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

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21 court has concluded that the federal government’s ability to authorize and consent to patent infringe- ment by its contractors does not offer protection to contractors for state transportation agencies who infringe patents in the performance of a federally funded contract. In Jacobson v. Cox Paving Co.,190 a paving contractor accused of patent infringement argued that, because its work for the Texas State Highway Department was “supported by federal funding,”191 the patent owner’s only remedy was to bring suit for a royalty from the federal government in the U.S. Court of Federal Claims. The U.S. District Court for the District of Arizona concluded that the paving contractor’s federally funded work for the state transportation agency did not make it a federal contractor subject to immunity. The general conclusion is that federal funding of state transportation agency contracts imposes restrictions on the state transportation agency related to patents, while offering few of the advan- tages related to patents that federal agencies enjoy. State transportation agencies are required to allow their contractors to elect to retain title to inventions made with federal funds, and are prohibited from using federal funds to pay for premiums or royalties associated with patents. At the same time, federal statutes do not grant state transportation agencies any license rights to the inventions of their contrac- tors, nor the ability to immunize their contractors from patent infringement lawsuits. However, state transportation agencies enjoy some advantages over federal agencies with respect to patents, namely immunity from suit for patent infringement as discussed in Section V. Patentability issues related to inventions made by state transportation agencies without federal funding are discussed in Section IV. IV. OTHER PATENTABILITY ISSUES WITH STATE AND LOCAL CONTRACTS A. Rights Retained by State and Local Governments to Contractor Inventions Although USDOT agencies have taken the posi- tion that the Bayh–Dole Act applies to state trans- portation agency contracts funded with federal transportation grant funds, the Bayh–Dole Act does not apply to state transportation agency contracts where federal funds are not involved. Therefore, the allocation of patent rights between the state trans- portation agency and its contractor will not neces- sarily follow the federal model, where the contractor can elect to take title to its inventions and the federal government retains a paid-up license. For example, in State Contracting & Engineering Corp. v. State of Florida,192 discussed in detail in Section IV.B infra, the U.S. Court of Appeals for the Federal Circuit concluded that the Florida Department of Transportation (FDOT) did not obtain a license to use an invention made by its contractor on an FDOT project. The patent rights to an invention made on a given state transportation agency contract will depend on the applicable state law, the contract language, and the circumstances of the specific case. As discussed in Section I.B.5 supra, the state statutes, procurement regulations, and policies governing patent rights on state transportation agency contracts will vary widely from one state to the next. More often than not, if there is an applica- ble state statute, procurement regulation, or policy, it grants patent ownership to the state for any invention made on a state transportation agency contract.193 However, the trend is in the direction toward a Bayh–Dole approach at the state level, where the state transportation agency would merely retain a paid-up license to inventions made with state transportation agency funds, and possibly march-in rights to reclaim inventions if the public interest requires it. NCHRP Report 799, Management Guide to Intel- lectual Property for State Departments of Transpor- tation,194 provides guidance for state transportation agencies regarding whether to exercise their rights to take title to a patentable invention. In situations where state law or policy presumes that the state owns inventions made on state transportation agency projects, NCHRP Report 799 identifies six critical factors that should be considered by the state transportation agency in determining whether to pursue patent protection for such inventions.195 These include whether and to what extent the state transportation agency wants to exclude others from use of the invention, control future use of the inven- tion, ensure that the invention remains in the public domain, avoid potential future license fees for use of 192 State Contracting & Eng’g Corp. v. State of Florida, 258 F.3d 1329, 1339-40 (Fed. Cir. 2001). 193 See, e.g., oKla. stat. tit. 74, § 85.60 (2016) (providing that the State takes title to “patented property” developed by its contractors); Conn. gen. stat. § 4–61a (2016) (providing that the State takes title to inventions made by its employees); N.M. stat. § 57–3C–3 (2016) (“Inventions, innovations, works of authorship and their associated materials that are developed by a state employee…within the scope of his employment or when using state-owned or state-controlled facilities or equipment are the property of the state.”). 194 bRaDley, msllela & ChesnIK, supra note 184. 195 Id. at 26–28. 190 949 F.2d 404 (Fed. Cir. 1991). 191 Jacobson v. Cox Paving Co., Civ. No. 89-1786, 1991 U.S. Dist. LEXIS 17787 (D. Ariz. May 16, 1991).

