Subject Patent Exhaustion

Caltech has just sued Apple for infringement of a patent. The patent in question, “Serial concatenation of interleaved convolutional codes forming turbo-like codes” (US Patent No. 7,116,710) includes this statement of government interest:


The U.S. Government has a paid-up license in this invention and the right in limited circumstances to require the patent owner to license others on reasonable terms as provided for by the terms of Grant No. CCR-9804793 awarded by the National Science Foundation.

Yes, this is a patent for a subject invention and falls under the requirements of the standard patent rights clause authorized by the Bayh-Dole Act. No doubt Apple will defend itself using all the available tools at its disposal, and somewhere in Apple management there will be discussions about how to deal with universities that attack. One line might be, as HP once did after Cornell turned on them, to pull out of sponsoring university research lots of places. All those university researchers probably never knew quite what hit them, because they didn’t think that it was Cornell Research Foundation administrators. What Cornell did–in addition to the nine years of fighting for what must have included a hefty cash settlement, which they did not share with all the scientists at other universities damaged by their action–was to destroy the political credibility within HP of those senior executives that had advocated for building research relationships with universities.

Another line in the discussions at Apple might be that universities these days are more like pit bull terriers–territorial, mean, ready to inflict harm–and less like retrievers or border collies, ready to provide helpful services. Since mean dogs bite, and we have decided to work with them, we will get bit from time to time–it comes with the territory and we deal with it. Or perhaps the change will be more subtle, as when Roche pulled its 900 person lab out of Palo Alto as the Stanford litigation with them wound up. Not because of the litigation, they said, but whatever the reason, it’s clear that Stanford made sure the list of reasons to stay was shorter than it might have been.

All this comes on the heels of the Wisconsin Alumni Research Foundation’s infringement suit against Apple, resulting last year in a $234m judgment against Apple (US Patent No. 5,781,752–also a subject invention, and within a couple years of the end of its term). [Update: Apple is appealing the judgment, now at $506m.]

Now the universities and their foundations treat the infringement of patents on subject inventions as if the category of subject invention is irrelevant. I argue they are wrong to think this way.

Subject Invention

The definition of “subject invention” is introduced into US patent law by the Bayh-Dole Act. It is one of the few things in the Act that is directed at inventions rather than at federal agencies. The definition itself is non-descript, but one has to read it carefully:

(e) The term “subject invention” means any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement: Provided, That in the case of a variety of plant, the date of determination (as defined in section 41(d) of the Plant Variety Protection Act (7 U.S.C. 2401(d))) must also occur during the period of contract performance.

An invention here is one that is protectable by patent or plant variety protection. The invention must be owned by a contractor (“of the contractor”). A contractor is any party to a federal funding agreement, including by way of assignment, substitution, or subcontract. Thus, when a university requires–as it agrees to do under (f)(2) of the standard patent rights clause–that its potential inventors “make a written agreement” to report subject inventions, to assist in obtaining patent rights, and to establish the government’s rights in those inventions (that is, by assignment or license), the inventors also become contractors.

The requirement in the standard patent rights clause to flow down responsibilities to potential inventors is not an administrative requirement within the organization (not, say, like a boss ordering people about) but rather an act to make these individuals party to the funding agreement–in their private capacity with personal rights in their inventions, not as employees of the organization making promises to the organization. It is as individuals, not employees, that U.S. inventors own rights in their inventions.

The (f)(2) requirement on universities is the key provision of the standard patent rights clause that makes Bayh-Dole work. It is a piece of the funding agreement, not of the Act. It is the last mile. The bit that connects up the whole awkward statutory apparatus to the source of energy, the inventors themselves. Without it, or with a wonky substitute for it, Bayh-Dole takes on a very different character. Defending the fluffy, daytime version of Bayh-Dole doesn’t address the problems of what Bayh-Dole becomes at night, irked on by university administrators with a hankering for power and a convenient lack of insight.

The invention must also be within scope of the project supported by the funding agreement–it must be (first) a patentable invention; then one must review the circumstances of the invention’s conception and its actual reduction to practice and determine that one or both of these phases of invention were anticipated by the written statement of work. That is, it is not enough to merely associate an invention with a federal grant by choice–for an invention to become subject, it has to meet the conditions specified in the statute’s definition. If the “planned and committed” work for a given project does not include the conception or actual reduction to practice, then even though those events took place while (or even after) the term of the funding agreement, the invention is not within scope of the definition or a federal claim to rights under the funding agreement. The federal government contracts for the rights it is appropriate to expect, not for any invention that might arise while university faculty are working on what they proposed in writing to do. The implementing regulations make this point clear (see 37 CFR 401.1).

