United States: Bayh-Dole Act Does Not Automatically Vest Title To Federally Funded Inventions In Federal Contractors

This article previously appeared in Last Month at the Federal Circuit, July, 2011.

[Appealed from Fed. Cir.]

In Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc.,
No. 09-1159 (U.S. June 6, 2011), the Supreme Court held that the University and Small Business Patent Procedures Act of 1980 (the "Bayh-Dole Act" or "Act") does not automatically vest title to federally funded inventions in federal contractors or authorize contractors to unilaterally take title to such inventions.

In the 1980s, Cetus, a research company, worked with Dr. Holodniy, a scientist from Stanford, to test the efficacy of new AIDS drugs.  Dr. Holodniy signed an agreement with Stanford stating that "he agree[d] to assign" to Stanford his "right, title and interest in" inventions resulting from his employment there.  Slip op. at 2 (alteration in original).  Later, as a condition to working with Cetus, Dr. Holodniy signed an agreement stating that he "will assign and do[es] hereby assign" to Cetus his "right, title and interest in . . . the ideas, inventions, and improvements" made "as a consequence of [his] access" to Cetus.  Id.  (alterations in original).  Working at Cetus, Dr. Holodniy developed a PCR-based procedure for measuring the amount of HIV in a patient's blood.  After returning to Stanford and testing the procedure, Stanford obtained three patents on the measuring process.

Roche Molecular Systems, Inc. ("Roche Molecular Systems") acquired Cetus's PCR-related assets.  After conducting clinical trials on the HIV quantification method developed at Cetus, Roche Molecular Systems commercialized the procedure and is now used worldwide.

The Supreme Court discussed the Bayh-Dole Act, indicating that it allocates rights in federally funded "subject invention[s]" between the federal government and federal contractors.  Because some of Stanford's research on the HIV measurement technique was funded by the National Institutes of Health ("NIH"), the Act applied.  Stanford complied with the provisions of the Act and notified NIH that it was electing to retain title to the invention and granted the government a license to use the patented procedure.

Stanford filed suit against Roche Molecular Systems, Roche Diagnostics Corporation, and Roche Diagnostics Operations, Inc. (collectively "Roche"), claiming that their HIV test kits infringed Stanford's patents.  Roche asserted several defenses, including that Dr. Holodniy's agreement with Cetus gave Cetus (and consequently, Roche) co-ownership of the inventions, and thus Stanford lacked standing to sue Roche for patent infringement.  In response, Stanford contended that Dr. Holodniy did not have any rights to assign to Cetus because Stanford had superior rights under the Act.

The district court agreed with Stanford and held that under the Act, Dr. Holodniy had no rights to assign to Cetus.  The Federal Circuit, however, disagreed, concluding that Dr. Holodniy's agreement with Cetus assigned his rights to Cetus, and thus to Roche, and that the Act did not automatically void an inventor's rights in federally funded inventions.  Thus, the Act did not extinguish Roche's ownership interest in the invention, and Stanford lacked standing.

The Supreme Court first noted that the basic idea that inventors have the right to patent their inventions has not changed in the 220 years since the passage of the first Patent Act in 1790.  And, that it is also well established that an inventor can assign his rights in an invention to a third party, such as an employer. 

Second, Congress has divested inventors of their rights in inventions in several specific contexts by using "unambiguous" language, such as stating that title to such inventions "shall be vested in, and be the property of the [Atomic Energy] Commission," "shall be the exclusive property of the United States," and "shall vest in the United States."  Id. at 8 (alteration in original).  The Court found, however, that "[s]uch language is notably absent from the Bayh-Dole Act. . . .  Instead, the Act provides that contractors may 'elect to retain title to any subject invention.' . . . A 'subject invention' is defined as 'any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement.'"  Id. at 8-9 (quoting 35 U.S.C. §§ 202(a), 201(e)).

Third, the Supreme Court rejected Stanford's argument that the phrase "invention of the contractor" should be "read to include all inventions made by the contractor's employees with the aid of federal funding."  Id. at 9.  According to the Court, Stanford's interpretation would render "of the contractor" superfluous.  Rather, "of the contractor" is naturally read to mean "invention owned by the contractor" or "invention belonging to the contractor" because, as the Court has previously held, "[t]he use of the word 'of' denotes ownership."  Id. (alteration in original) (citations omitted).  While the Court found Stanford's reading of the phrase "plausible enough in the abstract, . . . patent law has always . . . rejected the idea that mere employment is sufficient to vest title to an employee's invention in the employer."  Id. at 10.

