Stem Cell Research and Patents: An Introduction to the Issues

CRS Report for Congress
Stem Cell Research and Patents:
An Introduction to the Issues
September 10, 2001
Wendy H. Schacht
Specialist in Science and Technology
Resources, Science, and Industry Division
John R. Thomas
Visiting Scholar in Economic Growth and Entrepreneurship
Resources, Science, and Industry Division


Congressional Research Service ˜ The Library of Congress

Stem Cell Research and Patents:
An Introduction to the Issues
Summary
The announcement by President George W. Bush permitting federal funding for
human embryonic stem cell research on “existing stem cell lines” has raised several
patent-related issues both specific to this situation and part of the general formulation
of patent policy. The grant of a patent provides the inventor exclusive rights on its
practice for 20 years. This is intended to encourage the additional investment
necessary to further develop an idea into a marketable technology. Concurrently, a
patent places the concept on which it is based in the public domain. In return for a
monopoly right to specific applications of the knowledge generated, the inventor must
publish the ideas covered in the patent. Thus, the patent can, and often does,
stimulate others to invent “around” existing patents to provide for parallel technical
developments or to meet similar and expanded demands in the marketplace.
As with many other biotechnologies, inventions pertaining to stem cells may be
subject to patent protection. To be afforded patent rights, a particular stem cell
invention must be judged to consist of patentable subject matter, possess utility, and
to be novel and nonobvious. In addition, an inventor must file a patent application at
the U.S.Patent and Trademark Office. That application must fully disclose and
distinctly claim the stem cell invention for which protection is sought. If allowed to
issue, the patent grants its owner the ability to exclude others from making, using,
selling, offering to sell, or importing into the U.S. the patented invention.
The Bush Administration policy decision limits federal research funding to a
discrete number of human embryonic stem cell lines. At least some of these cell lines
are subject to patent protection. Scientists who wish to use federal financing to
explore certain research possibilities may have few alternatives but to employ a
patented cell line. With federal policy having arguably limited research options, some
attention might be paid to how patents on exploitable stem cell inventions are used by
their proprietors. The arrangements worked out between the Public Health Service
and the University of Wisconsin (through its licensing agent WiCell) may be
instructive. These, and other licensing policies and practices may be especially
appropriate for consideration.
Although the original embryonic stem cell patents owned by the University of
Wisconsin were not developed with government support, future intellectual property
may arise as a result of federally-funded R&D under the Bush plan. Ownership of
patents originating from research performed by institutions outside the federal
research establishment but financed by the government is prescribed by P.L. 96-517,
commonly referred to as the “Bayh-Dole Act.” The law provides small businesses and
non-profit organizations title to inventions made under federal funding (grants or
contracts) within certain limitations. If new stem cell patents are generated subject
to the Bayh-Dole Act, the way the provisions of the statute are applied may be of
interest given the specific parameters of the Bush plan. It remains to be seen if the
research limitations associated with stem cells will influence the government to
exercise the rights conferred in ways distinct from current practice.



Contents
The Role of Patents..............................................1
Patent Law Pertaining to Stem Cell Lines.............................5
Patents and Federally-Funded R&D.................................10
Issues and Observations..........................................13



Stem Cell Research and Patents: An
Introduction to the Issues
The announcement by President George W. Bush permitting federal funding for
human embryonic stem cell research on “existing stem cell lines” has raised several
patent-related issues both specific to this situation and part of broader concerns over
intellectual property. This report examines the rationale behind the patent system,
established in the U.S. Constitution, and its role in promoting innovation in all sectors
of the economy. The application of patent law in the area of stem cell research is also
discussed. However, the parameters of the Bush Administration plan may generate
additional intellectual property considerations with respect to both the private sector
and the federal government. To date, research in this area has proceeded without
federal financing; thus any resulting patents reside in the private sector. A
Memorandum of Understanding for use of certain cell lines has been signed between
the Public Health Service and WiCell, the licensing agent of the University of
Wisconsin that owns several relevant patents. Still, additional patents may arise from
government supported research and development (R&D) in this area. Thus, this
report explores the laws that influence the disposition of intellectual property1
generated under federally-funded R&D.
The Role of Patents
Congressional interest in the availability of drugs and other therapeutics has
focused attention on the role of patents in biomedical R&D and the pharmaceutical
industry. Enterprises within the pharmaceutical sector frequently obtain patent
protection and enforce patent rights, and reportedly place a higher comparative value
on patents than do competitors in many other markets. Concurrently, the value of all
intellectual property has grown as technology becomes increasingly important to the
United States. It is now widely accepted that technological progress accounts for up


