The sound and fury of nonprofit assignments of subject inventions

Over the past few months I have returned the issue of exclusive licenses and assignments in Bayh-Dole. Here’s the operative requirement for nonprofits (35 USC 202(c)(7)(A)):

(7) 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);

The problem is that if one grants an exclusive license to the substantial rights of an invention–make, use, and sell–then the courts have long held that such an exclusive license is in fact an assignment. In copyright law, by way of reference, an exclusive license is defined in the law as one of the ways to transfer ownership in a copyright.

Despite all this, university patent administrators routinely grant exclusive licenses to subject inventions that cover all substantial rights–grant the right to enforce the patent, grant the right to sublicense, and require a reimbursement of the university’s patenting costs–putting the exclusive licensee into the position of paying as if the licensee had filed the patent application. Such exclusive licenses are in every way possible assignments. To be valid, under Bayh-Dole’s requirements–other than requiring federal agency approval–an assignment (even if labeled “exclusive license”) must include that the assignee is subject to the same provisions as the nonprofit contractor–that is, with restrictions on assignment, on sharing royalties with inventors, on recovering costs only for the management of subject inventions, and using the remainder of any income only for scientific research or education. These are not restrictions that most for-profit companies will accept.

And despite this argument, I have yet to encounter many university patent administrators who agree. They guffaw and swear and insist that there’s no problem. They have nothing to back it up other than they haven’t been caught out for it. 

I’ve been thinking that perhaps they get confused between title to a patent (which has the attributes of personal property, subject to the provisions of federal patent law, including Bayh-Dole) and assignment of an invention. When an exclusive license is granted to an invention, the title to the patent may not change–the owner of the patent will still be listed in the U.S. Patent Office as it was. Thus, the title to the patent need not be conveyed in an exclusive license. The exclusive licensee won’t go hip-hip-hopping to the USPTO to record a change in ownership of the patent.

But Bayh-Dole’s prohibition is not directed to title in the patent, but rather to the rights to a subject invention. Those rights are not to be assigned without the nonprofit conditions. It is those rights that constitute the substantial rights of an invention, and it is those that cannot be licensed exclusively so as to constitute an assignment without also complying with the requirement to assign as well those nonprofit conditions.

Here are arguments that might mitigate this position.

“Rights to a subject invention” means “the rights under Bayh-Dole’s standard patent rights clause to elect or retain title if one has acquired title” to a subject invention. In this reading, the prohibition has to do with assigning the nonprofit’s end of a patent rights clause rather than with assigning an invention. That is, a nonprofit might think to assign to a company just the provision in 37 CFR 401.14(b) and nothing else:

(b) Allocation of Principal Rights

The Contractor may retain the entire right, title, and interest throughout the world to each subject invention subject to the provisions of this clause and 35 U.S.C. 203. With respect to any subject invention in which the Contractor retains title, the Federal government shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world.

Perhaps a company would pay for this right, and then could, if it could obtain assignment from inventors, go on its merry way exploiting each invention without any other obligations, since the nonprofit contractor would keep all the other bother but never have any inventions to be bothered with. In this reading, all 202(c)(7)(A) says is that if you assign part of the patent rights clause, you have to assign all of it.

But that’s a strange way to put it. Especially given that assigning the patent rights clause is already dealt with in the definition of funding agreement at 35 USC 201. Any party to a funding agreement becomes a contractor, and parties may join a funding agreement by assignment, subcontract, or substitution. So if a nonprofit assigns part of the patent rights clause, they create in the assignee a new party to the funding agreement, a new contractor, and the requirements of the funding agreement already apply. There’s not much reason for federal approval or a stipulation that the rest of the funding agreement must apply–it does. So this reading renders other parts of the law inoperative or redundant.

Here’s a second idea. The “right to subject invention” means the “right to file a patent application on a subject invention.” That’s a limited right–something of the right to act as an agent for the owner of the invention, such as a patent attorney might be. But in that case, there’s no real reason for federal agency approval or a concern for the broader requirements of the funding agreement–that’s more like the choice of legal counsel or patent agent to do the filing and the requirement reads: “you cannot choose a patent agent that does not have as a primary function being a patent agent.” That’s silly.

Yet a third idea. The prohibition is with regard to assignment of patent rights in the United States. Thus, perhaps one could assign the rights in a subject invention to a company outside the U.S.–so, to a Chinese firm, say. The concern in Bayh-Dole then must be that American firms must accept all the requirements of the patent rights clause, but foreign firms do not have to do so. I don’t think this idea will get very far.

