Comply with commitments under federal regulations

Restoring voluntary assignment for university inventors is the first step in reconditioning university invention management–and putting that management on a road of development consistent with university mores and roles. Voluntary assignment can be accomplished a number of ways. I will outline a few here.

  1. correct interpretation of policy–often policies are drafted with a narrow scope on claims but that scope has been expanded by administrative interpretation
  2. change policy–often the change does not have to involve dramatic redrafting
  3. change acceptance practice in the IP office
  4. implement (f)(2) properly for subject inventions
  5. change state law (for public universities)

We’ve worked through a number of points: reading patent policy statements carefully often results in the discovery that they in fact endorse voluntary assignment and limit compulsory assignment to a narrow set of situations. Policy can be changed, too, to remove the apparatus–often inept, often clutter, often designed to deceive or permit administrators to change their interpretation of the policy later–that doesn’t work and creates much of the problem, bitterness, and liability in the present compulsory, comprehensive “dual monopoly” approach to university patent management.

Apart from these two strategies, one can also often use language built into most patent policies to defend against the problems of agency when a university takes ownership of patentable inventions (and non-inventions, and whatever). Policies often provide a review step prior to a university asserting a claim and also provide for the university to choose to stop managing an invention it has demanded assignment of. There is rarely any requirement in policy that university administrators must demand assignment of all inventions, or that once assigned, all inventions must be pursued for “commercialization.” There are, however, statements that if the university does not file a patent application, it will offer the rights back to the inventors or, in the case of federal funding, to the federal government.

Let’s look, then, at the federal regulatory context for voluntary assignment. It turns out to be favorable to inventors and not so favorable to those who claim that university-owned patents are just like any other patents and universities are free not to license to anyone or to troll or to flip patents to those who will exploit nonuse and trolling. We will deal with the standard patent rights clause authorized by Bayh-Dole and then move to the requirements on intangible property in the standard terms and conditions for federal grants to universities, of which the standard patent rights clause is a part.

The University Framework

Let’s set the framework at the university first. Federal funding is provided to support work at universities proposed by individuals, called the principal investigators, or PIs. PIs are almost always faculty members. If someone who would be a PI isn’t a faculty member, standard practice is to give them a faculty appointment of some kind, such as “assistant research professor” or “affiliate instructor.” The PI must request from the university (from university administrators) a release from “official” or “regular” duties to undertake the work proposed to be funded by the federal government. That’s what the term “extramural” research means–“outside the walls” of the university, something other than the duties a university might require of the PI.

The proposal for the grant is then submitted by the university to the government. The proposal consists of a statement of work and a budget that sets out the salaries, supplies, and other costs anticipated in order to carry out the work plan, the “planned and committed activities” along with the accounting for those activities. If the proposal is approved, then the federal government releases funds to the university, and university administrators set up an account for the grant. The pay of the PI and any other faculty and staff involved are then shifted to the grant account–it may be a 5% shift or a 100% shift, depending on the time commitment to the grant.

The government provides funds in two tranches–a “direct” portion and an “indirect” portion, called the “Facilities and Administration” or F&A costs, essentially the costs to the university for managing the grant that can’t be easily broken out as direct costs–such as electricity, janitorial, building maintenance, communications and computers, depreciation of equipment, and the administrative costs of setting up accounts and delivering reports to the government. The details are complicated–stuff about calculating the indirect portion as a share of the total modified direct costs, negotiations with a government agency to establish an indirect cost rate, and the like. But the general point is that the F&A covers the universities costs in permitting the PI to do work “outside the walls,” supported financially by the federal government, not by the university. Faculty PIs step out of their regular duties to do work supported by the federal government, and the federal government reimburses the university for the full cost of the PI’s work on the grant.

The federal grant, then, is a subvention, a kind of governmental donation to assist the special performance by the PI of work proposed, with additional money to make the university administration and resources whole for their support of the PI’s work on the grant. The university does not assign faculty to this work, does not set the conditions for the work or the deliverables. The work is not done for the university–the work is done for the purposes of doing the work, supported by the federal government. The work also is not done for the federal government–a subvention or grant is not a procurement. The federal government receives reports and has a right to use these reports, and has a right to use inventions or other things made in the work for government purposes, but the government does not specify the deliverables and is not purchasing services.

