Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2003 by Greenwood Consulting Group, Inc.

Let us start by stating that neither of us is a patent attorney. Never have been, never will be, never wanted to be. Therefore, our comments should not be misconstrued as legal advice.

We also will refer you to our previous SBIR Alerting Service article on how sensitive, confidential, or proprietary information in your SBIR/STTR proposal should be labeled—each agency has its requirements. That article is archived on our website at http://g-jgreenwood.home.att.net.

With that said, let’s get down to business on "IP Issues" in SBIR/STTR proposals.

First, we want to make sure that you are not thrown off by the erroneous advice of some individuals/agencies who might tell you that patented technology cannot be the basis of an SBIR/STTR project. This blanket statement is wrong. In fact, technology being transferred from a federal lab or university may very well be patented by the discovering entity before it is transferred to you. We also know companies that like to patent the status of their technology and ideas before signing an SBIR/STTR contract or grant to help document the enhancements to the technology made during the SBIR/STTR project. Why? Because the Federal government has rights to a royalty free license on only what they funded through SBIR/STTR, and not to what existed before the SBIR/STTR project started.

Second, the cost of patenting or otherwise protecting your intellectual property is an unallowable cost for purposes of your SBIR/STTR budget and your company’s indirect cost rate (or F&A cost rate, as some agencies call it), or its underlying G&A and/or overhead rates). There are a few exceptions to this rule: one is if the agency asks you to patent the IP, if you negotiate its inclusion before you sign the SBIR/STTR grant or contract, or if you are proposing a Phase 2 project to the Dept. of Energy. DOE is the only agency that explicitly states it will allow the cost of patenting the SBIR/STTR technology you are working on, up to $10k, as a direct cost in a Phase 2 project. Therefore, in most cases, your patent filings will have to be paid out of pocket—meaning your personal or corporate pocket. Note this is yet another good reason to always ask for fee/profit as part of your SBIR/STTR budget—you can do whatever you want to with the fee/profit funds, including filing patents.

Third, the agencies want you to report any IP discovered during the course of your SBIR/STTR project. National Institutes of Health, for example, instructs SBIR/STTR companies to report the discovery to the granting NIH entity "promptly," and then report it to NIH’s Extramural Invention Reporting and Technology Resources Branch of the Office of Policy for Extramural Research within another two months. One way to report is via the Interagency Edison Invention Reporting System; see http://www.iedison.gov for more information.

Fourth, do not confuse patents with commercialization. This is a common mistake that we see in proposals: the agency asks you to demonstrate your commitment to commercialization, and you respond by telling them how many patents you have. Many patents have no corresponding commercial product and service, and some products and services are not based on patented technology, so there is no one-to-one correspondence between patents and products/services. Sure, go ahead and mention any patents as part of your commercialization discussion, but you must go beyond that and convince the reviewer you have a plan reflecting intent, desire, commitment, and ability to commercialize the results of the SBIR/STTR project.

Fifth, we encourage you to consider that patents are only one way to protect your IP. Some SBIR/STTR applicants naively assume that filing a patent protects themselves from theft of their ideas. In fact, we see it more as a deal with the government where you agree to disclose your idea to anyone who wants to look it up in return for you having the right to go after anyone who attempts to rip off your ideas. Some companies have decided that trying to maintain their IP as "trade secrets" is a preferred way to go—as the term suggests, the strategy here is to keep anyone else from accessing the details of your IP. We also like the notion that the real advantage of a small firm is its ability to move rapidly—in other words, while an unscrupulous company is trying to steal your ideas, you continue to innovate so that what they are ripping off isn’t the latest and greatest. The point here is that you may want to carefully think through your IP protection strategy rather than immediately deciding that pursuit of patents is the way to go.

Finally, recall that small companies competing in SBIR/STTR retain the legal rights to their IP that is funded by the Federal government, but that the Feds do retain some rights—notably to a "royalty free license for Federal Government use," and to "encourage" you to pursue commercialization and to manufacture in the United States. There are limits on who gains access to your IP through that royalty free license, but the impact of those limits can vary by project, whether you are talking hardware or software, and other factors. We encourage you to carefully consider the ramifications of the royalty free license on your particular project and IP, and you should do so during (or even before) the Phase 1 project starts. It also is possible to lose IP rights if you fail to follow reporting requirements to which you agreed in the SBIR/STTR grant or contract. And take care in negotiating IP with any subcontractors/consultants so that you don’t give away more rights than you are willing to give up.

So go forth, innovate under SBIR/STTR, but practice safe IP strategies.