The use of the patent system for federal research results, 11: Safeguards that don’t guard

We have been working through Federal Security Agency order 110-1, which in 1952 introduced an agency-wide policy for inventions made in public health research. The core of the policy was to prefer open access for all such inventions, but then the policy goes on to say that in some cases maybe exclusive rights might be better, so long as there are safeguards that go with those exclusive rights. Federal officials have been fighting about this fork ever since. Bayh-Dole happened when those opposed to open access as the default slipped something through.

FSA order 110-1 added two more features. First, it designated the unit heads to make decisions in those cases in which there was some doubt about whether exclusive rights might be better. That sounds good, but it’s like putting in place a procedure to pick the winning lottery ticket, designating unit heads to do the picking–all that’s needed is that they follow a procedure. Considered this way, it’s just dumb and would appear dumb if it weren’t wrapped in administrative rhetoric. It’s difficult enough to see the future and all the contingencies of intellectual property rights, but it’s not much possible when one asks a federal agency unit head to do the seeing. How would anyone know in advance whether allowing a private contractor–eventually, perhaps, a for-profit company–hold exclusive patent rights in a given invention will result in adequate commercial development and no other alternative will not (that’s the force of the necessary in 110-1’s way of putting things)?

Even if one tried open access and there was not adequate commercial development to support widespread distribution, it’s still not necessarily the case that patent exclusivity is necessary so that there will be such development. One would still need to evaluate a range of alternatives, such as the federal government itself funding development for widespread distribution, as the Attorney General recommended in 1947. That was a reasonable recommendation given the arguments the Attorney General made against the federal government suing citizens for use of inventions, playing favorites with companies, policing license agreements, taking a financial interest in exploiting inventions made in work to address public needs, and putting the force of the federal government behind efforts to exclude all others from practice any such invention. If FSA 110-1 makes widespread distribution a purpose of the federal government, then what is it that prevents the government from also doing the development work?

Why then would it be necessary that such development work be done by a private company? And if the federal government does not view widespread distribution as so important that it will fund development, what prevents an industry consortium to share the development costs and allow access on a standard essential claims basis? What makes it necessary to prevent such consortia from forming in favor of a single company excluding all others? Why not a nonprofit foundation that supports research and development? And these days, why not, even crowd-funded development. If an art student in Finland can crowd fund raise over $100,000 to print an edition of her web comic which is freely available on line, surely there would be interest in raising millions for a cure for any form of cancer. If exclusionary patent practice is going to be necessary, then it must be compelling over the alternatives, which have to be found to not work. And certainly, we are nowhere close to making an argument that because, in some one instance, exclusive rights were involved in some invention that did become a product, those exclusive rights were the sole cause of the successful creation of the product or even the sole cause of the decision to spend money on development. We are nowhere close, even, to making an argument that in a similar situation, exclusive rights are necessary because once in the past someone decided exclusive rights were necessary.

If you argue that it’s really difficult to show that exclusive rights were necessary, or were indeed the sole cause, the great catalyst, the thing but for which no development would have ever happened–argue that way and you see the problem with the policy requirement that an FSA unit head have the insight to make such a determination before anything has even happened.

We are very far away here from making the argument that because in some instances exclusive patent rights were involved in licensing and some of those instances resulted in commercial development of product, then the default for federal invention policy should be private exclusive control of patents. But this is pretty much the argument Norman Latker made–because he had a few instances of exclusive licensing, that’s what the default ought to be for all federal agencies, for all funding purposes, for all contracting relationships, for all the spreading around work, and for all the unmet public need.

But FSA order 110-1 does not stop with this simple form of “necessary,” intractable as it is. 110-1 backs away from: will exclusive rights be “necessary to foster an adequate commercial development to make a new invention widely available” and substitutes something very different: will an invention with exclusive rights be “more adequately and quickly developed for widest use.”

The first version of the policy asks a limited question–are some exclusive rights be necessary to get an invention distributed widely? Embedded in this question is the idea that for such exclusive rights to be necessary, there must be some further development of the invention that enables widespread distribution. It is to protect the investment in this development, determined to be necessary, that the exclusive rights come into play. The question is not whether the invention will be used at all, but that in being used, it will also be developed in a form that permits widespread distribution, if such a form is a precondition to widespread distribution. In other words, is a mass produced form of the invention necessary and does it require special spending to create such a mass produced product? These are questions that require evidence from the field, based on what the invention does and what forms it might take as a mass produced product.

The second version of the policy asks a question that can be decided without reference to specifics of any given invention. Imagine an invention. Will it be developed for “widest use” by a company or not? Sounds plausible that a company is needed. Will a company with exclusive rights do a better job than a company that doesn’t have exclusive rights and could see its investment lost because other companies can move in once they see there is a real market and see how a successful product is made, and then free-ride on this information to make product and not have significant development costs to recover.

