The Bayh-Dole Act definition of “practical application”

(revised March 3, 2022)

This is an essay about a one sentence definition in a federal law that sets out the public’s rights in government funded inventions, and in particular, what “available to the public on reasonable terms” means. It discusses the text, the legislative history, and attempts to ignore or misrepresent the act. The relevance today concerns the authority agencies have to address unreasonable prices for drugs or other products invented on government grants. The definition also is relevant when considering the reasonableness of the terms under which inventions are licensed.

The Bayh-Dole Act became law in 1980, and has been amended several times. The original act was part of Public Law 96–517, enacted December 12, 1980, in a lame duck session of Congress. Chapter 38 of the Act modified Sections 200 through 211 of titled 35 of the United States Code.

There are several phrases in the Bayh-Dole that are important enough to have been defined in Section 201 of the Act. One of them is the definition of “practical application.”

35 U.S.C. §201. Definitions

(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.

There are four grounds for a federal march in under 35 U.S.C. §203. One is a determination that action is necessary when a rights holder has not or is not expected to achieve “practical application” of a subject invention.

The act defines “invention” broadly, and includes “invention or discovery” that “may be patentable or otherwise protectable” under Chapter 35 of the U.S. Code, or any novel variety of plant under the Plant Variety Protection Act.

(d) The term “invention” means any invention or discovery which is or may be patentable or otherwise protectable under this title or any novel variety of plant which is or may be protectable under the Plant Variety Protection Act (7 U.S.C. 2321 et seq.)

Worth noting that inventions or discoveries treated as trade secrets are included if they “may be patentable.”

To achieve “practical application,” an invention has to be “utilized,” but that is not all. It’s “benefits” have to be “available to the public on reasonable terms”

The “benefits” of an invention are available “to the public” when they are part of a product or service. This is different than making the inventions available for licensing. If one is making a drug available to the public on reasonable terms, it’s pretty hard to say that prices are not covered by the definition.

On the Legislative History of the 1980 Bayh-Dole Act.

The following discussion relies upon and sometimes quotes from KEI’s submission to NIST, “Comments on the Proposal to Eliminate Unreasonable Prices as a Standalone Basis for March-in Rights.” The longer analysis is published as KEI Briefing Note 2021:1.

Pages 7 through 11 of the KEI submission to NIST is a section titled “A Deeper Look at the 1977 to 1979 Legislative Discussions.” This begins with a quote from Diane Schauburg. She had been commissioned to provide a “Legislative History Report and Analysis” for Public Law 96–517, as it relates to the 1980 additions to sections 200 through 211 to Title 35 of the United States Code (the original version of the Bayh-Dole Act). (Schauburg, 2009)

Understanding the legislative intent of any legislative measure necessarily includes knowledge about various other measures competing with or preceding the bill ultimately enacted, particularly where the focus is on specific language. As you compare that enacted with the unsuccessful proposals in the failed bills, you may be able to discern useful insight as to the intended meaning.

As noted by Schauburg, the Bayh-Dole Act was the product of a longer debate in Congress over government patent policy, including legislative hearings and consideration of bills on the same topic, which took place from 1997 to 1980. One of the bills was S.1215, 96th Congress, titled the “Science and Technology Research and Development Utilization Policy Act.”

Like HR 6933 which became law as PL-96–517 (the 1980 version of the Bayh-Dole Act), S.1215 had a march-in section, and a definition of practical application. The march-in provisions in S.1215 were similar to those included by the original Bayh-Dole Act, including the first march-in ground, which was to remedy a failure to achieve practical application of the invention.

The S.1215, 96th Congress bill (and some others) definition of practical application distinguished between a general obligation to make benefits available the public on reasonable terms (the text that ended up in the Bayh Dole Act definition), and making benefits available “through reasonable licensing arrangements”

(12) “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 worked and that its benefits are available to the public either on reasonable terms or through reasonable licensing arrangements;

If “benefits are available to the public .. on reasonable terms” is different than “or through reasonable licensing arrangement” then it is difficult to argue that the Bayh-Dole language excludes prices. If anything, the Bayh-Dole language could be seen as only addressing products to end users on reasonable terms, including prices.

