Fourth layer: Funding agreements
We have looked at Bayh-Dole the statute, the implementing regulations, and the standard patent rights clauses. These are all apparatus that are disconnected from contractors and inventors–just laws and regulations and templates. The apparatus gets connected to contractors by means of funding agreements. It is to funding agreements that patent rights clauses attach, creating obligations for contractors such as universities and establishing rights in inventions for federal agencies.
Funding agreements are an important layer of Bayh-Dole as it is the funding agreement that establishes the scope of the definition of subject invention. This scope is subject of much goofiness on the part of university administrators, so it is worth considering in some detail how this scope is defined. Like most everything about Bayh-Dole, the scope of a funding agreement is not presented in a straightforward manner. We will have to work through it to show the structure.
Funding agreements to nonprofits are established by 2 CFR 200. These agreements are often called “grants” or “awards.” 2 CFR part 200 refers to the funded party as a “non-Federal entity” or “awardee” or “recipient.” Besides the desire for bureaucratic generality, the usage stems from the idea that federal awards to universities were considered subvention–grants-in-aid–rather than procurement, in which deliverables were specified. In turn, 2 CFR 200.315(c) incorporates the whole of 37 CFR part 401 by reference into each funding agreement.
Funding agreements that follow procurement are typically referred to as “contracts” and are subject to the Federal Acquisition Regulations as their regulatory authority. Federal contracts for research or development are controlled by FAR 27.303, which in turn specifies the patent rights clause to use in a given federal contract. The primary form for Bayh-Dole’s standard patent rights clause is set forth in FAR 52.227-11. This provision is substantially similar to the standard patent rights clause set forth in 37 CFR 401.14(a), but the requirements are rearranged and therefore carry different reference indicia from those in 37 CFR 401.14(a). In places, too, there are differences that may have a material effect on the interpretation of a provision or shape expected practice, so it is important to be aware of both the subvention regime and the procurement regime.
In a subvention award, the conduct of the work as proposed is the deliverable. A patent rights clause intrudes a procurement-like provision into awards. Under executive branch patent policies before Bayh-Dole, investigators hosted by nonnprofits receiving subvention awards were to assign their inventions to the federal government, to be made broadly available to all (including the inventors) via the public domain or royalty-free non-exclusive licensing. If a nonprofit wanted to obtain patent rights and restrict access to an invention for a public purpose, such as more rapid development of the invention into a useful form that then would be made broadly available on less than the conditions of a full-term patent monopoly, a federal agency on a case-by-case basis was authorized to permit the nonprofit to hold title. But no federal agency was required to do so.
The effect of Bayh-Dole’s standard patent rights clause for nonprofits is to require federal agencies to allow a nonprofit contractor to hold title to inventions made in projects receiving federal support–so long as the nonprofit gives notice to the federal agency that the nonprofit has chosen to keep title to the invention that it has acquired. In this way, Bayh-Dole reverses the regulatory apparatus of the disposition of title–but only after a contractor has acquired title, and that acquisition of title lies entirely outside of Bayh-Dole. Bayh-Dole and its patent rights clause do not require a contractor to obtain title, do not give a contractor any special right or privilege to obtain title, do not even encourage a contractor to obtain title. The law requires federal agencies to allow a contractor to retain title when it obtains title and chooses to keep that title–regardless of the contractor’s capabilities, past performance, stated purposes, or investigator wishes, and regardless of the federal agency’s purposes or the distribution of research funds to various nonprofits on the same project or area of research.
Funding agreements come in a variety of forms. Bayh-Dole recites “grant, contract, and cooperative agreement” in its definition of “funding agreement” at 35 USC 201(b). Expressly excluded by Bayh-Dole are educational grants (35 USC 212):
No scholarship, fellowship, training grant, or other funding agreement made by a Federal agency primarily to an awardee for educational purposes will contain any provision giving the Federal agency any rights to inventions made by the awardee.
