The prostate cancer drug Xtandi was invented by taxpayer-funded scientists at UCLA, but now costs Americans nearly $190,000 — or up to six times the price in other wealthy countries. If you are taking Xtandi and would like to share your story, click below.
Yes, federal agencies should march in on Xtandi, among other actions they have a duty to take to enforce Bayh-Dole’s patent rights clause, under which a contractor retaining title to a subject invention grants the government rights sufficient to protect the public from nonuse and unreasonable use, including unreasonable, non-competitive pricing.
Senator Sanders is right to call out Pfizer for unreasonable pricing. But his standard is not the standard set forth in Bayh-Dole. Bayh-Dole is not concerned with either affordability or the patent monopoly prices charged in other countries–Bayh-Dole rather is concerned with free competition and enterprise and requires either a competitive price or licensing that creates competition. I’ll show you how it works. Bayh-Dole is a messy, dismal law, and as a consequence, the pain you feel is having to read 4,000 words for what ought to be straightforward. I’m sorry. Not my fault. I feel the hurt, too.
Bayh-Dole expects federal agencies to review utilization reports (35 USC 202(c)(5)) and determine if the benefits of a subject invention are available to the public on reasonable terms (35 USC 203(a)(1) and 201(f)). If the terms are not reasonable, then, as already agreed to by the contractor, a federal agency is to require licensing to introduce competition. But NIH won’t even conduct a review! NIH refuses to do its duty under Bayh-Dole.
Bayh-Dole’s remedy (35 USC 203(a)) for unreasonable terms (35 USC 201(f)) is free competition (35 USC 200). Let’s work through it.
35 USC 200:
Congress states among its policy and objectives:
to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions;
This is federal patent law. Bayh-Dole distributes the patent property rights between a contractor that has obtained title to a subject invention and the federal government. The government obtains, from the contractor rights in each subject invention–and necessarily also rights under any patents obtained by the contractor in those inventions. March in is not a right *over* a contractor, a governmental right to take away a contractor’s rights–it is a right granted by the contractor to the government in each subject invention, as it were a patent property right distributed to the contractor as promised by Bayh-Dole’s patent rights clause.
Next, Bayh-Dole (35 USC 202(a)) bakes the bargain between contractors and the government:
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.
Well, those “rights” in paragraph (c) are invention rights pertaining to patents. The provisions of paragraph (c) are those required of a patent rights clause incorporated into each funding agreement. A contractor agrees to the patent rights clause. That contractor has got title to a subject invention. That contractor agrees to distribute certain rights under that title to the subject invention to the government. Paragraph (8) of paragraph (c) cites march-in (35 USC 204):
The requirements of sections 203 and 204 of this chapter.
So march in is a right granted to the government by a contractor to any subject invention (35 USC 201(e))–the contractor agrees to divide up invention property rights in choosing to become a party to the federal funding agreement and its patent rights clause. In march in, the government does not take rights, void a patent, or confiscate a patent. March in is no eminent domain “taking.” A contractor is not entitled to any compensation and is not damaged by the government acting on the rights the contractor has agreed to, or promised, or granted as a condition of the federal funding. March in happens within the invention property right, not outside it.
Here’s an analogy. If an invention has two joint owners, each has an undivided interest in the invention, and has no obligation to account to the other joint owner for any exploitation of the invention or patent covering the invention. But neither joint owner can make an exclusive license or enforce a patent against infringers without the other joint owner. If a joint owner refuses to join an infringement action, that refusal does not somehow damage the other joint owner or take away a right the joint owner had. Similarly, universities deal all the time with joint inventions. They often enter into technology administration agreements, laying out who will take the lead on patenting, who pays, what right of review the non-lead university has, and the same for marketing the invention, and licensing, and covering costs and splitting up income after costs. The technology administration deal is made inside the invention property right. If a joint owner university objects to a direction a patent prosecution is taking, or refuses to enforce a patent, that’s a right that joint owner has under the technology administration agreement. The technology administration agreement redistributes rights in the invention among the joint owners.