Scope of Government Interest

This definition of subject invention creates a new class of inventions within federal patent law. How does this definition then operate? University administrators have dealt with it in an unexpected way. The implementing regulations at 37 CFR Part 401 anticipate that a contractor might claim inventions are outside the scope of the standard patent rights clause, and the regulations give federal agencies the right to challenge such claims. But university administrators went the other way. They have tried to expand the scope of the standard patent rights clause. They want inventions to be considered subject inventions. Why? Because doing so exploited ambiguities in their own research and patent policies. Typical language here was that contract requirements superseded university policy defaults. Thus, if a federal contract could be construed as requiring assignment of inventions to the university, well, then that was a most expeditious way of demanding assignment. One got around any statements in policy that inventors might have a right to their inventions, or any lack of any policy statement on the matter whatsoever.

Of course, Bayh-Dole does not vest invention title with universities that host federally supported research, nor does it require inventors to assign to their university hosts, nor does it even discuss assignment. It is drafted not to care, in all likelihood because that was the only way it could get approved by Congress. Given that Bayh-Dole does not require assignment of invention rights, those drafting the standard patent rights clause therefore had no new mandate as a result of Bayh-Dole with regard to inventor ownership of inventions. What they had to go on was how a party contracts for research services, and the patent rights that might arise, without regard for what arrangements the host of those research services has with the individuals it allows to do the federally supported work. Thus, the (f)(2) provision requires universities (and nonprofits, and small businesses) to flow down responsibilities that take the form of a written agreement that makes potential inventors party to the funding agreement to cover the federal government’s interest in inventions, not to cover the research host’s interest in inventions–if the host even has any such interest. Bayh-Dole does not require a research host to take any interest in inventions made with federal support, and therefore neither do the implementing regulations nor the standard patent rights clauses. There’s no authority in the law to do so.

When university administrators attempt to stretch the definition of “subject invention,” they do so with two faulty conceptions about Bayh-Dole. First, that Bayh-Dole requires assignment to the university. Second, that the statutory definition is subject to administrative choice–that is, administrators can choose to designate inventions as “subject” to gain the benefits of the law. But the statutory definition is not set up to permit such administrative choice. The anchor for the definition is what has been “planned and committed” and anything otherwise that might “diminish or distract” from doing what was planned and committed.

The open question, then, is that potentially many inventions reported by university administrators as subject inventions fail to meet the standard of the definition. If administrators have exploited misreadings of the definition to take ownership of personal property–inventors’ title to inventions–then there’s some abuse of authority going on, along with other shady stuff, such as fraud, conversion, misappropriation, malpractice, noble cause corruption, breach of federal regulations, and perhaps just simple unthinking incompetence. But so long as there’s no audit or challenge, they get away with it. Once they start stealing, folks tend to continue stealing until they get caught–fluffy, sweet-eyed university administrators included.

Once university administrators exploit the definition of subject invention to gain ownership of research inventions, they promptly forget that the inventions they have acquired remain subject inventions. They read the definition (if ever) as a gateway to secure ownership, and nothing more. But what does the definition of subject invention actually do?

Clearly, the definition of subject invention establishes the scope of government interest in inventions made with federal support. Only if an invention is within the definition can a federal agency expect to have an interest. The government’s interest in the invention end at the boundary of that scope. So far, so good. But the definition also works to bind the inventions that are subject to the standard patent rights clause applicable to the contractor.

Standard Patent Rights Clauses

There are, in effect, four standard patent rights clauses. The first two are at 37 CFR 401.14(a). One is general to all nonprofits and small businesses. The second is a special section of the first, and add further restrictions on contracts (but not grants or cooperative agreements) with nonprofits (see 37 CFR 401.14(a)(k)). The third, at 37 CFR 401.14(b) is a variation on the first, applicable to certain contractor-operated government weapons and nuclear propulsion laboratories. The fourth, the most liberal of them all, is at 37 CFR 401.9, and applies when inventors do not assign their patent rights to anyone. This fourth standard patent rights clause requires federal agencies to treat inventors as if they are small business contractors, but with fewer requirements than those required of regular small businesses.

If inventors assign their inventions, such as to the university that hosted the federally supported research, then the definition of subject invention follows the assignment. The invention is subject to the standard patent rights clause that applies to a contractor-assignee and to 35 USC 203 (the march-in provisions). If nonprofits assign a subject invention to some other organization–such as an invention management organization–their standard patent rights clause follows the assignment: “such assignee will be subject to the same provisions as the contractor.”

So subject invention does more than set the scope of government interest. It also then binds the invention to the appropriate provisions for management of the invention. These provisions are usually set out from the standard patent rights clause–reporting inventions to the government, electing to retain title (or not), filing patent applications, having a preference in licensing for small businesses, requiring U.S. manufacturing for exclusive licenses, and the like. But is this all?

Property Trust Relationship

Clearly, it is not. First, for universities, there are requirements outside of the standard patent rights clause that also pertain to inventions. While the standard patent rights clause addresses the government’s interest, federal regulations for grants to universities–the federal funding agreement for grants (2 CFR 200)–includes an additional, important requirement. Universities are to act as trustees with regard to intangible assets they acquire or improve with federal support, including patents and patent applications. Here’s the key sentence clause (at .316, with emphasis supplied):

Real property, equipment, and intangible property, that are acquired or improved with a Federal award must be held in trust by the non-Federal entity as trustee for the beneficiaries of the project or program under which the property was acquired or improved.