1For additional analysis of these issues, please refer to the following CRS reports: Stem Cell
Research, by Judith A. Johnson, RL31015, 10 August 2001; An Examination of the Issues
Surrounding Biotechnology Patenting and Its Effect Upon Entrepreneurial Companies, by
John R. Thomas, RL30648, 31 August 2000; R&D Partnerships and Intellectual Property:
Implications for U.S. Policy, by Wendy H. Schacht, 98-862, 6 December 2000; Patent
Ownership and Federal Research and Development: A Discussion on the Bayh-Dole Act and
the Stevenson-Wydler Act, by Wendy H. Schacht, RL30320, 11 December 2000; and Federal
R&D, Drug Discovery, and Pricing: Insights from the NIH-University-Industry
Relationship, by Wendy H. Schacht, RL30585, 19 June 2000.

to one-half of the nation’s economic growth and is one principal driving force for
increases in our standard of living.2
The patent system was created by Article I, Section 8, Clause 8 of the U.S.
Constitution to promote new discoveries and their reduction to practice, commonly
known as innovation. The grant of a patent provides the inventor with a means to
capture returns to his invention through exclusive rights on its practice for 20 years
from date of filing. This is intended to encourage those, often substantial, investments
necessary to further develop an idea and generate a marketable technology. At the
same time, the process of obtaining a patent places the concept on which it is based
in the public domain. In return for a monopoly right to specific applications of the
knowledge generated, the inventor must publish the ideas covered in the patent. As
a disclosure system, the patent can, and often does, stimulate other firms or
individuals to invent “around” existing patents to provide for parallel technical
developments or meet similar and expanded demands in the marketplace.
Innovation typically is knowledge-driven — based on the application of
knowledge, whether scientific, technical, experiential, or intuitive. Innovation also
produces new knowledge. One characteristic of knowledge that underlies the patent
system is that it is a “public good,” a good not consumed when used. Patents permit
novel concepts or discoveries, typically costly and resource intensive to develop, to
become “property” when reduced to practice and therefore allow for control over
their use. Patent ownership “. . . create[s] incentives that maximize the difference
between the value of the intellectual property that is created and used and the social
cost of its creation.”3
The patent process is designed to resolve the problem of “appropriability,” those
“. . . factors, excluding firm and market structure, that govern an innovator’s ability
to capture the profits generated by an innovation.”4 Studies demonstrate that the rate
of return to society as a whole generated by investments in R&D is significantly larger
than the benefits that can be captured by the person or organization financing the
work. It has been estimated that the social rate of return on R&D spending is over
twice that of the rate of return to the inventor.5 Without the protection provided by
patents, ideas may be easily imitated, the knowledge associated with an innovation


2Gregory Tassey, The Economics of R&D Policy (Connecticut: Quorum Books, 1997), 54.
See also: Edwin Mansfield, “Intellectual Property Rights, Technological Change, and
Economic Growth,” in: Intellectual Property Rights and Capital Formation in the Next
Decade, eds. Charls E. Walker and Mark A. Bloomfield (New York: University Press of
America, 1988), 5.
3Stanley M. Besen and Leo J. Raskind, “An Introduction to the Law and Economics of
Intellectual Property,” Journal of Economic Perspectives, Winter 1991, 5.
4David J. Teece, “Profiting from Technological Innovation: Implications for Integration,
Collaboration, Licensing, and Public Policy,” in The Competitive Challenge, ed. David J.
Teece (Cambridge: Ballinger Publishing Co., 1987), 188.
5For a list of relevant research in this area see: Council of Economic Advisors. Supporting
Research and Development to Promote Economic Growth: The Federal Government’s Role,
(October 1995), 6-7.

dispersed and adapted to other products and processes that, in turn, stimulate growth
in the economy. The difficulty in securing sufficient returns to spending on research
and development has been associated with underinvestment in such activities.
If discoveries were universally available without the means for the inventor to
realize a return on investments, there would result a “. . . much lower and indeed
suboptimal level of innovation.”6 While research is often important to innovation,
studies have shown that it often constitutes only 25% of the cost of commercializing
a new technology or technique, thus requiring the expenditure of a substantial amount
of additional resources to bring most products or processes to the marketplace. The
grant of a patent provides the inventor with a means to capture the returns to his
invention through exclusive rights on its practice. That is intended to encourage those
investments necessary to further develop an idea and generate a marketable
technology.
The patent system thus has dual policy goals — providing incentives for
inventors to invent and encouraging inventors to disclose technical information.7
Disclosure requirements are factors in achieving a balance between current and future
innovation through the patent process, as are limitations on scope, novelty mandates,8
and nonobviousness considerations (as discussed below). They give rise to an
environment of competitiveness with multiple sources of innovation, viewed by some
experts as the basis for technological progress. This is important because, as Robert
Merges (Boston University) and Richard Nelson (Columbia University) found in their
studies, when only “. . . a few organizations controlled the development of a
technology, technical advance appeared sluggish.”9
Not everyone agrees that the patent system is a particularly effective means to
stimulate innovation. It has been argued that patents do not work in reality as well
as in theory because they do not confer perfect appropriability. In other words, they
allow the inventor to obtain a larger portion of the returns on his investment but do
not permit him to capture all the benefits. Patents can be circumvented and
infringement cannot always be proven. Thus, patents are not the only way, nor
necessarily the most efficient means, for the inventor to protect the benefits generated
by his efforts. A study by Yale University’s Richard Levin and his colleagues
concluded that lead time, learning curve advantages (e.g. familiarity with the science
and technology under consideration), and sales/service activities were typically more
important in exploiting appropriability than were patents. That was true for both
products and processes. However, patents were found to be better at protecting the
former than the latter. The novel ideas associated with a product often can be
determined through reverse engineering — taking the item apart to assess how it was


