©2017. Published in Landslide, Vol. 9, No. 6, July/August 2017, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
Teaming with the U.S. government through contracts, grants, and other types of agreements represents an additional market for commercial companies, as well as an opportunity to engage in research to develop intellectual property (IP) that can meet both government and commercial needs. These opportunities, however, are not without risk. Companies selling to or engaging in research and development activities with the U.S. government must understand the regulatory requirements that apply to these activities and must take necessary measures to protect their preexisting intellectual property and to convey to the government only those rights it intends to convey for new intellectual property.
Conducting business with the government implicates a complex regime of statutes and regulations that can vary based on the type of intellectual property at issue (e.g., software, technical data, patents) and the agency that holds the contract or grant (e.g., civilian agencies, the Department of Defense (DoD)). This article provides an overview of the most common IP-related considerations when contracting with the government. First, it addresses technical rights and computer software, focusing on the licenses conveyed to the government and the actions contractors may take to protect such rights. Second, the article discusses patent-related rights, including the government’s preference for conveying title to contractors, the license and other rights conveyed to the government, and measures contractors should take to preserve their rights in patents. Third, the discussion addresses additional challenges subcontractors may face when supporting a government contract. Fourth, the article briefly discusses an alternative contracting vehicle that could provide greater flexibility for some contractors performing research for the government.
Technical Data and Computer Software
Many contracts with the government contemplate that the contractor will develop and deliver to the government technical data and computer software. Even more contracts involve delivery of technical data or commercial software rights that have been previously developed. In the context of DoD and civilian agencies, the term “technical data” encompasses any recorded information that is scientific or technical in nature.1 The term excludes computer software or any data that is merely incidental to contract performance, including financial data.2 The term “computer software” includes, among other things, computer programs, source codes, and algorithms, but it does not include computer software documentation or computer databases (which would typically qualify as technical data).3
Contractors generally retain title to technical data and computer software and convey a license to use such data to the government. There are three general categories of government license rights in technical data and computer software: unlimited rights, limited rights (technical data) or restricted rights (computer software), and government purpose rights. In limited instances, contractors can negotiate special license rights in appropriate situations. The level of license rights that the government will receive will depend on a number of factors, including whether government funding was used to create the data or software, whether the data or software was delivered under the contract, and which government agency is the contracting party. This section first considers data rights in contracts with civilian agencies, then considers data rights in DoD contracts. Additionally, this section addresses commercial data and also provides practical steps contractors may take to protect their data rights.
Civilian Agencies as Contracting Parties (FAR)
The data rights regime governing technical data and computer software when contracting with civilian agencies is usually governed by Federal Acquisition Regulation (FAR) 52.227-14. Under this clause, the government receives unlimited rights in technical data and computer software first produced in performance of the contract or delivered under the contract regardless of how funded.4 The contractor retains the right to use, reproduce, distribute, and publish data in which the government has unlimited rights.5
With unlimited rights, the government may use, disclose, or reproduce the data “in any manner and for any purpose,” and permit others to do so.6 In practice, this means that the government can release unlimited rights data that a contractor has delivered in performance of a contract and allow a third party (e.g., a contractor’s competitor) to practice the technical data for any reason, including commercial gain.
