Federal grants are an important source of funding for many businesses and research institutions. The Bayh-Dole framework provides contractors the ability to retain title to an invention developed using federal funding, but comes with a number of administrative burdens. Recently, the U.S. Department of Commerce issued the revised Bayh-Dole Rule, which tightens many of those administrative burdens.
As federal agencies have been updating funding agreements, the tightened deadlines are starting to apply to inventions subject to the revised Bayh-Dole Rule. Contractors, including federal grant recipients, should check their funding agreements to determine whether the revised rules apply to inventions made with federal funding. Likewise, contractors should adhere to the shortened deadlines to avoid losing title to such inventions.
Background: The Bayh-Dole Act
Chapter 18 of Title 35 of the United States Code (the Bayh-Dole Act) and its implementing regulations, including 37 C.F.R. 401 (the Bayh-Dole Rule), require federal funding agencies to employ certain “standard clauses” in funding agreements awarded to contractors, except under certain specified conditions. Through these standard clauses, set forth at 37 C.F.R. 401.14, contractors (including grant recipients) receiving government funding are obligated to take certain actions to properly manage subject inventions—inventions that have been conceived or reduced to practice in the performance of work under a funding agreement with the federal government agency. These actions include, but are not limited to:
- Disclosing each subject invention to the federal agency within two months after disclosure by the contractor's inventor;
- Electing in writing whether to retain title to any subject invention within two years of disclosure to the federal agency;
- Filing an initial patent application on a subject invention to which the contractor elects to retain title within one year after election;
- Executing and promptly delivering to the federal agency all instruments necessary—essentially a confirmatory license—to establish or confirm the rights the government has throughout the world in those subject inventions to which the contractor elects to retain title;
- Requiring, by written agreement, the contractor's employees to disclose promptly in writing each subject invention made under contract;
- Notifying the federal agency of any decision not to continue the prosecution of a patent application; and
- Including in the specification of any U.S. patent applications and any patent issuing thereon covering a subject invention, a statement that the invention was made with government support under the grant or contract awarded by the federal agency, and that the government has certain rights in the invention.
In addition, a contractor is obligated to:
- Include the requirements of the standard clauses in any subcontracts under the contractor's award;
- Submit periodic reports as requested on the utilization of a subject invention or on efforts at obtaining such utilization that are being made by the contractor or its licensees or assignees; and
- Agree that neither the contractor nor any assignee will grant to any person the exclusive right to use or sell any subject inventions in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States, subject to waiver.
Funding agreements subject to the Bayh-Dole Rule generally cover any contract, grant or cooperative agreement between a federal agency (other than the Tennessee Valley Authority) and a contractor for the performance of experimental, developmental or research work funded in whole or in part by the federal government.
The Revised Bayh-Dole Rule
On April 13, 2018, the Department of Commerce revised the Bayh-Dole Rule effective May 14, 2018, adding new requirements and tightening compliance deadlines for federal contractors. However, due to time lags associated with each agency’s revision of grant policy statements incorporated into funding agreements to adopt the new requirements and the length of the applicable time periods, contractors are just now starting to face the first shortened deadlines under the revised rule. For example, a provisional patent application filed in February 2019 for an invention made under an NIH grant received on or after October 1, 2018 would need to be converted before the end of the year.
The revised Bayh-Dole Rule does not apply to a funding agreement in effect on or before May 14, 2018. However, when an existing funding agreement is thereafter amended, the funding agency can make the amended funding agreement subject to the revised Bayh-Dole Rule prospectively. New funding agreements after the applicable agency’s adoption of the revised Bayh-Dole Rule will be subject to the new requirements.
Accordingly, whether a subject invention is governed by the revised rules depends on the funding agreement and related grant policy statement of the federal agency awarding the grant, as well as the date of conception and reduction to practice for the invention.
For example, the NIH Notice dated September 24, 2018 announces the updates to the NIH Grants Policy Statement for 2018 effective October 1, 2018, applicable to all new (including renewals) and continuation awards beginning on or after October 1, 2018. The updated NIH Grants Policy Statement incorporates by reference the requirements of the revised Bayh-Dole Rule. Thus, if a subject invention is conceived or reduced to practice under such a grant from the NIH, it would be governed by the revised Bayh-Dole Rule.
As another example, awards under NSF 13-132, Technology Enhancement for Commercial Partnerships (TECP, Dear Colleague Letter) are subject to the Proposal & Award Policies & Procedures Guide applicable to SBIR grants obtained through the National Science Foundation. The updated guide is effective for proposals submitted or due on or after February 25, 2019, and awards made on or after February 25, 2019. Consequently, inventions conceived or reduced to practice under funding agreements based on such proposals or governing such awards would be subject to the revised Bayh-Dole Rule.
