Defense Contracting, Bayh-Dole Fantasies, and Workarounds–3

We have been working through a DoD guide for contracting officers in navigating IP rights–Bayh-Dole and data rights. The data rights are a whole nother saga, so we are leaving them alone for now. Here in summary form are the primary worries about Bayh-Dole, what the guide suggests to avoid Bayh-Dole, and some comments on the guide’s proposed solutions.

Conception and first actual reduction to practice

Companies object because they don’t want the government to have a free license to an invention because the government funds the testing of the invention to demonstrate it works for its intended purpose. This is the lingering ambiguity of In re Eddie L. King, in which an invention made by a federal employee on his own time, with a patent application prepared but not filed based on actual prototypes, was provided to the Air Force for testing in its applications. The Patent Commissioner ruled that the Air Force had a license to the invention as a result of its spending money on testing–even though the results of the test were not necessary to the patent application. The Patent Commissioner left open whether the Air Force would have had rights to the invention had the patent application been filed before any government testing took place. Is first actual reduction to practice still a thing once there has been constructive reduction to practice?

The guide’s solution is to draft a statement of work that excludes government testing of “previously conceived inventions.” A better approach would be to recommend that a candidate contractor file its patent applications before involving inventions in government-specified research.

Disclosure and filing

Bayh-Dole requires a contractor to disclose inventions and file patent applications on those inventions that the contractor chooses to keep. The guide drops the concept of subject invention–one that the contractor must first acquire. That was a simple mistake in 2003, years before Stanford v Roche. But it is still a common mistake now, with no excuse for it.

The guide considers trade secret issues. This is a legitimate area of concern.

The guide’s solution is for contractors to petition for an extension of the time to file a patent application. Alternatively, the contractor can request a waiver not to file a patent application with the condition that the federal agency will not then request title to the invention. In effect, the solution is for federal agencies to agree on a case-by-case basis to let contractors keep inventions as trade secrets.

It is understandable that when there’s no purpose to holding a patent–the invention is readily usable, there’s no value in excluding others, exploitation of the invention is not viable in any commercial way, the time to develop the invention exceeds the term of any patent–that a contractor and federal agency might agree not to file a patent application. Getting to federal agencies agreeing to allow contractors to hold inventions made in publicly funded work as trade secrets runs against purposes of public funding for research–even if there are good reasons for trade secret protection in procurement transactions.

Under Bayh-Dole as amended, a contractor has no obligation to disclose a subject invention to the federal government so long as it has not disclosed the invention to the public. Thus, so long as the contractor does not disclose an invention, it has no obligation to elect to retain title to it, and therefor there is no requirement to file a patent application. That appears to solve much of this problem.

Subcontractor rights

The guide points out companies don’t like the idea that they can’t use their status as prime federal contractors to take ownership of inventions made by subcontractors. The guide proposes workarounds–get a FAR deviation, such as NASA has done, under which a prime contractor is authorized to negotiate an invention rights deal with a subcontractor; or request a determination of exceptional circumstances that allows a prime contractor to use its leverage to obtain inventions from subcontractors.

Here the guide makes a great point:

Furthermore, there is nothing to preclude a prime contractor from privately negotiating a separate license with the subcontractor for rights in the technology developed by the subcontractor.

There it is, sparkling. It is important to note that Bayh-Dole does not expressly forbid prime contractors from taking an interest in subcontractor inventions. The requirement arises in the standard patent rights clause–without express authorization from Bayh-Dole. The requirement was imported into the standard patent rights clause from the Federal Procurement Regulation, now defunct and replaced by the FAR. Even then, the prohibition on primes taking an interest in subs’ inventions extends only to using the prime contract as leverage. Any straight up deal on the side, for its own consideration, works, so long as there’s no threat to pull the federal subcontract running alongside the negotiation.

