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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24 Today, however, state statutes, policies, and employment agreements often modify the general rule that the individual inventor has the exclusive right to patent an invention. The modern trend is for state statutes, policies, and employment agreements to provide that the state retains title to inventions made by state transportation agency employees in the course of employment, but the employee is enti- tled to share in any of the profits or revenues derived from the patent.210 V. PATENT INFRINGEMENT ON STATE AND LOCAL CONTRACTS A. Use of Patented Inventions in the Performance of State and Local Contracts As discussed in Section II.D supra, federal contractors are effectively immunized from patent infringement lawsuits for work performed on behalf of the federal government, and the patent owner’s only recourse in that situation is to seek a royalty from the federal government in the U.S. Court of Federal Claims. This situation is almost entirely reversed on state contracts. State governments, including state transportation agencies, are widely understood to be immune from suit for patent infringement, but their contractors are not. In fact, notwithstanding their sovereign immunity, stan- dard language in state procurement regulations and state transportation agency contracts typically require contractors to indemnify and hold harmless the state transportation agency for the contractor’s use of patented inventions on behalf of the state transportation agency.211 This role reversal has several implications for state transportation agen- cies, as discussed herein. The Eleventh Amendment to the U.S. Constitution provides: “The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.”212 This is generally understood to preclude a lawsuit in federal court, seeking to recover damages from state govern- ment agencies (including state transportation agen- cies), except where either the state agency has waived its immunity or Congress has abrogated the state’s immunity in order to enforce other substan- tive provisions of the Constitution.213 Patent infringement lawsuits can only be brought in federal court,214 so the Eleventh Amendment effectively immunizes state transportation agencies against damages lawsuits for patent infringement brought without their consent. A state transportation agency could consent to the federal court’s jurisdiction, in the process waiv- ing its immunity from a patent infringement coun- terclaim, by initiating an action seeking a declaratory judgment that a patent is either invalid or has not been infringed.215 At least one federal court, in an older opinion, has concluded that a state transporta- tion agency can also impliedly consent to be sued for patent infringement by the operation of indemnity language in its contracts. In Warren Bros. Co. v. Kibbe,216 the U.S. District Court for the District of Oregon concluded that the Oregon State Highway Commission, by including language in its paving contracts “agreeing to indemnify contractors against damages for infringement of patents,” waived its immunity from suit for patent infringement. Most federal courts confronting alleged patent infringement by state transportation agencies have declined to follow the Warren Bros. decision, typically distinguishing that case on the basis of the specific indemnity provision in the Oregon contract. Federal courts typically give state transportation agencies the benefit of Eleventh Amendment immunity 210 Catherine E. Colyer, Stephen C. Schott, Kristin W. Sprinkle & Jason S. Beaton, vIRgInIa tRanspoRtatIon ReseaRCh CounCIl, IntelleCtual pRopeRty hanDbooK foR employees of the vIRgInIa DepaRtment of tRanspoRtatIon (2005); n.m. stat. § 57–3C–4 (2016) (providing that state employees receive “50 percent of the income collected on the invention or work”). 211 See, e.g., VanKirk v. Green Const. Co., 195 W. Va. 714, 719, 466 S.E.2d 782, 787 (1995) (requiring contractor’s surety to “save and keep harmless the West Virginia Department of Highways and the State of West Virginia from all losses to it or them from any cause whatever including patent, trade-mark, and copyright infringe- ments in the manner of constructing said Road[.]”); Signalisation Ver-Mac, Inc. v. Addco Mfg., Inc., No. 3:05-CV 00707 (D. Or. Filed May 18, 2005) (“Pursuant to the terms of its contract with Oregon, Ver–Mac had to defend, indemnify and hold harmless the State of Oregon.”). 212 U.S. Const. amend. XI. 213 Welch v. Texas Dep’t of Highways & Pub. Transp., 483 U.S. 468, 472–73, 107 S. Ct. 2941, 2945–46, 97 L. Ed. 2d 389, 396 (1987) (holding that an employee of the Texas Department of Highways and Public Transportation was barred by the Eleventh Amendment from suing the state transportation agency pursuant to federal employment law to recover damages for injuries sustained in the line of work). See also Coll. Sav. Bank v. Florida Prepaid Postsec- ondary Educ. Expense Bd., 948 F. Supp. 400, 409 (D.N.J. 1996) (stating that Eleventh Amendment sovereign immunity extends to “subdivisions of states” including “highway departments”). 214 28 U.S.C. § 1338 (2016). 215 See, e.g., State of Cal. Dep’t of Transp. v. Tycor Walls, Inc., 106 F. App’x 709, 714 (Fed. Cir. 2004) (overturning summary judgment of non-infringement in favor of California Department of Transportation (Caltrans), and remanding for lower court to consider patent owner’s infringement counterclaim against Caltrans). 216 3 F.2d 582 (D. Or. 1925).

