10 Issues That May Limit Infringement Claims on Subject Inventions

I have been working on the problem of infringement litigation involving subject inventions under Bayh-Dole.   Here is a working summary of Bayh-Dole-related issues that companies being hit by universities with subject invention infringement cases might consider.  I am not aware of anyone attempting to challenge the standing of universities to bring infringement litigation using patents on subject inventions.  However, I’d say it’s time that folks pushed back.  It is only by doing so that universities will be required to comply with Bayh-Dole, and not use it as a means to attack practice and industry for profits, with or without speculative investors lined up at the trough with them.

1.  Failure to comply with assignment provisions.

If there is an exclusive licensee involved, and the licensee is bringing the infringement action to which the university is required to join, then challenge the license under 35 USC 202(7)(A).  An exclusive license that transfers substantially all rights may well be an assignment that requires federal agency approval:

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);

See Stuart Schanbacher and Bruce G. Chapman and Keith D. Fraser for recent discussions of the issue.  If the exclusive licensee/assignee cannot show that it has as a primary function the management of inventions, then the assignment is not in compliance with the law.  Call the assignment void, and seek to exclude the company as a party to the infringement action.  The invention, at that point, becomes unlicensed.  That might be a good time to obtain a non-exclusive license on reasonable terms. 

2.  Challenge effective steps in reasonable time.

If there is no product on the market by the patent owner, assignee, or exclusive licensee, challenge under lack of effective steps under 35 USC 203(a)(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;

This is part of the march-in requirements, but the argument here is different.  In a march-in proceeding, the federal agency decides whether a condition exists that justifies requiring that a license be granted.  Here, the argument is that there is no standing to sue if an owner of a subject invention–contractor or assignee (or exclusive licensee)–has not taken the proper steps “within a reasonable time” to achieve practical application.

3.  Challenge practical application.

Practical application has its own definition in Bayh-Dole:

(f) The term “practical application” means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.

Utilization is expressed through practical application.  Without practical application, the objectives of the Bayh-Dole Act are not met.  When there is practical application, obviously, the objectives are met and an owner of patent rights to a subject invention is not free to then attempt to use the patent system to prevent that practical application.  The owner of a subject invention does not have the same freedoms as does the owner of an invention that is not subject.  This is fundamental to the Bayh-Dole Act.  Without this restriction, the Act would reduce to a simple broad brushed disclaimer of federal interest in inventions but for a non-assert and an opportunity to acquire title if it was an invention no one wanted.

It is important to see that the definition of practical application does not mention product for sale, but rather stipulates “manufacture,” “practice,” and “operate” depending on the nature of the invention.  These actions are then connected to the primary requirement:  that the benefits of any of the invention are “available to the public . . . on reasonable terms.”

If the plaintiff has not established that the invention is being used, then it has not met the requirement of practical application.  Alleging infringement, however, is a claim that seeks to establish that the defendant has achieved practical application.  The plaintiff therefore must show that by suppressing that practical application, the patent owner is meeting the objectives of the Bayh-Dole Act.  It may be possible to do so, but I suggest that it will be a very difficult argument to sustain, as it cannot be based on the mere assertion of ownership of a patent, but must also include an account of why the plaintiff has the resources to bring an infringement case but has not been able to achieve practical application itself, when clearly it believes another company has.

Even if the plaintiff can show practical application, it must further show that the benefits of the invention are available to the public “on reasonable terms.”  Much depends on how “reasonable terms” are viewed.  Again, it cannot be merely that such terms are “reasonable” to the patent owner or plaintiff.  The terms must be “reasonable” within the context of the objectives of the Bayh-Dole Act, including how such terms promote free competition and do not unduly encumber future research or discovery, such as may have been undertaken by the defendant.

