Bayh-Dole Compliance

A law firm, Sterne, Kessler, Goldstein & Fox, PLLC, has posted an article on Bayh-Dole compliance written by attorney John Covert, “Patent Prosecution Tool Kit: Federally Funded Inventions and Compliance with the Bayh-Dole Act.” The advice given here is typical, and unfortunately “typical” means in a number of places simply wrong. And there’s more. But first let’s work through the wrongness, and by doing so learn something more about Bayh-Dole and its advocates.

The article starts with basic Bayh-Dole wrongness:

Any invention conceived or reduced to practice with the assistance of the Federal funding is subject to the Bayh-Dole Act.

This is not true. Bayh-Dole defines a subject invention to be an “invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement” (35 USC 201(e)). The article drops three critical elements of scope that limit what inventions come within Bayh-Dole and its standard patent rights clause.

First, an invention must be owned by the contractor to be “of the contractor.” That’s the clear message of the Supreme Court in Stanford v Roche (2011). If a contractor has not acquired a given invention, then it cannot possibly be a subject invention. Nothing in Bayh-Dole requires a contractor to turn a non-subject invention into a subject invention by acquiring it. Again, the Supreme Court was clear on this point. John should be, too.

Second, the scope is limited to “first actual reduction to practice.” Actual reduction to practice means that an invention has been practiced and performs each claimed element as expected. There’s another form of reduction to practice–constructive reduction to practice, in which an invention is set forth in a patent application. Merely filing a patent application during the performance of work under a funding agreement does not mean Bayh-Dole applies, even if the invention is related to the work being performed. As a first order distinction, for actual reduction to practice, think testing necessary to demonstrate that a claimed invention actually works. If a funding agreement anticipates the need for testing and testing is done and shown to actually reduce an invention to practice, then–if the contractor also owns the invention–we have got a subject invention. Even if a funding agreement does not anticipate a need for testing but testing is done and that testing does not “diminish or distract” from the performance of work under the funding agreement, the testing does not bring the invention (if owned by the contractor) within Bayh-Dole.

There is a whole world of uncertainty and legal guidance behind all of this. For openers, one must consider the scope discussion at 37 CFR 401.1 and review In re Eddie L. King, a patent commissioner ruling that held that the federal government had a free license to an invention made by a federal employee on his own time and with his own resources because he allowed the government to test prototypes of the invention before he had filed a patent application which was already drafted. The decision left open whether the government would have had rights in the invention if the inventor had filed the application before the government spent its own money conducting tests.

As a matter of compliance, then, it is absolutely essential to have a clear statement of the scope of the work performed under a funding agreement and to keep accurate records of work performed. Moreover, it is also absolutely essential to understand that the “work” performed “under a funding agreement” is not merely activity that one has spent federal money on–it is any “work” for which in any part federal money has been spent on. Once one is a federal contractor performing work under a funding agreement, one cannot split off some of that work under a private account and hold it out.

If the “work” is to study the biological response of a class of chemicals, then it doesn’t matter whether a contractor splits accounts and studies some chemicals in the class with federal dollars and others with its own dollars. Inventions made with its own dollars, if within the scope of the “work” are, when acquired by the contractor, also subject inventions. These are not “federally funded inventions” but they are “inventions made in work receiving federal funding.” This latter is Bayh-Dole’s scope. Inventions made “with the assistance of the Federal funding” may well become subject inventions. But they are only a subset of the inventions that may come within the scope of Bayh-Dole.

More misinformation, but of a different sort:

Filing an initial patent application on the invention within one (1) year of election of title or prior to the end of any statutory period, and filing in additional countries or international patent offices within 10 months of filing the initial application.

Not quite. Here’s 35 USC 202(c)(3):

within one year after election of title or, if earlier, prior to the end of any statutory period wherein valid patent protection can be obtained in the United States after a publication, on sale, or public use.

But it’s really worse than just dropping the “if earlier” part, which is just sloppy and makes the restatement of the requirement incomprehensible. The worse thing is that the requirement itself has no basis in Bayh-Dole. It’s just pulled out of NIST’s legendary posterior cortex. Here’s Bayh-Dole, which was amended in 2011 at the implementation of AIA. Here is the current 35 USC 202(c)(3), setting out what must be in the default patent rights clause federal agencies must use unless they can justify something else:

(3) That a contractor electing rights in a subject invention agrees to file a patent application prior to the expiration of the 1-year period referred to in section 102(b), and shall thereafter file corresponding patent applications in other countries in which it wishes to retain title within reasonable times, and that the Federal Government may receive title to any subject inventions in the United States or other countries in which the contractor has not filed patent applications on the subject invention within such times.

