We could use better guidance on Bayh-Dole

I like how Eric Guttag goes after legal ideas.  I appreciate the way he digs into things, and his willingness to acknowledge when he needs to change his point of view.  Some time ago, he posted an excellent discussion of the FilmTec decision in the context of Stanford v Roche, and just how far the magic of a “present assignment” ought to go.   It’s worth the read.  Guttag emphasizes the importance of getting at the fact set in S v R, and this in itself appears to be rather difficult to do.   The question that burns throughout S v R is how to size up the status of assignments at the time that Stanford files its patent application.  The CAFC looks at it and goes, “there’s only one assignment, and that’s to Cetus”.  That assignment was the present assignment embedded in the Cetus Visitor’s Agreement.  If that assignment fails, then Stanford’s later assignment becomes operative, and we are back to other issues, such as whether Stanford’s patents are even valid.

However, with the decision we get a strange mix of responses.  On the one hand, we have questioning of the nature of present assignments, and in particular of the FilmTec decision, which features such an assignment.  There’s plenty of practice that indicates that there are instances of well formed present assignments, such as in some publication agreements.  If the asset to be created is clearly delimited, why should not an author or inventor be able to obligate his or her expectant rights in a work of authorship or invention?  The question, though, is whether there’s something magically different about “hereby assign” over “will assign”.   But here’s the rub: if a promise to assign is as good as the “hereby assign” to transfer title, then Cetus is still holding a valid agreement (which used *both* forms).   If, however, “hereby assign” means nothing more than “I really, really do promise to assign in the future”, then one would have to follow up with an actual written assignment specifying the invention.

It appears the CAFC is fine with the idea that “hereby assign” really does serve to transfer title, and it appears that the Supreme Court was willing to let that idea stand, pending a case that directly addresses present assignments.  Meanwhile, universities have been throwing “hereby assigns” into policy statements and other agreements on the advice of attorneys who say this is necessary to secure rights from inventors.  Of course, the same argument that had it succeeded would have got Stanford closer to big bucks is also the one that fails universities relying on present assignment language now.

How will it all shake out?  I don’t know.  But it does appear that the only way that I’d let a university visitor in the door at my company, if I was sitting on really hot technology and actively working on product, and that visitor wanted to learn what we were doing, and as a favor to one of my technical advisory board members from the university I was willing to let the visitor do that would be an assurance from the visitor that any inventions arising from that special access were my company’s.  For that, a present assignment that operates with “hereby language” is important.  It allows the execution of the assignment regardless of where the visitor goes next, and since the visitor is not my employee I won’t have much leverage later, once I’ve shown the visitor what I’ve got.

The essence of the bargain between Stanford and the visiting employee on the one hand, and Cetus on the other, and between Stanford and its employee, was that the intention was that inventions arising from the visiting would be Cetus’s.  Without that understanding, I can’t imagine Cetus letting anyone from Stanford in the door.  Even if the “hereby assign” language breaks technically, it would be hard to construct an argument that ran–too bad for you Cetus, you thought you had a bargain but it comes crashing down because we don’t have to send our employee back over to you to finish up with a written assignment.  Instead we can file ourselves and make you pay or shut you down.”   I don’t see much justice served in that.

In addition to the various uncertainties that Guttag mentions, I will add:  Stanford had an IP policy at the time that held that inventors retained ownership of their inventions “whenever possible.”  That’s not quite the thing of an outright promise to assign all inventions to Stanford.  It is of the form, rather, of “Stanford will only require you to assign those inventions that Stanford is required to take title to.”   That is, “if you are part of a project funded under a contract that requires Stanford to take title, then you promise to assign title to Stanford.”

The misunderstanding for Stanford, and for much of the university technology transfer community, was that Bayh-Dole requires the university to take title.  It does not.  There were multiple assignments–but the first one with Stanford was not one of those.  The only valid, effective promise to assign or actual assignment (take your pick) at the time Stanford filed patent applications was to Cetus.   If Stanford had obtained an assignment before filing the application, perhaps there would be a different argument.  But that’s not what the facts that are reported say.  Stanford sought assignments after filing the application.  It filed an application that it did not have any ownership in.  It filed that application on behalf of the inventors.  And one of the inventors had assigned his rights to Cetus, and Stanford knew that, but apparently thought that Bayh-Dole would trump that assignment so it could be ignored.  Thus, while a comprehensive promise to assign *might* hold up in a university setting if there’s no priority given to the language of a later “hereby assign,” it wouldn’t appear to in the facts of the Stanford v Roche case.

