Technology Contracting for Transit Projects (2017)

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37 invention or discovery is not necessarily patentable simply because the invention or discovery involves the use of a computer. At issue in Alice was whether a financial program used “to facilitate the exchange of financial obliga- tions between two parties by using a computer system as a third party intermediary” was patent- able.537 The Court explained that patentable subject matter under section 101 does not include “[l]aws of nature, natural phenomena, and abstract ideas….”538 If the courts upheld the patentability of an abstract idea, the courts “‘would effectively grant a monopoly over an abstract idea.’”539 However, “an invention is not rendered ineligible for [a] patent simply because it involves an abstract concept.”540 The computer program in Alice was not patentable because the method “merely require[s] generic computer imple- mentation….”541 The computer implementation was not a new and useful application of an idea for it to be patentable.542 The Court held that a mere instruc- tion to implement an abstract idea on a computer is not eligible for a patent.543 Since the Alice decision, in Enfish, LLC v. Micro- soft Corp.,544 the Federal Circuit held that the computer programs at issue were patentable because the programs “are directed to a specific improvement to the way computers operate” rather than to “a process that qualifies as an ‘abstract idea’ for which computers are invoked merely as a tool.”545 As the programs were not directed toward an abstract idea, the programs were patentable.546 In JDS Techs., Inc. v. EXACQ Technologies,547 a federal court in Michigan held that defendant’s patents for software, which were “directed at protect- ing against the unauthorized use of video surveil- lance software,” were valid.548 The patents were valid because the subject matter of the patents was not abstract. The process used a “‘hardware address obtained from an accessible video server’ to validate whether to permit particular software on a computer to display an image from that server.”549 motion for a preliminary injunction. Ticketmaster demonstrated that it was highly likely that the defendant’s use of automated devices to access the Ticketmaster web site violated a provision in the web site’s terms of use and that the defendant’s use of Ticketmaster’s web site was not a fair use.528 XI. TECHNOLOGY CONTRACTS AND PROTECTION OF A TRANSIT AGENCY’S RIGHTS UNDER THE PATENT LAWS A. Patentability of Technology A thorough discussion of the possible applicabil- ity of the patent laws to technology procured or developed by transit agencies is beyond the scope of the report;529 however, section 101 of the Patent Law “is at the center of the debate over the patentability of computer programs….”530 Section 101 provides that “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composi- tion of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”531 The section applies to “utilitarian inventions” for which “the guiding principle is that all useful things made by human ingenuity are patentable….”532 Patents for computer hardware have been less controversial than have patents for software or software-related inventions.533 Many software patent cases deal with the issue of whether an invention or discovery that uses a mathematical algorithm is patentable under section 101.534 In 1981, the U.S. Supreme Court held in Diamond v. Diehr535 that computer-related inventions could be patented. However, as held by the Supreme Court in 2014 in Alice Corp. Pty. Ltd v. CLS Bank International,536 an 528 Id. at 1117. 529 Emily Michiko Morris, What is Technology, 20 B. U. J. sci. & tecH. L. 24 (2014) (defining what patentable technol- ogy is); John Clizer, Exploring the Abstract: Patent Eligibil- ity Post Alice Corp. v. CLS Bank, 80 mo. L. rev. 537 (2015); and University of Washington School of Law, Copyright v. Patent: A Primer on Copyright and Patent Protection for Software (explaining that both copyright and patent laws may apply to software). 530 Burgunder, supra note 95, at 65. The author notes that 35 U.S.C. § 103 “essentially require[s] that an inven- tion add something to existing knowledge that is not obvi- ous to one who is skilled in the relevant field. Id. Section 171 covers design patents. Id. 531 35 U.S.C. § 101 (2016). 532 Burgunder, supra note 95, at 65. 533 Lemley, Menell, Merges, & Samuelson, Software and Internet Law 151 (2006), hereinafter referred to as “Lemley, Menell, Merges, & Samuelson.” 534 Id. 535 450 U.S. 175, 101 S. Ct. 1048, 67 L. Ed.2d 155(1981). 536 134 S. Ct. 2347, 189 L. Ed.2d 296 (2014). 537 Id., 134 S. Ct. at 2352, 189 L. Ed.2d at 302. 538 Id., 134 S. Ct. at 2354, 189 L. Ed.2d at 304. 539 Id. (citation omitted). 540 Id. (citation omitted). 541 Id., 134 S. Ct. at 2357, 189 L. Ed.2d at 307. 542 Id., 134 S. Ct. at 2357, 189 L. Ed.2d at 308 (citation omitted). 543 Id., 134 S. Ct. at 2358, 189 L. Ed.2d at 309. 544 822 F.3d 1327 (Fed. Cir. 2016). 545 Id. at 1335–36. 546 Id. at 1339. 547 Case No. 15-10387, 2016 U.S. Dist. LEXIS 73622, at *1 (E.D. Mich. June 7, 2016). 548 Id. at *2. 549 Id. at *23 (citation omitted).

