Fifth Layer: practice
On to the next layer of Bayh-Dole, actual practice. We will restrict our discussion here to university practice, but things are much the same for other nonprofits. Small business practice has its own peculiarities, including the oddness of the SBIR/STTR IP agreements, but we will not work through those issues here.
It’s one thing to read the law and follow through the implementing regulations to the patent rights clauses. It’s another thing to assume that universities and other contractors actually comply with the patent rights clauses. The reality is that much of the time they don’t. Whatever is happening under Bayh-Dole does not result from contractors complying with the patent rights clauses. Something else is happening. And that something is not Bayh-Dole or its patent rights clauses.
We have worked through the statute, the implementing regulations, the various patent rights clauses, and how those clauses end up in federal funding agreements surrounded by other requirements on intangible assets. Now let’s look at another characteristic of Bayh-Dole that’s essential to any account of how the law operates or its outcomes.
Bayh-Dole operates through patent rights clauses placed in federal contracts. The enforcement of “Bayh-Dole” really involves the enforcement of the patent rights clauses in the federal contracts. But Bayh-Dole provides no provisions for enforcement. Federal agencies are not tasked with enforcement, nor is the Secretary of Commerce. As a GAO report from 1998 repeatedly observed, Bayh-Dole is not enforced:
Federal agencies’ administration of the Bayh-Dole Act as it applies to research universities is decentralized. While the Department of Commerce has issued implementing regulations and provides coordination under limited circumstances, the act actually is administered by the agencies providing the funds. The agencies’ activities consist largely of ensuring that the universities meet the reporting requirements and deadlines set out in the act and regulations.
That is, agencies worry about the reporting deadlines and not much more. The result has been widespread misrepresentation of Bayh-Dole and widespread non-compliance with the standard patent rights clauses, especially by universities. Universities generally comply (in my experience) with the reporting requirement (c)(1), notices to elect to retain title (c)(2), filing patent applications (c)(3), including a federal funding notice in patent applications (f)(4), and providing a government license (b). Universities also generally comply with conveying signed documents (f)(1) and notifying federal agencies of decisions not to continue patent prosecution or to maintain or defend a patent (f)(3)–though on this point I expect there’s plenty of room for improvement. Universities generally comply with subcontracting requirements, though there are instances in which universities have sought to demand an interest in a subcontracting university’s subject inventions ironically “to comply with Bayh-Dole.”
Universities make an effort to comply with requests for reports on invention use (h), though the substance and accuracy of these reports is not open to public inspection because Bayh-Dole purports to exclude the reports from FOIA disclosure. The reports could be incomplete or perfunctory or make unsupportable claims regarding efforts. But no one would know–not even the inventors. Similarly, universities comply with the U.S. manufacturing requirement (i), but mostly because they don’t actually know what they are doing and so place general language into their exclusive licenses that aims to pass the compliance to the licensee/assignee. Universities also appear to seek waivers to this provision and the NIH, at least, has set up a web site to process these waiver requests, suggesting that there is sufficient volume to justify setting up shop to deal with them.
There a number of areas in which university practice is non-compliant with Bayh-Dole and its patent rights clauses, and where universities misrepresent the law and its requirements. Universities misrepresent the definition of “subject invention,” in section (a) of the standard patent rights clause. Their guidance to inventors varies wildly, but generally university administrators fail to grasp what it means for a subject invention to be made “in performance of work under a federal funding agreement.” They construe “funding agreement” to mean just a specific federal contract and the accounting for its funding in a grant budget. But the definitions at work show a different result. A funding agreement includes extensions by “any assignment, substitution of parties, and subcontract of any type.” It is the work that receives federal support, even if only in part, that defines what work may be “under a funding agreement.” Separate accounting is not determinative. Sequence of work is not determinative. The Supreme Court in Stanford v Roche even held that the mere presence of federal funding did not require the finding that an invention was a subject invention–the work on the invention would have to “distract or diminish” the federally supported, “planned and committed” activities.
The definition of subject invention might be reduced to the difference between any patentable invention “made in a project supported at least in part by the federal government” and a patentable invention “made with federal funds.” The first definition focuses on the project, and then looks to see whether there’s federal support for the project. Any invention in the project is a subject invention. In the second definition, one asks inventors only whether they used federal funds in any way to make the invention. But even the Supreme Court made it clear that the use of federal funds is not determinative. What matters is the activities of the project that has been “planned and committed” and the effect of work on the invention on those activities. Thus “made with federal funds” may be a shorthand, but it is an inaccurate and misleading shorthand.
We might excuse university administrators for getting confused. Bayh-Dole and its patents rights clauses are not drafted to be readily understood by the casual reader or one who has been told what the words must mean–say, by a lobbying group or a law professor–before doing any reading. In practice, however, the problems in meeting the definition of subject invention mean that university administrators routinely both report inventions as subject inventions when they are not, and do not report inventions when they are subject inventions. The definition of subject invention is part of federal patent law. It is not a matter of agreement between a federal agency and a contractor, and it is certainly not up to the contractor to make up whatever definition it wants. University administrators have an incentive to over-report subject inventions–when they can claim an invention is a subject invention, they have then also claimed that “federal law” gives them the right to “take title” or “elect title” on behalf of the university, despite university policy that might be ambiguous on the matter or even place ownership with the inventors.
