Understanding Bayh-Dole Act: the ownership of an invention funded by government grants

If you’ve ever licensed a technology out of a university, you would know “Bayh-Dole Act.”  The Bayh–Dole Act, 35 U.S.C. §§200-212, titled “Patent Rights in Inventions Made Under Federal Funding Agreements, codified the rules in dealing with intellectual property rights on inventions funded by federal government grants.  The act is implemented by 37 C.F.R. 401 titled “Standard Patent Rights Clauses.”   In essence, Bayh-Dole permits a university, small business, or non-profit institution to elect to pursue ownership of an invention in preference to the government.  The Bayh-Dole Act authorizes the Department of Commerce to create standard patent rights clauses to be included in federal funding agreements with nonprofits, including universities, and small businesses.  The standard patent rights clause is set forth at 37 CFR 401.14(a).  The clause is incorporated into federal funding agreements through a number of contracting instruments, including grants made to universities and contracts (such as SBIR grants) made with for-profit companies.

Under the standard patent rights clause, small businesses and non-profit organizations can retain that title of a subject invention, which is defined as "any invention of the contractor that is conceived or first actually reduced to practice in the performance of work under a funding agreement," by complying with certain formalities if they obtain title by assignment to "subject inventions."  In order to retain the title, the organization must to do the following:

• Include the patent rights clause in any subcontracts;
• Report subject inventions to the sponsoring agency;
• Elect in writing whether or not to retain title;
• Conduct a program of education for employees regarding the importance of timely disclosure; and
• Require certain employees to make a written agreement to protect the government's interest in subject inventions.

In addition, if an organization elects to retain title to a subject invention for which it has obtained assignment, the organization is obligated to do the following:

• Grant to the government a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world;
• File its initial patent application within one year after its election to retain title;
• Notify the government if it will not continue prosecution of an application or will let a patent lapse;
• Convey to the Federal agency, upon written request, title to any subject invention if the organization fails to file, does not continue a prosecution, or will allow a patent to lapse;
• In each patent, include a statement that identifies the contract under which the invention was made and notice of the government's rights in the invention;
• Report on the utilization of subject inventions;
• Require in exclusive licenses to use or sell in the United States that products will be manufactured substantially in the United States; and
• Agree to allow the government to "march in" and require licenses to be granted, or to grant licenses, in certain circumstances, such as if the organization has not taken effective steps to achieve practical application of the invention.

For nonprofit organizations such as universities, these additional requirements apply:

• Assign rights to a subject invention only to an organization having as a primary function the management of inventions, unless approved by the Federal agency
• Share royalties with the inventor
• Use the balance of royalties after expenses for scientific research or education
• Make efforts to attract, and give preference to, small business licensees

However, it’s worth noting that Bayh-Dole Act does not require the small business or nonprofit organizations to obtain ownership of such inventions.  If an organization does not elect to retain title, control of the invention passes to the Federal agency.   The agency may waive its right to take title to the invention, and allow the inventors to retain title to their inventions.

The Bayh-Dole Act has a growing body of case law interpreting the statue.  The most well-known is the case of Stanford v. Roche, decided by the Supreme Court on June 6, 2011.  The case addresses the question whether the Bayh-Dole Act automatically assigns the title of an invention by a researcher at a federally funded lab to the university.  The answer is no. 

Here is the fact of the case: a Stanford employee, who was under obligation to assign inventions to Stanford, spent time at a biotech company to learn a technique, and signed an agreement with that company agreeing to assign inventions to it.  The company was later purchased by Roche.  Stanford filed patents on work the employee did after returning to Stanford, and the company (and later Roche) introduced products based on the work the Stanford employee did at the company.  When Stanford sued Roche for infringing its patents, Roche countered that it had an ownership interest in the patents due to the agreement that the Stanford employee had signed.  Among the arguments Stanford was one that stated that the Bayh–Dole Act gave grant recipients a "right of second refusal" subject to the Government's right of first refusal, based on the following language of the statue: "If a contractor does not elect to retain title to a subject invention in cases subject to this section, the Federal agency may consider and after consultation with the contractor grant requests for retention of rights by the inventor subject to the provisions of this Act and regulations promulgated hereunder."  The Court disagreed holding that title in a patented invention vests first in the inventor, even if the inventor is a researcher at a federally funded lab subject to the Bayh–Dole Act.  The justices affirmed the common understanding of US Constitutional law that inventors automatically own their inventions, and contractual obligations to assign those rights to third parties are secondary.

Needless to say, after Stanford v. Roche, universities across the nation changed their employment contract language from requiring a university employee to “agree to assign” to “hereby assign” any invention done in the university context to the university tech transfer office.

Thanks for reading.
Connie

cwan@patentonomy.com