Bayh-Dole Government License–9: Recommendations

Our webinar ends with “Recommendations” for licensing agreements. Given what we have worked through, we are in a good position to assess the strength of these recommendations. Here’s the first recommendation:

It’s implied, but never stated, that rights the licensor here reserves are those necessary to grant the government its license under Bayh-Dole, and that a contractor cannot then obligate to others these rights, and so must be made express in any grant of an exclusive license. The government license really doesn’t matter when other licensing is non-exclusive–non-exclusive licenses don’t require statements of reserved rights with regard to other non-exclusive licenses. The sample language then assumes–but doesn’t bother to come out and say it–that the license involved is exclusive (involve exclusive rights to one or more of the substantial rights in the subject invention, and if all substantial rights, then the exclusive license is also assigns the subject invention).

There are many problems with the recommended provision. First, the reserved right does not follow the statutory language. This is a fatal problem. Here’s 35 USC 202(c)(4):

the Federal agency shall have a nonexclusive, nontransferrable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world

The same language then shows up in the standard patent rights clause at 37 CFR 401.14(b):

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.

The only differences between the two versions are the CFR substitution of “government” for “agency” and the spelling of “nontransferable.” It is not so much a problem that paid-up and nontransferable are left out–they are no more relevant in a reservation of rights context than is irrevocable. These elements–nontransferable, irrevocable, paid-up–pertain to the licensee’s rights. The federal agency cannot transfer the license. The contractor, by contrast, must transfer the government license in any assignment of the invention. Or, the assignee is required to grant that same license, which amounts to the same thing. These are signs that whoever drafted this recommended wording didn’t understand the government license at a most fundamental level.

The big problem, however, is the handling of scope. Let’s skip over replacing “for or on behalf of” with “by or on behalf of”:

Recommended: “for all governmental purposes (as distinguished from commercial purposes) by or on behalf of the Government of the United States”

Statute: [nothing] “for or on behalf of the United States”

I have boldfaced the recommended slop. The statutory government license places no limits on “practice and have practiced” other than for or on behalf of the United States. The recommended language adds “for all governmental purposes,” which is not a restriction in the statutory license. “Government purpose” was a defined phrase in the Kennedy and Nixon patent policies, and there it means “to practice and have practiced.” The FPR does away with the definition and just requires a license to “make, use, and sell.” If the federal government has the authority to practice the invention, then it can do whatever it will within that power. There’s nothing a patent holder of a subject invention can do to expand the authority of the United States to act–and Bayh-Dole’s government license aims to make it clear there’s nothing a patent holder on a subject invention can do to limit what the United States can do–and in particular, the patent holder will never make a claim against the United States for compensation for the practice of the subject invention.

The recommended language attempts to separate “governmental purposes” from “commercial purposes.” This is a bit of nonsense. The statutory license to practice entails all rights in an invention–to make, use, and sell. Sale necessarily includes “commerce.” The distinction between governmental purpose and non-governmental purpose, furthermore, is oxymoronic. The license is to the government. The government has no need of a permission that lies outside of its authority.

The recommended language also gets the nature of the license wrong. In Bayh-Dole, it is the Federal agency (USC) or Federal government (CFR) that receives the license and the scope of benefit is the “United States.” The recommended language inserts “Government of” as a restriction on “United States.” The difference matters. The license is to the federal government but the scope is for the benefit of the United States–not just the federal government. In the Kennedy and Nixon patent policies, and in the FPR that codifies Nixon, the license extends to the States and municipal governments. There’s nothing in Bayh-Dole that indicates that Congress intended to restrict in any way this scope. And there’s nothing in Bayh-Dole to indicate that any such restriction was somehow needed to make Bayh-Dole achieve its stated objectives. The restriction is not there.

It is worth pointing out that the States cannot be sued for patent infringement anyway–sovereign immunity under the eleventh amendment–so the statutory license here makes formal what is necessarily the case anyway. The “United States” is, at the very least, the federal government and the States. The recommended language makes it appear that the States are excluded from the license. That’s a restriction that’s not supported in Bayh-Dole and in any prudent recommendation for language to use, one would certainly not make it appear that there is a restriction when there’s no support for it.

