What Bayh-Dole Does–enabling but not requiring exploitation of patent monopolies

Prior to the NIH Institutional Patent Agreement program, the Kennedy executive branch patent policy required federal agencies to do the following:

Allow contractors with real businesses in non-governmental markets to own inventions made under federal contract, except in research directed at public health or safety.

Require everyone else–both federal agencies and contractors–to make a case that their dealing in patent monopolies better served the public interest than open innovation.

This is not all that difficult to comprehend. Companies contracting with the federal government could patent stuff as might be their practice, except for biomedical inventions–those, by default, were to be made open. Thus, the company still had full access to those inventions, as did the company’s inventors, as did everyone else. If the company wanted exclusive control (but for the government) of a given invention, it had to show how that exclusive control worked out better for the public than open access.

Two things happened. One, following the Harbridge House report in 1968, which included a chapter describing the pharmaceutical company boycott of federally supported inventions, the NIH revived its IPA program, which allowed selected nonprofit contractors to agree to take ownership of inventions made in NIH-supported work no questions asked, provided the contractor file patent applications on those inventions. Under the IPA program, then, contractors did not have to make a case that dealing in patent monopolies might be somehow better for the public. They could do most anything they wanted.

Yes, the NIH did some things to put the public at ease. First, they required a review of the nonprofit’s invention policies and technology transfer capabilities and record. Nonprofits without good policies (that’s interesting!) and lacking in invention management resources would not qualify. Second, the NIH put all sorts of requirements in the IPA master agreement pertaining to exclusive licensing of inventions. But these requirements turned out to reduce to “you can license exclusively if you tried non-exclusive and it didn’t work” or “you thought about non-exclusive and decided it wouldn’t work.” And even then, it didn’t matter because the NIH had no mechanism to force compliance with the requirement anyway. Sure, the NIH could enforce–but nothing required it to. So all those provisions to govern exclusive licensing were just for show. When the IPA program was reviewed in 1978, as the NIH was trying to make it a government-wide program, folks found that despite all those cautions on exclusive licenses, almost all the nonprofit licensing was exclusive anyway.

Not only did the nonprofits not have to make a case for dealing in patent monopolies, but once the NIH gave them the freedom to license exclusively, that’s just what the nonprofits did. Or at least tried to. Mostly, they didn’t license at all. Their licensing rate under the IPA program was about 20% of their claimed licensing rate for their own, non-federal inventions–about 5%. The IPA program was shut down. Lousy licensing outcomes. Patented stuff withheld from public access as the default, rather than made available as the default. And for the handful of things that did get to commercial product, the nonprofits received only a tiny royalty, relatively speaking. It was as if the nonprofits served merely to pass through inventions made in public health work to favorite companies for little more than a handling fee–or some might see it as a kickback. Enough to provide an incentive to do the deal but not so much to be a major beneficiary of the commercial success of the product. You know, net 2% rather than, say, net 40%. It all seemed wrong, and was wrong. Ineffective, suppressive, sweetheart deals.

The second thing happened when the IPA program was shut down. And that was Bayh-Dole. The IPA program ended in 1978, and by 1979 the NIH had drafted the Bayh-Dole Act. Norman Latker, patent counsel for the NIH, sought to avoid having the drafting work traced back to him and had a professional colleague outside government type up the draft of the bill for him. Bayh-Dole, according to Latker, was based on the failed IPA program–and in some ways it surely is. But Bayh-Dole goes much further.

Like the IPA program, Bayh-Dole does not require nonprofits to make a case for their patent monopoly exploitation better serving the public interest. But unlike the IPA program, nonprofits do not have to have any policies, technology transfer capability, or track record of handling inventions. Whatever public protections there are, then, are packed into the law and implementing regulations. If a contractor acquires an invention made in work under a federal contract, the contractor gets to keep that invention, no questions asked. If a federal agency wants to avoid this outcome, it must determine an “exceptional circumstance” exists, write a report justifying it, and then modify the Bayh-Dole patent rights clause only so much as necessary to address that circumstance, and only in ways that better promote the policy and objective of Bayh-Dole–as distinct from the policy and objective of the federal agency. Whatever public benefit there might be in, say, federal open innovation management, that cannot happen unless it is couched in terms of what Bayh-Dole says it is intended to promote. It’s rather odd.

