The IPA and Bayh-Dole on nonprofit assignment of subject inventions, 4

Well, now we can look at Bayh-Dole’s nonprofit assignment provision. It’s in Bayh-Dole’s specification for what must be included in a patent rights clause that runs with any funding agreement with a nonprofit or small business. Here, 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);

We have the same restriction to nonprofit organizations, and the same structure–a prohibition followed by an exception. But things are different.

a prohibition upon the assignment of rights to a subject invention in the United States

The prohibition is restricted to the US. A nonprofit can assign foreign rights without conditions. Also, any small company can assign any rights in a subject invention without any conditions. One wonders, what changes when a subject invention is owned by a nonprofit so that there must be federal approval, but only for US assignments?

without the approval of the Federal agency,

And what does a federal agency have to review to give its approval? Just the assignment document? Or a patent administration agreement? Or an exclusive license to all substantial rights (which makes an implicit rather than express assignment)? Bayh-Dole is silent. The IPA context has been dropped–review of the patent administration agreement–without any guidance of what diligence a federal agency must do before reaching a determination whether to approve any assignment by a nonprofit of a subject invention. The provision continues with the exception:

except where such assignment is made to an organization which has as one of its primary functions the management of inventions

Rather than “patent management organization,” Bayh-Dole has something of a definition–an organization which has as one of its primary functions.” There’s a bit of Monty Python’s Spanish Inquisition sketch here. No doubt organizations might have other functions, but the only relevant point is that they manage inventions, also. Why would it matter whether an organization, say, managed research contracts and did some patent work on the side. It might be really excellent at that patent work, and not see it as a primary function of the organization. Thus, it would require federal agency approval, apparently.

Also dropped here is the restriction to nonprofit patent management organizations. The invention management may be done by a for-profit, and without agency approval, so long as invention management is a primary function. That’s indeed strange. Lost, apparently, are the public expectations that balance making money (now, for shareholders) with lower relative price for any medicines produced (a public interest).

Part of the change lies in changes to Bayh-Dole after the law was passed. Here’s the original language (my bold):

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 and which is not, itself, engaged in or does not hold a substantial interest in other organizations engaged in the manufacture or sale of products or the use of processes that might utilize the invention or be in competition with embodiments of the invention (provided that such assignee shall be subject to the same provisions as the contractor);

This language was dropped in 1984 (PL 98-620). One can see that the original wording worked hard to separate pre-approved assignments from ones that required federal agency approval. But what does this wording mean? Essentially, it’s a bureaucratic generalization for companies that make and sell products in the same area as the subject invention. Nonprofits cannot, originally, assign to companies that make or sell products without federal agency approval, even if the company had as a primary function the management of inventions. Of course, any pharmaceutical company might view its management of inventions as a primary function, especially if its executives swear that without exclusive rights, they would all but cease new medicine development operations. A nonprofit can’t assign to companies that make or sell or would compete with anyone else making or selling in the same area as the invention. That’s what was dropped almost immediately from Bayh-Dole, leaving the present stubby language.

But there’s one more thing:

(provided that such assignee shall be subject to the same provisions as the contractor)

The contractor here is a nonprofit. The provisions that are the same are those of the standard patent rights clause with the nonprofit extension (35 USC 202(c)(7)–37 CFR 401.14(k)). It does not matter whether the assignee is a for-profit or nonprofit–the assignee must operate under the nonprofit patent rights clause. Here are the other elements of the nonprofit patent rights clause (also changed in 1984):

share royalties with the inventor

deduct from royalties or income earned with respect to subject inventions only costs incidental to the administration of subject inventions

use any remaining balance to support scientific research or education

prefer licensing subject inventions to small businesses

If organization with a primary invention management function receives assignment from a nonprofit of a subject invention, then that organization has to accept, in addition to everything else in the standard patent rights clause, these nonprofit-specific requirements. Even if the organization is a for-profit, nothing arising from licensing or otherwise making money on subject inventions can go to the shareholders–or even be retained by the organization other than to cover direct costs of administration of subject inventions (not other inventions, not non-inventions, not other administration) and to support scientific research or education. Once again we see this odd balancing of public interests–assignees of nonprofits can make all the money they want to make on behalf of inventors and the designated public activities–scientific research and education. They just cannot make all that money for themselves.

There’s a fundamental problem with interpreting Bayh-Dole’s provision on nonprofit assignment. What do we do with the parentheses? If there were no parentheses, then we would follow a basic interpretive principle and attach the qualification to the immediately preceding element–the organizations that do invention management as a primary function. But the parentheses push this qualification to modify any assignees, not just those expressly singled out for pre-approval in the statute. The parenthetical qualification applies to all assignees, regardless of whether the assignment required federal agency approval.

In the IPA master, there is no provision by which a Grantee may assign a subject invention other than to the federal government or to an approved patent management organization. There is no possibility of creating a speculative pyramid by which one group of investors forms a company “to manage inventions” and then sells that company after a time to another group of investors (or to a company representing another group of investors), and so on. Bayh-Dole, however, allows such sequential assignments. Why? Because anyone receiving assignment of a subject invention that was at some point acquired by a nonprofit contractor must accept those nonprofit patent rights clause requirements along with the rest of the patent rights clause. That’s anyone. Patent management organization, shell company to aggregate rights for investors, startup company, major pharmaceutical company.

The kicker. Exclusive license of all substantial rights in an invention–make, use, and sell–constitutes an assignment of the invention. Courts looking squarely at exclusive licenses granted by nonprofits under Bayh-Dole have determined that those licenses in granting all substantial rights (even with reservation of rights or grant-backs for educational use, and even with a government license) constitute assignments. The consequence under Bayh-Dole is that companies cannot take exclusive licenses to make, use, and sell unless they also operate under the nonprofit patent rights clause. Of course, they do. And no one bothers with it.

But Bayh-Dole is set up to push nonprofits to break up the patent monopolies in the subject inventions they acquire, and to push companies that make and sell products to want to receive a license to less than all substantial rights (or, great souls that they might be, to take that exclusive license and work on the public’s behalf and take no income for themselves–a nice thought when it comes to “life-saving” medicines–akin to lifeguards jumping into the big waves to save a tyke and not asking first what’s it worth to the parents). If folks don’t like this bit of Bayh-Dole, then they should be arguing to change Bayh-Dole into what they think it ought to be (lifeguards should charge what the market will bear to save drowning tykes) rather than demanding that Bayh-Dole be “preserved.” What they mean, apparently, is that they should be allowed to continue to make up what Bayh-Dole stands for and get NIST to create regulations that make it appear that Bayh-Dole really does stand for whatever these folks say it stands for, even if the law itself does not do anything of the sort. A law that only works if it is unenforced and subject to the personal whims of those who stand most directly to benefit from those whims really isn’t a law at all. It’s more like a weapon left lying about, picked up by folks who have organized themselves into a lobby determined to keep it.

This entry was posted in Bayh-Dole and tagged , , . Bookmark the permalink.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.