In 1918, the U.S. Supreme Court held that government contractors could be sued for patent infringement even if their products were manufactured specifically for the U.S. government. Franklin D. Roosevelt, then acting secretary of the Navy, wrote an urgent letter to Congress warning that contractors were hesitant to build equipment for the Navy that could expose them to expensive litigation. Congress responded swiftly, amending federal law to shield contractors from patent suits when they were manufacturing products for the government. That statutory immunity, now codified as 28 U.S.C. § 1498, has protected defense manufacturers for over a century. But a recent federal court ruling in Delaware shows the limits of that protection for the modern procurement era.
The case in Delaware involves patent litigation over a COVID-19 vaccine, not a weapons system. But the legal principle at stake — what it means for a product to be made “for the Government” and protected from litigation — carries direct implications for the rising class of defense technology companies known as “neoprimes”: firms like Anduril, Palantir, