Necessary Federal Exclusive Licensing

The Harbridge House report in 1968 mused that based on survey responses from nonprofit patent administrators,

. . . the inventions must frequently arise from basic research and require substantial private development before reaching the stage where they are commercially useful. Some measure exclusive rights appears necessary motivate licensees invest the work necessary commercialize these inventions.

The report ignores the idea that companies might work together to develop inventions, as they do in research consortia or standards organizations. The report also ignores the role of government in funding development (even the the report points out that various federal agencies had a 100% commercial utilization rate when they funded development “to the point of practical application”). Same for the role of nonprofit foundations and wealthy donors or community donations (now we would talk about crowd sourcing rather than fun runs to raise money).

The report also hold back–“some measure” of exclusive rights is not granting the exclusive right to make, use, and sell for all instances of a claimed invention (which may run to tens to thousands of instances, only some of which have been demonstrated and only some of which might ever be used by a single developer). “Some measure” indicates limitations–the exclusive right to sell, but not the exclusive right to make or to use; a limitation on field of use; a limitation on territory; a limitation on the duration of exclusivity. “Some measure” may be necessary (if nothing else works), but it’s the “some measure” that’s necessary, not a wholesale trade in the entire patent monopoly.

The Harbridge House report is used by a federal committee (that includes Norman Latker, patent counsel at the NIH) to change the Kennedy patent policy in 1971. A summary of a response to survey questions is turned into fact-finding:

Section 2 has been amended to insure that the licensing recommended in this section is interpreted as being broad enough to include some form of exclusive as well as nonexclusive rights. The Harbridge House Study clearly showed that there are circumstances under which some degree of exclusivity will be necessary in order to achieve commercial utilization of some inventions.

The comment uses “some form” and “some degree” of exclusivity without putting forward the case that the federal government might consider selling patents on publicly funded inventions or granting exclusive licenses to all substantial rights, which amounts to the same thing, a sort of conditional sale managed through a document labeled “exclusive license.” The comment turns a report of survey results into a “clearly showed.” And while the Harbridge House report posited that there could be some inventions for which “some measure” of exclusivity would be necessary, it did not identify any, even as it discussed inventions that had been licensed exclusively. The report also did not take up directly whether the federal government should get into the business of dealing in patent monopolies.

The AG’s report of 1947 made a substantial case that the federal government should not deal in patent monopolies. What inventions held by the government should be developed by the government or non-exclusively with no conditions and no governmental interest in payment. That approach had a history of working. The government had no mandate to start suing its citizens for practicing inventions made in federally supported work and no need to take on the burden policing licensing agreements, having imposed conditions or payment requirements. And the government had no reason to play favorites or give any particular company the right to two decades of dominance in a given area that previously was the subject of public funding. The change to exclusive licensing introduced in 1971 by the Nixon patent policy ignore the AG’s report in favor of the compiled results of a survey.

Bayh-Dole, also drafted by Norman Latker, takes exclusivity a step further in 35 USC 207 and 209. Section 207(a)(2) authorizes–in an act of Congress, no less, amending federal patent law–federal agencies to

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;

Without out and saying it, this provision authorizes federal agencies to assign federally owned inventions. An exclusive license of all substantial rights in an invention operates as an assignment. The owner of an invention has the right of enforcement. If the licensee has the right of enforcement, then the exclusive licensee of the patent is also the owner of the invention. This is a huge change, broken cleverly into technical details so it is likely not to be noticed.

Section 209 then takes pains to identify when such exclusive licenses may be granted. It’s long, involved, painful. We won’t work through all of it here. There are four primary conditions that all must be met:

(1) the license is a “reasonable and necessary incentive” to spend money to develop the invention or promote its use by the public.

This condition is a tautology–granting the license will be an incentive (how could it be otherwise?). This conditional also twists the Harbridge House findings–that federal agencies needed to both develop inventions for practical application and promote their use to the public to persuade companies to step in and build product. But this has been twisted to an “incentive” for an exclusive licensee to “promote the invention”–essentially to advertise the invention. Now look at it–either spend the money or advertise the product. Only one of these two prongs has to be true. It’s easy for a company to say, “without exclusive rights, we won’t have a “reasonable and necessary incentive” to do so. Meaning, if we don’t get exclusive license we don’t have the incentive to take a free, non-exclusive license. Or, another way, we won’t bother unless we see a way to make an outrageous profit–in which case, even if it costs us nothing to develop, you can grant us an exclusive license anyway to give us the incentive to advertise the product. It’s just twisted.

