Now let’s look at the transmogrification of the definition of practical application from Kennedy to Bayh-Dole. In doing so, we also will see how the usage of “reasonable terms” arises, along with Bayh-Dole’s introduction of “reasonably satisfies.” This gets detailed. Anyone suffering from TL;DR syndrome with regard to complicated policy will have difficulty. But the Bayh-Dole tricks are in the details. If you want the outcome only, skip to the end of this installment, where I promise you, there’s a simple statement to slurp up.
Here’s the Kennedy definition of “to the point of practical application”:
To the point of practical application–means to manufacture in the case of a composition or product, to practice in the case of a process, or to operate in the case of a machine and under such conditions as to establish that the invention is being worked and that its benefits are reasonably accessible to the public.
Nixon retains this definition unchanged. The Federal Procurement Regulations then implement the Nixon patent policy in 1975, and parse the march-in with a significant variation–the FPR treatment (1-9.107-5) makes it clear that march in can take place for either a failure to achieve practical application or for public purposes. The wording is subtly screwed up.
With respect to each Subject Invention to which the Contractor retains principal or exclusive rights, the Contractor: . . .
Agrees to grant to responsible applicants, upon request of the Government, a license on terms that are reasonable under the circumstances:
(i) Unless the Contractor, his licensee, or his assignee demonstrates to the Government that effective steps have been taken within 3 years after a patent issues on such invention to bring the invention to the point of practical application, or that the invention has been made available for licensing royalty-free or on terms that are reasonable in the circumstances, or can show cause why the principal or exclusive rights should be retained for a further period of time; or
(ii) To the extent that the invention is required for public use by governmental regulations or as may be necessary to fulfill public health, safety or welfare needs, or for other public purposes stipulated in this contract; . . . .
Let’s look at two subtleties. First subtlety, the FPR introduces the idea of demonstration of “effective steps.” This alters the impact of the definition of “to the point of practical application.” In Kennedy, bring an invention to the point of practical application in three years, or else. In Nixon, same thing. But now, here in the FPR implementing Nixon, the logic gets shifted. In the FPR, the requirement is that the contractor (or licensee or assignee) must demonstrate that it has taken “effective steps” to achieve practical application.
In Bayh-Dole, by contrast, it is up to each federal agency to “determine” that the contractor or assignee (licensee is omitted) is not expected (i.e., by the federal agency–the agency determines that the agency does not expect something–figure that) to take effective steps to achieve practical application and that determination may be appealed to the Court of Federal Claims, as if it is a taking of private property rather than a failure of a condition in a federal contract.
By the time we reach Bayh-Dole’s implementing regulations for march-in, at 37 CFR 401.6, the idea that the contractor (or assignee or licensee) must demonstrate practical application (or at least effective steps) is entirely forgotten. Instead, the agency acts on information “received” and the contractor’s (et al.) right is to contest this information. In the coarse world of practice, the whole march-in procedure is stupid, just as Howard Bremer designed it to be. In practice, agencies would monitor subject inventions for patents that issue, add three years, and for any utilization report at three years that does not clearly establish that practical application has been achieved, the agency initiates march-in. In the Bayh-Dole era, there are over 50,000 university and affiliated nonprofit owned US patents citing federal support. The federal government should have marched in on over 40,000 of these inventions. But it didn’t. It hasn’t done a thing. That’s one of the great awfulnesses of Bayh-Dole.
Bayh-Dole omits the three year term from Kennedy/Nixon. But under Bayh-Dole, federal agencies have the discretion to decide what “within a reasonable time” ought to be (so much for a “uniform” law, eh?). Again, we are not talking about the time it takes to get a drug candidate through an FDA approval process–we are talking about *starting* that process in a meaningful (“effective”) way. Later, we will argue that a contractor merely assigning or licensing exclusively a subject invention has nothing to do with “effective steps.” While an assignment or exclusive license might be a “step” (in some fantasy version of practice), there is no way to show that it is “effective” without other evidence of actual activity that would lead to use with benefits available to the public on reasonable terms.
