Patently Strategic Podcast: Government Grants and Patent Rights

Non-diluting capital can be an essential source of funding when trying to get your innovation off the ground. Investor money comes with the loss of equity and/or control. Family and friends’ money may come with the risk of strained relationships. In comparison, essentially free money by way of government grants can seem like an obvious choice, right? And it is for many. The Small Business Technology Transfer (or STTR) and Small Business Innovation Research (or SBIR) grants are the largest source of early-stage capital for life science startups in the United States, combining to provide over $2 billion annually in support from federal agencies like the National Institutes of Health (NIH). But like money from investors, friends, and family, these grants do still come with some serious strings attached and potential ramifications you need to be aware of.

Strings Attached

As you might expect, in exchange for the use of these funds comes an automatic grant of a royalty-free license for the government to practice your invention worldwide. To the surprise of many, however – and as we’ll discuss – this can include royalty-free use of patents obtained before even applying for the grant! This is potentially a big problem, especially if the federal government could be one of your primary customers. Other provisions can result in lost ownership rights if you fail to commercialize or neglect to file the correct paperwork on time. Most of these strings are manageable, but when considering government grants, you need to be aware of these gotchas so you’re going in with clear eyes and can manage the hooks in a way that doesn’t jeopardize your patent rights.

Episode Overview

In this month’s episode, we’re exploring the various types of small business research grants, how the Bayh-Dole Act regulates inventions generated under government grants, licensing and ownership implications for your patent when using federal dollars, and the sticky webs that you may find yourself in if you are not carefully tracking IP and adhering to the numerous provisions and timelines. Dr. Ashley Sloat leads the discussion along with our all-star patent panel, exploring:

• How the Bye-Dole Act of 1980 regulates inventions under government grants
• As a small business, what types of grants are available to you and whether or not they can cover IP-related costs
• The federal government’s rights to your Invention when you use grant money – including risk analysis around march-in rights
• Implications for using subcontractors to perform the work under the grant
• And, of course, some of the biggest gotcha’s and practical tips for avoiding them

The Bayh-Dole Act

The Bayh-Dole Act of 1980 regulates inventions under government grants. It was created to promote the use of inventions that were conceived of or first actually reduced to practice under federally supported research grants. The terms “conceived of” and “reduced to practice” can cause many startup companies heartache if they don’t fully understand these terms when it comes to government grants. In this context, conceived of or conception means the formation of a definite and permanent idea and means of putting the idea into practice. First actually reduced to practice means that the device, system, compound, or process meets every element of the claimed invention and operated for its intended purpose. So, if you conceived of or first actually reduced your invention to practice while using the government grant money – or during the grant period – the government has certain rights to your invention. Since obtaining a patent oftentimes does not require reduction to practice (but instead, enablement), this can mean that patents obtained before the grant, but reduced to practice after, can be subject to royalty-free government use.

Rights of the Government to Your Invention

Should you find that you conceived of or first reduced to practice your invention under the government grant, you will need to include a government grant statement in your utility patent application indicating that the government has certain rights to the invention. Further, for elected inventions, the government has a nonexclusive, non-transferable, irrevocable, paid-up license to practice the invention throughout the world.

Struggling to commercialize your technology? The Bayh-Dole Act includes a march-in provision, also called march-in rights, to require licensing of any patent that resulted from federally-supported research. This is a provision that causes some confusion and alarm. As discussed, when you use government grant money, that often comes with a requirement to license your patent to the government for free. This doesn’t prevent you from licensing to others for profit and doesn’t have to impact your ownership rights – it just means that Uncle Sam gets free use in exchange for your now federally-supported research. March-in rights, however, can take that one step further and would allow the government to demand that you license – or even assign your invention – to another entity, potentially even outside of the government! As the panel will discuss, this hasn’t been as horrifying in practice as it sounds like it could be, but it’s important to understand the potential risk and distinction when compared to the express rights that come by default for the federal government.

Using Subcontractors

This is probably the sneakiest, sharpest corner. If you hire a subcontractor to perform some of the work under the grant, any invention (conceived of or first actually reduced to practice) from the subcontractor cannot be assigned to your company. The subcontractor retains ownership. This provision was likely included to prevent large entities from applying for large swaths of grants and then farming them out to subcontractors to execute, while they reap all the benefits. So, in practice, only use subcontractors for aspects that do not require any innovation, or better yet, have your employees work on grant-sponsored projects.

I’m a Small Business; Which Grants Can I Use?

The two most common grant types that we discussed in this month’s episode are the Small Business Technology Transfer (STTR) grant and the Small Business Innovative Research (SBIR) grant. Companies interested in shared innovation between their business and a research institution should apply for an STTR grant. Private, for-profit companies interested in advancing their innovation should apply for an SBIR grant. Each grant has its nuances, which should be reviewed in detail before applying.

Do SBIR and STTR grants cover IP costs?

The great news is that, yes, SBIR and STTR grants can include budget line items to cover IP costs. These costs are meant for USPTO-related filings (e.g., provisionals, international patent applications under the Patent Cooperation Treaty, non-provisionals, continuations, divisionals, and continuations-in-part), certain types of searches, and even market or competitive landscape analyses. Excluded costs include foreign-related costs and licenses.

Discussion Panel

Ashley is joined today by our always exceptional group of IP experts, including:

• Kristen Hansen, Patent Strategist at Aurora
• David Jackrel, President of Jackrel Consulting
• Ty Davis, Patent Strategy Associate at Aurora

Mossoff Minute: PREVAIL Act

In this month’s Mossoff Minute, we discuss the introduction of a very important piece of patent reform legislation called the Promoting and Respecting Economically Vital American Innovation Leadership Act (PREVAIL). We’re also publishing excerpts as short-form videos on Instagram Reels, YouTube Shorts, and TikTok.

Related Listening

Enablement is a topic that comes up in this conversation and something we’ve discussed extensively in past episodes. There are few more important areas of patent law to grasp when it comes to getting a quality patent that can actually stand the test when it comes time to assert your hard-earned patent rights. For a deeper understanding of enablement, see the following past episodes:

• Fortifying Life Science Patents: Eligibility and Enablement. The two major plagues confronting life science patenting.
• Unpredictable Arts: Patenting Bio, Chem, and Emerging Technologies. Practical tips for getting more predictable results when patenting the unpredictable arts.
• Means-Plus-Function and the Risk of Losing Your Way. Enablement standards around the use of functional claim language.
• From Alice to Axle: IP Uncertainty for the Innovation Economy. In part, discusses how the courts are conflating eligibility with enablement.