Univeristy and Exclusive Licensee Exposure to Bayh-Dole Non-Compliance

I’ll try to make this simple.

When a university creates a written policy that commits it to attempting to commercialize inventions made with federal support, that policy alters the scope of any proposal the university submits for federal funding. Commercialization becomes a purpose of the funding.

When a university furthermore demands that faculty investigators assign all inventions to the university as a condition of employment or as a condition of participation in sponsored research, the university confirms that the scope of any federally funded project includes commercialization. What faculty investigators may intend by their work is irrelevant. The university intends to attempt commercialization with any invention within the scope of its claims.

When a university in addition claims that its technology transfer program provides it a competitive advantage in obtaining federal grants, the university makes it ever more clear that it intends commercialization to be an intended part of any federal project.

With me so far? A university by its formal administrative policies extends the scope of the projects it hosts beyond the proposal, beyond the specifications of work in the request for proposals, to include development of inventions for commercial purposes. Any sponsor of research, including the federal government, implicitly relies on the university to comply with its own policies. The public, too, may rely on the university to comply with its policies. If a university declares commercialization of inventions as a standing purpose, and makes faculty assign research inventions to the university, and advertises its technology transfer program to attract research sponsors, there you have it. Commercialization is a necessary part of every university research project, whether funded by a sponsor or not.

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When a university grants an exclusive license to a subject invention, it is for development of that invention as a commercial product. Development is a necessary adjunct to a commitment to commercialization.

If the exclusive license conveys all substantial rights in the invention–the rights to make, use, and sell–then the exclusive license operates as an assignment. It does not matter that title to any patent is not formally transferred. Courts have held that an exclusive license to all substantial rights in an invention–even with reservation of rights for nonprofit and government use–assigns the invention. The tell: the assignee gains the right to enforce the patent.

Many university exclusive licenses routinely grant all substantial rights in an invention.

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Under Bayh-Dole’s standard patent rights clause, any assignment adds a new party to the funding agreement–Bayh-Dole defines contractor as any party to a funding agreement. As a party to the funding agreement, the assignee must comply with the standard patent rights clause. Since the university is a nonprofit, Bayh-Dole stipulates that the assignee must accept the nonprofit version of the patent rights clause. See 35 USC 201(b), 35 USC 202(c)(7)(A).

Bayh-Dole’s scope of interest is broad: “use the patent system to promote the utilization of inventions arising from federally supported research or development” (35 USC 200).

And funding agreement is broad: “any … agreement … for the performance of … work funded in whole or in part by the Federal Government.” Plus “any assignment, substitution of parties, or subcontract of any type” (35 USC 201(b)).

A project (“work”) is supported, then, in part by federal funding when a part of that project is supported by federal funding. It does not matter who then among the parties to a federal funding agreement makes an invention or follow-on inventions or develops commercial products. It is enough that federal funding has supported some part of the project (“in whole or in part”) and that one or more inventions have arisen in that project (“arising from federally supported research or development”). As Bayh-Dole’s implementing regulations make clear, separate accounting for federal research work and invention work or development is not determinative–what matters is whether the inventions are within scope of the intended project (see 37 CFR 401.1).

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For universities with policies committed to taking faculty inventions and commercializing those inventions, all federal projects to which those universities are parties necessarily include development as part of the intended scope of the project unless that intent is expressly disclaimed by the university and the disclaimer is expressly accepted by the federal government at the time of the offer of an award.

Words matter. Words in formal policy matter even more. Words that create federal contracts or which may be relied upon in forming a federal contract matter still even more. Just because university policy makers get all hot to get patents to profit from for whatever moralizing purpose and change policy to suit their needs does not mean they get an exemption for the consequences of those words under federal law and contracting. “We don’t intend for these words to mean what they appear to mean, except when we decide they do.” Doesn’t work that way, buddy.

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Inventions made by exclusive licensees of universities in support of development efforts are every bit as much subject inventions as the inventions exclusively licensed.

“research or development”

“in whole or in part”

“includes any assignment, substitution of parties, or subcontract of any type”

“separate accounting . . .  is not a determining factor”

Not just inventions that can be traced directly to the use of federal funds, but any invention made anywhere in a project in which some portion of the project received federal funding. See Mine Safety Appliances, say.

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What do we get to?

All subject inventions must be timely disclosed to the federal government or the federal government may take title (35 USC 202(c)(1)).

Subject inventions assigned by a nonprofit to a for-profit must comply with the nonprofit’s patent rights clause (35 USC 202(c)(7)(A)).

Inventions made in development by a party to a federal funding agreement, when acquired by that party, become subject inventions.

All income earned with respect to nonprofit subject inventions–by any party to the funding agreement, including any for-profit assignee–must be used to support scientific research or education, with deductions allowed only for expenses incidental to the administration of subject inventions (35 USC 202(c)(7)(C)).

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What’s the exposure for universities and their exclusive licensees?

  1. They have failed to disclose many subject inventions. The federal government could audit their projects and take *many* inventions. Inventions made by university personnel but excluded by accounting tricks from disclosure. Inventions made by university exclusive licensees during “commercial” development.
  2. They have failed to use income earned with respect to subject inventions for scientific research or education, deducting only expenses incidental to the administration of subject inventions. The federal government could audit their income and require compliance–which could involve billions of dollars of undeclared income from undisclosed subject inventions.
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