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Suggested Citation:"II. PATENT ISSUES WITH FEDERAL CONTRACTS." National Academies of Sciences, Engineering, and Medicine. 2017. Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies. Washington, DC: The National Academies Press. doi: 10.17226/24693.
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Suggested Citation:"II. PATENT ISSUES WITH FEDERAL CONTRACTS." National Academies of Sciences, Engineering, and Medicine. 2017. Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies. Washington, DC: The National Academies Press. doi: 10.17226/24693.
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Suggested Citation:"II. PATENT ISSUES WITH FEDERAL CONTRACTS." National Academies of Sciences, Engineering, and Medicine. 2017. Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies. Washington, DC: The National Academies Press. doi: 10.17226/24693.
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Suggested Citation:"II. PATENT ISSUES WITH FEDERAL CONTRACTS." National Academies of Sciences, Engineering, and Medicine. 2017. Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies. Washington, DC: The National Academies Press. doi: 10.17226/24693.
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Suggested Citation:"II. PATENT ISSUES WITH FEDERAL CONTRACTS." National Academies of Sciences, Engineering, and Medicine. 2017. Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies. Washington, DC: The National Academies Press. doi: 10.17226/24693.
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Suggested Citation:"II. PATENT ISSUES WITH FEDERAL CONTRACTS." National Academies of Sciences, Engineering, and Medicine. 2017. Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies. Washington, DC: The National Academies Press. doi: 10.17226/24693.
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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.

8A. Contractor Rights to Inventions Made on Federal Contracts As noted in Section I.B.3, on any federal contract that involves the performance of experimental, developmental, or research work, the contractor in privity with the federal agency (which may be an individual, a commercial firm, or a nonprofit organi- zation), or its subcontractor,53 may elect to retain title to an invention developed pursuant to the contract.54 In order to exercise its right to take title to the invention, the federal contractor must have disclosed the invention to the funding agency within a reasonable time after the contractor became aware of the invention,55 and within 2 months after any internal disclosure (e.g., to contractor personnel responsible for intellectual property management).56 The contractor’s disclosure must “be sufficiently complete in technical detail to convey a clear under- standing of the subject invention.”57 For contracts with USDOT agencies, the invention disclosure may be satisfied by the contractor completing DD Form 882, Report of Inventions and Subcontracts and submitting the form to the funding agency.58 Within a reasonable time after disclosing the invention to the funding agency,59 and within 2 years of such disclosure,60 the contractor must notify the agency in writing of its election to retain title of the invention. This 2-year period to elect to retain title may be effectively shortened by the 1-year “look- back” period discussed in Section I.B.4 supra, during which public disclosure by the inventor will not adversely affect patentability. Once the inventor has made a public disclosure (e.g., print publication, sale, or public use) of the invention, the inventor effectively has a 1-year period to file the patent application,61 and accordingly the federal contractor must elect to retain title to the invention well before that period expires, so as not to prejudice the fund- ing agency’s rights.62 The federal contractor electing to retain title to an invention made with federal funds is required to file a patent application with the USPTO, as well as with any other country in which the contractor elects to With respect to state transportation contracts funded by the federal government, the Bayh–Dole Act prob- ably applies, as discussed in Section III.A infra, regardless of any state statute or policy. C. Overview of This Digest Section II addresses patent issues involving direct contracts with federal agencies, including USDOT agencies such as the Federal Highway Administration (FHWA). The discussion addresses the federal contractor’s right to patent the invention and the federal contractor’s immunity from patent infringement lawsuits. Section III addresses in detail patent issues related to federal funding of state transportation agency contracts, including federal contract principles that probably apply to those