Defense Contracting, Bayh-Dole Fantasies, and Workarounds–1

In 2001, the Office of the Under Secretary of Defense For Acquisition, Technology and Logistics published a guide to federal contracting–“Intellectual Property: Navigating Through Commercial Waters: Issues and Solutions When Negotiating Intellectual Property with Commercial Companies.” The guide is helpful in setting out the statutory and regulatory framework for federal contracting. I remember when I first had to work with the FAR, DFARs, and NASA FAR Supplement. Layers on layers of requirements and alternates.

The guide is helpful, too, in helping us understand how intellectual property is treated by federal policies. In particular, for patentable inventions, software, and trade secrets.

The guide also discusses Bayh-Dole, and here it gets things very wrong. Sure–it’s a twenty year old document written a decade before Stanford v Roche, but it is worth discussing its wrongness because it is still up at a U.S. government website.

The opening premise of the guide reveals a great deal (if true!):

In the past, research programs funded by the Department of Defense (DoD) often led industry efforts in technology. Today the reverse is largely the case—technology leadership has shifted to industry, where most research and development (R&D) dollars are spent. (iii)

We might pause there and ask–if true–what does this premise say about federal expenditures for research? If industry leads in technology, what is the point of the federal government funding *any* research that trails? Furthermore, one would think that any technology that the federal government might think to procure from industry via research contracting will be available as well to every other government, whether legally or otherwise. If one is going to fight a war, it’s not an effective strategy to complain that some enemy country’s weapons infringe. Thus, one would expect the government to use purchase strategies to acquire industry technology in the form of parts and products, relying on first sale exhaustion of rights. The government would use research for stuff that industry does not already have–and perhaps no one has–and this would be the stuff that makes the current industry stuff obsolete or ineffective when it comes to fighting wars.

From this premise, the guide argues that the central problems are (1) “to find ways to entice commercial industry into collaborating with the Department in vital research efforts” and (2) “to acquire commercial products using commercially friendly terms.” These are odd problems for a federal government. One would think that the primary problems would be recruiting and retaining development talent at the forefront of new technology production and to acquire commercially available products when there’s no need for custom innovation. After all, patent holders do not have a right of enforcement of patents against the federal government. They have, instead, the right to bring a claim for compensation against the federal government for its use of patented inventions–reasonable and entire compensation, as determined by the Court of Federal Claims. That would be your “commercially friendly terms.” The only reason for a federal agency to negotiate a license is to get terms better than those that might be awarded by the Court of Federal Claims–that is, terms from friendly companies, rather than friendly terms from indifferent companies.

The guide then lays out a set of five “Core IP Principles for the DoD Acquisition Community”:

These are all reasonable principles–Think about the IP rights you need when you are dealing with new stuff so you don’t end up paying more when you don’t have to. Don’t break IP positions by throwing federal weight around. Distinguish between requiring ownership of IP and obtaining permission to use it. Be flexible. Don’t take more than the government needs.

These are platitudes, of a sort. The idea is that capitalist companies so value IP positions that to mess with those positions verges on destroying the American economic system. We might consider other “principles” that might come up:

Don’t overpay for IP the government won’t need.

Don’t pay more for IP than reasonable and entire compensation for government use.

Avoid the appearance of corrupt dealings–deliberately paying more or taking more than is needed.

Consider whether the government already has rights or comparable technology before contracting to acquire either again.

Don’t use federal positions on IP to favor certain companies with competitive advantages, either in the commercial marketplace or with regard to bidding on future government contracts.

The list goes on. Perhaps all these IP principles might be reduced to “Acquire a royalty-free government purpose license to every new invention made under contract with rights to march-in.” After all, Bayh-Dole requires this position. 35 USC 210(c).

Perhaps the most sensitive bit for company IP is trade secret. For trade secrets, it may not help to lump them in with patents and copyrights, where there’s established law on the matter. How much should the federal government receive, with regard to trade secrets, and how does the government go about securing those trade secrets from disclosure, and to what extent should the government accept limitations on the use of those trade secrets for its purposes? Some principles here would help. The IP part is rather straight forward. The trade secret part isn’t.

The Bayh-Dole portion of the guide is revealing, both with regard to how the guide characterizes the issues and how the guide represents the law. Consider. After identifying the FAR equivalents of Bayh-Dole’s standard patent rights clause for small companies and nonprofits and the Reagan EO extension of Bayh-Dole-like treatment (short of taking precedence over federal law) for large companies, the guide describes the “Industry Concern”:

In general, industry prefers not to have these clauses in its contracts because of the various rights, restrictions, and requirements that are treated later in this chapter.

