Companies Using Chips Act Money Should Mitigate March-In Risks

The evolution of artificial intelligence and other advanced technologies and infrastructure to support onshore semiconductor manufacturing has prompted businesses to use funding from the 2022 Chips Act to build out their capabilities.

Such funding may seem attractive, but it comes with certain conditions, including the US government’s rights to “march in” and compel granting of licenses of federally funded intellectual property to third parties if certain criteria are met.

The government can exercise march-in rights to address a public health emergency, satisfy federally prescribed public use requirements, address violations of requirements to substantially manufacture funded IP in the US, or ensure a “practical application” of funded IP is achieved. Achieving a practical application generally means the funded IP is being manufactured, practiced, or operated in a way that allows for its use and where its benefits are available to the public on reasonable terms.

Exercising such rights aims to advance a public benefit, but it could significantly devalue the federally funded IP.

The risk of the US government exercising these rights may be rising. The National Institute of Standards and Technology in December published a request for information from the public on draft guidance as it considers the circumstances under which march-in rights may be exercised.

Using two hypothetical scenarios from NIST’s draft guidance, we can see how companies can understand and consider how to mitigate risks associated with a potential government exercise of march-in rights.

March-In Scenarios

In one example, a technology company develops federally funded transceiver technology, which is required by federal law to be included in new vehicles for safety purposes.

The technology company refuses to grant licenses to third-party manufacturers. These manufacturers believe market demand isn’t being satisfied and asks the government to compel the technology company to grant them a license.

According to NIST, if the company can’t provide assurance that it will adequately supply the market and meet regulatory requirements, and no alternative technologies exist, the government could compel the granting of such a license.

In another scenario, a biotechnology company exclusively in-licenses a federally funded patent from a university covering a potential new treatment but elects to pursue a similar, non-funded treatment. A third party is denied a license from the biotechnology company and the university for such patent and asks the US government to compel the university to grant it a license.

According to NIST, if neither the biotechnology company nor the university take effective steps to achieve practical application of the potential treatment the federally funded patent covers, and there are no valid reasons for ceasing development, the government could compel the university to grant the third party a license to the federally funded patent. This would effectively make the original biotechnology company’s license non-exclusive.

Risk Mitigation

Businesses must decide whether to accept federal funding or transact with others that may do so. When developing Covid-19 vaccines, some pharmaceutical companies expressed publicly that they wouldn’t accept federal funding to avoid the risk of the US government requiring them to grant licenses to other companies.

Businesses that accept federal funding may consider several following risk mitigation strategies, such as:

Practical application. A business must ensure it takes steps to achieve a practical application of the applicable technology.

Third-party contracts. In addition to its own development efforts, a business may contract with a third party to develop the technology. A business still may need to mitigate the risk of a government march-in in such a case.

For example, it must ensure it can terminate rights granted to the third party if efforts to achieve a practical application are insufficient. This way, the business can either pursue its own development or contract with another party to do so.

Manufacturing location. A business that accepts federal funding must consider whether the developed technology must be substantially manufactured in the US, or obtain a waiver from the government to be permitted to manufacture such technology outside the US.

IP development. Businesses should appropriately document the IP that’s developed with such funding and, if possible, not combine IP with other technology. This can mitigate the risk that technology that isn’t federally funded is adversely affected by an exercise of government march-in rights.

IP protection. Businesses should consider expanding IP protection for federally funded technology with IP that isn’t federally funded. This may reduce the commercial impact of an exercise of government march-in rights, as the full suite of rights won’t be encumbered by a compulsory license if the government elects to march in.

Due diligence. When obtaining rights to technology from a third party, businesses must conduct due diligence to ascertain whether the third party has obtained or may obtain federal funding. If march-in rights are implicated, a business should consider seeking contractual terms to address the risks involved, such as adjustments to economic terms that would apply if march-in rights are exercised.

The rise in availability of federal funds presents opportunities for important technology development. But before any business accepts federal funds and invests in such development, it must assess the march-in rights risk and adopt appropriate strategies to mitigate such risk.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David Bauer is IP, tech, and commercial transactions partner at Davis Polk and Wardwell.

Frank J. Azzopardi is partner and head of the IP, tech, and commercial transactions group at Davis Polk and Wardwell.

Gabrielle Mazero contributed to this article.

Write for Us: Author Guidelines