Sharing, accounting, audit, joint accounting, and joint sharing

The Bayh-Dole Act at 35 USC 202(c)(7) requires sharing of royalties earned on subject inventions with inventors.  That sharing is part of the “expenses incidental to the administration of subject inventions”:

(B) a requirement that the contractor share royalties with the inventor;

(C) except with respect to a funding agreement for the operation of a Government-owned-contractor-operated facility, a requirement that the balance of any royalties or income earned by the contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidental to the administration of subject inventions, be utilized for the support of scientific research or education;

This requirement gets baked into the standard patent rights clause at 37 CFR 401.14(a)(k)(3), which is is in turn baked into 2 CFR 215, which is how the requirement shows up in grant funding agreements at universities:

(2) The contractor will share royalties collected on a subject invention with the inventor, including Federal employee co-inventors (when the agency deems it appropriate) when the subject invention is assigned in accordance with 35 U.S.C. 202(e) and 37 CFR 401.10;

(3) The balance of any royalties or income earned by the contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidential [sic] to the administration of subject inventions, will be utilized for the support of scientific research or education;

Notice the wording in both the law and standard patent rights clause.  In the “sharing” clause, the royalties earned on a subject invention must be shared with the inventor of that invention, but in the “accounting” clause, the university is allowed joint accounting for “expenses incidental to the administration of subject inventions.”  That is, royalties from one subject invention can pay for the expenses incurred in the management of others.  In this way a patent licensing program for subject inventions can cover its costs with only a handful of well performing licenses.

There are two details here to be mindful of, however.  There is no authorization in the law or SPRC to spend money earned by subject inventions on the administration of inventions that are not subject inventions.  That is, the authorization under SPRC (k)(3) is not general joint accounting, but only accounting that supports federally supported invention administration.  Thus, for compliance, a university licensing office must have separate accounting for subject inventions.  One way to do that is to run separate offices.  Another way is to establish an overhead rate for subject inventions and keep track of direct expenditures and time records for the administration of subject inventions.  It is clear, furthermore, that “scientific research or education” is not broad enough to take in “administration of other inventions.”  So joint accounting for subject inventions, but not for the wholesale running of technology transfer offices–not for non-subject inventions, not for startups, not for industry sponsored research agreements.  Nada of that.

Further, there is no basis to simply call inventions “subject” that do not meet the definition provided by the law.  “Subject invention” is a definition in the patent law.  It is like “work for hire”–when something meets the definition it is that thing.  One cannot by contract agree to call something that thing and expect it to become it.  Thus, as a second compliance matter, a university must establish that a reported invention really does come within the “planned and committed activities” of a federally supported project, as set out in 37 CFR 401.1.  For that to happen, it is not sufficient for inventors merely to write in a federal grant number on an invention disclosure form.  Someone needs to pull the grant–and any other grants that might be involved–and check the statement of work against the reported invention.  If it is not there as a stated activity, then a second check needs to be done to see whether the activities of the grant have been distracted or diminished by the inventive work.  If not, then it’s not a subject invention, even if it is closely related to the federal grant, even if the principal investigators want it to be credited to their grant work–and they still can–but it’s not a subject invention unless it meets the definition.

One last thing.  Although the “sharing” clause identifies only the “inventor” as a recipient of the sharing of royalties, the “accounting” clause is broader.  Payments to inventors are part of the “expenses incidental to the administration of subject inventions.”  Thus, a university may include payments to *any* and *all* inventors of subject inventions out of the royalty pool for any one subject invention.  That is, the SPRC authorizes a broader sharing program than just the one involving the inventor whose patents are producing royalty income.

Imagine what would happen to the participation rates if an office had a set aside for “subject inventors.”  It might work like this:  of the income from all subject inventions, after paying the inventors of those subject inventions their “share,” the office sets aside 10% of income as “administrative expense” and apportions it to all “subject inventors” based on 1) inventions that they have submitted and which have a) met the definition and b) managed by the office; 2) subject inventions for which a full utility patent application has been filed (including divisionals, but not continuations or reissues); and 3) subject inventions for which a patent has issued.  One chit for the subject invention report, one chit for a full utility application, and two chits for each issued US patent, and maybe another for the PCT to reward folks who disclose promptly.  Add up all the issued chits and that’s the denominator D.  Now add up the total chits T earned by each inventor and they each get T/D of that 10%.  If you have $1m in royalties on subject inventions after paying the happy inventors involved, the set-aside is $100K.  If you have 100 subject inventors, then you have on average $1K each.  That’s a pretty nice participation fee, enough to keep folks heads in the game.  Even if you’ve got 1000 subject inventors, it’s still $100 on average for hanging around the shop.

So, auditors, pay attention to compliance, and get the details right.  For you licensing office folks, looking to put a spark of money happiness into the university community, extend “expenses incidental to the administration of subject inventions” to include all subject inventors, and give them a reward for participating in the program, especially if the program has the remnants of a “invention agent” policy and public face, but actually operates on a portfolio model.  If winners pay for losers on the university side, they should do so on the inventors side as well.

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