Feature Comment: Traps for the Unwary: An Overview of Patent Issues For The Commercial Company Entering Into Federally Sponsored Research and Development Projects

By James G. McEwen[1]

Background

For the uninitiated, contracts and agreements with the Federal Government present a dizzying array of acronyms and terms which seemingly add a layer of confusion above the already-complex subject of patent rights for parties under research and development agreements.   However, it is important to realize that, generally, contracts with the Federal Government are similar to commercial contracts (i.e., consideration, offer, and acceptance).  Thus, while generally similar in terms of appearance, the difference in a government contact becomes apparent when you realize one important fact: the contract is with the rule maker who may or may not have consented to suit according to the particular circumstance.   As a result, a Government contract can be thought of in terms of a controlled taking since the Government creates laws that govern all contracts, and is therefore in a better position as a contracting party to create mandatory clauses, and to ensure their inclusion in all contracts.

For instance, in a contract between private parties, if one party fails to include a clause, that clause is not part of the contract.  In contrast, since certain clauses are required by law, where a Government contract is concerned, omitted clauses can be included as if in the contract since the contract is otherwise ultra vires. [2]

In the context of intellectual property, many intellectual property rights are governed by such laws or by strong Federal procurement policies, and are thus “read in” to all contracts.[3]  Therefore, unlike commercial contracting, one cannot assume that since a Government contract lacks a provision that the missing provision will not be later automatically included.

This requirement is especially strong in the context of intellectual property.  For instance, when inventions are created or made under a procurement agreement with the Government, such inventions are generally referred to as “subject inventions.”  These inventions are defined by law in the Bayh-Dole Act,[4] which requires Government rights in certain inventions made in conjunction with a Government contract.[5]  Similar statutes apply in the context of other intellectual property, most notably for technical data for contracts with the Department of Defense[6].  However, since patents represent a core protection for many companies whose existence is based on exclusive use of knowledge and who are interested in working with the Government, it is important for these companies to recognize the Government’s requirements for patents, and how to account for these requirements in a manner that fits their particular marketing model.

A.      Intellectual Property Clauses Governed Strictly

Consistent with commercial contracts, intellectual property clauses are governed strictly.  As such, where a patent is developed under a Government contract, that contract’s terms will govern the respective rights of the parties.  Thus, it is these terms and conditions which have an effect on subsequent licensing.  However, since these clauses have the veneer of law, Courts are more likely to enforce the clauses even where the contractual remedy appears harsh.

For example, in Campbell Plastics Engineering & Mfg., Inc., v. Army,[7] the Government took title to a contractor’s patent for the contractor’s failure to report a subject invention pursuant to the timing requirements governed by FAR 52.227-11 and by statute (35 U.S.C. §202).  This clause, like many of the patent rights clauses, have been in effect for a number of years without such a ruling.[8]  Indeed, there appeared to be a feeling that such clauses were not of importance.  As such, this holding was a shock to many in the procurement community who had never considered the remedies these intellectual property clauses have with respect to contractor-owned intellectual property.  Importantly, from a licensing standpoint, a potential licensee performing due diligence needs to check whether the patent owner performed the required contractual duties for reporting the subject invention since, as demonstrated in Campbell Plastics, the failure to perform these duties can result in the loss ownership itself.

These intellectual property clauses, which are in most procurements, are standardized and have multiple requirements for reporting, notices, dispute resolution, and later rights to use.  Moreover, these requirements cannot be waived merely because they are believed oppressive at a later time.   Also, any attempt to deviate from a standard intellectual property scheme must be done properly and carefully since, unlike pure commercial contracts where implied and apparent authority can still bind the parties, anyone lacking actual authority lacks the ability to bind the Government to a contract.  Thus, in the same way it is important to ensure that a Government official signing a procurement vehicle has the actual authority to do so, it is important that there is a statutory basis for a procurement vehicle with deviations from the standard intellectual property provisions.

B.     Overview of Patent Clauses

For patents, the standard requirements are embodied in the Bayh-Dole Act at 35 U.S.C. §200-204 and in the Federal Acquisition Regulations (FAR) at section FAR 227 and 52.227-11 and Defense Federal Acquisition Regulation Supplement at section DFARS 252.227-7038 (collectively referred to as Bayh-Dole rights or clauses hereafter). There are strong public policies implicated by these requirements.  Specifically, the Government’s contribution is often most important in two different phases of development: the conceptual phase and the prototyping phase.  As such, Bayh-Dole rights are generally created for patented inventions where the Government entered into a contract to conceive of the invention, as well as for when the invention was actually created (as opposed to merely being a plan to be built).[9]  The strong policy next requires that such inventions are used to benefit the American tax payer by allowing the Contractor the right to retain title of the invention with the exclusive right to commercialize the invention.  Where the Contractor fails to live up to these expectations, the Government will take title to or license the invention itself.

