The Arizona Commerce Authority Guidance on Bayh-Dole, 2

We are working our way through the Arizona Commerce Authority’s unhelpful misguidance to small businesses regarding Bayh-Dole. Our first article worked through the ACA’s fake law and fake history, culminating with its note about Stanford v Roche, a case important enough for ACA to add a note, but ACA was too dull or indifferent to bother correcting its account of Bayh-Dole in response.

Now we get to ACA’s effort to rub small business noses in fake law. Worse, watch as the ACA flips from talking to small businesses to talking to universities about how to exploit small businesses, using Bayh-Dole.

Companies using the SBIR/STTR program must understand the implications of intellectual property (IP) rights and the limitations and restrictions caused by contracting with the government.

Again, we are only talking patentable inventions, not IP. The government’s interest in subject inventions certainly must be understood. But it’s not what the Authority makes it out to be. The short answer for small companies is: Don’t do it. Don’t contract with the government under SBIR or STTR. You will get overwhelmed with administrative demands that have nothing to do with your success. You will get distracted trying to comply. You may even get addicted to getting more federal funding, like a phase 2 grant. You will turn into an SBIR junkie rather than develop any product. You will go back for more phase 1 and phase 2 grants. Don’t go there. It’s not worth the energy, the hassle, the exposure.

If the government funds development of your innovation or technology, you grant them a royalty-free license to use your invention world-wide.

More stupid. If the government funds your work and you invent while doing that work, and you acquire that invention and elect to keep title to it, then you must grant the federal government a royalty-free license to practice and have practiced your invention world-wide. Practice means “make, use, and sell.” If Bayh-Dole had meant “use” it would have used “use.” It uses “practice” just as did the Kennedy patent policy, which defined it as “make, use, and sell.” The Nixon patent policy replaced practice with “make, use, and sell.” The federal government gets the right to practice and authorize others to practice on its behalf.

However, the government does not have the right to commercialize your invention.

The government does not need the right to “commercialize” the invention. It has the right to make, use, and sell, and have others do so on its behalf. “Commercialize” is not an exclusive right of a patent holder. If the government wants to sell, or authorize others to sell, product based on your invention, the government has that right. Call it whatever you want. Play games with words. The government has the right to authorize others to manufacture product under the license you have granted to the government. That’s commercialization. Your only happiness is that the government never does this and NIST, the agency delegated to write the regulations for Bayh-Dole, thinks “practice” means “use” as in “for internal government research purposes” or something. So screw all this fear mongering. SBIR is a pain in the butt for the amount of funding. If you are desperate, go for it. But if you are that desperate, consider finding something better to do.

Therefore, you retain the right to make money from your invention.

Can it be this stupid? A patent does not give anyone the “right” to “make money.” Granting a license to the government means that you have given up the right to demand “reasonable and entire compensation” in the Court of Federal Claims for the government for using your invention. Otherwise, the point of a patent is the right to exclude others from making, using, and selling the claimed invention. That doesn’t give you any right to make money. It just gives you the opportunity to piss off others, get entangled in expensive legal actions, write complicated agreements, and maybe if you are fortunate to sell product based on your invention. Even if the government took ownership of your invention–whether under the old Federal Procurement Regulations or Bayh-Dole, you still retain a royalty-free license from the government for your commercial activity. For you, small company, it doesn’t matter a hill of beans whether you own your invention or the government does, in terms of making money from your invention. But you are so screwed if you let a university own any part of your invention or development path via an SBIR subcontract, and that’s where Bayh-Dole is not your friend. Again, the best advice is not to go there, don’t go there, SBIR is not a pretty bunny. It is an attack rabbit.

Here, invention “means any invention” that is “conceived or first actually reduced to practice in the performance of work under a funding agreement.” This definition covers a wide range of research activities that are either partially or completely federally funded.

The ACA is wrong about “invention” on a key point. Bayh-Dole’s focus is on “subject invention.” A subject invention is one that a contractor has acquired–and also is patentable and made in the performance of work under a funding agreement. The “conceived or first actually reduced to practice” is its own world of strange language. It means, in practice, that the government has a license to anything that arises from something that was envisioned but not yet patentable (“conceived” without “reduction to practice”) or built or tested with government funds, even if that work is not necessary to support a patent application. What the ACA here can’t quite get is that Bayh-Dole aims to be as broad as any claim that any federal statute might otherwise make to federal ownership of any invention. That’s the only way Bayh-Dole can completely preempt those statutes whenever a contractor acquires ownership of an invention made in any such work.

Here, the ACA is right that the scope of Bayh-Dole does include inventive work that has been funded only in part by the federal government. But it does not get at the core of it, which is in Bayh-Dole’s definition of “funding agreement” (35 USC 201(b)).

If the government funds any part of a project, then any invention made in that project is potentially, if some federal statute applies, claimable by the federal government. It does not matter whether the invention itself was specified in the statement of work for the federal funding or was supported by federal money; it does not matter whether the inventor happens to have received payment from federal funds. What matters is that the invention was made in a project that otherwise, somewhere, also received federal support. It is the project, the work, that gets federal funding. Any inventions in that work the government has a claim to–either ownership or a license. If a contractor–a party to the funding agreement–acquires title to such an invention and chooses to keep that title, then the government gets a license and the contractor has to file a patent application; otherwise, the government can request title and the contractor gets a license (and doesn’t have to pay the patenting costs!).

Imagine a project to do research or development or research and development. Now have any part of that project accept federal funding. At the beginning, at the end, for some part but not other parts. Any invention made in that project, if it is acquired by a party to the funding agreement, becomes a subject invention under Bayh-Dole. All that matters is that federal money was accepted somewhere in the project, by some party to the funding agreement. A contractor may extend a funding agreement by assignment of any kind, substitution of parties, or any subcontract. Thus, a contractor may add parties to the funding agreement at will by delegating work, assigning work or ownership of work product, or subcontracting work.

Simple example, then. A company proposes to solve a problem and use that solution to create a commercial product. That’s the “work,” the “project.” Now it seeks and obtains a phase 2 SBIR grant to do a feasibility study for a solution to the problem. That is “in part” funding of the entire project. If the company’s personnel make an invention and the company acquires their invention, then Bayh-Dole comes into effect. Even if the company does not obtain a phase 2 SBIR grant to develop a product, any such development has been supported by federal funding, and any inventions made in that development work, if acquired by the company or anyone that the company assigns, substitutes, or subcontracts with, are also subject inventions. That’s the effect of “in part” combined with “work” combined with adding parties to the funding agreement.

The practice tips then are (i) be sure to clearly define your project, the “work” in the definition of “funding agreement” to limit the appearance that the work extends to all the company’s activities, even if the company is small and doesn’t have much activity; (ii) be careful about acquiring inventions that won’t help you get to product but if patented might make it more difficult for you to get to product, especially if the federal government takes ownership and licenses exclusively to someone else; (iii) recognize that if you define the work to include development and then you don’t get a phase 2 SBIR, then whatever additional inventions you make in that subsequent work may still be considered subject inventions, should you acquire them.

The big practice tip here, really, is ask yourself seriously “Why do I want this government money?” What have you become, that you would trade focus for paperwork and such exposure?

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