Bayh-Dole does have something to say about subcontractor rights, but indirectly. A subcontractor, according to the definition of funding agreement (35 USC 201(b)), becomes a party to the funding agreement. As a party to the funding agreement, it has the same rights to inventions (35 USC 202(a)) that any other party has, including a prime contractor. The subcontractor operates on the version of the standard patent rights clause appropriate to its status–small company, nonprofit, employee-inventor–and as far as 35 USC 202(a) is concerned, if a subcontractor acquires an invention made under federal contract, it can elect to retain title, and there’s nothing that a prime contractor can do about that. One might argue that the prime contractor, in accepting the definition of funding agreement, and in choosing to add subcontractors as parties to the funding agreement, waives any interest it may otherwise have sought in subcontractor inventions.

US manufacturing

The guide points out that contractors are not permitted to grant exclusive licenses to use or sell unless the “product is substantially manufactured in the United States.” Companies don’t like this requirement “as companies are becoming more and more global.” The guide points to “Buy-American-type initiatives” for this requirement. But the requirement goes to the heart of Senator Bayh’s argument for the law, to catch the U.S. up with other countries. Section 204 of Bayh-Dole presents itself as the most important section of the law, taking precedence over all other parts. Working around this part of the law is in effect repudiating the primary premise of the law.

Here the guide messes up the order of things. There’s a difference between “substantially manufactured” and “manufactured substantially.” In the first instance, most of the manufacturing of a given product must be U.S. based, but some parts of the product may be manufactured elsewhere. In the second instance, most of the product manufactured must be manufactured in the U.S., but some product can be manufactured elsewhere. As it turns out, however, it really doesn’t matter.

The guide does a good job with workarounds: license a foreign company non-exclusively. Ask for an agency waiver. As for large companies, because the requirement is only a matter of Reagan’s executive order, a company can ask for a FAR deviation “thereby rendering the U.S. manufacturing requirements moot.” Makes sense for federal contracting officers to find ways to work around U.S. first initiatives, no? They just have to know what’s important.


The guide identifies one of the four forms of march-in as a problem for industry–when a company “has not made reasonable progress in bringing [an invention] to the commercial market.” The guide then recites fears companies may have based on a misreading of the march-in provision, even while noting that the government has never used march-in.

The guide’s solution is to emphasize that march-in has never been used. “Ultimately, the likelihood of this action ever being taken is very remote.” Then emphasize that a contractor may appeal march-in and string things out. A third recommendation is to avoid using the term “march-in” as this triggers some companies. Use “compulsory license” apparently.

It is true that march-in was designed not to operate. It was apparently considered necessary to get Bayh-Dole passed. By delegating march-in to each federal agency awarding research grants and contracts, Bayh-Dole creates a conflict of interest between agencies wanting to maintain good contractor relationships and enforcing the law to protect the public from nonuse or unreasonable use.

The guide gets it wrong, however, on the condition for nonuse march-in at 35 USC 203(a)(1). The standard is practical application–use of an invention with benefits available to the public on reasonable terms (35 USC 201(f)). The standard is not to bring the invention “to the commercial market.” Furthermore, the standard is very weak–it is not that a contractor has failed the definition of practical application in some respect, but that a federal agency determines that the contractor is unlikely to timely take effective steps toward practical application. Thus, before ever there’s march-in, a contractor might communicate with the funding agency using, say, annual reports to document efforts toward use with benefits available to the public on reasonable terms. So long as the contractor can maintain a reasonable profile of effort, there’s no basis for an agency to determine that it is unlikely that the contractor will take effective steps.

The guide gives one other possible solution:

A potential solution to this issue is to negotiate a contract provision whereby the Government would agree not
to invoke compulsory licensing rights until a stated number of years (e.g., five or ten) have passed or until a specific event has occurred.

The irony here is that the Kennedy patent policy–1963–had just such a requirement, three years from patent issue–and that would be about six years from the date of an invention, and given how the patent system could be manipulated at the time, a contractor might keep a patent from issuing for a number of years. It would appear that there’s nothing that would prevent NIST from issuing a regulation that interpreted the time period for practical application to be a fixed time period–like 5 years from patent issue–and after that, a company has to show cause why it has not achieved practical application in order to retain exclusive rights. Use it, license it non-exclusively, or have it licensed non-exclusively by the government, either with you (you make money) or without you (because you refuse).


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