But this idea does raise a valuable point. The assignment prohibition is restricted to “in the United States.” Why? What possibly could be the difference between assigning rights to a subject invention elsewhere and in the U.S.? And why should the provisions of the standard patent rights clause be waivable (or not assigned) if the assignment for rights in a subject invention not in the U.S.? It’s hard to know, but one guess is that it has to do with how foreign patent rights are handled under Bayh-Dole. Whatever the restrictions Bayh-Dole places on the use of the U.S. patent system to promote the utilization of subject inventions, those restrictions do not apply in foreign jurisdictions. One could, then, assign foreign rights–even all foreign rights–to anyone without the nonprofit conditions, but not the U.S. rights. That’s worth an essay all on its own. But let’s turn back to the U.S. What we do find in Bayh-Dole is a comparable clause regarding exclusive licenses in the U.S.(35 USC 204):

Notwithstanding any other provision of this chapter, no small business firm or nonprofit organization which receives title to any subject invention and no assignee of any such small business firm or nonprofit organization shall grant to any person the exclusive right to use or sell any subject invention 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….

We’ve been over this ground previously. The “exclusive right to use or sell” is carefully drafted so that there’s no implication that all substantial rights in the invention have been licensed exclusively–just the exclusive right to use or the exclusive right to sell, in which case, the licensee must make the attempt to comply with the requirement for substantial manufacture in the U.S. of the invention or products produced through the use of the invention.

In the context of 35 USC 204, our prohibition on assignment in 35 USC 202(c)(7)(A) makes some sense. It’s rather of the same concern. If the substantial U.S. rights in a subject invention are assigned by a nonprofit, then the assignee must take on the obligations of the nonprofit, all the way down to the restrictions on the use of licensing income, just as an exclusive license (not an assignment) in the U.S. must require substantial U.S. manufacturing. Another way of putting it is that a nonprofit, in acquiring rights to an invention made with federal support (and thus the invention is a subject invention) must break up the patent monopoly in deploying the invention. That is, if the nonprofit assigns the subject invention, the new assignee must take on this same task–license exclusively or non-exclusively or don’t license at all, but any assignment–that is any transaction with all the substantial rights–must include the nonprofit restrictions as well. The nonprofit, then–or any assignee standing in for the nonprofit–must retain the right to enforce the patent and must allocate all income after allowable expenses to scientific research or education.

Put it bluntly. The enforcer of any patent right in a subject invention must use the proceeds for scientific research or education, after deducting allowable expenses (for the management of subject inventions only and for sharing royalties with inventors). That’s what 35 USC 202(c)(7)(A) is about. That means if an exclusive license grants all substantial rights, then the licensee has standing to enforce the patent, and that means the licensee also has to adopt all the requirements of the nonprofit’s patent rights clause.

Only an entity that dedicates the proceeds from infringement actions to scientific research or education has the right to enforce a patent on a subject invention. This, one might argue, is a prohibition against patent trolling for profit. The investors behind startup companies with failed exclusive licenses to subject inventions do not have the right to “monetize” the patents as a way to recover their investment–if “monetize” means “sue industry for infringement.” Thus, all those clauses in university exclusive patent licenses that have to do with granting the licensee the right to sue for infringement also, necessarily, must also include the requirement that all proceeds from such actions must be used for scientific research or education, after allowable costs.

We might see, then, in the prohibition on nonprofit assignment a limitation on the use of litigation involving patents on subject inventions. Whatever the reasons for the litigation, the financial outcome must be decidedly “public interest”–scientific research or education. One cannot sue for profit. Again, this is consistent with Bayh-Dole’s fundamental statement of policy and objective–to use the patent system to promote the use of inventions made with federal support. How does suing to prevent the use of subject inventions, or to disrupt that use, or to raise the cost of that use in any way serve to promote the use of subject inventions? Answer: doesn’t, not in any way, not really.

Thus, we are back to the argument that exclusive licenses that grant all substantial rights in a subject invention are assignments, and as assignments must include assignment of the nonprofit patent rights clause.

No university that I know complies. The federal government does not appear to care–at least the funding agencies don’t. NIST doesn’t. Maybe the solicitor general would. But until there’s an audit and enforcement, this is just another worthless bit of apparatus that sounds good but is never enforced… rather MacBethian:

Out, out, brief candle!
Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

For “Life” read “Bayh-Dole.” Now, who is it who plays this MacBeth character, who has betrayed the common good and proper authority for personal gain? Ah, I feel the potential for tragic heroes in technology licensing offices everywhere.

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