WTO Rejects EU´s Attack on US Boeing Subsidies
(IPRinfo 2/2012)
Niklas Bruun
Professor, Director, IPR University Center
The European Union’s WTO attack on the US Bayh-Dole-legislation is rejected by the Appellate Body.
During the last decade, several European states have amended their legislation on ownership of inventions made within universities. One of the international models for new legislation and new policies has been the United States’ Bayh-Dole Act, which was introduced in 1980 in order to provide incentives for universities to retain ownership of inventions made within university research projects and to apply for patents on such inventions. New legislation has been introduced in, among others, Germany, Denmark, Finland, and Norway.
It is therefore surprising to learn that the European Union, in the context of a panel procedure under the WTO rules on state subsidies (the Agreement on Subsidies and Countervailing Measures, the SCM Agreement) concerning prohibited and actionable subsidies provided to US producers of large civil aircraft, argued that the Bayh-Dole Act, or its specific application in the aeronautics and space administration, was inconsistent with the SCM Agreement. The panel was established on 22 November 2006 and the case has now been finally decided upon in March 2012.
Two claims concerning IPR
The European Union claimed that ten categories of measures constituted subsidies to Boeing’s large civil aircraft division and were inconsistent with the SCM Agreement. Most of the claims related to tax regimes in various US States, but also to certain payments and access to government facilities given by NASA (National Aeronautics and Space Administration) and the DOD (Department of Defense) to Boeing.
In this context we note only two claims that NASA/DOD 1) ”Waivers”/”transfers” of intellectual property rights under NASA and DOD R&D contracts and agreements entered into with Boeing and the Department of Commerce (DOC), and 2) payments and access to government facilities, equipment and employees provided to joint ventures/consortia in which Boeing participated under the Advanced Technology Program, were claimed to constitute subsidies.
The European Union estimated that the total amount of all the alleged subsidies was $19.1 billion between 1989 and 2006. More than half of this amount was accounted for by the value of the alleged NASA R&D subsidies, which, according to the European Union, was $10.4 billion.
Interpretation of the SCM Agreement
The panel report addresses many important issues relating to the interpretation of Articles 1 and 2 (definition of subsidy and specificity), Article 3.1(a) (prohibited export subsidies) and Articles 5 and 6 (adverse effects), of the SCM Agreement.
For example, the Panel found that R&D funding received by Boeing under certain NASA aeronautics R&D programmes, and some of the R&D funding received by Boeing pursuant to DOD R&D programmes, constituted specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement.
A fundamental question addressed by the Panel in this regard was whether or not the R&D transactions at issue were excluded from the scope of Article 1 of the SCM Agreement as ”purchases of services”.
The Appellate Body found in its report published on 12 March 2012 that the allocation of patent rights under contracts and agreements between NASA/USDOD and Boeing – on the assumption that such allocation was a self standing subsidy – was not explicitly limited to certain enterprises within the meaning of Article 2.1(a).
However, it found that the Panel erred by failing to examine the EU’s arguments that such allocation was ”in fact” specific under Article 2.1(c) of the SCM Agreement. The Appellate Body thus found that the Panel’s overall finding under Article 2.1 could not be sustained, but declined to find that such allocation was specific within the meaning of Article 2.1(c) of the SCM Agreement.
The US patent regime scrutinized
In the Appellate Body procedure, the body examined whether, assuming the allocation of patent rights under NASA/USDOD contracts and agreements was in some respects a self-standing subsidy, access to such subsidy was explicitly limited to certain enterprises in the light of the interpretation of Article 2.1(a) of the SCM Agreement.
The US had explained that, under its patent regime, the inventor is the initial owner of any rights to his/her inventions. A person that obtains a patent is authorized ”to prevent all other entities from exploiting the technologies claimed by the patent”, and the patent holder is ”allow{ed} … to license the technology to others in exchange for compensation”.
More specifically, the US patent regime accords the patent holder the right to ”exclude others from making, using, offering for sale, or selling” the invention in the US, or ”importing” the invention into the US, for a limited period of time (currently, a minimum of 20 years from the date of application). In addition, a patent holder has the right to assign, or transfer by succession, the patent and to conclude licensing contracts with third parties.
