High Court Split in Arguments on Bayh-Dole Conflicts With Individual Inventors' Rights

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The U.S. Supreme Court justices seemed split Feb. 28 during oral arguments in a case testing whether, despite the limitations of the Bayh-Dole Act, inventors may assign their individual rights in patents resulting from research partially funded by the federal government (Board of Trustees of the Leland Stanford Jr. University v. Roche Molecular Systems Inc., U.S., No. 09-1159, argued 2/28/11).

While some of the justices held to the “long-standing rule” that patent rights vest in the inventor and only then do contract and statutory considerations come into play, others questioned why Congress would write the Bayh-Dole Act with an obvious loophole that essentially allows universities and the individual inventors to circumvent the government's interest in federally funded research.

Invention Developed in University, Private Setting.

Bayh-Dole--more formally the University and Small Business Patent Procedures Act of 1980, 35 U.S.C. §§200-212--has a comprehensive set of rules for allocating patent interests among the government, the “contractor”--generally a university or small business--that the government funded, and the individual inventors listed on the patents.

Just as with any private company, a contractor conducting research funded by the government can eliminate any question of individual researchers' rights to patents arising from the research through appropriate assignment contracts. The instant case arose because Stanford University's employment agreement language did not guarantee assignment to the university.

The patents at issue (5,968,730; 6,503,705; and 7,129,041) involve correlating measurements of HIV nucleic acids obtained through a polymerase chain reaction (PCR) assay to determine whether a therapy is effective.

The inventors include one Stanford researcher, Mark Holodniy, who collaborated with the university and Cetus, a laboratory where PCR techniques matured in the early 1980s. Roche Molecular Systems Inc. acquired Cetus's assets in 1991.

Holodniy's 1988 employment agreement with Stanford included language that he would “agree to assign” patent rights to the university. However, his work with Cetus included a provision in a confidentiality agreement that recited, “I will assign and do hereby assign” intellectual property rights.

Holodniy conceived the procedure at issue while at Cetus/Roche, then returned to Stanford to conduct clinical studies. According to Stanford, funding by the National Institutes of Health supported research on the technology at the time Holodniy was hired and thereafter. According to Roche, whatever NIH funding Stanford had, it was not used to support Holodniy's work while at Cetus.

Holodniy returned to Stanford to conduct clinical testing, which led to a patent application filed by Stanford in 1992, and ultimately to the patents at issue. Stanford and Roche negotiated possible licensing terms, but when those negotiations failed, Stanford filed a lawsuit alleging that Roche's HIV detection kits infringed the patents.

The U.S. District Court for the Northern District of California granted Stanford's motion for summary judgment, ruling that Roche was barred from asserting that it was the owner of the disputed patents, that it had a license, and that Stanford lacked standing without Holodniy's assignment. However, the court subsequently granted Roche's motion for summary judgment of invalidity for obviousness. Board of Trustees of the Leland Stanford Jr. University v. Roche Molecular Systems Inc., 563 F. Supp. 2d 1016 (N.D. Cal. 2008) (76 PTCJ 222, 6/13/08).

Stanford appealed the invalidity ruling; Roche appealed the court's judgments as to the parties' respective ownership rights in the patents.

Federal Circuit Denies Stanford Standing.

The Federal Circuit only addressed the standing issue, and held that Stanford had no standing to sue to bring a patent infringement lawsuit. The court held that Cetus was co-owner of the patents--along with Stanford--because Holodniy had assigned his rights to Cetus prior to conception of the invention. 583 F.3d 832, 92 USPQ2d 1442 (Fed. Cir. 2009) (78 PTCJ 694, 10/9/09).

The court said, “the contract language 'agree to assign' reflects a mere promise to assign rights in the future, not an immediate transfer of expectant interests,” citing IpVenture Inc. v. Prostar Computer Inc., 503 F.3d 1324, 1327, 84 USPQ2d 1853 (Fed. Cir. 2007) (79 PTCJ 702, 10/12/07).

In contrast, the “do hereby assign” language in the Cetus agreement meant that “Cetus's equitable title converted to legal title no later than the parent application's filing date,” the court said. When Holodniy finally, in 1995, executed an assignment of his rights in the 1992 application to Stanford, he no longer had such rights to assign, according to the court.

