Would an Apple and Broadcom v Caltech case deliver a second pounding to faux Bayh-Dole?

[Yes, you read the title correctly–Apple and Broadcom should be suing Caltech.]

In Bayh-Dole, the public covenant that runs with patent rights in subject inventions is not as well developed as it was in the Institutional Patent Agreements. It is still there, but it has been broken up into pieces to make it more difficult to reconstruct. In the IPA approach, federal contracts are made within the framework Kennedy’s Statement of Government Patent Policy. Bayh-Dole’s framework is 35 USC 200–“Policy and objective.” It’s just that the relationship between section 200 and the rest of Bayh-Dole is not made express. It’s easy enough to read section 200 as a rationalization for what follows, a set of hopes for the law rather than a policy framework that contracting and practices must stay within. But if section 200 is read as a rationalization, then it is mere surplusage, adding nothing to the law.

It is important that section 200 is placed in federal patent law, unlike Kennedy’s Statement, which is a directive of government policy. The connection between section 200 and the standard patent rights clause that Bayh-Dole authorizes comes by means of a restriction on the property rights available to the owner of a patent owner. Here is the basic calculus:

  • 35 USC 200 states the public covenant that applies to patents on subject inventions.
  • 35 USC 201 defines subject invention as a new class of patentable invention.
  • 35 USC 261 states that patent property rights are subject to the provisions of 35 USC–including, then, 35 USC 200.
  • 37 CFR 401 sets forth the standard patent rights clauses to be used in funding agreements.
  • 35 USC 202(a) allows federal agencies to modify patent rights clauses in certain circumstances.
  • Agency acquisition of principal rights follows agency regulations absent inventor assignment of rights and compliance of any assignee or exclusive licensee.
  • Federal agencies must comply with Bayh-Dole.
  • Universities must comply with the patent rights clause in each funding agreement and with 35 USC 200.
  • Inventors must comply with the patent rights clause if required to do so by the university complying with the patent rights clause in the funding agreement and with 35 USC 200.

The property rights in patents on subject inventions are constrained by the requirements of the public covenant stated in 35 USC 200. A patent on a subject invention does not have the full set of property rights available to other patents. The management of subject inventions is also constrained by the standard patent rights clause. Agencies may modify the patent rights clause for reasons set forth in 35 USC 202(a).

The primary standard patent rights clause is at 37 CFR 401.14(a). There are two flavors: one for small businesses (lacking paragraph (k)), and one for nonprofits (including paragraph (k)). A secondary version for certain DOE situations is at 37 CFR 401.14(b). A third version, for inventors when treated as small businesses, is at 37 CFR 401.9.

In the IPA system, by comparison:

  • 35 USC 261 states that patent property rights are subject to the provisions of 35 USC.
  • Kennedy’s Statement states the public covenant.
  • The recitals of the IPA bind the IPA to Kennedy’s Statement.
  • The IPA defines subject invention as a potential contract deliverable.
  • The IPA stipulates the management of patents on subject inventions.
  • Agency acquisition of principal rights follows agency regulations absent the IPA.
  • Federal agencies must comply with the Kennedy Statement.
  • Universities must comply with the IPA.
  • Inventors must comply with a patent agreement required by the IPA, or otherwise with the funding agreement, following federal agency regulations.

In the IPA system, the public covenant is a matter of presidential executive order placing constraints on the disposition of patents on subject inventions held by universities, their designated invention management organizations, assignees, and exclusive licensees. Any IPA must conform to the framework of the executive order. Patent law remains what it is. An agency may choose to permit an IPA with any given contractor at its discretion, and may choose the term (such as three years), with any renewals subject to modification of practices and changes in the IPA requirements as determined by the federal agency.

In the Bayh-Dole system, the public covenant is made a part of federal patent law and removed from executive branch control. Further, the public covenant runs with patents on subject inventions as a statutory restriction on the property rights of any owner of a subject invention, including inventors, universities, their assignees and exclusive licensees, and the federal government. Patent law is changed for subject inventions. The standard patent rights clauses constrain agency policy with regard to the disposition of subject inventions in funding agreements with nonprofits and small businesses.