state contracts (e.g., contractor ownership) and federal contract principles that probably do not apply (e.g., contractor immunity). Section IV addresses other patentability issues involving inventions made on state and local trans- portation agency contracts, including considerations when allocating patent rights in such inventions, such as state statutes, contract language, and the preexisting proprietary technology of the state contractor or others. Section V addresses in detail the respective liability and defenses of state trans- portation agencies and their contractors regarding patent infringement claims, including sovereign immunity, the impact of prior art, and shop rights. II. PATENT ISSUES WITH FEDERAL CONTRACTS As noted in Section I.B.3 supra, the Bayh–Dole Act provides that federal contractors generally may take title to inventions made on federal contracts, with the federal funding agency retaining a perma- nent, paid-up license to use the invention (or to have the invention used on behalf of the federal govern- ment). These and other provisions of the Bayh–Dole Act are implemented in federal contracts via the federal acquisition regulations (FAR) promulgated by the U.S. Department of Commerce.50 The FAR requires a patent rights clause in all federal contracts and solicitations that will include some “experimen- tal, developmental, or research work.”51 The FAR is applicable to most acquisitions by the USDOT.52 The following sections demonstrate how the Bayh–Dole Act and other FAR provisions operate to allocate rights to inventions made in the performance of contracts with federal agencies such as FHWA. 50 48 C.F.R. subpt. 27.3 (2015). 51 48 C.F.R. § 27.303(a) (2015). 52 48 C.F.R. § 1201.104 (2015). 53 48 C.F.R. § 27.304–3 (2015). 54 48 C.F.R. § 27.302(b) (2015); 48–C.F.R. § 52.227–11(b) (1) (2015). 55 35 U.S.C. § 202(c)(1) (2016). 56 48 C.F.R. § 52.227–11(c)(1) (2015). 57 Id. 58 48 C.F.R. § 1227.305–4 (2015). 59 35 U.S.C. § 202(c)(2) (2016). 60 48 C.F.R. § 52.227–11(c)(2) (2015). 61 35 U.S.C. §§ 102(b), 202(c)(3) (2016). 62 35 U.S.C. § 202(c)(2) (2016); 48 C.F.R. § 52.227–11(c)(2) (2015).

9retain title,63 as there is typically no other realistic way for the contractor to exercise ownership of the invention. The patent application filed with the USPTO must include “a statement specifying that the invention was made with Government support and that the Government has certain rights in the invention.”64 The contractor may also be required by the funding agency to periodically report on its subsequent efforts to commercialize the invention.65 The federal contractor’s failure to take any of the prescribed steps previously highlighted may result in the contractor’s loss of patent rights to the federal government,66 as discussed in greater detail in Section II.B infra. Even in such cases where the federal government obtains title to the invention, however, the contractor typically is entitled to a “revo- cable, non-exclusive, paid-up license”67 for itself or any of its subsidiaries and corporate affiliates to prac- tice the invention anywhere in the world. Therefore, if the federal government ultimately obtains a patent for an invention made by its contractor, the contrac- tor can continue to practice the invention without concerns about having to pay a royalty or being sued for infringement. Likewise, for any invention made by the contractor that is not ultimately patented by any party, the contractor typically retains the right to use any data (including software, technical drawings, etc.) first produced or used by the contractor in the performance of the federal contract.68 The Bayh–Dole Act and the related patent rights clauses from the FAR apply to inventions made pursuant to federal contracts; they do not address rights to preexisting, proprietary inventions of the contractor made at private expense. Because the contractor or funding agency may ultimately want to pursue patent protection for inventions made with federal funding, it is important for there to be clear distinctions between what was invented with federal funding and what was invented beforehand, since that will affect the allocation of rights between the contractor and the government. If the contractor intends to use its own preexisting patented invention in the performance of a federal contract, that should be disclosed to the funding agency as addressed in Section II.D infra. If the contractor intends to use preexisting proprietary technology that has not (yet) been patented, that should also be disclosed to the funding agency if the contractor intends to retain its proprietary interest in the technology. The federal government acknowledges the contrac- tor’s proprietary interest in technology developed at private expense, and accordingly federal