June 7, 2011

Contractors Should Expect Government to Impose Strict Invention Ownership Requirements in Response to Supreme Court's Stanford v. Roche Decision

On June 6, the Supreme Court held that the Bayh-Dole Act (35 U. S. C. §§ 200–212) does not automatically vest title to federally funded inventions in federal contractors, or authorize contractors to unilaterally take title to such inventions ahead of individual inventors.  Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc. 563 U.S. __ (2011). 

Many legal commentators believe that the Court’s decision in Stanford will have no long-term consequences for patent owners.  Not so.  Rather, the decision highlighted a significant loophole in the allocation of rights to federally funded inventions under the Bayh-Dole Act, namely: an inventor working on a contractor’s federally funded project can intentionally or unintentionally “contract around” federal procurement regulations by assigning inventions to a third party – and thereby defeat patent license and “march-in” rights granted to the Government by the Act.  To close this loophole and protect its rights in federally funded inventions, the Government will undoubtedly make significant changes to procurement regulations and policies. 

Contractors and universities should expect that the Government will eventually require proof that all researchers working on federally funded projects have properly assigned their inventions to the contractor.  Such requirements will have long-term and substantial consequences for contractors that have made the strategic decision to assign title to intellectual property developed by their researchers to third parties for tax or liability purposes, such as a foundation or intellectual property holding company.  One day soon, such contractors may be forced to make an unwelcome choice between receiving federal funds on the one hand, and obtaining the advantages of assigning inventions to a third party on the other.

The Bayh-Dole Act and Federally Funded Inventions

The Bayh-Dole Act was enacted in 1980 to allow contractors to “retain” title to patents protecting inventions created with the support of federal funds.  Before the Act, the Government generally took title to such patents.  After the Act, contractors were permitted to retain title, but in exchange, the Act required contractors to do certain things:

  • First, the Act provides that “the Federal Government may receive title to any subject invention” if it is not timely disclosed by the contractor, or if the contractor does not timely elect to retain rights or does not timely file a patent application.  35 U.S.C. 202(c)(1)-(3). 
  • Second, the Act grants the Government “a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced” the invention for governmental purposes.  35 U.S.C. 202(c)(4). 
  • Third, if the contractor fails to take “effective steps to achieve practical application,” to adequately “alleviate health or safety needs,” or to require exclusive licensees to manufacture substantially in the United States, the federal government has “the right” to require the contractor or its licensee to grant a license to another responsible applicant.  35 U.S.C. 203(a). 

The Act’s provisions reflect an effort to assure that rights to inventions arising out of research for which the public has paid are distributed and used in ways that further the public interest.  Notably, the Act imposed these requirements on contractors receiving federal funds – not the contractor’s employee inventors.

The Stanford Case

The patents in the Stanford case claimed PCR techniques used to measure the therapeutic effectiveness of certain drugs.  The technology was developed as a result of a collaboration between Stanford researchers and Cetus, a company specializing in PRC techniques.

One of the named inventors, Mark Holodniy, was a Stanford researcher who signed a “Copyright and Patent Agreement” (“CPA”) with Stanford in 1988.  The assignment provided that Holodniy “agree[s] to assign or confirm in writing to Stanford [Holodniy’s rights in his inventions].” 

In 1989, Stanford sent Holodniy to Cetus to learn about PCR techniques.  When he arrived at Cetus, Holodniy signed a “Visitor’s Confidentiality Agreement” (“VCA”).  This agreement provided that Holodniy “will assign and do[es] hereby assign to CETUS, [Holodniy’s] right, title and interest” in those inventions that Holodniy may devise “as a consequence of” Holodniy’s work at Cetus. 

While at Cetus, Holodniy developed a new PCR assay.  Holodniy then returned to Stanford where he and other University employees tested the technique.  Over the next few years, Stanford obtained written assignments of rights from the Stanford employees involved in refinement of the technique, including Holodniy, and filed several patent applications related to the procedure.  Stanford ultimately secured three patents to the measurement process: U.S. Patent Nos. 5,968,730; 6,503,705; and 7,129,041. 