A university may acquire rights to patent in a variety of ways. An inventor (or other owner of a patent) may donate the patent. A university could also purchase patent rights. Or a patent could be transferred in a legal document, such as a will. Or, a university could enter into an agreement with an inventor–a patent agreement–that establishes conditions under which the inventor agrees to assign patent rights. One sort of such agreement is an invention marketing agreement–the inventor agrees to assign the invention, and the invention marketing organization (it could be the inventor’s university, but often wasn’t) agreed to act as an agent for the inventor and would see to the patenting, marketing, and licensing of the invention. In exchange for the rights, the invention marketing organization typically agreed to share a portion of the royalties earned from any licenses with the inventor.

Another sort of patent agreement involves future rights. Such agreements can be independent of employment or can be a condition or requirement of employment. Thus, one can become employed, and then agree independently of that employment and for separate consideration, to assign inventions to one’s employer. This approach has been used on matters of both patent and copyright by universities, and many universities still have the copyright language in their policies. For inventions, the typical patent policy established a threshold for the “significant use”of university resources. Under these policies, inventors were expected to assign inventions when a review of the circumstances showed that there was an agreement to assign (such as in a special commission to do work) or significant support (money, release time) from the university. In such agreements, the consideration for assignment is independent of employment. The consideration was the supply of the special resources or an agreement to share any royalties from licensing (but not to act as an agent for the inventor), or both.

Finally, a patent agreement can be based on employment. In such agreements, employment itself–continued pay for services–is the consideration for the assignment. In these cases, a university acquires patent rights by paying the employee to whatever the employee is assigned to do.

Now consider what happens in federal grants when a university adopts a patent policy that makes assignment a condition of employment, not voluntary (donation, will), and not mutual (separate contract). The federal government provides money to the university under a funding agreement to be spent on a proposed project. The federal dollars are divided into two pools–direct and indirect (“Facilities & Administration) costs. The university shifts the pay of those involved in the project to the federal budget. The university pockets the indirect cost payment to cover the costs of facilities and other resources not directly represented in the project budget. The university is now using federal money–the money of the grant–to pay its employees and to provide them with the university resources to the project. Anything patentable those employees invent that the university acquires or improves is done so with the federal grant money and the patent rights to the invention, as an intangible asset, comes within the property trust requirements of the federal grant regulations.

A university does not have to acquire patent rights as a condition of employment or as a condition of use of resources, just as one does not have to pay to acquire a shovel from a store. One might (not recommended) break in after hours and steal the shovel. It’s the same thing–one gets the shovel–but it is obvious that the pathways of acquisition are very different. It’s a choice one makes. University administrators who make the choice to require assignment of patent rights as a condition of employment or resources also have chosen one pathway in federal regulations, and should be held to them.

Who Are the Beneficiaries?

Now think about who the possible beneficiaries might be to a federally funded project that comes up with “serial concatenation of interleaved convolutional codes forming turbo-like codes.” Not your average stoners in a vape den. Here’s the abstract for the Caltech NSF award that produced this invention (emphasis supplied):

Abstract: In 1993, a group of French researchers announced the invention of “turbo-codes,” a fundamentally new approach to the problem of attaining near Shannon limit performance on a variety of communications channel models. Many researchers believe that turbo codes are the most important new idea in error-correcting codes since Shannon’s original paper. Professor McEliece’s work under this NSF grant is motivated by the desire to provide a sound theoretical explanation for the experimentally verified iterative turbo decoding algorithm, which is the key innovation of the French group. McEliece’s research has led to the discovery of a close connection between the turbo decoding algorithm and a number of other algorithms known in the cryptography, information theory, digital communications, signal processing, statistics, and artificial intelligence communities. McEliece and his co-workers have shown that all of these algorithms can be unified by a single technique which he calls the generalized distributive law, or GDL. In this work, the goal is to exploit the GDL to (a) search for a theoretical explanation of the turbo decoding algorithm, and (b) to devise new decoding algorithms in non-turbo situations.

Now I haven’t looked into the technical particulars of the work, but the stated objectives of the grant are theoretical understanding (no patentable stuff there) and new non-turbo algorithms (patentable territory). It’s just that the title of the patent in question involves algorithms for “turbo-like” codes–and that’s not a “non-turbo” environment at all. Perhaps the turbo-like stuff “distracted and diminished” the performance of work on algorithms for non-turbo environments. Otherwise, it would appear that Caltech has assigned the invention to be a “subject invention” even when it doesn’t meet the definition in federal law. That’s something to consider. As we develop this line of reasoning, it may be that Caltech will want to correct the record and argue that this invention is not subject to the standard patent rights clause, but even if it is not, Caltech still has a problem. Let’s look at that problem first.