The standard patent rights clause authorized by Bayh-Dole does not replace Bayh-Dole’s public covenant at 35 USC 200. 35 USC 200 limits property rights in subject patents. 37 CFR 401.14 (and other patent rights clauses) limits contractor actions with regard to subject inventions. Bayh-Dole limits federal agency actions with regard to the standard patent rights clause (subject inventions) and the disposition of patents (subject patents). Contractors enjoy the benefits of the standard patent rights clause, but are also limited to these benefits.

Key differences then:

Bayh-Dole applies to federal agencies and changes federal patent law. Agencies have limited discretion in how they contract for rights to subject inventions. Subject inventions are defined by patent law. Subject inventions are a new class of patentable invention with restrictions on their property rights relative to ordinary patents. Agencies and contractors cannot negotiate the definition of subject invention. Contractors cannot assert an invention is subject if it fails to meet the definition in federal patent law (at 35 USC 201(e) as interpreted at 37 CFR 401.1). The constraints on subject patents are distributed between patent law and the standard patent rights clause. Agency disposition of subject inventions is constrained only by patent law when an agency obtains a patent on a subject invention. The standard patent rights clause governs all inventions owned by a contractor. Inventors are made conditional parties to the funding agreement when a university complies with the standard patent rights clause. Otherwise, inventions do not become subject inventions unless acquired by a contractor from an inventor.

IPA applies to university contractors. Agencies have discretion in how they they contract for subject inventions, subject to an executive order. Agencies do not have to offer an IPA to any contractor. In a range of situations, per the executive order, they may require that principal rights in subject inventions are conveyed to the government. They may grant exceptions this requirement, provided certain conditions are met regarding reporting and limits on exclusive licensing. The IPA governs only those subject inventions that a university decides to patent. The disposition of all other subject inventions is not within the scope of the IPA.

With regard to the public covenant itself, the Kennedy-IPA regime placed substantial limits on university ownership of subject inventions. A university could only own subject inventions that it had already decided to patent. Thus, it had to receive a report of an invention before it could make a decision with regard to its interest in owning. Under the Kennedy-IPA, a university had to have agreements with both employees and subcontractors that they would assign inventions to the university if the university chose to patent their inventions. The IPA is independent of the funding agreement for any given research project. A university, by deciding to patent a subject invention, extracts it from the normal agency disposition of rights under a funding agreement.

Only universities with patent policies and practices meeting agency approval are eligible for an IPA. An agency may require changes to a university’s patent policy or practices as a condition of granting an IPA.

At the same time, the university agrees to the public covenant that runs with any subject patent:

The university (and any designated invention management organization, assignee, or exclusive licensee)

  • must bring the invention to the point of practical application within three years OR
  • the university must offer the patent non exclusively and royalty free or on reasonable terms OR
  • the university must show cause why the university should retain principal rights.

A university must make a formal determination that it must offer an exclusive license:

  • non-exclusive licenses have been offered and not been accepted OR
  • an exclusive license is necessary as an incentive to develop the invention OR
  • market conditions require an exclusive license.

Any exclusive license may run for the first to occur of three years from the date of patent issuance or eight years from the date of the license. Extensions may be granted with agency approval.

A university may assign a subject invention only to a non-profit invention management organization. The university must report upon request the status of subject inventions it manages.

The Kennedy-IPA public covenant is enforced as follows.

The federal agency may require non-exclusive licensing, take ownership, or issue non-exclusive licensing if the university does not comply with the above performance. The federal agency may at any time march-in if an invention concerns public health or welfare, required for the public to comply with federal regulations, or the agency determines that the public interest will suffer without agency intervention. Such intervention may be done on thirty days’ notice, with an opportunity for the university to ask for a hearing before the intervention becomes final.

By contrast, the Bayh-Dole public covenant is not nearly so direct, and enforcement is made so difficult that it has never happened.

No review of a university’s patent policy or practices is required. A university may have no patent policy and may have no capability to manage inventions or may have a policy and practices at variance with federal agency preferences. Limitations on university patent practices are established by federal law (35 USC 200; 35 USC 261).