22 the invention, control the commercialization process of the invention, and establish a revenue stream from the invention. NCHRP Report 799 identifies additional factors that can influence whether a state transportation agency should attempt to exercise “march-in rights” or otherwise attempt to take ownership of the inventions of its contractors, in situations where the applicable state law presumes that the contractor is entitled to patent inventions made on state contracts. These factors include the state transportation agency’s legal authority to reclaim title (under applicable state law or under the contract language) and the state trans- portation agency’s need to control future use of the invention.196 For example, if a state transportation agency wants to ensure that its funded inventions are available for use by the public at large, or by transpor- tation agencies in other states, a nontransferable license will not suffice and the state may need to retain title to keep the invention in the public domain. The type of contract and type of contractor will affect this decision as well.197 University employees, licensed design professionals such as engineers, and other professional researchers will typically expect to be able to patent their inventions, and may be discouraged from working with state transportation agencies if title to their inventions is contested. Financial consid- erations will also come into play. In some cases, it may be advantageous for the state transportation agency to negotiate a lesser interest in its contractor’s deliver- able (e.g., license rather than title) in exchange for a more favorable contract price. If permitted by the applicable procurement statutes and regulations, the state transportation agency may request contingent bids based on either the state or the contractor having primary patent rights in a resulting invention. Generally speaking, unless the state is allowed to receive royalties from use of the invention by others, and unless the state intends to actively manage the commercialization process, retaining a paid-up license to have the invention used on behalf of the state should suffice for most state transportation agency purposes. As long as the state transportation agency is authorized to do so, there is little downside in allowing its contractors to take title to inventions (and having its contractors bear the burden of obtaining a patent and commercializing the inven- tion) as long as the state retains a license. B. Patentability of Inventions by Contractors on State and Local Contracts Although some state governments may presume state ownership of inventions made with state funds, the general rule remains that patent rights belong to “[w]hoever invents or discovers any new and useful process, machine, manufacture, or compo- sition of matter, or any new and useful improvement thereof.”198 Therefore, in the absence of applicable state law, policy, or contract language providing otherwise, the patent rights for inventions made on a state transportation agency contract may be assumed to belong to the individual inventor(s). However, neither the state transportation agency nor its contractor should assume the disposition of patent rights. Ideally, the contract language will spell out the disposition of patent rights—including whether the state or contractor is presumed to take title as well as the scope of license retained by the other party—within the boundaries of the applicable state statutes, procurement regulations, and policies. If the state transportation agency intends to allow its contractor to pursue patent protection, it is criti- cal for the contract to expressly reserve a paid-up license for the state to use the invention and to have the invention used on its behalf by its contractors, as illustrated by the State Contracting and Engineering Corp. cases discussed in the following section. It is also important, as with federal contracts, for the state contract language to provide that the disposition of patent rights in the prime contract is required to be flowed down to any subcontracts. Otherwise, subcontractors or other parties not in privity with the state transportation agency may attempt to patent inventions made with state fund- ing in the performance of the state transportation agency contract, and the subcontractors could claim they are not bound by the agreement between the state transportation agency and its prime contrac- tor. For example, in the MDSS pooled fund project discussed in Section III.B supra, the prime contract provided that all participating state transportation agencies would take a paid-up license to use the MDSS technology. However, a patent was issued to a technology provider participating in the project who was not a party to the prime contract, leaving other contractors vulnerable to patent infringement lawsuits for using the MDSS technology for partici- pating state transportation agencies. 1. State Contracting and Engineering Corp. Cases In State Contracting and Engineering Corp. v. State of Florida,199 a contractor for FDOT, in the course of a contract to construct sound barrier walls, invented a new construction method that involved positioning the wall posts in a cement slurry pile. FDOT accepted the contractor’s new method as a 198 35 U.S.C. § 101 (2016). 199 258 F.3d 1329 (Fed. Cir. 2001). 196 Id. at 61–63. 197 Id. at 56–58.

