Would you believe still more on Can universities assign patent rights under Bayh-Dole?

The distinction between exclusive license and assignment also matters in Bayh-Dole practice. Bayh-Dole’s definition of funding agreement at 35 USC 201(b) makes clear that any assignment by a contractor extends the funding agreement–and necessarily the patent rights clause–to the assignee. The assignee becomes a party to the funding agreement, a “contractor” per the definition at 35 USC 201(c). Each added contractor then works with the form of the standard patent rights clause specific to its standing–either a for-profit or nonprofit–with the stipulation, following 35 USC 202(c)(7)(A), that if a nonprofit assigns to a for-profit, the nonprofit patent rights clause must still apply to the for-profit.

This asymmetry is in its way huge. When a for-profit takes assignment of a subject invention from a nonprofit, it must, in addition to the general requirements of Bayh-Dole and its patent rights clause, also follow the nonprofit-specific requirements of 35 USC 202(c)(7)–limiting assignment, sharing royalties with inventors, deducting from income earned and royalties only administrative expenses to manage subject inventions, dedicating any remaining income and royalties to scientific research or education, and working to attract small businesses as licensees.

No normal for-profit company in its right profit-seeking mind would accept assignment of a subject invention from a nonprofit. 

And that, too, is a fundamental policy of Bayh-Dole. The dealing in patent monopolies by universities (and other nonprofits) under Bayh-Dole’s standard patent rights clause is in effect restricted to granting licenses that involve less than all substantial rights in a subject invention. Anything else is just speculative trading on the future value of the right to exclude (the patent as threat) without actually doing anything to use or develop the invention (where benefits arising from use are to be made available to the public)

Bayh-Dole then provides a licensing sandwich: on the bottom, licensing has to be more restricted than non-exclusive (because non-exclusive licenses undercut the fundamental rationale for Bayh-Dole) and on the top, licenses cannot be used to assign subject inventions (because doing so merely changes who is responsible for deploying rights in the invention rather than deploying the invention itself).

This sandwich directly responds to Bayh-Dole’s statement of policy and purpose at 35 USC 200:

to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery

How does one use the right to exclude all others to promote free competition and enterprise? That can’t be non-exclusive licensing–if so, then why have Bayh-Dole at all? And it cannot be excluding all others, in the case of a nonprofit owner of a subject invention–if so, then the nonprofit would have to do the development and provision of the invention’s benefits to the public, and that’s generally an unlikely thing, but for research tools. We are left with limited exclusive licensing–exclusive licensing of less than all substantial rights.

We see this restriction anticipated in 35 USC 204, having to do with US manufacturing:

Notwithstanding any other provision of this chapter, no small business firm or nonprofit organization which receives title to any subject invention and no assignee of any such small business firm or nonprofit organization shall grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.

A grant of an exclusive right to use or to sell is a grant of less than all substantial rights in a given subject invention. In the case identified here in 35 USC 204, the licensee receives an exclusive right in only a single right (to use or to sell) and therefore the invention has not been granted or conveyed to the licensee in the licensing transaction.

Given that Bayh-Dole is built on the argument that exclusive patent rights are necessary for the public to receive a benefit from the use of inventions made in work receiving federal support, how Bayh-Dole deals then with assignment of patent rights is right at the heart of the law. In the case of nonprofits, the conditions on assignment drive after the distinction between exploitation of the value of patent rights (making money by trading those rights around) and the use of patent rights to exclude others (to justify investment in the development of an invention as a commercial product with the understanding that only by means of the commercial product will the public benefit from use of the invention). In this second case, the patent elicits an investment that otherwise would not be made, to put an invention into a form from which the public can benefit. In the first case, the patent rights are traded around on the prospect that at some point someone will find it even more valuable to acquire the patent rights on the prospect that further down the chain, someone will value the patent rights even more (for the same reason, or because they need the patent’s exclusivity to justify their investment–at which point their investment and future “market” must be significantly greater than the cost to acquire the patent rights).

A nonprofit, then, could simply trade in patent exclusivities–passing a patent right (and the title to the subject invention) to an invention management firm or to a speculative investor or to a plain speculator or to a company that would rather hold the rights than to leave a university up to no good potentially licensing the rights to a competitor before anyone has figured out whether the invention actually works, whether there are work-arounds that work just as well if not better, and whether the cost and uncertainties to develop are justified by the potential market (and income) to be had if the invention does work out as a commercial product or service.