The 1-year period in 102(b) is the period following public disclosure of an invention prior to filing a patent application. Previous text referenced “any statutory bar date” and the like. Nothing in Bayh-Dole justifies a requirement that a patent application must be filed within a year of electing to retain title. The requirement is to file a patent application before the end of the statutory period for such filings after a “disclosure” of the invention.

If someone were wanting to check a contractor’s compliance, then, at the very least it would be helpful to point out this huge mismatch between the regulation–which has not even been updated by NIST to recognize the changed wording introduced nearly a decade ago–and the statute. In conflicts between the CFR and the USC, the USC controls. Thus, what a contractor with a need to show compliance might really want to know is whether they must rush patent applications or whether they can hold inventions as trade secrets until they are ready to disclose them.

More badness:

Contractors are also required to have clauses in employee agreements ….

Bayh-Dole says nothing about contractors agreements with employees. It’s simply not there, not addressed. Bayh-Dole allows a contractor to add other contractors to a funding agreement–by assignment, substitution of parties, or subcontract. See 35 USC 201(b). Thus, a contractor may add employees as contractors. But another principle followed by Bayh-Dole is that the default standard patent rights clause varies with the status of the contractor. Nonprofit contractors have different requirements from for-profit contractors. What then is the standing of an individual inventor that becomes a party to a funding agreement, and therefore a contractor? The implementing regulations make clear that Bayh-Dole treats such individuals as sole proprietors–as the smallest sort of small business–and thus provides them with their own version of the small business standard patent rights clause at 37 CFR 401.9. Once an inventor becomes a contractor, the inventor has the same rights any small business has under 35 USC 202 to elect to retain title to inventions the inventor owns–and by default, an inventor owns the inventions the inventor has made until the inventor signs away rights. Nothing in Bayh-Dole requires any inventor to sign away any rights. The Supreme Court made that clear in Stanford v Roche.

Bayh-Dole’s implementing regulations, however, include a requirement not in Bayh-Dole. Arguably it is spurious, but there it is and folks have to deal with it. Under 37 CFR 401.14(f)(2), contractors are required to require employees to make a written agreement to protect the government’s interest in subject inventions. This requirement is  most definitely not an employment matter. Stanford v Roche again. The written agreement requirement does not have to do with amending employment agreements but rather with delegating an interest in inventions made in work receiving federal support to inventors by requiring contractors to make these inventors parties to the funding agreement. To advise contractors to instead alter employment agreements and so avoid making inventors parties to the funding agreement in essence tells contractors to violate the patent rights clause. That’s moxie coming from a law firm promoting its due diligence capabilities.

More:

If the government takes title, it takes all rights. The contractor will not even retain the right to practice the invention.

This is an overstatement, presumably to scare the bejeezus out of uninformed contractors so they will feel the need for legal advice from a compliance-minded law firm. As marketing, it’s sweet. Coming from a law firm as an account of the law, it’s bitter. Bayh-Dole provides only one circumstance in which a contractor might lose all rights in a subject invention, and that’s when the contractor fails to timely disclose the subject invention to the federal government. See 37 CFR 401.14(e)(1). For other non-compliances, or decisions, as it were, having to do with the administrative requirements in electing to retain title and file patent applications, a contractor gets a non-exclusive license when the government takes title.

This fact opens up a legitimate practice strategy that anyone worth a bean ought to point out to contractors. They don’t have to waste money on filing patent applications if they don’t need exclusive rights and just want freedom to practice. Acquire the invention, making it a subject invention, and disclose it to the federal government. Now, don’t elect to retain title, and let the government file and pay for the patent application. Take your non-exclusive license and run with it. Given how bad the federal government is in granting licenses to such inventions, that non-exclusive license can turn out to have the effect of an exclusive commercial position, and at no cost–no patenting costs, no royalties, no negotiation, no indemnification. How’s that? I get that a law firm would not trot this sort of thing out–at least it wouldn’t do so if it made its money filing patent applications, which might turn out to be not so much in the interest of the company client as it is in the interest of the law firm. Sketchy, no?

There’s a whole host of things in Bayh-Dole’s standard patent rights clause for which non-compliance does not have anything to do with the federal government taking title. In fact, the only thing that comes close is march-in (35 USC 203), under which a federal agency may require a failed contractor to grant an exclusive license which might be so broad as to convey all substantial rights in a subject invention, amounting to an assignment of the invention. But that’s not an assignment to the federal government–it’s rather the federal government forcing a contractor to assign the subject invention to a company of the federal government’s choosing. Strange stuff. Never has happened. And there’s a protocol in Bayh-Dole for a contractor to resist that sort of thing, drag it out, make it hurt until it’s moot. But hey, it’s compliance porn, so why not?

