Preference for United States Manufacturing
By Stephen P. Rothman

A second feature of the Bayh-Dole Act that investors need to understand is the preference for U.S. manufacturing. If a university grants an exclusive license to a federally funded invention, the Bayh-Dole Act requires the licensee to manufacture substantially in the United States. An exception applies if domestic manufacture is not commercially feasible, or if the university tried unsuccessfully to find a licensee that was likely to manufacture in the U.S. To take advantage of one of these exceptions, a waiver must be obtained from the agency that funded the research.¹⁰

Unlike in 1980 when the Bayh-Dole Act was passed, in 2007 most manufacturing of electronic and consumer products is done outside the U.S., where costs are dramatically lower. This is less true in the life science field. For industries where U.S. manufacturing is not practical, the most likely solution is to seek a waiver of the requirement. If one assembles convincing evidence that U.S. manufacturing is not commercially feasible, a waiver can ordinarily be obtained. There is some difference between the federal agencies, with NIH having a reputation for a streamlined waiver process, and a willingness to grant waivers fairly freely, particularly if there is reason to believe that foreign manufacturing will allow a medical product to be made available to patients at a lower cost. The Department of Defense, not surprisingly, may be somewhat less quick to agree to foreign manufacture, particularly for a sensitive military product. If DOD is the funding agency, an investor might reduce risk by requiring the waiver to be obtained prior to funding the investment, though this could involve substantial delay.

An application for waiver of the requirement of substantial manufacturing in the U.S. should address the following points:

• Does anyone in the industry manufacture in the U.S.? Where are competing products produced?
• What are the relative costs of U.S. versus foreign manufacture of the product in question?
• Will the licensee do some manufacturing in the U.S. even if not enough to be considered "substantial," such as final assembly?
• Is there other economic value to the U.S. economy, despite the absence of U.S. manufacturing, such as additional jobs in the U.S. in research and development, design, or sales and marketing; taxes to be paid by the licensee for sales in the U.S., etc.?
• If applicable, are there restrictions in the license so that foreign-manufactured products are only authorized for foreign sales, and the U.S. market is still reserved for U.S. manufacturing?
• Is there any ancillary consideration that makes the granting of a license beneficial to the U.S. public? (For example, is it an environmentally responsible technology?) ¹¹

Addressing these matters thoroughly and with detailed documentation will make it easier for the agency to approve a waiver application, and likely speed the process. Less thorough applications are likely to result in follow-up questions and delay. It can be helpful to contact the agency personnel in advance to discuss the proposed submission.

A couple of other avenues are available if one is not willing to go through the waiver process. The U.S. manufacturing requirement only applies to an exclusive license. Most of the time a spinout company will not be interested in a non-exclusive license. But in some cases a company may be satisfied with a license that allows other licensees, but only in a very limited number (one or two). One could take the position that this is not an exclusive license, though the issue is not free from doubt.

Another approach involves interpretation of the requirement to manufacture "substantially in the United States." There is no clear percentage requirement, nor is there guidance from the Department of Commerce or other sources on what "substantially" means. For electronic products, one might have parts such as circuit boards made abroad, but then brought to the U.S. for final assembly, software installation and quality control. If sufficiently key elements take place in the U.S., arguably the requirement for "substantial" manufacture in the U.S. is met.

The two approaches described above leave some risk of challenge regarding whether the license was truly exclusive or whether the product was really substantially manufactured in the U.S. Failure to meet the U.S. manufacture requirement where applicable would allow the agency that funded the research to exercise march-in rights ( discussed in Section 3). Unless the federal agency is likely to exercise march-in rights, the practical risk may not be great. A federal district court in New Jersey has determined that violation of the U.S. manufacturing requirement by a licensee does not result in any adverse consequences to the exclusive license unless and until the applicable agency invokes its march-in rights.

This decision about the U.S. manufacturing requirement arose out of Ciba-Geigy Corp. v. Alza Corp., 804 F.Supp. 614 (1992). In that case, Ciba-Geigy had an exclusive license for a nicotine patch from the Regents of the University of California. Ciba-Geigy sued Alza, claiming that Alza's product Nicoderm infringed the Regents' patent. Alza counterclaimed that Ciba-Geigy's exclusive license from the university was not valid because Ciba-Geigy had been manufacturing its product in Germany, in violation of the U.S. manufacturing requirement. The court determined that Alza could not defend against an infringement claim based on the failure of Ciba-Geigy to meet the U.S. manufacturing requirement. The court ruled that failing to manufacture in the U.S. does not automatically invalidate an exclusive license nor convert it to a non-exclusive license, so long as the government agency that funded the invention does not invoke its march-in rights. The funding agency had discretion as to whether or not to exercise march-in rights, and unless and until it chose to do so (which it had shown no interest in doing), the license was unaffected.

In conclusion, there are generally satisfactory ways of dealing with the Bayh-Dole U.S. manufacturing requirement. The safest is to submit a thorough waiver application, documenting why U.S. manufacture is not commercially feasible, and also pointing out other benefits to the U.S. economy of granting an exclusive license to the spin-out company. If there is a reason to believe that a waiver might be harder to obtain in a particular case, such as in the case of a sensitive military technology, consideration might be given to requiring obtaining a waiver as a condition of funding an investment.

Endnotes

¹⁰ 35 U.S.C. §204, as implemented by 37 C.F.R. 401.14(i) through the Department of Commerce.

¹¹ The NIH lists factors to be considered in a waiver application on the inter-agency online system iEdison.

Reprinted with permission of the author.

Stephen P. Rothman
Thelen Reid Brown Raysman & Steiner LLP
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E-Mail: srothman@thelen.com