DOE Imposes Strict Domestic Manufacturing Requirements on R&D Funding Recipients

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Publication date: 
October 14, 2021
Number: 
91

As part of its efforts to bolster domestic supply chains for critical technologies, the Department of Energy is implementing a policy that requires inventions resulting from DOE-funded R&D to be “substantially manufactured” in the U.S. unless it grants a waiver.

Granholm_jobs_plan.jpg

Energy Secretary Jennifer Granholm

Energy Secretary Jennifer Granholm

(Image credit – DOE)

As of Oct. 1, the Department of Energy has begun implementing a policy requiring inventions resulting from DOE-funded R&D to be “substantially manufactured” in the U.S. First announced in June, the move is part of a broader Biden administration push to build up domestic supply chains for critical technologies and it expands on similar, albeit more targeted requirements DOE has previously implemented.

The new policy rests on a “determination of exceptional circumstances” under the Bayh-Dole Act, a 1980 law establishing patent rights for recipients of federal funding. Although Bayh-Dole generally grants small businesses and nonprofits patent rights to inventions they produce using federal funds, it permits agencies to restrict these rights if it would serve the act’s broader goals, which include encouraging domestic manufacturing.

However, some stakeholders have argued DOE’s new policy could prove counterproductive by adding uncertainty into the technology-licensing process that would make it more difficult to secure the private funding necessary to commercialize inventions. For instance, the Bayh-Dole Coalition, which represents various U.S. universities and technology transfer organizations, raised such concerns in a letter to DOE in August seeking clarification on aspects of the policy. The department responded to queries and offered further details on its reasoning in a guidance document it released in conjunction with the policy going into effect.

DOE aims to strengthen current requirements

The guidance document states the new requirement will be implemented through a U.S. Competitiveness Provision that will be incorporated in “most” new R&D funding opportunities issued by DOE's applied energy offices and Office of Science. The provision stipulates that “any products embodying any subject invention or produced through the use of any subject invention will be manufactured substantially in the United States unless the contractor can show to the satisfaction of DOE that it is not commercially feasible.”

The Bayh-Dole Act already has a U.S. Preference clause that requires entities granted exclusive licenses for federally funded inventions to substantially manufacture them domestically unless they secure a waiver. However, in the guidance document DOE argues the clause has been “largely ineffective” because it only applies to exclusive licenses for domestic sales or uses, citing evidence that funding recipients can “easily maneuver around” the requirements.

In a video announcing the policy’s implementation to the public, Energy Secretary Jennifer Granholm argued companies are exploiting a “loophole” in the Bayh-Dole framework to offshore manufacturing. She remarked, “If these companies have benefited from taxpayer investments and then turned around and moved these jobs overseas? I am just really upset about that, and you should be too. … The bottom line is, your tax dollars paid for these innovations, from battery storage to solar technologies.”

Accordingly, the new provision extends the domestic manufacturing requirement to non-exclusive licensees and to uses and sales beyond the domestic market. It also states that if a contractor or other recipients of the invention rights undergo a “change in ownership amounting to a controlling interest,” then the rights are suspended unless DOE provides written approval. That restriction also applies to cases in which such entities “sell, assign, or otherwise transfer title or exclusive rights in the invention.”

Agencies may grant waivers of the U.S. manufacturing requirement under the Bayh-Dole Act if the title holder made “reasonable but unsuccessful efforts” to find a suitable domestic firm. The guidance document states DOE will continue to grant waivers or modifications to the requirement when they “facilitate or promote commercialization,” though it adds DOE expects full waivers “will rarely be approved.”

In a press call on the policy, DOE officials noted that the department has previously applied enhanced requirements for domestic manufacturing to work funded through its Office of Energy Efficiency and Renewable Energy and the Advanced Research Projects Agency–Energy. Most recently, in 2020 it extended such requirements to quantum information science and technology.

The officials argued the requirements have already helped to prevent companies from offshoring manufacturing, citing an example involving an unnamed company that developed a next-generation solar energy technology using DOE funding. In her video announcement, Granholm asserted, “In some cases, [the requirement has] already helped keep hundreds of millions of dollars of revenue here in America, which means, of course, jobs, jobs, jobs — good-quality, American manufacturing jobs.”

Beyond promoting domestic manufacturing, DOE is also arguing the policy provides it with an important new method for keeping tabs on emerging technologies. In its determination of exceptional circumstances from June, DOE notes it funds research on a variety of rapidly evolving technologies that could lead to dramatic shifts in global power in the coming years.

Therefore, it states the policy “provides an important tool for DOE to not only ensure domestic impact but also to provide ‘extra attention’ or oversight of the constantly changing introduction, trajectories, and implications of emerging technologies which may now arrive more quickly and with less warning.”

The determination states it covers “all of DOE’s Science and Energy programs,” though it also notes that the department “may decide it is not warranted to require the U.S. Competitiveness Provision in funding agreements for certain technologies, especially certain basic science technologies.”

Bayh-Dole backers warn of chilling effects

In their August letter to DOE, the Bayh-Dole Coalition expressed particular concern about the policy’s requirement that contractors and licensees receive approval from DOE in cases involving change of control over rights to inventions, such as mergers or acquisitions. They argued that uncertainty about the approval process is likely to deter investment in inventions resulting from federally funded research.

“We understand and share DOE’s concern about the offshoring of emerging energy technologies of strategic importance to U.S. national security. However, the ability of our member institutions to transfer such technologies to the private sector for further commercial development may be seriously impeded, if not eliminated, by these requirements,” the coalition wrote.

Accordingly, among the coalition’s requests were that DOE declare it only intends to review mergers and acquisitions in extraordinary cases. Addressing this point in the guidance document, DOE stated it is considering limiting reviews to transactions that “include critical and emerging technologies and involve a transfer to a sensitive country or country of risk.”

Speaking with FYI, coalition members said that while they appreciate DOE’s efforts to provide clarifications, they remain concerned about various aspects of the policy. For example, Coalition Chair Joseph Allen, who worked on the Bayh-Dole Act as a staff member for then-Sen. Birch Bayh (D-IN), said greater certainty is needed in the process for receiving waivers for the domestic manufacturing requirement.

“In tech transfer, time is of the essence,” Allen remarked. “If it takes you three or four months to get a reply back from the agency, all types of deals are gone. The biggest complaint that the users have about the current system is not that it's vague and people work around it, it's that the agencies don't respond. Now you're going to have an even more complex waiver system.”

The coalition has proposed that waivers be automatically granted if the applicant does not hear back from DOE within 90 days.

Stephen Susalka, CEO of AUTM, a technology transfer association, suggested that the new approval process for changes in control over rights to inventions may especially impede startup companies working to develop cutting-edge technologies for which there is no domestic manufacturing capacity. “At the end of the day, those people need to know that they can actually sell, recover their investment, and [DOE] just added this level of unpredictability,” he said, suggesting DOE establish clearer criteria on what types of transactions would trigger the approval process.

"There is a perception that people are lined up at the door to take these new technologies from universities, and that's not true,” said Robert Hardy, director for research security and intellectual property management at the Council on Government Relations, an association that represents research universities. “There tends to be reluctance to heavily invest in them until they're more proven. So anything that makes that process more challenging, like these requirements seem like they will do, is concerning.”

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