Fourth, the Court read § 202(a) of the Act, stating that contractors may "elect to retain title," as confirming that the Act does not "vest title."  Id. at 11.  It noted that Stanford argues the opposite conclusion only because it reads "retain" to mean "acquire" and "receive."  Id.  But, according to the Court, "retain" means "to hold or continue to hold in possession or use."  Id.  In other words, "[y]ou cannot retain something unless you already have it."  Id.

Additionally, the Court also found that the provisions pertaining to inventors' rights in subject inventions were consistent with the Court's interpretation of the Act.  The Act provides that "a federal agency may 'grant requests for retention of rights by the inventor . . . [i]f a contractor does not elect to retain title to a subject invention.'"  Id. at 12 (alterations in original) (emphasis added) (quoting 35 U.S.C. § 202(d)).  Thus, "[b]y using the word 'retention,' [the Act] assumes that the inventor had rights in the subject invention at some point, undermining the notion that the Act automatically vests title to federally funded inventions in federal contractors."  Id.

Finally, the Supreme Court found that the limited scope of the Act's procedural protections for third parties and inventors "bolsters" the Court's conclusion that "there is no need to protect inventor or third-party rights, because the only rights at issue are those of the contractor and the Government."  Id. at 13.  Thus, the Court found that "[i]t would be noteworthy enough for Congress to supplant one of the fundamental precepts of patent law and deprive inventors of rights in their own inventions.  To do so under such unusual terms would be truly surprising."  Id. at 14.

Accordingly, the Court concluded that the "Act does not confer title to federally funded inventions on contractors or authorize contractors to unilaterally take title to those inventions; it simply assures contractors that they may keep title to whatever it is they already have."  Id. at 11.  Thus, the Supreme Court affirmed the Federal Circuit's decision.

In a concurring opinion, Justice Sotomayor wrote separately to note that she shares the dissent's concerns regarding the principles adopted by the Federal Circuit in FilmTec Corp. v. Allied-Signal, Inc., 939 F.2d 1568 (Fed. Cir. 1991), and the application of those principles to agreements that implicate the Bayh-Dole Act.  Because Stanford failed to challenge the Federal Circuit's decision on those grounds, however, she agreed that the appropriate disposition is to affirm.  She also agreed with the dissent that the majority opinion leaves the door open for the Court to consider arguments related to FilmTec in a future case.

In a dissenting opinion, Justice Breyer reframed the issue on appeal as "[w]hether 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."  Breyer Dissent at 1 (citation omitted).  In the dissent's view, the answer to this question was "likely no," but because the issue was not fully briefed, the dissent would return the case to the Federal Circuit for further argument.

The dissent agreed with the majority that the Bayh-Dole Act does not "simply take the individual inventors' rights and grant them to the Government."  Id. at 4.  Rather, the Act "assumes that the federal funds' recipient, say a university or small business, will possess those rights."  Id.  The dissent presented two "different legal routes" to what it considered "an interpretation more consistent with the statute's objectives."  Id. at 6.  The first route would disagree with the Federal Circuit's decision in FilmTec, find that Stanford and Cetus had competing equitable interests in the inventions, and that Stanford's equitable claims were stronger than Cetus's because Stanford's contract with Dr. Holodniy came first and Stanford subsequently obtained a postinvention assignment.  The second route proposed by the dissent would treat the Bayh-Dole Act "as ordinarily assuming, and thereby ordinarily requiring, an assignment of patent rights by the federally funded employee to the federally funded employer."  Id. at 8.  Although conceding that this latter route "would treat federally funded employees of contractors (subject to the Act) differently than the law ordinarily treats private sector employees," the dissent argued that there was sufficient precedent to support that interpretation.  Id.

Ultimately, the dissent's views were only "tentative," with the preferred route to remand "to provide the parties with an opportunity to argue these, or related, matters more fully."  Id. at 10.

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