It’s really a nonsense question, but on the surface, it sure does sound right that a company with exclusive rights will be motivated to spend the money to develop a mass producible product–free of free-riders, free of price competition, free of feature competition, free of being combined with other products and features that the company does not control. But this is just fantasy–it includes great sounding motivations and ignores all the alternatives with other motivations. Perhaps companies recognizing a common platform will be motivated to collaborate on the platform, saving a great deal of money and resolving IP issues before they ever start to cause delays. Perhaps companies taking exclusive positions get isolated and are forced to develop without support, more slowly, and outside what will become standards. Perhaps a company with exclusive rights will be less motivated to develop quickly than a company in a race to be first to market. Perhaps a company with exclusive rights will be motivated to produce a limited or poorer product. It’s like debating what Dorothy was thinking in The Wizard of Oz. It doesn’t really matter–Dorothy is a fiction. The only thinking she does is what’s reported. There is no other thinking. There’s no other possible way for things to go, because Dorothy is only that. Same for imagining companies, as if they have thoughts, or even company CEOs, and make assertions for what sounds plausible for those CEOs to think. Harbridge House reported in 1968 that many companies did not care for patents–many CEOs then–so it would be strange to task a public health unit director with the task of fantasizing about what some CEO might think about exclusive rights.

It goes the other way: fantasize about exclusive rights and then go out and try to find a CEO who likes your fantasy. Another way: fantasize an approach and then try to prove your approach was the right fantasy. Another way: you will attempt to attract companies that have a business reason to take your offer (with whatever fantasy baggage you include). All such thinking reverses what FSA 110-1 starts out with–open access, but limited exclusivity if open access does not result in widespread distribution, widespread distribution is important for public health, and exclusivity is necessary to achieve such widespread distribution. Instead–will exclusive rights do better at achieving the widest distribution? Instead of situational facts, substitute administrative fantasizing about the role of patents. If you believe in patents, and in motivating people to work in public health with the maximum opportunity to profit, then the answer to the second version of FSA 110-1 does not require any situational facts.

The FSA 110-1 policy then declares open access to be the preferred default but sets up an impossible policy decision in which exclusive rights is the implicit default. “We would prefer open access, but we can’t help ourselves in thinking that in general exclusive rights via patents will be better.” The rider on the end of this is that “exclusive rights will be okay so long as there are safeguards so that the full power of those exclusive rights is not used to run up the price or place unreasonable terms on access.” But safeguards mean that the patent is not an ordinary patent, that the federal government has to monitor the use of each such patent, have access to the activities surrounding each patent (licensing, development, products, terms, income), and take action to respond to anything not compliant. Safeguards on the use of a patent mean that the patent holder does not have the same patent property rights as those of an ordinary patent: there’s a working requirement (the patent holder must use the invention, or see that it gets used); there’s a pricing requirement (financial terms cannot be excessive and other conditions must be reasonable), and there’s a limitation on enforcement (if widespread distribution is the objective, then suing to prevent widespread distribution runs against the purpose of allowing the exclusive position to “more adequately and quickly” achieve the “widest distribution.” One would have to make a special argument to show that preventing distribution by others will achieve the widest distribution more quickly and more adequately.

At each point, FSA 110-1 makes a public gesture and then builds in a back door to avoid the gesture. Open access, but maybe exclusive rights. Or maybe just do the calculus each time to see that exclusive rights will almost always appear to operate more adequately and quickly for widest distribution, but with safeguards. Or, maybe with safeguards. Or with safeguards that federal agencies can choose not to enforce as they think to be in the public interest. And if dropping safeguards is the only way left to induce anyone to take the offer of patent exclusivity, then the appearance of safeguards but in practice no safeguards at all–not even public information concerning development, deal terms, benefits, and income. All this is implicit in FSA order 110-1 and realized in Bayh-Dole.

Consider “safeguards” in light of present university research invention practice, shaped in wicked ways by claims made about Bayh-Dole. It is common (to the extent that there is any licensing) that a university will license an invention exclusively (that is, assign via an exclusive license) to a startup that then uses the fact of the license to attract private investment. There you have the claim that exclusive rights were necessary for development because they played a role in attracting investment. Still, nothing in the abstract shows that exclusive rights were necessary for all investors–just that the ones that did invest decided that exclusive rights were not a deal breaker. But let’s play along. Here’s what often happens. Once the university startup has its investment, it shifts the work to a product outside the scope of the licensed invention, and often before anything is completed the startup sells itself to a company interested in the startup’s technical personnel or to the startup’s non-licensed technology or in limiting the near-term market effect of that technology, or to avoid being cut out access to the technology and potential future developments.

Whatever the acquiring company’s motivations, the initial investors make their money at the exit, the invention and its patent(s) get used as assets to increase the startup’s valuation and to attract engineering talent, and then the company gets sold, invention undeveloped. But in such cases, does the university pursue a claim for breach of the licensing deal, for failure to develop the licensed invention for widest distribution, or for any distribution? No. Generally, never. Getting a stock cash out at acquisition is defined as a success–the patent gets used to attract investment for development, but not to develop the invention that was licensed, the public invention, the not ordinary invention. If a university were to enforce its claims, so the argument goes, then that would sour the marketplace for such investors to operate. They would avoid university patent deals because they would be constrained to develop what they had licensed rather than wheel and deal on whatever makes the startup valuable for acquisition. Safeguards, if used, according to this way of thinking, destroy the opportunity just as surely as would open access, again according to this way of thinking.