The broad meaning of the statutory license in Bayh-Dole is that a holder of a patent on a subject invention will bring no claim against any governmental body in the United States. Put another way, when the federal government supports research or development, government at all levels has open access to any invention that arises in that work. Whatever a contractor wants to do with a subject invention, that cannot have anything to do as a matter of patent rights with what government does. If a contractor wants to sell to the government, that’s fair game. The government–any level of US government–can choose to purchase rather than make its own or have others (even the contractor, if it is willing) make things for the government. If the government chooses to purchase, then it pays whatever price it can negotiate, with no discounts for “royalties” based on the fact that the government also holds a license. And if for some reason, a law prevents the government from negotiating price (as, for, say pharmaceuticals–why, God only knows), Bayh-Dole provides that the government can march-in and require licensing on reasonable terms (specified by the government, and thus also may reflect pricing) if the price on offer to the public (and thus to the government at any level) does not reflect “reasonable terms” to the public (for which see 35 USC 201(f) and 35 USC 203(a)(1)).

Now we can look at the recommended extension of the Bayh-Dole government license to accommodate foreign licensing. Again, the recommended language implies an exclusive license. Any license at all presumes that the patent holder has rights or prospective rights outside the United States. Here’s how the recommended language proposes we handle the situation:

and on behalf of any foreign government pursuant to any existing or future treaty or agreement with the United States.

The proposed language is inadequate at best and at worst, full of liability. Why? At the broadest, the problem is that the federal government may modify the Bayh-Dole language in any number of ways. Only one of those ways (37 CFR 401.5(d)(1) and (2) involves extending the government license. Other ways involve “additional rights”–ownership or direct licensing–even exclusive licensing–from the contractor (or the contractor’s assignee). Without having the specifics of a given funding agreement present, it is impossible to construct sample language. At the very least, any “recommended” language must make clear the funding agreement requirements.

Even if one were to go with the proposed language, Bayh-Dole establishes that agreements that can justify foreign rights are not only “treaty or agreement” but may include “arrangement of cooperation, memorandum of understanding, or similar arrangement” (35 USC 202(c)(4)). As far as Bayh-Dole is concerned, it does not appear that the “arrangement” even has to be binding. Just a common statement to work together appears to be enough to trigger a requirement for “additional rights.”

Given the uncertainties with regard to what rights a federal agency may assert in foreign requirements, a good recommendation–one founded in the actual language of Bayh-Dole–is to treat foreign licensing rights always as a species of non-exclusive. What a prospective “exclusive” licensee gets, in reality, is a head start in foreign jurisdictions. If a company is able to manufacture product–especially in various foreign jurisdictions–then even if a federal agency requires foreign licensing, a foreign government may prefer to purchase product rather than start from scratch to have product made.

To get at the uncertainties all the way around, if one is going to recommend wording, start with a standard reservation of rights for the government license, assuming there are no special requirements for additional rights set forth in the funding agreement:

The exclusivity of the license granted is limited by a statutory non-exclusive license to [funding agency] pursuant to and with the scope as set forth at 37 CFR 401.14(b) or as expressly provided by [contract #].

If there are requirements for additional foreign rights, those will be in the funding agreement. If so, then if those rights are license rights, state them with the license limitation. If those rights involve ownership of foreign rights, then the contractor will not be offering an exclusive license for those foreign rights, because the contractor will not have standing to do so. And if the funding agreement has language indicating that foreign rights may be subject to compliance with future treaties or other arrangements, then a sound practice is not to offer exclusivity and instead work with a sole license–a non-exclusive license done once. Thus, wording might look like this:

Provided that Licensee remains in compliance with the terms of this Agreement, Licensor shall not grant further non-exclusive licenses in non-US territories during the term of exclusivity of this Agreement, except as may be required by [federal agency] pursuant to its license rights or additional rights under [contract #].

This approach allows the federal agency to grant whatever sublicenses it is required to grant under whatever international arrangement without the licensor–university or whatever–having to hold out to have a licensee come back begging for more rights or fussing over the fact that the offer of exclusivity turns out not to be what it was made to appear. If one wanted to get onto really sound footing, one wouldn’t offer exclusive foreign license rights at all, not because of anything to do with Bayh-Dole, but because non-exclusive licensing is an all-around better way to handle patent rights, especially in areas such as public health, environmental safety, and anything that might rely on standards.