A note of caution.  Just because a company claims to have developed a product using a subject invention does not mean that it is actually using the subject invention in its current products.  This may be especially true if the invention is based in engineering processes or software algorithms.  It is all too easy for implementations to slip out from licensed claims.  Indeed, a licensee often may be motivated to find designs that work around licensed claims as a way to relieve the burden of royalty payments.  Frequently with university startup companies, the product ultimately developed runs outside the scope of the licensed patents.  So the effort to “establish” utilization of an invention requires more than an assertion that a product is covered by claims of the patent in dispute.  The use has to be “established.”

4.  Challenge the election to retain title.

The Bayh-Dole Act lays out conditions under which the federal government can obtain title to subject inventions.  These conditions are not part of the march-in provisions.  This provision is at 35 USC 202(c)(2):

And provided further, That the Federal Government may receive title to any subject invention in which the contractor does not elect to retain rights or fails to elect rights within such times.

If the university failed properly to elect to retain title to the invention, then it does not have secure title to the invention.  The government may require assignment of title.  Thus, it is essential that the paperwork showing the date of disclosure of a subject invention to the government is established, along with the date on which the university notified the government that it elected to retain title to that invention.

For instance, in the case of Stanford v. Roche, Stanford filed a patent application in May 1992, in June 1992 Stanford disclosed the invention to the NIH.  In November 1994, Stanford granted the government a non-exclusive license.  But it was not until April 1995, well beyond the required two year window required by Bayh-Dole.  At that point, the NIH could have required Stanford to assign title to the federal government.  That would have prevented a lot of wasted expense by a lot of people, right there.  However, in the SPRC (d)(1), the government is given only 60 days from learning of the failure to request title.

5.  Challenge patent misuse that subverts the objectives of Bayh-Dole.

If the patent owner or exclusive licensee is not using the invention but merely asserting patent rights, challenge under 35 USC 200:

The statement of objectives for Bayh-Dole at 35 USC 200 include:

to use the patent system to promote the utilization of inventions arising from federally supported research or development;

This objective serves as a general restriction on the exploitation of patents on subject inventions. The objective of Congress is not met by a patent owner asserting rights to prevent use, when the objective is to promote use.  If the plaintiffs are not using the invention, then it is an abuse of the patent system to prevent others from using the invention.

6.  Challenge the use of the invention with regard to free competition and future discovery.

If the plaintiff is using the invention to obtain a patent right that then defeats free competition and enterprise, then again the plaintiff is not compliant with the objectives of the Bayh-Dole Act.

to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery;

Emphasis should be placed on “free”.  It is not merely a flowery attribute of competition, but rather a particular species of competition that exists free of monopoly controls.  A patent grants a monopoly power.  However, it is the intent of Congress that such a monopoly power is not exploited in the case of subject inventions to suppress competition, but to promote it.  An exclusive license may be indicated, such as in the case when no company desires even a non-exclusive license.  However, if the university licensor or assignee never broadly announced the availability of a non-exclusive license, and offered only an exclusive license (and may not have publicly announced even that license, or its terms, as available), then the invention may be used in a manner counter to Congress’s stated objectives.

The plaintiff should be required to demonstrate that the invention is being used to promote free competition.  This is not merely an argument that might drive toward antitrust, but one that also disables the standing to sue for infringement of a patent on a subject invention.

7. Challenge the effect on future research and discovery.

If the defendant company has developed its implementation of the invention by means of its own research and discovery, then the plaintiff must show how its actions, and especially the terms of any exclusive licensing agreement, have not unduly encumbered future research and discovery.

to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery;

If anyone conducting research might come up with the same approach, then any arrangement that would prevent a company from enjoying the benefit of its research and discovery is potentially an undue encumbrance.  Exclusive licenses to patents on subject inventions which provide standing for the licensee to sue for infringement without first requiring that the licensee has achieved practical application of the invention should be challengeable as failing to comply with the restrictions placed by Congress on such licensing.  If universities exploit the provision of federal funding to support their research so that no company can undertake comparable, independent research in the same area, then the universities are engaged in anti-competive behavior arising from the advantage they have gained through their relationship with the federal government.  They should not have standing to exploit their patent positions on subject inventions in such a manner that encumbers the future research and discovery of others.  A non-exclusive, non-discriminatory licensing regime is consistent with Bayh-Dole.  Exclusive licensing regimes must pass a much higher standard than that afforded to a conventional invention.