38 of an employee.554 The applicable rules presently are set forth in 37 C.F.R. part 501.555 State agencies, for example, those in California, Florida, Minnesota, New York, Texas, and Virginia, may file for patents.556 In Florida, state agencies may own patents only with legislative authoriza- tion, whereas in New York individual agencies may decide whether to patent their inventions.557 Only two transit agencies responding to the survey reported having developed a project in the previous five years that was patentable;558 however, no agency stated that it had filed for and/or obtained a patent on any discovery or invention resulting from a tech- nology project. A transit agency should be aware of the possibility that technology it has acquired by license or other- wise, without the agency’s knowledge, could infringe a copyright or patent. Although no cases were located for the report involving transit agencies, one case was located involving the Florida Department of Trans- portation (FDOT). State Contracting & Engineering Corp. v. Condotte America, Inc.559 arose out of FDOT’s contract with State Paving Corporation (State Paving) to construct sound barrier walls along the highway. After the contract was signed, an employee at State Paving “invented a new and more cost-effective sound wall system,” which FDOT decided to use for all of its sound wall projects.560 After State Paving obtained two patents for the new system, it demanded that Transit agencies have been involved in patent litigation. For example, in response to the survey, the Toledo Area Regional Transit Authority reported that in 2013, there was an action against the agency alleging that the technology it used infringed a patent. The agency said that the action was decided in its favor, but provided no additional details.550 In Smart Systems Innovations, LLC v. Chicago Transit Authority,551 the plaintiff alleged that the Chicago Transit Authority (CTA) and three companies with which the CTA contracted to develop Ventra—the CTA’s transit-fare collection system—infringed five Smart Systems’s patents. A federal district court in Illinois held that the challenged patents fail to demonstrate the necessary inventiveness to overcome the fact that they are drawn to an invalidly abstract idea. That is not to say that enabling riders to quickly access mass transit using bankcards is not useful.…Yet, as the Supreme Court has counseled, “The Information Age...enable[s] the design of protocols for more efficient performance of a vast number of business tasks. If a high enough bar is not set when considering patent appli- cations of this sort, patent examiners and courts could be flooded with claims that would put a chill on creative endeavor and dynamic change.”…Simply applying the fundamental, abstract concept of paying with a bankcard to the transit context does not clear the bar.552 Although the Alice and Smart Systems Innova- tions cases imply that obtaining a patent on soft- ware or software-related inventions or discoveries may be difficult, the Patent and Trademark Office issues over 20,000 patents each year in software- related patent classifications.553 B. Patent Rights of the Federal Government and State Governments The U.S. Code declares what the patent rights are that apply to discoveries and inventions made with government assistance or funding. Since Executive Order 10096 of 1950, the federal government has had the right, title, and interest to discoveries made during working hours by government employees using government resources or a discovery made by a government employee that bears “a direct relation to” or is made “in consequence of the official duties” 550 See Appendix C, Toledo Area Regional Transit Author- ity’s response to question 17. 551 Case No. 14 C 08053, 2015 U.S. Dist. LEXIS 89628, at *1 (N.D. Ill. July 10, 2015). 391 Verified Complaint at 17, Hickox v. Christie et. al., Docket No. 2:15-cv-7647-KM-JBC (D.N.J Oct. 22, 2015). 552 Id. at *22–23 (citation omitted). 553 Lemley, Menell, Merges, & SamuelsonSamuleson, supra note 533, at 151. See also, James Besson and Robert Hunt, The Software Patent Experiment, Business review, Federal Reserve Bank of Philadelphia (2004), https:// www.researchgate.net/publication/5051757_The_ software_patent_experiment. 554 Exec. Order No. 10,096 ¶ 10096 ¶1(a) (1950), https:// www.archives.gov/federal-register/codification/executive- order/10096.html (last accessed Feb. 24, 2017). 555 37 C.F.R. §§ 501.6(a)(1)(i)–(iii) (2016) state in part that “[t]he Government shall obtain, except as herein otherwise provided, the entire right, title and interest in and to any invention made by any Government employee…[d]uring working hours…[w]ith a contribution by the Government of facilities, equipment, materials, funds or information, or of time or services of other Government employees on offi- cial duty, or…[w]hich bears a direct relation to or is made in consequence of the official duties of the inventor.” 556 Bureau of State Audits, California State Auditor, State-Owned Intellectual Property: Opportunities Exist for the State to Improve Administration of its Copyrights, Trademarks, Patents, and Trade Secrets, at 8 (2000), here- inafter referred to as “State-Owned Intellectual Property,” https://bsa.ca.gov/pdfs/reports/2000-110.pdf (last accessed on Feb. 24, 2017). 557 Id. at 9. 558 See Appendix C, responses of Transit Authority of Northern Kentucky and Tri-County Metropolitan District of Oregon, TriMet to question 15(b). Thirty-eight agencies reported that their projects had not developed any tech- nology that was patentable. Two agencies did not respond to the question. See id. 559 Case No. 97-7014, 2004 U.S. Dist. LEXIS 28600, at *1, 3 (S. D. Fla. Oct. 25, 2004). Although the opinion references other decisions in the case, the opinion discusses primarily a protracted dispute over the patent holder’s attorney’s fees. 560 Id. at *4–5.

