IP Ruling Shows Even Uncle Sam Must Abide By Licensing Terms

Government agencies are increasingly requiring vendors and other private-sector partners to enter into arrangements requiring them to relinquish their intellectual property rights.[1] These demands threaten to discourage the country's most innovative enterprises from working with the federal government, thus impairing our national security and global competitiveness.

Government contractors are understandably concerned about the government's attempts to exploit their IP beyond the terms of a contractual agreement, whether explicit or implicit.

Frequently, IP used or developed under contract with the federal government is part of a larger stable of tools and techniques used by the contractor in a variety of products. Even when the tool or technique is bespoke, the relevant IP is likely to be useful in other products the contractor is developing, or has developed, for use or sale in the private sector.

It is their stock-in-trade. A contractor's aptitude with such tools and techniques is likely an important factor in the government's decision to award them a contract in the first place.

A useful reminder that even the government must respect contractor IP and abide by the commitments it undertakes with respect to IP is Bitmanagement Software GmBH v. U.S., a decision from the U.S. Court of Federal Claims.[2]

The Facts

In 2016, the U.S. Navy entered into a contract with Bitmanagement Software GmbH for 3D software to be used in the visualization of geographic locations. The contract called for 38 licenses to be used by the Navy to test the software.

Bitmanagement's lawsuit at the Court of Federal Claims argued that the Navy actually made 600,000 copies of the software, each with a license value of over $1,000. Bitmanagement further claimed that the government owed it $596.3 million for copyright infringement pursuant to Title 28 of the U.S. Code, Section 1498(b).

The court agreed that a breach of the license had occurred. But, in denying the claim, Claims Court Judge Edward J. Damich concluded that Bitmanagement was aware that the government intended to make additional copies, creating an implied license, and dismissed the case.[3]

The Appeal

Bitmanagement appealed to the U.S. Court of Appeals for the Federal Circuit, which agreed with the Court of Federal Claims that an implied license had been created.

However, it found the lower court ended its analysis prematurely in failing to consider whether the Navy had complied with the terms of the license. The lower court should have specifically considered the provision requiring the Navy to use specified software to monitor and track actual usage to determine how many additional copies were used, and thus would have to be purchased.

The Contours and Limits of an Implied-in-Fact License

In affirming that an implied-in-fact license had been created, the Federal Circuit noted that an implied-in-fact license is founded upon a meeting of the minds, and even if not expressed within a contract, it is fairly inferred from the parties' course of conduct showing their tacit understanding.

As with contracts in general, such a license ordinarily requires finding: (1) mutuality of intent to contract, (2) consideration, and (3) lack of ambiguity in offer and acceptance.

The court rejected the argument that the existence of an express contract precluded an implied contract, noting a lack of privity due to reliance on an intermediary, failure to address copying in the express contract and ambiguity about how the monitoring software was to be used.

Having found an implied-in-fact license, the Federal Circuit addressed whether the Navy failed to comply with a condition that limited the scope of the license, or whether it merely violated a covenant. The court observed that terms in a license are generally presumed to be covenants, unless it is clear that a condition precedent was intended.

Here, the court concluded that, although the parties agreed that the Navy could download many copies of the software, it was conditioned on the Navy's use of the monitoring software to determine how many were actually used. It was undisputed that the Navy failed to do so. Thus, the Navy's use constituted copyright infringement.

The court remanded the case, directing that damages be evaluated using a hypothetical negotiation and actual usage.[4]

Back to Claims Court

On remand, the court noted that Title 28 of the U.S. Code, Section 1498(b) affords fair and reasonable compensation to IP owners for breach of license agreements by the government.

The court then set about constructing a hypothetical negotiation according to the guidance in the 2013 Court of Federal Claims decision in Gaylord v. U.S.,[5] and assessing damages consistent with the factors in the 1970 decision of the U.S. District Court for the Southern District of New York in Georgia-Pacific v. U.S.[6]

The court further approved the use of the patent damages "Book of Wisdom" to permit consideration of post-infringement factors in constructing the hypothetical negotiation, and to better understand the situation between the parties at the relevant time.

The Claims Court found that the proper royalty base was not the number of copies that the Navy made, but rather the number of copies it actually used. It then established a royalty rate for each infringing use, and assessed damages of $154,400, plus some later, to-be-determined delayed compensation.

The process by which the Claims Court assessed damages for copyright infringement under Section 1498(b) in Bitmanagement has a corollary for patent infringement in Section 1498(a). Both have profound implications for how the government chooses to exploit IP procured from the private sector.

In recent years policymakers have suggested that, rather than holding the government accountable for infringement, Section 1498 empowers the federal government to ignore the rights of IP owners, effectively creating a compulsory licensing regime. According to this reasoning, the government may authorize others to make and sell products covered by privately owned IP, e.g., patented drugs.[7]

But the Claims Court's procedures in Bitmanagement show that the government's infringement of a person's IP, whether copyright or patent, would require that the government provide that person with fair and reasonable compensation for all such sales. Taxpayers would thus foot the bill for the harm suffered by the IP owner in the form of monetary damages.

Conclusion

The protections of Section 1498 mean that IP owners are protected against infringement by the government, and that the government can be held accountable as any other infringer or a licensee in breach. The fair and reasonable compensation for any infringement or breach is assessed according to long-standing precedent, just as it would be for any other infringer or party in breach.

However, because of the government's size and peculiar bargaining power, it is critical that those who contract with the federal government clearly state the scope of rights they intend to grant to the government, and accurately describe any condition precedent to the exercise of those rights.

To the extent possible, an agreed royalty base and royalty rate should be established and clearly stated. If the consideration exchanged for those rights depends on contingencies, those should be set forth with specificity in the license agreement, and both parties must rigorously adhere to those provisions throughout the life of the contract.