Given the breadth of this license, contractors are well advised to limit the data delivered under the contract, especially because, by default, the government will receive unlimited rights in any “background” or preexisting intellectual property developed exclusively at private expense delivered under the contract. Contractors may withhold such data from delivery by (1) identifying the preexisting data, and (2) providing the government form, fit, and function data sufficient to allow the government to practice the data.7 Notably, however, if a contract contains alternates I or II of FAR 52.227-14, then the limited rights technical data (i.e., data developed at private expense) generally must be delivered to the government. However, to the extent that it is properly identified as limited rights technical data, the government only obtains the right to use and disclose the data within the government.8 Similarly, if a contract contains alternate III of FAR 52.227-14, then restricted computer software (i.e., computer software developed at private expense) generally must be delivered to the government. Again, however, if it is properly identified as restricted computer software prior to delivery, then the government only obtains the right to use the software within the government on the computer(s) for which it was acquired under the contract.9 When identifying limited rights technical data or restricted rights computer software, contractors must use the notices identified in the FAR and Defense Federal Acquisition Regulation Supplement (DFARS) clauses or risk the government obtaining unlimited rights.10
DoD as Contracting Party (DFARS)
When contracting with a DoD entity, the government receives unlimited rights in technical data and computer software “developed exclusively with Government funds” or that is preexisting intellectual property delivered to the government without the appropriate restrictions.11 Similar to unlimited rights granted to civilian agencies, unlimited rights allow DoD to use, reproduce, release, or disclose the technical data “for any purpose whatsoever.”12 The contractor retains all rights not conveyed to the government, including ownership, with respect to the technical data.13
As to data developed partially or completely with private funds, DoD receives a more limited license. Specifically, the government obtains government purpose rights for technical data and computer software developed with “mixed funds” (i.e., private and government funding).14 These rights allow the government to use or allow others to use the data for “government purposes,” which generally include activities for which the government is a party.15 For example, if the government contracts to develop a vaccine, and the contractor uses its funds to assist in the vaccine’s development, the government would generally acquire a government purposes license in the vaccine. The government could then use that license to contract with a third party to (1) perform continued research on the vaccine, or (2) manufacture the vaccine for military use. Importantly, government purpose rights normally convert into unlimited rights after a certain period, usually five years; however, contractors may negotiate for a longer period.16 During the period the government retains only government purpose rights, the contractor holds an exclusive license to use the data commercially.17
The government receives fewer rights in technical data and computer software developed exclusively at private expense and marked prior to delivery in accordance with the appropriate limited/restricted rights legend.18 With limited rights, the government may use the technical data within the government, but is generally prohibited from disclosing such data outside the government, even for government purposes, without the contractor’s consent.19 With restricted rights, the government generally may only use the computer software on one computer at a time and may only make a limited number of copies for backup purposes.20
Notably, the specifically negotiated license DFARS clause provides contractors the opportunity to negotiate the licenses to technical data and computer software that are conveyed to DoD.21 For instance, DoD may agree not to take unlimited rights in technical data produced exclusively with government funds to encourage a contractor to engage in work that it would otherwise decline if it had to convey an unlimited license to the government. That said, DoD cannot agree to any less than limited rights in technical data or restricted rights in computer software.22
Finally, DoD’s interest in technical data and computer software typically is conveyed when such data is delivered to the government. Therefore, in some instances, contractors may avoid conveying to the government unlimited rights in data—even if that data was developed exclusively with government funds or in performance of the contract—if the contract does not call for delivery of the data. Therefore, contractors should carefully vet any potential deliverable to confirm that delivery is required under the contract. Nevertheless, even if delivery is not required during performance, the government may require delivery if a contract contains a deferred ordering clause such as DFARS 252.227-7026 (two years; only predesignated technical data and computer software), DFARS 252.227-7027 (three years; any technical data or computer software generated in the performance), and/or FAR 52.227-16 (three years; “any data first produced or specifically used in the performance of th[e] contract”). Under these clauses, the government has inchoate rights in data and software that the government may choose to exercise for a two to three-year period following the end of contract performance.23
Commercial Technical Data and Computer Software
The FAR and DFARS provide additional protections for contractors delivering commercial technical data or computer software to the government, but only if the contractors follow the precise marking requirements imposed by the procurement regulations. For instance, when delivering commercial computer software to a civilian agency or DoD, a contractor generally conveys to the government its standard commercial license.24 That said, if a civilian agency includes FAR 52.227-19, contractors must be sure to affix a notice, the language of which is provided in the FAR clause, to the software upon delivery, noting that the contractor conveys only the rights listed in FAR 52.227-19.25 Failure to attach this notice may result in conveying to the government unlimited rights in the commercial computer software.26
When delivering commercial technical data to a civilian agency, the contractor again typically only conveys a commercial license.27 However, by contrast, delivery of commercial technical data to DoD requires a contractor to affirmatively label the data as restricted prior to delivery. Doing so conveys to the government a limited license to practice the data within the government for noncommercial purposes.28 Failing to properly label commercial technical data prior to delivery to DoD will convey to the government an unrestricted right to use, release, and disclose the technical data and allow others to do so.29
Delivery of Data: Asserting Rights, Marking Data
Contractors must take measures before and after contract award to ensure that their preexisting intellectual property is protected and to take advantage of the above-discussed limitations on the license conveyed to the government. As an initial step, contractors typically should include an assertion of rights table in their proposals.30 This table should list all of the technical data or computer software that the contractor anticipates it and its subcontractors will deliver during performance of the contract with reduced (i.e., less than unlimited) rights. The table should also include the basis for assertion and the category of asserted rights (e.g., government purpose, limited, restricted).