funding agencies may only demand such rights to preexisting technology as are essential to the government’s needs.69 The “rights in data” provisions of the FAR allocate rights to unpatented proprietary technology used in the performance of federal contracts.70 Certain preexisting proprietary data, including tech- nical drawings or computer software, used in the performance of the federal contract may be withheld from delivery to the government, or delivered to the government with only “limited rights” or “restricted rights.”71 The contractor may deliver such proprietary data to the government, marked as “limited rights” or “restricted rights,” to prevent the government from disclosing the data outside the government72 (e.g., to the contractor’s competitors), if the contractor intends to protect the technology as a trade secret, or if the contractor simply wants to prevent public disclosure in order to preserve its right to obtain a patent later. Delivering “limited rights” or “restricted rights” data to the federal government can also limit the government’s use of the proprietary technology to specific purposes outlined in the contract,73 allow- ing the contractor to preserve its right to charge a royalty to the federal government or others for future use of the technology. Disputes can arise over the scope of preexisting technology in which the contractor attempts to preserve proprietary rights.74 If the technology is enhanced or modified in the performance of the federal contract, the government can acquire unlim- ited rights to use or have the technology used on its behalf, especially where the preexisting proprietary technology is not easily segregated from the end product that is ultimately delivered to the funding 63 35 U.S.C. § 202(c)(3) (2016); 48 C.F.R. § 52.227–11(c)(3) (2015). 64 35 U.S.C. § 202(c)(6) (2016); 48 C.F.R. § 52.227–11(e) (4) (2015). 65 35 U.S.C. § 202(c)(5) (2016); 48 C.F.R. § 27.302(e) (2015); 48 C.F.R. § 52.227–11(f) (2015). 66 See generally 35 U.S.C. § 202 (2016). 67 48 C.F.R. § 27.302(i)(1) (2015); 48 C.F.R. § 52.227– 11(b)(2) (2015). 68 48 C.F.R. § 52.227–14(b)(2) (2015). 69 48 C.F.R. § 27.102 (2015). 70 See generally 48 C.F.R. § 27.404–2 (2015). 71 Id.; 48 C.F.R. § 52.227–14(g) (2015). 72 48 C.F.R. § 27.404–2(c) (2015); 48 C.F.R. § 52.227– 14(g) (2015). 73 48 C.F.R. § 52.227–14(g) (2015). 74 See, e.g., 48 C.F.R. § 27.404–5 (2015) (setting forth a procedure for the government to contest the improper marking of data as “limited rights” or “restricted rights”); 48 C.F.R. § 27.404–6 (2015) (allowing the government “to inspect data at the contractor’s facility” to verify a contrac- tor’s assertion of “limited rights” or “restricted rights”).

10 agency.75 Likewise, if the contractor ultimately applies for patent protection, the funding agency could argue that the preexisting proprietary tech- nology identified by the contractor was not yet a fully formed invention, and that the invention was actually first reduced to practice in the performance of the federal contract, allowing the government to take a paid-up license to practice the invention. The delivery of proprietary data with “limited rights” or “restricted rights” does not necessarily reduce the scope of the government’s license to practice the patented invention.76 However, a patent application filed prior to the contractor beginning performance of the federal contract work would typically demon- strate that the invention was not first reduced to practice in the performance of the federal contract,77 so that the federal government would not automati- cally obtain a paid-up license in the invention. For example, in Hazeltine Corp. v. United States,78 a contractor for the Federal Aviation Administration (FAA) had begun development of an open array antenna system prior to responding to FAA’s solici- tation for development of new air traffic control technology. The contractor unsuccessfully negoti- ated with FAA to acknowledge in the resulting contract that the open array antenna system was reduced to practice prior to the contract, but FAA insisted on incorporating the standard patent rights clauses in the contract. The contractor applied for a patent on the open array antenna system 3 months after beginning work on the FAA contract. FAA took the position, later affirmed by the U.S. Court of Appeals for the Federal Circuit, that FAA acquired rights to the open array antenna system patent because the invention was first reduced to practice on the FAA contract.79 Therefore, the contractor/ inventor could not obtain a royalty for the federal government’s subsequent use of the open array system, even though the system was developed, at least in part, with the contractor’s private funds.80 B. Rights Retained by Federal Government Regardless of