Five Audit Issues for University Compliance with Bayh-Dole

While most discussions about Bayh-Dole compliance focus on the time periods for reporting inventions, filing patent applications, and giving notice of election to retain title, the compliance issues that matter are often overlooked. The top five involve ownership, money, and accurate representations of the law.

If you are going to audit a university patent practice, here are things to look for.

1  University representations of the Bayh-Dole Act, its implementation, and standard patent rights clauses. 35 USC 200-212; 37 CFR 401; 37 CFR 401.14(a), 37 CFR 401.9; and 2 CFR 215.36, .37.

From 1981 until 2011, many university patent policy statements, practice manuals, and guidance documents claimed that the Bayh-Dole Act vested ownership of inventions made with federal support in the university. These documents differ in their account of how the law operates, but agree that Bayh-Dole gives the university the right to take title from inventors. In 2011 the Supreme Court expressly rejected these claims.

Bayh-Dole does not apply to universities; it applies to federal agencies and to federal patent law.

Bayh-Dole does not vest title to inventions in university contractors, does not give contractors a right to take title, does not give contractors a right of first refusal, does not give contractors title upon notice to elect to retain title. Bayh-Dole establishes a contracting default that restricts a federal agency’s power to require assignment of title if a university has somehow acquired title.

Bayh-Dole does not require commercialization; it requires use of the patent system to promote practical application of inventions made with federal support. Practical application is defined as (i) invention use (ii) that can be established (i.e., not secret) with (iii) benefits (iv) available to the public (v) on reasonable terms. While commercialization may achieve this end, there is nothing in Bayh-Dole that requires commercialization to be used to do so.

Examples of material misrepresentations:

The University must report it’s [sic] inventions and may elect to own and promote them. The University has the right to license and commercialize inventions and intellectual property, subject to certain retained government purpose rights. (source)

[uses “elect to own” instead of “elect to retain ownership”; makes it appear that the university chooses to own as a right of federal law rather than that the university may retain, against a claim by a federal agency, ownership that it otherwise has obtained in a conventional manner; expands rights from inventions to intellectual property generally]

As a result of this law, universities retain ownership to inventions made under federally funded research. In return, universities are expected to file for patent protection and to ensure commercialization upon licensing. (source)

[makes it appear that universities have ownership as a result of federally funded research rather than as a result of an agreement made with inventors; weakens language with regard to patent applications–the university must file or give up ownership on request; there is no expectation of “commercialization” in Bayh-Dole–the standard is practical application]

Pursuant to federal statute, known as the Bayh–Dole Act, UC is entitled to take title to inventions arising from federally funded research (source)

[makes it appear that federal law gives the university the right to “take” title–the university has a right to “retain” title; how the university obtains title has nothing to do with Bayh-Dole]

The definition of a subject invention is intellectual property that is either conceived or first actually reduced to practice in performance of a government-funded project. This Act gives grantee/contractor organizations first rights to title of a subject invention stemming from federally-funded research (source)

[not the definition of subject invention; subject invention is a patentable invention (or plant variety), not “intellectual property” generally; Bayh-Dole gives no first right to title; expands “in performance of” (a matter of the “planned and committed” activities) to “stemming from”–much broader than Bayh-Dole’s scope]

UWM (or its designated patent management organization, the UWM Research Foundation) has first right of refusal to ownership of inventions made in performance of all federal grants and contracts unless otherwise stated in the award documentation. (source)

[no right of first refusal in Bayh-Dole; award documentation has nothing to do with it–any conditions other than the standard patent rights clause have to involve changes in the patent rights clause]

Material misrepresentations of Bayh-Dole in university policy and related documents create a red flag that university practices may be out of compliance with Bayh-Dole. Furthermore, misrepresentations, as distinct from lack of specificity or failure to accurately communicate technical points, carry much greater consequences if they involve claims of institutional ownership that are not in fact legally justified. Where public universities are involved, outright claims of state ownership of private property may require eminent domain procedures.

Any university statement on the Bayh-Dole Act should be reviewed for accuracy with regard to representations of ownership. Challenge and revise any university statement on the Bayh-Dole Act or federally funded research that assumes university ownership or leaves the impression that the university has the right to take ownership.