So much for industry thinking Bayh-Dole is something inspired. The “various rights, restrictions, and requirements” are bureaucratic dead weight. All that’s needed for companies is that the government have a license to practice whatever gets invented within the scope of the contract. All the rest–disclosure with threat of loss of rights, patenting, and the like–is waste energy.

In addition, because the patent rights clauses do not account for a company’s financial investment in creating the IP, the clauses could inhibit the company’s ability to secure private funding from venture capitalists who view these clauses as an unnecessary risk.

This part is strange. The Bayh-Dole requirements start with a company retaining rights to inventions it acquires. That more than accounts for a company’s financial investment. One might say this provision uniformly fails to account for the government’s financial investment in funding the work in which the invention has been made. The government’s use of inventions is a “risk” anyway. The only difference between a license and not is the company’s right to seek compensation in the Court of Federal Claims. No sponsor of research in its right mind will fund research and in the same breath give up any and all rights to whatever might be invented in that research. If a company worries that the venture capitalists it desires won’t invest based on federal government access, then the company has got the hots for the wrong venture capitalists. We might ask whether there is any public purpose served by creating a federal government policy to appease venture capitalists so that their target companies get special treatment to request federal money but then get to charge federal agencies for licenses to whatever it is that the federal money produces. No one does that, except university administrators trying to game their system. The federal government shouldn’t do it.

What’s more interesting, however, is the guide’s “solution”: try to duck the Bayh-Dole clauses! Example: “Contractors working on proposed new computer interfaces may be funded with research funds, but the nature of the work is not experimental, developmental, or research oriented.” What part of working on new computer interfaces is not “developmental” work?

This is not to say that the Government might not acquire unlimited rights in the resulting technical data or computer software, but research is not expected and therefore the patent clause would be inapplicable.

Bayh-Dole’s scope is “research or development.” The patent clause is entirely applicable to the example given.

Here’s FAR 35.001 on “development:”

Development, as used in this part, means the systematic use of scientific and technical knowledge in the design, development, testing, or evaluation of a potential new product or service (or of an improvement in an existing product or service) to meet specific performance requirements or objectives. It includes the functions of design engineering, prototyping, and engineering testing; it excludes subcontracted technical effort that is for the sole purpose of developing an additional source for an existing product.

Maybe in developing a new computer interface, companies don’t use scientific and technical knowledge–that sure seems to be the case at times!–or perhaps they are not systematic about it. Imagine that the workaround to avoid Bayh-Dole is simply to put “don’t be systematic in the use of scientific and technical knowledge.” Very strange, indeed.

The obvious “solution” to such Bayh-Dole worries is to determine exceptional circumstances and revise the patent rights clause to meet governmental requirements. If the government has no need to a license to inventions made in fussing over a software interface because–why?–say, the government wants to pay for those rights and so funnel more money to the company, then the Bayh-Dole sanctioned solution is not to weasel around the requirements but rather modify the patent rights clause to match the situation. Yes–be “flexible” according to the Core Principles. But follow the procedures established by the law rather than trying to avoid it all. Again, here’s DoD advice that Bayh-Dole is something to be avoided, if one wants to be “company friendly.”

The guide takes up the conflict between trade secret and Bayh-Dole. This part is important and often ignored. Bayh-Dole requires subject inventions to be disclosed to the government, and if the contractor elects to retain title, then the contractor must attempt to patent the invention–that is, Bayh-Dole’s standard patent rights clause requires the contractor to publish the invention using the patent system. If any trade secret information has been involved in the invention, then that information will be compromised when the patent application is published. And there’s no way out for the company–if it does not elect to retain title, then the federal government gets the invention and may disclose it and whatever company information goes with it–either directly or using the patent system. Bayh-Dole provides for exceptions to FOIA disclosure (some legit and others not), but that’s not going to save a trade secret once it is disclosed in a patent publication. Unfortunately, the guide merely states that this is a problem and offers no solution.

The Government needs to recognize that that a contractor’s background IP is vital to that company’s commercial success and business interests. Protecting these rights will encourage further commercial participation and support companies’
efforts to obtain additional capital for further research investment.