After contract award, contractors must ensure that any technical data and computer software slated for delivery to the government is properly marked prior to delivery. The legends that contractors should generally apply are provided in the relevant FAR and DFARS provisions.31 For instance, a contractor delivering limited rights technical data to a civilian agency must use the legend provided at FAR 52.227-14 alternate II. Importantly, these legends must be included on any restricted data delivered to the government, even though the contractor should have already identified the restricted rights in its assertion of rights table.
Measures for Protecting Technical Data and Computer Software
There are several steps that a contractor may take to position itself to prevent unnecessarily conveying interest in its intellectual property to the government. These measures include:
- Segregating research and other work that is funded by the government or performed in support of a government contract from work that is privately funded.
- Documenting the segregation between private – and government-funded work. For instance, employees engaged in both types of activities should be required to track their time separately to avoid comingling their work.
- Reviewing requests for proposals carefully to assess what must be delivered under the contract and negotiate down the scope of deliverables, if possible, as funding alone may not control.
- Ensuring that all preexisting technical data and computer software is identified in the assertion of rights table in proposals.
- Marking all deliverables with appropriate restrictions.
- Instituting a legal review process for vetting deliverables to confirm that the contract requires delivery of the item and that the item contains appropriate restrictions.
Of course, because each contractor’s situation is different, the measures for protecting intellectual property must be individually tailored. However, these potential steps may help ensure that a company does not inadvertently and unnecessarily convey data rights to the government.
In addition to protecting data, contractors must affirmatively protect their patent rights when selling to or researching for the government. The division of rights between contractors and the government with respect to patents is similar to the above-discussed division of data rights. That is, a contractor typically retains ownership of inventions discovered using government funds—known as “subject inventions”—while conveying to the government a limited bundle of rights that include a nonexclusive, royalty-free license and the right to march in and license the subject invention to a third party if the contractor fails to practice it properly.32 This division of rights is reflected in the Bayh-Dole Act,33 which is implemented by 37 C.F.R. part 401 and FAR parts 27 and 52.
By enacting the Bayh-Dole Act, Congress encouraged greater collaboration between private industry and the government with the goal of growing the return on public investment by increasing the number of innovative products brought to market and enhancing economic growth by stimulating new, innovative industries. Contractors should embrace the Bayh-Dole Act’s patent rights regime, as it can present a great opportunity to secure title to government-funded inventions and allow them to benefit from efforts to commercialize a product embodying such inventions, in exchange for providing the government a limited set of rights in the invention.
Government Rights in Subject Inventions
In exchange for retaining title to subject inventions, the Bayh-Dole Act conveys to the government certain rights and places various restrictions on the use of subject inventions. We consider below each of the most significant of the government-retained rights, and their implications for contractors.
The government’s license is limited to the right to practice the subject inventions “for or on behalf of the United States.”34 The government has traditionally interpreted this license as limited to uses for a government purpose, such as allowing third parties to practice a subject invention in performance of a government contract.35 Importantly, the government license does not allow the government to use the subject invention for nongovernment (e.g., commercial) purposes. Additionally, the government’s license in the subject invention alone does not give it the right to use background intellectual property that may be necessary to practice the invention.
An example can demonstrate how this license functions in practice. Consider if a new type of electrical wire is invented using government funds: the government may generally use its license to allow a third party to manufacture the electrical wire for use in government buildings. It could not use its license to allow a third party to manufacture and sell the electrical wire for commercial gain. Instead, assuming the contractor took the necessary steps to preserve title (discussed below), the contractor would retain title to the invention and could commercialize the electrical wire.
