June 21, 2011
Stanford v. Roche, Bayh-Dole and the Intersection of Patent and Tax Exemption
I hope someone writes an article using the title of this post. The Wal-Mart case is all over the news these days but Stanford v. Roche, a case decided last week has gone quietly unnoticed, it seems, by most within the nonprofit sector. I am not quite sure how, but the case seems to unwittingly implicate the prohibition against private inurement. I am only just now getting to a thorough read, but my first impression is that the Supreme Court appears to state that a researcher at a university may claim personal ownership of intellectual property derived from the researcher's activities on behalf of the university. This, it seems to me, raises an interesting issue of private benefit, and perhaps private inurement and excess benefit (depending on whether the researcher can be characterized as an insider). Suppose the researcher applies for and receives a grant in her capactiy as a professor and scholar at a tax exempt university. The researcher subsequently makes a monumental discovery and, for whatever reasons, retains the IP rights in that discovery. May the researcher license those rights for her own personal benefit? Stanford v. Roche seems to answer the question in the affirmative. But who should own the discovery when the discovery was made at, with the indispensable assistance of, and by virtue of the researcher's affiliation with the tax exempt university? The Court's disposition of the narrow issue, whether the University's rights in the discovery necessarily take precedence over the researcher's rights, seems to miss the important point that the university is a tax exempt public trust. Only Justice Breyer's dissent seems to give this fact the significance it deserves, though he does not explicitly mention that tax regulations designed to make sure tax exemption leads to public rather than private benefit:
The Bayh-Dole Act creates a three-tier system for patent rights ownership applicable to federally funded research conducted by nonprofit organizations, such as universities, and small businesses. It sets forth conditions that mean (1) the funded firm; (2) failing that, the United States Government; and (3) failing that, the employee who made the invention, will likely obtain (or retain) any resulting patent rights (normally in that just-listed order). U. S. C. §§202–203. The statute applies to "subject invention[s]" defined as "any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement." §201(e)(emphasis added). Since the "contractor" (e.g., a university or small business) is unlikely to "conceiv[e]" of an ideaor "reduc[e]" it "to practice" other than through its employees, the term "invention of the contractor" must refer to the work and ideas of those employees. We all agree that the term covers those employee inventions that the employee properly assigns to the contractor, i.e., his or her employer. But does the term "subject invention" also include inventions that the employee fails to assign properly? . . . Given this basic statutory objective, I cannot so easily accept the majority’s conclusion—that the individual inventor can lawfully assign an invention (produced by public funds) to a third party, thereby taking that invention out from under the Bayh-Dole Act’s restrictions, conditions, and allocation rules. That conclusion, in my view, is inconsistent with the Act’s basic purposes. It may significantly undercut the Act’s ability to achieve its objectives. It allows individual inventors, for whose invention the public has paid, to avoid the Act’s corresponding restrictions and conditions. And it makes the commercialization and marketing of such an invention more difficult: A potential purchaser of rights from the contractor, say a university, will not know if the university itself possesses the patent right in question or whether, as here, the individual, inadvertently or deliberately, has previously assigned the title to a third party.
The majority's rationale and decision might be limited, it seems to me, to a holding that Stanford simply failed to assert the rights necessarily implied by tax exemption. In other words, many observers suggest that Stanford v. Roche is more about contract law; but Stanford sought to have the contracts at issue interpreted in the context that Justice Breyer seems to understand. The majority's fault lies in its taking the issue out of the tax exempt, nonprofit context. Had it paid heed to that context, one which necessarily implies public ownership first and foremost, it might not have held that a researcher may take her invention, made with the indispensible assistance of the tax exempt entity, and commercialize it for her own benefit.
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