SBIR Intellectual Property: Data Rights, Patents, and Deals

I advise emerging companies on IP and SBIR issues, with an eye toward building value in both government and commercial markets. This article provides tips based on the successes and failures I have seen.

Patents are for the Commercial Market; Data Rights are for DoD

Many dual-use ventures have either a patent strategy or a government data rights strategy. This is generally a mistake—dual-use ventures often benefit by considering both.

A government data rights plan is essential for the government market.

Government data rights are what prevent DoD from giving your technical reports and source code to its large prime contractors—the General Dynamics, Lockheeds, and Raytheons of the world.

DoD likes to fund startups through the SBIR program, but it prefers to buy products from giant companies. DoD sees startups as risks—will you be around in 5 years, can you scale production quickly enough, are your IT systems vulnerable? DoD also sees efficiency gains to having a large prime build your tech as part of a broader system.

The bottom line: if you reach a point where DoD wants to buy your technology at scale, DoD will also likely be interested in sharing your technology with your competitors. Data rights—and especially SBIR data rights—are how you solve that problem.

For SBIR contracts, protecting your data rights might be as simple as properly marking your deliverables with restrictive legends. But as your company grows, you should think carefully about how you draft your deliverables, how you allocate government dollars, which portions of your technology will be funded solely with private investment to restrict the government’s rights, and how you will establish workflow and record-keeping practices to effectuate those strategic decisions.

Patents advance your objectives in the commercial market.

If your exit strategy involves an acquisition by a large commercial company, chances are good that you will secure more investment on better terms and make more money at exit if you have patents.

Patents also serve other functions: they de-risk strategic alliances, deter copyists, provide a trading chip in negotiations with large companies and an asset against which to secure debt financing, and, in some circumstances, you can secure royalty income or a significant infringement judgment.

Dual-use ventures need to think about both data rights and patents.

Government data rights are essential for the government market; patents can be exceedingly helpful for the commercial market. But the converse generally does not hold true.

SBIR data rights—and government data rights more generally—are nearly useless in the commercial ecosystem. If an Apple or Microsoft sees your tech and decides to make its own version, SBIR data rights will do nothing to help you.

Patents, meanwhile, need to be carefully managed to remain effective for the government market. Successful dual-use ventures tend to receive significant SBIR money at their early stages, and, as a result, many of their technical ideas are conceived or first reduced to practice with government funds. Patents covering such government-funded ideas are “subject inventions” under the Bayh-Dole Act, and they cannot be enforced against the government. (See our Awardees Guide to SBIR IP for more detail.)

Take the case of OptoKnowledge, which spent years under a series of SBIR awards developing a variable aperture technology for use in infrared imaging systems. OptoKnowledge filed patent applications on its technology, and those patents eventually issued and published, waiving OptoKnowledge’s data rights in the now-public information. And, because the patents were on “subject inventions” under Bayh-Dole, DoD received a royalty-free license to the patented technology. DoD gave the technology to Raytheon to incorporate in a larger system, and OptoKnowledge lost a production contract worth tens of millions of dollars.

With careful planning, you can avoid this enforcement trap. But you need to be cognizant of the risk early on, and the need is sufficiently niche that most lawyers do not have it on their radar.

It Takes a Network

DoD likes to fund capabilities—not science fair projects. Often, a startup is built around one core technology that is too narrow or too technical for its value to be understood by DoD evaluators. These companies tend to get more traction if they network within DoD to find a pain-point and then propose a solution to that pain-point which happens to leverage the company’s technology.

But this presents its own challenges:

  • How do you find the right problems to address; and
  • How do you deliver a solution in which your technology is only one component?

On the first point, companies seem to meet more success when they have technology-focused veterans on their team—whether as co-founders, or as consultants. There is a robust ecosystem of SBIR consultants and business development specialists who help scientists and engineers network within DoD, find the right customers, and package the technology in a way that is likely to attract funding.

The second question—how to take your narrow technology and turn it into a broader solution—is easier to solve. The answer: form alliances with companies and universities, propose a sufficiently enticing solution to DoD, and subcontract the parts of the work you cannot do yourself.

SBIR subcontracts can be an excellent way to advance your company’s development. They are also a good time to bring in a lawyer—you need to make sure your company will maintain the IP rights needed to continue developing and selling your technology, and you also need to make sure you comply with a lengthy list of FAR and DFARS provisions included in your prime contract.

Phase III is a Low-Friction Way for DoD to Buy What it Already Wants

Many companies struggle to convert SBIR Phase I / II research and development contracts to Phase III production contracts.

Implementing a sound IP plan can help. I have spoken with a number of companies who lost Phase III opportunities because DoD found a way to give the tech to a large prime (the most common culprit is failure to properly mark, but Bayh-Dole also creates its share of problems).

More broadly, companies seem to succeed where they first persuade a DoD customer that the company’s technology should be purchased, and then educate the DoD customer about the benefits of Phase III as a contracting vehicle.

From DoD’s perspective, a Phase III contract is an easier way to buy what it already wants to buy. Phase III contracts can be sole-sourced, which means that DoD does not need to compete the contract, evaluate proposals from multiple offerors, and then defend its evaluations against bid protests. In short, a Phase III contract makes the contracting officer’s life much easier.

By law, DoD is required to make Phase III awards to the “greatest extent practicable,” which gives SBIR awardees a helpful rhetorical tool (and perhaps a legal tool) to push the deal over the goal line. A particularly effective CEO told me she closed her first Phase III deal by telling a high-ranking officer that she had pursued the SBIR program because she knew DoD was legally required to make Phase III awards to the greatest extent practicable, and who was she to think that DoD would not follow the law?

Conclusion

Dual-use ventures face a number of unique business and legal challenges. You should generally consider both patents and data rights; you will likely need to enter teaming agreements and subcontracts; and you may encounter any of a number of SBIR issues—eligibility and Phase III contracting disputes are common examples. Our goal is to help clients skillfully navigate all of these issues, and to do so in a way that is accessible and cost-effective for startups.