What is excluded is specifically three provisions of the standard patent rights clause:
(b) no government license
(d) no government right to obtain title
(f) no need to convey rights to the government, protect the government’s interest, or place a government rights notice in patent applications
Thus, while Bayh-Dole stipulates that the government will not have rights to inventions in educational awards, section 212 treats these educational awards within the definition of funding agreement (such awards may also have a research component, such as in providing opportunities for new faculty to develop their research skills)–but now distinguishes the primary purpose of the award (“educational”) from general purposes (“experimental, developmental, or research work”) in the definition of “funding agreement” at section 201(b).
Also excluded by Bayh-Dole is any funding not from the executive branch or “the military departments.” Executive agency is defined in 5 USC 105 to include executive departments, government corporations, and independent establishments. Government corporations are ones “owned or controlled” by the federal government. The US Postal Service and Amtrak are perhaps the most widely recognized government corporations. Others include the Export-Import Bank, the FDIC, and Ginnie Mae (the Government National Mortgage Corporation. The Tennessee Valley Authority, a government corporation, is expressly excluded from Bayh-Dole’s definition of funding agreement. Kevin Kosar provides an overview discussion of these corporations. Independent establishments are any other executive branch establishment not already accounted for plus the Government Accountability Office (5 USC 104).
Funding from a Congressional source, such as “earmark” funding, even if for research, is not within the scope of the definition of a Bayh-Dole funding agreement. Thus, the general statement that any federal funding triggers Bayh-Dole is not true. Grants from executive agencies primarily for education cannot carry provisions giving the federal government rights to inventions (though other aspects of Bayh-Dole might apply, such as reporting inventions and reporting on the utilization of inventions), and funding provided directly by the legislative branch falls outside Bayh-Dole’s definition of a funding agreement, as does any funding from the Tennessee Valley Authority. Conversely, most government-owned or controlled corporations are within the definition, and thus funding from a source such as the US Postal Service, if for “experimental, developmental, or research work” does trigger Bayh-Dole’s requirements for a patent rights clause. It is an open question whether for-profit corporations in which the government acquired an interest (such as General Motors during the 2009 economic crisis) met the definition of “government corporation.”
The definition of “funding agreement” is essential to setting the scope for subject invention, and Bayh-Dole’s scope for contracting is the subject invention. Here’s the first part of the definition in 35 USC 201(b):
The term “funding agreement” means any contract, grant, or cooperative agreement entered into between any Federal agency, other than the Tennessee Valley Authority, and any contractor for the performance of experimental, developmental, or research work funded in whole or in part by the Federal Government.
We have already addressed the forms of agreement–contract, grant, cooperative agreement. We have looked at the purpose of the work–experimental, developmental, ore research, not education. We have looked at what Federal agency means–executive branch department, military department, government corporation, independent institution, but not legislative earmarks, even if for research. A “contractor” is defined by 35 201(c) as “any person, small business firm, or nonprofit organization that is a party to a funding agreement.” Given that Bayh-Dole’s principal allocation of rights (35 USC 202(a) cites only nonprofit organizations and small business firms, the inclusion of “person” in the list of possible contractors is noteworthy–here a “person” must be some entity distinct from nonprofit organization or small business firm. Let’s remove these expansions and qualifications from the definition of “funding agreement” to show its basic structure:
any . . . agreement . . . for the performance of . . . work funded in whole or in part by the Federal Government.
The part to consider, then, is “in whole or in part.” Observe that the broader construction is “in part”–the federal funding may be in part, or in such parts to also be the entirety of the funding. We might rewrite in the form “work funded at least in part.” The scope of Bayh-Dole, and therefore the scope in which to identify subject inventions, is in the performance of work funded at least in part by the federal government. This statement may be contrasted with the common claim that the criterion is whether a given invention has been made with federal funding. That common claim is not accurate on a number of points. First, it is difficult to determine exactly how an invention has come to be–how the initial idea has formed, how that idea has led to conception of a patentable invention, and how that conception has been evaluated for function by reduction to practice, creating an invention that is or may be patentable. Second, Bayh-Dole does not direct its concern to the funding of any particular invention, but to the “performance of work” in which an invention has been made. Thus, the scope of the funding agreement is critical, as it is this scope that establishes where subject inventions may be found.