Like the IPA program, Bayh-Dole goes out of its way to worry exclusive licenses. But for contractors, Bayh-Dole was amended (in 1984) to remove the primary restriction–on the duration of exclusive licenses granted by nonprofits to large companies. The other restrictions on contractor exclusive licensing were presented as so weak as to be useless.

The policy requirement of 35 USC 200 that the patent system was to be used to promote free competition and enterprise–clearly an implicit expectation of non-exclusive licensing–was ignored in the list of requirements for the standard patent rights clause. The requirement for U.S. manufacturing in 35 USC 200 was addressed–and given standing to take precedence over anything else in Bayh-Dole–but 35 USC 204 turns out to be hopelessly narrow, applying only to exclusive licenses to use or to sell in the U.S. and even then is waiveable by federal agencies if–you will recognize this part adapted from the IPA program–the contractor has tried to find a U.S. exclusive licensee and failed or thought about it and decided that there would be no U.S. exclusive licensee. The other bits on exclusive licensing are obscure.

Nonprofits are to give preference in licensing to small business firms–following up on the policy expectation that using the patent system should maximize the opportunities for small businesses to participate in federally supported research or development (and for nonprofit licensing, that would be development of inventions). According to the implementing regulations are to make attempts (“reasonable under the circumstances” 37 CFR 401.14(k)(4)) to “attract licensees of subject inventions that are small business firms.” But even that is walked back–nonprofits are to give preference to small business firms in licensing, but only if all things are otherwise equal. Nothing in the requirement addresses the situation in which a small business firm presents as better. And even then, the licensing choice is “at the discretion of the contractor.” Federal agencies can review licensing practices and bitch about them. But that’s bitching about an empty barn.

Finally, there’s the all-important but ignored bit that restricts nonprofit assignment of inventions, 35 USC 202(c)(7)(A). Any assignment must carry with it the requirements of the nonprofit patent rights clause. Under the nonprofit patent rights clause, any income earned with respect to a covered invention must be used for scientific research or education, deducting only expenses incidental to the administration of such covered inventions. Obviously, such conditions on assignment would be attractive only to the most publicly spirited of companies. Most companies–this is not a dig at them, because companies gotta company–would much prefer to use income from inventions to pay their operating expenses, invest in new stuff, and pay dividends to shareholders. But if they take assignment of a Bayh-Dole invention acquired by a nonprofit, they have to adopt nonprofit ways with regard to invention income.

Here’s the connection to exclusive licensing–any exclusive license that conveys all substantial rights in an invention assigns that invention. A grant of the exclusive right to make, use, and sell an invention–including the right to enforce a patent on the invention–is an assignment. Any reservation of rights ends up as a grant-back from the new owner. Thus, the effect of this provision is to limit exclusive licenses granted by nonprofits to those that involve less than all substantial rights–one might grant the exclusive license to sell product based on the invention, but that exclusive licensee would have to deal with others that had the right to make or to make and use the invention. Free competition and enterprise sort of thing.

Nonprofits ignore this provision by labeling their inventions assignments “Exclusive Patent License”–and of course these are exclusive patent licenses. In actual practice, they function as assignments, and 35 USC 202(c)(7)(A) applies. But Bayh-Dole delegates enforcement of the patent rights clauses to the federal agencies that award the funding under which any given invention has been made, and thus the federal agencies are free to ignore enforcement. Again, the requirements are for show. There is the potential that federal agencies might enforce, but that is used as a threat to keep contractors and prospective contractors from squeaking about the situation. Capricious enforcement, like non-enforcement, sets up the argument that federal agencies are estopped from suddenly starting up enforcement. It is as if the requirements do not exist in practice, though they continue to exist on paper.

