Another question on RE: what to do if a subcontractor has a subject invention?–2

We are working through what to do if a subcontractor under a federal funding agreement for research or development has a subject invention–that is, an invention within the definition set out by Bayh-Dole that the subcontractor has acquired and was made under the funding agreement.

We turn now to the basic grant of Bayh-Dole, 35 USC 202(a), to see about subcontractors:

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

There a bunch of provisios that follow, but this is the basic gesture. Instead of “contractor” we have “nonprofit organization or small business firm.” That’s a weirdness. One would like to think that only nonprofits and small businesses that are contractors–parties to the funding agreement–are included in this provision. But that’s not express. But let’s follow it out for those nonprofits and small businesses that are contractors. In that case, if one is a contractor, then one has the right to keep ownership of any invention (arising in work supported by the federal government) that one has acquired ownership of. Bayh-Dole has nothing to say about how one goes about acquiring ownership or from whom. The Supreme Court in Stanford v Roche made it clear that to acquire ownership of an invention from the inventor requires the established ways of doing so–by written assignment, say. Bayh-Dole offers no magickal vesting or mandate or first option or second option twice removed to give a contractor any advantage in acquiring inventions from inventors.

Furthermore, while the general context for Bayh-Dole concerns whether a contractor may resist not only federal agency demands to convey ownership of an invention but also the requirements of federal statutes, the general statement of Bayh-Dole is not constrained to this context. It appears that Bayh-Dole provides, within federal patent law, a basis under which any nonprofit or small business, should it acquire a subject invention, has a right as a matter of federal law to resist any claim–not just a federal agency’s claim to ownership. The Supreme Court in Stanford v Roche, however, ruled that Bayh-Dole had to do only with the disposition of title as between the federal government and a contractor, and that’s why the Court did not find it “troubling” that there were so few protections for third parties (a citation removed):

The Act, for example, does not expressly permit an interested third party or an inventor to challenge a claim that a particular  invention was supported by federal funding. In a world in which there is frequent collaboration between private entities, inventors, and federal contractors, that absence would be deeply troubling. But the lack of procedures protecting inventor and third-party rights makes perfect sense if the Act applies only when a federal contractor has already acquired title to an inventor’s interest. In that case, there is no need to protect inventor or third-party rights, because the only rights at issue are those of the contractor and the Government.

We are strangers in a strange land, here.

The general reading of Bayh-Dole’s basic gesture is that once a contractor has got ownership of an invention, making it a subject invention, by electing to retain that invention, the contractor may as a matter of federal law resist claims to that invention made by any other party to the funding agreement, whether the federal government or any party that the contractor has added to the funding agreement, as by subcontract.

Although Bayh-Dole has only this much to say about subcontracts, that should give you a good sense about what must happen in the implementing regulations and in particular the standard patent rights clause authorized by Bayh-Dole. In the standard patent rights clause, at 37 CFR 401.14(g), we find a whole section that addresses subcontracts.

At (g)(1), the contractor must flow down the patent rights clause in subcontracts. This is consistent with the definition of funding agreement–subcontractors become parties to the funding agreement, the patent rights clause is integral to the funding agreement, thus subcontractors are parties to the patent rights clause, and it must be flowed down to the subcontractor. The requirement at (g)(1) then does not introduce something new–it makes express the consequence of the definition at 35 USC 201(b), which might not be all that obvious. If subcontractors are parties to the patent rights clause, then they have, independently, all the benefits and responsibilities that accrue to any contractor.