39 The Act defines the term invention as “any invention or discovery which is or may be patentable or other- wise protectable” under 35 U.S.C. § 1, et seq.; however, the term subject invention under Bayh–Dole applies to “any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement….”574 Subject to other conditions and exceptions stated in § 202(c)(4), a contractor must disclose “each subject invention to the Federal agency within a reasonable time after it becomes known to contrac- tor personnel responsible for the administration of patent matters” and “make a written election within two years after disclosure to the Federal agency… whether the contractor will retain title to a subject invention….”575 The government “may receive title to any subject invention in which the contractor does not elect to retain rights or fails to elect rights within such times.”576 Federal regulations set forth the procedure for restricting a contractor’s patent rights at the time of contracting.577 In as much as the Act applies to small business firms,578 the statute provides that “[e]ach nonprofit organization or small business firm may, within a reasonable time after disclosure as required by para- graph (c)(1) of this section, elect to retain title to any subject invention….”579 There are four situations, however, when a funding agreement may otherwise provide.580 The situation that appears most likely to apply to FTA funding is the one for “exceptional circumstances when it is determined by the agency that restriction or elimination of the right to retain title to any subject invention will better promote the policy and objectives of this chapter….”581 FDOT and its contractors pay royalties for their use of the system.561 FDOT claimed it did not need to pay royalties and told its contractors not to pay the royal- ties because State Paving’s value engineering change proposal vested FDOT with a license to use the system without royalties.562 When State Contracting & Engineering Corporation (SCEC) later acquired State Paving, SCEC also acquired all right, title, and interest in State Paving’s patents.563 In an action by SCEC against FDOT and its contractors for patent infringement, a jury rendered a verdict against the defendants for approximately $5.2 million.564 The trial court also entered a perma- nent injunction that enjoined the defendants from infringing SCEC’s patents.565 An amended judgment that included pre-judgment interest increased the total judgment to $9.3 million.566 FDOT eventually agreed to settle and pay SCEC $8.0 million.567 Under the agreement, SCEC could “license its patents for the construction of sound wall projects for FDOT construction jobs and earn a license fee or royalty pursuant to any such license.”568 C. Patents Developed With Federal Funding In 1980, Congress enacted the Bayh–Dole Act (Bayh–Dole),569 inter alia, “to use the patent system to promote the utilization of inventions arising from federally supported research or development” and “to encourage maximum participation of small busi- ness firms in federally supported research and development efforts….”570 Bayh–Dole applies to procurement contracts, grants, and cooperative agreements that are funded by the government. Under the Act, a federal agency is any executive agency as defined in 5 U.S.C. § 105.571 Bayh–Dole defines the term funding agreement as any contract, grant, or cooperative agreement that any federal agency enters into with a “contractor for the performance of experimental, developmental, or research work funded in whole or in part by the Federal Government.”572 The term contractor includes any person, small business firm, or nonprofit organi- zation that is a party to a funding agreement.573 561 Id. at *5. 562 Id. 563 Id. at *6. 564 Id. at *18. 565 Id. 566 Id. at *6. 567 Id. 568 Id. 569 35 U.S.C. §§ 200–211 (2016). 570 35 U.S.C. § 200 (2016). 571 35 U.S.C. § 201(a) (2016). 572 35 U.S.C. § 201(b) (2016). 573 35 U.S.C. § 201(c) (2016). 574 35 U.S.C. § 201(d) (2016). 575 35 U.S.C. §§ 202(c)(1) and (2) (2016). 576 35 U.S.C. § 202(c)(2) (2016). The Act also requires that “a contractor electing rights in a subject invention agree[] to file a patent application prior to the expiration of the 1-year period” in 35 U.S.C. 102(b), as well as in other countries where the contractor wants to retain title. 35 U.S.C. 202(c)(3) (2016). Under § 202(d), if a contractor does not elect to retain title to a subject invention, “the Federal agency may consider and after consultation with the contractor grant requests for retention of rights by the inventor subject to the provisions of this Act and regulations promulgated hereunder.” 577 See, e.g., 37 C.F.R. §§ 401.3 and 401.14 (2016). 578 A small business firm is one as defined in 15 U.S.C. 632, as well as in the Small Business Administration’s implementing regulations. See 35 U.S.C. § 201(h) (2016). 579 35 U.S.C. § 202(a) (2016). 580 Id. 581 35 U.S.C. § 202(a)(ii) (2016). Before a federal agency may exercise its rights, the agency must determine first that at least one of the conditions in §§ 202(a)(i) through (iv) exists, file a copy of its determination with the Secre- tary of Commerce, and proceed in the manner as further required by the section.