We aren’t done. There is another issue to deal with, that of “prudential standing”–which has to do with the standing to bring an action in federal court, such as for patent infringement. There are cases that find that a license has not conveyed all “substantial” rights in a patent if the licensee cannot “indulge” infringement. I won’t get into all the details. Read here, and here for starters. And this gets us as well into sublicensing, since a sublicense can resolve a matter of infringement. The primary case of interest here is that of AsymmetRx v Biocare.
Harvard licensed an antibody to Biocare and subsequently granted an exclusive license to AsymmetRx, which then sued Biocare for infringement. On appeal, the court found that AsymmetRx lacked standing to sue because its license was not an assignment and Harvard retained “substantial” rights in the patent. We might observe–obviously–because Harvard had granted commercial rights to another company, so that AsymmetRx could not have those rights, and as far as the license between Harvard and AsymmetRx was concerned, Harvard had retained those rights. The court, however, dug further and ruled that Harvard also retained rights to sue for infringement and to join any action for infringement and to lead such action that it did join. This right, along with requirements on AsymmetRx to consider the public interest in any litigation (something that universities might do well to consider on their own–hey, Caltech, how about it?), led the court to rule that Harvard’s exclusive license to AssymetRx was just that, and not an assignment.
The Harvard situation, however, does not declare that exclusive licenses to make, use, and sell are never assignments. Rather, it points out that once you have divided licensing among fields of use or granted one license that’s non-exclusive and a second one that is a sole license–essentially packaging all remaining opportunity to license further into the value of the second license, then the second license is not going to be an assignment, because it cannot overcome the substantial rights retained by the patent owner and made available to the first licensee. But the Harvard situation does show that the provisions for enforcement in a license may affect the determination of whether the transaction is a license or an assignment. In Sharplan, for instance, a University of Washington license similar to that of WU’s, was found to be an assignment.
The WU exclusive license permits the licensee to enforce the patents–but does not require the licensee to do so:
Licensee will have the right, but not the obligation, at its sole expense, to promptly stop any infringement of the Patent Rights in the Territory and in the Field. Upon receipt of WU’s written consent, such consent not to be unreasonably withheld, Licensee may initiate and prosecute actions in its own name or, if required by law, in WU’s name against third parties for infringement of the Patent Rights in the Territory and in the Field through outside counsel of Licensee’s choice who are reasonably acceptable to WU.
The WU license also deals at some length with limitations on settlements made by the exclusive licensee in the case of infringement claims. If an exclusive licensee settles an action, it owes WU the value of that settlement reflected by the royalty payment obligations to WU:
If Licensee obtains any value, payment, or compensation of any type or kind, including all forms of non-cash consideration, as a result of any claim brought by Licensee pursuant to this Section, Licensee shall pay to WU a percentage equal to the Patent Royalty Rate of any such value, payment, and compensation, including the fair market value of any noncash forms of consideration.
Combine this with the extensive sublicensing requirements in Schedule D of the WU exclusive license agreement, and it is clear that an exclusive licensee cannot “indulge” infringement by granting a royalty-free sublicense. Or, if the license were for some strange reason to be royalty-free, the exclusive licensee still has to pay to WU the value of that sublicense as if it required the stipulated royalty. Are such restrictions sufficient to preclude a finding that a WU exclusive license is virtually an assignment? I don’t think so. But here’s the bigger problem. What I think doesn’t much matter, does it? These things get decided one of three ways–by reasoning, in which case folks at WU decide among themselves that they won’t grant such broad licenses, as a matter of avoiding doubt on the matter and doing (alien concept trigger warning) the right thing; or by litigation, in which opposing counsel persuades a judge that WU has transferred substantial rights in its patents and the limitations on enforcement are not sufficient to preclude a finding that the licensee is in fact, by operation of law, an assignee; or, third, by legislation that makes clear what otherwise isn’t.
One might say “it’s a gray zone.” And it surely has become that, and will be that until there’s a court case (if ever) that makes things clearer. But let’s consider whether the matter should be all that “gray” for universities operating under the Bayh-Dole Act.
The Bayh-Dole Act is a part of federal patent law dealing with inventions made with federal support. Bayh-Dole defines a new class of inventions, called subject inventions, and sets the conditions upon which a contractor may acquire and manage patent rights in subject inventions. Exclusive licensing and assignment both come into play in Bayh-Dole and in the standard patent rights clause authorized by Bayh-Dole that conveys federal agency obligations to contractors.
