What might the Arizona Commerce Authority do to revise their guidance? Here are some helpful suggestions.
First, audience. Focus on small company issues and leave the nonprofits for another time. There’s plenty written for nonprofits elsewhere. Give an account of Bayh-Dole for the small company folks. Small companies and nonprofits both may be involved in SBIR/STTR funding, either directly from the government or by means of subcontracts. It’s important to know the requirements of prime funding agreements and subcontracts. There are plenty of hairy things going on if one takes government funding. Inventions, rights in data, copyrights, financial controls, reporting. There’s way more bureaucratic red tape than any SBIR/STTR funding is actually worth to most small companies. That’s the first bit of advice.
Second, the pain of red tape. Larger research universities–U of Az, ASU–are used to the bureaucracy and are set up to handle it (for their own advantage), but most small companies are not and they should think twice about accepting federal money for research. If you are not set up for the administrative overhead of SBIR/STTR funding, run away. It’s not for you. It will not help your company. It is not free money. It is not smart money. It is distracting, energy-sucking, bureaucratic bothering money. At best you end up on a poster, with the government writing the caption. At worst you get audited down to accounting for the paper in your printer.
Third, the ghastly outcomes. The vast majority of small businesses obtaining SBIR/STTR funding never produce a product based on this funding. This is money that is not designed to help you succeed. It is designed to make the government look good and virtue signal that small businesses matter despite the vast majority of government research funding going to big businesses. Participating in SBIR/STTR then validates the entire scheme. Think welfare. Then you know where you stand.
Why would Arizona Commerce Authority want to promote SBIR/STTR rather than warn small businesses of what they were getting into?
Bayh-Dole is mostly irrelevant, but for the pain of it. Bayh-Dole won’t help you be successful. It really doesn’t matter what laws control federal shaping of the contractual terms in SBIR/STTR funding agreements. Talking about Bayh-Dole is so off topic here. Let’s talk the default patent rights clause in SBIR/STTR funding agreements. This clause allows small businesses, if they acquire inventions made in SBIR/STTR funded projects, to keep those inventions, but subject to a set of burdensome conditions. Are the burdens worth the money? The answer, almost always, is “no.”
Compulsory patenting sucks. If the small business decides to keep ownership of an invention, the business has to file patent applications–it can’t hold inventions as trade secrets and it can’t publish them for everyone to have access. Compulsory patenting is a totally stupid requirement. The small business has to divert its funding to patent applications–including PCT applications and national phase filings if it wants patents in foreign jurisdictions. Everywhere the small company cannot afford to file, the federal agency can step in and take ownership in those jurisdictions. Don’t have the $200K for worldwide patent rights? The government gets those rights, then. They pay you $100,000 to do research, you use the money and invent, and then they get nearly all the rights because they know you are poor (or foolish–otherwise you wouldn’t need their money) and can’t afford worldwide patenting.
A good first choice, then, for a small business is to not take ownership of any invention made with federal support. Then the patent rights clause in the contract doesn’t apply, since it only kicks in when a small business acquires ownership. The practice advice, then, for the small company is to make sure that it does not have patent agreements with employees that assert that the company owns all their inventions–only those made outside SBIR/STTR funding. The company can assert a shop right in any of these inventions and therefore have a paid-up license to practice for the small business’s purposes, and employee inventors can do what they want.
Company counsel might not like this approach because, while following the clear language of the patent rights clause and consistent with the Supreme Court’s interpretation of that language in Stanford v Roche, federal agencies and universities can be stupid bullies and make life miserable for small companies. A second alternative, then, is for the small company to acquire ownership of each invention made with SBIR/STTR funding, disclose that invention to the federal agency, and then choose not to keep ownership. Then the federal agency can request ownership. If they don’t, then the company has ownership anyway. If they do take ownership, then the default patent rights clause provides that the company retains a conditional non-exclusive license that extends by subcontracting to all entities to which the company was legally required to offer a license before the SBIR/STTR award. (See 37 CFR 401.14(e)(1)).
