The Bayh-Dole Public Bargain, 2

Baked into Bayh-Dole is the policy expectation that a holder of a patent on a subject invention will offer products based on that invention as if there were competition, even if a patent is used to suppress that competition. In the case of medicines, this policy reduces to: offer products as if they were generics.

The logic becomes evident: if one doesn’t offer products as if they were generics, then the terms are “unreasonable” and the federal government is authorized–expected–to protect the public by requiring licensing to introduce “free competition.” It actually works. You just have to get over all the nonsense you hear from people who have a vested interest in making sure Bayh-Dole’s public bargain never operates. To timely achieve practical application then means to provide patented product, or benefit from using a patented process, to the public on terms, including price, as if what’s offered has competition from others also practicing the invention. It’s not just that there’s competition from other companies that hold their own patents and charge what amounts to a patent monopoly price–their pain killer, say, uses a different compound, but you both have patents to stifle competition for each of our compounds (and any analogues), so you both can charge monopoly prices. Bayh-Dole’s licensing remedy only indirectly addresses such competition. No, the remedy of licensing works only if the patent holder (or ilk) or the federal government breaks up the patent monopoly and, in the case of the patent holder, at least, receives compensation for use by others, who then are in competition with the patent holder and with each other (and potentially in competition with the federal government).

In effect, Bayh-Dole changes the patent property rights in subject inventions, so that a patent holder is limited in how it may be compensated for the use of a subject invention. A patent on a subject invention may be used to suppress competition, so that the patent holder (or its ilk) has a monopoly, as it were, on use of the invention, but the patent holder does not have the right, under a Bayh-Dole patent, to price product to take advantage of its exclusive position in the market. The price must be as if there were competition, even if there is none because of the patent. Under Bayh-Dole, a patent holder then gets compensated based on generic pricing, not patent monopoly pricing. The value of the patent–as an asset–is based on generic pricing over time, not patent monopoly pricing. That difference in value must be considered from the start, and not be viewed as a surprising, unfair takeaway or diminishment of value later. Under Bayh-Dole, patent monopoly pricing is an “unreasonable use” of subject inventions. The remedy is to introduce competition by compulsory licensing.

The second and third conditions for compulsory licensing concern unmet need. A patent holder of an ordinary patent has no special obligation to meet demand, even for matters of health or safety. In fact, having great demand and strategically limited supply is a great way to run up prices, and a patent is a wonderful tool for doing just that. Thus, the love affair between the pharmaceutical industry and patents. Big need, even desperate need, ability to gate supply, crazy high prices seem almost, well, plausible. But here again, Bayh-Dole makes it clear that patents on subject inventions are not ordinary patents. Failure to “reasonably satisfy” needs is the second part of the “accessible” in the Kennedy policy. If the holder of a patent on a subject invention (or any ilk) cannot satisfy needs, then the government can require licensing. More manufacturers, more variation, different functions and features–any of these things may come about with “free enterprise”–the freedom (because licensed) for companies to do what they will to meet demand, to make things different, to combine products, and the like.

A similar logic holds for failure to meet “requirements for public use.” The concern goes back decades–that if the federal government allowed private entities to hold patents on work directed at things that the government was going to require–say, a new method of cleaning industrial exhaust–then those private entities could jack the price and exploit the government’s requirement to use a federally supported invention. Along with the reasonable price, then, also comes a requirement to make enough product that complies with the government’s requirements that it reasonably satisfies needs. Here “reasonably” is tangled up with “allows people to comply with laws and regulations.”

The fourth condition for march-in licensing concerns failure to enforce the Bayh-Dole requirement for US manufacturing. In Bayh-Dole’s statement of policy at 35 UCS 200 we find this objective:

to promote the commercialization and public availability of inventions made in the United States by United States industry and labor

Some people read this objective as a mandate to commercialize, but it is not that at all. Rather, this objective is about where inventions that achieve practical application are made, and who makes them. Along with “commercialization” is “public availability.” We might see here that Bayh-Dole does not care whether there’s an effort to create product or to license rights or to make an invention generally available (as for a standard, or dedicated to the public). But Bayh-Dole does care that what gets made is made in the United States, by United States companies and workers. Given the premise for Bayh-Dole presented by Senators Bayh and Dole when they introduced the bill, that the United States was losing its technology manufacturing leadership to other countries, especially Japan and Europe, the manufacturing requirement would appear to be crucial to Bayh-Dole. The idea here is that the patent system should be used to promote–encourage, advance–the development of United States manufacturing capabilities for new technologies arising in federally supported work. From one perspective, this idea seems quite practical. From another, it looks wildly nationalist, even protectionist, Rather than sharing technology globally–for things such as medicines and desalination technology–Bayh-Dole sets out an objective to have those things made in the United States, and exported to other countries.

