Management Guide to Intellectual Property for State Departments of Transportation (2015)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

50 For the state DOT, as with most organizations, understanding the impact of IP management decisions on the key state DOT stakeholders is very important. This chapter highlights some of the key factors and stakeholders involved in IP management decisions for the state DOT. 6.1 State DOT Employees In the course of their employment, state DOT employees create, invent, and develop work products that potentially constitute valuable property interests and may be protected as IP. What property interests do state DOTs take in the IP created by their employees? Even if state DOTs have the legal right to take title to IP developed by their employees, are there good reasons to allow the employees to take title instead? This section considers several questions state DOTs should consider as they develop policies and strategies concerning ownership, protection, and management of employee-generated IP. 6.1.1 What Defines the IP Ownership Interests? The U.S. Constitution authorizes IP rights such as copyrights and patents to the authors and inventors, respectively (94). That is, absent some legal mechanism (e.g., a contract employment agreement) that modifies the presumption, it is generally presumed that the individuals who develop the IP, and not a corporate entity or agency, have the right to obtain title to the IP, typically by way of registering the IP. However, in the case of IP developed by employees in the course of their employment and using the employer’s resources, valid reasons exist why the employer might be entitled to some interest in the IP. This may be especially true in the context of government agencies such as state DOTs, for which the interests of both the employer agency and the taxpaying public come into play. Aspects of the legal framework to be considered in determining who has the right to take title to IP developed by state DOT employees include: • Common law and shop rights. • Policies on royalty revenue. • Employment agreements and assignment agreements. 6.1.1.1 Common Law and Shop Rights Although the constitutional authority providing for IP rights focuses on individuals, the law has historically recognized the employer’s contribution (facilities, equipment, materials, employee compensation, etc.) toward employees’ creations and inventions. Therefore, some C H A P T E R 6 Understanding IP Management and Options

Understanding IP Management and Options 51 common law doctrines exist to protect the rights of employers in IP generated by employees in the course of their employment. • Inventions. With respect to inventions made by employees in the course of their employment, in the absence of a written employment agreement or assignment agreement clearly stating that such inventions are the property of the employer, employers should not presume that courts will find such an agreement was implied (95). Especially if the employee was not specifi- cally hired to perform R&D, courts would likely find that the employee-inventor, and not the employer, has the right to apply for patents for inventions made in the course of employment (96). By default, therefore, the employee typically has the right to patent the invention, but this default presumption may be modified by the circumstances of hiring, by the terms of the contract or employment agreement, or by statute (particularly in the case of state employees). Moreover, in most cases, even when the employee is entitled to the patent, the employer is entitled to “shop rights” in the invention (97). Shop rights convey a nonexclusive license to practice the invention in the course of the employer’s business without having to pay royalties or being subject to an infringement action brought by the employee. • Creative expressions (work for hire). With respect to creative expressions, on the other hand, the presumption is that the copyright to such material developed by employees in the course of their employment belongs to the employer and not the employee. This common-law work- for-hire doctrine has been encoded in federal statute, which provides that “the employer or other person for whom the work was prepared is considered the author [and] owns all of the rights comprised in the copyright” (98). The statute also specifically defines work made for hire to include “a work prepared by an employee within the scope of his or her employment” (99). However, it can sometimes be unclear whether the author is an employee acting within the scope of employment at the time the work is prepared. If either the employment relation- ship or the employee’s scope of duties is unclear, the determination of rights typically reverts to the common law of agency to determine whether the work was prepared in the context of an employment relationship (100). As with patentable inventions, the language of contracts or employment agreements, as well as statutes (particularly in the case of state employees), may clarify that the state DOT takes title to certain creative works of its employees, thus avoiding the uncertainty of having a court apply the common law. • Trademarks. In the case of trademarks, the trademark identifies the provider of goods or services—typically the employer, not the employee. Even though the value of a trademark often lies in the marketplace goodwill developed by the employee’s efforts, the trademark is typically the employer’s IP. For example, a former state DOT employee going to work for a private employer would not be allowed to continue to provide goods and services using trade- marks that were used to identify the individual’s work for the state DOT, because that could create marketplace confusion that the private employer’s work is affiliated with or endorsed by the state DOT. 6.1.1.2 Policies and Royalty Revenue The common law of IP ownership often is modified by statute to confer rights to government agencies, especially as it pertains to employee rights to copyrights and patents for IP developed in the course of employment. For patentable inventions, it is not uncommon for state statutes to specify that the state government is entitled to own title to any invention developed by state employees in the performance of their jobs (101). Where such statutes exist, they reverse the common-law presumption that the state DOT retains only shop rights. In some of these states, although the state takes title, the employee has a statutory right to share in any revenue from the state’s commercial exploitation of the invention or creative work (102). In other states, although there is no statutory right to revenue sharing, it may be the policy

52 Management Guide to Intellectual Property for State Departments of Transportation of the state DOT to share revenue with the employee (103). Although it is not as authoritative as a statute, in the absence of a controlling statute, a state DOT policy covering ownership and revenue sharing from IP developed by employees can be effective to reduce uncertainty and ensure that similarly situated employees receive consistent treatment from the state DOT. Such revenue-sharing provisions certainly provide incentive for state DOT employees to be creative and inventive on the job, and to disclose potentially valuable IP. It is unclear, however, whether this model is more likely to result in a successful commercial product than the federal model, by which federal government employees often patent their employment-related inven- tions and enter into cooperative agreements to commercialize them (to the extent that there is no conflict of interest) (104). In the federal model, the employee may have greater incentive to invent and commercialize his or her invention, but the government employer might not receive any royalties. An ideal policy might give the state DOT the authority and flexibility, on a case-by-case basis, to decide whether to retain title for the state DOT or to transfer title to the employee (with a license retained by the state DOT). For example, one approach may be to presume that the state DOT owns title to the IP, but that an employee is entitled to petition or request the right to take title. Such petition could be heard by an IP management review group (preferably a board of decision-makers) within the state DOT or elsewhere in state government. In any such policy or procedure, the criteria for granting title to employees should be well-defined to reduce uncertainty and ensure consistent treatment of similarly situated employees. For example, if the invention is closely related to the state DOT’s mission, that factor may weigh heavily toward the state DOT retaining title. If the employee failed to disclose the invention or creation in a timely manner, that factor also may weigh heavily toward the state DOT retaining title. 6.1.1.3 Employment Agreements and Assignment Agreements It is common for employees of private companies to be required (as a condition of employment) to assign to the employer title to all IP developed in the course of employment. Such IP assign- ment agreements often are combined with nondisclosure agreements (preventing the employee from disclosing the employer’s trade secrets) and with covenants not to compete (preventing the employee from using certain IP or know-how acquired in the course of employment in com- petition with the employer). State law generally upholds IP assignment agreements, subject to certain limitations that vary from state to state. For example, some states restrict an employer’s ability to require its employees to make a present assignment of rights to IP yet to be developed in the course of employment (105). However, IP assignment agreements do not appear to be a widespread practice among state DOTs. In response to a survey conducted in the development of this Guide, only 15 percent of state DOTs acknowledged requiring employees to enter into an IP assignment agreement, whereas 85 percent responded that their state DOT has no such requirement. The very low rate of assignment agreements at these agencies (in comparison to private employers) may be attributable to a variety of factors. An assignment agreement may be unnecessary if a statute or state policy (such as an employee handbook) addresses IP ownership. The state DOT may not have the authority to require its employees to assign their IP (e.g., because of union agreements). Finally, a state DOT may have made a conscious decision that it has no intent to commercialize the IP of its employees, so it does not need to take title to it. 6.1.2 Considerations for the State DOT Ideally, a state DOT would have a documented approach (statute, regulation, or policy) for determining ownership, managing, and commercializing employee-developed IP. A standard

Understanding IP Management and Options 53 approach, preferably enforceable by law, reduces uncertainty and disputes over IP rights, but can also mean less flexibility for the state DOT to make decisions on a case-by-case basis. A recom- mended approach for a state DOT would provide the flexibility for the DOT to decide to take title, otherwise assist the employee in commercialization, or simply take a hands-off approach, depending on the circumstances and according to documented criteria. For a state DOT, the ideal approach will provide the highest value to the taxpaying public. At a minimum, it should provide that the state DOT retains rights to use the IP created by state DOT employees for state DOT purposes. Beyond that, an approach to handling employee-created IP should be tailored to the state DOT’s IP objectives and commercialization mandates. The ideas discussed in Chapter 3 and Chapter 4 of this Guide should be considered, along with the following factors specifically related to employee-developed IP. 6.1.2.1 Future Needs Typically, a paid-up, permanent, nonexclusive license to use the IP developed by employees (or to have the IP used on behalf of the state DOT) will satisfy most future needs of a state DOT to use the IP. Provided the state DOT obtains such a broad license, it typically will not adversely affect DOT operations to allow employees to obtain title to IP they develop. The primary consider- ation is whether the state DOT needs the right to exclude others from using the IP. For example, if the state DOT has the intention and authority to commercialize the IP, then the state DOT probably needs to keep ownership (and perhaps pay its employee a percentage of the royalties as compensation for the employee’s loss of registration rights). (See Chapter 5 for additional discussion about the right to exclude others from using IP.) 6.1.2.2 Types of IP The type of IP is an important factor to consider when deciding whether to grant state DOT employees title to IP that they develop. For example, a state DOT generally will not want to grant employees title to trademarks. If a mark is initially developed by an employee to identify prod- ucts and services of the state DOT, the potential for marketplace confusion exists if the employee (or the employee’s licensee) later uses the mark, or a similar trademark, to market commercial products and services. As discussed in Section 6.1.1, it is common for state DOTs to deny employees title to patentable inventions developed with state DOT resources (106). Patents may be the form of IP most likely to have commercial potential, and the state DOT may see patent royalties as a form of revenue. Even if the state DOT does not intend (or have the authority) to commercialize the patents, how- ever, the DOT or state legislature may prevent state DOT employees from taking title to patents simply to avoid the private commercial exploitation of public resources, effectively donating the IP to the public domain. It is less common for state DOTs to deny their employees a copyright in works created in the course of employment. Like the federal government, state DOTs might deny their employees a copyright in works that represent an official views or statements of the state DOT or works that the state DOT is obligated by statute to create (107). Furthermore, where the employee is tasked to produce work product intended to generate state DOT revenue, the DOT typically will retain title itself. For example, if the DOT wants to generate mass copies into the foreseeable future (such as with highway system maps) it typically will not allow its employee to register a copyright. However, for research papers, books, and so forth—especially those expected to have a limited distribution—it can be in the state DOT’s interest to allow its employee to register a copyright. This employee right can incentivize the employee to document the work of the state DOT, as well as to seek a wider audience for the work (as the employee attempts to commercially exploit the copyright). The end result

