I want my, I want my IPA–Part III

Part III continues a discussion of the changes from the Institutional Patent Agreement to the Standard Patent Rights Clause authorized by Bayh-Dole.  (Part I is here; Part II, here). The Bayh-Dole Act was passed like swiss cheese, with a bunch of holes to be filled in later.  The holes were where there were objectionable parts to the IPA.  There was plenty for folks to dislike in the IPA.  Agencies could dislike it because it let universities loose with federally supported work.  Companies could dislike it because it let universities loose with federally supported work.  Inventors could dislike it because…  well, more of the same.  And university administrators could dislike it because it did not make them loose enough.  The effort to produce an SPRC to fill the holes centered around how federal power through the offer of support to faculty-proposed and -led work could leverage claims to agency control of inventions, on the one hand, and university patent broker control of those same inventions, on the other.

In 14th-century England, there was a poem called Winner and Waster, in which a personage representing Hoarding debates a personage representing Squandering.   The argument is over who is better.  Winner and Waster are taken to be failed virtues of Prudence and Generosity.  Neither should win.  Reason should win.  But the poem we have is fragmentary, and lacks the ending, so we will never know.  However, in the case of the debate between university patent brokers and federal agency administrators over who should get control of faculty-led inventions, at least we have it in our power to write the ending the way we want, if we have the will to do it.  For thirty years, we have let it go.  Now with the Supreme Court guidance in Stanford v Roche, we have an opening.  What will we do with it?

Changes in how assignments of inventions are handled between the IPA and SPRC also changed the responsibility for the looking out for the public interest. Whereas in the IPA these are direct conditions of oversight, in Bayh-Dole these are displaced to generic objectives and relaxed constraints.  The effect, at least with regard to Bayh-Dole, though not for federal funding agreements with universities generally, is that protection of the public interest is shifted from the universities to the federal agencies.  Here is how it comes about.

Licensing.  The essence of a patent is the right to exclude others from practicing within the scope of the claimed invention.  Universities have lack the general capability from developing inventions into commercial products, and as for methods and technology that do not require a product manifestation to be used, universities have no competitive reason to exclude others from such use.  Universities exist to support their faculty in teaching and study.  There is nothing beyond prestige–itself destructive in its way–for which universities might compete.  Well, that and federal funding.  And the attention of wealthy donors.  And money from state governments because the successful should get more than others.

The fundamental challenge for allowing universities to own patents on inventions made with federal support is that they will have to license those inventions.  In doing so, there are many pitfalls.   They may introduce unreasonable terms.  They may be inept.  They may choose licensees for the money being offered rather than performance.  They may choose licensees that are inept or merely speculators, however accomplished.  They may fail to enforce contracts.  They may allow licensees to run up prices or engage in anti-competitive behaviors.  They may license to trolls.  They may use their patent positions to block other university faculty from doing research, or others from enjoying the benefit of that research.  They may use their patent positions to get leverage to compete for federal funds.  They may sue for infringement the very companies they were to have collaborated with.  They may, in the long of it, do a lot of things very badly, if given half a chance.

University patent administrators by nature are terriers, not poodles, and Bayh-Dole proposed to leave them at home alone all day with tasty couch pillows to destroy, and a bunch of other mischief to do.  WARF, a flagship university-affiliated foundation, had had multiple run-ins on antitrust in its licensing programs.  Folks were wary.  Bayh-Dole had to be shaped so that it provided protections for licensing, but as far as the university administrators were concerned, it also had to be set up so that the protections were more theoretical than effective.

Under section VI of the IPA we arrive at licensing.  The basic premise is nothing like what one finds–or doesn’t find–in Bayh-Dole:

Here we have the default.  Non-exclusive royalty free, or what we would now call FRAND–fair and reasonable non-discriminatory licensing, with the only stipulation that the licensees are “qualified.”   The general requirement is that inventions are administrated “in the public interest.”  The IPA does not say, “in the Grantee’s interest” or “for the sake of maximum income to the institution, for which a share is offered to faculty inventors so they will not squawk about values or choices and instead be with us on this.”

A second general requirement is that the Grantee include safeguards in licenses for “unreasonable royalty and repressive practices.”  This is most odd.  Royalties are consideration for a patent license.  One almost might come to believe that what is meant here is rather “the excess pricing that may be charged by virtue of obtaining a monopoly to an invention, by way of a university administration, that was made in the public interest by faculty working with federal, public support.  Such a reading is bolstered by the reference of sales to the government, which are to be royalty free. Here, too, it would appear the usage is that sales to the government should not reflect monopoly pricing.  A “measurable hire”not a “mede measureless” in the language of Piers Plowman, that consummate handbook of money and integrity.

