Sublicensing in Bayh-Dole

Let’s look at sublicensing of inventions made with federal support. Here’s the summary:

Contractors can distribute rights in subject inventions in advance by assignment, substitution, and subcontracting. (35 USC 201)

A contractor can grant sublicenses if it loses title to the government, provided that it did not fail to report the invention and that the sublicenses were obligated at the time of the funding agreement. (37 CFR 401.14(a)(e)(1)–not in Bayh-Dole)

Exclusive sublicenses may be assignments, and if made under an exclusive license/assignment by a nonprofit may require federal agency approval and require flow down of the nonprofit’s standard patent rights clause. (35 USC 202(c)(7)(A))

A sublicensee–even nonexclusive–may be required to report on the use of a subject invention.(35 USC 202(c)(5))

An exclusive sublicensee in a chain of exclusive licensing and exclusive sublicensing may be exposed to the effects of a march-in procedure. But since there’s never been a completed march-in procedure, this is like saying that exclusive licensees may be exposed to the shadows of flying pigs. (35 USC 203)

Any other sublicensing is a matter of negotiation, implied rights, cleverness, and leverage positions, and doesn’t have much to do with Bayh-Dole, its regulations, or the standard patent rights clause.

A licensee might circumvent sublicensing restrictions by assigning the licensing agreement.

However, the patent property rights defined by Bayh-Dole for subject inventions run with the patents on subject inventions regardless of ownership or licensing. A subject invention is not an ordinary invention. A patent on a subject invention is not an ordinary patent. (35 USC 200, 201)

I’ll repeat the summary at the end. Perhaps then you’ll have a new appreciation for it.

The Bayh-Dole Act does two things. First, as an addition to federal patent law, Bayh-Dole defines a new class of patentable inventions–subject inventions (35 USC 201)–and states a policy that applies to the patent property right in such inventions as well as to federal contracting for research (35 USC 200). Second, Bayh-Dole requires federal agencies to use a standard patent rights clause in funding agreements for research at nonprofits and small businesses (35 USC 202-204), sets out provisions that must be in such a clause, how federal agencies may vary from the default, and what happens if contractors fail to comply with the clause.

These two elements of Bayh-Dole run in parallel. The change in federal patent law follows the patent property right in a subject invention, regardless of who owns the invention. The change in federal contracting follows each funding agreement, and the obligations in the funding agreement follow subcontracts, assignments, and licenses.  To keep things in mind, one has to observe the properties of a patent on a subject invention as well as the properties of the patent rights clause in a given funding agreement. A patent on a subject invention is not an ordinary patent. The patent property right in a subject invention is restricted by the public covenant established by Bayh-Dole: a patent must be used to promote the use of a subject invention, not to prevent that use; a patent must be used to promote free competition and enterprise, not to stifle competition and preclude (free) enterprise. These are concepts that fizzle the brains of ordinary patent thinkers, but that’s the nature of public covenants running with a patent property.

The patent rights clause in the funding agreement receives more attention–if not all of it. As part of a federal contract, the patent rights clause takes precedence over any state-enforced contracting that a university might do–including contracting with its own employees (who might invent). When people talk about Bayh-Dole “requiring” universities to do something, what they ought to be saying is that a university has agreed to a given patent rights clause in a federal funding agreement–Bayh-Dole lays the foundation for what must be in a default standard patent rights clause and how the clause may be altered. Bayh-Dole’s patent rights clause requirements, once incorporated into a funding agreement, create the terms and conditions that a university agrees to follow.

At this point, however, Bayh-Dole does not reach to individuals, such as those who might invent. The Supreme Court in Stanford v Roche was adamant that Bayh-Dole concerned only the disposition of rights as between the federal government and a university or small business contractor after that contractor had obtained ownership of an invention made within the scope of a federal funding agreement. Under Bayh-Dole, agencies have no obligation to require university inventors to report inventions, assign inventions, or use inventions–none of that–because the inventors’ inventions are not subject inventions until a party to a federal funding agreement comes to own such an invention.

This situation makes plenty of good sense, if one thinks about it. A federal agency funds research work at a university, providing funds to the university on behalf of a specific individual, the “principal investigator.” The university releases the principal investigator (and other collaborators) from their official university duties to work on the federal project and is compensated for both direct (salary, equipment, supplies) and indirect (building maintenance, administration, communications, power) costs. Thus, the work is “extra-mural”–“outside the walls” of the university’s activities. There is no particular reason for the federal government to dictate to anyone what should be done with patent rights in inventions made in that extramural work. Federal common law of inventions applies. Inventors own their inventions and have a personal right to seek patents on those inventions, subject to any agreements they may make with others. Bayh-Dole doesn’t change any of this.