25 regarding damages claims for patent infringement.217 However, a number of these decisions suggest that a patent owner can sue a state transportation agency in federal court for injunctive relief (to prevent the infringement of a patent),218 or the patent owner can pursue a takings claim (or similar remedy) against the state transportation agency in state court. A representative example is Hercules, Inc. v. Minnesota State Highway Department,219 in which the owner of a patent for spray application of pesticides sued the Minnesota Department of Transportation (MnDOT) and its supplier for patent infringement. The U.S. District Court for the District of Minnesota concluded that, absent its consent, MnDOT was immune from liability for damages.220 The court rejected the patent owner’s argument that MnDOT consented to suit for patent infringement by language in its invitation to bid, which required contractors to include all patent royalty fees in their price and required contractors to immunize the state against claims for patent infringement.221 The court declined to opine whether the patent owner might have any other valid claim against MnDOT, either in state court or in a state administrative claims process.222 However, the court concluded that the use of a patented process by a state transportation agency “amounts to the taking of property without the due process of law,”223 providing justification for federal courts to issue an injunction against future infringe- ment by the state transportation agency. Further- more, the court suggested that the patent owner might have an infringement claim against individual employees of MnDOT, who would not be shielded by Eleventh Amendment immunity.224 Finally, the court concluded that MnDOT’s supplier could be liable for damages for its own infringement, or for contributing to the infringement of the patent by MnDOT.225 The issues raised by the Hercules court, including the injunctive power of federal courts regarding patent infringement by state transportation agencies, as well as potential remedies available in state court, were ultimately examined by the U.S. Court of Appeals for the Federal Circuit in Jacobs Wind Electric Co., Inc. v. Florida Department of Transportation.226 As discussed in the following section, the outcome of this case led to a failed effort by Congress to abrogate state sovereign immunity for patent infringement. 1. Jacobs Wind Electric Co. v. Florida DOT In Jacobs Wind,227 the owner of a patent for a tidal flow system sued FDOT for patent infringement after FDOT installed tidal flow systems on public waterways. The U.S. Court of Appeals for the Federal Circuit, like the Hercules court, concluded that, under the Eleventh Amendment, a state transporta- tion agency is immune from suit for damages due to patent infringement.228 However, unlike the Hercules court, the Federal Circuit appeared to reject the patent owner’s position that the federal court could determine that the patent was infringed by FDOT and issue an injunction against further infringement by FDOT.229 Instead, the Federal Circuit suggested that the patent owner’s available remedies were to assert a claim against FDOT under the state admin- istrative claims process, or sue FDOT in state court for an unconstitutional taking.230 The patent owner then brought a takings claim in the Florida state court, which was dismissed by the trial court as essentially a patent infringement claim, over which the federal courts have exclusive jurisdiction.231 However, the Supreme Court of Florida overturned, in a 5–2 decision, concluding that state courts have jurisdiction over takings and conversion claims against a state agency involving patent rights, where there is no other remedy due to the state’s Eleventh Amendment immunity from suit for patent infringement.232 The dissent contended that the patent owner’s remedy was not a takings claim in state court, but rather injunctive relief in federal court against FDOT for patent infringement233 (although the Federal Circuit had appeared to reject that notion). 217 See, e.g., Order Dismissing Colorado Department of Transportation, Hildebrand v. Henderson Truck Equip- ment, No. 15 CV 00486 (D. Colo. Jun. 16, 2015). In Hildebrand, the Colorado Department of Transportation and a number of its equipment suppliers had been sued for infringing a patent on an attachment for snow removal and road maintenance equipment. See Hildebrand v. Douglas Dynamics, Inc., No. 15-CV-00486, 2015 U.S. Dist. LEXIS 60007 (D. Colo. May 6, 2015). 218 See Abhay Watwe, Ex Parte Young Remedy for State Infringement of Intellectual Property, 12 lewIs & ClaRK l. Rev. 793, 797–98 (2008) (citing Hercules Inc. v. Minnesota State Highway Dep’t, 337 F. Supp. 795 (D. Minn. 1972)). 219 337 F. Supp. 795 (D. Minn. 1972). 220 Id. at 800. 221 Id. at 802. 222 Id. at 799 n.3, 802. 223 Id. at 799. 224 Id. at 800. 225 Id. at 801. 226 919 F.2d 726 (Fed. Cir. 1990). 227 Id. 228 Id. at 729. 229 Id. at 728. 230 Id. 231 State, Dep’t of Transp. v. Padgett, 601 So. 2d 1331 (Fla. Dist. Ct. App. 1992). 232 Jacobs Wind Elec. Co., Inc. v. Dep’t of Transp., 626 So. 2d 1333, 1336–37 (Fla. 1993). 233 Id. at 1338 (Harding, J., dissenting).

