Feature Comment: Supreme Court To Decide How Technology Licensing Will Proceed Under Bayh-Dole

By James G. McEwen[1]

I.        Brief overview of Bayh-Dole Act

The Bayh-Dole Act[2], through Federal Acquisition Regulations and/or 37 CFR 401, applies to the typical government funding agreements: procurement contracts, grants, and cooperative agreements.[3]  While seemingly an obscure act, Bayh-Dole is often held up as one of the most important pieces of legislation governing patent rights resulting from collaborations between private institutions and the Government, and is a model on which other countries have based their attempts to promote technology transfer between Government and the private sector.

Under Bayh-Dole, small businesses, universities, and other non-profit organizations may elect to retain title to subject inventions rather than conferring title to the Government.[4]  In return, the Government receives a license right to the subject inventions to use for Government purposes (including procurement).[5]  Pursuant to executive order, these same rights are conferred on large contractors[6] to the extent permitted by law.[7]   Thus, under a normal funding agreement, a contractor is entitled to title in their subject inventions.

At the same time, not all inventions are subject inventions.  Thus, whether the Government obtains rights under Bayh-Dole is entirely dependent on how the invention was developed. Specifically, the Government only obtains rights to those inventions accruing under funding agreements, where the invention is first conceived or actually reduced to practice.[8]  Thus, unless the work is being performed outside of the United States,[9] the Government typically only obtains a license right as opposed to ownership to the subject invention.[10]  Importantly, this definition specifically disclaims certain inventions: i.e. those which are outside of the statement of work of a funding agreement.  As such, the Bayh-Dole Act only governs rights where the invention is an “invention of the contractor” which was “conceived or first actually reduced to practice in the performance of work under a funding agreement.”[11]

Whether an invention was first conceived or actually reduced to practice under a Government contract has been litigated often both after passage of Bayh-Dole and under predecessor procurement regulations. This is often because the issue at hand is whether the Government is required to pay reasonable compensation for use of a contractor’s patented invention under 28 U.S.C. § 1498(a).  In these cases, there is no issue as to ownership of the patent being asserted that would implicate Bayh-Dole.  Instead, the issue becomes a licensing defense based upon whether the invention should have been a subject invention such that the Government already has an existing license to the invention.  In asserting such a defense, the Government will carefully review the interactions between the contractor and the Government to see if there were funding agreements which might have made the invention a subject invention.

For instance, in Rutgers v. United States[12], the Court of Federal Claims found that an invention conceived during a contract but outside the statement of work was not a subject invention.  The Court reached this decision even though the statement of work was later modified to include the invention since there was no evidence that the invention was later actually reduced to practice under the contract having the enlarged statement of work.   In contrast, in Mine Safety Appliances Co. v. United States[13], since the first reduction to practice of an invention occurred between contract phases but was within the statement of work, the resulting invention was deemed a subject invention since it has a “close and umbilical connection” to the work.[14]  Thus, given the normal use of Bayh-Dole as a defense, it is the Government attempting to show a license through conception and reduction to practice being tied to a funding agreement as defined in Bayh-Dole, not whether the invention is one “of the contactor” as defined in Bayh-Dole.[15]

For this reason, no cases have dealt squarely with whether the invention is “of the contractor.”  While no cases have looked at what qualifies as an invention “of the contractor”, it is important to understand that, while the Government acquires rights in subject inventions, conversely, the Government does not acquire rights in other existing inventions unless specifically provided for.[16]   If background inventions are needed, the Government is required to pay for the licensed use for these background/non-subject inventions.[17]  As such, for background inventions which are not subject inventions, the Government must acquire a license to use the patents in the same manner as a private individual.  In this sense, there is no requirement that all necessary inventions have their ownership bundled in one entity, but instead there is an understanding that the Government will only obtain rights in those inventions to which the contractor is able to obtain title.  And for those remaining patents, the Government is allowed to use the inventions subject to payment of a reasonable royalty.[18]

It is also important to understand that Bayh-Dole and its implementing regulations require the contractor to have a proper system in place to ensure the Government obtains its rights in subject inventions.  Bayh-Dole requires the contractor provide record keeping to ensure that the Government obtains the benefit of the acquired right.[19]   The entire reporting system is predicated on the business having such a plan, and the patent clauses actually require large contractors to ensure that such a plan exists in order to adequately track and report inventions.  Indeed, the assurance that such a plan exists is a condition of compliance with the clause in the first place and can be grounds for withholding of final payment.[20]  Thus, there is a contractual requirement which effectively requires that the contractor obtain the necessary assignments from the inventor for subject inventions (which are necessarily inventions “of the contractor”), and there is no express revocation of the background rule that the invention is first owned by the inventor.[21]