Bayh-Dole did another thing. It waived all federal law requirements that the federal government should have ownership of inventions as a condition of specific programs of research or development–at least whenever a contractor acquired ownership of any such invention. Under the IPA program–adopted by the NIH and NSF–a federal agency could contract to waive the effect of such laws by refraining from claiming title to inventions that federal laws said the federal agencies should take title to (with the expectation of open access under federal supervision). Bayh-Dole just out and waives those past federal laws and substitutes a requirement that federal agencies must rebuild those claims within the context of Bayh-Dole’s policies and objectives. And if Congress later wants to restore those claims (why? they just waived them) or add new ones, the legislation must cite Bayh-Dole and stipulate that it intends to take precedence over Bayh-Dole. See 35 USC 210(a).

There is another way around Bayh-Dole for federal agencies. They can fund work without specifying research or development. These are called funding agreements under “Other Transaction Authority” or OTA. Just don’t call it research or development and it falls outside the entire Bayh-Dole apparatus. Sweet.

Finally, Bayh-Dole broadens the IPA program’s requirements on federal secrecy. This part was easy because the IPA had no secrecy requirements. The NIH was not obligated to keep contractor invention reports secret, or reports of progress in developing an invention, or patent application materials. Bayh-Dole makes all such things a government secret. Indeed, in 1984 Bayh-Dole was amended so that not only were the confidential and privileged parts of contractor reports to be kept secret but also all information in those reports was to be treated as if it were confidential and privileged, even if it otherwise wasn’t. It was an exploitation of FOIA–one waiting a challenge that has never come.

With all this, we are in a position to look at what Bayh-Dole actually does.

No case for public benefit. Bayh-Dole suppresses the need for company contractors to make a case to handle health-related inventions to better serve the public than would open innovation. And Bayh-Dole suppresses the need for nonprofits to make a case to handle any inventions–and including health-related inventions.

Suspends laws that would promote open innovation. Bayh-Dole suspends laws premised on federal ownership of inventions for the purpose of open innovation whenever a contractor does acquire ownership of any invention made under any funding agreement for research or development.

Federal dealing in patent monopolies. Bayh-Dole expressly authorizes federal agencies to assign inventions or grant exclusive licenses (see 35 USC 207(a)(2) and 209(a)) where before federal agencies argued that such exclusive licensing required an act of Congress–and now they have it, carte blanche, with virtually no federal oversight, everything kept secret, no public right of appeal, no enforcement mechanisms, and no obligation to enforce the patent rights clauses directed at protecting the public from nonuse or unreasonable use of inventions made in federally supported work.

And now we get down to it. Without the dealing in patent monopolies, there would be no reason for Bayh-Dole to exist at all. We would be left with a debate about whether nonprofit contractors might be, in the general case, better at breaking up patent rights and distributing inventions than are federal agencies. We might note that federal agencies have budgets for this sort of thing and nonprofits generally do not–if a nonprofit is going to spend $15K or $20K on a U.S. patent application, then it has to have some way to recover that expenditure. We are immediately at the question of whether nonprofits should take a financial interest in such inventions–even if licensed non-exclusively. Federal agencies do not have this problem in a non-exclusive licensing situation. Any money they might make goes back to the U.S. Treasury. If nonprofits were to adopt this model, even if they made money from patent licensing, that income would go to some unrelated entity to be distributed for scientific research or education based on, say, what might best serve the public rather than whatever a given nonprofit that happened to acquire a patent wanted to spend that income on.

Without Bayh-Dole’s provisions for exclusive licensing and dealing in patent monopolies, inventions made in work with federal support would by default be made openly available, either public domain, or FRAND licensing, or commons licensing, or standards licensing. Assignment of inventions would be used to move the inventions to a platform better suited to such open practices. Federal agencies might assign inventions to private concerns, but only so that those concerns could better make the inventions accessible by all than might the federal agency. It would not be a matter of whether some private entity could do a better job creating a mass-market commercial product if only it could suppress all other access to a given invention and all possible permutations of its application or development.