54 Management Guide to Intellectual Property for State Departments of Transportation would tend to be enhanced dissemination for the state DOT and enhanced credentials for the employee-author. Because of public records and open government laws, the development of true trade secrets by employees in the course of their state DOT employment is rare. If the employee develops sensitive information or knowledge (i.e., information or knowledge that is critical to the nation’s transpor- tation infrastructure), the employee typically is prohibited by law or regulation from disclosing it or otherwise personally exploiting the secret (108). On the other hand, there is typically no way to prevent the employee from “owning” the know-how gained in the course of employment. State laws typically favor allowing the employee to apply his or her trade (including skills developed working for the state DOT) after leaving employment. To avoid conflicts of interest, however, state statutes may restrict a state DOT employee’s ability to go to work for a private company that did business with the state DOT employee. Such legal restrictions on state DOT employees are analogous to nondisclosure agreements, covenants not to compete, and state unfair trade practices laws that allow private employers to protect their trade secrets. 6.1.2.3 Incentives to Employees Statutes or employment agreements requiring state DOT employees to surrender their work- related IP to the DOT can have the adverse effect of hindering IP development. State DOT employees who develop ideas in the course of employment that have commercial potential generally will have little incentive to fully develop those ideas if they know the DOT will take title to any such work or invention. The employee might even attempt to withhold the idea from the state DOT and pursue commercialization independently or decide not to disclose IP that could have potential high value. It is common for state statutes to require state employees to disclose registrable IP to the state employer and to assist the state in obtaining registration (109). However, these statutes typically are binding on the employee only after the employee’s idea has been reduced to practice or tangible media (given that it generally cannot be registered otherwise). Therefore, when formu- lating approaches to address IP developed by employees, state DOTs should consider incentives to employees for creating and disclosing potentially valuable ideas developed in the course of employment, as well as compensated time and resources to fully develop the ideas. The incentives may be incorporated into a state DOT’s existing internal R&D program, to which employees can submit proposals, with only those ideas that best fit the state DOT’s R&D objectives selected to receive state DOT resources for further development. Additional incentives might include bonuses for patents issued, a share of the revenues earned by licensing the IP, or a transferable license that would allow the employee to license the IP to a commercial interest to develop it, even while the state DOT retains title. Available incentives are, of course, limited by budget concerns and may need to be expressly authorized and funded by the state legislature. 6.1.3 Potential Approaches 6.1.3.1 Employee Assignment Agreements If the state DOT expects to manage employee-developed IP, assignment agreements can be invaluable. Even in states where state statutes or common law suggest that the state DOT takes title to IP developed by its employees, assignment agreements can reduce uncertainty and encourage the employee’s cooperation. 6.1.3.1.1 Legal Issues. State DOTs considering the use of assignment agreements should consult their legal counsel. Legal counsel can determine what IP rights the state DOT has in the absence of an assignment agreement (e.g., by statute) and help determine what additional rights may be

Understanding IP Management and Options 55 obtained by agreement. Legal counsel can also determine whether state courts have imposed any constraints on IP assignment agreements in other contexts (e.g., private employment). The state DOT’s legal counsel will determine what authority the state DOT has to require its employees to assign IP rights. Some state employees may have the right to take title to IP that they develop on the job. A statutory employee right may or may not prevent the state DOT from entering into a contract with the employee transferring the right to the state DOT. The enforceability of an IP assignment agreement will depend in large part on whether the state DOT is attempting to extract IP rights from its existing employees, or whether the IP assignment is a condition of new employment. If the employee is currently employed, a new IP assignment agreement might have to be supported by additional consideration (e.g., a bonus payment) to be enforceable. Union contracts may impose additional restrictions against IP assignment agreements in some states. 6.1.3.1.2 Sample Language. In crafting a new employee assignment agreement, it is gener- ally advisable to closely follow forms that have been upheld as enforceable, particularly in the courts of the state where the DOT exists. The sample language shown in Figure 7 (combining an IP assignment with nondisclosure and noncompetition agreements) is commonly used by federal government laboratories (110). Ideally, the employee will be required to sign or otherwise acknowledge the agreement upon beginning employment. Later, once the employee has developed IP that the state DOT wishes to register, the state DOT may want the employee to execute additional assignment agreements, suitable for recordation with the Copyright Office or USPTO, that specifically identify the IP to which title is assigned. Therefore, the state DOT may wish to include language in the new employee assignment agreement obligating the employee to “execute any instruments necessary to give full effect to this agreement.” By accepting employment at [State DOT] you acknowledge that: • All intellectual property created as a result of your employment is owned by [State DOT]. • All rights in the intellectual property created as a result of your employment to [State DOT] are assigned to [State DOT]. • You are obligated to do the following: 1. Inform [State DOT] prior to the iling of any patent application in which you are listed as an inventor during your employment and for a year afterwards. 2. Cooperate with [State DOT] in obtaining the rights to intellectual property created as a result of your employment. 3. Keep accurate documentation of your work, including up-to-date laboratory notebooks. You are prohibited from: • Disclosing [State DOT]’s proprietary information. • Entering into agreements which compromise [State DOT]’s rights to intellectual property created as a result of your employment. You are entitled to: • A share of the royalties gained from commercializing intellectual property created as a result of your employment. • Maintain the rights to any intellectual property which is unrelated to your employment and created solely on your own time without the use of any [State DOT] resources. Figure 7. Sample language combining IP assignment with nondisclosure and noncompetition agreements (111).

56 Management Guide to Intellectual Property for State Departments of Transportation 6.1.3.2 Employee Revenue Sharing Where the state DOT takes title to IP developed by its employee, the employee generally should receive something in return. As discussed in Section 6.1.2, this helps ensure that the assignment is enforceable and encourages employees to disclose inventions or creations. Private employers often pay employees a fixed bonus for every patent that the employee receives. If a state DOT intends to retain title and perhaps market the IP itself, a practical approach would be to pay the employee a fixed percentage of the royalties earned (after registration expenses, considering that registration expenses may exceed the eventual royalties, especially in the case of patents). The percentage of royalties earned by state DOT employees (after registration expenses) generally ranges from 20 percent to 50 percent with the remainder paid to the state DOT or another state agency responsible for technology transfer (112, 113, 114, 115). If state DOTs allow employees the right to retain ownership to IP developed on the job, they may want to institute procedures that allow the state DOT some oversight of the commercialization process. Oversight helps protect the DOT against employee conflicts of interest. For example, if a federal government employee personally profits from inventions in the course of his or her employment, the employee generally is allowed to do so only in the context of a Cooperative Research and Development Agreement (CRADA) between the federal employer and one or more outside parties, which may include commercial interests, nonprofit organizations, or even state DOTs (116, 117). A CRADA is not a funding agreement, so traditional rules about owner- ship of IP developed with federal funding do not apply. Under the CRADA, all terms are open to negotiation, including the percentage of royalties to be assigned to the employee-inventor and the government employer. However, the entire CRADA process is subject to approval by the government employer (118). This type of program may be ideal when state DOTs do not want to be directly involved in the commercialization process. Because it involves employee profits and agency discretion, however, the state legislature typically would have to formally authorize the state DOT to institute such a program. 6.2 State DOT Contractors Contractors often generate IP in the performance of their contracts for state DOTs. Especially in the context of research and development contracts, state DOTs generally will want to retain a license to use this IP. However, state DOTs may follow dramatically different approaches regard- ing the rights that the contractor is allowed to take. This section discusses considerations for state DOTs developing policies and strategies concerning ownership, protection, and management of contractor-generated IP. State DOTs enter into a wide variety of funding agreements with outside entities—both commercial firms and nonprofit entities. Although some contracts are more likely than others to result in IP interests, the potential always exists. The state DOT’s flexibility to allocate owner- ship rights to IP developed by a contractor in any given situation often is limited by the legal framework governing a particular type of contract, as well as the expectations of the parties. Factors that can influence the IP rights taken by the state DOT and its contractors include types of contractors, the definitions of IP ownership interests, state statutes, and other considerations. 6.2.1 Types of Contractors A wide variety of outside entities enter into contracts to receive funding from state DOTs. All of these entities are technically state DOT contractors, but the DOT’s approach with respect to IP developed by the contractor will depend in part upon where the contractor falls on the following spectrum.

Understanding IP Management and Options 57 6.2.1.1 Service Contracts State DOTs regularly contract for standard services (e.g., janitorial services) that do not lend themselves to IP generation. On the other hand, it may be that the state DOT has the most leverage (and legal authority) to assert rights to any IP developed by the contractor while performing work for the DOT in these situations. To the extent allowed by the state’s procurement law, the standard terms and conditions of such services contracts should provide that the state DOT takes title to such IP. Such a provision is rarely invoked due to the non-innovative nature of this work. Depending on the state, such a boilerplate provision may even be unenforceable if challenged by the contractor (due to the state DOT’s superior bargaining power). But in the absence of a judicial determination otherwise, it creates a presumption that the state DOT takes title to innovations that it pays for. 6.2.1.2 Contracts with Suppliers Typically, supply contracts must conform to standard specifications (e.g., aggregate gradations or asphalt mix criteria), leaving little room for innovation. Furthermore, applicable procurement regulations may restrict the state DOT’s ability to contract for nonstandard materials or supplies in which some proprietary interest may exist. As with standard services, in standard supply situ- ations it is unlikely that IP will be developed in the performance of the state DOT contract. The state DOT is more likely to be concerned with ensuring that the supplier is not supplying products that infringe against a third party’s IP interest, and the supply contract may require the supplier to provide a certification to that effect (and perhaps to indemnify the state DOT against any claim by a third-party rights-holder). In certain specialized situations, however, where the state DOT has a demonstrated need for a product that is innovative or experimental, IP considerations will come into play. In those cases, the state DOT should consider treating the procurement as an R&D contract (described in more detail in Section 6.2.1.5). 6.2.1.3 Construction Contracts Construction contractors typically are required to construct facilities strictly according to designs and specifications prepared by design professionals. Therefore, there usually is little opportunity for innovation and invention by construction contractors. More likely, the state DOT contract will require the construction contractor to certify that it has not infringed the IP of any third party in the course of construction and to indemnify the DOT against any claim made by any IP rights-holder (119). For standard construction services, the state DOT typically has the leverage to demand title to any IP developed by the contractor in the course of construction (via a standard provision in the contract terms and conditions), although it is rare that such a provision would be invoked. However, with the emergence of design-build project delivery methods, the line between a construction contractor and design professional has blurred; in a design-build situation, additional considerations come into play. 6.2.1.4 Contracts with Design Professionals and Professional Consultants Design professionals (e.g., architects) and professional consultants (e.g., engineers) are increas- ingly cognizant and protective of their IP that is delivered under contract (120). These contractors tend to have significant bargaining power, and statutes infrequently dictate who takes ownership to IP developed by design professionals and professional consultants under state government contract. State DOTs may have to negotiate IP rights most frequently with this type of contractor. At minimum, the design professional typically expects to be able to register a copyright in any plans or drawings prepared under a state DOT contract. Historically, this practice did not create concerns for the state DOT because the copyright only extended to the graphical representation