Here are the bits on exclusive license in the standard patent rights clause:
(e) The contractor’s domestic license may be revoked or modified by the funding Federal agency to the extent necessary to achieve expeditious practical application of the subject invention pursuant to an application for an exclusive license submitted in accordance with applicable provisions at 37 CFR part 404 and agency licensing regulations (if any).
(i) Notwithstanding any other provision of this clause, the contractor agrees that neither it nor any assignee will grant to any person the exclusive right to use or sell any subject inventions in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.
(j) The contractor agrees that with respect to any subject invention in which it has acquired title, the Federal agency has the right in accordance with the procedures in 37 CFR 401.6 and any supplemental regulations of the agency to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such a request the Federal agency has the right to grant such a license itself if the Federal agency determines that
(4)Such action is necessary because the agreement required by paragraph (i) of this clause has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of such agreement.
There are three bits, one having to do with U.S. manufacture and the other two having to do with march-in, including march-in for failure to comply with the U.S. manufacture requirement. In the case of U.S. manufacture, an exclusive license “to use or sell” in the U.S. must require that product is also made in the U.S. The language here is restrictive in an odd way. The exclusive license is either to use or to sell–not both. And it’s also possible that the exclusive licensee for use or sale does not have to make the product as well–the licensor could make the product and designate the licensee as the exclusive user or seller of the product. But what about both using and selling?
One reading of the standard patent rights clause here is that if one grants the exclusive license to both use and sell, then there is no requirement also to substantially manufacture in the U.S. That’s what the words say here. Exclusive use or sell–product made in the U.S. Exclusive use and sell–ha! ha! home free! Oddly, universities do not do this, even though their template patent licenses invariably grant both use and sell rights. They still contain a Bayh-Dole inspired limitation on U.S. manufacture.
Here’s the WU version:
2.4 Licensee agrees and acknowledges that: (a) in accordance with Public Laws 96- 517, 97-256, and 98-620, codified at 35 U.S.C. §§ 200-212, the United States government retains certain rights to inventions arising from federally supported research or business; (b) under such laws and implementing regulations, the government may impose requirements on such inventions; (c) Licensed Products embodying inventions subject to such laws and regulations sold in the United States must be substantially manufactured in the United States; and (d) the license rights granted in this Agreement are expressly made subject to such laws and regulations as amended from time to time. Licensee agrees to abide by all such laws and regulations.
This provision is problematic in many ways. But let’s stay with the question of assignment and exclusive license first. What does the standard patent rights clause use “use or sell” rather than “use or sell, or use and sell”? Why the big, technical hole? And why don’t university folks exploit the hole, given they exploit most every other hole in Bayh-Dole?
Let’s look at the assignment language in the standard patent rights clause:
(h) The Contractor agrees to submit on request periodic reports no more frequently than annually on the utilization of a subject invention or on efforts at obtaining such utilization that are being made by the contractor or its licensees or assignees.
(i) Notwithstanding any other provision of this clause, the contractor agrees that neither it nor any assignee will grant to any person the exclusive right to use or sell any subject inventions in the United States . . .
(j) The contractor agrees that with respect to any subject invention in which it has acquired title, the Federal agency has the right in accordance with the procedures in 37 CFR 401.6 and any supplemental regulations of the agency to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license . . .
(k)(1) Rights to a subject invention in the United States may not be assigned 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 will be subject to the same provisions as the contractor;
(k)(2) The contractor will share royalties collected on a subject invention with the inventor, including Federal employee co-inventors (when the agency deems it appropriate) when the subject invention is assigned in accordance with 35 U.S.C. 202(e) and 37 CFR 401.10;
In most of these uses, “assignee” runs in parallel with “contractor.” This use makes clear that the standard patent rights clause permits assignment as well as exclusive license. Bayh-Dole permits, for federal employees who jointly invent with a contractor’s employees, the federal agency, if it acquires rights from its inventors, to assign those rights to the contractor. The contractor, then, is required to share royalties with the federal co-inventors. That makes sense. (What doesn’t make sense is the reverse–that if the contractor’s co-inventors assign to the federal government, they are screwed–but Bayh-Dole makes clear that any such assignment must be voluntary for “the party from whom the rights are acquired.”)