If there’s practical application, then what’s the point of demonstrating anything other than that there’s practical application–establish that the invention is being used. Show that there are benefits arising from that use. Show that those benefits are “reasonably accessible” to the public. The standard in Kennedy/Nixon is that the government must assess whether a contractor (et al.) has developed an invention to the point of practical application. In the FPR, this shifts to the contractor must demonstrate that it has achieved practical application. In Bayh-Dole, all the contractor has to do is contest whatever information a federal agency “receives”–as if the contractor’s own reports of invention utilization would not be a sufficient basis for a federal agency to make a determination that a contractor has not demonstrated practical application or effective steps or even created the expectation that there will be effective steps–unless of course any abstract, unsupported claim in a contractor’s utilization report is sufficient create the impression in a naive federal agency officer that there must be effective steps being taken. If the basis for march-in ought to be a contractor’s own utilization reports, then there is no reason whatsoever for a federal agency to notify the contractor of the information in that report, give the contractor 30 days to respond, or to otherwise contest the information in the report. Information “received” by the federal agency from any other source (whistleblowers, say, or the public) would be information that differs from the claims made by a contractor in its own utilization reporting. In that case, the federal agency would have to determine whether the contractor has committed fraud on the agency in its utilization reporting–preparing false, negligent, misleading, or partial reports. It would not be sufficient for an agency to simply ask the contractor to rebut the other information received–one would expect an audit of the contractor’s activity, and from there establish whether the contractor has truthfully and fully reported its utilization. But something like that would be counter to Bayh-Dole, if Bayh-Dole’s purpose was to pass federally supported discoveries in health directed research to the pharmaceutical industry (and to speculators on health care).
We can then ask what does “effective steps” have to do with practical application? The steps are effective because they have resulted in, or will result in, practical application. If there’s no practical application in a reasonable time, then are the steps at all “effective”? No. Not unless “effective” means something like “put on a show of effort that makes it seem that there will be practical application.” The FPR changes the condition–rather than achieve practical application within three years, the contractor (et al.) now has must demonstrate that within three years, it has taken effective steps toward achieving practical application. It has made a start rather than it has achieved the goal.
Second subtlety–the FPR throws in a public “welfare” condition that is in the Nixon patent policy for inventions that the government ought to acquire but not in the Nixon patent policy as a condition of march-in. Someone no doubt thought that this was an oversight in the Nixon patent policy at paragraph (g) and “fixed” it. The triad of health, safety, and welfare appears to come from Vannevar Bush’s justification for the federal government being concerned with scientific research:
Moreover, since health, well-being, and security are proper concerns of Government, scientific progress is, and must be, of vital interest to Government. Without scientific progress the national health would deteriorate; without scientific progress we could not hope for improvement in our standard of living or for an increased number of jobs for our citizens; and without scientific progress we could not have maintained our liberties against tyranny.
Bush’s “health, well-being, and security” (1945) become Kennedy’s “health, safety, and welfare” (1963), taken up by Nixon (1971), transmitted to the FPR (1975) and from there only a small hop into the drafting of Bayh-Dole (1979). By adding “welfare” to the march-in conditions, the FPR expands march-in licensing to anything within the general scope of the government purpose in funding scientific research. As Bush implies any research directed at scientific progress that might improve “our standard of living” or increase the “number of jobs” comes within “public welfare.” Thus, not only should the federal government take ownership of any federal research directed at the public welfare, but also it should be able to march-in for the public welfare on inventions even when those inventions were not made in research directed at fields that directly concern the public welfare. That is a significant broadening of march-in over the Nixon patent policy.
Bayh-Dole then breaks march-in into four categories. The attempt is to treat each of the four in parallel, but really they are very different from each other and from the Nixon patent policy and FPR.
(1) practical application failure
(2) not reasonably satisfied health needs
(3) not reasonably satisfied regulatory needs
(4) failure to comply with US manufacturing requirements.
In the Nixon-FPR regime, march-in can be for either a failure to achieve practical application (or, er, at least start the effort) OR (i) for government regulations or (ii) for public health, safety, or welfare. In the first instance, the problem is a failure of the contractor to provide a timely and reasonably accessible benefit to the public, either by licensing non-exclusively on reasonable terms or by practical application that makes the benefits of use reasonably accessible to the public. In short–license or use. In Nixon-FPR’s second set of instances–(2) and (3) in Bayh-Dole’s 203(a)–it does not matter what the contractor does–what matters is that the government identifies a need condition and determines that a single monopoly source is not acceptable as a matter of public policy.
