The Misunderstood Role of Patents When Engaging the Federal Government

Anyone who works in the government marketplace will tell you it’s a complex environment. Yes, the United States Government is the largest single customer in the world. Yes, it spends billions of dollars each year, including funds for research and development, seeking the best and brightest solutions to today’s challenges. Recall that it was this system (the Federal Government’s investment in commercial R&D) that is responsible for such things as the Internet, that search engine called Google, almost all advancements in aircraft, GPS, LED lights, voice recognition, modern tires, and all those vaccines, to name a few.

The scope of innovations sponsored or funded by the U.S. Government is impressive indeed. Many companies leverage very lucrative contracts with the Government to fund research leading to commercially viable products. This “undiluted” form of capital investment is very attractive. And, without getting into the details, a favorable regulatory framework enables companies to retain title to their innovations, thereby leveraging their work with the U.S. Government into the commercial marketplace. Thus the reason so many companies tolerate the earlier mentioned “complexities.”

Patents: What They Are and How the Government Gets Its Cut

A patent gives its owner certain rights to exclude others from making, using, manufacturing, or importing their invention. It is a powerful competitive advantage recognized by investors and competitors alike.

Indeed, having a well-crafted patent portfolio can enable a company to influence, if not outright control, a market sector for a limited period.

But how does having a patent aid those companies working primarily, or solely, with the U.S. Government?

No one is surprised to find out that when the Government sponsors the development of an innovation, the Government gains certain rights to that innovation. Understanding the scope of those rights and their implication is critical to leveraging the existence of a patent within the governmental marketplace.

When an innovation is either conceived or first reduced to actual practice in the performance of a government contract, the Government gains a nonexclusive, nontransferable, irrevocable, paid-up license to practice, or have practice for or on its behalf, the subject invention.

This is a broad grant, and as a result, many government contractors focus on securing data rights, akin to an amalgamation of trade secrets and copyright protection, to secure their competitive advantage in the government marketplace while viewing patents as directed to any future commercial opportunities. This leads to a lack of emphasis on patenting innovations in the government sector.

The lack of emphasis is, in the writer’s opinion, misguided. In the commercial environment, the patent owner can block an infringer from practicing the patented technology, thus safeguarding the company’s competitive advantage.

But what happens when the Government does not have such broad rights as mentioned above to the patented technology?

Government Contracts: A Guide to Protecting Intellectual Property

Recall that the Government grants patents. So, it might not be too surprising to find that you cannot use a U.S. Government-granted patent to stop the Government from practicing the patent technology. Yes, it’s good to be king.

In this scenario, the Government does not have a paid-up license to practice the patent. That would be deemed a “taking,” which the U.S. Constitution prohibits without reasonable compensation. And this practical (that is, cost) implication is what makes a patent valuable in the government marketplace.

The first thing to recognize is how not to unthinkingly give rights to an innovation when working with the Government. Controlling what is done in “performance of a contract” is a key factor. This factor drives careful wording of the proposal and statement of work in the resulting contract.

In many instances, an invention is conceived before the grant of a contract. Proposals are often focused on a prior conceived idea looking for the Government to fund further research to validate a new approach. Recall that the Government gains rights when in performance of the contract, an innovation is first actually reduced to practice. The first actual reduction to practice is simply the first time the invention is demonstrated/made/practiced.

But what if the invention is not “first actually” reduced to practice in performance of the contract? What if the proposal said the innovation would be demonstrated rather than developed, and if that demonstration was not the first time the invention was reduced to practice?

In that instance, the Government gains no rights to the invention. If the Government thereafter chooses to practice the invention, it may be forced to pay a reasonable royalty to the patent owner. It's time to dive into government contracting a bit deeper.

The Role of the Contracting Officer

Unlike the commercial marketplace, the only individual that can bind the government to a contract is a government contracting officer. There is no application in government contracting of apparent authority or implied contracts. Government contracting officers are government employees who shoulder the risk of engaging companies on behalf of the Government.

Exposing the Government to excess risk or excess cost is not a path to career success as a government contracting officer. Accordingly, many government contracting officers promote relationships between large, low-risk companies and smaller innovative, high-risk companies. They also routinely push for the highest value (or lowest cost) in securing the desired technology.

When neither the Government nor a low-risk company of choice has rights to desirable patented technology, the contracting officer faces the risk of paying twice for the same technology: once to the low-risk likely large government contractor to make/use the technology, and secondly to the owner of the patent. That presents a dilemma to the contracting officer.

Sometimes the response by the large contractor is to offer similar yet non-infringing technology, but this is where a carefully crafted patent portfolio comes into play. If sufficiently broad, a thicket of claims of a well-prepared patent portfolio will preclude a large contractor from circumventing the patent owner’s right to an innovation.

On the one hand, the contracting officer is seeking the best possible solution to address the Government’s needs yet at a price point that is reasonable, fair, and just. While the contracting officer can authorize a contractor to infringe another company’s patent, such an authorization is rare. The contracting officer is more likely looking for a solution to minimize and maximize the value of the product for which it contracts. This opens a door for the patent owner to negotiate with the Government or a large contractor.

Building and executing a strategy to limit the government’s rights in an innovation and thereafter using those limitations to maintain a competitive advantage in both the commercial and governmental marketplace paves a path to multiple awards and increased valuations.

If you need legal guidance for patents and government contracts, schedule a consultation with Martensen IP by calling (719) 358-2561.