Undisclosed subject inventions made in development and commercialization contracts

A note on subject inventions not disclosed under Bayh-Dole–and a place for auditors to romp and play as auditors are wont to do, if auditors were ever to romp and play with regard to anything consequential in Bayh-Dole. What follows then is a sort of fantasy because no one ever audits Bayh-Dole for anything consequential!

Under Bayh-Dole, any party to a federal “funding agreement” (a “contractor”) may extend at will the funding agreement to add additional parties to the funding agreement. See the definition of funding agreement at 35 USC 201(b).

New parties to a funding agreement may be added by “any assignment, substitution of parties, or subcontract of any type.” For instance, the (f)(2) agreement requirement in the standard patent rights clause in effect requires institutional contractors to make specified potential inventor employees parties to the funding agreement via the patent rights clause. More so, and expressly, Bayh-Dole requires assignees of nonprofit-owned subject inventions to accept the nonprofit patent rights clause–and therefore those assignees become parties to the funding agreement, and therefore contractors. See 35 USC 202(c)(7)(A).

An exclusive license to all substantial rights in an invention conveys ownership of the invention–is an assignment. There are a number of court decisions, some looking directly at university licensing practices. Most–almost all–university-granted exclusive licenses to inventions are assignments. That means that inventions made in development work by a company that has accepted assignment of a subject invention from a nonprofit, when those inventions are acquired by the company, are also subject inventions. Those inventions are just as “made under contract” or “made in performance of . . . work funded in whole or in part by the Federal government.”

How a contractor manages the scope of any federally supported project therefore has significant consequences for a determination of what work is “under contract.” A university contractor does not have to assign any subject invention to a company as part of “commercialization” efforts. That’s a university’s choice. And when it does assign, the company becomes another party to the funding agreement and any inventions made in the development work, when acquired by the company, have the same requirements as if they were made by the university itself. They are nonprofit subject inventions

If a contractor conducts business so that development comes within the funding agreement’s patent rights clause, then any inventions made in development are also “under contract.”

Take it another step. If a university contractor has a formal, expressly stated policy of seeking to commercialize inventions through use of “development” partnerships, then when a given federal grant is awarded to the university, unless that formal policy is expressly disclaimed, it too becomes part of the “planned and committed” activities that are “under contract.” Any contract created by the university that delegates activities that the university expressly has committed to–such as “commercialization”–extends the federal funding agreement. The federal funding needs only to support “part” of the overall project–reread the “in whole or in part” bit in the definition of funding agreement. Thus, a contractor may create a subcontract under a funding agreement that does not allocate any federal money but does allocate obligations under the funding agreement (via its proposal for funding and/or via the university’s expess, standing policy commitment)–that is, a license to subject invention may also be a subcontract under a federal funding agreement’s patent rights clause. Reread that “subcontract of any type” bit again in the definition of funding agreement.

If any invention made in such development work is not disclosed timely to the federal government, then the company is at risk to lose ownership of these inventions–including any residual nonexclusive license under 37 CFR 401.14(e).

If someone wanted to get at pharma ownership of inventions made in development of drugs discovered at universities in projects receiving federal funding, then a clear angle of attack is to go after these subsequent inventions–not disclosed, and therefore subject to a federal claim of ownership. The company does not even get to retain a non-exclusive license. That means that a company cannot obtain assignment of a university-owned subject invention and then obtain blocking improvement patents so that even if the federal government marched-in on the university’s patent on that subject invention, no one would be able to produce the drug because the company held all the key additional patents that covered the drug–its formulation, dosing, methods of delivery, extended applications, combinations with other interventions, whatever.

Where to start? Pick a pharma company holding assignment (exclusive license) to a university-owned subject invention. Look at the pharma’s patents that cite the university’s patents. Likely these company patents cover undisclosed subject inventions. It’s not that the company merely stands to have these subject inventions enter the public domain–it’s that these inventions won’t enter the public domain and the company will lose any license to practice them–and so shuts down the company’s practical application of the university’s subject invention, now assigned to the company.

March-in then could take place because the company failing to disclose subject inventions could not meet the requirements specified in 35 USC 203(a)–the company would clearly not be able to achieve practical application (could not practice the subsequent subject inventions without a government license) and could not “reasonably satisfy” public needs. There would not be much arguing about it–the lack of a government license would be sufficient to demonstrate breach of 35 USC 203(a). The government could then require the company to license non-exclusively the subject invention acquired from the university, with the consideration being that the federal government would then grant to the company non-exclusive licenses to those undisclosed subject inventions made in development, provided that the company also share its regulatory data with those other companies receiving non-exclusive licenses.

All the tools are there in Bayh-Dole to break up university subject invention patent monopolies. It’s clear that despite the claims of Bayh-Dole advocates with regard to the necessity of patent monopolies for commercial development to take place, Bayh-Dole intends for university patent monopolies on subject inventions to be broken up–or everyone in the chain of ownership of such university subject inventions to dedicate all royalties and income earned with respect to these subject inventions to specified public purposes. The only thing lacking is the will to enforce the law. And that is Bayh-Dole’s greatest cleverness–it was designed without a formal enforcement–not federal oversight, not civil claims. Bayh-Dole delegates all enforcement to federal agencies that grant the funding, and makes a weak, hopelessly useless, agency-optional march-in provision the remedy.

It’s clear how Bayh-Dole should operate. Companies should be expected to take non-exclusive licenses or limited, true exclusive licenses. That would promote “free competition and enterprise” (35 USC 200). That would provide “maximum participation” for small businesses in federally supported development efforts. Companies taking ownership of nonprofit subject inventions would, by contrast, dedicate their earnings on those inventions to the specified public purposes. And any inventions made in development of commercial products based on assigned nonprofit subject inventions would also be subject inventions, would be disclosed and managed as if these inventions, too, had been made at nonprofit organizations under the nonprofit requirements at 35 USC 202(c)(7)(A)–and for that, the companies would have to share royalties with *their* inventors. Those inventors surely have a cause of action.

But like everything else of consequence to the public interest apparatus in Bayh-Dole, nothing of the sort ever happens. 

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