Exclusive licensing in Bayh-Dole, Part 1: Licenses and Assignments

Here is what Bayh-Dole says about exclusive licenses:

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

That’s from 35 USC 204. An exclusive license to use or to sell in the U.S. requires substantial U.S. making as well. And even that gets walked back immediately. There are two points to make here. The first concerns the meaning of “the exclusive right to use or sell.” The second has to do with the fact that the only limitation on exclusive licenses is here, in 35 USC 204, when originally Bayh-Dole had an extensive limitation on exclusive licenses specific to nonprofit organizations, at 35 USC 202(B)–don’t look there for it now, as the clause has been relettered, as it were, into oblivion.

exclusive right to use or sell

any products embodying the subject invention or produced through the use of the subject invention

This is odd wording. Why not just require any exclusive license in the U.S. to require U.S. manufacture? Why just single out “use” and “sell”? And why is there an “or” between the two words? And what is that limitation on products doing? Why not just any products covered by a claim of a patent on a subject invention?

Let’s expand the wording:

no small business firm or nonprofit organization and no assignee shall grant

  • the exclusive right to use any subject invention in the United States or
  • the exclusive right to sell any subject invention in the United States

unless the licensee agrees that any product

  • embodying the subject invention (i.e., exclusive right to sell) or
  • produced through the use of the subject invention (i.e., exclusive right to use)

will be manufactured (i.e., not necessarily exclusive right to make) substantially in the United States.

Let’s work through things to see what motivated the wording we have here.

Let’s start with the difference between assignment and exclusive license. A good discussion is available with regard to assignment in a case involving plant variety protection, which isn’t itself patent law but is based on patent law. Public Varieties of Miss. v. Sun Valley Seed Co. (734 F. Supp. 250 (N.D. Miss. 1990)) involved a dispute over whether a license granted was an assignment or an exclusive license. Mississippi State University operates the Agricultural and Forestry Experiment Station, an agricultural extension program. MAFES developed a new variety of cotton, obtained a plant variety protection certificate, and licensed rights to a non-profit, Public Varieties of Mississippi, Inc. (for which there is virtually no information readily available–even whether it still exists as a functioning entity). Under the deal, MAFES would produce “foundation class” seed and PVM would then would sublicense the right to produce and sell seed. A company obtains the seed and resells some, in violation of its sublicense. PVM sues. The company argues that PVM does not have standing to sue because it is merely a licensee, not an owner of the right. The court grumpily agrees. What’s important here is the reasoning about the difference between an exclusive license and an assignment.

The PVM court first works through a set of distinctions:

  • Common law gives an inventor the right to make, use, and sell their invention.
  • A patent gives an inventor the right to exclude others from making, using, and selling.
  • Only the owner of “the entire bundle of common law rights” in a patent can enforce the patent.

Thus, it is common law that gives rise to an inventor’s interest in their invention. Patent law provides a statutory basis to exclude others. Only an owner of a patent has standing to enforce the patent right. Citing another case (Crown Die & Tool), the PVM court lays out the condition under which someone has the power to enforce a patent:

Hence, to effectively convey a patent’s exclusionary power, which is the incident of owning all three common law rights in an invention, a patentee must sufficiently convey each of his common law rights to make, [use], or vend his invention so as to also convey to the recipient the incidental statutory right of exclusivity.

(The original has “sell” for “use”–clearly an error from the immediately preceding text that identifies “make, use, and vend” as the three common law rights an inventor enjoys.) To have standing to sue for infringement, one must be an owner of all three common law rights–to make, to use, and to sell (or vend). Citing various cases, the PVM court then sets out the difference between an assignment and a license:

An assignment is defined as a conveyance which transfers the entire bundle of common law rights residing in a patent. Any agreement which transfers less than all of the rights in a patent is considered a license, and does not entitle the recipient to sue on the patent in his own name.

The court continues (citations removed):

A license merely grants a party permission to do something which would otherwise be unlawful; it grants immunity from suit rather than a proprietary interest in the patent.

And the conditions on assignment:

To assign an interest in a patent, a patentee must assign, grant and convey either:

(1) the whole patent, comprising the exclusive right to make, use and vend the invention throughout the United States; or

(2) an undivided part or share of that exclusive right; or

(3) the exclusive right under the patent throughout a specified part of the United States.