Such trade in speculation is a common practice in IP. Music distribution companies can buy up recording contracts. The agent that signed a recording act to the contract makes money (from the sale of the recording contract itself) while the band must make its money (if ever, heh, heh) from the sale of its music under the contract. (See Moses Avalon’s Confessions of a Record Producer). Patent aggregators such as Intellectual Ventures work on a similar model–acquire patent rights in little lost inventions from companies facing bankruptcy or from universities that want to unload sunk patenting costs on the prospect that the patent rights will some day be worth more than was paid to acquire them.

Bayh-Dole is set up to restrict such trade on patent speculation by nonprofits. Anyone taking assignment of a subject invention must operate as if a nonprofit in the administration of that subject invention. Share royalties with inventors. Deduct only administrative costs pertaining to subject inventions. Allocate all other income earned with respect to the subject invention and any royalties to scientific research or education.

There is a practice problem here at the heart of Bayh-Dole. Patent exclusivity is Bayh-Dole’s premise for public benefit. Without patent exclusivity, so goes the argument, inventions won’t be used or developed. Federal research money is then wasted. There’s no point in any nonprofit contractor taking ownership of any invention made in work receiving federal funding if the contractor then merely gives the invention away–fair, reasonable, non-discriminatory licensing. That’s what the federal government would have done anyway under the Nixon patent policy. The only difference, perhaps, would be that the nonprofit would *make potential users of the invention pay and for that would fuss with paperwork and the gawd-awful delays of negotiating with nonprofit attorneys* and the federal government would not. In that case, Bayh-Dole’s argument reduces to “the public won’t benefit from the use of inventions made in federally supported work unless companies interested in those inventions are first made to pay before they can use or develop them.” Silly. But that’s actual practice.

Now look at the problem. If nonprofits are restricted in assigning subject inventions (and related patent rights)–so that any assignee must behave like the nonprofit–then the necessary practice that Bayh-Dole endorses is that the nonprofit must grant limited exclusive licenses–an exclusive license to use, or an exclusive license to sell, and not all substantial rights in the subject invention.

This is not a problem for for-profit federal contractors. If they have business operations, then they can exploit patent exclusivity to augment their reasons to invest in the invention they have made. Harbridge House found in its 1968 study that this was the best possible situation for federally supported inventions–a capable company inventing and owning what it invented was much more likely to use the invention and do so timely than in any other scenario. The worst outcomes of all arose when contractors without experience took licenses to inventions. So companies with subject inventions can use their patent rights to develop those inventions for commercial use and thence to public benefit, or they can trade on those patent rights and assign them without restriction (or license them exclusively without restriction, or just license them non-exclusively or dedicate them to an industry standard or cross license them to gain access to other technology).

Nonprofits, by contrast, are restricted by Bayh-Dole in their trading on the exclusivity of patents on subject inventions. They can grant an exclusive license to use a subject invention (for provision of a service, say, or to produce a product) or an exclusive license to sell (incorporating a subject invention into a product) but they cannot grant (without restriction to the nonprofit patent rights clause) an exclusive license to make, use, and sell (because no for-profit in its right mind would accept a license or assignment with those requirements).

From this we arrive at a refinement of the implicit argument behind Bayh-Dole derived from Bayh-Dole’s own requirements. It’s not that patent exclusivity is necessary for the public to benefit from the use of inventions made in work receiving federal funding. It’s rather that companies won’t sell products or use methods based on such inventions unless they have exclusive rights to do so. The same goes for “making” inventions. According to Bayh-Dole’s regulatory framework, a company won’t “make” an invention unless it has exclusive rights, and other companies may use the invention or sell product practicing the invention so long as they acquire manufactured product from the company with the exclusive right to manufacture.

Perhaps you now can see the nonprofit problem. Bayh-Dole exists so nonprofits can deal in exclusive patent rights. If the nonprofits were to license inventions non-exclusively, there is no reason for all the bureaucratic paperwork of Bayh-Dole. Federal agencies can do that. But if a nonprofit licenses exclusively all substantial rights in a subject invention, then that’s an assignment, the nonprofit patent rights clause must apply to the assignee, which then must comply with the nonprofit patent rights clause–and there goes all the profits (“any royalties or income earned by the contractor with respect to subject inventions”). So a nonprofit can trade in patent exclusivity speculation–assign a subject invention to some other organization willing to exploit the invention under nonprofit restrictions–but when it comes to licensing for utilization of the subject invention, to achieve practical application, the licenses granted must be limited exclusive licenses. An exclusive license to make, or to use, or to sell, but not all three with the same licensee (or, again, it is an assignment).

The great uncertainty then in Bayh-Dole is whether there really are any inventions made in research work supported by federal funds and hosted by nonprofit organizations that require nonprofit patent exclusivity to be translated into limited exclusive licenses or else  the inventions will never be used and no benefits will ever be available to the public on reasonable terms. Bayh-Dole dictates that nonprofits grant limited exclusive licenses.

