The following article appears in the journal JOM, 42 (4) (1990), p. 69. JOM is a publication of The Minerals, Metals & Materials Society

The Federal Funding of R&D: Who Gets the Patent Rights?

Herbert J. Zeh, Jr.

The federal government, through the operation of government-owned research facilities, research grants to universities and procurement contracts with private industry, funds almost 50% of the national R&D effort. Because of this enormous funding, the federal government has the most United States patent rights. It is estimated that the government has title to over 30,000 patents and annually files several thousand new applications. The government also has rights to nonexclusive, irrevocable, royalty-free licenses in thousands of patents. In addition, the government has a myriad of other patent rights. Examples include march-in rights, rights to require the owner to license others, rights to require licensing of background patents, rights to approve assignments, rights to limit terms of license agreements and reversionary ownership rights.

One of the most complicated problems associated with government funding of R&D is the allocation of patent rights among the government, government employees, universities, university employees and government contractors and subcontractors. This allocation is a complex determination that is controlled by federal laws, executive orders, federal acquisition regulations, and the regulations and policies of over 25 government agencies.

The allocation of patent rights between the government and its employees is covered by Executive Order 10096. Unlike private industry, government employees do not have employment contracts. The order has been in effect since 1950 and was created to provide a uniform method of allocating patent rights between the agencies and their employees. Most of the patents owned by the government are obtained under the provisions of this order.

The main section of the executive order provides that the government shall obtain all rights to any invention made by an employee if any one of the following conditions applies: the invention is made during working hours; the invention is made using either government facilities, equipment, etc., or is made with the help of another government employee who is on official duty; or the invention relates to the official duties of the inventor.

Under another provision of the order, the government is not required to take title if it would be inequitable. For example, if the invention was made by an employee with minimal use of government time or materials, the government does not have to take title. Similarly, the government is not required to take title when it has insufficient interest in the invention. Even if the government has the right to take title but elects not to, it retains a nonexclusive, irrevocable, royalty- free license with the power to grant licenses to others for all government purposes.

The executive order provides the guidelines for allocating patent rights, but the actual allocation requires the resolution of complicated issues. For example: When is an invention "made?" What are the official duties of a government employee inventor? When is it inequitable for the government to obtain title? Accordingly, to determine the government's rights to inventions of its employees, the factual circumstances of each case must be evaluated in view of the executive order as applied by the various agencies and as interpreted by the courts.

The government rights to patents for inventions developed under federally sponsored R&D at universities, nonprofit organizations and small business organizations are determined in accordance with the terms of the funding agreement. Prior to 1980, the patent rights clauses used in a funding agreement were determined by the legislation and policy of the agency involved. Some agencies kept title, and others gave title. In 1980, the Congress passed an act to provide uniformity among the various government agencies. More importantly, this act was passed so that universities, nonprofit organizations and small business organizations could more easily obtain title to patents developed with federal funding.

In accordance with the act, all funding agreements with such organizations must give the organization the right to obtain title to any invention that is conceived or first reduced to practice in performance of work under the funding agreement. There are several exceptions to this requirement, such as inventions made during the operation of a government- owned facility or if the organization is not located in the U.S.

In order to obtain title, the organization must follow the prescribed procedure set forth in the funding agreement. Even if the organization obtains title, the government retains several rights. These rights include a nonexclusive, nontransferable, irrevocable, paid- up license to practice or to have practiced the invention for or on behalf of the U.S. throughout the world. If the organization is not diligently proceeding to commercialization, the government has march- in rights and can force the organization to license the patents upon reasonable terms. The government has the right to file patent applications anywhere the organization does not file and has the right to acquire any U.S. or foreign patent or application which the organization elects to abandon. The government may also, under certain circumstances, require the licensing of background patents upon reasonable terms. In certain instances, the government may require the organization to include "buy American" clauses in any license agreement. Finally, if the organization is a nonprofit entity, the government can prevent the assignment of the patents, limit the term of any exclusive license and limit the use of royalties obtained from licenses.

The government rights to patents for inventions developed under federally funded R&D at privately owned business organizations (except small businesses) are determined by the terms of the procurement contract. These procurement regulations required to be used by most government agencies closely parallel the provisions used for universities, nonprofit corporations and small business organizations. Accordingly, the government's rights in patents developed under procurement contracts are very similar to those described above. There is, however, one very important exception. Several governmental agencies (e.g., the Department of Defense, the Department of Energy and NASA) have statutory prohibitions against private business organizations obtaining title to inventions developed with federal funds.