26 The Hercules and Jacobs Wind decisions are contradictory, and leave largely unanswered the question of a patent owner’s remedy (and a state transportation agency’s liability) for patent infringe- ment by a state transportation agency. The Hercules court was skeptical of state law remedies and found a federal remedy, despite inadequacies in the patent owner’s pleadings. The Jacobs Wind courts, on the other hand, suggest that there are no federal reme- dies, but that there are state remedies akin to damages for patent infringement.234 However, it is worth noting that, despite the differences of opinion between the Hercules and Jacobs Wind courts, both ultimately came down on the side of the patent owner and denied outright immunity to the infring- ing state transportation agencies. The Jacobs Wind outcome, ultimately in favor of the patent owner, depended on the existence of a state law remedy, which could vary from state to state. In similar circumstances, some state courts have concluded that there is not a conversion or takings remedy under state law for the unauthorized use of a patent by a state transportation agency, concluding that those legal theories are just patent infringement claims in disguise, which fall under the exclusive jurisdiction of the federal courts.235 Some commenta- tors have criticized the Federal Circuit’s opinion in Jacobs Wind for failing to first confirm that the patent owner would have a remedy under Florida law.236 After the Federal Circuit’s decision in Jacobs Wind, and partly as a result of that decision, Congress enacted legislation providing that state agencies could be sued for patent infringement in federal court, and could be liable for damages as well as injunctive relief.237 However, the U.S. Supreme Court, in a 5–4 decision, invalidated the legislation, concluding that Congress unreasonably abrogated sovereign immu- nity because there was not extensive evidence of abuse by the states.238 The Court thus affirmed that an act of Congress to abrogate state sovereign immu- nity for patent infringement is subject to heightened scrutiny, leaving the state’s consent to suit in federal court as the only realistic way for a patent owner to recover damages for patent infringement by a state transportation agency. However, some commentators have suggested that Congress could effectively abro- gate state sovereign immunity for patent infringe- ment by conditioning a state’s acceptance of federal highway funds on the state’s waiver of sovereign immunity for patent infringement.239 Although the state transportation agency itself is immune from suit seeking damages for patent infringement, it is conceivable that employees or officials of state transportation agencies could be personally liable.240 Patent owners may argue that individual employees or officials of a state transpor- tation agency have acted in bad faith, outside of the scope of their employment, and are not entitled to immunity where they are aware that actions taken on behalf of the state transportation agency consti- tute patent infringement. For example, patent owners may complain that employees of state trans- portation agencies induce infringement by drafting project specifications very narrowly, so that the proj- ect specifications effectively require the use of the patented invention. However, such specifications- based claims are generally unsuccessful,241 espe- cially where it can be shown that there were alternatives to the patented invention that would suitably comply with the specifications. Contractors, on the other hand, will be liable in those cases when 238 Florida Prepaid Postsecondary Educ. Expense Bd. v. Coll. Sav. Bank, 527 U.S. 627, 640, 119 S. Ct. 2199, 2207, 144 L. Ed. 2d 575, 598 (1999). But see Nelson, supra note 234, at 295–96 nn.170–171 (2000) (examining the evidence of patent infringement by states considered by Congress, including the Jacobs Wind case, in deciding to abrogate state sovereign immunity for patent infringement). 239 Nelson, supra note 234, at 311. 240 Crane v. State of Tex., 759 F.2d 412, 428 (5th Cir. 1985) (“The Eleventh Amendment is obviously no bar to actions for damages against officials sued in their indi- vidual capacities…”). See also Order Granting Partial Summary Judgment, Trinity Industries, Inc. v. Road Sys- tems, Inc., No. 98 CV–01623 (E.D. Tex. Sept. 2, 2010) (denying Eleventh Amendment immunity for patent infringement claim brought against state university employee in his individual capacity). 241 McKeown v. City of Chicago, 20 Fed. Appx. 856, 858 (Fed. Cir. 2001) (“We are unaware of any authority, and appellant has not directed us to any, supporting a claim for an infringing use based upon the City’s inclusion of specifications allegedly embodying his patented invention in its informational material.”). 234 George L. Blum, Jurisdiction of State Court Over Actions Involving Patents, 85 A.L.R. 6th 1 (2013) (“The state court has jurisdiction over takings and conversion claims against the State with respect to property that is a subject of a patent when the State is immune from suit for patent infringement in federal court….” (citing Jacobs Wind)). 235 See, e.g., Thimgan v. State, 125 Neb. 696, 251 N.W. 837 (1933) (dismissing patent owner’s claim against the State for taking or conversion as federally preempted, where the patent owner alleged the State was using his road marker patent “along every state road and highway in the state of Nebraska”). 236 Scott D. Nelson, Big Brother Stole My Patent: The Expansion of the Doctrine of State Sovereign Immunity and the Dramatic Weakening of Federal Patent Law, 34 U.C. DavIs l. Rev. 271, 298 n.186 (2000). 237 Patent and Plant Variety Protection Remedy Clarifi- cation Act, Pub. L. No. 102–560, 106 Stat. 4230 (Oct. 28, 1992) (codified at 35 U.S.C. §§ 271(h), 296). See also Coll. Sav. Bank v. Florida Prepaid Postsecondary Educ. Expense Bd., 148 F.3d 1343, 1347 (Fed. Cir. 1998) (“In response to our decisions in Jacobs Wind and Chew, Congress amended the patent laws to express unambiguously its intent to abrogate the sovereign immunity of the states.”), rev’d, 527 U.S. 627, 119 S. Ct. 2199, 144 L. Ed. 2d 575 (1999).

