[co-authors: Ryan Kwock, Grace Fernandez and Esther Galan*]
A Looming AI War: Transparency v. IP Rights
By Stuart P. Meyer and Grace Fernandez*
As artificial intelligence systems become more prevalent in daily life, efforts to create a unifying set of AI principles have intensified. In the past few months, at least three major works have been published on the issue. The Institute of Electrical and Electronics Engineers authored the first edition of Ethically Aligned Design (EAD1e), a comprehensive three-year project that focuses largely on AI ethical issues. The International Technology Law Association released its in-depth review of ethical guideposts in Responsible AI: A Global Policy Framework in June 2019 (Disclosure: Stuart Meyer is a co-author of Responsible AI). And the Organisation for Economic Co-operation and Development published a set of intergovernmental policy guidelines on AI, all of which were adopted by 42 participating countries.
All three of these publications seek to address vital questions, such as how AI systems should handle human safety concerns. Many of these issues combine philosophy, social norms and engineering design.
Here, we focus on a class of problems that seem either unique in AI systems, or at least present in AI systems to a degree not common elsewhere. Specifically, we address a natural tension between traditional intellectual property rights and a commonly stated ethical goal of ensuring some degree of transparency or explainability in AI systems. Think of a hypothetical AI system for determining whether someone has committed a criminal offense beyond a reasonable doubt, or a system that assigns transplant organs to waiting patients based on a wide variety of factors. It is natural that those impacted (if not society as a whole) will want to know how the systems made those decisions. Yet IP rights — including copyright, trade secrets and patents — may well be implicated by that need.
In this article, we outline the extent to which each of the three recent publications attempt to address this tension. We conclude by offering observations on analogous technological and IP issues that could provide additional guidance on ways that this tension might be handled.
EAD1e: Ethically Aligned Design
To ensure that AI systems are created with consideration of their ethical ramifications, EAD1e presents a set of general principles to inform standards and policy making going forward. Two of these principles, referred to as accountability and transparency, propose that AI systems “provide an unambiguous rationale for all decisions made” and that the basis of an AI decision “should always be discoverable.” Without accountability and transparency, EAD1e warns that the design and development of AI systems will face challenges regarding ethical implementation and oversight.
Despite this warning, EAD1e does not attempt to explicitly challenge the role of traditional IP rights. For instance, EAD1e recognizes that algorithmic transparency does not necessarily supersede “intellectual property that cannot, or will not, be released to the general public.” It nonetheless calls for standards “to be created to avoid harm and negative consequences.” There is little emphasis given to this issue; to the contrary: at one point, EAD1e asserts that trust or distrust in an AI system may be fostered in numerous ways. “In such circumstances, the challenges presented by the other principles, e.g., the challenge of adhering to the principle of transparency while respecting intellectual property considerations, may become of secondary importance.” As such, EAD1e recommends that creators “describe the procedures and results of [AI] testing in clear language that is understandable to both experts and nonexperts, and should do so without disclosing intellectual property.” However, there is no discussion of how reasonable it is to do so. For example, it is the details of a training set corpus and weightings of various factors that may well determine whether an AI system is fair or biased. How such details might be provided without implicating trade secrets is unclear, though a later discussion suggests that IP concerns might be mitigated by permitting only, for instance, a “public interest steward” with access to such detailed intellectual property.
EAD1e asserts that policymakers creating frameworks for realizing AI transparency “should consider the role of appropriate protection for intellectual property, but should not allow those concerns to be used as a shield to prevent duly limited disclosure of information needed to ascertain… acceptable standards of effectiveness, fairness, and safety.” Thus, policymakers should recognize that the level of disclosure will depend “on what is at stake in a given circumstance.”
Responsible AI: A Global Policy Framework
Responsible AI argues that AI systems have a duty of transparency, as analogous to that of data protection regimes around the world (e.g., Article 5 of the European General Data Protection Regulation). However, the publication advocates, in addition to transparency, that AI systems “provide information about how exactly a certain output was produced” (also referred to as “explainability”). The importance of transparency and explainability centers around maintaining the public’s trust; it also serves as an accountability tool as AI continues to be developed and implemented.
Despite the policy implementations Responsible AI suggests, it also realizes there are limits. For example, the publication concedes that trade secrets present a unique challenge to transparency and explainability since “private businesses have legitimate interests in keeping their valuable know-how secret,” as do public authorities in some respects to law enforcement. Responsible AI also warns of a person’s ability to cheat or alter systems, such as an algorithm that assists in a job application process, if all information becomes widely available. Indeed, at a certain point, a high amount of transparency might “encourage or exacerbate” manipulation and abuse. And in some cases, where traditional IP protection is not available, strict secrecy is “the only viable option to protect valuable know-how and exclusivity.”
To alleviate these concerns, Responsible AI recommends that regulatory principles not “unduly limit the ability of AI developers and adopters to protect their proprietary algorithms, business secrets and know-how, and to safeguard a competitive advantage they may have compared to their competitors.” This is achieved through a balancing of conflicting interests—a process that is commonly used in existing data protection laws.
Finally, Responsible AI addresses the challenge of balancing transparency with traditional IP rights by relating the tension to previously seen issues. For example, the evolution of IT auditing has been able to keep pace with advances in technology, while not jeopardizing IP rights. Similarly, it can be anticipated that protocols, like algorithm audits, that are “developed to ensure that AI systems are explainable will evolve to accommodate AI system issues in these areas.” As such, Responsible AI explains that transparency and explainability can be achieved by relying on the assumption that algorithm audits will be able to alleviate the burdens of balancing interests—if such a balance can be achieved in the first place.
