Stanford’s claim on a quarter billion dollars in royalties in Stanford v Roche turned on the little word “of” in the construction “of a contractor” as part of the definition of subject invention. “Of” it turns out, has its ordinary meaning pertaining to ownership, not agency. The universities desiring the force of federal law to make them owners of what others had invented argued that subject inventions were whatever was done by university employees, so the “of” meant something more like “by.” The administrators were making a common mistake: imagining what they want and then making the law merely an icon that represents this want, and if pressed, is picked at in parts that appear to support the want. The law is never read for its plain meaning, but only interpreted for its secret meaning that makes it work out that the administrators should get what they want. A similar thing happens with university patent policies. So many of them are so badly written one can surmise they were drafted only as monuments to the incontestability of whatever administrators might want in the future. More like heads on stakes outside the administration building, not requiring much in interpretation of the past to indicate what will happen to anyone who does not agree to agree.
In Stanford v Roche, a number of convenient misreadings came to light, beyond “of” not meaning “of”. There was “elect to retain title” meaning “elect title” as in “take title.” There was “retain” meaning “patent law was secretly changed to vest title so it could be retained” rather than “to be permitted to hold what one has obtained by assignment.” Beyond these, we find that “practical application” means “commercialization” and “contractor” means only the “university.” We find also that the (f)(2) written agreement which becomes part of a federal agreement to protect the government’s interest is transmogrified into a requirement that the university demand ownership of inventions with a written agreement, and thus a contract requirement made on behalf of a sponsor is conflated with university self-interest.
Perhaps only by having a whole cluster of gross misreadings of the law can one hope to have a reading that sounds coherent to anyone who doesn’t bother with reading the law, the implementing regulations, the federal funding agreements, the patent rights clauses of those funding agreements, and the implementations by the agencies and contractors under those patent rights clauses. Maybe it’s all too difficult for the administrators to do this. But it also did not suit their purpose, to the extent that their purpose was to make money from holding patents, and to make sure no one else made money that they didn’t get a share of. Talk about a passive aggressive protection racket! (“That’s a nice invention ya got there, Professor. It would be a pity if something were to happen to it.”)
There are other areas in Bayh-Dole with potential for misreading as well. One of these comes in 35 USC 202(c)(7), (B) and (C):
(B) a requirement that the contractor share royalties with the inventor;
(C) except with respect to a funding agreement for the operation of a Government-owned-contractor-operated facility, a requirement that the balance of any royalties or income earned by the contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidental to the administration of subject inventions, be utilized for the support of scientific research or education;
This is picked up in the same form in the standard patent rights clause at 37 CFR 401.14(a)(k) (2) and (3):
(2) The contractor will share royalties collected on a subject invention with the inventor….
(3) The balance of any royalties or income earned by the contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidential [sic] to the administration of subject inventions, will be utilized for the support of scientific research or education;
This provision is usually restated as a requirement of the law that universities will “share” royalties with inventors. Here is a typical, if not canonical, restatement:
Universities must share with the inventor(s) a portion
of any revenue received from licensing the invention.
Any remaining revenue, after expenses, must be used
to support scientific research or education.
This restatement is repeated everywhere. Wikipedia, the repository for all that is trendy, for example:
Share the income they received with the inventors—how much to share was left up to individual institutions;
The emphasis is on “share,” language that is of course to be found in the both the Act and the standard patent rights clause. But the “expense” portion of the Act is ignored. By looking at the expense side of the arrangement, we can see how misleading the Wikipedia statement is on “how much to share was left up to the individual institutions”.
An “expense” is something spent “to attain a goal or accomplish a purpose” according to one on-line dictionary. It is “money spent or cost incurred in an organization’s efforts to generate revenue, representing the cost of doing business” according to a business dictionary or “the economic costs that a business incurs through its operations to earn revenue,” according to another. 26 USC 262 treats expenses as payments for services rendered, for travel, rentals, and the like for “purposes of the trade or business.” Behind all of these definitions is the concept that an expense is not largesse–it is something that must be paid out in exchange for services and goods. An expense is a payment of a cost, not merely of an award.
With this in mind, consider two points. First, what does it mean to “share royalties” with an inventor. If a university licenses patent rights, consideration paid for the right to practice under the patent is a “royalty”. In one version of share, inventors receive payments directly from the licensee. This makes some sense–there are two recipients of payment for a grant of rights–the inventors and the broker, and they share the income. For that to happen, the split payment becomes a condition of the license agreement between the inventors and university on the one hand, and the company licensee on the other.
In another version of share, the university receives the entire payment, and then pays some portion of that payment out to the inventors. The question is, what is the nature of this payment? By what instrument does it go out? Clearly, the university has agreed under the standard patent rights clause to “share” some of this money with the inventors. But how much? And in what way? Here, the Wikipedia bit is right insofar as Bayh-Dole does not dictate how much. But there is nothing to support the assertion that how much is left up to the institutions.
