Bayh-Dole basics, 3: funding agreement comments

Bayh-Dole uses the definition of “funding agreement” for much heavy lifting. The definition does much more than merely restrict Bayh-Dole’s interest to grants, contracts, and cooperative agreements. The definition establishes the scope of the law to include experimental work, developmental work, and research involved in any such grants, contracts, and cooperative agreements. Experiment, development, and research are not just a pile of synonyms for whatever work is performed under a grant, contract, or collaborative agreement. For instance, consider these definitions from OMB Circular 11 (1998) (via a Rand report):

Basic Research

Systematic study directed toward greater knowledge or understanding of the fundamental aspects of phenomena and of observable facts without specific applications toward processes or products in mind.

Applied Research

Systematic study to gain knowledge or understanding necessary to determine the means by which a recognized and specific need may be met.


Systematic application of knowledge toward the production of useful materials, devices, and systems or methods, including design, development, and improvement of prototypes and new processes to meet specific requirements.

There are other definitions around, of course, but the gist here is that research involves something systematic–there’s a protocol, a planned set of actions, no going off topic. Second, research is about greater knowledge–whether basic or applied–while development is about applying knowledge to do something, such as build a prototype of something useful. Development is the process by which products get created, for instance. Thus–and this is important–the definition of funding agreement is broad enough to take in both the university-hosted research and the “commercialization” of product development that applies the new knowledge created by the university-hosted research.

These two activities–university-hosted research and commercial product development–can be thought of as entirely separate activities, bridged in some way by a university brokered contract. Indeed, that’s a typical mental geography. But the definition of funding agreement does not follow that mental geography. Instead, the definition puts forward the prospect that a funding agreement can include development if a party to the funding agreement extends the funding agreement according to the definition.

The definition expands a funding agreement to include a wide range of agreements and actions that are based on the funding agreement–assignment, substitution of parties, and subcontract of any type. A university contractor is required by the standard patent rights clause to make qualified inventor-employees parties to the funding agreement–that’s the import of the (f)(2) written agreement requirement of the standard patent rights clause at 37 CFR 401.14(a). The inventor-employees, by the university’s action, are subcontracted as private individuals to report inventions, sign papers to permit patent applications to be filed, and to establish the government’s rights in subject inventions. The inventor-employees are to be treated, according to 37 CFR 401.9, as small business contractors–but with fewer requirements than other small business contractors. The (f)(2) written agreement requirement amounts to a compulsory subcontract to inventors hosted by the university-contractor as small business contractors for the purpose of reporting inventions, filing patent applications, and licensing or assigning rights to the federal government.

That’s one significant element of the expansive definition provided for funding agreement. A second significant element concerns assignment. There are multiple forms of assignment available–assignment of the funding agreement, assignment of the patent rights clause, assignment of subject inventions. These forms of assignment extend the definition of funding agreement, and by extension, expand the parties to the funding agreement, and therefore also the “contractors”–which are defined as any parties to the funding agreement.

Consider, then, assignment of subject inventions. For nonprofits, there’s an express limitation on the assignment of subject inventions, given at 37 CFR 401.14(a)(k)(1):

(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

We can remove the qualifications for a moment to show the structure of the requirement:

Rights to a subject invention may be assigned [in certain circumstances], provided that such assignee will be subject to the same provisions as the contractor

That is, in any assignment of a subject invention by a nonprofit, the assignee has to accept the same nonprofit patent rights clause–namely, section (k) of the standard patent rights clause. Yes, we are only talking about the US rights in an invention–amazingly–and there’s an agency approval step for assignments other than to invention management organizations–but there’s a requirement on all assignments that the assignee will “be subject to” the nonprofit patent rights clause. The nonprofit patent rights clause follows all assignments–and the assignee of the subject invention then becomes a party to the funding agreement, by Bayh-Dole’s expansive definition of funding agreement.

This is, in its way, huge. If a nonprofit assigns a subject invention to a company, then that company also accepts the conditions of the nonprofit patent rights clause. That means, in particular, that the company accepts restrictions on the use of royalties (arising from licensing) and the use of income with respect to the subject invention (that is, anything other than royalties–such as sales revenue):

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

The only expenses to be deducted from such revenue is for the administration of subject inventions. Anything remaining goes to scientific research or education. Not to dividends, not to new buildings, not to executive bonuses. The company, by accepting assignment of a subject invention from a nonprofit, becomes, for the purposes of anything with respect to the subject invention, also a nonprofit in its financial affairs concerning the development and exploitation of subject inventions. Few if any companies will accept a deal with these requirements–but there they are in federal patent law and the standard patent rights clause.

