What happens if a contractor fails to report a subject invention?

James Love and Knowledge Ecology International have made a request to the Office of the Inspector General at Health & Human Services to examine whether Cold Spring Harbor Laboratory and Isis Pharmaceuticals failed to disclose two inventions as required by the Bayh-Dole Act. Their request is well documented and it will take some work for Cold Spring Harbor and Isis to explain the situation. “Facts, facts, facts,” said Thomas Gradgrind–and that’s what will matter here, too.

The definition of subject invention is a place to start. Bayh-Dole defines subject invention–a new class of invention in patent law–and these definitions are repeated in the implementing regulations and standard patent rights clause:

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

The term “invention” means any invention or discovery which is or may be patentable or otherwise protectable under this title

The term “funding agreement” means any contract, grant, or cooperative agreement entered into between any Federal agency, other than the Tennessee Valley Authority, and any contractor for the performance of experimental, developmental, or research work funded in whole or in part by the Federal Government. Such term includes any assignment, substitution of parties, or subcontract of any type entered into for the performance of experimental, developmental, or research work under a funding agreement as herein defined.

So an invention has to be patentable and made “in the performance of work” under a funding agreement. Once there is a patentable invention, then either the “conception” or the “first actual reduction to practice” must have been made in the performance of work. That is, the statement of work for the funding agreement must set out one or both of these actions. 

Bayh-Dole operates by requiring federal agencies to use a standard patent rights clause in funding agreements. That clause is set out in the regulations at 37 CFR 401.14(a). The regulations provide guidance with regard to the scope of a subject invention. That guidance is at 37 CFR 401.1:

To the extent that a non-government sponsor established a project which, although closely related, falls outside the planned and committed activities of a government-funded project and does not diminish or distract from the performance of such activities, inventions made in performance of the non-government sponsored project would not be subject to the conditions of these regulations.

There is then a two-part test for whether an invention is within the scope of the definition of “subject invention”–that is, within the “performance of work.” First, the invention is outside the “planned and committed activities.” These activities are set forth in the statement of work for each federally funded grant. The statement of work in turn may reference a research proposal, federal requirements for the grant, and other materials. But to be “planned and committed” these activities must be described in writing. Words matter here–what, formally, did the government intend to fund, and what formally did the investigators propose to do with the federal funds?

It is important to see that the guidance does not consider merely whether something might be “closely related”–what matters is what exactly is planned and committed. That’s the starting point.

The second test is whether, even if an invention is not “planned and committed,” a related project “diminishes or distracts” from the federally funded “activities.” This test requires a consideration of whether work leading to the invention, while not funded by the federal government, caused work on the federal grant to be “diminished” or “distracted.” There’s no definitions for either term, so we rely on general usage. Activities are diminished when work that has been planned is not accomplished. For instance, a worker planned and committed to be paid under the federal grant is shifted off the grant, without a replacement. Activities are distracted when attention shifts, so that even though a worker is still on federal funding, planned production schedules are not met or a planned and committed worker’s time on the federal task cannot be documented–but time on a related non-federally funded project can.

The federal regulations provide an example:

An example of such related but separate projects would be a government sponsored project having research objectives to expand scientific understanding in a field and a closely related industry sponsored project having as its objectives the application of such new knowledge to develop usable new technology.

That’s a pretty close relationship. But pay attention–if the federal project’s statement of work does not specify applications, then applications are not within the performance of the funding agreement unless those applications diminish or distract from the federal work. Taking it a step further, a patentable invention is not within the scope of the performance of the federal funding agreement unless either the conception (solves a problem or realizes a possibility with each element working to achieve an effect and recognized as an invention by the inventors) or actual reduction to practice (“we will build a prototype that evidences all the elements of something we have conceived”) is present in the statement of work–or work on one or both of these elements has diminished or distracted from the federal work.

If the federal work has met all its commitments as proposed, and does not specify either the conception (difficult to anticipate) or actual reduction to practice (pretty clear–we have made an invention and we plan to build it and demonstrate it with federal funding), then the invention is not a subject invention.

Further in 37 CFR 401.1:

An invention which is made outside of the research activities of a government-funded project is not viewed as a “subject invention” since it cannot be shown to have been “conceived or first actually reduced to practice” in performance of the project.

Here we see the burden is on the federal government to show that an invention has been “conceived or first actually reduced to practice” in the federally funded project–within the planned and committed activities or not diminishing or distracting from those activities.

We might expect, then, that there can well be applications derived from federally funded projects that are, while closely related and even arising from the work done in those project, not subject inventions. Imagine the case in which investigators in a federally funded project publish findings, and someone else reads the report and makes an application that’s patentable. Clearly the invention derives from the research, but it’s not a patentable invention. The same reasoning holds when the invention is made by people also working on the federal project, as if they have read their own findings (published or not). The question is whether, in making the invention, they take time or attention away from the federal work they have formally committed to do.

Guidance, again:

The time relationship in conducting the two projects and the use of new fundamental knowledge from one in the performance of the other are not important determinants since most inventions rest on a knowledge base built up by numerous independent research efforts extending over many years.

That is, it does not matter whether the application comes directly after the research findings. What matters is whether the invention is specified–conception or first actual reduction to practice–in the statement of work for the federal project, and if not, then whether there are records that demonstrate that workers were shifted to a non-federal project without replacements and/or work was not completed or delayed or not done as fully as committed as a result of work being done on the new inventive project, but without accounting for the change in focus.