You can see that in a subvention, the PI is not employed by the university for purposes of intellectual property–the university is not the author of the reports the PI writes, nor does the university hire the PI to invent or direct the work to invention (despite the dreams of university patent administrators). The work is not within the scope of employment, where the scope of employment means what the university controls or has the right to control in the creation of works of authorship or inventions. Academic freedom here is almost a side issue–though an important one. The practice of allowing faculty to set their own work plan and do the work for others, supported by still others, may be one consequence of academic freedom, but the practice of extramural research stands on its own tradition, built from university administration recognition of the value of public service provided by faculty in engaging the broader community. Such a recognition was added to many public universities with the Morrill Act (and extensions) in the 19th century, giving rise to agricultural extension offices.

Faculty extramural research–and other activities, such as personal consulting, serving as editors of scholarly journals, advising state and municipal governments–are themselves a form of university subvention–donating faculty expertise and service to the benefit of “the public” or “the community,” expressed in various forms of releases (for instance, up to one day per week, for personal consulting) from “regular” duties. The PI is “seconded” to work for others, to the extent that the work the PI takes on is not what the university has a right and expectation to schedule. A university cannot force a faculty  member to do research, (though the university might not promote a faculty member who does no research).

While the PI is an “employee” of the university in the sense that the PI receives a salary and is provided with access to university resources, for the purpose of a federal grant, the university, in a move parallel to that of the federal government, also makes a university subvention in support of the extramural work, by releasing the PI from university duties. The PI’s salary is then paid as “assistance” by the federal government. The university is also paid by the government for the cost of the bother to manage the federal grant.

This work under a federal grant, then, is not “contract research.” The university is not an “independent contractor” bidding on work from the government and when winning a bid, assigning faculty to work on it, removing them kicking and screaming from their teaching assignments to do research. Nothing of the sort. The university on the contrary may even insist that faculty PIs “buy out” their scheduled teaching duties. The university gets the value of the faculty salary for whatever courses the faculty member was scheduled to teach, and then (often) hires temporary instructors for those courses (at much lower pay), pocketing the difference as a happy windfall.




The Federal Funding Agreement

Federal grants to universities move through multiple layers of law and regulation. The grant instrument of conveyance takes the form of a “federal funding agreement”–a federal contract, which takes precedence over contracts formed under any state law. The terms and conditions of each federal grant are established by the federal agency providing the money. Particular requirements are set out in calls for proposals and other announcements of funding. The general requirements are established in the agency’s federal regulations, part of the Code of Federal Regulations or CFR. The agency’s CFR is in turn subordinate to general CFR requirements on federal funding agreements. For grants to universities, the general terms and conditions are at 2 CFR 215. The National Science Foundation’s version of these terms and conditions, tailored for the NSF, are at 45 CFR 650. The NSF gives further guidance regarding its expectations and practices in an additional document.

With regard to inventions and patents, the Bayh-Dole Act (35 USC 200-212) controls federal agency requirements. Those requirements are then implemented by 37 CFR part 401, which includes standard patent rights clauses authorized by Bayh-Dole:

  • small businesses                                                          37 CFR 401.14(a)(a)-(j), (l)
  • nonprofits                                                                     37 CFR 401.14(a)(a)-(l)
  • DOE naval propulsion and weapons programs    37 CFR 401.14(b)
  • inventors retaining rights                                          37 CFR 401.9
  • exceptional circumstances                                         37 CFR 401.3(a)

These clauses are not in Bayh-Dole. For university grants, the standard patent rights clause is incorporated by reference into the standard terms and conditions for awards at 2 CFR 215.36(b). Federal agencies may tailor 37 CFR 401.14(a) and incorporate the changes into their agency-specific terms and conditions. It might look complicated, but the complexity is reduced once one looks at any particular agreement, because the choices in these layers of regulation have already been made by the funding agency. What one has to do, then, is the most basic step in the management of any contract–read the actual agreement that controls the relationship.

The key point in all of this apparatus is that federal requirements regarding inventions are not a matter of law, imposed on all citizens of the country, but are agreements made by universities (unreal corporate persons that they are) on behalf of their PIs and potential inventors. But PIs and other potential inventors have to also agree, personally, to the terms and conditions that involve them. If they don’t agree, they don’t get to participate in the research, but there’s nothing that forces them to participate in the research. The agreement, like the research itself, is voluntary. That’s an important point to consider as we get to invention management choices.

