By: Erica M. Hines

The United States Supreme Court recently heard oral arguments in connection with Stanford v. Roche, a case dealing with assignments of future inventions by faculty inventors, and the competing rights of universities and private industry to patent royalties associated with those inventions. The decision, from what appears to be a divided panel, may ultimately affect the ownership status of Intellectual Property (IP) resulting from federally-funded research under the Bayh-Dole Act.

Upon joining Stanford as a Research Fellow, inventor Mark Holodniy signed the University’s “Copyright and Patent Agreement” (“CPA”), which obligated him to assign future inventions to the university. During his research at Stanford, Dr. Holodniy collaborated with the other inventors to design a better polymerase chain reaction (“PCR”) technology assay for quantitation of HIV RNA. To facilitate the development of the new assay, Dr. Holodniy visited Cetus Corporation, and for eight or nine months spent several days a week working there, although he was never paid by Cetus. When he began to work with Cetus, Dr. Holodniy signed a Visitor’s Confidentiality Agreement (“VCA”) with the company. The VCA provided that Dr. Holodniy assigned all future inventions to Cetus. Before leaving Cetus in late 1989, Dr. Holodniy had submitted an invention disclosure, but the Cetus patent committee gave the disclosure the lowest possible ranking, and never filed a patent application on the disclosure. In mid-1990, Dr. Holodniy and the other Stanford inventors began new experiments, and eventually discovered a correlation between HIV levels and effectiveness of treatment. In May 1992, Stanford filed a patent application on the work, to which the patents-in-suit claim priority.

In 2005, Stanford University brought suit against Roche Molecular Systems, Inc. — which had bought Cetus’s PCR business in December 1991 — alleging infringement of university patents involving methods of using PCR to detect HIV. Roche argued that it could not be liable for infringement because, based on prior agreements, including the VCA that Dr. Holodniy had signed, it held ownership rights in the patents. The Federal Circuit agreed with Roche, stating that the contractual language “agree to assign” in Stanford’s CPA reflected a mere promise to assign rights in the future and did not affect an immediate transfer of expectant interests. The VCA language “I … do hereby assign”, on the other hand, was found to effectuate a present assignment of Dr. Holodniy’s future inventions to Cetus. Finding that Cetus immediately gained equitable title to Dr. Holodniy’s future invention upon the signing of the VCA, the Federal Circuit found that Roche held ownership rights in the patents and therefore could not be liable for infringement.

On appeal to the Supreme Court, Stanford, joined by the U.S. Department of Justice, argues that because it received federal funding for the research that culminated in the patents-in-suit, under the Bayh-Dole Act, title initially vests in the university or federal contractor, as opposed to the inventor. The Federal Circuit had rejected this argument, holding instead that the Bayh-Dole Act does not automatically void ab initio inventors’ rights in government-funded inventions, or inventors’ prior contractual transfers of patent rights in government-funded inventions.

During oral arguments on February 28th, the Supreme Court noted weaknesses in both Stanford and Roche’s arguments. Justice Alito indicated that there were two weaknesses that cut strongly against Stanford’s argument: (1) the long-standing rule that inventors initially have title to their patents, even if they make the invention while working for somebody else; and (2) Stanford’s reliance on statutory language stating that a nonprofit or small business may “elect to retain title to any subject invention”. Justice Alito submitted that “[t]here’s just no accepted definition of the word ‘retain’ that corresponds to the meaning that [Stanford] want[s] to assign to that word. ‘Retain’ does not mean obtain.”  In response to Roche’™s position that the Bayh-Dole Act has no impact on the initial vesting of patent ownership, and that what the contractor gets is what the government gets, Chief Justice Roberts proposed that contractors/ universities could work out deals (e.g., with private corporations), to make sure that the contractor/university does not get the invention or patent, but rather would only get royalties, such that the patent itself could not be diluted by government-held rights. In response to Roche’s answer that the government could invoke other doctrines to obtain patent rights, the Chief Justice asked whether Roche was suggesting “that Congress passed a law that could … be easily circumvented not only by the inventor but by the inventor and the contractor working together.” Clearly uneasy over Stanford’s interpretation of Bayh-Dole, Justice Kennedy articulated that “[w]hat [Stanford and the U.S. Department of Justice are] asking for … means a very great change in … how patents are held.” Justice Kennedy asked, “[i]f we can resolve this case on a simple contract basis, why not do it?”, and the Court went on to inquire whether many universities have assignments similar to Stanford’s, using “agree to assign” language.

The Supreme Court is expected to issue its decision in this case by July 2011. If the Court responds to the parties’ divergent Bayh-Dole constructions, then the decision will have a significant impact on the initial vesting of patent rights for inventions resulting from federally-funded research. The decision would represent landmark precedent departing from the well-founded rule of law that all U.S. patent rights invest first in the inventor.  Since the Federal Circuit’s decision, many universities have altered their IP agreements with staff and students to use “hereby assign” language, as opposed to “agree to assign” language. As articulated by counsel for the Department of Justice during oral arguments, “[i]t seems a little ethereal to distinguish between a present assignment of an invention that has not yet been created and an agreement to assign that in the future.” If the Supreme Court opts to pursue this argument, or to otherwise resolve the case on a contract law basis, it will avoid Justice Kennedy’s concern that the Court is being asked to uproot well-established law regarding how patents are held.  No matter the basis of the decision, it will likely have a significant impact on the IP policies of small businesses and non-profits (such as universities) partaking in federally-funded research.