Substantial Manufacturing Requirement
In exchange for allowing contractors to retain title, the Bayh-Dole Act requires that entities holding an exclusive license to a subject invention substantially manufacture products embodying the invention in the United States, if such products are intended to be sold domestically.36 This requirement helps to encourage commercialization of subject inventions using industry and labor in the United States.37 Notably, because this substantial manufacturing requirement applies only to domestically directed sales, exclusive licensees typically may manufacture abroad products intended for sale outside the United States.38
It is possible to secure a waiver of the substantial manufacturing requirement if the contractor holding title makes one of two showings to the federal funding agency. First, a waiver is appropriate if “reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States”—commonly referred to as the licensing prong.39 Second, a title holder may receive a waiver if “under the circumstances domestic manufacture is not commercially feasible”—commonly referred to as the feasibility prong.40
The government also retains the right to “march in” and convey a license to a third party if one of four criteria are met:
- The party holding title or license to the subject invention has not achieved, and is not taking reasonable steps to achieve, practical application of the subject invention in such field of use.41 Achieving a “practical application” requires that the invention’s benefits are “available to the public on reasonable terms.”42
- Health and safety needs are not being reasonably satisfied by the party holding title or license to the subject invention.43 Notably, the National Institutes of Health (NIH) has adopted a narrow reading of this basis for exercising march-in rights, explaining that if the product is “safe and effective” and prescribed for its approved indications, then “health and safety needs” do not justify exercising march-in rights.44
- The requirements for public use specified by federal regulations are not being reasonably satisfied by the party holding title or license to the subject invention.45 Again adopting a narrow interpretation of its march-in rights, NIH explained that this ground for marching in applies only “when a statute or regulation, e.g., a safety or standards regulation, specifically requires the use of a patented technology, and the patent owner is not willing to grant licenses to third parties required to use it in their products.”46
- The party holding title or license to the subject invention grants an exclusive license to the subject invention without either the exclusive licensee’s agreement to substantially manufacture in the United States or a government waiver of the manufacturing requirement.47
Although doing so would be unprecedented, the Bayh-Dole Act and associated regulations establish when and how an agency may exercise its march-in rights if one of the above-discussed criteria is met.48 Should the agency exercise its march-in rights, a third party would receive a license to the subject invention “upon terms that are reasonable under the circumstances.”49
Contractor Obligations to Preserve Rights in Subject Inventions
As noted above, contractors may retain rights in their subject inventions (i.e., inventions made with the support of government funding). However, retaining title requires contractors to take timely affirmative measures to preserve their rights. Typically, these requirements include:
- Reporting promptly “subject inventions” to the agency (i.e., potentially patentable inventions conceived or reduced to practice during the contract);50
- Choosing whether to retain ownership of the subject invention or assign its interest to the funding agency (election of waiver or retainer of title to the subject invention);51
- Filing a complete (provisional or nonprovisional) U.S. patent application for the subject invention within one year of electing title or earlier, if required, for example because of a prior public disclosure;52
- Adhering to time frames for obtaining patent protection in the U.S. and foreign countries;53
- Acknowledging government support in U.S. patent applications by including the following statement in the patent specification: “This invention was made with government support under (identify the contract) awarded by (identify the Federal agency). The government has certain rights in the invention”;54
- Executing and delivering all instruments necessary to establish or confirm government rights throughout the world in the subject inventions, both retained by the contractor and assigned to the agency through waiver of title;55
- Offering back to the agency any subject inventions, associated patents, and patent applications that the contractor wishes to abandon (must notify the agency at least 30 days before any response deadline);56 and
- Providing annual reports on the use of the subject inventions, including date of first commercial sale or use and gross royalties received.57
The specific requirements with which contractors must comply will be dictated by the underlying agreement with the government. Indeed, in addition to FAR and DFARS patent right clauses (e.g., FAR 52.227-11 and DFARS 252.227-7038) that are common in government contracts, additional requirements may be imposed by agency-specific regulations or by language in the contract itself. Contractors should carefully consider these provisions to ensure they comply with their obligations and preserve the greatest interest possible in subject inventions.