The federal government’s problem is how, in a federal funding agreement, to reach past the university-as-contractor and gain the agreement not only of the PI but of everyone employed with federal funds to work on the grant (except clerical and non-technical workers). The government could just “trust” universities to obtain promises from everyone involved, but that’s not prudent. Instead, the government uses the standard patent rights clause to require the university to assign responsibilities under the grant to potential inventors–to report inventions, to sign papers to permit patent applications to be filed, and to sign papers to establish the government’s rights in inventions. This requirement is at (f)(2) of the standard patent rights clause. The government requires universities to require this written agreement of each employee, each participant paid from the grant.

The government’s requirements, however, are remarkably loose. Grants are subventions–assistance–not procurement. Thus, there is no prohibition in funding agreements that prevents the PI or anyone else in the grant from collaborating with others not paid by the grant (and not necessarily even working for or at the university that hosts the grant).

Similarly, clerical and non-technical workers are excluded from the scope of the government’s interest. In a university, a clerical worker in a grant could be a Ph.D. student in another program–perfectly able to invent. Similarly, collaborators might also invent, based on ideas and information they gain from discussions with the PI and other paid grant participants.

Inventions that result might be jointly made with the paid grant participants, but also might not be.  For all that, a PI might give a talk at a conference on the grant work while in progress, and a member of the audience might thereafter invent. Again, such an invention lies outside the scope of the government’s interest and outside of what a university can require by way of assignment. And such inventions might even be within the planned and committed activities anticipated by the grant proposal.

But the government does not consider such inventions to be subject inventions unless the university (or another contractor, as the term is defined in the standard patent rights clause) obtains ownership and the invention is otherwise within the scope of the standard patent rights clause–and there is nothing in Bayh-Dole, the implementing regulations, the standard patent rights clause, or the agency terms and conditions that requires a university to obtain ownership of any invention made with federal support, let alone inventions not made with federal support simply because a colloborator invents.

The Dynamics of the Standard Patent Rights Clause

To sum up. Universities release faculty to participate in such grants. Administrators do not assign the work or have control over it. The university is compensated by the federal government for direct and indirect costs associated with the work. Nothing in federal law or regulation or funding agreement requires a university to own any invention made with federal support. Now we can look at how voluntary assignment policies work in conjunction with the standard patent rights clause in university federal grants.

Imagine a university that does not require inventors to assign any invention. I know–there aren’t that many in the United States–though there are in other countries, such as Canada. If a university has implemented the (f)(2) requirement, then each potential inventor paid on a federal grant has agreed in writing to protect the government’s interest. This is the promise that is at the heart of the invention requirements for each federal grant.

When a patentable invention is made in the performance of work on a grant, the inventor, as a result of the (f)(2) agreement he or she has made, becomes a party to the funding agreement, a contractor, and the invention is therefor a subject invention. The university is required to report all subject inventions to the federal funding agency, and in the (f)(2) agreement, the inventor has promised to disclose all subject inventions to the university so that it can report them.

This is full extent of the university’s obligations under a federal grant:

  • to require the (f)(2) agreement for all potential inventors paid under the grant
  • to designate personnel responsible for patent matters
  • to report subject inventions to the government when these are reported to the university’s personnel responsible for patent matters

There is nothing difficult or complicated about this. When anyone is to be paid from the grant, they sign an (f)(2) compliant agreement. If they invent, they report the invention to whomever the university has designated–could be a university official, a patent attorney at a law firm, or an invention management organization. That person reports the invention to the government. That’s the end of it.

Or, at least the end of the requirements as a condition of receiving the federal grant. Everything else follows from other choices that get made.

If a university does not have title to a subject invention (because that invention is owned by the inventor, who has not assigned it), it cannot elect to retain title, but it can notify the federal funding agency that it has chosen not to obtain title. In that case, the patent rights clause switches from 37 CFR 401.14(a) to 37 CFR 401.9. The federal agency may then require the inventor to assign the invention to the agency or may allow the inventor to retain title, with the minimum requirements of 37 CFR 401.9. Either way, there is no need for the university to be involved, other than to respond to a request by the federal agency if it contemplates allowing the inventor to retain title to the invention.

