----------------------------------------------------------------------------- Intellectual Property Rights after Federal Funding By: Jenna Dana Prepared for THE NEW YORK STATE ENERGY RESEARCH AND DEVEOPMENT AUTHORITY Albany, NY Michael H. Shimazu Project Manager Prepared by GOVERNMENT LAW CENTER OF ALBANY LAW SCHOOL Albany, NY Rose Mary Bailly Project Director Emily Ekland Post Graduate Fellow Agreement No. 11116 October 26, 2012

NOTICE This report was prepared by the Government Law Center of Albany Law School in the course of performing work contracted for and sponsored by the New York State Energy Research and Development Authority (hereinafter NYSERDA). The opinions expressed in this report do not necessarily reflect those of NYSERDA or the State of New York, and reference to any specific product, service, process, or method does not constitute the implied or expressed recommendation or endorsement of it. Further, NYSERDA, the State of New York, and the contractor make no warranties or representations, express or implied, as to the fitness for particular purpose or merchantability of any product, apparatus, or service, or the usefulness, completeness, or accuracy of any processes, methods, or other information contained, described, disclosed, or referred to in this report. NYSERDA, the State of New York, and the contractor make no representation that the use of any product, apparatus, process, method, or other information will not infringe privately owned rights and will assume no liability for any loss, injury, or damage resulting from, or occurring in connection with, the use of information contained, described, disclosed, or referred to in this report.

DISCLAIMER: The information contained in this report is provided with the understanding that the authors are not herein engaged in rendering legal or other professional advice and/or services. Accordingly, the information provided in this report is for educational purposes only and not for the purpose of providing legal advice. The opinions expressed in this report are the opinions of the authors and may not reflect the opinions of the law school or any other contributing author.

I. INTRODUCTION...1 II. FEDERAL GRANTS...1 a. Application Process...2 b. Different Phases...4 III. INTELLECTUAL PROPERTY RIGHTS AND PATENTS...4 IV. EFFECTS OF FEDERAL GRANTS ON INTELLECTUAL PROPERTY RIGHTS...5 V. CONCLUSION...6

I. INTRODUCTION Small businesses often need financial support to get their company off the ground and running efficiently. Unfortunately, in this economy, funding resources are limited and, often, unavailable to new businesses that have not had the opportunity to establish or prove themselves. Some of these businesses have new, innovative ideas but no funding to make those ideas a reality. The federal government has traditionally encouraged innovation and that trend continues today in the Small Business Administration s Small Business Innovative Research and Small Business Technology Transfer grant programs. This paper discusses those two federal grants that are available through federal agencies to small businesses for research and development. It includes a discussion of small business eligibility and the competitive application process as a whole. It contrasts the main differences between the two grant programs and between the several phases. Finally, it discusses how these grants may affect the small business s intellectual property rights of the newly developed product. II. FEDERAL GRANTS The Small Business Innovative Research (SBIR) program and the Small Business Technology Transfer (STTR) program provide federal grants to small businesses developing unique products. 1 Through these grants, the United States Patent and Trademark Office is encouraging innovative technology for the furtherance of the society, a foundational principle of the U.S. Constitution. 2 1 SBIR/STTR, Small Business Innovative Research/ Small Business Technology Transfer, SBIR.GOV, http://www.sbir.gov (last visited October 14, 2012). 2 See U.S. CONST. art. 1, 8, cl. 8 ( To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries. ). 1

