Appendix D

Analysis of NIH Options Under Current Law

NIH has multiple roles in biomedical research that suggest a number of options for facilitating the dissemination of research tools. Through its intramural research program, NIH is an end user of research tools as well as a leading producer and supplier of new tools. As a sponsor of biomedical research in extramural laboratories, NIH has an interest in how its grantees and contractors obtain research tools from other institutions and how they disseminate the tools created in NIH-funded research. As an agency of the Federal government, NIH may invoke additional legal authorities for advancing its interests related to research tools. Existing law also restricts NIH's authority in certain respects. NIH has considerable authority over how it manages its own intellectual property rights what sorts of agreements it enters into to acquire research tools for use in its intramural programs. NIH's authority over the activities of grantees is somewhat more constrained, and its authority over privately-funded activities is more limited still.

Intramural Authorities

First and foremost, NIH has authority6 to determine the patent, license, publication, and distribution policies to apply to the tools that NIH intramural scientists develop. By implementing and publicizing policies that promote widespread access for use in research,7 NIH can set an example and encourage others to follow its lead. In general, NIH does not file patent applications on technologies that are useful primarily as research tools and maintains a non-exclusive licensing policy for patented technologies that might be used as research tools. Further, when it enters into exclusive commercialization licenses, NIH reserves continuing rights over research uses, and when it grants exclusive license options on future discoveries, it seeks to ensure that the options do not attach to technologies primarily useful as research tools.

Second, as a user of research tools generated by others, NIH can determine the terms that it will accept in entering into license agreements and MTAs. As a matter of policy, NIH generally avoids giving an advance promise of future commercialization rights as a condition for obtaining a research tool. Although NIH has the authority to enter into such an agreement under the Cooperative Research and Development Agreement (CRADA) mechanism authorized by the FTTA, it will do so only upon a finding that the tool is a unique research resource not reasonably available from any other source. NIH generally seeks access to research tools either through ordinary procurement mechanisms or under its model material transfer agreements (MTAs), neither of which transfers or otherwise promises future intellectual property rights to the provider. By using the FTTA authorities strategically to enhance access to research tools, NIH may influence the policies of others in the biomedical research community through moral suasion.

6 This authority arises under the Bayh-Dole Act, 35 U.S.C. 200-211, and Steven-Wydler Technology Innovation Act of 1980, 15 U.S.C. 3701 et seq., as amended (which includes the Federal Technology Transfer Act of 1986 (FTTA), as amended).
7 Copies of the Public Health Service (PHS) patent and license policies are attached to this Appendix at D1 and D2.
Grants Authorities

As a funding agency charged with monitoring the use of grant funds and ensuring that the purposes of grants are carried out, NIH can set terms and conditions on grants and promulgate grants policies. In this capacity, NIH has put in place several different policies that encourage the widespread dissemination of research tools. These policies are somewhat constrained by the Bayh-Dole Act, which gives the recipients of federal funds considerable discretion in their handling of patentable "subject inventions" made in federally supported research. Many research tools generated under NIH-funded research projects can be defined as both a "unique research resource" for purposes of the grants policy statements, and a patentable "subject invention" for purposes of the Bayh-Dole Act. In the latter case, NIH policies are limited.

The PHS Grants Policy Statement explains in full PHS policy with regard to the distribution of research resources developed with PHS funds.8 Although the policy statement encourages recipients of federal funding to make unique research resources available to others for continuing research, it also encourages the commercialization of research results, in acknowledgment of the Bayh-Dole Act. Indeed, the policy statement goes beyond what the Bayh-Dole Act requires by giving grantees the same latitude in licensing unpatented resources that the Bayh-Dole Act gives them for patented "subject inventions."

