Can the government legally challenge the contractor on the patent right?
Your situation requires consultation with an attorney as the intellectual property issues raised are too complex for this forum. However, the Department of Defense offers expansive information on intellectual property. I suggest you start with these:
www.ACQuipedia contains information and explains the different types of intellectual property rights. Once in the ACQuipedia site, click on Volume D and then on Data Rights. For help analyzing a patent issue review the Article at https://dap.dau.mil/acquipedia/Pages/ArticleDetails.aspx?aid=bc8736d5-0c9a-4296-8541-a2e9e120c725
DOD AT&L’s INTELLECTUAL PROPERTY: NAVIGATING THROUGH THE COMMERCIAL WATERS, Issues and Solutions When Negotiating Intellectual Property with Commercial Companies http://www.acq.osd.mil/dpap/Docs/intelprop.pdf provides practical guidance such as:
“The rights granted to the government depend, among other things, on determining the commerciality of the product being purchased, whether the item is a deliverable, and the type of funding (private or public) that was used to develop it.
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Generally, contractors may claim patent ownership for an invention made in the performance of a government contract. However, contractors are obligated to disclose any invention in writing, state ownership rights and pursue patent protection through the normal patent process within certain timeframes. If the Contractor retains ownership of an invention, the Government still has rights which are dictated by the contract, the FAR and DFARS.”
More comprehensive is the Contract Attorney’s Deskbook 2014, Volume 1 Chapter 16, located at www.loc.gov, Military Legal Library. These sections may be relevant to your question:
“ ‘Background patents’ are patents that the contractor brings to the table. They are not expressly addressed by the FAR or DFARS. Nonetheless, many contractors will choose to place the Government on notice of their background IP, and the rights (if any) the Government will receive therein. Often, contractors use a format similar to that found in DFARS 252.227-7017 for technical data and computer software.
The ownership of background patents may provide a contractor a competitive advantage in the procurement process. Ownership of a patent, however, is not, in and of itself, sufficient to justify a sole-source award to the patent owner.
B. Third-Party Patents.
1. Contractors may need to utilize inventions made by others when working on Government contracts. Generally, the Government will not refuse to award a contract on the grounds that the prospective contractor may infringe a patent. FAR 27.102(b).
2. In the ideal case, the parties will identify, up front, any patents that will need to be practiced in performing the contract. This allows offerors to seek a license and include the same in their proposal. Certain requirements are imposed upon patent royalties that the contractor may need to pay as a result. See DFARS 252.227-6.
3. Most cases, however, are not ideal. Instead, the parties discover during contract performance that they are practicing a third-party’s patent. To address this situation, many Government contracts include three types of clauses: Authorization and Consent (e.g., FAR 52.227-1); Notice and Assistance (e.g., FAR 52.227-2); and Indemnification (e.g., FAR 52.227-3 to -5).
a. Authorization and consent.
(1) Authorization and consent may be express (e.g., by contract clause) or implied (e.g., by the Government’s conduct). It may be broad (e.g., FAR 52.227-1 Alt. I) or narrow (e.g., FAR 52.227-1). It may also be provided up front (e.g., in the contract) or after the fact (e.g., by the Government inserting itself into litigation between the patentee and the contractor).
(2) A contractor’s use or manufacture of a patented invention for the Government and with the authorization of the Government is deemed use or manufacture for the United States. 28 U.S.C. § 1498(a).
(1) Just because the Government accepts liability for its contractors’ acts of infringement in the first instance does not mean that the contractor can escape liability for patent infringement entirely. By including an indemnification clause in the contract, the Government can shift the burden of infringement back to the contractor
(2) Indemnification can be blanket (e.g., FAR 52.227-3), or by specific inclusion and/or exclusion of particular patents (e.g., FAR 52.227-3, Alt. I and Alt. II). Indemnification is, however, always a contractual question.
C. Remedies for Aggrieved Patentees.
1. Judicial Remedy
a. The sole remedy for use of manufacture of a patented invention by or for the United States is an action at the Court of Federal Claims for the patentee’s reasonable and entire compensation. 28 U.S.C. § 1498(a).
b. ‘Reasonable and entire compensation’ is most typically measured as a reasonable royalty for the use or manufacture, though other measures, such as lost profits and cost savings to the Government, have been used in limited circumstances. It also includes attorneys’ fees and costs under many circumstances.
c. A patent owner cannot enjoin use of a patented invention by a Government contractor operating with the authorization and consent of the Government. 28 U.S.C. § 1498; 10 U.S.C. § 2386. The patent owner is required to accept a reasonable amount of compensation for the infringement instead.
2. Administrative Remedy (DoD Only)
a. 10 U.S.C. § 2386, which permits DoD appropriations to be used to procure intellectual property licenses, allows DoD to settle patent infringement claims administratively.
b. The administrative claim procedures are set forth at DFARS Subpart 227.70.
c. An advantage of the administrative claims process is that it potentially allows the parties to avoid the time and expense of litigation.
d. Disadvantages of the administrative claims process include ‘piecemeal’ settlements (e.g., settlement on an agency-by-agency basis instead of a Government-wide settlement brokered by the Department of Justice) and the use of agency appropriations (vs. the Judgment Fund for Department of Justice settlements).”
And, of course, read the contract! The contract should contain the appropriate FAR and DFAR clauses to specify the contractor’s and government’s patent rights. See DFARS Part 227 and 252.227.