We are working through the Federal Procurement Regulations (1975) advice with regard to the exercise of rights in inventions made in projects receiving federal support. We have looked at the first part of the opening statement and made the point that the policy, to work, requires that the federal government exercise its rights.
Here’s the full opening statement:
It is important that the Government and the contractor know and exercise their rights in inventions conceived or actually reduced to practice in the course of or under Government contracts . . .
. . . in order to ensure their expeditious availability to the public, to enable the Government, the contractor, and the public to avoid unnecessary payment of royalties, and to defend themselves against claims and suits for patent infringement
Three objectives are stated for contractors and the government knowing and exercising rights to inventions made under contract:
1) expeditious availability
2) avoid unnecessary royalties
3) defend against infringement claims.
Let’s work through these three policy objectives. Warning: it’s a mess. Carrot: we learn some neat stuff by reading carefully.
Expeditious availability makes clear that a purpose of the patent rights clause has to do with the time from invention to availability–that development to the point of practical application will be expeditious, will be faster than otherwise, faster than if the contractor held patent rights without any obligation to the public or the Government under the patent rights clause.
Expeditious availability makes clear that the purpose of being expeditious is that the invention is available to the public. “To the point of practical application” is defined in the FPR patent rights clauses as “the invention is being worked and that its benefits are reasonably accessible to the public.” Nothing here about “commercialization” or “commercial products” or “puffing up one’s equity profile by holding a patent monopoly” as purposes. We will get to these things shortly, however.
Avoiding unnecessary royalties carries some interest. In the first place, of course, the government avoids royalties that it should not have to pay if it has a royalty-free license. The government should have notice of exactly what properties a contractor has obtained and which the government has a free right to practice. Thus, apparently, one reason for disclosure of the invention. But the FPR goes on to assert that the contractor might also avoid unnecessary payment of royalties. It is difficult to imagine how such a thing might come about. Perhaps this is an indirect and poorly drafted reference to this bit in the patent rights clause (long form). The contractor:
Agrees to refund any amounts received as royalty charges on any Subject Invention in procurements for or on behalf of the Government and to provide for that refund in any instrument transferring rights to any party in the invention
This provision is routinely asserted to be required by Bayh-Dole, but Bayh-Dole does not include a refund clause. Universities often include a provision in their exclusive licenses that licensees will not include in their royalty payments any royalty charged to the federal government–but that’s not quite the same thing as requiring the licensee to give notice to the federal government and reduce the price quoted by the amount of the royalty that would be due the university. If you see the logic, then you see the pettiness of the scam–and if you see that there’s nothing even required by Bayh-Dole on this point, you see the odd ineptitude of the university compliance folks. And beyond all that, the royalty rate–typically 1% to 5% or so, is often of little consequence in any given federal procurement, especially if the federal government has failed to act on its own broad non-exclusive license to make, use, and sell the invention and authorize others to do so on its behalf. If the federal government has not acted on its rights, then it stands to receive a 5% discount on what is already monopoly-enabled pricing. Oh well.
The “any party in the invention” wording raises interesting questions. Is an exclusive licensee “a party in the invention”? A non-exclusive licensee? We would expect an assignee to be a “party in the invention.”
The FPR assumes that licensing transactions will involve a royalty on sales as the primary form of consideration. If a university grants an exclusive license to a company and takes in return an equity stake in the company, then how does that equity stake translate into a price paid by the federal government in some future procurement transaction? What repayment might be due the government from the university? It is pretty much impossible to work out. The same thing happens if the consideration for the license is a lump sum or the royalty is reduced by an upfront fee or the royalty rate can be bought down or future royalty obligations bought out, or that the obligation to pay further royalties ends when some total payment cap has been reached. In any of these structures for consideration, it is a complicated affair to come up with the repayment obligations for a contractor so that the federal government avoids an unnecessary royalty payment.
The FPR also indicates that the public might, if everyone behaves under the patent rights clause, also avoid unnecessary royalty payments. This, too, is a tough nut to crack. We might speculate that the public may avoid unnecessary royalty payments because contractors and federal agencies are limited, in the case of compulsory licensing, to licenses with terms that are “reasonable in the circumstances” and thus the public is protected from unreasonable terms. Sort of out there, but that’s about as good as it gets. Perhaps the FPR tossed in public here as a kind of flavoring, needed to create the impression that the public stands to benefit financially in some way if government agencies and contractors comply with the FPR. If so, then perhaps “royalty” paid by the public might mean “price” rather than “that tiny bit of the price that involves consideration paid to a nonprofit contractor by a for-profit licensee, for which neither contractor or licensee have an obligation to repay to the public.” Or some empty gesture of this sort.
Finally, the FPR insists that compliance with the patent clause will reduce exposure to patent infringement claims. How that might work is not clear. How does a contractor’s or the federal government’s knowledge of rights in subject inventions provide any defense to a claim of infringement? The contractor cannot bring a claim of infringement against the government anyway–that’s the substance of 28 CFR 1498. The contractor can bring a claim in the Court of Federal Claims for reasonable and entire compensation, but not for infringement. Same for any assignee.
As for the contractor, how does the contractor knowing its rights in a given invention defend it from a claim of patent infringement? If we are talking about an invention that the contractor, inventor, or the government must own under the FPR, then it would appear that the FPR’s concern is that an inventor might sue a contractor for infringement because the contractor did not know its rights under the patent rights clause. Perhaps, but it seems way out there. As for a claim of infringement based on any other patent–it does not appear relevant whether or not a contractor knows its rights with regard to a subject invention. Having rights in an invention does not defend against claims that the contractor is infringing someone else’s patent on a different invention. Sure, perhaps there is a basis for countersuing–using the patent on the subject invention as a kind of bomb–but that again seems far afield.