But there is more in the legislative history. The original version of the Bayh-Dole Act was introduced in 1978, as S. 3496, 95th Congress, titled “Small Business Nonprofit Organization Patent Procedure Act.” The original definition of practical application read as follows:

(e) 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 from the subject inventor or licensee or assignee of the subject inventor.

(See: Congressional Record, S15030. September 13, 1978. Introduction of S. 3496, Small Business Nonprofit Organization Patent Procedure Act by Senator Robert Dole, September 13, 1978)

A table of competing definitions of practical application in competing bills from 1977 to 1980 is here, including versions that distinguished between an obligation to work the patents (the act of commercially exploiting the invention) from the obligations to make the benefits of the inventions “available to the public on reasonable terms.”

It is hard to argue that the Bayh Dole Act’s current definition only requires licensing on reasonable terms, when Bayh and Dole’s first version included “available to the public from the subject inventor or licensee or assignee of the subject inventor.” When reviewing every possible version of the bills before passage, it is obvious that “available to the public on reasonable terms” was considered to the more inclusive language, covering both licensing and prices to end users.

No private right to march in

While there are obligations in the Bayh-Dole Act to make products “available to the public on reasonable terms,” there is no private right to enforce those obligations. The march in remedy is purely at the discretion of the funding agency. There are four possible grounds.

1. 35 U.S.C. § 203(a)(1) concerns actions to achieve practical application.
2. 35 U.S.C. § 203(a)(2) is when “action is necessary to alleviate health or safety needs that are not reasonably satisfied by the contractor, assigneee, or their licensees.”
3. 35 U.S.C. § 203(a)(3)is when action is “necessary to meet requirements for public use”.
4. 35 U.S.C. § 203(a)(4) concerns a failure to comply with requirements for U.S. manufacturing of products.

It is worth noting that the practical application ground is independent of the others. Any single ground or any combination of the grounds can justify a march in.

The 1997 Cellpro march in case

To those who think that determining when prices are not reasonable is difficult, try determining when licensing terms are not reasonable. Former Senator Bayh himself failed when he petitioned HHS Secretary Donna Shalala in 1997 on behalf of Cellpro, a small biotech company in Seattle that was being sued for patent infringement by Johns Hopkins University.

In a March 3, 1997 letter to Shalala, Lloyd N. Cutler and Birch Bayh argued that the reasonableness of terms should take into account the government role in funding the inventions, that the public should not have to pay twice, and that the Act should be used to protect the public from high prices for medical care.

In fact, the circumstances — and the interests of the public which paid for the research that led to the patents and is now being asked to pay again — cry out for a far lower royalty payment by CellPro.
………..
CellPro submits that there may well be reason for the government to adopt regulations covering situations like the present where the same product may be claimed to be covered by patents arising out of work done by more than one federal grantee. Moreover, investigation may be needed to determine whether the royalty layering that plainly exists in the present case . . . is a common problem that leads to unreasonably high royalties (and prices of medical care) that should be dealt with by regulation.

At the urging of a pediatric oncologist who had used the Cellpro device and considered it superior to the one being developed using the Johns Hopkins licensed technology, I reached out to Curt Civin, the Johns Hopkins faculty member who was the inventor for the Johns Hopkins patent. I urged Civin to settle the case so that cancer patients would have access to two different stem cell devices, instead of only the one that Johns Hopkins had licensed. Civin was forcefully opposed to a settlement.

Secretary Shalala assigned the case to the NIH. Just two years earlier, in 1995, Director Dr. Harold Varmus had announced the NIH would no longer enforce reasonable pricing provisions in NIH CRADA or patent licensing agreements.

The Cellpro petition was not about the price of the medical devices, it was about the reasonableness of the licensing terms. The District court in the infringement case had allowed Cellpro to market its devices only until the Johns Hopkins licensed device received its own FDA approval.