This advice, too, is strange, in part because as a general statement, it is not true. Background IP to government research and development work may not be vital at all to a company. If background IP were vital, and a company stood to lose it by accepting government work, the company would not accept government work. Nothing forces a company to bid for government work. If a company has cutting edge, even secret technology, and the DoD wants it, then the DoD has to shape a relationship to get it. It’s not enough for the government to have sads about the vitalness of the company’s secret technology.

A good practice is to acquire technology straight up rather than try to do it buried in a research agreement. Procure rather than weasel and wrangle. In dealing with small companies, the way such acquisition is done is to buy out the company. That way, one not only gets the trade secrets, but also, if one works it right, keeps all the technology talent. But there’s nothing in the guide that goes this direction. At least if the federal government bought the company, there’s nothing in Bayh-Dole that requires federal agencies to file patent applications. Thus, a federal agency might sit on an invention–keep it secret–where a company contractor cannot do so.

Universities deal with this situation by negotiating with federal agencies. The exchange goes something like this:

University: We don’t think a patent will do anything for this technology. We would like to use trade secret or copyright. If we elect to retain title and don’t file a patent application, are you going to request title or leave us alone?

Federal Agency: [possible long delay] Okay, we will leave you alone.

For all that, no one publishes data on the number of subject inventions that universities don’t elect to retain title to, having got title, and the number of subject inventions that universities elect to retain title to and then don’t file a patent application, and for all that, the number of inventions that each federal agency then requests title to. My expectation is that the number of federal title requests is really low.

For companies, however, federal contracting requires invention publishing. It does not have to, but it does. Bayh-Dole doesn’t require patent applications to be filed unless there is an upcoming bar to patenting, but the standard patent rights clause does require patent applications to be filed, and the FAR clause version does as well.

The way around the requirement again involves a determination of exceptional circumstances under Bayh-Dole, so that a company contractor knows going into a bidding situation that the contractor can acquire inventions made under contract and choose not to patent them, and the government will agree not to request title and won’t disclose the invention or any of its backing trade secrets. This determination actually is directed at the default patent rights clause, not at Bayh-Dole’s defaults, which do not require filing unless there has been public disclosure.

Our guide proposes a different option–companies should request extensions to the application filing times for subject inventions. Bayh-Dole has no provision for such a thing. Instead, Bayh-Dole allows contractors to request delays in notice to elect to retain title. Bayh-Dole’s standard patent rights clause, at 37 CFR 401.14(c)(3) requires contractors to file patent applications within one year of electing to retain title–but such a deadline is not in Bayh-Dole. Bayh-Dole originally required contractors to file patent applications “within a reasonable time” but that requirement was removed in the 1984 amendments and was replaced by a requirement that the contractor file before any statutory bar to patenting. Why the standard patent rights clause does not follow the law is just one more bit of evidence for how careless the law and its implementation are.

But our guide on this point is the reverse of flexible. Instead, the guide insists that a company must list all its proprietary technologies in its proposal:

To help identify and protect background IP, offerors and contracting officers must be firm in requiring a list of proprietary technologies up front in the proposal, including noncommercial data/software, commercial data/software, and if possible, background inventions and other relevant IP.

This is an impossible requirement. If the contract is for procurement–purchase of product–then the background IP is all there is, and rights in such IP is exhausted by sale–meaning, there is nothing that the government needs, any more than you do when you purchase a car with 300 patents covering various features. You don’t care, and don’t have to. If, however, the contract is for research or development services, and the background IP pertains to an invention that hasn’t been made yet, then it is simply not workable for anyone to list the “background IP” to that invention. Having a contracting officer be “firm” about getting a list is rather like sending someone out of the room, having someone tell something embarrassing about them, and then asking them to come back in and guess what it got told.

As we move deeper into the guide, the Bayh-Dole pieces begin to show sloppiness:

The patent rights clauses grant the Government rights only if the invention is either conceived or first actually reduced to practice during contract performance.