8.  Challege lack of public availability.

If the invention is not publicly available through the agency of the plaintiff, challenge any effort to suppress that availability through the agency of any other entity.  The objectives of Bayh-Dole include public availability in parallel with commercialization.

to promote the commercialization and public availability of inventions made in the United States by United States industry and labor;

While Bayh-Dole is routinely cited as a mandate for “commercialization” efforts by universities, this is not supported in the law.  Bayh-Dole places the burden of commercialization on “United States industry and labor.”  If there is no licensee, and the university is merely claiming to “protect its rights” then it is violating the premises of Bayh-Dole, which do not merely entitle the university to retain title that it receives, but also to take those actions that meet the objectives of the law.  It cannot by preventing public availability also promote public availability.

9. Challenge agreement for US manufacture.

If the license under which the plaintiff operates is exclusive, and the infringement involves the US market, then challenge compliance with the substantially manufactured in the United States provision at 35 USC 204:

Notwithstanding any other provision of this chapter, no small business firm or nonprofit organization which receives title to any subject invention and no assignee of any such small business firm or nonprofit organization shall grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.

Note, this is not the same as finding that a product is manufactured substantially in the United States.  The requirement is a condition of an exclusive license–the licensee must agree to it.  Furthermore, it must be a material term, as Bayh-Dole makes such a condition express.  Check the language of the exclusive license.  If the license agreement lacks the required language properly drafted to reflect a material condition of the license, the license is void unless a federal agency has waived the requirement on certain conditions.  If such a waiver has been granted, then challenge the “showing” under which the representation was made that the patent owner used

reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible.

If the defendant company is manufacturing in the United States, and the plaintiffs are not manufacturing in the United States, or are not manufacturing at all, well then.

10.  Challenge university performance as trustee.

The Bayh-Dole Act operates through federal funding agreements.  Each agreement must carry a standard patent rights clause.  For federal grants and cooperative agreements with universities, that funding agreement is set forth at 2 CFR 215.  The standard patent rights clause is incorporated by reference at 2 CFR 215.36.  The next provision, .37, however, is important:

Real property, equipment, intangible property and debt instruments that are acquired or improved with Federal funds shall be held in trust by the recipient as trustee for the beneficiaries of the project or program under which the property was acquired or improved.

Here “recipient” plays the role of “contractor” in Bayh-Dole.  Intangible property is defined at 2 CFR 215.2(s):

Intangible property and debt instruments means, but is not limited to, trademarks, copyrights, patents and patent applications and such property as loans, notes and other debt instruments, lease agreements, stock and other instruments of property ownership, whether considered tangible or intangible.

An invention is personal property.  It is not the university’s until the university acquires it.  If a university has obtained ownership of inventions made with federal funding based on a claim that assignment is a condition of being paid from the federal funds, then the university has indeed claimed that the federal funds are consideration for the agreement to assign.  The university has, in fact, acquired the invention with federal funds.  Furthermore, if having acquired the invention, the university then continues to use federal funds to “improve” the invention, then regardless of the particulars of assignment, any patent on the invention comes within the requirements of 2 CFR 215.37.

Under this provision, the university is required to act as a trustee of the patent “for the beneficiaries of the project or program under which the property was acquired or improved.”  A trustee may not act on its own self-interest.  Nor may it through such means as a licensing agreement claim no further responsibility for its obligation.  As a trustee, the university must show that any litigation claiming infringement is in the interest of the beneficiaries of the research under which the patent was obtained or improved.  The university breaches its obligations as a trustee if it cannot show how bringing an infringement action is for the benefit of the beneficiaries.  Clearly, the university and any exclusive licensee are not the beneficiaries intended by the federally funded project or program.