Responsible AI also includes an entire chapter on IP rights. This discussion is geared toward “achieving the right balance between the owner or developer of the AI technology and those third parties using the technology, and also as to the provider(s) of data sets.” One relevant area discussed in this section is whether “non-expressive” use of a copyright-protected work (e.g., for purposes of explaining how a system has come to a decision) could be treated as a non-infringing use, compared with creation of copies of the work for commercial exploitation. In a related area, Responsible AI reports that some support a view that text and data mining (TDM), for example as used to train AI systems, perhaps should not be under the control of rights owners based on the idea-expression dichotomy of copyright law. Responsible AI uses as an example of a TDM exception a new provision of copyright law passed by the Japanese Diet last year, “which basically allows for text data mining by all users and for all purposes, both commercial and non-commercial.” In the area of trade secrets, the IP chapter of Responsible AI asserts that “it may be that seeking to rely on trade secrets for protection of AI inventions or data sets is contrary to requirements or desire for transparency and fairness with regard to AI.” However, no suggestion is given for where to draw the line between IP rights and those transparency/fairness goals. The chapter warns that any urge to create new laws to address these issues be tempered by a cautious approach, lest it further “complicate an already complex bundle of IP rights.”
The Organisation for Economic Co-operation and Development
With the support of 42 countries, including the United States, the OECD’s AI principles provide a historic step in AI governance. Unlike EAD1e and Responsible AI, the OECD serves to encourage international cooperation and facilitate global relevance through the world’s first intergovernmental AI policy guidelines. However, the OECD fails to provide any more clarity than either of the other publications regarding the intellectual property tension. And, one might argue, the high-level overview results in even more ambiguity and vagueness.
As stated principles for responsible stewardship of trustworthy AI, the OECD recognizes transparency and explainability as well as accountability to be important objectives. It finds that AI actors should “provide meaningful information, appropriate to the context, and consistent with the state of art.” Specifically, the OECD challenges AI actors to (1) make a general understanding of AI systems known, (2) ensure awareness of AI systems, such as the workplace, (3) help those affected by an AI system understand outcomes and (4) assist those who are adversely affected by an outcome to understand the factors and logic that serve as a foundation for the AI system’s decision.
Despite these goals, OECD addresses the tension with IP only by stating that participating countries recognize “certain existing national and international legal, regulatory and policy frameworks already have relevance to AI, including… intellectual property rights… while noting that the appropriateness of some frameworks may need to be assessed and new approaches developed.” But OECD provides no clear indication of how to assess the level of appropriateness for any given framework, leaving the participating nations with little guidance on how to reconcile tensions of transparency goals with IP rights.
Where to Look for Solutions
While the three recent publications attempt to shed light on the tension between IP rights and transparency goals, the dilemma is far from being solved. Unfortunately, we do not purport to provide the answer here either. Instead, we suggest that discussion of appropriate responses can look to various analogues where solutions have previously been found. One way to reconcile this conflict is to draw from existing exceptions within IP regimes today that balance transparency and traditional IP rights.
Trade secret law provides at least two such examples. It is now common to require trade secret plaintiffs to identify with some specificity their trade secrets before being granted the ability to take discovery related to alleged misappropriation. See, e.g., the new Massachusetts version of the Uniform Trade Secrets Act at § 42D(b) and California’s longer standing Civ. Proc. Code § 2019.210, as well as case law and local rules along the same lines. A second example is the federal Defend Trade Secrets Act, which expressly allows for disclosure of trade secrets by whistleblowers under certain instances, e.g., 18 U.S.C § 1833. As such, one possible approach for resolving this IP tension would be to employ similar provisions where appropriate to require limited disclosure, in a manner that maintains trade secrecy as much as possible, where such disclosure is needed to satisfy other AI infrastructure requirements, such as explainability of a critical decision made by an AI system. In certain circumstances, such disclosure might need to be limited in scope but public, while in others it could be broader but made only in camera to a special master, for instance.
Likewise, copyright law has long recognized the need to strike a balance between private ownership and public welfare. In fact, a recent development further emphasizes the limits of copyright infringement. A recent D.C. Circuit case held that safety standards and codes that private standards development organizations had coordinated and published, and, which various governments had then incorporated by reference into law, was not necessarily infringed after a nonprofit corporation posted the standards and codes to the internet. The court reversed a summary judgment in favor of the plaintiffs, remanding the case for the district court to correct errors in its fair use analysis. (“[t]he task is not to be simplified with bright-line rules, for the statute, like the doctrine it recognizes, calls for a case-by-case analysis”). Thus, the balancing done in this area is similar to the task of addressing the tension we outline here. (The D.C. Circuit reserved the issues of copyrightability and merger doctrines in the case, directing the district court to address fair use specifically and suggesting that the other issues might come to the fore if necessary later in the case. Note: Fenwick is representing the defendant pro bono.)
Related concerns have also been dealt with in patent law. In the United States, § 287 of the Patent Act limits, at least to some degree, patent infringement remedies for certain medical activities. Additionally, India has historically contemplated limitations to pharmaceutical patents. Before 2005, India denied medicine patents and granted compulsory licenses to allow generic drug manufacturers to create cheaper alternatives. This was an effort to provide affordable drugs to the poor. Since the country became a signatory to the World Trade Organization, however, India has faced pressures to follow patent regimes similar to that in the United States. The country continues to decide how to align its patent policy with the world market, but India provides an alternative scenario to how patent rights could be balanced. (For more information, please see this article.) These two examples show the influence of evolving societal interests on patent protections as technology has evolved.
While the task is difficult, the tension within AI systems is not the first time that societies have had to consider balancing IP rights against other critical issues. As AI continues to grow, policymakers (and indeed society overall) will have to face the issue head-on and make some very important decisions. The three recent publications on ethical AI principles are just the beginning of a larger conversation.
Avoiding Loss of Title to Inventions Made Under Federal Funding as New Bayh-Dole Requirements Affect Patent Rights
By Pinar Bailey
Federal grants are an important source of funding for many businesses and research institutions. The Bayh-Dole framework provides contractors the ability to retain title to an invention developed using federal funding, but comes with a number of administrative burdens. Recently, the U.S. Department of Commerce issued the revised Bayh-Dole Rule, which tightens many of those administrative burdens.