27 they actually infringe the patent by adhering to project specifications that closely track the patent.242 B. Defenses to Infringement in the Performance of State and Local Contracts Although state transportation agencies are immune from suit for patent infringement, their contractors are not.243 As seen in the State Contract- ing and Engineering Corp. cases discussed in Section IV.B, infringement lawsuits against their contrac- tors can become very costly for state transportation agencies. When lawsuits arise, contractors accused of infringement typically assert a variety of defenses, which are discussed herein. 1. Obvious or Not Novel When contractors for state transportation agen- cies face patent infringement claims, they typically raise as a defense that the invention is not patent- able; i.e., that it was obvious or not novel in light of prior art, so the patent should not have been granted.244 For example, in Chiuminatta Concrete Concepts, Inc. v. Cardinal Industries, Inc.,245 the owner of a patent for cutting concrete sued compet- ing manufacturers of concrete saws. The defendants argued that the patented methods were obvious or not novel, based on an FHWA report that allegedly disclosed the patented method of cutting highway concrete. However, the FHWA report described tests that occurred after the patent filing date, and thus the methods were not prior art and the tests did not indicate that the patented methods were known in the industry or otherwise obvious to industry practi- tioners prior to the patent filing date. The U.S. Court of Appeals for the Federal Circuit thus upheld the patent as valid and upheld the lower court’s ruling that the patent was infringed. This is representative of the way that prior art is considered to determine patent validity. Where an invention solves a longstanding need of state transportation agencies, resolution of the long- standing need is evidence of the invention’s novelty, non-obviousness, and patentability. For example, in 1936, a patent for sheet piles used to prevent wash- out of highway grades prior to paving was upheld as non-obvious, based on the fact that no state highway department had apparently used the method prior to its invention by the patent owner.246 More recently, in Amerace Esna Corp. v. Highway Safety Devices, Inc.,247 a patent on reflective roadway markers that are affixed to pavement surfaces was validated as non- obvious, in part due to its commercial success. The fact that the reflective markers have become widely used by state transportation agencies across the country is evidence of invention and patentability. As discussed in Section I.B.4 supra, when analyz- ing earlier case law involving prior art defenses (e.g., novelty and obviousness), it is important to keep in mind that the standards for prior art have changed. For patent applications filed prior to the March 16, 2013, effective date of the America Invents Act, public disclosure by others within 1 year prior to the filing date is typically not considered prior art. 2. Public Use or Sale Public use of inventions on state transportation projects or sales to state transportation agencies, prior to any applicable patent application “lookback” period,248 can invalidate a patent, offering a defense to state contractors who are accused of infringe- ment. For example, Cimline, Inc. v. Crafco, Inc.,249 involved an improvement made to traditional seal- ant melters (used to seal pavement cracks), by which blocks of sealant material could be safely deposited into the melting kettle without splashing hot sealant and injuring workers. Crafco, a manufac- turer of sealant melters, obtained a patent on the improvement, years after selling a similar device to TxDOT (and more than a year after Pennsylvania Department of Transportation (PennDOT) employees independently developed a similar device). A dispute arose over whether Crafco’s competitor, Cimline, was infringing Crafco’s patent by selling similar 242 See, e.g., Baldwin-Southwark Corp. v. Tinius Olsen Testing Mach. Co., 88 F.2d 910, 914–15 (3d Cir. 1937) (holding manufacturer of concrete strength testing machines liable for patent infringement when it modified its machines to conform to New York State Highway Department specifications that closely tracked a patented machine). 243 Hercules Inc. v. Minnesota State Highway Dep’t, 337 F. Supp. 795, 801–02 (D. Minn. 1972) (holding that suppli- ers to MnDOT were not entitled to “derivative” sovereign immunity for patent infringement). 244 See Section I.B.2 for a discussion of the requirements of patentability, including novelty and non-obviousness. 245 145 F.3d 1303, 1305 (Fed. Cir. 1998). 246 Tyra v. Adler, 85 F.2d 548, 552 (8th Cir. 1936) (“Nei- ther did any of the hundreds of highway engineers work- ing on the same problem throughout the country during the years of experimentation think of it.”). 247 330 F. Supp. 313, 318 (N.D. Tex. 1971). 248 As discussed in Section I.B.4, for patent applications filed prior to the March 16, 2013, effective date of the America Invents Act, public use or sale by others in the 1 year prior to the patent application will not bar a patent from issuing. 35 U.S.C. § 102(b) (2010). However, as a result of the America Invents Act, the 1-year “lookback” period now applies only to public use or sale by the inven- tor named in the application. 35 U.S.C. § 102(b) (2016). Therefore, for a patent application filed on or after March 16, 2013, any public use or sale by others prior to the filing date can invalidate the patent. 249 413 F. Appx. 240 (Fed. Cir. 2011).

