IP Watchdog Misses the Mark on March-In Rights

IPWatchdog, a blog site, published on April 22, 2020 an article by Joseph Allen arguing that the Washington Post got Bayh-Dole’s march-in provision all wrong. But Allen has got it wrong.

Let’s be clear, then, about Bayh-Dole and march-in. Even fair. Here is Allen:

Bayh-Dole allows universities and companies to own inventions made with federal support.

No. Bayh-Dole allows nonprofits and small businesses to retain ownership of inventions they go out of their way to acquire and which were made in work that receives federal support, on specified conditions that don’t apply to ordinary patentable inventions under federal patent law. The inventions don’t have to be made with federal support–they are just made in work–a project– that at some point also receives federal support.

In exchange, the government can “march in” to force additional licensing under four circumstances.

There is no such “exchange” in Bayh-Dole. The right of nonprofits and small businesses to elect to retain title to subject inventions (patentable inventions or plant varieties made under a funding agreement and acquired by nonprofit or small business) is made subject to all the requirements of Bayh-Dole. It is not an exchange. It is the imposition of limitations on the patent property rights in subject inventions acquired by the nonprofit or small business.

“Additional” with reference to licensing is nonsense, too. March-in allows the government to require (i.e., request) march-in licensing of a given subject invention in certain circumstances, and if the organization involved refuses, the government can license on its own. “Additional” implies that there has already been licensing. For university-held subject inventions, perhaps 80%–more in some places–are never licensed. It’s a travesty that federal agencies don’t march-in early and often on all subject inventions unlicensed three years from patent issuance. One of the great tricks in the Bayh-Dole scam is that it has the appearance of federal patent law but there’s no requirement that any of the patent rights clauses are enforced. Federal agencies can ignore the public protections and there’s no remedy–all reports and licensing terms become a government secret and there’s no right of public appeal for federal agencies refusing to enforce rights or act on rights reserved for the public through the government.

There’s no requirement in Bayh-Dole that a subject invention must be licensed. The standard is utilization. March-in for nonuse is provided when there’s a failure to achieve practical application. Here’s march-in, item (1):

(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;

March-in is specific to “fields of use” for an invention. Use in one application, under one set of patent claims, does not free a contractor from the expectation of use for any other set of patent claims. Thus, if a contractor develops as a product an application specific to one disease, but has nothing going for any other disease (even though the patent lists a number), then march-in is indicated for all those other disease applications. Bayh-Dole does not say–“a contractor can tick off all those other applications when it gets around to it.”

March-in for nonuse or unreasonable use, then, depends on the definition of practical application. Here’s Bayh-Dole’s definition of practical application (35 USC 201(f)):

(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.

It’s a pain in the posterior cortex definition with typical Bayh-Dole qualifications and walk-backs. Let’s simplify to make clear the core of the definition:

(f) The term “practical application” means . . . that the invention is being utilized and that its benefits are . . . available to the public on reasonable terms.

If the invention in any field of use is not being used, then march-in. If an invention is being used, but its benefits aren’t available to the public (such as for research purposes), then march-in. If an invention is being used, but the benefits are not available to the public on reasonable terms, then march-in.

In no part of the known universe does “available to the public on reasonable terms” exclude price as one aspect of what’s reasonable. It’s clear that “on reasonable terms” has to do with what is on offer to the public and has nothing to do with whatever licensing, if any, might have also taken place.

Nothing in Bayh-Dole requires licensing. Nothing in Bayh-Dole, as it is now, requires contractors to license on reasonable terms (but for march-in, which we will get to). Parties can contract for licenses to inventions however they wish. Terms of the license is whatever the parties agree to. Reasonable has nothing to do with it. If one wanted to bound “reasonable” terms in contracts with something more like “on terms that are not criminal or violate antitrust law or revolt the conscience,” fine–but there’s no reason to include such a thing in a law, any more than adding a requirement that all living humans must swallow spit from time to time, or permit their hearts to beat.

For benefits available to the public–not just to some customers–then, the offer has to be public, the terms of the offer must be public, and the public that matters–to whom the offer is made–must view those terms as reasonable. Price is necessarily front and center. If many members of the public cannot afford a life-saving medication, and the medication has been priced 100x over the combined cost to manufacture plus a reasonable charge for development plus a reasonable profit, then the price is not reasonable and the definition of practical application is not met.

