When Uncle Sam Wants Your Invention

By Samuel Petuchowski, Ph.D..

October 2009 IP Update

In the patent arena, Congress has set rules for the federal government that differ from those that apply to other players. When a patented invention is infringed for the benefit of the government, no injunction is available to the patentee to stop the infringement, as the government’s needs are deemed to override proprietary rights as a matter of public policy.

This principle was established in 1918 by an act of Congress that allowed contractors to furnish the Government with needed provisions during World War I without fear of becoming liable to patent owners for infringement. The Supreme Court noted this historical background in Richmond Screw Anchor Co. v. U.S. (1928).

Under 28 U.S.C. § 1498(a), the only remedy available to a patentee whose patented product or method is used “for the Government” is to sue the government for reasonable royalties in the United States Court of Federal Claims in Washington. A patentee cannot sue a private party for contracting to provide infringing goods to the Government, cannot recover lost profits, and cannot obtain enhanced damages for willful infringement, as it might under other circumstances.

In a recent opinion, Advanced Software Design v. Federal Reserve Banks and Fiserv, Inc., the Federal Circuit affirmed a ruling  that addressed the question of what constitutes use “for the Government.” In this case, three regional Federal Reserve Banks, which are not technically government entities, contracted with Fiserv, Inc., a private company, to implement a technology alleged to infringe a patent owned by Advanced Software Design.

The patented technology encodes identifying data in a “seal” on the face of a check when the check is printed, so that altered or counterfeited checks can be identified immediately when the check is first deposited and funds can be frozen to prevent loss. This system was implemented in 2004 and has prevented millions of dollars of loss due to fraud. Advanced Software Design sued the Federal Reserve Banks and Fiserv for infringement.

The federal district court dismissed the portions of the case that involved U.S. Treasury checks, invoking the “for the Government” clause of Section 1498(a), even though the government did not procure the system, was not a party to any contract with Fiserv, and was not at risk of loss in the case of check fraud, since the Federal Reserve Bank or a member bank generally bears the loss.

Given those facts, Advanced Software Design had argued that the government is not even a “beneficiary” of the patent infringement. The only connection to the government is that the U.S. Treasury checks were encrypted to enable the Federal Reserve banks to use the system provided by Fiserv.

Historically, some cases have found government benefit adequate to trigger 28 U.S.C. § 1498(a) while others have not. For example, in Hughes Aircraft v. United States, the Court of Claims held in 1976 that work performed on a defense satellite program in which the United States participated, although the satellites were owned by the United Kingdom, was work “for the Government” because the program was vital to the defense and security of the U.S.

By contrast, a federal district court in Texas held in 1998 that the mere receipt by the government of royalties for offshore drilling rights did not provide a defense to patent infringement for methods of installing an offshore platform. Riles v. Amerada Hess.

In Advanced Software, the Federal Circuit found that, even though the government never explicitly authorized or consented to procurement of the check encoding system, the Treasury’s participation by encoding its checks sufficed to immunize the defendants against allegation of patent infringement, at least to the extent to which the infringement concerned U.S. Treasury checks.

In another recent case we covered, the Court of Claims held that, where infringing activity arising from government contracts occurred abroad, the U.S. was protected by sovereign immunity, but direct recourse against the contractor was available.

Advanced Software does not lay down a bright-line rule, but provides another insight into the type of infringement activity that will limit a patentee’s recourse against the government.