Some of Stanford’s research related to the measurement technique was funded by the National Institutes of Health, thereby subjecting Stanford to the requirements of the Bayh-Dole Act.  Stanford disclosed the invention to the Government,  formally notified Government that it elected to retain title to the invention, and conferred on the Government a nonexclusive, nontransferable, paid-up license to use the patented procedure.

Roche purchased Cetus in 1991.  In 2000, a Stanford licensing associate gave a presentation at Roche where Stanford asserted its ownership of the Holodniy invention and offered to license its rights in the invention to Roche.  The parties negotiated terms for such a license over the next several years, but never finalized an agreement. 

The District Court Decision

In 2005, Stanford filed a patent infringement action against Roche in the Northern District of California.  In response, Roche asserted that the patents were invalid, and that Roche was the actual owner of the inventions.  Roche’s ownership assertion took three forms: (i) a declaratory judgment counterclaim; (ii) an affirmative defense to Stanford’s infringement claim; and (iii) a challenge to Stanford’s standing to sue for infringement of the patents-in-suit.  The district court only considered Roche’s declaratory judgment counterclaim, and found this claim to be barred by, among other things, the Bayh-Dole Act.  The parties cross-appealed.

The Federal Circuit Decision

On appeal, the Federal Circuit held that the district court erred in failing to consider Roche’s affirmative defense and challenge to Stanford’s standing.  583 F.3d 832 (Fed. Cir. 2009).

The Federal Circuit considered the question of which party – Stanford or Roche – had title to the patents.  Holodniy’s CPA with Stanford purported to assign Holodniy’s interest in his inventions to Stanford, but the court found the precise language of the CPA to be of critical importance.  Specifically, the court noted that the CPA stated that Holodniy “agree[s] to assign” his rights to Stanford.  The court followed the precedent it had established in prior cases holding that such language operates as an “agreement to assign” in the future, and does not suffice on its own to effect an actual assignment.  Conversely, Holodniy’s VCA with Cetus provided that Holodniy “do[es] hereby assign” his rights in his inventions to Cetus.  In contrast to the language in the CPA, the court found that the VCA operated as a present assignment of Holodniy’s rights – even his future rights – in his inventions to Cetus, notwithstanding Holodniy’s prior “agreement” to assign such rights to Stanford.  Therefore, according to the Federal Circuit, legal title in Holodniy’s inventions accrued to Cetus immediately upon Holodniy’s conception of the inventions, after which point Holodniy had no interest left to assign to Stanford.

The Federal Circuit ultimately held that because all co-owners of a patent are required to join as plaintiffs in an action alleging infringement, and given that Stanford never possessed Holodniy’s interest in the patents, Stanford lacked standing to bring the infringement action against Roche.  Stanford appealed the Federal Circuit’s decision to the Supreme Court.  

The Supreme Court’s Decision

Chief Justice Roberts, writing for the 7-2 majority, affirmed the Federal Circuit’s ruling. The Court concluded that the Act did not include any provisions that divested Holodniy of ownership of the patented inventions before they were assigned to Cetus.  Therefore, Roche, as successor to Cetus, had an ownership interest in the patents and a valid defense to infringement.

 In its opinion, the Court first confirmed the general rule that rights in an invention belong to the inventor.  Unlike the Federal Circuit, however, the Court did not turn to then focus on the language of the assignment documents, but rather, considered what effect, if any, the Bayh-Dole Act had on the inventor’s ownership interest in the invention. 

According to the Court, “unless there is an agreement to the contrary, an employer does not have rights in an invention ‘which is the original conception of the employee alone,’” (Slip Op. at 8).  Such an invention, said the Court, remains the property of he who conceived it, and the Act does not divest the inventor of his rights by operation of law.  According to the Court “[n]owhere in the [Bayh-Dole] Act is title expressly vested in contractors or anyone else; nowhere in the Act are inventors expressly deprived of their interest in federally funded inventions. Instead, the Act provides that contractors may ‘elect to retain title to any subject invention.’”  Id.

