Unauthorized Use of Patents by the Government and Government Contractors[1]

by

Kenneth B. Weckstein, Shlomo D. Katz and Corinne Marie Pouliquen

Introduction

The unauthorized use of patents – what is called “patent infringement” in the private sector -- is governed by special rules when it happens in connection with a Government contract. To a large extent, these rules permit the U.S. Government and its contractors to “infringe” valid patents. The patent owner can’t directly sue the unauthorized user of its patent. The patent owner can’t obtain an injunction to prevent the infringement. A private company that infringes a patent in performing a U.S. Government contract may have a complete defense to a suit brought against it for patent infringement. That does not mean that the patent owner is without a remedy. Instead, the patent owner has the right to bring a lawsuit against the United States in the U.S. Court of Federal Claims. This article briefly addresses some of the rules that apply to this special breed of patent claims.

What the Statute Says

The Founding Fathers considered patent protection important enough to provide for it in the Constitution.[1] In the commercial sector, the law allows a person whose patent was infringed to sue the infringer for treble damages (in the case of willful infringement)[2] and to obtain an injunction to stop the infringement.[3] In exceptional cases, a court also may award attorneys fees to the patent owner.[4]

However, a relatively unknown statute creates a giant loophole in the scheme of patent protection. Specifically, 28 U.S.C. § 1498(a) states:

Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.

Under this statute, an owner whose patent has been infringed by the United States Government can sue the Government only for compensation; the owner cannot get an injunction to stop the infringement or other damages.[5] In effect, this statute gives the Government the same right of eminent domain vis-à-vis patents that it has to take and use other types of property.[6]

The Government’s right to take patents can have far-reaching consequences. In one case,[7] the Government had developed a worldwide radio navigation system that was found to infringe a patent held by the plaintiff. The Court of Claims (predecessor to the Court of Federal Claims) noted that the Government’s action essentially prevented the patentee from exploiting its patent. Since the Government’s system was already in use worldwide, it was extremely unlikely that anyone else would license the patent; there simply was no need for a second navigation system. Even so, the owner was limited to obtaining a reasonable royalty from the Government. It did not receive any other damages for the fact that it was essentially put out of business.

Section 1498 goes on to say that:

For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States.

Thus, the Government may authorize one of its contractors to infringe another company’s patent when performing under a Government contract, and that infringing contractor may cite the Government’s direction as an affirmative defense to liability[8] and obtain summary judgment dismissing it from a lawsuit.[9] In these cases, a patent owner that sues the private party infringer is wasting its time. Instead, the owner needs to properly exercise its rights against the Government.

The Government’s ‘Authorization and Consent’

Courts have recognized that the Government’s authorization and consent for a contractor to infringe a patent can be express or implied.[10] In practice, many Government contracts contain a standard Federal Acquisition Regulation (“FAR”) clause that states:

The Government authorizes and consents to all use and manufacture, in performing this contract or any subcontract at any tier, of any invention described in and covered by a United States patent (1) embodied in the structure or composition of any article the delivery of which is accepted by the Government under this contract or (2) used in machinery, tools, or methods whose use necessarily results from compliance by the Contractor or a subcontractor with (i) specifications or written provisions forming a part of this contract or (ii) specific written instructions given by the Contracting Officer directing the manner of performance. . . . [T]he Government assumes liability for all other infringement to the extent of the authorization and consent hereinabove granted.[11]

However, if a contract or grant does not contain this clause and the Government does not otherwise give its consent in some other form, a contractor or grantee may be liable for patent infringement.[12] Significantly, though, the Government can be found liable under section 1498 if it directs its contractor to use a certain device even if the Government does not know that the device infringes on a patent.[13]

FAR § 27.202-1 provides that a contractor is required to notify the contracting officer of all claims of infringement that come to the contractor's attention in connection with performing a Government contract. In addition, the contractor is required, when requested, to assist the Government with any evidence and information in its possession in connection with any claim or suit against the Government on account of any alleged patent infringement arising out of or resulting from the contract performance.

Enforcing the Patent Holder’s Rights

To exercise its right to obtain “reasonable and entire compensation,” the patent holder may file an administrative claim with the allegedly infringing agency. Each agency has its own procedures for settling patent infringement claims. For example, the Department of Energy has delegated to the DOE General Counsel the authority “to investigate, settle, deny, or otherwise dispose of all claims of patent and copyright infringement.”[14]

After an agency has denied the patent holder’s claim, or without ever seeking an administrative remedy, a patent holder may file a complaint in accordance with the rules of the Court of Federal Claims.[15] Rule 9 requires that the complaint specifically include the claim or claims of the patent or patents alleged to be infringed. Any action will be barred unless the complaint is filed within six years after the right of action first accrues[16] -- i.e., the suit generally must be brought within six years after the infringement occurs. This also means that only six years’ worth of damages can be obtained. However, the law provides that:

In the case of claims against the United States Government for use of a patented invention, the period before bringing suit, up to six years, between the date of receipt of a written claim for compensation by the department or agency of the Government having authority to settle such claim, and the date of mailing by the Government of a notice to the claimant that his claim has been denied shall not be counted as part of the [six year] period[.][17]

Thus, at least one court has held that it is mathematically possible for the period of recovery to extend over a total maximum of 12 years.[18]

Note that any action will be subject to 28 U.S.C. § 2514, which provides that: “A claim against the United States shall be forfeited to the United States by any person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof.”