Here’s how the NSF puts it:

If a grantee elects not to retain rights to an invention, NSF will allow the inventor to retain the principal patent rights unless the grantee, or the inventor’s employer, if other than the grantee, shows that it would be harmed by that action.

If the inventor’s employer would be harmed if the inventor retained rights, then apparently the NSF would require the inventor to assign title to the invention to the NSF. And that’s the end of it, again.

Now, what if an inventor wants to retain title to an invention and the federal funding agency indicates that it will require assignment of the invention? Here’s where the university’s invention management infrastructure comes into play. The inventor has the option–voluntary–of choosing between assigning to the federal agency or to the university (or the university’s invention management agent). If the inventor chooses the university, then the inventor accepts the university’s conditions. But the inventor has some negotiating leverage–if the university’s conditions are not acceptable, the inventor can assign to the federal agency. Similarly, there’s no requirement that the university accept assignment from the inventor. If the university doesn’t like the invention or the inventor’s requirements, it can decline to take assignment, and the inventor must assign to the federal agency as promised by the (f)(2) agreement.

If the inventor retains ownership of the invention, then the public covenant that runs with the invention is that of 37 CFR 401.9. If the inventor assigns to the university, then the public covenant is that of 37 CFR 401.14(a) as applicable to nonprofits. The more favorable covenant for development is clearly that of 401.9, which permits all sorts of exclusive licensing, venture fund-raising, and selling without significant federal agency oversight or the overhead and fuss of a license from a university. Perhaps the more favorable covenant for the sharing of the invention on a non-discriminatory basis is that of 401.14(a)–especially when it requires federal agency approval for exclusive licenses that are really assignments. If university administrators wanted the best chance of making money from patents for the least administrative distraction, cost, and liability, they would always try to get subject inventions to end up under a 401.9 covenant and in exchange take a financial interest in any upside the inventors might make–which might be augmented by the offer of university support in the form of lab space, visibility, access to seed funding, and the like.

Property Trust Relationship

We now turn to one further aspect of federal funding agreements. In addition to the Bayh-Dole requirements expressed in the standard patent rights clause, federal grants to universities also incorporate terms and conditions directed at “intangible property.” This clause is headed Property Trust Relationship (2 CFR 200.316), the clause immediately after the one that incorporates the standard patent rights clause (2 CFR 200.315). Intangible property is defined expessly to include patents and patent applications, but is “not necessarily limited” to the list of things in the definition (2 CFR 200.59):

Intangible property means property having no physical existence, such as trademarks, copyrights, patents and patent applications and property, such as loans, notes and other debt instruments, lease agreements, stock and other instruments of property ownership (whether the property is tangible or intangible).

My emphasis, of course. The Property Trust Relationship forms an additional public covenant on inventions acquired or improved by a university when the acquisition or improvement involves the use of federal funds. Here’s the core of the clause:

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.

I have highlighted the key phrases. If a university acquires or improves patents or patent applications using its own funds, then it is subject only to the public covenant in the standard patent rights clause at 37 CFR 401.14(a) and the statement of policy and objectives in federal patent law at 35 USC 200. But if the university uses federal funds, it undertakes an additional responsibility to serve as a trustee, not merely an owner of the patent or patent application. There are two ways to use federal funds to acquire patents: as a direct cost and as a condition of participation in the federal award. Let’s look at both.

Some patent costs are allowable as direct cost if the cost is accepted as part of the grant. Here is the NIH’s guidance:

Invention, Copyright, Patent, or Licensing Costs Unallowable as a direct cost unless specifically authorized on the grant award. May be allowable as F&A costs, provided they are authorized under applicable cost principles and are included in the negotiation of F&A cost rates. Such costs include licensing or option fees, attorney’s fees for preparing or submitting patent application, patent maintenance, or recordation of patent-related information.

Thus, if a university charges patent application work to the direct cost budget of a federal grant, it uses federal funds to acquire or improve that patent application–and it accepts a property trust relationship has formed with regard to that intangible property.

Second, a university may acquire rights by making the consideration for a requirement to assign an invention participation in the federally funded work. In such a case, the consideration for the requirement to assign is the benefit of working on the grant, and the entire cost of the grant–direct and indirect costs–is generally paid for by the federal government. The use of the federal funds, therefore, is the consideration for the obligation to assign inventions, and therefore federal funds have been used to acquire patent applications and patents–from the inventors. The university has paid no other consideration for the requirement to assign; hence, it accepts the property trust relationship, just as if it had charged the acquisition to direct funds.