This much is not accurate. The Government has rights under Bayh-Dole only if the invention is a subject invention–the invention must be potentially patentable, must be owned by the contractor, and then we can worry scope of the contract. If a contractor does not acquire an invention, or if the inventor does not recognize the invention as an invention, then the invention is not a subject invention and is out of scope of Bayh-Dole. The guide is also inaccurate with regard to the rest of the scope. The “conceived or first actually reduced to practice” provisions apply without regard to when the invention was made. “During” here is not right. “In the performance of work under the contract” follows the law. What the guide fails to point out is that Bayh-Dole’s “work under the contract” is broad–the work is whatever the government is trying to accomplish. The contract is the bit of the work the government has contracted to the contractor. “Under” this contract–the funding agreement–any invention that is responsive to the government’s purpose–that work–will be “under” the contract. For all this, see the Mine Safety Appliances case, where university investigators invent a helmet design on the side, in Navy work aiming at creating new protective gear for pilots, where the investigators’ bit of that work was to do some centrifuge studies, not to design helmets. But their side inventive work was responsive to the Navy contract. They, as it were, donated extra effort to the Navy purpose.

As for “first actually reduced to practice,” here’s the guide:

Further, a patent may already have been awarded based on constructive reduction to practice (perhaps through simulation) and still may be at risk because it may not have been actually reduced to practice until performance under the Government contract.

This is nonsensical. Although much is garbled in Bayh-Dole, the case of In re Eddie L. King makes it reasonably clear that “first actually reduced to practice” pertains to inventions for which a patent application has not been filed. Once a patent issues, any further testing is not any form of “reduction to practice.” The patent is a “background IP” at that point, and if the government is to acquire rights, it will not be by operation of Bayh-Dole’s standard patent rights clause.

Thus, if the contractor can demonstrate that an invention falls outside of the relevant contract—or any other Federal contract—the Government will not acquire any patent rights.

This part will be very difficult for any contractor. Again, this is a defect in Bayh-Dole’s “uniform” treatment. A “core principle” is that the government should acquire only the rights it needs, and nothing “just in case.” But here is Bayh-Dole setting up just the opposite–that the government gets rights in everything that comes within a broad scope of claim, whether the government needs it or not. It is difficult for any contract officer to voluntarily give up rights in what federal law says the government should have. In general, contract officers give up rights only when required to do so. To provide the needed flexibility, the DoD needs to determine exceptional circumstances under Bayh-Dole. In this case, the circumstance is that the default patent rights clause demands more rights in contractor inventions than the government needs. But–obviously–how can anyone know upfront what an invention will be, or whether it is something that the government has bargained specifically for, or is something else altogether? Writing a statement of work sufficiently narrow to make the scope of invention crystal clear ends up defining the invention, and so anticipates it.

The guide then takes up “other transaction authority” as another way to circumvent Bayh-Dole. Here is the problem, according to the guide:

The Government is having difficulty in attracting truly commercial business to research Government problems, whether in research programs or in weapons systems development programs. This is largely due to the use of traditional IP clauses and procurement methods.

On the face of it, this is a silly problem. Why is it that the government needs “truly commercial businesses” to research its problems? The alternative is not “fake” or “untruly” commercial businesses, to be sure. But if the matter involves research–the problem statement says it does–then the firms suited to that work are often contract research firms. For contract research firms, the research is their business. Delivering all IP they create is part of their expectations, and they don’t need to bother with taking out exclusive positions against the interests of their potential clients, nor to hold back background IP rights to force those clients to pay extra. If government research contracting is a form of political pork, or requires spreading money around geographically, then perhaps truly commercial businesses have to be involved. Otherwise, involve commercial businesses when the government intends to purchase product, and don’t bother using them for research services.

The guide paints industry views on IP with a broad brush, as if all industries and all companies within any given industry hold the same views on IP. The Harbridge House report in 1968 found widely varying industry views on IP. The vast majority of the 26,000 (and then 28,000, and then 30,000) patents that the government held prior to Bayh-Dole came from defense contractors who had the right to retain title and chose not to. That does not point to defense contractors feeling that holding patent rights on government-contracted inventions is vital to their businesses. Certainly there was no consensus among companies that patent rights were vital to their capitalistic survival, or that IP was necessary to exclude all others.

The government works with a fantasy view of IP, and then constructs policy requirements on its contracting to dance around the fantasy. Companies “generate economic wealth” in many ways–and only rarely do isolating patents or copyrights figure. More important, often, is the use of IP to defeat the hazards of IP–by cross-licensing, by creating standards, by creating pre-commercial platforms that form the basis for new, IP-complex products from which companies may compete on production efficiencies, brand, features, price, distribution, and support, among other things. The guide envisions, by contrast, that companies by and large treat IP the same way: “many commercial companies may refuse to do business with the Government because they believe they will be forced to give up their IP rights under a traditional Government contract.” If that were true, is it much of a bad thing? Does the federal government have some compelling need to contract with companies that worry about the IP rights the government might require? Are these companies really going to take a government contract and then demand compensation for the various background rights they have stitched into deliverables on top of the contract payments? Really? What purpose is served by the federal government seeking out those sorts of companies to work with? If there even are many of them, which it appears has not been the case, historically.