Further, as Guttag points out, there is some question whether Stanford approved of the arrangement between its employee and Cetus.  It sure appears there was such an approval.  Stanford knew of the arrangement and did not contest it–neither the faculty supervisor nor the administration.   Even if Stanford had a claim to the invention under its policy, it would have waived that claim in favor of the benefits of the relationship with Cetus.  The basis, in Stanford’s policy at the time, for its claim, however, was not employment or use of facilities, but a contractual requirement, namely Bayh-Dole.  Stanford has since changed its policy, but how would changing a policy rewrite the history that’s already in place, and that Cetus clearly relied upon to protect its interests from pretty much exactly the thing that happened–an invention reported after the collaboration, in exactly the area of the collaboration, relying on the technology taught in the collaboration, for something that the company was working on.   Where would be the justice in finding for a “technicality” that caused this prudent action to fail, and broke the foundation of the bargain that provided Stanford with access to Cetus technology in the first place.  If there’s going to be a battle of “technicalities”, then the one that establishes a present assignment and preserves the benefit of a bargain (both with the Stanford employee and the understanding with Stanford) would appear to be preferred over a technicality that undoes that bargain and exposes a party to a huge claim made by the other.

Certainly I don’t see any merit in the claim that Bayh-Dole vests title to inventions with contractors, requires university assignment, or even assumes that assignment.   But there is more to Eric Guttag’s discussion that is worth qualifying, at least, and for that I’ll take issue with a couple of points that Eric argues with regard to universities and Bayh-Dole.

First, Guttag accepts the “hierarchy” in Bayh-Dole that Justice Breyer repeats.  That is, that ownership starts with the contractor, then the agency, and last the inventors.  But this hierarchy is itself faulty.  It is clear that ownership starts with the inventors.  The only thing that matters in Bayh-Dole is when the federal agency can require the assignment of ownership to the government.  Bayh-Dole says, except in exceptional circumstances, the agency must await the disposition of title with regard to any qualified agent chosen by the inventor.  If the inventor does not choose an agent, then it’s up to the agency according to its policies, and if the agency does not request title, then in allowing the inventors to retain title, it must require at least the stuff in 37 CFR 401.9, which is, in essence, a standard patent rights clause applied to the inventors directly, as if they were a small business contractor.

Let’s repeat.  Bayh-Dole does not require any disposition of title by the inventors.  It does require that the inventors use an agent if they don’t want to deal with a possible agency requirement to assign title to the government.  What Bayh-Dole says about agents is the interesting bit.  That’s where there is something of a “hierarchy”–but it is not a line for ownership, but rather for degree of agency administrative oversight.   If the inventors assign to the contractor, then if the contractor chooses to retain that title, it may do so simply upon notice.  No administrative work for the agency, standard provisions apply–non-exclusive license, preference for small business, march-in for failure or need.  If the inventors assign to anyone else that the contractor has assigned its rights under its funding agreement, the same is true, provided that the assignee has as a primary function the management of inventions.  Similarly, if the contractor retains title and then assigns title to another organization.  If the assignee does not have as a primary function the management of inventions, then the funding agency must approve the assignment–more work for the agency.

It is not the case that Bayh-Dole provides a “pecking order” for who can *claim* title to federally supported inventions.  This is not about lining up to see who can first strip inventors of their personal rights.  Rather, Bayh-Dole provides a standard procedure by which the private disposition of title, with standard assurances for good behavior, takes precedence over federal agency claims to title.   The university is *not* first in line to claim title.  The university is merely the organization that is pre-approved to retain title if it gets it, even if it does not have a primary function in the management of inventions.  That’s the benefit provided by the law to the university (or nonprofit or small business) contractor.   Anyone else with such a primary function is also pre-approved when the contractor assigns its rights (expectant or actual)–but they have to have that primary function or else the agency must approve the deal (and perhaps impose its own requirements).

The bothersome issue is what happens if the inventor has no obligation to assign to the contractor?  Can an inventor voluntarily choose an agent other than the contractor?  If so, how does the government’s interest get protected?  Here is my reasoning on it.  If you see problems with it, point them out, please.