In effect, that’s what Bayh-Dole’s patent rights clause does. It functions as a federal technology administration agreement. When a contractor obtains title to an invention made in federal work, the contractor has agreed to distribute rights in the invention–a subject invention–as if the federal government almost but not quite were a joint owner of the invention. The government doesn’t hold title, but may get title. The government cannot sue for infringement, unless it gets title, but the government can require licensing of the invention if the contractor does not timely achieve practical application of the invention and having done so reasonably satisfy health or safety needs of the public. It’s a deal within the invention property rights. Both the contractor and the federal government have an interest in each subject invention.
So let’s look at practical application. Bayh-Dole (35 USC 200 again) sets out among its policy and objective two restrictions on the use of the patent system:
to promote the utilization of inventions arising from federally supported research or development
to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery
These are not restrictions on ordinary patents. Bayh-Dole amends federal patent law to restrict the use of patents to these purposes. The first is a working requirement–inventions should be used. That’s not something generally required by ordinary patent law. The second presents a limitation on the use a patent to exploit economic power. Again, something not present in ordinary patent law. These two restrictions are linked in the march-in right that contractors grant to the federal government in Section 203(a).
Section 203(a) adds a further condition on the working requirement. If a federal agency determines that a contractor has not meet any of four conditions, the federal agency
shall have the right . . . to require the contractor . . . to grant a . . . license . . . to a responsible applicant or applicants . . . upon terms that are reasonable under the circumstances, and if the contractor . . . refuses such request, to grant such a license itself,
I’ve omitted some stuff to make clear the structure. The contractor gives the government this right in the invention–it is a key part of their joint administration agreement, important enough to be expressly required by Bayh-Dole.
The first of the four conditions is this, at 203(a)(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;
There are two elements going on. One is that something has to happen in a “reasonable time.” We might propose that a reasonable time is the time one would expect a company to take to develop an invention for practical application if it were competing with others to exploit the subject invention. You’ll see the basis for this interpretation as we work through the second element. This second element is that the outcome of the effective steps is practical application, which is a defined term in Bayh-Dole. Here’s the definition (35 USC 201(f)):
The term “practical application” means [to utilize the invention] under such conditions as to establish that the invention is being utilized and that its benefits are . . . available to the public on reasonable terms.
I have highlighted the final phrase because it is critical to the definition. The definition of practical application is not met unless every element of the definition is met. Bayh-Dole does not merely say “use the invention”–there has to be benefits of that use, and those benefits–such as products–must be made available to the public–and on reasonable terms. If the contractor fails the conditions of this definition in the determination of the federal agency, then the contractor has agreed to allow the federal agency to request licensing. Either the contractor grants licenses and collects reasonable compensation from those licenses or refuses, and then the federal agency may grant licenses and the contractor gets nothing.
The outcome stipulated is not “commercialization” or “profitable,” or “there’s a product at all” or even “you’re using it.” The outcome is practical application, and flagged as important with a definition all its own, and the key restriction on practical application is that whatever the benefit of utilizing the subject invention, that benefit (such as a product) is available to the public on reasonable terms.
But what are reasonable terms? And what’s a reasonable time? There are excellent well used ways to muddy the use of “reasonable.” What a company thinks is reasonable. What other companies usually do in a similar situation. What the public thinks is reasonable (after all it is the public that is getting the offer). Or, reasonable just means a company has to demonstrate it is not making up terms without thinking, reasoning, about them. In this formulation, a reasonable price would be one that a company thought long and hard about how to maximize profit. That sort of reasoning = reasonable.
But here in Bayh-Dole we don’t have to stomp in the mud beyond the law since the meaning is made clear from the design of the law. If any of the 203(a) conditions are not met, the remedy is licensing. What is reasonable, then, arises from an examination of what terms would be on offer if multiple parties were to have the right to utilize a given invention. Similarly, a reasonable time is the time a company would take if it were competing to be the first on the market, and not using its patent merely to delay others (not like, say, UC and Ciby-Geigy did to delay Alza Corporation’s nicotine patch). Reasonable terms are those that would be reasonably expected if one were selling product in competition with others also using that same invention. If “reasonable” meant anything other than “competitive” here, then one would expect Bayh-Dole’s remedy would be to force the contractor to develop the invention more quickly or to change the terms on offer, not to grant licenses. It would make no sense to say–you aren’t developing the invention fast enough, you must go more quickly. What sort of remedy is that? The same would be true if a federal agency could say–you aren’t developing fast enough, therefore we will take ownership of the invention. Makes no sense. The government already has a license for government to make, use, and sell, and have others do so, on behalf of the government. So the government would just have to license the invention to some other company or companies, which would mean starting all over, to address the going too slow bit–and no doubt that would slow everything down even more. Not that it is beyond imagining bureaucrats doing this, just to show who is boss. But let’s not go there.