Our article supports its overbroad claim with regard to federal ownership claims in subject inventions with:

See Campbell Plastics v. Brownlee, 389 F.3d 1243 (Fed. Cir. 2004).

Here you go. A small company provides patent application to the federal government by way of disclosure but fails to put it in the form of a written report, so feds take the invention. A process failure on disclosure. Some incentive for innovation, that. But that just illustrates that Bayh-Dole compliance is a matter of proper paperwork under threat of the most egregious remedies but for everything else in the law having to do with the use of inventions, public benefits, reasonable terms, American jobs, and the like, crickets–nothing in the form of compliance.

More bad advice:

employment agreements should be reviewed to ensure the agreements require the employee to provide timely notification of new inventions to the employer, and an obligation of assignment, or a vesting of title, for new inventions to the employer/contractor.

Not Bayh-Dole. In fact, this misrepresents Bayh-Dole to recommend that a company take inventors’ rights, force inventions into the scope of Bayh-Dole, and then have to spend money filing patent applications. I get how a law firm would see such advice as a good thing. But I don’t get how a law firm gets away with pretending that Bayh-Dole compliance requires it. Oddly, given that inventor rights are established in the Constitution, it would appear that the law firm is using the color of law to induce companies to violate inventors’ rights. That’s an 18 USC 242 consideration, not that anyone cares.

Again, Bayh-Dole is silent on employee inventors disclosing inventions. The standard patent rights clause throws in a spurious requirement that contractors must require their would-be qualifying inventors to make a written agreement to protect the government’s interest in those inventions. That written agreement requires inventors to agree to assign subject inventions to their employers–after NIST finished botching a revision to 37 CFR 401.14(f)(2) a couple of years ago. But a subject invention for the contractor is one it already owns. And a subject invention owned by an inventor who is a contractor is subject to the inventor’s standing to elect to retain title as a small business under 35 USC 202(a) and 37 CFR 401.9, so the NIST botched assignment requirement applies only to inventions that the contractor already owns–equitable title or some such because the inventor was hired to invent. The Supreme Court was clear that nothing in Bayh-Dole forces inventors to assign.

Nothing, therefore, in the implementing regulations, can force inventors to assign. And if inventors had to assign, that would make nonsense of (f)(2)’s other requirement that inventors agree to sign papers to establish the government’s rights in subject inventions. Well, if the inventors have to assign their inventions to their employers, then they will never have any rights left to convey to the government. Heck, that’s also Stanford v Roche, but at the CAFC.

A company might want an arrangement with its employees under which those employees agree to assign their inventions made within some agreed-upon scope to the company. Fine. But it has nothing to do with Bayh-Dole compliance. But there is a Bayh-Dole rub: if a company complies with the (f)(2) written agreement requirement, it then delegates to the inventor control of rights in subject inventions–the inventor becomes a contractor, the invention is owned by the inventor, and the company has in essence preempted its own prior claims on those inventions by complying with the (f)(2) requirement. A company cannot require the written agreement–which insists inventors must sign papers to establish the government’s rights–and at the same time demand that inventors assign those same inventions to the company. Law firms may not want to sort that out, but it’s pretty simple once you look at it. If an invention is made in work with government support and is acquired by a contractor-inventor, then a contractor-employer cannot force the inventor to assign the invention to the employer.

Woo. Do you see where this goes? For inventions made in federal work, Bayh-Dole’s federal policy as expressed by the (f)(2) requirement starts with the premise that inventors own their inventions and have first choice about what to do. Not the company that hosts the research. Not the federal agency that provides the money. Exactly the opposite of what Senator Bayh argued in his amicus brief to the Supreme Court, which the Supreme Court found unpersuasive. Why not advise federal contractors about this sort of compliance?

Alternatively, if a company does not take ownership of an invention made in federally supported work and also does not comply with the (f)(2) written agreement requirement in the standard patent rights clause, then inventions made in that work are not subject inventions, Bayh-Dole doesn’t apply, and since the federal government has dismantled most everything that would otherwise apply, the government has no mechanism (short of a few federal statutes in specialty areas such as space technology and nuclear weapons) to express an interest in such inventions. One can argue that’s a defect in federal policy–and construct some nonsense about how people who didn’t bother to spell things out some way must have intended what they didn’t express. I rather like to see this as the expression of federal policy–if a contractor does not acquire, then the federal government has no further interest in the invention.