28 sealant melters to state transportation agencies. Crafco argued that its patent was not barred by prior sales or public use, because the patented device included a powered conveyor belt whereas the devices used previously by TxDOT and PennDOT included only manual conveyor belts. The U.S. Court of Appeals for the Federal Circuit concluded that the addition of a powered conveyor belt was only an obvious improvement to the prior art, thus invali- dating Crafco’s patent on the basis of prior sales and public use by state transportation agencies, and allowing Cimline to sell its device without concerns about infringement. In Mendenhall v. Astec Industries, Inc.,250 the owner of patents involving reclaimed/recycled asphalt pavement sued competitors for infringe- ment, and the defendants asserted that the patents were invalid based on prior use (by the patent owner and others) for state transportation agencies. The U.S. District Court for the Eastern District of Tennessee originally concluded, and the Federal Circuit affirmed, that the patents were not invalid in light of this prior use. After distinguishing the patented methods from those used on previous proj- ects for Iowa DOT and MnDOT,251 the court addressed the inventor’s own actions on an I-15 repaving project for Nevada DOT more than 1 year before the patent application. The court concluded that the Nevada DOT project itself was not prior art, because it involved only recycled asphalt material rather than the combination of recycled material and virgin aggregate disclosed in the patent.252 Rather, the court concluded that the patented method was first reduced to practice at the I-15 proj- ect site, after completion of the Nevada DOT project, when the inventor apparently had virgin aggregate delivered to the site and paved a section of I-15 using the new method.253 The court concluded that the first public use did not occur until several months later, within 1 year of the patent application.254 However, in subsequent litigation, in the U.S. District Court for the Northern District of Iowa, the court determined (and the Federal Circuit affirmed255) that the I-15 utilization was a public use that invalidated the patent, allowing competitors to practice the method for state transportation agen- cies without fear of infringement. Key to this deter- mination was the fact that, in the I-15 utilization, the new mix was applied to a public highway, “no attempt was made to restrict access to the site, and that the project was witnessed by state and federal highway officials,” and Nevada DOT documented the work in a memorandum.256 The patent owner may argue that the prior use was “experimental” and thus should not invalidate the patent. However, longstanding U.S. Supreme Court precedent establishes that prior sales to a public transportation agency or incorporation of an invention into a public transportation facility are generally not the type of “experimental use” that can save a patent.257 For example, in Dix Seal Corp. v. New Haven Trap Rock Co.,258 a patent for a pavement mix and paving process was deemed invalid (and thus not infringed by Connecticut Department of Transportation contractors) where the process was tested on Connecticut state highways and subse- quently described in Connecticut highway pavement specifications,259 resulting in “many thousands of tons of mix using [the inventor]’s process” being applied to Connecticut highways,260 more than 1 year prior to the patent application. The use on Connecticut highways was not experimental, because “[p]ractical men in the road building industry and officials in the State Highway Department whose occupation embraced concern and responsibility for possible failure of the process were more than satis- fied that no further testing was necessary.”261 In Fox Industries, Inc. v. Structural Preservation Systems Inc.,262 the Maryland Department of Transportation (MDOT) awarded a bridge repair project to Structural Preservation Systems (SPS) despite the fact that the project specifications appeared to require the use of a patented pier protec- tion system and Fox Industries owned the patent.263 Fox Industries sued SPS for patent infringement after SPS refused to pay Fox for a license to use the patent for MDOT. SPS argued that the Fox patent was invalid in light of a test installation of the Fox system performed by MDOT more than 1 year before Fox’s patent application, which was disclosed in a 250 No. Civ-1-86-229, 1988 U.S. Dist. LEXIS 19508 (E.D. Tenn. 1988). 251 Id. 252 Id. 253 Id. 254 Id. 255 Mendenhall v. Cedarapids, Inc., 5 F.3d 1557 (Fed. Cir. 1993). 256 Id. at 1564. 257 City of Elizabeth v. American Nicholson Pavement Co., 97 U.S. 126, 24 L. Ed. 1000 (1877) (“Had the city of Boston, or other parties, used the invention, by laying down the pavement in other streets and places, with [the inventor]’s consent and allowance, then, indeed, the inven- tion itself would have been in public use…”). 258 236 F. Supp. 914 (D. Conn. 1964). 259 Id. at 922. 260 Id. at 924. 261 Id. at 925. 262 922 F.2d 801 (Fed. Cir. 1991). 263 Fox Industries, Inc. v. Structural Preservation Sys- tems, Inc., No. HAR 83-3689, 1988 U.S. Dist. LEXIS 1504 (D. Md. 1988).