The EU’s claims on appeal concerned a particular aspect of the US patent regime, namely, the allocation of patent rights when an invention is discovered in the course of R&D work being performed by an enterprise under a contract or agreement with the US Government, and more particularly with NASA and the USDOD.
The contractor may file a patent application
The allocation of rights over inventions discovered during the course of work performed for the USDOD is determined by sections 27.300-27.306 of Title 48 of the United States Code of Federal Regulations, which give effect to the 1983 Presidential Memorandum and the 1987 Executive Order. Section 27.302(b) of Title 48 of the United States Code of Federal Regulations provides:
Under the policy set for in {the Bayh-Dole Act, the 1983 Presidential Memorandum, and 1987 Executive Order}, each contractor may, after disclosure to the Government as required by the patent rights clause included in the contract, elect to retain title to any invention made in the performance of work under the contract.
This means that the contractor may file a patent application over the invention and exercise all rights that this entails. The regulations, however, provide that the US Government shall receive at least a non-exclusive, non-transferable, irrevocable, paid-up license to practice, or have practiced for or on behalf of the United States, any subject invention throughout the world.
The government also obtains ”march-in” rights, which empower the federal department or agencyto compel the contractor, in certain limited circumstances, to grant a license to applicants on terms that are reasonable under the circumstances, or to grant the license itself. The Panel, however, observed that ”{n}o U.S. government department or agency has ever exercised these march-in rights for any patent under any contract.”
The same regulations that apply to the USDOD, apply to all other US Government departments and agencies, with the exception of NASA, which has its own regulations.
NASA differs from other US Government departments
Under the Space Act, the legislation that created NASA, the rights over inventions discovered in the course of work performed under a contract with NASA belong to the United States.
Within the framework of the US patent regime, NASA’s patent waiver regulations are formally different and separate from the regulations that apply to other US Government departments or agencies. While one set of regulations concerning the allocation of patent rights applies to other government departments and agencies, the regulations are specific to NASA. There are also differences in how the regulations operate.
Under the legislation and general regulations that apply to other departments and agencies, a contractor may ”elect to retain title” in the invention. By contrast, NASA’s statutory framework provides that title to any invention initially vests in the government, but NASA can waive title upon request.
At the oral hearing, the European Union explained that its claim of specificity was ”the explicit limitations in the types of R&D that NASA and US DOD could fund, and consequently the enterprises that could benefit from the patent waivers and transfers for inventions deriving from the R&D”. The thrust of the EU’s argument was that, because aerospace companies were the only ones eligible to receive NASA and USDOD funding, the patents that might result under the NASA/USDOD R&D contracts and agreements also had to be specific.
The Appellate Body took a broader view
The Appellate Body, however, emphasized that the waiver provisions of the NASA regulations were linked to the broader legislative and regulatory framework established under the Bayh-Dole Act, the 1983 Presidential Memorandum, and the 1987 Executive Order. Moreover, the result of a waiver of patent rights by NASA would appear to be the same as where a contractor elects to retain title under the general regulations.
Whether a contractor requests a waiver under the NASA regulations, or the contractor elects to retain title under the general regulations applicable to the USDOD, the contractor in both instances will obtain title to the invention, that is, will be able to claim sole ownership over it.
As the titleholder, the contractor can exploit the invention commercially, for instance by licensing the technology or incorporating it into its own products, without having to pay any royalties to the government. The contractor may also file for a patent that will give it the right to prevent others from using the technology without its permission. The government, for its part, obtains the right to use the invention free of charge for government use.
According to the Appellate Body, the key point was that, both under the general regulations, which apply to the USDOD and other departments, and under a NASA waiver, ownership rights (title) over the invention would belong solely to the contractor through the allocation of patents under NASA and USDOD contracts and agreements, even though the mechanism for the initial allocation of patent rights was formally somewhat different.
