Illusions of Bayh-Dole: “manufactured substantially” 5

Bayh-Dole’s statement of policy at 35 USC 200 includes a provision calling for the use of the patent system “to promote the commercialization and public availability of inventions made in the United States by United States industry and labor.” Folks often misread this requirement as if it states that Bayh-Dole mandates commercialization–it does not. Rather, this provision focuses on the making inventions in the United States by United States industry and labor, regardless of whether those inventions are commercialized or are made publicly available. Note–not making of inventions in the United States by foreign industry, or making of inventions in the United States with foreign labor.

Bayh-Dole’s statement of policy at 35 USC 200 stands on its own. The rest of the statute provides guidance for specific situations–when a contractor licenses exclusively in certain situations, when the federal government licenses, and when the federal government permits a federal employee to own an invention. We have worked through Section 204 in detail in previous installments. Now let’s consider the federal side of Bayh-Dole’s use of the patent system to promote United States industry and labor.

First, a refresh. Section 204 of the Bayh-Dole Act positions itself as the most important part of the law. Section 204 requires that owners of subject inventions must, in exclusive licenses to use or to sell in the United States, have licensees agree to source product based on the invention “manufactured substantially” in the United States. The requirement is a weak one–it applies only to exclusive licenses in the United States, not to a patent owner’s own exploitation of a subject invention. The requirement is further weakened because it authorizes federal agencies to grant waivers to the requirement. The requirement is weakened further still because (i) the requirement is placed in the standard patent rights clause, (ii) federal agencies are given authority over the standard patent rights clause, and (iii) federal agencies have no obligation to enforce the standard patent rights clause. Thus, Section 204 is mostly administrative fluster.

Things are rather different on the side of Bayh-Dole dealing with federal ownership and licensing of inventions. The federal side does not cite Section 204 but rather makes up its own requirements. Let’s look.

35 USC 207 authorizes federal agencies to grant licenses to inventions owned by the federal government, including licenses that amount to an assignment of the invention. Section 209(a) then sets out the conditions under which the federal government may grant exclusive or “partially” exclusive licenses–whatever the heck a “partially” exclusive license is. Section 209(b) then sets out the federal side implementation of the American manufacturing requirement:

(b)Manufacture in United States.—A Federal agency shall normally grant a license under section 207(a)(2) to use or sell any federally owned invention in the United States only to a licensee who agrees that any products embodying the invention or produced through the use of the invention will be manufactured substantially in the United States.

This provision differs from Section 204 in a number of ways. I have highlighted two. First, there’s an amazing use of the adverb “normally.” That “normally” represents a substantial walk-back in the requirement. What constitutes “normally” licensing? Does “normally” mean “almost always”? or “more than half the time”? or “we always start out by requesting this provision but may not end up with it much of the time”?

The second difference has to do with the nature of the licensing. Here’s Section 204 again:

to any person the exclusive right to use or sell any subject invention in the United States

Section 209(b), by contrast, references section 207(a)(2), not a repeat of section 204, but now for federal agencies and the inventions they have acquired:

(2) grant nonexclusive, exclusive, or partially exclusive licenses under federally owned inventions, royalty-free or for royalties or other consideration, and on such terms and conditions, including the grant to the licensee of the right of enforcement pursuant to the provisions of chapter 29 as determined appropriate in the public interest;

This is one sloppy sentence. “Under” would be less awkward with “federally owned patents” than with “federally owned inventions“–there’s nothing under an invention, and there’s nothing to license if there’s no patent right. The drafters of this clause also apparently don’t understand that a royalty is any consideration for a grant of rights. Thus, the elaboration of “for royalties or other consideration” amounts to “we don’t know what the hell we are drafting here so we will use some terms we have heard and then save butts by throwing in a catchall in case we really truly don’t know what we are doing here.” And there appears to be a comma dropped after “29”–the terms and conditions that are determined to be in the public interest, not merely whether the licensee should have the right of enforcement (that is, the rights of an owner of an invention).

Essentially, this sentence at section 207(a)(2) says federal agencies may do anything they “determine” to be in the public interest. The sentence labors, however, to ensure that federal agencies can grant exclusive licenses, can assign inventions (granting the right to enforce), and charge whatever they want. Bayh-Dole can’t get anything out simply. At least Bayh-Dole is consistent in that respect.

The big difference in substance, however, is that where section 204 applies only to licensing the exclusive right to use or sell in the United States, section 207(a)(2) authorizes licenses that are “nonexclusive, exclusive, or partially exclusive.” It’s clear that section 209(b)’s American manufacturing requirement applies to both foreign and domestic licensing, while Section 204 is limited to exclusive licenses to use or to sell and then only when in the United States. Bayh-Dole requires the federal government “normally” to obtain agreement from any licensee that “any products” will be manufactured substantially in the United States. There’s not even a restriction with regard to “use” or “sell”–any licensee, any products. Oh, but of course, there’s also that “normally” that can walk back anything dramatic–such as something becoming simple and clear as the truth.