In contrast, the NSF’s general award policy was amended on May 14, 2018 to incorporate the revised Bayh-Dole Rule effective May 14, 2018: Unless otherwise noted in a specific article, the revised Grant General Conditions apply to all new NSF grants and funding amendments to existing NSF grants awarded on or after May 14, 2018 to for-profit organizations (other than Small Business Innovation Research/Small Business Technology Transfer grantees) and inventions conceived or reduced to practice under such grants and funding agreements will be subject to the revised Bayh-Dole Rule.
Note that an invention that had been conceived but not reduced to practice by a contractor prior to commencement of a funding agreement under the revised Bayh-Dole Rule—and that was first actually reduced to practice under that agreement—would be subject to the new rule, even if a provisional application had been filed prior to commencement. Failure to meet the disclosure, election of title or continued prosecution requirements discussed below would violate the terms of the funding agency’s funding agreement and could trigger conveyance of title to such subject inventions to the government.
Updates on Contractors’ Right to Retain Title
The most consequential changes in the revised Bayh-Dole Rule are the provisions that restrict a contractor’s right to retain title to a subject invention made under a federal grant. Those include disclosure, election of title and continued prosecution obligations under revised timelines, which, in many cases, turn on the revised definition of what is considered an “initial patent application” under the revised Bayh-Dole Rule.
Initial Patent Application Now Includes Provisional and PCT Applications
The revised Bayh-Dole Rule updates the term initial patent application. The new definition includes, as to a given subject invention, the first provisional application and the first PCT application designating the United States, in addition to U.S. non-provisional patent applications. There are a number of deadlines imposed by Bayh-Dole that turn on the date of an initial patent application and that affect the contractor’s ability to retain title to a subject invention. Given the timing of updates to the respective federal agency grant policies, some of those deadlines are approaching for the subject inventions made under federal grants.
It is not all bad news. For example, contractors must file their initial patent application on a subject invention within one year after election of title (or, if earlier, prior to the end of any statutory period that provides exceptions to prior art under 35 U.S.C. § 102(b) as amended by the America Invents Act). But, the inclusion of a provisional application under the definition of the term “initial patent application” now allows a contractor to satisfy this requirement by filing a provisional application.
However, as discussed below, inclusion of provisional application in the definition of initial patent application creates additional deadlines that awardees must observe.
10-month Deadline: Filing Non-Provisional, PCT and Foreign Applications
For subject inventions governed by funding agreements incorporating the revised Bayh-Dole Rule, there are shortened periods to convert provisional applications. Contractors must file U.S. non-provisional applications within 10 months of the first-filed provisional application. Additionally, the filing deadline for PCT applications and for applications in jurisdictions not covered by the PCT is also 10 months from the first filed patent application (or six months from the date permission is granted by the Commissioner of Patents to file foreign patent applications where such filing has been prohibited by a Secrecy Order). Therefore, the deadline for filing PCT and foreign applications will generally be 10 months from the first filing, regardless of whether the first filing is a provisional application. (Note that even where the initial patent application is not a provisional application, the filing deadline for foreign and PCT applications is still 10 months from the initial filing.)
Recognizing that a contractor may, as a matter of patent prosecution strategy, decide not to convert a given provisional application without necessarily abandoning the subject invention, the revised Bayh-Dole Rule does not require conveyance of title to the government for decisions to abandon a provisional application. Contractors should, however, inform the funding agency of such decisions.
In addition, as discussed, contractors must also file their initial patent application on a subject invention within one year after election of title (or, if earlier, prior to the end of any statutory period that provides exceptions to prior art under 35 U.S.C. § 102(b) as amended by the AIA).
Disclosure of Subject Inventions
The contractor must disclose each subject invention to the funding federal agency within two months after the inventor discloses it in writing to the contractor’s patent personnel. In addition, even where a manuscript describing the invention is accepted after the initial disclosure to agency, the contractor must promptly notify the agency. Likewise, the contractor must provide follow-up notification even after the initial disclosure for any planned sale or public use of the invention. The revised Bayh-Dole Rule does not make any changes to the disclosure timeline. However, as discussed below, failure to timely disclose subject inventions will now cause a defect in title that is incurable over time.
Election of Title
The deadline to elect title to a subject invention is normally within two years of the disclosure of the invention to the agency. And where a one-year statutory period is triggered, the agency may shorten the period for election of title to end up to 60 days before the end of the statutory period that provides exceptions to prior art under 35 U.S.C. § 102(b) as amended by the AIA. This rule generally has not changed, although the revised Bayh-Dole Rule did clarify the definition of the term statutory period and updated the list of triggering events to reflect the statutory language of the AIA, i.e., a statutory period may be initiated by a patent, a printed publication, public use, sale or other availability to the public.