These are the three kinds of assignment: whole, undivided part, or for a territory. Are you with me so far? A license grants immunity from suit. An assignment grants an ownership interest in the invention. A licensee does not have standing to sue for infringement. An owner does. It matters, then, whether an agreement to convey rights in an invention is a license or an assignment. An exclusive license, then, is fundamentally ambiguous in patent practice. An exclusive license may be simply (if that’s possible) a promise not to sue for infringement–the only such promise that the patent owner will make. Or an exclusive license may convey each of the patent owner’s rights so that the licensee is now in fact an owner of the whole patent, or of an undivided interest in the patent (imagine co-owners), or of an exclusive right to a territory (such as the United States).

If an instrument labeled an exclusive license grants the rights to make and to use and to sell, then that license is, actually, also an assignment. Similarly, if an instrument labeled exclusive license grants a right to a patent for the United States (or any region within the United States), then that license is also an assignment (because practicing the patent–making, using, or selling–is now controlled by the licensee, er, assignee for the named territory. The difference between license and assignment has to do with whether an ownership interest in the invention has been conveyed–and that depends on whether the common law rights of the inventor have been conveyed. If so, then we have an assignment.

To anchor things, let’s work through it again, this time using the MPEP. First, ownership:

Ownership of a patent gives the patent owner the right to exclude others from making, using, offering for sale, selling, or importing into the United States the invention claimed in the patent. 35 U.S.C. 154(a)(1).

Next, assignment (bold in original):

“Assignment,” in general, is the act of transferring to another the ownership of one’s property, i.e., the interest and rights to the property.

In 37 CFR 3.1, assignment of patent rights is defined as “a transfer by a party of all or part of its right, title and interest in a patent [or] patent application….” An assignment of a patent, or patent application, is the transfer to another of a party’s entire ownership interest or a percentage of that party’s ownership interest in the patent or application.

In order for an assignment to take place, the transfer to another must include the entirety of the bundle of rights that is associated with the ownership interest, i.e., all of the bundle of rights that are inherent in the right, title and interest in the patent or patent application.

And now license. We must work carefully here:

As compared to assignment of patent rights, the licensing of a patent transfers a bundle of rights which is less than the entire ownership interest, e.g., rights that may be limited as to time, geographical area, or field of use.

A patent license is, in effect, a contractual agreement that the patent owner will not sue the licensee for patent infringement if the licensee makes, uses, offers for sale, sells, or imports the claimed invention, as long as the licensee fulfills its obligations and operates within the bounds delineated by the license agreement.

A license is a promise not to sue. It involves a conveyance of less than an entire bundle of rights–that is, a license does not give a licensee standing to enforce a patent. Now the MPEP deals with exclusive licenses.

An exclusive license may be granted by the patent owner to a licensee. The exclusive license prevents the patent owner (or any other party to whom the patent owner might wish to sell a license) from competing with the exclusive licensee, as to the geographic region, the length of time, and/or the field of use, set forth in the license agreement.

This is important. The effect of exclusivity in a license–which does not convey an ownership interest–is a promise that the licensor will not compete with the licensee. That is, not only is the licensee the only one to which a promise not to sue has been given but also the licensor agrees not to practice the invention in the same area as the license granted to the licensee. But for an exclusive license to be a license, it must still grant less than the full bundle of rights in the patent. It is not sufficient simply to label a written instrument “exclusive license.” It is what the instrument does that matters. More from the MPEP (original has the bold):

A license is not an assignment of the patent. Even if the license is an exclusive license, it is not an assignment of patent rights in the patent or application.

Here the MPEP is repeating the meaning of the definitions. A license cannot be an assignment because a license is defined not to be an assignment. These are different forms of patent transaction. Again, this is not a discussion of what a document of transaction is labeled–it is a discussion of what the document does. A license, even an exclusive license, cannot, by definition, convey an ownership interest in a patent and so cannot convey all three of the rights to make, use, and sell and cannot convey an exclusive interest in a region, such as the United States.

In 1991, a court looked squarely at a university exclusive patent license in Surgical Laser Technologies and ruled that it was an assignment–the license granted the rights to make, use, and sell; granted the right to grant sublicenses; and granted the right to sue for infringement. Even with reserved rights for educational use, the court found that the instrument was an assignment. Same for Ciba-Geigy v. Alza, which provides an extensive discussion of a University of California exclusive license. [Watch for the incomplete definition of “funding agreement” provided by the University of California, though.]