Unique Issues When Selling as a Subcontractor to the U.S. Government
In addition to the issues discussed above, subcontractors selling to the government should take additional measures to ensure they do not convey unnecessary rights to a higher-tier contractor. Subcontractors should expect to see IP-related clauses in their subcontracts, as the FAR and DFARS data rights clauses expressly require higher-tier contractors to flow down their provisions, and higher-tier contractors must convey to the government the necessary rights in lower-tier contractors’ intellectual property.58
That said, subcontractors generally should not allow higher-tier contractors to secure any greater rights than are necessary to convey to the government the rights required under the prime contract. Indeed, the DFARS explicitly prohibits a higher-tier contractor from extracting greater rights in technical data from a subcontractor than is reflected in the technical data clause negotiated between the government and the prime contractor.59 To ensure that the prime contractor is requesting rights consistent with the prime contract, subcontractors should review the prime contract.
Additionally, subcontractors should seek to include a clause in their subcontracts prohibiting higher-tier contractors from using the license the subcontractor conveys for any purpose other than in support of the prime contract for which it was conveyed. Failing to do so could allow a higher-tier contractor to practice a subcontractor’s intellectual property for a variety of purposes and for commercial gain. For example, consider a subcontractor developing a guidance system exclusively with government funds for a prime contractor that will incorporate the system into a military aircraft. If the subcontractor conveys to the prime contractor the same unlimited rights it is required to convey to the government, the prime contractor could incorporate the guidance system in unrelated commercial aircraft, thereby profiting from the subcontractor’s intellectual property without an obligation to compensate the subcontractor. Therefore, although the subcontractor typically would still be required to convey to the government an unlimited right to use the guidance system for any purpose, the subcontractor would be well advised to negotiate a clause in the subcontract limiting the prime contractor’s use of the guidance system to the contract being performed. This would also help protect the subcontractor’s rights in any follow-on contracts or subsequent procurements.
Finally, subcontractors should confirm processes are in place to facilitate compliance with the assertion of rights table and marketing requirements when they pass their intellectual property through a higher-tier contractor. To that end, subcontractors should ensure that the higher-tier contractor’s proposal incorporates a sufficient assertion of rights table that covers the subcontractor’s intellectual property. Additionally, subcontractors should confirm that their higher-tier contractors will not remove subcontractors’ markings on restricted data or, if markings do need to be removed (e.g., the data is incorporated into the higher-tier contractor’s data), the higher-tier contractor will mark the data with the most restrictive legend possible before delivery to the government.
Other Transaction Agreements
Certain contractors interested in performing research and development for the government may also consider negotiating an other transaction agreement (OTA). Congress has authorized 11 agencies to use OTAs, including DoD, the Department of Energy, and Health and Human Services.60 OTAs are not a procurement contract, grant, or cooperative agreement, and the standard procurement regulations, such as the FAR and DFARS, generally do not apply. As a result, OTAs provide contractors and the government flexibility to negotiate terms, including the division of IP rights between the contractor and the government.
Although OTAs can be useful contracting vehicles, their use is restricted in some instances by agency-specific regulations. For instance, DoD permits the use of OTAs only to the extent a contractor, to the extent practicable, funds half of the project and the research funded by the OTA is not duplicative of other DoD research. Therefore, contractors seeking to perform research and development work for the government would be well advised to consider whether the relevant agency offers OTAs that fit the contractor’s circumstances.
There are great opportunities for companies to benefit from selling to or performing research for the U.S. government. However, these opportunities also present potentially significant liabilities if a contractor does not appropriately protect its IP rights. This article’s overview of many of the IP-related considerations that contractors should address should be supplemented with a close review of a contractor’s individual circumstances and the government agreements to which it is a party.