From a “let’s exploit everything without accountability” point of view, this clause is a poison pill. From a “patents on subject inventions are not ordinary patents and are subject to a public covenant and especially for nonprofits” point of view, this clause is just what the doctor ordered–the money made from the exploitation of subject inventions should be dedicated to expenses in administrating those inventions, sharing royalties with inventors, and anything else dedicated to the support of scientific research (not just any old research) or education (and here it’s ambiguous whether “scientific” modifies both coordinate nouns, research and education, or in baddish usage modifies only the first noun–is it education or scientific research? or is it scientific research or scientific education?) In any event, it’s clear that money made from the exploitation of patents on subject inventions is not ordinary money.

Now here’s the thing. University patent administrators believe they can circumvent this requirement by labeling their licenses “Exclusive Patent License.” It’s just that those exclusive licenses routinely make an exclusive grant of all substantial rights in the subject invention. And a grant of all substantial rights constitutes assignment of the invention. The intent to assign the invention is further evidenced by the exclusive patent license’s acknowledgement that the exclusive licensee/assignee has the right to enforce the patent–only the owner of the invention has this standing, generally. Thus, while university patent administrators make a big flourish about not assigning title to their patents, they do assign the subject inventions on which those patents are based.

Of course, none of this is yet enforced. But when it happens, it will be a ton of bricks on companies that have taken assignment of subject inventions and are called to account for the use of all income with respect to those subject inventions. We are talking tens of billions of dollars just with respect to a handful of prescription drugs.

The upshot: for non-profits, Bayh-Dole insists that licenses to subject inventions must be less than assignments. As Bayh-Dole puts it in the US manufacturing requirement (limited to the point of silliness as it is)–exclusive license to use or to sell. If a nonprofit grants an exclusive license to make, use, and sell–that’s an assignment, and the nonprofit patent rights clause transfers with the assignment as a matter of federal law and contract.

This requirement is at the heart of Bayh-Dole’s requirement that the patent system be used, for inventions arising in work funded at least in part by the federal government, to promote free competition and enterprise. That is, nonprofits must break up the patent monopoly or else, if they transfer the patent monopoly, they must also transfer the nonprofit obligation–to break up the patent monopoly or dedicate all income after allowable expenses to “public” purposes–“scientific research or education.”

We may push this point one more way. The definition of funding agreement includes this:

for the performance of experimental, developmental, or research work funded in whole or in part by the Federal Government

Parse this. A funding agreement may provide partial support for the “performance of work.” This, too, is huge. The scope of the work or “project” can be greater than that of the federal funding portion. The work may extend in time before or after the term in which the federal funding is provided. The implementing regulations, in the discussion of scope at 37 CFR 401.1, make clear that “separate accounting for the two funds used to support the project in this case is not a determining factor.” Indeed, the “or in part” is much, much more general and expansive than the “in whole.” Just because a university (and any other parties to the funding agreement created through the actions of the university) keeps separate books does not mean that an invention made entirely without the direct use of federal money is free and clear. The determining criterion is whether the activity is part of the combined “performance of work” that has received in another part the support of the federal government.

There is an easy analysis and a more arguable one. Let’s look at the easy analysis. Anyone who is a party to a funding agreement receives the benefit of federal support. The scope of the “work” is anything that follows from the actions of the university-contractor in assigning, substituting parties, or subcontracting. When a university-contractor assigns a subject invention for commercial development, it is crystal clear that the performance of the specified development work, even though separately accounted, is entirely within the scope of the “performance of work” of the funding agreement. That development work is supported in part by the federal funds received by the university. It’s clear as day in the exclusive licensing agreements, which lay out the fact of federal funding, that the invention is a subject invention, and that the licensee/assignee is subject to the Bayh-Dole Act and its implementing regulations–meaning, in the convoluted way in which university patent administrators tend to work–subject to the nonprofit patent rights clause.

The more arguable analysis broadens the scope further. If a university states in its policies or an investigator states in his or her proposal for funding or the federal agency states in its call for proposals that a purpose of the project is to invent and discover as a foundation to create commercial products, then the “performance of work,” the “project” conducted under the funding agreement spans experiment, research, and development, regardless of who might become involved. In the old days of the pharmaceutical industry boycott of Public Health Service supported inventions in medicinal chemistry, this was exactly the point of contention. A little PHS funding for an invention meant that any resulting commercial product was also encumbered with a federal claim–and the PHS then could then make the product–not merely the patented invention–available non-exclusively. Or, put another way, the “invention” that was supported was the entire thing–the discovery through development to product–that invention, not merely a bit that was first patented by whomever supported with PHS funding. There are law cases that go this direction and all that. Folks that don’t want this result will throw sticks and leaves in the air and howl, and we will waste time fussing through their logic.