Now, let’s get back to the wording in Bayh-Dole at 35 USC 204. There, the restriction is on (i) an exclusive license (ii) to use or to sell (iii) in the United States. That is, an exclusive license to use or an exclusive license to sell in the United States. In either case, 35 USC 204 requires that such a license must also require that product is manufactured (“made”) in the United States–either product that incorporates the invention (and so would infringe the patent) or product that results from using the invention (such as a method) that wouldn’t infringe the patent but the making of it would.

It’s not quite–but almost–that Bayh-Dole requires that an exclusive license to use or to sell in the United States must also require a license (which doesn’t have to be exclusive) to make. One could license five companies to make and sell, but only one company to use–those five would have only one company to sell to in the U.S., and only then if they were doing their making substantially in the U.S. (because the company doing the exclusive using would have to agree to use product made substantially in the U.S.).  Seems sort of silly, but possible. More seriously, one could license many companies to make and use the invention, but only one company to make (non-exclusive) and use (non-exclusive) and sell (exclusive) the invention or product based on using the invention.

But it’s stranger than that. The license to make can be non-exclusive rather than exclusive (so others might, say, make product that otherwise infringes–but why? If they could not also either use or sell, what’s the point? Give away product?) The U.S. manufacture requirement here in 35 USC 204 actually works as a restriction on the right to import product and either use it or sell it in the United States under one’s exclusive right. [See here a fuller discussion of the narrowness, if not silliness, of this section 204 gesture]. Thus, it appears that Bayh-Dole requires that any exclusive license to use or to sell must include also (i) the right to make and (ii) a restriction to prevent an exclusive licensee from importing product (which it could then use or sell).

But what Bayh-Dole doesn’t point out, but does tip-toe around, is that if an owner of a patent on a subject invention grants exclusively both the right to use and the right to sell, and thus must also grant the right to make [to someone, or do the making itself], and if the right to make is also exclusive, then it’s not an exclusive license any more–it’s an assignment–since the licensee now has received all substantial rights in the invention. (Of course, the make right could be non-exclusive, if others could make product in the United States to be sold only outside the United States, say–but I haven’t seen a deal for a subject invention done this way, ever).

Now, what does Bayh-Dole have to say about assignments? That’s at 35 USC 202(c)(7)(A), in the set of restrictions special to nonprofit organizations:

In the case of a nonprofit organization, (A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions (provided that such assignee shall be subject to the same provisions as the contractor)

Nonprofits cannot assign subject inventions without federal agency approval, with one exception and one ambiguity. This means that nonprofits cannot grant an exclusive license “to make, use, and sell” in the United States without federal approval (with an exception) because to do that would be an assignment. Nonprofits can grant only an exclusive right to use (and to make, but not to import) or an exclusive right to sell (and to make, but not to import). Of course, they could grant an exclusive license to make for the United States, and either use or sell non-exclusively. That would work–though it’s not clear how a non-exclusive right to sell is meaningful on its own, without a right to either make or to use. I suppose if there’s a big sharing community and only one company has a right to charge for sharing, then companies opposed to sharing and who would rather pay to get what they want could indeed pay.

Bayh-Dole permits nonprofits to assign rights without federal approval to an invention management organization. For what it’s worth, here’s the original language, amended away four years later:

(A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions and which is not, itself, engaged in or does not hold a substantial interest in other organizations engaged in the manufacture or sale of products or the use of processes that might utilize the invention or be in competition with embodiments of the invention (provided that such assignee shall be subject to the same provisions as the contractor);

Previously, the invention management organization had to be a non-practicing entity and could not hold stock in companies that might make, use, or sell the subject invention or compete with it–that is, it could not have a substantial organizational conflict of interest (and one wonders if the same would hold true for the university itself, in managing patents on subject inventions–but no matter, university folks got rid of the prohibition in the law regarding institutional conflicts of interest, making it federal policy that such conflicts are entirely acceptable). Removing the prohibition on organizational conflicts of interest makes the limitation on assignment potentially trivial with respect to any possible assignee–any organization that can manage inventions appears to qualify, so long as managing inventions is a “primary” function. But here’s the kicker, the sting that has to go along with any assignment by a nonprofit:

provided that such assignee shall be subject to the same provisions as the contractor