(2) the public will be served, based on the licensee’s plans based on (1)

Under Bayh-Dole federal agencies cannot grant any license without the licensee submitting a plan for development or marketing–those two prongs of (1)–even if the licensee only wants to use the invention. Not allowed–see 35 USC 209(f). Bayh-Dole not only authorizes exclusive licensing, but also it suppresses non-exclusive licensing by imposing requirements for plans and expenditures, as if each licensee was by default an exclusive licensee.

(3) the scope of exclusivity is “not greater than reasonably necessary to provide” the incentives identified in (1)

We are back to another form of “necessary,” but here it’s a “reasonably” necessary–whatever that means. Perhaps that is merely “expedient” or whatever the agency wants. “Scope of exclusivity” answers to the “some measure” of Harbridge House and “some degree” of the comment justifying the Nixon patent policy change. It’s pretty much a direct line, but with the political twists to remove things from context and put them into a condition that federal agencies are authorized to deal in patent monopolies as if they were private entities, or to take a financial interest in such inventions by playing favorites and supporting those favorites in maximizing their competitive advantage.

(4) granting the license won’t “substantially lessen competition” or “create or maintain a violation of Federal antitrust laws

How could granting an exclusive license not “substantially lessen” competition? And what is the standard here for “substantially.” The Supreme Court in Dubilier reasoned that since an invention was unforeseen, there could be no competition with regard to it. The public lost nothing because it could not even imagine or anticipate having the invention until it has been made. In one sense, then, no exclusive license granted by the government could ever lessen competition unless people were already using the invention and infringing on the government’s rights–in which case, the government has no business granting an exclusive license, even if doing so would provide an incentive for the exclusive licensee to invest its own money.

Do you see? Even if others are already investing their money to develop an invention–but without a license, federal agencies are authorized to grant an exclusive license specific to the plans of the chosen, favored exclusive licensee. That licensee then may be granted the right to shut down those other users of the invention. It’s a corruption of the idea of federal exclusive licensing as something “necessary” for some inventions to be used at all. Here, in Bayh-Dole, any invention for which for any given licensee an exclusive license might be an incentive to either spend or promote, can be licensed exclusively.

When the federal government operated on an open access approach, it had no basis to suppress public use to favor its licensees. Contractors could be highly selective about what inventions they retained rights to, knowing that the federal agencies would release rights open access and the contractor would continue to have full access to the invention. Indeed, the argument for federal patenting was that if the federal government failed to patent, then another inventor, starting later but maintaining diligence, could obtain a patent on substantially the same stuff, blocking open access. Thus, there was a rationale for the federal government to acquire inventions, obtain patents, and then not enforce the rights–no conditions, no payments, no exclusivity. That kept public things public.

The “necessary” of the Harbridge House report was based on survey responses. Perhaps there was a class of inventions for which development was needed, but without any further inventive work, and the inventions were so “basic” and so unessential–merely ingenious–that government and philanthropic organizations had no interest in supporting development. Perhaps that class would benefit from “some measure” of exclusivity, but not a wholesale trade in patent monopolies.

The “necessary” of the Nixon changes was directed to federal exclusive licensing and kept it at “some degree” of exclusivity, but now suggestive of any invention made in federal programs, including mission-directed ones, not merely the ingenious, isolated inventions of academics for which merely sponsoring new science was the public’s goal. The “necessary” in Nixon meant–essentially–“where the companies involved refused non-exclusive access and the federal agencies declined to fund development, even when they could, even when development was within their public mandate.” One might think that the federal government, in dealing with patents in this new way, was involved in antitrust matters–even if antitrust law had not considered federal agencies as engaging in antitrust behaviors. Granting an exclusive patent license in a publicly important invention–assigning the invention–to any company with market power would one think be on the borders of antitrust.

The “necessary” of Bayh-Dole is merely federal agency expediency. “A reasonable and necessary incentive” is merely an incentive chosen by the federal agency. There’s no demonstration that the exclusive license is the last remaining option, the others having been all attempting in some meaningful way. There’s no determination that others are not already using or developing a given invention, so that some favorite’s expenditures on development ought to be in a competitive, open, (and even collaborative) environment. No, so long as the exclusivity acts as an “incentive” for the licensee to spend money (or, not–promoting public use is all that’s required), a federal agency can deal in patent monopolies. In essence, the federal government can issue patents to itself and then re-issue those patents to whomever it wants. The Constitution does not give such power to Congress, but federal agencies can work the system so that inventors must give up their Constitutional rights, and federal agencies can then issue patents (under the ruse of exclusive licensing that amounts to assignment of the claimed invention) to whomever they want, not based on the merit of inventing but based on approval of a plan that smells nice to the federal agency.

We have come a long way down a rotted road in federal disposition of inventions made in federally supported research.

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