Government Contracts and Your Intellectual Property: Ingredients for a Lucrative Deal or an Expensive Liability?

Editor's Note: James W. Norment is a member of the Government Representation Practice Group and the Business Section of Ward and Smith, P.A.

The federal government spent about $2 billion in North Carolina during 2007 on intellectual property procurement through the licensing and purchasing of customized source and object codes as well as technology research and development. Additionally, hundreds of millions of dollars were spent nationally procuring off-the-shelf software.

Although the private sector now spends more than the federal government overall on technology, no single company can match the $143 billion in the 2008 federal purchasing pipeline for technology. North Carolina's technology companies should position themselves now in order to take advantage of the expected tremendous growth in Department of Defense and Department of Homeland Security spending in the state.

Government Contracts Require Special Attention

Unfortunately, many technology companies avoid government contracting because of the perceived risk that a lucrative deal could turn into an expensive liability. This is a valid concern when it comes to intellectual property. More than once, a contractor has failed to follow the terms of the Federal Acquisition Regulations and, as a result, lost valuable intellectual property assets and trade secrets. We have seen situations where vendors failed to provide proper notice or improperly marked data to such an extent that their trade secrets and confidential information rights were waived. The government then was able to disclose the information to the public and re-use the trade secrets with other vendors. Such actions can be devastating to the unprepared contractor.

The concern is one that can be managed. Thus, federal contracting can be rewarding financially if one understands the complex and relatively rigid procedures and rules used by the federal government. The federal government has immense volumes of procurement regulations and specific processes for various types of procurements. Some knowledge of the system goes a long way to improve a contractor's chance of winning a job. However, a technology company also must protect its most important asset – usually its intellectual property. Therefore, a technology contractor should understand how the government treats intellectual property before entering any bid. Although the approach to the federal government market is similar to the commercial sector, the procedures and rules of doing business in the government arena are different. Failure to understand those differences almost always leads to trouble.

The federal government has a reputation for being inflexible and over-reaching by demanding that contractors give up basic intellectual property rights commonly retained in the private sector. For example, if a contractor fails to commercialize a patent developed from federally-funded research, the government can exercise what is known as march-in rights and grant a license to a third party to use the patent without the permission or involvement of the contractor. Fortunately, the federal government has never exercised its march-in rights. But that does not mean it never will.

Important Issues to Consider

Managing your intellectual property under a federal government contract can be difficult. Fortunately, a basic understanding of the key questions related to intellectual property issues will provide important assurances that your contract will be a more lucrative enterprise than a liability.

The government generally respects a contractor's need to protect its intellectual property. Since 1980, the Bayh-Dole Act (the "Act") has streamlined how the government deals with private intellectual property and simplifies the acquisition of intellectual property by the government while extending new protections to the contractor. The Act's policy statement presents the fundamental approach that the government should take with regard to intellectual property: "It is the policy and objective of the Congress . . . to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions; and to minimize the costs of administering policies in this area."

Over the last 27 years, the Act's focus on invention patents has expanded to the procurement of intellectual property generally through licensing. Today, the Act and its implementing regulations rely on two factors to determine the extent of the government's control over a contractor's intellectual property.

First, the amount of government funding for the project helps to determine the degree of its interest. For instance, the procurement of software through the micro-purchase or GSA schedule system often will not give the government any rights beyond what would be granted in the public sector. In contrast, the government expects nearly complete control over intellectual property developed solely with federal funds.

Second, the purpose of the procurement often determines whether the government will acquire any special intellectual property rights. This is especially true for highly sensitive uses by the Departments of Defense and Homeland Security. If the government has a national security interest in the intellectual property or the data generated through its use, then the government often will require the contractor to provide intellectual property rights not granted in the private sector.

For most federal agencies, government rights in intellectual property generally fall within the following categories:

1. Unlimited rights. The government acquires the right to use and disclose the data publicly, in any manner and for any purpose, and to permit others to do so. For the Department of Defense, this sort of expansive right applies to intellectual property created exclusively with government funds and certain types of mission-critical data delivered to the government regardless of funding. For most other civilian agencies, this right applies to intellectual property first produced or delivered in the performance of the contract; form, fit, and function data funded by the government; and intellectual property needed for repairs or maintenance.

2. Government purpose rights. This category allows the government to acquire the right to use or disclose the intellectual property within the federal agency without restriction. In some cases, the government may allow third parties to use the intellectual property for government purposes only. This category affords the contractor greater protection than unlimited government rights because it somewhat limits the government's use and stops third parties from using the intellectual property for commercial purposes. For both defense and civilian purposes, this right applies to intellectual property developed with a mix of government and private funds.

3. Negotiated rights. Here, the contractor and the government negotiate the terms of the government's right to use intellectual property for governmental purposes on a case-by-case basis. Other rights may be tailored as needed. These rights apply to civilian agencies where the intellectual property is developed with a mix of government and private funds.

4. Limited rights. This category affords the contractor the greatest protection possible because it allows the federal agency only to use or disclose the intellectual property internally or pursuant to a more typical commercial license. Thus, the government cannot disclose the intellectual property outside the agency without permission except for certain agreed-upon purposes. These rights typically apply to intellectual property that is commercially available or is developed at private expense and embodies trade secrets.

Conclusion

Finally, what protections does a company have if the government breaches its agreement regarding the use of intellectual property? The typical private-sector license terms related to venue, controlling law, or arbitration normally do not apply to government contracts. Instead, contractors must take a series of steps. First, informal dispute resolution must be pursued with the contracting officer. Second, if that fails, the contractor can seek redress in the Court of Federal Claims or utilize arbitration through the government's civilian or defense Boards of Contract Appeals. The contractor can seek not only actual damages, but also some consequential damages such as lost profits and, in the event of especially egregious government actions, other statutory damages such as legal expenses and penalties.

The above issues demonstrate that a contractor must consider several issues in order to protect its intellectual property when dealing with the federal government. Indeed, government contractors cannot rely solely on technical expertise and good business sense to protect their intellectual property. Instead, success also is linked to a clear and complete understanding of the federal procurement process.

© 2008 Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. James Norment is a member of the Business Section and leads the Government Representation Practice Group of Ward and Smith, P.A. His practice encompasses a variety of business law matters related to state and federal government contracts, procurement, and related disputes. Comments or questions can be sent to jwn@wardandsmith.com

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.