The question arises, who might be the beneficiaries of this project? Academics might be one group. No doubt those French researchers would be happy to have some Americans explain why what they have done actually works. Advance of science and all. But the primary reason to be at this stuff–devising new decoding algorithms–is for their use in industry. People writing software that needs decoding functions would also have to be beneficiaries of this project. I would expect the full project proposal makes some sort of gesture to such folks, describing the benefits of such applications. Some of these beneficiaries may work for companies. No matter–still part of the class that a university must by federal regulation act as a trustee for when it comes to patents.

Choice of How Patents Are Acquired

You see where this goes. Caltech takes federal money, and makes assignment a condition of the use of resources paid for by the federal funds. Here are the first two paragraphs of the Caltech patent policy–one of the clearest, neatest of university patent policies.

Inventions made by employees in the line of Institute duty or with the use of Institute facilities may be patented in order to protect and benefit the Institute and the public. Title to such patents is to be assigned to the Institute or, if appropriate, the sponsor. The cost of acquisition of such patents shall in no instance be borne by the employee.

It is the policy of the Institute that such patents be used for the public benefit. If there are innovations or discoveries that result in the filing of patent applications and the acquisition of patents, the Institute intends to serve the public interest by prudent and appropriate efforts to transfer the technology to those who will facilitate public use. When this result is achieved by the licensing of an invention or patent, income and/or equity may accrue to the Institute under terms negotiated at the Institute’s discretion.

The obligation to assign is then implemented by a “Patent and Copyright Agreement“–again, good practice. None of the legal bombast of trying to turn a policy statement into a binding assignment document. Here’s the key line from the Agreement:

In view of the patent and copyright policies of the Institute in force at this date and as may from time to time be amended, and as consideration for my use of and access to Institute resources, facilities and equipment, I hereby agree as follows:

The consideration for the assignment is the use of resources, which resources were paid for by federal grant funds from the NSF. Caltech acquires its patent rights by choosing the pathway that goes through the property trust relationship at 2 CFR 200.316. Not only that, Caltech’s patent policy stipulates that inventions be used “for the public benefit” and “the Institute intends to serve the public interest by prudent and appropriate efforts to transfer the technology to those who will facilitate public use.”

But here we have Caltech suing Apple for using–so it claims–a subject invention in which Caltech by federal regulation has agreed to act as a trustee for the benefit of folks who write software that needs better decoding algorithms. Does Caltech have standing under 2 CFR 200.316 to sue for infringement when a company is using an invention Caltech has acquired that it is required to hold in trust for the benefit, apparently, of just those sorts of programmers that work at Apple? How can Caltech aim to exclude those same programmers and their companies from practicing the invention? Only if they ignore the federal regulation and their own choice of the pathway by which they have acquired their patent rights–not to mention their own stated purposes in their patent policy.

Bayh-Dole’s Policy and Objective

Having dealt with the general case, let’s look further at what happens to subject inventions under Bayh-Dole. In particular, let’s ask the question whether the statement of purpose and objectives in the law (at 35 USC 200) actually do anything. Some folks read these statements as pure fluff–like the puffy rhetoric in preambles to university patent policies. (No doubt, if challenged, Caltech attorneys would say that their language about “efforts to transfer the technology to those who will facilitate public use” is secret code for “efforts to make money from licensing patent rights” but is said with the more abstract language so as not to piss anyone off. True intent, not expressed, is irrelevant. Or, another way, preambles actually matter or they are fraudulent.

What about Bayh-Dole? Here’s the statement of “policy and objective”:

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 or development; to encourage maximum participation of small business firms in federally supported research and development efforts; to promote collaboration between commercial concerns and nonprofit organizations, including universities; 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; to promote the commercialization and public availability of inventions made in the United States by United States industry and labor; to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions; and to minimize the costs of administering policies in this area.

Some commentators have noted that it is unusual for a federal law to state its intent and objectives in this way. According to Joseph Allen, the key staffer to Sen. Bayh who worked the bill through the Senate and is in a good position to know these things, the objectives are in the law for a reason:

That the original intent of the law was preserved in the regulations was only because there was a strong oversight entity insuring that the intent of Congress was met.  This operation was headed by Norman Latker, former patent attorney for the National Institutes of Health. Mr. Latker was intimately familiar with the problems in the old government patent policies having seen first hand at NIH that unless universities were allowed to manage their inventions, taxpayers were not likely to see research turn into products improving public health and well being.

But how does including a statement of objectives in a federal law insure that the intent of Congress is met? One principle of statutory construction is that nothing in the statute should assumed to be inoperative; that is, one should not assume text is “surplusage” (see the discussion in Larry M. Eig’s “Statutory Interpretation: General Principles and Recent Trends):

A basic principle of statutory interpretation is that courts should “give effect, if possible, to every clause and word of a statute, avoiding, if it may be, any construction which implies that the legislature was ignorant of the meaning of the language it employed.” The modern variant is that statutes should be construed “so as to avoid rendering superfluous” any statutory language: “A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant….”

