Invention Option Theory and Bayh-Dole Crock Work

At one point, many years ago, I thought Bayh-Dole was totally clever. I was very wrong, but here’s how I thought Bayh-Dole worked.

The federal government had a general claim under federal law to own any invention made under federal contract. It did not matter who otherwise owned the invention–inventor, contractor, or any other assignee–if the invention was made under federal contract, it was a contract deliverable due the federal government.

Deep breath. Go on. Bayh-Dole then required the federal government to shift this obligation to deliver inventions to pass by the contractor. The contractor could choose to became a conditional substituted party–the contractor could intercept any invention due the government, and claim ownership of it in the name of the government, subject to various conditions under which the government would not interfere in the contractor’s ownership. The contractor, if it intercepted such an invention, was in effect nominated by Bayh-Dole to act in the place of–on behalf of–with the authority of–the federal agency for the intercepted invention.

Another deep breath. Continue. Thus the odd use of “elect” in Bayh-Dole, as in “elect to retain title” and “elect rights”–the contractor elected to exercise an option to obtain and exploit the government’s deliverable, with all the rights that attended the government’s authority to demand assignment. Any inventor or any assignee of the inventor would then be required to assign to the contractor with the same force of law that the inventor or assignee would otherwise have been required to assign to the federal government. Thus, inventors had to assign to a contractor when the contractor “elected to retain title” as a matter of federal law because the contractor had invoked the federal right to the invention deliverable in place of the federal government.

Run through it again. Government requires invention deliverables. Bayh-Dole requires government to grant the contractor an option to receive the government’s deliverable. When a contractor elects to retain title, it is exercising its option to receive the government’s deliverable. The government upon notice from the contractor transfers to the contractor the government’s right to receive title.

A concrete image, please. Imagine it this way. You agree to gather a pail of blueberries and deliver them to me. A big bear, however, also wants blueberries. I do a deal with then bear so that if it looks at your pail of blueberries and wants them, I agree to assign my end of your obligation to deliver those blueberries to me to the bear, so you must deliver the blueberries to the bear to fulfill your agreement with me, as if you were delivering those blueberries to me. The bear holds an option to become a substituted party, which it may exercise at will upon notice to me. My deal with the bear then takes the form that while I like to bake with blueberries, the bear is in general going to be a better blueberry baker, and unless it flubs up and doesn’t bake with the blueberries, I am better off letting it do the baking. Otherwise, I can storm in and make the bear give the blueberries to someone else who I think will be a better blueberry baker than either me or the bear–or perhaps make the bear give the blueberries to everyone.

The foundation of this sort of arrangement in patent licensing is found in the assignment provisions. A licensor may regulate how a licensee disposes of the license agreement itself. The licensee becomes the owner, as it were, of its side of the license agreement. In addition to having various rights under the agreement–freedom from suit from the licensor for infringement, right to sublicense (perhaps), right to enforce the patent (perhaps, if the license also transfers ownership)–the licensee also could assign its side of the license agreement.

For instance, the licensee could be acquired by another company, which then would receive assignment of the licensee’s side of the agreement. Or the licensee could sell off the part of the company that holds the license, and the license with it. Or the licensee could just do a deal to sell its side of the license. “Let’s see, we paid patent costs plus $20K plus a future 2% royalty on sales with a $50K milestone payment due in a year credited against earned royalties and we are looking at spending $5M in development with a one chance in ten of success–and here’s a company willing to pay us $5M to take the license off our hands. Done deal!” In such a transaction, the licensor (if there are no restrictions in the license) gets nothing from the transaction, and the licensee is up by nearly $5m for acting as a middleman. Nice.

So assignment of the agreement is something that folks pay careful attention to in patent licenses. Otherwise, one may license to someone who is more interested in flipping the agreement for a profit than it is in developing the invention. The licensee makes money, but the licensor does not–and does not even then have its choice of licensee.

If you follow this, then you can see how federal policy could set something similar up for invention deliverables. That’s what I thought was so clever. Bayh-Dole, so my misguided thought went, authorized the federal government to get into the business of conditionally selling off part of its end of the research agreement–the part of the agreement under which ownership of inventions has to be delivered to the federal government. More particularly, Bayh-Dole required federal agencies to do this, and to start with a uniform offer.

Organizations could–I was so wrong–obtain the government’s share of the deal by which inventions are to be delivered to the government in exchange for doing what the government would otherwise do, only do it better and at less cost to the government. The federal government’s benefit in the deal–the consideration, the benefit to the public–would be (in theory or at least in serious political bluffery) better invention outcomes or less cost to the federal government for those outcomes, or both. Plausible worst case: instead of the federal government paying for 50,000 inventions to sit unused, university contractors pay for these inventions to sit unused–a billion dollar savings to the federal government, all things being equal.

