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To bolster homeland security, the government is directing an unprecedented amount of funding to the development and procurement of new security products that can help protect the nation’s infrastructure, landmarks, and other critical assets. Government departments and agencies such as the Department of Defense (DoD), the Defense Advanced Research Projects Agency (DARPA), and the Department of Homeland Security (DHS) are in charge of deciding where these dollars will go, and many private security companies are clamoring for a piece of the funding pie.

What they may not realize is that if they are using government funds in the research, development, or production of new inventions, the government may retain a license to use the information or product. In some cases, the government may even be entitled to sole ownership of the resulting intellectual property.

Before taking public seed money, management must understand how it will affect the company’s ownership interests and future profit-earning potential. With that in mind, let’s look at the laws and regulations governing these arrangements and at a fictional case study that shows what the real-life impact could be.

Funding agreements. As many security professionals know, there is an extensive process that a potential contractor or subcontractor must go through to receive government funding. At the end of this process, a complicated funding agreement between the contractor and the government is in place. Government funding agreements include, for example, grants, contracts and cooperative agreements.

Let’s look first at the role of the Federal Acquisition Regulations (FAR) and the Defense-Federal Acquisition Regulations Supplement (DFARS). These regulations address every aspect of the funding agreement, from the requirement for a drug-free workplace to the effect of a contractor bankruptcy on the funding agreement. Both FAR and DFARS have specific clauses that address intellectual property rights (see box, page 101).

Key aspects of intellectual property addressed by the FARs and DFARS include patent rights to inventions, computer software, and technical data. As a general rule, when the government provides funding to a private entity and the funding is used, even peripherally, in the research, development, refinement, or experimentation of an invention, software, or technical data, the government will usually retain some sort of rights in the result.

The differences between the FAR and DFARS clauses are minimal with respect to patent rights, but there are important differences with respect to the treatment of technical data and software. These clauses offer definitions for data, technical data, and computer software, and define the government’s rights differently depending on whether the property was developed in performance of work done pursuant to a government funding agreement exclusively, or whether it used private funds or was the result of mixed government and private funding.

These clauses also define the government’s rights differently depending on whether the data, technical data, or computer software is considered commercial or noncommercial. Accordingly, the FAR and DFARS clauses affect not only a private entity’s patent rights but also a private entity’s rights in its copyright and trade secret data.

It is important to keep in mind that even if a particular funding agreement does not explicitly list one of these intellectual property clauses, they are by law implicitly incorporated. I have seen instances in which FAR clauses are listed in a proposal for government funds with corresponding checked or unchecked boxes next to each clause. This is misleading, because the fact that a box is unchecked for a particular FAR clause cannot be relied on as an indicator that the FAR clause is not a part of the funding agreement.

The DFARS clauses are necessarily incorporated, in addition to the FAR clauses, within funding agreements with particular defense-oriented departments and agencies including the Departments of the Army, Navy, and Air Force, DARPA, the Defense Commissary Agency (DeCA), the Defense Contract Management Agency (DCMA), the Defense Finance and Accounting Service (DFAS), the Defense Information Systems Agency (DISA), the Defense Intelligence Agency (DIA), and the Defense Security Service (DSS), just to name a few.

Other Agreements. Some alternative agreements are not subject to the FAR or DFARS. For example, DARPA has broad authority to enter into “innovative agreements and other transactions” (known as “Other Agreements”) to support research and development activities. These “innovative agreements and other transactions” are sometimes called Other Transaction Authority (OTA) Agreements or Technology Investment Agreements (TIAs). They are not required to include the traditional FAR and DFARS clauses.

However, Other Agreements are usually only available when contracts or grants are not feasible, except where the Other Agreements are directly relevant to weapons or weapon systems. Other Agreements may also be applicable to support dual-use technologies, such as those with commercial nonmilitary potential as well as potential military applications.

The Other Agreements typically exist in situations where both government funds and private entity funds are used to complete a project. In such cases, contract terms other than the standard FAR and DFARS intellectual property clauses may be included, and it may be possible to negotiate the terms of those clauses.

However, typical agency guidance to contracting officers who draw up Other Agreements is to seek to obtain intellectual property rights consistent with the statutes that serve as authorization for the standard FAR and DFARS intellectual property clauses. So, with few exceptions, if a contractor enters into a funding agreement with the government, some combination of the FAR and DFARS clauses will be included.

Preexisting rights. Before a company submits a funding-request proposal to the government, it should consider how intellectual property that the company already owns might be affected by the funding agreement. In some instances, there may be steps that the private entity should take prior to submitting the proposal to preserve rights in its preexisting intellectual property. It may also make sense to include references to that preexisting intellectual property within the proposal itself to demarcate what intellectual property is indeed preexisting prior to entering into the funding agreement.

Similarly, during the performance of a funding agreement, the private entity will want to monitor the status of changes to existing intellectual property and the development of new intellectual property as a way to preserve the entity’s rights in the intellectual property to the fullest extent permitted.

