The Bayh-Dole Public Bargain, 1

Bayh-Dole is directed at federal agencies contracting for research or development with small businesses and nonprofits. The law requires agencies to use a default patent rights clause in every funding agreement unless an agency can justify a different clause. The heart of the public bargain is 35 USC 202(a):

Each nonprofit organization or small business firm may, within a reasonable time after disclosure as required by paragraph (c)(1) of this section, elect to retain title to any subject invention . . .

The rights of the nonprofit organization or small business firm shall be subject to the provisions of paragraph (c) of this section and the other provisions of this chapter.

There are two parts to this bargain.

(1) A subject invention is an invention that is or may be patentable (or plant variety) which the nonprofit or small business has acquired. The nonprofit or small business may keep title to a subject invention against any claim of federal government ownership, provided that the nonprofit or small business timely discloses the invention to the federal agency.

A contractor may keep title to a subject invention if properly disclosed. 

(2) Bayh-Dole is part of federal patent law. The second part of the bargain alters the property rights in patents on subject inventions. Think of it as you would a covenant that runs with real property. The rights–the patent property rights–are subject to the provisions of Bayh-Dole–including the provisions specified for patent rights clauses incorporated into funding agreements. In a sense, the apparatus of the default patent rights clauses is something of a confirmatory notice that the statute has placed special conditions on the patent property rights covering subject inventions. Patents on subject inventions are not ordinary patents. See 35 USC 261 for confirmation:

Subject to the provisions of this title, patents shall have the attributes of personal property.

Patents on subject inventions are subject to the provisions of Title 35 (“this title”), including the provisions of Bayh-Dole (35 USC 200-212).

Patents on subject inventions are not ordinary patents.

That’s the Bayh-Dole deal with regard to federal contracting for research or development with small companies and nonprofits. You can keep inventions that you acquire, but patents on those inventions don’t have ordinary rights. The key differences in these non-ordinary rights are that you must use the invention you have patented, you must make the benefits of using it available to the public, and at a reasonable (competitive, generic) price and with other reasonable terms, and if you are a nonprofit, you must use royalties and income earned, after expenses incurred in administrating subject inventions, for scientific research or education–and you must pass this same requirement on to anyone that you assign a subject invention to (where an exclusive patent license may also assign the underlying subject invention if the license exclusively grants all substantial rights in the invention).

A patent holder (and assignee, or exclusive licensee) must offer benefits of use, such as a product, as if there were competition, even if the patent is used to suppress competition.

Nonprofits and their assignees (and some exclusive licensees) must use all net income for scientific research or education.

Let that sink in.

That’s a pretty interesting bargain! Feel better? Good! Now let’s discuss things in greater detail.

Bayh-Dole’s statement of policy at 35 USC 200 lays out how these patent rights on subject inventions differ from ordinary patents:

The patent system is to be used to promote utilization of inventions made in federal work.

For patents on ordinary inventions, the holder of a patent has no obligation to use the claimed invention, or to license it to others to use. An inventor or company assignee can sit on the patent for the full term, too bad. But a patent on a subject invention is not ordinary–there’s a working requirement that the patent holder must use the invention, or allow others to use it.

Clearly, then, it is difficult to see how a patent could be used to exclude all others and so prevent a subject invention from being used. One would have to demonstrate that excluding others that are or would use the invention somehow is necessary to promote the use of the invention. One would think that this would be a primary defense to any action claiming infringement of a patent on a subject invention, especially if the plaintiff was, say, Caltech and wasn’t using the invention itself, just trolling industry for using the invention.

The patent system is to be used to promote free competition and enterprise. 

The ordinary way of describing a patent right is that a patent gives its holder the right to suppress competition by excluding others from making, using, and selling products based on the claimed invention. An inventor or company assignee does not have to exclude all others–that’s a choice not a mandate–but that’s the ordinary expectation.

A patent holder might, for instance, dedicate patent rights to a standard and so not enforce the patent, except against those who fail to comply with the standard. Or a patent holder might grant non-exclusive licenses to anyone who requests a license. Some very big companies do just this–they would rather have others using their technology, technology they know, rather than have everyone else coming up with their own improvements and then blocking Big Co or worse, designing around Big Co’s patents and forming an industry standard that locks Big Co out of the market, as the VHS standard did to Sony’s tightly held, patented Betamax video format.

