Bayh-Dole Government License–4: Licensing Despite the Government License

We are working through a recent “webinar” panel discussion on Bayh-Dole’s government license. The panelists get the government license wrong in material ways and then concern themselves with scenarios in which the government license as they represent it appears to get in the way of their money-making licensing hopes. They scheme about how they can make money anyway or abandon the invention because they don’t think they can make money. Sounds dire–and it is in its way, since the panelists ignore Bayh-Dole’s statement of policy and objectives–but there are moments of hope.

As you listen to the webinar (if you do), notice how the panelists discuss Bayh-Dole. They work from a number of crucial misrepresentations of the law.  They are far from conforming Bayh-Dole practice, even though they recite what most anyone who listens to university licensing folks would accept as typical practices. The panel appears to have no idea how far they are from compliant Bayh-Dole. It’s like they have accepted normalized breach of Bayh-Dole, while devoting a whole webinar to Bayh-Dole practice. Other than that, everything is nominal.

Consider this statement:

“And there’s three decision points that happen when you’re dealing with federally funded innovations. The first is whether you elect title or not.”

We have spent enough time on “federally funded” and “innovations” to see that the subject matter to consider is “inventions” made in “federally funded work.” These are not just the same thing said differently–they are entirely different terms of art referring to substantially different scopes. “Innovation” could be most anything. “Federally funded” is much too narrow. With respect, it’s lazy talk. It’s perhaps fine if you do that sort of thing in your own cubicle, but not fine when putting on a webinar for people who you expect don’t know about something as basic as the government license and who expect that you do.

Under Bayh-Dole, the first decision point clearly is whether to acquire title to an invention made under contract. If a university does not acquire title, the invention does not become a subject invention, and Bayh-Dole does not apply. If a university does not acquire title, it has no reporting obligation under Bayh-Dole, there’s no title for it to elect to retain, and the government license therefore does not operate under Bayh-Dole. Other statutes might apply–but that’s a separate topic. If a university contractor has complied with the standard patent rights clause and required its employees to make a written agreement to protect the government’s interest, then it makes those employees parties to the funding agreement and if any of them invent, they are subject to a separate patent rights clause specific to inventors (at 37 CFR 401.9), which is a subset of the patent rights clause for universities (at 37 CFR 401.14).

The decision to elect to retain title comes after acquisition of title, and before disclosure of the subject invention to the federal government. University folk blow by the acquisition of title because they persist in reading “retain title” to mean “take title” or “keep what you got by way of legal magic.” It was just this sort of thinking that the Supreme Court decisively rejected in Stanford v Roche. Over eight years later, folks haven’t given up their habits. They really should. Second:

“If you do decide to elect title, do you patent it or not?”

This is not really a decision point. Under the standard patent rights clause, if a contractor elects to retain title, it must file a patent application within a year (or less, if there’s a bar date) or give up title to the government upon request. See 37 CFR 401.14(c)(3). If you are not going to seek a patent, then there’s little reason to go to the bother to take title to an invention. Why? To prevent the inventors from patenting? To delay the inventors in establishing the government’s rights? Makes no sense. Or if you have been so unthinking to take title without considering patenting, then there’s no point in electing to retain that title–upon which you are required to file a patent application. The decision point on patenting logically comes before acquisition of the invention–right where it came in the IPA programs. First a contractor decided to file a patent application. Then it was required by the IPA master to obtain assignment from the inventor.

“And if you do patent it, what’s your licensing strategy?”

A panelist–for a GOCO DOE lab–makes a good opening with regard to licensing to a company that intends to sell to the federal government:

“So we’d be happy to license to a company that does initially plan to work with only the U.S. government, for a couple of reasons: one, again, it gives us the ability to demonstrate that we’re having impact”

Makes sense, except that one does not need either a patent or a formal license to demonstrate this sort of impact. If government research produces stuff that companies want to make for the government, then any form of transfer–by publication, consulting, workshop, CRADA–documents the impact. Among these forms of transfer, patent and license is among the most expensive and slowest. But GOCO labs appear to be driven by bean counting and fear of discipline if one lab doesn’t measure up to the beans assembled by the others. It’s sort of a mine-shaft gap problem, if you know where that’s coming from.

“Secondly, you never know when a government application is going to morph into a commercial application, so we like to give our licensee the opportunity to do that and third it creates a possible business opportunity going forward so we would do it.”