The problem that the nonprofits encountered–the ones that aimed to make money from patent positions–was that federal agencies took too long to determine whether the public was better served by their exploitation of exclusive rights in inventions made in work receiving federal support. Sure, federal agencies may have had problems responding. But there’s also the possibility that nonprofits had problems making the case for exclusive rights. The NIH and NSF bypassed the need for nonprofits to make a case with their IPA programs, and those programs accounted for a great proportion of all the federal money going to universities for research outside of defense-related spending (including nuclear and space). Thus, oddly, Bayh-Dole suppresses both contractors making a case for exclusive control and contractors reporting the outcomes of that exclusive control.

Nothing in Bayh-Dole requires exclusive control. Contractors are not required to take ownership of inventions made in work receiving federal support. They are not required to grant exclusive licenses or to hide assignments under the label of exclusive license. Federal agencies are not required to grant exclusive licenses. Neither contractors nor federal agencies are authorized by Bayh-Dole to hold back general access to inventions in the hope of some future exclusive licensing deal. Nor are they authorized to hold back access for research purposes or to make and use an invention or products based on the invention, even if they determine that dealing the exclusive right to sell (but for the government’s right to sell) is a good thing for the public.

Bayh-Dole does not dictate these behaviors. And yet the only thing Bayh-Dole exists to do is to enable these behaviors.

If a university adopted (or reverted) to a policy of non-exclusive dissemination only for inventions that it accepted for management, then Bayh-Dole would almost be a non-issue. It could give up ownership to the federal government and still hold a revocable non-exclusive license for its own purposes with a right to sublicense to anyone who had signed up prior to the federal government (see 37 CFR 401.14(e)(1)). Companies would sign up to each university’s master research access program agreement. Free–but ensures rights and builds a working relationship for later collaboration. If a university wants money, it will get it by offering research services, technology assistance services, research reviews and open houses, and opportunities for collaborative research.

I write “almost” because Bayh-Dole gives federal agencies the right to grant exclusive licenses. Thus, if a university chooses not to accept ownership of a Bayh-Dole invention, then the federal agency awarding the funding can take that invention and license it to whatever favorite the agency chooses, or hold the invention back waiting for some favorite who may never show up. In such situations, the federal agency can deny access to an invention to the research community (and especially the industrial research community), forcing work into the research that the federal agency wants to promote and/or controls. Inventors, too, if they leave contractor employment, tumble into the general public and lose access to their inventions, just for not taking a patent interest in those inventions when the federal agency that funded their work later then does.

A university adopting a public-purpose non-exclusive dissemination approach to inventions it chooses to manage then ends up, because of Bayh-Dole, being forced to take patent positions (at $15K or more per application) to prevent federal agency invention hold backs and favoritism. That’s an expensive piece of action, when multiplied by 100 or 200 or more inventions reported per year per university, 60% or so carrying Bayh-Dole requirements.

There is another alternative for universities, and that involves careful compliance with Bayh-Dole’s implementing regulations. This may be beyond the skill and courage of most universities, but here it is. Test yourself. Under Bayh-Dole’s standard patent rights clause, in a section not authorized by Bayh-Dole but made up from fragments of the Federal Procurement Regulation finalized in 1975 as a codification of Nixon’s 1971 revision of Kennedy’s patent policy, contractors are required to require selected employees (not clerical or non-technical folk) to make a written agreement to protect the government’s interest in subject inventions–patentable inventions made in federally supported work and owned by a party to the federal funding agreement.

Inventors making this agreement agree to disclose subject inventions to their employer and among other things agree to sign papers to establish the government’s rights in these inventions. Now think about it. Until an invention is owned by a party to a federal funding agreement, it cannot be a subject invention. Thus, inventors have no obligation under this written agreement to disclose inventions that aren’t subject inventions, even if those inventions have been made in federally supported work. Bayh-Dole just doesn’t apply. Better yet, inventors have nothing to convey to the federal government to establish rights in such inventions–those inventions are not subject inventions, apparently. And there’s nothing in Bayh-Dole that gives any contractor any authority or special privilege to take invention rights from inventors in order to make those inventions subject inventions and thus trigger Bayh-Dole requirements.

