Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies (2017)

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14 is required to notify the federal funding agency of any notice or claim of patent infringement that is made against it,124 since any claim can only be pros- ecuted against the government in the U.S. Court of Federal Claims. Because the patent owner’s sole remedy is the “reasonable royalty” awarded in the Court of Federal Claims, the patent owner can not sue the federal contractor. Nevertheless, the federal contractor is generally expected to indemnify the government for any liability for patent infringement that occurs in the performance of the federal contract,125 including the amount of the “reasonable royalty” that must be paid to the patent owner. However, where the government is aware that certain patents must be infringed during contract performance, the contract can identify specific patents to which the contrac- tor’s indemnity obligation will not apply.126 Further- more, the funding agency has the ability to waive the contractor’s indemnity obligation entirely.127 Because the patent owner’s only remedy for infringement by or on behalf of the federal govern- ment is in the Court of Federal Claims, the patent owner has no standing to protest the award of a federal contract to its competitor even if the contract documents appear to require the use of the patented invention.128 Holding the patent (or a license) may give one bidder a pricing advantage over its competi- tors, but it cannot preclude award to a competitor. Furthermore, even where the federal contract appears to require the use of a patented invention, the funding agency may, in its solicitation, invite bidders to quote prices for equivalent alternates to the patented invention.129 If the contract is ultimately awarded to a low bidder supplying an alternate, the patent owner would not even be able to recover a royalty in the Court of Federal Claims unless it can show that the alternate infringes its patent. Most legal authority related to patent issues on government contracts involves federal contracts, which has been the focus of Section II. However, with regard to transportation, most patent issues will arise on state and local contracts (albeit often with federal funds). The remainder of this digest deals with patent issues on state and local govern- ment contracts, where there is not as much legal authority directly on point. To the extent there is relevant law regarding patent issues on state and local government contracts, it is summarized in the following sections. III. STATE AND LOCAL CONTRACTS WITH FEDERAL FUNDING A. Patentability of Inventions by Contractors on Federally Funded Contracts The Bayh–Dole Act was enacted with federal contracts in mind and did not specifically address contracts between federal grant recipients (such as state transportation agencies) and their contrac- tors. However, since at least 1994,130 FHWA has taken the position that its planning and research funds provided to state transportation agencies are subject to the Bayh–Dole Act,131 meaning that the state transportation agency’s contractor is entitled to patent any invention made with FHWA plan- ning and research funds. In guidance released in 2004, and updated in 2014, FHWA has reiterated its position that the Bayh–Dole Act applies to contracts made by state and local transportation agencies that are funded in part with FHWA plan- ning and research funds.132 Accordingly, FHWA requires that “the standard patent rights clause,”133 which is incorporated into funding agreements between the federal government and its contrac- tors, be included in all state transportation agency contracts that are funded with FHWA planning and research funds.134 Since 2011, the Federal Transit Administration (FTA) has also taken the position that the Bayh–Dole Act applies to inven- tions made with FTA grant funds provided to state 124 48 C.F.R. § 52.227–2(a) (2015). 125 48 C.F.R. § 27.102(c) (2015); 48 C.F.R. § 52.227–3 (2015); 48 C.F.R. § 52.227–4 (2015). 126 48 C.F.R. § 27.201(e) (2015); 48 C.F.R. § 52.227–3 (2015); 48 C.F.R. § 52.227–4 (2015). 127 48 C.F.R. § 27.201(e) (2015); 48 C.F.R. § 52.227–5 (2015). 128 See, In re Diversified Technologies, Comp. Gen. B 236035 (Nov. 6, 1989) (rejecting protest of U.S. Department of Transportation solicitation because patent owner’s only remedy is in the Court of Claims); In re Jet International, Inc., Comp. Gen. B 183168 (May 28, 1975) (rejecting pro- test of FAA solicitation because the patent owner’s only remedy for infringement is in the Court of Claims). 129 See, e.g., In re Concrete Systems, Inc., Comp. Gen. B 259283 (Mar. 22, 1995) (denying bid protest by patent license holder, where U.S. Department of Transporta- tion invitation for bids specifically authorized bidders to propose alternates that satisfied bid specifications). 130 State Planning and Research Administration, 59 Fed. Reg. 37,548, 37,557 (July 22, 1994) (codified at 23 C.F.R. pt. 420); see also Planning and Research Program Administra- tion, 67 Fed. Reg. 47,268, 47,276 (July 18, 2002). 131 23 C.F.R. § 420.121(j) (2015). 132 feDeRal hIghway aDmInIstRatIon, fhwa, state Dot, anD mpo RIghts to CopyRIghteD anD patenteD Items DevelopeD wIth fhwa plannIng anD ReseaRCh funDs (Mar. 11, 2004, rev. Dec. 26, 2014), available at http://www. fhwa.dot.gov/hep/guidance/sprpat.cfm. 133 37 C.F.R. § 401.14 (2015). 134 23 C.F.R. § 420.121(j) (2015).