The guide’s proffered solution is for the government to use FAR Part 12 to avoid the idea that a company is doing research or development. The dodge appears to be that if the “services” are of a “commercial nature,” then Bayh-Dole doesn’t apply. But there’s a potentially bigger dodge that would allow contract officers to ignore Bayh-Dole, and that’s 41 USC 1906(b)(1):

The Federal Acquisition Regulation shall include a list of provisions of law that are inapplicable to contracts for the procurement of commercial products or commercial services.

Those lists show up in FAR Part 12.503, 504, and 505. Bayh-Dole is not presently on the list, but from 2003 to 2013, there was a general exception in the FAR for any contract under $25M–and so including Bayh-Dole. Perhaps this is what our guide has in mind. But that provision, at 41 USC 2310 has expired. However, any time the Council chooses, it could add laws to the excluded list. Essentially, the executive branch has the legal authority to set aside laws pertaining to federal contracting–at least for “commercial” items. It’s also interesting that (now expired) 2310 simply asserts that some contracts can be treated as “commercial” ones:

(a) Criteria.—A performance-based contract for the procurement of services entered into by an executive agency or a performance-based task order for services issued by an executive agency may be treated as a contract for the procurement of commercial items if—

(1) the value of the contract or task order is estimated not to exceed $25,000,000;

(2) the contract or task order sets forth specifically each task to be performed and, for each task—

(A) defines the task in measurable, mission-related terms;
(B) identifies the specific end products or output to be achieved; and
(C) contains firm, fixed prices for specific tasks to be performed or outcomes to be achieved; and

(3) the source of the services provides similar services to the general public under terms and conditions similar to those offered to the Federal Government.

Basically, a “Council” –the Federal Acquisition Regulatory Council–decides what laws it wants to exclude from procurement of “commercial” items–Secretary of Defense, Administrator of NASA, Administrator of General Services, and the Administrator for Federal Procurement Policy. The Council can decide when to call a contract one for “commercial” items. Simply, as long as the procedure is followed, the Council decides what laws apply.

Thus, the guide’s advice just winds up the complications where none should be:

The parties should carefully craft the statement of work to preclude the actual reduction to practice of previously conceived inventions from occurring under, and being charged to, the Government contract.

The idea is, use a statement of work to push contract work into a FAR definitional area where IP laws (Bayh-Dole, essentially–the IP law) does not apply.

A provision of law properly included on the list pursuant to paragraph (2) does not apply to purchases of commercial products or commercial services by an executive agency.

This does not include Bayh-Dole, however, so it’s difficult to follow what the guide is suggesting here as a solution. Even under 2210, the law did not have to be on one of the FAR lists to be excluded.

This section does not render a provision of law not included on the list inapplicable to contracts for the procurement of commercial products or commercial services.

And thus, the guide offers no good solution in the form of gaming the statement of work to make research or development look like the procurement of a commercial item.

For what it’s worth, the NIH takes a different path to avoiding Bayh-Dole. The NIH trick is to not call a funding arrangement a grant, contract, or cooperative agreement. Since Bayh-Dole defines a funding agreement (35 USC 201(b)) to be “any contract, grant, or cooperative agreement,” to get outside of Bayh-Dole, according to the NIH, all one has to do is call the agreement by some other name. That’s as much as interpreting “contract” to mean a name for a transaction rather than a description of a transaction. Clearly, the transactions that the NIH engages in as Other Transactions are federal contracts, but since NIH does not call them contracts, that’s enough to avoid Bayh-Dole.

Really–a company contemplating federal work should file its patent applications for what may be background IP before getting into the federal contract. The company should go so far as to have completed actual reduction to practice–all the necessary tests and data are completed. If the purpose of the contract is to test company new technology for government applications, however, then the focus of the contract should be on new inventions made (conceived, first actually reduced to practice) in that testing. The challenge then is how a new invention might relate to an invention covered by a pending patent application–could it form a continuation in part? Or might the prior application otherwise count as prior art against it? These are not matters for carving out statements of work so much as they are company folks filing patent applications in advance of federal contracting.

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