6Kenneth W. Dam, “The Economic Underpinnings of Patent Law,” Journal of Legal Studies,
January 1994, 247.
7Robert P. Merges, “Commercial Success and Patent Standards: Economic Perspectives on
Innovation,” California Law Review, July 1988, 876.
8Dam , The Economic Underpinnings of Patent Law, 266-267.
9Robert P. Merges and Richard R. Nelson, “On the Complex Economics of Patent Scope,”
Columbia Law Review, May 1990, 908.

made. That information then could be used by competitors if not covered by a patent.
Because it is more difficult to identify the procedures related to a process, other
means of appropriation are seen as preferable to patents, with their attendant10
disclosure requirements.
The utility of patents to companies varies among industrial sectors. Patents are
perceived as critical in the drug and chemical industries. That may reflect the nature
of R&D performed in these sectors, where the resulting patents are more detailed in
their claims and therefore easier to defend.11 In contrast, one study found that in the
aircraft and semiconductor industries patents are not the most successful mechanism
for capturing the benefits of investments. Instead, lead time and the strength of the12
learning curve were determined to be more important. The degree to which industry
perceives patents as effective has been characterized as “. . . positively correlated with
the increase in duplication costs and time associated with patents.”13 In certain
industries, patents significantly raise the costs incurred by nonpatent holders wishing
to use the idea or invent around the patent — an estimated 40% in the pharmaceutical
sector, 30% for major new chemical products, and 25% for typical chemical goods
— and are thus viewed as important. However, in other industries, patents have
much smaller impact on the costs associated with imitation (e.g. in the 7%-15% range
for electronics), and may be considered less successful in protecting resource
investments. 14
Despite questions as to their efficacy, firms continue to patent their inventions.
In the United States, the number of filed patent applications and issued patents
continues to climb. In 1995 inventors filed 221,304 patent applications at the U.S.
Patent and Trademark Office; in 2000, that number had increased to 293,244
applications. In a study of 100 companies spanning 12 industries conducted by Edwin
Mansfield, about half of the eligible inventions are patented in those sectors that did
not consider patents important.15 That activity appears to be the result of additional
perceived benefits including royalty payments, delays to imitators, and the ability to
use patents as bargaining tools to meet alternative priorities of the firm. Others
speculate that patents are used primarily to measure employee performance and to


10Richard C. Levin and Alvin K. Klevorick, Richard R. Nelson, Sidney G. Winter.
“Appropriating the Returns for Industrial Research and Development,” Brookings Papers on
Economic Activity, 1987, in The Economics of Technical Change, eds. Edwin Mansfield and
Elizabeth Mansfield (Vermont, Edward Elgar Publishing Co., 1993), 254.
11Ibid., 255 and 257. See also: Mansfield, Edwin. Intellectual Property Rights, Technological
Change, and Economic Growth, in eds. Charles Walker and Mark A. Bloomfield, Intellectual
Property Rights and Capital Formation in the Next Decade, (New York, University Press
of America, 1988), 12 and 13.
12Levin, et. al., Appropriating the Returns for Industrial Research and Development, 243.
13Ibid., 269.
14Mansfield, Edwin, Mark Schwartz, and Samuel Wagner. Imitation Costs and Patents: An
Empirical Study, The Economic Journal, December 1981, in The Economics of Technical
Change, 270.
15Mansfield, Intellectual Property Rights, Technological Change, and Economic Growth,

14.



gain access to foreign markets.16 The low expiration rate prior to the full term of
high technology patents relative to patents on less sophisticated technologies may
indicate the value that companies assign to such protection, even in industries when17
the life cycle of the invention is short. According to Suzanne Scotchmer (University
of California, Berkeley), the innovator’s incentives to patent depend on: “(i) the
profitability of marketing the first technology prior to the development of second
generation products; (ii) the extent of disclosure that patenting entails; (iii) the ease
with which the technology could be reverse-engineered if marketed but not patented;
and (iv) the breadth of patent protection.”18
Patent Law Pertaining to Stem Cell Lines
As with many other biotechnologies, inventions pertaining to stem cells may be
subject to patent protection.19 To be afforded patent rights, a particular stem cell
invention must be judged to consist of patentable subject matter, possess utility, and
to be novel and nonobvious. In addition, an inventor must file a patent application at
the United States Patent and Trademark Office (“USPTO”). That application must
fully disclose and distinctly claim the stem cell invention for which protection is
sought. This report reviews each of these requirements in turn.
Many stem cell inventions may be judged patentable subject matter under U.S.
law. Under the Patent Act of 1952, patents may be granted for any “process,
machine, manufacture, or composition of matter.”20 Stem cell inventions would
typically be classified as either a composition of matter (such as a purified suspension
of stem cells); or as a process (such as a method of preparing or using stem cell
products).
That stem cell inventions are derived from living beings does not necessarily bar
their patentability. Although a patent will not be granted for inventions that merely
duplicate materials found in nature, an inventor may obtain a patent for an artificially
modified biotechnological product.21 Inventions that require the isolation and
purification of a stem cell line have been judged to involve a sufficient transformation
of raw materials to be patentable. Of three patents (related to “adult” or cord blood


