United States: Armed Vehicle Ruling Offers IP Lessons For Gov't Contractors

A recent US Court of Federal Claims decision in Ideal Innovations Inc. v. US,¹ on appeal in the US Court of Appeals for the Federal Circuit, serves as a warning to contractors - especially nontraditional government contractors - to familiarize themselves of the intellectual property risks associated with contracting with the US government.

Introduction

It is cliché by now to argue that federal agencies must become more comfortable negotiating commercial agreements if they are going to partner with the most innovative commercial companies. With the private sector driving the leading edge of innovation, to maintain technological superiority the US Department of Defense must be able to contract on terms that these companies will accept, particularly with respect to intellectual property rights.

The problem is not limited to the DOD. The COVID-19 response confirms that civilian agencies must also be flexible enough to partner with leading health care and other companies, many of which are not traditional government contractors and are, justifiably, protective of their IP.

Blame is often leveled at the laws governing allocation of IP rights for traditional procurement contracts, grants and cooperative agreements. The Bayh-Dole Act and a strict regulatory regime operate to automatically grant the government broad license rights to use inventions developed with government funding, this framework is foreign to customary licensing practices used in partnerships among private entities.

Congress has provided alternative contracting vehicles that are widely understood to be exempt from Bayh-Dole and, in theory, provide more flexibility when negotiating IP rights, particularly cooperative research and development agreements, or CRADAs, and other transaction agreements.

These tools however, are not silver bullets. 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 other transaction agreements.

The government officials that negotiate CRADAs and other transaction agreements are trained to adhere to agency norms and, often, understandably, due to their relative inexperience in commercial contract negotiations, often do not understand why nontraditional government contractors in particular may seek to deviate from the Bayh-Dole framework.

Moreover, foundational principles of sovereign immunity, separation of powers and federal common law simply prevent the government from doing business like a private party, meaning that even when the government does genuinely negotiate IP terms, the interpretation, application and enforcement of the resulting rights will necessarily depart from private sector norms and expectations.²

The Court of Federal Claims' decision in Ideal Innovations serves as an ideal case study (pun intended) to highlight several ways that doing business with the government can significantly impact IP rights, particularly patent rights.

The plaintiffs have appealed, giving the Federal Circuit an opportunity to address important issues in this area, including certain issues of first impression.³

This article discusses five significant IP consequences of contracting with the government that are revealed through the trial court's opinion, as well as areas of law that may be impacted by the Federal Circuit's decision on appeal.

Ideal Innovations

The most recent Ideal Innovations decision, appealed to the Federal Circuit on July 21, is the third opinion in a long-running, complex dispute relating to the US' alleged infringement of a patented invention to armor vehicles for protection against exploding projectiles, designed to protect US troops fighting in Iraq and Afghanistan.

The timing and sequence of events is disputed in many respects, but the plaintiffs did work with the US Army through two contracts prior to patenting the invention. The first contract is referred to as the rapid equipping force, or REF, contract, "which did not include any provisions regarding a license for the government." ⁴

The second contract was a CRADA, which "included provisions that granted a license to the Army on any invention first actually reduced to practice during the term of the CRADA," essentially mirroring the default Bayh-Dole regime.⁵

After patenting the inventions, the plaintiffs raised infringement claims against the government for contracting with third parties to acquire allegedly infringing vehicles. Following administrative proceedings before the DOD, the plaintiffs filed suit against the government in the Court of Federal Claims.

The government argued that, even though the earlier REF contract did not contain any clause giving the government license rights, the court should read the Bayh-Dole regime into the contract by operation of law. The government invoked the so-called Christian doctrine, which holds that where an agency omits a mandatory clause that reflects important public policy from a contract, courts will read that clause into the contract as a matter of law.

If accepted, this would mean the government obtained a license to use the patented invention as long as the invention was first actually reduced to practice during the REF contract.

The court declined to use the Christian doctrine to read the Bayh-Dole regime into the REF contract, unable to determine whether the REF contract was actually subject to Bayh-Dole. The court declined to assume that when the government negotiated the REF contract it accidentally omitted mandatory licensing provisions.⁶

Based on the finding that the Bayh-Dole regime did not apply to the REF contract, the court concluded that if the inventions were first reduced to practice prior to the CRADA, then the government had no license.⁷

The bulk of the opinion is dedicated to analyzing when the patented invention was first actually reduced to practice. It was undisputed that an actual reduction to practice occurred during the CRADA, but the court found insufficient evidence of when the first actual reduction occurred. Ultimately the court ordered a mini-trial on the issue, repeatedly expressing concern that the plaintiffs had not produced sufficient evidence on this point.

The court emphasized the legal standard for actual reduction to practice, including the need for adequate testing to demonstrate that the invention serves its intended purpose. The court rejected as insufficient evidence that the plaintiffs had engaged in various testing and assemblies short of tests that replicate field conditions to confirm that the invention "protects soldiers as promised and that the vehicle is maneuverable."⁸

IP Consequences of Contracting with the Government

The Ideal Innovations litigation reveals five IP considerations that any private entity, particularly one new to government contracting, should keep in mind when doing business with the government.

Infringement claims against the US government provide limited relief as compared to suits against a commercial entity.

Because Ideal Innovations was a patent infringement suit against the US, 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 Title 28, Section 1498 of the US Code.

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.

Infringing contractors are also protected by the government's sovereign immunity.

The plaintiffs in Ideal Innovations 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.⁹

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 negotiating IP terms of an other transaction agreement or a 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.

Government contracts have five corners, or maybe six - but not four.

The terms of a government contract do not always tell the whole story. Notwithstanding that 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 REF contract reflects one of many long-standing 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 the Federal Circuit revising the terms of a contract as a matter of law.¹⁰

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 this issue is raised on appeal in Ideal Innovations, 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.

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 so-called background and foreground IP, classifying as background any IP that was either (1) conceived or reduced to practice prior to entry into an agreement, or (2) 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.¹¹

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 - the standard the plaintiffs struggled to meet in Ideal Innovations.

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 other transaction agreements. Pay close attention to the definitions of terms, particularly "subject invention," to understand the inventions in which the government will receive rights.

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.

Footnotes

1. Ideal Innovations Inc. v. US, No. 17-889C, 2020 U.S. Claims LEXIS 851 (Fed. Cl. May 12, 2020)

2. See Nathaniel E. Castellano, Other Transactions" Are Government Contracts, And Why It Matters, 48 Pub. Cont. L.J. 485 (2019).

3. The appeal is docked as case No. 2020-2065.

4. Ideal Innovations, 148 Fed. Cl. at 387.

5. Id.

6. Id. at 394-95.

7. Id.

8. Id. at 392.

9. See Daniels, Sharifahmadian & Castellano, Fed. Circ. Clarifies Infringement Liability for Contractors, Law360 (June 29, 2018).

10. See e.g., K-Con Inc. v. Secretary of the Army, 908 F.3d 917 (Fed. Cir. 2018).

11. 35 U.S.C. § 201(e).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.