Bayh-Dole Government License–8: Foreign Licenses

Okay. I’ve had about enough of this webinar on Bayh-Dole’s government license. It’s not that the advice provided is unexpected–it is entirely conventional wisdom, from the description of the NIST Green Paper on government use rights to how to deal with discounts for the government’s purchase of products produced under a royalty-bearing license to how to mitigate the effects of the government license to using patents to create bean-counting metrics. It’s just that repeatedly, this expectable, conventional advice is wrong. It gets Bayh-Dole wrong, it conflates sales and licensing, it ignores Bayh-Dole’s objectives. And the big point is that it does these things without batting an eye–it is entirely normal to get Bayh-Dole wrong, to conflate licenses and sales, to ignore Bayh-Dole’s objectives. Sigh. Diligent people repeating what they have heard and what sounds good, and making perfect sense if you don’t stop to think about the consequences of their words in practice. That’s the nature of conventional wisdom in matters of Bayh-Dole.

Let’s look at one more issue raised by the webinar, that of how the Bayh-Dole government license deals with foreign licenses. The Bayh-Dole government license stipulates that the federal agency shall have a non-exclusive license to practice and have practiced for or on behalf of the United States each subject invention throughout the world. Right there, embedded in the government license is a worldwide scope. Anywhere in the world that a federal contractor acquires a patent right (or any ownership claim, really) in any invention within the scope of federal government-funded work, the Bay-Dole government license provides that the federal agency can practice or authorize the practice of the subject invention “for or on behalf of the United States.”

We may ask, then, what “on behalf of the United States” might mean in the context of US foreign policy. Clearly, if the US government wants a company in a foreign country to make product for it, that activity would be within the government license to practice and have practiced. While “have practiced” does involve something akin to a license, it differs from a license in that “have practiced” carries with it that the have practicing is for the benefit of the authorizing party (“make for us”) rather than practicing for which the authorizer gets, at most, a payment for allowing the practice (“make for yourself if you pay us”). As long as the practice is so that the US government obtains some good or service, we are dealing with “have made” and not with an open license.

But what about matters of foreign policy–environmental safety, say, or public health? In such settings, it may be a government purpose that other countries use inventions made in work receiving US federal funding, and thus improve water quality or reduce air pollution or save people who would die of some preventable or treatable disease. And it may be that the US government might offer technology (military, oil exploration, whatever) in exchange for something in return (access to markets, reduced tariffs, preferential treatment, and the like).

From the Kennedy patent policy on, federal invention practice has addressed foreign implications of contractor ownership of inventions made in work funded by the US government. Here’s the two Kennedy statements on it:

The public interest is also served by sharing of benefits of government-financed research and development with foreign countries, to a degree consistent with our international programs and with the objectives of U.S. foreign policy.

and

There is growing importance attaching to the acquisition of foreign patent rights in furtherance of the interests of U.S. industry and government.

These two policy concerns represent both a desire to contribute inventions to the world and to compete in the exploitation of those inventions worldwide. The Kennedy policy, rather than deciding one way or another about which should dominate, instead reserves the right of the government to make decisions whenever it may. Thus, the government’s foreign activities take precedence over a contractor’s control of “principal or exclusive rights” in any given invention.

The Kennedy policy makes this precedence clear in its provision regarding foreign patent rights to inventions in which the government acquires “principal or exclusive rights” but does not pursue foreign rights:

Where the government may acquire the principal rights and does not elect to secure a patent in a foreign country, the contractor may file and retain the principal or exclusive foreign rights subject to retention by the government of at least a royalty free license for governmental purposes and on behalf of any foreign government pursuant to any existing or future treaty or agreement with the United States.

The Kennedy patent policy expressly defines “governmental purpose” to mean “to practice and have practiced (made or have made, used or have used, sold or have sold) throughout the world by or on behalf of the Government of the United States.” And “Government of the United States” is defined to include state and municipal governments. Even when the federal government obtains an invention, if it does not file in foreign countries, the contractor may do so, subject to the limitation that the Government of the United States also has rights there if it makes a treaty or agreement to that effect. Thus, under Kennedy, “have practiced” extends to “on behalf of any foreign government.” Bayh-Dole is based on the Federal Procurement Regulation (1975) that was built to codify the Nixon patent policy (1971) that modified the Kennedy patent policy (1963) to clear space for Latker’s IPA program (1968), which was shut down in 1978. Latker drafted Bayh-Dole a year later. Latker had a hand in both the Nixon patent policy revisions and the FPR–it has been Latker all the way down.