Among these reporting requirements is a requirement to report subject inventions,[22]  and after reporting the existence of the subject invention, the contractor is required to inform the Government whether the contractor will be keeping ownership of the invention (i.e., title) and in which countries.[23]  The contractor must also inform the Government where it is declining title as to filing in other countries, or failing to make a maintenance fee payment, or otherwise allowing the application to go abandoned in situations where the contractor is otherwise not maintaining protection for the subject invention.[24]  Where the Government also declines title so as to allow the invention to go abandoned or become unenforceable, Bayh-Dole allows the Contractor and Government to allow the inventor to have title.[25] It is important to note that the inventor could also be an assignee of title if the contractor directly assigns the invention to the inventor instead of declining title, which is a more likely situation since directly assigning title would allow the contractor to obtain royalties for the subject invention.

Thus, Bayh-Dole provides a comprehensive framework to ensure that the subject invention is commercialized at some level, either by the contractor, the Government, or the inventor if both the contractor and Government would otherwise allow the patent to go abandoned.  However, while Bayh-Dole most obviously allocates rights between the Government and the commercial sector, it does not obviously purport to allocate rights among private parties to the extent both private parties are not participants in a funding agreement.  Yet no case has confirmed this basic proposition squarely until Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Sys. Inc. (Hereinafter Stanford v. Roche)[26].

II.      Background on Stanford Junior University v. Roche

In Stanford v. Roche, Stanford owned patents related methods for quantifying Human Immunodeficiency Virus (HIV) in human blood samples using polymerase chain reaction (PCR) and correlating those measurements to the therapeutic effectiveness of antiretroviral drugs (hereinafter the PCR patents). The inventors, Mark Holodniy, Thomas Merigan, and David Katzenstein, were Stanford researchers who signed an agreement with Stanford agreeing to assign their rights to inventions to the university.

One of the inventors, Mark Holodniy, later signed an agreement with Cetus, a private company, as a condition of working on PCR.  The Cetus agreement required the signor to “hereby assign” all present rights to Cetus at the time of the agreement, as well as “’title, and interest in each of the ideas, inventions and improvements’” that he may devise ‘as a consequence of’ his work at Cetus.”  Subsequent to signing the agreement, Mr. Holodniy returned to Stanford to continue the research, and reported his invention as a subject invention to Stanford as being within a funding agreement with National Institutes of Health.  It is unclear from the record as to whether Mr. Holodniy conceived or first actually reduced to practice the invention while at Cetus, but it is clear that the patent application was filed as if the invention were first conceived and first actually reduced to practice at Stanford and that Cetus was not aware of this filing. Inventors Thomas Merigan, and David Katzenstein did not work at Cetus and there is no issue as to whether their assignment to Stanford was affected by Mr. Holodniy’s agreement with Cetus.

Stanford also reported to NIH that the invention was a subject invention in which the Government would obtain rights under Bayh-Dole, and notified the Government it was retaining title to the inventions as allowed under the Bayh-Dole Act, 35 U.S.C. §202. Stanford duly required the inventors to assign the inventions, which each did. The issued patents list Stanford as the assignee.

Several years afterwards, Roche purchased Cetus, which therefore gave Roche ownership of Cetus’ intellectual property. When Roche began selling HIV assay kits based on the Cetus’ intellectual property, Stanford disclosed the patents-in-suit to it and offered a license. Based on Holodniy’s VCA and the fact that the techniques he learned and applied in developing the assay came from Cetus, Roche claimed that it had co-ownership, or at least a shop rights license (Stanford held joint title at least through the other Stanford researcher inventors), of the patents-in-suit and refused to take the license. Stanford sued and the trial court found, in part, that Mr. Holodniy could not have transferred any title to Cetus/Roche, because title had transferred to Stanford automatically, or by operation of law, under Bayh-Dole once the inventions arose. Roche appealed and prevailed, with the Federal Circuit ruling that the Bayh-Dole Act only regulates the legal relationships between Federal agencies and their contractors, and not as between inventors and the Federal contractor. The Federal Circuit held that because the Cetus VCA executed an immediate assignment of future inventions, it vested equitable title in Cetus before any title vested in Stanford. While Mr. Holodniy had signed Stanford’s CPA before signing the VCA, it only imposed a contractual obligation on him to assign inventions when they arose and at Stanford’s request. Thus, Mr. Holodniy essentially breached the CPA when he signed the VCA, because he assigned away the then future inventions and would not be able to fulfill his obligation to Stanford when the inventions later arose.

