Key Takeaway
For a target company that used government funding to develop its technology, intellectual property (IP) due diligence must extend beyond ownership confirmation to evaluate the practical impact of government license rights on the business value of the target’s patent portfolio.
Introduction
IP due diligence is typically focused on confirming proper ownership — ensuring chain of title is clean, assignments are in place, and there are no encumbrances. Where a target company received government funding to develop its IP, however, another set of questions emerge — in particular, whether that government funding creates any material effect on the value of the company’s IP rights.
What material IP risk is created by government funding of a target company’s development efforts?
A target company that used government funding to develop its key, patented products will likely have no claim for patent infringement if the government decides to source the same products from a third party.
Under the Bayh-Dole Act, when a contractor retains title to a subject invention, the federal government receives “a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world.[1]” The critical phrase — “have practiced … for or on behalf of the United States” — means the license extends to any third party acting at the government’s direction.
A concrete example illustrates the risk. In University of South Florida Board of Trustees v. United States, 92 F.4th 1072 (Fed. Cir. 2024), the plaintiff (USF) owned a patent claiming transgenic mice used in Alzheimer’s disease research, and a third-party lab had been producing and distributing the patented mice with the government’s authorization. The Federal Circuit affirmed a judgment of noninfringement, holding USF’s invention to be a “subject invention” due to government funding of USF’s research. Id. The government was entitled to its royalty-free license, including the right to have the patented mice made by the third-party lab. Id.
What factors influence the scope of that risk?
Several factors bear on the materiality of the government’s license rights:
(1) What non-patent IP protections are in place?
Depending on the industry and type of grant, other types of protections are in place to incentivize grant recipients and contractors to develop intellectual property.
For example, for Small Business Information Research and Small Business Technology Transfer (SBIR/STTR) program grants, specific data rights protections are provided. The government has nondisclosure obligations with respect to properly marked SBIR/STTR data for up to 20 years[2]. SBIR/STTR data rights can extend to source code, software architecture, drawings, formulas, and other recorded information of a technical nature generated under an SBIR/STTR funding agreement, such that the government may be prevented from sharing such information to third party bidders. Id. These protections are contingent on proper marking of deliverables with the SBIR/STTR data rights legend, so due diligence should examine whether the target has been consistent in its marking practices. Id.
(2) Understanding the scope of IP developed independently as compared to government funding.
IP developed independently of government funding is not subject to the government rights discussed in this article. Companies that can clearly articulate a systematic approach by which background IP was developed and protected separately from government funding will increase prospective buyer or investor confidence in their IP portfolios.
In contrast, companies that do not maintain clear boundaries between government-funded and privately funded projects risk inadvertently expanding the scope of the government’s license rights. Due diligence should evaluate the company’s internal processes for tracking which inventions relate to which funding sources, potentially including a careful mapping of the target’s patent portfolio against its government funding history and product offerings to assess the scope of government rights.
(3) Who are the company’s customers?
The government’s license rights are typically immaterial for technologies with a primarily nongovernmental market. The federal government would not typically attempt to use its license rights to compete with a company’s sales to consumers and businesses.
In contrast, government license rights may be highly material where the federal government is the main — or potentially only — viable end user, as may often be the case in the defense industry.
(4) Do long-term supply agreements, customer relationships, or niche expertise mitigate the risk?
Even where the government license rights are theoretically significant, long-term supply contracts, incumbent contractor advantages, specialized manufacturing capabilities, and established customer relationships can reduce the likelihood that the government would turn to a third party.
Other issues to check in IP due diligence for a target with government funding
Additional questions that should be asked in IP due diligence involving a government-funded target include:
(5) Do the company’s patents include the required government funding statements?
35 U.S.C. § 202(c)(6) requires that any patent covering a subject invention include a statement that the government has rights in the invention. Due diligence should confirm all applicable patents include this statement; where it is missing, certificates of correction should be filed.
(6) What are the company’s practices for reporting inventions to the government?
Reporting obligations under the Bayh-Dole Act are a prerequisite for retaining IP ownership. Due diligence should examine whether the target has been consistently reporting subject inventions through iEdison, electing title, and filing patent applications within applicable deadlines. Lack of reporting may suggest underlying ownership issues — the government may have the right to request title to unreported subject inventions. Id.
Whether you are evaluating potential acquisition of or investment in a target company with government-funded IP or building an innovative company with the support of government funding, Foley attorneys can help assess and navigate the complex issues outlined above. Reach out to discuss your specific situation.
[1] 35 U.S.C. 202(c)(4)
[2] See https://www.sbir.gov/tutorials/data-rights/tutorial-2
