The Key Provisions of Bayh-Dole–Really Edition

I wrote a long article on the key provisions of Bayh-Dole. That’s all fine and good, but none of those provisions get at how Bayh-Dole has to work. Those key provisions are mostly just bureaucratic fluff. Stuff about being able to keep ownership of an invention if you get ownership, and complying with various administrative demands such as obtaining conforming (f)(2) written agreements that turn inventors into parties to the funding agreement and neat stuff like that. Big whoop.

Sigh. Really, when you get down to it, there are two key provisions in Bayh-Dole that make the law work the way Congress intended, but which have been entirely ignored. These provisions take effect only *after* a contractor has gone full fool and acquired ownership of an invention arising in federally supported research or development. Having got the invention onto its administrative finger, there are two key provisions in Bayh-Dole for how the contractor must behave as it tries to get that invention off.

1) Nonprofit assignments of subject inventions must include the nonprofit patent rights clause. 35 USC 202(c)(7)(A).

Assignment includes any exclusive license of all substantial rights in an invention. A key indicator is that the exclusive licensee has the right to enforce patents on a subject invention. If so, then the license is also an assignment.

When a nonprofit assigns a subject invention–as by exclusive license–the licensee becomes another federal contractor operating under the nonprofit patent rights clause. Any income earned with respect to the subject invention, less expenses for administration of subject inventions, then must be used for scientific research or education. 35 USC 202(c)(7)(C). It’s not just profits that go to scientific research or education–it is all net income after subject invention administration expenses. Any commercial contractor operating with exclusive rights to a nonprofit-licensed subject invention has to act as a nonprofit with regard to that subject invention.

In effect–income goes to specified charities. So, sell at cost if the direct public benefit is more important than the public charitable use.

That’s not just the royalty income received by the nonprofit. It is income earned by each contractor in any chain of assignments, substitutions of parties, and subcontracts.

2) Bayh-Dole defines “funding agreement” to expand to include any assignment, substitution of parties, or subcontract of any type.  35 USC 201(b).

The general rule is that when a contractor expands a funding agreement to add a new party to the funding agreement, the patent rights clause that applies to the new party is the one specific to that party’s status. If a for-profit subcontracts to a nonprofit, the nonprofit works under the nonprofit patent rights clause while the for-profit operates under the for-profit patent rights clause. However, Bayh-Dole goes out of its way to make clear that when a nonprofit assigns to anyone, the nonprofit patent rights clause must apply, even if the assignee is a for-profit. 35 USC 202(c)(7)(A) again.

But the definition of funding agreement goes further. It stipulates that the “work” that is implicated as within the funding agreement may be funded “in part” by the federal government. There may be multiple contractors engaged in a given “work” and Bayh-Dole applies to all of their activity directed towards performance of the “work” even if federal funds touch only one aspect of the activity of one of the contractors.

Example. A nonprofit subcontracts federal funding to a small company. That company uses subcontracted federal money to do some of its work, and self-funds other of the work. All of the company’s work comes within Bayh-Dole.

If the “work” funded by the federal government is to do research in medicinal chemistry leading to beneficial drugs available commercially at reasonable prices, then even if the piece of that work proposed and funded at the nonprofit is just to synthesize certain molecules and the subcontract is to screen those synthesized molecules for biological activity, all of that work comes within Bayh-Dole. If the company develops an inventive process for screening, that process becomes a subject invention, even if the company spent its own money to develop the inventive process. Doesn’t matter where the money comes from. What matters is that the company is a party to the funding agreement via a subcontract and that the activity is directed at the overall “work,” which is to produce a commercially available drug at a reasonable price.

Example. A nonprofit assigns via exclusive license a subject invention to a company for “commercial development.” The company becomes a party to the funding agreement. The company must comply with the nonprofit’s patent rights clause. As a party to the funding agreement, the company is a federal contractor. Any inventions made and acquired by the company directed at the development of the subject invention are also subject inventions and must be disclosed timely to the federal government once made known to the company’s personnel responsible for patent matters. If a company fails to disclose these subject inventions, the federal government at any time may require assignment of the inventions to the government.

People have suggested that march-in won’t matter much because even if the government requires licensing of the subject invention that has been disclosed, the companies doing the commercialization will have developed other IP that they can hold back, making it impossible for new licensees to create comparable commercial products. But that’s not so. All the company’s inventions–whether patented or held as trade secrets–are within the scope of Bayh-Dole and so within the scope of march-in and within the scope of a government claim to ownership in there’s not been timely disclosure.

In this it matters that the government has the right to own subject inventions that have not been patented. As long as the invention “may” have been patentable, the government has an ownership claim, even if the company has chosen to hold that inventive work as a trade secret. The government can still take ownership of the invention, absent any apparent patent rights–and that means that the company must fully disclose the invention to the government, and since there are no apparent patent rights remaining, the government may under 35 USC 205 disclose the invention–blow the company’s trade secret claims, such as including that information in any license compelled via march-in.

In many ways, these two elements are the key provisions of Bayh-Dole. The first makes clear that a nonprofit must break up each patent monopoly that it acquires; otherwise, any downstream assignee or exclusive licensee must choose to act as a public charity with regard to any work it does with regard to the overall purpose to which the federal funding has attached. Companies don’t generally do such things except in times of great crisis. Thus, this provision in Bayh-Dole expects that companies will demand licenses with scopes less than those of assignment–companies will refuse to have anything to do with enforcing patents on subject inventions, companies will prefer free competition to acting as a charity. The result will be (in administrative theory, at least) competitive–or collaborative–development of uses and products.

Similarly, the second key provision makes clear that any invention made by anyone in any line of assignment, substitution of parties, or subcontract becomes a party to the funding agreement, a federal contractor, and it does not matter what money that new anyone uses to do research or development directed at the overall purpose of the “work.” It only matters that there is that “work”; that someone has requested that the federal government support some portion of that “work”; and that whatever it is that this new anyone contractor has done comes within the scope of that “work.” Separate accounting does not necessarily matter. Timing does not necessarily matter. What matters is that (i) that anyone is a contractor, (ii) what they have done is or may be patentable, (iii) they have acquired ownership of that whatsome invention, and (iv) that the invention is directed at the overall “work.” Failure to timely disclose such inventions exposes each contractor to loss of invention, regardless of whether the contractor files a patent application or holds the invention as a trade secret.

Those are the two key provisions of Bayh-Dole, by far. Nonprofits must break up their patent monopolies or the companies they engage must use income earned for the specified public purposes. Any company accepting assignment or sublicense must disclose all inventions it obtains that are responsive to the overall “work” as subject inventions or lose them. That overall “work” is not just what the federal dollars have “paid for.” It’s the overall purpose for which the federal government has been asked to fund any part. If the overall purpose of doing medicinal chemistry research is to produce new drugs for public benefit at reasonable prices, then anything within that purpose that’s inventive and acquired by any contractor in any chain of assignments or subcontracts is also within the scope of Bayh-Dole. “Under contract” does not mean “what’s directly paid for” but “responsive to the final goal, however that’s paid for, in addition to federal dollars.”

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