Five IP Consequences of Contracting With the Government
The recent Court of Federal Claims Decision in Ideal Innovations, Inc. v. United States, now appealed to the Federal Circuit, serves as a warning to contractors—especially non-traditional government contractors—to familiarize themselves of the IP risks associated with contracting with the US government.1
This Advisory highlights five IP considerations that any private entity, particularly one new to government contracting, should keep in mind when doing business with the government.
For a more in-depth review of Ideal Innovations, please see our recent publication, here.
1. Infringement claims against the US government provide limited relief as compared to suit against a commercial entity. Because Ideal Innovations involved a patent infringement suit against the United States, this case was litigated as a bench trial at the Court of Federal Claims, where the only available relief is money damages—essentially the value of the government "taking" a license to the asserted patents. One of the most powerful features of patents is the ability to exclude others from practicing the invention by obtaining an injunction in federal district court, and a significant jury verdict for the value of a hypothetical royalty. The US government, however, is protected by sovereign immunity. It can only be sued for patent infringement at the Court of Federal Claims pursuant to the limited waiver of immunity at 28 U.S.C. § 1498; injunctive relief is not available; equitable and tortious theories of liability are generally barred; and, when a trial judge does issue an opinion justifying money damages, those damages are often less generous (and more easily challenged on appeal) than a sympathetic jury award.
2. Infringing contractors are also protected by the government's sovereign immunity. The plaintiffs' claimed that the government purchased allegedly infringing vehicles, but did not have an independent cause of action against the various contractors that sold those allegedly infringing vehicles to the government. This is because the government's sovereign immunity from infringement actions extends to authorized contractors performing on the government's behalf.2 Most traditional procurement contracts contain a standard Authorization and Consent clause that confirms the contractor's immunity for work performed within the contract scope. Two implications follow: Most obviously, your competitors may well be immune from liability if their infringing activities are authorized by a government contract. More subtly—when using a contract vehicle with flexibility to negotiate IP terms—e.g., an Other Transaction (OT) or Cooperative Research and Development Agreement (CRADA)—it may benefit the private party to incorporate a version of the Authorization and Consent clause from traditional procurement contracts, to ensure that the private party is also protected from third party infringement claims.
3. Government contracts have five corners, or maybe six—but not four. The terms of a government contract do not always tell the whole story. Most government contracts are subject to a standard licensing framework dictated by the Bayh-Dole Act. In Ideal Innovations, the government argued that, even though one of its contracts with the plaintiffs did not have any licensing provision, the court should read the Bayh-Dole licensing framework into the contract as a matter of law, giving the government a license to practice the invention if it was first actually reduced to practice under the contract. The government invoked the so-called Christian doctrine, which holds that where an agency omits from a contract a mandatory clause that reflects important public policy, courts will read that clause into the contract as a matter of law.
While the court was not persuaded in this case, the government's argument that the Christian doctrine should be used to incorporate the Bayh-Dole regime into the contract reflects one of many longstanding features of the federal common law of contracts that differentiate government contract disputes from commercial disputes. Countless cases have turned in the government's favor due to the Court of Federal Claims or Federal Circuit revising the terms of a contract as a matter of law.3 The end result is that a private party negotiating a contract with the government cannot take the terms of the agreement at face value, but must also ask whether the government has, intentionally or not, omitted or deviated from a mandatory framework that a court may read into the agreement as a matter of law. Assuming it is raised on appeal, practitioners should pay close attention to the Federal Circuit's resolution of this issue, particularly whether the court agrees that the Christian doctrine does not apply in this case.
4. Filing a patent application prior to accepting government funding doesn't necessarily protect the invention from Government license and other rights. It is not surprising that the government would obtain certain rights in the development of intellectual property it has funded—this is common in the commercial world outside of government contracting. However, the default Bayh-Dole framework defines critical IP buckets in a manner that gives the government broader rights than private parties typically grant each other. Private parties typically delineate between "background" and "foreground" IP, classifying as background any IP that was either (i) conceived or reduced to practice prior to entry into an agreement or (ii) conceived or reduced to practice outside the scope of the agreement. Therefore, if a party independently filed a patent application for an invention prior to entry into the agreement, the conception of the invention (and the constructive reduction to practice that occurred when the patent application is filed) generally would ensure the invention qualifies as background IP.
Unlike commercial contracting parties, the government often takes the position that its definition of "subject invention"—the Bayh-Dole analog to "foreground IP"—is keyed off of actual reduction to practice. Therefore, in order for an invention to be treated as "background" in a government contract, the invention must be both conceived and actually reduced to practice prior to entry into the funding arrangement.4 This can be surprising for a private entity that assumes it has protected its rights in IP by filing a patent application prior to performing a government contract, only to learn that the relevant standard will likely require demonstrating that first actual reduction to practice occurred prior to performing a contract subject to Bayh-Dole (a standard the plaintiffs struggled to meet in Ideal Innovations).
5. Even when the government has discretion to alter terms, it can be hard to convince the agency officials to use it. Even if you are able to take advantage of the flexibility associated with a contract vehicle that is not subject to Bayh-Dole, that does not mean the government will not revert during negotiations to the familiar terms of Bayh-Dole and other government-unique IP regimes. Many agencies adhere to the IP framework of the Bayh-Dole Act even when it is not required, such as in the case of CRADAs and OTs. Pay close attention to the definitions of terms, particularly "subject invention," to understand what inventions the government will receive rights in.
Don't hesitate to push back against overreach, but do understand that your counterpart simply may not have context for what is customary in commercial transactions among private parties. It is certainly possible to negotiate terms that both parties can live with, but neither party can treat the matter as business as usual.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
148 Fed. Cl. 385 (May 12, 2020).
See Daniels, Sharifahmadian & Castellano, Fed. Cir. Clarifies Infringement Liability for Contractors, Law360 (June 29, 2018).