Alternatively, the clause may also have been directed at invention management organizations that universities were doing business with.   Universities, if they hand inventions off to these agents by way of a license, are to ensure that royalties are not “in excess of normal trade practice.”  Here is the general clause in the IPA on assignment:

The university may assign inventions only to a “nonprofit patent management organization” and only then with the approval of the funding agency, with the provision that any assignment agreement has to flow through the IPA requirements, as if the patent management organization stood in the place of the university.  In Bayh-Dole, this substitution of parties is handled in the definition of “funding agreement”:

(b) The term “funding agreement” means any contract, grant, or cooperative agreement entered into between any Federal agency, other than the Tennessee Valley Authority, and any contractor for the performance of experimental, developmental, or research work funded in whole or in part by the Federal Government. Such term includes any assignment, substitution of parties, or subcontract of any type entered into for the performance of experimental, developmental, or research work under a funding agreement as herein defined.

Again, this is not the greatest drafting, but is how one comes to expect university patent licensing folks to do things, so why not use sketchy license drafting to write a law?   The point comes out, though, if one pushes on it long enough:  if one assigns, or subcontracts, or substitutes parties, or, say, requires a written agreement so that someone does under a funding agreement what they only can do when they invent, then those agreements are all inclusive of the term “funding agreement.”  Since a the definition of contractor is:

(c) The term “contractor” means any person, small business firm, or nonprofit organization that is a party to a funding agreement.

One sees that in Bayh-Dole’s treatment, contractors spring up like mushrooms.  The hidden delight, the truffle as it were, in all of this is that exclusive patent licenses under which substantially all of the rights of the patent owner are transferred to the licensee, are in essence assignments, and courts treat them as such.  It is not how a document is labeled, but the effect that it has in practice, that determines what it is.  If exclusive licensees of subject inventions have the right to sue for infringement, have the right to sublicense (and so could resolve infringement), and hold rights to all fields of use and all territories, but for a reservation of the right for the university to practice for non-commercial purposes, then folks, that sure looks like an assignment, and the moment it is an assignment, then that licensee is a contractor under the law’s definition.  It’s not an optional thing.

The IPA assignment clause shows up, transmogrified, as SPRC (k)(1):

(1) Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions, provided that such assignee will be subject to the same provisions as the contractor;

The assignment clause here removes the nonprofit requirement, eliminates agency approval (or even notice) of the assignment, relaxes the requirement that the assignee be a “patent management organization,” replacing this with a “primary function” being “management of inventions.”  Such a definition could easily include for-profit companies with commercial operations that run programs of research.  IBM, say, or Roche.   There is one additional requirement, and that is that the flow through for assignment means that SPRC that applies to the university also applies to the assignee, regardless of its tax classification.  The SPRC is made to deal with both nonprofits and small businesses, so there is a special set of provisions at section (k) that track parallel provisions in Bayh-Dole proper at 35 USC 202(c)(7), which place additional restrictions on nonprofits that are not present for small businesses.   These restrictions also flow through upon assignment to a for-profit company, including stipulations to share royalties with inventors and use remaining funds after expenses incidental to the administration of subject inventions for “scientific research or education.”  Thus, if an exclusive license is constructed as to act as an assignment, then certain conditions are also required by the federal funding agreement.

A company being sued by an exclusive licensee of a patent covering a subject invention might well counterclaim, if discovery supports it, that the exclusive licensee is an assignee, and therefor a party to the funding agreement and subject to the same terms as the university licensor.  Rather than asking for march-in, deal with the plaintiff as if it were the university.  If nothing else, the inventors suddenly might rather agree, as their share from such an outcome is likely to be much greater by far than anything they would ever see from a share of royalties from the university.   Perhaps noncompliance with SPRC by the plaintiff might even be cause to disable standing to sue for infringement.

In any event, little of the restrictions on licensing in the IPA shows up in Bayh-Dole.  There are the general statements of objectives, of course.   The primary statement of it is buried in a definition:

The term “practical application” means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.

The direct expectation in the IPA of royalty-free non-exclusive licensing, with royalties no more than what is normal in the trade, is removed to a definition.  It is entirely open who is to be the arbiter of what terms are “reasonable” short of a march-in determination, which we will get to shortly.