If there’s no obligation to assign, then it would appear that the inventors have the choice of agent.  There is nothing in the standard patent rights clause that constrains an inventor from assigning title.   Let’s say that the absence is a feature, not a defect.  Let’s say that the feature is that faculty inventors working with federal funds should have the benefit of their independence.   If the inventor does make a choice, then it’s the same deal that the university has:  if to an organization with a primary function to manage inventions, then approved; if lacking such a function, with agency approval.   How does all this come down?

For this, one has to move from the USC to the CFR.  This is where a number of legal commentators, including it would appear Eric Guttag (at least in the linked essay), miss a key element of the implementation of Bayh-Dole.  That implementation passes through the Department of Commerce, which is required to produce standard patent rights clauses that are to be incorporated into funding agreements.  That’s what 37 CFR 401.14 is all about.   What actually happens is a function not of the Bayh-Dole statutory language, but of the federal agreement by which the government funds work hosted by the contractor.  One has to follow the agreement, and in particular, one has to follow the patent rights clause, which may be a standard one, or may be modified by the agency, per Bayh-Dole.

The key to it all is to see how the standard patent rights clause handles research employees of the contractor.  This is the thing that the Department of Commerce folks worked out.

1) Bayh-Dole defines (and the CFR repeats) the definition of a funding agreement:

(a) The term funding agreement means any contract, grant, or cooperative agreement entered into between any Federal agency, other than the Tennessee Valley Authority, and any contractor for the performance of experimental, developmental, or research work funded in whole or in part by the Federal government. This term also includes any assignment, substitution of parties, or subcontract of any type entered into for the performance of experimental, developmental, or research work under a funding agreement as defined in the first sentence of this paragraph.

2) Bayh-Dole and the CFR also define “contractor”:

(b) The term contractor means any person, small business firm or nonprofit organization which is a party to a funding agreement.

Persons may also be parties to a funding agreement, and they may do so by being engaged by the government or by “assignment, substitution of parties, or subcontract of any type”.  Thus, a federal funding agreement may actually extend to multiple agreements of various kinds, and parties to the agreement includes all those that are parties to these multiple agreements.  The contractor as used in the implementing regulations and the standard patent rights clause is not simply the university receiving funds, but all the parties that become involved.  What parties might those be?

3) Under section (f), “Contractor Action to Protect the Government’s Interest”, the standard patent rights clause requires contractors to require their research employees to make a written agreement to protect the government’s interest, including establishing the government’s rights in inventions (the (f)(2) agreement):

(2) The contractor agrees to require, by written agreement, its employees, other than clerical and nontechnical employees, to disclose promptly in writing to personnel identified as responsible for the administration of patent matters and in a format suggested by the contractor each subject invention made under contract in order that the contractor can comply with the disclosure provisions of paragraph (c), above, and to execute all papers necessary to file patent applications on subject inventions and to establish the government’s rights in the subject inventions. This disclosure format should require, as a minimum, the information required by (c)(1), above. The contractor shall instruct such employees through employee agreements or other suitable educational programs on the importance of reporting inventions in sufficient time to permit the filing of patent applications prior to U.S. or foreign statutory bars.

The university agrees under the funding agreement to require an agreement by others, by its employees.  This is not a contract *with the university*.  It is part of the funding agreement, for the benefit of the government, limited to the government’s interest in the patent rights clause.   This action to require its employees to do these things means that the contractor’s employees, when they make this agreement, become parties to the funding agreement:  they are, if you will, conditional contractors.  If they invent, then the invention is a “subject invention” of the contractor–meaning, of the employee-subcontractor-assignee by the university of certain obligations under the federal funding agreement, such as establishing the government’s rights. That written agreement to establish the government’s rights becomes part and parcel of the inventor’s “right, title, and interest” to any invention made within the scope of the patent rights clause.

This chain of contracting is not discoverable from reading 35 USC 202.  It exists only by the action of the standard patent rights clause, which carries requirements that are not in 35 USC 202.

