The Dole-Bayh Act: Preference for United States Industry

Before there was the Bayh-Dole Act, Senator Dole drafted a version of the law. We are looking at various sections. Today, the Preference for United States Industry. In Bayh-Dole, this is 35 USC 204. But in Dole-Bayh, it is Section 205 (the Dole-Bayh section 204 has to do with the federal government getting a share of royalties from nonprofits and small company licensing).

There are two parts to Section 205. Here’s the first.

Let’s work through this provision, and then compare with Bayh-Dole.

The provision begins with a precedence marker: “notwithstanding any other provision.” This section, with this construction, declares itself to be the most important section of the law. That assertion is consistent with the premise that Senator Bayh presented when introducing the bill in the Senate Judiciary Committee. The U.S., according to Bayh, was falling behind other countries in technology, and somehow by allowing universities to take ownership of inventions and license these exclusively, that would change:

I think that it is time for the Government to stop tying up innovation in red tape and provide incentives for American ideas to be developed here while providing new jobs and benefits for the public which is supporting our research effort.

The core purpose of the law, then, was not to enable universities to seek profits by aligning themselves with patent speculators but rather that product development here based on such inventions would result in American jobs. Thus, section 205–204 in Bayh-Dole–is at the heart of Bayh-Dole’s purpose. Everything else is secondary, is collateral. If one wanted to ask after Bayh-Dole’s success, one would start with the effect of Bayh-Dole practices on American jobs. Given that innovation may take away as well as give, that examination would do more than take licensing income, times by 50, and divide by an average worker salary and say that represents jobs supported by university patents. One would also have to consider the issue of post hoc reasoning. Just because American technology rebounds after Bayh-Dole does not mean Bayh-Dole has had anything to do with the rebound. Bayh-Dole could, in some odd way, have made any rebound less, well, boundy. Any honest discussion would have to sort that one out.

The statement of precedence in section 205 suggests that other provisions in this new Chapter 18 might give small businesses and nonprofits rights to assign or license inventions that would conflict with this Section 205. That might be worth chasing down at some point. For now, it’s good enough to see that from the start, the Dole draft was about directing public inventions to American jobs. The patent, then, becomes a way to prevent foreign companies from adopting American research and selling it back to us. Here’s Senator Bayh:

Ironically, many foreign companies have been able to take new ideas from our research, patent and manufacture them abroad, and then export the resulting products to America.

Bayh was wrong of course about the patenting. Companies cannot take published ideas and patent them. They take published ideas and patent non-obvious applications or improvements. The new inventive work takes place in development. Companies do this as well with patented ideas. They patent around those patents, so that when some patent holder shows up to play the troll or to suppress use, these companies can pull out their own patents and create a standoff. The patent holder cannot move on development in given directions without infringing, and so there will be a cross license, either with a fight or without. In this way, multiple patents on improvements and applications neutralize initial patents. We might say that taking out a patent on a research finding may well motivate investment by others–in blocking that patent and the lines of development of the invention it claims, and in designing around that idea to avoid its use and to prevent it from gaining a hold in the market.

If one thinks this line of reasoning out, then we have the dilemma that foreign companies are more than happy to adopt new research, even without patents, and compete on other factors, such as price. We are left with the dilemma that American companies, apparently, won’t develop anything without having a monopoly position, while foreign companies, apparently, are happy to go after things based on the opportunity and compete. Something doesn’t add up here. Bayh-Dole advocates have spent a good deal of time claiming that other countries should also adopt Bayh-Dole. That amounts to making the claim, for each country, that companies in other countries get a free ride but companies on one’s own country demand patent exclusivity before they will make or use or develop or sell anything new. Something still doesn’t add up.

Let’s say that a country decides that this is true–that patent exclusivity is the key–patents then can block companies from other countries getting a free ride on domestic research. So the country creates a policy that gives nonprofits–universities, mostly–a right to take out patents on inventions made in work funded by the public. If we stop here, we have done two things. First, we have blocked all those free-loading foreign companies from using our publicly minded inventions. Second, however, is that we have also blocked all domestic companies from making, using, or selling product based on the invention. If the university involved is incapable of licensing, then the entire domestic industry is blocked. If the university insists on granting only one license–an exclusive license–then everyone in the domestic industry that does not expect to be that licensee, or has no reason to want to be that license, will have to design around the invention (i.e., deliberately *not* adopt it) or undermine it (talk it down, exclude it from standards, challenge its validity) or neutralize it (patent improvements and applications and settle in to deal with cross licensing). If the university never licenses, or licenses exclusively and the licensee/assignee does nothing with the invention, then the invention is lost to the country for the term of the patent, short of covert infringement. This is a strategy only a bureaucrat could love.

The critical element that would mitigate these issues is that every patent a university takes ownership of and patents gets licensed, and every licensee/assignee then invests more money quickly than would happen any other way, even with government funding for development available, and creates a broad range of products that everyone can use for all the applications they desire, with just the right functions they need, at the price points and with the availability and quality they want. You know, reasonable terms and all. In that scenario, everyone gets the product they want, and gets it faster and better than in any other approach. Why? Well, for one, this approach works because we just defined it to work that way. It works because we asserted it works. In actual practice, however, this approach does not work as claimed. It barely works at all. Really, things get done despite university bureaucrats with patents biting at companies’ ankles.