Who’s affected. When a company enters into a funding agreement, the terms of which are defined by the FAR and/or DFARS, the intellectual property clauses are applicable not just to the prime contractor but also to any subcontractor. Therefore, a subcontractor will want to review the prime contract carefully to determine what effect the FAR and DFARS clauses may have on the subcontractor’s intellectual property prior to entering into a subcontract with the prime contractor.

Further, the FAR and DFARS clauses apply equally to all private entities, regardless of the size of the organizations or whether they are for-profit or not-for-profit entities. While it may seem like a daunting task to review these considerations, this review may be crucial to protecting a private entity’s intellectual property rights. Such considerations should be raised with the entity’s government contracting and legal departments or with outside counsel.

Case study. To put this all into context, let’s take a look at a fictional private company, which we’ll call Company X. The inventors working for Company X have created a device known as the “widget” which will be used to inspect cargo for illegal substances. As is often the case, Company X has conceived of the new invention prior to requesting any government funding; the inventors have even gone so far as to prepare schematics of the widget, though no actual widget has yet been built.

Company X managers know there is federal funding available for the development of cargo inspection devices, thanks to a broad area announcement (BAA) or request for proposal (RFP). They realize that this funding could be used to further develop and build the widget.

Subject Inventions. Attorneys at Company X recognize that one of two FAR clauses that apply to patent-rights retention by a contractor will be incorporated into any funding agreement with the government. These clauses affect “Subject Inventions,” defined as “any invention of the Contractor conceived or first actually reduced to practice in the performance of work under this contract.” (The term “reduced to practice” means built.)

Under this definition, the widget would be considered a Subject Invention once the company applied for and obtained the government funding and signed an agreement with this language, even though the invention was conceived of before a contract was signed for government funding. That’s because the widget will be “first actually reduced to practice,” or built, in performance of the funding agreement.

Nonexclusive license. Since the widget will most likely become a Subject Invention and thus be subject to the provisions of the FAR clauses, Company X’s rights to the widget will be affected. But there is more to consider.

Assuming that Company X has filed or plans to file patent applications for the widget, the FAR clauses indicate that Company X may retain title or ownership in any patents, but the “Federal Government shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world.”

It makes sense that the government would be allowed to produce the widget invention without payment to Company X because, in essence, the government has already paid for the right to such practice by funding the building of the first actual widget. The government’s license allows the government to make, have made, use, sell, and offer to sell the patented widget without having to pay Company X for such activities. But a nonexclusive license does not preclude Company X from simultaneously licensing the patented widget to others.

Customer considerations. Company X will want to consider at this point whether the government’s retention of a nonexclusive license is acceptable from a business perspective. One question that its management may want to consider is: Who are the potential customers for the widget?

If the only foreseeable customer is the government, then the company may want to consider building the widget with its own funds prior to entering into any government funding agreement. This way, the widget will not be a Subject Invention and the government would not be entitled to the nonexclusive license. The government customer would have to pay Company X if the government wishes to make (or have made), use, sell, or offer to sell the patented widget.

Alternatively, if the government is likely to be the only customer, but Company X envisions that it will be retained to produce and sell the widget to the government, the company may find it acceptable to use the government funding and have the government retain the nonexclusive license since Company X is confident that the government will be paying Company X to provide the widgets.

This scenario assumes that Company X has a significant production advantage over possible competitors. If it does not, the government is free to have Company Y produce the widget. Further, Company X cannot seek royalties from Company Y for such production because the government is exercising the “have made” portion of the nonexclusive license.

If the customer base will include entities other than the government, it may be acceptable to Company X to have the government fund the actual reduction to practice and retain the nonexclusive license, since the other entities will have to pay Company X to make (or have made), use, sell, or offer to sell the widget.

Reporting requirements. Let’s assume that Company X has determined that the widget will be a Subject Invention, and enters into the funding agreement with the government. The relevant FAR and DFARS clauses require that the company meet certain reporting requirements with respect to the widget so that Company X can retain title in any patents resulting from the filed or to-be-filed patent applications.

The reporting requirements must be met for all Subject Inventions, whether or not Company X plans to file patent application for these. The details of the reporting requirements are beyond the scope of this article, but it is important to note that the requirements are complicated, specific, and time-sensitive. There are government-identified forms and mechanisms available (and in some cases required) for the acceptable reporting of Subject Inventions. If Company X does not meet the reporting requirements, the government may take full title in the widget, leaving Company X with no rights to the invention at all.

The Company X scenario set forth herein highlights why companies must consider their intellectual property situations and consult experts on the relevant legal issues before entering into any government funding agreements.

Too often, the author has seen situations where a private entity enters the funding agreement first, expends funds to pay for the protection of intellectual property, and then finds out later that the government either has a license to certain rights in the intellectual property or can make a case for complete ownership of the private entity’s intellectual property due to failure to meet reporting requirements. Knowing the rules and relevant regulations before getting government funding is a critical step in protecting intellectual property rights.

Dawn-Marie Bey is a Washington, D.C.-based attorney with the law firm Kilpatrick Stockton LLP. Any opinions expressed herein are solely those of the author and should not be attributed to Kilpatrick Stockton LLP. The information provided on this article does not constitute legal advice.