As for subject invention management:

The only limitation on licensing is that preference is to be given to U.S. small businesses. The only limitation on exclusive licensing is that exclusive licenses in the U.S. must require products to be substantially manufactured in the U.S., with broad exceptions. The only limitation on assignment is that a subject invention may be assigned without agency approval only to an organization having as a primary function the management of inventions.

Universities must report upon request the status of subject inventions it manages. Any such reports are exempt from federal public disclosure law.

The public covenant is not enforced by federal agency intervention. It is a matter of federal patent law. The standard patent rights clause permits federal agency intervention (“march-in”) in limited circumstances (contractor includes any assignee or licensees):

  • the contractor has not taken effective steps in a reasonable time to achieve practical application
  • action is necessary to alleviate health or safety needs not reasonably satisfied by contractor
  • action is necessary to meet federal regulation requirements for public use not reasonably satisfied by contractor
  • action is necessary because contractor has not complied with the U.S. manufacturing requirement.

The contractor has a right of appeal, including fact-finding and hearings, all of which are “closed to the public.” Following fact-finding and hearings, the agency may make a recommended determination, which the contractor has thirty days to appeal to a hearing before the agency, with restrictions on what evidence the agency may consider or exclude, including 35 USC 200. The agency then has ninety days (longer of end of fact-finding or after oral arguments) to make a determination. The contractor can then appeal this determination to the US Court of Federal Claims. In all, the appeals procedure can drag on for years–even if the contractor has failed in every respect to achieve practical application of the subject invention. No-one has successfully induced a federal agency to complete a march-in, and no federal agency has initiated a march-in on their own determination. In short, Bayh-Dole offers no workable procedure for federal agencies to exercise oversight of failures by contractors to comply with the standard patent rights clause’s requirement that contractors achieve practical application of each subject invention they claim and manage.

The public covenant with Bayh-Dole barely registers in the standard patent rights clause. University representatives worked hard to prevent march-in procedures from having any teeth. Howard Bremer describes how he and others had to step in to prevent federal agencies from creating regulations that would have held universities accountable for their management of subject inventions. In a talk delivered in 1992, Bremer described efforts by “a university group, which built into the regulations protection against both arbitrary exemptions to the law at agency discretion and to the exercise of march-in rights.”

There does appear to be another line of public accountability that has not been, to my knowledge, explored by those damaged by university management of subject inventions, and that is by arguing exhaustion of patent rights and patent misuse, relying of the public covenant of 35 USC 200, not on the intentionally broken march-in procedures.

For instance, under 35 USC 200, the patent system is to be used “to promote the utilization of inventions arising from federally supported research or development.” That is, once there is utilization, the owner of a patent on a subject invention has no property right available under federal patent law to prevent that utilization–such as by bringing a suit for infringement. There may be any number of other reasons to bring litigation–breach of contract, violation of a standard, misrepresentation of origin, producing damaging or poor quality products–but not for infringement.

Similarly, under 35 USC 200, inventions (presumably subject inventions) made by nonprofits and small businesses are “used in a manner to promote free competition without unduly encumbering future research and discovery.” Here, a university or small business would have to show how its licensing (or, often, in the case of universities, the  failure to license) has resulted in free competition and enterprise, and how a failure to grant a general license for research somehow still complies with the requirement that patents on subject inventions do not “unduly” encumber future research. “Unduly” carries a meaning of “improper” or “excessive.” Whatever meaning we might attach to the adverb, the burden is on the university to show that the refusal to grant a general license for research has some basis–that is, effort has been to mitigate exclusion of the research community from practicing the invention, that exclusive rights are necessary to be granted to a licensee to attract the needed private investment as the only way by which the invention might be practiced, and that the scope of these exclusive rights are such that the research community must necessarily be excluded from practice.

No university I know of grants a general non-discriminatory public license to subject inventions for all research uses. That is, universities uniformly refuse to grant a general license to for-profit companies to make, have made, and use a patented subject invention for research purposes. The failure to show “due” reasons for such an exclusion violates the public covenant in 35 USC 200. Under Bayh-Dole’s neutered march-in procedures, federal agencies have no authority to intervene in such a situation. But federal patent law appears to restrict the property rights of universities (and other federal contractors) to prevent such research uses unless they can show cause for doing so rooted in the promotion of practical application.

