Federal Contracting; Contractor Disclosure to Funding Agencies and Agency March-in Rights

Federal Contracting; Contractor Disclosure Requirements to Funding Agencies and Funding Agency March-in Rights

In 1980, Congress passed the Bayh-Dole Act, promoting collaboration between the Federal Government and private intellectual capital. The act sets up a mechanism for transferring federally funded research to be performed by businesses and nonprofits through funding agreements. The act also establishes the rights for businesses and nonprofits to patent and commercialize inventions developed within the scope of the funding agreement. Additionally, under this statute, there is a preference for small businesses and nonprofits when awarding contracts. In exchange for the funding agreement, contractors must disclose any invention conceived or reduced to practice under the funding agreement to the funding agency. The Bayh-Dole Act also establishes the rights of the Federal Government to “march-in” and take any subject invention under certain circumstances.

Accordingly, there are two main elements of the agreement to keep in mind as a contractor when performing federally funded research. First, contractors have a duty of disclosure to their funding agency that is separate from the duty of disclosure for patent applications. Second, the Federal Government retains certain march-in rights to any subject invention during and after the funding agreement. While no agency has exercised these march-in rights, contractors should understand that the funding agency retains the right to compel a license on any subject invention to the United States or, in certain circumstances, to a third party.

What is a Small Business for Federal Funding Purposes

Bayh-Dole seeks to prioritize small businesses that are not yet dominant in their field of operation. Small businesses under Bayh-Dole may be eligible for certain benefits, such as preferential treatment in government contracting. Suppose you are thinking of starting a business or are already operating a small business. In that case, knowing what is considered a small business is important and what it means for your business. For funding agreements, contractors are classified as small under the North American Industry Classification System (NAICS) and are measured by the number of employees or average receipts. A good rule of thumb from the Small Business Administration (SBA) indicates that small businesses are usually 500 employees or less for manufacturing companies and less than $7.5 million in receipts for non-manufacturing businesses.

Disclosure requirements for the funding agency

Funding agencies also require disclosure to the agency when a contractor has identified an invention. Contractors have two months to submit a written disclosure to the funding agency about the invention from when the contractor’s personnel responsible for patent matters is notified. The report will include the contract under which the research was performed and technical detail to convey an understanding of the invention to the funding agency. As defined in 37 CFR 401.14(c)(1), the report should convey the invention’s nature, purpose, operation, and any inherent characteristics such as physical, chemical, biological, or electrical characteristics.§ 

§ 401.14 Standard patent rights clauses.

(c) Invention Disclosure, Election of Title and Filing of Patent Application by Contractor

(1) The contractor will disclose each subject invention to the Federal Agency within two months after the inventor discloses it in writing to contractor personnel responsible for patent matters. The disclosure to the agency shall be in the form of a written report and shall identify the contract under which the invention was made and the inventor(s). It shall be sufficiently complete in technical detail to convey a clear understanding to the extent known at the time of the disclosure, of the nature, purpose, operation, and the physical, chemical, biological or electrical characteristics of the invention. The disclosure shall also identify any publication, on sale or public use of the invention and whether a manuscript describing the invention has been submitted for publication and, if so, whether it has been accepted for publication at the time of disclosure. In addition, after disclosure to the agency, the Contractor will promptly notify the agency of the acceptance of any manuscript describing the invention for publication or of any on sale or public use planned by the contractor. 

Patent rights under federally funded research

In general, the Federal Government has the right to title any invention or discovery made under a federally funded research agreement. Specifically, any invention conceived or reduced to practice within the scope of the funding agreement from the government may be considered “subject inventions” and may be subject to regulation under 37 CFR 401. These regulations also apply to all parties involved in the contract including any subcontractors or assignees that perform any work within the scope of the funding agreement. Enforcement falls to the contracting agency to ensure proper reporting, summarization, and acquisition of patent rights by the contracted party. However, there are instances where the Federal government may waive its rights and allow the inventors to retain title to the invention. In these cases, it is up to the inventors to protect their invention by filing for a patent.
When contractors retain their entire right to any subject invention, the government is still entitled to license the invention. The contracting agency may license the invention to be practiced for the United States or on its behalf worldwide by exercising march-in rights. When an agency exercises its march-in rights, it can compel a contractor to license their subject inventions to specific fields of use. Typically the license will be limited to use by the United States Government, however, under certain circumstances, third-party licensing may also be required. Only when the funding agency determines that the use of the invention would be necessary for the practice of a subject invention or use of a work product in the funding agreement can the agency compel a contractor to license to a third party. Additionally, the scope of the license issued to the third party is minimal and only allows for action necessary to achieve practical application of the subject invention or work object.

There are only four situations where the funding agency can assert their march-in rights on a contractor as defined in 35 U.S.C. § 203.

35 U.S. Code § 203 – March-in Rights

    (a) With respect to any subject invention in which a small business firm or nonprofit organization has acquired title under this chapter, the Federal agency under whose funding agreement the subject invention was made shall have the right, in accordance with such procedures as are provided in regulations promulgated hereunder to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself, if the Federal agency determines that such—

(1) Such action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;

(2) Such action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee or their licensees;;

(3) Such action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee or licensees; or;

(4) Such action is necessary because the agreement required by paragraph (i) of this clause has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of such agreement.;

Of the six petitions filed for Agencies to exercise their march-in rights, all have been filed with the National Institute of Health (NIH). As the NIH deals heavily in pharmaceutical research, one common theme among all the petitions focuses on high costs of medicines funded by government research. However since the beginning of the program in 1980, no federal agency has exercised its march-in rights on any contractor. Funding agencies have taken a very narrow approach when interpreting the four categories listed above from 35 U.S.C. § 203. Accordingly, contractors should understand how march-in rights function in theory, but it is historically unlikely to assume an agency would exercise this power without further legislation. Ultimately, contractors should focus on furthering their research and ensuring proper disclosure practices to their funding agencies, as it is historically unlikely that a funding agency will exercise their march-in rights and compel contractors to license any of their subject inventions.

John DeStefano, Technical Advisor

John DeStefano
Technical Advisor
[email protected]

John DeStefano, is a patent and technology technical advisor at Founders Legal. He received his Bachelor’s Degree in Electrical Engineering from Missouri University of Science and Technology (Rolla) and is pursuing a J.D. at Franklin Pierce School of Law with a focus on Intellectual Property.

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