Here, one might suppose, the FPR provides unguarded, unthinking prose that sounds good to the inexperienced but makes no sense in practice. Flowerly stuff. Pixie dust. Rainbows.
The FPR now delivers a clear, practical restatement of the whole complicated hot mess of the FPR:
To attain these ends, contracts having Patent Rights clauses should be so administered that:
(1) Inventions are identified, disclosed, and reported as required by the contract clauses;
That is, enforce the disclosure requirements. There are a bunch in the FPR and much more broad than in Bayh-Dole–requirements that contractors have systems in place to monitor inventions and document them and expenditures made to make and develop them, the right of federal agencies to inspect laboratory records, and the like. None of this in Bayh-Dole. In the FPR, subject invention does not depend on ownership. In Bayh-Dole it does. Thus, where the FPR requires disclosure of each invention made under contract, Bayh-Dole requires disclosure only of those inventions a contractor owns, if also made under contract, and requires that disclosure only when the invention has been disclosed to patent personnel–that is, patent folk have enough information to determine that a patent is possible (no statutory bars) and sufficient material to file a patent application with an enabling specification. If the patent folk don’t have this material, then there’s no obligation for the contractor to report the invention. It didn’t have to be this way, and even wasn’t in the original Bayh-Dole statute. But Bayh-Dole was amended in 1984, three years after it came into effect, to make disclosure conditional in this way. Strange, but strange law is still law.
(2) The rights of the Government in such inventions are established;
A broad brush statement. We can suppose this means that the disclosure of each invention includes sufficient documentation to demonstrate that it is a subject invention–one made under contract, according the FPR–and that the government has either the right to request assignment of title or to receive a royalty-free license to make, use, and sell the invention and authorize others to do so on its behalf. Bayh-Dole’s standard patent rights clause, in a provision not authorized expressly by Bayh-Dole, requires contractors to require inventors to make a written agreement that includes executing “all papers necessary to establish the government’s rights in subject inventions.” Of course, if an inventor has standing to establish the government’s rights in a subject invention, then the inventor must own that invention and the inventor must also be a contractor, a party to the funding agreement. And if that’s the case, then the inventor has the benefit of Bayh-Dole’s basic grant of rights at 35 USC 202(a), in which small business firms may elect to retain title in subject inventions, conditioned on disclosure of those inventions. 37 CFR 401.9 provides that inventors are to be treated as small business firms when they own their subject inventions. Fun stuff that university administrators don’t want anyone to know and have long misrepresented. It’s a pity that NIST, which is responsible for Bayh-Dole regulations, doesn’t want anyone to know this, either, and does its own share of misrepresenting and bungling the law.
(3) When appropriate, patent applications are timely filed and prosecuted by contractors or by the Government;
There’s much packed into that “when appropriate,” given the FPR gives no guidance about when a patent application is appropriate and when not. And there’s much packed into the omission of inventors from who might timely file a patent application. The FPR patent rights clause clearly singles out inventors as owners of subject inventions–are inventors then included here in the category of “contractor”? That’s the guidance of FPR 1-9.109-6(a)(3): “In submitting the information required for a determination for the retention of greater rights as provided in 1-9.109-6(a)(1), and in applying the other provisions of this paragraph, the term contractor shall be understood to also mean the employee-inventor.” Does something similar happen with Bayh-Dole? It would appear so.
(4) The filing of patent applications is documented by formal instruments such as licenses or assignments; and
This is goofus. Filing of patent applications is documented by notification by the Patent Office. Perhaps the FPR intends “ownership” of inventions. But then licenses don’t signify here, other than exclusive licenses that convey all substantial rights and therefore also transfer ownership.
(5) Expeditious commercial utilization of such inventions is achieved.
And here we go. We return to “expeditious” but now rather than “expeditious availability to the public,” we find “expeditious commercial utilization.” And neither usage takes up “to the point of practical application,” which is the threshold below which the government may act to compel licensing. Even so, “commercial utilization” is not “commercialization” of an invention. A “commercial” firm may use an invention and not “commercialize” it. The benefits of the invention may be available to the public without the invention itself taking the form of a commercial product–which is the case with methods and devices that enable, say, better manufacturing processes.
Bayh-Dole, by contrast, does away with “expeditious” utilization just as it does away with “commercial” utilization. The goal of Bayh-Dole policy is neither faster nor commercial development but plain and simple “utilization.” One can assert that Bayh-Dole really meant something that is no longer there–but then why is it that the same people who put such stuff in before didn’t keep it there with Bayh-Dole? We should not assume their were careless–rather, we ought to assume that what we find in Bayh-Dole, so long as it is reasonable, is intended just as it is. While the Kennedy and Nixon patent policies emphasize the expeditious development by non-federal owners of federally supported inventions, Bayh-Dole does not.
Even Bayh-Dole’s march-in procedures are relaxed compared to the Kennedy/Nixon procedures. In Kennedy/Nixon, a non-federal invention owner has three years from the issuance of a patent to “take effective steps” to get an invention to “the point of practical application.” Otherwise, the owner must license non-exclusively (and royalty free, under Kennedy) or show cause why the owner ought to still own even though no effective steps have been taken. Bayh-Dole removes the time constraint and backs off the requirement so that a federal agency must determine if an invention owner is “not expected to take within a reasonable time” those “effective steps.” Thus, the condition for march in is displaced to an abstract “expectation” of whether a given invention holder will in the future take “effective steps.” Expectation regarding a future action is almost impossible to pin down to anything objective, unlike, say, three years. Bayh-Dole takes an existing, reasonably clear threshold for federal agency action and makes it almost unworkable. That, too, must be seen as a policy intention.