Nonprofit assignment of subject inventions in the standard patent rights clause 37 CFR 401.14(a)(k)(1)

Universities ubiquitously claim as a matter of formal policy to handle patentable inventions in the public interest. That expectation forms a basis for the federal government to award grants–subvention funding, grants-in-aid–for faculty-proposed research hosted by these universities. That’s also the basis for the requirement in Bayh-Dole that federal agencies must require in their funding agreements that nonprofits  include the nonprofit patent rights clause in any assignment of a subject invention. See 37 CFR 401.14(a)(k)(1). [As of May 14, 2018, NIST has relettered things so the reference is now 37 CFR 401.14(k)(1)–there cannot be multiple standard patent rights clauses anymore–just one big honking one with a maze of conditionals.]

Again. Universities swear they will manage inventions in the public interest. Bayh-Dole agrees and requires federal agencies to use a patent rights clause specific to nonprofits in funding agreements with nonprofits. That nonprofit patent rights clause requires that when a nonprofit assigns a subject invention, the nonprofit patent rights clause is included. The nonprofit patent rights clause requires nonprofits to use income with respect to any subject invention, after allowable costs, to support scientific research or education. The same goes, then, for any assignee of a subject invention. If you are a company, then unless you are a big-hearted, publicly spirited sort of company, you really, truly do not want to receive assignment of a subject invention from a nonprofit.

Here is the original version of the nonprofit patent rights clause (my emphasis), as a required by clause (35 USC 202(c)(7)):

In the case of a nonprofit organization, (A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions and which is not, itself, engaged in or does not hold a substantial interest in other organizations engaged in the manufacture or sale of products or the use of processes that might utilize the invention or be in competition with embodiments of the invention (provided that such assignee shall be subject to the same provisions as the contractor)

Here’s the amended version, circa 1984, after the university patent brokers finished removing the restriction that an invention management organization could not have a conflict of interest by holding stock in companies that also might compete with others for licenses:

In the case of a nonprofit organization, (A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions (provided that such assignee shall be subject to the same provisions as the contractor)

WARF comes to mind, since WARF has made its money more by investing royalties in stocks than from accumulating royalties on their own. We couldn’t have a law that forbid conflicts of interest in licensing, now could we?

Let’s remove the qualifications to show the core structure:

In the case of a nonprofit organization, (A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency . . . (provided that such assignee shall be subject to the same provisions as the contractor)

That terminal parenthetical applies to any assignment of rights in a subject invention. The matter of federal agency approval involves what the primary functions of the assignee are. But in either case, the nonprofit patent rights clause goes with the assignment.

If you think that the parenthetical requirement applies only to the assignment without federal approval–to an invention management organization–then consider the logic. I know, I know. But words in laws ought to have meaning and not be subject to whim.

Why should assignment of a subject invention otherwise under a patent rights clause be freed from those requirements simply because a federal agency approves. The patent rights clause *is* the embodiment of Bayh-Dole’s contracting requirements. The patent rights clause is the reason Bayh-Dole exists. If federal agencies can simply approve a naked assignment of subject inventions to organizations that don’t even have a primary function in managing inventions, then the upshot is that federal agencies could waive Bayh-Dole for assignees of subject inventions. Bayh-Dole would be, then, merely a law that authorizes federal agencies to waive a major portion of the law. Yes, it is true that the patent rights clause also gives federal agencies the option to waive almost everything of substance–failure to disclose or elect to retain title, failure to file patent applications, failure to require American manufacturing, failure for nonprofits to get approval for assigning subject inventions, failure of nonprofits to make efforts to attract small business licensees–pretty much everything substantive in the patent rights clause can be waived by federal agencies.

But if one reads the terminal parenthetical in (k)(1) to apply only to assignments permitted without federal agency approval, then the entire patent rights clause is waivable by federal agencies when an invention is assigned to anyone other than an organization that manages inventions. That makes no sense–why should organizations that don’t focus on managing inventions get a free ride to do whatever they want with inventions? If this reading were accepted, Bayh-Dole would be bureaucratic fussiness–all those requirements, but a federal agency could simply approve assignments to whomever. To Darth Vader. To Jar Jar Binks. Think of the implications for public policy. Bayh-Dole would be the law that authorized federal agencies to waive most of the public covenant (but for 35 USC 200) that runs with subject inventions. Bayh-Dole would read: “federal agencies must use a standard patent rights clause to protect the public interest in all funding agreements, but once they have done so, the clause allows them to waive the clause, but only if a contractor is assigning a subject invention to Darth Vader or Jar Jar Binks rather than to an invention management organization.” Silly nonsense.

