According to the SBA Policy Directive for the SBIR program, your SBIR/STTR data rights clauses are non-negotiable and must not be the subject of negotiations pertaining to an SBIR Phase III award, or diminished or removed during award administration. An agency must not, in any way, make issuance of an SBIR Phase III award conditional on data rights.

By law, you must protect your subcontractor’s IP. You have to learn how best to do that within the constraints of your own rights and contractual obligations.

Licensing under a patent is very common. But if the SBIR firm did not patent, and is protecting its SBIR Data by means of the government’s nondisclosure obligation, then licensing will permit another firm to use the small firm’s SBIR Data and its underlying technology. The SBIR firm owns its SBIR Data and the government receives a license in it. A prime federal contractor may wish to use the SBIR Data and technology on a prime contract, and this can lead to a desire by the prime contractor to sublicense the SBIR Data. The SBIR firm should restrict the prime contractor’s ability to sublicense the SBIR Data without the SBIR firm’s consent. In contrast, a license to a commercial firm will normally result in a free-standing license of both the SBIR Data and the technology associated with it, or rights under a patent.

Fields of use establishes the boundaries for use of the SBIR Data by the licensee, which is the receiver or beneficiary of the license. It is recommended that you limit the field of use to the extent possible. There are some common fields of use for federal contractors. When a large prime contractor seeks access to an SBIR technology, limit the field of use to performance on the prime’s contract, grant, or other funding agreement. That limitation is quite common. It is a wise policy for the SBIR firm to seek a subcontract to the prime so that it can monitor the prime’s use of the SBIR Data and technology and assure that they are being implemented correctly.

A wider use would be to allow the prime contractor’s use of the SBIR Data or technology on the program referenced in the contract–for instance, the AEGIS program or a NASA funded program. That is a much broader license because the prime contractor may get additional program contracts that don’t include the SBIR firm. Yet the prime contractor would still have a license to use the SBIR Data and technology for the performance of the additional program contracts. An even wider field of use would be an agency-wide license for use with a particular agency or an agreement that would allow use of the SBIR technology under any funding agreement with the federal government. That license would prohibit use only in the commercial market, and should constitute the widest license granted in the federal market.

SBIR Data Rights require special handling in licensing. The SBIR-funded firm must protect its SBIR Data from nondisclosure in any license. A license is a permit to use but may not address nondisclosure. Be certain that a nondisclosure agreement is in effect. The nondisclosure agreement can be written into the license if one does not already exist, or the pre-existing nondisclosure agreement can and should be incorporated by reference into the license. This is particularly important when the SBIR-funded firm is a subcontractor to a prime contractor under either a civilian agency or defense prime contract. This situation might arise when the original subcontract was for services, but the prime contractor decides to amend the subcontract to include access to SBIR Data. The existing subcontract may not contain nondisclosure obligations, which should be then included.

Prime contractors will always seek the widest field of use. They want to avoid restrictions, and so the field of use will become a negotiating item. The wider, or broader, the field of use, the harder the license is going to be to enforce and prove that the licensee operated outside that very broad field of use. Obviously, license fees or royalties should increase as the field of use widens. That is because the licensee’s broadening field of use narrows the other markets within which the SBIR firm can make money on the technology and generate a return on its investment in developing it.

This government license to use an SBIR technology applies only to the government, does not allow prime contractors to use SBIR Data, and does not allow disclosure of SBIR Data outside the government. Thus, if the government desires to provide any entity outside of the federal government access to the SBIR Data, then it must direct the SBIR firm to do something the government cannot do – disclose the SBIR Data to that entity. (The exception to this is that defense support contractors can have access to SBIR Data for evaluation purposes.) To do so, the SBIR firm would have to negotiate a license with the prime contractor, involving attorneys’ fees and other types of transaction costs. The SBIR firm can recover these and other costs in license fees charged to the prime contractor. Under SBIR rules, the government receives a license to use SBIR Data, but does not own it. The key reason that license fees are justified in this situation is because of the non-disclosure provision. The SBIR firm is disclosing its SBIR Data to the prime contractor because the government cannot do so.

A license does not transfer Phase III SBIR rights. Phase III rights include the right to receive sole-source Phase III funding agreements. In a license, the SBIR firm allows use of its SBIR Data and/or technology by another party but continues to retain ownership of that data and technology. A license bestows a right to use, but not ownership. So a license cannot bestow Phase III rights on the licensee. That is because the SBIR firm continues to retain ownership of the technology and data and continues to retain sole-source rights itself in the technology. Two firms cannot demand sole-source rights at the same time.