(I have removed the footnote citations here). When we turn to the statement of “policy and objective” of Bayh-Dole, then, it’s not intended to function as puffery or as an opening joke to get the audience ready to receive what follows. It should have an effect. What would that effect be?

Consider the first statement of objective:

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

The objective is to promote the use of inventions. These inventions are defined as subject inventions. They are subject to the standard patent rights clauses to be produced and which federal agencies must use as their defaults. But they are also subject to Bayh-Dole, where they are defined as a new category of patentable invention in federal patent law. Subject inventions therefore are also subject to this statement of objective. That is the intent of placing the objective in the statute itself and not leaving it as a matter for Congressional history.

Subject Patents

If we trace the development within Bayh-Dole of the controls placed on patent rights in subject inventions, we can see that these patents must be considered to be subject patents, not ordinary patents. The owner of subject patents is also subject to both the standard patent rights clause and to Bayh-Dole, including Bayh-Dole’s statement of objectives, which is there to have a purpose. That purpose is to use patents to promote public use of inventions made with federal support. For universities, in particular, the problem that presented was that universities did not have the mission, means, or culture to support turning inventions into practical stuff, whether new practices or new products. Their business was research and instruction, not development and technology activity at scale, commercial or otherwise. The idea then was that the patent system might have a role in helping universities develop an infrastructure that encouraged the movement of new stuff from research to industry. This objective is given expression thus:

to promote collaboration between commercial concerns and nonprofit organizations, including universities

A subject patent is to be used to promote practical application and collaboration between companies and universities. Read as statute, these are requirements, not merely premises to be ignored at the whim of the owners of subject patents. Subject patents, as a category, exist for the express purposes provided by Bayh-Dole, not for any and all purposes that one might use a patent for. For instance, with a normal patent, one could agree to sell it to a company knowing that the company intended never to practice the claimed invention and furthermore intended to keep others from practicing the invention as well. This is perfectly fine. The inventor gets money. The company gets a patent, and can use it to keep something it doesn’t like off the market–say, perhaps, some new way of providing fuel to an automobile engine. But if someone tried this with a subject invention, we would say it is wrong–holding a patent to keep something from being practiced runs against the intent of Bayh-Dole. It is not just that we have a cause to fuss about it; rather, the law itself provides a statement of intent that has statutory meaning. The purpose of a subject patent is to promote use. To use a subject patent to prevent use is not merely bad behavior–it violates federal law.

Bayh-Dole provides a definition for “practical application” (emphasis supplied):

(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.

This definition is used throughout the law. The key standard patent rights clauses repeat this definition, making clear that owners of patent rights by assignment are subject to this limitation on their rights as owners of a subject patent. It turns out that a subject patent is indeed a special kind of patent. We can state a general principle:

The purpose of a subject patent under Bayh-Dole is exhausted when there is practical application.

Subject Patent Exhaustion

One holds a subject patent to promote use of the invention claimed by the patent so that the benefits are publicly available on reasonable terms. This is not the full set of purposes for which a patent may be used. For a standard patent, the invention may not be used (that’s the owner’s prerogative) or the benefits may not be publicly available (an owner trades publication of the invention for the right to prevent anyone from using it) or the benefits may not be on reasonable terms (an owner can charge monopoly rates). For a standard patent, any of these things come with patent ownership. We can bitch and moan about it, and fuss about patent reform, but it’s within the patent laws to behave in these ways. That is not true for subject inventions. That’s the effect of the statement of policy and objectives at 35 USC 200. It’s the foundation for the march-in rights at 35 USC 203. But those march-in rights do not replace the broader requirements on subject patents made by the statement of policy and objective. They are merely one part of the picture, addressing one way in which an owner or a licensee of a subject patent may fail to achieve practical application.

The primary form of “patent exhaustion” is found in the first sale doctrine. A patent owner has a right to control a claimed invention up until the sale of product incorporating that invention. A car may incorporate 300 or more patented inventions, but the purchaser of a car does not have to take a license to practice these inventions while using the car–and most don’t even know the patents exist. That’s because the patent owner’s rights are said to be exhausted with the sale. See the Supreme Court case of Quanta v LG, or read the discussion by Audrey A. Millemann at the IP Law Blog. The Supreme Court puts it this way:

The patent exhaustion doctrine provides that a patented item’s initial authorized sale terminates all patent rights to that item.

Bayh-Dole, in creating the category of subject invention and tying that category to the permitted uses of an owner of patent rights in a subject invention creates a new form of patent exhaustion, one that depends not on authorized sale but on practical application. If a subject invention gets used with public benefits on reasonable terms, Bayh-Dole is satisfied. The purpose of holding a patent right in a subject invention is to achieve practical application. A federal agency may “march-in” if it determines that (35 USC 203):

(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 one aspect of the flip side of the objective of practical application in Bayh-Dole’s statement of policy and objective. If a patent owner does not achieve practical application, then the government can require the subject patent owner to grant licenses or can grant those licenses itself if the owner refuses. A subject patent is no ordinary patent. But there’s more to it.

