The Arizona Commerce Authority Guidance on Bayh-Dole, 1

Here is the Arizona Commerce Authority providing advice about IP and the Bayh-Dole Act in the SBIR/STTR programs to small businesses. The article was apparently written a decade ago, updated with a note after Stanford v Roche (2011), and apparently abandoned to blink out its obsolete and mistaken message to Arizona small businesses since, just to hammer home the point of how much the Authority really cares about small businesses and these issues, which according to the Authority, are among the most important ones a small business ought to understand. Let’s work through this lingering, unattended bit of bad guidance from the Arizona Commerce Authority.

The Bayh-Dole Act (also called the University and Small Business Patent Procedures Act) is United States legislation dealing with intellectual property developed as part of federal government-funded research.

A poor opening. Bayh-Dole deals only with patentable inventions and (non-patentable) plant varieties–and only then when such inventions (i) have been acquired by a party to a federal funding agreement and (ii) have been made in the performance of work under that agreement. Bayh-Dole does not concern not intellectual property generally. Bayh-Dole does not concern inventions made in work receiving federal support until those inventions are acquired by a party to the federal funding agreement–a contractor. If a contractor does not acquire, Bayh-Dole does not apply.

The opening is then just plain sloppy, and in misleading and potentially damaging ways. Here is a less sloppy revision:

The Bayh-Dole Act deals with patentable inventions (and nonpatentable plant varieties), when acquired by company contractors, that have been made in research or development work receiving federal support.

Folks really shouldn’t just make things up about the law when offering guidance.

Bayh-Dole stipulates the provisions for a standard patent rights clause for every federal research or development funding agreement unless a federal agency can justify a different patent rights clause. This standard patent rights clause becomes effective when there’s an invention made under contract that is acquired by the contractor. Bayh-Dole defines such acquired inventions as subject inventions. A subject invention is not just any invention (or intellectual property) developed in federally funded research–the distinguishing condition is that the invention has been acquired by a contractor. If a given invention has not been acquired by a contractor, then there’s no subject invention, and Bayh-Dole at least does not apply. Other federal laws may apply–but not Bayh-Dole. This is all laid out in detail by the Supreme Court in Stanford v Roche. An invention “of the Contractor” is one owned by the Contractor: “of” means owned by.

Adopted in 1980, Bayh-Dole is codified in 35 U.S.C. § 200-212 and implemented by 37 C.F.R. 401.

Yes! This part is true. Just for clarity, Bayh-Dole became effective July 1, 1981. But the important point is that Bayh-Dole preempts other federal laws pertaining to federal government interest in inventions made in federally funded research or development when contractors acquire those inventions. The practice importance is: if a company wants the benefits (and pain) of Bayh-Dole, then the contractor should find ways to acquire those inventions. Otherwise, and especially if a contractor needs only a shop right in such inventions, then there’s no point in acquiring the invention and incurring the pain and expense of dealing with Bayh-Dole.

Among other things, it gives U.S. universities, small businesses and nonprofit organizations control of their inventions and other intellectual property that result from such funding.

Not. Bayh-Dole does not give anyone anything. Bayh-Dole requires federal agencies to use a default patent rights clause in funding agreements with nonprofits and small businesses unless they can justify a different patent rights clause. That patent rights clause allows contractors to retain ownership of subject inventions–patentable inventions made under federal contract and which the contractors have acquired. “Other intellectual property” is too broad. The sloppiness in the first sentence gets repeated. The “other intellectual property” is the quasi-intellectual property of plant variety certificates. But the Commerce Authority would have readers think about copyrights and trade secrets and know how and ideas and software and whatever else someone might cough up claiming it’s intellectual property.

The Act, sponsored by senators Birch Bayh of Indiana and Bob Dole of Kansas, was enacted by the United States Congress on December 12, 1980.

Yes, but this is meaningless filler at this point. Actually, it is also wrong. What is called Bayh-Dole was in historical fact sponsored by Representative Kastenmeier of Wisconsin as H.R. 6933. The bill sponsored by Bayh and Dole (and many others), S. 414, did not pass. Instead, Kastenmeier tacked the text of S. 414 onto a house bill, which passed and then got voted on by the Senate. This bit is also meaningless filler, but at least it is accurate filler.