I wasn’t super crazy for thinking this way. It was, after all, in effect how the NIH’s Institutional Patent Agreement program worked from 1968 to 1978. The NIH would enter into a research agreement that wasn’t a research agreement at all but rather a meta-research agreement that concerned only the disposition of rights to inventions otherwise due the federal government. It used this meta-research agreement to end-run the Kennedy patent policy (and later, the Nixon patent policy and its codification) and Public Health Service (and HEW) policy on inventions made in research directed at public health. As a meta-research agreement, since it had no research component, the IPA master agreement did not involve the preparation of any research proposal, did not involve any faculty or other researcher. No one who might conduct research got to decide whether to submit the IPA proposal to the federal government or review the deal. No researchers were parties to the IPA master agreement–only administrators. Administrators could then use the IPA master agreement to circumvent their own university patent policies, which might leave rights to inventions with their inventors. The federal government and university administrators could mutually agree, using the IPA as a federal contract, to circumvent both federal regulations and university policies. Bayh-Dole was inspired, if you admire that sort of thing.

Here’s the “election” in the IPA (Article III):

The Grantee shall have the right to elect to file patent
application in the United States and in foreign countries on any subject invention and to administer such invention pursuant to the provisions of this Agreement.

This is the basic right–and it is a master right applicable to all future funding agreements. The grantee–university or other nonprofit–can “elect” to file a patent application and then “administer” the invention. \

Grantee shall notify Grantor at the time each subject invention is reported to Grantor as required by paragraph V hereof, if it intends to file patent application(s) on and to administer the invention.

The grantee does this by notice to the NIH, informing the NIH that the grantee intends to file a patent application.

If Grantee does not elect to file a U.S. patent application on and to administer a subject invention, it shall notify Grantor in sufficient time to permit Grantor to file a U.S. patent application thereon.

And if the grantee doesn’t “elect” to file a patent application and administer the invention, then it must timely so notify the NIH.

In such event, all rights in and to such invention, except rights in any foreign patent application filed by Grantee, shall be subject to disposition by the Grantor in accordance with its Regulations then in effect.

If the grantee does not elect to file a patent application, then the NIH’s regulations come back into play. The NIH would have the right to file a patent application on any such invention, but the IPA agreement transfers that right to the grantee–gives the grantee an option that it may exercise on that right, upon notice, subject to conditions.

In the IPA, unlike Bayh-Dole, a subject invention is not one owned by the contractor:

The term “subject invention” as used in this Agreement means any process, machine, manufacture, composition of matter or design, or any new or useful improvement thereof,
and any variety of plant which is or may be patentable under the Patent Laws of the United States made in the course of or under research supported by grants and awards from the Department of Health, Education, and Welfare.

There is nothing in the IPA definition of subject invention that has to do with ownership. A subject invention is just a patentable invention made under federal contract. See–just like the option idea I had.

Now the IPA also includes a patent agreement requirement–grantees must require “all persons”–not just employees–to report and assign subject inventions to the grantee:

The Grantee shall obtain patent agreements from all
persons who perform any part of the work under a grant or award from the Department of Health, Education, and Welfare, exclusive of clerical and manual labor personnel, requiring that such persons promptly report and assign all subject inventions
to Grantee or its approved patent management organization.

These are clearly promises to assign, not present assignments. Then, if the grantee elects to file a patent application, it must enforce the promise:

The Grantee shall require assignment to it of all right, title and interest in and to each’ subject invention on which it elects to file any patent application for administration by it in accordance with and subject to the terms and conditions herein set forth.

If the grantee doesn’t intend to file a patent application, then it has no obligation to require assignment of inventions. If it had the intent to file at one time, required assignment, but then “changed its mind,” then the grantee, rather than the inventor(s), has obligations to convey rights in the invention to the NIH. Otherwise, the obligation remains with the inventors, subject to federal regulation (in 1968, some variation of the Kennedy patent policy based on Public Health Service regulations; by 1971, that was the Nixon patent policy revision, and by 1975, it was the patent rights clause in the codification of the Nixon patent policy in the Federal Procurement Regulations).

Norman Latker asserted that Bayh-Dole (which he drafted and sought to conceal) was based on the IPA program (which he also drafted, apparently with Howard Bremer at WARF). Latker’s assertion is partially true, but Bayh-Dole clearly is derived as well from the codification of the Nixon patent policy in the Federal Procurement Regulations (which Latker was also involved in producing).

If a university chooses to file a patent application, then it notifies the NIH and calls in the inventors’ promise to assign. If the university does not choose to file a patent application, then inventors are obligated to whatever federal regulations require. In the case of the Kennedy and Nixon patent policies, for research addressing matters of public health, the federal government required assignment of inventions unless it decided, in extraordinary circumstances, otherwise.

In effect, the IPA program master agreement granted to nonprofits an option to the NIH’s right (even obligation) to take ownership of inventions as deliverables and to administer the inventions. The condition that made the option effective was the nonprofit’s notice of intent to file a patent application. The nonprofit then had the obligation to call in the inventors’ promise to assign, which otherwise would have been a promise to “effectuate” the requirements of federal regulations–by assigning the invention to the federal government.

