Can Bayh-Dole void an exclusive license?
Let’s unravel this one. A rewrite–
Question: Can a federal agency void an exclusive license under Bayh-Dole’s standard patent rights clause?
Now some text. The exclusive license voiding has more to it than just the easy answer.
Bayh-Dole authorizes the creation of standard patent rights clauses to be used in federal funding agreements with nonprofits and small companies for research or development. Bayh-Dole also stipulates what the default provisions for the clauses should be. One of those default clauses, at 35 USC 203, involves “march-in” under which a federal agency can require a contractor to grant licenses, or if the contractor fails to do so, to grant the licenses itself.
Here’s the start of 35 USC 203(a):
With respect to any subject invention in which a small business firm or nonprofit organization has acquired title under this chapter, the Federal agency under whose funding agreement the subject invention was made shall have the right, in accordance with such procedures as are provided in regulations promulgated hereunder to require the contractor, an assignee or exclusive licensee of a subject invention 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, if the Federal agency determines that such–
There follows a list of four circumstances under which a federal agency may invoke its march-in rights. Let’s simplify 203 to get past all the wordaciousness:
With respect to any subject invention . . . the Federal agency . . . shall have the right . . . to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license . . . and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself, if the Federal agency determines that such–
This is a goofy provision. Let’s point out some goofiness. If a federal agency requires a contractor to grant an exclusive license, and the contractor has assigned the subject invention, then the contractor necessarily will have to refuse the request because it does not have rights in the subject invention. Thus, the federal agency would then apparently have the right to grant the license itself. Such a march-in would not void an exclusive license so much as it would exploit an assignment to void the exclusivity of patent ownership that runs with assignment of the subject invention.
Now consider the case in which a federal agency invokes its march-in right against a contractor who has granted an exclusive license. If the federal agency requires the contractor to grant even a non-exclusive license, doing so voids the exclusivity of the prior exclusive license. The license itself isn’t voided–but the exclusive grant of rights is.
But if the federal agency requires the contractor to grant an exclusive license, well then any prior exclusive license is effectively voided. There you have it. But it is worse–let’s say that the contractor has granted a bunch of non-exclusive licenses, and that’s not sufficient for a federal agency bothered that no one has taken effective steps to achieve practical application or reasonably satisfy health or safety needs or meet the requirements for public use specified by federal regulations. The federal agency could then void all the non-exclusive licenses in favor of an exclusive license.
This truly is goofy. If a contractor were to make a given subject invention available on a non-discriminatory, royalty-free, non-exclusive basis, then any company could obtain the right to make, use, and sell product based on or incorporating the invention. Such a practice might be seen as worthwhile in developing a new standard, or contributing to a broad research effort that might take years, even decades. No one would be necessarily ready to build commercial product (if that’s what a federal agency took “practical application” to mean). A clever company, rather than joining the collective effort, might then go to the federal agency involved and push for march-in. The federal agency then could void the collective effort and demand that the contractor license the subject invention exclusively to the clever company. Doing so would conform to the monopoly meme–that no invention will be used if it is available to everyone. But the monopoly meme is a pretty bogus meme, given there a plenty of examples of inventions available to all being used by even lots of people and companies. The internet, say, and the world wide web protocols, say, and even this WordPress code I’m using–all defy the monopoly meme.
In any event, you can see the logic in Bayh-Dole for what it is: if you don’t achieve practical application, or even if you do but can’t manufacture to meet demand, or even if you do meet demand but your product does not “reasonably satisfy” health or safety needs or federal regulations, then the federal government can step in and exclusively license the subject invention out from under your licensees–and from you, too.
There’s a deeper logic at work, here, as well. That logic has to do with the exclusivity that runs with patent rights. A subject invention is not an ordinary invention. It is a new category of invention under federal patent law. Bayh-Dole policies run with subject inventions that do not apply to other inventions. In executive branch patent policies that Bayh-Dole preempts when a contractor acquires ownership of a subject invention, the invention rights were called “principal or exclusive rights.” The Federal Procurement Regulation that implemented the Nixon variant of the Kennedy patent policy uses “allocation of principal rights.” A contractor or employee-inventor is assured (conditionally) of a non-exclusive license to a given subject invention (using a definition that differs from Bayh-Dole). The contractor or employee-inventor, if the federal government does not require assignment, may be allowed to “retain greater rights than the non-exclusive license.”
Bayh-Dole, by contrast, introduces the idea of “title” to a subject invention. Title is, in the definition at Black’s Legal Dictionary, “The union of all elements (as ownership, possession, and custody) constituting the legal right to control and dispose of property; the legal link between a person and some object of property.” In executive branch patent policy, then, a contractor gained a share of rights along with the federal government. The contractor got some, and the federal government got some. The question in each case was how much should each get. Everyone was pretty clear that the government and the contractor should each get at least a non-exclusive right. The federal government’s right was “to practice and have practiced”–which executive branch patent policy defined as “made or have made, used or have used, sold or have sold.” That is, the federal government’s rights are, non-exclusively, as broad as the contractor’s rights–each can make, use, or sell and have others do so on their behalf. The government’s rights, in fact, extended to state and municipal governments. Any Government within the United States. Without patents, that would be the end of it–contractor and Government get to make, use, and sell–and so does everyone else who learns how to make or do it. With patents in play, the issue was how much more right than non-exclusive should a contractor get and with what stipulations.