Now, the second part of the definition of funding agreement:
Such term includes any assignment, substitution of parties, or subcontract of any type entered into for the performance of experimental, developmental, or research work under a funding agreement as herein defined.
Let’s simplify by removing the qualifications that we have already discussed:
Such term includes any assignment, substitution of parties, or subcontract of any type entered into for the performance . . . of work . . . under a funding agreement.
This second sentence expands a funding agreement to include actions taken by a contractor to assign the funding agreement, substitute parties, or subcontract work. The expansion is intended to be broad, as signaled by “any assignment” and “subcontract of any type.” The “performance of work” under a funding agreement may not be entirely funded by federal money–thus “under a funding agreement” does not mean “only that work charged to a federal account” or “only that work that federal money pays for.” The meaning of “under a funding agreement” then is “work identified by the funding agreement, whether or not all of that work is paid for with federal funds.”
The implementing regulations (37 CFR 401.1) explain the distinction between the “work” to be performed overall and the portion of that work paid for with federal money. The regulations consider three aspects of scope with regard to funding from sources other than the federal government. That funding may be used “to expand” a federally supported investigation or “to aid in completing” a federally supported investigation, or “to conduct separate investigations closely related to research activities sponsored by the government.” In the first two cases–expanding or aiding–the regulations make clear that the federal government has an interest in inventions arising anywhere in the expanded or aided work, regardless of the accounting:
it is clear that the ownership provisions of these regulations would remain applicable in any invention “conceived or first actually reduced to practice in performance” of the project.
That is, one must first establish the project, including any expansion of the project (such as by subcontract), and then determine whether any particular invention has been made–the inventive work either starting or being completed–in that project. It does not matter whether federal funding is specifically used on making the invention (or, more likely, creating a prototype or testing the invention to determine that it works as conceived in all its elements):
Separate accounting for the two funds used to support the project in this case is not a determining factor.
If the funding for a given invention is considered narrowly, it could be claimed that an invention might be made only with non-federal funding, even if it was made in a project that otherwise also received federal funding. That would be an easy work-around to Bayh-Dole’s scope: any time someone felt that they might be coming up with an invention, simply move the inventive work to a new, non-federal budget. Bayh-Dole’s implementing regulations seek to preclude that strategy by defining first a project that receives at least some federal funding. Was the invention made in the performance of work in that project? If so, then the invention was made “in performance of work under the funding agreement”–even if there was separate accounting so that the people who did the inventing were not paid during that time with federal money.
The regulation on scope makes a further distinction, dealing now with non-federal funding for “closely related” projects:
To the extent that a non-government sponsor established a project which, although closely related, falls outside the planned and committed activities of a government-funded project and does not diminish or distract from the performance of such activities, inventions made in performance of the non-government sponsored project would not be subject to the conditions of these regulations.
To determine whether a closely related project is indeed independent of a project that receives at least in part federal funding, the closely related project must fall outside the “planned and committed activities” of the federally supported project. These activities are ones that have been specified by the project and agreed to by the “research performers.” These activities could be specified by a federal agency call for proposals, by the proposals themselves, and by other documents to which any given proposal refers. Without documentation, however, it is not possible to establish what has been “planned and committed” for any given project.
In addition to planned and committed work under a project, some of which is funded by the federal government, the regulations on scope also consider unplanned work that might “diminish or distract” from the project receiving at least some federal support. If funding or research performers shift away from the planned and committed project so that the project work if affected, then the scope of the funding agreement expands to include the work that diminished or distracted.