We now confront a bit of a logic tree. It isn’t the easiest thing, but bear with me, because there are a number of things going on, one level down, and it is the exploits and clevernesses and contradictions one level down that make all the difference.
If the university has to share, because it is bound by federal contract to share, then the act of sharing cannot itself be consideration for any right that it obtains. That is, if one is already obligated to perform an action, then that action cannot be also consideration in a bargain, even if anticipated by the bargain. If I am required to pay you $15, and offer you as well $15 to buy me a pizza, these are different $15. I should be out $30. If I am required to pay you a share of whatever I may earn in the future from patent licensing, and I offer you as well a share in exchange for your assignment of the invention to me, these, too would appear to be different “shares”. The share required by the standard patent rights clause cannot be consideration for the assignment of the invention, because it was already obligated. I know, I know–you are muttering, “But we don’t know how much Bayh-Dole obligates! The university could set it at $1 and therefore it’s a non-issue.” Hold that mutter for a minute or two.
We have pointed out that the written agreement at (f)(2) is distinct from any employee agreement regarding education about timely reporting of inventions or assignment of inventions to the university. The (f)(2) agreement transfers bits of the standard patent rights clause to potential inventors to whose work the government expects to have an interest, and makes those workers parties to the funding agreement, and therefore contractors, when they invent within the planned and committed activities of a federally supported project. An agreement to assign inventions to an employer is an entirely different beast that has nothing to do with the requirements of Bayh-Dole or the implementing regulations or the standard patent rights clause.
For that matter, universities are not even proper owners of intangible assets that they acquire or improve. Per 2 CFR 215.37, these assets, including patents, “that are acquired or improved with Federal funds shall be held in trust by the recipient as trustee for the beneficiaries of the project or program under which the property was acquired or improved.” Even if the university is paying for the inventions, if those inventions were “improved” with Federal funds, then the university must act as trustee, not self-interested owner. Steward, not king. This, quite apart from Bayh-Dole, which affects only the disposition of invention rights by the funding agency, not the behavior of a grant recipient with respect to ownership positions it obtains. It is clear in the case of subcontracting federal funds that under the standard patent rights clause (g), the prime can have no interest in the inventions of the sub as part of the deal to award the subcontract. That is, the federal money cannot both pay for the work to get done and pay for acquisition of the sub’s inventions. There has to be a separate deal that is not tied to the award of the subcontract, a deal that carries its own consideration and is not in any way leveraged by the subcontract.
Still muttering about the $1 cleverness? If a university has got a federal funding agreement, and under that agreement the university agrees to permit a faculty investigator to conduct research, then permitting that research to conduct that research is not also consideration for obtaining invention rights from that investigator. The fact of federal funding cannot be the consideration for the deal. More: if the university submits a detailed budget to the government in support of the grant application in which the university commits to pay the investigator out of the proceeds of the grant in order to do the work, then that “employment” of the investigator by the university, using committed federal funds, also cannot possibly be consideration for the assignment of inventions. The university has already accepted the bargain to permit the investigator to do the work and the government to pay for that work, both direct and indirect costs. The university has no claim that either employment or use of resources is consideration for anything other than the services provided to the government. This is just as it is in subcontracting: the university is to have no leverage on rights merely because it comes to have federal funds at its disposal. The drafters of the standard patent rights clause must have expected this sort of misbehavior and sought to ward it off. They got to it in subcontracts. Didn’t make it explicit for the clueless and clever everywhere, however. But just because it’s express doesn’t mean the logic doesn’t operate. Consideration is above and beyond what you already are obligated to pay.
We must further distinguish between university invention policies that demand ownership and those that aim to bargain for it. Some policies merely assert that the university owns all inventions–often with weaselly qualifications that aim to sound expansive but which may in practice be terribly narrow, depending on who happens to be offering a reasonable interpretation. The effort by some university administrators, the not very nice ones, is to cow everyone to accept their not-nice interpretations, on threat of job actions, assertion of ethics violations, and general make-life-miserable behaviors. So long as policy is just an announcement of administrative desires, the administration can hem and haw as it wishes. If the policy is claimed, however, to be enforceable against faculty, then it must be that there is a law, or an agreement, or something in equity that enables that enforcement. If the policy isn’t law, and there is no binding agreement, then it had better be that there is something obviously equitable about the university and not the inventor having ownership of what the inventor owns by federal law, or it’s is all just bullying.
