Exclusive licenses, assignments, and ticks, Part 3

We may now come back around to our primary interest–does the WU Exclusive License template agreement assign patent rights? The answer appears to be yes, it does. It grants exclusive rights to make, use, and sell, leaving only vestigial rights for the university. It grants the right to sublicense and to enforce the patent against infringers–these are rights of an owner, not a licensee. And while the template also claims that “all ownership rights” are retained, the transaction itself forces the meaning of “all” to be “all rights not conveyed” to avoid making a huge build out of grants and rights to be withdrawn by a clever word tucked into its own nondescript paragraph.

Bayh-Dole, in limiting its attention with regard to exclusive licenses to “use or sell” follows a technical point. An exclusive license may grant the right to “use” or the right to “sell” or the right to “make”–or any combination of two of these rights–but if an exclusive license grants all three–“make, use, and sell,” then the license transfers the “substantial” rights of the patent. And that’s an assignment. Put another way, a license grant is a contractual right to be free from a suit for infringement–it’s a license “under” a patent right. It’s a permission of sorts. The licensee gains no rights in the patent, just freedom from suit for infringement. An assignment is a grant of rights in the patent itself–and the assignment may result in co-ownership, conditional ownership, or outright ownership of the invention. A license and an assignment both provide the recipient freedom from a claim of infringement, but they do it in different ways. The license is an agreement not to sue. An assignment makes the recipient an owner of the patent, and so there is no way that the assignor can sue. No license is needed if one has an assignment.

Universities have a choice when it comes to how they deploy their patent rights. They can license or they can assign, and if they assign, they can use any number of approaches, including sale, donation, or even an instrument labeled “exclusive license.” What matters is what the instrument does, not how it is titled.

For small company contractors, whether a deal is an exclusive license or an assignment doesn’t matter much, as far as Bayh-Dole is concerned. For nonprofits and their business partners, however, the difference is huge. If the license is an assignment, then  paragraph (k) of the standard patent rights clause kicks in, and (k) deals with the money side of the use of patents on subject inventions.

Bayh-Dole is noticeable for its absence of express protections for the public use of subject inventions. The original version of the law had limitations on the term of exclusive licenses, restrictions on assigning subject inventions to invention management organizations with conflicts of interest, and reporting obligations that were not entirely government secrets. Soon after, however, the law was changed to strip out public accountability and protections wherever possible, leaving the statement of “policy and objective” at 35 USC 200 pointing out into mostly emptiness.

One can still interpret the statement of policy and objective for meaning–for instance, “to use the patent system to promote the utilization of inventions” on the face of it limits the property rights of an owner of a patent on a subject invention has. The patent must be used to promote use, not to exclude use. Not only is nonuse then not an option, but so apparently is trolling industry for infringement after the fact of not being diligent to promote use. That is, if one sues for infringement without protecting a bona fide, diligent investment in an effort to use a given subject invention, then one is outside the property rights for patents on subject inventions stated by Bayh-Dole at 35 USC 200. I know, I know–no one apparently cares. What university patent attorneys say is the law, must be the law. You know, like in Stanford v Roche where they lined up professing their considered professional opinion that Bayh-Dole was a vesting statute, to get swatted down by the Supreme Court, who all but said “Can’t you folks read?” Answer–no, not much and not well.

But Bayh-Dole is not without protections. It’s just that they are mostly implicit, the necessary outcome of disciplined reading of the law and knowledge of the patent practices. This, too, appears to be a drafting strategy in the law, to make a big show of public welfare, walk that show back so it’s unusable, and hide the actual operation of the law–the technically accurate parts–so that later the law can be superficially interpreted any much way university attorneys want, at least until someone sues and wins. That’s a fine attitude about a law with a public purpose and weak enforcement–take as much as one can because those who would resist are not wealthy and so cannot resist.

One of those protections has to do with the nature of exclusive licenses. Bayh-Dole permits exclusive licenses, but it does not permit in the same way assignments by nonprofits. An exclusive license does not convey an ownership interest in a patent. The owner of the patent retains “substantial” rights; the owner is responsible for enforcement–that is the prerogative of ownership. Bayh-Dole makes a point of restricting the assignment of subject inventions acquired by nonprofits. We might ask why? Bayh-Dole does not give any answer, but we might construct some possible ones.

First, it is possible that the federal government did not trust nonprofits. WARF, one of the leading nonprofits, had been charged (and convicted) multiple times of antitrust licensing practices. That would be enough. But further, under the IPA program, which made non-exclusive licensing the default, an examination of practices by nonprofits found that in practice they ignored the nonexclusive requirements and licensed exclusively anyway, and not with impressive results–no better than the federal government’s efforts, and the federal government wasn’t particularly trying to license exclusively. So nonprofits were not so much the beneficiaries of a happy new law as they were the restricted and distrusted contractors among the rest. Small companies are relieved of the (k) restrictions and inventors who retain their common law invention rights are relieved of most of the provisions of the standard patent rights clause.

Second, nonprofits enjoy federal support primarily as part of subvention programs–that is, nonprofits obtain funding on behalf of faculty who have proposed projects in the public interest–to advance the frontiers of science, or to address a matter of public health or welfare. These projects are not a matter of government procurement needs. The government does not so much need to use the results as it intends for the results to be used by the public to do more or better. Thus, there is a purpose in federal funding for universities that is handled by grant rather than contract. Under the grant regulations, at 2 CFR 200.316, universities are to act as “trustees” on behalf of the beneficiaries of federally supported projects for any patent applications or patents acquired or improved with federal funds.

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.

Intangible property is defined broadly (see definition 200.59) to include, expressly, patents and patent applications.