No university that I know of accepts this outcome, and prior to Bayh-Dole, most universities operated with only limited requirements for assignment of inventions, and so it would not arise. But as universities have come to adopt compulsory assignment policies, often predicated on a mischaracterization of the Bayh-Dole Act to claim that federal law required assignment to the university (when it didn’t and doesn’t), the situation has changed significantly, though the effect of the change is not immediately obvious. If a university acquires inventions through an agreement independent of the federal grant, not as a condition of participation in it, then the university is outside the property trust relationship.

The university may accept voluntary assignment of the invention made with federal support (a great approach in the past–up to and including the Cohen-Boyer gene-splicing patents), or the university may require assignment as a condition of appointment, but if the conditions for assignment are employment (and here, employment in a grant) or use of resources (all of which are paid for by the grant), then the university is expressly using the federal funding to obtain patent rights–patent applications and issued patents. A university does not have to require assignment of inventions as a condition of either employment (in a grant) or use of resources (in a grant). That is a choice. The Property Trust Relationship clause says, “If you do it that way, then act the part of trustee, for the beneficiaries of the grant, not for your own institutional self-interest.”

The Property Trust Relationship appears to one of the few possible protections for inventors faced with university administrative power. Federal grants are express when it comes to protecting subcontractors. No university can demand patent rights as a condition of granting a sublicense on a federal grant, per 37 CFR 401.14(a)(g):

The subcontractor will retain all rights provided for the contractor in this clause, and the contractor will not, as part of the consideration for awarding the subcontract, obtain rights in the subcontractor’s subject inventions.

The situation for university inventors is not so clear. There are two areas of potential protection. One is the (f)(2) requirement. When a university acts to require the (f)(2) agreement, it displaces any other requirement that would conflict with the (f)(2) agreement, since the action of the university cannot both require (f)(2) compliance and also insist on something different. Since (f)(2) agreements require the inventor to promise to establish the government’s rights in subject inventions, and an (f)(2) agreement makes the inventor a party to the funding agreement (just as a subcontractor is), (f)(2) ought to exclude a university’s prior claims on subject inventions.

The university then has to use a separate patent agreement, one that is not conditioned on the use of federal funds or use of resources paid for with federal funds–an agreement that carries its own consideration, not federal consideration. If a university wants ownership of a patent on a federally supported invention, then (f)(2) argues that the university must find some other agreement than one based on employment in the grant or use of resources paid for by the grant. The university, once it has required the (f)(2) agreement, has to find some other agreement, not as a condition of making the grant funding available to the inventors-to-be, that is the basis for the university’s acquisition of patent rights. The problem with all this is that no university I know of complies with the (f)(2) requirement. They just ignore it.

The second protection is the Property Trust Relationship, 2 CFR 200.316. If a university goes ahead and demands assignment as a condition of the release of the federal grant funds to the PI, then the university accepts as well the role of trustee, and that puts a substantial limitation on the technology licensing office’s standard “commercialization” practices. It may be that commercialization is consistent with the university’s status as a trustee, but charging a royalty or offering an exclusive license that prohibits local use of the invention by anyone may well not be. The benefits sought by a trustee are those accruing to others, on whose behave the trustee acts. In the case of the university, royalties then (other than the inventor share, which is required by the standard patent rights clause), must go to the beneficiaries, not to the university (and even if those royalties must be used for scientific research or education, as required by the standard patent rights clause, it is the beneficiaries, not the university, that enjoys the use of the funds and the benefit from that use).

If university administrators do not want to create a property trust relationship, then they must find some other way to acquire an invention from an inventor. The primary way of doing that, the obvious way, is by means of a voluntary agreement that carries its own consideration, not in any way connected with the federal grant. The problem with all this, too, is that no university I know of complies with property trust relationship requirement. They just ignore it, too.

The upshot is that voluntary invention assignment practice is entirely consistent with federal funding agreements. Bayh-Dole is fine with it. The standard patent rights clause is fine with it. All that’s required is compliance with the (f)(2) requirement. Opening up inventor choice in federal funding would go a long way toward creating a much better, healthy, open working relationship between inventors and the university patent administrators that offer to manage inventions.


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