Thus, on the face of it, Bayh-Dole does not require inventors to disclose any inventions, nor file patent applications, or give federal agencies any right to claim inventions that are neither reported nor claimed for patenting. Unless there is a federal law requiring federal ownership as a default–hardly the case now outside of space and nuclear research–inventors are free and clear of federal claims.

But there’s one more step. When a federal agency by means of a patent rights clause inserted into each funding agreement requires a federal contractor to require their employees to make a written agreement responsive to such funding agreement, the agency requires the contractor to make those employees parties to the federal funding agreement. This is a necessary consequence of Bayh-Dole’s definitions of funding agreement and contractor. Bayh-Dole provides that a contractor may extend a funding agreement to include others by “any assignment, substitution of parties, or subcontract of any type.” The written agreement to be required by contractors is square within this part of the definition of funding agreement and explains why the federal agency is required to require the contractor to require it–convoluted as all that is–because in doing so, the contractor makes its employees parties to the funding agreement. When those employees invent, then, if the inventions are in work receiving federal support, the inventions are subject inventions and voila, the inventors have something to disclose and rights that may be conveyed to the federal government as may be indicated under Bayh-Dole.

Bayh-Dole makes it clear that a “contractor” is any party to a funding agreement–35 USC 201(c). Thus, wherever “contractor” shows up in the law or the implementing regulations it refers to any contractor–not just the nonprofit, university, or small business but also anyone that the nonprofit, university, or small business engages by assignment, substitution of parties, or subcontract–including by means of the written agreement required by contractors of their employees.

It should be clear that this written agreement is not a patent agreement in the traditional sense. It is made by employees not to convey inventions to their employers but to ensure that they have agreed to convey rights to the federal government. It is not, then, a part of any employment agreement. It is part rather of the federal contract by which money is made available to a contractor for their use. The written agreement is part of the funding agreement, not part of any employment agreement or condition of employment or condition of continued employment. There’s no consideration for the making of this written agreement but for access to the use of federal funds, certainly none coming from the nonprofit, university, or small business.

Once employees have become parties to the funding agreement–contractors–they then have the benefit of a patent rights clause under the funding agreement specific to them. It’s at 37 CFR 401.9, and it takes a subset of the provisions of the small company patent rights clause at 37 CFR 401.14. The inventor patent rights clause instructs federal agencies to treat inventors who are parties to the funding agreement as small business contractors. They have the same standing, then, to elect to retain title to their inventions under 35 USC 202(a) as any other contractor, including their employer who was required to delegate this right to them as a condition of the federal award. In particular, inventors, unless they assign their inventions to a nonprofit contractor (and there are some reasons why, once they become contractors, their nonprofit employer cannot demand assignment of their inventions–at least not as a condition of the federal award), they do not have to file patent applications. They still must disclose their inventions to the federal government and elect to retain title (which they have by default under federal patent law as inventors). They may lose rights in inventions only if they file patent applications and then back out. But they are not required to use the patent system. And thus, with only the bother of disclosure and marking patents with a federal rights, an inventor-cum-contractor may publish the invention without further concern for federal rights, patenting, or whatever a nonprofit employer, at least, might say.

In practice, nothing of this sort ever happens, even though it is a clear consequence of the implementing regulations and an outcome of the Supreme Court ruling in Stanford v Roche. Universities ignore the requirement. Federal agencies ignore it as well. NIST, which is delegated to administrate Bayh-Dole for the Department of Commerce, shows itself clueless about the inventor patent rights clause and intends to be rid of it, and in the meanwhile has tried to turn the written agreement into, somehow, exactly what the Supreme Court ruled that Bayh-Dole had no authority to do, and therefore the patent rights clause authorized by Bayh-Dole has no authority to do, and therefore federal agencies have no authority to do on the side as it were, unless they go through the Bayh-Dole process to determine exceptional circumstances apply to all inventive employees of federal contractors, which they haven’t bothered to do.