Consider a different situation. In this situation, not only does the subject patent owner not take action to achieve practical application, but others working in the same area, do develop the invention (not even aware of the subject patent). Now the subject invention is being used, with benefits available to the public. The problem is, there are no “terms,” reasonable or otherwise, for this use. One can see that there was no need to obtain a patent on the subject invention, because use took place without reference to the patent, without the need for the inducement of an exclusive license to invest–nothing about patenting the subject invention promoted its utilization. Bayh-Dole does not require patenting. It does not read “you must patent and then demand that your patent position enter into every instance of practical application.” It does not read “you must use exclusive licenses and are hereby authorized to deny anyone the opportunity to use the subject invention until the exclusive licensee has got around to creating a product, if ever.”

In this instance–independent development–in a normal patent, there’s no concern. Independent development is no defense. However, with a subject patent, independent development that results in use does achieve the purpose of practical application that is a fundamental requirement of Bayh-Dole. If the subject patent owner failed to use the patent system to promote practical application, and there is now practical application, then there is no other purpose for the subject patent. Its purpose is exhausted. It is a dead parrot. It may still exist for a term as a valid patent, but it has no legal use to exclude others. Bayh-Dole restricts subject patent owners, and thereby opens up the freedom of others to practice. March-in rights are one way to deal with this, where the subject patent owner has not made the appropriate effort and others are ready to do so. But where the subject patent owner has not achieved practical application and others have done so anyway, it is not a matter of licensing but of having standing to sue for infringement. Here is the thing: there is nothing in Bayh-Dole that allows the owner of a subject patent to sue to prevent practical application where the benefits of the subject invention are available to the public on reasonable terms.

Bayh-Dole’s statement of policy and objective prevents the owner of a subject patent to sue for infringement if doing so would prevent the utilization of an invention so that its benefits are available to the public on reasonable terms. 

The statement of policy and objectives provides the basis on which the owner of a subject patent has the standing to enforce the patent. A subject patent owner might sue to protect the public from nonuse or abuse of a subject invention (for instance, sue for breach of license or for infringement following from breach of license, or sue to enforce a public standard to which the subject patent has been contributed). A subject patent owner might sue for infringement if a use did not arise from “free competition” (for instance, an exclusive licensee might make illegal or inappropriate ties of the subject invention to other company products or services) or “unduly encumbered future research and discovery” (an exclusive licensee with a first right to enforce the patent might threaten university or industry researchers from studying the subject invention–what once was called the “research exception,” which appears to be authorized by Bayh-Dole).  But there is no standing to sue for infringement where there has been independent use.

Trolling with Subject Patents

Consider patent trolling in the context of subject patents. A patent troll acquires a patent position, waits until it appears that companies are practicing the invention claimed by the patent, and then sues the companies for infringement, often starting with the strongest case against a weak company, hoping for a judgment or settlement that will motivate other companies to pay up without litigation. Such a use of patents is accepted as legitimate under present U.S. patent law (though there are efforts–not so very satisfying–to try to change things). But there is no room for such a use of a subject patent. There is nothing in patent trolling that involves the use of the patent system to promote utilization. Just the opposite. It involves use of the patent system to penalize utilization.

Nothing in Bayh-Dole gives the owner of a subject patent a monopoly on the pathway by which the technology involved in a subject invention gets used. Nothing in Bayh-Dole gives the owner of a subject patent a monopoly on being the source for a line of development leading from a subject invention to practical application. While a normal patent provides the opportunity for such monopolies, subject patents do not. They are special. They are limited. They serve an express, statutory purpose, to promote utilization, so benefits are available to the public on reasonable terms. It’s not this–and anything else a patent owner might come up with instead. It’s just this, and this alone. Anything that isn’t this, isn’t. And that includes patent trolling. No owner of a subject patent has a right under Bayh-Dole–that is, under federal patent law–to seek to prevent others from using a subject invention unless doing so meets an objective stated in Bayh-Dole–

  • prevents utilization
  • prevents collaboration between commercial concerns and nonprofits
  • disrupts free competition and enterprise
  • unduly encumbers future research and discovery
  • does not use US industry and labor
  • involves non-use or unreasonable use

If the subject patent litigation does not involve one or more of these theories, then it is not within the scope of rights a subject patent owner holds.

Consider, then, Caltech’s move. It is suing Apple for infringement of a subject patent. Apple has removed products from the market. That is, the effect of Caltech’s litigation is to deny the public the benefit of the subject invention on reasonable terms. Caltech’s argument, no doubt, is that it has not authorized Apple’s use of Caltech’s subject patent, and therefore Apple is infringing its patent. This would be true if the patent was a standard patent. But it is not true if the patent is a subject patent. Why? Because Caltech’s rights in the subject patent are exhausted. By Caltech’s own claim, Apple has achieved practical application. The patent Caltech holds didn’t matter. That’s Caltech’s loss and failure, not Apple’s. Caltech could grant Apple a license upfront, as a matter of course, to resolve any possible later uncertainties that might make Apple’s activities more difficult. Apple might even be willing to pay to obtain the benefit of such a license. But that would be a deal based on something other than Caltech’s right to enforce a subject patent against an independent user.