Phase III eligibility rights have to exist in only one firm at a time. So, a license, which grants the right to use, cannot convey Phase III eligibility rights. Only a sale or assignment can accomplish that.

That is one way that a large firm legally can inherit Phase III eligibility to receive sole-source contracts from the government for SBIR technologies – it can acquire the SBIR firm or its technologies. This has happened successfully and often in the past.

The Bayh-Dole Act (also called the University and Small Business Patent Procedures Act) is United States legislation dealing with intellectual property developed as part of federal government-funded research. Adopted in 1980, Bayh-Dole is codified in 35 U.S.C. § 200-212 and implemented by 37 C.F.R. 401. Among other things, it gives U.S. universities, small businesses and nonprofit organizations control of their inventions and other intellectual property that result from such funding. The Act, sponsored by senators Birch Bayh of Indiana and Bob Dole of Kansas, was enacted by the United States Congress on December 12, 1980.

All small businesses, as well as faculty entrepreneurs that are pursuing SBIR or STTR funding, should read the Bayh-Dole Act. It is important to know the rights of small businesses, universities and inventors.

Perhaps the most important change associated with the Act is that it reversed the presumption of title. Bayh-Dole permits a university, small business, or nonprofit institution to elect to pursue ownership of an invention in preference to the government.

Prior to the enactment of Bayh-Dole, the U.S. government had accumulated 30,000 patents. Only approximately 5-percent of those patents were commercially licensed.

*New: Review the case of Stanford v. Roche, which describes how the courts have interpreted the Bayh-Dole Act and how universities will consider their patent policies in lieu of this late 2011 ruling. If you are licensing university technology and maturing it through the SBIR/STTR program, this case is very important to you.

Companies using the SBIR/STTR program must understand the implications of intellectual property (IP) rights and the limitations and restrictions caused by contracting with the government. If the government funds development of your innovation or technology, you grant them a royalty-free license to use your invention world-wide. However, the government does not have the right to commercialize your invention. Therefore, you retain the right to make money from your invention.

Here, invention “means any invention” that is “conceived or first actually reduced to practice in the performance of work under a funding agreement.” This definition covers a wide range of research activities that are either partially or completely federally funded.

Small businesses and non-profit organizations can retain title to intellectual property in a federally funded “subject invention.” In exchange for this title, the organization is required to:

The government’s march-in rights are one of the most challenging provisions in Bayh-Dole. It allows the funding agency, on its own initiative or at the request of a third party, to effectively ignore the exclusivity of a patent awarded under the act and grant additional licenses to other “reasonable applicants.” This right is strictly limited and can only be exercised if the agency determines, following an investigation, that certain criteria are met. The most important of these is a failure by the contractor to take “effective steps to achieve practical application of the subject invention” or a failure to satisfy “health and safety needs” of consumers.

Though this right is, in theory, quite powerful, it has not proven to be so in terms of its practical application — to date, no federal agency has exercised its march-in rights. March-in petitions have been made to the National Institutes of Health, however. For example, pharmaceutical companies occasionally instruct their legal departments to evaluate the risk of march-in prior to negotiating licenses for drugs developed under Bayh-Dole coverage. This is important to SBIR/STTR ventures because your ownership of your IP is one of your most important and valuable assets. The future growth of your company likely hinges on your ability to raise money based on the valuation of your IP. It is important to understand your rights, the extent of and contraints on those rights, and how to best protect your IP.

There are two very important U.S. export control laws that can affect SBIR/STTR ventures: International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR). The objective of both laws is to prevent disclosure or transfer of sensitive information to a foreign national by controlling access to specific types of technology and the associated data.

The ITAR contains a United States Munitions List (USML) of restricted articles and services. The EAR contains a Commerce Control List (CCL) of regulated commercial items, including “dual-use” items that have application in both commercial and military markets.

To be ITAR or EAR compliant, a manufacturer or exporter whose articles or services appear on the USML or CCL lists must register with the U.S. State Department’s Directorate of Defense Trade Controls (DDTC). ITAR and EAR compliance can be challenging. For example, data related to a specific type of technology may need to be transferred over the Internet or stored locally outside the U.S. in order for business processes to flow smoothly.

It is the responsibility of the exporter to take all needed steps to certify that they are in compliance with these export regulations. The consequences may be expensive. Penalties may occur for failure to comply with ITAR, carrying civil fines as high as $500,000 per violation. Criminal penalties include fines of up to $1,000,000 and 10 years imprisonment per violation. Under EAR, maximum civil fines may reach $250,000 per violation. Criminal penalties can be as high as $1,000,000 and 20 years imprisonment per violation.

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