2  Implementation of the written agreement requirement. 37 CFR 401.14(a)(f)(2).

The Bayh-Dole Act authorizes the Department of Commerce to create standard patent rights clauses that federal agencies must use by default in funding agreements with universities. It is by means of a patent rights clause that Bayh-Dole requirements for federal agency interest in inventions made with federal support are communicated to university contractors. The key provision of the standard patent rights clause concerns how potential university inventors are included in federal contracts.

The (f)(2) written agreement provision requires universities, for each funding agreement, to require employees other than clerical and nontechnical employees to make a written agreement to protect the government’s interest. In that agreement, potential inventors promise to report inventions to personnel designated by their host university, agree to sign papers to permit patent applications to be filed, and agree to sign papers to establish the government’s rights in their inventions made with federal support. When potential inventors make their (f)(2) agreement at the direction of the university, they become parties to the federal funding agreement and thus under Bayh-Dole’s definitions become contractors for the limited purposes set out in (f)(2). Without (f)(2), the definition of “subject invention” (a patentable invention made with federal support and owned by a contractor) would not operate until a university obtained title to an invention made with federal support. But universities are not required by Bayh-Dole or the standard patent rights clause to acquire title. Therefore, the effect of (f)(2) is to supersede university claims to own inventions made with federal support when those claims operate in reliance on the federal funding agreement.

Universities routinely ignore the (f)(2) requirement and substitute a non-conforming agreement with the university, sometimes taking the form of a patent agreement or an acknowledgement of obligations or a promise to comply or a present assignment to all future inventions. Such instruments fail to make potential inventors parties to the federal funding agreements, overreach university authority within a funding agreement, fail to respect inventors’ personal property interests, and fail to protect the federal government’s rights. Examples of non-compliant agreements.

Yale: Patent Policy Acknowledgement Agreement (source)
University of California: Patent Acknowledgment (source)
University of Delaware: Reminder Letter (source)
Stanford: Patent and Copyright Agreement (source)

The (f)(2) agreement is not a patent agreement between the university and an employee. It is an agreement made by certain employees within the apparatus of a federal funding agreement for the benefit of the federal government.

Material misrepresentations of the (f)(2) written agreement requirement create the impression that the university has a right established under Bayh-Dole to require assignment of inventions to the university and an agreement or acknowledgment of this right is required by Bayh-Dole. Such representations are not merely inaccurate: they falsely present an agreement as compulsory or required for compliance with federal law, when the agreement presented is not the one required.

3  Determination of what constitutes a subject invention. 35 USC 201(e). 37 CFR 401.1.

Under Bayh-Dole, “subject invention” is made a new category of invention within federal patent law. A subject invention is one that (i) is or may be patentable (including plant varieties), (ii) owned by a contractor, and (iii) made in the performance of work (iv) under a federal funding agreement. As a definition placed in law, a subject invention arises when an invention meets the conditions of the definition. An invention may not be arbitrarily designated to be a subject invention, nor is the designation the result of a private agreement. The university’s obligations and rights under a federal funding agreement’s patent rights clause extend only to subject inventions, not to any other inventions or forms of intellectual property.

The implementing regulations for Bayh-Dole describe the scope “performance of work” with regard to the subject invention definition. To conform, an invention must be made within the “planned and committed activities of a government-funded project.” Even closely related but not expressly planned and committed work, such as the application of laws or phenomena discovered in federally funded work, even though benefiting from the federally supported work, does not come within the scope of definition of subject invention unless the unplanned activity “diminishes” or “distracts” from the performance of work under the federal funding agreement.

University policies routinely fail to make a determination of whether the definition of subject invention has been met.

(i) fail to review statements of work for planned and committed activities
(ii) fail to ask whether development of an invention diminished or distracted federally funded work
(iii) expand the definition of subject invention to include any inventions that may have benefited from past or current federal support
(iv) expand the definition to include subject matter that is not patentable.