All small businesses, as well as faculty entrepreneurs that are pursuing SBIR or STTR funding, should read the Bayh-Dole Act. It is important to know the rights of small businesses, universities and inventors.

And their heads will hurt and they still won’t know anything. If anything, they should read the standard patent rights clauses at 37 CFR 401.14 and 37 CFR 401.9. Those are the clauses that will control the actions of federal agencies–unless a federal agency changes the default–if a contractor acquires an invention made in the performance of work under an SBIR or STTR grant. They won’t learn much at all about the rights of inventors, small businesses, or universities, however. They will learn about the rights of federal agencies. Gosh golly whiz.

Here is the essence of Bayh-Dole: 35 USC 202(a):

Each nonprofit organization or small business firm may, within a reasonable time after disclosure as required by paragraph (c)(1) of this section, elect to retain title to any subject invention

There it is. Acquire an invention made under federal contract, thus turning the invention into a subject invention. Disclose the subject invention to the funding agency with the detail necessary for determining patentability and filing a patent application. Notify the federal agency that you choose to keep ownership of the subject invention you have disclosed.

Perhaps the most important change associated with the Act is that it reversed the presumption of title.

Now we get fake–and irrelevant–history. What does it matter for Arizona small businesses and nonprofits what federal contracting was doing in 1980–two decades and more ago? Nothing.

For what it is worth, the federal contracting situation prior to Bayh-Dole involved a set of statutes that required ownership of inventions made in specific research and development circumstances. These statutes in turn overlaid the Federal Procurement Regulation (1975) based on the Nixon (1971) executive branch patent policy which was a variation on the Kennedy (1963) patent policy. In effect, the federal statutes came within the four situations in which the Kennedy and Nixon policies expected federal ownership of inventions–with release of the inventions to the public.

In the FPR, the “presumption of title” applied to inventions made in these four situations–in research for which federal agencies intended to do the development; research addressing public health, safety, or welfare; research in which the government was the dominant funder or user and private ownership would screw up open bidding processes; and where a contractor was managing the work of others. It was not a “presumption of title” so much as a requirement that the government had the right to request (and then receive title) from either the contractor or the inventors employed by the contractor. It made *sense* in these areas for the government to acquire ownership and release rights. Even so, the FPR allowed federal agencies to make a determination that a contractor could retain ownership–that is, the federal agency could waive the requirement that the contractor assign title–if doing so best served the public interest. The point was–the contractor had to make a written case that its control of patent rights in inventions made with public funding would be better than the government’s release of inventions for public use, with or without issuing a patent to itself.

Outside of these four situations, the federal policy provided that companies with a non-governmental market could expect to own their inventions. The “presumption of ownership” was with companies that had a business other than getting government contracts. That covered most defense contracting–where the government spent the vast majority of its research and development funds.

Companies without a real market and nonprofits–not expected to have any market–were required to make a written case why they should get to deal in patent monopolies for invention they had gone out of the way to acquire and which would otherwise be released to the public via the public domain or government royalty-free, non-exclusive licenses, often with no formalities. The big reversal of Bayh-Dole, then, involved doing away with contractors having to make a case for their dealing in patent monopolies. What could possibly go wrong? Yes, many things.

Under the FPR, “subject invention” had a definition that differs from the definition used by Bayh-Dole–in the FPR patent rights clause, a subject invention was any invention made with federal support, regardless of ownership. Under Bayh-Dole, a contractor has to acquire a conforming invention before Bayh-Dole’s standard patent rights clause even applies. In effect, after Bayh-Dole, each federal contract carries three patent rights clauses. One is Bayh-Dole, effective if a contractor acquires an invention made under contract, and preempting other federal laws (but for Stevenson-Wydler). A second one is that of federal statute–if a federal statute applies and a contractor does not act to make Bayh-Dole effective. A third one is that of executive branch patent policy in the situation in which a contractor does not acquire a given invention made under contract and no other federal statute applies–but this third patent rights clause apparently no longer exists because the FPR was replaced by the Federal Acquisition Regulation in 1984 and the FAR specifies the use only of Bayh-Dole’s standard patent rights clause.

