One cannot read “contractor” in Bayh-Dole and assume that “contractor” only refers to the initial or prime contractor. One must always look to the circumstances of a given contract to determine whether others have been made parties to the funding agreement. A contractor may add parties to a funding agreement by any assignment, substitution of parties, or subcontract of any type. Let’s work through some examples. We will start with more overt examples and then look at stuff that is not what you find in the usual glossy accounts of Bayh-Dole.
Consider some examples.
(1) Nonprofit subject invention assignment. Bayh-Dole requires federal agencies to require nonprofit organizations, if they assign a subject invention, to require the assignee to comply with the nonprofit’s patent rights clause. See 35 USC 202(c)(7)(A):
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)
This provision then shows without the second set of parentheses in the standard patent rights clause at 37 CFR 401.14(k)(1).
Rights to a subject invention in the United States may not be assigned 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 will be subject to the same provisions as the contractor;
If a nonprofit assigns a subject invention to a company, even under the cover of an exclusive patent license, the company becomes a party to the funding agreement–becomes a contractor–and any inventions acquired by the company arising from federally supported research or development are then also subject inventions. Furthermore, the company is obligated to handle those inventions, just as with the assigned invention, under the nonprofit patent rights clause. Specifically, the company-assignee agrees–as a party to the funding agreement–to dedicate income earned with respect to subject inventions to the specified public purposes.
Keep in mind, a funding agreement concerns not only the part of a project that the federal government pays to support–the funding agreement concerns what happens in the entire project. That’s baked into the definition of “funding agreement”–work funded “in whole or in part” by the federal government. If the project is to discover compounds that can be developed into medicines, and the federal government funds the discovery effort, then the scope of the funding agreement includes inventions made during the development effort–if the developers have agreed to become parties to the funding agreement, as they must by law if they accept assignment of a subject invention.
If a company does not wish to collaborate with a nonprofit owner of a subject invention to achieve a public purpose with any income it earns beyond administrative purposes going to scientific research or education, then the company must insist on receiving less than an assignment of any subject invention–at best an exclusive license to less than all substantial rights–an exclusive license to sell, but not to make, for instance.
The enforcement of the patent must be left to the nonprofit–otherwise, the company becomes the owner, the nonprofit patent rights clause applies, and any money from that enforcement–income earned with respect to the subject invention–is to be dedicated to the specified public purposes.
Even suing for infringement carries public interest: (i) any suit must demonstrate that the patent system is being used to promote utilization (so something about the infringing use, which is on the face of it utilization must, must work against utilization); (ii) any money received by way of settlement or judgment after expenses must go to the specified public purposes. One cannot “monetize” the value of a subject invention owned by a nonprofit except as permitted by Bayh-Dole and only then if any amounts earned from doing so go to public purposes.
If a company finds its own public purpose (following Milton Friedman’s argument) is making as much money for its owners as it legally can, then that company will decline to participate in the public purpose specified by Bayh-Dole for nonprofit organizations acquiring inventions made under contract. Such a company, with a different public purpose, then should insist that the nonprofit break up its monopoly right so the company can pursue its own public purpose of maximizing its income rather than making money for the public purposes required by Bayh-Dole.
(2) Subcontracts. The standard patent rights clause requires special handling of subcontractors. See 37 CFR 401.14(g).
(1) The contractor will include this clause, suitably modified to identify the parties, in all subcontracts, regardless of tier, for experimental, developmental or research work to be performed by a subcontractor. The subcontractor will retain all rights provided for the contractor in this clause, and the contractor will not, as part of the consideration for awarding the subcontract, obtain rights in the subcontractor’s subject inventions.
The subcontractor becomes a party to the federal funding agreement–becomes a contractor, and has a right to inventions that the subcontractor chooses to retain, just as does the initial or prime contractor–and the initial or prime contractor cannot assert any rights in such inventions in offering the subcontract. In essence, once a person is joined to the federal funding agreement–becomes a party to the federal funding agreement–then that person has the benefit of Bayh-Dole’s basic right of preemption, at 35 USC 202(a):
Each nonprofit organization or small business firm may, within a reasonable time after disclosure as required by paragraph (c)(1) of this section, elect to retain title to any subject invention
The anchor is “subject invention”–if one has a subject invention, then one has the benefit of 35 USC 202(a). To have a subject invention, one must be a contractor–“invention of a contractor”–that is, one must be a party to the federal funding agreement.
Thus, in the case of subcontracting, an initial or prime contractor adds parties to the funding agreement by entering into subcontracts, and in doing so the initial or prime contractor gives up any claim to the inventions owned by a subcontractor in connection with the subcontract. In reading Bayh-Dole, one must in such circumstances recognize that “contractor” may mean “subcontractor” of any type.
(3) The Written Agreement. Consider a third instance. We have referred to this agreement earlier. Let’s look at it in more detail as an instance of a contractor adding parties to a funding agreement.
In the standard patent rights clause at 37 CFR 401.14, under the heading “Contractor Action to Protect the Government’s Interest,” contractors are required at (f)(2) to require certain of their employees to make a written agreement to perform specified functions–to disclose subject inventions, to sign papers to allow patent applications to be filed, to sign papers to establish the government’s rights in subject inventions:
(2) The contractor agrees to require, by written agreement, its employees, other than clerical and nontechnical employees, to disclose promptly in writing to personnel identified as responsible for the administration of patent matters and in a format suggested by the each subject invention made under contract in order that the contractor can comply with the disclosure provisions of paragraph (c) of this clause, to assign to the contractor the entire right, title and interest in and to each subject invention made under contract, and to execute all papers necessary to file patent applications on subject inventions and to establish the government’s rights in the subject inventions.