Examples of reporting guidance that fails to be specific or accurate in the relationship between a subject invention and federal support.

umninvdis (source)

[“related to” is broader than Bayh-Dole’s scope; “intellectual property” is broader than Bayh-Dole’s scope; “conception and development” mis-states the scope of subject inventions–“conceived or first actually reduced to practice”–“development” in this context is meaningless with regard to Bayh-Dole; of course, the instructions are for any funding situation, so the specific requirements for compliance with the standard patent rights clause are obscured–inventors could easily be induced to cite federal funding, making an invention a “subject invention” when it is not]

illinoisinvrep

(source)

[“contributing to research” is far afield from the standard patent rights clause, as is anything that would be acknowledged in a publication (which could be a source of materials or data, supply of equipment, processing of data, or co-authorship–none of which are material to the standard patent rights clause; “be liberal in interpretation” means inventors are encouraged to identify “sponsorship” that would create an opportunity for the university to claim ownership–which for federal funding is overbroad]

gatechinvdisc
(source)

[“result from” is overbroad; is the invention within the “planned and committed activities” of a federal grant for research? did work on the invention “diminish or distract” from those activities? separating what inventors owe the federal government from what the university might claim from inventors is at the heart of the distinction]

caltechinvrepa

caltechinvrepb

(source)

[“invention” is defined to include not patentable work. The standard patent rights clause is concerned only with patentable inventions (and plant varieties)–so the definition combined the funding question leads to an overbroad disclosure report; there is no guidance for what constitutes a “funding source”]

In each of these instances, the guidance makes an inappropriate connection between federal funding and a subject invention. While a wide range of assets defined by university policy as “inventions” may be reportable under a university’s policies, a separate step is then required to differentiate the policy-defined “invention” from a “subject invention.” A university-reported invention may not be patentable or may not have been made in the performance of work under a federal funding agreement–even if federal support did assist in the conception or reduction to practice or development of the invention. A university with a general-purpose disclosure form must have a formal procedure by which subject inventions are determined from the assets reported using the form.

Universities exploit an over-broad definition of subject invention to claim ownership in reliance on a misrepresentation of federal law (see above). Even if university patent or research policy otherwise might provide for assignment to the university, the university may misidentify the basis of its authority to do so and thereby mislead inventors into making assignments or failing to understand and assert rights they may have in their work:

(i) Patentable inventions that are not subject inventions may be reported as subject inventions, resulting in government rights that have no basis in law;

(ii) The university may gain ownership of unpatentable assets depicted as inventions when university policy does not provide for such ownership absent an obligation in an extramural funding agreement.

4. Assignments mislabeled as exclusive licenses. 35 USC 202(c)(7). 37 CFR 401.14(a)(k)(1). 35 USC 200.

The standard patent rights clause, following Bayh-Dole, restricts nonprofit assignment of subject inventions. Federal agency approval is required for any assignment other than to an organization that “has as one of its primary functions the management of inventions.” Assignments must include all of the requirements placed on the nonprofit in the administration of the subject invention: “the assignee will be subject to the same provisions as the contractor.”

Courts have held that widely used university exclusive patent licenses are in fact assignments: “courts have long held [that] an exclusive, territorial license is equivalent to an assignment” (Primatek II). Another case reviewed an exclusive license granted by the University of Washington and found it to be an assignment. The exclusive license included

(i) a grant to make, use, and sell
(ii) the right to sublicense
(iii) the right to sue for infringement
(iv) the right to collect damages
(v) the right to settle infringement claims by granting a sublicense

The exclusive license was determined to be an assignment even with the reservation of university rights to practice the invention and allow others to do so for non-commercial purposes, to approve any settlement of suits, and to intervene to defend the validity of its patent.

Many university exclusive licenses take the form found to be an assignment. They grant substantially all rights in the patent, sometimes with a territorial restriction. They reserve rights for university and non-commercial use. They allow the licensee to sublicense and lead litigation for infringement. The grant of these rights amounts to an assignment of the invention, even if they do not formally assign title to the patent. The law is directed at assignment of the invention.