whether the federal contractor pursues patent protection, the federal government typically acquires “unlimited rights” to use data (including technical drawings and software) first produced in the performance of the federal contract.81 Likewise, if the federal contractor does exercise its patent rights to inventions made with federal fund- ing, the funding agency retains “a nonexclusive, nontransferable, irrevocable, paid-up license” to practice the federally funded invention, or to have the invention practiced for or on behalf of the United States, anywhere in the world.82 In other words, the federal agency that funded the invention can hire other contractors to use or perform the patented invention in the future, without concerns about patent infringement or paying royalties to the patent owner. Notwithstanding the federal contractor’s patent rights under the Bayh–Dole Act, there are circum- stances in which the federal funding agency may obtain title to its contractor’s inventions, including title to patents. Each federal agency is authorized to apply for patent protection for any invention in which it retains title.83 The funding agency has the right to retain title to its contractor’s inventions where its contractor does not timely disclose the invention, does not timely elect to retain title, does not timely file a patent application, or declines to continue prosecuting a patent application.84 In those circumstances, the contractor may be required to execute a written assignment of its patent rights to the funding agency,85 although the contractor is effectively waiving its patent rights by failing to take the steps necessary to achieve patent protection. In rare situations, the federal government can obtain title to the inventions of its contractors even over the objections of its contractor. For instance, even if the contractor elects to retain title, the fund- ing agency may itself retain title and pursue patent protection for the federal government if the funding agency makes a written determination that “excep- tional circumstances” warrant it, and that govern- ment ownership of the invention would “better promote the policy and objectives” of the Bayh–Dole 75 See, e.g., 48 C.F.R. § 52.227–14(b)(1) (2015) (granting the federal government “unlimited rights” in “[d]ata first produced in the performance of this contract”). See also 48 C.F.R. § 252.227–7014(b)(2) (2015) (providing that, in U.S. Department of Defense contracts, the federal government takes “government purpose rights in computer software developed with mixed funding,” which transform into “unlimited rights” after a fixed period of time). 76 48 C.F.R. § 52.227–14(i) (2015). 77 Hazeltine Corp. v. United States, 820 F.2d 1190, 1196 (Fed. Cir. 1987) (“[T]he filing of a patent application is a constructive reduction to practice.”). 78 820 F.2d 1190 (Fed. Cir. 1987). 79 Id. at 1198. 80 See Vanessa Bell, The State Giveth and the State Taketh Away: Patent Rights Under the Bayh–Dole Act, 24 S. Cal. InteRDIs. L.J. 491, 515–16 (2015) (summarizing Hazeltine). 81 48 C.F.R. § 27.404–1 (2015). Exceptions to this gen- eral rule include when the data is subject to “limited rights” or restricted rights” as discussed in Section II.A supra. 82 35 U.S.C. § 202(c)(4) (2016); 48 C.F.R. § 27.302(c) (2015); 48 C.F.R. § 52.227–11(d)(2) (2015). 83 35 U.S.C. § 207(a)(1) (2016). 84 48 C.F.R. § 27.302(d) (2015); 48 C.F.R. § 52.227–11(d) (2015). 85 48 C.F.R. § 52.227–11(d)(1) (2015); 48 C.F.R. § 52.227– 13(b)(1) (2015).

11 Act.86 Even when the contractor obtains a patent for a federally funded invention, the funding agency may exercise what are known as “march in rights,”87 where the government can effectively reclaim ownership of the patented technology that it funded or require the patent owner to grant a license to another firm or organization. To exercise its march in rights, the federal agency must first make a written determina- tion that the “action is necessary” in order to satisfy the commercialization goals of the Bayh–Dole Act (e.g., when the federal government determines that the patent owner is not taking “effective steps to achieve practical application” of the invention “within a reasonable time”) or for other public policy reasons.88 Any such written determination by the federal government to deprive the contractor of its patent rights under the Bayh–Dole Act is subject to admin- istrative appeal within the agency.89 For example, the USDOT acquisition regulations provide an administrative process for contractors to appeal written determinations denying their patent rights.90 A federal agency denying patent rights to its contractor is also potentially subject to a lawsuit in the United States Court of Federal Claims.91 Accordingly, it is very rare for the federal govern- ment to attempt to assert title to its contractor’s inventions over the objections of the contractor.92 C. Patent Rights Under Alternative Contracting Vehicles The patent rights allotment under the Bayh–Dole Act—where the contractor can take title to the invention but the federal funding agency retains a license—only applies to “funding agreements” as defined in the statute. There are alternative federal contracting vehicles, typically used for the specific purpose of conducting advanced research and devel- opment, to which the Bayh–Dole Act does not apply. These are addressed briefly herein. 