Webinar Scenario: A licensee intends to sell product based on a subject invention to the US government and to foreign governments.

Here’s how a panelist responds:

It really depends on whether the licensee is directly selling to foreign entities or the government or if it’s going through the United States and this is an area we’ve seen a lot of confusion around as well in terms of Bayh-Dole and understanding.

[Some edits and additions here: This response confuses sales and licenses, and confuses licenses and “having made.” The Bayh-Dole government license has nothing to do with selling. Not selling to the US government. Not selling to a foreign entity. If your licensee is selling, and you have a royalty deal indexed to selling, then you should expect the benefit of your bargain, unless you were too stupid for words and baked in a government discount that reflects the waiver of your royalty.

If the US government authorizes a foreign entity to “have made” product under the Bayh-Dole government license, it can do so, and that foreign entity can even sell that product to the US government or to anyone else within the US government’s authorization to “have made”–so, say, sell to US government contractors, or the various States.

In the very special case in which a contractor’s licensee also happens to be the company authorized to “have made” or “have sold” product by the US government, the contractor’s license does not extend to sales made under the US government license–unless the licensee was too stupid for words and accepted an obligation to account for sales outside the scope of the license–to pay consideration for sales for which the licensed patent right has no control. Or, another way, if the licensor is the one that demanded such a tie, that could end up being a species of patent misuse, like insisting on a royalty after a patent has expired, or a royalty on goods outside the scope of a patent’s claims in order to obtain a license to make, use, and sell goods that are within the scope of the patent’s claims.

And in the very, very special case in which a contractor’s licensee also happens to be a foreign entity selling to its foreign government, there’s still not a big deal. If the foreign entity sells under the Bayh-Dole government license–which is worldwide–then its activity is outside the scope of the contractor’s license (but for some unaccountably strange agreement to pay anyway). The same is true if the US government has asserted “additional rights” under Bayh-Dole in its funding agreement with the contractor–it is just a matter of how the funding agreement specifies the flow of control of those additional rights. In general, any “additional rights” will result in *less* for a contractor to have to worry about licensing. The contractor won’t have those foreign rights in the first place, or will be required to license directly to the foreign entity (under whatever terms are specified), or the foreign entity will have rights as specified by treaty, agreement, or any similar arrangement. For the most part, the contractor will have less to do or worry about, and any entity doing whatever selling has been authorized via the Bayh-Dole government license or additional rights specified under a federal funding agreement has no obligation to account to the contractor for that activity–not to report it, not to pay royalties on it, not to discount its sales to the US government or any foreign government.

None of this seems terribly complicated or confusing, really.

Similarly, if the US government purchases from a contractor’s licensee and then resells, the Bayh-Dole government license is not in play. The contractor’s patent rights are exhausted by a first sale. Once a sale is made, the buyer has no need of a patent license to use the thing that’s been bought or to resell it. We don’t have license agreements for the 300 or so patented inventions that get included in a typical automobile. And we don’t have to pay royalties if we later sell the car. The Bayh-Dole government license is just that, a license. It does not have anything to do with reselling, one way or another, domestic or foreign, government or non-governmental. A license is a limitation on a patent holder’s right to enforce the patent. A patent holder may require a royalty on sales. But that’s entirely distinct from the situation in which someone who already has a license chooses to buy from another that also has a license.

That buyer with a license has no right to a discount from a seller with a license (unless, of course, everyone has botched up their agreements to insist on such a thing). If the buyer wants the benefit of its license, then it uses its “have made” right. If it chooses not to use the “have made” right, then it buys at whatever price it can negotiate, and the seller owes the patent holder whatever its license deal requires. It’s like the choice between cash and credit. If I pay cash, then the seller keeps the entire amount. If I pay with credit, then the seller pays whatever it owes on the transaction to the credit card company for handling the money and collecting from me at the end of the month. It’s a choice. –End edits and additions]

As we have seen, Bayh-Dole has no provision for refunding to the US government royalties on sales to the US government (or requiring a discount in the sales contract). A federal agency might demand such a discount as a matter of negotiating, but any such discount is not in Bayh-Dole.