The second sentence of (g)(1) then pulls a provision from the Federal Procurement Regulation (some things got left out of Bayh-Dole from the FPR and the IPA that were added back in the standard patent rights clause, such as paragraphs (e), (f), and (g)–clever? oversight? there’s a whole book in there–one could argue really well that Bayh-Dole is merely the FPR with one tweak from the IPA about contractor ownership poorly executed and a preemption clause especially directed at permitting nonprofits and federal agencies to deal patent monopolies in matters of public health to pharmaceutical companies). Second sentence:

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 “all rights” retained are the rights of 35 USC 202(a)–the right to elect to keep ownership of inventions the subcontractor has acquired. The contractor is expressly forbidden to use awarding a subcontract as leverage to obtain any rights in a subcontractor’s subject inventions–ones the subcontractor owns. So far so good. But the prohibition on taking an interest is limited. A contractor could do a deal with subcontractors for the subcontractor’s subject inventions that does not depend on the awarding of the subcontract. For instance, having first awarded a subcontract, a contractor could offer to manage the subcontractor’s subject inventions, taking on the costs of patenting and sharing back some portion of any income earned with respect to those inventions. Or, the contractor and subcontractor could have an agreement entirely independent of any federal funding under which the subcontractor agrees to assign all inventions–not just subject inventions–to the contractor. One might encounter that with a company working with subsidiaries.

Thus, if a contractor wants to have an interest in inventions made by a subcontractor, the contractor had better do something prior to becoming a party to a funding agreement–and not in anticipation of that funding agreement–or after the subcontract has been awarded. In either case, the common requirements are that the subcontractor’s engagement (i) must be independent of the funding agreement and (ii) must therefore carry its own consideration.

Section (g)(2) stipulates that if the subcontractor is not a nonprofit or small business, then the contractor must use the patent rights clause appropriate to the status of the subcontractor. That is, Bayh-Dole doesn’t apply to such subcontractors, so their inventions are not subject inventions, and thus a federal agency can specify the rights clauses that must be used. All this has been screwed up by Reagan’s modification to the Nixon patent policy–Reagan’s modification requires Bayh-Dole be used by federal agencies for all companies–i.e., for non-small companies. It’s just that an executive order cannot preempt federal law, and so large companies are still stuck with any statutory requirements to assign inventions to the federal government but in the absence of such requirements then operate under Bayh-Dole–or, Bayh-Dole without the preemption clause of 35 USC 210.

Section (g)(3) requires that if the funding agreement takes the form of a contract, then subcontracts have the effect of forming an independent contract between the federal government and the subcontractor. The contractor, in effect, in awarding a subcontract, makes a contract on behalf of the federal agency. While the subcontractor is, per Bayh-Dole, a party to the funding agreement, the federal government may deal with the subcontractor without involving the contractor (the contractor has no right (“privity”) to approve or oppose any arrangement the federal government subsequently may make with the subcontractor.

There is a simple answer, then, to the question. A contractor has nothing to do about a subcontractor’s subject inventions unless it wants to offer a deal to obtain rights after the subcontract has been awarded. Just as a contractor electing to retain ownership of a subject invention then has a right to assign or license the invention to others, so too a subcontractor may choose to do business with a contractor–or, stated generally, nothing in Bayh-Dole prevents contractors from dealing subject inventions among themselves. The restriction made in the standard patent rights clause is that any such dealing must not be predicated on granting subcontracts and therefore must also carry its own consideration.

There are two situations in which all this matters for practice.

The first involves teaming agreements in anticipation of bidding for a federal research contract. Among industry players, such teaming agreements may involve various companies that might otherwise be competitors as well as nonprofits and universities. The (g)(1) stipulation means that a prime contractor organizing a teaming agreement cannot use its prime position to demand ownership or even a license interest in whatever any subcontractor comes up with. This screws up all sorts of standard practice–such as a practice of requiring that everyone involved shares rights with the others. This can still be done, but not as a condition of any subcontract. That makes it difficult to navigate the situation. Even stipulating that subcontractors will make their subject inventions openly available asserts an interest on behalf of the prime contractor, who then would gain royalty-free non-exclusive access. And subcontractors, to comply with such a requirement, would still have to file patent applications in order to resist a federal agency demand for ownership–which if it were to happen would screw up things for everyone, since the federal government could then license the invention exclusively to some company outside the team that has won the contract in the first place. Perhaps that would be bad faith. But Bayh-Dole makes it a statutory possibility.