1. Cooperative Research and Development Agreements With the Federal Technology Transfer Act of 1986,93 Congress authorized federal laboratories to enter into Cooperative Research and Development Agreements (CRADAs) with potentially multiple parties including federal agencies, state agencies, commercial firms, and nonprofit institutions (includ- ing universities) in order to promote technology transfer.94 Under a CRADA, the federal lab gener- ally may contribute resources including personnel, facilities, and preexisting intellectual property, but not funding, to its collaborating parties.95 Since the federal lab cannot contribute funding to its collabo- rating parties, the CRADA by definition is not a “funding agreement” subject to the Bayh–Dole Act96 or other procurement regulations such as the FAR. As in the Bayh–Dole Act, the federal lab’s collabo- rating partner is entitled to a patent on any inven- tion made by its employees in the performance of the CRADA, with the federal government retaining a “nonexclusive, nontransferable, irrevocable, paid up license to practice the invention or have the invention practiced” on its behalf.97 However, aside from that, the federal lab and its collaborating part- ners (including state agencies) are able, to a large extent, to negotiate intellectual property rights. Rights subject to negotiation include the private contractor’s right to commercially exploit technology transferred from the federal lab, as well as the contractor’s rights to protect both its preexisting proprietary inventions and technical data developed during performance of the CRADA.98 Private contractors participating in a CRADA may receive stronger rights than they would under a typical federal contract, including title to inventions made by federal employees in the performance of the CRADA, or exclusive licenses to preexisting inven- tions owned by the government. In such cases, the federal laboratory retains at least a nonexclusive, nontransferable, irrevocable, paid-up license to practice the invention or to have the invention prac- ticed on behalf of the government.99 The general authority for federal laboratories to enter into CRADAs applies to the FHWA 94 15 U.S.C. § 3710a(a)(1) (2016). 95 15 U.S.C. § 3710a(d)(1) (2016). 96 Pub. Citizen Health Research Grp. v. Nat’l Insti- tutes of Health, 209 F. Supp. 2d 37, 40 (D.D.C. 2002) (A CRADA “allows the federal laboratories to agree to license the invention arising out of the CRADA to the outside party at the outset of the collaboration without going through the standard licensing regulations required by the Bayh–Dole Act.”). 97 15 U.S.C. § 3710a(2) (2016). 98 Nancy O. Dix, Fernand A. Lavallee & Kimberly C. Welch, Fear and Loathing of Federal Contracting: Are Commercial Companies Really Afraid to Do Business with the Federal Government? Should They Be?, 33 pub. Cont. L.J. 5, 30 (2003). 99 15 U.S.C. § 3710a(b)(1)(A) (2016). 86 35 U.S.C. § 202(a) (2016); 48 C.F.R. § 27.302(b)(2) (2015). See also 48 C.F.R. § 27.303(e)(1)(ii) (2015). 87 35 U.S.C. § 203 (2016); 48 C.F.R. § 27.302(f) (2015); 48 C.F.R. § 52.227–11(h) (2015). 88 35 U.S.C. § 203(a) (2016); 48 C.F.R. § 27.302(f)(1) (2015). 89 35 U.S.C. § 203(b) (2016); 48 C.F.R. § 27.304–4 (2015). 90 48 C.F.R. § 1227.304–5 (2015). 91 35 U.S.C. § 203(b) (2016). 92 Mireles, supra note 23, at 1138, 1155; Sidebottom, supra note 23, at 69–70. 93 Pub. L. No. 99–502, § 2, 100 Stat. 1785 (Oct. 20, 1986).

12 laboratories housed at Turner–Fairbank Highway Research Center. Further, FHWA itself is specifi- cally authorized to enter into CRADAs with the Transportation Research Board (TRB), state trans- portation agencies, and local governments “to conduct joint transportation research and technol- ogy efforts.”100 Keeping in mind the requirement that federal labs are not to contribute funding to nonfederal parties in a CRADA, FHWA is neverthe- less authorized to contribute funds to cover the “cost of activities” under these CRADAs, but the nonfed- eral parties are required to contribute at least 20 percent of the “cost of activities.”101 2. Other Transactions In highly specialized research and development situations, certain federal agencies are