The NIH rejected the march in request. The decision, signed by Director Dr. Harold Varmus, stated the following:

It would be inappropriate for the NIH, a public health agency, to exercise its authorities under the Bayh-Dole Act to procure for CellPro more favorable commercial terms than it can otherwise obtain from the Court or from the patent owners. CellPro’s commercial viability is best left to CellPro’s management and the marketplace.

The end result was a bankrupted Cellpro, an abandoned medical device, and narrowed choices and higher prices for doctors and patients. The Wall Street Journal would later report on the aftermath in an article titled “Baxter Beat CellPro in Court, But Some Say Dying Patients Lost.”

The notion that the only role for marketing the “benefits” of inventions “available to the public on reasonable terms” applies to licensing terms for inventions is not consistent with a plain reading of the act or the legislative history, as described by Schauburg. The Cellpro case, perhaps the last time I have seen eye to eye with former Senator Bayh on a Bayh-Dole Act issue, also illustrates a deep hostility at the NIH to intervene with market outcomes, even when they lead to high prices and removing important medical technologies from the market.

1994 to 2016 commentary on reasonable prices and march in cases

In 1994, the NIH convened two panels to discuss the use of reasonable pricing clauses that the NIH had introduced into Cooperative Research and Development Agreements (CRADAs), beginning in 1989. NIH Director Harold Varmus eliminated the use or enforcement of contractual reasonable pricing clauses in 1995, a topic that will be discussed in a future essay. Among the comments to the CRADA panels was a September 7, 1994 letter from Bradley Stillman, Legislative Counsel for the Consumer Federation of America. Stillman referred to the statutory obligation to make technology “available to the public on reasonable terms,” the phrase in the definition of practical application.

Finally, it is important to recall that most of the NIH funding for new drug development is channeled through Universities and other research institutions which obtain intellectual property rights under the Bayh-Dole Act. The Bayh-Dole Act has always provided for compulsory licensing under government “march-in” rights if drug companies do not make the technology available to the public on reasonable terms. If NIH totally eliminates the reasonable pricing clause it will lower the public interest accountability for drugs developed directly by the government below that which now exists for research funded at the university level.

In 2001, Professors Peter Arno and Michael Davis published “Why don’t We Enforce Existing Drug Price Controls?” in the Tulane Law Review. This was followed by an Arno and Davis March 27, 2002 op-ed in the Washington Post, titled “Paying Twice for the Same Drugs.” Both articles focused on the obligations to make products “available to the public on reasonable terms” when patented inventions were derived from federally funded research.

The Davis Arno op-ed motivated former Senators Bayh and Dole, both then working as lobbyists for right holders, to write a letter to the editor of the Washington Post, stating “The law makes no reference to a reasonable price that should be dictated by the government. This omission was intentional . . . The law instructs the government to revoke such licenses only when the private industry collaborator has not successfully commercialized the invention as a product.”

The Bayh Dole letter to the Washington Post was subsequently held out by right holder groups and their advocates to argue that “available to the public on reasonable terms” really meant “available to the public,” and nothing more. Or that “the public” included the companies that licensed inventions and manufactured and sold drugs, but not the people who purchased them, and that reasonable terms, if they meant anything, only concerned terms in licenses.

This narrative, still promoted by rights holders, is nonsense as a legal analysis, is inconsistent with Birch Bayh’s 1997 petition on Cellpro, and stands at odds with the plain language of the statute.

The purpose of this narrative was to provide political and public relations cover for the continued blocking of constraints, no matter how modest, on the pricing of federally funded inventions. From 2004 to 2016, the NIH and DoD rejected three march in petitions that objected to prices in the United States being significantly higher than in other high income countries. (NIH for Norvir/ritonavir in 2004, NIH for Xalatan/latanoprost also in 2004, and NIH and DOD for Xtandi/enzalutamide in 2016).

2017 Senate Armed Services Committee NDAA Directive

On July 17, 2017, the Senate Armed Services Committee unanimously approved a Directive in the National Defense Authorization Act (NDAA) that would require the Department of Defense (DOD) to march in or use government rights when U.S. prices were higher than the median price for the seven largest economies that have at least half the per capita income as the United States.