The Value of Subject Patents

But, but, but cries the university patent administrator (together with patent attorneys who make their livings from patent infringement litigation)–if what you argue is true (or, worse, is accepted by a judge), then what’s the value of Bayh-Dole’s use of the patent system? Companies can just go their way, develop technology independently that federal money has paid to develop already, and we are stuck with patenting costs and a piece of official paper, without the right to bring anyone to their knees who ignores us. There is something to this objection, but one has to accept, first, that Bayh-Dole is dealing with inventions made with public funding. These are not ordinary inventions. These are subject inventions, and if private parties are going to exploit the patent system with regard to these inventions, then those exploits must meet the requirements of public policy, not merely private money-making self-interest, even when the money-makers are university administrators claiming they are better at it than inventors or anyone else the inventors might choose to work with. This fundamental observation insists that Bayh-Dole’s statement of policy and objectives is not pure fluff, to be ignored once one has got a patent on a subject invention. Not everything is fair game for licensing, nor for infringement. Bayh-Dole addresses standing to license and litigate in its statement of policy and objective. Bayh-Dole further addresses failures of licensing at 35 USC 203. Bayh-Dole offers no additional guidance with regard to litigation.

But that does not mean the policy and objectives mean nothing. Nor does it mean that recognizing meaning in the policy and objectives (not just that Congress wanted to be sure everyone knew it had good intentions) means that subject patent ownership is worthless (meaning, one can’t make money on licensing). But the value of subject patent ownership is not set up to allow an owner to maximize the money any way it pleases. It can’t sell or license the patent to someone who won’t practice the invention. It can’t sell or license the patent to someone who will charge the public unreasonable prices. It can’t sell or license license the patent to someone who will work against “free competition and enterprise”–that is a monopolist that abuses its market power. And it can’t just wait for folks to stumble on the technology, use it in their companies and products, and then set about suing them all for their use.

On the flip side, the owner of a subject patent cannot use its patent position to prevent practical application when it finds it, unless that practical application is harming the public. How so? The use could be unreasonable. A company could use a subject invention for illegal or immoral purposes. A company could claim to be practicing a standard in which the subject patent participates, but not implementing the standard properly. A company could be copying a subject invention being made available by one or more companies under license from the subject patent owner. A company could be manufacturing product incorporating a subject invention overseas and importing it into the U.S., harming U.S. companies or workers. In any of these situations, one can readily see a public benefit arising from the assertion of subject patent rights.

The value of subject patents lies in their use to meet the plain statements of Bayh-Dole’s policy and objectives. Just as there is no presumption in Bayh-Dole that the law strips inventors of ownership of their inventions and secretly vests it with university, so also there is no presumption in Bayh-Dole that any patent on a subject invention is just another patent that can be shot around industry any way a university administrator or lawyer can rationalize will make money.

How To Use Subject Patents

How, then, does one use a subject patent?

First, one must work quickly.

If the owner of a subject patent licenses early (and often), then it both teaches the invention and provides a license to the associated rights. The companies may pay for the license, but what they want to acquire is the knowledge of the subject invention. It is the subject invention which they want to use. The subject patent is not a threat to prevent such use: it is ancillary to the transfer of the technology, by providing a legal relationship. It is the receiving company in such cases that wants a license, wants to document that it has obtained an asset through proper channels, is in good standing, will not be accused later of misappropriation, conversion, infringement.

If one delays–for whatever reason, even because it’s too difficult to market the invention or because one asks unreasonable terms or because one is fixated on finding an exclusive licensee, or through bungling or taking on too many inventions at once–then if there’s independent development and use, it’s too late for the owner of the subject invention. One’s subject invention rights to sue for infringement, generally, are exhausted. One might still sue for other reasons, but they have to be within the policy and objectives set out by Bayh-Dole for the use of the patent system involving subject inventions.

Second, one must offer reasonable terms.

The purpose of a subject patent is not to maximize the revenue to the patent owner. There is no “fair return to the taxpayer” in Bayh-Dole. That’s an administrative rationalization. It flatters administrators about what they do, so they repeat it and come to believe it. But there’s no mandate to make such a return in Bayh-Dole, or even to think of royalty demands as somehow a “return on public investment” in research. Think about it–it makes no sense that the return on a federal subvention to support research would be that a non-federal organization (private or state) would clean up on patent royalties. How is that a proper “return”? No, a proper return would be either money to the federal government or achieving practical application of subject inventions with public benefit on reasonable terms. Anything else is pretty much administrative fantasy–that all that federal research money is really provided to make sure there are jobs for administrators and their patent attorney and contract attorney colleagues at the parasitic edges of the research enterprise, funded by patent royalties. Really, now!