The effect of Bayh-Dole’s “let universities patent stuff and exploit patent monopolies” policy is to create a huge domestic barrier to early adoption of inventions made in publicly supported work. Universities have acquired more than 50,000 U.S. utility patents in the Bayh-Dole era citing federal funding–and another 70,000 U.S. utility patents that don’t cite federal funding. Collectively, they have dammed off the flow of key research findings from the public domain, from research commons (shared with industry), from cumulative technology, and from standards. The idea that universities will patent these findings and try to find a U.S. company to make product based on claimed inventions to prevent free-riding foreign companies from exploiting these inventions, patenting improvements, and selling product back to us at crazy high prices sounds really nice. But like pigs with wings and magickal unicorns, it is fantasy. But unlike winged pigs and horned horses, the Bayh-Dole policy has real consequences, and despite the repeated claims by university administrators about how wonderful their technology transfer programs are, the stark reality is that using patents to block foreign exploitation of federally supported research has had really bad outcomes. Thus, we see the absurdity of the NIST effort to find ways to help universities do a better job of blocking American industry with their patenting on the premise that adjustments to regulations will somehow “unleash” American innovation.

Now let’s look at how the Dole bill deals with this most important thing, this preference for U.S. industry. Here is the core, again, broken down for a slow read:

no small business firm or nonprofit organization which receives title to any subject invention

That is, gets assignment from an inventor (or anyone else that the inventor may have assigned to) — but the Dole language excludes inventors from this preference, since they don’t receive title to subject inventions.

and no person which receives an assignment of the subject invention

That’s the 1 USC 1 definition of “person” again–broader than small business or nonprofit–suggesting there’s a difference between “receiving title” and “receiving an assignment.” This gets into the problem of what “of the contractor” means–the Supreme Court ruled “of” means “owns.” No doubt Latker in creating the Federal Procurement Regulation in 1975 did not expect “of” to mean “owns”–but rather “having a right to own” but without having any clear idea about how such a right comes about. At least Latker’s IPA master agreement made the basis for this right clear–the IPA required universities to take ownership of any invention made in NIH funded work that they chose to patent.

The overall thing is that anyone in any chain of assignments of a subject invention is within scope. What can’t these people do?

shall assign the right to practice such invention in-the United States or grant an exclusive license to practice the invention in the United States

Making equivalent assignment and exclusive license–which follows numerous court cases that have ruled this same way. Practice here means “make, use, and sell,” given that’s what the government license uses in Section 202, which lifts the language from executive branch patent policy. And who is the target?

to any foreign corporation or any other organization substantially ‘owned or controlled by foreign interests.

Any foreign or foreign controlled company. The preference for U.S. industry is that patent exclusivity stays in U.S. company hands. There’s nothing here about where a U.S. company might choose to manufacture product or use the invention or sell product, so long as it is a U.S. company that holds the rights. In short–look at it!–there’s no “manufactured substantially” requirement. If a U.S. company gets assignment of a subject invention, it can do what it pleases. The prohibition is on assigning or exclusive licensing to a foreign company. A foreign company might make product in the U.S.–but it would not have mattered under the Dole bill, except there’s a walk back:

However, in individual cases, this restriction may be waived by the Federal agency under whose funding agreement the invention was made.

Federal agencies can waive the preference. The Dole bill provides no guidance here on why they might waive this most important of Bayh-Dole provisions. Under the Bayh-Dole Act’s waiver process, the NIH has turned granting waivers into a system. Prefer anyone you want to, so the practice goes, so long as you are a good bureaucrat about it.

There’s a second part to the Dole bill preference for U.S. industry. This part runs parallel to the first but concerns itself with rights to foreign patents on a claimed invention. For these rights, small businesses, nonprofits, and persons receiving assignment may grant an exclusive licensee or assign a subject invention outside the U.S.:

shall assign the right to practice the invention outside the United States or grant an exclusive license to practice the invention outside the United States to any foreign corporation or any other organization substantially owned or controlled by foreign interests

But there’s an exception:

unless it shall have first make reasonable efforts, as defined by regulations promulgated pursuant to this Chapter, to interest domestic, United States organizations or corporations in such foreign rights.

A small company or nonprofit must at least try to interest a U.S. company in foreign rights. Here, there’s no federal agency right of waiver. Instead, the provision pushes the criteria for what’s a “reasonable effort” to the regulations, where it might be most anything. In the Bayh-Dole version, these efforts–to grant an exclusive licensee to use or to sell under which the licensee agrees to “manufacture substantially” product in the U.S.–amount to “we tried and couldn’t” or “we didn’t bother to try because we decided we couldn’t.”

The Dole bill focuses on the ownership and controlling interest of the organization that would receive exclusive U.S. or foreign rights in a subject invention. Bayh-Dole, by contrast, does not care whether the company receiving assignment or exclusive license is foreign or U.S. All that matters is that there’s an agreement that the exclusive licensee will source product “substantially manufactured” in the U.S. unless a federal agency waives the requirement. Perhaps the Bayh-Dole version represents an odd gesture toward globalism–foreign investors ought to be able to profit from patent positions in the U.S., so long as they use American-based labor (not necessarily American citizens) most of the time for their manufacturing. That brings the focus of the Bayh-Dole preference down to preferring a certain sort of manufacturing based in the U.S., but indifference with regard to the ownership of the company, where profits end up, and who the company employs (or contracts with) to manufacture product. The Dole bill, by contrast, stipulates U.S. ownership and control, and doesn’t worry itself with where manufacturing takes place or with what national origin for labor–also a lame assumption about corporate ownership of patent rights relative to where new product is manufactured.



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