As a third example, 35 USC 200 provides that the law should provide the government with sufficient rights to “protect the public against nonuse or unreasonable use of inventions.” Yet the law does not provide the government with any procedures to address unreasonable use–such as refusing to license patents for research uses or suing to stop practical application when it is clear that an exclusive license is unnecessary to attract private investment (or that significant private investment is unnecessary for the use of the invention). For instance, in the case of many patented disease assays, any competent laboratory medicine clinic can develop its own version of an assay without having to purchase a commercial version, which may not be as sensitive as the local version. But a university licensor can use its patent position to prevent the development of local use of a patented disease assay to favor a monopoly investor.

Bayh-Dole’s only gesture to “unreasonable” use is to use the construction “not reasonably” in connection with the inability of a contractor or its licensees to meet demand for the use of inventions necessary to alleviate health or safety needs or are required for the public to comply with federal regulations. This is an entirely different sort of “reasonably”–having to do with supply of product, not having to do with “unreasonable use” of patents on subject inventions. Although there are no march-in rights available to a federal agency, it appears that 35 USC 200, as a part of federal patent law that shapes the property rights owners have to subject patents, there is a case that a civil action can be taken directly to attack unreasonable uses of subject patents–any uses that lie outside the property rights that run with ownership of a subject patent; that is, any uses that run against the objectives stated in 35 USC 200 or that fail to comply with the patent rights clause in the funding agreement that governs the management of the subject invention.

Thus, when Caltech sues Apple and Broadcom for infringement of a subject patent, Apple should have a defense in subject patent misuse. Under 35 USC 200, Caltech does not have a property right in the subject patent that extends to preventing the use of the subject invention. Under 35 USC 200, Caltech’s property right in the subject patent extends only to promoting use. If anyone might use the invention without the need for an exclusive position in order to invest the money to develop it for “practical application,” then Caltech does not have a property right in its subject patent to grant a scope of exclusive license broad enough to prevent such use. To do so would be a misuse of the subject patent. The subject patent at that point has no role to play in inducing investment needed to develop the subject invention to the point of practical application–clearly investment has been made without the benefit of a patent position. 35 USC 200 does not give Caltech the right to grant exclusive licenses to prevent independent development of an invention.

Subject inventions are a special class of invention. Patents on subject inventions are not the same as other patents. The property rights in subject patents are restricted to the uses set forth in 35 USC 200. A university cannot sue for infringement of a subject patent if there has not been practical application of the invention under license prior to the infringement or within a reasonable time of exclusivity. The property right in a subject patent does not allow such exclusion. This is the effect of placing 35 USC 200 in federal patent law and defining “subject invention” as a category of patentable invention rather than placing the patent covenant in an executive order and defining subject invention within a federal funding agreement with participating contractors. If 35 USC has no effect but to provide a rationale for the existence of the law–including its own existence as law–then it has no purpose in law. If 35 USC 200 is to be given meaning, it places limits on the property rights available under federal patent law (35 USC 261). Those limits exclude from the property rights created the use of patents merely to prevent the use of subject inventions or to threaten to prevent the use of a subject invention merely to extract payment from the user. There is no infringement of the property right defined by 35 USC 200. Use equals success. Use exhausts the property right created by 35 USC unless practical application has been achieved under license within a reasonable time of exclusivity.

Under the IPA, a reasonable time of exclusivity for an invention to reach the point of practical application was three years from the date of issue of the patent–about seven years from the date an invention was made. Bayh-Dole makes no claim that anything has changed with regard to expectations of development of an invention for practical use. Nothing in Bayh-Dole speaks to what a reasonable time might be. While the time to develop a commercial product might be longer (as in the case, say, of pharmaceutical drugs), the time to demonstrate research use and local use for many subject inventions (especially methods) can be under a year. Nothing in Bayh-Dole overturns the expectations present in the IPA with regard to the time period in which a university has the right to maintain exclusive rights in a subject invention.