Through participating federal agencies, the SBIR offers money to small businesses to encourage the development of new technology in areas of interest or need of a respective agency. 3 The STTR offers grants to small businesses who are partnered with research institutions to get ideas from our nation s research institutions to the market. 4 The STTR differs from SBIR in that STTR offers grants to partnerships with research institutions, whereas SBIR offers grants money to small businesses only. The purpose of both these grants is to encourage maximum participation of small business firms in federally supported research and development efforts... [and] to promote free competition and enterprise without unduly encumbering future research and discovery. 5 Eleven federal agencies participate in these programs. 6 The objectives of each agency create a wide range of possible grant opportunities for numerous small businesses in all area of research and development. A. Application Process 1. Eligibility When a small business decides to apply for one of these grants, it must first ensure it fits within the designated requirements. The basic eligibility requirements for these grants are as follows: 51 percent of the company must be independently owned by U.S. citizens or permanent residents; it must operate primarily in the U.S. for profit; and it must employ less than 500 people. 7 Further, for the SBIR, the principal investigator must be primarily employed by the 3 SBIR/STTR, Applicants, SBIR.GOV, http://www.sbir.gov/applicants (last visited October 14, 2012). 4 Id. 5 35 U.S.C.A. 200 (West 2000). 6 http://www.sbir.gov/applicants (last visited October 14, 2012). Those agencies are: Department of Agriculture, Department of Commerce the National Oceanic and Atmospheric Administration and the National Institute of Standards and Technology, Department of Defense, Department of Education, Department of Energy, Department of Health and Human Services, Department of Homeland Security, Department of Transportation, Environmental Protection Agency, National Aeronautics and Space Administration, National Science Foundation. 7 Id. 2

proposing small business. 8 The principal investigator is the one individual designated by the applicant to provide the scientific and technical direction to a project supported by the funding agreement. 9 The applicant for SBIR must complete a minimum of two-thirds of the research and development in Phase I and one-half in Phase II. 10 For STTR, the small business must complete at least 40 percent of the work and the research institution must complete at least 30 percent. 11 2. Available Grants After making sure that the business fits these requirements, the applicant should then research the topic area each participating agency is interested in funding. This information is released in a solicitation on its website. 12 Solicitations are offered by each agency individually and compiled on the SBIR main website, 13 but are not aligned in their schedules of release. Small businesses interested in applying for these grants should, therefore, look at the solicitation schedules ahead of time to ensure that they are prepared when topics are announced; many of them are continued from one year to the next. 3. Application The application process is competitive. It is a standard process that requires a written letter of intent and a formal application. The release of an agency s topic solicitation document marks the beginning of the application period. Applicants must write a letter of intent by the deadline 8 Id. 9 SBIR/STTR, SBIR, SBIR.GOV http://www.sbir.gov/about/about-sbir#embedded_flash_59613016 (last visited October 29, 2012). 10 Id. 11 U.S. DEPARTMENT OF ENERGY: OFFICE OF SCIENCE, Overview of the DOE s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs, SCIENCE.ENERGY.GOV, http://science.energy.gov/~/media/sbir/pdf/files/ppt-fy13-phase-i-release-1-changes-webinar.pdf (last visited October 14, 2012). 12 See for example, DEPARTMENT OF ENERGY, Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs, SCIENCE.ENERGY.GOV http://science.energy.gov/~/media/sbir/pdf/docs/doefy13phaseirelease1topicsamend1081512.pdf (last visited October 15, 2012). 13 SBIR/STTR, Solicitations, SBIR.GOV http://www.sbir.gov/solicitations (last visited, October 15, 2012). 3

expressed in the solicitation. 14 The letter of intent must include the applicant s interest in a particular topic area, information about the small business, and summary of the project that the small business will pursue. 15 The letter of intent merely shows that the applicant is interested, and gives agencies an idea of who is applying. This process allows the agency to begin reviewing applications sooner. 16 After the letter of intent has been submitted, the agency will send out notifications to applicants who are permitted to complete the formal application process. All applications must be submitted through a separate website, grants.gov, by the agency articulated deadline. 17 To be prepared to file the applications on time, interested applicants should set up an account on grants.gov in advance because the registration process can take as long as six weeks. 18 Applications must include an overview of the proposed project, including a detailed description of the project, the estimated budget, who will be working on the project (such as the principal investigator and other individuals) and a commercialization plan. 19 B. The Different Phases The SBIR and STTR programs have three phases. Phase I and II are funded by the grants, while Phase III is funded through other means. Phase I is meant to further research and project feasibility, while Phase II takes the next step and gives the applicant a chance to develop a prototype. The grant awarded to Phase I and Phase II are not more than $150,000 over six months or more than $1,000,000 over two years, respectively. 20 When a small business applies 14 http://science.energy.gov/~/media/sbir/pdf/files/ppt-fy13-phase-i-release-1-changes-webinar.pdf (last visited October 14, 2012). 15 Id. 16 Id. 17 Id. 18 U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES: OFFICE OF EXTRAMURAL RESEARCH, Prepare to Apply & Register, GRANTS.NIH.COM, http://grants.nih.gov/grants/electronicreceipt/preparing.htm#4 (last visited, October 26, 2012). 19 http://science.energy.gov/~/media/sbir/pdf/files/ppt-fy13-phase-i-release-1-changes-webinar.pdf (last visited October 14, 2012). 20 SBIR/STTR, FAQs, SBIR.GOV, http://www.sbir.gov/faq/sbir#t25n66934 (last visited October 15, 2012). 4