15 and local transit agencies,135 allowing contractors for state and local transit agencies to elect to retain title to inventions made with FTA grant funds. Aside from the rulemakings in which FHWA and FTA adopted these respective patent policies, there is limited legal authority for the conclusion that the Bayh–Dole Act applies to USDOT grant funds in the hands of state and local transportation agencies. Congress specifically limited application of the Bayh–Dole Act to funding agreements between the federal government and small businesses or nonprofit organizations. Although the Bayh–Dole Act was subsequently extended by executive order to all contractors, regardless of size, there is no legis- lation or executive order extending it to funding agreements between the federal government and units of state or local government. However, at least one federal court has affirmed FHWA’s position that the Bayh–Dole Act applies to FHWA grant funds in the hands of state transportation agencies, as discussed in the following section. 1. Trinity Industries v. Road Systems In Trinity Industries, Inc. v. Road Systems, Inc.,136 university researchers had invented a guardrail end terminal under a cooperative research agree- ment with the Texas Department of Transportation (TxDOT). The cooperative research agreement was funded, at least in part, with FHWA planning and research funds received in 1985 and 1986137 (i.e., prior to FHWA’s 1994 rulemaking that applied the Bayh–Dole Act to FHWA funds). The university obtained a patent on the invention, and licensed the patent to a guardrail supplier to manufacture and sell the guardrail end terminals to state trans- portation agencies. The university and its licensee sued competing manufacturers of guardrail end terminals for infringing the patent by making sales to state transportation agencies. The defendants, attempting to invalidate the patent, argued that the invention was subject to the Bayh–Dole Act because FHWA funds were used for its develop- ment and that, under the Bayh–Dole Act, the inventors were required to disclose the federal government’s rights to the patent in their applica- tion to the USPTO.138 The U.S. District Court for the Eastern District of Texas concluded that the failure to disclose federal funding to USPTO did not invalidate the patent.139 However, the court agreed with the defen- dants that the invention was subject to the Bayh– Dole Act, despite the position of the university and its licensee that the Bayh–Dole Act did not apply to the cooperative research agreement between TxDOT and the university.140 To reach its conclu- sion, the court determined that the FHWA grants to TxDOT were “funding agreements” pursuant to the Bayh–Dole Act, thus making TxDOT a federal contractor.141 Likewise, the court determined that the cooperative research agreement between TxDOT and the university was a “subcontract” pursuant to the Bayh–Dole Act, making the univer- sity a federal subcontractor.142 The court concluded that, because the university “received funds from the Federal Highway Administration,” via a “subcontract” with TxDOT, “the federal govern- ment automatically had an irrevocable license to the” patented invention.143 The Trinity decision involves some questionable premises, not the least of which is that the court considered the state transportation agency to be a federal contractor for purposes of the Bayh–Dole Act. As previously noted, there is no indication in the legislation, its implementing regulations, or subsequent executive orders that federal grants to state and local governments are “funding agree- ments” for purposes of the Bayh–Dole Act. In fact, there is substantial legal authority that recipients of federal grant funds such as state and local transpor- tation agencies are not considered federal contrac- tors in other contexts, so that statutes applicable to 138 Id. at 538. 139 Id. at 541. 140 Id. at 538 (“Plaintiffs contend that although federal funds were used to develop the 928 patent, there was no ‘funding agreement…. Therefore, Plaintiffs argue that the federal government has no rights to the 928 patent….”). 141 Id. at 539. 142 Id. at 539–40. 143 Id. at 539. 