in surely does depend to a great degree on price, as price is one of only a few factors that pertain in making a benefit available to the public.

One last bit from Allen:

While the phrase can seem ambiguous taken out of context, it was used in march-in rights provisions referring to commercial availability or terms of a license, not price. In the first trigger, since a university is not developing the product and has no authority to set its price, the language clearly refers to the license.

Nothing in the march-in language refers to “commercial availability” or “terms of a license.” Nothing in the definition of practical application refers to commercial availability, but practical application does depend on “available to the public on reasonable terms”–regardless of whether that availability is commercial or not. 35 USC 200 puts it this way in its policy objective concerning the use of American industry and labor:

to promote the commercialization and public availability of inventions made in the United States by United States  industry and labor

Commercialization contains within its concept the offering products for sale. Public availability is not just a restatement of the result of commercialization–it is a distinct and separate means by which American industry and “labor”–people using the invention, not in industry. Bayh-Dole does not require commercialization. It requires utilization. Whether that use is commercial or professional or standards or DIY is not a decree of the law. For that matter, Bayh-Dole’s American manufacturing clause (35 USC 204) does not depend on commercialization–just on the exclusive right to use or to sell in the United States. Use is not restricted to commercial use.

Allen is wrong about the remainder as well. A university may well develop an invention to the point of practical application. It does so with every inventive research tool. It does so with anything that it builds under contract–such as satellites or telescopes or particle detectors. It does so with agricultural products and with disease diagnostic assays. That these university-developed inventions are not commercially available is utterly beside the point in Bayh-Dole. Even the American manufacturing clause does not apply if an invention is made available non-exclusively in the United States. The invention then can be made *anywhere* and imported into the United States.

And Allen is wrong about the university’s authority to set price. It can set price in its licensing and it can influence price in its licensing. There’s nothing in patent or antitrust law that prevents a patent holder from setting a price. Setting a price is not “price fixing.” Setting a low price is not “anticompetitive.” A licensor may also influence pricing by, for instance, terminating exclusivity if a price required by an exclusive licensee is greater than a stated threshold.

In 203(a)(1), the “trigger” is a failure to achieve practical application (or at least a failure to make a show of attempting to get up the gumption to attempt to achieve practical application–making a show of getting up the gumption to find someone who will make a show of getting up the gumption is simply too dumb to be relevant). There’s nothing there in the trigger that has anything to do with licensing. Even Allen argues that (a)(1) does not involve licensees. Of course not. Because practical application does not care about licensees–practical application is independent of invention ownership or patent license. But both a licensor and a licensee have to address price, whether in the license or not–if they wish to avoid setting off the (a)(1) march-in condition.

All this assumes, of course, that march-in is not a mere legislative fantasy used to get Bayh-Dole passed and never “intended” to be used. In which case, Allen’s rhetorical logic is really this: 203(a)(1) march-in was never intended to be used; therefore it follows that price was never intended to be used for march-in–because nothing was intended to trigger 203(a)(1) march-in. Even license terms were not intended to trigger march-in. If a license was granted, the licensee must have determined that the terms were reasonable or wouldn’t have agreed to the deal. If a license was not granted, well, all a university has to do is appear to want to grant a license and that counts apparently as “effective steps.”

Perhaps that’s enough to show how Allen twists the law to his preferred private meaning and constructs a selective and warped history to make it sound plausible. At one point many years ago I was asked by a big company legal representative what I would suggest by way of revisions to Bayh-Dole. I thought I had some answers. But I was clueless then. Now I know. The number one thing is to repeal is Joseph Allen’s chronic, widely distributed, and largely unchallenged misrepresentations of the law.

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