No, “reasonable” here is a general term for which the remedy is licensing, and that indicates that what’s reasonable is what would be considered reasonably competitive. If a contractor works to develop the invention at a competitive pace “effective steps” in a “reasonable time”; and offers the benefits of using the invention to the public on competitive “reasonable” terms, then everything with regard to practical application is acceptable. If things are not competitive, then the remedy is to introduce actual competition–that’s the “free competition” of 35 USC 200.
The upshot is, a contractor (or anyone having got exclusive rights from the contractor) must offer product on competitive terms, as if there were competition, even if there’s not because the patent has been used to suppress competitive uses, or the contractor will have to license to introduce competition (and get compensated for doing so) or the government may grant licenses (and the contractor does not get compensated because it chose not to).
Or in the most simple terms, in a medical context–a contractor must offer product at a generic price from the get-go, and if not, then licensing will make the product generic. It’s free competition that turns a proprietary medicine–patent–into a generic. The patent holder still may be compensated for the patent, but that compensation is what’s reasonable in the context of competition to make and sell generic versions. That’s a Bayh-Dole limitation on how the holder of a patent on a subject invention may exploit a patent for compensation–that’s an agreement between the contractor and the government on behalf of the public.
The contractor agrees to use the patent to obtain compensation as if the patent were available to license to all qualified applicants on reasonable terms.
If by sale–competitive pricing
If by license–fair, reasonable, non-discriminatory terms
This is the central limitation of Bayh-Dole patents–not your ordinary patents, to be sure. It is, in its way, a core requirement of Bayh-Dole, entirely more important–like that of federal agencies dealing in exclusive licenses for money on secret terms–than anything having to do with reversing the presumption of ownership or title certainty, both of which are largely untrue, are political posturing, and are underwhelming in practice.
Bayh-Dole sets out this premise of patent rights limitation on how a contractor receives compensation in a set of steps spread about various provisions rather than placing all together in a single statement. Doing so makes the collocation of requirements more difficult to recognize on a casual or selective reading, but nonetheless the design is there, just to be got at by following each reference and definition, giving substance to each phrase and clause, not treating anything like fluff to be dismissed in preference to some already formed desired interpretation.
In that line, of reading for an already formed desired interpretation, some folks argue that “price is not a term” in the phrase “on reasonable terms” in the definition of practical application at 35 USC 201(f) because price is not expressly named, or that “price was never intended to be included in reasonable terms.” As to the first version of this argument, no particular terms are specified in 201(f). The expression is general, and plain–“on reasonable terms.” No “such as” or “including but not limited to.” The expressed intent is any terms–whatever terms–no need to make a list or try to teach people what the terms of a transaction might be in the abstract. It is also well established that price is a usual term, and in transactions involving the public, such as a sale of product, price is often the most visible, most important term.
Black’s Law Dictionary defines “terms” to mean “provisions that define an agreement’s scope; conditions or stipulations <terms of sale>.” The Free Dictionary: “The conditions the parties agree to follow in the trade of a good or service. Necessary terms of sale include price, quantity, and, if necessary, quality. The terms of sale may also include special conditions.”
Bayh-Dole does not restrict “reasonable terms” to “terms of sale” only, but certainly in transactions involving the public, sale would be well within the scope of transactions involving terms. Price, according to the Free Dictionary, is a necessary term–of course, given the premise is that a sale is involved.