135 feDeRal tRansIt aDmInIstRatIon, ReseaRCh, teChnICal assIstanCe anD tRaInIng pRogRams: applICatIon InstRuC- tIons anD pRogRam management guIDelInes, FTA Circular 6100.1D, at IV–21 (May 1, 2011) (“Recipients are subject to applicable regulations governing patents and inventions, including government-wide regulations issued by the Department of Commerce at 37 CFR Part 401….”). Prior to 2011, FTA reserved all patent rights to inventions made with FTA grant funds. feDeRal tRansIt aDmInIstRatIon, tRansIt ReseaRCh anD teChnology pRogRams: applICatIon InstRuCtIons anD pRogRam management guIDelInes, FTA Circular 6100.1C, at III–23 to III–24 (May 2, 2003) (“FTA determines whether or not and where a patent application will be filed, as well as the disposition of all rights in such inventions, improvements and/or discoveries, including title to and rights under any patent application or patent that may be issued.”). 136 235 F. Supp. 2d 536 (E.D. Tex. 2002). 137 Id. at 539.

16 federal contracts do not automatically apply to grant funds, absent specific direction from Congress.144 Another potential implication of the Trinity deci- sion, as discussed in more detail in the remainder of Section II, is that if contractors to state transporta- tion agencies are federal subcontractors, then infring- ing contractors could assert statutory infringement defenses including immunity (as federal subcontrac- tors) or license (if the federal government has acquired a license for use of the invention on its behalf).145 Those defenses could leave the patent owner without a remedy, since the state transporta- tion agency itself is immune from suit for patent infringement. However, as discussed herein, courts to date have been unwilling to extend the Trinity deci- sion (that state transportation agency contractors are federal subcontractors) to these defenses. Notwithstanding the questions about the Trinity opinion and its limited precedential value in other jurisdictions, it is nonetheless persuasive authority that contractors to state and local transportation agencies may elect to retain title to inventions made on contracts funded in part with federal transporta- tion grant funds, regardless of whether patent rights are expressly allocated in the contract with the state transportation agency. If the state transportation agency expressly incorporates the Bayh–Dole patent rights language in the contract (as appears to be required by both FHWA and FTA as a condition of receiving grant funds), that should resolve all doubts as to whether the contractor may pursue a patent. B. Rights Retained by Federal, State, and Local Governments As noted in Section III.A, FHWA and FTA both take the position that the Bayh–Dole Act applies to inventions made in the performance of state and local contracts funded in part with federal grant funds. The implication is that the federal funding agency retains “a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have prac- ticed for or on behalf of the United States any subject invention throughout the world.”146 Accordingly, the Trinity court concluded that “the federal govern- ment automatically had an irrevocable license” to an invention made under a state transportation agency contract funded in part with FHWA planning and research funds.147 However, the Trinity court and other federal courts148 have declined to rule as to whether state and local transportation agencies can take advan- tage of the “automatic” federal license (i.e., whether state transportation agency contracts funded with federal grant funds constitute work performed for the federal government, on which a federally funded invention can be used royalty-free). Shortly after the Trinity court ruled that the patented invention was subject to the Bayh–Dole Act, the defendants (accused of patent infringement) filed a number of new affirmative defenses and motions to dismiss, based on the position that the patent could not be infringed by sales of guardrails to state transporta- tion agencies using federal funds. Among other things, the defendants claimed that if the federal government acquired a license to the patented invention, then sales of guardrails to state transpor- tation agencies using federal funds were within the scope of the federal license.149 In other words, the defendants argued that their federally funded work for state transportation agencies was in the nature 144 For example, it is understood that the Buy America Act applicable to federal contracts is inapplicable to state transportation agency contracts funded by federal grants; therefore, Congress has enacted separate “Buy American” requirements applicable to grant funds received from spe- cific federal transportation agencies. See, e.g., 23 U.S.C. § 313 (2016); 49 U.S.C. §§ 5323(j), 24405(a), 50101 (2016). Likewise, after federal courts concluded that the False Claims Act applicable to federal contracts was inapplicable to federal transportation grant funds, Congress amended the False Claims Act to specifically make it applicable to state and local transportation agency contracts funded by federal grants. Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111–21, § 4, 123 Stat. 1617 (May 20, 2009). There has been no similar action by Congress to apply the Bayh–Dole Act to contracts funded by federal grants. 145 The Trinity court later recognized that its decision raised “possible implications” regarding statutory defenses to patent infringement, but declined to rule whether those statutory defenses are available to contractors for state transportation agencies. Order Granting Plaintiffs’ Motion to Strike, Trinity Industries, Inc. v. Road Systems, Inc., No. 98 CV–01623 (E.D. Tex. Dec. 18, 2002). 146 35 U.S.C. § 202(c)(4) (2016). 147 Trinity Industries, Inc. v. Road Systems, Inc., 235 F. Supp. 2d 536, 539 (E.D. Tex. 2002). 148 In a context similar to Trinity, the U.S. Court of Appeals for the Federal Circuit declined to rule on the argument made by alleged patent infringers that their work for state transportation agencies was work for the federal government (thus allowing the alleged infringers to benefit from immunity pursuant to 28 U.S.C. § 1498), where the state transportation agency contracts were “funded by the U.S. government through the interstate and federal highway construction funding programs.” Manville Sales Corp. v. Paramount Sys., Inc., 917 F.2d 544, 554 n.3 (Fed. Cir. 1990). The Manville case is discussed in more detail in Section V.B.2. 149 The defendants also argued that purchases by state transportation agencies with federal funds made the defendants federal subcontractors, who were entitled to immunity under 28 U.S.C. § 1498, which immunizes con- tractors who infringe patents on behalf of, and with the authorization and consent of, the federal government. Order Granting Plaintiffs’ Motion to Strike, Trinity Indus- tries, Inc. v. Road Systems, Inc., No. 98 CV–01623 (E.D. Tex. Dec. 18, 2002). This immunity for federal contractors is discussed in greater detail in Section II.D.

17 of a federal subcontract, relying on the Trinity court’s earlier ruling that a university was a federal subcontractor when it received FHWA funds through a cooperative research agreement with TxDOT. However, the Trinity court declined to consider the argument, ruling that the defendants did not raise it in a timely manner.150 The better legal argument seems to be that state transportation agencies cannot take advantage of the license obtained by the federal government under the Bayh–Dole Act. The Bayh–Dole Act clearly states that the federal government’s license is “nontrans- ferable,”151 suggesting that it cannot grant a license to its grant recipients, including state transportation agencies. In addition, FHWA requires the state transportation agency to include the following clause in any contract “for experimental, developmental or research work” that is funded, at least in part, with FHWA planning and research funds: The subgrantee or contractor will retain all rights provided for the State in this clause, and the State will not, as part of the consideration for awarding the subgrant or contract, obtain rights in the subgrantee’s or contractor’s subject inventions.152 This suggests that the state transportation agency does not automatically obtain a paid-up license to use inventions made by its contractors if FHWA planning and research funds are involved. A literal interpretation of the regulation would poten- tially prohibit the state transportation agency from taking a license under the FHWA-funded contract (if such license would be considered “rights in the… subject inventions”). In practice, however, FHWA encourages its grant recipient to reserve, “in its contract with the contractor,” a license for the state or local transportation agency “to use an invention or discovery resulting from activities funded by FHWA planning and research funds.”153 Accordingly, it is typical for research and development contracts with state transportation agencies to reserve a royalty-free license for use by the state transporta- tion agency, in