According to the standard patent rights clause (37 CFR 401.14(f)(2)), a contractor must instruct employees on the

importance of reporting inventions in sufficient time to permit filing of patent applications prior to U.S. or foreign statutory bars.

This instruction may be “through employee agreements or other suitable educational programs.” There’s nothing about federal law forcing inventors to give up their inventions to employers merely because federal money gets used somewhere in work under a funding agreement to which a company has become a party. And there’s no penalty whatsoever if inventors publish inventions and don’t disclose them. Even the inventor patent rights clause (37 CFR 401.9) does not include a requirement that inventors file patent applications. Not only does Bayh-Dole not require inventors to give up the rights secured to them by the Constitution but also Bayh-Dole does not require inventors to use the patent system. They are not forced to file patent applications, and they are not forced to assign their inventions to companies that then may force them to file patent applications. Makes sense, unless one is a sense-challenged lawyer or a university administrator.

If a contractor doesn’t acquire an invention, it cannot be a subject invention, and the contractor has no obligation to disclose non-subject inventions. Further, even if an invention is a subject invention, if the inventors don’t disclose it to the contractor’s patent personnel, contractor has no obligation to disclose it to the government. See 35 USC 202(c)(1). Heck if Campbell Plastics screwed up by not putting disclosure of its invention as specified in a patent application in the form of a report–if this is the level of bureaucratic fussiness at which Bayh-Dole provides such public benefits through the use of inventions–then it’s clear that if inventors don’t submit a fully compliant invention disclosure to the proper company personnel, then the company does not have an obligation to disclose that subject invention. It doesn’t matter if non-inventors report the invention, or if the inventors report only part of what’s required for the disclosure, or if the inventors report to everyone in the company except for the designated patent personnel. If we are doing Campbell Plastics compliance fussiness here, then until a company’s designated patent personnel obtain from inventors a fully conforming written disclosure, the company has no obligation under Bayh-Dole to disclose anything to the federal government. There it is. But law firms can make up whatever they want about Bayh-Dole and trot that out as a matter of compliance with the law.

More:

Invention disclosures and patent department workflow should be updated to allow for flagging inventions conceived or reduced to practice using government funds.

Basic wrongness. Bayh-Dole’s definitions make clear the scope is work funded in whole or in part. 35 USC 201(b). An invention made in such work may not have “used” federal funds. What matters is that the invention is within the scope of the “work” and the “work” received at least in part federal funding. See 37 CFR 401.1. Separate accounting is not determinative. Nor is chronology. If you request federal support, you join a federal work effort, and anything you do responsive to that work effort, whether you use federal money or not, is within the scope of the work effort. Take ownership of patentable inventions within scope of that work effort, regardless of whether those inventions “used” federal funds, and they come within scope of Bayh-Dole. Is this too difficult? How about this:

Patent departments should update their procedures to identify the scope of work under each federal funding agreement to which the company becomes a party, and invention disclosures should be evaluated to allow for flagging inventions conceived or first actually reduced to practice under those funding agreements–that is, within the scope of work in those funding agreements, regardless of whether federal funds were directly used to conceive or first actually reduce to practice such inventions so that the company may make an informed decision regarding whether to acquire title to these inventions and begin a bothersome compliance process.

So we have an article to drum up business for a law firm’s compliance unit loaded with misinformation about Bayh-Dole’s requirements. The overt thing here is that if one follows this misinformational advice, one ends up with more invention bother, more patent applications, more compliance bother. No one stops to ask–does the company need to deal in all this patent bother? Are these patents the ones the company is looking for? Or are they just pooped out artifacts of getting bad advice about compliance with Bayh-Dole?

The worst thing of all in all this bad advice is that Bayh-Dole is reduced to bureaucratic compliance. There’s nothing at all about promoting utilization or free competition. Nothing about unreasonable terms. Nothing about maximizing participation of small businesses. Sure it’s a short article designed to rouse up business for the firm’s compliance practice, but there’s still room for a sentence to point out that patents on subject inventions are not ordinary patents and carry with them limitations on their use to better shape these patents for public benefit consistent with the company asking for federal support for their work in the first place. If a company does not feel the urge to acquire patents with restricted rights, then perhaps it would be better just to pass subject inventions on to the federal government to churn out patents, take the non-exclusive license, and go back to a focus on being a company, not a patent camel carrying government bureaucratic patent beans across a marketing desert.

In all this compliance porn, too, it might be worth pointing out that other than the administrative paperwork requirements–the least substantive of Bayh-Dole matters–nothing is enforced. Compliance means, basically, don’t embarrass federal agencies. But that wouldn’t drive new business to a law firm, and would embarrass federal agencies, and so you will go a long time before you see such thing in a compliance article.

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