Under section 1498, a patent holder may obtain reasonable and entire compensation. What is “reasonable and entire compensation”? The preferred basis for calculating damages in a section 1498 suit is a “reasonable royalty” -- preferably, the established rate that the patent-owner actually asks in the commercial marketplace.[19] Alternatively, a court may hypothesize a negotiation between a willing licensor and a willing licensee to determine a reasonable royalty.[20] The U.S. Court of Appeals for the Federal Circuit observed that "because recovery is based on eminent domain, the proper measure is 'what the owner has lost, not what the taker has gained.'"[21]

Two other, less-favored measures of damages are lost profits and savings to the Government.[22] To obtain lost profits, a patent owner must present “the strictest proof that the plaintiff would in fact have earned and retained those sums on its sales to the government” but for the infringement.[23] In one case, for example, the holder of a patent for eyewear was not capable of producing the number of units of the eyewear that the Government needed; thus, the patentee could not show that it would have made sales to the Government and it was not awarded lost profits.[24]

As part of “reasonable and entire compensation,” the Court of Federal Claims sometimes awards delay damages to compensate the patent holder for the Government’s delay in paying royalties.[25] And, if the patent holder is an independent inventor, a nonprofit organization, or an entity that had no more than 500 employees at any time during the five-year period preceding the use or manufacture of the patented invention by or for the United States, “reasonable and entire compensation” can include reasonable fees for expert witnesses and attorneys to pursue the action.[26]

The Government’s Defenses

In defending against a suit under 28 U.S.C. § 1498, the Government can assert the same defenses that are available in a commercial patent infringement suit. For example, the Government can argue that the patent is not valid because the invention is not “useful” or “novel” or is obvious in view of the prior art.[27] The Government also can assert that the patent is not infringed because the allegedly infringing item or activity encompasses different technology than that claimed in the patent.[28]

Conclusion

Title 28 U.S.C. § 1498 offers protection for Government contractors that are required to infringe on a patent and a roadmap for recovery for patent owners whose patents are infringed by or for the Government. Familiarity with the law can help all parties better protect and exercise their rights.

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[1] © 2004 Epstein Becker & Green, P.C. This document has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligation on you and your company.

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[1] Const. Art. I § 8, cl. 8.

[2] 35 U.S.C. § 284.

[3] Id. § 283.

[4] Id. § 285.

[5] Standard Mfr’g Co. v. United States, 42 Fed. Cl. 748 (1999).

[6] Penda Corp. v. United States, 29 Fed. Cl. 533, 573 (1993).

[7] Decca Limited v. United States, 640 F.2d 1156 (Ct. Cl. 1980).

[8] Toxgon Corp. v. BNFL, Inc., 312 F.3d 1379 (Fed. Cir. 2003).

[9] See, e.g., Crater Corp. v. Lucent Technologies, Inc., 255 F.3d 1361 (Fed. Cir. 2001).

[10] Hughes Aircraft Co. v. United States, 29 Fed. Cl. 197, 233 (1993).

[11] FAR 52.227-1, Authorization and Consent (Jul 1995).

[12] Madey v. Duke University, 307 F.3d 1351 (Fed. Cir. 2002).

[13] Hughes Aircraft, 29 Fed. Cl. at 223.

[14] 10 C.F.R. § 782.3.

[15] Those rules may be found at < http://www.uscfc.uscourts.gov/Rules/FinalRuleWPSep152003..pdf > (Note the double “.” before the “pdf” extension.)

[16] 28 U.S.C. §§ 2401 & 2501.

[17] 35 U.S.C. § 286.

[18] Bendix Corp. v. United States, 676 F.2d 606, 608 (Ct. Cl. 1982).

[19] Penda Corp., 29 Fed. Cl. at 573.

[20] Id. at 574-75. See also Standard Mfr’g Co., 42 Fed. Cl. at 758-59 & 762.

[21] Hughes Aircraft v. United States, 86 F.3d 1566 (Fed. Cir. 1996).

[22] Penda Corp., 29 Fed. Cl. at 573.

[23] Id.

[24] Gargoyles, Inc. v. United States, 113 F.3d 1572 (Fed. Cir. 1997).

[25] See, e.g., Decca Limited, 640 F.2d at 1168.

[26] 28 U.S.C. § 1498.

[27] Messerschmidt v. United States, 29 Fed. Cl. 1 (1993).

[28] Hughes Aircraft, 29 Fed. Cl. at 208.