Except that’s not  the end of it. The Department of Commerce (actually, a forerunner) inserted a requirement into the standard patent rights clause that’s not addressed in Bayh-Dole. Just pulled it out of their posterior cortex, as it were. That’s the requirement that nonprofit and small business contractors require that potential inventors make a written agreement to protect the government’s interest in subject inventions. It’s a sad, strangely clever clause. As a clever clause, it requires contractors to substitute inventors for key tasks under the patent rights clause. When inventors make the written agreement as part of the funding agreement, they become parties to the funding agreement–that is, they become (by the definitions in Bayh-Dole) contractors themselves. Thus, any invention they make is a subject invention (since they are contractors and they own their inventions), and they then have an obligation to report the invention to whomever the institutional contractor has designated as responsible for patent matters, to sign papers to permit patent applications to be filed, and to establish the government’s rights in their inventions. Pretty twisted–and changes significantly how the patent rights clause operates.

The (f)(2) written agreement requirement connects the federal funding agreement directly with inventors, and obligates inventors to assign or license inventions to the federal government to the extent that the federal government “has rights” in their inventions. How the federal government has rights is one of the deeply strange things about Bayh-Dole, since prior to Bayh-Dole those rights were established by regulations and funding agreement patent clauses, and Bayh-Dole expressly preempts those regulations and funding agreement clauses. The remaining provisions under which the government can take title to a subject invention are few–that a contractor fails to report an invention or elect to retain title or fails to file a patent application or prosecute that application. There’s no general provision that the government, as the sponsor of the research leading to the invention, has a “right” to the delivery of an invention, subject only to an institutional contractor (nonprofit, small business) getting the invention ahead of the government. There’s no presumption of government ownership because Bayh-Dole does away with that presumption by stipulating what must be in the standard patent rights clause. Only if a federal agency modifies the standard patent rights clause (using the “exceptional circumstances” procedures) can the federal government have a general expectation of rights in a subject invention.

The sad part of the (f)(2) written agreement requirement is that everyone ignores it. There’s no compliance and federal agencies don’t enforce compliance. Perhaps that is because (f)(2) shows up where one might otherwise expect a requirement that inventors assign their inventions to the institutional contractor. Something of that sort was in the Institutional Patent Agreement program template–if a contractor decided to file a patent application, then that contractor must have an agreement with inventors that they will assign the invention to the contractor. Put another way, inventors only had to assign inventions to the contractor after the contractor had decided to file a patent application. Under the IPA, there was no general requirement that the contractor must own all inventions made with federal support–only those inventions that the contractor had decided to file a patent application on.

Keep the distinction clear: the IPA did not require a contractor to own all inventions and then decide which ones to file patent applications on and which ones to hand over to the federal government or back to the inventors. The only inventions in play under the IPA are ones that a nonprofit has made the decision to patent. By contrast, Bayh-Dole does not require a contractor to own any inventions made with federal support, but rather requires federal agencies to allow a contractor to “retain” ownership in inventions the contractor does acquire, subject to various conditions, such as reporting the inventions and filing patent applications. By still further contrast, the federal agency responsible for implementing Bayh-Dole as federal regulations and its standard patent rights clause adds the (f)(2) requirement, displacing any other contractor requirements, turning each inventor into a contractor, making all inventions they make within the scope of a federal funding agreement into subject inventions, and requiring the inventors to agree to establish the federal government’s rights in these inventions.

If all this is complicated, it’s not so much that the situation is complicated but that the law is so badly drafted, and the regulations are so badly drafted, and the patent rights clause is so badly drafted that no one in their ordinary mind can readily make sense of it all. It takes a special effort to follow the words, the logic (where there is any), the inconsistent usage, the ambiguous phrasing, the conflicting requirements, the abstractions, the sticks and dirt thrown into the air, the walk-backs and excuses. Just on inspection, Bayh-Dole is a rotten bit of drafting–one doesn’t have to reach to the design of the law (flawed, cleverly) or to the implementation (goofball) or to the practice (unenforced in all key areas). Given the extent to which Bayh-Dole is an ambiguous mess, it ought to be declared unconstitutional. Certainly if NIST turns Bayh-Dole into a vesting statute by requiring all contractors to own the inventions made with federal support, Bayh-Dole will be unconstitutional, handing patent rights to institutions when the constitution provides only for patent rights for individuals. By awarding funding contracts to institutions, the federal government would then decide that the institution, not any individual inventor, would own inventions made in work that the inventor (or the principal investigator) had proposed and been released by his or her institution to do.