Licensing of federally owned medical inventions
The committee directs the Department of Defense (DOD) to exercise its rights under sections 209(d)(1) or 203 of title 35, United States Code, to authorize third parties to use inventions that benefited from DOD funding whenever the price of a drug, vaccine, or other medical technology is higher in the United States than the median price charged in the seven largest economies that have a per capita income at least half the per capita income of the United States.
[115TH Congress, 1st Session, 2017, Senate Report 115–125. National Defense Authorization Act for Fiscal Year 2018. Report to accompany S. 1519, page 173.]

In 2019, two prostate cancer patients including one Vietnam veteran, petitioned DOD to grant a march in petition for Xtandi, submitting data that made it clear the U.S. prices far exceeded the standard set out in the 2017 NDAA directive. The Trump Administration never acknowledged the petitions.

Events of 2021

In early 2021, the National Institute of Standards and Technology (NIST), heavily lobbied by rights holders and drug companies, sought to modify Bayh Dole Act regulations to eliminate prices as a stand alone basis for a march in request. At the time, the NIST Director was Walter Copan, whose job before his appointment in the Trump administration was advising companies and universities on licensing policies, a profession to which he has since returned. A Federal Register notice received more than 80,000 comments in opposition to the NIST proposal. On July 9, 2021, President Biden issued Executive Order 14036, “Promoting Competition in the American Economy,” which blocked “any provisions on march-in rights and product pricing in the proposed rule.”

Also in 2021, prostate cancer patients petitioned both DoD and HHS to use Bayh Dole march in and government use rights to address price discrimination against US residents for the cancer drug marketed by Astellas as Xtandi. On December 23, 2021, the NIH announced it had been assigned the case by HHS.

Notes:

Schauburg, D. (2009, June 10). Legislative History Report and Analysis Re: Public Law 96–517. https://web.archive.org/web/20210221181853/https://ipmall.law.unh.edu/sites/default/files/BAYHDOLE/Compiled_Legislative_History.pdf

Peter Mikhail, “Hopkins v. CellPro: An Illustration that Patenting and Exclusive Licensing of Fundamental Science is Not Always in the Public Interest.” Harvard Journal of Law & Technology, Volume 13, Number 2, Winder 2000.

Bill Richards, “Baxter Beat CellPro in Court, But Some Say Dying Patients Lost”, Wall Street Journal, August 6, 1999.
https://www.wsj.com/articles/SB933892068466213011

James Love. Comments on the Proposal to Eliminate Unreasonable Prices as a Standalone Basis for March-in Rights (Modify 37 CFR § 401.6), KEI Briefing Note 2021:1, March 18, 2021

National Institutes of Health, Office of the Director, Determination In the Case of Petition of CellPro, Inc. August 1997
https://www.ott.nih.gov/sites/default/files/documents/policy/cellpro-marchin.pdf

Peter Arno and Michael Davis. Paying Twice for the Same Drugs. The Washington Post. March 27, 2002. https://www.washingtonpost.com/archive/opinions/2002/03/27/paying-twice-for-the-same-drugs/c031aa41-caaf-450d-a95f-c072f6998931/

Peter Arno and Michael Davis, Why Don’t We Enforce Existing Drug Price Controls? The Unrecognized and Unenforced Reasonable Pricing Requirements Imposed upon Patents Deriving in Whole or in Part from Federally-Funded Research. Tulane Law Review, 75(3), 631–693. 2001.

Birch Bayh and , Bob Dole, “Our Law Helps Patients Get New Drugs Sooner.” Letter to the Editor. The Washington Post. April 11, 2002.
https://www.washingtonpost.com/archive/opinions/2002/04/11/our-law-helps-patients-get-new-drugs-sooner/d814d22a-6e63–4f06–8da3-d9698552fa24/

This is the letter that Bayh sent to Shalala.

ANNEX, Cutlet and Bayh letter to HHS Secretary Shalala on the Cellpro case.

