AUTHOR NOTE: The Eagle Forum invited Brian O’Shaughnessy, President of the Licensing Executives Society, Steve Susalka, Executive Director of the Association of University Technology Managers and me to speak at a Capitol Hill briefing on Bayh-Dole and related issues last week. This was my message for the Congressional staffers and those working with the new Administration who attended.
Bayh-Dole passed in a time just like this. In 1980 a candidate who was widely derided by the media unexpectedly won the presidency when voters concerned with the direction of the country decided to shake things up. At the time many pundits were writing that America’s best days were behind us and we should resign ourselves to no longer being the leading economic power. We had widespread unemployment, had lost our lead in traditional industries like cars, electronics and steel and it looked like just a matter of time until we lost the rest. Many of the “best and brightest” said our only hope was to copy the Japanese model where centralized government planners working with dominant companies confidently charted the economic future. They added that the days of “cowboy entrepreneurs” were over.
But we chose a different path. We selected a Jeffersonian model, decentralizing power from Washington while providing incentives to our entrepreneurs and restoring confidence in the patent system. That combination ignited the greatest explosion of innovation in human history.
However, the system which has served us so well is starting to fray. Bayh-Dole is running on autopilot without Executive branch oversight and U.S. patents are no longer the world’s gold standard. Without a course correction, we could be headed back to the bad old days.
We started our previous turnaround without any fanfare. One day several of us on Senator Birch Bayh’s Senate Judiciary Committee staff were visited by a delegation headed by Purdue University. We had no idea what they wanted but whenever Purdue called, we listened. They informed us that under the patent policies then in place when inventions were made with federal support they were taken from their creators and stockpiled in Washington. Then potentially important discoveries wasted away because the incentives of patent ownership necessary for their development had been destroyed.
At that time the federal government funded about half of the R&D in the country (it’s now a third) and the vast majority of basic research where breakthrough products are discovered. We found that 28,000 inventions had been taken by the government with less than 5% ever being licensed. We also discovered that not a single new drug had ever been developed under these policies. That was a tragic waste of billions of taxpayer’s dollars spent annually on government R&D.
Sen. Dole had similar concerns and our offices agreed to work together to change direction. The result was the Bayh-Dole Act which decentralized the management of inventions from the Washington bureaucracy back to small businesses and universities performing federal research.
The law says that universities must give preferences in licensing their discoveries to small companies and those who agree to manufacture resulting products substantially in the U.S. Government agencies are allowed to use inventions they fund to meet their needs (generally advancing science or meeting mission requirements).
If a technology is successfully commercialized, universities must spend resulting royalties on more research, rewarding their inventors or paying the costs of their technology transfer operations.
One of the great concerns of the time was that dominant companies might license university inventions with the deliberate purpose of suppressing them if they threatened existing products. Thus, Bayh-Dole included a “march-in” clause allowing the funding agency to investigate and if this is occurring, require universities to issue additional licenses “on reasonable terms.” The same phrase was used in defining the Congressional intent that these inventions be brought to “practical application” by being available in the marketplace. The government can also march in if the developer is not able to meet the production needs of a health or national security emergency.
Twenty years later two enterprising law professors wrote in The Washington Post that they had found a startling new authority in the statute. They declared that “reasonable terms” means that the government can take a technology away from the developer if it doesn’t like the price of a commercialized product. Senators Bayh and Dole immediately denounced that theory, as giving agencies the authority to second guess a product’s price after it has been developed with private funds would completely undermine the law. Regardless, a small band of critics have tried numerous times to have NIH march in to lower the price of drugs, each of which was appropriately rejected.
What the critics gloss over is that federally funded inventions are at a very early stage, more ideas than products. Under our system the considerable risk and expense of taking them from the lab into the market falls on the private sector. When they fail, no one feels sorry for the company or pays their expenses. The risks are much greater in drug development which takes more than a decade, costing hundreds of millions to billions of dollars with little chance of commercial success. No one would ever undertake such efforts if the government could issue compulsory licenses to their competitors anytime bureaucrats decide they don’t like the price of a product.