The part that concerns us most, however, is (k)(1). Here nonprofit organizations agree not to assign “rights to a subject invention” without federal approval except to an invention management organization. The condition on any assignment is that the “assignee will be subject to the same provisions as the contractor.” That is, if the contractor is a nonprofit, then the assignee must accept not only the standard patent rights clause generally, but specifically must accept the nonprofit restrictions in (k). This treatment contrasts with the treatment of subcontractors in (g). There, no restriction is placed on the flow down of the patent rights clause–if a subcontractor is a nonprofit, then (k) applies; if a small business, then (k) does not apply. This is not the case with (k)(1) assignment requirements. Once a subject invention is acquired by a nonprofit, any assignment requires the nonprofit restrictions to run with the subject invention and any patents on the subject invention.
This, then, is the key difference between an exclusive license in Bayh-Dole and an assignment–this restriction on nonprofit organizations. It is clear, too, that “assign” is used to refer to a transfer between organizations. There is no use of “assign” in Bayh-Dole or the standard patent rights clause that ever refers to what inventors do to convey rights. This is a remarkable silence. The Supreme Court made note of the silence in determining that Bayh-Dole did not vest ownership of inventions made with federal support in the contractor. (You know, it’s important to read silence in law as well as words.) Even with regard to federal co-inventors, the language used avoids “assign”:
(e) In any case when a Federal employee is a coinventor of any invention made with a nonprofit organization, a small business firm, or a non-Federal inventor, the Federal agency employing such coinventor may, for the purpose of consolidating rights in the invention and if it finds that it would expedite the development of the invention–
(1) license or assign whatever rights it may acquire in the subject invention to the nonprofit organization, small business firm, or non-Federal inventor in accordance with the provisions of this chapter; or
(2) acquire any rights in the subject invention from the nonprofit organization, small business firm, or non-Federal inventor, but only to the extent the party from whom the rights are acquired voluntarily enters into the transaction and no other transaction under this chapter is conditioned on such acquisition.
In the standard patent rights clause, as if to somehow fill the silence at least for federal government rights when a contractor fails to acquire title to an invention made with federal support (and to make inventors into contractors for purposes of making the definition of “subject invention” work), we find:
(d) The contractor will convey to the Federal agency, upon written request, title to any subject invention – . . .
(f)(1)(ii) convey title to the Federal agency when requested under paragraph (d) above and to enable the government to obtain patent protection throughout the world in that subject invention.
(f)(2) … and to execute all papers necessary to file patent applications on subject inventions and to establish the government’s rights in the subject inventions
Again, no “assign.” Bayh-Dole is a law regarding the disposition of title to inventions made with federal support, placed in federal patent law, and cannot bring itself to use the term of art in patent law–assign–except with regard to nonprofit organizations. Inventors never assign. Federal agencies don’t assign. And contractors, but for nonprofits, don’t assign–they can, of course–it’s just that Bayh-Dole and the standard patent rights clause don’t use the term–“convey,” “acquire,” “establish”… not “assign.” A sloppy way of reading doesn’t much care for the variations on the “it all means what I say it means” method of interpretation. That’s a good Calliclesian version of law–the law of power, but it gets rather silly when the person asserting it is a petty anti-moralist like a university attorney. Except it’s not silly at all when such a university attorney sets out to wreak havoc on faculty and student inventors.
In (k)(1), nonprofits are prohibited from certain assignments but all assignments must carry with them the patent rights clause including the (k) restrictions–on assignment, on sharing royalties, on the use of royalties to recover costs, on the use of royalties after cost recovery, and a sorry weak gesture (now) at preferring small businesses in licensing. If a university assigns to any regular old company, it must get federal approval, and it must include the standard patent rights clause, and that necessarily and expressly includes the (k) provision. A university might wish to avoid the bother of seeking federal agency approval for such assignments, but a company licensee absolutely will abhor the idea of accepting the (k) provision in such a transaction–sharing royalties with inventors, say, or spending all net income on scientific research or education. Shareholders will not be pleased by such public gestures. Wait until James Love at Knowledge Economy International figures this part out and sues Pfizer for the use of profits from Xtandi, a drug developed from a subject invention at UCLA (licensed exclusively, with all the usual trappings as described above, to Medivation, which was subsequently acquired by Pfizer).