Bayh-Dole Act—US Manufacturing Requirements

In my last post I discussed the federal Bayh-Dole Act and reviewed the likelihood that federal agencies that have funded inventions that universities have exclusively licensed to private entities to commercialize such invention might exercise their “march-in rights” and grant a competing license to another party.  While I explained that no federal agency has exercised its march-in rights since the Bayh-Dole Act came into effect, investors might still reasonably be concerned about whether a company relying on an exclusive license from a university might suddenly be deprived of the benefits of exclusivity if it runs afoul of the requirement that it must give “preference to U.S. manufacturing”.  The Bayh-Dole Act requires that exclusive licensees of a federally funded invention must manufacture substantially in the U.S.; however, a waiver of this requirement can be obtained from the agency that funded the research if U.S. manufacturing is not commercially feasible or if the owner of the invention (e.g., a university) tried but was unsuccessful in finding a licensee that was likely to engage in US manufacturing.  See 35 U.S.C. § 204, as implemented by 37 C.F.R. 401.14(i) through the Department of Commerce.  Since is now quite common for manufacturing activities in areas such as electronic and consumer products to be done outside of the US, given the substantially lower costs of manufacturing that are available in many foreign countries, the waiver process is often the preferred route for exclusive licensees.  The waiver application should address the specific concerns of the relevant funding agency; however, in general the information in the application should cover the following:

  • Do other companies involved in the relevant industry manufacture in the US?
  • Where are actual or potential competitive products manufactured?
  • What are the relative costs of manufacturing the product in the US as opposed to manufacturing the product outside of the US?
  • Will some manufacturing be done in the US(e.g., final assembly) even though it would not be considered to be “substantial”?
  • Does the grant and exploitation of the exclusive license provide other economic value to the US economy apart from manufacturing such as additional US jobs in other functional areas (e.g., R&D or sales) or taxes to be paid by the licensee on sales made in the US?
  • Does the license restrict the sale of foreign-manufactured products to foreign markets and provide that products sold in the USmust still be manufactured in the US?
  • Are there any ancillary considerations that should be taken into account that demonstrate that the license is beneficial to the US public despite the lack of domestic manufacturing (e.g., lower cost for US consumers or the underlying technology is environmentally responsible)?

Practices, procedures and schedules differ among agencies.  In general, the NIH is considered to have a relatively streamlined process; however, the Department of Defense may act more slowly in situations where a waiver is sought to manufacture in a foreign country if the technology involved is considered especially sensitive and investors may want to consider obtaining a waiver in advance before transferring the funding.  While seeking a formal waiver is the preferred approach it should also be recognized that an exclusive licensee that appears to have violated the manufacturing requirement is not in danger of having the license invalidated, or converted to non-exclusive status, unless and until the appropriate funding agency actually exercises its march-in rights.  See Ciba-Geigy Corp. v. Alza Corp., 804 F.Supp. 614 (1992).

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