16Levin, et. al., Appropriating the Returns for Industrial Research and Development, 257.
17Donald J. Quigg, “Safeguarding Intellectual Property — Stimulus to Economic Expansion,”
in Walker, Intellectual Property Rights and Capital Formation in the Next Decade, 40.
18Suzanne Scotchmer, “Standing on the Shoulders of Giants: Cumulative Research and the
Patent Law,” Journal of Economic Perspectives, Winter 1991, in Mansfield, The Economics
of Technical Change, 209.
19See generally U.S. Library of Congress, Congressional Research Service, An Examination
of the Issues Surrounding Biotechnology and Its Effect Upon Entrepreneurial Companies,
by John R. Thomas, Report RL30648, 31 August 2000.
2035 U.S.C. § 101.
21See Michael A. Sanzo, “Patenting Biotherapeutics,” 20 Hofstra Law Review (1991), 387.

stem cells) that Johns Hopkins University asserted against Cell Pro, Inc.,22 one
claimed a purified suspension of stem cells;23 another a method of creating a purified
suspension of stem cells using certain antibodies;24 and a third patent claimed a25
method of using a purified suspension of stem cells in bone marrow transplants.
Because none of the products or processes claimed in these patents exists in nature
per se, each was considered to be patentable subject matter.
Particular stem cell inventions may also fulfill the novelty and nonobvious
requirements. The novelty requirement mandates that the invention differ from public
domain knowledge.26 To fulfill the nonobviousness requirement, the invention can not
be within the capabilities of a person of ordinary skill in the art.27 Because particular
stem cell inventions may not precisely duplicate what exists in nature, or had been
artificially generated by earlier biotechnicians, stem cell inventions may fulfill the
novelty requirement. Similarly, the identification, isolation and purification of stem
cell inventions often involves the exercise of considerable skill by highly trained28
scientists. As a result, particular stem cell inventions may also meet the
nonobviousness requirement.
Finally, the utility requirement mandates that inventors patent tangible products29
capable of providing an immediate benefit. According to the United States Supreme
Court, the utility requirement enforces the principal that patents are granted for
downstream, applied technology, rather than more abstract, upstream knowledge.30
Otherwise, the Court explained, patents would impede rather than advance31
subsequent technological progress.
Whether stem cell inventions should be considered to possess utility within the
meaning of the patent law has been subject to some debate. Stem cell lines potentially
possess widespread laboratory uses and have sometimes been labeled “research
tools.”32 Some commentators believe that scientists who wish to use certain “research
tools,” including some transgenic animals and biological receptors, have sometimes
found that these tools are the subject of patent protection. According to these


22See Johns Hopkins University v. CellPro, Inc., 152 F.3d 1342 (Fed. Cir. 1998).
23U.S. Patent No. 4,714,680.
24U.S. Patent No. 5,035,994.
25U.S. Patent No. 5,130,144.
2635 U.S.C. § 102.
2735 U.S.C. § 103.
28See Jean deVellis, “Ownership of Cell Lines,” 65 Southern California Law Review (1991),

697.


2935 U.S.C. § 101. See Brenner v. Manson, 383 U.S. 519 (1966).
30Brenner v. Manson, 383 U.S. at 519.
31 Ibid.
32See Janice Mueller, “No ‘Dilettante Affair: Rethinking the Experimental Use Exception to
Patent Infringement for Biomedical Research Tools,” 76 Washington Law Review (2001), 1.