Examples of template exclusive licenses that appear to make assignment of rights by meeting all of the above criteria:

Harvard: Sample License Agreement Exclusive Patent Rights (source)
UC Davis: Sample Template for Exclusive Patent License Agreement (source)
University of Pennsylvania: Patent License Agreement (source)
University of Rochester: Exclusive Patent License Agreement (source)

Universities are exposed to liability for making an assignment that requires the university’s own nonprofit obligations under the standard patent rights clause to be assigned with a subject invention. Those obligations include among other things restrictions on the use of income, which a commercial licensee may not find acceptable. A university in making an assignment rather than a legitimate exclusive license risks failing to work within the scope of Bayh-Dole’s statement of policy and objective that requires the patent system to be used to “promote free competition and enterprise.” While a legitimate exclusive license permits the patent owner to authorize other commercial uses of a subject invention, an assignment does not, and therefore falls outside Bayh-Dole’s statement of policy and objective, and therefore outside the property right established in federal patent law for patents on subject inventions.

5. Use of  subject invention royalty income. 35 USC 202(c)(7), 37 CFR 401.14(a)(k)(3).

The standard patent rights clause stipulates that “any royalties or income earned by the contractor with respect to subject inventions” (a broad scope) may be used for two purposes:

(i) expenses incidental to the administration of subject inventions
(ii) scientific research or education

Payments to inventors are classified with incidental expenses.

Universities often ignore the broad scope of the requirement (and so consider only royalties from patent licensing and not any other “income earned with respect to a subject invention.” They also often ignore the two restrictions on the use of such money.

Universities allocate income from the licensing of subject inventions to support their technology licensing activities generally, but Bayh-Dole limits the use to the “administration of subject inventions.” A university must provide separate accounting for the expense of administrating subject inventions in order to establish proper use of funds. Deducting an “administrative fee” from a royalty stream in addition to costs is a warning sign the deducted amounts may not be held to cover future costs involved in administrating subject inventions. Similarly, the standard patent rights clause requires that the balance of income earned after the deduction for authorized expenses is to be used for “scientific research or education.” Universities frequently fail to provide accounting to show that the balance has been used as specified. Shares often are allocated to departments and schools without specific requirements regarding use or accounting to demonstrate that those requirements were met. In essence, royalties on subject inventions may become administrative slush funds, to be used without accounting to Bayh-Dole requirements.

Examples of university practices that suggest non-compliance:

2.3 Next, in accordance with the SDSU Intellectual Property Policies, the State shall be compensated for its part of the total institutional costs associated with the support of the invention or copyrighted work.

2.3.1 Total costs to be recovered by the State are based on the Inventor(s)/Author(s) Declaration of Institutional Support, the determination of the University Patents and Copyrights Committee and the approval of the Vice President for Business and Financial Affairs. (source)

For this policy, “Net Income” is defined as gross revenues, received by the university or its nominee, resulting from any given intellectual property, less an administrative fee of 15%, then less all unreimbursed costs incurred by ASU or its nominee in protecting, licensing, maintaining, and litigating rights in the intellectual property or any agreements thereon as described under “Administrative Responsibilities” above, including, for the sake of clarity, any legal fees and other costs and expenses associated with intellectual property protection and litigation. (source)

The Office of Brown Technology Partnerships will deduct 15% of the gross Royalties it receives as a contribution towards the costs of operating the Office for the University. After this deduction, remaining Royalties shall be used first to offset costs directly attributable to the protection of rights to the intellectual property and to the licensing of rights. (source)

The patent property right universities enjoy in patents on subject inventions is expressly limited by the requirements of Bayh-Dole (35 USC 200) and the standard patent rights clause. Compliance with the use of funds derived from exploitation of patents on subject inventions is every bit as important as compliance in the formalities of notifying the government of election to retain title or placing a government rights notice in patent applications for subject inventions.

In fact, statements about the law, the methods by which ownership is acquired and transferred, and the money that stems from this activity all are more important than the details of how a university administrates paperwork exchanges with the federal government. While the federal government can monitor the paperwork that it receives to determine whether dates are being met, the government cannot readily determine that a university has accurately and clearly stated the law (Bayh-Dole did away with the IPA’s required review of university patent policy and practices); does not see how a university acquires ownership of subject inventions (Bayh-Dole did away with the requirement that universities obtain assignment under a patent agreement after they decided to file a patent application); and receives no accounting of how money has been spent (Bayh-Dole does not require an agency to ask for such information, and provides no federal agency remedy for non-compliance). The government therefore relies on universities to manage their programs consistent with federal law and the patent rights clauses in federal funding agreements, with the auditors of university patent management programs to ensure that universities do not stray into self-interest that damages the public interest.

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