Since being promulgated, the military industrial complex has dwindled to only a few main contractors.   Thus, there is a new incentive to attract non-traditional contractors for procurements.  Moreover, many Government labs have closed such that the Government is required to rely more on extramural research to accomplish agency missions, which necessarily requires flexibility for intellectual property provisions.  Also, both Government and private industry are realizing a need to more effectively leverage their intellectual property, which necessarily requires both parties to be flexible in their approach to public-private collaborations for different needs.  As a result, the standard procurement terms and conditions have grown more flexible, and a whole host of procurement vehicles now exist which provide the contracting authority with actual authority to deviate from standard procurement terms and conditions for intellectual property.[10]

While many types of intellectual property are created during research and development, patents are the most prominent type since patents are granted to encourage and protect ideas themselves.  In contrast, copyrights are granted to protect only a particular expression, such as the software resulting from a project, and provide very thin protection only to that particular expression.  Trademarks solidify a consumer’s understanding as to the source of a product or service, but do not confer ownership over the substance of the developed product itself and do not prevent others from copying the results.  Lastly, while trade secrets are available to protect the specifics of the developed product, trade secrets only protect unknown information of demonstrable value and do not protect the product if there is independent development or where the product is reverse engineered.  Thus, patents are often the tangible result of a concerted research and development program.

Moreover, patents have become a powerful tool for attracting investment since a grant of a patent enjoys a presumption of validity and an extent as broad as the claims.  This is a particular advantage since over other types of intellectual property (most notably trade secrets) which do not hold a presumption of validity.  Lastly, and perhaps most importantly, patents hold the threat of a permanent injunction which is a far more devastating remedy in many cases than mere damages.  While this threat of injunction has been somewhat mitigated by the Supreme Court’s recent decision in eBay v. Mercexchange, the injunctive remedy is the traditional norm as acknowledged by the Supreme Court’s decision.[11]

In view of these many advantages, most commercial and all Government development agreements address patent rights in one form or another.  Generally, these describe treatment for improvements developed during the agreement, which parties own or license the patent, and intellectual property indemnification or joint defense for the developed product.  In the context of Government research and development, these terms and conditions are substantially uniform such that a party can determine in advance the Government’s typical position.  However, while each situation holds special and unique requirements[12], there are general terms and conditions that one needs to be aware of before entering into a research and development contract with the Federal Government.  These general terms and conditions are set forth separately below.

1.       Timing as Affects Rights

The Government typically obtains patent rights based upon the timing of an event.  Specifically, under 35 U.S.C. 200-202 as implemented in FAR 52.227, the Government obtains license or ownership rights in subject inventions.  Subject inventions are defined to include inventions first conceived or actually reduced to practice (i.e., built) while conducting research and development during a procurement contract.[13]

A few consequences of this phraseology are important.  As defined, subject inventions are independent of constructive reductions to practice (i.e., when a patent application is filed) as well as being independent of delivery of the patentable invention. In addition, since the test for subject inventions is event based, the test is independent of funding so long as the work is within the statement of work of the procurement contract.  This situation is in contrast to how the Government obtains rights in trade secrets and copyrights (i.e., technical data and computer software), which is generally based on funding.[14]  As such, it is conceivable that inventions conceived and first reduced to practice outside of a government contract can be considered a “subject invention.”[15]

Once a subject invention is created, the Government will typically only obtain a non-exclusive license to use the invention for Government purposes unless the work is being performed outside of the United States.[16]  Further, the Government typically only obtains a license right as opposed to ownership to the subject invention.  Thus, the mere fact that the invention is classified as a subject invention does not preclude enforcement of the patented invention in the commercial marketplace.

2.       Unique Monitoring and Disclosure Requirements

In order to identify and track subject inventions, the Government requires the contractor provide record keeping in order to ensure that the Government obtains the benefit of the acquired right.  While seemingly reasonable, these reporting requirements can be seemingly onerous to a small business lacking a formal invention disclosure and evaluation plan.  The entire reporting system is predicated on the business having such a plan, and the patent clauses actually require the contractor to ensure that such a plan exists in order to adequately track and report inventions.  Indeed, the assurance that such a plan exists is a condition of compliance with the clause in the first place and can be grounds for withholding of final payment.[17]  However, it is important to recognize that such a plan need not be ornate so long as there is some contact for patent issues to help identify patentable inventions, which is something most businesses involved in research and development have either formally or informally.