The advocates for Bayh-Dole–at least a certain class of them–have made a big deal out of the idea of exclusive licensing.  A non-exclusive license is just a tax.  It was non-exclusive licensing that was preventing all those 28,000 patents from being used commercially as products.  No matter, none whatsoever, that many of those patents were weapons systems that the inventors did not want to make into commercial products.  The raison d’être for Bayh-Dole was to be able to do big time exclusive licensing.  If there was a punch list of to-do items on the university patent administrators’ list, exclusive licensing reform was at the top.

Under the IPA, exclusive licenses occupy a long section of restrictions.  Under Bayh-Dole, the restrictions are short and sweet.  Here is the first part of the IPA restrictions on exclusive license:

To get to exclusive licensing, the Grantee has to determine that non-exclusive licensing “will not be effective in bringing such inventions to the commercial market in a satisfactory manner.” There’s plenty of wiggle room there, if one wants to squirm, not the least of which is the emphasis on commercial markets rather than the effect of access to an invention that does not require a product manifestation, or if a product form, then not one that must move through a “commercial market.” The IPA dates for 1968.  Software hasn’t been unbundled for mainframes.  The NIH is focused on vitamins and antibiotics and the like, so the assumption is, no commercial market, no satisfactory use.

The requirement for exclusive licensing, though, is more than just making a determination.  The Grantee has to meet a two-part test:  either make an effort to license non-exclusively and show that this hasn’t worked out, or make a determination that an exclusive license is necessary, either as an incentive or for market reasons.   Two-part tests are happy times for administrators when the parts are unequally weighted.   Even if a Grantee gets this far, and makes such a determination, there’s the next level of restriction to deal with:

Exclusive licenses are for three years from date of first commercial sale or eight years from the date of the license, whichever occurs first.  Running it out, that means a company has five years to get a product on the market.  Eight years was used by Stanford for some time as the limit for exclusive licenses.  Here is likely the reason.  All that is left of this requirement, in the SPRC, is the reporting of the date of first commercial sale, and even that is subject to a FOIA exemption, so we will never know.

The last part of the restrictions allows the federal agency, the Grantor, to approve extensions to exclusivity.  At the end of exclusivity, access is available to all, just as under the default expectation of non-exclusive licensing, but now with a cap on the royalty rate established by the exclusive license.

In Bayh-Dole, and under the SPRC, licensing is treated minimally.  There is a limitation on exclusive licenses tied to one of the stated objective of Congress:

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

This objective finds its echo in 35 USC 204, which stipulates that exclusive licenses using or selling (but not making, having made, or importing, apparently) must require products to be “manufactured substantially” in the United States.

Notwithstanding any other provision of this chapter, no small business firm or nonprofit organization which receives title to any subject invention and no assignee of any such small business firm or nonprofit organization shall grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.

That sounds nice.  One might also think that for fairness, the government might also have proposed that any foreign exclusive licenses to foreign firms contain a similar provision, requiring manufacturing in that country.  But no matter, the remainder of the provision backs off on the requirement by permitting agency waiver:

However, in individual cases, the requirement for such an agreement may be waived by the Federal agency under whose funding agreement the invention was made upon a showing by the small business firm, nonprofit organization, or assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible.

I don’t know any instance in which a request for waiver has been denied.  Perhaps it has happened.  There is no reporting requirement by agencies with regard to their compliance with Bayh-Dole.  Finally, there is a requirement specific to nonprofits, that they prefer to license to small businesses, also with a qualification that declaws it:

a requirement that, except where it is determined to be infeasible following a reasonable inquiry, a preference in the licensing of subject inventions shall be given to small business firms

The management of licensing under Bayh-Dole is markedly different from that of the IPA.  It is here that much of the heavy lifting of the university patent administrators was done to get what they wanted.  If they could not get outright ownership of faculty inventions, at least they could get freedom from federal agency restrictions.  Where the IPA sets a default of non-exclusive FRAND licensing, with term limits on exclusive licenses, and standards for royalty rates, Bayh-Dole has nothing but general statements of objectives, little of which translate into anything substantive at the level of the SPRC, which communicates the requirements to universities and their licensees.  Where the IPA requires agency approval for assignments and limits assignments to nonprofits, Bayh-Dole opens it up to pretty much anyone with the requisite “primary function” all without agency notice, review, or approval.  These bits must have tasted sweet for a long time to those who worked to get Bayh-Dole passed.

Related to the licensing restrictions are the march-in provisions, the subject of Part IV.