addition to a license for FHWA, if planning and research funds are used.154 For example, in the Concaten cases discussed in the following section, state transportation agencies reserved a royalty-free license for use of technology developed using pooled FHWA planning and research funds. Furthermore, as discussed in Section IV.A infra, there may be state statutes, policies, and procure- ment regulations that reserve a license to the state for inventions made on state transportation agency contracts. Any license conferred pursuant to such state law or policy is presumed valid as long as it does not conflict with requirements pertaining to federal funds. For example, if the Bayh–Dole Act applies to state contracts funded by federal grants, then the state transportation agency could not deny its contractor the right to elect to patent the inven- tion, even if state law provides that the state takes title to any invention of its contractor. However, there would be no obvious conflict with federal law if the state transportation agency merely reserves a license that is consistent with the federal funding agency’s license under the Bayh–Dole Act. 1. Maintenance Decision Support System— the Concaten Cases If federally funded contracts with state transpor- tation agencies are subject to the Bayh–Dole Act, then any government rights to a resulting invention depend in large part on the efforts of the state trans- portation agency to actively manage its contractor’s patent efforts. If the state transportation agency fails to require its contractor to pursue patent protection for inventions made with grant funds, the federal government (and by extension, the public) could effectively lose its rights to either a license or a patent on the invention, and the invention made with government funds could perpetually remain out of the public domain. One example is the maintenance decision support system (MDSS), which originated in 2001 as a CRADA or similar effort involving FHWA and a number of federal laboratories to develop a prototype MDSS that was made publicly available.155 Begin- ning in 2002, a number of state transportation agen- cies pooled FHWA planning and research funds to continue development of the MDSS.156 Meridian Environmental Technology, Inc., was selected as the contractor for what became a multiyear, $6.5-million 150 Id. 151 35 U.S.C. § 202(c)(4) (2016). 152 23 C.F.R. § 420.121(j) (2015). 153 feDeRal hIghway aDmInIstRatIon, supra note 132. 154 See, e.g., noRth CaRolIna DepaRtment of tRanspoRta- tIon, ReseaRCh & Development manual 45 (Dec. 2015) (“Royalty free patent rights for the North Carolina Depart- ment of Transportation and the Federal Highway Admin- istration are fully preserved for intellectual properties which are either directly documented in a federal aid SPR contract research project or directly produced during the course of formal research activities.”). 155 William P. Mahoney & William L. Myers, Predicting Weather and Road Conditions: An Integrated Decision Support Tool for Winter Road Maintenance Operations, tRansp. Res. ReCoRD, No. 1824, at 98 (Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, 2003). 156 Development of maIntenanCe DeCIsIon suppoRt system, solICItatIon no. 820 (Jul. 1, 2002) available at http://www.pooledfund.org/Details/Solicitation/820.

18 effort involving 19 state transportation agencies. Under the arrangement, the state transportation agencies participating in the pooled fund study would obtain a paid-up license to use the MDSS, but Meridian would retain ownership of intellectual property, including the source code to any software, developed under the project. The state transporta- tion agencies would not have access to the source code itself, just a license to use the MDSS system, including the software.157 Because Meridian would be able to keep its source code proprietary despite federal funding, Meridian had little incentive to seek patent protection for MDSS developments. This would not be possible under typical federal contracts subject to FAR and the Freedom of Information Act (FOIA), where source code developed with federal funds would typically be a required deliverable and would generally be subject to public disclosure. While Meridian worked to develop the technology, methods, and algorithms to process data, predict weather forecasts and road conditions, and make maintenance recommendations, the state transporta- tion