1. FAR 52.227-14(a).
2. FAR 52.227-14(a); DFARS 252.227-7013(a)(15).
3. FAR 52.227-14(a); DFARS 252.227-7013(a)(4).
4. FAR 52.227-14(b)(1).
5. FAR 52.227-14(b)(2)(ii).
6. FAR 52.227-14(a).
7. FAR 52.227-14(g)(1).
8. FAR 52.227-14 alts. I & II.
9. FAR 52.227-14 alt. III.
10. FAR 52.227-14 alts. I, II & III.
11. DFARS 252.227-7013(b)(1), – 7013(b)(1)(vii), – 7014(b)(1), – 7014(b)(1)(iv).
12. DFARS 252.227-7013(a)(16), – 7014(a)(16).
13. DFARS 252.227-7013(c).
14. DFARS 252.227-7013(b)(2)(i), – 7014(b)(2)(i).
15. DFARS 252.227-7013(a)(12), (13).
16. DFARS 252.227-7013(b)(2)(i)–(ii), – 7014(b)(2)(i)–(ii).
17. DFARS 252.227-7013(b)(2)(iv).
18. DFARS 252.227-7013(b)(3), – 7014(b)(3).
19. DFARS 252.227-7013(a)(14).
20. DFARS 252.227-7014(a)(15).
21. DFARS 252.227-7013(b)(4), – 7014(b)(4).
22. DFARS 252.227-7013(b)(4), – 7014(b)(4).
23. DFARS 252.227-7026, – 7027; FAR 52.227-16.
24. DFARS 227.7102-1 (computer software); FAR 12.212(a) (computer software).
25. FAR 52.227-19(c).
26. FAR 52.227-14(b)(1)(iv); DFARS 252.227-7013(b)(1)(vii).
27. FAR 12.211 (technical data).
28. DFARS 252.227-7015(b)(2).
29. DFARS 252.227-7015(b)(1).
30. FAR 52.227-15; DFARS 252.227-7017.
31. FAR 52.227-14 alts. II & III; DFARS 252.227-7013(f), – 7014(f).
32. See 35 U.S.C. § 202(a). A “contractor” generally refers to an entity that is a party to a federal funding agreement. Id. § 201(c); see also Exec. Order No. 12,591, 3 C.F.R. § 220 (1987) (extending Bayh-Dole to most entities holding a government funding agreement).
33. 35 U.S.C. §§ 200 et seq.
34. Id. § 202(c)(4).
35. See id.; Office of the Under Sec’y of Def. for Acquisition, Tech. & Logistics, Dep’t of Def., Intellectual Property: Navigating through Commercial Waters (2001), available at http://www.acq.osd.mil/dpap/Docs/intelprop.pdf.
36. See 35 U.S.C. § 204 (providing that no contractor that “receives title to any subject invention and no assignee of any such [contractor] shall grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States”).
37. Id. § 200.
38. See id. § 204 (limiting the scope of the requirement to “the exclusive right to use or sell any subject invention in the United States”).
41. Id. § 203(a)(1).
42. Id. § 201(f).
43. Id. § 203(a)(2).
44. Elias A. Zerhouni, Dir., Nat’l Insts. of Health, Determination in the Case of Norvir Manufactured by Abbott Laboratories, Inc. 5 (July 29, 2004), available at https://www.ott.nih.gov/sites/default/files/documents/policy/March-In-Norvir.pdf.
45. 35 U.S.C. § 203(a)(3).
46. Francis S. Collins, Dir., Nat’l Insts. of Health, Determination in the Case of Norvir Manufactured by AbbVie 5 (Nov. 1, 2013), available at https://www.ott.nih.gov/sites/default/files/documents/policy/March-In-Norvir2013.pdf.
47. 35 U.S.C. § 203(a)(4).
48. See id. § 203 (establishing when an agency may exercise its march-in rights); 37 C.F.R. § 401.6 (establishing how the agency may exercise these rights).
49. 35 U.S.C. § 203.
50. 37 C.F.R. § 401.2(d).
51. Id. § 401.14(c)(2).
52. Id. § 401.14(c).
53. Id. § 401.14(c)–(f).
54. Id. § 401.14(f)(4).
55. Id. § 401.14(f)(1).
56. Id. § 401.14(f)(3).
57. Id. § 401.14(h).
58. FAR 52.227-14; DFARS 252.227-7013.
59. DFARS 252.227-7013(k), – 7014(k).
60. U.S. Gov’t Accountability Office, GAO-16-209, Use of “Other Transaction” Agreements Limited and Mostly for Research and Development Activities (2016).