The Bayh-Dole Act's U.S. Manufacturing Preference and the Global Marketplace: The Importance of Waivers

| Deana A. Labriola

The Bayh-Dole Act

The Bayh-Dole Act (the "Act") is a federal law enacted in 1980.  The Act covers university licensing of inventions:

  1. That result from research funded in whole or in part by the U. S. government;
  2. Where the licensed activity includes manufacturing; and,
  3. Where the license is exclusive or partially exclusive.

The purpose of the Act is to promote the utilization of inventions arising out of federally-supported research by giving incentives to private enterprises to commercialize those inventions.

Among other things, the Act enables small businesses and nonprofit organizations, including universities, to retain title to, and grant licenses to use, inventions made under federally-funded research programs. Under the Act, a university can elect to patent and own an invention growing out of federally-funded research and can grant either exclusive or non-exclusive licenses to companies to commercialize and develop those inventions or products including those inventions.  The company receiving such a license may be either an established company or a startup venture formed to exploit the invention.

U.S. Manufacturing Preference

The rights given by the Act come with a catch. The Act restricts foreign manufacture of federally-funded inventions. More specifically, if a university grants a company an exclusive license to use a federally-funded invention, the Act requires that such invention, or products including such invention, be manufactured substantially in the United States.

The Act, however, does not completely prohibit foreign manufacturing in all cases, and a waiver from the requirement can be obtained from the government agency that provided the funding if (a) domestic manufacture of the product is not commercially feasible, or (b) attempts to find a U.S. manufacturer have been unsuccessful. For example, if either exception applies and the National Institutes of Health ("NIH") funded research, a company that has exclusive license rights to a product developed as a result of that research can apply for a waiver from NIH if it wants to manufacture that product substantially outside of the United States. If multiple government agencies provided the funding, then a waiver must be obtained from each agency. Absent a waiver from each funding agency, an exclusive licensee or its sub-licensee will be required to substantially manufacture in the United States any product utilizing federally-funded licensed technology. If an exception applies, a waiver generally will be granted from the agency or agencies that funded the research on the invention.

While the U.S. manufacturing preference may seem to be a significant limitation in a global economy, it is important to note that the preference applies only to inventions that are (a) exclusively licensed and, (b) not subject to a waiver from the preference by the funding agency. If a company does not need an exclusive license, but rather can accept a non-exclusive license, the U.S. manufacturing preference is not applicable and no waiver must be obtained.

The Waiver Process

An application for a waiver of the U.S. manufacturing preference must document which of the two exceptions applies to the invention for which the waiver is being requested.

U.S. Manufacture Is Not Commercially Feasible. If a company files for a waiver from the U.S. manufacturing preference because finding a U.S. manufacturer is not commercially feasible, the waiver application should include detailed information on the following:

  • The significance of the technology including the availability of alternative products;
  • Whether the requirement for U.S. manufacture will delay entry of the product into the United States or foreign markets, and if so, the effect of such delay;
  • The strategies implemented to find a U.S. manufacturer; and,
  • The factors that make domestic manufacture not commercially feasible including the relative costs of U.S. and foreign manufacturing and any other circumstances that make foreign manufacture necessary.

Attempts to Find a U.S. Manufacturer Have Been Unsuccessful. If a waiver from the U.S. manufacturing preference is based upon the fact that attempts to find a U.S. manufacturer have been unsuccessful, the waiver application should include detailed information on the following:

  • The part of or percentage of products in the invention to be manufactured outside of the United States; and,
  • The benefits to the United States from the technology even if it will not be substantially manufactured in the United States, including (a) direct or indirect investment in U.S. plants or equipment, such as for marketing or packaging; (b) the creation of new or higher quality U.S.-based jobs, and (c) the enhancement of the domestic skills base.

A waiver application must be submitted to the applicable funding agency or agencies, and generally can be submitted online through iEdison, the federal government's online tool for reporting under the Act (www.iedison.gov).

Failure to Obtain a Waiver; March-In Rights

If the U.S. manufacturing preference applies and a waiver is not obtained, a funding agency can "march in" and take the license rights from the licensee and give them to another company.

While march-in rights should be a concern, precedent suggests that it is unlikely that march-in rights will be exercised by any federal agency. Government agencies currently do not have comprehensive enforcement programs and, to date, there is no evidence that any government agency has exercised its march-in rights aggressively. However, the current economic slowdown may spur enforcement efforts and, therefore, compliance with the Act is the only prudent course of action.

Conclusion

While the Act creates a strong preference for U.S. manufacturing, in practice, waivers can be obtained and enforcement has been lax. Therefore, it is hard to determine the true impact of the Act's U.S. manufacturing preference. As the U.S. economy continues to depend on other nations, so too will our technology manufacturing, and perhaps the preference will need to be reconsidered to account for the change in times.

For further information regarding the issues described above, please contact Deana A. Labriola.

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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.