Thus, section 209(b) appears to require American manufacturing for all federal licensees of inventions, not just for exclusive licenses to use or to sell in the United States, but then walks the gesture back with a “normally” and so doesn’t require anything at all except arse-covering paperwork.

We are left with the broad policy statement that the patent system should be used to promote American industry and labor, but with an implementation that indicates this promotion of American industry and labor should done only when a federal agency determines that doing so is in the public interest. Isn’t that odd? Wouldn’t we think that each policy objective stated by Bayh-Dole necessarily has been determined by Congress to be in the public interest? But way down in the bowels of the statute, we find that federal agencies are delegated to decide just when it is in the public interest to promote American industry and labor.

“We here at the agency have decided that it’s in the public interest not to develop American manufacturing capability and outsource this invention exclusively to a foreign company to make outside the country.”

What a sad, strange little law.

The implementing regulations do little to help the situation. 37 CFR 404.5(a)(2) repeats 35 USC 209(a)(2)’s “normally” requirement for all licenses, and then adds:

However, this condition may be waived or modified if reasonable but unsuccessful efforts have been made to grant licenses to potential licensees that would be likely to manufacture substantially in the United States or if domestic manufacture is not commercially feasible.

This is roughly the same language that’s in 35 USC 204, but here it’s a distorted requirement. In section 204, a federal agency may waive the requirement in the standard patent rights clause that forms a federal agreement with a contractor. Here in the implementing regulations on the federal side, the federal agency may waive its own compliance with *the requirement of the statute itself.* It makes no sense. If a federal agency has the discretion to decide what terms and conditions are to be in any license based on a determination of the public interest, then there is no reason whatsoever to burden a federal agency with having to go through some gyrations to make “reasonable efforts” to grant licenses for product made in the United States or just give up and decide it’s not feasible to promote American industry, despite that being an express public purpose of Bayh-Dole.

Bayh-Dole’s federal side wraps up its treatment of the requirement for American manufacture with a statement of staggering obviousness (37 CFR 404.5(b)(7)):

Where an agreement is obtained pursuant to § 404.5(a)(2) that any products embodying the invention or produced through the use of the invention will be manufactured substantially in the United States, the license shall recite such an agreement.

Yes, if an agreement is obtained that products will be made in the United States as a condition of the license, then it would be good for that license to “recite” that agreement. Of course, if a federal agency decides it doesn’t need such an agreement, then the license won’t recite such an agreement. Brutal obviousness. Licenses should also specify the scope of what is licensed, provide addresses for notices to be sent to either party, and be clear on the effective date of the agreement. The regulations here read like the people drafting the federal side of the regulations did not have much of a clue what they were doing. Mostly, they were trying to copy Bayh-Dole’s standard patent rights clause, which agencies are to use as a default in research contracts, as if it were the template for a license contract made by a federal agency with a maker or user or seller of product based on a patented invention. If so, this is another deep bozonet silliness.

The whole point of promoting American industry and labor with new inventions made in federally supported work is to find ways to make American manufacture feasible. To do anything else guts the substance of the law and ends up saying “whenever you can’t be bothered, grant exclusive licenses to companies making product off shore, using non-American labor.”

There’s more to the federal side of American manufacturing requirements. On the contractor side, Bayh-Dole handles contractor employee-inventors as themselves small business contractors. The standard patent rights clause compels contractors to require employee-inventors to make a written agreement to protect the government’s rights in subject inventions. By doing so, contractors make their employee-inventors parties to the funding agreement and thus, by the definitions in Bayh-Dole, they are also contractors. Then the inventor patent rights clause at 37 CFR 401.9 applies. The inventor patent rights clause is a subset of the standard patent rights clause, and expressly includes the implementation of 35 USC 204, which shows up as 37 CFR 401.14(i).

When a small company contractor–either a company or an inventor treated as a small company–owns a subject invention, the contractor has no obligation under section 204 to make product in the United States. The section 204 requirement–if not waived–applies only if the company contractor licenses the subject invention exclusively in the United States. If a company contractor instead assigns the subject invention, section 204 does not apply to the new owner’s exploitation of the invention but rather applies only if the new owner grants an exclusive license to use or to sell in the United States. Follow? Section 204 applies only to exclusive licenses, not to a contractor’s own use and not to any assignee of the invention.

By contrast, for some unknown reason–incompetence?–the federal requirement for American manufacture is both broader–applying to all licenses–and more optional–a federal agency can simply decide not to require American manufacturing, without any oversight, public or otherwise, on the matter. And this gesture by Bayh-Dole is apparently made in the public interest. Perhaps that’s the best that can be said–the gesture of a requirement, but not the requirement itself, is made as if in the public interest. Clever.

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