The consequences of Bayh-Dole non-disclosure of inventions, 3

Finally, we reach a non-empty consequence of an invention becoming a subject invention, even if not disclosed to the federal agency. This consequence has to do specifically with subject inventions made under the nonprofit patent rights clause. Bayh-Dole stipulates that each federal funding agreement will contain a standard patent rights clause. But there are three versions of this clause–one version for nonprofits, another version for small business contractors, and a third version for inventors treated as small business contractors. NIST has created a fourth version, taking up Reagan’s extension of Bayh-Dole practices to large company contractors–but botches this version because Reagan’s executive order cannot preempt federal law nor can it use Bayh-Dole to preempt federal law for contractors that are beyond the scope of Bayh-Dole.

Anyway, the general idea in Bayh-Dole is that contractors operate under the version of the standard patent rights clause that is appropriate to them. Thus, nonprofits have 37 CFR 401.14(a) thru (l), small business contractors have 37 CFR 401.14(a) thru (l) but not (k), and inventors as small business contractors have a subset of the small business contractor clause as set out at 37 CFR 401.9. The implementing regulations for Bayh-Dole stipulate that when a contractor adds parties to a funding agreement by subcontract, the subcontract’s patent rights clause takes the form appropriate to the status of the subcontractor. If the prime contractor is a for-profit and a subcontractor is a nonprofit, then the nonprofit subcontractor operates under the nonprofit version of the standard patent rights clause even though the for-profit operates under the for-profit version.

However, this is not the case when a nonprofit prime contractor adds parties to the funding agreement by assignment. Here Bayh-Dole is express that in this situation, the assignee must operate under the nonprofit’s patent rights clause. Once a subject invention is acquired by a nonprofit contractor, the nonprofit patent rights clause–and in particular paragraph (k)–applies to any assignee (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 same provision is then implemented in the standard patent rights clause, in paragraph (k):

If the contractor is a nonprofit organization, it agrees that:

(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;

The terminal constitute–the requirement regarding the “same provisions as the contractor” clearly applies to all assignments that are made, whether formally approved by the federal agency or pre-approved by the law. Even if the assignee is a for-profit, they must, with regard to the assigned subject invention, as a new party to the federal funding agreement, comply with the nonprofit provisions of paragraph (j).

Assignments of inventions may be express–one assigns all right, title, and interest in and to the invention to another party–or they may be implicit, such as when the owner of an invention exclusively licenses all substantial rights in the invention to another party. Bayh-Dole’s requirement regarding assignment does not have to do with some fussiness about how a nonprofit assigns a subject invention. The provision is not–“if you assign expressly, then you must have federal agency approval, but if you convey ownership of the subject invention by an instrument labeled exclusive license, then you are all good and there’s no need for federal approval or whatever.” No, it does not matter how ownership is conveyed.

Well now. What’s in (j) besides this requirement on assignments of nonprofit subject inventions? Let’s focus on (j)(2) and (j)(3):

(2) The contractor will share royalties collected on a subject invention with the inventor

(3) The balance of any royalties or income earned by the contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidental to the administration of subject inventions, will be utilized for the support of scientific research or education;

When a nonprofit exclusively licenses all substantial rights in a subject invention to a for-profit company, that company becomes a party to the federal funding agreement (35 USC 201(b)), and thus a contractor (35 USC 201(c)), and is subject to the nonprofit patent rights clause (including (j)(2) and (j)(3), per 35 USC 202(c)(7)(A)). The assignee–now “contractor”–must share royalties with the inventor. And this new contractor also must utilize the balance of any royalties or income earned with respect to the subject invention for the “support of scientific research or education”–deducting only those expenses “incidental to the administration of subject inventions.”

Big wow. If a for-profit company takes assignment of a nonprofit subject invention–even if that invention has not been disclosed to the federal government–that for-profit must share royalties with inventors and must use the rest (after very restricted deductions) for scientific research or education. The for-profit must plow essentially all of its income back into research or education–just as must a nonprofit.

This, then, is the only remedy for non-disclosure of a subject invention that carries any real teeth. If a nonprofit does not disclose a subject invention and then assigns that invention by means of an exclusive license to a for-profit company and that company goes out and makes a small fortune exploiting the invention–“income earned with respect to the subject invention”–then that small fortune must be used share royalties with the inventor, recover the costs to administrate subject inventions only, and to support scientific research or education.

If a federal agency discovers that a contractor has failed to disclose such a subject invention, then the remedy is an audit of all contractors–including contractors by assignment conveyed by exclusive license–for income earned with respect to the subject invention. It is that income–gross income–that is encumbered by the nonprofit patent rights clause, and it is that nonprofit patent rights clause that applies to the for-profit contractor.

So, in the case of Gleevac, for instance, in which Novartis discovers many years and $50B in profits down the road that the invention underlying its hit drug is a subject invention and corrects its patent accordingly, that’s $50B exposed to a requirement to support scientific research or education. That’s public money, in a way–reinvest all of it (but for inventor share and administration of subject inventions). No profits. No dividends to shareholders. No new office space. That’s more money right there than the NIH spends in a year on nonprofit-hosted scientific research.

