Bayh-Dole Regulatory Update Offers Clarifications to Federal Grantees and Contractors But Also Raises Specter of Government Interference with Patent Rights

FCPAEffective May 1, 2018, newly issued federal government contracts, grants, and cooperative agreements will be subject to revised regulations implementing the Bayh-Dole Act, the federal statute governing title and license rights for inventions developed with federal funding.  The new regulations were issued on April 13, 2018 by the Department of Commerce, National Institute of Standards and Technology (NIST) as a final rule amending 37 C.F.R. part 401.  See 83 Fed. Reg. 15954 et seq.  Included in the regulations are changes to the standard intellectual property-related contract clauses that must be included in most federal contracts, grants, and cooperative agreements.

Of particular note, under the revised regulations the federal government now has essentially an unlimited amount of time to demand title to grantee and contractor “subject inventions” – those inventions conceived or first actually reduced to practice in the performance of work under a funding agreement – in instances where the contractor did not precisely follow the notice and election procedures.  This change reinforces the importance of meeting the deadlines imposed under Bayh-Dole for invention disclosure and election of title.  A graphic describing the applicable deadlines is available here.

Below we summarize this change and other significant considerations under the new regulations.  While the new rules apply to all federal funding agreements (i.e., grants, contracts, cooperative agreements) executed after May 14, 2018, agencies may, in their discretion, amend current funding agreements to make the new rules applicable prospectively.

  1. Expanded Government Opportunities to Demand Title to Inventions

Historically, if a contractor[1] failed to disclose a subject invention or to elect title to that invention within the timeframes specified under the Bayh-Dole regulations, the government had sixty days, upon discovery of the error, to object to the procedural error and seek title for itself.  In practice, this meant that even where a contractor had mistakenly failed to disclose an invention or to elect title it could rectify the mistake by filing a notice and/or election of title and then waiting sixty days for the government’s objection period to expire.  This now happens routinely when subsequent licensees of an invention discover that government funding was involved in the development of the product, but that Bayh-Dole procedures were not followed.

The most significant revision to the implementing regulations eliminates the government’s limited sixty day objection period and instead makes the objection period indefinite.  37 C.F.R. § 401.14(d)(1).  This means that a contractor’s failure to timely notify the funding agency of a subject invention, or to elect title to that invention, could allow the government to request title at any point in the future.  This new scheme injects uncertainty into the process and will have significant ramifications for companies, universities, and other organizations that develop inventions with government funding assistance.  Contractors may find themselves without valid title to a product or process they have patented or facing legal action from subsequent licensees whose licenses could be of little to no value if the government elects title.

Now that the risk profile has changed, recipients of federal funding must prioritize strict adherence to the invention disclosure rules from this point forward.  (This has historically been a challenge for researchers, particularly those in life sciences fields.)  Further, potential licensees of inventions must be very careful to ascertain whether federal funding was involved and, if so, to verify through due diligence that all required deadlines were met.  In the event of error or delay, funding recipients must now seek and receive explicit confirmation from the funding agency that it will not seek to obtain title in the future.  It remains to be seen whether federal agencies will be willing to provide such confirmation.

  1. Regulatory Confirmation of Bayh-Dole’s Application to Large Businesses

As originally crafted, the Bayh-Dole Act applied only to small businesses and non-profit institutions, including research universities.  The Patent and Trademark Law Act of 1980, Pub. L. 96-517 (as amended), was codified in 35 U.S.C. §§ 200-212 (the “Bayh-Dole Act”).  Executive Order 12591, issued April 10, 1987, expanded the reach of the Bayh-Dole Act’s requirements and protections to large businesses, thereby bringing all recipients of federal grants, contracts, and cooperative agreements under the same set of rules with respect to the treatment of subject inventions.  Notwithstanding the Executive Order, however, the implementing regulations in 37 C.F.R. were never amended to include large businesses until now.  Revised 37 C.F.R. § 401.1(b) now states that the regulations apply “to all funding agreements with firms regardless of size.”