That’s pretty straight. There are other factors that go into “public reasonable terms” beyond price. An offer to provide access to benefits must be public–one cannot offer the benefits to some and not others, and the terms of the offer must be public as well–cannot offer secret terms. Finally, the offer must be non-discriminatory. One cannot give some a discount and not others, which amounts to running up the price for people with enough money to pay, and discounting for others until the price reaches a level at which they can pay. In short, that’s the essence of optimized price gouging–start at 100x a reasonable price, and then segment the market based on ability to pay to set different choke points for different degrees of desperation. Extract maximum income by backing off a price gouge with discriminatory pricing. The standard in Bayh-Dole’s definition of “available to the public on reasonable terms” must include price. If any price was reasonable, there would be no point in having the definition include reasonable terms at all. But “reasonable terms” is there, is directed at benefits available to the public, and necessarily involves price.

The simple answer, then, is that Bayh-Dole does set out a mechanism by which the price to the public may be (ought to be, must be) addressed for any products produced under a patent monopoly permitted by the federal government. What the article advocates is that the federal government should not enforce march-in when pricing to the public is unreasonable–or rather, that there should not even be march-in for price gouging. It is as if patents on subject inventions should be just like ordinary inventions and the public protections placed in Bayh-Dole (as anticipated by 35 USC 200) should be ignored. That’s way beyond re-interpreting the law rather than changing it–it is arguing that the law is successful when the government allows the public to get screwed over. It takes some moxie to call that sort  of thing “inspired.”

Here’s Allen’s version of the definition of “practical application”:

The definition of “practical application” includes that the invention is being made available on “reasonable terms.” This was seized upon by a group of critics to assert that the government can march in if a resulting product isn’t “reasonably priced.”

You see how he cuts out the “to the public,” slips the distinction between the invention being made available (that would be some form of licensing or sale) and the benefits of using the invention being made available (what the definition of practical application is directed to). In being selective, Allen misrepresents the law to make it appear to be concerned with the terms of university licensing to companies rather than terms under which benefits are available to the public. It’s clever, but the intent is to deceive not only you but also federal government policymakers, starting with NIST with its control over Bayh-Dole regulations. One may as well get out scissors, cut words from the text of the law, and rearrange them as you will, arguing that it’s not re-interpretation but just, um, clarifying the law or something.

It does not require a “theory” to point out that the definition of practical application necessarily includes reasonable pricing, and that if there’s not reasonable pricing, then the federal government should march-in and compel licensing to one or more organizations that commit to reasonable pricing. There is absolutely no purpose to including “reasonable” before “terms” in Bayh-Dole’s definition of practical application if “reasonable” is any price that a patent holder or licensee wants to charge the public. A “reasonable” price is not what a price setter considers reasonable, but what the public, taken as a whole considers reasonable. On the face of it, setting a price 100x above a reasonable cost to produce, recover development costs, and a reasonable profit to boot, is unreasonable as a matter of public response. One might take surveys to establish a quantified argument, if it had to be. I’m not in any doubt what the outcome would be, especially if one focused on the public that had a need of the medical product under discussion.

For that public–the ones for which the offer makes any sense–there’s no doubt that pricing beyond cost+development+reasonable profit is gouging, is unreasonable under Bayh-Dole. No amount of subsidy for poor people or developing countries forgives the baseline gouging practice. “We offer this medicine to poor people at a deeply discounted price so they can just barely afford it and thus we continue to make sales, and this forgives us for all the other price gouging we engage in to take money from insurance companies, states, and the federal government for people that can afford the maximum we can get away with charging.” That, in essence, is what Allen argues Bayh-Dole somehow intends, that Congress intended. It’s worse than nonsense. It makes a travesty of Bayh-Dole, which is hard to do, since Bayh-Dole is such an awful mess anyway.

Allen continues to misrepresent the law:

As discussed in my previous articles, three march-in triggers apply to the patent owner and the licensee. The other one, which is the bone of contention, is limited to the patent owner, which will normally be an academic institution.

