These are not the investors Congress was looking for

Universities routinely assign federally funded inventions to companies. They do so under the cover of an exclusive patent license, expecting that they won’t get caught.

There are two kinds of exclusive license. In one, a true exclusive license, the licensee gets an exclusive license in less than all substantial rights in an invention–less than an exclusive license to all of make, use, and sell. In a true exclusive license, the licensor (in our case, a university) is responsible for enforcing the patent. Universities almost never use true exclusive licenses these days.

There is a second form of exclusive license, in which the licensor grants all substantial rights in an invention to the licensee. This form of exclusive license transfers ownership of the invention. It acts as an assignment. Yes, it is an exclusive license of the patent, but it is an assignment of the invention covered (perhaps only in part) by the patent. In such exclusive-license assignments, the “licensee” (really, the assignee) has the right to enforce the patent and sue for infringement. This is the form of license you find in almost all university exclusive licenses.

Why does it matter? Well, in one way, it doesn’t at all. No one cares. Certainly there’s no one who cares to enforce the Bayh-Dole Act. Federal agencies don’t care–they even actively help universities and companies ignore the law. So we might say, the law isn’t what is written but rather is a secret other law that says that universities and federal agencies can do whatever they please. Call it Chevron deference if you will–the courts will have to defer to the federal agency interpretation of the law.

But let’s say it does matter whether an invention license is truly exclusive or is instead an exclusive-license-assignment. Then what?

Under Bayh-Dole, nonprofits are prohibited from assigning subject inventions (ones made with federal funding) except to invention management firms unless they get federal agency approval. In any case, along with any assignment, the nonprofit must include the patent rights clause that applies to the nonprofit. See 35 USC 202(c)(7)(A).

This provision has to do with assignment of subject inventions, not assignment of patents. The title to a patent might stay with the licensor of the patent, but title to the invention on which the patent is based passes to the “licensee.” If a university administrator blusters about reserving title to a patent, ignore. If a university administrator blathers that even though they granted an exclusive license to make, use, and sell, by reserving title they didn’t actually grant an exclusive license to make, use, and sell, help them find professional therapy.

Under Bayh-Dole’s nonprofit patent rights clause (an extension of the small business patent rights clause, now made by NIST an omnibus business patent rights clause), nonprofits must use royalties or income earned with respect to subject inventions, after expenses incidental to the administration of subject inventions, for “scientific research or education.” That is, any money-making from the exploitation of a subject invention by a nonprofit must be dedicated to the specified charitable purposes. That is also the case for anyone to which a nonprofit assigns a subject invention.

Well, now. If a university assigns a subject invention to a company, then the company must act as if a nonprofit. Any income earned with respect to the subject invention–not merely profits–must go to scientific research or education. Not to investors, not to a new corporate headquarters, not to higher pay for executives, not even to drug development. Scientific research or education. In Bayh-Dole, “development” has independent standing–“development” is not a longer, weird spelling of “research.” It’s not “scientific development.”

Furthermore, it is then clear that any money after costs from an infringement action to enforce a patent on a subject invention must also be dedicated to scientific research or education. The company must act as if a nonprofit with regard to any such income. The company must serve the public interest–if the point is to enforce a patent on a subject invention, that enforcement must not be to recover “damages” of lost profits for the company, but rather only to provide more money for scientific research or education.

One more thing. Bayh-Dole includes an expansive definition of a federal “funding agreement.” A party to a funding agreement can add additional parties to the funding agreement by “any assignment, substitution of parties, or subcontract of any type.” That’s expansive language. And right at the start is “any assignment.” Now, this language pertains to the standard patent rights clause–any assignment includes any assignment of any subject invention–because, right there in 35 USC 202(c)(7)(A), any assignment of a subject invention must include the standard patent rights clause for nonprofits. That’s equivalent to making the assignee a party to the funding agreement via the standard patent rights clause, even if the assignee is otherwise a for-profit company.

When a university assigns a subject invention, then, it adds parties to the federal funding agreement. Any inventions made by the new parties in performance of work under the expanded federal funding agreement are also subject inventions that must be disclosed to the federal government (when owned and known to the personnel responsible for patent matters). That is, Bayh-Dole covers not only research but also development–including development of a subject invention into a commercial product. If a university has a standing policy of attempting to “commercialize” the inventions it owns, and submits grant applications to the federal government, then that standing policy becomes, implicitly, an expectation of the funding agreement. Indeed, many universities argue that they have a federal mandate to commercialize inventions made with federal support, that Bayh-Dole requires it. Academics even get into this act, writing articles that insist commercialization is a necessity under Bayh-Dole. If so, well, then they have already made the case, because Bayh-Dole operates by becoming a part of any federal funding agreement for research or development or experimental work. There it is. Assignees of subject inventions obtained from nonprofits create subject inventions when working within the scope of an assignment that obligates them to “commercialize” subject inventions.

