Biden Executive Order Has Potential To Discourage U.S. Company Participation In Federal Research | Morrison & Foerster LLP – Government Contracts Insights

A new Biden administration Executive Order proposes to enforce more rigorously U.S. manufacturing requirements attendant to federally funded inventions. While the aim of the Executive Order is to support domestic manufacturing and jobs, the policy could have the unintended effect of discouraging U.S. company participation in federally funded research and development activities.

Issued on July 28, 2023, the “Executive Order on Federal Research and Development in Support of Domestic Manufacturing and United States Jobs” (“Executive Order”) has as a policy aim “that when new technologies and products are developed with support from the United States Government, they will be manufactured in the United States whenever feasible and consistent with applicable law.” The Executive Order does not call for a change in existing law, but tasks government agencies with more careful consideration and application of domestic manufacturing requirements in research and development funding agreements. It also suggests that agencies could find “exceptional circumstances” to apply so as to extend U.S. manufacturing requirements beyond the current application to exclusive licensees, particularly with respect to “critical and emerging technologies.” The administration’s directives could cause agencies to insert such requirements in agreements where legally acceptable but not necessarily legally required, or to apply more frequently exceptions that are now rare. The new directive could also lead agencies to grant fewer waivers of U.S. manufacturing requirements under existing research grants and funding agreements.

The Executive Order also suggests improvements to the current processes for invention utilization reporting and applying for U.S. manufacturing waivers, which should help to standardize federal invention reporting and the waiver process.

Current Domestic Manufacturing Requirements for Federally Funded Inventions

The Bayh-Dole Act Generally

The Bayh-Dole University and Small Business Patent Procedures Act of 1980 (“Bayh-Dole Act” or “the Act”), as amended, governs intellectual property rights in inventions stemming from federally funded research.[1] The Bayh-Dole Act established a uniform federal policy with respect to inventions made by non-profit organizations, universities, and small businesses under federally supported research and development programs, giving such entities ownership of inventions resulting from their research, and thus encouraging participation. The government later extended the Bayh-Dole Act to cover businesses of all sizes.[2]

The Bayh-Dole Act applies to research and development procurement contracts, grants, and cooperative agreements issued by all federal executive agencies.[3] Some notable exceptions where the Act does not apply are with cooperative research and development agreements (CRADAs)[4] and other transaction agreements (OTs), including National Aeronautics and Space Administration (NASA) Space Act Agreements.[5]

In addition, by its terms, agencies may deviate from Bayh-Dole Act requirements: (i) where the contractor is not located in the United States or does not have a place of business in the United States, or is controlled by a foreign country; (ii) in “exceptional circumstances” when the agency determines “that restriction or elimination of the right to retain title to any subject invention will better promote the policy and objectives” of the Act; (iii) when necessary to protect foreign intelligence and counterintelligence operations; or (iv) with respect to operation of Department of Energy (DoE) facilities involving nuclear weapons or programs.[6] In practice, agencies do not frequently use these exceptions, except that the DoE (in addition to the nuclear-related exception) uses the “exceptional circumstances” language to take title to inventions made by large businesses under many DoE funding agreements, unless a waiver is granted.[7]

Where applicable, the Bayh-Dole Act provides contractors or grantees with the option to elect to retain title to any invention conceived or first actually reduced to practice in the performance of work under a federal funding agreement (called a “subject invention”)[8] after the contractor or grantee makes the required disclosures to the government.[9] In turn, the federal government obtains a nonexclusive, nontransferable, irrevocable, paid-up license to practice, or have practiced for or on behalf of the United States, any subject invention throughout the world.[10]

If a contractor or grantee does not meet the Act’s timing deadlines for disclosure of the subject invention to the government, election to retain rights to the subject invention, or the filing of a patent application, the government may take title to the subject invention.[11] The Bayh-Dole Act also provides for “march-in” rights should the contractor, grantee, or their assignees or licensees fail to commercialize any subject invention within a reasonable period of time.[12] Under these march-in provisions, the government can force a license to a third party that will commercialize the subject invention.[13]

The Bayh-Dole Act’s U.S. Manufacturing Requirements

As most relevant here, the Bayh-Dole Act includes domestic manufacturing restrictions. Notably, these restrictions generally apply only to exclusive licensees, not to the inventor or non-exclusive licensees. Specifically, the Act prohibits a contractor or grantee that receives title to a subject invention from granting any person an exclusive license to use or sell the subject invention “unless such person agrees that any product embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.”[14] The failure of an exclusive licensee to abide by such an agreement is one of the grounds upon which the government may exercise its march-in rights.[15]