This is wrong. Here are the targets to the four march-in conditions:

(1): contractor or assignee (practical application)

(2): contractor, assignee, or their licensees (health or safety needs)

(3): contractor, assignee, or licensees (regulatory requirement)

(4): licensee of the exclusive right to use or sell (US manufacturing)

None of these conditions involve only the patent owner. None of them are even specific to owning patents. Throughout Bayh-Dole, the targets are contractors and ownership of inventions and rights in inventions, not patents. This is basic stuff.

Given that Bayh-Dole takes in nonprofits and small businesses, and Reagan extended the same treatment, short of pre-empting the laws that do not permit it, to large companies, the contractor or assignee for march-in condition (1) won’t just be universities. At the time Bayh-Dole was passed, most universities, even did not take patent positions in inventions–they directed inventors to Research Corporation or to a university-affiliated “research foundation” (which then likely did a deal with Research Corporation). The target of Bayh-Dole was the nonprofit research foundations that did university inventor patent management. Universities was thrown in to include the University of California, MIT, and Stanford, essentially, since these schools had their own patent licensing shops.

More nonsense follows:

As academic institutions are not commercializing their discoveries, the language applies to the terms of the patent license, not to how a product is priced in the market. That distinction is ignored by the critics.

The “discoveries” are not “theirs.” The discoveries belong to the discoverers. It is when a university forces a discoverer to give up ownership of the discovery that the university can now claim it is “theirs.” Universities in general do not propose research, direct research, supervise research, or determine what, where, when, and how to publish.

Bayh-Dole’s standard is use, not “commercialization.” Bayh-Dole does not care how use arises–whether use by the contractor, open innovation, licensing, exclusive licensing, or assignment to some company; whether that use is commercial or non-commercial DIY; whether anyone makes money or doesn’t.

One might argue that if academic institutions “are not commercializing” the inventions they choose to acquire, they should not be acquiring them in the first place. But then, it’s really that if academic institutions are not meeting the definition of practical application–use, benefits, available to the people, reasonable terms–then they should not be taking ownership of inventions.

The language of practical application in march-in (1) is clearly directed at public terms, not the licensing terms between an invention owner or assignee and some other party, a licensee. Indeed, none of the four march-in conditions has anything to do with whatever terms an owner of a subject invention may have licensed rights. The license could be royalty-free, non-exclusive for all that (but for the fourth condition), and march-in would still apply if there was no practical application or health or safety needs weren’t being satisfied or a needs were not being satisfied with regard to a regulation requiring public use. To trigger march-in, licensing or not licensing is a non-issue. Non use, unreasonable terms, needs not met, breach of the US manufacturing requirement–those are the triggers.

The remedy for any march-in condition–that a license must be granted (by whomever–the contractor, assignee, licensee, government agency)–also involves “terms that are reasonable under the circumstances.” Those terms are not the “available to the public on reasonable terms” terms. They are the terms of the license that grants rights, not the terms under which benefits from use are made available. Terms of a license involve scope of exclusivity, if any, field of use restrictions, risk language, and consideration for the license. “Reasonable” here has meaning, too. It’s not whatever the contractor or assignee thinks is reasonable, but rather what the government and new licensees think is reasonable.

The “terms that are reasonable under the circumstances” is old language. Here’s the Kennedy patent policy (1963):

Where the principal or exclusive (except as against the government) remain in the contractor, unless the contractor, his licensee, or his assignee has taken effective steps within three years after a patent issues on the invention to bring the invention to the point of practical application or has made the invention available for licensing royalty free or on terms that are reasonable in the circumstances, or can show cause why he should retain the principal or exclusive rights for a further period of time, the government shall have the right to require the granting of a license to an applicant on a non-exclusive royalty free basis.

In the Kennedy policy, “reasonable in the circumstances” means reasoning away from royalty-free non-exclusive licensing–that there is some reason “in the circumstances” under which something other than royalty-free terms is indicated. If the contractor cannot show why such terms are reasonable–given there’s no practical application–and cannot show any other reason to keep hold of a patent monopoly, then the government can open the invention up for royalty-free non-exclusive licensing. The offer of “reasonable” terms then had better result in something because otherwise folks will wait for the royalty-free version coming sometime after three years from patent issue.