The NIH resolved this issue by reviving the Institutional Patent Agreement program in 1968. Under the IPA, a nonprofit contractor, if it decided to file a patent application, was by federal contract required to acquire
The “title” language in Bayh-Dole suggests something different. The contractor then was required to obtain by assignment from inventors the “entire right, title, and interest” in such inventions and grant the federal government a non-exclusive license to practice and have practiced under its prospective patent rights. In the mental imagery that is Bayh-Dole, the contractor acquires title in an invention, and the apparatus of Bayh-Dole then proposes the limited conditions under which a contractor could be required to give up that title (failure to disclose, or elect to retain title, file a patent application, or maintain or defend an issued patent) or have exclusive rights weakened (march-in, modified patent rights clause in exceptional circumstances). Where executive branch policy started with at least equal sharing and the government determining to grant a contractor greater rights, Bayh-Dole starts with a contractor acquiring title, granting the government its rights, and then using Bayh-Dole procedures to resist any further weakening of the contractor’s exclusive rights.
Thus, the Bayh-Dole march-in procedure that would undo a contractor’s exclusive right to a subject invention takes on the form of an eminent domain taking of property rather than a rescinding for non-performance of a government permission to deal in greater rights than non-exclusive. It’s more of a frame than a reality, but it makes a huge difference when one takes one’s case to the public or to legislators who lack specialized knowledge.
The upshot, then, in Bayh-Dole is that contractors and their licensees are exposed to potential government voiding of exclusive licenses, non-exclusive licenses, and even title to an invention, given that for the government to have the authority to issue its own exclusive license (at least one that entails all substantial rights in a given subject invention), it must have some ownership standing to do so. We might ask, if the government issues an exclusive license on its own because a contractor will not, then who has standing to enforce the patent right? If the contractor must enforce the patent right–but has no incentive to do so because it has no rights to license to resolve any matter of infringement–then it would appear that the federal government must enforce the patent or there’s no point in the exclusive license. If the federal government can, by contrast, convey to the exclusive licensee the right to enforce the patent, then clearly, the federal government must own the subject invention or must have the power to relieve the contractor of that ownership.
Bayh-Dole expressly gives federal agencies the right to grant exclusive licenses in inventions om which the federal government owns “a right, title, or interest.” The government may:
grant nonexclusive, exclusive, or partially exclusive licenses under federally owned inventions, royalty-free or for royalties or other consideration, and on such terms and conditions, including the grant to the licensee of the right of enforcement pursuant to the provisions of chapter 29 [i.e., infringement] as determined appropriate in the public interest;
Granting the right of enforcement is a good sign that the exclusive license transfers all substantial rights in an invention and acts as an assignment of the invention. In the case of a march-in exclusive license granted by a federal agency, the title of the patent involved might remain with the contractor, but the subject invention covered by the patent would be owned by the new exclusive licensee. All this is a mess. It wasn’t thought out. It should not exist. It has never been used, for good reason. It’s like seeing an airplane with its wiring and fuel lines all wrong, and being told that’s the airplane folks will use if there’s ever a problem with the law. Yeah, right.
This leaves us with one other aspect to this exclusive license voiding. Under Bayh-Dole’s default patent rights clause provisions, the federal government gets a royalty-free license (35 USC 202(c)(4)):
With respect to any invention in which the contractor elects rights, the Federal agency shall have a nonexclusive, nontransferrable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world
This license is conditioned only on the contractor acquiring title to an invention (and thereby making it a subject invention) and then electing to keep that title–in such a case, the federal agency has a license to practice and have practiced the subject invention. While Bayh-Dole does not expressly define “practice,” executive branch patent policy, the Federal Procurement Regulation, and the Institutional Patent Agreement master agreement all use practice to mean “make, use, or sell.” Bayh-Dole would have to go out of its way to expressly define practice to mean something more restrictive, such as 28 USC 1498’s “used or manufactured.”
Thus, the federal government, by operation of Bayh-Dole’s default patent rights clause, has the right, without obligation to pay compensation, to make, use, and sell the invention and products based on the invention–no march-in required. Thus, even if a contractor grants an exclusive license, it is not really an exclusive license because the federal government has a full non-exclusive license in the same invention, limited to those activities that the federal government is authorized to engage in–which is still a pretty broad scope. Thus, in any area that the federal government sees a public need for which it has the authority to address, the federal government can make, use, and sell inventions and have others do so on its behalf. There is simply no need to march-in to do so, unless the public need is beyond the federal government’s authority–which it clearly will not be for public use to comply with federal regulations or to meet public health or safety needs.
We are left then, with march-in for failure to achieve practical application of a subject invention that is not needed for compliance with federal regulations or to meet public health or safety needs. And with march-in for failure to comply, in the case of exclusive licenses to use or sell in the United States, with the United States manufacturing requirements of 35 USC 204.
Thus, for a broad range of subject inventions–especially those in biomedical areas–the federal government can do one better than void an existing exclusive license. It can render the exclusivity meaningless without directly addressing the license at all. The federal government can authorize anyone to make, use, and sell under the federal agency’s license to meet any public need within the scope of the federal government’s authority to act.
Just keep in mind that no federal agency has ever marched-in, and as far as I know, no federal agency has ever used its non-exclusive license to practice to authorize companies to sell product (other than, perhaps, to the federal government). In one sense, the government license in Bayh-Dole is a wasted asset. In another, it is a bomb waiting to go off that would change dramatically nonprofit contractor exclusive licensing practices.