Bayh-Dole alters this second set of instances so that it’s not about public policy prohibiting a private monopoly to profit from public health or federal regulations but rather about whether the private monopoly is “reasonably” selling into the “market” of public health or federal regulations. In its way, it is a ghastly change. The subtext is that without allowing such private exploitation of what the public has supported, profit-seeking speculators won’t participate in exploiting the public and (the conclusion) no one at all will take any action to help the public using federally funded inventions.
In Kennedy, the government’s position is that when it funds research resulting in inventions, those allowed to hold the inventions have an obligation to the public to timely provide benefit (that’s reasonably accessible to the public) or make the invention available to all (on terms that are reasonable in the circumstances). If they fail at this, then those holding patents agree to release the inventions royalty-free (in Nixon, on reasonable terms). But that’s the first prong. For the second prong, those holding patents acknowledge that the government has a broader right to require licensing than is provided under 28 USC 1498 for government use (which provides a patent holder with a right to “entire and reasonable compensation” in the Court of Federal Claims) but only for an invention “used or manufactured by or for the United States.”
Under Kennedy, the government can require non-exclusive licensing–making the invention available for practice by others–on the finding that the invention is required by regulation or by a public need. Nothing in this finding has anything to do with whether the invention has been practically applied or the benefits of its use are reasonably accessible to the public. If that had been the consideration, then the policy would have been constructed differently, starting with an examination of whether practical application had been achieved. Instead, the basis for the decision to require licensing on terms reasonable in the circumstances has only to do with whether the invention is required for public use by government regulations, or to fulfill health needs, or to fulfill other public purposes stipulated in the funding agreement. Because the licensing is on terms “reasonable in the circumstances” there is no Court of Federal Claims compensation to be sought. The compensation comes in the form of terms “reasonable in the circumstances.” What the Kennedy apparatus requires is that the contractor accept compensation in the form of non-exclusive license reasonable terms, not as a settlement of claim for government use of an invention under a privately held patent.
Bayh-Dole makes it appear that this action to address public determinations–regulation, health needs, any other contractual purposes–is somehow a federal abridgment of private property rights. But it’s not that way in Kennedy. There, a contractor never has those broader rights in the first place. The contractor agrees up front as a condition of the policy that the contractor does not have those rights. If the government anticipated any of those requirements up front–regulation, health needs, contract stipulations–with regard to something unexpected (the invention) rather than something fully defined (the work to be performed), then the government would simply have placed the invention in the first Kennedy category of inventions that the government should normally acquire and be done with it. Bayh-Dole does not have this first category of inventions as a default. So Kennedy second prong category covers those cases in which an invention in a protected area of public interest is not anticipated under a given contract but concerns something that the government otherwise would have required ownership of had the invention been anticipated.
For instance, a contract to develop an instrument that turns out to have an inventive application in medical diagnostics that is already the subject of a government effort to develop an application for public health needs. Such an invention, if held privately under patent, would block the government effort to provide a public benefit–a benefit that allows public access to the technology being developed to the point of practical application for public use. It would not matter that the contractor makes an attempt to develop its bit of invention to the point of practical application. It would do so in competition with the federal government’s own effort, and would end up playing the troll or beating back the government any other of its contractors.
This second prong in Kennedy provides that no federal contractor may hold a patent monopoly based on federal funding in an area of declared federal interest (the first section of Kennedy–where the federal government normally acquires inventions) even if the research funded is not at the outset in such an area of federal interest. Instead of simply moving in and taking ownership of such inventions, however, the Kennedy policy stipulates that the invention owner must accept compensation for granting public access that is “reasonable in the circumstances.” The stipulation here is that in these instances (i) the contractor must license non-exclusively regardless of its own development activity; (ii) must offer reasonable terms; and (iii) the compensation it receives reflects the value of the right it holds by virtue of the Kennedy patent policy, so there is no diminishment of value, no government “taking” of property.
Simply, the second prong of Kennedy requires FRAND licensing whenever an invention made with federal funding outside the first conditions of Kennedy requiring federal ownership would impinge on those first conditions, regardless of the contractor’s own exploitation of the invention. Bayh-Dole doesn’t have this requirement. That’s a huge difference.