We can address here the argument that pharmaceutical companies and venture-backed biotech startups require exclusive licenses. The answer is–that’s not true. Such companies might negotiate for exclusivity if they can get it, but may well settle for non-exclusive rights, especially if the cost for such rights is less than the bother of calling in lawyers. Any exclusive position these companies need will typically be found in background rights they already have or in new rights they develop in inventions they make going forward–and the sooner they have access, the sooner they can develop those rights. And if money is the thing, some of the most lucrative biotech licensing deals, such Cohen-Boyer and Axel, have used non-exclusive strategies.

It is all too easy for an exclusive license to also operate as an assignment. Exclusively granting all substantial rights (make, use, and sell) in an invention constitutes an assignment of the invention. A key test is whether the exclusive licensee has the right to enforce the patent. If so, then it’s all the more clear that the exclusive license involves an assignment. For Bayh-Dole, assignment of a subject invention makes the assignee a party to the funding agreement–a contractor–and thus the assignee is subject to Bayh-Dole’s standard patent rights clause with one big exception: if the assignor is a nonprofit, then the assignee, even if a for-profit, must accept the nonprofit’s patent rights clause. The nonprofit patent rights clause requires all income earned with respect to each subject invention, after deduction only for costs to administrate subject inventions, to support scientific research or education. Not a problem for a university, but potentially a big problem for a for-profit company, which may have an interest in using income for other things.

If a university contractor contemplates assigning a subject invention (using an exclusive license as the means to do so), then a reasonable practice is to provide a copy of the funding agreement, and especially the patent rights clause specific to that funding agreement, to the prospective licensee. It is very likely that the prospective licensee will then insist on a sole or non-exclusive license rather than accept assignment.

If one cannot bear to offer non-exclusive licenses, then the next best approach is the sole license. With a sole license, one provides an exclusive position but for the federal government’s rights, for the term of exclusivity.

The webinar’s second recommendation is also less than sound:

We have the same problems of wording as we saw in the first recommendation–“by” instead of “for”; “United States Government” instead of “United States.” The primary problem, however, is that this proposed requirement creates an obligation for the licensee that does not exist in Bayh-Dole. Sure, it can be imposed, but doing so cannot be based on a requirement in federal regulations. It’s just something a licensor might make up, from thin air, just to be a turd. Put it this way: most products of any built complexity might involve ten or fifty or more patents. Any university royalty claim will invariably be exposed to a royalty-stacking relief provision–the university will get its (say) 5% royalty on a pro-rata basis as calculated by the ten or fifty other claims to a royalty set aside of 5%. And in biotech, 5% is way high. Think more like 2% or 1% of 0.5%. That university royalty may end up being, in practice, 0.05%. That’s the *discount* that the recommended language requires to be passed on to the federal government and accounted for in royalty reports. Only a turd of a licensor would demand that if not expressly required by law.

In all but the biggest of the big super hit inventions involving few inventions and stupendous sales markets, a university is better off financially by asking for an annual flat payment, not bothering with exclusivity, and skipping the accounting for sales and royalty calculation with right of audit and imposition of penalties for under reporting or under payment–provisions that create overhead and liability and bother for a licensee and therefore take both desirability and value out of the relationship. Sure, such an approach lacks the speculative gambling of the exclusive license, but for most university-held inventions, this approach moves more technology, creates stronger relationships, reduces uncertainties and liabilities, and–get this–runs closer to the policy and objectives of Bayh-Dole, if not also the university’s own academic mission.

As for sales to foreign governments, there’s nothing in Bayh-Dole that requires a discount or refund, even if the sale is somehow connected to activity on behalf of the United States. Again, a university may as a gesture of goodwill offer discounts based on negotiated royalties to foreign governments, but there’s nothing in Bayh-Dole that requires doing so. If one is going to recommend that universities take up this practice, that’s all well and good, as long as it is clear it has nothing to do with Bayh-Dole’s government license.

To sum up, then. The webinar is chock full of confusion about Bayh-Dole. The government license is to practice and have practiced–make, use, and sell and authorize others to do so also, for or on behalf of the United States. That’s clear enough for clear minds. The government gets a license, not a right to demand discounted sales or refunds based on a contractor’s negotiated consideration for granting a license. That, too, is clear enough. Finally, Bayh-Dole provides multiple possibilities for federal agencies to deal with foreign rights. One way to navigate the situation is to deal in sole licenses rather than exclusive, and the next best practice is to draft language specific to the requirements of the funding agreement that controls the subject invention and not rely on generic template language. In short, don’t be a turd of a licensor.

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