But the patent rights in subject inventions are not ordinary. Here, too, we see a significant reversal of ordinary patent practice. The holder of a patent on a subject invention must promote “free competition.” That’s not just “compete with other companies by excluding them from using the invention”; rather, this policy provision indicates that patent rights are to be used. The default uses then look like dedication to a standard, or FRAND–fair, reasonable, and non-discriminatory–non-exclusive licensing. Those are the default patent rights for patents on subject inventions. Very not ordinary.

The law must ensure that the government obtains sufficient rights to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions

For ordinary patents, the federal government gets no rights. Yes, under 28 USC 1498, if the federal government infringes a patent, the patent holder can go to the Court of Federal Claims and demand “reasonable and entire compensation” for that use. But that’s just a way of saying that the federal government’s exposure to patents is financial. A patent holder cannot sue to prevent the federal government from using the claimed invention or make the federal government stop–the patent holder just gets to sue for the damage done by the government use.

Bayh-Dole handles things differently. The patent property right is split into two not quite equal bits. The patent holder gets the “principal” rights, and the federal government gets a broad non-exclusive license to “practice and have practiced”:

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

Holders of patents on subject inventions don’t have any 28 USC 1498 rights to seek compensation for federal practice of inventions. The phrase “practice and have practiced” comes from the 1963 Kennedy patent policy via the 1968 NIH Institutional Patent Agreement program (which recites the Kennedy language in its master patent agreement). Norman Latker, NIH patent counsel and drafter of the IPA program master agreement, wrote that he based Bayh-Dole on the NIH IPA program. In the Kennedy policy and IPA program, “practice and have practiced” is defined to mean “to make and have made, to use and have used, to sell and have sold.”

Under Bayh-Dole the federal government has the right (obtained from the patent holder) to do anything with the invention that is within the federal government’s authority to do–except to sue for infringement or grant an exclusive license. The Kennedy patent policy distinguishes between “non-governmental” markets, which companies deal in and the government might regulate, and “governmental” markets, which are markets supporting government activities, whether that’s building nuclear bombs or space craft or highways or water desalination facilities or tomato picking machines. Bayh-Dole does much the same thing with its non-exclusive government license. The holder of a patent on a subject invention not only cannot exclude government use in a government market, but also cannot prevent companies from providing products and services to the government or on behalf of the government. Two broad classes of markets for the subject invention, overlapping, but with a significant limitation on the scope of patent rights for any practice of the subject invention in a governmental market.

This third objective has two parts. We have looked at the governmental market portion. Now let’s look at the non-governmental market bit:

protect the public against nonuse or unreasonable use of inventions

Here again we encounter the working requirement. The holder a patent on a subject invention must practice that invention. A Bayh-Dole limitation on ordinary patent property rights. Furthermore, Bayh-Dole indicates that the federal government will have responsibility to enforce this working requirement–to protect the public from nonuse of inventions, or, in direct language to suspend the patent property right to enforce the patent against others (all that 35 USC 281 and the rest of Chapter 29 stuff on remedies). This suspension of the right to exclude others will show up in Bayh-Dole as a compulsory licensing requirement called for some murky reason “march-in.”

Now we get to the 80 proof stuff. Bayh-Dole also limits patent property rights in subject inventions with regard to “unreasonable” use. This, most interesting. We are not talking here about things that are already illegal–no need for another law to pound away at what’s already the subject of other laws. Nor are we talking about patent abuse–fraud on the patent office and the like. So what is this “unreasonable” use of inventions that Bayh-Dole is concerned with?

Let’s look now at the compulsory licensing provision of Bayh-Dole–35 USC 203, labeled “march-in.” Here we find that a federal agency may require licensing (or may grant licenses itself) if the holder of a patent on a subject invention (or assignee or exclusive licensee–technically, the “ilk”) fails:

(1) to timely achieve practical application
(2) to reasonably satisfy health or safety needs
(3) to reasonably satisfy requirements for public use
(4) to obtain and enforce the US manufacturing requirement for some licensing      situations

These, then, are–necessarily–among the uses of subject inventions that are “unreasonable” and which require federal agencies to step in to protect the public using rights that the federal government has obtained from holders of patents on subject inventions–or, another way, that holders of patents have agreed are limitations to their not-ordinary patent property rights.