The NIH Procedures for Handling Non-Election of Title to Patentable Biological Materials9 sets forth NIH policy and procedures regarding conditions under which NIH will refrain from electing title to patentable, but unpatented, research tools that the funding recipient wishes to license as a biological material. Under the Bayh-Dole Act, a recipient of NIH funds may elect title to inventions developed with NIH funding, but must file a patent application within one year of such election. Where the recipient elects not to file a patent application, the NIH may request title to the invention. Typically, the recipient's election not to file a patent application on an invention is an indication that the recipient is not interested in retaining domain over the invention. However, this is not necessarily the case with regard to patentable biological materials, which may frequently be licensed for commercial use without patent protection.

The NIH policy allows the recipient to retain title only if the recipient agrees to ensure the continuing availability of the research tool for non-profit research use. The recipient must make information about the invention publicly available and must provide for independent maintenance of the material, whether at a national repository or at the originating grantee laboratory. Finally, the policy requires that the recipient provide sufficient quantities of the biological material to the NIH, and reserves the right of the government to distribute the material itself if the conditions of the non-election are not met.

Another policy that encourages the dissemination of research tools is NIH Procedures for Handling Inventor Requests for Retention of Title in an Extramural Invention,10 which governs review and disposition of requests to allow employee inventors to retain title to extramural inventions. Under the Bayh-Dole Act, the NIH may permit a recipient to grant requests by an inventor for title to an invention when NIH does not wish to obtain title itself. 35 U.S.C. 202(d). Among the criteria set by NIH for allowing retention of title is a requirement that NIH determine that retention of title by the inventor will foster the rapid and appropriate commercialization of the invention, particularly with regard to inventions primarily useful as research tools. In addition, in order to retain title the inventor must certify that he or she will ensure the continuing availability of inventions useful primarily as research tools. NIH imposes similar requirements when its intramural inventors seek to retain title.

Although NIH has taken significant steps to ensure the appropriate dissemination of research tools arising from its grants, the policies currently in place apply piecemeal to isolated circumstances and have not to date been integrated into a strong, cohesive policy directive in this area. NIH could do more to clarify its expectations that appropriate grant stewardship includes ensuring the appropriate dissemination of research tools. In addition, NIH currently grants virtually all requests by recipients of its funding to allow employee-inventors to retain title to their inventions. NIH could revise this policy and routinely retain title to any research tool offered by the recipient, in order to ensure dissemination. These policies would be consistent with both the Bayh-Dole and NIH grant objectives, in that they implement the commercialization provisions of the Act in light of the public policy goals of appropriate access.

8The pertinent excerpt, set forth in Chapter 8 at pp 25-26 (1994), is attached to this Appendix at D3.
9Attached to this Appendix at D4.
10Attached to this Appendix at D5.

The Bayh-Dole Act

The Bayh-Dole Act ("Act") provides the statutory basis and framework for federal technology transfer activities, including the patenting and licensing of federally funded inventions by recipient organizations. The Act permits recipients of federal grants and contracts to elect title to patentable "subject inventions" that arise with the use of federal funds. If recipients elect title, the Act requires them to file patent applications, seek commercialization opportunities, and report back to the funding agency on efforts to obtain utilization of their inventions. The Act also retains for the funding agency certain residual rights in subject inventions.

Exceptional Circumstances

The Bayh-Dole Act gives NIH authority either to limit the recipient's right to elect title, or to retain title itself, to subject inventions in the terms of a funding agreement "in exceptional circumstances when it is determined by the agency that restriction or elimination of the right to retain title to any subject invention will better promote the policy and objectives of this chapter."11 NIH could use this authority to retain title in the terms of grants that have a specific purpose of generating research tools for broad dissemination. As owner of these inventions, NIH could then decide for itself what patenting and licensing strategies make the most sense to ensure continuing availability of particular tools for further research, as well as to ensure incentives for commercialization.