observers, royalty obligations and heightened transaction costs resulting from the
allowance of patents on research tools threaten the development of new drugs and
medical devices.33 Other commentators believe that patents provide the incentives
necessary to facilitate investment and coordination around the complex, costly, and
risky activities required to generate research tools, similar to other sorts of
inventions. 34
Under guidelines issued by the USPTO, so long as a single utility is identified for
an invention for which a patent is sought, the utility requirement will be considered
satisfied. Patent applicants must disclose a “specific, substantial and credible” utility
for their inventions, unless such a utility is already well-established.35 To fulfill the
standard set out by the USTPO guidelines, an inventor must identify a particular, “real
world” use to which the subject matter claimed can be put, as compared to a general
statement of the use of the invention, or a mere statement that the invention can be
used to conduct further scientific investigation. In the context of stem cell inventions,
inventors have sometimes asserted that particular stem cell lines have therapeutic uses,
such as in bone marrow transplantation,36 aplastic anemia treatments,37 or efforts to
inhibit the growth of prostate tumor cells.38 If credible, such uses ordinarily suffice
to meet the patent law’s utility requirement.
Patent rights do not arise automatically. Even if an invention is of the
appropriate subject matter, possesses utility, and is new and nonobvious, it will not
be subject to patent protection unless an application is pursued at the USPTO. This
application must distinctly claim and fully disclose the invention, such that a skilled
person may make and use the claimed invention without undue experimentation.39
For cell lines and other biological inventions, sometimes an inventor must provide a
sample of the cell line to a recognized public depository in order to fulfill the40
enablement requirement.
If allowed to issue, the patent grants its owner the right to exclude others from
making, using, selling, offering to sell, or importing into the United States the41
patented invention. Patent rights are not self-enforcing. A patentee bears
responsibility for monitoring its competitors to determine whether they are using the


33 Ibid.
34 F. Scott Kieff, “Facilitating Scientific Research: Intellectual Property Rights and the Norms
of Science – A Response to Rai and Eisenberg,” 95 Northwestern University Law Review
(2001), 691.
35United States Patent & Trademark Office, “Revised Utility Guidelines,” 64 Federal
Register (22 Dec. 1999), 71440.
36U.S. Patent No. 4,714,680.
37U.S. Patent No. 6,207,802.
38U.S. Patent No. 6,267,960.
3935 U.S.C. § 112.
40See: Amgen, Inc. v. Chugai Pharmaceutical, Inc., 927 F.2d 1200 (Fed. Cir. 1991).
4135 U.S.C. § 271.

patented invention or not. Patent proprietors who wish to compel others to observe
their intellectual property rights sometimes must commence litigation in the federal
courts. In addition to arguing that they do not practice the patented invention,
accused infringers may defend on the ground that the patent was improvidently
granted by the USPTO and is therefore invalid. Issued patents are presumed to be
valid, however, and the burden lies upon the accused infringer to demonstrate that the
patented invention lacks utility, would have been obvious, or another ground for42
defeating the patent. The maximum term of patent protection is ordinarily set at 20
years from the date the application is filed.43
A patentee may license others to practice the patented invention. A patent
license essentially consists of a promise by the patentee not to sue the licensee for
infringement.44 In addition to the payment of royalties, licensees often make
additional promises in exchange for the license. One such promise is sometimes
referred to as a “reach-through” agreement. Under a reach-through agreement, the
licensee promises to provide the patentee with rights in future discoveries made by the
licensee. These rights range from the payment of royalties, the grant of a license back
to the original patentee, or even the requirement that licensees obtain approval of the
patentee before passing on or commercializing new discoveries.45
Some commentators believe that reach-through agreements do not serve valid
social policies, particularly when the licensed patent concerns a “research tool.”46
According to these accounts, reach-through agreements lessen the incentive to
complete downstream research, and may discourage the very innovation that
intellectual property is intended to promote.47 In addition, reach-through agreements
may allow patentees to leverage their proprietary positions in upstream research tools
into a broad veto right over downstream research and product development.48 Other
observers suggest that reach-through agreements present an effective price
discrimination and metering tool, allowing the patentee to charge a low base price,
while charging higher prices only to licensees whose research is successful.49
A number of issued U.S. patents concern stem cell inventions. Through August

28, 2001, a total of 168 U.S. patents with the term “stem cell” in the title had been


4235 U.S.C. § 282.
4335 U.S.C. § 154(a)(2).
44See: Fromson v. Western Litho Plate and Supply Co., 853 F.2d 1568, 1572 (Fed. Cir.

1988).


45Michael A. Heller. and Rebecca S. Eisenberg, “Can Patents Deter Innovation? The
Anticommons in Biomedical Research,” 280 Science (1998), 698.
46Clarissa Long, “Proprietary Rights and Why Initial Allocations Matter,” 49 Emory Law
Journal (2000), 823.
47Mark R. Patterson, “When Is Property Intellectual? The Leveraging Problem,” 73 Southern
California Law Review (2000), 1133.
48Heller & Eisenberg.
49 Patterson.