authorized to enter into “other transactions” (also known as “other agreements”102) that are something other than contracts, grants, or cooperative agreements.103 In other words, they are not “funding agreements” subject to the Bayh–Dole Act, and they are not contracts subject to the FAR. “Other transactions” allow a federal funding agency and its contractor to start with a “blank page” to begin negotiating patent rights, and therefore they “are subject to even fewer laws and regulations than Cooperative Agreements or CRADAs.”104 This could potentially involve the contractor taking greater rights to federally funded inventions than provided by the Bayh–Dole Act, which could mean the federal funding agency does not take a license for use by or on behalf of the government.105 The first USDOT agency to be granted “other transaction” authority was FAA, which in 1996 was broadly authorized to enter into “other transactions as may be necessary to carry out [its] functions.”106 In 1998, Congress extended this broad authority to the entire department, to conduct research and develop- ment in “all phases of transportation planning and development (including construction, operation, modernization, development, design, maintenance, safety, financing, and traffic conditions)” by entering into “other transactions” with practically anyone, specifically including TRB, the American Association of State Highway and Transportation Officials (AASHTO), state transportation agencies, and any “for-profit or nonprofit corporation.”107 Since that time, however, the USDOT’s “other transaction” authority has been limited to situations of national importance where the standard patent rights scheme is deemed infeasible. Beginning in 2005, Congress limited the department’s “other transaction” authority to research and development involving “innovative technologies and facilities to improve safety, enhance the speed of highway construction, and improve the quality and durability of highways,”108 as well as “other agreements” for research and develop- ment involving “technology of national significance to public transportation.”109 Aside from this general authority for issues of national significance, USDOT agencies are occasionally granted “other transaction” authority for specific issues for a limited time.110 “Other transactions” have been used to conduct “DOT research to enhance oil and gas pipeline safety” and “FAA research on safe unmanned aerial system operations in the national airspace.”111 In general, however, the use of “other transactions” by the USDOT has been in steady decline,112 and the Bayh–Dole Act continues to govern the vast majority of research and develop- ment funded by federal transportation agencies. D. Use of Patented Inventions in the Performance of Federal Contracts The Bayh–Dole Act governs patent rights to inven- tions made with federal funding; it does not address inventions made without federal funding that are later utilized on federal contracts.113 Federal 100 23 U.S.C. § 502(c)(2) (2016). 101 23 U.S.C. § 502(c)(3) (2016). 102 See unIteD states DepaRtment of tRanspoRtatIon, fInanCIal assIstanCe guIDanCe manual, ch. 10, § E (Mar. 2009) (“The term, ‘other agreement’ is considered as an ‘other transaction’ for Department program purposes.”). 103 See, e.g., Sidebottom, supra note 23, at 92 n.229 (“Called Other Transactions, these agreements are defined in the negative as being something other than a contract, grant, or cooperative agreement.”). 104 Dix, supra note 98, at 23, 26, 29–30. 105 See u.s. goveRnment aCCountabIlIty offICe, gao 16–209, feDeRal aCquIsItIons: use of “otheR tRansaCtIon” agReements lImIteD anD mostly foR ReseaRCh anD Devel- opment aCtIvItIes, 12–13 (2016). 106 Federal Aviation Reauthorization Act of 1996, Pub. L. No. 104–264, § 226, 110 Stat. 3213 (Oct. 9, 1996) (codi- fied at 49 U.S.C. § 106(l)). 107 Transportation Equity Act for the 21st Century, Pub. L. No. 105–178, § 5102, 112 Stat. 107 (Jun. 9, 1998). 108 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, Pub. L. No. 109–59, § 1502, 119 Stat. 1144 (Aug. 10, 2005). 109 Id., § 3014 (codified at 49 U.S.C. § 5312). 110 In 2012, Congress granted FHWA the authority to enter into “other transactions” for highway safety research and development. Moving Ahead for Progress in the 21st Century Act, Pub. L. No. 112–141, § 403, 126 Stat. 405 (Jul. 6, 2012) (codified at 23 U.S.C. § 403). 111 U.S. goveRnment aCCountabIlIty offICe, supra note 105, at 15–16 (2016). 112 Id. at 27. 113 37 C.F.R. § 401.1(a)(2) (2015) (“An invention which is made outside of the research activities of a government- funded project is not viewed as a ‘subject invention’ since it cannot be shown to have been ‘conceived or first actually reduced to practice’ in performance of the project.”).