Although NIH has not yet used its "exceptional circumstances" authority as a means of ensuring dissemination of research tools, in light of the restrictive practices of many grantees in licensing NIH-funded research tools, there is some force to the argument that the purposes of the Bayh-Dole Act would be better served if NIH were to retain title to these inventions itself. These purposes, as set forth in the language of the statute, include

"to promote the utilization of inventions arising from federally supported research or development; to encourage maximum participation of small business firms in federally supported research or development efforts; to promote collaboration between commercial concerns and nonprofit organizations, including universities; to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise; to promote the commercialization and public availability of inventions made in the United States by United States industry and labor; 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; and to minimize the costs of administering policies in this area." 12

Particularly if the primary purpose of the grant is to generate specific research tools, or an entire class of tools, that are likely to be widely disseminated and utilized if left in the public domain, it is hard to see how the stated purposes of the Bayh-Dole Act would be better served by giving grantees the option to retain title and restrict access as they see fit.

On the other hand, for discoveries that require substantial commercial investment to achieve practical utilization, the purposes of the Bayh-Dole Act might ordinarily be better served by leaving title in the institution where the research was done so that it will get a patent and find a licensee. A declaration of exceptional circumstances must be made at the time of the grant award, and it might be difficult at that point to predict that a particular grant might give rise to a research tool. One way around this dilemma might be for NIH to develop standard grant language that declared exceptional circumstances for research tools as a category. NIH could thereby retain title to all research tools (or impose a lesser restraint), while leaving title to other subject inventions with the recipient. The difficulty with this approach, as elaborated above, is that it requires an ability to distinguish research tools from other discoveries. Moreover, some research tools might require the sort of private investment that is unlikely in the absence of an exclusive license before they will be developed to the point of achieving practical utilization. A less extreme step for NIH to take would be to delineate the circumstances under which the recipient could request greater rights, for example, if the recipient agrees to ensure the continuing availability of the research tool.

Declaration of exceptional circumstances, either on a case by case or standardized basis, would be a provocative step by NIH, which to date has scrupulously respected the rights of grantees to retain title to inventions. Nevertheless, when the purpose of the grant is to generate research tools for widespread distribution, experience suggests that there are certain circumstances in which the policy and objectives of the Bayh-Dole Act will be better served through retention of title by the funding agency. Given the magnitude of the potential adverse consequences to competition, free enterprise, and public availability that continuing restraints on access to important research tools would pose, it is likely that a well-crafted declaration of exceptional circumstances would survive the inevitable legal challenge from recipients accustomed to deciding their own patent strategies.

11 35 U.S.C. 202(a) provides in pertinent part:
Each nonprofit organization or small business firm may, within a reasonable time after disclosure . . . elect to retain title to any subject invention: Provided, however, That a funding agreement may provide otherwise . . .in exceptional circumstances when it is determined by the agency that restriction or elimination of the right to retain title to any subject invention will better promote the policy and objectives of this chapter.
12 35 U.S.C. 200.

Government Use License

Apart from the exceptional circumstances authority, for all inventions made in the course of NIH-funded research, the Bayh-Dole Act retains "a non-exclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world." 13 This license gives the NIH, and any other agency of the Federal government, the right to use any patented research tool arising in the course of federally-sponsored research without liability for patent infringement. In practice, however, this license has been of little practical value to NIH in obtaining research tools from its grantees, either for its own intramural scientists or for dissemination to others. Some grantees have taken the position that the statute provides protection from infringement only, and have refused to provide samples of the materials in question to facilitate the actual use.

This interpretation seems to defeat the purpose of the retained license and rests on questionable logic. If NIH's retained rights to subject inventions under the Bayh-Dole Act do not extend to tangible materials, it is difficult to see how the Act gives grant recipients rights in such materials. If the recipients' position is based on ordinary tangible property rights rather than Bayh-Dole rights, then the Act does not constrain NIH from seeking an assignment of such rights by contract. NIH should explore whether a standard grants clause could be developed and placed as a condition of all grants to the effect that the recipient agrees to provide to NIH, upon request, samples of any unique research resource developed under the funding. This would facilitate not only the use of patented materials by NIH under its retained license, but also broad dissemination of unpatented research materials that are not "subject inventions."