Any given patentable invention is not subject to the Bayh-Dole regulations until it has been (i) made in the performance of work under a funding agreement and (ii) acquired by a contractor–a party to the funding agreement.
The effect of the second sentence of the definition of “funding agreement,” then, is to expand the number of parties to a funding agreement beyond the party that receives the initial federal award. These parties then are “contractors” wherever that term is used in Bayh-Dole and the patent rights clause in any given funding agreement. The patentable inventions these extended parties acquire–when made in the performance of a project funded at least in part by the federal government–then also become subject to the patent rights clause, subject to the Bayh-Dole regulations.
The crucial expansion that is required by the standard patent rights clause, but not by Bayh-Dole the statute, is that the contractor receiving an award make the contractor’s technical employees (“its employees, other than clerical and nontechnical employees”) also parties to the funding agreement by requiring them to make a written agreement to protect the government’s interest in subject inventions. To comply with this requirement, a contractor must assign to those technical employees a portion of the patent rights clause specific to inventors–disclosing inventions, signing declarations and oaths regarding inventorship, and “establishing the government’s rights in subject inventions.” Without a provision requiring each contractor to make such a requirement of its technical employees, inventions made by those technical employees in the performance of work under a funding agreement would not be subject inventions because those inventions would not have been assigned to a contractor–and Bayh-Dole’s contracting provisions apply only to subject inventions.
While there are other ways for a contractor to secure ownership of inventions made in the performance of work under a funding agreement, those ways are not consistent with Bayh-Dole’s public policy or regulatory requirements.
A second way in which a funding agreement may be expanded by the action of a contractor is by subcontract of a portion of the work under a funding agreement. Subcontracting is a frequent action in federal grants to universities, where one university may serve as the coordinator for a number of investigators at various universities and nonprofits. Similarly, both the SBIR and STTR programs directed at small businesses anticipate subcontracting–and the STTR program requires it. Bayh-Dole’s standard patent rights clause requires subcontracts to include the standard patent rights clause–thus, the subcontractors also become parties to the funding agreement. In the case of funding agreements that are contracts, the patent rights clause stipulates that the patent rights clause in the subcontract creates an independent contract directly between the subcontractor and the federal government.
There’s a third way in which a nonprofit contractor may expand a funding agreement to include additional contractors. Under the nonprofit patent rights clause, if a nonprofit organization assigns a subject invention, it must also require the assignee of the subject invention to agree to the nonprofit patent rights clause. Thus, the assignee also becomes a party to the funding agreement, a contractor. Furthermore, the assignee is required to dedicate any income earned with respect to the subject invention (after allowable costs) to public purposes–scientific research or education–just as nonprofit organizations must do. This requirement on assignment is specific to subject inventions, not to patents on subject inventions. It does not matter that a nonprofit organization might license a patent exclusively and insist that it has not assigned the patent. What matters is whether the nonprofit has exclusively licensed the underlying subject invention–and if so, if that exclusive license is to all substantial rights in the invention (to make, to use, and to sell), so that the licensee has the right to enforce the patent, then that exclusive license transacts an assignment of the invention, the nonprofit patent rights clause follows the assignment, and the assignee becomes, for the purposes of compliance, a nonprofit contractor.
From this discussion, it should be apparent that determining the federal scope of interest in a funding agreement is critical to determining whether any given invention has been made in the performance of the funding agreement. To do this, one must first establish the project to which at least some federal money has been directed. If a patentable invention arises (is conceived or first actually reduced to practice) in that project, and comes to be owned by a contractor, then it is a subject invention. This is true even if a contractor shifts would-be inventors from federally supported budgets to other budgets.
Furthermore, a contractor may expand the parties to a funding agreement in various ways–by requiring technical employees to make their own written agreements to protect the government’s interest established in the patent rights clause, by subcontracts that require the flow down of the standard patent rights clause, and by assignments of subject inventions for which the standard patent rights clause must be passed to the assignee.