granted, the majority of which appear to associated with “adult” or cord blood stem
cell inventions rather than the embryonic stem cells covered by the Bush
Administration plan. Because the USPTO maintains many pending patent50
applications in secret until they are issued as granted patents, the number of filed
patent applications concerning stem cell inventions is uncertain. The correspondence
between these patents and patent applications, on one hand, and stem cell lines for
which federal research grants for embryonic stem cell research may be obtained, on
the other, has not been determined.
Several patents pertaining to an embryonic stem cell invention, on research
performed by Dr. James A. Thomson, have been the subject of discussion in both the51
lay and scientific press. These patents, held by a foundation associated with the
University of Wisconsin, claim both a method of isolating stem cells and the resulting
stem cell line. Some observers reportedly believe that the Wisconsin patents have an
extremely broad scope, in that they cover basic tools and techniques of embryonic
stem cell research.
Under this view, even those who obtain patents on subsequent improvements
may be subject to the dominating Wisconsin patent. In assessing this argument, it is
important to understand that an inventor who obtains a patent remains subject to
other laws and property rights, including the patents of others. To use a simple
example, suppose that Inventor A invents and obtains a patent on a chair. Inventor
B later invents and obtains a patent on a rocking chair. Because a rocking chair
incorporates an ordinary chair into its design, Inventor B would be unable to
manufacture rocking chairs without infringing Inventor A’s patent. In these
circumstances, the chair patent is often termed a “basic” or “dominant” patent, while
the rocking chair patent is termed an “improvement” or “subordinate” patent.
Similarly, according to some observers, the Wisconsin patent covers such fundamental
stem cell tools and methods that it would dominate subsequent improvement
patents. 52
When considering the scope of protection offered by a “basic” or “dominant”
patent, it is important to note that the proprietary rights associated with a particular
patent are, generally speaking, only as broad as the technical information disclosed
within that patent instrument. Even though a particular patent may be worded
broadly, the patent is effective to the extent that its claims are supported by a
technical disclosure that enables others to practice the patented invention. Applying
this principle to the present circumstances, some observers have noted that the
Wisconsin patents appear to have broadly worded claims to fundamental inventions,
such as the process of isolating stem cells and the resulting stem cell lines. However,
if other scientists invented new methods of isolating stem cell lines that are sufficiently


5035 U.S.C. § 122.
51E.g., Sheryl Gay Stolberg, “Patent Laws May Determine Shape of Stem Cell Research,”
New York Times (17 Aug. 2001).
52See Susan Greenlee, “Dolly's Legacy to Human Cloning: International Legal Responses and
Potential Human Rights Violations” 18 Wisconsin International Law Journal Spring (2000),

537.



different from those methods described in the Wisconsin foundation patents, they
would be entitled to use and themselves patent their distinct inventions.
On September 5, 2001, the Public Health Service, U.S. Department of Health
and Human Services, signed a Memorandum of Understanding (MOU) with WiCell
Research Institute, Inc., the licensing agent of the University of Wisconsin regarding
the use of certain technologies and materials covered by the Wisconsin patents.53 The
MOU generally parallels the standard uniform biological material transfer agreement
used by NIH since 1995. It permits Public Health Service employees, particularly
NIH scientists, to utilize the University of Wisconsin embryonic stem cell materials
covered by the University’s patents for research purposes that meet the relevant
criteria for such work. Any new intellectual property arising from this intramural
research is to be the property of the Public Health Service/NIH. While there is no
expressed statement regarding retention of patent rights, the contract does not negate
federal patent law that provides the inventor, in this case the NIH, the rights to any
intellectual property generated. The Memorandum does not deny the NIH publication
rights so therefore by implication the PHS is free to publish the results of research
using Wisconsin materials covered by the University’s patent.
The Memorandum of Understanding makes it clear that the use of University of
Wisconsin materials are for research purposes only; any future commercial activity is
not covered by this document. However, it acknowledges that the results of
federally-funded research may lead to products for the marketplace. A separate
contract, with WiCell, must be entered into regarding use of any Wisconsin materials
for commercial purposes. The parties anticipate that any future agreement for
commercial activities will be similar to existing commercial licenses with WiCell. (It
should be noted that commercial licenses often use reach-through provisions, although
this has not been verified in the case of of WiCell.)
While the memorandum covers research performed by NIH scientists, it also
indicates that WiCell agrees to make parallel agreements containing the same
provisions with other research institutions receiving federal funding. While these have
not been executed, to date, it may be presumed that the university or other non-profit
research organization would keep any new intellectual property rights as the Public
Health Service does under the current MOU. However, any activities to
commercialize these patents are expected to require a separate commercialization
agreement with WiCell.
Patents and Federally-Funded R&D
Although the original stem cell patent owned by the University of Wisconsin was
not developed with government support, as discussed above, future intellectual


53The Memorandum of Understanding is available at the NIH Office of Technology Transfer
Web site at [http://www.nih.gov].

