SBIR/STTR Training: Intellectual Property Considerations
In this lesson, you will learn:
- What laws provide protection for SBIR/STTR ventures?
- What do I need to know about the government and IP rights?
- What are “march in” rights?
- What export restrictions impact SBIR/STTR funded IP?
- How can I protect my IP rights when contracting with the government?
- What are good practices for protecting Intellectual Property?
Be sure that you and your legal counsel understand the new America Invents Act, which is the most significant change to the patent law since 1952. Intellectual Property (IP) is any creation of the the intellect that may have commercial value. For technology companies, this may include patents, copyrights, business methods, industrial processes, trademarks and certain industrial designs. For a startup or small technology company, IP is likely the company’s most valuable asset. It is imperative that you understand IP, your rights as an IP owner, and the law in regards to the government’s use of your IP.
The Bayh-Dole Act (also called the University and Small Business Patent Procedures Act) is United States legislation dealing with intellectual property developed as part of federal government-funded research. Adopted in 1980, Bayh-Dole is codified in 35 U.S.C. § 200-212 and implemented by 37 C.F.R. 401. Among other things, it gives U.S. universities, small businesses and nonprofit organizations control of their inventions and other intellectual property that result from such funding. The Act, sponsored by senators Birch Bayh of Indiana and Bob Dole of Kansas, was enacted by the United States Congress on December 12, 1980.
All small businesses, as well as faculty entrepreneurs that are pursuing SBIR or STTR funding, should read the Bayh-Dole Act. It is important to know the rights of small businesses, universities and inventors.
Perhaps the most important change associated with the Act is that it reversed the presumption of title. Bayh-Dole permits a university, small business, or nonprofit institution to elect to pursue ownership of an invention in preference to the government.
Prior to the enactment of Bayh-Dole, the U.S. government had accumulated 30,000 patents. Only approximately 5-percent of those patents were commercially licensed.
*New: Review the case of Stanford v. Roche, which describes how the courts have interpreted the Bayh-Dole Act and how universities will consider their patent policies in lieu of this late 2011 ruling. If you are licensing university technology and maturing it through the SBIR/STTR program, this case is very important to you.
GOVERNMENT & IP RIGHTS
Companies using the SBIR/STTR program must understand the implications of intellectual property (IP) rights and the limitations and restrictions caused by contracting with the government. If the government funds development of your innovation or technology, you grant them a royalty-free license to use your invention world-wide. However, the government does not have the right to commercialize your invention. Therefore, you retain the right to make money from your invention.
Here, invention “means any invention” that is “conceived or first actually reduced to practice in the performance of work under a funding agreement.” This definition covers a wide range of research activities that are either partially or completely federally funded.
Small businesses and non-profit organizations can retain title to intellectual property in a federally funded “subject invention.” In exchange for this title, the organization is required to:
- Report each disclosed invention to the funding agency
- Elect to retain title in writing within a statutorily prescribed timeframe
- File for patent protection
- Grant the federal government a non-exclusive, non-transferable, irrevocable, paid-up license to practice or have practiced on its behalf throughout the world
- Actively promote and attempt to commercialize the invention
- Not assign the rights to the technology, with a few exceptions
- Share royalties with the inventor
- Use any remaining income for education and research
- Give preference to US industry and small business
The government’s march-in rights are one of the most challenging provisions in Bayh-Dole. It allows the funding agency, on its own initiative or at the request of a third party, to effectively ignore the exclusivity of a patent awarded under the act and grant additional licenses to other “reasonable applicants.” This right is strictly limited and can only be exercised if the agency determines, following an investigation, that certain criteria are met. The most important of these is a failure by the contractor to take “effective steps to achieve practical application of the subject invention” or a failure to satisfy “health and safety needs” of consumers.
Though this right is, in theory, quite powerful, it has not proven to be so in terms of its practical application — to date, no federal agency has exercised its march-in rights. March-in petitions have been made to the National Institutes of Health, however. For example, pharmaceutical companies occasionally instruct their legal departments to evaluate the risk of march-in prior to negotiating licenses for drugs developed under Bayh-Dole coverage. This is important to SBIR/STTR ventures because your ownership of your IP is one of your most important and valuable assets. The future growth of your company likely hinges on your ability to raise money based on the valuation of your IP. It is important to understand your rights, the extent of and contraints on those rights, and how to best protect your IP.
WHAT EXPORT RESTRICTION IMPACT SBIR/STTR FUNDED IP?
There are two very important U.S. export control laws that can affect SBIR/STTR ventures: International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR). The objective of both laws is to prevent disclosure or transfer of sensitive information to a foreign national by controlling access to specific types of technology and the associated data.