Folks plumb forget to include the FPR’s patent rights clause, which would have applied when a contractor did not acquire ownership of an invention made under contract. Well, actually they didn’t forget. They did something else. They created a separate patent rights clause that applies only to inventors (see 37 CFR 401.9) and then required contractors to make their inventive employees parties to the funding agreement (see 37 CFR 401.14(f) and 37 CFR 401.2(a)), so that inventors were now to be treated as small business contractors and therefore their inventions made under contract were then necessarily subject inventions–but ones owned by the inventors and not by their employer-contractors. Sheesh. Now I have a headache.

So the real turnabout in Bayh-Dole is that when a contractor does not acquire an invention made under federal contract through some conventional means (make an offer, have that offer accepted, pay consideration), the inventor has the right under 35 USC 202(a) to choose to keep ownership of the invention–and without the obligation to file a patent application. The inventor can blow patent rights, or can deal in patents in the same manner as could a small company, even if the inventor is employed by a nonprofit (Bayh-Dole restricts the patent dealing of nonprofits).

Just to add one more historical layer. The nonprofit “presumption” of federal ownership under executive branch patent policy (both Kennedy and Nixon) was disabled for most nonprofit federal contracts by the NIH’s and NSF’s Institutional Patent Agreement program. Under the IPA master contract, these two federal agencies essentially contracted away the federal government’s policy of requiring federal ownership of inventions for nonprofits. Over 70 nonprofits were in the NIH’s IPA program by 1978, when the program was shut down as ineffective and contrary to public policy. Thus, for nonprofits, Bayh-Dole represented no great change at all in federal claims of ownership, and represented a huge change for inventors–but nonprofits, especially universities, have for some reason (what? money? surely not!) suppressed this change in favor of inventors. The Arizona Commerce Authority doesn’t evidence much authority in its recitation of history. But there’s more.

Bayh-Dole, unlike the IPA program and the FPR, placed the acquisition of inventions entirely outside federal contracting requirements. Bayh-Dole’s big move was to establish an arbitrary patent rights clause that applied regardless of the contracting purposes or circumstances, regardless of the capabilities or intentions or track record of the contractor, and regardless of outcomes. Federal agencies, to recover invention management practices consistent with their public purposes, had to go through a Bayh-Dole procedure to justify those practices for each contract. Only the Department of Energy argued effectively for its own standing exception to the Bayh-Dole standard patent rights clause, for certain research contracts involving nuclear propulsion and weapons systems. Both the National Patent Planning Commission and the Harbridge House report concluded that an arbitrary patent policy across all federal research was not in the public interest and was not workable. Bayh-Dole cheerfully ignored those conclusions, turned arbitrariness into a virtue and relabeled it “uniform,” made it difficult to change the defaults and left it open for federal agencies to waive or ignore the contractor’s obligations under the default patent rights clause whenever it suited them. So much for any uniform application of an arbitrary patent rights clause. Got it? Good!

And then fake law:

Bayh-Dole permits a university, small business, or nonprofit institution to elect to pursue ownership of an invention in preference to the government.

There is nothing in Bayh-Dole about contractors “electing to pursue ownership in preference to the government.” A contractor has to already have ownership for Bayh-Dole to even apply. Having ownership, in rational minds, does not involve pursuing ownership. These are different. Perhaps the Arizona folks mean pursuing a patent on a subject invention–but they didn’t bother to write that. But even then, Bayh-Dole requires institutional contractors to pursue a patent on each subject invention they acquire–institutional contractors (unlike inventor contractors) don’t get to “elect” to do that. They must file a patent application or else the federal agency can request title (but doesn’t have to–again, so much for uniform practice).