Guttag then argues that Stanford could not have assigned to Cetus without agency approval.  But we find this at 37 CFR 401.14(a)(k)(1):

(1) Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions, provided that such assignee will be subject to the same provisions as the contractor;

Which repeats this at 35 USC 202(c)(7)(A):

(7) In the case of a nonprofit organization, (A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions (provided that such assignee shall be subject to the same provisions as the contractor);

There is no restriction on for-profit companies receiving assignment. An inventor without an obligation to assign to the university-employer-research host-trustee (or other private party), and now also party to the obligations of the university via the (f)(2) agreement, can assign but only by also conveying the obligations held under (f)(2).   What I don’t know is how much is actually assigned in such an assignment.  Certainly the obligations set out under (f)(2) with regard to establishing the government’s rights.  There could be better guidance here in 37 CFR 401.  My sense is that the entire patent rights clause gets assigned, in the form it has for the university contractor.   The inventor employee carries the conditions of the nonprofit requirements into the (f)(2) and any subsequent personal disposition of rights when the funding agreement is with a nonprofit.

Guttag worries that an inventor assigning to anyone other than the university would undermine “the funding federal agency’s stake in any invention rights” (his emphasis).  As we see, this might be the case if there were no (f)(2) agreement.  But the (f)(2) agreement is a federal requirement and itself a federal agreement, made by each employee when the university requires it.  That agreement protects the government’s rights.  That’s something that Stanford apparently did not do, and as far as I can tell, not many universities do.  There is a lot of admonishment about complying with university policy, and with the terms of contracts, but that’s not what (f)(2) requires of a university:  it requires a written agreement that protects the government’s interest, not the university’s own self-interest.

The (f)(2) agreement also addresses Justice Breyer’s concern:

I cannot so easily accept the majority’s conclusion that the individual inventor can lawfully assign an invention (produced by public funds) to a third party, thereby taking that invention out from under the Bayh-Dole Act’s restrictions, conditions, and allocation rules.

If Stanford had sought (f)(2) agreements, doing so would have brought the conflicting obligations to the foreground.  The employee could not make the (f)(2) agreement without dealing with the prior obligation. The employee would be excluded from the federal research, or the arrangement with Cetus would have to be renegotiated, or a business relationship struck between Stanford and Cetus.  Take your pick.  My read is that if the (f)(2) agreement was properly required anyway, then the “right, title, and interest” to the inventor’s share of the subject invention would still transfer to Cetus, but it would carry, necessarily, the standard patent right clause requirements that applied to Stanford (” provided that such assignee shall be subject to the same provisions as the contractor”).   The federal government’s interest in the invention would be fully protected by this chain of contracting (as between the government and Stanford), substitution of parties (as between Stanford and its federally supported employees), and assignment (as between an employee later a federally supported employee and then inventor).

If there is a weakness in the present assignment language used by Cetus, it is that it involves the entire right, title, and interest, and for subject inventions, that includes Bayh-Dole requirements conveyed via the standard patent rights clause and the (f)(2) agreement.  A company seeking future patent rights from anyone who may later work within the scope of a federal agreement might desire *not* to receive such an assignment automatically, and might prefer to negotiate a license.  After all, if Cetus had been obligated under Stanford’s patent rights clause, then it appears that section (k) would also have applied, and Cetus would be obligated to share royalties with the inventors and use any proceeds after expenses for scientific research or education.   A company might not want that outcome, making a license look mighty attractive.

Stanford v Roche has been characterized as a study in the technicalities of assignment language.  Justice Breyer is right in calling this into question, and Guttag does a good job of elaborating the concern.  I have some empathy for the position as well.   Stanford v Roche has also been described as a huge problem regarding Bayh-Dole.  I don’t see that.  The problem is in the university implementation of Bayh-Dole.  Quite simply the universities have not done a good job with this, and especially with the (f)(2) agreement.  The funding agreement says:  get it in writing.  The universities haven’t done this, and that is what exposes the federal government to “sham” assignments (as Guttag would have it).

We can turn to one last point.  Eric Guttag, in arguing that assignments by inventors might interfere with government rights, makes the following argument:

But under application of the “formalistic” FilmTec rule according to the Federal Circuit in the Stanford case, even when the contractor/grantor does get an obligation to assign those invention rights to itself (as it must do to “elect title” under Bayh-Dole), the federal agency’s potential “nonexclusive license” in those rights is now squarely in jeopardy.