There’s a reasonable argument that if a subject invention has not been licensed within three years after the date of issue, or if licensed exclusively without practical application–demonstrable use with benefits to the public available on reasonable terms–then the owner of the subject patent has no standing to sue for infringement if someone uses the invention without a license. This claim is independent of any federal agency “marching-in”–for which there are limited rights available (by design).

There are discussions under way to try to use march-in procedures to change the pricing of drugs developed by means of exclusive positions in subject patents. Those efforts have been rebuffed repeatedly by federal agencies. Here’s a different angle: amend Bayh-Dole to restore, for universities and nonprofits only, the requirements from the IPA on the time to practical application and time limits on exclusive licenses.

At 35 USC 201, add a new paragraph (j):

(j) The term “period of exclusivity” means, with regard to any subject invention for which a nonprofit organization has elected to retain title, three years from the date a patent issues on the subject invention, unless during that time the nonprofit organization or its assignee or exclusive licensee has achieved practical application, in which case “period of exclusivity” means the sooner to occur of three years from the date of first commercial sale or use or eight years from the date of the exclusive license.

At 35 USC 200, add the following to the first sentence:

“…to use the patent system to promote within the period of exclusivity the utilization of inventions arising from federally supported research or development”

At 35 USC 201, add new paragraph (k):

(k) The term “unduly” means, with regard to any subject invention for which a nonprofit organization has elected to retain title, any grant of an exclusive license with such scope as to exclude the making, having made, or using the subject invention without first publishing a determination that an exclusive license of such scope is necessary to attract private investment to develop the invention to the point of practical application within the period of exclusivity.

At 35 USC 201, add new paragraph (l):

(l) The term “free competition and enterprise” means, with regard to any subject invention for which a nonprofit organization has elected to retain title, a grant after the period of exclusivity of a nonexclusive license royalty free or for a reasonable royalty to any qualified applicant.

These definitions may then be carried forward to the implementing regulations at 37 CFR Part 401 and the standard patent rights clause specific to nonprofits–37 CFR 401.14(a)(k).

If a university or its patent brokering partner cannot within three years from the issue date of a patent on a subject invention achieve practical application–not restricted to a commercial product–then the university should lose the ability to sue to stop practical application or threaten to stop practical application. A subject invention is a special class of patentable invention. It is not like ordinary inventions. It does not have the same scope of property rights. The owner of a subject patent has no property right to prevent the use of subject inventions, but only to promote their use. That’s a tough lesson. It is right up there with the lesson about “vesting” of ownership that the Supreme Court rejected in Stanford v Roche. Bayh-Dole is a franken-sausage law, badly written, worsely implemented, and awfully practiced.

It’s time for the next piece of faux Bayh-Dole to be thrown out–that once a university acquires ownership of a patent on a subject invention, it can do anything it pleases with the patent, so long as it complies with the standard patent rights clause. This is not true. The property rights in such a patent are limited by the policy set forth in 35 USC 200. A patent on a subject invention is not an ordinary patent subject to minimal, unenforced requirements under federal contract. A patent on a subject invention has a short window of exclusivity, after which it is not much of a patent at all, if there has been no practical application (or even a reason to expect the likelihood of practical application) within that window of exclusivity. If a subject invention cannot be used within, say, seven years, then the exclusivity offered by the patent system is inappropriate under Bayh-Dole. That’s the point of federally funded research. Discover stuff. Make it available to all. Do it faster than otherwise. Do it for the public benefit more than one’s own. Provide opportunities for exclusive control only where doing so is necessary to attract investment without which the invention will not be developed to the point of practical application. If that cannot happen promptly, then screw it all.

Apple and Broadcom v Caltech. That’s the case I’d like to see pound its way through the courts with 35 USC 200 in play.

[For all that, Apple and Broadcom ought to have a case against the federal government for failing to enforce Bayh-Dole as a matter of federal patent law. It’s the government’s negligence (if it is just negligence) to enforce that gives Caltech the standing to troll industry using patent rights acquired by exploiting Bayh-Dole. If Caltech has not timely established its own practical application of the invention–by its own actions or by those of its licensees–then the federal government must march-in and require non-exclusive licenses on terms reasonable under the circumstances (royalty-free comes to mind). Just sayin’.]

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