Proposed Changes to March-In and Other Bayh-Dole Regulations for Federally-Funded Inventions
The National Institute of Standards and Technology (NIST) issued a notice of proposed rulemaking to revise the regulations that govern allocation of rights in patentable inventions developed under federal funding agreements.1 While the framework for allocating rights remains largely unchanged, NIST proposes a few significant adjustments to its regulations. Most notably, NIST proposes language that precludes an agency's decision to use march-in rights based exclusively on a firm's commercial pricing decisions, which appears to reject recent calls for the government to use march-in rights as a mechanism for lowering pharmaceutical prices. Those interested in NIST's proposed rulemaking should consider filing comments, which are due April 5, 2021.
Basic Framework for IP Rights in Patentable Inventions Developed with Federal Funding
For almost all government contracts—including procurement contracts, grants, and cooperative agreements—the Bayh-Dole Act,2 as implemented by NIST regulation3 and Executive Order,4 provides the basic framework for allocating intellectual property rights in patentable inventions generated in performance of the funding agreement. By delegation, NIST is responsible for promulgating regulations to implement this framework.
The basic premise for allocating rights is relatively simple: when a government contractor "conceives or first actually reduces to practice" a patentable invention during the performance of a federal funding agreement, the contractor may retain title to that "subject invention," and the government obtains a non-exclusive license to use the subject invention for government purposes (which may include contracting with third parties). However, the right to retain title to subject inventions does not come without conditions. While Bayh-Dole and the implementing NIST regulations set out a number of contractor obligations and government retained rights, the most controversial provisions establish so-called "march-in" rights. These provisions allow the government, under certain enumerated circumstances, to compel the contractor to license rights in a federally-funded invention to a third party.
Five Take-Aways of NIST's Proposed Changes to the Bayh-Dole Implementing Regulations
1. The basic allocation of rights remains, and contractors should be aware of its limitations. The proposed rulemaking does not attempt to change the fundamental framework dictated by the Bayh-Dole Act and associated Executive Orders. Whether a funding agreement is awarded to a large or small business, a for-profit corporation, nonprofit entity, or university, the fundamental framework allows the private recipient to retain title to any subject invention, while the government obtains a license to use the subject invention for government purposes.
Companies doing business with the government, or participating in federally-funded research, should be familiar with the standard license terms and conditions. Exceptions to the standard terms are narrow, and are detailed throughout the NIST regulations. Companies doing business with the government also should be aware that certain types of government contracts, such as Other Transactions (OTs) and Cooperative Research and Development Agreements (CRADAs), are not governed by the Bayh-Dole Act or the implementing regulations, and the IP frameworks set out in those contracts may deviate from the Bayh-Dole framework entirely. And, certain agencies, such as NASA and the Department of Energy (DOE), are subject to different statutes and regulations that generally result in the government obtaining title to subject inventions.
2. The government's march-in authority is not intended as a product pricing control. In the 40 years since enactment of the Bayh-Dole Act, multiple organizations have petitioned the National Institutes of Health, requesting that NIH use its march-in authority to lower drug pricing. To-date, NIH has refused to do so, always deferring to Congress on matters of drug pricing. With that context, NIST's most notable proposed revision in the current rulemaking is the addition of the statement that:
March-in rights shall not be exercised exclusively based on the business decisions of the contractor regarding the pricing of commercial goods and services arising from the practical application of the invention.5
This proposed revision appears to reject recent calls for the government to use march in rights as a means of lowering pharmaceutical prices. We expect many in industry and the public will be particularly interested in this provision and may seek to challenge, bolster, or modify NIST's proposed approach.
NIST also proposes to extend the period of time that agencies have to consider any decision to invoke march-in rights. The regulations provide for an informal consultation between an agency and private party when the agency believes march-in may be warranted. The proposed rulemaking would extend from 60 to 120 days the time the agency has to notify the private party of its decision following the informal consultation.6
3. The government's rights attach only to federally-funded inventions—but not privately-funded inventions generated in performance of a government contract. The language of the current regulation suggests that the government may receive rights in respect of inventions created in the performance of a government contract, even if those inventions were privately-funded. The proposed rulemaking would add language to the definition of "subject invention" to confirm there is no subject invention (and therefore no government license rights) if the invention is conceived and reduced to practice without the use of federal funds. The revised definition of subject invention in the standard patent rights clauses would read as follows, in relevant part:
Subject inventions means any inventions of a contractor conceived or first actually reduced to practice in the performance of work under a funding agreement . . . . An invention that is conceived and reduced to practice without the use of any federal funds is not considered a subject invention.7
If promulgated, this would be welcome clarification for industry members that participate in federally funded programs without actually receiving federal funding. Note, however, that if federal funding is involved in conception or reduction to practice, the invention does qualify as a subject invention to which the government obtains rights. This is a critical distinction between working with the federal government and private parties: when the government is involved, it is not enough to protect IP rights by conceiving of an invention before the collaboration begins, because the government still receives rights to such an invention that is first actually reduced to practice under a funding agreement.
4. Funding agencies receive discretion to waive compliance obligations. As noted, the Bayh-Dole Act and NIST regulations impose various compliance obligations, such as obligations to promptly report subject inventions to the government, to elect to retain title to subject inventions, and to file patent applications on subject inventions. There are draconian consequences for a failure to timely comply; the current regulations provide that contractors which do not comply will forfeit title to the applicable subject invention to the funding agency.8 Under the current framework, there is no mechanism to "cure" any such failure.
NIST proposes to revise the regulations to make this forfeiture of title discretionary with the funding agency: "A Federal agency, at its discretion, may waive the requirement for the contractor to convey title to any subject invention."9 If promulgated, this would be a welcome change for many contractors—particularly small businesses, and companies that are infrequent government contractors. All too often, companies accept federal funding agreements without complete understanding of these compliance requirements and inadvertently fail to comply. While strict compliance with these requirements is the best course of action and the federal agency is not required to waive these requirements, the proposed rulemaking would give contractors some basis for seeking to retain title following a technical breach.
5. Disclosures of subject inventions are recognized as contractor confidential information. The proposed rulemaking would also add language throughout the regulations confirming the confidential nature of submissions that private entities make to agencies regarding subject inventions.10 Once information about subject inventions is submitted to federal agencies, that information is subject to the Freedom of Information Act (FOIA) and is therefore at risk of public release. In light of the Supreme Court's standard for withholding confidential business information under FOIA Exemption 4,11 it is helpful that the proposed NIST regulations will formally recognize that submissions regarding subject inventions typically contain confidential information that the government must hold in confidence. The proposed confidentiality provisions, however, contain limitations and may not provide blanket protection to all submissions made to the government relating to subject inventions. Companies submitting confidential information to federal agencies should take care to ensure the information is protected from public release.
Request for Comments
NIST requests public comments on the proposed rulemaking, due by April 5, 2021. Companies interested in challenging, adjusting or bolstering NIST's proposed rulemaking should consider submitting formal comments in order to ensure their perspectives are reflected in the administrative record and thus available for consideration in any subsequent agency decision making or judicial review.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
NIST, Notice of Proposed Rulemaking (NPR), Rights to Federally Funded Inventions and Licensing of Government Owned Inventions, Dkt. No. 201207-0327 (4 Jan. 2021).