Substantial rights is a concept used by courts in considering whether an invention has been licensed or assigned. The substantial rights in an invention are the rights to make, use, and sell. If these rights are licensed exclusively, then the substantial rights in the invention are said to pass to the licensee, and the invention has been, in fact, assigned for the duration of the license contract.
Inventions and Patents
Substantial rights concerns an invention. We may distinguish title to a patent on the invention. When an inventor invents, federal common law provides that the inventor is the owner of the invention. An inventor may make, use, and sell the invention, subject only to various laws that may regulate the production of goods and trade. An inventor, then, may also choose to give up these rights–to agree not to make, use, and sell his or her invention in favor of someone else having these rights. Of course, without a patent, the only benefit that a recipient of the invention gains is the promise of the inventor not to make, use, or sell the invention. Anyone else who learns of the invention and its manner of operation may also make, use, or sell the invention.
Federal patent law provides for the federal government to issue patents to inventors, at their request, based on the merit of their inventions. A patent reserves for an inventor the exclusive right to his or her invention, for limited times, in exchange for the publication of the details of the invention. Thus, an inventor, in having a right to a patent, may also obtain the right to exclude others from practicing the substantial rights in his or her invention. That’s the purpose of a patent–the right to exclude for a limited time in exchange for teaching people how to make what they then may not be able to make, use, or sell during the term of the patent.
If an inventor assigns an invention, he or she necessarily assigns as well the patent rights that may be available that run with the invention (including the right to have a patent issued to the assignee). Similarly, if an inventor assigns a patent, he or she has assigned all rights in the underlying invention as well–including to make, use, and sell products within the claims of the patent.
Substantial Rights and Patent Enforcement
The issue of substantial rights arises in the context of questions regarding the standing of a licensee to enforce a patent. The courts use the principle that a potential infringer should be subject to only one claim for infringement–from the possessor of substantial rights in an invention (and holding a patent to those rights). If an owner of an invention licenses all substantial rights in the invention exclusively to another, then that licensee comes into possession of those rights, and generally has standing to enforce the patent, and the previous owner does not.
University exclusive licensing agreements end up faced with this issue. A typical university exclusive license will grant the rights to make, use, and sell an invention, typically for a broad territory (the U.S. or worldwide) and for a broad field of use (pertaining to the general area in which any commercial products might be created). In these cases, though the written instrument is titled “exclusive license,” it is in effect an assignment of the invention. These licensing agreements navigate the enforcement issue by granting the licensee/assignee the first right to litigate for infringement. This grant confirms the assignment nature of the license. Often, these exclusive licenses will provide that the licensor may enforce the exclusively licensed patent if the licensee-assignee does not. To my knowledge, such a clause has not been reviewed by a court, but given that courts have reviewed the licensing language and found it to constitute assignment, it is unclear how a licensor-assignee could acquire the standing to enforce a patent while not holding substantial rights in the invention.
University licensing folks are wont to make things up as they go, letting things fall where they will if something ends up in court. Perhaps this is an instance.
Nonprofit Assignments and Bayh-Dole
The situation involving substantial rights also involves compliance with the standard patent rights clause authorized by the Bayh-Dole Act. Under Bayh-Dole, federal agencies are required to include in funding agreements a provision prohibiting nonprofits from assigning subject inventions unless they include with the assignment the same obligations that the nonprofit has under the patent rights clause in the funding agreement. Under the standard patent rights clause, nonprofits are restricted in the use of income arising from exploitation of subject inventions–they must share royalties with inventors, may recover from royalties and licensing income only their incidental costs of managing subject inventions, and must use any remaining income for “scientific research or education.”
It’s clear that such restrictions may not be at all acceptable to a for-profit company to which a nonprofit assigns a subject invention. Since exclusive licenses conveying all substantial rights are in fact assignments, to comply with the standard patent rights clause, nonprofits must either limit exclusive licenses so that all substantial rights are not conveyed (such as granting an exclusive license only to sell, while granting non-exclusive rights to make and use) or must require the exclusive licensee of all substantial rights to accept the nonprofit’s own obligations under the standard patent rights clause.
University licensing folks and their legal advisors generally ignore the concept of substantial rights and ignore Bayh-Dole’s standard patent rights clause requirements on assignment as well. They argue that it is sufficient if they don’t assign title to a patent as part of the exclusive license agreement. If they own the patent, so the reasoning goes, then they must still also own the invention. But the assignment issue does not depend on the ownership of patent document; it depends on where the substantial rights in the invention have been placed. While the ownership information in the U.S. Patent Office may not have been changed as a result of the transaction, the assignment has taken place. What has been left undone is the recordation of the assignment in the Patent Office. A failure to record may limit the ability of an assignee to maintain ownership of an invention, should the assignor later assign its interest in a patent to another, (see 35 USC 261).
Since Bayh-Dole’s standard patent rights clause is generally unenforced beyond the superficial elements of reporting inventions, election to retain title, and providing a notice of government rights in patent applications, the nonprofit assignment restriction awaits a challenge. Similarly, until an exclusive licensee or a university as exclusive licensor is challenged in court with regard to standing to enforce a licensed patent, university practice likely will continue to use exclusive licenses that really are assignments as standard practice.