Risks of Investing in Government-Sponsored Research

“March-in” rights under 37 CFR 401.6 allow the government to re-possess a patent using a very arbitrary process.

One reason NOT to invest in startups based on government-sponsored research, including patents from universities.

Inventors can get patents on government-sponsored research, and may university patents have a statement in the text of the patent that states that the government has “certain rights” to the invention.  An example from a random University of California patent has the government-sponsored statement highlighted:

When government rights to government-sponsored research is a good thing.

The government rights include a license so that the government may have another vendor manufacture the patented product for the government.  For example, the government may sponsor research for a weapon system, which a contractor may patent.  The contractor may use that patent commercially, but the government may use their license to buy the weapon system from another vendor.  This makes sense because the government paid for the research and they have a license for their own use.

But “march-in” rights make investment much less favorable.

“March-in rights” are a mechanism by which the government may take back any patents that come from government-sponsored research.  The “framework” (which begins here: https://www.federalregister.gov/d/2023-26930/p-95) walks through a seemingly endless set of questions about whether the contractor was able to license/sell the patented product.  If, in the government’s view, the patent owner was not ‘successful’ in bringing the product to market, the government may “march in” and take the patent back.

The framework is extraordinarily vague and arbitrary, and it leaves the door open for a mid-level government bureaucrat (who is not an entrepreneur, inventor, nor angel investor) to determine that the patent owner did not do a “good enough” job.  In the march-in rights proceeding, the bureaucrat is both the decision maker and the fact finder.  This means that as long as the bureaucrat includes enough of the vague language of the framework, they are able to take back the patent and, effectively, shut down any startup company trying to commercialize that patent.  The startup company has virtually no recourse and no meaningful appeal.

The Bayh-Dole Act is designed to facilitate commercialization of government-sponsored inventions.  The “march-in” rights are a brazen, heavy-handed mechanism by which the government can second guess any commercialization efforts, and if those efforts are not ‘good enough’, the patent may be forcefully taken from the patent owner without due process required under the 14th Amendment.  

The existing framework fails to include any analysis of outside investment to commercialize a patent from government-sponsored research.

The framework does not include any factors about outside investment, multiple rounds of investment, or any other commercialization factors in the analysis. The framework allows the government to re-possess a patent if the commercialization efforts were unsuccessful in the eyes of a government agency.

The best indicator of potential commercial success is outside investment by angel and venture capital investors. Angel and venture capital investors perform due diligence – and invest their capital – when they believe a patented invention has commercial potential.

The framework allows a government agency to completely ignore the due diligence – and hard-earned capital invested – to re-possess a patent.

Investors need patents – and the certainty of the patents – to underpin their investments.

Most investments in early-stage companies are based on a company’s intellectual property, the highlight of which is often a patent.

A patent protects a competitive advantage of a business idea, and it also serves as backstop collateral for investors. With a patent, entrepreneurs raise much more money than without it, and as angel investors, we count on the patent to give the entrepreneur a barrier to competition.

Angel and venture investors almost always ask if a product is patented. Even investors on the television show “Shark Tank” routinely ask about patent protection from the start of the conversation.

Patents not only reflect the inventor/entrepreneur’s belief that their ideas are unique and valuable, but when those patents are examined and issued by the USPTO, the result is a strong legal right that serves as a backstop for the business.

Investors look to patents in two ways: (1) to defend a competitive advantage so that a company can grow and (2) as an asset to restructure the company in case of a liquidation event.

As such, investors give an exceptional amount of weight and importance to an entrepreneur’s patents when making an investment. Anything that would dissuade investors, such as the possible exercise of march-in rights, would dramatically reduce an entrepreneur’s availability to capital.

Because of the arbitrary nature of “march-in” rights, angel investors should avoid investing in patents that come from government-sponsored research.

Government-sponsored research is very appealing to an angel or venture capital investor, as the government is giving a startup company a big head start. Government-sponsored research is a tremendous source of non-diliutive funding, however, it comes with a significant downside.

The nature of early stage companies is very high risk.

Startup companies often take several years to find traction. While the company is developing their technology, marketing, and sales processes, it may look like the company is ‘failing.’ From the standpoint of a mid-level government bureaucrat in an agency like NIST, NIH, NASA, or other agency, they may take the stance that the startup company has not done “enough” to commercialize.

Using very arbitrary and hard to prove metrics, the agency can decide to just take the patent back from the startup. This is done without Due Process, without compensation, and in a closed, secret process under 37 CFR 401.6.

As enticing as a startup from a university may look with their government-sponsored research, they are not good investments. At any time, the government may arbitrarily re-take the patents underpinning the whole company. This is done without compensation, without judicial review, and in a secret process that will shutter the company at any time.