An assignee of a subject invention–someone with rights of ownership and thus the standing to sue to enforce the patent–must also accept the same provisions as the nonprofit organization–the provisions of the standard patent rights clause, 37 CFR 401.14(a)(k)–which repeat the requirements set out in 35 USC 202(c)(7). Among those requirements are a limitation on the use of revenue “earned with respect to subject inventions” (a rather broad scope, not specific to patents):

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

That is, assignees must use income earned from a subject invention *only* for recovery of expenses for subject inventions and *support of scientific research or education.* Not for stock market investments, not for acquiring companies, not for salaries for staff (other than scientific or educational staff). Even if a federal agency approves, Bayh-Dole requires the provisions following nonprofits to run with the ownership of the subject invention. This is pretty darned devastating to current university practice, which ignores this requirement and play everyone for fools by labeling subject invention assignments as “exclusive” licenses.” Of course, these instruments are exclusive licenses to patent rights but the effect of the exclusive license is to assign the underlying subject invention by granting all substantial rights in the invention. Take a look.

Here’s UC Davis’s exclusive patent license template (my emphasis):

Subject to the limitations set forth in this Agreement, including, without limitation, the rights reserved in Paragraph 2.2, The Regents hereby grants to Licensee an exclusive license under Patent Rights, in the Licensed Field of Use in the Licensed Territory, (a) to make, use, offer for Sale, import, and Sell Licensed Products and Licensed Services, and (b) to practice Licensed Methods.

That’s language that assigns the invention. The reservations in 2.2 are for educational and research uses–not commercially relevant. Notice that the license includes the right to import. What is the point of granting such a right for a subject invention? There is no way that an exclusive licensee could benefit from a right to import product if the exclusive licensee must comply with the U.S. manufacturing requirement.

Here’s AUTM’s exclusive patent license template, based on a University of Rochester template (my emphasis):

3.1 Grant. Subject to Licensee’s compliance with Articles 8.0 (Licensing Fees and Royalty) and 9.0 (Payments and Reports), and all other provisions of this Agreement, and to the reservation of rights in Paragraphs 3.2 and 3.3, University hereby grants to Licensee, and Licensee accepts, an exclusive, royalty-bearing license, with the right to Sublicense, in the Field under the Patent Rights to import, make, have made, use, and sell Licensed Products in the Territory.

That’s assignment language. And it grants the right to import, too.

Here’s Harvard’s simple sample exclusive license, also assignment language (my emphasis):

2.1. License Grant. Subject to the terms and conditions set forth in this Agreement, Harvard hereby grants to Licensee (i) an exclusive, [worldwide,] royalty-bearing license under Harvard’s interest in the Patent Rights and (ii) a non-exclusive license to use the Harvard Technology Transfer Materials, solely to develop, make, have made, offer for sale, sell, have sold, import, export, distribute, rent or lease Licensed Products [in the Territory], solely for use within the Field; provided, however, that:

The field restriction might overcome an assertion that the license is an assignment, if the field restriction is sufficiently narrow. But then there’s 7.2:

7.2. Suit by Licensee. Licensee shall have the first right, but not the obligation, to take action in the prosecution, prevention, or termination of any Infringement. Before Licensee commences an action with respect to any Infringement, Licensee shall consider in good faith the views of Harvard and potential effects on the public interest in making its decision whether to sue.

Yeah, it’s an assignment. Otherwise, a licensee doesn’t have standing to sue. The qualifications on the scope of Harvard’s grant don’t help, either:

2.1.1. Harvard retains the right, for itself and for other not-for-profit research organizations, to practice the Patent Rights and to use the Harvard Technology Transfer Materials within the scope of the license granted above, solely for research, educational and scholarly purposes; and

That’s the reservation of a non-commercial right–just the right to “practice” the Patent Rights. What the heck does that mean? “Patent Rights” is just defined (in painful detail) as the patents and patent applications that are licensed. I get what it means to practice an invention–to make it, to use it. But to practice the Patent Rights–huh? Does that mean to license the rights? Even the folks at Harvard can’t seem to draft something square. University licensing practice is so very poor–even after 35 years of being self-appointed as the “stewards” of the output of federally supported research hosted by universities. Anyway, a reservation of non-commercial rights doesn’t change a finding of assignment.

There’s one more qualification:

2.1.2. the United States federal government retains rights in the Patent Rights pursuant to 35 U.S.C. §§ 200-212 and 37 C.F.R. § 401 et seq., and any right granted in this Agreement greater than that permitted under 35 U.S.C. §§ 200-212 or 37 C.F.R. § 401 et seq. will be subject to modification as may be required to conform to the provisions of those statutes and regulations.

