THE GOVERNMENT’S DEFAULT POSITION IS THAT YOU DO NOT OWN THE IP
Generally, the default position taken by the federal government is that it owns all “Intellectual Property” rights in the “Foreground Information” as soon as it comes into existence and that the contractor has no rights to the Foreground Information except as granted by the federal government.
The terms used above are of importance since they do not have meaning in every day language. For example, while intellectual property is a term often used to refer to patents, trade-marks, copyright and a host of other forms of property defined by federal legislation, the term “Intellectual Property” in most government contracts includes the traditional terms plus “any information or knowledge” relating to the “Work” as well as “know how”, a term that refers to knowledge of how to commence and carry on a particular operation based on individual skill and experience. While “know how” is often viewed as business asset, the courts have noted that “know how” is not property. In other words, the definition of “Intellectual Property” in government contracts is more expansive than the traditional meanings given to these terms and includes aspects that may not otherwise be provided for at law.
It is also important to understand the meaning of the terms “Work”, “Foreground Information” and “Background Information”. These terms are almost invariably used in any contract with the federal government:
- The term “Work” is typically used to refer to “all the activities, services, goods, equipment, software, matters and things required to be done, delivered or performed by the Contractor [that’s you] under the Contract [that’s your contract with the federal government]”.
- “Foreground Information” is usually defined as “Intellectual Property first conceived, developed, produced or reduced to practice as part of the Work under the Contract”.
- “Background Information” is usually defined as “all Intellectual Property that is not Foreground Information that is incorporated into the Work or necessary for the performance of the Work, regardless of whether it is owned by the Contractor or a third party”.
In other words, Foreground Information is the Intellectual Property in the Work that you create and develop under the Contract while Background Information is the Intellectual Property that you may have created or developed, including with a third party, prior to your participation in the government contract. Background Information is normally incorporated into the Work, or alternatively, is necessary for the performance of the Work.
The significance of these terms becomes magnified in view of the default position of the federal government, i.e. that it owns all “Intellectual Property” rights in the “Foreground Information” as soon as it comes into existence and that the contractor has no rights to the Foreground Information except as granted by the federal government. What this means is that the federal government owns the Intellectual Property created and developed by you in the Work.
In addition to not having any rights in the Intellectual Property that you create and develop for the federal government in respect of the Work, you will also typically be required to grant a license for the federal government to use the Background Information, i.e. any IP that you own or that is owned by a third-party that is used in the Work, and that such a license is generally non-exclusive, perpetual, irrevocable, worldwide, fully-paid, royalty-free and cannot be restricted by any other document. Typically, such a license will also provide the federal government with the right to disclose the Background Information to third-parties and to sublicense and authorize the use of the Background Information, including source code in software. If the Background Information is already the subject to patent protection, be it by virtue of a patent registration or by virtue of a patent application having been filed prior to the public disclosure taking place, then this contractual obligation to disclose to Background Information to the federal government may not present an issue. However, if the Background Information is not the subject of patent protection but contains know-how or trade secrets, the disclosure of the Background Information could result in the loss of protection for those rights and your ability to register a patent to protect the invention. In the process, you may also be affecting the rights of third party developers of the Background Information, or third parties who you have contracted with for the supply of the Work, which may expose you to liability.
In short, when contracting with the government – be cautious. In the absence of such caution, you may get far less than you bargained for in terms of rights in the underlying IP and far more than you bargained for in terms of obligations owning to the federal government. Even if you manage to get the federal government to break from its default position and you get an agreement whereby you own the Foreground Information, your rights may be severely limited and curtailed by ongoing obligations that the federal government will impose. In this latter case, however, you will at least know exactly what you have bargained for.
SIMPLY MOVING THE FEDERAL GOVERNMENT FROM ITS DEFAULT POSITION IS NOT NECESSARILY THE ANSWER
Even if you are able to get the federal government to move from its default position and you, the Contractor, negotiate your way into owning the “Foreground Information” and “Intellectual Property”, the federal government may nevertheless try to insert contractual provisions that essentially claw back much of the rights you thought you obtained while also placing additional and ongoing obligations on you for the term of the Contract and beyond.