It all sounds nice, but here Bayh-Dole breaks down. If the United States is going to lead with domestic manufacturing, then contractors acquiring patent rights will have to also file for patents throughout the world. Suddenly a manageable $10K or $15K patent process becomes a $100K or $200K effort to block manufacturing world wide (but for a license from the patent holder–or from the federal government, if the patent holder has not sought foreign patents).

If we look at Bayh-Dole’s implementation of this objective, at 35 USC 204, we find a strangely narrow restriction on patent property rights in subject inventions that laughs off the idea of United States manufacturing. Nonprofits and small company contractors are required, if they grant an exclusive license in the United States to use or to sell a subject invention (one would think by “sell invention” Bayh-Dole here means something like “sell product based on or incorporating a subject invention), that the exclusive licensee must agree to source products from United States manufacturers:

Notwithstanding any other provision of this chapter, no small business firm or nonprofit organization which receives title to any subject invention and no assignee of any such small business firm or nonprofit organization shall grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.

This is a big mess. Let’s sort it out. If you get an exclusive license to use a subject invention or sell product based on that invention, then you must agree that the product will be manufactured substantially in the United States.

This restriction is very strange. First, it is narrow. If you get a non-exclusive license, you can get stuff manufactured anywhere you want. If you are the patent holder (say, a small company), you can manufacture anywhere you want. It’s only if you exclusively license in the United States that this restriction kicks in. And it is only in limited situations that you will exclusively license to use or to sell, and not throw in everything else (making the license an assignment). It’s even worse, because the next sentence of 204 provides that federal agencies can waive the narrow United States manufacturing requirement. Although 203(a)(4) provides for march-in if a holder of a patent on a subject invention (or its ilk) has failed to comply with 204–that’s only after the federal agency has decided not to waive the United States manufacturing requirement. Even if a federal agency decides that march-in is indicated for non-compliance, 37 CFR 401.6(h) allows the agency to just walk away from the march-in:

An agency may, at any time, terminate a march-in proceeding if it is satisfied that it does not wish to exercise march-in rights.

This walk-away provision–37 CFR 401.6(h)–applies to the other march-in conditions as well. In effect, any of these may be waived by the federal agency that provided at least some of the funding for the work in which the invention was made. However, despite the walk-away provision (no support for it whatsoever in Bayh-Dole the statute)–meaning that federal agencies may choose not to enforce the limited patent property rights in subject inventions, the law is the law. The limitations are there. One might think, then, that the public should have standing to bring actions to enforce where they have been harmed–such as being abused by unreasonable pricing for medicines–and that companies accused of infringement of a patent on a subject invention (“utilization”!, what Bayh-Dole says patents on subject inventions must be used to promote) might rely on these restrictions in framing a defense: the holder of a patent on a subject invention has exceeded the patent property rights available for a Bayh-Dole patent.

These then are the fundamentals of Bayh-Dole’s public bargain. A federal contractor, if it acquires an invention made in research or development work at least partially funded by the federal government and timely discloses that invention to the funding agency, may keep title to that invention, but any patent that issues is not an ordinary patent–the patent holder must use the invention, must offer the benefits of use of the invention on reasonable terms, as if there were competition, even if there is not because the patent is used to suppress free competition. This is the public bargain–you can own that invention, but you have to make it available as if there were competition, or else you agree to grant licenses to create competition, whatever you choose to do by way of your own pricing and other terms.

In an otherwise abjectly dismal law, this part of it actually makes sense. Pity that it is never enforced. The failure to enforce Bayh-Dole is a compelling reason to repeal the law. The price-gougers, trolls, and speculators have had four decades to feed from the federal research trough. Time to scatter those folks away and move things on. We can and must do much better.

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