March 3,1997

The Honorable Donna E. Shalala
Secretary
Department of Health and Human Services
200 Independence Avenue, S.W.
Washington, D.C. 20201

Dear Secretary Shalala:

Under the Bayh-Dole Act, 35 U.S.C. 9 200 et sea., the Secretary of Health and Human Services has the authority to issue licenses under privately owned patents to inventions developed as a result of government-financed research. We are writing to request your action pursuant to that Act to ensure that an important new medical product will be available for use in this country.

As discussed in more detail below, the exclusive private licensee of rights under a patent that resulted from federally-funded medical research is threatening to force removal from the market of our client’s allegedly infringing product that recently received FDA approval for use in bone marrow transplantation to treat breast cancer and related diseases. The exclusive licensee’s own efforts to develop a product for such use has not resulted in an FDA approved product and may never do so. Nevertheless, the licensee has refused to license our client’s product on reasonable terms and is taking the position that its approved product should be subject to an injunction preventing its use. These are the precise circumstances in which Congress provided in 35 U.S.C. 203 for the exercise of “march in” rights to protect the public interest. Accordingly, on behalf of our client, CellPro, Incorporated, the company whose product has been approved by the FDA, we ask that you exercise those rights to require that a license be issued to the extent necessary to ensure that the product remains on the market or, if necessary, issue such a license yourself.

. . .

In enacting Bayh-Dole, Congress made the judgment that policy objectives of commercializing the results of federally-funded research were better served by allowing federal nonprofit grantee institutions like Johns Hopkins to obtain and hold patent rights, with exploitation of inventions generally left to the nonprofits’ licensing programs and competitive forces. At the same time, however, Congress recognized that in particular cases the public interest might require government action and therefore included in the Act ‘march-in’ provisions “to ensure that the Government obtains sufficient rights in federally supported inventions to . . . protect the public against nonuse or unreasonable use of inventions.” . . .

To carry out these federal policies, the Bayh-Dole Act provides that a Federal agency may exercise its march-in rights and require the exclusive licensee of an invention made with Federal funds to issue a license to a responsible applicant’s “upon terms that are reasonable under the circumstances” if the Federal agency determines that

(a) 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; [or]

(b) action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees. 35 U.S.C. 203.

In the present instance, both of these statutory bases have plainly been met.

…………………

As to the question of reasonable license terms, there are fortunately several clear benchmarks on which the agency can rely. First, Baxter itself initially offered (before attempting to extract exclusive distribution rights over CellPro products) a license based on a lump sum payment of $750,000 and a 16% royalty on antibody sales or the antibody content of other products. Baxter also entered into nonexclusive licenses on essentially these same terms with two competitors of CellPro (though neither of those firms has in fact developed a product). This, CellPro submits, should set a cap on what could be regarded as “reasonable under the circumstances.”

In fact, the circumstances — and the interests of the public which paid for the research that led to the patents and is now being asked to pay again — cry out for a far lower royalty payment by CellPro.

………..

CellPro submits that there may well be reason for the government to adopt regulations covering situations like the present where the same product may be claimed to be covered by patents arising out of work done by more than one federal grantee. Moreover, investigation may be needed to determine whether the royalty layering that plainly exists in the present case . . . is a common problem that leads to unreasonably high royalties (and prices of medical care) that should be dealt with by regulation.

. . .

V. Conclusion

Baxter has threatened to require CellPro to remove the Ceprate products from the market on the basis of patents issued to Johns Hopkins that are governed by the Bayh-Dole Act. In doing so, Baxter threatens the welfare and very lives of many individuals who need bone marrow transplants and whose suffering could be lessened and whose lives could be saved with these products. The Secretary has the authority under the applicable law and regulations to avoid this result, and on behalf of CellPro, we urge that you take immediate steps to do so. We would also appreciate the opportunity to meet and discuss this request with Health and Human Services and NIH staff at the earliest possible opportunity.

Very Truly Yours

Lloyd N. Cutler

Birch Bayh