As federal agencies have been updating funding agreements, the tightened deadlines are starting to apply to inventions subject to the revised Bayh-Dole Rule. Contractors, including federal grant recipients, should check their funding agreements to determine whether the revised rules apply to inventions made with federal funding. Likewise, contractors should adhere to the shortened deadlines to avoid losing title to such inventions.
Background: The Bayh-Dole Act
Chapter 18 of Title 35 of the United States Code (the Bayh-Dole Act) and its implementing regulations, including 37 C.F.R. 401 (the Bayh-Dole Rule), require federal funding agencies to employ certain “standard clauses” in funding agreements awarded to contractors, except under certain specified conditions. Through these standard clauses, set forth at 37 C.F.R. 401.14, contractors (including grant recipients) receiving government funding are obligated to take certain actions to properly manage subject inventions—inventions that have been conceived or reduced to practice in the performance of work under a funding agreement with the federal government agency. Learn more.
Funding agreements subject to the Bayh-Dole Rule generally cover any contract, grant or cooperative agreement between a federal agency (other than the Tennessee Valley Authority) and a contractor for the performance of experimental, developmental or research work funded in whole or in part by the federal government.
The Revised Bayh-Dole Rule
On April 13, 2018, the Department of Commerce revised the Bayh-Dole Rule effective May 14, 2018, adding new requirements and tightening compliance deadlines for federal contractors. However, due to time lags associated with each agency’s revision of grant policy statements incorporated into funding agreements to adopt the new requirements and the length of the applicable time periods, contractors are just now starting to face the first shortened deadlines under the revised rule. For example, a provisional patent application filed in February 2019 for an invention made under an NIH grant received on or after October 1, 2018 would need to be converted before the end of the year.
The revised Bayh-Dole Rule does not apply to a funding agreement in effect on or before May 14, 2018. However, when an existing funding agreement is thereafter amended, the funding agency can make the amended funding agreement subject to the revised Bayh-Dole Rule prospectively. New funding agreements after the applicable agency’s adoption of the revised Bayh-Dole Rule will be subject to the new requirements.
Accordingly, whether a subject invention is governed by the revised rules depends on the funding agreement and related grant policy statement of the federal agency awarding the grant, as well as the date of conception and reduction to practice for the invention.
For example, the NIH Notice dated September 24, 2018 announces the updates to the NIH Grants Policy Statement for 2018 effective October 1, 2018, applicable to all new (including renewals) and continuation awards beginning on or after October 1, 2018. The updated NIH Grants Policy Statement incorporates by reference the requirements of the revised Bayh-Dole Rule. Thus, if a subject invention is conceived or reduced to practice under such a grant from the NIH, it would be governed by the revised Bayh-Dole Rule.
As another example, awards under NSF 13-132, Technology Enhancement for Commercial Partnerships (TECP, Dear Colleague Letter) are subject to the Proposal & Award Policies & Procedures Guide applicable to SBIR grants obtained through the National Science Foundation. The updated guide is effective for proposals submitted or due on or after February 25, 2019, and awards made on or after February 25, 2019. Consequently, inventions conceived or reduced to practice under funding agreements based on such proposals or governing such awards would be subject to the revised Bayh-Dole Rule.
In contrast, the NSF’s general award policy was amended on May 14, 2018 to incorporate the revised Bayh-Dole Rule effective May 14, 2018: Unless otherwise noted in a specific article, the revised Grant General Conditions apply to all new NSF grants and funding amendments to existing NSF grants awarded on or after May 14, 2018 to for-profit organizations (other than Small Business Innovation Research/Small Business Technology Transfer grantees) and inventions conceived or reduced to practice under such grants and funding agreements will be subject to the revised Bayh-Dole Rule.
Note that an invention that had been conceived but not reduced to practice by a contractor prior to commencement of a funding agreement under the revised Bayh-Dole Rule—and that was first actually reduced to practice under that agreement—would be subject to the new rule, even if a provisional application had been filed prior to commencement. Failure to meet the disclosure, election of title or continued prosecution requirements discussed below would violate the terms of the funding agency’s funding agreement and could trigger conveyance of title to such subject inventions to the government.
Updates on Contractors’ Right to Retain Title
The most consequential changes in the revised Bayh-Dole Rule are the provisions that restrict a contractor’s right to retain title to a subject invention made under a federal grant. Those include disclosure, election of title and continued prosecution obligations under revised timelines, which, in many cases, turn on the revised definition of what is considered an “initial patent application” under the revised Bayh-Dole Rule.
Initial Patent Application Now Includes Provisional and PCT Applications
The revised Bayh-Dole Rule updates the term initial patent application. The new definition includes, as to a given subject invention, the first provisional application and the first PCT application designating the United States, in addition to U.S. non-provisional patent applications. There are a number of deadlines imposed by Bayh-Dole that turn on the date of an initial patent application and that affect the contractor’s ability to retain title to a subject invention. Given the timing of updates to the respective federal agency grant policies, some of those deadlines are approaching for the subject inventions made under federal grants.
It is not all bad news. For example, contractors must file their initial patent application on a subject invention within one year after election of title (or, if earlier, prior to the end of any statutory period that provides exceptions to prior art under 35 U.S.C. § 102(b) as amended by the America Invents Act). But, the inclusion of a provisional application under the definition of the term “initial patent application” now allows a contractor to satisfy this requirement by filing a provisional application.
However, as discussed below, inclusion of provisional application in the definition of initial patent application creates additional deadlines that awardees must observe.
10-Month Deadline: Filing Non-Provisional, PCT and Foreign Applications
For subject inventions governed by funding agreements incorporating the revised Bayh-Dole Rule, there are shortened periods to convert provisional applications. Contractors must file U.S. non-provisional applications within 10 months of the first-filed provisional application. Additionally, the filing deadline for PCT applications and for applications in jurisdictions not covered by the PCT is also 10 months from the first filed patent application (or six months from the date permission is granted by the Commissioner of Patents to file foreign patent applications where such filing has been prohibited by a Secrecy Order). Therefore, the deadline for filing PCT and foreign applications will generally be 10 months from the first filing, regardless of whether the first filing is a provisional application. (Note that even where the initial patent application is not a provisional application, the filing deadline for foreign and PCT applications is still 10 months from the initial filing.)