58 Management Guide to Intellectual Property for State Departments of Transportation of the design, not the utilitarian aspects of the architectural work. However, with passage of the Architectural Work Copyright Protection Act in 1990, a copyright in an architectural work can prevent others from using a copyrighted design to construct a similar structure (121). Therefore, state DOTs should negotiate, to the extent allowed by law, for a license to use the design delivered on one state DOT contract in the performance of future contracts regardless of whether the same design professional is hired for the future contract. Aside from the right to use design deliverables in the future, architect-engineer services do not typically present an IP concern for the state DOT. For example, under the federal acquisition regulations (FARs), federal agencies do not address patent rights in architect-engineer contracts for “standard types of construction” (122)—those where the distinctive features are expected to involve only variations in size, shape, or capacity of conventional structures, or where the anticipated innovations are expected to be purely aesthetic or artistic (as opposed to functionally significant). If the federal agency is contracting with the design professional to design “novel structures, machines, products, materials, processes, or equipment (including construction equipment),” however, or if the agency is contracting with an engineer or other professional consultant to perform test and evaluation studies, the contract is treated like an R&D contract. State DOT IP policies should distinguish between standard architect-engineer services and R&D contracts with design professionals. 6.2.1.5 R&D Contracts If a contractor is hired specifically to perform R&D or other experimental work, the strong potential exists that IP interests with commercial viability could be generated under the con- tract. Recall that when employees are hired specifically to perform inventive work, patentable IP developed in the course of the employment will likely belong to the employer. In the case of government contractors, however, the reverse is often true. As described in Section 6.2.2, in federal contracts for experimental, developmental, or research work, the R&D contractor (rather than the contracting agency) typically is entitled to obtain a patent in inventions developed under government contract. State DOT contracts may deviate from the federal model—some state statutes and policies will provide that the state takes title to inventions made with state funds. Nonetheless, changing contractor expectations resulting from the federal model, as well as state initiatives to promote commercialization of state-funded inventions, have resulted in a trend in favor of granting R&D contractors the right to inventions made with state DOT funds. 6.2.1.6 R&D Contracts with Universities Universities are most likely to contract with state DOTs as R&D contractors, often as research grant recipients. Even if the state DOT’s standard approach is not to grant its R&D contractor title to IP developed on a state DOT contract, this standard approach may not apply to uni- versities. Universities often demand title to IP that they develop under government contract, and state statutes often provide that state universities (or their employees) are entitled to such rights (123). 6.2.2 What Defines the IP Ownership Interests? 6.2.2.1 Funding Source Before 1980 it was generally presumed that the government took title to IP that was developed with government funds (124). In that year, however, Congress passed the Bayh-Dole Act, which granted to small businesses, nonprofit organizations, and universities the right to obtain patents in most inventions made with federal funding (125). In 1987, by executive order, these patent

Understanding IP Management and Options 59 rights were formally extended to all federal contractors, regardless of size or for-profit status (126). If the federal contractor elects to take title to the invention, the federal government retains a paid-up, nonexclusive license to use the invention. If the federal contractor does not elect to take title, or fails to take appropriate steps to commercialize the invention, the federal government can reclaim title to the invention using march-in rights (127). Although the Bayh-Dole Act does not apply to copyrightable material, a similar model applies to creative works developed under federal contract (at least with respect to the contractor’s rights). The Copyright Act expressly prohibited copyright protection for “any work of the United States Government,” including works of federal employees created in the course of their employment (128). The legislative history indicates, however, that Congress intentionally decided not to expressly prohibit federal contractors from taking a copyright for works prepared with federal funding, as long as the contractors were not simply used as an alternative to having federal employees prepare the work (129). The FAR provides that the contractor can obtain a copyright except in certain situations, such as when the contractor’s work product represents “the official views of the agency” (130). As a result, contractors generally have been able to register a copyright in creative works (reports, software, and so forth) prepared under government contract, with the government retaining an unlimited license to use and reproduce the works. Although the federal model allows federal contractors to retain IP rights in works funded by the federal government, this is not necessarily true for works developed under contract to state DOTs. State DOTs and their contractors should be aware that the laws and policies concerning contractor rights vary widely from state to state; however, the Bayh-Dole model—granting IP rights to government contractors—has become widely accepted and adopted by government bodies both within the United States and internationally (131). In the absence of any specific state law or policy, the Bayh-Dole model may be persuasive authority suggesting a presumption in favor of contractor rights to title in IP (with a license retained by the government). If the state DOT contracts to spend federal funds, the Bayh-Dole model probably applies (as illustrated by the guardrail end terminal case study included in Chapter 9 of this Guide). In other words, when a state DOT project is funded in part by the federal government, the state DOT contractor probably has the right to take title to the IP developed by the contractor for the state DOT, and the federal government has a nonexclusive, nontransferable license to use the IP (132). At least with respect to patentable inventions, this generally rules out the state DOT’s right to take title or even to take advantage of the federal government’s license. The state DOT’s only option is to bargain with its contractor for a license of its own. With respect to creative works, given that no federal statute specifically prohibits or grants contractors the right to copyright federally funded works, either the contractor or the state DOT may be able to register a copyright in such works (133). Whether the copyright belongs to the state DOT or the contractor will depend on state law, policy, or contract language. Even if the contractor has the right to certain IP developed under state DOT contract, its IP interests generally will be limited to those that can be registered. Contractors generally are not allowed to protect state DOT–funded IP as trade secrets, in part because public records laws may make it difficult to keep the technology secret. However, some state statutes now allow state agencies to have trade secrets, so it is not out of the realm of possibility that contractors could develop trade secrets in the performance of state DOT contracts (134). 6.2.2.2 State Statutes and Policies The Bayh-Dole framework applies to state DOT contracts that involve federal funding. State legal frameworks governing ownership rights in other funding situations are wide ranging. Although few state statutes clearly address who is entitled to own IP developed by state DOT

60 Management Guide to Intellectual Property for State Departments of Transportation contractors with state DOT funding, those that do are likely to provide that any IP developed through state DOT contracts becomes state property, not the property of the contractor (135). If there is a discernable trend at the state level, it is in the direction toward a Bayh-Dole type approach. The California Council on Science and Technology Intellectual Property Study Group and the New York State Science and Technology Law Center have proposed policies for their respective states that are similar to the Bayh-Dole Act but would retain stronger rights for the state government (136). Under these proposed approaches, the state DOT would retain an unlimited license to use patented technology developed by the contractor as well as march-in rights should the technology not be effectively commercialized by the contractor, and the state DOT could also receive a portion of the revenues from any royalty that the contractor charges non-state actors for the use of the IP. The existence of a state statute or standard policy governing IP developed by state contrac- tors is generally helpful in clarifying the relationships and rights among the contracting parties. Although an enforceable, standardized approach could reduce the flexibility of the state DOT to negotiate IP rights tailored to a given situation, it could also confer the benefit of ensuring that all state DOT contractors, regardless of bargaining power, receive consistent treatment in similar circumstances with respect to rights in IP that they develop. A statute or standard policy also helps reduce the likelihood of misunderstandings, false expectations, and disputes as to who owns the IP developed under state DOT contracts. 6.2.2.3 Contract Language In the absence of a controlling statute, ownership rights to IP developed by state DOT contractors will be determined by the contract language and by the state common law that governs inter- pretation of the contract. To reduce uncertainty and the likelihood of disputes, state DOT contracts should clearly state who will take ownership to IP developed by the contractor in the course of the contract, as well as what interest (e.g., license) will be taken by the state DOT. Even in states that do not have statutes granting title to the state, it is common for standard state contract terms to provide that the state takes title to all IP developed under state contracts (137). Depending on the type of contract and the circumstances surrounding the contract, the state DOT may or may not have the authority to negotiate modifications to these standard terms. Ideally, the state DOT’s IP contract provisions would be standardized, by regulation (like the FAR) or otherwise, to ensure consistent treatment of similarly situated contractors. California, for example, has adopted a “Rights in Data” clause similar to that in the FAR, which provides that IP developed by the contractor over the course of the contract is the “exclusive property” of the contractor, with the state government obtaining a paid-up, nonexclusive, and irrevocable “government purpose” license to use that IP. Nonetheless, even the California procurement regulations provide that the standard “Rights in Data” clause can be modified in the contract statement of work (138). In the case of creative works, it is not presumed that the state DOT takes ownership to the copy- right, unless the contract unequivocally states that it is a work made for hire (139). Standard terms in contracts with state DOTs often go further, expressly providing that contractors are to grant the state DOT complete and unrestricted rights in all reports, data, or other work product (140). In some cases, the contractor may bring pre-existing proprietary IP to the state DOT project. Even if a statute exists granting the state DOT a license to use any IP developed under contract with the state DOT, that statute typically will not address the pre-existing IP. A state DOT could discover, for example, that it does not have a paid-up license to use a new technology devel- oped under a state DOT contract because the DOT only funded an improvement to pre-existing

Understanding IP Management and Options 61 technology of its contractor, which cannot realistically be practiced without a license to also use the pre-existing technology. State DOTs are advised to proactively consider whether they want to require their contractors to license pre-existing technology to the state DOT, at least when used in conjunction with the pro- posed improvement being funded by the state DOT. State DOTs also may benefit by considering the adoption of standard procurement regulations similar to the FAR, which require a contractor to make upfront disclosures regarding any proprietary IP that will be used in performance of the state DOT contract. This approach ensures that all contractors receive consistent treatment, and it leaves fewer IP rights subject to negotiation. If the state DOT has the authority or mandate to encourage commercialization of IP devel- oped with state DOT funding, the DOT policy or procurement regulations could be crafted to give the DOT flexibility to negotiate IP rights in situations conducive to commercialization. For example, the federal government is authorized to enter into CRADAs with state DOTs “and their agents to conduct joint transportation research and technology efforts” (141). CRADAs are not subject to Bayh-Dole, so under this framework, the state DOTs or their contractors could negotiate for exclusive title to IP developed partially with federal resources. Likewise, the scope of the license taken (by the federal government, the state DOT, or the contractor) is negotiable. 6.2.3 Considerations for the State DOT Except for federally funded R&D, no general rule that controls the distribution of IP rights between a state DOT and its contractors is applicable to all state DOTs. In states that do have clear rules, the framework is generally preliminary. As state legislatures and state DOTs develop statutes, regulations, and policies covering ownership of IP developed by contractors, they should consider the following factors. 6.2.3.1 Is the State DOT Statutorily Excluded from Ownership? 6.2.3.1.1 State Statutes. Only a few states expressly authorize their DOTs to take ownership of IP (142). In some states, state agencies other than DOTs are expressly authorized to own IP and engage in commercialization efforts. This situation could be taken to imply that the state DOT does not have that authority. Typically, if the state has a technology transfer agency of some sort that is authorized to own IP, that agency would act as a surrogate for the state DOT with respect to commercializing IP developed under a state DOT contract (143). 6.2.3.1.2 Federal Statutes. The U.S. Constitution and the U.S. Patent Act (35 U.S.C. §§ 1–376) generally grant patent rights to the inventor, not to the funding agency. Historically, this could have prevented a state DOT from obtaining a patent if the inventor (contractor or employee) refused to cooperate with the application. However, under the AIA, a government agency or a business entity (such as the inventor’s employer) can obtain the patent as long as the inventor “is under an obligation to assign the invention” (144). Therefore, the question will be whether the contractor is obligated (by statute or contract) to assign the patent to the state DOT, and possibly whether the contractor’s employee is obligated (by the terms of the employment agreement) to assign any invention to the contractor. If these obligations to assign the patent are not in place, then the state DOT may be unable to obtain a patent even under the AIA. For federally funded contracts, the state DOT is generally required to allow its contractor to take title to IP developed in the course of the contract. Furthermore, the federal government takes a nontransferable license to the IP. Therefore, the state DOT has no statutory right to title or license and should negotiate its own license. (For an example, see the guardrail end terminal case study included in Chapter 9 of this Guide).