Perhaps, though, you see where the argument for the public interest lies in the arguable analysis. The pharmaceutical industry objects to the idea that the public interest lies in making available products to all without the benefit of a patent monopoly to run up 10x to 100x the profits–money that then can be used to reward investors and expand the effort to buy up even more discoveries to prevent them from becoming generally available–of course such efforts will be “risky” and prone to “failure” to develop commercial products–that’s the point–that everything that the pharmaceutical industry doesn’t adopt as lucrative product should be killed off. And remember, we aren’t talking about an invention as a single molecule. An invention, in this area, is often hundreds if not thousands of compounds in myriad variations. All those variations get killed off, for twenty years, when the invention that’s acquired doesn’t become a product because one or two samples from the class of compounds doesn’t go forward in testing.

If Bayh-Dole were enforced, then a company would get only an exclusive license to sell the class of compounds covered by the patent, and after a time, would lose that exclusive license for all compounds in the class that the company was not selling as product. That is, nonuse of the invention has to do with each and every bit of claim. Use of the “invention”–the class of claimed compounds–is not met by using just one of those compounds in a product. A company might get five or eight years to develop a product. Then everything else that’s not a product and not clearly on its way to becoming a product goes non-exclusive or the license gets terminated for nonuse of all those unused, undeveloped compounds within the patent’s claims. Free competition and enterprise. Utilization. Availability of everything else. This is more than just the march-in. This is fundamental to Bayh-Dole’s public covenant for patent rights in inventions arising in federally funded research or development–35 USC 200 stuff. If Bayh-Dole were enforced, there would be a whole lot more inventive work available for competitive use and commercial development. But university patent administrators refuse to comply with Bayh-Dole, even while they champion Bayh-Dole. The boogers.

Through the actions of the university-contractor, a company accepting assignment of a subject invention brings the entire “commercialization” effort within the scope of the definition of “funding agreement.” The entire effort then is committed to a public purpose. Not only must the benefits of use of the invention be made available to the public on reasonable terms (not whatever the market will bear, not whatever a patent monopoly might support) but also whatever balance is left after the expense of administrating subject inventions (filing patent applications, paying maintenance fees, paying inventors) goes to public purposes–“scientific research or education.”

May I say this is huge one more time? Yes. It does not have to be this way. A university and a company can agree that the company will have less than all substantial rights in a subject invention. That’s a choice–nothing in Bayh-Dole or the nonprofit patent rights clause gets in the way. The company can get an exclusive right to sell, for instance, but not an exclusive right to make or use. That frees up a wide scope of making and using that does not involve also selling–anyone then might make and use an invention for research purposes or for internal company use or for professional use (such as a laboratory medicine test). Thus, there would be free competition between those who could make and use an invention on their own and companies aiming to sell them commercial products to do the same thing. Bayh-Dole’s public covenant would be satisfied.

This is the heart of Bayh-Dole as it exists in the statute. But university administrators, Aztecs that they are, cut the heart out of Bayh-Dole and dedicate it and the lifeless body of requirements on the alter of their nasty, boogerish mindset about dealing in patent monopolies. If they were forced to comply with Bayh-Dole, had their noses rubbed in it long enough to make them gasp for breath and cry uncle, and if companies came screaming back to them demanding to give up their exclusive rights to make and use and so avoid accounting for their income as if nonprofits working for the public good, then we would see Bayh-Dole restored to life, at the expense, hopefully of the jobs of the good-for-nothing patent administrators and their legal advisors who have led this corruption of federally sponsored research, to the disadvantage of inventors, innovation, and us all.

University administrators aren’t the only ones to circumvent the “funding agreement” issues in Bayh-Dole. Federal agencies do so as well. They use two approaches. The first is to assert that a given contract is for procurement or for commercially available items and therefore is not within the definition of “funding agreement” even if the commercially available item is “research services.” The second is to assert that the funding arrangement is not a grant, contract, or collaborative agreement. It is something else. An “other transaction authority” deal, even if it is indeed a federal contract. Thus, even though Bayh-Dole gestures toward a “uniform” policy regarding patent rights in federally supported work, it does not achieve that goal.

There are of course work arounds to uniformity built into Bayh-Dole, such as exceptional circumstances determinations and Congress permitting itself to pass later laws to supersede Bayh-Dole’s defaults. Federal agencies are given broad power to waive obligations and decline to enforce the patent rights clause and decline to oversee practice under the law and decline to act on rights reserved for the federal government. But there are also ways to work around Bayh-Dole by stepping outside its definition of funding agreement–not a contract (even if it is), not for research (even if it is). One would think, if Bayh-Dole were so inspired, and gave such incentives to contractors to innovate in the public interest, that university administrators, federal contract officers, and company contractors alike would insist on moving work within Bayh-Dole and using its default terms. But none of them do. Bayh-Dole serves a purpose, but it’s not uniformity (a bureaucratic virtue, at best, not an innovation virtue).

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