property may arise as a result of federally-funded R&D under the Bush plan.54
Ownership of patents originating from research performed by institutions outside the
federal research establishment but financed by the government is prescribed by P.L.
96-517, Amendments to the Patent and Trademark Act. This law, commonly referred
to as the “Bayh-Dole Act” after its two main sponsors, former Senators Birch Bayh
and Robert Dole, provides small businesses and non-profit organizations title to
inventions made under federal funding (grants or contracts) within certain55
limitations.
The Bayh-Dole Act evolved out of congressional interest in developing a
uniform federal patent policy to promote the utilization of inventions made with the56
support of the federal research establishment. Such action was deemed necessary
because, at the time the legislation was under consideration, only 5% of federally-
owned patents were being used. While there were possibly several reasons for such
a low level of utilization (including no market applications), this was thought by many
to be one consequence of the practice by most agencies of taking title to all inventions
made with government funding while only permitting the nonexclusive licensing of
contractor inventions.57 Without title to inventions, or at least exclusive licenses,
companies may be less likely to engage in and fund the additional R&D necessary to
bring an idea to the marketplace. The legislation, by providing universities, nonprofit
institutions, and small businesses with ownership of patents arising from federally-
funded R&D, offers an incentive for cooperative work and commercial application.
Royalties derived from intellectual property rights provides the academic community
an alternative way to support further research and the business sector a means to
obtain a return on their financial contribution to the endeavor.
In enacting P.L. 96-517, the Congress accepted the proposition that vesting title
in a contractor will encourage commercialization and that this should be used to foster
innovation in specific segments of the economy. As stated in the law:
It is the policy and objective of the Congress to use the patent system to promote
the utilization of inventions arising from federally-supported research and
development; . . . to promote collaboration between commercial concerns and
nonprofit organizations, including universities; . . . to promote the
commercialization and public availability of inventions made in the United States
by United States industry and labor; [and] to ensure that the Government obtains
sufficient rights in federally-supported inventions to meet the needs of the


54National Institutes of Health (NIH) Update on Existing Human Embryonic Stem Cells, 27
August 2001 available at : [http://www.nih.gov]. See also: Congressional Research Service,
Stem Cell Research, by Judith A. Johnson, CRS Report RL31015, 10 August, 2001.
55For a more detailed discussion of the Bayh-Dole Act and related legislation see:
Congressional Research Service, Patent Ownership and Federal Research and Development:
A Discussion on the Bayh-Dole Act and the Stevenson-Wydler Act, by Wendy H. Schacht,
CRS Report RL30320, 11 December 2000.
56House Committee on Science and Technology, Government Patent Policy, 95th Cong., 2nd
sess., May 1978, H.Rept. Prt. 4.
57Ibid., 5.

Government and protect the public against nonuse or unreasonable use of58
inventions. . . .
The anticipated paybacks to the country through increased revenues from taxes on
profits, new jobs created, improved productivity, and economic growth were seen by
Congress as a balance for the initial cost of the technology to the government or any
potential unfair advantage to any recipient.
Each nonprofit organization (including universities) or small business is
permitted to elect (within a reasonable time frame) to retain title to any “subject
invention” made as a result of R&D funded by the federal government; except under
“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.”59 The owner of the intellectual property must
commit to commercialization of the patent within a predetermined time frame agreed
to by the supporting agency and the performing organization. As stated in the House
report to accompany the bill (H.R. 6933), “the legislation establishes a presumption
[emphasis added] that ownership of all patent rights in government funded research
will vest in any contractor who is a nonprofit research institution or a small business.”
Certain rights are reserved for the government to protect the public interest. The
government retains “. . . a nonexclusive, nontransferable, irrevocable, paid-up license
to practice or have practiced for or on behalf of the United States any subject
invention throughout the world. . . .” The government also retains “march-in rights”
that enable the federal agency to require the contractor (whether he owns title or has
an exclusive license) to “. . . grant a nonexclusive, partially exclusive, or exclusive
license in any field of use to a responsible applicant or applicants. . .” with due
compensation, or to grant a license itself under certain circumstances. The special
situation necessary to trigger march-in rights involves a determination that the
contractor has not made efforts to commercialize within an agreed upon time frame
or that the “action is necessary to alleviate health or safety needs. . .” that are not
being met by the contractor (15 U.S.C. §203).
The Bayh-Dole Act also addresses the licensing of inventions to which the
government retained title typically because of past agency practices or because of a
public interest. Title 35 U.S.C. §209 proscribes the licensing of this type of invention
(except under certain conditions). The law permits federal departments to offer
nonexclusive, exclusive, or partially exclusive licenses under certain conditions and
with specific rights retained by the government. These include the right to terminate
the license if commercialization is not pursued as provided in the business plan or if
the government needs the license for public use. The agencies are required to inform
the public about the availability of a patent for licensing. In providing licenses, small
businesses are given preferences and licensees must agree that “. . .any products
embodying the invention or produced through the use of the invention will be
manufactured substantially in the United States.”