62 Management Guide to Intellectual Property for State Departments of Transportation 6.2.3.2 Is There a Need to Control Future Use of the IP? The state DOT’s primary concern in crafting an IP policy should be to maximize value to the taxpaying public. Certainly, this means that the state DOT should retain a license to use any IP developed in the course of a DOT contract. This concern may also obligate the state DOT to maximize use of its IP (i.e., to seek out opportunities to use licenses earned through prior state DOT contracts). Whether the state DOT needs additional rights depends largely on the state DOT’s authority and mandate to commercialize IP developed under state DOT contract. In crafting a policy regarding IP developed by state DOT contractors, the main factors to consider are (1) the need to ensure that the public can perpetually benefit from the IP, (2) the need to ensure that other state DOTs can benefit from the IP, and (3) the need to ensure that the IP is commercially developed. 6.2.3.2.1 Ensure the Benefit to the Public. The paid-up, unlimited license taken by the federal government under Bayh-Dole allows the federal government to perpetually use the federally funded IP, or to direct others to use the IP on behalf of the federal government. For IP that will be developed in part through state DOT funding, the state DOT will most likely have limited rights, the details of which can be worked out in the contract. If a state DOT elects not to retain title to IP developed in part or in whole through state DOT funding, the state DOT should at least retain a paid-up, unlimited license so that it will not have to pay royalties on the IP to the same contractor in the future. Taking this step protects the interests of the taxpaying public. If the state DOT wants to dedicate the IP developed by its contractors to the public domain, then it needs to retain greater rights (i.e., title). Although this arrangement would appear to be in the best interests of the taxpaying public, it could have the adverse effect of discouraging contractors from performing work for state DOTs, and it also could discourage commercialization (because the contractor is unable to take title to the IP). Clearly, there are competing public interests at stake, and a given state DOT or legislature could determine that the public interest dictates one approach or the other. 6.2.3.2.2 Ensure Benefits to Other State DOTs. State statutes and policies modeled on Bayh-Dole (e.g., regarding a nontransferable license) might provide that only the state DOT that funded the work is entitled to use the paid-up license, and other state DOTs have to pay royalties to the contractor. In drafting state DOT statutes and policies, decision-makers should consider whether they want other states to benefit from work funded by the state DOT. For example, in the guardrail end terminal case study included in Chapter 9, the contractor granted a license to all state DOTs. Alternatively, a state DOT policy could provide that the funding state DOT takes a transferable government-purpose license, allowing the funding DOT to grant a license to other DOTs on a case-by-case basis (e.g., to state DOTs entering into a cooperative pooling agreement). If the state DOT wants other DOTs to benefit from IP developed by its contractors, it probably should not take title. State DOTs may be prohibited by law from “gifting” free licenses to other state DOTs to use IP to which the state owns the title (145). Therefore, establishing the transferable license rights in the contract is more likely to meet the objective of having the IP widely adopted by other state DOTs. 6.2.3.2.3 Ensure that the IP Is Commercially Developed. Another significant factor in a state DOT’s decision to take ownership (title) or to take a license to IP developed by its contractor is whether the DOT expects to control the commercialization process. If the state DOT expects to direct the commercialization process, it typically will need to retain ownership, or at least march-in rights.

Understanding IP Management and Options 63 The taxpaying public will often expect the state DOT to retain ownership to IP that it funds, or even to devote that IP to the public domain. However, the public at large can benefit from IP developed by state DOT contractors even if public or other private actors have to pay for future non-DOT uses of the IP. For example, technological innovations developed under state DOT contracts and marketed by the contractors may result in increased economic activity and increased quality of goods in the commercial marketplace. With respect to patentable inventions, if state DOTs have the right to title, they will have the flexibility to consider whether a given technology would benefit from being patented and, if so, who should hold the patent to best promote commercial development. In some cases, the exis- tence of a patent can hinder commercial development, because the patent owner has a monopoly on the base technology and its competitors may be unwilling to invest in improving the technology given the license fees that would be owed to the patent owner. In other cases, private interests may be unwilling to invest in commercialization of the product unless a patent exists, giving them some assurance that there will be limits to the number of their marketplace competitors. If a patent is required to ensure the technology is commercially developed, state DOTs should consider whether widespread licensing would hinder the technology’s development. If state DOTs are the only realistic customer for a particular technology and state DOTs will all receive a paid-up license to use it, then the inventor will have little incentive to develop the technology. If a state DOT wants to ensure the commercial development of IP developed on its behalf, it will at minimum want to retain some march-in rights similar to those the federal government retains under Bayh-Dole. March-in rights allow the state DOT to proceed with commercialization if the contractor has not taken steps to do so in a reasonable time, or allow the state DOT to license or transfer title to another contractor if necessary. For example, if a state statute or state DOT policy allows a contractor to patent an invention but the contractor is not taking the necessary steps to do so, then the march-in rights stipulated in the contract could allow the state DOT to proceed with registration. The march-in rights should be expressly stated in the state DOT contract, because a patent is a creation of federal law and, lacking such an express statement, rights granted to the state DOT by a state statute could be pre-empted by federal law in certain situations. If a contractor has already obtained a patent, but is not effectively commercializing the product, then the state DOT would prefer to have a contract remedy to retrieve title to the patent (because the patent registration would presumptively vest title in the contractor). 6.2.4 Potential Approaches 6.2.4.1 Model Statute Language The model statutory language presented in Figure 8 is adapted from legislation that was intro- duced in New York in 2007 but has not yet been enacted into law (146). The proposed statute would allow each state agency, such as a state DOT, to craft its own IP management policy conforming to certain principles. Generally speaking, the proposal would reserve to the state much stronger rights to the IP of its contractors than the federal government takes under Bayh-Dole. The proposal also reflects a desire for the state to be actively involved in commercialization of the IP and to obtain revenue from the IP where possible, which is very different from the federal model. 6.2.4.2 Model Contract Language As described herein, federal government R&D contracts typically provide that the contractor may retain title to IP developed under government contract, with the federal government retain- ing a license to use the IP. However, federal agencies may elect to retain title “in exceptional circumstances” when they determine that doing so would better achieve the commercialization

64 Management Guide to Intellectual Property for State Departments of Transportation and technology transfer objectives of Bayh-Dole. In that case, federal agencies are authorized by the FAR to use a different contract clause that confers title to the government, while providing a mechanism for the contractor to request title upon presenting the government a commercial- ization plan in writing (147). For state DOTs seeking more control over the commercialization process, this latter approach may be preferable to merely retaining a paid-up license. The model contract language shown in Figure 9 is based on the FAR clause for patent ownership by the funding agency. The actual contract language adopted by any state DOT should be developed in consultation with legal counsel, to ensure that it is enforceable under state law and that it is consistent with procurement regulations applicable to state DOTs. 6.3 Third-Party Owners State DOTs often are in the position of wanting or needing to use IP that the state DOT has no existing right to use. This section discusses considerations for the state DOT in deciding whether to acquire rights to use IP owned by a third party. For the purposes of this discussion, a third party is defined as a party that has developed or acquired title to IP (or possibly an exclusive license) outside of a contractual relationship with a state DOT (i.e., the party is not a state DOT employee or contractor. The primary reason for registering IP (or for protecting it as a trade secret) is to maintain control over the exploitation of the IP in the marketplace. Given that spending by federal, state, and local governments has risen to approach 40 percent of the nation’s gross domestic product in recent years, IP rights-holders typically prize commercial relationships with their govern- ment customers. Likewise, government agencies like state DOTs can benefit from using the IP of third-party commercial actors, because doing so often provides access to the best, state-of-the-art means for accomplishing the state DOT’s work. The key for the state DOT in such situations is to determine under what terms it will be in the best interest of the DOT (and the taxpaying public) to acquire the right to use the IP. Any state agency policy governing the management of intellectual property resulting from research conducted in state facilities, by state employees, or with state funds shall conform to the following principles: A. The state shall retain a nonexclusive, royalty-free license to use the intellectual property for noncommercial purposes; B. If a state agency or its contracting partner does not pursue commercialization or patent rights within reasonable time limits, the state must be able to take title to the invention; C. When intellectual property is not dedicated to the public domain, good faith efforts in demonstrable outreach, such as active technology transfer offices and outreach to business associations including venture capital networks should be made to commercialize the technology within the state; D. If intellectual property is sold or licensed to private businesses, and a sufficient revenue stream is generated, the state shall receive a return on its investment and, when intellectual property is sold or licensed to private businesses not resident within the state, the state shall obtain a higher return on its investment than it would if the product resulting from the intellectual property were commercialized within the state; and E. When research is conducted directly by a state agency, the individual whose research leads to the discovery of a patentable invention should share in any proceeds resulting from the sale or license of the invention. Source: N.Y. Assembly Bill 8787, 2007–08 Session. Figure 8. Model statutory language.

Understanding IP Management and Options 65 Figure 9. Model contract language for patent ownership by funding agency (based on FAR clause). (a) Ownership (1) Assignment to [State DOT]. The Contractor shall assign to [State DOT] title throughout the world to each subject invention, except to the extent that rights are retained under paragraph (a) (2) of this clause. Subject invention means any invention of the Contractor made in the performance of work under this contract. (2) Greater rights determinations. The Contractor, or an employee-inventor after consul- tation with the Contractor, may request greater rights in a subject invention. The request for greater rights must be submitted to [State DOT] at the time of the first disclosure of the subject invention as required under paragraph (b)(2) of this clause, or not later than six months thereafter, unless a longer period is authorized in writing by [State DOT] for good cause shown in writing by the Contractor. Each determination of greater rights under this contract normally shall be subject to paragraph (b) of this clause, and to the reservations and conditions deemed to be appropriate by [State DOT]. (b) Minimum rights acquired by [State DOT]. (1) Regarding each subject invention to which the Contractor retains ownership, the Contractor agrees as follows: (i) [State DOT] will have a nonexclusive, nontransferable, irrevocable, paid-up license to practice, or have practiced for or on its behalf, the subject invention throughout the world. (ii) [State DOT] has the right to require the Contractor to license the subject invention upon a finding that such requirement would better promote State DOT policies and objectives. (iii) Upon request, the Contractor shall submit periodic reports no more frequently than annually on the utilization, or efforts to obtain utilization, of a subject invention by the Contractor or its licensees or assignees.The reports shall include information regarding the status of development, date of first commercial sale or use, gross royalties received by the Contractor, and any other data and information as [State DOT] may reasonably specify. To the extent data or information supplied under this section is considered by the Contractor, or its licensees, or assignees to be privileged and confidential and is so marked, [State DOT], to the extent permitted by law, will not disclose such information to persons outside the Government. (iv) When licensing a subject invention, the Contractor shall ensure that no royalties are charged on acquisitions involving [State DOT] funds. (v) When transferring rights in a subject invention, the Contractor shall provide for [State DOT]’s rights set forth in paragraphs (b) (1) (i) through (b) (1) (IV) of this clause. (2) The Contractor shall disclose in writing each subject invention to [State DOT] within two months after the inventor discloses it in writing to Contractor personnel responsible for patent matters or, if earlier, within six months after the Contractor becomes aware that a subject invention has been made, but in any event before any on sale (i.e., sale or offer for sale), public use, or publication of the subject invention known to the Contractor. The disclo- sure shall identify the contract under which the subject invention was made and the inventor(s). It shall be sufficiently complete in technical detail to convey a clear understanding of the subject invention. The disclosure shall also identify any publication, on sale, or public use of the subject invention and whether a manuscript describing the subject invention has been submitted for publication and, if so, whether it has been accepted for publication. In addition, after disclosure to the agency, the Contractor shall promptly notify [State DOT] of the acceptance of any manuscript describing the subject invention for publication and any on sale or public use.