agencies independently worked with providers of mobile data collection (MDC) technology to collect data from maintenance vehicles and transmit data to the central MDSS. Among other things, Meridian provided guidance on the touch screen menus for the in-vehicle, touch screen maintenance data collection systems manufactured by Iwapi, Inc. (one of the MDC technology providers) and for a 2004–05 MDSS demonstration test in Colorado using the Iwapi equipment.158 Thereafter, Iwapi began to file a number of patent applications, ultimately culminat- ing in a patent for the MDSS system in 2010.159 Meridian was not involved or named in this patent application, despite the fact that most of the algo- rithms to process data to generate predictions and maintenance instructions were presumably devel- oped by Meridian. In fact, in materials in support of its patent application, Iwapi denied any substantive inventive role by Meridian or anyone else.160 Shortly after obtaining the MDSS patent, Concaten, Inc. (the parent company to Iwapi) contacted the state transportation agencies participating in the pooled fund study and requested the MDSS source code. However, under the terms of the pooled fund study, the participating state transportation agencies only had a license to use the MDSS system and did not have the source code, which remained propri- etary to Meridian.161 Although Iwapi’s patent included the element of processing the data received from the snowplow to make predictions and recommendations, Iwapi could not practice its invention without either obtaining Meridian’s source code or developing its own algorithms. In August 2010, Concaten filed suit against Meridian for infringing the MDSS patent.162 The case settled163 with Meridian entering into a license agreement with Concaten (i.e., agreeing to pay royalties to Concaten from Meridian’s revenues for providing MDSS services to state transportation agencies). Concaten also filed suit against other MDC providers who provided MDSS technology to other state transportation agencies,164 and those lawsuits also resulted in settlements and license agreements requiring Iwapi’s competitors to pay royalties to Concaten for any MDSS equipment sold to state transportation agencies.165 However, one such lawsuit by Concaten against a competing MDC provider recently resulted in the MDSS patent being declared invalid. In Concaten, Inc. v. Ameritrak Fleet Solutions, LLC,166 the U.S. District Court for the District of Colorado concluded that the MDSS patent only described the “abstract idea” of “receiving, processing, and transmitting data”—namely, “sending sensor data from a snow plow truck over a wireless communications network to a central server” and “the transmission of infor- mation back from the server to the snow plow truck.”167 Concaten argued that its patent was not directed at an abstract idea, but rather the “tangible concept” of “dynamic optimization of the allocation of snowplow resources in view of real time condi- tions.”168 However, the court concluded that the 157 Telephone interview with David Huft, Research Program Manager, South Dakota DOT (May 20, 2013). 158 meRIDIan envtl. teCh., InC., Development of a maIntenanCe DeCIsIon suppoRt system: phase II, InteRIm Rep., at 11 (Nov. 2004), available at http://www.pooled- fund.org/Document/Download/392. 159 Maintenance Decision Support System and Method, U.S. Patent No. 7,714,705 (filed Mar. 11, 2008); see also Smart Modem Device for Vehicular and Roadside Applica- tions, U.S. Patent App. No. 12/046,121 (filed Mar. 11, 2008). 160 Declaration of Kevin K. Groeneweg under 37 C.F.R. § 1.98, In re Application of Rennie et al., U.S. Patent App. No. 11/363,581 (Filing date Feb. 27, 2006). 161 Telephone interview with David Huft, Research Pro- gram Manager, South Dakota DOT (May 20, 2013). 162 Complaint for Patent Infringement, Concaten, Inc. v. Meridian Envtl. Tech., Inc., No. 10 CV–02106 (D. Colo. Aug. 30, 2010). 163 Notice of Dismissal, Concaten, Inc. v. Meridian Envtl. Tech., Inc., No. 10 CV–02106 (D. Colo. Nov. 8, 2010). 164 Complaint for Patent Infringement and Lanham Act Violations, Concaten, Inc. v. Delcan Corp., No. 11 CV–01440 (D. Colo. Jun. 2, 2011). 165 Joint Stipulation for Dismissal with Prejudice, Concaten, Inc. v. Delcan Corp., No. 11 CV–01440 (Apr. 6, 2012). 166 131 F. Supp. 3d 1166 (D. Colo. 2015), appeal dock- eted, No. 16–1112 (Fed. Cir. 2015). 167 Id. at 1174. 168 Id.