The guidance anticipates that there may be disputes with regard to scope, with contractors reporting fewer subject inventions than might be expected:

Should such an invention be claimed by the performing organization to be the product of non-government sponsored research and be challenged by the sponsoring agency as being reportable to the government as a “subject invention”, the challenge is appealable as described in § 401.11(d).

Here we have a typical weakening of government oversight of Bayh-Dole. If the contractor does not report an invention, and the federal agency believes the invention is a subject invention, then the federal agency can challenge the contractor’s non-reporting. For that, the federal agency will have to have more than a similarity between the work in the federal funding agreement and a patented invention. The invention will have to be specified in the the statement of work, or the records documenting expenditures and progress on the federal work will have to show transfer of workers, delay in meeting schedules, and the like, AND show that these transfers and delays are the result of work done on the invention in question. That alone will be challenging and might take some auditing of records.

But of course there’s more. Even if the federal agency has some evidence, the contractor can appeal the challenge. Here’s part of 37 CFR 401.11:

(b) The agency official initially authorized to take any of the following actions shall provide the contractor with a written statement of the basis for his or her action at the time the action is taken, including any relevant facts that were relied upon in taking the action.

The agency has to provide the contractor with a written statement, but only for one of five actions, including (2):

A request for a conveyance of title under paragraph (d) of the standard clauses.

That is, for the contractor’s failure to report a subject invention. If the federal agency does not challenge the contractor’s reporting and asks, rather, for the contractor to review its records and determine whether it has made an error, there’s no official challenge nor appeal.

The implementing regulations require each federal agency to create an appeals process:

Each agency shall establish and publish procedures under which any of the agency actions listed in paragraph (b) of this section may be appealed to the head of the agency or designee. Review at this level shall consider both the factual and legal basis for the actions and its consistency with the policy and objectives of 35 U.S.C. 200-206.

And, specifically with regard to failures to report subject inventions:

Appeals procedures established under paragraph (c) of this section shall include administrative due process procedures and standards for fact-finding at least comparable to those set forth in § 401.6 (e) through (g) whenever there is a dispute as to the factual basis for an agency request for a conveyance of title under paragraph (d) of the standard clause, including any dispute as to whether or not an invention is a subject invention.

The process must follow that for march-in procedures. Now, keep in mind that university licensing folks got involved in the drafting of the march-in procedure regulations and boasted later that they were able to get the procedures modified so that they would be unworkable. So what might we expect if a contractor appeals a federal challenge regarding not reporting a subject invention?

(e)

  • fact finding, informal but fair
  • contractor may
    • use legal counsel
    • provide evidence
    • produce witnesses
    • confront others
  • transcribed record
  • closed to the public
  • government will not disclose any information obtained

(f)

  • findings sent to head of agency with recommended determination
  • copy of findings sent to contractor
  • contractor has 30 days to respond
  • contractor may request oral arguments before agency

(g)

  • agency head makes determination on facts and testimony in record
  • consistency with the policy of 35 USC 200 will be considered
  • agency head must document any facts rejected as erroneous
  • written notice of determination sent to contractor within 90 days
  • otherwise, the government may take no action

So there’s a challenging road ahead if a federal agency decides to challenge a failure to report. First, it bears the burden. Second it must request conveyance of ownership. Third, it must respond to any challenge through an established appeals process. Fourth, that response must be in writing, fully document each fact that’s dismissed as erroneous. And fifth, the proceedings are closed to the public and no information obtained from the contractor may be disclosed outside government.

What’s interesting is that Bayh-Dole is set up expecting under reporting of subject inventions. There is no comparable regulatory guidance for over-reporting subject inventions. Yet universities routinely have over-reported subject inventions, using their claim that Bayh-Dole vests/mandates/permits universities to “elect” title to inventions made with federal support by notice to the government. Not so, but for three decades it was a handy ruse to by-pass university patent policies that might provide otherwise. There’s no process in Bayh-Dole by which an inventor or anyone from the public might appeal a university claim that an invention is a subject invention when it is not. Sort of a Hotel California situation–you can never leave.

The most interesting thing to watch is, if HHS does consider whether the Cold Spring Harbor inventions are indeed subject inventions, how it handles the check for consistency with Bayh-Dole’s statement of policy and objectives at 35 USC 200. Will it find that declaring an invention a subject invention will interfere with “collaboration between commercial firms and nonprofit organizations”? Will if find that by taking ownership of these inventions (and associated patents) that it can promote the commercialization and public availability of the inventions in some way? Given there are more patents in play than the two that are potentially contested, it would appear that the government’s leverage position, if it obtains title from Cold Spring Harbor Labs, is to disrupt commercial sales of product until the licensee has done whatever the government decides is necessary to achieve the purposes set out in 35 USC 200. For KEI, that would appear to be to require “practical application”–including public benefit on reasonable terms, where the present $700K first-year dosage price might appear unreasonable. But it might be that the government simply takes over Cold Spring Harbor’s royalty stream and pockets the cash. In that case, the inventors are out their royalty share–perhaps that’s the penalty that inventors bear if they don’t report inventions as subject inventions.

 

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