Specifically the district court had held the Bayh-Dole Act negated the second assignment between Cetus and Mr. Holodniy because the Bayh-Dole Act empowered Stanford to take complete title to the inventions by reason of the holding in Central Admixture Pharmacy Services, Inc. v. Advanced Cardiac Solutions, P.C..[27]  The Federal Circuit disagreed and noted that Cent. Admixture had held that when the Bayh-Dole Act’s provisions are violated, the government could choose to take action and title to the patent may be voidable. It is not void: title remains with the named inventors or their assignees. Nothing in the statute or regulations indicates title is automatically forfeited.[28] Thus, the Bayh-Dole Act and the holding in Cent. Admixture did not automatically void the second assignment to Cetus as it at most provided the Government a discretionary option to patent rights owned by the contractor, and did not reach into situations where the inventor could not provide ownership to the contractor.

The district court had also ruled that under 35 U.S.C. § 202(d), the inventor could keep title to his inventions only if a contractor did not elect to retain title to a subject invention. Stanford argued the inventor’s rights were contingent on his obligations to assign them to Stanford, and that Stanford’s subsequent election of title gave it all patent rights.[29]

The Federal Circuit disagreed since, under Federal common law, the Cetus assignment was a present assignment for all inventions of the inventor, whereas Stanford had only an agreement to assign what was available in the future.[30] As such, Stanford was entitled to claim whatever rights were still available, including the rights of the co-inventors who had not transferred their rights prior to the election. However, as Mr. Holodniy had already transferred his rights to Cetus more than six years before Stanford formally notified the government of its election of title, Stanford could not obtain the assignment from Mr. Holodniy despite his earlier agreement to assign these same rights. Citing Cent. Admixture, the Federal Circuit noted that as the Act does not automatically void ab initio the inventors’ rights in government-funded inventions, it saw no reason why the Act voids prior contractual transfers of rights.[31]

The Federal Circuit also noted that Stanford’s interpretation had already been rejected by another circuit.  Specifically, the Federal Circuit noted that its interpretation was in accord with that of the Sixth Circuit in University of Pittsburgh v. Townsend.[32] As such, the Federal Circuit held that Bayh-Dole does not create a mechanism to allow a contractor to void prior valid transfers of patent rights and consolidate ownership in the contractor merely by declaring the invention a subject invention.  As Mr. Holodniy had previously assigned title to the invention to Cetus, Mr. Holodniy could not later fulfill his agreement to later assign title to the same invention to Stanford.  Therefore, any rights obtained by the Government were subject to whatever rights the contractor actually had at the time of the conception or first actual reduction to practice.

Subsequently, Stanford petitioned for certiorari to the Supreme Court, which was granted on November 1, 2010.  The case is Board of Trustees of the Leland Stanford Junior University, Petitioner v. Roche Molecular Systems, Inc., et al, Docket No. 09-1159.  The Petitioner and Respondent briefs have been filed, and the oral argument was conducted February 28, 2011.  12 Amici Briefs on the merits have been filed.[33]

III.      Question on Certiorari

Whether a federal contractor university’s statutory right under the Bayh-Dole Act, 35 U.S.C. §§ 200-212, in inventions arising from federally funded research can be terminated unilaterally by an individual inventor through a separate agreement purporting to assign the inventor’s rights to a third party.

II.       Likely Effects of Supreme Court Decision

While it is anybody’s guess as to how the Supreme Court is going to decide this case, it is important to understand the ramifications.  For instance, should Stanford’s interpretation prevail, companies performing due diligence in relation to a patent will have additional questions as to the ownership where the inventors may or may not have been on sabbatical from a University.  Moreover, the Government might be liable for takings damages for, in effect, cancelling an otherwise-valid assignment or license.  Should the Government be liable under a takings theory, this would result in the Government to paying twice for the same invention: the first time for first actually making the invention at the University and the second time for damages from consolidating the ownership in a single entity using Bayh-Dole.  Further, companies may become more reluctant to use University consultants where they are unable to control, through contracts, the results of the research performed by the consultants.  Lastly, any subcontracts or teaming agreements will need to be reviewed to ensure that any division of foreground and background inventions are preserved assuming ownership is otherwise consolidated in only one participant.

In contrast, should Stanford’s interpretation be rejected, Universities as well as companies who use Federal funding for research projects will need to be extra careful in ensuring a clear record of assignment.  Otherwise, should the assignment be defective, the University could be liable for any damages experienced by the Government.  Moreover, Universities will need to be much more careful in ensuring that any consultant work performed by University inventors are carefully scrutinized to ensure that potential subject inventions will be assigned to the University, and that the agreement is clear as to that effect.  As such, no matter the outcome, Stanford will likely result in an increased complexity of the University-Government-Industry interface for the foreseeable future.


[1]

[2] Bayh-Dole Act, 35 U.S.C. §§ 200-12.