The part in bold was added by NIST in May 2018. Each contractor is now required to require employees to assign subject inventions–inventions that the contractor already, by definition, must own. How does that work? Only NIST knows. But it clearly cannot serve to turn inventions that are not subject inventions into ones that are. Nor can it serve to make inventors, if they are contractors, give up to any other contractor the subject inventions they are entitled by Bayh-Dole (35 USC 202(a)) to retain.
What then is the status of this “written agreement”? Does it add parties to the funding agreement or not? It most certainly is not a patent agreement. For thirty years, this provision has not included an assignment requirement (NIST has added an odd one, but only in 2018–it’s a complication worthy of its own fuss, but not here). The written agreement is not between the contractor and its employees. It is an agreement that is compulsory on the contractor–the contractor cannot claim any consideration for requiring the agreement (what one is already obligated to do cannot be consideration in a deal under which one commits to doing that same thing).
The agreement is made for the benefit of the federal government. The contractor is required to require employees to make an agreement to protect the government’s interest in subject inventions, not to protect the contractor’s interest in subject inventions (as might a patent agreement). Furthermore, how could an employee have any rights in a subject invention by which to sign papers to establish the federal government’s rights in subject inventions. If a subject invention must be one owned by a contractor–by party to the funding agreement–then inventors would have no rights whatsoever on which to base signing any paper to establish the federal government’s rights. The employees would have had to already assign their rights to the contractor.
If you see the problem, then no doubt you see the resolution. The written agreement required by (f)(2) of the standard patent rights clause must have the effect of making a contractor’s employees parties to the federal funding agreement. If an inventor is a party to the funding agreement–a contractor–then the inventor owns each invention made under contract and thus each invention is a subject invention. But now “contractor” in (f)(2) does not mean only the initial or prime contractor but rather “contractor” may also be read to mean the inventor-as-contractor. It’s just that the inventor-as-contractor’s obligations are set forth in 37 CFR 401.9, not here in 37 CFR 401.14. The written agreement requirement requires initial or prime contractors to subcontract (of any type) certain patent-related work to their employees, making them parties to the funding agreement and giving them the status, rights, and obligations of contractors according to the patent rights clause that applies to them.
One can fuss and disagree. But then those employees that invent are not parties to the funding agreement, their inventions are not subject inventions unless assigned, and they therefore have no obligations under Bayh-Dole whatsoever. They have no obligation under Bayh-Dole to disclose their inventions to the contractor because their inventions are not, cannot be, subject inventions until they assign them to the contractor. They may, however, have obligations under the Reagan patent policy to the extent that policy applies when Bayh-Dole does not.
If the (f)(2) requirement does not result in making employees parties to the funding agreement, when an employee invents, the invention is subject to federal specialty statutes or to the Reagan modification to the Nixon patent policy. One might then consider that an inventor, say one at a nonprofit with an ill-suited technology transfer program (for whatever reason–understaffing, underfunding, poor staffing, lack of expertise in the area of the invention, fixation on exclusive licensing, bad history with companies of interest, etc.), might prefer to deal directly with a federal agency under a specialty statute or under the Nixon patent policy. Bayh-Dole does not force an inventor to assign inventions to any contractor, does not force an inventor to use the patent system, and does not even force inventors to disclose inventions made under federal contract–unless the inventor is a party to the funding agreement and therefore the invention is necessarily a subject invention because the inventor as the default of federal law owns the invention.
The implementing regulations for Bayh-Dole anticipate that inventors may be contractors. See 37 CFR 401.9:
Agencies which allow an employee/inventor of the contractor to retain rights to a subject invention made under a funding agreement with a small business firm or nonprofit organization contractor, as authorized by 35 U.S.C. 202(d), will impose upon the inventor at least those conditions that would apply to a small business firm contractor under paragraphs (d)(1) and (3); (f)(4); (h); (i); and (j) of the clause at § 401.14.
This is in effect an inventor patent rights clause built from the standard patent rights clause applicable to companies, not nonprofits. The only way an inventor can retain rights to a subject invention is if the inventor is a contractor–otherwise, the invention is not a subject invention, and the inventor has not retained rights–those rights have already been assigned to a contractor. This inventor patent rights clause treats inventors as small business contractors, but with fewer requirements than small business contractors. As a small business contractor, inventors have the benefit of Bayh-Dole’s basic preemption of other federal ownership requirements–35 USC 202(a). A federal agency must allow the inventor-contractor to retain ownership of a subject invention if the inventor-contractor discloses the invention and elects to retain title in that invention.
In this third example, then, inventors become contractors, and the term contractor in Bayh-Dole must be read to mean inventor when the circumstances require that reading–such as when an initial or prime contractor complies with the written agreement requirement and does make its employees parties to the federal funding agreement. Even if some contractors object that they most definitely do not make their employees parties to the federal funding agreement, even if that might mean breach of the standard patent rights clause, it should be clear that contractors could follow this practice with regard to the written agreement requirement, and when they do, their inventors become contractors and have the same benefits as a subcontractor enjoys under Bayh-Dole’s standard patent rights clause.