Assignment of subject inventions, not assignment of patents

Let’s make something really clear about inventions and patents.

Courts have repeatedly held that an assignment of an invention is made when all substantial rights in an invention are conveyed, whether by assignment or exclusive license. The rights to make, use, and sell are the conventional substantial rights. Courts have also held that reserving non-commercial rights or rights for the federal government do not affect the analysis. Transfer all substantial rights = assignment of the invention. A key test of assignment is whether the entity obtaining the rights also has standing to sue to enforce a patent on the invention. If so, then there’s been an assignment of the invention.

Bayh-Dole’s treatment of federal research contracting concerns required provisions for subject inventions, not for patents. An invention is anything that “is or may be patentable.” A subject invention is an invention owned by a contractor and made in the performance of work under a funding agreement for research.

Bayh-Dole requires a provision in the standard patent rights clause that forbids nonprofits from assigning subject inventions except to an organization that has as a primary function the management of inventions, unless the nonprofit gets federal agency approval. In any case, any assignment of the invention must carry with it the patent rights clause the nonprofit has agreed to. The patent rights clause by law must run with any assignment of a subject invention.

Now look at typical university patent licensing practice. Universities use template license agreements labeled “Exclusive License.” In those agreements, universities grant an exclusive license to “make, use, and sell” the subject invention. They further generally grant the right to sublicense and to pursue claims of infringement. Such a transaction amounts to assignment of the invention. It does not matter that the instrument is labeled “Exclusive License”–it operates as an assignment.

Now university patent brokers get confused because these same instruments insist that the university has not given up title to the patents under which is granted the exclusive licenses. True, they haven’t. The title to the patent is still registered with the USPTO in the name of the university. But the title to the patent is not the same thing as ownership of the invention.

The patent gives one the right to exclude others from practicing an invention. If a patent owner were to contract with someone and say, whatever you do with my invention, I won’t ever sue you for infringement, and I won’t ever contract like this with anyone else with regard to my invention, and I won’t ever sell any products based on my invention, then that someone would have an exclusive commercial position with regard to the invention, but there would be no assignment because the substantial rights in the invention have not been transferred, have not been licensed exclusively. The patent owner still has the right to make and use the invention, to start, and still has the right to sue for infringement, and the other someone does not have that right. At best that someone has an exclusive right to sell, and a sole license (non-exclusive license done once) to make and to use.

Bayh-Dole does not address title to patents. It concerns title to subject inventions. It is subject inventions that nonprofits cannot assign without approval, and the nonprofit standard patent rights clause must follow any assignment. That is, the assignee also cannot assign the subject invention without approval, must share royalties with the inventor, and may deduct from royalties or other income earned “with respect to subject inventions” the costs of administrating subject inventions and must use any remaining balance for “scientific research or education,” and must show a preference for licensing to small businesses. These restrictions are not confined to invention management organizations. Any assignee must take these requirements, even when a federal agency approves an assignment.

When universities grant an exclusive license to make, use, and sell a subject invention, they assign that invention, even if they retain title to patents on that invention, even if they label the written instrument an “exclusive license.” An exclusive license to each of the substantial rights in an invention is an assignment of the invention. Bayh-Dole requires the nonprofit patent rights clause to follow such an assignment. Companies receiving such an assignment are faced with loss of the license or compliance with the requirements of the nonprofit patent rights clause.

Inventors have a cause of action against such an assignee if the assignee does not share royalties with the inventors. It does not matter that the university shares a portion of the royalties it receives. The inventors should have the same relationship with the assignee that they have with their university. If the university has a contractual obligation to share 30% of its income with the inventors, then when the university assigns an invention, arguably, the university must assign as well its contractual obligation to share royalties or income earned with the inventor. Otherwise, a university can do a sweetheart deal with an invention management agent, under which the agent pays the university, say, 40% of its royalties, and then “gifts” more of its income to the university outside the royalty deal. The effect is to reduce the inventor’s share of the income.

Dealing with a company, a university can split the income by requiring a sponsored research agreement back–so that the company splits the royalty it pays between the license and the research agreement. Again, the inventors get the shaft but the university collects the indirect costs on top of the licensing income, but doesn’t have to share the indirect costs (except when it is forced to by a court, as in Singer v the University of California). Chains of sublicensing can dilute the royalty income stream still further. A company, of course, may choose not to sublicense the invention–but it may still earn income “with respect to a subject invention” by selling product that incorporates the subject invention. Under Bayh-Dole’s requirements, the company, as an assignee of the subject invention, has an obligation to share royalties and is restricted on what it can use the money it earns for.

Now look at these pharmaceutical companies with their blockbuster drugs made from subject inventions. All those billions of dollars–and these companies have been assigned the subject inventions, have all substantial rights plus the right to sue for infringement. Those billions in profits are subject to the nonprofit restrictions on the use of “income earned with respect to subject inventions.”

The problem is that the NIH shows no interest in enforcing Bayh-Dole’s standard patent rights clause, let alone pursuing pharmaceutical companies to comply with the nonprofit patent rights clause–even though federal law requires it. Perhaps this is because the NIH is not charged with enforcing its own contracts, including the standard patent rights clause for nonprofits. Who then does have this responsibility? It’s not a matter of enforcing Bayh-Dole, since all Bayh-Dole does is require a patent provision to be placed in the funding agreement, and the NIH does this. The NIH thought up the Bayh-Dole scheme to break the executive branch patent policy that restricted the creation of private monopolies to exploit public health inventions made with federal support. If such private monopolies are what the public wants, then the NIH was on our side from the get-go. If however there are good reasons to do research and develop interventions that are not entirely wrapped up in commercializing monopolies, then the NIH has betrayed us since at least 1968.

The problem only gets worse when a university ignores this provision of the standard patent rights clause and the NIH ignores the university’s non-compliance. It is as if the provision does not exist, even though Bayh-Dole requires it, and there it is. So who is it that inspects whether the NIH is enforcing its contracts? The Office of Inspector General. But who would motivate the OIG to bother with enforcement of Bayh-Dole? Congress, perhaps. There’s no mechanism in Bayh-Dole for any third party to appeal a Bayh-Dole matter–not for assignments, not for march-in, not for use of licensing income funds. Even the Supreme Court noted the lack of protection for inventors and third parties in its Stanford v Roche decision. If the federal agencies are not going to enforce the standard patent rights clause–and especially the NIH won’t–then the law should be amended so there is a private right to bring an action to require federal agencies to enforce the nonprofit patent rights clause in funding agreements, including the assignment provision pertaining to subject inventions–and not to title to patents on subject inventions.

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