Bayh-Dole’s anti invention-flipping provision for nonprofits, or where’s that $250B?

Let’s look at Bayh-Dole’s anti-invention flipping protection of the public, aimed at nonprofits. Here’s the text, at 35 USC 202(c)(7)(A):

In the case of a nonprofit organization,

(A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency,

except where such assignment is made to an organization which has as one of its primary functions the management of inventions

(provided that such assignee shall be subject to the same provisions as the contractor);

This provision has four elements, which I have marked out by introducing blank lines:

[1] directed at nonprofit contractors

[2] assignment of US rights requires federal agency approval

[3] except assignment to an invention management organization

[4] if the assignee complies with the nonprofit patent rights clause

Bayh-Dole requires federal agencies to use this clause in all funding agreements unless they can justify something else. The clause then shows up in the default patent rights clause at 37 CFR 401.14(k)(1):

If the contractor is a nonprofit organization, it agrees that:

(1) Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions, provided that such assignee will be subject to the same provisions as the contractor;

The CFR version is almost the same as the USC version, but replaces the use of parentheses with a comma–which makes one wonder whether anything substantive is going on.

How does this anti-flipping provision work?

In the typical university approach to inventions, circa 1980, a university would direct its inventors to submit their inventions to Research Corporation or to a university-affiliated “research foundation” (which then often would submit the inventions to Research Corporation) for possible management. Research Corporation then would review the invention and decide whether to accept it for management. If it did, then it would request assignment, agree to pay inventors a royalty on any licensing income, and pay for filing and patent application and marketing the invention to industry for development and use. A typical deal was Research Corporation would recover its costs plus take 40% of what it might make in licensing, sending 60% to the university or research foundation from which the invention came.

The anti-flipping provision appears to be designed to enable these sorts of assignments. Universities may assign to their invention management agents–generally also nonprofits–and these agents then work under Bayh-Dole as if they were the contractors that received the federal grants (and in some cases, as in the old SUNY way of doing things, they were). So far, so good. But for anyone else–that wasn’t an invention management organization–a federal agency would have to approve the assignment (and it would appear, have some say on the terms of the assignment deal). The assignee foundation then would have to share royalties with inventors, send any income after administrative costs for subject inventions to scientific research or education, and prefer small business licensing, and not assign to anyone else (other than another such like invention-management organization without federal agency approval–just like any other nonprofit).

But there’s more to it, of course.

In Bayh-Dole as originally passed, the provision was somewhat different:

In the case of a nonprofit organization,

(A) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency,

except where such assignment is made to an organization which has as one of its primary functions the management of inventions

and which is not, itself, engaged in

or does not hold a substantial interest in other organizations engaged in

the manufacture or sale of products or the use of processes that might

utilize the invention or

be in competition with embodiments of the invention

(provided that such assignee shall be subject to the same provisions as the contractor);

I have bolded the part that was amended away almost immediately, in 1984. This part limited which sort of invention management firms could receive assignment without federal agency approval. There’s a big difference between the two versions. Removing the bolded qualification opens up a broader range of nonprofit assignments without federal review. In the original version, a company with an invention management function but which aimed to do its own development of the invention was excluded from the waiver of federal review. In the amended version of the provision, such companies were now within the scope of the blanket assignment authorization. That’s huge.

In the original, the invention management firm was to be disinterested itself in using the invention or competing with the invention–that makes some sense, if one is thinking of research foundations or Research Corporation. But consider, then, the venture capital firm or the hedge fund that would have money to acquire inventions made at universities and place those inventions with its portfolio companies. Should assignment deals with them be subject to federal agency approval? If so, what would be the basis of that agency approval? What would the agency be looking for? There’s no guidance at all in Bayh-Dole about that. Not even the rough and ready guidance that FSA 110-1 proposed, back in 1952 (policy review and modification, available without unreasonable restrictions or excessive royalties; or if not a grant-in-aid, then either made available royalty-free and non-exclusively; or assigned to a competent organization for development and administration [i.e., Research Corporation or a research foundation].

In the amended version, however, any organization which has as “one of its primary functions the management of inventions” can take assignment of a nonprofit’s subject inventions without federal agency approval. That could be a company with a conflict of interest between developing the subject invention and continuing its own competing work. Or it can be any company at all, so long as it has a “primary function” among others in managing inventions–and what company wouldn’t, at this point?

The amended version of Bayh-Dole basically requires federal agency approval for assignments of subject inventions only if the assignee doesn’t have the capability to manage inventions. That’s sensible, but only in a low-information, vapid sense.

Nonprofits then may assign subject inventions to most anyone–but here’s the kick: the assignee must accept the nonprofit’s patent rights clause, including all of 35 USC 202(c)(7)–

assignment must flow down the nonprofit patent rights clause
contractor (now the assignee) must share royalties with inventors
net royalties and income earned must go to scientific research or education
in any licensing, a preference for small businesses

When a nonprofit assigns a subject invention, then, the assignee must accept the nonprofit’s patent rights clause. Bayh-Dole’s definition of “funding agreement” includes anyone made a party to the funding agreement by “any assignment, substitution of parties, or subcontract of any type” (35 USC 201(b)). And if one is a party to the funding agreement, then that party is a contractor (35 USC 201(c)).