Well, clearly, there is no law that forces the ownership of patents from inventors to their employers. Certainly Bayh-Dole doesn’t do that. Even Ohio’s ORC 3345.14 doesn’t do that, though it appears to try, but ownership of inventions is a function of federal law, not state law. Recast to operate within constitutional bounds, ORC 3345.14 would have to read something like: “the state will hire no faculty who do not agree, as a condition of being hired, that the state will own and control their scholarship for the purpose of attempting to make money off of the exploitation of such scholarship by dealing with speculators and others, in the state’s sole discretion.” Of course, with good legal help, the frank nature of the law would be recast as abstractions such that only an innuendo of state control of scholarship would be detectable.
As for the agreement prong of invention policy, the California court in Shaw laid it out about as plainly as one can want. A university may have a policy on inventions, but if it enters into an agreement with an employee that makes the policy a part of that agreement, then the employee also has the benefit of that agreement. The university may change the policy, but not as regards the employee, without the employee’s consent. It is not a binding agreement if the employee is required to agree to all future university changes in the policy. It is then merely an agreement to agree. A vehicle for bullying and exploitation, cast as administrative expediency in the face of possibly stubborn employees who it can be anticipated won’t take well to bullying and exploitation.
For there to be an agreement on inventions in the context of federal funding, it has to be more than something involving employment or use of resources or right to participate in the federal project–all of these things are already committed to by the university when it accepts the federal funding agreement, and therefore these things cannot be consideration as well for the assignment of inventions to the university. Furthermore, the university cannot use the fact of the grant to leverage that assignment. Thus, we return to the ideas of sharing and expenses.
“Sharing” without an agreement is interesting. Consider an inventor assigning an invention at no charge to a research foundation, which in turn licenses the invention to industry and pays under contract to the university a portion of what it earns. Under the sharing requirement of 37 CFR 401.14(a)(k)(2), the university owes a portion of what it receives to the inventor. But so does the research foundation! Even if the inventor did not require any payment. Both the university and research foundation are contractors with regard to the standard patent rights clause, though through different delegations.
But this sharing is not the same thing as an expense, which comes as something paid in the course of doing business. That’s what we are working on here, not merely sharing. Expense means that there is a deal between the inventor and the university regarding the invention rights. The university is paying to get the invention. If that payment was “salary” or “use of resources,” then it would appear that the university would never have any remaining funds after expenses, because the university could deduct salaries and costs of resources, even though for the federal grant those salaries and resources were reimbursed by the government. No, there is a reason that payments to inventors are handled as expenses here and not as sharing of royalties. These are different deals. Sharing is an obligation of the standard patent rights clause. Payments to inventors as expenses is a function of how a university comes to acquire ownership of inventions. For that acquisition, there has to be a transaction that carries its own consideration, not the sharing already required.
One can always say that the law does not read the way that one likes. Or that the drafting is sloppy and means one thing though it says another. There is a time for that. But first, one has to establish if there are reasonable interpretations of the law, and if so show that they are so obviously in error that no one reasonable would think that the reasonable interpretation is in fact intended. Here we have a reasonable interpretation, with no indication that the sharing requirement has anything to do with payments to inventors treated as expenses in the next clause. None of this matters, of course, for small businesses or for inventors if they retain their initial ownership of inventions. Small businesses have no requirement to spend remaining funds on scientific research or education, so they can do what they want with the inventions they acquire–including making payments to inventors if they wish. For universities, however, the law appears quite set on the idea that there are limitations on just what nonprofits can spend their royalties and income earned. Expenses “incidental to the administration of subject inventions”: the rest goes to scientific research or education. Not slush, not administrative salaries, not even spending on stuff incidental to the administration of non-subject inventions.
Is, then, a university “royalty sharing schedule” part of “sharing” or part of “expenses”? That would depend, in any particular case, whether the royalty sharing schedule is imposed on the university (a policy that directs its own administrative actions), as a kind of incentive program to reward inventors (who, by implication would not invent but for the encouragement of money)? Or is chosen by inventors as compensation for assignment of ownership to the university (and therefore part of a negotiated arrangement, in which the inventors could have chosen otherwise, but agreed to this as consideration)? Or is the schedule imposed, as if the assignment was an operation of law, and the payment offered a “just compensation,” as if the arrangement, at least for public universities, is a formality of eminent domain, using the power of government to take private property for public uses–which is pretty much what is going on, if there’s no independent, voluntarily negotiated arrangement.
The answer, then, about payments to inventors as “expenses” will vary with the treatment at various universities. In many universities, however, the preferred practice is to impose the obligation to assign. There is no negotiated deal. There is no consideration for the assignment when the invention is made with federal funds, because the recited conditions of policy–employment, use of resources, participation in extramural research–don’t apply, as those things are already required to be committed. Similarly for “sharing” approaches: those, too, do not create consideration for assignment, because sharing is also required by the federal funding agreement: the university has already agreed to this and therefore cannot recite it as consideration for assignment.