There are ways to navigate this situation. The first follows the approach used by the NSF in its Cooperative Research Center program, which involves a prime contractor–usually a university–and industry “members” who pay a fee for research to match the federal contribution. In the NSF approach, the NSF will not score highly any proposal from a prime that does not include granting non-exclusive, royalty-free licenses to the industry members. Essentially, the rights flow down runs opposite of (g)(1)–the NSF cannot force the prime to grant licenses (except by changing the standard patent rights clause–which the NSF should do but won’t, or through march-in, which no one has ever used, and likely never will)–but the NSF can refuse to fund proposals in which a prime does not commit to granting such licenses. Thus, a prime could use this same strategy in choosing teaming partners. An organization cannot join the team without first committing to make inventions relevant to the overall purpose of the team available to all the other team members. The condition then of the prime’s interest in subcontractor inventions is not the subcontract but rather the mutual sharing of subject inventions–including the prime sharing inventions with the subcontractors. The argument then is that the prime has not used the subcontract to gain an interest in a subcontractor’s subject inventions, because the subcontractor has independently agreed that the consideration for granting licenses in subject inventions to the prime is the prime’s granting licenses in subject inventions to the subcontractor.

It’s all rather stupid, as the standard patent rights clause has it. The requirement works fine when the prime is a nonprofit and the subcontractors are nonprofits and the work is basic scientific research for which there may not ever be “markets” and none of the organizations involved have the capability to develop anything. But even there, the effect is to fragment rights in collaborative projects into the tiny bits that each participating organization is able to acquire, and it is almost impossible for those organizations to put the rights together again in a coherent package to offer to industry as either a gross patent monopoly position or as an ad hoc standard or even as an open platform. This is one of the more pernicious effects of Bayh-Dole. It has had the same effect on federal agency contracting in the case of development projects. Here is the Nixon version of one of the four areas of exclusion for contractors obtaining rights in the inventions they make under federal contract:

a principal purpose of the contract is to create, develop or improve products, processes, or methods which are intended for commercial use (or which are otherwise intended to be made available for use) by the general public at home or abroad, or which will be required for such use by governmental regulations

Thus, when a federal agency intended to use contractors (say, multiple contractors) to develop a product (say, a new fertilizer or a tomato-picking machine), it would have as a matter of executive branch policy the right to require all contractors to assign their inventions to the federal government with the expectation that when the development work was complete, they would all have non-exclusive, royalty-free, non-discriminatory access to all the inventions that had been made in the work. That was a fair deal, and it made sense for the federal agency to serve as escrow for all the inventions, given that if the federal agency didn’t do it, then it might not get done at all and anyone trying to use the product would have to negotiate rights with every contractor who claimed any bit of invention that was included in the product or needed to make the product.

A federal agency can still do this sort of thing, but it takes a determination of exceptional circumstances along with an upfront federal commitment to license back rights non-exclusively and royalty-free. Even then, university administrators squawk and complain and refuse to participate. The subcontracting requirement inserted into the standard patent rights clause does this same thing for prime contractors even when their goal is to make inventions openly available within a team that includes subcontractors. To change things, a federal agency would again have to determine exceptional circumstances and go through a bureaucratic procedure to justify the change. So these sorts of things invite workarounds, such as the NSF uses, rather than something open, rational, and useful.

There’s a second area in which the subcontracting provision operates and makes a mess of things. This area has to do with the status of employees who invent. US patent law has always provided that inventors own their inventions and mere employment is not sufficient to establish an employer’s right to an employee’s invention. If the employee uses the employer’s resources, then the employer may have a “shop right” in the invention–a royalty-free right to practice the invention in the employer’s business. Courts have held that if an inventor is expressly hired to invent or conduct experiments, then the employer may be deemed to have an equitable right to own the invention. Otherwise, generally, the employer and potential inventor have to enter into a patent agreement that carries its own consideration–continued employment, say, or the employer will share royalties earned with respect to the invention with the inventor.

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