Now let’s look at sublicensing in Bayh-Dole, meaning in Bayh-Dole’s standard patent rights clause. A sublicense is a license granted by a licensee of a patent right. We can distinguish a sublicense from a subcontract. Under the standard patent rights clause, contractors, when they subcontract a portion of work under a federal funding agreement, cannot claim any interest in the inventions made in the subcontract. This, too, is not something in Bayh-Dole, but pulled out of the posterior cortex of the folks drafting the standard patent rights clause (see 37 CFR 401.14(a)(g)). The subcontract provision requires that a contractor pass through the contractor’s obligations under the funding agreement. This becomes important when a nonprofit subcontracts to a for-profit company, since the for-profit must then accept the requirements specific to the nonprofit (at 37 CFR 401.14(a)(k))–including how royalties are used and how inventions are assigned). But no one bothers with compliance here, either. Note that things do not work the same way in reverse for a large company subcontracting with a university–the large company must modify the requirements to flow down the appropriate patent rights clause requirements for small businesses and nonprofits. (See for instance NASA’s FAR Supplement, 1827.304-3).

In a sense, however, shifting work to a subcontractor is a form of sublicensing–it’s just before the fact, and moves the entire invention right to the subcontract (that is, the right of a subcontractor to retain title to an invention if the subcontractor acquires title).

More generally, a federal “funding agreement” is expressly defined to include “any assignment, substitution of parties, or subcontract of any type.” Thus, the (f)(2) written agreement requires that an institutional contractor flow down obligations to inventors (by substitution of parties); thus the subcontracting requirement (g) requires the institutional contractor to flow down the contractor’s own rights to the subcontractor. That’s one way that invention rights (and claims to patents on those inventions) might flow in a federal contracting situation. If someone didn’t want to deal with sublicensing, then one could use on of these methods to circumvent sublicensing–assigning, substitution, subcontracting.

Now for sublicensing proper. “Sublicense” shows up only once in the standard patent rights clause, in the section having to do with ways to circumvent government claims to title (37 CFR 401.14(a)(e)(1)):

The contractor’s license extends to its domestic subsidiary and affiliates, if any, within the corporate structure of which the contractor is a party and includes the right to grant sublicenses of the same scope to the extent the contractor was legally obligated to do so at the time the contract was awarded.

Thus, if a contractor loses title to a subject invention to the government, the government is required to grant a license to the contractor (except if the contractor failed to report title) and that license extends to all parties that the contractor had a “legal obligation” to grant licenses (now sublicenses).

That’s it. Nothing else. Assignees and licensees show up.

(h) Invention use reporting obligations extend to licensees and assignees. Presumably a sublicensee is also in some way a licensee.

(i) Preference for U.S. industry extends to assignees but not to licensees. An exclusive licensee lacks all substantial rights in an invention; an assignee has all substantial rights. Thus, by the time a licensee has rights, the preference for U.S. industry requirement has to have been complied with. There’s no flow down. If the license is exclusive, however, and involves all substantial rights, then it’s an assignment, and there must be flow down.

(j) March-in applies to assignees or exclusive licensees as well as contractors. Under a march-in procedure, the federal government could require an exclusive licensee to grant one or more licenses–“nonexclusive, partially exclusive, or exclusive license”–and any of these would be sublicenses. If the exclusive licensee refuses or cannot or does not, then the federal government can grant a license–and since the federal government grants that license under its broad license to practice and have practiced, then the federal government is granting a sublicense–just through a different chain of licensing.

Oddly, however, the march-in condition directed to nonuse involves only contractors and assignees, not exclusive licensees. Apparently it’s enough if a contractor or assignee exclusively licenses a subject invention. After that, there’s no nonuse march-in condition available–and that’s probably by design. You have to look for these clevernesses–all part of the circumvention of federal policy that is at the heart of Bayh-Dole.

(k) Nonprofit contractors are restricted in assigning subject inventions without federal agency approval–only to organizations having as a primary function the management of inventions. Any assignment must require the assignee to comply with “the same provisions as the contractor”–that is, including the provisions specific to nonprofits at (k). Since exclusive licenses that grant all substantial rights in an invention are assignments, the nonprofit requirements at (k) must also follow such licenses (but this requirement is also ignored). We might add, then, that for any nonprofit granting an exclusive license, any exclusive sublicense for all substantial rights must also follow clause (k) and must also include the standard patent rights clause and its clause (k) in the sublicense. But no one does. I’m quite sure.