Many universities have changed their patent policies to “comply” with the Bayh-Dole Act. What they have done, however, in practice is to make their policies reflect their administrative practices that do not comply with Bayh-Dole. Once universities throughout the country have adopted such new policies, however, Bayh-Dole is in a sense redundant and could be repealed without much effect–since the universities don’t comply with the law in many of its substantive elements, and universities have established their non-conforming practice as a matter of policy, repeal of Bayh-Dole would leave those policies in place, still operating. And that would reveal one of the profound effects that Bayh-Dole has had on university patent policy and practice–even without anyone complying with the stipulated nonprofit patent rights clause.
Universities also ignore the definition of “practical application” at (a)(3). Most accounts of the “process” of “technology transfer” end with university licensing. But the patent rights clause is clear that the goal is “practical application”–the use of each invention so that benefits of that use are available to the public on reasonable terms. Thus, a university must conduct its licensing practice so that benefits from use are publicly available.
One way to comply is to license inventions non-exclusively or with only limited points of exclusivity or with exclusivity for only a limited time relative to the life of the patent. By breaking up the patent monopoly and spreading opportunity among various groups–for research use, for internal or DIY use, for use in standards–a university creates the opportunity for benefits to be available on reasonable (that is, not monopolistic) terms.
A second way to comply is to require price controls in an exclusive licensing agreement, so that the licensee agrees not to rely on the licensed patent monopoly to extract the greatest price the market can bear. In the case of the “market” for medical treatment of disease or injury, we might regard charging the greatest price suffering or desperate people are willing to pay as an unethical gouging. Perhaps business on its own might be permitted to do so, but why should the federal government be aligned with doing so, even to the point of subsidizing the investments made by such speculators in seeking monopoly positions to exploit? We might ask then even if Bayh-Dole permitted (or even encouraged) universities to provide speculators in areas such as human health with patent positions, why would university administrators allow their institutions to participate in such a scheme? As it is, Bayh-Dole does not promote such schemes directly, but it does set up a pipeline that accomplishes this same result if the patent rights clause is not enforced.
Universities misrepresent their rights with respect to subject inventions (b). University administrators depict Bayh-Dole as favoring institutional ownership of inventions made in federally funded projects. But nothing in Bayh-Dole does so. The Stanford v Roche case hinged on whether Bayh-Dole granted some special right or obligation to universities that host federally funded research. The Supreme Court ruled that it did not. Bayh-Dole dictates the priority of rights between a contractor and the federal government only after the contractor has come to own an invention, making it a subject invention. All this notwithstanding, university administrators continue to misrepresent their privilege, playing on the ambiguity in “elect title.” If pressed, they might concede that “elect title” is shorthand for “elect to retain title” obtained by other means unrelated to Bayh-Dole and its patent rights clauses. But in practice, they allow inventors, faculty, companies, and the public to surmise that the usage means that the university has a special right to ownership and inventors are powerless to stop their taking.
Universities refuse to comply with the written agreement requirement at (f)(2). No university to my knowledge complies. One that I worked for flatly refused. “We will comply when a federal agency tells us we must.” Another one that I used to worked for shut down a faculty member’s grants in retaliation because she asked the university to comply and it refused. Without an (f)(2) agreement, inventions are not subject inventions until acquired by the research host organization, rendering the inventor patent rights clause inoperative and the authority in Bayh-Dole for the clause (35 USC 202(d)) useless.
University administrators interpret the sequence by which inventors might gain ownership of their inventions backwards. They first claim the invention for the university and then indicate that they might be willing to assign the invention back to the inventors if the invention proves worthless to them. But if they assign back, that assignment is subject to (k)(1) of the nonprofit patent rights clause, and so carries with it the nonprofit patent rights clause, not the inventors patent rights clause. In short, university administrators make a complete hash of the regulations.
Similarly, the idea that assigning inventions back to inventors after they prove worthless makes hash of Bayh-Dole’s use of “retain” in the authorization for inventor ownership (35 USC 202(d) again). The Supreme Court argued that inventors must have some rights in subject inventions “at some point”:
By using the word “retention,” §202(d) assumes that the inventor had rights in the subject invention at some point, undermining the notion that the Act automatically vests title to federally funded inventions in federal contractors.
The Supreme Court was not asked to provide a discourse on Bayh-Dole’s implementing regulations and thus did not discuss how the inventor patent rights clause operates, but the Court let stand an inventor’s assignment–one that Stanford disputed–and such an assignment is perfectly consistent with the inventor patent rights clause.
Compliant practice requires the (f)(2) written agreement, and in turn (f)(2) compliance results in university inventors becoming small business contractors under the inventors patent rights clause. The 2018 insertion of an assignment of subject inventions “to the contractor” applies apparently only to those inventions that “the contractor” (the research host organization) would otherwise have an equitable claim upon, were there no federal funding involved. But is easy to see how the assignment requirement will be abused by university administrators and federal agency officers alike.