66 Management Guide to Intellectual Property for State Departments of Transportation 6.3.1 Benefits and Considerations for State DOTs Using Third-Party IP In a number of scenarios, state DOTs may consider acquiring the right to use third-party IP. State DOT employees or managers may simply become aware of commercial or proprietary products or services for which the state DOT might have a general use, without devoting the IP to any specific application. Research for solutions to specific state DOT needs may identify one or more providers of proprietary products or services. In response to a solicitation, the state DOT may receive a bid from a potential contractor to provide a proprietary product or service (perhaps as a proposed alternative to bid specifications). This section addresses factors that may affect state DOTs’ decisions when considering the use of third-party IP. 6.3.1.1 Does the State DOT Need to Use the IP? A state DOT should consider its options—including the option to “do nothing”—before deciding to use the proprietary IP of a third party. Questions to ask include: • What would be the impact on the state DOT of not using the proprietary IP? • Could the state DOT meet its objectives using its standard, nonproprietary methods or by using other IP to which it already has rights? • What outcomes would be expected with and without using the third-party IP? Making such questions a part of the decision-making process when a state DOT considers using third-party IP may help clarify whether doing so is necessary or if it will be beneficial. If it becomes clear that third-party IP is needed, the state DOT should consider more than one third-party provider. A state’s competitive bidding laws often will require the state DOT to seek out lower-priced alternatives, which may or may not involve proprietary IP. Furthermore, if federal funds are involved, there will be restrictions against the state DOT using the federal funds to pay “for any premium or royalty on any patented or proprietary material, specification, or process specifically set forth in the plans and specifications for a project” (148). (For an example of this situation, see the spray paver case study in Chapter 9 of this Guide.) That said, the federal govern- ment can reimburse the state DOT for any such premium or royalty in the following situations: • Where it was obtained as a result of competitive bidding with “equally suitable unpatented items.” • Where the state DOT certifies that the IP “is essential for synchronization with existing highway facilities.” • Where the state DOT certifies “that no equally suitable alternate exists.” • Where the state DOT uses the IP for research or experimental purposes (149). Working through this list of exceptions forces the state DOT to consider alternatives to the proprietary IP. These alternatives may be less functional but still suitable for the state DOT’s needs. It will generally be possible to draft bid specifications broadly enough to encompass the third-party IP as well as functionally similar alternatives, without formally specifying any specific proprietary product or service. Drafting specifications broadly enough to cover multiple products or services often has the effect of reducing the premium or royalty price for the proprietary IP, as the third-party rights-holder will be forced to compete for the state DOT’s business. 6.3.1.2 Is It Cost-Effective to Use the IP? The functional advantages of using third-party proprietary IP typically are offset to varying degrees by the additional cost (the premium or royalty). For example, public domain software is generally cheaper but has less functionality than proprietary software algorithms that come with an expensive license. The competitive bidding process described above will help clarify the cost-benefit analysis for proprietary IP in the context of a given solicitation. In evaluating

Understanding IP Management and Options 67 the alternatives, however, state DOTs also need to consider the long-term, life-cycle costs of contracting for third-party proprietary IP. This analysis will account for the scope of the license being acquired. Questions to consider might include: • If the state DOT incorporates proprietary technology into a project, will the third-party rights-holder have a monopoly on future maintenance contracts (if other contractors do not have the proper license or know-how to maintain the proprietary technology)? • If the state DOT acquires a license to use proprietary software, will compatible alternatives be available in the future that allow the state DOT to continue accessing work initially generated using the proprietary software? • What are the renewal terms likely to be once the initial license expires (or will the proprietary IP become public domain by that time)? • Is the license to be acquired broad enough to be used for other state DOT work, resulting in potential cost savings recognized beyond a single procurement? 6.3.1.3 Does the State DOT Need to Hire the IP Owner to Perform the Contract? State DOTs will encounter a wide variety of commercialization models used by third-party IP owners. At one extreme, they may encounter nonpracticing entities who acquire title to IP (typically patents) and merely charge royalties or license fees for use of the IP by others. At the other extreme, the IP rights-holder (or its exclusive licensee) may refuse to allow the IP to be practiced by anyone but itself, in order to reduce competition and preserve monopoly prices. The latter is almost always the commercialization model followed when trade secrets are involved. Both of these extreme commercialization models create concerns for state DOTs in light of competitive bidding requirements and restrictions against use of proprietary IP. However, once a state DOT has determined that there is no suitable alternative to acquiring certain proprietary IP, the focus shifts from considering alternatives to minimizing the monopoly costs associated with the proprietary IP. The state DOT will want to determine the cost of obtaining the IP (or a license to use the IP) from the third-party rights-holder. The rights-holder may offer a government-purpose license at more favorable rates and terms than its standard commercial license. If the federal government is unable to negotiate a license agreement with an IP rights-holder, the federal government can “authorize and consent” to another contractor’s use of the proprietary IP on its behalf (150). Both the contractor and the federal government are then immune from an infringement lawsuit by the rights-holder. In these situations, however, the federal government is generally required to pay a “reasonable” royalty for using IP that was not developed using federal funds. The value of the royalty in a given situation is determined by the U.S. Court of Federal Claims, and it is often much less than the IP owner would ordinarily charge for commercial use of the IP (151). Unlike the federal government, state DOTs do not have authorization-and-consent authority. Although the state DOT is immune from suit in federal court for IP infringement of patents or copyrights, its contractors are not. Also, the state DOT could be liable to a claim to compensation by the rights-holder for takings (a government entity’s taking of private property for public use) or even for misappropriation of the third party’s IP under state law (152). Generally, then, unlike the federal government, the state DOT will have to negotiate a license with the rights-holder in order to use the IP. Ideally, the state DOT should separate the license acquisition process from procurement of goods and services so that the state DOT’s exposure to monopoly costs will be limited to the license fee negotiated with the IP rights-holder. Further, the state DOT can realize efficiencies (e.g., by negotiating a license that covers multiple projects). After a state DOT has negotiated a

68 Management Guide to Intellectual Property for State Departments of Transportation license from the rights-holder allowing the IP to be used on behalf of the state DOT, the DOT could enter into a competitive bidding process with multiple contractors (possibly including the licensor) to provide the goods or services covered by the license. This two-step process intro- duces a measure of competition that may satisfy a state’s competitive procurement requirements even though proprietary IP is being used. Although this two-step procurement process may be available for federally registered IP, it will typically not be available if the IP is being protected as a trade secret or corporate know-how. A third-party rights-holder may be willing to license its patented or copyrighted IP to be used by another contractor in the performance of a state DOT contract because the licensor knows that the other contractor’s use of the IP will be limited to the scope of the license. On the other hand, disclosing its trade secrets to the state DOT’s other contractor in the context of a state DOT contract would create the risk of losing the trade secret. For example, a third party may be willing to license its executable software to a state DOT and even provide an application pro- gramming interface allowing other contractors to create custom applications for the state DOT using the software. That same software rights-holder may be unwilling to provide its source code to the state DOT’s other contractor, however, because the source code could disclose propri- etary algorithms and other secret information, possibly enabling the other contractor to develop competing software. The third-party IP rights-holder would typically only consent to this kind of arrangement under a nondisclosure agreement with stiff enforcement penalties. At the same time, fewer competitive bidding concerns arise when contracting with a third party to use its own trade secrets (as opposed to its registered IP) in the third party’s self-performance of a state DOT contract. The restrictions related to federal funding only apply if the state DOT is contracting to obtain a “patented or proprietary material, specification, or process specifically set forth in the plans and specifications for a project.” The third party may have internal trade secrets or corporate know-how that enables it to accomplish the state DOT’s plans and specifica- tions more effectively than less-experienced contractors. When this is the case, there may be a fine line between the state DOT contracting for a “proprietary” process and simply selecting the contractor with the strongest technical rating. When the contractor does not request that any of its project deliverables be withheld from disclosure in response to public records requests, there typically would be no concerns that hiring the contractor equates to contracting for a proprietary process. 6.3.1.4 What License Options Are Available? Before purchasing a license to use third-party IP, the state DOT should consider whether it already has a formal license or common-law right to use the IP for its intended purposes. This section discusses some situations in which such license or right may exist. 6.3.1.4.1 Was the IP Generated with Government Funding? The state DOT may have obtained a license to use the proprietary IP if it was developed in part under a previous state DOT contract. As has been discussed, whether the state DOT previously obtained a license will depend on the state statutes and/or contract provisions in effect at the time of the previous contract. A statewide IP inventory (or at least a state DOT–wide inventory) will be invaluable in determining whether the DOT already has a license, so that it can avoid paying twice for the same IP. The federal government will have a paid-up license if the IP was developed with federal fund- ing, but the state DOT typically is unable to take advantage of it (because the federal license is generally nontransferable) (153). State DOTs may, however, negotiate their own licenses to IP developed with federal funding under a state DOT contract (154). As in the guardrail end ter- minal case study included in Chapter 9, the terms of one state DOT contract may provide that all state DOTs are able to take a license to use the resulting IP. If the IP was developed in whole