So, price is among the terms that Bayh-Dole contemplates will be reviewed for reasonableness. A random claim about an unnamed someone “never intending” to include price as a term in offering benefits to the public carries no weight. Absent Congress going out of its way to exclude expectable things such as price, the necessary reading is that Congress intended price among the terms to review for reasonableness.
As for the first version, that price is not mentioned as a term, and therefore is excluded, also fails. If such an exclusion were true, it would apply to any specific term–quantity, quality, special conditions, ties to other items, restrictions on public negative comment, and the like. No term would be subject to review, and the whole provision rendered meaningless. No, it does not work, other than for desperate or foolish folk. Price is a term, often the key term. Price is front and center in any review of terms for reasonableness.
We can reassemble what is drafted in scatter in Bayh-Dole:
A reasonable price is a price that would be reasonably expected if there were free competition, even if a patent on a subject invention is used to suppress competition.
Or, another way in the context of medicines:
Price as a generic drug from the get-go.
Recover investment in development from reasonable, not monopoly, prices.
Under Bayh-Dole, a reasonable price is not any monopoly price a company might charge in other “wealthy” countries. That would be a “reasonable patent monopoly price.” Bayh-Dole does not go that direction. Bayh-Dole does not restrict reasonableness review to comparing prices in the US with prices in other countries. Given that the remedy already stated is licensing, each of the four conditions in 203(a) have to do with some aspect of patent exclusivity and the effect of free competition and enterprise as the alternative if the exploitation of patent exclusivity goes beyond what is “reasonable.” The Bayh-Dole bargain, the contractor’s agreement to accept a limited form of patent, is this:
Price competitively without competition or license to create competition.
That’s the Bayh-Dole deal.
There is a follow-on to this deal. Federal agencies are delegated the responsibility to enforce it. The public has no standing to require–or even petition for–a federal agency to conduct a review for reasonableness. There is no procedure in the CFR under which a member of the public has the right to petition for review, no guidance for federal agencies obligating them to conduct a review when so requested. The Supreme Court in Stanford v Roche noted that lack of protections for third parties and found such a lack would be “deeply troubling” if third parties were intended to be exposed to the ability of contractors to take inventors’ inventions–even ones that the inventors had assigned to third parties. We might expect the Supreme Court then to take a dim view of readings of Bayh-Dole that similarly provide no protection for the public as a third party beneficiary of the law.
Bayh-Dole expressly states that Congress intends the law to provide sufficient rights in inventions–that would be, dividing up the ordinary rights into a contractor’s rights in inventions, and the rights in those inventions that the contractor grants to the federal government–license to practice and have practiced, right to require licensing, limitation on use of income under the nonprofit patent license, limitation on assignment for nonprofits, right to receive reports on utilization. These are not ordinary patent obligations. They are rights distributed in the invention (and in any patents) between the contractor and the government by the technology administration agreement presented as a standard patent rights clause included in each funding agreement. This agreement then works to provide to the government rights in each subject invention so that the government may protect the public from nonuse and unreasonable use–including failing to use a subject invention, failing to provide benefits to the public, and failure to do so on reasonable terms.
Bayh-Dole provides no provision by which the government might object to the contractor’s terms on offer. That should have been pounding on you from the start, when you read Bayh-Dole for the first time. When is he ever going to get around to this glaring omission. Bayh-Dole’s technology administration agreement could easily give the government standing to object to any offering of benefits of using a subject invention that the government found unreasonable, and even not require anything more than the giving of a reason as the basis for objection–which would then amount to the veto of the offer, just as a joint owner of an invention has standing (even without reason) to refuse to join in an exclusive license or infringement action. One would expect that a government objection–a veto, if you will–would be the simple way to deal with it. “Okay, you object with a reason to the terms of this offering of benefits to the public. So what terms will be acceptable, short of making us license the rights to qualified applicants on terms reasonable under the circumstances?” An obvious answer is, “Terms that would be reasonably expected if you have licensed rights to qualified applicants.”