It is not clear whether NIH's retained license "to practice or have practiced for or on behalf of the United States any subject invention throughout the world" allows NIH to authorize use of subject inventions by other recipients of NIH grants. Some agencies take the position that the activities of grantees are covered by the exemption, but NIH has considered it an open question. Government contracts are clearly considered to be for the purpose of fulfilling a government purpose under The Federal Grant and Cooperative Agreements Act of 1977, which directs federal agencies to use a contract "whenever the principal purpose of the instrument is the acquisition, by purchase, lease, or barter of property or services for the direct benefit or use of the Federal Government," 31 U.S.C. 6303. On the other hand, this same law states that grants are to be used when "the principal purpose of the relationship is the transfer of order to accomplish a public purpose of support or stimulation authorized by Federal statute...." and there is no substantial involvement on the part of the federal government. 31 U.S.C. 6304. This language suggests an essential distinction between a direct Federal benefit obtained under a contract and a broader "public purpose" benefit under a grant, which may provide authority for limiting the useful scope of the retained license "for or on behalf of the United States" under the Bayh-Dole Act to the activities of government agencies and contractors. 14

13 35 U.S.C. 202(c)(4).
14 A broader interpretation of the retained license might also have implications for appropriations and grants law that neither the NIH nor other Federal agencies would welcome.

March-In Authority

The Bayh-Dole Act also has a mandatory licensing provision commonly referred to as the "march-in" authority, at 35 U.S.C. 203(1). 15 The purpose of the march-in authority is to prevent the underutilization of federally funded inventions. Like the government use license, march-in would apply only to those research tools that could be defined as patentable "subject inventions." Prior to exercising march-in rights, the agency must determine that such action is necessary because of the failure of the contractor or its licensees to take effective steps to achieve practical application of the inventions in a particular field of use, to satisfy health or safety needs, or to meet requirements for public use specified by Federal regulations.

The march-in authority might be of use on a case by case basis to improve access to particular research tools, but it is a cumbersome mechanism that does not lend itself to routine use. In order to exercise march-in rights, the funding agency must comply with a lengthy administrative process and make one of the determinations described above. Each particular case can be expected to be lengthy and uncertain. Although administratively burdensome, march-in has one advantage over the exercise of the government use license, in that it is not limited to use for a government purpose. If the funding agency were successful in asserting march-in rights for a patented research tool, a third party licensee could manufacture that tool and make it available for sale to the research community at large.

The Federal government has routinely advocated to Federal courts that recipients of grant funds are not "agents" of the Federal government for purposes of avoiding liability for the acts of grantees in various contexts. Under a long line of cases, Federal agencies consistently distinguish between the acts of employees and contractors, as agents carrying out a government purpose, and the acts of grantees, as independent entities who are not supervised or otherwise significantly controlled by the federal funding program. See generally, Principles of Federal Appropriations Law, Volume II, Chapter 10, U.S. General Accounting Office, 1992.

15 Section 203(1) states in pertinent part:

[w]ith respect to any subject invention in which a [grantee] has acquired title under this chapter, the Federal agency under whose funding agreement the subject invention was made shall have the right ... to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee or exclusive licensee refuses such request, to grant such a licensee itself, if the Federal agency determines that such--
  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;
  2. action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees;
  3. action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee, or licensees ....

Other Authorities

Rights of Government Agencies

Another legal authority, unrelated to the Bayh-Dole Act but available to the NIH due to its status as an agency of the Federal government, is the limitation on remedies for patent infringement against the government under 28 U.S.C. 1498. Section 1498 gives the Federal government the right to use and manufacture any patented invention, whether or not developed with federal funding, without a license, subject to liability for money damages. Section 1498 states:

[w]henever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner's remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture....For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States.

This differs from the government use license under the Bayh-Dole Act in several important respects. First, 1498 is not limited to the funding agency, nor even to patents funded by the Federal government. In effect, it provides the government with a compulsory license under all U.S. patents. Second, 1498 requires payment of reasonable compensation to the patent holder, while the government use license for subject inventions under the Bayh-Dole Act requires no further payment (presumably in consideration of the fact that the agency funded the invention in the first place). Third, 1498 specifically contemplates that the Federal government may provide authorization and consent to others to practice the patent. This language is more amenable to a construction that extends to grantees than the narrower language of the Bayh-Dole Act that restricts the government use license to activities "by or on behalf of the government."