19 patent specification did not actually describe the claimed optimization method (probably because those algorithms had been developed by Meridian, the pooled fund contractor, and maintained by Meridian as proprietary). Therefore, the MDSS patent was invalid for lack of invention by the named inventor.169 With respect to the MDSS, the failure of the state transportation agencies to pursue patent protection resulted in a third party obtaining patent rights (albeit temporarily) to an invention funded by the federal government. Because the pooled fund contractor did not pursue patent protection, any license obtained by the federal government pursu- ant to the Bayh–Dole Act arguably did not apply to the patent obtained by Iwapi/Concaten, and thus was of little value. Further, the license negotiated by the state transportation agencies with the pooled fund contractor was of little value, because other contractors for the state transportation agencies (including the pooled fund contractor itself) were subjected to patent infringement lawsuits for work performed for the state transportation agencies. Had the patent not been invalidated by the court, the government could have been required to pay royalties for the use of an invention that was made with public funds. C. Use of Patented Inventions on Federally Funded Contracts State transportation agencies or their contractors often find themselves in the position of using patented inventions or other preexisting proprietary technolo- gies in the performance of a state contract, which always requires attention to ensure that the use is not infringing (as discussed in detail in Section V.A infra). If the contract work is funded in part with federal funds, there are additional considerations. Of primary concern is that, as a general rule, FHWA prohibits the use of federal funds to pay “for any premium or royalty” associated with any patented or proprietary technology.170 If the state transportation agency or its contractor intends to use a patented or proprietary technology in the performance of a federally funded contract, it is advisable to demonstrate that the decision to use the patented or proprietary technology was reached “through competitive bidding with equally suitable unpatented items,”171 to show that the government is not actually paying a premium over the use of generic alternatives. If there is no generic alterna- tive, making competitive procurement impossible, then the state transportation agency must certify to FHWA that the “patented or proprietary item is essential for synchronization with existing highway facilities, or that no equally suitable alternate exists” before FHWA will pay for the technology.172 There is a limited exception, whereby FHWA will allow federal funds to be used by the state transportation agency to pay for patent royalties “for research or for a distinctive type of construction on relatively short sections of road for experimental purposes.”173 Complying with the FHWA prohibition requires some attention to project specifications for state transportation agency contracts. Ideally, project specifications will be drafted in such a way that there are multiple “suitable unpatented items”174 that could be used to perform the contract, in lieu of patented or proprietary technology. Certainly, the project specifications for a contract that will be funded by FHWA should not reference “single trade name materials,”175 except in the rare case that FHWA determines that it is “in the public interest” to use a specific material or product.176 Barring that, the state transportation agency may direct its contractor to substitute a patented or proprietary technology for the lower-priced alternative included in the contractor’s bid, but federal funds may not be used to pay for the resulting price increase (i.e., the premium or royalty).177 Contractors and disappointed bidders often complain that in order to work around the FHWA prohibition on patented or proprietary inventions, state transportation agencies draft project specifi- cations very narrowly, so that the project specifica- tions effectively require the use of a patented or proprietary technology even though no specific tech- nology is identified. For example, in Fox Industries, Inc. v. Structural Preservation Systems, Inc.,178 the retired chief engineer for one state transportation agency testified that during his tenure, contract specifications were drafted to effectively require the use of a patented noncorrosive bridge pier, even though “the Federal Highway Administration frowns on specification of proprietary (i.e., one source) material supplies.”179 This practice is not in keeping with the spirit of the FHWA prohibition on patented or proprietary technology, and can result 169 Id. at 1177. 170 23 C.F.R. § 635.411 (2015). 171 23 C.F.R. § 635.411(a)(1) (2015). 172 23 C.F.R. § 635.411(a)(2) (2015). 173 23 C.F.R. § 635.411(a)(3) (2015). 174 23 C.F.R. § 635.411(a)(1) (2015). 175 23 C.F.R. § 635.411(d) (2015). 176 23 C.F.R. § 635.411(c) (2015). 177 23 C.F.R. § 635.411(b) (2015). 178 922 F.2d 801 (Fed. Cir. 1990). 179 Fox Industries, Inc. v. Structural Preservation Systems, Inc., No. HAR 83-3689, 1988 U.S. Dist. LEXIS 1504 (D. Md. Feb. 19, 1988).