Recognizing that a contractor may, as a matter of patent prosecution strategy, decide not to convert a given provisional application without necessarily abandoning the subject invention, the revised Bayh-Dole Rule does not require conveyance of title to the government for decisions to abandon a provisional application. Contractors should, however, inform the funding agency of such decisions.
In addition, as discussed, contractors must also file their initial patent application on a subject invention within one year after election of title (or, if earlier, prior to the end of any statutory period that provides exceptions to prior art under 35 U.S.C. § 102(b) as amended by the AIA).
Disclosure of Subject Inventions
The contractor must disclose each subject invention to the funding federal agency within two months after the inventor discloses it in writing to the contractor’s patent personnel. In addition, even where a manuscript describing the invention is accepted after the initial disclosure to agency, the contractor must promptly notify the agency. Likewise, the contractor must provide follow-up notification even after the initial disclosure for any planned sale or public use of the invention. The revised Bayh-Dole Rule does not make any changes to the disclosure timeline. However, as discussed below, failure to timely disclose subject inventions will now cause a defect in title that is incurable over time.
Election of Title
The deadline to elect title to a subject invention is normally within two years of the disclosure of the invention to the agency. And where a one-year statutory period is triggered, the agency may shorten the period for election of title to end up to 60 days before the end of the statutory period that provides exceptions to prior art under 35 U.S.C. § 102(b) as amended by the AIA. This rule generally has not changed, although the revised Bayh-Dole Rule did clarify the definition of the term statutory period and updated the list of triggering events to reflect the statutory language of the AIA, i.e., a statutory period may be initiated by a patent, a printed publication, public use, sale or other availability to the public.
Note that agencies may have additional requirements or stricter timelines. For example, the 2018 NIH Grant Policy Statement requires that election of title must be made within two years of the disclosure of the invention to NIH, but the election also needs to be made before the filing of an initial patent application. The revised Bayh-Dole Rule does not provide support for requiring contractors to elect title prior to the filing of an initial patent application. It only requires that the initial patent application be filed within one year after electing title. Although in exceptional circumstances an agency may determine that restriction or elimination of the right to retain title to a subject invention will better promote the policy and objectives of the Bayh-Dole Act, the NIH Grant Policy Statement does not provide such a justification to change the standard patent clause setting forth the conditions for the contractor to retain title.
However, non-compliance with agency specific requirements, while not without consequence, would not necessarily result in loss of title. The situations requiring conveyance of title to the government are prescribed in the Bayh-Dole Rule. Yet, violation of additional requirements imposed by agencies result in other consequences, including termination of a grant. To lower risk, a contractor should adhere to the restrictions imposed by the agency’s funding agreement—in the case of NIH, elect title before filing an initial patent application (which does include a provisional application).
Conditions When the Government May Obtain Title
Under Bayh-Dole, title to a subject invention is conveyed to the federal agency upon the agency’s request when the contractor fails to timely disclose or elect title, file patent applications or continue prosecution as prescribed under the revised Bayh-Dole Rule. Under the revised rule, the agency must still provide a written request for conveyance; however, the conditions for conveyance and the timeline for agency’s request have been revised. Specifically:
Failure to timely disclose or timely elect title: A funding agency can request conveyance of title upon contractor’s failure to timely disclose a subject invention to the agency or to timely elect title. While the old rule required the agency to act within 60 days after learning of the failure of the contractor, the revised Bayh-Dole Rule allows the agency to request conveyance at any time. Therefore, where a contractor misses the disclosure or the election of title deadlines, there will be a permanent defect in the contractor’s title to the subject invention.
Failure to timely file patent applications: The agency can request conveyance of title upon contractor’s omission to timely file patent applications in any country. However, if the contractor has filed a patent application in a country after the specified deadline, but before receiving the agency’s request for conveyance, the contractor shall continue to retain title in that country. This provision has not changed in the revised Bayh-Dole Rule, although the deadlines for filing have. As discussed above, the deadline to file non-provisional, foreign and international applications is reduced to 10 months from any provisional application in most cases, which is two months earlier than what is required to preserve priority benefit of the provisional application. Therefore, where an extension of time is not requested and the filing deadline is missed, it is still generally in the contractor’s best interest to file the required applications as soon as possible before a communication from the agency or, where a provisional application has been filed as the initial patent application, to abandon and refile the provisional application, communicating its interest to continue prosecution to the agency. The latter approach will of course create risk of intervening prior art, but a quick filing may not always be practical due to delays caused for example by translations for non-PCT countries or unavailability of a foreign filing license. The best strategy for a contractor will depend on the specifics of its overall IP strategy.
Decision to discontinue prosecution: Funding agencies can request conveyance of title in any country in which the contractor decides to discontinue prosecution. Discontinuation broadly includes not continuing prosecution of any non-provisional patent application for a subject invention or refusal to pay a maintenance, annuity or renewal fee on, or to defend in a reexamination or opposition proceeding on a patent on a subject invention. As noted below, at least 60 days prior to the expiration of a statutory deadline, the contractor must notify the agency of any decision not to continue the prosecution of a non-provisional patent application and funding agencies may have additional notification requirements in funding agreements. As mentioned above, only non-provisional applications are captured in the revised Bayh-Dole Rule and that abandonment of a provisional application to refile with a later filing date alone is not sufficient to trigger this provision.
Extensions of Time
Although the timelines for disclosure, election of title and filing are tight, requests for extension of the time for each deadline are granted at the discretion of the funding agency.
When a contractor requests an extension for filing a non-provisional application, a one-year extension will be granted unless the agency notifies the contractor within 60 days of receiving the request. A conservative interpretation of this provision does not extend such automatic extensions to deadlines for filing foreign and PCT applications. Thus, where federal contractors wish to wait to convert applications at the 12-month deadline, requests for extensions should be filed as early as possible—even as early as at the time of filing.
