Let’s look at two things–Bayh-Dole’s standard patent right clause license to the government and 28 USC 1498. First, 28 USC 1498:
Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.
That’s the first part of section (a). Basically, if the United States uses or authorizes the use of an invention that’s the subject of a patent issued by the United States, then the patent owner can recover “reasonable and entire compensation” for the government’s use. That is, the patent owner doesn’t sue for infringement, but rather makes a claim in the Court of Federal Claims.
So far, so good. Now let’s look at Bayh-Dole’s government license, at 37 CFR 401.14(a)(b):
With respect to any subject invention in which the Contractor retains title, the Federal government shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world.
As a condition of the federal funding, the contractor must grant to the the government a royalty-free license. It’s important that this is a license–it is not a taking of private property by the government; rather, it is an exchange, and if a contractor is not willing to grant the license, then the contractor cannot receive the federal support. Since the license is not a taking, it is not subject to a claim for compensation.
We can see then that these two things dovetail. The federal government may use inventions covered by privately issued patents, and the recourse of the patent owner is to seek “reasonable and entire” compensation for that government use (and use by any contractor that the government authorizes). It’s just that if the invention is a subject invention, the contractor has already granted royalty-free use, so there’s no reasonable and entire compensation to be had.
Really, all that the license requirement in Bayh-Dole, reflected in the standard patent rights clause, does is to remove the “reasonable and entire” compensation bit from 28 CFR 1498 for subject inventions. Patents cannot stop the federal government from using inventions for which the government has issued a patent, and if the federal government provided funding that supported the invention in the first place, the fact of that funding precludes the contractor from receiving compensation for the use of the invention. It is as if the invention is still a deliverable under federal contract, but that the federal government defers taking on the obligation to file a patent. Another way to put it: the federal government pays the cost of the research that creates the invention, and the federal government receives back the value of that invention for whatever is within the power of government to do or to authorize. In many cases, the cost of the research is much greater than the value of any inventions–because often times, there are no inventions, and even when there are inventions, nothing comes of them. But every so often, there’s an invention that does matter–the government may want to make the invention, or use it, or even sell it. And in those cases, the cost of the research is much less than the value to the government of the invention.
It’s odd, then, given this exchange, for an owner of a patent on a subject invention to think that somehow this bargained-for value that the government enjoys is somehow a value that the government has taken away from the patent owner. It’s a value that the patent owner never had. The value of the patent to the patent owner is entirely to be found in a market that does not involve the government’s own interest, action, and authority. If a subject invention is something that will be used almost entirely by the government, then the value of any patent on that invention, for the patent owner, is going to be small. That’s the nature of the bargain. If a potential patent owner can’t tolerate small, then it would be good not to elect to retain title and not to spend money trying to obtain a patent. Small valued patents on subject inventions may serve other purposes–not merely the financial desires of university administrators–but it would appear few university technology transfer practices are set up to do anything except seek big hit deals and bumble along with everything else.
We can say, then, that Bayh-Dole divides up the service domain of a subject invention into two “markets”: a government market and a private market. The government may do what it pleases with a subject invention in the government market–the patents it issues on subject inventions do not operate in the government market. In the private market, the owner of a patent on a subject invention may do what it pleases, seeking compensation, trolling, licensing, licensing exclusively to the point of assignment, or doing nothing, nothing, nothing at all. Actually, that’s not true, according to Bayh-Dole, but then no one enforces anything of consequence in Bayh-Dole, so it’s rat’s asses.
What is the boundary line between these two markets? The government market is as broad as any action of government permits–what the government may do, or may authorize on its behalf. The license is “to practice and have practice.” In the Kennedy patent policy and again in the Institutional Patent Agreement template, “practice and have practiced” is defined to mean to make, use, and sell, and to have made, used, and sold. That’s a broad license. Furthermore, the license in the Kennedy patent policy and the IPA expressly covers not only the federal government, but also state and municipal governments. The wording in Bayh-Dole’s standard patent rights clause is “the United States”–not the federal government of the United States, but the, you know, united states. The upshot is that state governments have the same rights as do the federal government under the standard patent rights clause.
Now, university licensing officers routinely misunderstand all this. In their view, the government license means that any licensee has to discount any sale to the government by the amount of the royalty due the university. This is madness, of course. First, in many cases it is simply not possible–what if part of the consideration for the license was an equity position or a lump sum? How could one then possibly calculate what the “royalty” was for any given sales of licensed product? No, can’t be done. If reducing a sale by the amount of a royalty was actually required, then universities would insist that the only compensation they would accept would be a royalty on the sale of each licensed product, nothing more–no license issue fees, no milestone fees, no equity, no payment of past patenting costs, nada. Just a running royalty on sales. Actually, this would be a really good requirement, as the university would have a continuing interest in the licensee achieving sales. Isn’t achieving sales the whole point of “commercialization”? But look at all those helpful university diagrams of the “commercialization” process. They mostly end at the license. More rat’s asses.
Not only that, but adding a royalty reduction requirement for government sales cheats inventors of royalties that they ought to receive. For that matter, because the government license is a matter of record, and any exclusive license granted by a university for the private market as a matter of course recites the government license (however badly–at least university licensing folks are consistent), there’s no need for a university to require a licensee to reduce prices (by the amount of the royalty due the university) for government sales. If the government merely purchases from the private market, then the government may negotiate whatever price it can. A supplier could agree (for other reasons) to provide a product at cost or even below cost–and still pay a royalty on licensed product to a university patent owner.
If the government chose to authorize a supplier to make a product for or on behalf of the government, and that product involves the use of subject inventions covered by a patent, then neither the supplier nor the government owes anything to the patent owner, per the license granted by the patent owner to the government, as required by the standard patent rights clause authorized by Bayh-Dole.