The ITAR contains a United States Munitions List (USML) of restricted articles and services. The EAR contains a Commerce Control List (CCL) of regulated commercial items, including “dual-use” items that have application in both commercial and military markets.
To be ITAR or EAR compliant, a manufacturer or exporter whose articles or services appear on the USML or CCL lists must register with the U.S. State Department’s Directorate of Defense Trade Controls (DDTC). ITAR and EAR compliance can be challenging. For example, data related to a specific type of technology may need to be transferred over the Internet or stored locally outside the U.S. in order for business processes to flow smoothly.
It is the responsibility of the exporter to take all needed steps to certify that they are in compliance with these export regulations. The consequences may be expensive. Penalties may occur for failure to comply with ITAR, carrying civil fines as high as $500,000 per violation. Criminal penalties include fines of up to $1,000,000 and 10 years imprisonment per violation. Under EAR, maximum civil fines may reach $250,000 per violation. Criminal penalties can be as high as $1,000,000 and 20 years imprisonment per violation.
ITAR [22 CFR 120-130]
EAR [15 CFR 730-774]
Covers military items or defense articles.
Regulates items designed for commercial purpose which could have military applications such as computers or software.
Regulates goods and technology designed to kill or defend against death in a military setting.
Covers both the goods and the technology.
Includes space related technology because of application to missile technology.
Licensing addresses competing interests and foreign availability.
Includes technical data related to defense articles and services.
Combines commercial and research objectives with national security.
Strict regulatory licensing – does not address commercial or research objectives.
Visit www.export.gov for a broad view of requirements and regulations. The Bureau of Industry and Security has an Introduction to Commerce Department Export Controls as well as webinars on EAR compliance. The U.S. Department of State also has more information on ITAR.
THE BEST IP APPROACH
Government contract law, public law, and intellectual property law are all entwined. Protecting your intellectual property (IP) and your rights to that property can be a complex task. When dealing with protecting your IP, be proactive. Get the requisite knowledge before you need it, and act on it consistently.
When you are successful in doing this, you give yourself the chance to have the government fund your creation of breakthrough technologies that you will own and can profit from.
PROTECTING YOUR IP
To be proactive with your IP, you must take a number of steps. These include getting a good IP attorney, learning about the law and your rights under the SBIR and STTR programs, studying the use of non-disclosure agreements, subcontracts and teaming agreements, and creating an IP disclosure plan.
A Good Attorney. You need both a good corporate attorney and a good IP attorney. The following are some suggestions for selecting a good attorney:
- Look for an attorney that is a good match for you scientifically or technically; doing so will reduce your cost associated with getting them up to speed.
- Look for an attorney that has experience with patents in your state and has prosecuted copyrights and trademarks and is knowledgeable about trade secrets.
- Look for an attorney who will help you help yourself – that is, help educate you and your employees in government contract law so that you can avoid IP issues.
Hire the best attorney and find a way to pay for this important service. Good attorneys are worth the cost.
Learn about the Law. The law says that you have a right to the inventions you create under an SBIR or STTR contract – it is your IP. However, you must learn more about your specific rights so that you may be proactive in protecting what you own. One way to protect your IP is to make sure you identify and mark those proposal pages that contain company private or proprietary information. Every agency has different rules about how you must mark proprietary information in your proposal.
Read the proposal preparation instructions carefully.
Some proposal writers try to put all proprietary information in one location within the proposal, thereby limiting the number of pages that must be declared as containing company private information. The agencies warn proposal writers not to mark every page of their proposals as containing private information.
Assume your proposal will be the subject of a Freedom of Information Act (known as FOIA) request. Make it easy for agencies to exclude your private information from FOIA disclosure by limiting private information to as few pages as possible in your proposal.
Use of Non-disclosure Agreements (NDA). Proactively plan partnering, teaming and subcontracting discussions in advance by working with your attorney and using an IP disclosure plan. In discussions with the “customer,” you should think through the path or process in which you disclose your IP. For example, you may never want to fully disclose some company secrets. Ask yourself, “At what point in the discussion does an NDA need to be signed to continue?” When you reach that point, go no further until an NDA is executed. The government does not sign NDAs. However, you will want to use NDAs when dealing with subcontractors, consultants and nonprofit research institutions.
Subcontractors. By law, you must protect your subcontractor’s IP. You have to learn how best to do that within the constraints of your own rights and contractual obligations.
According to the SBA Policy Directive for the SBIR program, your SBIR/STTR data rights clauses are non-negotiable and must not be the subject of negotiations pertaining to an SBIR Phase III award, or diminished or removed during award administration. An agency must not, in any way, make issuance of an SBIR Phase III award conditional on data rights.
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