The follow on to this distribution of invention rights between contractor, and by the contractor’s action, the federal government, is that federal agencies must enforce the Bayh-Dole bargain. Enforcement is implicit in, even necessary to, the idea of protecting the public from nonuse and unreasonable use, from unreasonable terms, from unreasonable pricing. Having been granted the right to protect by the contractor is not sufficient to protect. Federal agencies have a duty to use the rights in inventions that they have been provided–entrusted with–by Bayh-Dole. We may call it a statutory duty to enforce the terms of a mandated federal contract with each federal contractor, under which the public is an express beneficiary.
But Bayh-Dole does not stipulate that a federal agency might bicker with a contractor over price. Bayh-Dole has no requirement that a federal agency object to an offered price or any other term. And federal regulations do not provide a procedure for doing so. Instead, and this should inspire policy awe, Bayh-Dole moves directly to licensing–keep your unreasonable terms if you want, but you must license (with compensation if you do it, without if the government does it after you fail to license). That’s the nature of the review–if a contractor wants to change its terms of offer, it is free to do so, but once the contractor has established unreasonable terms (such as price gouging, non-competitive price), the federal agency’s task is to review those terms, and if it finds them unreasonable, then the directed action is licensing, not fussing over changing the terms. That is, the contractor does not give the government a right in the invention to dictate or control price. But it’s somewhat worse for the unreasonable pricing contractor–screw up the price and the remedy is licensing to create the competition the absence of which you exploited to do your screw up. A contractor might rather want pre-screw up pricing review–which might end up with a ceiling set on pricing, much as one might find in a government-regulated utility service, perhaps with a citizen rate setting advisory board–something not present in Bayh-Dole, but perhaps would be direct to set up within the framework of Section 203, in preference to the extended account of procedures, with written determinations, appeals, hearings, and more appeals–all the while the unreasonable terms damaging the public are allowed to persist.
While Bayh-Dole is clear on the demand for competitive pricing or create your own competition by licensing, the procedures appear to be antagonistic to the public interest, as if the public interest were represented by unreasonable terms–price gouging medicines, slow-walked development to protect investments in other products, suppression of alternative formulations and methods of delivery, or of availability of product in sufficient quantity to meet public needs. In the formulation of the procedures, the federal agency is depicted as acting against the contractor’s interests by initiating a march-in review, and the contractor’s interests are aligned with the public interest, as if the public desired the development of each subject invention in whatever way suited the contractor, as if any terms the contractor demanded were reasonable simply because there was commercially available product, and that was all that mattered. If that were true, it would make for consternating federal policy, just on the face of it. But it’s not true.
The federal agency’s march-in action protects the public from unreasonable terms, unreasonable pricing, non-competitive pricing. And that march-in does not stop to fuss about the contractor’s interests or actions, does not make the contractor change its pricing–it holds the contractor to the contractor’s distribution of rights in the subject invention under the patent rights clause and requires licensing. Bayh-Dole stipulates, then, that licensing is in the public interest. If the contractor has acted in good faith from the start, the contractor also has agreed that licensing is in the contractor’s interest–or the contractor has accepted the federal funding on a false pretext, denying that it has aligned its interest, as set forth by the agreement it has made regarding subject inventions in the patent rights clause of the funding agreement. The implication in that case is that the contractor agrees to something the contractor intends to violate. There’s no good faith to fulfill the terms of the agreement. To take it out of the calming administrative register, it is a betrayal of the public interest, a repudiation of the fundamentals on which the benefit of retaining title without having to make a case that it better serves the public interest for the contractor to exploit exclusive rights than for the public to have access through federal dedication of rights to the public.
The government right to march is required by Bayh-Dole–required to be part of the patent rights clause, part of the invention rights administration agreement–but it is the contractor, in accepting the administration agreement, that grants the right, as part of the bundle of rights gathered up in title to a subject invention, to the government. The government’s right, then, is not an imposition on a private property right. The march-in right is conveyed by agreement, granted by the contractor. The march-in right is in its way, a patent right, but directed at joint owners of interest in the patentable invention. March-in arises only because there is something to license, and that there is something to license arises because there is a patent.
Unless the federal government acts on the patent property rights provided to it by the contractor under Bayh-Dole’s joint administration agreement (i.e., the patent rights clause), we the public are helpless. That also should be “deeply troubling” in considering whether Bayh-Dole should stay or go.