29 brochure published by Fox more than 1 year before the patent application.264 The U.S. District Court for the District of Maryland rejected Fox’s claim that the MDOT test was a purely “experimental use” of the system, in light of other contemporaneous sales of the system.265 The court concluded,266 and the Federal Circuit affirmed,267 that the Fox patent was invalid in light of the MDOT tests as well as Fox’s inequitable conduct in failing to disclose the MDOT tests or the brochure to the USPTO examiner. The “experimental use” doctrine is a judicially created exception to the general rule that public use by the inventor, more than 1 year prior to filing a patent application, will bar issuance of the patent. The USPTO has expressly declined to opine whether the experimental use exception applies with respect to patent applications filed on or after the March 16, 2013, effective date of the America Invents Act, noting that Congress did not address the experi- mental use doctrine in the legislative history of the America Invents Act, and that the “doctrine arises infrequently before the [USPTO].”268 Even if the experimental use exception is still applicable to patent applications filed on or after March 16, 2013, the previously referenced cases demonstrate that prior sales to a public transportation agency or incorporation of an invention into a public transpor- tation facility rarely qualify as “experimental use.” Manville Sales v. Paramount Systems —A rare exception where use of an invention in performance of a state transportation project, more than 1 year prior to filing an application, was deemed “experi- mental” and not a public use, is Manville Sales Corp. v. Paramount Systems, Inc.269 Manville was contracted to supply the luminaires to be installed atop 150-ft-tall light poles for a Wyoming State Highway Department rest stop.270 The luminaires failed after installation, and Manville developed an improved luminaire assembly.271 Manville proposed to replace the failed luminaire with its improved design, providing a drawing of its new invention, with a confidentiality notice, to the Wyoming bridge engineer responsible for the rest stop project. Wyoming allowed Manville to install the improved luminaire at the rest stop as a potential substitute for the failed luminaire in November 1971, conditioned upon the successful performance of the new invention.272 Six months later, in April 1972, after the luminaire survived the severe Wyoming winter, the replace- ment luminaire was formally accepted by the Wyoming State Highway Department as a suitable replacement, in fulfillment of the contract require- ments.273 The rest stop was opened to the public in June 1972.274 Meanwhile, in March 1972, after determining that the Wyoming installation was successful, Manville took steps to commercially market the improved luminaire assembly, with the State of Nebraska approving it for purchase for state projects that month,275 and Manville subsequently success- fully marketed the invention to a number of other state transportation agencies. Manville filed a patent application in February 1973, and a patent for the improved luminaire was issued in November 1974. Several years later, a Manville competitor obtained drawings of Manville’s luminaire assembly from employees at FDOT.276 The competitor devel- oped its own version of a self-centering luminaire based on Manville’s drawings,277 and made sales to a number of state transportation agencies.278 Manville sued its competitor for patent infringement. The accused infringer attempted to have Manville’s patent invalidated, based on the installa- tion for the Wyoming State Highway Department in November 1971, more than 1 year before Manville’s patent application was filed. The U.S. District Court for the Eastern District of Pennsylvania concluded, and the U.S. Court of Appeals for the Federal Circuit affirmed, that the installation was experimental, and thus not a public use. The court concluded that Manville did not publicly display the invention at that time, as the rest stop was not open to the public, and the invention was at the top of a 150-ft-tall light 272 Id. at 548. 273 Id. 274 Id. 275 Manville Sales Corp. v. Paramount Sys., Inc., No. 86-CV–04157, 1989 U.S. Dist. LEXIS 10662, at *4 (E.D. Pa. Sept. 7, 1989). 276 Manville Sales Corp. v. Paramount Sys., Inc., 917 F.2d 544, 549 (Fed. Cir. 1990). See also Manville Sales Corp. v. Paramount Sys., Inc., No. 86-CV–04157, 1989 U.S. Dist. LEXIS 10662, at *6 (E.D. Pa. Sept. 7, 1989). 277 Id. 278 Id. at 554 n.3. 264 Id. 265 Id. 266 Id. 267 Fox Indus., Inc. v. Structural Preservation Systems, Inc., 922 F.2d 801 (Fed. Cir. 1990). 268 Examination Guidelines for Implementing the First Inventor to File Provisions of the Leahy–Smith America Invents Act, 78 Fed. Reg. 11,059, 11,063 (Feb. 14, 2013). Some legal scholars contend that the “experimental use” exception survived the America Invents Act, because the statutory language requiring filing of a patent within 1 year of public use or sale was largely unchanged by Congress. Mark A. Lemley, Does “Public Use” Mean the Same Thing It Did Last Year?, 93 texas l. Rev. 1119, 1132–33 (2015). 269 917 F.2d 544 (Fed. Cir. 1990). 270 Id. at 547. 271 Id.