The court further rejected Stanford's argument that the Bayh-Dole Act negated Holodniy's assignment to Cetus since the invention proceeded from NIH-funded research, giving the government discretionary rights and Stanford the right to take complete title to the inventions as a “right of second refusal” under the act.

“Bayh-Dole does not automatically void ab initio the inventors' rights in government-funded inventions,” the appellate court panel said, nor did the statute void Holodniy's rights, assigned to Cetus, in the instant case.

Petition Supported by Solicitor General.

Stanford filed a petition for writ of certiorari March 22 (80 PTCJ 104, 5/21/10).

The petition presented the question as follows: “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.”

In a Sept. 28 response to the court's request for its views, the government sided with Stanford and asked the court to correct the Federal Circuit's “serious misunderstanding of the Bayh-Dole Act's framework for determining ownership of federally funded inventions.”

The court granted certiorari Nov. 1 (81 PTCJ 5, 11/5/10).

Briefing was completed Feb. 1, including a new brief by Neal Kumar Katyal, acting solicitor general, supporting Stanford's view (81 PTCJ 456, 2/11/11). “[N]othing in the Bayh-Dole Act suggests that a contractor must obtain an assignment of rights from an inventor to retain clear title under the Act,” the brief stated.

The high court granted the solicitor general's request to participate in the oral arguments as amicus curiae.

The other 11 friends of the court disagreed on whether application of the statute is affected by existing patent assignments as in the instant case, but the brief writers were more interested in the underlying Bayh-Dole policy, each arguing that the opposing position “frustrates Congress's purposes” in passing the act.

Equitable Character of Patent Assignments.

Donald B. Ayer of Jones Day, Washington, D.C., represented Stanford at the oral arguments before the high court. Deputy Solicitor General Malcolm L. Stewart represented the government. Mark C. Fleming of Wilmer Cutler Pickering Hale and Dorr, Boston, argued on behalf of Roche.

“First,” Justice Samuel A. Alito began, challenging Stanford's position, “it has long been the rule that inventors have title to their patents initially, even if they make those inventions while working for somebody else.” Indeed, several justices seemed to agree that reading language into the Bayh-Dole Act to support a contradiction to that long-held rule would be hard to justify on the facts of the instant case.

Throughout the arguments, Justice Ruth Bader Ginsburg suggested that the case could be decided on two factual issues without interpreting Bayh-Dole: Was the work Holodniy did at Cetus part of the NIH funding, and would there be a dispute in front of the high court had Stanford's contract language said “do hereby assign”?

The answer to the first question was left unresolved, as it was clear that the role of federal funding played no part in the Federal Circuit's decision and would have to be adjudicated on remand. As to the second question, though, she expressed some concern. “The notion that the answer--who is it who loses--should turn on whether one drafter says 'I agree to assign' and the other says 'I hereby assign' does seem very odd,” she said.

In a later colloquy with Fleming, nonetheless, Ginsburg asked, “So in the future, the universities would be protected against a third party simply by changing the form of contract with their employees to say 'I hereby assign,' so we would have no continuing problem?”

“They would be protected from the particular constellation of facts that came up in this case,” Fleming said, appearing to satisfy the justice.

Justice Anthony M. Kennedy asked Ayer if Stanford had preserved the argument below that it could win on equitable considerations, and that the assignment to Cetus was contrary to public policy.

“That's at the heart of our core argument,” Ayer said. He referred to “the equitable character of any assignment of a future interest” and said that the point “of paramount significance is the fact that the Congress of the United States has said in the context of Bayh-Dole that when the United States invests money in research, it wants certain things to happen that are very carefully set out in the Bayh-Dole Act.”

Ayer called Holodniy's assignment of his rights to Cetus “a slip up.” He said it would be wrong to have the interest of the United States thwarted contrary to its rights under Bayh-Dole, “when it spends millions and billions of dollars on research.”