Depending on the agency, the funding agreement may have specific requirements for requesting extensions. For example, the NIH Grant Policy Statement requires extension requests to be submitted at least 30 days in advance of the 60-day disclosure reporting deadline and before the expiration of the time allowed for election of title and filing of patent applications.
Other Compliance Issues Under the Revised Bayh-Dole Rule
Other changes in the revised Bayh-Dole Rule are significant, even though they do not result in conveyance of title to the funding agency. Adherence to these provisions not only is important to avoid breaching the funding agency’s funding agreement, but failure to do so may cause contractors to breach representations and warranties in their agreements with third parties. For example, representations and warranties that the contractor complies with the Bayh-Dole Rule in an M&A, financing or licensing context may be breached. Some of the new requirements reflect best IP practices, so compliance is in the contractor’s best interest in many circumstances.
Agreements with Personnel
Under the Bayh-Dole Rule, a contractor must impose disclosure and assignment obligations on its employees (other than clerical and nontechnical employees) to allow for contractor’s performance of its disclosure obligations under rule and to establish government’s rights in the subject invention. The previous rule merely required execution of papers for filing and establishing government’s rights in the subject inventions, but the revised Bayh-Dole Rule requires that employees assign to the contractor entire right, title and interest in and to each subject invention made under contract. The assignment must be in the form of a present assignment of future rights and must protect the government’s interest against competing claims. Assignments made at the time of disclosure would not satisfy the rule. Agreements with employees should have further assurances clauses to sign such papers as patent assignments for recordation with the USPTO. Such agreements must be executed before a grant recipient (or a consortium) employee participates in federally funded research and development.
As was the case under the old rule, contractors must execute and deliver to the funding agency all instruments necessary to establish or confirm the rights the government has throughout the world in those subject inventions to which the contractor elects to retain title.
The revised Bayh-Dole Rule maintains the flow-down requirements in agreements for experimental, developmental or research work with subcontractors, namely, contractors must include the standard patent right clauses under the Bayh-Dole Rule in agreements with subcontractors. Note that the rule specifically prohibits contractors obtaining rights to subcontractor’s subject inventions as part of consideration for awarding the subcontract. Therefore, the customary blanket intellectual property assignments in subcontractor agreements may be in violation of the Bayh-Dole Rule. In addition, where the prime award with the agency was a contract (as opposed to a grant or cooperative agreement), the subcontractor and the contractor must agree that the mutual obligations created by the standard patent rights clauses would create a contract between the subcontractor and the funding agency.
Notice Requirement for Discontinuation of Prosecution
The revised Bayh-Dole Rule expands the universe of prosecution decisions requiring notice significantly. Accordingly, at least 60 days before the expiration of the statutory deadline, a contractor must notify the agency for each subject invention of any decision:
- Not to continue the prosecution of a non-provisional patent application;
- Not to pay a maintenance, annuity or renewal fee;
- Not to defend in a reexamination or opposition proceeding on a patent, in any country;
- To request, be a party to or take action in, a trial proceeding before the Patent Trial and Appeals Board of the U.S. Patent and Trademark Office, including but not limited to post-grant review, review of a business method patent, inter partes review and derivation proceeding; or
- To request, be a party to or take action in a non-trial submission of art or information at the USPTO, including but not limited to a pre-issuance submission, a post-issuance submission and supplemental examination.
Note that the first three items are those that would constitute discontinuation of prosecution and trigger conveyance of title to the agency under 37 C.F.R. 401.14(d).
The revised Bayh-Dole Rule also makes several rules for agencies to follow. For example, it provides detailed provisions for handling situations in which a federal employee is a co-inventor of an invention made under a funding agreement. These include the federal agency’s ability to file an initial patent application on joint inventions, although the contractor would retain its ability to elect title in such an event.
Consequences of Non-Compliance with the Funding Agreement
Both the old and the revised Bayh-Dole Rule enumerate the circumstances that would trigger a conveyance of contractor’s title to the U.S. government. With limited exceptions, an agency’s funding agreement cannot add substantive requirements outside of what is enumerated under 37 C.F.R. 401.14(d), non-fulfilment of which would cause conveyance of title to the government. For example, 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 Bayh-Dole Act, the standard patent clauses may be changed by the agency. However, as mentioned above, funding agreements provide for additional consequences other than conveyance of title.
Such consequences may include withholding of grant funds or other enforcement actions, e.g., the imposition of special terms and conditions and other enforcement actions that may include disallowing costs, withholding of further awards, wholly or partly suspending the grant, pending corrective action and termination.
The numerous administrative requirements make it easy for a contractor to breach the funding agreement in material ways, even if not material for purposes of retaining title to subject inventions. As mentioned above, breach of the funding agreement may have secondary consequences of greater importance, for example, risks related to contractor’s breach of representations and warranties contained in its agreements with third parties, such as those pertaining to compliance with its agreements in general or specifically agreements with a governmental agency. In an M&A or financing context, such a breach may at a minimum delay a transaction, may increase necessary due diligence efforts and, in some cases, may derail the transaction.
Conversely, parties conducting due diligence on intellectual property that may have been made under federal funding should take into account the new requirements of the revised Bayh-Dole Rule and consider adding or tightening contractor’s representation and warranties to ensure compliance with the revised Bayh-Dole Rule.
SCOTUS Gives a “FUCT” in Brunetti: First Amendment Supports “Immoral” or “Scandalous” Trademarks
By Ryan Kwock* and Eric Ball
On June 24, 2019, the U.S. Supreme Court, in Iancu v. Brunetti, struck down the Lanham Act’s prohibition on the registration of “immoral” or “scandalous” trademarks. Justice Kagan wrote for the 6-3 majority, holding that the prohibition impermissibly disfavors certain ideas and thus violates the First Amendment. The majority opinion was joined by Justices Ginsburg, Alito, Thomas, Gorsuch and Kavanaugh.