This license is conditional in that the government can revoke the company’s license following a procedure that involves determining that an exclusive license is necessary but only in fields where the contractor has not achieved practical application–that is, it is a form of march-in. The obvious move, then, for the small company to consider is to allow the federal government to take title, see if the government files a patent application, and then request an exclusive license. Now the government is paying for the patenting, not the small business, and if the government is going to determine that an exclusive license is necessary, it has an “applicant” for that license. If the government indicates that an exclusive license isn’t necessary, then it has burned its conditional and the non-exclusive license is pretty much assured. If the government determines that an exclusive license isn’t necessary, also, it argues that the small business would have been foolish to spend money on patenting for an exclusive position that wouldn’t help it advance its business interests.
So, don’t own those federally supported inventions and claim a shop right. Or own them, disclose them, don’t spend a dime on patenting until you see what the government is going to do. If it doesn’t request ownership, then you are home free outside of Bayh-Dole’s requirements. If it takes ownership and doesn’t file, then again you are free to use the invention however you want–tip: get clear of the federal money and then work to improve on the invention, and file patent applications on the improvements (if you feel you need patents).
If the government takes ownership and does file a patent application, then you are assured a royalty-free license without having to pay for the patenting, and you can then decide whether to go after an exclusive license from the government. If the government won’t grant an exclusive license, then you are pretty much home with a stable non-exclusive license. And think about it–anyone else who wants any license to the invention has to negotiate with the federal government. That will suck big time for them. In a way, then, your non-exclusive license is pretty much an exclusive license without having to pay for it. Only if a big government favorite company shows up do you have a problem, and you would have that problem no matter what you do, so don’t grind on things you can’t control. Even if you owned the patent, you will still get squashed like a bug if a big company wants what you have, and you are only *really lucky* if they choose to buy you out rather than starve you or hire away your talent or any of their other easy to use tricks to ruin your business to their advantage.
About this exclusive license with the government. Yes, you will have to pay, and yes you have to deal with the government. But you already have a royalty-free non-exclusive license. So set up the exclusive license as an option, and pay only an option fee–has to be way less than the cost of the patenting–and give the option a term, like three years from the date of patent issuing. That gives you six years of de facto exclusivity for a tiny cost. And have the option fee creditable against future royalties. In the alternative, pay no fee and focus only on paying a running royalty on sales. If you never have sales, you don’t owe anything. Insist on this approach–argue that it will keep the government interested in the new product development success of the company–the public purpose of the SBIR program–that I in the acronym is for Innovation, not Inure to the benefit of the government. But in dealing with the government, always frame your position as a requirement that the government has in dealing–that in so dealing with you, the government complies with its regulatory responsibilities and thus achieves the best deal for the government.
Don’t waste your time and effort and money. As a small company, it is important that you don’t waste your time and money going through bureaucratic motions that don’t help you. You have problems with this, of course, if you have gone out and gotten an SBIR or STTR award anyway, so you will have to work to mitigate the hole you have started. Don’t take ownership and have a shop right. Take ownership, disclose, and let the government decide whether it wants to own. If it does not, then you have ownership free of the patent rights clause. If it does, then it pays the patenting costs and you get a royalty-free license. If you want an exclusive license, or want to preclude one offered to another company in the future, that’s something you can deal with through negotiation.