Within the tracking system are multiple required notifications related to ensuring that the Government is made aware of the existence of the subject invention, and which allow the Government an option to take over responsibility for obtaining a patent on the subject invention if the contractor declines to do so.  Specifically, the contractor is required to report each subject invention as soon as possible, and usually within two (2) months.[18]  Moreover, after reporting the existence of the subject invention, the contractor is required to inform the Government, within eight months after disclosure, whether the contractor will be keeping ownership of the invention (i.e., title) and in which countries.  After electing to keep title, the contractor is required to complete the filing within one year of election or prior to a potential patent bar date.[19]  Lastly, after filing, the contractor is required to report each filing abroad and if a maintenance fee will not be paid.  The failure to render any of these notices in time allows the Government the contractual option to take the title from the contractor upon written request to do so.  While the government is not required to take title, this provision has been found enforceable and does allow the Government an option to take title to protect the Government’s interest.[20]

The reporting and disclosure provisions are often supplemented by annual and final reports, either as part of the clause used for large contractors, or as supplements for small contractors.[21]  These additional reports summarize the inventive activity for the year or, in the cases of a final report, for the entire contractual effort.  As such, these summary reports are required even where no inventions have been created, requiring contractors to submit negative reports confirming that nothing has been reported.  These reports also help confirm whether the contractor is compliant with other patent rights provisions requiring the contractor to ensure that a process is in place to ensure timely reporting of subject inventions.  Since no patent title is at risk where no invention is made, the Government uses withholding of final contract payment as an incentive to comply with this requirement.  Such payment withholdings can be up to $50,000 and can substantially delay final closeout of contracts.[22]  Thus, failing to sufficiently inform the Government that nothing patentable was developed can result in significant administrative and financial hardship.

C.     When are standard Bayh-Dole clauses used?

1.       Is there a procurement contract?

While pervasive, it is important to note that these clauses are not required in all contracts.  For instance, standard Bayh-Dole clauses are only required in “procurement contracts.”  As defined in 35 U.S.C. §200, procurement contracts only includes grants, contracts, and cooperative agreements.  Thus, standard Bayh-Dole clauses are not required in other types of agreements, notably Other Transactions and Cooperative Research and Development Agreements (CRADAs).  As such, where procurement is using another contractual vehicle specifically designed to allow flexibility for intellectual property, the Government is generally allowed and encouraged to deviate from the standard Bayh-Dole clauses in order to attract more non-traditional contractors.[23]  Thus, where these clauses appear in non procurement agreements, the contractor can (and should) object.

2.       Is there research and development being performed?

Further, even where there is a procurement contract, the standard Bayh-Dole clauses are only appropriate where the procurement contract is for research and development.[24]  While this is generally the case for grants and cooperative agreements, most contracts are not for research and development and are only mechanisms to purchase standards goods or services.  In these cases, unless the statement of work includes research and development, the standard Bayh-Dole clauses should not be used and should be objected to at least on the grounds that the reporting requirements are an unnecessary administrative burden.[25]

D.     March in rights

While many of the reporting requirements required for standard Bayh-Dole clauses are generally similar to those used in commercial joint development agreements, one of the more controversial provisions in the Bayh-Dole clauses is very different: the march-in provision.  Under the march-in provision, the Government can take and license a contractor’s patented subject invention in very limited circumstances.[26]  Specifically, the Federal agency has the right to grant a license to the patented subject invention where the contractor is not taking adequate steps to “achieve practical application of the subject invention” or where the Contractor is not complying with public use or preferences for exclusive licensing to U.S. industries.  Alternately, the Government can use the march in rights to license a patented subject invention in emergencies, such as to “alleviate health or safety needs.” This provision reflects the importance that is placed upon ensuring that, where the Government helped at critical stages in the development of a patented subject invention, the American taxpayer receives the maximize return on investment in terms of commercialization of the invention or increased access in times of need.