Section 2(a) of the Lanham Act and the Landmark Ruling in Tam
Section 2(a) of the Lanham Act—which harmonized trademark law throughout the country—states in relevant part that the U.S. Patent and Trademark Office may prohibit the registration of a mark that “[c]onsists of or comprises immoral… or scandalous matter.” 15 U.S.C. § 1052(a). That section has been the subject of controversy and lawsuits.
In 2017, the Supreme Court, in its landmark ruling Matal v. Tam, unanimously struck down a neighboring provision of § 2(a) that prohibited registering marks that “disparage.” In Tam, the founder of an all-Asian American dance-rock band “The Slants” applied to federally register THE SLANTS as a trademark. The trademark office denied registration on the grounds that it would disparage persons of Asian descent. The Trademark Trial and Appeal Board affirmed. But the Federal Circuit, in In re Simon Shiao Tam, held that prohibiting the federal registration of disparaging marks violated the First Amendment. The Supreme Court affirmed the Federal Circuit’s en banc decision, ruling that the bar against “disparaging” marks was viewpoint-based and thus unconstitutional, violating the “bedrock First Amendment principle” that the government cannot discriminate against “ideas that offend.”
After Tam, questions arose whether § 2(a)’s parallel prohibition on “immoral” or “scandalous” registrations would survive constitutional scrutiny. The Supreme Court has now provided an answer: it does not.
In the current case, Erik Brunetti, founder of a clothing line using the trademark FUCT as its branding name, claimed the mark is pronounced as four separate letters — F-U-C-T — and sought federal registration. A USPTO examining attorney and the TTAB rejected the mark for registration, determining that it was highly offensive, vulgar and had negative sexual connotations. Brunetti then brought a facial challenge to § 2(a)’s “immoral” or “scandalous” bar in the Federal Circuit, which found, in In re Brunetti, that the prohibition violated the First Amendment.
Affirming the Federal Circuit, the Supreme Court cited its Tam viewpoint discrimination rationale, finding the “immoral” or “scandalous” prohibition to be similarly unconstitutionally viewpoint-based.
The Court turned to guidance from dictionary definitions and found that the statute, on its face, distinguishes between two opposed sets of ideas. On one hand, marks that are “aligned with conventional moral standards… and induce societal nods of approval” favor registration. On the other hand, marks that are “hostile to [conventional moral standards]… and provok[e] offense and condemnation” are rejected. The Court conceded that it is understandable for the USPTO to have rejected marks based on what it believed would be offensive to many Americans (e.g., BABY AL QAEDA for use on T-shirts). Nevertheless, it reinvoked Tam to emphasize that a law disfavoring “ideas that offend” discriminates based on viewpoint and thus violates the First Amendment.
The government argued that § 2(a) could have a limiting construction that would remove its viewpoint bias, but the Court disagreed, reasoning that § 2(a)’s statutory bar stretches far beyond the government’s proposed construction.
Separate opinions, each dissenting in part with the majority, were written by Justices Sotomayor, Breyer and Chief Justice Roberts. Generally, the three agreed with the majority’s holding that the ambiguity in determining “immoral” marks was sufficient to strike down as unconstitutional. However, the dissenters proposed that the bar on “scandalous” marks could be narrowed to prohibit only marks that are highly obscene, vulgar or profane; rejection of such marks would not be based on the ideas they convey, but on their mode of expression. Thus, the impermissible viewpoint bias would be removed.
Chief Justice Roberts and Justice Breyer emphasized that the government has an interest in not associating itself with promoting obscene, vulgar or profane material. They also noted how refusing “scandalous” trademark registration based on this narrowed construction would have minimal harm to trademark owners because they would still be able to use such marks in commerce, as permitted by common law. Thus, owners would merely be denied certain additional benefits conferred by federal trademark registration. Justice Alito noted that Congress is empowered to adopt a “more carefully focused statute” precluding registration of “vulgar” terms that “play no real part in the expression of ideas.”
After Brunetti, the USPTO might encounter an influx of trademark applications that owners previously withheld out of concern of being rejected based on § 2(a)’s bar. Indeed, Justice Sotomayor’s divided opinion raised concern that there will be a “rush to register” the most vulgar, profane or obscene words and images imaginable, and the government would be left “immediate[ly] powerless to say no.” On the other hand, Justice Alito noted that a law granting government officials the power to ban speech deemed to be “immoral” or “scandalous” can easily be exploited for illegitimate ends.
One thing is clear: The Court is willing to chip away at the Lanham Act and strike down laws that discriminate based on viewpoint in order to uphold free speech principles. But as it stands now, § 2 of the Lanham Act can prohibit registration for “deceptive” and “tarnishing” marks, as well as those that can suggest “contempt” or “disrepute” against people, institutions, beliefs and national symbols. If challengers bring lawsuits against these bans, it is possible that the Court would strike down these provisions to uphold the same free speech principles that triumphed in Tam and Brunetti. At the same time, should Congress wish to revise the statute, the Brunetti Court has laid out a path to do so.
The USPTO has already initiated changes to its examining procedures to reflect Brunetti. While the case was being litigated, it suspended action on pending trademark applications involving “immoral” or “scandalous” marks subject to refusal. After Brunetti, it issued a new examination guide, instructing that it is no longer a valid ground to refuse or cancel trademark registration because a mark is “immoral” or “scandalous.” Accordingly, trademark applications that initially received an advisory refusal due to the bar will now be removed from suspension and examined for any other requirements or refusals. Additionally, if an application was previously abandoned after being refused registration due to the bar, a new application may be filed.
Patent Eligibility Reform in Congress: Updates on the Tillis-Coons Proposal
By Christopher P. King
In April, Senators Chris Coons (D-DE) and Thom Tillis (R-NC) proposed a draft framework for legislation reformulating the standards for determining patent eligibility under § 101 of the Patent Act. The framework largely codified the Patent Office’s latest internal eligibility standards, which took effect in January 2019, formulating a closed list of categories excluded from patent eligibility and creating a “practical exception” test to ensure that such categories are construed narrowly.