For example, even when you as the Contractor own the “Foreground Information” and “Intellectual Property”, you may be required to keep detailed records of “Foreground Information” created and developed. This information is often subject to reporting requirements. This is essentially the same requirement that would exist if the federal government owned the “Foreground Information” and “Intellectual Property”. While such disclosure presents risks for unprotected Background Information, the risks may be far more pronounced when it comes to the disclosure of Foreground Information, which may very well contain know how, trade secrets and other Intellectual Property that may not have been protected at the time of disclosure to the federal government. This issue is of particular concern in the case of inventions that are to be the subject of patent protection since disclosure of such Foreground Information may exclude you from being able to protect the very Intellectual Property that you are creating.
In addition, such provisions typically provide that in cases where the federal government does not own the “Foreground Information” and “Intellectual Property”, the federal government is nonetheless entitled to receive the deliverables contracted for, and the right to be able to use those deliverables and any Intellectual Property arising by virtue of the Contract for Canada’s activities, which includes future contracts, procurements and to protect or advance the broader public interest. The corollary is that the Intellectual Property created or developed by you is, under the Contact, deemed to have been developed or created by the federal government. Accordingly, while the “Intellectual Property” and “Foreground Information” will be owned by you upon creation, the federal government will have an unrestricted contractual ownership right in any prototype, model, or any other deliverable under the Contract, including in respect of any manuals, documents, etc. More importantly, the federal government will also have the right to make them available for public use, sell them or otherwise transfer ownership in them.
The rational for the above is that since the federal government contributed to the cost of developing the Foreground Information, the federal government is entitled to receive a license to exercise all Intellectual Property Rights in the Foreground Information such that the federal government is permitted to do anything that it would be able to do if it were the owner of the Foreground Information, other than commercially exploit it and transfer or assign ownership of it.
Is the bargain you made with the federal government starting to look increasingly hollow? It could get worse. For instance, the federal government’s contract will likely require that you license to the federal government the right to use both the Foreground Information and the Background Information under the same terms and conditions that would exist even if you did not own the “Intellectual Property” and “Foreground Information”.
Additional contractual requirements may also include the prohibition, during the term of the Contract, from selling, transferring, assigning or licensing the Foreground Information (that you notionally own) without the federal government’s prior consent. Even after the Contract has expired, you may be required to notify the federal government of the proposed transfer of ownership in the Foreground Information, along with information about the transfer, so as to ensure that any such grant does not affect the federal government’s rights under the Contract and license.
Another common contract term establishes that if a contractor is in breach of its obligations under the Contract, or if the federal government unilaterally cancels the Contract, then that contractor must transfer its rights in the Intellectual Property and Foreground Information to the federal government. Moreover, if you have sold or assigned your rights in the Intellectual Property and Foreground Information to a third party, you may be required to pay the federal government fair market value of the Intellectual Property in the Foreground Information or an amount equal to what you obtained from the sale. In addition, if you use the Foreground Information to develop any new product or any improvement in any existing product, you may be required to provide to the federal government the ability to purchase such a new and improved product at lowest price paid by any other customer.
Lastly, in exchange for all of your efforts, if the federal government and/or you are sued for infringement of any third party’s intellectual property rights, you may be required to participate fully in the defence of the litigation and in any settlement negotiations but in doing so you may be called upon to allow the federal government to have carriage over the litigation and only agree to a settlement if the federal government agrees as well. More importantly, you may be required to pay all costs of the litigation, damages and legal fees incurred as a result of the claim, including the amount of any settlement. Even where actual litigation has not formally commenced, you may be required to do whatever is necessary to ensure that the federal government can use the Work, or you may be obligated to modify the Work so the federal government can use it, or take back the Work and refund the federal government’s contributions made to date.
While contracts with the federal government can be seen as a crucial ingredient for contractors seeking to develop innovative technologies for use in the defence and security sectors, you should make all efforts to avoid entering such contracts with your eyes wide shut. Make sure that you understand all of the rights and obligations that flow from the resulting contract. If the contract is particularly complex, obtain advice from a firm that has experience in dealing with the federal government in IP matters. This will help ensure that you are well protected, to the greatest extent possible, in your dealing with the federal government. In the best case, you will ensure continued ownership of the IP you create while providing the federal government with only a limited license to use the IP and technology, without onerous ongoing obligations. In the worst case, you will be subject to onerous terms, but you will enter that contract with your eyes wide open; in so doing, you can then take all steps available to mitigate those risks.
This article was originally published in FrontLine Security, published by Beacon Publishing Inc., Issue 2, 2012.