While perhaps a reasonable provision from a public policy perspective, this provision is contrary to the security in ownership for patents required in the commercial world.  Moreover, while march-in rights have never been used successfully for the purposes of obtaining rights, commercial contractors recognize that there is a potential for abuse.  Indeed, there are periodic attempts by public interest groups to have the Government invoke these march in rights in relation to medical devices and drugs.  However, since this clause is not negotiable in procurement contracts, there is little that a contractor can do to remove this clause in a procurement contract.[27]

E.     Miscellaneous provisions

While the main elements, such as the march‑in rights, of the standard Bayh-Dole clauses are better known, the standard Bayh-Dole clauses typically will include miscellaneous provisions which are less well known.  These provisions are unexpected and can be as troublesome from a contractor point of view as the march in rights or the definition of the subject invention.  As such, these miscellaneous provisions deserve at least a brief mention.

1.       Commercialization Reports

Incidental to the march in rights are provisions regarding required reporting (at the option of the Government) of commercialization for the subject invention.  These reports require reporting commercial sales, gross revenue, development status, and “such other data and information as the agency may reasonably specify.”  Thus, the Bayh-Dole clauses require the contractor to turn over sensitive and proprietary information, which is both burdensome to compile and risky since there is always a risk of accidental disclosure.

2.       Preference for U.S. Industry

Moreover, the contractor, prior to granting an exclusive license, needs to require the exclusive licensee to manufacture the subject invention substantially in the United States.  It is unclear what “substantially” means in the context of manufacturing the subject invention since it is unclear if final assembly of imported components is compliant.  Such a requirement may be difficult to fulfill for certain industries and, while a waiver may be obtained, the accidental failure to comply with this preference for U.S. manufacture could result in the Government exercising its march in rights for the licensed subject invention.  As such, this provision represents a trap for the unwary contractor hoping to utilize subject inventions as part of a licensing campaign.

3.       Subcontracts

Recognizing that many research and development contracts involve subcontractors, the Bayh-Dole clauses include a requirement to include the same clauses in subcontracts involving research and development.  The flowdown clauses are required to stipulate that the prime contractor does not receive the benefit of the Government’s rights in subject inventions.   However, while not the beneficiary of the subject invention, the prime is also required to ensure that the subcontractor complies with the clause included in the subcontract.  Since the prime is responsible, the Government will invoke its withholding right to ensure the prime forces the subcontractor to perform the necessary reporting under the clause.

F.      Authorization and Consent

While there are many issues of concern to contractors in relation to the Bayh-Dole clauses, not all of the patent clauses are as burdensome to contractors.  Especially for research and development contracts, the standard terms and conditions do have beneficial clauses of interest to the contracting community.  One such clause is an authorization and consent clause, contained in FAR 52.227-1, by which the Government assumes the liability for the contractor’s having used a third party’s patented invention.  When this provision is included, the third party has no recourse against the contractor, and instead must file a claim under 28 U.S.C. §1498(a).  Moreover, the contractor is not generally liable for the infringement during a research and development contract.[28]  As such, contractors performing research and development work are able to avoid substantial liability and the threat of injunction due to patent infringement when performing a research and development contract on behalf of the Government.  Given the benefit of these particular clauses, even contractors performing work under non-procurement agreement should consider having these standard provisions included.

Conclusion

When entering into a standard procurement vehicle with the Government to perform, even tangentially, research and development, it is important to recognize that the Government requires the contractor to take certain actions to protect the Government and the taxpayer.  While certain of these provisions are relatively intuitive and exist in normal commercial contracting, other provisions require advanced planning in order to ensure compliance.  Moreover, contractors need to realize that these other provisions reflect a number of social and public policies, and will be enforced in court if there is a dispute.   However, with sufficient planning, contractors can implement internal patent policies which account for these various requirements or have the choice of only performing work using alternate contract vehicles in which the Bayh-Dole clauses are not mandatory.


[1] The opinions in this article do not represent the official positions of Stein McEwen, LLP.  Portions of this article utilize research included in Intellectual Property In Government Contracts: Protecting And Enforcing IP At The State And Federal Level, slated for release in August of 2008 by Oxford University Press.

[2] Federal Crop Ins. Corporation v. Merrill, 332 U.S. 380 (1947).  See also the Christian doctrine as outlined in G.L. Christian and Associates v. United States, 312 F.2d 418 (Ct. Cl. 1963).

[3] While not all forms of intellectual property have a law on point, such clauses are very likely going to be read into these contracts under the Christian doctrine.  Pursuant to this Doctrine, important regulations are read into contract or conflicting terms are removed.  Since intellectual property provisions represent important procurement policy objectives, as evidenced in terms of their treatment in the Federal Acquisition Regulations and Congressional and Executive interest on the subject, these provisions would likely satisfy the requirements for inclusion using the Christian Doctrine since an improper inclusion/exclusion would be ultra vires.  E.g., FilmTec Corp. v. Hydranautics, 982 F.2d 1546, 25 USPQ2d 1283 (Fed. Cir. 1992) (Patent title automatically divested mid-litigation due to finding invention was “subject invention” under Saline Water Conversion Act (since repealed)).