to the program for the first time, it is applying for Phase I. 21 A small business must successfully complete Phase I to be eligible to apply for Phase II. 22 Phase III is the commercialization phase and is not funded by these programs. 23 The commercial phase is where the small business develops a marketing strategy for the newly developed product. In some agencies, it is possible for participants to apply for non-sbir funded research and development contracts during this Phase. 24 Otherwise, participants can seek funding through other channels, such as non-profit organizations. III. EFFECTS OF FEDERAL GRANTS ON INTELLECTUAL PROPERTY RIGHTS If the applicant s proposal is accepted, the offering agency drafts a funding agreement describing the rights of both parties. This funding agreement usually grants the federal government a royalty-free license to use the developed product. 25 The license is nontransferable, meaning the government cannot give the product to anyone else to use, but it also means the government does not have to pay to use the product. The government also reserves the right to require the patent holder to [grant a] license [to] others in certain circumstances. 26 The government generally must abstain from releasing any sensitive information about the product for at least four years from the time that the grant is accepted, in an attempt to allow the inventor time to patent the product. 27 Small businesses should note that although the normal funding agreement allows the government to retain a royalty-free license, the consequences of not reading the agreement, or failing to adhere to it, could be the loss of an anticipated or 21 Id. 22 Id. 23 Id. 24 Id. 25 DEPARTMENT OF COMMERCE, Small Business Innovation Research Program: Solicitation, WWW.NIST.GOV, http://www.nist.gov/tpo/sbir/recent-solicitation.cfm (last visited, October 14, 2012). 26 Id. 27 Id. 5

expected IP right to the product that the small business developed because, for example, it failed to timely apply for patent rights. 28 In short, the SBIR and STTR grants are helpful because they provide necessary funding to startup entrepreneurs, but they come at a price. Applicants who receive either grant cannot expect to make money from government use of their products because funding agreements provide for royalty-free licenses, and the government has already paid for the product by issuing the grant. Applicants should therefore ensure that the product is marketable to others besides the government to effectively make money off the product. Applicants should also be vigilant regarding potential IP rights available to their products because a failure to timely safeguard those rights could result in the government acquiring those rights. Aside from these potential drawbacks, it is important to note that a small business without the resources to develop a product on its own can benefit from these federal grants. IV. CONCLUSION In today s economy more than ever, these grants are opening doors for small businesses that have the drive to improve or create new products. Offering these grants is a way for the federal government to encourage innovation and development. Although they are similar, it is imperative that small businesses examine the details of the programs in the respective agencies to ensure they are complying with all the unique requirements. It would also be beneficial to small businesses to plan ahead and prepare for these details when the application opens, so they are sure to complete all of the documents correctly 28 General Terms and Conditions for DOE SBIR and STTR Phase I and Phase II Grants, SBIR/STTR-GTC-0024(d), SCIENCE.ENERGY.GOV, http://science.energy.gov/~/media/sbir/pdf/files/manageapp/general_terms_and_conditions_june_2010.pdf (last visited, October 26, 2012). 6

and on time. Because these grants are so competitive, it would be prudent for small businesses to have a strong, detailed proposal ready before the application even opens. The importance of IP rights of a product to an up-and-coming small business is unlimited. For this reason, small businesses that are offered a funding agreement should take the time and care to thoroughly read and understand it. For many small businesses that enter into these agreements with a clear understanding of the terms, these grants are just what is needed to get a start in the right direction. 7