When Harbridge House in 1968 examined contractor use of inventions made under federal contract, it found that a significant majority were using inventions within three years. Time to use dropped off significantly when an invention was made by a contractor without commercial operations–a contract research organization or a university. The impression one gets from the Harbridge House report is that other than in isolated industries, patents are of little importance and if one wants rapid use of inventions, it’s best to contract for research with companies already in the business or have federal agencies hold all invention rights until practical application has been achieved and then make the product available along with all its inventions, licensed royalty-free. Those were the methods that worked. The Bayh-Dole approach–involving universities that didn’t practice anything–was about the worst possible alternative.

The Nixon revisions to the Kennedy policy (1971) change the text a bit–the government may require either a non-exclusive or exclusive license “on terms that are reasonable under the circumstances”–this, rather than royalty-free, non-exclusive terms. It’s actually a huge leap–setting the stage for Bayh-Dole’s authorization of federal agencies to grant their own exclusive licenses (and on secret terms). Now, instead of reasoning away from royalty-free non-exclusive terms (and those are the essential terms for any license–scope and consideration), Nixon has it be whatever terms the government thinks are reasonable. It’s really a very different policy, though the textual changes seem innocuous. As the commentary on the change has it, non-exclusive royalty free is included as a possibility within “reasonable under the circumstances.” It’s just a whole different treatment of circumstances.

The “reasonable” in “terms reasonable under the circumstances” in Bayh-Dole then indicates “reasonable” with respect to what otherwise would be royalty-free, non-exclusive but something about the circumstances leads one to think it is reasonable to charge something for the license.

There is a reason, then, why Allen’s “critics” of Bayh-Dole ignore Allen’s distinction: his is a spurious distinction. In Bayh-Dole, there are two very different conditions for “reasonable terms” and Allen conflates them. One has to do with practical application. That involves terms reasonable to the public. By implication–terms for which there is a reason for some price rather than no price but no basis for a price for more than cost recovery and a reasonable (from the public perspective) profit.

Now there’s a group of patent advocates that argue that if companies cannot price gouge on products made from Bayh-Dole inventions, then universities won’t be able to license their inventions to those companies. That may well be true. It may also be true that it is not in the public interest that universities focus their attention on licensing to such companies. Even so, the “reasonable terms” in the definition of practical application does not have to do with a rationale under which universities license exclusively to companies with a predisposition for price gouging–the reasonable terms standard has to do with what the public for which the offer of benefits is meaningful sees as reasonable to gain access to that benefit. It is not “reasonable” in the sense of “Oh, I see, you really must price gouge me, a patient suffering from a disease that requires your medicine, so that you will have the incentive to take a license from a university, which has no incentive to license unless it too can make a lot of money, and I see that as a result you spend a lot of money developing a product all on your own because everyone else is excluded, and it is only through such dealings that I will ever have the opportunity to obtain this medicine at all–in part because universities refuse to deal with companies committed to something other than price gouging. I guess that is reasonable.” It’s not that sort of reasonable, I assure you.

Allen’s distinction by contrast is mistaken. March-in conditions have nothing to do with licensing terms and everything to do with the effects of patent monopoly positions on the public. If the public interest is not served, then government-mediated licensing. That isn’t necessarily a gloriously inspired remedy as far as public policy goes, but advocates for Bayh-Dole have nevertheless claimed (because once The Economist published a piece that said so–and later walked back) that the law was “inspired.”

The NIST green paper then adds to the stupidity by proposing regulations that prevent march-in for contractor licensing involving pricing. But that’s not even a condition for march-in. NIST is just too dumb to be involved in Bayh-Dole matters. Just like their change to the written agreement requirement (37 CFR 401.14(f)(2)), itself a non-authorized addition to the Bayh-Dole standard patent rights clause, under which inventors are to be made to agree to assign to contractors subject inventions–but those are inventions that the contractors must already own to be subject inventions. The Supreme Court ruled that Bayh-Dole is not a vesting statute. There’s no authority then in the law to force inventors to turn inventions into subject inventions, or to force inventors to use the patent system.

It’s NIST nonsense like this that is now at the heart of $50B in federal contracting for research. It’s like having a drunken untrained person dressed like a doctor in the operating room insisting on controlling the surgery by messing with the equipment.

Allen accuses Professor Thomas of attempting to rewrite the history of Bayh-Dole, but is Allen that is engaged in this effort.