Chief Justice John G. Roberts tried to undercut that concern by asking whether universities typically have different levels of agreements with researchers, depending on their stature. Presumably, he said, Stanford might agree, as to contracts with prominent researchers, “to negotiate less than a requirement of full assignment of their inventions in order to get that person there. … In other words, wouldn't you be willing to sell the interests of the United States down the river to get to advance your interests?”

Ayer replied that Stanford would not be willing to break the law, “and we would submit that that's what's going on here.”

Did Bayh-Dole Leave a Loophole?

Justice Sonia M. Sotomayor summarized the primary argument against Roche's position: “Why would Congress create this act relying on assignments and not have a provision requiring one? Nothing in the act, nothing in its regulations, nowhere is there a requirement that federal contractors seek assignments,” she said.

Justice Elena Kagan phrased the question differently. “Clearly Congress was thinking about how to protect the government's interests with respect to these patents,” she said, “and to say, well, we have these interests with respect to patents that the university owns, but we don't have those same interests with respect to patents that the individual researcher owns, just seems bizarre.”

Justice Stephen G. Breyer identified what appeared to him to be a loophole in the act. What you are asking us to accept, he said to Fleming, is that “Senator Bayh and Senator Dole passed a law which could so easily be subverted by individual inventors and third-party companies, that there might be a large class of cases where neither the university nor the government would actually get much of a benefit from research that the taxpayer had funded.”

Fleming's response was simply that third parties have not contracted around Bayh-Dole in the 30 years of its existence.

Roberts was unconvinced, and even extended the hypothetical. “The problem is you may get together, the inventor gets together with the university and say, 'Look, we share an interest in making sure none of this goes to the government.' Why would we want to do that?” He envisioned that the university would agree that the individual retained title and pay royalties to the university.

“I think in that situation, Mr. Chief Justice,” Fleming said, “there would be other doctrines that the government or a bona fide third-party purchaser could invoke, including Section 261 of the Patent Act or a lawsuit for a reassignment.”

Section 261 identifies patent ownership and assignment rules. “There are ways in which … an inequitable assignment … can be attacked in equity,” he summarized.

More importantly, Justice Antonin Scalia contributed, the government could just refuse to fund universities that take advantage of the loophole.

Two Bayh-Dole Terms Challenge Stanford.

Roche relied on two terms in the Bayh-Dole Act that caused the justices--and by extension Ayer--particular problems.

The first problem for Stanford arises in the Bayh-Dole definitions, in Section 201(e): “The term 'subject invention' means any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement.”

As to the term “invention of the contractor,” Breyer said, human beings--“not entities like universities”--invent things. Fleming argued that this argument supports Roche's position. “The statute is limited to inventions where the contractor has gotten title from its inventors,” he said.

However, Ayer contended, “The word 'invention' of someone is conventionally understood. If you hear the light bulb was an invention of Thomas Edison, you don't think Thomas Edison owns the patent; you think he invented it. The same thing is true [in the Bayh-Dole Act].”

The second terminology issue, stressed by Alito and Scalia, follows from Roche's position that “subject inventions” had to have been assigned outside the context of Bayh-Dole per Section 202(a), which allows that a contractor “may … elect to retain title to any subject invention.”

Alito said to Ayer, “There's just no accepted definition of the word 'retain' that corresponds to the meaning that you want to assign to that word. 'Retain' does not mean obtain.”

As Scalia pressed for any interpretation that could possibly support Stanford's position, Ayer replied, “['Retain' is] actually a word that has a lot of potential connotations. The one thing we can be sure of here without any doubt is that it doesn't mean that you had to have ownership before, because in Section 202(d) of the act, the act specifically talks about the inventor's opportunity to itself be considered for retention of title, and everyone agrees that that phrase is one that never applies when the inventor already has title. So 'retain' doesn't mean ['obtain'].”

By Tony Dutra


Federal Circuit decision at http://pub.bna.com/ptcj/081509Sept30.pdf

Stanford's brief at http://pub.bna.com/ptcj/091159StanfordDec16.pdf

SG's brief at http://pub.bna.com/ptcj/091159SGDec23.pdf

Roche's response at http://pub.bna.com/ptcj/091159RocheJan25.pdf

Oral argument transcript at http://pub.bna.com/ptcj/091159OralArgsFeb28.pdf