13 agencies are not generally prohibited from contract- ing for the use of patented or proprietary technology, and “will not refuse to award a contract on the grounds that the prospective contractor may infringe a patent.”114 However, federal agencies may be cautious of contracting for the use of patented or proprietary technology for a number of reasons (including concerns about paying a premium to the rights holder or concerns about government programs becoming dependent on proprietary tech- nology to the extent that the rights holder estab- lishes an effective monopoly position as the only realistic service provider for future contracts). Like- wise, as in the Hazeltine case,115 contractors may have realistic concerns about losing their proprie- tary technology by utilizing it on a federal contract. It is typically in everyone’s interest for the contractor to make upfront disclosures regarding preexisting, proprietary technology that will be utilized on the federal contract. As noted in Section II.A supra, the contractor may deliver unpatented data developed entirely with private funds (includ- ing technical drawings and computer software) to the government with “limited rights” or “restricted rights,” as appropriate, to preserve its proprietary interest in the data. Although not dispositive as to patent rights, such upfront disclosures can help avoid later disputes regarding the scope of invention made in the performance of the federal contract (which would be subject to the Bayh–Dole Act). When the contractor expects to furnish or use its own patented invention in the performance of a government contract, the existence of a patent (or patent application) will typically demonstrate that the invention was not first reduced to practice in the performance of the federal contract.116 In that situa- tion, the contractor does not have to be concerned that use of the invention on a federal contract enti- tles the federal government to a broad license for future use of the invention. Nevertheless, the contractor should still make upfront disclosures that it intends to use the patented invention in the performance of the federal contract. Among other reasons, ownership of the patent can offer competi- tive advantages to the contractor during bidding, as the bids of its competitors may be adjusted to reflect the royalty that would be owed to the patent owner if its competitor is awarded the contract.117 The federal government may, knowingly or unknowingly, solicit bids for work that requires the use of patented inventions.118 Where the government is aware that the work requires the use of patented inventions, the government may negotiate a license with the patent owner. If the government has acquired a license to have the patented invention used on its behalf, either through negotiations with the patent owner or through application of the Bayh– Dole Act, the federal contracting agency must notify prospective contractors of the existence and terms of the license, including any royalty that will be owed to the patent owner.119 Likewise, regardless of whether the contract requires the use of a patented invention, if a contractor intends to use a patented invention in performance of the contract, it is required to notify the funding agency of any royalty or license that it has negotiated with the patent owner.120 Importantly, even if neither the federal govern- ment nor the contractor has a license agreement with the patent owner, the patent owner’s sole remedy for infringement of its patent by a federal contractor (or its subcontractor) is to petition for a “reasonable royalty” from the federal contracting agency in the U.S. Court of Federal Claims.121 The “reasonable royalty” awarded by the court will typi- cally be less than the patent owner might demand in negotiations with private parties and less than the patent owner might be awarded for infringement by private parties. A federal contract subject to the FAR typically includes a blanket “Authorization and Consent” clause that authorizes the contractor to infringe any patents where infringement “necessarily results” from adherence to the contract specifications or the contract officer’s instructions, or where the work is accepted by the federal government.122 This effec- tively immunizes the contractor from direct suit by the patent owner for infringement.123 The contractor 114 48 C.F.R. § 27.102(b) (2015). 115 Hazeltine Corp. v. United States, 820 F.2d 1190, 1196 (Fed. Cir. 1987). 116 Id. (“[T]he filing of a patent application is a construc- tive reduction to practice.”) 117 48 C.F.R. § 27.202–2(b) (2015); 48 C.F.R. § 27.202– 5(b) (2015); 48 C.F.R. § 52.227–7 (2015). 118 48 C.F.R. § 27.102(b) (2015). 119 48 C.F.R. § 27.202–2(a) (2015); 48 C.F.R. § 52.227–7 (2015). 120 48 C.F.R. § 27.202–5(a)(1) (2015); 48 C.F.R. § 52.227– 6(a) (2015). 121 28 U.S.C. § 1498 (2016); 48 C.F.R. § 27.201–1 (2015); 48 C.F.R. § 52.227–1(a) (2015). See also Comp. Gen. B 178104, 52 Comp. Gen. 761 (May 4, 1973) (concluding that a patent own- er’s only avenue to recover a royalty from the U.S. Depart- ment of Transportation was by action in the U.S. Court of Federal Claims, because the department at the time was not authorized to enter into patent licensing agreements). 122 48 C.F.R. § 52.227–1 (2015). 123 See, e.g., TDM America, LLC v. United States, 85 Fed. Cl. 774, 780, 808 (2009) (holding a federal contractor immune from suit by the patent owners, where the patent specifica- tion envisioned that the invention would be used “as a paving material for parking lots, airfield construction, road base or other Department of Transportation projects”).

Next: III. STATE AND LOCAL CONTRACTS WITH FEDERAL FUNDING »
Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies Get This Book
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TRB's National Cooperative Highway Research Program (NCHRP) Legal Research Digest 73: Primer on Patentability and Use of Ideas Developed by Contractors Performing Work for State and Federal Transportation and Local Planning Agencies summarizes federal and state patent laws and then reviews the similarities and differences between the two. It also discusses and distinguishes patentability issues concerning inventions by contractors for federal contracts, federally funded state and local government contracts, and state and local government contracts sourced by state and local funds. The balance of the digest is dedicated to a thorough review of patent infringement on state and local government contracts and defenses in the performance of these contracts.

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