  1. Circumvention of Supreme Court’s Ruling in Stanford v. Roche

In its 2011 decision, the Supreme Court held that title in a patented invention vests first in the inventor, even where the Bayh-Dole Act applies.  NIST has attempted to temper the impact of this holding by mandating that contractors require their employees to sign agreements requiring prompt disclosure of subject inventions and assigning all rights in the inventions to the contractor.  37 C.F.R. § 401.14(f)(2).

  1. Continued Preference for U.S. Companies and Requirement for U.S. Manufacture

Several commenters on the draft proposed rule had requested that the regulations be revised to permit foreign collaborators to receive standard Bayh-Dole rights.  NIST rejected this request as contrary to the statutory mandate.  83 Fed. Reg. 15,955.  Similarly, NIST maintained the requirement for substantial U.S. manufacture of subject inventions, and rejected the suggestions of commenters to permit automatic waivers in certain instances.  In doing so, NIST noted that the Bayh-Dole statute allows waivers from the requirement only “in individual cases.”  83 Fed. Reg. 15,956.

  1. No Deviation from Required Patent Language

Some commenters had asked NIST to give contractors flexibility in terms of the language used to reference government support in patent applications.  83 Fed. Reg. 15,956.  NIST declined, reiterating that the “two clear, concise sentences”[2] prescribed by 37 C.F.R. § 401.14(f)(4) must be used to “notify readers of the Federal government’s rights in a subject invention.”  Id.

  1. Recognition of Contractors’ Strategic Use of Provisional Patent Filings

NIST acknowledged several commenters who pointed out the increasing use by contractors of provisional patent applications.  83 Fed. Reg. 15,956.  In turn, NIST amended the provision permitting the government to obtain title when a patent application had been abandoned to now apply only to non-provisional patent applications.  37 C.F.R. § 401.14(d)(3).  NIST also altered the requirement for contractor notice of a decision not to continue patent prosecution to require notice only where a non-provisional patent application has been abandoned.  37 C.F.R. § 401.14(f)(3).  (This notice period also was extended from thirty days prior to the expiration of the response period to sixty days (although sixty days was a compromise from the original 120-day change proposed by NIST).)  83 Fed. Reg. 15,956.  Finally, where a contractor requests an extension of time for filing a non-provisional application after a provisional application has been filed, a one year extension will now be granted automatically upon request, unless the funding agency notifies the contractor otherwise within sixty days of the request.  37 C.F.R. § 401.14(c)(5).

  1. Affirmation of Small Business Licensing Preference Requirement for Nonprofit Organizations

Nonprofit organizations have historically been required to give preference to small businesses when licensing subject inventions for commercial exploitation.  37 C.F.R. § 401.14(k).  The new regulations provide an avenue for small business appeals to the funding agency if they believe a nonprofit organization is not following this small business preference requirement.  37 C.F.R. § 401.7(b).

  1. Revised Procedures in Situations Involving Government Employee Co-Inventors

Under the revised regulations, the government agency that employs a government employee co-inventor now has patenting priority over the funding agency in instances where the contractor has declined to elect title.  37 C.F.R. § 401.10(a).

  1. Recognition of iEdison Challenges

While NIST expressed its support for the online electronic database operated by the National Institutes of Health (NIH), it noted that it cannot compel agencies to use the database and implicitly acknowledged some challenges with the system in touting a new collaboration between NIH and NIST to develop enhanced iEdison training modules and to identify “opportunities for updates and improvements” to the iEdison messaging system.  83 Fed. Reg. 15,957.

[1] The term “contractor” in 37 C.F.R. part 401 encompasses grant recipients and cooperative agreement holders as well as those with procurement contracts and is therefore used throughout this article to pertain to all federal funding recipients.

[2] The required language is:  “This invention was made with government support under (identify the contract) awarded by (identify the Federal agency).  The government has certain rights in the invention.”