The Appellate Body also found that, once the legal framework for the allocation of patent rights under R&D contracts and agreements with the government was taken into account, it became clear that the eligibility to receive the alleged subsidy was not limited to the class of enterprises that conducts aerospace R&D.
As regards NASA, the European Union emphasized that ”the Panel specifically found that NASA has its own specific legislation and regulations related to patent waivers”. The European Union asserted that the Space Act and its implementing regulations constituted ”the legislation pursuant to which the granting authority operates”, within the meaning of Article 2.1(a) of the SCM Agreement, and added that the Space Act explicitly limits the scope of NASA’s aeronautics R&D activities to aeronautics and space.
According to the Appellate Body, the Space Act and NASA’s regulations could not be viewed in isolation but, rather, should be viewed against the broader framework of legislation and regulations setting out the policy for the allocation of patent rights under government R&D contracts. Even if only certain enterprises performed aerospace research, and thus would enter into contracts or agreements with NASA, this had to be analyzed in the broader context, in which patent rights were also allocated to contractors under all R&D contracts.
Allocation of patent rights not limited to certain enterprises
In sum, proceeding on the Panel’s assumption that the allocation of patent rights was in some respects a self-standing subsidy that was separate from the payments and other support provided under the NASA/USDOD contracts and agreements to the extent that such self-standing subsidy could exist, the Appellate Body did not see a basis to find that such subsidy was explicitly limited to certain enterprises, and therefore specific within the meaning of Article 2.1(a) of the SCM Agreement.
The outcome of the process concerning allocation of patent rights in this case is not controversial, more remarkable is the argumentation presented by the EU. Although in the end the Bayh-Dole Act as such was not seen as a form of state subsidy, the case clearly shows that legislators must keep in mind the limits set by the SCM Agreement when designing and promoting innovation policies and the content of R&D contracts.
References
Bruun, Niklas and Landau, Michael B: University and employees´ Inventions in Europe and the United States. Published in ”Nanotechnology Commerzialisation for Managers and Scientists (eds. Helwegen, Wim and Escoffier, Luca). Pan Stanford Publishing 2012. pp 291-337.
Five legal instruments in the US patent regime
As regards this aspect of the US patent regime, the Panel explained that, prior to 1980, the US Government had a general policy of taking all rights to patents over inventions produced by contractors under federally funded R&D contracts (and then granting non-exclusive licences to any applicant, including the contractor, that wished to use the subject invention).
In 1980, the government changed its policy and started allowing government contractors to retain ownership of patents over any invention that they produced with federal funding under R&D contracts (with the government receiving a ”government use” licence to use the subject invention without having to pay the contractor any royalties). This new government policy was implemented through the following legal instruments:
(a) the Bayh-Dole Act, which was adopted in 1980 and which is codified at Title 35 of the United States Code, sections 200-212 (entitled ”Patent Rights in Inventions Made with Federal Assistance”);
(b) the 1983 Presidential Memorandum to the heads of Executive departments and agencies (entitled ”Government Patent Policy”) that extended the scope of the policy to all government contractors, regardless of size and profit/non-profit status;
(c) the 1987 Executive Order (entitled ”Facilitating access to science and technology”) into which the terms of the 1983 Presidential Memorandum were eventually incorporated;
(d) the corresponding general federal regulations implementing the Bayh-Dole Act, the 1983 Presidential Memorandum, and the 1987 Executive Order, which are codified at Title 48 of the United States Code of Federal Regulations sections (entitled ”Patent Rights Under Government Contracts”); and
(e) the NASA-specific regulations (entitled ”Patents and Other Intellectual Property Rights”, with subpart 1 entitled ”Patent Waiver Regulations”) codified at Title 14 of the United States Code of Federal Regulations, section 1245.
Under the Bayh-Dole Act, the new policy initially applied only to non-profit organizations and small business firms. The policy concerning allocation of patent rights introduced in the Bayh-Dole Act was subsequently expanded by President Ronald Reagan to all government contractors. The expansion of the policy’s coverage was effected through the 1983 Presidential Memorandum and the 1987 Executive Order.