The Court further acknowledged that that certain government agencies are automatically vested by statute with ownership of inventions created with the support of federal funds, e.g., NASA and the Atomic Energy Commission (now the DOE).  Such language, said the Court, is “notably absent” from the Bayh-Dole Act.  Id. “[W]e have rejected the idea that mere employment is sufficient to vest title to an employee’s invention in the employer. Against this background, a contractor’s invention – an ‘invention of the contractor’ – does not automatically include inventions made by the contractor’s employees,” (Slip Op. at 12). 

The Court then acknowledged that because “universities typically enter into agreements with their employees requiring the assignment to the university of rights in inventions,” the decision would not harm the public interest intended to be served by the Act. “With an effective assignment, those inventions – if federally funded – become ‘subject inventions’ under the Act, and the statute as  apractical matter works pretty much the way Stanford says it should.  The only significant difference is that it does so without violence to the basic principle of patent law that inventors own their inventions,” (Slip Op. at 15).

Justice Breyer, joined by Justice Ginsberg, dissented and suggested, among other things, that the Act should be interpreted as “ordinarily assuming, and thereby ordinarily requiring an assignment of patent rights by the federally funded employee to the federally funded employer” because the invention was already paid for by the public. 

Implications for Contractors and Universities

The majority’s interpretation of the Bayh-Dole Act, said Justice Breyer in his dissent, causes a problem:

It allows individual inventors, for whose invention the public has paid, to avoid the Act’s corresponding restrictions and conditions.  And it makes the commercialization and marketing of such an invention more difficult: A potential purchaser of rights from the contractor, say a university, will not know if the university itself possesses the patent right in question or whether, as here, the individual, inadvertently or deliberately, has previously assigned the title to a third party. (emphasis added)

In other words, an individual inventor can “inadvertently or deliberately” avoid the requirements imposed on contractors by the Bayh-Dole Act – requirements that represent a quid pro quo given by the contractor in exchange for title to an invention supported by federal funds. 

For example, an inventor’s assignment of an invention to a third party can effectively eliminate the contractor’s responsibilities under the Act, specifically to: (i) disclose the invention to the Government; (ii) elect to retain title; (iii) grant the Government a license; and (iv) commercialize the invention as appropriate.  The Government will thus have no rights in an invention developed using federal funds.  The Government will undoubtedly make significant changes to procurement regulations and policies to prevent this outcome and ensure that contractors cannot avoid the Act’s requirements and restrictions. 

Contractors should expect that the Government will eventually require proof that all researchers working on federally funded projects have properly assigned their inventions to the contractor.  These assignments must recite the “magic words” blessed by the Federal Circuit, i.e. “I will and do hereby assign…” rather than “I agree to assign…”. 

Additionally, contractors and universities that have made the strategic decision to assign title to intellectual property developed by their researchers to third parties for tax or liability purposes, such as a foundation or intellectual property holding company, must consider the possibility that in the future the Government will not award federal funds to entities that do not require their researchers assign title to inventions developed using federal funds to the contractor itself.  Because a researcher’s assignment of inventions to any party other than the contractor subject to the requirements of the Bayh-Dole Act may frustrate the Government’s interest in the invention, it is possible that that such contractors may be forced to make a choice between receving federal funds and obtaining the advantages of assigning inventions to a third party.

Contractors are advised to obtain and review invention assignments from all researchers and employees, particularly those involved in federally funded projects.  Contractors should also compile such assignments with the expectation that the Government may one day require proof of their existence before granting an award.  Moreover, contractors should review, approve and compile all agreements between researchers and third-party research collaborators.  Finally, it is important that contractors consider whether researchers and employees are assigning their inventions to the same legal entity that is also the recipient of federal funds.  It is possible that in the future, the Government will not make awards to organizations that assign title in federally funded inventions to third parties.