23 value engineering change proposal. The value engi- neering change proposal was subject to a “rights in data” clause similar to that used in federal contracts (as discussed in Section II.A supra), which granted FDOT “all rights to use, duplicate, or disclose…data reasonably necessary to fully utilize such proposal on this and any other Department contract.” The contractor later obtained two patents, one directed to the structure of the post and cement slurry pile and one directed to the method of construction.200 The patent owner later sued FDOT and its contractors for infringing its patents in the construc- tion of other sound barrier walls. The U.S. District Court for the Southern District of Florida concluded that FDOT was entitled to Eleventh Amendment immunity from suit for patent infringement, and also that FDOT acquired a license (via the “rights in data” clause) that allowed its contractors to use the invention on behalf of FDOT.201 On appeal, the U.S. Court of Appeals for the Federal Circuit affirmed that FDOT was shielded by sovereign immunity, but reversed as to its contractors. The Federal Circuit concluded that the “rights in data” clause in FDOT’s contract, like that in federal contracts, did not convey any patent rights to FDOT.202 Accordingly, its contractors could be sued for patent infringement. A trial was conducted, with the jury ordering the contractors to pay “reasonable royalties” to the patent owner, plus almost $4 million in prejudgment interest.203 Furthermore, because FDOT apparently contractually agreed to pay any patent royalties associated with conforming to its contract specifica- tions, FDOT was ultimately responsible for the damages award as well as its contractors’ legal fees.204 (Despite FDOT’s agreement to pay patent royalties, the court concluded that there was no evidence of an agreement by FDOT to indemnify its contractors for patent infringement,205 which may have helped FDOT avoid being directly liable for patent infringement as in the Warren Bros. case discussed in Section V.A). Ultimately, FDOT settled with the patent owner, with FDOT paying $8 million for past infringement on FDOT contracts and stipu- lating that the patent owner was entitled to royalties for future use of the invention on FDOT projects,206 even though the invention was originally made on an FDOT contract. This case illustrates the importance of reserving a paid-up license for the state for inven- tions made on state transportation agency contracts. C. Patentability of Inventions by State Transportation Agency Employees Patentable inventions may be made by employees of state transportation agencies, as well as by contrac- tors, in the performance of the work of the state transportation agency. Under the Patent Act, the presumption is that the employee–inventor, and not the state transportation agency, is entitled to obtain patents for such inventions.207 There is historical legal precedent of employees of state transportation agencies being allowed to patent inventions devel- oped in the course of their employment and to person- ally profit from their inventions.208 In such cases, although the employee–inventor could market the invention for use on behalf of other state transporta- tion agencies, the state transportation agency that employed the inventor was generally entitled to “shop rights,” or a paid-up license in the invention.209 200 Id. at 1332. 201 State Contracting & Eng’g Corp. v. Florida, Dep’t of Transp., No. 97-CV–07014, 2000 U.S. Dist. LEXIS 22538, * 1 (S.D. Fla. Mar. 2, 2000), aff ’d in part, vacated in part, remanded, State Contracting & Eng’g Corp. v. State of Florida, 258 F.3d 1329 (Fed. Cir. 2001). 202 State Contracting & Eng’g Corp. v. State of Florida, 258 F.3d 1329, 1339–40 (Fed. Cir. 2001). 203 State Contracting & Eng’g Corp. v. Condotte Am., Inc., No. 97-CV–07014, 2002 U.S. Dist. LEXIS 28214, at *1 (S.D. Fla. June 4, 2002). 204 Daniel P. Valentine, The Plenary Power of States to Infringe Intellectual Property Under the Cloak of Sover- eign Immunity, 6 J. hIgh teCh. L 165, 168–69 n.34 (2006) (“It appears that the contracts between Florida and the contractors contained a provision which stated that ‘if any patent or license fees are…required…for use of the sound barrier wall called for by the plans, [then] any such fees or royalties required and paid by the contractor will be reim- bursed by the [Florida] department’ of transportation.”). 205 State Contracting & Eng’g Corp. v. Condotte Am., Inc., No. 97-CV–07014, 2002 U.S. Dist. LEXIS 28214, at *1 (S.D. Fla. June 25, 2002) (“[T]he letter from an Assistant Secretary of FDOT does not bind the State of Florida to pay the debt of private companies. Defendants have not put forth a specific indemnification provision that would contractually bind the State of Florida to pay the dam- ages.”); State Contracting & Eng’g Corp. v. Florida, No. 97-CV–07014, 2000 U.S. Dist. LEXIS 22914, at *6 (S.D. Fla. Sept. 26, 2000) (“[A]t the time this action was com- menced there was no indemnification in effect.”). 206 State Contracting & Eng’g Corp. v. Condotte Am., Inc., No. 97-CV–07014, 2004 U.S. Dist. LEXIS 28600 (S.D. Fla. Oct. 25, 2004). 207 35 U.S.C. § 101 (2016) (granting patent rights to “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof”). 208 See, e.g., Power Curbers, Inc. v. E.D. Etnyre & Co., 298 F.2d 484, 486 (4th Cir. 1962) (involving curb building invention made by employee of North Carolina State Highway Department, who subsequently set up a corpora- tion to market the invention to state transportation agen- cies nationwide). 209 See, e.g., Hansen v. State, 8 Ill. Ct. Cl. 519, 524 (1935) (“[T]he State has a right and license to use the machine made and to make and use other similar machines,” where an employee of the Illinois State Highway Department obtained a patent on a pavement striping invention).