Wherever a university requires the assignment of inventions made with federal funds as a condition of participation in a federal grant–whether payment of salary or use of equipment provided to the grant–the university uses the federal funds to acquire the intangible asset. Again, the wording is there, the mandate is there, but university administrators ignore it. If nonprofits are “trustees” for subject inventions–when they acquire patent rights other than by voluntary assignment–then that trusteeship should follow the patents regardless to whom the university might assign those patents.

The (k) restrictions in the standard patent rights clause articulate what trusteeship means for nonprofits receiving federal grants: (1) one cannot sell or assign a patent on a subject invention without also transferring the trusteeship standing; (2) one must share proceeds with inventors–they, too, are beneficiaries of the trusteeship, because they have not chosen the university as an agent; (3) the trustee may deduct from its income only amounts to cover its expenses in managing subject inventions–not anything else, not even other inventions that aren’t “subject”; (4) and prefer small companies for licenses.

These are “public covenants” that run with the patent property right when a nonprofit acquires a subject invention. These covenants are consistent with the grant requirement that the university play the role of trustee, not the self-interested patent owner. Thus, the university has obligations to inventors (even if the inventors have no standing to negotiate for a share of income) and the university has an obligation to limit how it dips into funds to cover costs, and the university has an obligation to use net income for scientific research or education–not just anything that the university might spend on itself, not slush funds for administrators, not investments, and not even “public service.” Strange, but there it is. Support for university public service was omitted by design from Bayh-Dole.

Thus, in this second explanation, universities obtain grant funding on behalf of the faculty proposing to do research in the public interest. Universities accept restrictions on their management of inventions made in that research, and if the universities acquire patent rights as a condition of the federal funding, they become trustees. And regardless, they accept the restrictions of (k) in the standard patent rights clause, which parallels the trustee requirement in federal grant regulations. The restriction in (k)(1) states that a university cannot sell off the public obligations that run with a subject invention–it cannot separate the subject invention from this public trust obligation by assignment. It may avoid imposing the public trust covenant on others by restricting its licensing activities to no better than exclusive licenses–that is, licenses that do not convey “substantial” rights in the invention–that is, such as make and use, or make and sell, but not make, use, and sell. Such a restriction means that the opportunity to benefit from an exclusive position must be distributed–between at least two licensees. Otherwise, we have an assignment and the public covenant must run with the patent.

Clearly, non-exclusive licensing does not carry a requirement to convey the public covenant. That’s because non-exclusive licensing embodies performance under the public covenant. However one views the drivers of innovation–whether by capital-backed monopolies or non-market networked exchange–the reality of federal policy is that the public interest is served when the nonprofit owner of a subject invention makes opportunity available to at least two other organizations. That’s the effect of “exclusive license to use or sell.” Yes, it’s buried in the law. Yes, it is a consequence of a careful reading and understanding of assignment and substantial rights and the like. That it is this way appears to be by design, to serve the interests of the patent attorneys who drafted the law and advocated for the law and shaped the implementing regulations for the law and who amended the law when they could to weaken its public accountability. Thus, I dredge up what by design is obscure, and I get it that people will happily dismiss it on the basis that it looks obscure, technical–O, the details, the details, it’s too much I don’t have the time this has been settled a long time.

What’s interesting about the courts is that they show little reticence to overturn what companies and universities claim is settled practice when the law doesn’t support the assumptions and presumptions that have settled. Cases can run through to a finding of infringement, only to be overturned on appeal with a finding that the plaintiff lacked the standing to bring the litigation in the first place, was merely a licensee, not an assignee. Or things go the other way, and a court finds that someone is an assignee and does have standing.

In Bayh-Dole it is clear that when a nonprofit is involved, it must operate on a set of rules that forbids separating the additional public covenant (in (k), at least, if not in 35 USC 200 and 2 CFR 200.316) from the patent right in a subject invention. That’s the effect of the assignment restriction in (k)(1) and the requirement that any assignment carry with it the public covenant applicable to nonprofits. That public covenant stipulates that the owner of the patent on a subject invention must be responsible for the decision and action to enforce the patent. That is, Bayh-Dole prohibits nonprofits from authorizing others to sue for infringement. The suit must follow the mission and charter of the nonprofit, not the competitive interests of any licensee. The protection for the public in this is that any assignee of a nonprofit has to dedicate the proceeds from enforcement to what amount to nonprofit purposes–sharing with inventors, limiting charges against income, using the remainder for “scientific research or education.” The assignee can’t just pocket the proceeds from an infringement settlement or judgment as regular income.

Thus, it’s not enough for a university to authorize a licensee to enforce a licensed (er, assigned) patent and share proceeds back at the rate of the royalty schedule. That would leave the licensee (assignee) free to use its share of proceeds as regular income. The point of Bayh-Dole’s restriction here is to limit the litigation that can take place to public interest litigation, litigation that a nonprofit takes on, given its charter and sense of public interest, and if taken on by another (who has to be a patent owner), then with the nonprofit restrictions on the use of proceeds from such action (and any other action, at that). That is, the licensee–the failed startup, say–cannot enforce its rights for its own self-interest, but only for a public interest as reflected in the use of the proceeds. That’s why the LES executive director’s offhand happiness that if a company fails in creating a commercial product from a university exclusive license, it can always “monetize” the license to recover the investors’ funds misses the mark. If the exclusive license permits litigation, then we have an assignment, and the requirements at (k) of the standard patent rights clause run with the assignment, and whatever monetization that happens via infringement litigation–patent trolling, as it were–must be managed in the public interest and not pocketed by investors looking to recover from their unfortunate venture.

We might then see a second lesson in all of this: Bayh-Dole expects nonprofits to manage subject inventions as trustees of the public interest.

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