If the licensee is going to sell to a foreign entity without the US government being involved, then we want to make sure in our license agreement that we have really clear expectations about reporting and auditing and export control and compliance.

Or, if the licensee sells, it owes a royalty. Doesn’t matter the territory or status of the buyer, other than as the license provides. As for export control, university licensing folks appear oblivious to the nature of “deemed exports”–the transfer of controlled information within the US to a foreign national or agent of a foreign government. It is fine to insist in a license that a licensee obey US export control law, but it is also necessary to follow that law oneself in providing export controlled information in the first place. If there’s any duty of confidentiality in the license directed at any of the information to be conveyed (say, involving a patent application before it has been published), then the licensor may well have stepped outside of a “fundamental research” safe harbor in export control law. Adding export compliance language to a license agreement then creates the expectation that there indeed is export controlled information to be conveyed and raises licensor-side compliance. That ought to give folks pause.

Sometimes the way we might structure this which they have talked about previously is to just the license to the US government initially and then have the entity come back and renegotiate if they plan to do something with a foreign government.

This must be some of the confusion that the panelist previously alluded to. There is no need to license a company to do “have made” work for the US government–including selling that work to the US government (have practiced = have made, have used, have sold–including sold to the US government). If the company wants a license so that it can sell to the US government independently of the federal government’s Bayh-Dole license, then why bother with holding back other territories at the same time? What is the university going to do with those held-back rights in the meantime? License them exclusively to someone else and cut out the prospect of working with someone who is actually making product? Makes no sense, from a practice point of view, to set up a renegotiation in this way.

It seems as though, though, the Bayh-Dole Act allows for the US government to sell to a foreign government without paying a royalty.

Here’s Bayh-Dole on the matter (35 USC 202(c)(4)):

First, the world wide license to practice and have practiced:

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:

Then a provisio that allows a funding agreement to specify additional rights–that is, rights beyond those of the worldwide license to practice and have practiced:

Provided, That the funding agreement may provide for such additional rights, including the right to assign or have assigned foreign patent rights in the subject invention, as are determined by the agency as necessary for meeting the obligations of the United States under any treaty, international agreement, arrangement of cooperation, memorandum of understanding, or similar arrangement, including military agreement relating to weapons development and production.

The additional rights must be specified in the funding agreement (in the patent rights clause or elsewhere) and must be necessary for the US to comply with any conforming international arrangement. These additional rights are not license rights. They are ownership rights, such as assignment of rights in an invention to an entity–foreign or domestic–as stipulated by an international agreement. That entity might be, say, the World Health Organization, or the French government, or Faster Cures. But those additional rights are not license rights, as the license rights are already addressed in the primary specification of the government’s worldwide license to practice and have practiced. Nothing in this “additional rights” provisio limits a federal agency’s funding agreement requirement to arrangements that are already in place. A federal agency could include a conditional requirement for any future arrangements, just as did the Federal Procurement Regulation.

At this point, the webinar moderator provides a comment:

For clarification the code and the CFR stipulate that the US government can extend the discount or the royalty-free paid-up non-exclusive license to international governments and their entities if there is a treaty or agreement in that allows it.

Here’s the implementing regulation on the matter, 37 CFR 401.5(d)(1):

When the agency head or duly authorized designee determines at the time of contracting that it would be in the national interest to acquire the right to sublicense foreign governments, their nationals, or international organizations in accordance with any existing treaty or international agreement, a sentence may be added at the end of paragraph (b) of the clause at § 401.14 as follows:

This license will include the right of the government to sublicense foreign governments, their nationals, and international organizations, in accordance with the following treaties or international agreements: ____.