More so, the fake account of the law is misleading–it makes it appear that somehow universities and the like have under Bayh-Dole some special privilege to acquire (by pursuit, apparently) inventions made with federal support. They don’t.

Now our Authority repeats tired old bluffshit:

Prior to the enactment of Bayh-Dole, the U.S. government had accumulated 30,000 patents. Only approximately 5-percent of those patents were commercially licensed.

Admiral Rickover dismantled these claims when they were first made in the late 1970s. Rebecca Eisenberg has done so more recently. Most of the 28,000 patents (the number slopped around) were defense related, and the contractors had waived their interest in owning them. Those patents were acquired for, ahem, “defensive” purposes and were made available indifferently for domestic use. No one needed a license because no one bothered, in most cases, to require a license. Thus, the 5% figure–again a figure pulled out of his posterior cortex by a federal patent attorney without any support–represents an estimate of the number of patents for which any federal agency bothered with “commercial licensing.” That is, these perhaps 1,500 patents were ones that *were not generally available.” As Eisenberg documents it, of the 250 or so biomedical patents held by the federal government, 23% were not generally available for broad use, having been “commercially licensed.” By contrast, under the IPA program, only about 10% of biomedical patents had been licensed.

So it’s just political bluffery without regard for the truth–bluffshit. The government didn’t bother to track the inventions it made available to all. The 5% figure–even if it were based on anything but stinky lawyer air–represents not the inventions somehow available but the inventions that had been made unavailable in favor of private exploitation. How many of those 1,500 inventions became commercial products? What was the effect of those licenses on industry, on the cost of development, on the speed of development, on the price the public paid for access, if they ever got to access? It’s not to be found in the stinky air of that 5% figure.

By contrast, universities and affiliated nonprofits now hold over 120,000 US utility patents, over 50,000 of which cite federal funding. Bayh-Dole keeps their licensing rates secret and universities for the most part refuse to divulge their rates, but it appears their licensing rates are under 20% and commercialization rates much less than that. But here the 20% licensing rate does not even reflect the inventions that are generally available. Nearly all university patented inventions are available to no one, unlicensed. Of the, say, 20% of patents that have been licensed, most of these have not been made into commercial products and are not generally available. Is the exact opposite of what the 5% in federal licensing means. We have gone from 1,500 inventions sequestered from public access (out of some 30,000 or whatever) to 120,000 inventions sequestered from public access (out of yes those 120,000), with only a handful–maybe 1 in 1,000 or 1,200 becoming commercial products with benefits generally available to the public.

University practice under the influence of Bayh-Dole has throttled 100x the inventions available to the public as a result of federally supported research. And this is claimed as a virtue. Sucks, doesn’t it?

*New: Review the case of Stanford v. Roche, which describes how the courts have interpreted the Bayh-Dole Act and how universities will consider their patent policies in lieu of this late 2011 ruling. If you are licensing university technology and maturing it through the SBIR/STTR program, this case is very important to you.

Now here’s useless information. Yes, it is helpful to review Stanford v Roche. But then why doesn’t the Arizona Commerce Authority revise its account of Bayh-Dole–the Supreme Court interpreted Bayh-Dole to mean that contractors had no special right to inventions made with federal support. That should have caused the Authority to revise its guidance rather than just add a note at the bottom about “courts” and that universities will “consider the patent policies.” The ruling was not in “late” 2011. It came in June.

And Stanford v Roche has next to nothing to do with universities “maturing” their technology through SBIR/STTR funding. In fact, Bayh-Dole pretty much screws over small company interest in inventions made under subcontract with a university. Stanford v Roche doesn’t do anything to help.

All the universities have done as a result of Stanford v Roche is pick at Justice Breyer’s dissent over whether a present assignment of inventions that have not been made should be treated any differently from a promise to assign future inventions. The university administrators have twisted Breyer’s argument into a call to demand present assignments of all future inventions from their faculty and anyone else using university research resources. Breyer’s point, however, was just the opposite–that promises to assign should have the same standing as present assignments. Sucks to be so stupid. Sucks even more to be an inventor surrounded by such suckiness.

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