It’s just that university administrators generally ignore Bayh-Dole’s requirements. They routinely grant exclusive patent licenses that convey all substantial rights in subject inventions and thereby assign the subject inventions covered by the patent claims. The assignee companies do not comply with the nonprofit patent rights clause, as Bayh-Dole requires. Even then, it appears that Bayh-Dole does not produce the outcomes that were promised. Even with unrestricted exclusive patent rights, companies do not generally produce commercial product, and in the rare instances in which they do, the product often is not provided to the public on reasonable terms (the standard for  march-in against any licensing under 35 USC 203). Here “reasonable terms” might be reasonably paraphrased as “terms, including price, that otherwise would be offered if product involving the invention was made available in a competitive environment, as if the invention had been licensed non-exclusively but in fact has been licensed with limited exclusive rights–to make or to use or to sell, but not all three.”

Put another way, Bayh-Dole expects that nonprofits will broker patent licenses with only one or two substantial rights made exclusive and the other right(s) made non-exclusive. Thus, 35 USC 204 can stipulate requirements on exclusive licenses to use or to sell, where the necessary implication is that such licenses could not be exclusive licenses to make, to use, and to sell–that would be an assignment and would reset the exclusive licensing obligation regarding US manufacture. The owner of a subject invention has no US manufacturing obligation–that obligation only follows an exclusive licensee of the right to use or to sell–which may also be the exclusive licensee of the right to make, but not all three substantial rights. In other words, nonprofits are expected to break up the patent monopoly into a portion that’s exclusive (without which there’s no reason for Bayh-Dole to exist) and a portion that’s non-exclusive (which appears to address concern for pricing–reasonable terms–for product available to the public).

One might say that Bayh-Dole anticipates–even all but requires–nonprofits to make subject inventions available non-exclusively for making and using (such as for one’s own purposes), and that the exclusive right that must be reserved is that of selling or using for the purpose of producing product for sale. That is, the argument for Bayh-Dole is more along the lines that preparation of an invention for commercial use–use in commerce, sale as product–relies on the exclusive right to sell, but that exclusive right to sell cannot be broadened to suppress the rights of others to make and use the invention. That is, Bayh-Dole sets it up that nonprofits cannot license subject inventions such that they force the public (and companies, and even other nonprofits) to purchase product based on the invention when the public could make and use the invention for themselves without purchasing “commercial” product. Or, Bayh-Dole requires any commercial version of a subject invention to compete with local self-manufacture and use of an invention–and requires nonprofits to license to comply with this restriction by limiting exclusive licensing. The exclusive license to sell can suppress other companies’ sales activity, but cannot suppress anyone from making and using the invention for their own purposes.

This is Bayh-Dole’s actual argument–based on its actual provisions–for institutional control of inventions made in work receiving federal support. If you get ownership, you must break up the patent monopoly into exclusive bits and a non-exclusive bits. If all non-exclusive bits, then Bayh-Dole is a useless thing. If all exclusive bits, then the assignee of the exclusive bits inherits the same mandate to break up the patent monopoly or move the whole thing along.

The reality is that there is sufficient trade in moving the whole thing along that universities don’t actually don’t have to break up their patent monopolies or even achieve practical application of their inventions to make sufficient money to keep their patent licensing operations running. Even less money than is actually needed for operations can be used to induce the university (or the state) to provide more money on the premise that way more licensing income is just around the corner, any day now, such is the potential.

And the other reality is that federal agencies don’t enforce Bayh-Dole’s exclusive licensing and assignment provisions, though they make a show of processing waivers for the US manufacturing requirement–as if making the waiver process as quick and efficient as possible is a desirable administrative goal of Bayh-Dole. That’s it–take what Bayh-Dole sets out as the most important provision of the entire law and make it quick and easy to circumvent it. Whoohoo.

Thus, we have Bayh-Dole requiring each institutional owner of a subject invention to obtain a patent monopoly on that invention and then break that patent monopoly up into exclusive chunks held by different companies. Or an exclusive chunk without the right to sublicense and a least one non-exclusive chunk. Exclusive right to sell to one company and exclusive right to make to another, or non-exclusive right to make and use to a bunch of companies and exclusive right to sell to just one. All non-exclusive fails. All exclusive to one company is just an assignment and so fails. Somehow, the special insight that carries Bayh-Dole along requires this special form of exclusive licensing that stops short of assignment of the underlying subject invention.

Too nuanced to live in practice. Too delicate for the clumsy hands of university administrators. Too bogus to be actually true. And for whatever reason, simply unworkable and rejected in practice.


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