There you have it. I put the simple form at the end.

Bayh-Dole enables but does not require contractors and federal agencies to deal in patent monopolies. If contractors and federal agencies deal in patent monopolies, they do it on their own choice, not from something in Bayh-Dole.

And to be pointed about it, the only area of consequence is public health inventions. Some people wanted a pipeline from federal research funding to pharmaceutical commercial exploitation. Federal policy and law stood in the way. The NIH tried to circumvent that policy, got caught, and the IPA program shut down. Bayh-Dole was the next attempt, and amazingly, it passed and has persisted for four decades of madness, conflict of interest, ineffectiveness, and noncompliance.

The whole purpose of Bayh-Dole, then, is to allow federal contractors and federal agencies deal in patent monopolies so that they–of their own choice–may choose favorites to exploit monopoly pricing to extract maximum (10x to 100x) value from people suffering from disease or injury. That’s our public health policy, bluntly.

If you believe there has been a change brought about after Bayh-Dole went into effect, then you had better look for the driver for that change somewhere other than Bayh-Dole. That driver was the desire to profit from human suffering. The need was to prevent growth in public support for health research from competing with private efforts to speculate on the future value of medical breakthroughs. If companies and speculators could not prevent discoveries at universities, they sure could work it so that those discoveries were encumbered by patents, inventors bought out by the lure of future royalties or forced out by policy demands, and federal agencies and corporations given first–and de facto only–pickings for these inventions, with everything else packed away behind twenty years of patent exclusiveness to ensure nothing wildcat or non-speculative might break out into the open.

Bayh-Dole offers absolutely no sea change in federal policy or contractor management of inventions made in federally supported work. Bayh-Dole may have made that sea change bureaucratically easier to bring about, but that was a matter of suppressing reporting, preventing public oversight or right of appeal, delegating enforcement to the agencies awarding funding, and not requiring agencies to require reporting, or to enforce the patent rights clause, or to act on the rights reserved for the government, or to act to protect the public from nonuse or unreasonable use of inventions subject to Bayh-Dole. The big change was that Bayh-Dole hung window dressing out to make it appear that the public interest was looked after, when in practice it allowed contractors and federal agencies to do just the opposite.

As it is, invention practice under Bayh-Dole is an awful failure. Most inventions unused and worse, suppressed by patent claims, delayed in publication and access by patenting, rights fragmenting among organizations when research is spread about. Institutions taking in significant–even fatal–doses of organizational conflict of interest, not to mention happy non-compliance with the standard patent rights clause. Despite Bayh-Dole’s premise that the law has to do with U.S. technological leadership in a global economy, you won’t find a single metric reporting inventions specifically made by U.S. industry and labor under Bayh-Dole. You won’t see talk about how Bayh-Dole returned manufacturing to the U.S. or build new manufacturing in the U.S. before anywhere else in the world. You won’t see talk of maximum participation of small businesses (just how paper startups got exclusive rights to the exclusion of all other companies, hoping to get acquired by some big company); you won’t see talk of all the free competition and enterprise enabled by exclusive licensing or the hope for exclusive licensing that will never be requited. That’s because none of this has happened. Awful failure.

The record of SBIR small companies is just as bad. The NSF, for one, cannot figure out why all those SBIR small companies never produce commercial products. It hasn’t got to them that it is easier to get SBIR grants than it is to develop commercial products, and once one has got SBIR funding, it is necessary to focus on getting more SBIR funding and not at all easy to shift to something else, even to follow research findings and technology development off the agreed upon statement of work when that may be where a product might be.

Instead, patent attorneys have expanded their businesses. Universities have diverted funds to pay technology transfer administrators. Speculators have got preferential access to a betting pool of patent rights held by universities. Big companies have the ability to pick and choose at what’s presented to them by universities and speculators, with the relief of knowing that most anything they don’t pick up will be held under patent rights and thus away from general access.

There’s what Bayh-Dole does.


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