[3] 35 U.S.C. § 201(b).

[4] 35 U.S.C. § 202.

[5] 35 U.S.C. § 202(c)(4)( the Government shall receive “nonexclusive, non-transferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world.”).  See also FAR 52.227-11(d)(2) and DFARS 252.227-7038(d)(2).

[6] The term “large contractors” is intended to cover any organization or person that does not qualify as a small business or nonprofit organization under the Bayh-Dole definitions.  See 35 U.S.C. § 201.

[7]Executive Order 12591.  See also Memorandum on Government Patent Policy to the Heads of Executive Departments and Agencies (February 18, 1983).  The basic government license, and march-in rights, are also applied to large businesses under 35 U.S.C. § 210(c), unless provided otherwise in agency-specific statutes.

[8] Funding agreements contracts include grants, contracts, and cooperative agreements.  Procurement contracts do not include other contracts, such as Cooperative Research and Development Agreements (CRADA)s and Other Transactions.

[9] FAR 27.303(e) and FAR 52.227-13.

[10] FAR 52.227-11 (small contractor) and DFARS 252.227-7038(h)(large contractor).  It should be noted that  for procurements outside of the United States, the Government receives title in subject inventions.  FAR 52.227-13.

[11] 35 U.S.C. § 201(2).

[12] 51 U.S.P.Q.2d 1642; 41 Fed.Cl. 764 (Fed. Cl. 1998).

[13] 150 U.S.P.Q. 453 (Ct. Cl. 1966).

[14] For a more detailed discussion on these cases, see generally James G. McEwen, David S. Bloch, Richard M. Gray Intellectual Property in Government Contracts, pp. 45-49 (Oxford University Press)(2009).

[15] This is not to say the Government would not be entitled to raise a standing defense by showing the patent is not owned by the plaintiff, regardless of whether the plaintiff was a contractor.

[16] E.g., DFARS 252.227-7038(i), DEAR 952.227-13 (c)(1)(v), & NFS 1852.227-70 (c)(2) (stating that no rights are obtained in “any invention other than a subject invention”).

[17] E.g., FAR 27.306 (requiring head of agency approval for licensing background inventions for use by the Government within meaning of 28 U.S.C. § 1498(a)), FAR 27.201 (requiring authorization and consent clauses to prevent injunctions for use of non-subject inventions within meaning of 28 U.S.C. § 1498(a)); and DFARS 227.7004 (discussing Defense Department regulations for settlement of claims and licenses).For more information, see David Bloch & James McEwen, Enforcing IP Against the Government, Intellectual Property & Technology Law Journal (November 2010).

[18] 28 U.S.C. §1498(a). See generally James G. McEwen, David S. Bloch, Richard M. Gray Intellectual Property in Government Contracts, pp. 48-49, 145-146 (Oxford University Press)(2009).

[19] E.g., FAR 52.227-11(e)(2) & DFARS 252.227-7038(e)(5)(requiring giving instructions to employees on compliance), and DFARS 252.227-7038(c)(1) & NFS 1852.227-70(e)(1)(require administration of patent rights sufficient to identify inventions within 6 months).

[20] E.g., DFARS 252.227-7038 (k)(1) & NFS 1852.227-70(g)(1)(i)(withholding of final payment for failing to establish and maintain procedures to assure that subject inventions are identified and disclosed.).

[21] See Beech Aircraft Corp. v. EDO Corp., 990 F.2d 1237, 1248, 26 USPQ2d 1572, 1582 (Fed. Cir. 1993).

[22] E.g., FAR 52.227-11(c)(1) (disclosing new inventions); DFARS 252.227-7038(c)(1).

[23] FAR 52.227-11(c)(2); DFARS 252.227-7038(c)(2).

[24] 35 U.S.C. §202(c); FAR 52.227-11(d); DFARS 252.227-7039(d).

[25] 35 U.S.C. §202(d); 37 CFR 401.9.

[26] 583 F.3d 832, 92 USPQ2d 1442 (Fed. Cir. 2009).

[27] 482 F.3d 1347 (Fed.Cir.2007).

[28] Id., 1352-53.

[29] 583 F.3d 832, 844.

[30] It is not to say that the application of Federal common law to assignments is without controversy, and it is unclear whether the same result would have occurred under California law.  See generally Ian B. Feinberg, Eric B. Evans, and Andrew M. Holmes, Consequences of the Federal Circuit’s New Reliance on Federal Common Law to Interpret Patent Assignment Agreements, Landslide, pp. 24-29 (ABA)(January/February 2011).

[31] Id., at 844 citing 482 F.3d at 1352-53.

[32] 542 F.3d 513 (6th Cir.2008).

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