The cost of any license has to be sufficiently low that any organization with an interest can acquire the license. For that, price is only one thing that needs to be kept low. So also are all the other costs–demands for diligence, right to approve all sublicenses, loss of the license entirely in the event of some breach, unfavorable venue, unreasonable indemnification and insurance provisions, and even incompetently drafted agreement language–unsuited to the situation, garbled with cut-and-paste, inconsistent and ambiguous usage, and the like. The purpose of the license is to convey new technology for use, not to maximize the financial return from holding a patent position. Opportunity, not threat. Collaboration with industry, not competing with industry for a maximum share of its income.

Third, licenses should offered on the idea that companies want to pay.

This one rubs folk the wrong way. The world, they retort, is full of opportunists and cheats. No company wants to pay for a license. A patent is a gun-of-the-law that forces payment in the nasty world where only the strong survive and everyone else is a patsy. Patents let weak players like universities, and even weaker players like inventors (so the retort goes) avoid being total patsies. Without a patent, Caltech could never stand up to Apple. Without a patent, Cornell could not bring HP to its knees. Without a patent, Illinois could not force Micron to pay for infringement. Or Washington go after GE. Or Stanford after Roche. Perhaps.

But all this happy university litigation does not matter, because Bayh-Dole is not a law about how to keep new technology from opportunists and cheats, nor from independent developers or graduate students leaving a lab for a company job. Bayh-Dole is about how new technology supported by public money gets used for a public benefit on reasonable terms. If university administrators can see how to get a technology into use more quickly or with better support by acquiring an ownership position in a subject patent, then Bayh-Dole says it is worth the try. But if folks will practice anyway, without the inducement of a patent license that might exclude some or all others for a time, then obtaining a subject patent has no purpose.

Therefore, people make money on subject patents because companies, recognize the benefits of collaboration, offer to pay. This happens, despite what university administrators project. Companies pay because they want the service of a university managing invention rights rather than any one competitor among others shaking the rest of them down. Thus, they often are at home with a non-exclusive license, provided they get good service, updates and improvements, and there’s help available when needed. Collaboration, you see, has value. Companies pay because they want early access or special help. Companies pay to supply resources to the labs that are training the people they want to hire, who are producing technology that supports developing standards, that changes the playing field for all of them. These sorts of motivations for payment are largely shut down by university administrators treating subject patents as standard patents. In doing so, the administrators fail to develop relationships that otherwise are available. And worse, when they come to sue companies for practicing subject inventions, they violate federal law in the form of Bayh-Dole’s policy and objectives.

The historic default license in federal research and university research alike is the non-exclusive license, often royalty-free. The default in standards licensing is FRAND–non-exclusive plus fair, reasonable, and non-discriminatory. If the purpose of basic research is to create broad opportunities, then the non-exclusive, royalty-free license is by far the best default approach. Such a license does not have to be offered to everyone–but when the conditions are stated (such as capability), then everyone who meets those capabilities should get to play, regardless of size, regardless of tax classification, regardless of whether a sponsor of research or donor or employer of graduates. Any exclusive license has better promote these same goals. If the primary value of an exclusive license is to disrupt broad opportunities, to make a patent more valuable by excluding all others who are ready to use a new technology, then folks are getting their value without regard to the policy and objectives of Bayh-Dole. They act as if Bayh-Dole were merely helping them wrest control of inventions from the hands of inventors and federal agencies, and then they can do anything they want, such as waiting until there’s use in industry, and then popping off and suing companies over it.

Will Subject Patent Exhaustion Be Raised As a Defense?

I don’t expect that Apple will mount a defense based on challenging Caltech’s standing to sue for infringement of a subject patent. But the argument is there. Caltech ends up playing the troll, no matter how it backs into it. Reuters reports (“Schools that sue: Why more universities file patent lawsuits“) a new study by Robin Feldman and Mark Lemley indicates that such demands for a license don’t promote innovation, and most university inventions get used in industry even before there’s a patent position. In these cases, there is absolutely no purpose served in using the patent system to promote use–it’s already happened.


Caltech’s litigation does not appear to have anything to do with the policy and objectives of Bayh-Dole. Practical application has been achieved. The subject patent is near the end of its term. Caltech’s opportunity to use the patent system to promote use has long been exhausted. It would be great if a company stood up to these universities in court and re-established the purpose of making a special class of inventions called subject inventions, with the distinctive and limited subject patents that non-federal invention management organizations are permitted to deploy.

It would be much better if Congress would amend Bayh-Dole to add a provision, in parallel with march-in rights, that expressly limits the rights of a nonprofit subject patent owner to sue for infringement once practical application has been achieved. No trolling. No delaying until industry has adopted to assert rights. No maximizing the value of the patent over promoting the use of the invention. Universities would file for fewer useless and merely disruptive patents, companies would not regard the academic literature as a minefield, and the public might form a more favorable view of university research and why they are asked to support it to the tune of forty billion or more per year.

This entry was posted in Agreements, Bayh-Dole, Commons, Litigation. Bookmark the permalink.