Note that agencies may have additional requirements or stricter timelines. For example, the 2018 NIH Grant Policy Statement requires that election of title must be made within two years of the disclosure of the invention to NIH, but the election also needs to be made before the filing of an initial patent application. The revised Bayh-Dole Rule does not provide support for requiring contractors to elect title prior to the filing of an initial patent application. It only requires that the initial patent application be filed within one year after electing title. Although in exceptional circumstances an agency may determine that restriction or elimination of the right to retain title to a subject invention will better promote the policy and objectives of the Bayh-Dole Act, the NIH Grant Policy Statement does not provide such a justification to change the standard patent clause setting forth the conditions for the contractor to retain title.
However, non-compliance with agency specific requirements, while not without consequence, would not necessarily result in loss of title. The situations requiring conveyance of title to the government are prescribed in the Bayh-Dole Rule. Yet, violation of additional requirements imposed by agencies result in other consequences, including termination of a grant. To lower risk, a contractor should adhere to the restrictions imposed by the agency’s funding agreement—in the case of NIH, elect title before filing an initial patent application (which does include a provisional application).
Conditions When the Government May Obtain Title
Under Bayh-Dole, title to a subject invention is conveyed to the federal agency upon the agency’s request when the contractor fails to timely disclose or elect title, file patent applications or continue prosecution as prescribed under the revised Bayh-Dole Rule. Under the revised rule, the agency must still provide a written request for conveyance; however, the conditions for conveyance and the timeline for agency’s request have been revised. Specifically:
Failure to timely disclose or timely elect title: A funding agency can request conveyance of title upon contractor’s failure to timely disclose a subject invention to the agency or to timely elect title. While the old rule required the agency to act within 60 days after learning of the failure of the contractor, the revised Bayh-Dole Rule allows the agency to request conveyance at any time. Therefore, where a contractor misses the disclosure or the election of title deadlines, there will be a permanent defect in the contractor’s title to the subject invention.
Failure to timely file patent applications: The agency can request conveyance of title upon contractor’s omission to timely file patent applications in any country. However, if the contractor has filed a patent application in a country after the specified deadline, but before receiving the agency’s request for conveyance, the contractor shall continue to retain title in that country. This provision has not changed in the revised Bayh-Dole Rule, although the deadlines for filing have. As discussed above, the deadline to file non-provisional, foreign and international applications is reduced to 10 months from any provisional application in most cases, which is two months earlier than what is required to preserve priority benefit of the provisional application. Therefore, where an extension of time is not requested and the filing deadline is missed, it is still generally in the contractor’s best interest to file the required applications as soon as possible before a communication from the agency or, where a provisional application has been filed as the initial patent application, to abandon and refile the provisional application, communicating its interest to continue prosecution to the agency. The latter approach will of course create risk of intervening prior art, but a quick filing may not always be practical due to delays caused for example by translations for non-PCT countries or unavailability of a foreign filing license. The best strategy for a contractor will depend on the specifics of its overall IP strategy.
Decision to discontinue prosecution: Funding agencies can request conveyance of title in any country in which the contractor decides to discontinue prosecution. Discontinuation broadly includes not continuing prosecution of any non-provisional patent application for a subject invention or refusal to pay a maintenance, annuity or renewal fee on, or to defend in a reexamination or opposition proceeding on a patent on a subject invention. As noted below, at least 60 days prior to the expiration of a statutory deadline, the contractor must notify the agency of any decision not to continue the prosecution of a non-provisional patent application and funding agencies may have additional notification requirements in funding agreements. As mentioned above, only non-provisional applications are captured in the revised Bayh-Dole Rule and that abandonment of a provisional application to refile with a later filing date alone is not sufficient to trigger this provision.
Extensions of Time
Although the timelines for disclosure, election of title and filing are tight, requests for extension of the time for each deadline are granted at the discretion of the funding agency.
When a contractor requests an extension for filing a non-provisional application, a one-year extension will be granted unless the agency notifies the contractor within 60 days of receiving the request. A conservative interpretation of this provision does not extend such automatic extensions to deadlines for filing foreign and PCT applications. Thus, where federal contractors wish to wait to convert applications at the 12-month deadline, requests for extensions should be filed as early as possible—even as early as at the time of filing.
Depending on the agency, the funding agreement may have specific requirements for requesting extensions. For example, the NIH Grant Policy Statement requires extension requests to be submitted at least 30 days in advance of the 60-day disclosure reporting deadline for disclosure reporting and before the expiration of the time allowed for election of title and filing of patent applications.
Other Compliance Issues Under the Revised Bayh-Dole Rule
Other changes in the revised Bayh-Dole Rule are significant, even though they do not result in conveyance of title to the funding agency. Adherence to these provisions not only is important to avoid breaching the funding agency’s funding agreement, but failure to do so may cause contractors to breach representations and warranties in their agreements with third parties. For example, representations and warranties that the contractor complies with the Bayh-Dole Rule in an M&A, financing or licensing context may be breached. Some of the new requirements reflect best IP practices, so compliance is in the contractor’s best interest in many circumstances.