This part is plain nonsense. The Government does not “retain” rights in subject inventions. Bayh-Dole requires federal agencies not to claim rights except in “exceptional circumstances” or when a contractor fails in certain obligations pertaining to subject inventions. Inventors have rights under common law. Bayh-Dole does not disrupt those common law rights. (In fact, if a federal agency allows inventors to retain their rights, the standard patent rights clause for such circumstances does not even require the inventors to grant the government a royalty free license. See 37 CFR 401.9.) Bayh-Dole requires a standard patent rights clause that requires an owner by assignment of a subject invention to grant the government a royalty-free license. That’s how the government gets its rights.  Reserving for the government a royalty-free license doesn’t change an assignment back into an exclusive license, either.

The drafting here is goofy. The actual construction that’s necessary is one that stipulates that the right to sell is exclusive, and the rights to make and use are non-exclusive. The rights to make and use can then be qualified–for nonprofits and for the federal government (if a subject invention). But Harvard’s qualification here also contains a bombshell. Since Bayh-Dole prohibits assignments without federal approval, and Harvard here publishes a template that proposes to assign anyway, then 2.1.2 requires the grant of rights to be “modified to conform” to Bayh-Dole, without giving effect, apparently to federal approvals. That would mean, either the right to use or the right to sell has to go non-exclusive. Imagine the fuss that must follow.

University exclusive licenses as standard practice are assignments: Maryland, Stanford, Oregon Health and Sciences, UT Southwestern, Rutgers, Boise State–all have published templates that, unless restricted by field in some way, will result in an assignment of patent rights–all deal in make, use, and sell; all authorize sublicensing; all acknowledge the licensee’s right to enforce the patent (Boise State actually requires licensees to enforce the patent); reservations of rights are for noncommercial uses. These are all assignments. In the context of Bayh-Dole, they are breaches of the standard patent rights clause. In terms of enforcement, there is none. So, in some sense, federal agencies, by not caring about their federal contracts, create the conditions under which both the agencies and universities disregard Bayh-Dole, at least with regard to licensing and assignment. Bayh-Dole is, apparently, a do WTF you want sort of law. It’s a wonder that anyone makes any money giving Bayh-Dole compliance workshops. There’s no compliance to speak of. Even Bayh-Dole compliance workshops are money-making scams!

The government or a public interest organization should challenge pharmaceutical companies that hold exclusive licenses that are really assignments from universities for subject inventions and require that *all income* less the patenting costs–billions a year–be allocated to scientific research OR the licenses must be restructured to be, in fact, actual licenses and not assignments–that is, not covering all common law rights of the inventor–making, using, and selling. Making and selling, or using and selling–and no rights to import. No sublicensing. No standing to enforce.

Bayh-Dole has been implicated in the U.S.’s high drug prices. But it looks to me that Bayh-Dole’s march-in procedures are not the primary problem–it’s more basic than that. Universities and federal agencies alike simply ignore Bayh-Dole. No wonder they think it is a wildly successful law. It’s a do WTF you want to law. And apparently, what university folks most want to do–and claim it is virtuous to do–is to screw over Americans with high prices for prescription drugs. Other than a few holdouts, such as UC Berkeley, most universities don’t have licensing programs that consider “social responsibility.” For most, “making as much money as the market will bear” is social responsibility. The problem, then, is that “the market” is also shaped by Bayh-Dole’s requirements on assignment, and Bayh-Dole requires licenses either to convey a divided interest in a patent on a subject invention or devote all income after specifically allowable expenses to scientific research or education. For all such exclusive licenses that are actually assignments–Xtandi, say–there should be a federal audit on the use of all income earned “with respect to the subject invention.” We might see a whole lot more corporate-sponsored research and donations to universities by big pharma forced to comply with the law.

Here’s part 2, “The Lost Requirements.”

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2 Responses to Exclusive licensing in Bayh-Dole, Part 1: Licenses and Assignments

  1. Pingback: Exclusive licensing in Bayh-Dole, Part 2: The Lost Requirements | Research Enterprise

  2. Gerald Barnett says:

    If you are reading this article for a class and you have questions or want to discuss, send me a note at barnett@researchenterprise.org.

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