This would all have been very clever. Bayh-Dole would not have been thought to vest invention title in contractors–it would have given contractors the same formal right to require assignment of title that federal agencies had by regulation or statute in those same inventions. Bayh-Dole would have been a conveyance of a federal contract right to non-federal parties. Those non-federal parties would then had the authority of federal regulation to compel the assignment of inventions in which they had “elected” to “retain title”–even if they did not have statutory title, they would have had equitable title, the same right that the federal agency would have had. Thus, with some weasel sounds, they could have argued that “of the contractor” meant not strictly ownership but rather also included any unambiguous, equitable right to ownership–as provided by the IPA master agreement as the right to file patent applications backed by the IPA requirement, as a matter of federal contract, that the nonprofit have patent agreements in place under which inventors promised to assign inventions to the nonprofit upon notice that the nonprofit intended to file a patent application on the invention.

In this option approach, which the IPA used and Bayh-Dole could have used, the contractor has no right to ownership of everything and then pick over the mess for what it wants to file patent applications on. Rather, the contractor has to decide to file a patent application, and only then does it obtain the right to acquire ownership of the invention from the inventors without a prior and superior claim to the invention made by the federal government.

Instead, Bayh-Dole defines a subject invention to be one already acquired by a contractor and which also was made under federal contract. For Bayh-Dole to apply, then, the contractor has to acquire ownership, disclose the invention, and notify the federal agency of its “election” to retain title–ownership. Or–and this is the obscure part–actually not in Bayh-Dole but included in the standard patent rights clause–a contractor has to make its inventors parties to the funding agreement, thereby making those inventors also contractors, each of which is treated as a small business contractor with his or her own patent rights clause (at 37 CFR 401.9). Each invention made under contract then would be a subject invention–except that the *contractor* in the text of the law with the right under federal patent law to retain title would not be the *organization receiving the money* but rather would be the inventor.

Since no one these days can imagine Senators Bayh and Dole intending for inventors to have any rights (Senator Bayh swore in an amicus brief to the Supreme Court that he intended inventors to be last in line for rights, once their employers and federal officials decided the rights weren’t worth anything), no one bothers to consider how inventors might be parties to federal funding agreements and have primary rights in their inventions, just as federal patent law assumes.

If, however, an invention is not a subject invention–not owned by a contractor–then Bayh-Dole does not apply. Other federal statutes that Bayh-Dole preempts apply, including the statute (15 USC 2218(d)) requiring the Nixon patent policy to apply–just that Reagan amended the Nixon patent policy to say that Reagan’s 1983 Memorandum applies, which required federal agencies to follow Bayh-Dole rather than the Nixon patent policy codification in the Federal Procurement Regulation, which was replaced in 1987 by the Federal Acquisition Regulation, which implements only Bayh-Dole patent rights clauses on the assumption that there never will be any invention made under contract not owned by a contractor. Thus, if Bayh-Dole doesn’t apply, then Bayh-Dole still applies, except that Bayh-Dole still doesn’t apply, and thus it’s all a logical crock. No wonder so many university administrators and their legal minions insist that universities must take ownership of all inventions they can–to try to make the crock work.

It may well be that Bayh-Dole was “not intended to be a logical crock” any more than it was “not intended to prevent patent owners from screwing over the American public with outrageous monopoly prices that discriminate against Americans relative to the rest of the world.” But Bayh-Dole is a logical crock–in addition to not operating, not being complied with by federal agencies or contractors, not being enforced by anyone, and with federal agencies not acting on the rights expressly reserved for them and with contractors acting on rights that they assert they have through Bayh-Dole which they do not have.

Imagine a simple Bayh-Dole:

To the extent that a federal agency has a right or obligation to receive title to an invention as a deliverable under a funding agreement under any federal law,

any party to that funding agreement, having obtained title to such an invention and upon disclosure of the invention to the federal government and notification of its intent to file a patent application,

may retain title to that invention,

providing that it grant a nonexclusive, nontransferable, irrevocable, paid-up license to make, use, and sell and have made, have used, and have sold for or on behalf of the United States throughout the world, and

subject to a requirement that it use the patent system to promote (i) the use of the invention, (ii) maximum involvement of small businesses in subsequent development of the invention, (iii) collaboration between nonprofits and for-profits with regard to the invention, (iv) free competition and enterprise involving the invention, and (v) the use of American industry and labor in the manufacture of the invention or products based on the use of the invention.

It’s still a crappy policy for developing new technology by sponsored contract, with work spread around to multiple parties. It’s still crappy policy for dealing with the free play of free intellects in the exploration of the boundaries of science. And it’s still crappy policy for dealing with the role of the patent system where the federal government ends up controlling a substantial portion of new work in any area in which it interjects its funding. But at least this version of Bayh-Dole is simple, clear crappy policy.


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