I have highlighted the problem text.  A contractor does not have to “get an obligation to assign those invention rights to itself”.    The deal in Bayh-Dole is that when a contractor does hold title (“of the contractor”), then it can elect to retain that title by notice.  The contractor does not have to require assignment of title to obtain title.  The inventors may voluntarily choose to assign to the contractor.  No obligation required. Certainly no federal requirement forcing them to give up their personal property to an employer, who may or may not want that property, and to whom the inventor may not want to assign that property for any number of reasons, including lack of resources, lack of expertise in the area of the invention, institutional conflict of interest, inappropriateness of the university’s invention management model, administrative overhead or delay in institutional contracting, having to negotiate with one’s employer, past history, and the like.

The idea that a university must require ownership is simply not in Bayh-Dole, and is not necessary for compliance with Bayh-Dole, and it is not necessary to further the objectives of Bayh-Dole, and it is not necessary to obtain valuable benefits from patent exploitation arising from inventions made under Bayh-Dole (since a university can obtain a financial interest without having an ownership interest; and a university might value other benefits even more–jobs for students, companies adopting the invention as a standard, as, say, Berkeley’s SPICE circuit design software).  The idea that Bayh-Dole somehow requires university ownership is not from Bayh-Dole.  As near as I can tell, it is an argument made up by patent licensing officers at universities and sold to university leaders and faculty. It is more a desire than an argument, a determination to get rather than a being persuaded to receive.

What these determined to get folks have to do, after Stanford v Roche, is to come up with some actual reasons why the largely voluntary, apparently very productive, invention assignment practice that motivated the passage of Bayh-Dole in the first place should be now entirely replaced by a compulsory, comprehensive, no-review present assignment practice that claims everything and releases only what’s worthless (and why bother to release what’s worthless?–yeah, that’s a waste of time, so don’t release anything).   Bayh-Dole was not predicated on universities being corporate employers owning everything employees do.  That simply wasn’t the case at the time.  There was a range and diversity of practices, from tight ownership, the MIT way, to entirely voluntary policies, with cautions regarding allowing personal activities to affect academic work–once the Wisconsin way.   It was this diversity that allowed faculty to seek institutions matched to their research, and to pursue the use of patents when it made sense to do that.  Choice and voice everywhere.  But not anymore.  What motivated the change was a claim about Bayh-Dole, and that claim was not true.  So now what keeps this new regime of obligatory ownership in place?  Why do people want to tighten it up even more, make it more automatic, more comprehensive, less negotiated when this is just the practice some federal agencies had and which the universities (and some agencies) said wasn’t working?

The burden is on the tighteners.  What has changed in 30 years that the federal agency model is now so attractive, and the wide-open, diverse, faculty-led approach that was so successful is now so unattractive that AUTM can have a web site devoted to stamping it out?  That’s what needs to be explained–explained so that faculty accept it, federal agencies accept it, state legislatures (in the case of public universities) accept it, and so that the public gets it.   Somehow, someway we need to be persuaded (not gulled, not threatened) that the best research and innovation policy is for top creative talent to be subservient to administrators, that no innovation will happen unless an administrator has a thumb in every pie, and that the purpose of federal funding is to provide universities with a new source of revenue by building paywalls for industry and by speculating with monopoly-minded investors.  I don’t expect anything reasoned will come forward.   Perhaps someone is willing to take on the task–skip the faulty, superficial reasoning and get up the mustard for an argument that shows how a compulsory scheme of institutional ownership really does advance research and innovation better than anything else, or at least better than the approach that brought Bayh-Dole into existence, way back in the mostly voluntary days, when faculty were smart and capable, academic freedom led the way, and the role of administrators was to support  and mediate.

This stuff is not as straightforward as it might be.  The Bayh-Dole Act itself is a jumbled mess of requirements.  The implementing regulations, and especially the standard patent rights clause at 37 CFR 401.14(a) do an admirable job creating an interface between the absolute requirements of the law and the practical necessities of implementing those requirements through funding agreements that allow the greatest degree of private freedom to innovate while ensuring that regardless of who ends up with invention rights, the government still has its license and its opportunity to take title or march in should the efforts to promote the use of a federally supported invention fail to meet minimum requirements.   Everyone could use better guidance, and it would be good if we didn’t have to wait for another Supreme Court case to find out.  Perhaps, then, this would be a good time have that discussion as well, and lay out whether Bayh-Dole is going to be a law that favors institutional ownership, or promotes in the case of universities faculty independence and choice of agent.  It would be a good debate to have:  institutional order and self-interest against diversity and independence expressed through a range of available agents.  Which do you think is a better route for scholarship?  For research?  For innovation?

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