One more thing. Yes, again! In an assignment of a subject invention, the U.S. manufacturing provision of Bayh-Dole does not operate, it merely shifts. The U.S. manufacturing provision applies only to exclusive licenses in the U.S. to use or to sell. Since an exclusive license to make, use, and sell is not an exclusive license but rather an assignment, then the patent rights clause applies directly to the new assignee, and only if the new assignee grants an exclusive license to use or to sell does the U.S. manufacturing provision come into play. Thus, a nonprofit can assign a subject invention to a company and ignore the U.S. manufacturing provision–the most important provision according to Bayh-Dole–because the company now has the obligation to comply with the provision in the company’s exclusive licensing–if any, if ever.

In the old days, one might imagine a university granting multiple licenses for companies to make an invention, and multiple licenses for other companies to use inventions. Then the companies making inventions could provide those inventions to the companies using the inventions. Similarly, companies licensed to sell inventions could obtain their products only from companies licensed to make products. A company licensed to make products might have, then, a broad license to make anything that is covered by any claim of a licensed patent. A company wishing to sell a given product of its own design might then need the manufacture covered by a tiny little bit of a single claim, while another company wishing to sell its own product might need the manufacture covered by a different claim.

In such licensing practice, there would be diversity of products based on the same subject invention. In the language of Bayh-Dole’s statement of policy and objective, the university would use the patent system to promote “free competition and enterprise.” The university would break up its monopoly right to include many companies–including maximum involvement of small business firms. While any one small business firm might not be able to compete to obtain an assignment–exclusively to make, use, and sell all together under one roof–small business firms might readily be able to do custom manufacture under one tiny bit of a patent claim covering a part of a subject invention.

Nothing in Bayh-Dole requires exclusive licenses to make, use, and sell–meaning, nothing in Bayh-Dole requires nonprofits to assign subject inventions as a condition of commercialization. The apparatus in Bayh-Dole points the other way entirely. The patent system should be used to promote free competition and enterprise. Bayh-Dole would not mention this objective if that was already the objective of the patent system–it’s not there, otherwise, and Bayh-Dole is the only thing that puts it there, for subject inventions (and for inventions owned by the federal government, but there only grudgingly and with byzantine verbiage). Nonprofits are not to assign except with approval (default or requested), and if they do assign, the assignees must act as nonprofits with regard to any money they make.

Now, just because Bayh-Dole, drafted as an end-run around HEW patent policy by an attorney working for the NIH, breaks things up into bits and spreads them around that Act so that it is not easy to see what has been done doesn’t mean that these things don’t operate. Yes, university officials want to deny that they operate. But then, Bayh-Dole is too complicated for them, and they never should have been allowed anywhere near subject inventions under such terms. Even if Bayh-Dole were a really grand idea instead of the historically failed policy it is, letting university administrators anywhere near subject inventions has not worked out. Even NIST officials can’t figure out Bayh-Dole, and NIST h as been delegated the responsibility for managing Bayh-Dole’s regulations. If university administrators and NIST officials cannot figure out Bayh-Dole–are just so thick that they have to make up a substitute, convenient law that they do understand–then as a matter of public policy, Bayh-Dole is just too complicated to continue. Simple laws for simple minds–a necessity to “unleash” American “innovation.”

As it stands, if Bayh-Dole is enforced, at least for nonprofits, then companies would not want to accept exclusive licenses to make, use, and sell–unless they want to work in the public interest with regard to income. Somehow, that does not seem likely. Instead, companies will insist on receiving less than all substantial rights in a given subject invention. Perhaps an exclusive license to sell, but not to make or use. Perhaps an exclusive license to use, but not to make or sell. And of course, if one sells product covered by a patent, then the patent owner’s rights are “exhausted.” There may be 300 or more patents in a typical automobile, but when you buy it, you don’t have to have a license to each of those 300 or more patents.

Even if some special investors would only invest in developing a subject invention if they had, in effect, ownership of the invention and had unrestricted control over how they enforced the patent and used any money they made–even then–those are not the investors that Congress intended to be attracted to the development of subject inventions. Just because there are people who happily would grow fat on public misery, or desire to earn enormous profits at the expense of sickness and misfortune, those are not the people that Congress was looking for. That these *are* the people that university administrators are looking for speaks again to why Bayh-Dole has been a total failure. Not only has the law not operated, not been enforced, not produced the claimed results, but also the law has attracted entirely the wrong people to flock to university inventions–university administrators who see their role as dealing in patent monopolies for the benefit of speculators who will invest only if they do not have to comply with the law. Worst of all is that all of this gets wrapped up in the reputation and mission of universities to serve the public interest, when the administrators involved have no intention whatsoever of complying with the law, for all their fuss about it.

 

 

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