Allen depicts the “intention” of Bayh-Dole as if that intention was whatever Senators Bayh and Dole later said, however ghostwritten, was their intention. That’s not how law works. That direction lies autocracy and private law. Sun King sort of stuff. Allen rails that anyone offering a reasonable interpretation of the law is somehow re-interpreting the law because, well, Allen has operated with a misrepresentation of the law for a long time now and anything that calls him out on it must be cast as a “re-interpretation.” Really, it’s just that Allen has been wrong about Bayh-Dole for a long time, and runs in circles where he will never be called out for it. Meanwhile, Senators Bayh and Dole get a free pass to make up anything they want about what they intended and that somehow must control interpretation of the law.

Senator Bayh tried that trick with an amicus brief to the Supreme Court in Stanford v Roche. Bayh argued from what he intended (see pages 10, 14, 15, and 23, for instance: “the drafters intended that individual inventors themselves would not own title to patents developed with federal funds”). The Supreme Court refused to go along with such reasoning–they looked to the wording of the law to ascertain what Congress intended, not to the later private memories of those who sponsored the bill. What I take to be Allen’s own amicus brief in the case, via BayhDole25, is an assemblage of such untruths that it would be impossible to write the commentary to untangle each and every one of them. It is an amicus brief from another university, not parallel with this one, in which personal fantasy presented as fact takes the place of history, law, measures of success, and–well–reason.

Not only Senators Bayh and Dole, but those most closely associated with creating the law rejected the Arno/Davis theory. Norman Latker, former NIH patent counsel, and Howard Bremer at the Wisconsin Alumni Research Foundation, who helped write Bayh-Dole, sent statements to NIH opposing the proposed misuse of march-in rights as contrary to the law. I did as well.

Beyond Senators Bayh and Dole, it is these three individuals at the heart of the scam called Bayh-Dole. It is entirely plausible that they would not want anything in Bayh-Dole to prevent price gouging, profit-taking, patent speculation, patent trolling. Bremer bragged publicly that he intervened in the drafting of march-in protocols to make sure march-in would never operate. Latker had designed the IPA program master agreement to build the appearance of public protections on exclusive licenses but made sure that all could be waived, ignored, or easily circumvented. Latker did the primary drafting of Bayh-Dole and later said he based the law on the IPA program agreement. Allen has continued the years of misrepresentations, misquotes, fake history, misleading statistics as if dealing with the public is just another occasion to engage in political spin.

It should be clear to any fair person which side is attempting to rewrite  history, but unfortunately in our current political climate, fair people are hard to find.

Bayh-Dole makes clear that a standard for march-in is that the benefits of use of a subject invention are not available to the public on reasonable terms. Those public reasonable terms necessarily involve price. If there’s price gouging, then the government is to step in. The government does not dictate price. It is limited to creating competition by licensing and ensuring that those licenses are granted on reasonable terms–reasonable in the circumstance of marching-in to create competition and to address nonuse, unreasonable use, failure to satisfy public needs, and failure to manufacture substantially in the U.S. March-in, however, has nothing to do with the terms under which a contractor or assignee independently licenses subject inventions. Certainly the definition of practical application has nothing to do with “reasonable terms” in patent licenses–it has to do with the downstream benefit to the public. The terms of a patent license can be whatever just this side of antitrust illegal or can be nothing at all–it doesn’t matter. What matters is the effect on the public. That’s what triggers march-in.

The remedy for unreasonable public terms is march-in to force licensing–and that licensing is to be on reasonable terms under the circumstances, which necessarily includes remedying the conditions that gave rise to march-in. Those are the “under the circumstances.” If the circumstance is price gouging, then the terms of any march-in license surely must address price gouging. The terms do not have to fix a price, but they certainly must deal with price, no matter what Allen asserts was in the late Senator Bayh’s head about it. At march-in, the government chooses the licensee(s) and sets the terms of the march-in license, and those terms must address price gouging. It is therefore certain that the government also must address price of product offered to the public. That’s pretty much the whole point of march-in under condition (1).

Allen’s argument ends up being against Bayh-Dole and for something else–say, that there should be no public accountability as to price for anyone speculating on patents on inventions made in work represented as being in the public interest. Interesting. But would any fair person go there with him?

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