In more than 35 years only one case has met the criteria of the march in provision. Genzyme’s production of an orphan drug, Fabrazyme, was halted due to problems in the factory. NIH declined to march in because it would take new licensees longer to get FDA approval to get into production that it took Genzyme’s facility to get back on line. That there haven’t been more cases does not mean the system doesn’t work. March in rights are the fail safe mechanism of tech transfer. Just like airbags in your car, hopefully they’ll never be needed. March in rights haven’t been necessary for a simple reason: universities are effectively enforcing their deals. If a licensee is not meeting development milestones, the license is revoked and another developer sought.
Because of Bayh-Dole policies, when Stanford and the University of California came up with the basic process for biotechnology they were able to own and manage it. Large companies were slow to realize the potential of the new industry so universities began spinning out new companies. The U.S. quickly eclipsed the United Kingdom’s lead in the field– and we never looked back.
While none were developed previously, under Bayh-Dole at least 200 new drugs and vaccines are now fighting disease. Due to industry/academic alliances the U.S. is far and away the world leader in the life sciences.
Universities license about 70% of their patents to small companies. Even in high risk, high cost industries like drug development, small companies are prominent players. Half of our new drugs originate in small companies.
There was another significant change soon after the passage of Bayh-Dole which contributed to our turnaround: we created the Court of Appeals for the Federal Circuit. That insured the uniform application of our patent laws, restoring confidence in the system. The combination of Bayh-Dole and having dependable patents soon reestablished America’s lead in every field of science– and more importantly, the effective transformation of early stage research into useful products benefitting hard pressed taxpayers.
Bayh-Dole has become a driver of the U.S. economy. Every day of the year universities form two new companies and two new products from their inventions are commercialized. University spin out companies tend to stay in state becoming significant contributors to the regional economy.
Two years ago a prominent study found that under Bayh-Dole academic inventions contributed $1.18 trillion to our economy between ’96- ’13 while supporting 4 million good paying jobs. With more than 90 million Americans out of the labor force and most of our new jobs paying low wages with few benefits, the economic impact of the law is apparent.
By the way, the Biotechnology Innovation Organization (BIO) authorized me to make an announcement today. You are the first to know that it will soon update that study. We can expect the new numbers to be even more impressive with two additional years of data.
Bayh-Dole also strengthened science. Before the law, companies were rightly afraid to work with universities because if the government funded even a small percentage of research, it could take any resulting inventions. With the passage of Bayh-Dole our best minds in the public and private sectors now work together. The National Science Foundation reported the resulting rise in jointly authored academic/industry papers is one of the most promising trends in science.
We’ve come a long way but can’t take our success for granted. While our system still leads the world, it’s foundations are showing cracks. As discussed, some are working to misapply Bayh-Dole so the government can set prices for products arising from federally funded research. That would be a fatal blow. We have allowed the statutory oversight function at the Department of Commerce, intended to insure that all agencies apply the law uniformly, to wither away. It’s remarkable Bayh-Dole has functioned for so many years without effective oversight but that can only continue for so long until agencies wander off track.
Indeed, the Dept. of Education recently put out a regulation that it will take ownership of educational software arising from its research. Universities pointed out that since software can be patented, the regulation violates Bayh-Dole. They added that since the software requires commercial development before it can be useful in schools, destroying intellectual property is counterproductive to the Department’s objectives. The Department shrugged off the comments and appears determined to plow ahead.
We are also witnessing a steady erosion of our patent system. If steps aren’t taken to correct practices that undermine the Constitutional right to own intellectual property like inter partes reviews (AKA: patent killing fields) and the inability of patent owners to get effective injunctions halting the stealing of their inventions, American innovation is in real peril.
Bayh-Dole is a recognized best practice. The Chinese have adopted it while strengthening their patent system to better compete with us. I was honored to be the lead witness when South Africa adopted Bayh-Dole. Last year, I was part of a World Bank project in Kazakhstan which is implementing our model. There’s no reason why we can’t continue to prosper even if others copy us. But like any engine, our system requires maintenance to perform properly.
Bayh-Dole is Jeffersonian democracy in action. The government funds research in our universities and federal laboratories, provides incentives for partnerships with industry under clear, consistently applied rules, and most importantly, gets out of the way. The American people are now demanding results. We have a proven system which we need to restore and treasure. This is a time for action, not words.