We are not aware of any published circumstance under which the government has exercised its march‑in rights based on a violation of the U.S. manufacturing section of the Bayh-Dole Act.[16] In addition, there is considerable uncertainty as to what “manufactured substantially” in the United States means. This term is not defined in statute and review of the legislative history of the Act suggests that the meaning of this term was not specifically discussed or deliberated during the legislative process. Applying dictionary definitions and common meanings of the term would suggest that a licensee with an exclusive right to use or sell a subject invention (or products derived therefrom) in the United States would be required to manufacture any products based on the subject invention largely, but not entirely, in the United States. Such a definition provides little concrete guidance for licensees or federal agencies.

Finally, even though the Act does not formally apply to CRADAs and OTs, it is common to find Bayh‑Dole-like requirements, including requirements for domestic manufacturing, in these agreements.

Waiver of U.S. Manufacturing Requirements

The Bayh-Dole Act allows inventors to seek a waiver of the requirement to manufacture a product “substantially” in the United States. The federal agency that was a party to the funding agreement may waive the requirement in individual cases upon a showing by the inventing party “that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible.”[17] Waiver applicants are generally required to provide extensive information in support of their arguments for waiver, including proof of what efforts towards licensing have been made to date, manufacturing plans, and identification of benefits accruing to the United States, even if manufacturing ultimately is based elsewhere.

The Biden Executive Order and Its Implications

With this background in mind, the Executive Order has the potential to create, within the confines of existing law, some significant shifts in the application of domestic manufacturing requirements for federally funded businesses.

First, the mere goal that products and technologies developed with any federal funding “be manufactured in the United States whenever feasible”[18] is at odds with the current application of U.S. manufacturing requirements almost entirely on exclusive licensees.

Second, the Executive Order urges the agencies with significant research spending to “consider domestic manufacturing in Federal R&D funding agreement solicitations, as appropriate and consistent with applicable law.”[19] In this regard, the administration specifically identifies Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.[20] More pointedly, with respect to OTs, the Executive Order goes so far as to suggest that these agreements should include terms to “ensure that the product is substantially manufactured in the United States.”[21] As the Bayh-Dole Act does not apply to OTs, nothing would prevent inclusion of such requirements for the OT holder and all licensees (as opposed to only exclusive licensees).

Finally, where “critical and emerging technologies”[22] are being developed, the Executive Order strongly suggests that agencies consider using the “exceptional circumstances” exception to Bayh-Dole to extend U.S. manufacturing requirements to the recipients of federal research and development funding and to non-exclusive licensees.[23] This would be a fundamental shift that could change the calculus for companies doing research in essential fields, including advanced computing, artificial intelligence, biotechnology, renewal energy, semiconductors, and microelectronics. If forced to manufacture any product embodying an invention developed in part with federal government money in the United States, these companies may seek funding elsewhere, thereby depriving the United States of government purpose licenses to the technology, and potentially slowing the pace of technology advancement. Interestingly, the administration seeks to impose the U.S. manufacturing burden here only on large companies, suggesting that small businesses and non-profits should get a pass from the restrictions.[24]

The administration proposes to monitor compliance with U.S. manufacturing requirements by requiring federal funding recipients to report on the location(s) in which subject inventions are manufactured, and to provide the names of all licensees and their manufacturing locations.[25]

Executive Order Implementation and Potential Benefits

The news is not all bad for federal research funding recipients. The Executive Order seeks to streamline and standardize funding recipients’ annual utilization reports for subject inventions by directing the National Institute of Standards and Technology (NIST) to develop common invention utilization questions, to be used by all agencies as of May 1, 2024.[26] NIST is also to develop a plan to transition all agencies to the online iEdison reporting system by calendar year 2025.[27] This will reduce administrative burden on funding recipients by eliminating certain agencies’ unique, and in some cases antiquated, reporting requirements.