With this background, let’s look then at prescription drugs that are based on subject inventions. People are concerned about the high prices charged by pharmaceutical companies for drugs developed from subject inventions. James Love at Knowledge Ecology International, for instance, has called for federal action to reduce drug prices, using Bayh-Dole as the basis for action. The thread of Love’s argument is that the definition of “practical application” in Bayh-Dole requires that the benefits of the use of a subject invention are “available to the public on reasonable terms.” One argument, then, is that “reasonable terms” includes price. And surely this is the case. And it’s also the case that if “reasonable” meant “anything that a patent owner finds reasonable,” then there would be no point in adding “on reasonable terms” to the definition of practical application. “Reasonable terms” must mean something other than whatever a patent owner asserts. Since a patent owner might be expected to establish a price that’s as high as the market can bear, we might also then think that “reasonable terms” must be a price that’s not as high as the market can bear, something less, such as the price that would be charged if there were multiple vendors vying to provide the same product–that is, the price under the influence of competition. Or, perhaps the price that would be charged if a customer had the choice of purchasing the product or building the product for itself–that is, the price charged ought to be no more than the cost for a customer to DIY the same thing.
Now let’s consider the heart of Bayh-Dole–that subject inventions get used with public benefits on reasonable terms. Here’s 35 USC 201(f):
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.
In the Kennedy patent policy “the point of practical application” was the threshold under which a contractor could retain a monopoly right on a patent made with federal support. If a contractor did not bring an invention to the point of practical application within three years of the patent’s issue date, then the government could step in and require the contractor to license on “a non-exclusive royalty free basis.”
But Bayh-Dole doesn’t implement its “march-in” procedures so clearly. Instead, Bayh-Dole provides this (35 USC 203, first part, qualifications omitted for now):
With respect to any subject invention… the Federal agency …shall have the right…to require the contractor…to grant a …license…upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself, if the Federal agency determines that such—
(1) action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;
There are other bases for march-in as well, but let’s focus on practical application. Compared to the Kennedy patent policy–three years or else–this is watered down (and I haven’t even included the watered down parts). Now the agency has to determine not practical application but rather “effective steps.” Look–read. The issue here is not practical application, though the words “practical application” show up, but rather “effective steps.” What the heck are “effective steps”? The implementing regulations don’t bother with a definition. Instead, they drone on about “fact-finding” that though “informal as possible” will include following the “principles of fundamental fairness” (what the heck?!), with lawyers present, witnesses, transcribed records, secrecy–sounds like a secret trial. After all this, and written determinations, time limits on communicating with patent owners, and an appeals procedure plus further appeal to the Court of Federal Claims, then perhaps there might be march-in. No march-in can happen in the time frame in which march-in might be useful.
Part of the problem, of course, is the contorted procedures necessary to march-in. But another part of the problem is that the fact finding concerns “effective steps” rather than practical application. If the fact finding was simply–is there practical application, as defined by the law?–then march-in would start with (i) whether use has been established; (ii) with public benefits; (iii) on reasonable terms. Whether someone was (on paper at least) really, really wanting to grant a license would make no difference whatsoever. As Harry G. Frankfurt has it, even sincerity, when it has no regard for the truth, is another form of bullshit. If (i) fails, then there’s no need to go on to (ii) or (iii).
If the present administration wanted to repeal one regulation in Bayh-Dole, start with 37 CFR 401.6. What a turd it makes of march-in. Restore march-in to what it was under the Kennedy patent policy. Three years from patent issue–or, better, to eliminate gaming the patent prosecution system (filing a PCT, naming the U.S., then stringing the PCT out to delay filing the U.S. application, then stringing out the U.S. application with continuations and divisionals)–how about six years from the date the contractor elects to retain title or files a patent application, which ever is sooner. If there’s no demonstration of practical application–burden is on the patent owner to make this demonstration–then boom, march-in. Use it or lose it. No fussing around. No speculative dealing in patent monopolies hoping that a decade on one of them might be worth shaking down an industry over.
Now since march-in is made irrelevant by the procedures at 37 CFR 401.6, it may seem goofy to consider march-in at all. Why not just use the subject invention and authorize the use of the subject invention and let the patent owner take its claim to the Court of Federal Claims, where the “reasonable and entire” compensation will be tested against the government’s royalty-free license? To be sure, there may be other patents in play besides those covering a subject invention. Many commercial products involve multiple patents. So the patent owner might have a claim regarding a patent that’s not covering a subject invention–but then that patent would not be a target for march-in anyway.
It is worth thinking about march-in in the context of high drug pricing to consider part (iii) of the analysis–“on reasonable terms.” If a drug based on a subject invention is not made available on reasonable terms, then it fails to meet the definition of practical application and the government can march-in (except, of course, in practice it can’t even if it tries, since the patent owner can string out the march-in procedure for years). In this analysis, what the drug company could claim in the Court of Federal Claims is not its lost income from charging monopoly prices, but rather the income it would have received had it charged a “reasonable” price–and the “reasonable and entire” compensation would be further reduced by the government’s own royalty-free license. There still might be reasonable compensation to be had for any other patented inventions–not subject inventions–that get used, but then the lost income from those will represent only a fraction of the total reasonably priced income for the product the government has march-in upon.
But this is all rather useless. March-in is for show. It is designed to fail. It’s barking up a tree with no squirrels. Bayh-Dole was created to pipeline monopoly control over federally supported inventions to pharma companies. The basic deal is that universities share in the monopoly pricing as their incentive to take ownership of inventions away from inventors who might not be willing to be complicit. If you don’t understand this basic point, you don’t understand Bayh-Dole.