On May 22, Senators Coons and Tillis were joined by Representatives Doug Collins (R-GA), Hank Johnson (D-GA) and Steve Stivers (R-OH) in proposing a bicameral draft bill containing — among other things — new text for § 101 and new supporting definitions in § 100. Summarized below are some of the draft language’s key points:
- New definition of patent eligibility: Section 101, subsection (a), makes the cornerstone of eligibility that the invention or discovery be “useful.” The definitions of § 100 are augmented by a new subsection (k), which defines “useful” to mean that the invention or discovery “provides specific and practical utility in any field of technology through human intervention.” This introduces new terminology whose meaning would have to be determined through judicial interpretation, such as what it means for the utility of an invention or discovery to be “specific” and “practical”; what constitutes a field of “technology”; and what it means for the utility to be obtained “through human intervention.” The focus on the “specific” would seem to address the long-standing judicial concern about avoiding preemption of a broad swath of technology, and the requirement of “human intervention” would serve to prevent patenting of purely natural laws.
- Requirement of holistic analysis: Section 101, subsection (b), states that eligibility “shall be determined only while considering the claimed invention as a whole, without discounting or disregarding any claim limitation.” This codifies, for example, the requirement of Diamond v. Diehr that “claims must be considered as a whole.”
- Statutory abrogation: Many recent legal decisions have argued that Congress’s silence regarding prior judicially-created exceptions to eligibility in subsequent Patent Acts constituted a tacit incorporation of those judicial exceptions into the acts. The draft bill squarely addresses this line of reasoning in the “Additional Legislative Provisions” section by expressly abrogating cases establishing or interpreting judicial exceptions.
- Exclusion of other statutory sections: Many past decisions invalidating patents for lack of eligibility have been asserted to implicitly import the considerations of the prior art inquiry of §§ 102 and 103, or of the definiteness inquiry of § 112, into § 101. Accordingly, the “Additional Legislative Provisions” section of the draft bill directly states that eligibility “shall be determined without… any other considerations relating to sections 102, 103, or 112.” Similarly, the requirement of prior Patent Acts that the invention or discovery be “new” as well as “useful” has been removed from § 101, presumably to avoid encouraging the importation of prior art considerations into § 101.
- Default position on eligibility: Finally, perhaps to address a concern that courts will seek to interpret the new statutory language to salvage many of the existing judicial exceptions, the “Additional Legislative Provisions” section further explicitly states that the “provisions of section 101 shall be construed in favor of eligibility.”
In sum, the draft bill would be expected to significantly reduce challenges to patents under § 101, leaving patent law to focus on the definiteness, enablement and written description requirements of § 112 and the prior art requirements of §§ 102 and 103. It should be noted, however, that the draft bill is still very much open to discussion and its text could change significantly. Indeed, the hearings of the Subcommittee on Intellectual Property held in early June expressed a great variety of viewpoints (e.g., those of technology companies, biotechnology companies and digital rights proponents). As of our publication date in mid-August a promised follow-up version of the proposed bill still has not emerged.
SCOTUS: Full Costs in Copyright Cases Limited by General Costs Statute
By Armen N. Nercessian and Crystal Nwaneri
In Rimini Street v. Oracle USA, the U.S. Supreme Court held unanimously that the “full costs” the Copyright Act authorizes federal district courts to award a party in copyright litigation means the costs specified in the general federal statute authorizing district courts to award costs, 28 U.S.C. §§ 1821 and 1920. While the Court’s decision is only directed toward the Copyright Act, it may have greater ramifications for all “200 subject-specific federal statutes that explicitly authorize the award of costs to prevailing parties in litigation.” It is already clear that other IP areas are dealing with similar issues—a dispute is currently before the Supreme Court regarding whether the U.S. Patent and Trademark Office can include its attorney fees as part of the “expenses” to be borne by an applicant who brings suit in federal court after losing an appeal at the USPTO. Thus it is timely to look at this issue in a broad context.
District Court Awards Litigation Expenses
In Rimini Street v. Oracle USA, Oracle sued Rimini Street and its CEO in the Federal District Court of Nevada for copyright infringement and violation of state computer access laws for copying Oracle’s software when providing support services to Oracle’s customers. The jury found that Rimini Street violated various statutes, including the Copyright Act, and awarded Oracle $50 million in damages. The District Court further ordered Rimini Street to pay Oracle $28.5 million in attorneys’ fees, $4.95 million in costs and $12.8 million in litigation expenses such as expert witnesses, e-discovery and jury consulting. The Ninth Circuit affirmed.
Under the statute at issue in Rimini Street, 17 U.S.C. § 505, a district court “in its discretion may allow the recovery of full costs by or against any party” and “may also award a reasonable attorney’s fee to the prevailing party as part of the costs.” When deciding to affirm the District Court’s award, the Ninth Circuit acknowledged that the litigation expenses were beyond the scope of the six categories of costs that may be awarded against a losing party under §§ 1821 and 1920 but held that it was permitted because it reasoned that § 505’s “full costs” were not confined to the six categories.
Interpretation with a Little Redundancy
In a 9-0 decision on March 4, 2019, the Supreme Court reversed the Ninth Circuit and remanded for further proceedings.
Justice Kavanaugh, writing for the Court, held that the term “full” did not expand the categories or kinds of expenses that may be awarded as costs under §§ 1821 and 1920, including the phrase in § 505. He noted that “[i]f, for particular kinds of cases, Congress wants to authorize awards of expenses beyond the six categories specified in the general costs statute, Congress may do so.” Without such express authority, courts are not permitted to do so themselves. Because the Copyright Act does not explicitly authorize additional costs, it does not authorize any award beyond the six categories specified under the general costs statute.