Understanding IP Management and Options 69 or in part with government funding, it is worth determining the scope of any licenses granted to the federal and/or state governments and agencies under the funding agreement. 6.3.1.4.2 Does Fair Use Apply? The state DOT (and its employees or contractors on behalf of the DOT) may have a defense to certain unlicensed uses of IP, especially where use does not affect the commercial significance of the IP. Although legal counsel should be consulted to discuss the specific circumstances of any unlicensed use, the discussion in this section covers some general guidelines. The Copyright Act provides that certain uses of copyrighted materials may constitute fair use (155). The statute lists factors that are to be considered to determine whether any given unlicensed use is a fair use, including: • The “purpose and character of the use” (i.e., whether it is commercial or nonprofit and educational). • The proportion of the copyrighted work that is used. • The “nature of the copyrighted work” (i.e., whether it is commercial/published, and where it lies on the spectrum between creative and factual). • The effect of the unlicensed use on the commercial value of the work (156). Historically, a similar “experimental use” defense has been used with respect to patents, allowing the unlicensed use of patented inventions for strictly scientific inquiry. However, courts typically have been unwilling to extend this defense to any use that is in any way commercial in nature. For example, nonprofit universities are not immune from infringement claims when they conduct research projects using patented inventions, because these projects are conducted in furtherance of the university’s commercial objectives (obtaining grant funding) (157). Although state DOTs are not traditional marketplace participants (i.e., commercial actors), they certainly have a tremendous role in the marketplace, and most unlicensed uses of patented inventions in furtherance of the state DOT’s lines of business would not be covered by the common-law experimental use defense. Although the Patent Act provides an experimental use defense for certain limited public-interest situations, such as medical experimentation, these situations typically would not apply to uses by the state DOT (158). 6.3.1.5 Potential Legal Claims by IP Owner 6.3.1.5.1 Federal Law (Liability for State DOT Contractors). Traditionally, the federal gov- ernment has not needed to own IP because federal agencies have the authority to authorize and consent to IP infringement by their contractors in the performance of federal contracts. Thus, any contractor (not just the IP rights-holder) can use the IP for the federal government without concern about being held liable for infringement. If registered IP is infringed under those cir- cumstances, the federal government is responsible for paying the IP owner a “reasonable” royalty (which is not necessarily the premium that the IP owner would ordinarily charge a non-federal actor wishing to use the IP). A completely different legal framework applies to state DOTs. With respect to IP that is federally registered, state DOTs benefit from immunity under the 11th Amendment to the U.S. Constitution, which generally provides that state governments cannot be sued in federal court without their consent (159). Patent and copyright infringement actions can only be brought in federal court, as these areas of law are generally understood to be pre-empted by the fed- eral government. Therefore, state DOTs can use federally registered IP without being liable for infringement (160). Immunity does not, however, extend to contractors for state DOTs. Contractors may be sued for infringement for the use of federally registered IP on a state DOT project even if the use

70 Management Guide to Intellectual Property for State Departments of Transportation occurs with the express knowledge and direction of the state DOT. Furthermore, when state DOTs are involved in the development of IP, the license taken by the DOT may or may not include the right to have the IP used on behalf of the DOT. Therefore, contractors for state DOTs occasionally find themselves being sued for infringement of IP in the performance of a state DOT contract, even though the DOT itself funded the development of the IP under a previous contract (161). In most cases, this complication can be avoided if, as part of the original contract involving the IP, the state DOT contracts to obtain a license to have the IP used on its behalf, and requires its original contractor to flow the license requirement down to all its subcontractors. When a state DOT knows that a contract will require the use of third-party IP, the state DOT owes it to its contractors either (a) to ensure that the state DOT has a license to have the IP used on its behalf, including under future contracts, or (b) to make it clear that the contractor must obtain proper licenses. 6.3.1.5.2 State Law (Liability for State DOTs). Federal and state courts have recognized that IP rights-holders may be able to obtain remedies against state DOTs in state courts, under state law, for unlicensed use of their IP by state DOTs (162). For example, a state-level process typi- cally is established by which an IP rights-holder can assert a takings claim or a conversion claim to compensation from a state DOT. (Slightly different from a takings claim, a conversion claim asserts intentional use of a rights-holder’s property that interferes with the rights-holder’s control over and use of the property.) Attempts by Congress to provide states with sovereign immunity against such claims have been declared unconstitutional by the U.S. Supreme Court (163). State DOTs should not treat sovereign immunity as a license to infringe IP without consequence. State DOTs may also be liable under state law for misappropriation of trade secrets. When a state DOT hires a contractor based on its trade secrets or corporate know-how, the state DOT will have to take steps to avoid disclosure of the contractor’s trade secrets. For example, the state DOT is generally required to not disclose contractors’ trade secrets in response to public records requests. State DOTs should consider adopting procurement regulations similar to the FAR, requiring the contractor to disclose (at the time of contracting) what it considers to be its trade secrets that will be used or delivered in performance of the state DOT contract. Doing this puts the initial burden on the contractor, creating a presumption that any materials not identified by the contractor are not trade secrets. When the contractor identifies or marks certain IP accord- ing to the documented procedure, however, the state DOT will need a process in place to ensure that such materials are properly protected from disclosure. 6.3.2 Potential Approaches to IP Protection 6.3.2.1 Statewide Inventory of IP Ownership or Licenses When making a decision about whether to use third-party proprietary IP, it would be useful for a state DOT to be able to refer to a centralized inventory of IP, within the DOT or possibly across state government, to which the state DOT has title or license. Ideally in database form, such an inventory can help the DOT avoid spending money to purchase licenses to use IP to which it already has established rights. Even if the database indicates that licenses have expired, or that existing licenses do not cover the state DOT’s intended use, the inventory can provide information about rates paid for similar licenses in the past, which can be useful information in negotiations and in cost-benefit analysis. The database should be sufficiently well-organized, with descriptive text fields and standardized search functionality, to allow the state DOT to identify available IP interests that provide a similar functionality to the proprietary IP under consideration. Effective use of this approach would require an IP management function (employee or office) as described in Chapter 3, either within the state DOT or elsewhere in state government, respon- sible for maintaining, populating, and searching the database. A policy also would be needed

Understanding IP Management and Options 71 requiring the state DOT to submit a request to IP management before contracting to acquire new rights in IP. Furthermore, IP management would need to have contract review authority and to actually review most contracts of the state DOT, both to ensure that the state DOT is not paying unnecessary premiums or royalties for IP already available to the state and to identify new IP interests that may arise from any given contract. Functions of IP management would include recording new licenses that the state DOT acquires, as well as identifying contracts likely to result in IP and following up with the contract officer to ensure that any such IP interests are recorded. 6.3.2.2 Assign Freedom of Information Act (FOIA) Manager to Protect Third-Party IP Although a central IP management function can be helpful to ensure that state DOTs maxi- mize their rightful use of the proprietary IP of third parties, another function of IP management should be to ensure that the DOT does not exceed the scope of its existing licenses. For example, under the scope of most licenses, state DOTs should be entitled to grant their contractors access to the IP for certain state DOT purposes (i.e., to use the IP on behalf of the state DOT). However, the state DOT can be liable under state law if the contractor uses the IP for unlicensed purposes. This situation is perhaps most likely to arise in the context of public records requests. State pub- lic records law typically will not require (or permit) a state DOT to disclose the trade secrets of its contractors or third parties. Therefore, state DOTs need to review public records requests carefully to ensure that they do not inadvertently trigger disclosure of trade secrets. It can be most effective to centralize this process, possibly within the IP management office. Ideally, as under the FAR, state DOTs will have a process requiring their contractors to mark or otherwise identify IP that the con- tractor considers to be a trade secret (e.g., proprietary technology developed with private funds but delivered or improved under a state DOT contract). These trade secrets would ideally be tracked in a state DOT (or state government-wide) database, with a public records employee assigned to ensure that no identified trade secrets are disclosed in response to public records requests. Clearly, security concerns would come into play in the development and maintenance of such a database, and steps would need to be taken to limit access to both the database and the underlying trade secrets themselves. 6.3.2.3 Build IP Disclosure Requirements into Contracts When a state DOT contracts for the delivery of third-party proprietary IP, both the DOT and the contractor will want to clearly understand what the contractor considers to be proprietary. The federal government has multiple procurement provisions covering this situation (164), generally requiring the contractor to make an upfront disclosure of proprietary IP before the contractor can assert that the federal government’s rights to the IP are limited and impose non- disclosure requirements. The model contract provision for state DOTs that appears in Figure 10 is adapted from the Defense Federal Acquisition Regulation Supplement (DFARS) (165). It puts the initial burden on the contractor to identify proprietary IP, although once the contractor has done so, the state DOT has constructive knowledge of information that it should not disclose in response to public records requests. 6.3.2.4 Execute Nondisclosure Agreements (with Employees) Employees of the federal government generally are prohibited from disclosing “any informa- tion coming to [them] in the course of [their] employment or official duties, which information concerns or relates to the trade secrets, processes, operations, style of work, or apparatus, or to the identity, confidential statistical data, amount or source of any income, profits, losses, or expenditures of any person, firm, partnership, corporation, or association” (166). Similar state laws may apply to state DOT employees.

72 Management Guide to Intellectual Property for State Departments of Transportation In addition to statutory prohibitions, however, state DOTs may require employees and con- tractors who are given access to third-party proprietary IP to sign nondisclosure agreements. Although such agreements may appear superfluous in light of applicable statutes, they have the advantage of putting the employee or contractor on notice that they are being given access to proprietary third-party IP for state DOT purposes only, and encouraging the employees or contractors to handle such third-party IP with appropriate care. [STATE DOT] RIGHTS IN PROPRIETARY CONTRACTOR DATA (a) Limited rights in technical data (1) [State DOT] shall have limited rights in technical data— (A) Pertaining to items, components, or processes developed exclusively at private expense and marked with the Limited Rights legend prescribed in paragraph (c) of this clause; or (B) Created exclusively at private expense in the performance of a contract that does not require the development, manufacture, construction, or production of items, components, or processes. (2) The Contractor acknowledges that— (A) Limited rights data are authorized to be released or disclosed to covered [State DOT] support contractors; (B) The Contractor will be notified of such release or disclosure; and (C) The Contractor may require each such covered [State DOT] support contractor to enter into a non- disclosure agreement directly with the Contractor regarding the covered [State DOT] support contractor’s use of such data. (b) Identification and delivery of data to be furnished with restrictions on use, release, or disclosure. (1) Technical data that the Contractor asserts should be furnished to [State DOT] with restrictions on use, release, or disclosure are identified in an attachment to this contract (the Attachment). The Contractor shall not deliver any data with restrictive markings unless the data are listed on the Attachment. (2) Generally, the development of an item, component, or process at private expense, either exclusively or partially, is the only basis for asserting restrictions on [State DOT]’s rights to use, release, or disclose technical data pertaining to such items, components, or processes. The Contractor shall indicate whether development was exclusively or partially at private expense. If development was not at private expense, the Contractor shall indicate the specific reason for asserting that [State DOT]’s rights should be restricted. (3) When requested by [State DOT], the Contractor shall provide sufficient information to enable [State DOT] to evaluate the Contractor's assertions. [State DOT] reserves the right to add the Contractor's assertions to the Attachment and validate any listed assertion at a later date. (c) Marking requirements. The Contractor may only assert restrictions on [State DOT]’s rights to use, modify, reproduce, release, perform, display, or disclose technical data to be delivered under this contract by marking the deliverable data subject to restriction. (1) General marking instructions. The Contractor shall conspicuously and legibly mark the Limited Rights legend on all technical data that qualify for such markings. The authorized legend shall be placed on the transmittal document or storage container and, for printed material, each page of the printed material containing technical data for which restrictions are asserted. When only portions of a page of printed material are subject to the asserted restrictions, such portions shall be identified by circling, underscoring, with a note, or other appropriate identifier. Technical data transmitted directly from one computer or computer terminal to another shall contain a notice of asserted restrictions. Reproductions of technical data or any portions thereof subject to asserted restrictions shall also reproduce the asserted restrictions. (2) Limited rights markings. Data delivered or otherwise furnished to [State DOT] with limited rights shall be marked with the following legend: LIMITED RIGHTS Contract No. _________________________ Contractor Name ___________________________________ Contractor Address ___________________________________ [State DOT]'s rights to use, modify, reproduce, release, perform, display, or disclose these technical data are restricted by the [State DOT] Rights in Proprietary Contractor Data clause contained in the above identified contract. Any reproduction of technical data or portions thereof marked with this legend must also reproduce the markings. Any person, other than [State DOT], who has been provided access to such data must promptly notify the above named Contractor. (End of Legend) Source: Adapted from the Defense Federal Acquisition Regulation Supplement (DFARS). Figure 10. Model contract provision for state DOTs.