[4] The Bayh-Dole Act refers to Chapter 18 of 35 U.S.C.

[5] Under 35 U.S.C. §201(e), subject invention “means any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement.”  The Government obtains rights in subject inventions either directly through 35 U.S.C. §202 or through a series of Executive Orders implemented in the Federal Acquisition Regulations.  See Federal Acquisition Regulation (FAR) 27.302(a) (discussing the interplay of the Presidential Memorandum on Government Patent Policy to the Heads of Executive Departments and Agencies dated February 18, 1983, and Executive Order 12591 and Chapter 18 of 35 U.S.C.).

[6] 10 U.S.C. 2320-2321.

[7] 389 F.3d 1243; 73 U.S.P.Q.2d 1357 (Fed. Cir. 2004).

[8] Versions of this clause and its requirements predate the enactment of Bayh-Dole, with some of the first versions being found dating back to the late 1950’s, and are in the earliest versions of the Defense Acquisition Regulations.  E.g., ASPR 7-302.23(a) (December, 1969).

[9] 35 U.S.C. 202.

[10] Examples include Other Transaction Agreements, CRADAs, Venture Funding through programs such as In-Q Tel, and Prize Authorities.

[11] 126 S. Ct. 1837 (2006).

[12] For instance, requirements vary according to the type of contractor, the particular agency who is party to the contract, and the type of contractual vehicle employed.

[13] Procurement contracts include grants, contracts, and cooperative agreements.  Procurement contracts do not include other contracts, such as Cooperative Research and Development Agreements (CRADAs) and Other Transactions.

[14] While beyond the scope of this article, additional information on rights in technical data and computer software can be found in DFARS 252.227-7013 & 252.227-7014, as well as in the FAR Part 27 generally.

[15] E.g., Mine Safety Appliances Co. v. United States, 150 U.S.P.Q. 453 (Ct. Cl. 1966) (first reduction to practice of helmet within statement of work sufficient to be a subject invention even though occurred between contract phases since was “close and umbilical connection” to work).

[16] FAR 27.303(c) and FAR 52.227-13.

[17] DFARS 252.227-38(k) allowing withholding of final payment for failing to “establish, maintain, and follow effective procedures for identifying and disclosing subject inventions ….”

[18] If the inventor identifies as subject invention: within 2 months.  If the contractor later determines is subject invention: within 6 months.

[19] The more applicable bar dates are, generally, publication of technical reports and offers for sale of the subject invention under 35 U.S.C. §102.  Since the filing must be made prior to either occurrence, patent applications are often filed well before this one year deadline.

[20] In re Campbell Plastics Engineering & Mfg. Inc., ASBCA No. 53319 (2003), affirmed Campbell Plastics Engineering & Mfg., Inc., v. Army, 389 F.3d 1243; 73 U.S.P.Q.2d 1357 (Fed. Cir. 2004).

[21] See DFARS 252.227-7038 for large businesses, and DFARS 252.227-7039 for small businesses.

[22]DFARS 252.227-7038, FAR 52.227-11.

[23] See David S. Bloch and James G. McEwen, “Other Transactions” with Uncle Sam: A Solution to the High-Tech Government Contracting Crisis, 10 Tex. Int. Prop. L.J. 195 (2002),Other Transactions Guide for Prototype Projects (January 2001)

[24] FAR 27.300 envisions inclusion “if a purpose of the contract or subcontract is the conduct of experimental, developmental, or research work.”

[25] Moreover, where the clause is removed and the removal is later found to be improper, the Government would still likely be protected since, as noted above, such clauses would likely be read into the contract.  C.f. FilmTec Corp. v. Hydranautics, 982 F.2d 1546, 25 USPQ2d 1283 (Fed. Cir. 1992) (in deciding title required under Saline Water Conversion Act, title obtained from inventor even though no evidence inventor required to assign rights to employer.)

[26] 35 U.S.C. §203.

[27] It should be noted that this march in provision is very often included, in some form, in other, non-procurement contracts since the provision has such a strong public policy basis.  However, the march in provision in these non-procurement contracts can at least be more narrowly crafted to reflect the true investment by the Government.

[28] FAR 27.201-2(b) & 27.203-1(b)(1).

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