30 made with federal funding, it is likely that the federal government has obtained a license, pursu- ant to the Bayh–Dole Act, to have the invention used on its behalf. However, as seen in the Trinity and Manville cases, courts have generally declined to consider arguments that state transportation agen- cies can take advantage of the federal license even when their contractors are performing work funded in part with federal grant funds. Where the accused infringement takes place in the performance of work for the same state trans- portation agency that funded the invention, it is more likely that the state transportation agency has obtained a license (either through operation of state law or in the contract with the inventor) that shields its later contractors from infringement claims. Even if a review of the contract with the inventor does not reveal any license expressly retained by the state transportation agency, there may be a “shop rights” defense allowing the invention to be practiced by the state transportation agency that funded its develop- ment. For example, as discussed in Section I.B.4 supra, the America Invents Act includes a new “shop rights” defense that creates a limited license where a patented invention was “commercially used” prior to the applicable patent application “lookback” period.285 “Commercial use” includes use of the invention for the benefit of the public, such as on state transportation agency contracts.286 The defense or license protects the entity that controls the persons who performed the prior “commercial use”— which may include the state transportation agency and/or its contractor. Barring the existence of a license arising under the law, if state transportation agencies anticipate that performance of a contract requires the use of a patented invention, the state transportation agency may attempt to negotiate a license with the patent owner, allowing its contractors to legally perform the patented invention on behalf of the state trans- portation agency. 4. Jurisdiction Finally, accused infringers typically assert defenses based on jurisdiction and venue. The federal courts have exclusive jurisdiction over patent law,287 so any patent infringement lawsuit brought in state court will be dismissed. Also, the infringer may be able to have dismissed any state law tort claims, such as conversion, that appear to be veiled attempts to maintain a patent infringe- ment lawsuit in state court. pole.279 Further, Manville’s interactions with Wyoming State Highway Department officials, including Manville stamping its drawings confiden- tial and Wyoming declining to accept the improved luminaire until after a 6-month testing period, supported Manville’s argument that the November 1971 installation was experimental.280 Further, the invention was not on sale until March 1972, within 1 year of Manville’s patent application. The November 1971 installation for Wyoming was not a sale, because Manville originally contracted to supply a different luminaire, and the improvement was not accepted by Wyoming as a suitable alternate until April 1972.281 The court concluded that the patent was valid and infringed by Manville’s competitor. The actions taken by Manville, specifically to ensure that details of its installation for Wyoming could not become public, illustrate the level of effort required to preserve patentability of inventions made in the performance of state transportation agency projects. After the adverse judgment, Manville’s competitor raised new affirmative defenses (as in the Trinity Industries case discussed in Section III.A supra), based on the position that it was entitled to immu- nity for all government purchases of luminaires.282 Because almost all of its sales were for use by state transportation agencies using federal highway funds, Manville’s competitor argued that its sales were for use on behalf of the federal government, and thus Manville’s only remedy for such sales was to sue the federal government for a reasonable royalty in the Court of Federal Claims. Alternatively, using logic similar to the Trinity court, Manville’s competitor argued that sales to state transportation agencies using federal funds made it a federal subcontractor, entitling it to immunity.283 However, as in Trinity, the Manville court declined to rule whether sales to state transportation agencies using federal funds entitled the infringer to immunity, because Manville’s competitor only raised the defense after judgment was entered against it.284 3. License Where a government contractor is accused of infringing a patent on an invention that was made with government funding, it is worth considering whether the contracting agency has a license (aris- ing under law or contract) that shields its contractor from an infringement claim. If the invention was 279 Id. at 550. 280 Id. 281 Id. 282 Id. at 554 n.3. 283 Id. 284 Id. at 555. 285 35 U.S.C. § 273(a) (2016). 286 35 U.S.C. § 273(c) (2016). 287 28 U.S.C. § 1338 (2016).