The Court stated that this is the approach that it had consistently adhered to in its precedents, citing Crawford Fitting Co. v. J. T. Gibbons, West Virginia University Hospitals v. Casey and Arlington Central School District Board of Education v. Murphy. It noted that the term “full” did not alter the meaning of the word cost but was merely a term of quantity or amount describing all the costs available under the law. When Oracle tried to argue that the history of the phrase “full costs” supported the Ninth Circuit’s interpretation, the Court said, first, that it frowned upon such “extensive historical excavation to determine the meaning of cost statutes.” Second, it stated that history did not support Oracle’s position. The justices found that in both statutes and case law “full costs” did not encompass expenses beyond those that could be awarded under applicable law. They were also not persuaded when Oracle argued that the meaning of “full costs” changed when Congress amended the Copyright Act in 1976. Oracle argued that the term “full” would have been surplusage when Congress made the award discretionary up to 100 percent of costs under the 1976 Act if they didn’t mean for it to encompass expenses beyond the costs listed in §§ 1821 and 1920. The Court explained that the 1976 amendment did not change the meaning of the phrase “costs” and that Oracle’s own redundancy argument created redundancy—interpreting the “full costs” the way Oracle suggested would have made the second sentence of § 505 granting attorneys’ fees unnecessary. It still obliquely acknowledged Oracle’s point, ultimately disagreeing with it, by stating that “[s]ometimes the better overall reading of the statute contains some redundancy.”
Implications for Future Awards
Although the Supreme Court’s interpretation of the phrase “full costs” is centered on § 505 of the Copyright Act, it notes that the Act is merely one of 200 subject-specific federal statutes that explicitly authorize the award of costs. This decision has ramifications for all of those statutes, suggesting that non-taxable costs, such as expert fees, will likely be unavailable unless the statutes expressly authorize them.
With respect to the Copyright Act, this interpretation of “full costs” may be a sign that the Court may take a more textualist approach in interpreting the Act in the future. One place where a more textualist approach can have a significant impact is in 17 U.S.C. § 504(c): statutory damages. The statute states that a copyright owner may elect to an award of “statutory damages for all infringements involved in the action… in a sum of not less than $750 or more than $30,000 as the court considers just.” (Emphasis added.) Thus far, courts have interpreted that to mean that a copyright owner may be awarded the sums listed for each individual instance of infringement but an accused infringer could reasonably argue that the text of the statute limits the copyright owner to one award of statutory damages for all the infringement of a work that occurs.
This holding may also provide a preview of the Court’s decision in Iancu v. NantKwest, a patent case to which the Supreme Court granted certiorari the same day as it handed down the Rimini Street decision, and which is set to be argued on [date] or [“this coming term”]. Iancu concerns the USPTO’s controversial policy that permits the agency to seek attorneys’ fees from applicants who seek de novo appeal to a district court after unsuccessful proceedings before the Patent Trial and Appeal Board.
Specifically, the Court will determine whether the phrase “[a]ll the expenses of the proceedings” in 35 U.S.C. § 145 encompasses the personnel expenses that the USPTO incurs when its employees, including attorneys, defend the agency in a § 145 litigation. Last July, the en banc Federal Circuit held that the USPTO’s policy of seeking attorneys’ fees from applicants, regardless of whether the applicant won or lost before the district court, violated the American Rule that litigants must pay their own legal fees. But the statute calls for the applicant to pay “[a]ll the expenses of the proceedings” and literal interpretation of those words would include the USPTO’s fees. Given the Court’s ruling in Rimini Street, there is a higher chance that it could rule in favor of the USPTO and that applicants going forward will be required to pay all the USPTO’s fees if they decide to bring a civil action to challenge the PTAB’s decision.
A Patent Application Does Not Bar a DTSA Claim Update
By Esther Galan*
In Cajun Services Unlimited, LLC v. Benton Energy Service Company, the U.S. District Court for the Eastern District of Louisiana denied a motion for summary judgment and held that material in a patent application can remain an actionable trade secret until publication. The plaintiffs brought claims alleging, among other things, a violation of the Defend Trade Secrets Act. Under the DTSA, a plaintiff must prove (1) the existence of a trade secret; (2) the misappropriation of a trade secret by another (3) and the trade secret’s relation to a good or service used or intended for use in interstate or foreign commerce. Additionally, the owner must take reasonable measures to keep the trade secret a secret.
Both the plaintiffs and the defendant operate in the oil and gas industry, and the dispute arose over an elevator roller insert system (ERIS) used in oil drilling. The named plaintiff, Cajun Services Unlimited, filed a patent for technology used in the development of ERIS. Before the patent issued in June 2018, Cajun tested ERIS at facilities, used it in well operations, and transported ERIS between its facility, the defendant’s facility and various other drilling rigs, all while ERIS was open to view. Cajun never required third parties to sign nondisclosure agreements.
In 2016, Cajun claimed that the defendant reverse engineered the ERIS tools to create its own ERIS system. The plaintiffs and the defendant filed a series of lawsuits that the district court consolidated into this action. The defendant’s motion for summary judgment claimed that Cajun’s DTSA claim failed because its actions before the patent issued suggested that it did not take reasonable efforts to maintain the secrecy of their trade secrets. The defendant further claimed that Cajun forfeited its trade secret claims by filing a public patent application.
The district court ruled against the defendant on both grounds and denied summary judgment. The district court held that the publication of the trade secrets in the patent application did not deprive the plaintiffs of a cause of action for misappropriation of trade secrets before the patent application. It chose not to discuss whether the plaintiff’s actions constituted reasonable measures to maintain the secrecy of its trade secrets, and instead relied on the fact that there were disputed issues of material fact.
This case serves as an important reminder that trade secrets can exist at one point in time, and the fact that they later become public does not deprive an owner of the trade secrets claim for the earlier timeframe. This means that while the owners of trade secrets must take reasonable measures to maintain secrecy, this is simply a time-based consideration.
A party that filed a patent application still has possibility of prevailing on a DTSA claim as long as the behavior at issue occurred before the patent issued. Similar reasoning applies when a product (like a smartphone) is released. The release of a product does not mean that a party necessarily gives up its rights to the pre-release trade secrets that it possessed. As the trade secret owner, the party can still pursue legal action against someone who misappropriated trade secrets during the pre-release period of the product.
* 2019 Fenwick summer associate.