When Stanford v Roche rejected the vesting claim for Bayh-Dole, it also threw out the idea that universities did not have to offer consideration to obtain assignment. In the faux Bayh-Dole, sharing and ownership are kept separate. Ownership is with the universities, by law, and sharing is an act of kindness, the extent to which is left to the big hearts in administration. But in the actual, gritty, real Bayh-Dole, the deal regarding assignment and consideration is between the inventors and the invention management agent. If Bayh-Dole were revised to make this clear, it would include a requirement, for nonprofits at 35 USC 202(c)(7)(F), that the nonprofit contractor will not as part of any consideration for permitting its employees to participate in the federally funded project obtain rights in the employee/inventor’s subject inventions. That is, the inventors and the university have to negotiate any disposition of ownership straight up, on a level field, without the university using any leverage to obtain inventions, such as threatening dismissal or denial of use of university resources provided for the purposes of the federal grant.
As it is, the big gap in Bayh-Dole university compliance is that many assignments of inventions appear to be made without consideration. Nothing is ever paid by the universities to the inventors, because the university never makes money over its own expenses. If such a deal is voluntary–the inventor accepts the arrangements and still assigns, then fine. But if the deal is imposed, then at best it is an adhesion contract and at worst a public taking of private property, without consideration and without just compensation. The “expense” language of Bayh-Dole indicates that such consideration is anticipated, and that it is part of the expenses incidental to the administration of inventions when a university negotiates payment for assignment of ownership from inventors of subject inventions. Such expenses are not required, but also they are not identical with the sharing of royalties and earned income, just as the (f)(2) written agreement is not an employment agreement addressing employer interest in employee inventions.
Some advocates of Bayh-Dole portray Bayh-Dole as their happy federal administrative friend, a sort of minor god that walks beside patent administrators and assures them in simple language that what they are doing, and the way they are doing it, is just fine. As long as federal law trumps all, then faux Bayh-Dole misreadings permit sloppy, self-serving practice. But if the law ought to be practiced as written, then inventors of subject inventions ought to be in a position to negotiate for assignment of their inventions. If in that negotiation, the university agrees to a payment, then that is an expense. But even if the inventor asks for no payment for assignment, the university has agreed to share royalties with the inventor, so after assignment, the university must make the effort. There is nothing in the standard patent rights clause that requires an inventor to accept a share of royalties, though many university officials insist it must be so, for tax reasons if nothing else.
If one looks at the tax problems associated with sharing and expenses, one will see what is on the line. Should a university report payments to inventors as 1099-MISC royalty income (box 2), or as regular salary (as if an incentive program for encouraging invention) (that is, on the W2), or as payment to an individual as a business expense 1099-MISC (box 7)? The answer depends on how a given university sets up arrangements with the inventor.
The language regarding expenses also raises an interesting dilemma. Bayh-Dole puts four distinct operations in competition: the inventor’s interest, represented by the value of the patent recognized as an expense; the operation of invention administration for subject inventions; the sharing of royalties with the inventor; and the remaining funds to be spent on scientific research or education. The problem left for the university and the inventor is, what balance should there be among these competing claims on licensing income? Typically this is represented as greedy faculty inventors seeking perks and income for themselves at the expense of the public interest, and that licensing income will be used for great public causes otherwise. Yet it appears that a whole lot of licensing income disappears into a vast administrative void and has no apparent consequence. I do not know of a single university that regularly reports on its use of “remaining funds” for the support of scientific research or education. There are no audits for how much money “remains” or how it is used, or what comes of that use. There is little indication that the money offsets money from other sources. It appears to be something fun on the margin.
In all of this, unlike the Wikipedia representation, the issue about how to decide the sharing is not left to the institutions alone, but also to the inventors, by virtue of the necessary step by which they convey assignment of their invention to a management agent for “a valuable consideration.” Under Bayh-Dole, there could be, with no policy violation or distress, no money remaining after expenses, because all money not taken by other invention administrative expenses goes to the inventors. That would be “recover your program costs for subject inventions and pay the rest back to the inventors.” The sharing obligation only kicks in when there *is* money left over from expenses. There, it is the case that the university decides what to share, in addition to what it has already paid as an expense. Again, the university could decide to share a lot and have little remaining. Most universities don’t do that, these days. The effort to find some remaining “balance” for scientific research or education would appear to be the portion of Bayh-Dole that deals with the financial outcomes, beyond costs and obligations. The universities, under Bayh-Dole, cannot possibly be in it for making money for general operations, but only to build up research and education, along with running a self-sustaining invention management program. The expenses paid to inventors are those that are negotiated with the inventors to obtain assignment, without any additional leverage, demands, or bullying. It is what inventors choose to contribute to that “balance,” in the end, that is what Bayh-Dole is all about. It is certainly not the university’s unilateral choice.