FSA order 110-1 then introduces a set of impossibles–that unit heads can determine in advance that patent exclusivity will work more adequately than open access, at least if there are safeguards, which come to think of it, cannot be used–impractical, invasive, scaring away investors, ruining the whole scheme. And since–so the argument goes–this scheme is the only thing, the necessary thing, by which the public may benefit from federally supported work to address unmet public needs, then there cannot be either open access or enforced safeguards attached to patent exclusivity.

The “safeguard” in Bayh-Dole for speculative ownership chains that never do produce product based on an invention made in federally funded work is 35 USC 203(a)(1) march-in for nonuse of the invention–a failure to timely develop the invention to practical   application, to timely use the invention so that the benefits of use are available to the public on reasonable terms. However, if “use” of an invention might include using a patent right to help a company attract investment to produce some other product, not within the patent right, rather as a kind of speculative catalyst, then there would be no mandate to insist that an invention actually be practiced. Indeed, insisting that an invention be practiced might sour the prospect that patent rights might be licensed so that these other products could be, in time, produced, even if the patented invention never is used actually. Investors would not be able to trade on the net present value of the potential of an invention to become profitable, backed by a patent’s exclusionary right over a potentially broad set of claims–a broad class of inventive stuff, any one or two instances of which (it doesn’t matter which) could, in theory, become wildly valuable, and even more so if when so desired is subject to the patent ownership claims of whomever has been fortunate enough to have taken the risk to obtain that patent.

Nonuse march-in has never been enforced under Bayh-Dole, despite apparently tens of thousands of patented subject inventions going unused in the Bayh-Dole era. We haven’t seen tens of thousands of products–just a few hundred, apparently–and we haven’t seen tens of thousands of march-ins. We might ask whether this is the outcome Congress intended–that universities would hoard inventions, withhold most from practice, troll what industry uses without taking a license, and licensing (rarely) to assign inventions to chosen companies, which then are free to exploit public health needs without safeguards, without a right of public appeal, without even a right to public information pertaining to the status of the invention’s development and terms of any licensing.

Within this private ownership version of the use of the patent system–Possibility 4 (flip without public conditions)–inventors at nonprofits must be forced to give up their rights in inventions (but for a right to receive some share of royalties from whomever does obtain the invention rights, if they ever make money in the form of royalties) to an organization willing to trade those inventions exclusively to people actively seeking the capital of investors. It is easy to find common situations in which a patent holder never receives a royalty–consideration paid for the grant of a license–and still gains value for holding the patent. A company, for instance, may gain value by preventing others from practicing an invention, and thereby improve the situation for its products or delay the need to invest in new facilities that producing product under the patent would require. A company, too, may sell product under its patent right, and the income from such sales is not a royalty. A company’s value may increase as a result of holding the patent, and that value may be realized by selling off the division of the company with the patent, or selling the company itself with the patent. A patent may be cross-licensed–no money changes hands–to gain access to patented technology held by other companies. Or a patent may be contributed to a standard, and in making the contribution, a company is positioned to shape the direction for further technology development, giving it tactical–and presumably, financial–advantages.

Finally, a patent may–if used to exclude others–create situations in which a company or other organization attracts research contracts to develop an instance of the invention or to do work to design improvements which in turn may obsolesce the original invention in favor of something new. The company or organization makes its money in the form of contract services, and need not license the original invention, or may license it royalty-free as part of the research deal, and thus may never receive royalty payments. Sharing royalties with inventors sounds nice–but there’s a number of ways to avoid receiving royalties, and therefore there’s a number of ways to cut inventors out of the money.

Even Bayh-Dole recognizes this distinction between royalties and any other income. Bayh-Dole stipulates that nonprofits must share royalties with inventors (35 USC 202(c)(7)(B)), but separates royalties from “income earned with respect to subject inventions” (35 USC 202(c)(7)(C)). Nonprofit inventors get paid only if the nonprofit or invention management firm licenses their invention. The inventors don’t get paid if there’s no license or the license is royalty-free. Under Bayh-Dole practice, inventors don’t even get paid to assign their inventions to universities in the first place. There’s no obvious consideration for such assignments–university administrators demand the assignments as a condition of employment or use of university resources or, well, just because they can.

FSA order 110-1, then, by creating the appearance of a middle ground in which patents on inventions made in FSA-funded health work might be exploited for their exclusionary value but with safeguards, lays the foundation for executive branch officials committed to the idea that a patent without its full power to exclude all others is a wasted asset to work to overcome the safe harbor of open access and in its place make a default of Possibility 4 (flip without public conditions). To do that, they proposed Possibility 3 (flip with public conditions) but made the conditions impracticable if not impossible to enforce–by making those conditions waivable by the agency, creating procedures so difficult that they could not succeed or succeed in the time frame in which they would be needed, suppressing public reporting of invention status and licensing terms, and precluding any form of public petition requiring agencies to act on the safeguards provided to them.

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