Understanding IP Management and Options 73 The model nondisclosure agreement language shown in Figure 11 has been adapted from various nondisclosure agreements used by federal government agencies: The actual language of any nondisclosure agreement should be developed in consultation with legal counsel, to ensure that it is enforceable under state law and that it is consistent with applicable statutory nondisclosure requirements applicable to state DOT employees and contractors. 6.3.3 Potential Approaches to IP Sharing A state DOT research contract may provide that a paid-up license in any resulting IP will be retained not just by the state DOT funding the work, but by all state DOTs nationwide. (For an example, see the guardrail end terminal case study in Chapter 9 of this Guide.) It is unclear how widespread this contracting practice might be, but it presents the possibility that state DOTs may obtain the right to use certain third-party IP royalty-free despite having no role in its creation. Such a license is only valuable to the extent that the nonfunding state DOTs know that it exists, a factor that weighs in favor of creating a formal pooling agreement between state DOTs by which each participating DOT agrees to share the IP rights that it is in a position to share, and agrees to publish all such IP rights to the other participating DOTs. A proposed pooling agreement might provide that each participating state DOT has a royalty- free license to use any IP to which the state DOT has title or will take title. The pooling agreement might further provide that, in future R&D contracts, each state DOT must provide that the other participating DOTs (or all state DOTs nationwide, as in the guardrail terminal case study) will It is understood that as part of my official duties as an employee of [state DOT], or as an employee of an official contractor of [state DOT], I may come in contact with procurement sensitive information or proprietary business information from other contractors (e.g., trade secrets or financial data). I certify that I will not disclose, publish, divulge, release, or make known, in any manner or to any extent, to any individual other than an appropriate or authorized employee of either [state DOT] or official contractor of [state DOT], the content of any procurement sensitive information provided during the course of my employment. I understand that for the purpose of this agreement, procurement sensitive information is to include procurement data, contract information, plans, strategies, and any other information that may be deemed sensitive and that is designated as procurement sensitive, proprietary, or Limited Rights information at the time of its disclosure. I further certify that I will use proprietary business information only for official [state DOT] purposes, and will disclose such information only to those individuals who have a specific need to know in performance of their official [state DOT] duties. I agree not to disclose to others any contractual information, including, but not limited to, proprietary information, trade secrets, financial data, and technical proposals which will be presented to me by [state DOT] and designated as procurement sensitive, proprietary, or Limited Rights. I agree that the described information is "inside information" and shall not be used for private gain by myself or another person, particularly one with whom I have family, business, or financial ties. For the purposes of this agreement, "inside information" means information obtained under [state DOT] authority which has not become part of the body of public information. I specifically will not disclose any such information to employees of any company (including my own employer) or any other contractor employees who have not signed this agreement. I will take all reasonable precautions to prevent the unauthorized disclosure and use of such information, and will immediately report any such unauthorized disclosure to [state DOT]. Sources: Adapted from U.S. Geological Survey, Contractor Employee Non-Disclosure Agreement and U.S. General Services Administration, Non-Disclosure Agreement. Figure 11. Model nondisclosure agreement language (167).

74 Management Guide to Intellectual Property for State Departments of Transportation receive a paid-up, nontransferable license to use any IP developed under the contract. For IP to which a state DOT has obtained only a nontransferable license, rather than title, the state DOT generally will be unable to make that license part of the pooling agreement (because doing so would impact the rights of the previous R&D contractor). The decision to enter into a pooling agreement with other state DOTs may depend on each DOT’s objectives with respect to commercialization. Where the IP is transportation-specific, so that state DOTs are the only realistic end customers or potential sources of royalty payments, granting a paid-up license to all state DOTs could have the effect of essentially devoting the IP to the public domain. If contractors are unwilling to commercialize the IP absent monopoly rights, a broad pooling agreement could have the unintended consequence of discouraging commer- cialization. Therefore, state DOTs entering into pooling agreements might consider retaining the ability to withhold IP from the pool under certain circumstances. 6.4 Dedication to the Public Domain Although dedication to the public domain is not considered one of the four principal forms of IP protection, its use by the public sector needs some attention, especially in a Guide that focuses on IP management for state DOTs. This section elaborates on some of the implications, challenges, and benefits of dedicating IP to the public domain. 6.4.1 What Is the Public Domain? The public domain refers to information of varying types that is free for anyone to use. This information may have never been protected or may have entered the public domain upon expiration of one of the principal forms of IP protection (e.g., copyright or patent). Release to the public domain effectively eliminates the IP creator’s or owner’s control over the use of the IP (although some exceptions exist in using creative commons rules). Many public-sector organizations feel the obligation to dedicate their protectable IP to the public domain because much of the work is funded by taxpayer dollars. Although the risk exists of losing control over the use of IP assets in the public domain, this approach has some value. Samuelson identified eight “values” that can arise from information and works in the public domain: • Building blocks for the creation of new knowledge, such as data, facts, ideas, theories, and scientific principles. • Access to cultural heritage, such as through information resources like ancient Greek texts and Mozart’s symphonies. • Promoting education, through the spread of information, ideas, and scientific principles. • Enabling follow-on innovation, such as by using works with expired patents and copyright. • Enabling low-cost access to information without the need to locate the owner or negotiate rights clearance and pay royalties through, for example, expired copyrighted works or patents, and non-original data compilation. • Promoting public health and safety through information and scientific principles. • Promoting the democratic process and values through news, laws, regulation, and judicial opinion. • Enabling competitive imitation through, for example, expired patents and copyright, or publicly disclosed technologies that do not qualify for patent protection (168). For state DOTs, dedicating their IP to the public domain can help support transportation innovation by allowing inventors/creators to continue to build on the incredible amount of work that has be completed over many decades. The public domain refers to information, of varying types, that is free for everyone to use. This information may have never been protected, or it may have entered the public domain upon expiration of one of the principal forms of IP protection.

Understanding IP Management and Options 75 6.4.2 Public Domain Decisions When deciding whether to dedicate protectable IP assets to the public domain, it is recommended that the state DOT consider what will best achieve the public good. Potential factors to consider include the following: • In some cases, delivering the public good can require public ownership (e.g., public parks, public museums). Ownership of IP in the best interest of the public by a public institution provides control over use and provides IP to trade with others. • The public good in other cases may be best achieved by private commercial investments, requiring some form of IP protection to entice potential commercial licensees and continual development. • Outcomes of research expected for public good cannot be readily practiced if the research infringes on the IP of a third party. Proper IP management can provide guidance to avoid these types of pitfalls. • It is a legitimate public good to receive a monetary return for IP owned by the public institution that is used by a third party. However, the monetary return should be invested in other projects that serve the public good. • When publications are the best means for delivering public good, the ability to publish should never be prevented. Should IP protection (and/or recognition of others’ IP rights) be appropriate for any material that will be published, however, it is strongly recommended that the necessary steps be taken to screen and register or acknowledge the protected IP before disclosure or publication. Ensuring proper attribution and protection of existing IP rights prevents complications, preserves trust, and promotes broader dissemination of ideas in the public interest. • Governments may also fund the creation of assets for the public good but require that the public pay for use of the asset (e.g., public transportation) (169). Dedicating an IP asset to the public domain should be an available option in all deliberations on matters of IP management within the state DOT. However, the decision to dedicate an asset to the public domain should be well informed. One benefit of dedicating IP to the public domain is to eliminate barriers to acquiring and using state DOT technology. If the IP is dedicated to the public, it becomes accessible to everyone. Dedicating the IP to the public also restricts others from subsequently taking ownership of IP that was funded by a state DOT. Once the IP is dedicated, however, the state DOT for the most part has limited control on future uses of the IP. 6.4.3 How to Dedicate IP to the Public Domain Dedicating an IP asset to the public domain literally makes the work or invention ineligible for IP protection. Some state DOTs may intend to dedicate most of the IP that they generate to the public domain, whereas other state DOTs may intend to obtain the highest level of IP protection possible. It is important to understand, however, that whether IP has been dedicated to the public domain is a legal determination that is generally made irrespective of the intent of the IP owner. Dedication to the public domain typically is accomplished by some form of publication of the work to the general public without benefit of registration. For example, a trade secret loses its character as an IP asset as soon as the secret is publicly disclosed, at which point it effectively becomes information in the public domain. Inventions covered by patents become public domain when the registration expires (no further publication being necessary, given that the invention is considered published through the act of registration). Likewise, a work with

76 Management Guide to Intellectual Property for State Departments of Transportation a registered copyright becomes dedicated to the public domain on expiration of the statutory copyright term (no further publication being necessary, given that the work was previously made public by registering it with the Copyright Office). Otherwise patentable subject matter is ineligible for registration if it is disclosed prior to patent application (taking into account applicable statutory grace periods for public disclosure, as discussed in Chapter 5 of this Guide), effectively dedicating that invention to the public domain. Historically, an otherwise copyrightable work could similarly be dedicated to the public domain—and thus be ineligible for copyright protection—if the work was “made available to members of the public at large without regard to who they are or what they propose to do with it,” or disseminated “among the public as justifies the belief that it has been dedicated to the public and rendered common property” (i.e., was published without notice of copyright and without registration) (170). As discussed previously, however, as a result of the 1988 adoption of the Berne Convention in the United States, publication of a work without notice of copyright and without registration no longer constitutes dedication to the public domain and loss of copyright. Inventions, therefore, are dedicated to the public domain as a matter of law if the invention is disclosed to the public prior to applying for a patent (taking statutory grace periods into account). Patents may not be issued to others for that invention after it is in the public domain. As a prac- tical matter, however, it should be understood that patents often are issued or upheld over the objections of previous inventors or others who believe that the invention was previously disclosed but who fail to convince the USPTO or the courts of that fact. Therefore, to prevent others from obtaining a patent and removing an invention from the public domain, a state DOT might obtain a patent on an invention that it wants to make available for practice by the public. Although there is no provision in federal patent law to dedicate a validly issued patent to the public domain (short of its expiration), the state DOT may be able to accomplish the same result by issuing a public notice that the state DOT declines to enforce its patent and encourages others to prac- tice the invention. If others are unwilling to practice the invention because of concerns about infringing the state DOT’s patent, the state DOT could grant practitioners royalty-free licenses to practice the patent, provided that doing so is permitted by state law. If state law prohibits the gifting of licenses by state DOTs, the state DOT could potentially grant licenses to practitioners conditioned on some fair consideration made to the state, such as the state receiving a license to practice any improvement made by the practitioners. With respect to works of authorship, the adoption of the Berne Convention in 1988 probably rendered obsolete the traditional concept of dedicating an otherwise copyrightable work to the public domain via general publication. Publication of a work without registration and without notice of copyright is expressly inadequate to dedicate it to the public domain, and the Copyright Act makes no further provision for dedicating a work to the public domain. A state DOT may be able to accomplish the same purpose, however, by making the work freely available (e.g., via the Internet). The ideas expressed in the work are not protected by copyright and thus enter the public domain immediately upon publication. If the state DOT wants to dedicate the work itself to the public domain (meaning that the general public is free to duplicate and distribute the actual work), then the state DOT may be able to achieve this goal merely by incorporating a notice into any such publication that the state DOT encourages the duplication and distribution of the work by others and will decline to enforce its copyright (perhaps conditioned on attributing the work to the state DOT). As with patentable inventions, even if the state DOT intends to make the information in works of authorship freely available, the state DOT may register a copyright in such works merely to preempt a claim to the copyright by others. If the state DOT registers a copyright, others may be unwilling to duplicate and distribute the work because of concerns about copyright infringe- ment, even if the work incorporates the permission notice described above. In such cases, if state