This is a great strategy, no question. Get into a relationship based on what a company wants, but create the opportunity to expand the relationship once you have it. There’s one catch, however. That’s the word “licensee.” In the singular. Why would there be any reason, here, for an exclusive license. If the government can acquire product from anyone using both sales and have made paths, why would a contractor–a federal lab, no less–set up to do an exclusive license? Given the government license, an exclusive license simply forces other companies into the have made path if they want to do work for the government involving the subject invention. That is, they end up with an incentive to avoid a relationship with the lab that’s all hungry for metrics of impact–an incentive created by the lab’s own patent strategy decision.

And given Bayh-Dole’s express policy to use the patent system to promote free competition and enterprise, an exclusive license that ties up all non-governmental rights runs against Bayh-Dole. An exclusive license works against free competition. It’s clear that if the government is going to be a buyer of product, that anyone with capability will be able to produce that product without exorbitant at-risk speculative investment. Making the transition from government to civilian markets, short of national security considerations, would appear to be relatively direct. As the panelist says later in another context,

“if the government is a customer, they’re de-risking the technology and validating it and you know over time that increases the probability that it could be adapted for commercial use if it’s an appropriate technology.”

If such a subject invention were to be handled as a government-owned invention, on the 35 USC 207-209 side of Bayh-Dole, then there would be no basis for the federal government to grant a single company an exclusive license to make product for acquisition by the government. No–it would be a straightforward “have made” situation, and would be non-exclusive to preserve open, competitive bidding. The same would then be true for a broader license for civilian use. If the cost of development is largely included in the have made government procurement deal, then there is nothing compelling that requires an exclusive license to repurpose product for a non-governmental market.

While the GOCO panelist makes an entirely reasonable point–in the context of Bayh-Dole, it is not reasonable. If the lab wants to show impact, then restricting that impact to one company only is a lousy way to do it. Any company wanting government business would take the license, especially once one company has done so, and the lab would be able to show multiple companies involved, giving the government multiple potential suppliers, competitive bidding, and choice among implementations.

There’s one more nuance–a big thing, really. The GOCO strategy ties a license for government sales to a broader license for possible future non-government sales. This non-governmental sales license (or option to a license) carries a “relatively modest” license fee (and presumably a standard-grade royalty on sales):

“We would normally structure it so that there’s a relatively modest upfront as basically just to preserve their future commercial rights and then we would bake into the license reporting requirements, so that we’d ask that they report to us their government sales and that gives us again ability to track impact and then hopefully they’ll be able to morph it into a future commercial business.”

The strategy here ties two things that do not need to be related. If a company is primarily a government contractor and has no non-governmental sales division, then there is no basis for granting an exclusive license, unless the company proposes outright to start up civilian-facing operations–but that’s not in the scenario. If the company already has civilian-facing operations, but does not request a license for those operations, then the GOCO strategy involves creating a patent tie–“you cannot get a license to sell to the government without also taking an exclusive license to sell to everyone else.” Sure, the GOCO might hope that things “morph” to include the civilian market, but the license tie is the wrong way to do it. If the company doesn’t ask for an exclusive license for non-governmental applications, then don’t tie it in anyway.

Better move: offer three non-exclusive licenses:  (1) a government-facing license–more a documentation that a company is free of any claim by the GOCO that it would interfere in deals with the federal government, with any sort of services that the company might request to improve its uptake and development processes; and (2) a non-government make/use license–free to anyone to make and use the subject invention, requiring only an exchange to confirm that a given company has accepted the license; and (3) a non-government license on FRAND terms–fair, reasonable, and non-discriminatory–to sell. Include a “relatively modest” license fee–consideration to embed the license in a binding contract–add in a royalty on sales–or an annual fee once there are sales–but so low and easy and direct that it makes no sense to try to game it or contest it, and maybe also include a lab offer–licensee’s choice–for the licensee to pay another modest amount for for a year’s assistance in working with the invention.

In this approach, one has three licenses, and companies can choose the level of relationship they want. If the government clearly is going to acquire the invention for its use, then assume the government will want multiple suppliers. Assume that if the invention morphs to non-governmental uses, it will do so on the same model as the government–for internal company use. And for that internal company use, a make/use license is all that’s needed. If the lab needs to show impact beans, then don’t bother charging a licensing fee for internal use–just track that such use is happening and promote it as broadly as makes sense. Companies that want sell, then, can get lab assistance–CRADA time. Why not use a licensing strategy that takes advantage of CRADA work?

Thus, while the GOCO panelist’s strategy is entirely in line with a standard university mindset about exclusive licensing, it runs against Bayh-Dole, government procurement expectations, forming broad relationships, pushing things toward CRADA, and counting beans of impact. Why would anyone go that way, other than that’s what everyone says they do? For what it’s worth, I’ve used the alternative strategy outlined above for twenty years, with plenty of success, lots of impact beans–and income–if those are the things that drive decisions about how to promote the use of inventions.


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