Money for Nothing, Patents for Free?

February 1, 2012
Pharmaceutical Executive

Volume 0, Issue 0

State tech transfer laws giving universities automatic ownership of employees' inventions represent a threat to pharma partnerships-but the Supreme Court is poised to intervene in the industry's favor.

Since Congress enacted the Bayh-Dole Act in 1980, universities have reaped hundreds of millions of dollars in licensing revenue from inventions arising out of the work of faculty, graduate students, and staff researchers. Accordingly, virtually all U.S. universities now have some kind of technology transfer policy in place under which the universities obtain patent rights to their researchers' work. Typically, universities compel their employees to disclose and assign all patentable inventions developed in the course of employment to the university as a condition of their employment.

(GETTY IMAGES / SUSAN LEVAN)

Some states have taken these efforts a step further, however, by enacting regulations that automatically give state-supported universities ownership rights to employee inventions by operation of law—even if the inventors never signed an assignment agreement. One such Florida regulation provides that inventions developed by University of South Florida employees "in the field or discipline in which the employee is employed" or "by using university support" are the property of USF. A Connecticut law provides that the Connecticut State University System "shall be entitled to own the entire right, title, and interest" to all inventions conceived by its employees, although inventors must be paid a share of any net proceeds. Other states, such as Virginia, have enacted laws that provide that all employees of state-supported higher education institutions are automatically bound to their institutions' IP policies as a condition of employment, whatever those policies may be.

John Shaeffer

Can states really enact such drastic laws? A Supreme Court case decided in June 2011 strongly suggests the answer is no; state laws with automatic vesting provisions are in conflict with federal patent law and thus would be preempted and unenforceable. In Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, the Supreme Court said that it is a "fundamental premise" of our patent system that inventors have an inchoate right to their own inventions, and, while an inventor may assign his rights to others, the chain of ownership must be traceable back to the inventor. In that case, the Supreme Court considered the question of whether the federal Bayh-Dole Act automatically vests title in an inventor's employer by operation of law. It concluded that that interpretation would be inconsistent with the entire scheme of federal patent law, dating back to the first Patent Act of 1790: "It 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 ... Had Congress intended such a sea change in intellectual property rights it would have said so clearly—not obliquely," through ambiguous language in the Bayh-Dole Act.

Brianna Dahlberg

State Versus Fed Angles

Although the Supreme Court has not directly addressed the question of whether state technology transfer laws, such as the Florida and Connecticut regulations described above, are preempted, the Supreme Court's reasoning in Stanford strongly suggests it would hold that such laws are likewise inconsistent with the basic, long-standing ideas of our federal patent system. State laws that purport to vest initial ownership of invention rights in the inventor's university employer by operation of law are clearly in conflict with the idea that initial rights to inventions are vested in inventors, who may later assign their rights to others. The Supremacy Clause of the Constitution provides that state laws that conflict with federal law are without effect. Therefore, state technology transfer laws like those above are likely preempted and not enforceable.

Ironically, lower courts before Stanford have said that states generally can enact laws to control the transfer of patent rights. For example, in 2009, the Federal Circuit held that foreclosure proceedings under Massachusetts law effectively transferred patent ownership without an assignment in writing. In another 2008 case, the Federal Circuit held that when an inventor died intestate, his patent rights passed to his wife by operation of state law. In yet another case, in 1997 a New York district court held that state law governed the disposition of patent rights in divorce proceedings. In these circumstances, state laws controlling the transfer of patent rights are not preempted by federal law.

While the lower courts' general policy is correct in most contexts, state technology transfer laws such as Florida's and Connecticut's are very different than the state laws in the those cases. Most importantly, the state laws in the lower court cases do not involve the initial vesting of rights at the moment when the inventor first conceives of the invention, but instead involve transfers of patent rights further down the line. Vesting and transferring of property rights are separate legal concepts. Moreover, the lower court cases involve state laws that concern the disposition of property generally, and only incidentally involve patent issues. And finally, the Supreme Court's characterization in Stanford of inventors' initial rights to their own inventions as a foundational premise of our patent system suggests that inventors get special protection. After all, the Constitution provides that the whole purpose of intellectual property law is "to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." Accordingly, even though lower courts have upheld state laws transferring patent rights by operation of law in some contexts, it doesn't weaken the argument that the state technology transfer laws are preempted by federal patent law.

The Takeaways

What points can the pharmaceutical industry glean from this discussion? First, state technology transfer laws can present a potential trap for any company that employs researchers. If a researcher makes discoveries while working for a public university, then later assigns the invention rights to a subsequent employer, under certain state laws a court could find that the assignment to the employer is not valid—even if the inventor never assigned any rights to the university. Accordingly, pharmaceutical companies should take special care with this aspect of due diligence before prosecuting patent applications or purchasing patent rights.

Secondly, and more importantly, however, there is a strong argument that these state technology transfer laws are preempted and not enforceable. Although the Supreme Court has not directly ruled on the question yet, its reasoning in the recent Stanford case strongly suggests these state laws are in conflict with the basic idea in federal patent law that inventors are vested with the initial rights to their inventions, which states cannot alter. Consequently, it is likely to be only a matter of time before these overreaching state technology transfer laws are definitively overruled.

John Shaeffer is a partner with Lathrop & Gage LLP and heads the firm's IP litigation department. He can be reached at jshaeffer@lathrogage.com.

Brianna Dahlberg is an associate with Lathrop & Gage LLP practicing in the firm's Los Angeles office. She can be reached at bdahlberg@lathropgage.com.