The Executive Order also proposes improvements to and standardization of the process of applying for waivers from the U.S. manufacturing requirements under the conditions specified in 35 U.S.C. § 204.[28] NIST is to develop guidance on the factors for agencies to use when determining waiver eligibility, and also to develop common waiver application questions for use by all agencies.[29] Administration priorities are clear from its instructions regarding waivers. For example, the list of considerations for waiver questions includes “the benefits that will accrue to domestic manufacturing and United States jobs as a result of the subject invention being brought to market,” and “the conditions under which the subject invention would be manufactured abroad, including unionization of workplaces, health and safety standards, labor and wage laws, and environmental impacts.”[30] And in a not-so-subtle attempt to prohibit manufacturing in China, the Executive Order directs that agencies “should consider limiting waivers to applicants that commit to manufacture in locations that maintain a market economy.”[31]

Parting Thoughts

Unlike other Executive Orders that require extensive implementing regulations and thus are limited in immediate effect, this order relies on existing law, and merely encourages agencies to put a different spin on their approach to research and development funding. As such, funding recipients could see rather immediate changes in how waivers are processed. For new contracts, grants, OTs, and CRADAs, changes in U.S. manufacturing requirements may appear in funding opportunity announcements, requests for proposals, and draft agreements. How extensive and widely adopted these changes may be remains to be seen.

Funding recipients also will have limited opportunities for input on the potential impacts of the administration’s directives. Only the NIST waiver guidance will be subject to public comment.[32] As such, the only way to assess the impact of the Executive Order will be to examine whether proposed changes result in reduced participation by contractors and grantees in federal research and development activities. In the meanwhile, we urge prospective funding recipients to very carefully examine the opportunity announcements to which they respond, and the agreements they are asked to sign, and to be certain they fully understand all limitations on subsequent subject invention manufacturing for themselves and any licensees.

[1] Public Law 96-17, §6(a), Dec. 12, 1980, 94 Stat. 3020; codified at 35 U.S.C. §§ 200-212, with implementing regulations at 37 C.F.R. Part 401.

[2] See Presidential Memorandum “Government Patent Policy” (February 18, 1983); Executive Order 12591, Facilitating Access to Science and Technology (April 10, 1987), as amended by Executive Order 12618, Federally Funded Inventions (December 22, 1987); 37 C.F.R. § 401.1(b) (as revised effective May 14, 2018).

[3] 35 U.S.C. § 201(b).

[4] The Stevenson-Wydler Act permits federal laboratories to enter into CRADAs to transfer personnel, services, facilities, equipment, intellectual property, or other resources to non-federal parties. 15 U.S.C. § 3710a.

[5] Congress has authorized nearly a dozen federal agencies to use other transaction agreements—which generally do not follow a standard agreement format or include mandatory terms and conditions—to help meet agencies’ mission needs. NASA first received this authority in 1958, followed over the ensuing decades by authorization for the Departments of Defense (DOD), Energy (DoE), Health and Human Services (HHS), Homeland Security (DHS), and Transportation (DOT). Congress has also granted OT authority to five agencies within these departments, including DOT’s Federal Aviation Administration (FAA), DHS’s Transportation Security Administration (TSA), and the National Institutes of Health (NIH) at HHS.

[6] 35 U.S.C. § 202(a).

[7] See, e.g., Department of Energy Determination of Exceptional Circumstances under the Bayh-Dole Act to Further Promote Domestic Manufacture of DOE Science and Energy Technologies (June 6, 2021).

[8] 35 U.S.C. § 201(e).

[9] 35 U.S.C. § 202(a),(c).

[10] 35 U.S.C. § 202(c)(4).

[11] 35 U.S.C. § 202(c)(1)-(c)(3).

[12] 35 U.S.C. § 203

[13] Id.

[14] 35 U.S.C. § 204.

[15] 35 U.S.C. § 203(a)(4).

[16] One of the few federal judicial decisions discussing the U.S. manufacturing requirement is Ciba-Geigy Corporation v. Alza Corporation, 804 F.Supp. 614 (D.N.J. 1992). In that case, the court observed that a party that fails to manufacture its product in the United States in accordance with Section 204 does not automatically lose its exclusive license. Instead, the federal agency under whose funding agreement the subject invention was made would have to exercise its march-in rights, after providing notice and an opportunity for a hearing to the licensee. 804 F. Supp. at 629. The court also emphasized that there is no private right of action to enforce Section 204. Id.

[17] 35 U.S.C. § 204.

[18] Executive Order, § 1.

[19] Id., § 3.

[20] Id. § 3(c).

[21] Id. § 3(d).

[22] This document contains a list of “critical and emerging technologies” as identified by the administration: It includes, among other essential technologies, advanced computing, artificial intelligence, biotechnology, renewal energy, semiconductors, and microelectronics.

[23] Executive Order, § 5.

[24] Id., § 5(a)(ii).

[25] Id., § 4(b),(c).

[26] Id., § 4(d),(g).

[27] Id., § 4(e).

[28] Id., § 7.

[29] Id., § 7(d)&(e).

[30] Id., § 7(e)(i).

[31] Id., § 7(h)(i).

[32] Id., § 7(d).

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