In the private sector, using another firm’s patented invention without a license may infringe upon patent rights, giving rise to damages liability and treble damages and an award of attorney fees if deemed willful. Federal contractors, however, can use patent rights owned by others without obtaining a license or paying royalties. By statute, the military and other government agencies have the right to use any patented invention to further valid government missions, and this right may be extended to government contractors.
The result is that the unlicensed use of patented inventions by federal contractors may not be illegal, or wrongful, depending on the usage.
Whether a patent is used by the government itself or one of its contractors, the patent owner is generally entitled to receive compensation (usually in the form of a reasonable royalty), but only from the government. Contractors have no liability to the patent owner, although they may be required under some contracts to reimburse the government for compensation it pays to the patent owner.
To avoid unnecessary patent infringement liability, knowing the boundaries of these special rules is critical. Particularly in the current environment of heightened scrutiny of contractor conduct — mastering these special rules of patent use will also help contractor personnel distinguish right from wrong in the use of patent rights owned by others.
Broadening patent usage to the government and its contractors is permitted so as to facilitate military and other governmental missions. Indeed, this is the policy rationale for special rules governing patent use by contractors.
For example, patent infringement typically gives rise to the right to a court injunction, barring further use of the patent, but not so in the context of a government contract, where the patent owner’s sole remedy is compensation from the government. Federal contractor patent use also may be protected from both injunctions as well as monetary liability, provided the contractor meets certain requirements.
Most importantly, the contractor’s use of the patent must be government-authorized. Several standard contract clauses address the authority issue and the related issue of financial liability for use of unlicensed patents. It is important that contractors that use (or may be accused of using) unlicensed patents in performing federal contracts closely abide by the clauses in their contract. Indeed, one clause, the “Patent Indemnity Clause,” transfers liability to compensate the patent owner on to the contractor.
Contractors generally should request that the government use the standard “Authorization and Consent Clause,” authorizing the contractor to use unlicensed patents and specifically absolving the contractor from liability for such use. If the government instead insists on inserting the Patent Indemnity Clause, then the standard “Waiver of Indemnity Clause” which effectively waives patent indemnity for specified patents — should also be negotiated and incorporated. With the Waiver of Indemnity Clause the government can encourage potential bidders otherwise wary of possible patent infringement as to certain patents to submit an offer.
In short, although a patent owner usually cannot enjoin a contractor’s use of a patent to perform a federal contract, or sue the contractor directly for patent infringement damages (its sole remedy being compensation from the government), depending upon which contract clause is incorporated, the contractor may incur some or full liability to indemnify the government for government-compensated patent owners.
Second, the compulsory license extended to contractors using patents in federal work should also protect contractors during the bidding process, before any contract is entered. The courts have indicated that bidders may include use of unlicensed patents in their bids to supply “infringing products,” without incurring damages liability and without risk of injunction. Government authorization may be implied. Unsuccessful bids render the potential for patent use moot. And, if the bid is successful, the patent owner may obtain government compensation.
Finally, a recent court decision provides a strong reminder that when federal contractors use patents belonging to others, determining whether that use is “right” or “wrong” can be surprisingly complex. In Zoltek v. United States, a federal appeals court held, contrary to the general rules outlined above, that the government was not required to pay reasonable compensation to that claimant, even though it was undisputed that a federal contractor was using patents owned by the claimant to perform a military contract. The rationale was that the contractor’s patent use occurred overseas, at least in part, and the statute giving the government and its contractors the right of patent use — and patent owners a corresponding compensation remedy against the government — does not apply if contractors “infringe” patents partly by conduct outside the United States. Ironically, that ruling in the future may encourage both the government and its contractors to ensure that otherwise actionable infringement occur at least partly overseas. By so doing, the government may escape all liability for compensating the patent owner, which would obviously absolve the contractor from any possible indemnity obligation as well.
As with most contractor conduct, there is a right way and a wrong way to use someone else’s patent. Knowing and adhering to the rules in advance avoids misuse of the property of others, and liability that could easily have been averted.
Jerry Stouck (firstname.lastname@example.org), a Washington, D.C.-based shareholder with the international law firm of Greenberg Traurig, specializes in litigation against federal government agencies on behalf of contractors. The views expressed here are solely those of the author.
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