Since university faculty must request to be released from their university duties to work on federally funded grants, at least faculty inventors clearly work outside the scope of any employment agreement pertaining to inventions once the university requires them to make the (f)(2) written agreement to protect the government’s interest in those inventions and joins them as subcontractors as parties to the funding agreement. The new 2018 assignment requirement cannot reach to inventions that are not subject inventions–it expressly limits its requirement to the assignment of subject inventions, inventions already owned by the contractor. This situation is as open as any particular participant does or does not believe that university faculty investigators should have a clear right to the inventions they make in projects receiving federal support.
(And if the choice is that faculty investigators should not have a right to their inventions–perhaps because they might become greedy and seek to exploit monopoly patent rights for financial advantage–then it becomes a strange logic that in their place university administrators should adopt similar practices to chase money based on offering monopoly patent rights, and even construing the need to do so as necessary to reward inventors for their assignment of rights to the university. If inventors’ greed or judgment is of such concern, why should not a university merely require the inventor to divest of any invention ownership that might be pursued for commercial gain. Inventions published to the public domain would not be an issue, nor would inventions for which patents were obtained but were licensed non-exclusively and royalty-free or for a fair, reasonable, and non-discriminatory royalty).
Universities generally fail to comply with the specific nonprofit provisions (k) of the patent rights clause. They routinely assign subject inventions without required federal agency approval and often without passing through the nonprofit patent rights clause (k)(1). As a result, universities fail to require the financial public covenant that comes with ownership of a nonprofit subject invention. Insofar as university administrators reason that a patent stripped of the financial requirements is “more valuable,” the administrators seek financial benefit for their institutions through their non-compliance.
While universities share royalties with inventors (k)(2), they do not require their assignees (in the form of exclusive licensees) to do so as well. University administrators also deduct from licensing revenue more than (k)(3) permits. Often the deductions take the form of a set percentage of any royalty, depicted as an “administrative fee” or the like. But unless the deduction is less than the total required for “expenses incidental to the administration of subject inventions,” or is reserved only for subject inventions, the university is non-compliant. The same is true for any other “income earned with respect to subject inventions”–research services, sales of materials, and the like. Any balance after expenses must go to support “scientific research or education.” University administrators take this requirement to mean any activity in “higher education” and so may allocate money to departments to use as discretionary funds. Or, as in a recent high-profile case in which a university sold its right to receive future royalties on a subject invention for hundreds of millions dollars, the university announced that it would invest the funds. Perhaps in some distant future, there would be returns to support scientific research or education.
The non-compliance with (k)(3) runs deeper when the university pushes subject inventions to a research foundation or commercialization corporation. Such organizations typically take a sizable percentage of income off the top (40%, say) plus expenses. Again,the organizations may some day use that money to support scientific research or education, but in the meantime, they invest in stocks, lease buildings, give raises to employees, add staff, and generally support themselves.
Of course, when universities assign subject inventions to for-profit companies under the cover of exclusive licenses to all substantial rights in the invention, they do not require (k)(3) and the financial covenant with regard to nonprofit subject inventions is simply ignored. If universities made clear that (k)(3) was required for such exclusive licenses, for-profit companies would refuse such exclusive licenses and Bayh-Dole would have a much different effect–much broader non-exclusive access to subject inventions, earlier access to subject inventions, less overhead in gaining access to subject inventions. University administrators’ refusal to comply with (k)(3) is one of the most significant failures under Bayh-Dole.
Finally, universities fail to comply fully with the requirement to prefer small business licensees (k)(4). While universities insist that a majority of their licenses go to small businesses, they never break out how many of those licenses involve subject inventions. Many such “inventions” involve unpatented materials, such as computer software, or inventions that are not subject inventions. AUTM, for instance, defines a “commercial license” as any deal generating more than $1,000. It is easy for such transactions to involve small companies without complying with (k)(4). Universities also routinely grant non-exclusive licenses upfront to industry research sponsors, but the inventions so committed are not generally subject inventions. NSF funded consortia are an exception, where the federal government provides partial funding and industry sponsors supply the rest. However, (k)(4)’s requirement is not met merely because a university licenses to small businesses. The requirement is for each subject invention, the nonprofit “will make efforts that are reasonable under the circumstances to attract licensees of subject invention that are small business firms.” For compliance with (k)(4) the “effort to attract” small businesses as licensees matters. Publishing a “technology available for licensing” on a web site does not constitute a reasonable effort under the circumstances.
If we pause for a moment to compare the areas of the standard patent rights clause in which universities mostly comply with those that they generally do not, the difference is stark. Universities comply with paperwork requirements–disclosure, notices, reporting, government licenses, and delivering required paperwork. Universities fail to comply with substantive requirements–they misrepresent their claim to ownership; they are confused about subject inventions; they refuse to comply with the written agreement requirement that establishes employee inventors as contractors and enables the inventor patent rights clause; and they ignore most of the requirements specific to nonprofits. In short, they are great with paper and rotten on the substance of Bayh-Dole–ownership, delegation, exploitation of patent monopolies, money.