Equity not Exclusion

Even if raising these issues do not preclude an owner of a patent on a subject invention from bringing an infringement action, these issues should prevent the issue under dispute from being one of exclusion.  The issue is properly one of equity, that is, of reasonable royalties owed to the patent holder, not whether the infringing activity, if it is indeed infringing and the patents are valid and all that, must be stopped.

Any owner of a subject invention cannot avoid the compliance obligations under Bayh-Dole.  These obligations extend well beyond merely the apparatus by which a university might retain title to a subject invention.  Indeed, how a university comes to hold title is almost of trivial importance in Bayh-Dole, a mess of fussy paperwork.  The real burden of Bayh-Dole is that federally funded inventions, when they are owned by an employer or invention management agent, are subject to a substantial apparatus that alters dramatically the actions available to owners of patents on those inventions.  This apparatus limits assignments, the nature of licensing efforts, the conditions under which licenses are granted, the effect of those licenses, and the exploitation that patent owners, assignees, and exclusive licensees may make of their patent positions.

Subject Inventions Mean Different Patent Practice

It is not acceptable that subject inventions be treated as if they are simply inventions, but for the ease by which they are kept from the federal government and taken from the university employees (and others) who make them.   The Bayh-Dole Act depends on the apparatus that restricts how patent owners may do with their subject inventions.  They may use the patent system to promote use.  They may not use the patent system to deny use.  Any patent owner of a subject invention must accept these limitations.  Any exclusive licensee must accept these limitations.  The measure of the law is practical application.  The limit of the right to exclude ends where free competition and enterprise end, where there is undue encumbrance on future research and discovery, where there are not effective steps in a reasonable time to achieve practical application, where the benefits of the invention are not available to the public on reasonable terms, where the right to sue has passed to a licensee with substantially all patent rights without federal agency approval.

No Standing to Troll or Assert

There is no foundation in the Bayh-Dole Act, or in federal funding agreements with universities, for a patent owner or exclusive licensee to operate as a patent troll or to undertake an assertion campaign against industry for practicing a subject invention simply to get paid by using the threat of litigation and penalties as a way to increase the amount to be paid.  That’s called a shakedown, and it is difficult to see how the Bayh-Dole Act was intended as a tool for universities to get into the racketeering business.  Such practice is not the objective of the Bayh-Dole Act.

The Act is satisfied when the patent system has been used to promote use of subject inventions.  The Act does not care if that promotion has resulted in the grant of a license, or payment of royalties.  It does not care if there is a product on the market or whether there is simply use.  The patent owner, faced with infringement, has the obligation to resolve such infringement by offering reasonable terms.  It is a matter of equity, not a matter of attempting to gain still greater value from a patent position by threatening litigation, seeking treble damages and attorneys fees for willful infringement, and the like.  Nor can a patent owner of a subject invention, such as a university, permit an assignee or exclusive licensee to engage in such behaviors.

Bayh-Dole is About Use

The Act is about use, and once there is use–whomever by–the actions available to a patent owner or exclusive licensee are limited to those that further the objectives of the Act, and recognize the equities of the parties involved.  Those actions do not include the right to exclude, or the right to sue for infringement, without first showing that by doing so one is both in compliance with the Act and the terms of the federal funding agreement under which the invention was made, and that the infringement action is necessary to further the objectives of the Bayh-Dole Act, as set forth, especially, by those provisions pertaining to the restrictions on the rights of patent owners for the purpose of promoting the utilization, not the leverage to shake down users, of inventions made with federal support.

Future User Rights

The Bayh-Dole Act is that part of the patent law concerning future user rights.  If public money finances the invention, then the invention is subject to future user rights, because future users of subject inventions are the objective of the law.  University administrators ought to resonate with this concept, and recognize that it is perfectly aligned with instruction and public service pertaining to scholarly work.  The purpose of the university is to provide resources so that scholarly work, including inventive work, can be published, taught, used, varied, and made available on reasonable terms.  Enough, then, of the idea that universities can “clean up” by filing infringement suits on subject inventions that they have not bothered to develop to the practical application, or have licensed in such a fashion that they are forced to follow their exclusive licensee into infringement fights.

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