That’s the extent of the provisions in the standard patent rights clause covering sublicensing. Anything else would appear to be fair game, but there’s plenty of room for uncertainty.

Consider. It’s not clear whether a license implies the right to grant sublicenses. If a license involves the right to “make,” then the right to “have made” is implied–and “have made” is not a sublicense, but a right broad enough to permit the commissioning of making by the licensee for the licensee (See Rawson and Rayski, “Critical Mistakes to Avoid in Intellectual Property Licensing“). Given the uncertainties, a good practice is to address sublicensing in any license–either to restrict it or to enable it. One big problem to address is what happens to a sublicense if the prime license terminates? What parts of the sublicense might continue as a direct license from the patent owner (or next licensee up the chain, in the case of tiers of sublicensing)? The issue become acute when a sublicense is exclusive or is an assignment labeled as an exclusive license.

Under Bayh-Dole’s standard patent rights clause, other than restrictions on assignments by nonprofits, and flow down of invention reporting assignees and licensees and march-exposure to assignees and exclusive licensees, a non-exclusive licensee of a patent on a subject invention does not have any particular requirements to deal with as a result of the standard patent rights clause. Those obligations will stay up the licensing chain, as will matters of sublicensing–which will be a matter for express treatment in the license, or implied by the license and dealings around the license, or will be settled by a fuss if not litigation after the fact. As for Bayh-Dole, the general policy the patent system will be used to promote the use of subject inventions would appear to work in favor of sublicensing (even if not expressly authorized) that promotes use of the invention. A licensor would be forced to argue against the use enabled by the sublicense (such as that the use was a lesser use compared with some other use). Again, no one does this sort of thing, because the standard patent rights clause is generally not enforced. Indeed, university contractors tend to overstate their obligations and take advantage of their overstatement to make it appear that they must so act to comply with federal law, when in fact they are just making things up from their posterior cortext. Among other things, they overstate their scope of  claims in inventions, overstate the operation of law that provides them any interest in those inventions, and overstate the U.S. manufacturing requirement.

A licensee may also work a sublicense by assigning the license agreement itself. Rather than dealing in the rights to an invention, the licensee deals in the intangible asset represented by the license contract itself. Of course, a licensor might attempt to prevent or at least to control such assignments, but such stuff is foreseeable, especially where a company may acquire another or sell off a unit that controls a license. In any case, where a license forbids any sublicensing, and a licensee wants to grant an exclusive sublicense, then assignment of the license agreement itself might be way to get around the sublicensing issue. For every stipulation, there’s a circumvention. If that’s the case, then at some point, to make the patent system “work,” people have to cooperate based on good faith and points of leverage. The law is not a clear moral authority to control actions, but rather a tangle of bother to make some actions less desirable or more bothersome or requiring cleverer attorneys or indifferent federal officials.  And given that Bayh-Dole is anything but clear, and its ilk the implementing regulations and standard patent rights clause are just as murky, Bayh-Dole becomes more of an administrative dream-monster, to be summoned at will to deflect a licensing situation along desired lines.

Here’s that summary again:

Contractors can distribute rights in subject inventions in advance by assignment, substitution, and subcontracting.

A contractor can grant sublicenses if it loses title to the government, provided that it did not fail to report the invention and that the sublicenses were obligated at the time of the funding agreement.

Exclusive sublicenses may be assignments, and if made under an exclusive license/assignment by a nonprofit may require federal agency approval and require flow down of the nonprofit’s standard patent rights clause.

A sublicensee–even nonexclusive–may be required to report on the use of a subject invention.

An exclusive sublicensee in a chain of exclusive licensing and exclusive sublicensing may be exposed to the effects of a march-in procedure. But since there’s never been a completed march-in procedure, this is like saying that exclusive licensees may be exposed to the shadows of flying pigs.

Any other sublicensing is a matter of negotiation, implied rights, cleverness, and leverage positions, and doesn’t have much to do with Bayh-Dole, its regulations, or the standard patent rights clause.

A licensee might circumvent sublicensing restrictions by assigning the agreement.

However, the patent property rights defined by Bayh-Dole for subject inventions run with the patents on subject inventions regardless of ownership or licensing. A subject invention is not an ordinary invention. A patent on a subject invention is not an ordinary patent.

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