The terminal parenthetical clearly applies to any assignment of a subject invention. That’s the whole point. The federal government awards some research work to nonprofit organizations with the expectation up front that they act in the public interest. That’s why the section (k) exists in the standard patent rights clause for nonprofits. If the federal award is to a nonprofit, then any disposition of subject inventions acquired by the nonprofit must be in the public interest, and any other organization acquiring rights from that nonprofit stays under those same obligations to act in the public interest. The public interest, once it attaches to a subject invention, is not alienable by the nonprofit. (Of course, if the subject invention is owned by a contractor-inventor, then the inventor is subject to the inventor patent rights clause, not the nonprofit patent rights clause).

We can then rewrite the requirement in 35 USC 202(c)(7)–and by extension 37 CFR 401.14(k)(1)–so the requirement is crystal clear:

In the case of a nonprofit organization, (A) a requirement in any assignment of rights to a subject invention in the United States that the assignee shall be subject to the same provisions as the nonprofit contractor; Provided That the approval of the Federal agency is also required if the assignment is to any organization that does not have as a primary function the management of inventions.

And we can provide a simpled-down version so that even university officials can follow it:

When you assign a subject invention, the nonprofit patent rights clause goes with the assignment.

To sweep away administrative cobwebs, we are talking about assignment of subject inventions, not assignment of title to patents. If one grants an exclusive license to all substantial rights in an invention, the exclusive license assigns the invention. The substantial rights in an invention are the rights to make, use, and sell. University exclusive patent licenses routinely assign the underlying invention by granting exclusive rights to make, use, and sell. These licenses confirm they are assignments by also permitting the licensee (assignee) to enforce the patents–which only the owner of an invention has standing to do.

Almost all university exclusive licenses of subject inventions are assignments. All template exclusive licenses I have found posted by universities and by AUTM assign the invention.

Many of these licenses also make reference to the Bayh-Dole Act and require the licensee (assignee) to comply with the Act, but none of them expressly point out to the licensee (assignee) that they are subject to the nonprofit patent rights clause–that they must share royalties with inventors (if they happen to sublicense) and they may not use royalty or other income with respect to the subject invention other than to recover expenses incidental to the administration of subject inventions and to support scientific research or education.  (See 37 CFR 401.14(k)(3)).

That is, all income from the invention must go to public purposes. 

If a for-profit company does not like that outcome, then don’t take assignment of a subject invention from a nonprofit. Take instead an exclusive license only to sell, if one must have an exclusive license, and leave the make and use rights non-exclusive. And give up any right to enforce the patent or to sublicense. That way, the exclusive license is not an assignment, and the nonprofit patent rights clause is not included in the transaction.

As it is, there are hundreds of nonprofit exclusive licenses on subject inventions that operate as assignments, and which require the assignee to act in the public interest with regard to all income with respect to the subject invention. Any federal audit would show that there are billions of dollars diverted by these assignees in violation of federal law that should have been dedicated to the public interest in the form of sharing royalties with inventors, administrating subject inventions, and supporting scientific research or education. That’s billions and billions of dollars. Good thing for these assignee-companies that Bayh-Dole is a do WTF you want law and not a law that actually does look out for the public interest!

[5/8/18 comment. With the NIST changes in the standard patent rights clauses, we might ask again about the interpretation of “such assignee shall be subject to the same provisions as the contractor.” Let’s say the reading is, “such assignee will be subject to the same standard patent rights clause as the contractor.” Well, that makes no sense, because there is only one standard patent rights clause now, since NIST rolled up the clause at 37 CFR 401.14(b) into (a) and then disappeared (a) in favor of notational simplicity. If there is only one standard patent rights clause, then “the same clause” is always going to be that one clause.

But this proposed reading also makes no sense another way. The point of the nonprofit restrictions are to highlight that universities and other nonprofits exist with the tax standing they have because they operate in the public interest. That’s why, in part, they receive their federal grants–through granting procedures, not procurement procedures. If a nonprofit could simply assign a subject invention and the assignee could operate without the nonprofit restrictions, then there’s no point in the nonprofit restrictions, really. They become an incentive for the nonprofit to assign every subject invention to a for-profit and so rid subsequent invention management decisions of the nonprofit requirements–there would be no further restrictions on assignment, no obligation to share royalties with inventors, no obligation to use the balance of income earned from subject inventions for scientific research or education, and no requirement to make an effort to attract small business licensees. All this would vaporize if a nonprofit assigned a subject invention, just requiring the assignee to comply with the standard patent rights clause generally. No, the “same provisions as the contractor” means here, since the contractor is a nonprofit, “subject to the same patent rights clause as the initial nonprofit contractor, including paragraph (k).” That’s the way in which the nonprofit requirements always follow a subject invention acquired by the initial nonprofit contractor. That’s the deal. It makes sense. There’s no point in anyone trying to squirm out of it.

The point of the restriction on assignment of subject inventions is to defeat nonprofits assigning all substantial rights to any one for-profit company unless the for-profit then agrees to behave as a nonprofit for the purpose of managing the invention (and any patents on the invention). That’s the point. It’s a decent point in an otherwise ugly law. It’s so strange that university officials would rather have consistent ugliness rather than anything that smacks of public purpose.]

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