Small business contractors may assign subject inventions to anyone without conditions or federal approval. That’s not the case for nonprofits, however. If they don’t get agency approval (and, arguably even if they do), they have to flow down their nonprofit patent rights clause, with its conditions on assignment, royalty-sharing, and use of income. If a company accepts a nonprofit’s assignment of a subject invention, then that company becomes a federal contractor subject to the Bayh-Dole specified nonprofit patent rights clause, and must for the disposition of that assigned subject invention behave as a nonprofit.

A nonprofit, then, cannot just flip a subject invention to a company, and so avoid all the requirements placed by Bayh-Dole on nonprofits. Otherwise, it would be too easy–create a company, flip the subject invention to the company, and the company doesn’t have to share royalties with inventors and doesn’t have to use net royalties and income earned for scientific research or education. The company gets the subject invention for pennies. A nonprofit then might use this approach to reduce what it shares with inventors. Flip to the company, take a 2% royalty, leaving 98% with the company, and then do deals with the company for sponsored research, or receive generous donations, or political support.

A similar thing can happen with a university’s use of an external “foundation.” Flip the subject invention to a research foundation that it controls, which takes costs plus 40%. The university gets 60% (if ever, if anything) and shares some portion of that 60% with the inventor. But the other 60% is in play–it may go to the university in the form of gifts, or be invested and the money made moved back to the university via various channels. Even tuition scholarships serve to move money back to university budgets. But the inventor doesn’t see any of this as part of a royalty share, which has been effectively reduced by 60% off the top.

The Bayh-Dole assignment restriction would appear to mitigate such nonprofit practices. The assignee still has to share royalties with inventors. There’s an open issue there in what that means–does an inventor then have some sort of leverage to negotiate what that share will be? Senator Bayh argued the inventor did have some sort of right under Bayh-Dole to negotiate the sharing, but then the Supreme Court found that Senator Bayh was wrong about the central parts of Bayh-Dole, so perhaps he is not a good authority here, either. If inventors do have a right to negotiate, then there must be some consequence if they do not agree with what the assignee has on offer. One stumbles toward what would constitute a “reasonable” royalty share–but even that smells of administrative fantasy.

But there’s an even bigger implication to all of this. Bayh-Dole focuses its restrictions on assignment of subject inventions. The restriction is not specific to patents on subject inventions, but on the inventions themselves–the “rights to a subject invention.” And here’s the deal. An assignment may be transacted a number of ways. One way is to create a document labeled “assignment,” add text specific to the act of assigning, and get the document signed by the owner of the invention. That’s how universities typically acquire inventions from inventors. Another way, however, is by creating a document labeled “exclusive license” and in that document transferring all substantial rights in the invention–rights to make, to use, to sell, for instance. That’s what an invention assignment is, regardless of what the document is labeled.

Universities routinely use documents labeled “exclusive license” to assign subject inventions to companies. Under Bayh-Dole, those companies must comply with the nonprofit’s patent rights clause. They must share royalties with inventors (no matter if they pay royalties as well to the university) and they must use the rest of royalties (that is, licensing income, or as it were sublicensing income) and any other income earned with respect to the subject inventions, for scientific research or education.

Universities reported via AUTM’s survey receiving some $9.5B in royalties from 1991-2010. Given that roughly 45% of university patents cite federal funding, let’s say that 45% of that $9.5B comes from patents on subject inventions. We are talking $4B. Now maybe 80% (I pick a figure that seems reasonable in my experience in university licensing) comes from “exclusive licenses”–and we are at a bit over $3B. That’s just the *money* paid to the university as a royalty–often that’s just 1% or 2% of the base of income on which the royalty is calculated. AUTM has created economic models that take the royalty money received and times by what they take to be a reasonable estimate of the average royalty rate (like 2%) and then multiply (say, by 50) to get an estimate of the royalty base–the money made by the company licensees. Well, that’s all bogus, but since AUTM does it, let’s consider–we are talking then about $150B in “income earned with respect to subject inventions” less the little bits expended in the administration of subject inventions including royalties paid to inventors via universities. That $150B then represents money that Bahy-Dole directs to be dedicated to the support of scientific research or education. Has it? I doubt it.

We could find out if the federal government audited university exclusive licenses for subject inventions. Ask universities to report all subject inventions that have been exclusively licensed–this federal agencies have the right to do under 37 CFR 401.14(h). For each exclusive deal, examine the license for transfer of all substantial rights. Does the license exclusively grant the rights to make, use, and sell? Does the licensee have the right to enforce patents covering the subject invention? Are there any rights not licensed, or duration of the agreement, that would mitigate a finding of assignment? My bet is that most university exclusive licenses will be found to transact assignments. Under Bayh-Dole, those assignments make the assignees parties to the funding agreement, with an obligation to comply with the nonprofit patent rights clause. That puts that $150B or so from 1991-2010 in play–and perhaps another $100B from 2011 to 2021. That’s maybe a quarter of a trillion dollars in play that, it would appear, should have gone to scientific research or education, but most likely hasn’t. If Bayh-Dole is any good, then here is a good place to start to prove it.


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