Given that the “take title” government remedy for an undisclosed subject invention is hopelessly defective, and that the government would not know it had a right to a license for such inventions, and that the government would not even know it had the authority (if not mandate) to march-in for nonuse or unreasonable use (e.g., unreasonable terms, such as price), the only remedy that has anything in the way of actual justice about it is the nonprofit patent rights clause provisions that restrict the use of income earned with respect to a subject invention. If a non-disclosed subject invention has been exploited for income–and regardless of whether a nonprofit contractor or any assignee has even obtained a patent–and it is later discovered that this invention has not been disclosed, the Bayh-Dole compliance element that most matters is an accounting for that income.

An invention becomes a subject invention when it is (i) acquired by a contractor and (ii) “may be patentable” (or a plant variety) and (iii) was made in the performance of work under a funding agreement. There is nothing in the definition of subject invention that requires a patent to issue, or that a subject invention must be disclosed, or that the contractor-owner must elect to retain title. When a nonprofit owns a subject invention, it must impose the nonprofit patent rights clause on any assignee, must share royalties (any consideration for a license) with inventors, must make efforts to attract small business licensees, and must use income earned with respect to the invention to support scientific research or education, deducting only expenses incidental to the administration of subject inventions. These same obligations then follow any assignee of any nonprofit subject invention. If a nonprofit exclusively licenses all substantial rights in a subject invention, even if it reserves educational use and federal government rights, that exclusive license operates as an assignment. The assignee becomes a party to the federal funding agreement, a nonprofit contractor. As a nonprofit contractor, the assignee must account for all income earned with respect to the subject invention under the nonprofit patent rights clause.

That’s the upshot across the bow of any company seeking an exclusive license to make, use, and sell any nonprofit subject invention. Take an exclusive license that assigns the subject invention and operate as a nonprofit, dedicating income after administrative expenses for managing subject inventions to scientific research or education. Reinvest everything for a public purpose.

In essence, a nonprofit assignment of a subject invention divides up between assignor and assignee the opportunities to dedicate money to public purposes–either supporting scientific research or supporting education. That’s expressly baked into Bayh-Dole. That may be the most important part of Bayh-Dole’s recipe.

Wherever there are university deals involving exclusivity and subject inventions–disclosed or not–the companies involved are exposed to an accounting for their use of any income earned with respect to those inventions. We are talking hundreds of billions of dollars that have been withheld, apparently, from public purposes. There’s no point to a federal agency taking title to undisclosed subject inventions–it’s an impossible, stupid logic and would cause meaningless economic mayhem. There’s not much to be gained by fussing over government licenses or march-in. Before there’s product, there’s nothing gained. After there’s product, then the cows are already out of the barn and again, march-in is too little too late–even if any federal agency had the will to march-in.

But the audit of income earned from nonprofit subject inventions. That has teeth. That is where the public expects a benefit in the form of a dedication of that income to the specified public purposes.

If companies do not want to be exposed to such an audit of their income, then they should insist that any nonprofit license be restricted to a scope of rights that is less than all substantial rights in any subject invention. Thus, companies should insist that they not have any right to enforce any patent or settle any patent infringement dispute. Such actions can only be taken by the nonprofit, acting within the scope of its public mission and not as a proxy for a company’s profit-seeking mission. Thus, companies should insist that any exclusive license not involve all substantial rights–maybe the exclusive right to sell, but no exclusivity on making and using.

In this way, companies would insist that nonprofits conform with Bayh-Dole’s statement of policy and objective–to promote free competition and enterprise. If no exclusive licensee can tie up all substantial rights, then those remaining rights necessarily must be worked by the nonprofit itself or made available to others to be worked.

This, at its dark flabby administrative heart, is what Bayh-Dole is about. Nonprofits are the primary target of Bayh-Dole. The small business part was just a toss-in in anticipation of the SBIR legislation to come. For-profits already had a broad right under executive branch patent policy to retain title to inventions made with federal support, restricted only where Congress expressly limited that right. For nonprofits, the Bayh-Dole proposition is:

if you choose to own an invention made in work with federal support, then you will dedicate any income earned from that invention to the support of scientific research or education–and that goes for any of your assignees as well.

If a nonprofit’s assignees don’t like this idea, well then they should be bitching about Bayh-Dole rather than singing its praises. They should be putting out statements about how Bayh-Dole prevents them from participating in the development and profitable exploitation of inventions made in work presented to the government as being in the public interest–because they are not willing to serve that public interest. They would argue that their profit-making serves the public interest, and it is unreasonable for a federal law to require them to dedicate income to other public purposes, let alone provide benefits of using an invention on reasonable terms–such as terms that might be expected if those companies did not have patent monopolies enabled by complicit nonprofits.

Bayh-Dole is a strange law in that it “works” only when no one complies with it, federal agencies don’t enforce it, and federal agencies don’t act on the rights reserved for them and don’t protect the public from nonuse (of each instance of an invention) and unreasonable use (such as unreasonable pricing). If the federal government had the courage to enforce any one thing in Bayh-Dole, it would be the nonprofit assignment and accounting requirements at 35 USC 202(c)(7).

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