Paragraph (d)(2) then expands on this language. Here’s the most relevant bit:

The language may also be modified to make clear that the rights granted to the foreign government, and its nationals or an international organization may be for additional rights beyond a license or sublicense if so required by the applicable treaty or other international agreement. For example, in some cases exclusive licenses or even the assignment of title to the foreign country involved might be required. Agencies may also modify the added language to provide for the direct licensing by the contractor of the foreign government or international organization.

This provision makes clear that Bayh-Dole’s provisio is broad. The limitations are that the foreign agreement must be specified (not merely in effect, and not one that is anticipated or otherwise in the future). Here, 401.5 specifies an additional right to “sublicense” as an extension of the government license beyond just “have practiced.” A real difference, but not the only form of additional right that the government might stipulate in a funding agreement, nor the only place in a funding agreement that such a stipulation might be placed.

Clearly, the “additional rights” provisio in Bayh-Dole pertains as well to ownership. The government can require assignment of an invention, or assignment of foreign rights in an invention, or require the contractor to grant licenses on the government’s specified terms–any of these additional rights are within the scope of Bayh-Dole’s provisio. This expansion of the government’s rights is distinct from a federal agency determining exceptional circumstances (35 USC 202(a)(ii)). To assert these additional rights does not require the same procedures as exceptional circumstances (for which, see 35 USC 202(b)(1).

The next paragraph, 37 CFR 401.5(e), allows for future treaties:

(e) If the funding agreement involves performance over an extended period of time, such as the typical funding agreement for the operation of a government-owned facility, the following language may also be added:

The agency reserves the right to unilaterally amend this funding agreement to identify specific treaties or international agreements entered into or to be entered into by the government after the effective date of this funding agreement and effectuate those license or other rights which are necessary for the government to meet its obligations to foreign governments, and international organizations under such treaties or international agreements with respect to subject inventions made after the date of the amendment.

The trick is that this language must be added to the funding agreement; otherwise, the funding agreement disables the operation of the treaty. Or, one might think, that funding agreements won’t disable treaties, and this language is a matter of courtesy to remind contractors that their rights in a federal contract are conditioned on the federal government continuing to allow them those rights.

Our webinar moderator continues:

So it’s not just a blanket if it’s some other foreign government they get the extension of the discount it has to be within a treaty so you want to be careful about the language and look at what’s in place for that government entity because otherwise you have free rein to go get your royalties.”

Or, one should recognize that the federal government is going to do whatever it wants, and one’s Bayh-Dole-based patent rights clause is not going to stand in the way. The patent holding contractor has the opportunity to collect royalties on any sales–but not the right to collect anything practiced under either the government license or any other stipulation of additional rights in the funding agreement–regardless of when the federal government places that stipulation in the funding agreement. So, yes, a patent holder on a subject invention has “free rein”–meaning, the liberty to contract for payment of royalties in return for granting a right to practice, other than as provided by the federal funding agreement.

“This is really a huge point of confusion.

Full agreement here.

Where does the responsibility lie for tracking these royalties and whether or not you should receive them. Does it lie with the prime contractor? Does it lie with the licensee? Does it lie with the tech transfer office? We’ve heard a lot of varying views on that question.”

There is no responsibility to track “these royalties.” There’s no refund or discount clause in Bayh-Dole. There’s not much point in soliciting confused views on the matter. If one is going to hold a webinar, get to the bottom of things and refrain from propagating confusion.

“I think it’s important for the tech transfer office to have a good licensing template that has language in it when you do have federal funding that it makes it clear to the licensee what their obligations are and that it puts as much of the obligation for reporting and enforcing that provision on the licensee as possible.”

And that’s all fine and good so long as one is clear on what obligation one has and when such an obligation can be transferred to others. The obligation one really should convey to others is notice that the federal government has a worldwide license to practice and have practiced, and may assert additional rights to comply with an existing or future treaty or other such arrangement. Those additional rights may be license rights or ownership rights; they may extend the government’s license or may be distinct from the government’s license; they may involve the government granting licenses or the government requiring a contractor, assignee, or licensee to grant licenses–and in this latter case, a compulsory license may also set the terms, which then may also address matters of royalties or sales price.

This entry was posted in Bayh-Dole and tagged , , . Bookmark the permalink.