Executive Branch Focus On Federally Funded Inventions

In recent months the executive branch has indicated a willingness to assert control over intellectual property funded by federal research dollars in novel ways. This could potentially include leveraging its march-in rights under the Bayh-Dole Act.

These actions could affect rights to federally funded inventions that have been licensed to life sciences companies, potentially affect royalty and related valuation expectations and have a meaningful impact on strategic planning for drug development and commercialization activities.

In anticipation of any potential action, recipients of federal research dollars should assess compliance with the terms of their funding agreements and with the requirements of Bayh-Dole. Also, licensees of intellectual property and their investors should assess their portfolios for federally funded inventions, ensure compliance with applicable funding and license agreements and plan for potential interventions.

Novel Inventions, Bayh-Dole and Related Federal Activity

Federally funded scientific inventions are of critical importance to companies in life sciences. A 2023 study reported that NIH funding contributed to nearly all drugs approved by the FDA from 2010 to 2019.

We are aware of multiple executive branch inquiries made to federal grant recipients about inventions and have monitored the government's public comments on the topic. These reveal intensive consideration of ways to leverage federal funding of novel and important discoveries, and specifically provisions of the Bayh-Dole Act that potentially allow the government to impose licenses under certain conditions. The exercise of the government's march-in rights has never been successful, despite various attempts over decades.

In a recent example, the government broadly alleged that a recipient of federal research grants had not complied with various requirements of the Bayh-Dole Act, such as the requirement to disclose inventions to the funding agency and to manufacture products in the U.S. The Secretary of Commerce also has publicly suggested that the government may have a claim on license revenue attributable to federally funded inventions. Revenue sharing is not contemplated under the Bayh-Dole Act, and no specific plan was offered for how such revenue-sharing might operate in practice.

These comments indicate an even more aggressive stance than the prior administration's proposal in 2023 to allow use of pricing as a factor that could be used to determine if an agency should assert available march-in rights. Likewise, it's foreseeable the current administration may threaten to invoke its march-in rights as leverage to force a reduction in drug prices, or more strictly enforce the requirement to manufacture products in the US.

Recommendation for Action

In light of the focus on inventions arising from federal funding, and the widely reported willingness of the government to pursue and consummate novel commercial, revenue sharing and shareholding arrangements in a variety of industries (including artificial intelligence, aerospace, defense and materials), recipients of federal research dollars and their current and potential industry licensees, partners and investors should consider evaluating their exposure to potential government intervention now and not wait to perform this defensive diligence until they are in the midst of a critical financing or other strategic transaction. To prepare:

• Recipients of federal research dollars should assess compliance with the terms of their funding agreements and with the requirements of Bayh-Dole.
• Current and future licensees, partners and investors should assess if the intellectual property portfolios for their products include inventions made with federal funds. If, as is likely for most life sciences products, they do, parties should review relevant funding, license and sublicense agreements and confirm compliance with applicable agreement terms and regulations.

Entities whose products rely on federally funded intellectual property may also consider whether to negotiate terms in license and partnering agreements that serve to mitigate the impact of a federal research funding recipient's noncompliance with Bayh-Dole. This could include adding terms (1) requiring that the entity be copied on notice(s) to invention owners of allegations of noncompliance with terms of federal funding awards and notices of related enforcement actions, and (2) adjusting the royalty and other economic terms in the event the Bayh-Dole Act march-in rights are invoked or other government intervention is undertaken.

Crowell Life Sciences has extensive experience counseling clients on licensing considerations and working with licensees, institutions and investors to develop practical solutions. In collaboration with our government contracting, regulatory and government affairs colleagues we will continue to monitor developments in the government's approach to inventions arising from federal funding and Bayh-Dole.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.