20 in loss of federal funding for the patented or propri- etary technology. In addition to loss of federal funding, specifying patented or proprietary technology on federally funded contracts could also violate state procure- ment law, and could subject the state transportation agency to claims or litigation in state court. (The state transportation agency would probably not be subject to suit in federal court for violations of the FHWA prohibition on patented or proprietary tech- nology, due to the sovereign immunity bar discussed in Section V.A infra.180) For example, in Jen Electric, Inc. v. County of Essex,181 a traffic signal equipment vendor chal- lenged bid specifications published by the New Jersey Department of Transportation (NJDOT), alleging that the specifications did not allow for suit- able generic alternatives. Although the specifications nominally allowed the vendor to propose to furnish an equivalent alternate, the vendor argued that the bid specifications were “unlawfully restrictive” in light of the FHWA prohibition on patented or propri- etary technology, and were drafted so that only one sole-source product could realistically satisfy the specifications.182 The Supreme Court of New Jersey concluded that the vendor had standing to challenge the bid specifications, as this issue is at “the very bedrock of public contract bidding requirements”— i.e., the public’s interest in competitive bidding.183 Likewise, in Pike Industries, Inc. v. State of Vermont,184 the Vermont Agency of Transportation (VTrans) solicited bids to furnish a patented “paver placed surface treatment” on a federally funded proj- ect, although the solicitation nominally required bidders to furnish only “non-proprietary” technologies. The selected contractor performed the work and then submitted a claim to VTrans for the additional cost of a patent license. The Vermont Transportation Board denied the claim because the contractor volun- tarily executed the contract with the understanding that a license was required. However, the board also criticized VTrans for putting the contractor in “an impossible situation.” The board concluded that VTrans “should have withdrawn the bid invitation” because VTrans “knew there were proprietary restrictions” even though its solicitation nominally prohibited proprietary technology.185 The use of patented or proprietary technology on a federally funded project does not violate the FHWA prohibition as long as there is no premium or royalty associated with its use; e.g., when the state trans- portation agency has previously acquired a royalty- free license to an invention developed on a previous state transportation agency contract. Likewise, where an invention was made on a prior federally funded project, the federal government will have acquired a royalty-free license to the invention under the Bayh–Dole Act. Courts have generally declined to rule whether the state transportation agency can take advantage of the federal license and avoid paying a royalty for the use of such inventions on federally funded projects.186 The better legal view would seem to be that state transportation agencies cannot take advantage of the license obtained by the federal government under the Bayh–Dole Act, since such license is “nontransferable.”187 This results in the paradoxical situation where state transporta- tion agencies can be prohibited from using a patented invention on an FHWA-funded project even though the invention itself was made with FHWA funds. Accordingly, FHWA recommends that where a state or local transportation agency “wishes to reserve the right to use an invention or discovery resulting from activities funded by FHWA planning and research funds, it must specifically do so in its contract with the contractor.”188 Courts have also generally declined to rule as to whether contractors for state transportation agencies on federally funded projects can benefit from the immunity for patent infringement claims that is accorded to contractors performing work for the federal government.189 However, at least one federal 180 See, e.g., KM Enterprises, Inc. v. McDonald, No. 11-CV-5098, 2012 U.S. Dist. LEXIS 138599 (E.D.N.Y. Sept. 25, 2012) (dismissing a complaint against the commis- sioner of the New York State Department of Transporta- tion (NYSDOT) on sovereign immunity grounds, where the complaint alleged that NYSDOT’s contractor on an FHWA-funded project wrongfully awarded a subcontract for proprietary technology in violation of 23 C.F.R. § 635.411). 181 197 N.J. 627, 964 A.2d 790 (2009). 182 Jen Elec., Inc. v. Cty. of Essex, 401 N.J. Super. 203, 208, 949 A.2d 861, 864 (App. Div. 2008), rev’d, 197 N.J. 627, 964 A.2d 790 (2009). 183 Jen Elec., Inc. v. Cty. of Essex, 197 N.J. 627, 646, 964 A.2d 790, 802 (2009). 184 Docket No. TB 326, Vermont Transportation Board (2010). This case is discussed in detail in Joe bRaDley, Jagannath mallela & KevIn ChesnIK, management guIDe to IntelleCtual pRopeRty foR state DepaRtments of tRans- poRtatIon 88–91 (Nat’l Cooperative Highway Research Program, Report 799, Transportation Research Board of the National Academies of Science, Engineering, and Medicine, 2015). 185 Id. 186 See supra notes 148–50 and accompanying text. 187 35 U.S.C. § 202(c)(4) (2016). 188 feDeRal hIghway aDmInIstRatIon, supra note 132. 189 See supra notes 148–50 and accompanying text.