However, the exercise of this authority entails significant costs. The most obvious of these is the requirement that the government pay "reasonable and entire compensation," which could be a staggering amount if NIH were to exercise its rights under 1498 on behalf of all its grantees and contractors. A less obvious, but perhaps more serious, cost is the potential to undermine the value of patents in the hands of private owners, which could have a chilling effect on the future willingness of private companies to develop, publish, or commercialize research tools. Nevertheless, 1498 might prove useful in highly extraordinary circumstances, if the need is critical enough to override these concerns and a license on reasonable terms is not otherwise available.

Rights of All Persons

Reexamination. Another legal option, available to NIH or to any party that believes that certain claims of a patent should not have been allowed, is to cite prior art to the PTO and seek reexamination of the patent under 35 U.S.C. 301-307. These sections of the patent statute allow any person to cite prior art "which that person believes to have a bearing on the patentability of any claim of a particular patent," and to "file a request for reexamination by the Office of any claim of a patent on the basis of the prior art cited." Such a request initiates a proceeding by the PTO to determine whether the prior art cited raises a "substantial new question of patentability," and if so, to order a reexamination of the patent. The reexamination procedure concludes with the issuance and publication of a certificate "canceling any claim of the patent finally determined to be unpatentable, confirming any claim of the patent determined to be patentable, and incorporating in the patent any proposed amended or new claim determined to be patentable." 35 U.S.C. 307.

This legal authority could be useful in cases where a patent on a research tool has claims believed to be overly broad or otherwise invalid in light of prior knowledge in the field. At present, there are patents covering research tools which may be overly broad and vulnerable to such a challenge. However, the reexamination procedure has certain disadvantages for those who would challenge the validity of an issued patent that limit is usefulness. Reexamination is generally done by the same examiner who initially allowed the claims and may be disinclined to find error in his or her own prior decision. Moreover, once reexamination is ordered, the proceeding is conducted on an ex parte basis between the examiner and the patent holder with no opportunity for further involvement by the party challenging the patent. As a result, private firms typically avoid reexamination in the PTO, believing that their prospects for successfully challenging invalid claims are greater in an infringement action.

Research Exemption. Finally, any discussion of legal authorities for improving access to proprietary research tools should include the so-called "experimental use exemption" or "research exemption" from infringement liability. The U.S. patent statute does not appear to permit any unlicensed use of a patented invention, in research or otherwise, but language in some early judicial opinions nonetheless suggests that use of a patented invention solely for research or experimentation is, in principle, exempt from infringement liability.

Although many researchers in non-profit settings believe in and rely on this exemption, there is little legal authority to justify this reliance. The cases that have recognized the existence of a research exemption in theory have typically not applied it to the facts of the cases before them, noting that the defense is "truly narrow." Foreign patent systems that recognize a research exemption typically distinguish between experimenting on a patented invention--i.e. using a patented invention to study the underlying technology or perhaps to invent around the patent, which is what the exemption covers--and experimenting with a patented invention to study something else, which the exemption does not cover. So construed, the exemption would not be available for researchers who make use of patented research tools in the course of investigating something else, as opposed to those who are studying the research tools themselves. This is a sensible distinction. It is difficult to imagine how a broader research exemption could be formulated without effectively eviscerating the value of patents on research tools. Researchers are ordinary consumers of patented research tools, and if these consumers were exempt from infringement liability, the patent holder would have nowhere else to turn to collect patent royalties. An excessively broad research exemption could eliminate incentives for private firms to develop and disseminate new research tools, which could on balance do more harm than good to the research enterprise.

In summary, NIH has numerous legal authorities available to assist in improve access to research tools. The exercise of some may be welcomed by the extramural community and viewed as a positive source of guidance. The exercise of others may be perceived as extreme, and may implicate other issues with far-reaching and perhaps unpredictable consequences.