31 change in venue to a federal court in the infringer’s home state is proper.291 VI. CONCLUSIONS Patent law as it relates to government contracts is well defined on direct federal contracts, and both parties (the federal agency and its contractor) typi- cally have a clear understanding of their rights and liabilities. Federal contractors are generally entitled to pursue patent protection for their inventions, and the federal government retains a paid-up license to use the invention on behalf of the government. In cases where the federal government does not have a license, its contractor is generally immune from suit for patent infringement on behalf of the govern- ment, and the patent owner’s only recourse is to petition for a reasonable royalty in the U.S. Court of Federal Claims. On state and local transportation agency contracts, however, the law provides less certainty, creating heightened risk for both the state transpor- tation agency and its contractor. State contractors may or may not be entitled to pursue patent protec- tion for their inventions, depending on a variety of factors including the existence of federal funding, state law and policy, and the applicable contract language. Further, the state transportation agency will typically not be entitled to a paid-up license to have the invention used on its behalf unless the contract specifically so provides. The state transpor- tation agency will generally not be able to take advantage of licenses obtained by the federal govern- ment or other state transportation agencies, which are typically nontransferable. The absence of a license has serious implications for the state trans- portation agency, since state contractors (unlike federal contractors) are not immune from suit for patent infringement (although the state transporta- tion agency itself is immune). This could result in the state transportation agency (or its contractor) being forced to pay steep royalties for the use of an invention that was originally developed with public funds on a state transportation agency contract. If the state transportation agency or its contrac- tor pursues patent protection for inventions made in the performance of a state transportation agency contract, they must expect challenges to the patent- ability of the invention. The public nature of a state transportation agency contract can impact patent- ability, especially where the invention is incorpo- rated into a public transportation facility and is The exclusive jurisdiction of the federal courts is not an insurmountable hurdle for a patent owner determined to enforce its patent. If the accused infringer is doing business for a state transportation agency, there will be some federal court that has jurisdiction over the accused infringer. However, the patent owner will typically prefer to bring suit in a federal court located in its home state, and some- times the accused infringer has insufficient contacts with the patent owner’s home state to support the court’s jurisdiction. For example, in Surface Preparation Technologies v. Jamaco Industries, LLC,288 an accused patent infringer “registered as a business partner with the Pennsylvania Department of Transportation in 2010,” but “ultimately decided not to pursue business with the Pennsylvania Department of Transportation.” Therefore, the U.S. District Court for the Middle District of Pennsylvania dismissed the claims against the infringer for lack of personal jurisdiction. If the federal court has jurisdiction, the accused infringer may nevertheless seek a change in venue (often to a federal court in the home state of the accused infringer). Requests to change venue are routinely denied where the accused infringer has conducted business with transportation agencies located in the state where the federal court is located.289 If transportation agency employees from the state where the federal court is located will be called to testify, the convenience of those witnesses is additional reason to deny a request for change in venue.290 Conversely, if the accused infringer can establish that there is evidence of significant sales to state transportation agencies in its home state, and employees of the transportation agency in its home state are needed to testify, that may suggest a 288 No. 1:11-CV-01978, 2012 U.S. Dist. LEXIS 50146, (M.D. Pa. Apr. 10, 2012). 289 Arr-Maz Products, L.P. v. Shilling Const. Co., Inc., No. 12-CV-0319, 2012 U.S. Dist. LEXIS 152624, at *1 (N.D. Okla. Oct. 24, 2012) (Venue is proper in Okla- homa because “Arr–Maz has also produced evidence that Shilling has bid on at least six other projects for the Oklahoma Department of Transportation and/or the Oklahoma Turnpike Authority in 2012.”); Signalisation Ver-Mac, Inc. v. Addco Mfg., Inc., No. 05-CV 00707 (D. Or. Feb. 21, 2006) (Venue is proper in Oregon because “the devices at issue were sold to ODOT and are presently being used in Oregon. This action seeks a declaration that the State of Oregon’s continued use of the devices does not constitute an infringement of ADDCO’s patent.”); Air-Flo M.G. Co., Inc. v. Louis Berkman Co., 933 F. Supp. 229 (W.D.N.Y. 1996) (not transferred out of New York due to sales to NYSDOT). 290 Uretek USA, Inc. v. Applied Polymerics, Inc., No. 3:11 CV–00542, 2011 U.S. Dist. LEXIS 139349 (E.D. Va. Dec. 5, 2011) (concluding that venue is proper in Virginia since VDOT employees will have to testify). 291 Granger & Associates, Inc. v. Marion Steel Co., No. 2:00 CV-355, 2001 U.S. Dist. LEXIS 26406 (S.D. Ohio Jan. 4, 2001) (transferred to New Jersey on the basis of sales to NJDOT and the need for NJDOT employees to testify).

32 to being invalidated as obvious or not novel. The vast amount of work performed by state transporta- tion agencies creates a huge store of prior art that can be used to challenge the patentability of an invention, if similar technology was previously used by others in the industry. readily observed by the public. Almost without exception, the patent application must be made within 1 year of public use or sale to the state trans- portation agency. Even when the application is timely made, and survives examination, resulting in the issuance of a patent, the patent remains subject

ACKNOWLEDGMENTS This study was performed under the overall guidance of the NCHRP Project Committee SP 20-6. The Committee is chaired by MICHAEL E. TARDIF, Friemund, Jackson and Tardif, LLC. Members are RICHARD A. CHRISTOPHER, HDR Engineering; TONI H. CLITHERO, Vermont Agency of Transportation; JOANN GEORGALLIS, California Department of Transportation; JAMES H. ISONHOOD, Mississippi Office of the Attorney General; THOMAS G. REEVES, Consultant, Maine; MARCELLE SATTIEWHITE JONES, Jacob, Carter and Burgess, Inc.; ROBERT J. SHEA, Pennsylvania Department of Transportation; JAY L. SMITH, Missouri Department of Transportation; and JOHN W. STRAHAN, Consultant, Kansas. MEGHAN P. JONES provided liaison with the Federal Highway Administration, and GWEN CHISHOLM SMITH represents the NCHRP staff.

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