Understanding IP Management and Options 77 law permits, the state DOT may grant others a royalty-free license to duplicate and distribute the copyright-protected work (similar to the licenses available via Creative Commons). Doing this has the same effect as a dedication of the work to the public domain (171). 6.5 Licensing A license is a legal contract in which the licensor grants a licensee the right to use his or her IP. Almost anything can be licensed as long as it contains a protectable property right. These rights are legally protected through the use of patents, trademarks, copyrights, and trade secrets. A license allows a person, organization, or entity to use the protected rights under the terms and conditions established in a license agreement (172). A license agreement defines exactly how the granted rights can and should be used. These agreements typically consist of: • A clear statement of the licensed subject matter and the scope of rights being granted by the owner/licensor to the licensee. • Identification of specific terms and conditions about the scope of the license (e.g., exclusive or nonexclusive), the field in which the licensed activities may be conducted, and the duration of the agreement. Licenses typically will be nonexclusive, but the contracting parties generally are free to negotiate an exclusive license as long as that would not breach licenses that have been granted to other parties. • A statement regarding the specifics of the compensation provided by the licensee for use of the IP rights (running royalty, lump-sum payments, fixed payments, or nonmonetary). • Additional terms and conditions as needed. Typically, these license agreements are negotiated between the interested parties. Several factors should be considered in the negotiation: • The strength and scope of the protected IP. • The expense necessary for a license to reach full production. • The cost of any additional R&D required. • The exclusivity or non-exclusivity of the licensing agreement. (Licenses typically are non- exclusive, but the contracting parties are generally free to negotiate an exclusive license provided that would not breach licenses that have been granted to other parties.) • The geographic scope of the license. • The competitive product, process, and technology available to the perspective licensee. • The total market and its estimated growth. • Common industry or standard license rates. • Whether the license covers all or part of a process or product. Licensing offers a number of benefits, especially from the perspective of the state DOT. Licensing may provide: • A mechanism to commercialize technology. • An additional revenue stream. • An opportunity to incentivize employee-inventors. • An opportunity to further support economic development for the state. 6.5.1 Licensing at the State DOT The state DOT does not need to own title to IP in order to use it—typically, a nonexclusive license from the IP owner will be available and sufficient for most state DOT needs. A license

78 Management Guide to Intellectual Property for State Departments of Transportation to use IP is similar to the concept of an easement over real property—an interest short of title that nevertheless allows the state DOT limited use of the property for specific purposes or for a specific timeframe. When IP is registered with the federal government, it is typically with an eye toward commercially exploiting that property. The title holders are therefore usually more than willing to negotiate to provide a license to a state DOT. Payments may be made to the title holder, which then allows the licensee to use the IP within the negotiated terms of the license. Licenses are highly flexible and can be crafted to convey a wide range of interests in the IP. The scope of a license may be unlimited (i.e., the full scope of the title holder’s usage rights), limited to certain IP (e.g., only to improvements made with state DOT funding), limited to specific applications, limited to certain frequencies of use, limited to certain users (e.g., exclu- sive and/or nontransferable), and/or limited to certain timeframes (e.g., permanent, or with an expiration date). Licenses will typically be nonexclusive, but the contracting parties are generally free to negotiate an exclusive license as long as that would not breach licenses that have been granted to other parties. The scope of a license often is defined by contract (e.g., between the IP owner and the state DOT). Therefore, the scope of a license can be tailored, within the procurement authority of the state DOT, to meet the state DOT’s objectives and budget. At the broader end of the spectrum, the license may be transferable and provide for unlimited use of the IP by the licensee. This is typically the case when purchasing commercial off-the-shelf products such as machines or software—the purchaser typically has a license to use that product as often as is necessary, in whatever manner is desired. The licensee typically is not authorized to make unlimited copies of the product, but especially in the case of software, a typical license may provide for a fixed number of installations or copies. The purchaser typically can transfer the license (e.g., by sell- ing the product), at which point the original purchaser’s license to use the IP typically expires. Although this is the most common form of license, an almost limitless variation of license terms could conceivably be negotiated: • The IP owner may make the license nontransferable (e.g., to keep the IP out of the hands of competitors). • The license may expire after a certain time limit, or after a certain number of uses. The state DOT as licensee may prefer this approach in certain situations, such as if the state DOT antici- pates that the technology will be obsolete at the end of the license term, so that a longer term is not warranted. • The licensor owns a collection of IP rights (patents, copyrights, trademarks, and even trade secrets) that it bundles into a single license package. If the state DOT can determine what subset of IP it really needs, it may be able to negotiate a license to a limited subset of the IP at a reduced price. • The IP owner may offer a license to the state DOT at a reduced price over its commercial rates but limit the license to government purposes only. • The IP owner may limit the license to a specific project or application, such as projects on which the state DOT engages the IP owner as a contractor. This often is the case when the IP owner’s commercialization model is to self-perform the work rather than license the IP to other service providers, perhaps to avoid disclosing trade secrets or know-how associated with the work. (See the mechanically stabilized earth [MSE] wall case study in Chapter 9 of this Guide.) Because the state DOT’s bargaining power will typically be much stronger than that of the average consumer of IP, an almost limitless variety of licenses could conceivably be constructed

Understanding IP Management and Options 79 between a state DOT and third-party IP licensors. There will be two primary limitations on the scope of the license: • First, the license will be limited by the title holder’s property interest. For example, if the title holder holds a patent in an improvement or a copyright in a derivative work, the title holder’s property interest may be very “thin,” so that the IP cannot be used without an additional license from the title holder of the underlying IP. • Second, statutory limitations on the state DOT’s ability to contract for proprietary commercial products may exist. If the state DOT has played a role in creation of the IP, a license may arise by statute rather than (or in addition to) by contract. For example, under federal law, the federal government typically takes a license to use IP developed with federal funding. For inventions made with federal fund- ing and patented by the federal contractor, the federal government “shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice, or have practiced for or on its behalf, the subject invention throughout the world” (173). For data (other than software) developed with federal funding, the federal government receives “a paid-up, nonexclusive, irrevocable, worldwide license in such copyrighted data to reproduce, prepare derivative works, distribute copies to the public, and perform publicly and display publicly by or on behalf of the [g]overnment” (174). For software developed with federal funding, the federal government takes a similar license, although the license does not include the right to distribute copies of the software to the public. State statutes may or may not provide similar license rights to state DOTs for IP developed under state DOT contracts. Obtaining the right for the state DOT to continue to use IP devel- oped with public funding may be one the most important reasons for IP management by state DOTs. Therefore, contract documents should clearly provide that the state DOT takes a paid-up, unlimited license to use IP developed with state DOT funding or to have the IP used on behalf of the state DOT. More complex licensing issues arise when pre-existing proprietary IP is improved with state DOT funding, or when state DOT products build upon pre-existing proprietary IP. Under the federal model, the contractor who intends to assert ownership of pre-existing proprietary IP, developed solely at private expense, is required to disclose the existence of the proprietary IP and obtain approval from the federal government to incorporate it into the government contract. Then, the government will typically take what is known as a limited license, restricted license, or government-purpose license. These types of licenses allow the government to use the deliverable but can restrict the government from further development of the IP without the participation of the IP owner. For example, if a contractor incorporates technology protected by patent or copyright, or as a trade secret, into its government contract, and properly discloses and marks the proprietary IP, the government may be unable to continue development using a different contractor without first negotiating with the IP owner for a broader license than was initially provided. It is important that state DOTs consider the scope of the license required, not just to perform a current project or contract, but also in relation to whether incorporating licensed proprietary IP into a state DOT project or contract will create licensing problems in the future. At a minimum, contractors should be required to disclose to state DOTs the scope of proprietary IP that the con- tractor intends to use or deliver in performance of a state DOT project. Apart from the licensing considerations, the state DOT may be restricted by state statute from contracting for proprietary IP. Also, if use of proprietary IP is permitted, the state DOT needs to know whether the contractor is supplying proprietary IP so that the state DOT can properly exclude the contractor’s trade secrets from public records requests.

80 Management Guide to Intellectual Property for State Departments of Transportation 6.5.2 Reasons the State DOT Might Take a License A license is a more limited option than outright IP ownership. Generally speaking, a licensee does not have the right to exclude others from exercising the IP. For most operations, a state DOT will not need the right to exclude others from using the IP. A license generally will suffice if the state DOT only needs the right to use the IP. Otherwise, whether a license will be sufficient depends largely on the state DOT’s objectives with respect to IP management and commercialization. Government policy often requires that government-funded IP be transferred to the commercial sector to promote economic development (175). This policy is perhaps the most likely reason that agencies such as state DOTs might elect not to retain title to IP funded by the agency, but rather transfer the title to a commercial interest while retaining a paid-up license. As discussed in greater detail in Section 6.2, federal agencies generally are required by statute to grant their contractors title to IP developed by the contractors with federal funds, to better promote com- mercialization of the IP. However, the commercialization success of this federal approach has been mixed (176). Generally, state DOTs and state legislatures have the freedom to craft different policies and statutes that better conform to the state DOT’s commercialization objectives. In the survey of state DOTs conducted during the development of this Guide, when queried on their role in the commercialization of technology generated from funded work, 53 percent of respondents indicated that the state DOT does not involve itself in commercialization activities; however, 32 percent of respondents reported that the state DOT may actively encourage com- mercialization by pursuing IP protection, assisting its contractors in commercialization activities via licensing for a fee, or encouraging the commercial use of the technology royalty-free. The wide range of approaches revealed by the survey suggests that state DOTs may reach very different decisions regarding taking title or license to IP, depending on their commercialization objectives and priorities.