Agreements with Personnel
Under the Bayh-Dole Rule, a contractor must impose disclosure and assignment obligations on its employees (other than clerical and nontechnical employees) to allow for contractor’s performance of its disclosure obligations under rule and to establish government’s rights in the subject invention. The previous rule merely required execution of papers for filing and establishing government’s rights in the subject inventions, but the revised Bayh-Dole Rule requires that employees assign to the contractor entire right, title and interest in and to each subject invention made under contract. The assignment must be in the form of a present assignment of future rights and must protect the government’s interest against competing claims. Assignments made at the time of disclosure would not satisfy the rule. Agreements with employees should have further assurances clauses to sign such papers as patent assignments for recordation with the USPTO. Such agreements must be executed before a grant recipient (or a consortium) employee participates in federally funded research and development.
As was the case under the old rule, contractors must execute and deliver to the funding agency all instruments necessary to establish or confirm the rights the government has throughout the world in those subject inventions to which the contractor elects to retain title.
The revised Bayh-Dole Rule maintains the flow-down requirements in agreements for experimental, developmental or research work with subcontractors, namely, contractors must include the standard patent right clauses under the Bayh-Dole Rule in agreements with subcontractors. Note that the rule specifically prohibits contractors obtaining rights to subcontractor’s subject inventions as part of consideration for awarding the subcontract. Therefore, the customary blanket intellectual property assignments in subcontractor agreements may be in violation of the Bayh-Dole Rule. In addition, where the prime award with the agency was a contract (as opposed to a grant or cooperative agreement), the subcontractor and the contractor must agree that the mutual obligations created by the standard patent rights clauses would create a contract between the subcontractor and the funding agency.
Notice Requirement for Discontinuation of Prosecution
The revised Bayh-Dole Rule expands the universe of prosecution decisions requiring notice significantly. Accordingly, at least 60 days before the expiration of the statutory deadline, a contractor must notify the agency for each subject invention of any decision:
- Not to continue the prosecution of a non-provisional patent application;
- Not to pay a maintenance, annuity or renewal fee;
- Not to defend in a reexamination or opposition proceeding on a patent, in any country;
- To request, be a party to or take action in, a trial proceeding before the Patent Trial and Appeals Board of the U.S. Patent and Trademark Office, including but not limited to post-grant review, review of a business method patent, inter partes review and derivation proceeding; or
- To request, be a party to or take action in a non-trial submission of art or information at the USPTO, including but not limited to a pre-issuance submission, a post-issuance submission and supplemental examination.
Note that the first three items are those that would constitute discontinuation of prosecution and trigger conveyance of title to the agency under 37 C.F.R. 401.14(d).
The revised Bayh-Dole Rule also makes several rules for agencies to follow. For example, it provides detailed provisions for handling situations in which a federal employee is a co-inventor of an invention made under a funding agreement. These include the federal agency’s ability to file an initial patent application on joint inventions, although the contractor would retain its ability to elect title in such an event.
Consequences of Non-Compliance with the Funding Agreement
Both the old and the revised Bayh-Dole Rule enumerate the circumstances that would trigger a conveyance of contractor’s title to the U.S. government. With limited exceptions, an agency’s funding agreement cannot add substantive requirements outside of what is enumerated under 37 C.F.R. 401.14(d), non-fulfilment of which would cause conveyance of title to the government. For example, in exceptional circumstances when the agency determines that restriction or elimination of the right to retain title to any subject invention will better promote the policy and objectives of the Bayh-Dole Act, the standard patent clauses may be changed by the agency. However, as mentioned above, funding agreements provide for additional consequences other than conveyance of title.
Such consequences may include withholding of grant funds or other enforcement actions, e.g., the imposition of special terms and conditions and other enforcement actions that may include disallowing costs, withholding of further awards, wholly or partly suspending the grant, pending corrective action and termination.
The numerous administrative requirements make it easy for a contractor to breach the funding agreement in material ways, even if not material for purposes of retaining title to subject inventions. As mentioned above, breach of the funding agreement may have secondary consequences of greater importance, for example, risks related to contractor’s breach of representations and warranties contained in its agreements with third parties, such as those pertaining to compliance with its agreements in general or specifically agreements with a governmental agency. In an M&A or financing context, such a breach may at a minimum delay a transaction, may increase necessary due diligence efforts and, in some cases, may derail the transaction.
Conversely, parties conducting due diligence on intellectual property that may have been made under federal funding should take into account the new requirements of the revised Bayh-Dole Rule and consider adding or tightening contractor’s representation and warranties to ensure compliance with the revised Bayh-Dole Rule.