5835 U.S.C. §200
59 Ibid.

Issues and Observations
The policy articulated by the Bush Administration limits federal research funding
to a discrete number of human embryonic stem cell lines. At least some of these cell
lines are subject to patent protection. Scientists who wish to use federal financing to
explore certain research possibilities thus may have few alternatives but to employ a
patented cell line. With federal policy arguably limiting research options, some
attention might be paid to how patents on exploitable stem cell inventions are used by
their proprietors. Licensing policies and practices may be especially appropriate for
consideration.
One possible option is an examination of the propriety of reach-through
agreements. According to opponents of reach-through agreements, owners of patents
on fundamental biotechnological research tools could use their proprietary position
to influence or hold back competing innovations resulting from stem cell research.
The persistence of this commentary suggests that the use of reach-through agreements
in the biotechnology industry might be subject to review. If reach-through
agreements were viewed unfavorably, legislative options include declaring such
agreements unenforceable or calling for their scrutiny by the relevant antitrust and
competition authorities.
Another approach would be to consider the possibility of an award of a
compulsory license on patents for embryonic stem cell inventions. A compulsory
license allows a competitor of the patent owner to use the patented invention without
the patent owner’s permission.60 Although compulsory licenses have played only a
minor role in the United States patent system,61 many foreign patent statutes include
such provisions.62 These statutes typically require an interested party formally to
request the compulsory license from the foreign government. Competent authorities
then decide whether to grant the license as well as the terms of any granted license.
Grounds for granting a compulsory license include the abusive exercise of patent
rights, lack of domestic manufacture of the patented product, commercialization of
the patented good that does not satisfy the needs of the local market and national
emergencies.63 While some accounts suggest that formal compulsory licensing
proceedings are commenced only infrequently, the mere existence of a compulsory
licensing statute may do much to encourage bargaining between patentees and would-


60Robert Sherwood, “Intellectual Property and Investment Stimulation: The Ratings of
Systems in Eighteen Developing Countries,” 37 IDEA (1997), 261.
61Dawson Chemical Co. v. Rohm and Haas Co., 448 U.S. 176 n.21 (1980).
62Gianna Julian-Arnold, “International Compulsory Licensing: The Rationales and the
Reality,” 33 IDEA (1993), 349.
63Ibid. For studies of specific compulsory licensing provisions of individual nations, see, for
example, Rafael V. Baca, “Compulsory Patent Licensing in Mexico in the 1990's: The
Aftermath of NAFTA and the 1991 Industrial Property Law,” 8 Transnational
Lawyer (1995), 33; Robert E. Rosenthal, “The Chinese Patent System,” 17 Law and Policy
in International Business (1985), 907; John M. Wechkin, “Drug Price Regulation and
Compulsory Licensing for Pharmaceutical Patents: The New Zealand Connection,” 5 Pacific
Rim Law & Policy Journal (1995), 237.

be users of the patented invention.64 It should be noted that World Trade
Organization agreements, to which the United States has acceded, to some degree
restrict the ability of signatories to enact laws authorizing compulsory license65
awards.
From a broader perspective, the issue of whether living organisms are merely
unpatentable products of nature or whether ethical or policy considerations should bar
their patenting continues to command public attention. Two principal issues have
arisen regarding biotechnology patenting. First, observers have fundamentally
questioned whether patents should be granted for living inventions, genetic materials
and other biotechnologies. Ethical issues and concerns over genetic diversity animate
many of these objections. Supporters of biotechnology patenting counter that trade
secret protection is a less attractive social alternative, observe that patents have long
been granted for biotechnologies, and question whether the patent law is the
appropriate vehicle for technology assessment.
Commentators have also differed over the extent to which an inventor must
show a specific, practical use for a biotechnology in order to be awarded a patent.
Some observers favor a strict view of the utility requirement due to concerns over
overlapping upstream patents that discourage research and commercialization. Others
believe that the utility requirement should be applied leniently, stating that a strict
view of utility will only lead to industry concentration and that biotechnology research
tools cannot be meaningfully distinguished from other sorts of inventions.
At this point it is unclear if federal research will generate new embryonic stem
cell patents subject to the Bayh-Dole Act. If so, the way the provisions of the statute
are applied may be of interest given the specific parameters of the Bush plan. Under
these research limitations, might the government exercise the rights conferred in a way
different from current practice? Will the government use its license “. . .to practice
or have practiced for or on behalf of the United States any subject invention
throughout the world. . . . ” to expand access for scientists? Might the research
constraints create a situation where the government utilizes march-in rights, although
to date they have not been invoked?
The Bayh-Dole Act is intended to provide ownership of intellectual property
derived from government funding in return for the commercialization of the results
of this work. However, as the environment within which R&D and innovation are
performed changes, and given the specifics of the Bush plan relating to embryonic
stem cell research, new issues may have to be addressed. Disputes have arisen over
competing claims to intellectual property developed under government-industry
ventures. Concerns have been expressed regarding the rights of companies to set
prices on pharmaceuticals and therapeutics that were developed in part with federal
funding or in collaboration with federal agencies. Problems have been encountered
in obtaining technologies for research use by federal laboratories because of


64Sarah Boseley, “Opinion: Pharmaceuticals move their battleground to Brazil to stem the tide
of cheaper drugs,” Irish Times (20 April 2001), 14.
65Congressional Research Service, HIV/AIDS Drugs, Patents and the TRIPS Agreement:
Issues and Options, Thomas, John R., RL31066, 27 July 2001.

apprehensions over diminished effectiveness of intellectual property if new
applications are discovered. As these and other related issues continue to be
explored, the information contained in this paper and the additional referenced reports
are presented as background for any additional congressional interest and oversight.