Unreasonable use (1) is the broadest of the four. “Practical application” is a defined term in Bayh-Dole (35 USC 201(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.

That’s a messfull. Let’s simplify for the important pieces, remembering there are qualifications:

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

This definition also comes, with variation, from the 1963 Kennedy patent policy. Yes, Bayh-Dole is made out of the body parts of past federal policies. Here’s the Kennedy policy definition:

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.

Differences–which we might think indicates a purpose–are the insertion of “to the extent permitted by law or Government regulations,” substituting “utilized” for “worked” and the change of “reasonably accessible” to “on reasonable terms.” The qualification for law and regulations is weird, and if you work at it for even a few minutes, your brain will fry, so don’t. Federal patent law does not have the concept of “working” an invention. Other countries do–for instance, Japan and India. There, the idea of “working” an invention is that an invention is being utilized and/or made available in the jurisdiction of the patent. An invention might be the basis of a product that’s offered for sale, or the owner of the invention might offer to assign or license the invention. In the Kennedy patent policy, “working” an invention is a necessary part of developing the invention “to the point of practical application.” Coarsely, either use it, sell product based on it, or offer to license it.

What matters most here is the change from “reasonably accessible” to “on reasonable terms.” “Accessibility” would appear to be broader than “terms.” Since there’s no definition provided by the either Kennedy or Bayh-Dole, we turn to common meanings. Merriam-Webster defines “accessible” to mean

1. affordable–“within the financial means of most people”
2. available–“possible to get”
3. convenient–“situated within easy reach”
4. understandable–“capable of being understood”

For our purposes, we might then see “reasonably accessible” to capture both affordable and available. For something to be “reasonably accessible” then we would plant a reasonable observer as a representative of the public to opine on price and availability. A product would reasonably available to the public if a member of the public could purchase it at a store, or by mail order, or from a near-by dealer. A product would not be reasonably accessible if one had to travel to Argentina to get it and deal with importing it back to the United States. Similarly, a product would not be reasonably accessible if the demand for the product was one million items and only one thousand items were manufactured. The product would not be “possible to get.”

“Reasonable terms” is less broad and focuses on the nature of the offer of benefits of using the invention to the public. “Terms” are the “provisions that determine the nature and scope of an agreement” according to Merriam-Webster’s definition 4. For a sale to the public, a primary term is often the price, but also delivery time, shipping charges, and any constraints on use (or resale) may be terms of the deal on offer. It is evident that the change from “reasonably accessible” to “reasonable terms” narrows the scope of the threshold for compulsory licensing. (Bayh-Dole takes up the “possible to get” part of “accessible” in the second and third conditions for compulsory licensing.)

We should then ask what constitutes a “reasonable term” in Bayh-Dole’s usage. The context of the statute provides a sound answer. Let’s consider price–a typical term for products on offer to the public. There are various candidates for a “reasonable” price–a price that is “affordable” or a price that is not made high to exploit limited availability or to exploit a great need–such as, say, a drug needed to keep someone alive. “Nice life ya got there, would be a pity if you were too cheap to come up with the dough to save it.” But in Bayh-Dole, there’s a direct logic at work. The remedy for an unreasonable price is not that the patent holder or its ilk must lower the price, but rather that the federal government can require the patent holder or its ilk to grant licenses. Licenses then remedy unreasonable terms? How so? Well, look to 35 USC 200’s “free competition and enterprise.” Licensing creates competition. Competition addresses unreasonable terms. A patent holder (or ilk) could persist in charging an unreasonable price, but competitors (so the competition theory proposes) will charge lower prices and therefore draw off business from the patent holder and ilk. The result is (one would think, absent price fixing) a reasonable price, one that reasonably reflects the cost to make and deliver and the competitive context in which the product is offered.

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