To point out how stupid the patent rights clause is in SBIR/STTR funding agreements, the government makes you disclose an invention three times. First, to the federal agency, which does nothing at all with that disclosure. And second to the US Patent and Trademark Office in the form of a patent application. The USPTO examines the disclosure for patentability and scope of claims and gets you a patent. Third, you have to provide to the federal agency your patent application–even though the government already has it. It’s a total waste of effort. The patent rights clause could be as simple as requiring in the statement of government support in the patent application “the government has certain rights in this invention including the license specified at 37 CFR 401.14(b).” One would disclose separately to the federal agency only if one did not choose to keep title and file a patent application. But that disclosure ends up being all the information necessary for the federal government to file a patent application, but for the claims drafting. So you will end up doing (and paying for it out of your own funds) a bunch of work to comply with the patent rights clause disclosure requirement. You will knock your knuckles on the side of your head and whisper “you old fool” to yourself and “why did we take this government money in the first place?” and “why were then so stupid to take ownership of this crap if we weren’t going to gain any benefit from filing a patent application?” Yeah, you get a non-exclusive license the hard way, but at least you have limited the depth of the hole.
Subcontracting with nonprofits–gawd no. Now let’s say you have declined the good advice here and gone ahead and taken the SBIR/STTR money. What’s the next line of problems that come up with invention rights? The biggest issue by far is subcontracting to a nonprofit. Please. Just don’t do it! If you need university talent, hire them. Don’t subcontract unless you have to (as is required by the STTR program).
If you decide to seek an STTR grant, then you have to “formally collaborate” with a research institution up front as part of the application process. That’s the goal of the program–to count the number of peas that are in collaboration pods. To formally collaborate, you will need to establish a subcontract that goes with your proposal and covers “intellectual property.” The subcontract will flow money and rights from the prime (you or the research institution) to the subcontractor (the research institution or you). Either way, prepare to dig a deeper hole. You will likely use the STTR template agreement, helpfully captioned with the disclaimer “This is only a model.” But you will use it, anyway. Be careful if it comes from a university–they may have made unmarked changes and you will think it is the standard off-the-pdf form when it isn’t. The STTR program is “highly competitive”–meaning you likely won’t get the award but will have wasted hours preparing a proposal and negotiating the subcontract that will never happen. That will surely get you to new product more quickly, eh? Okay. Enough. Let’s assume you like to dig holes and maybe there’s something down there for you.
Don’t use the it’s “only a model” agreement. It isn’t designed for you. Let’s have a look.
First, it is expansive and covers anything that’s “legally protectable,” not just rights in patentable inventions. You don’t want the government proposing what is good for your company. Don’t float along with this stuff.
Second, the model agreement aims to grant licenses to any or all of anything legally protectable with cookie cutter provisions, based on “revenues or profits” not on the value of the license to whomever receives it. One could *save money* by using a licensed asset but the model agreement can’t fathom stuff like that. Revenues or profits–as if these are somehow distinct, as profits could be in a form that’s not revenues or something. Don’t try to figure it out. It’s just slop.
It’s worse–the model agreement also tries to divide up expenses of development. Just don’t go there. All you need is a subcontract that specifies the work to be done, the budget provided for that work, and the deliverables. Specify that anything already existing that the research institution or its personnel puts into a deliverable is licensed to you royalty free. And you may as well prohibit from deliverables anything from third parties, including free/GPL software, without your express written approval.
Now, if you are a die hard and not only take the federal money and invent, but choose to spend your own money filing a patent application and going through all the bureaucratic nonsense with the federal agency, then you have made your nest already and there’s not much anyone can do for you at this stage. The usual practice is for small companies to try to get more SBIR/STTR funding–more phase 1 and phase 2 grants. If you get good at this, then it becomes more attractive just to keep getting SBIR/STTR funding since that’s what you have ended up rigged to do–whatever you once were, now you are a contract research operation, where getting the next contract for research is worth more than getting to product launch. In this way, SBIR/STTR can divert small companies from a pathway of growth to one of dependency for survival on federal grants and university subcontracting. Maybe that sounds attractive. It can be a fun life, but it’s a strange way of thinking about new products, innovation, or even what makes IP valuable to a small company. If all you want are more federal grants, all that IP is just a hill of beans to make you look impressive for the next grant application–and that’s university thinking. But you are a small company! There is hope for you! You don’t have to go there! So–don’t.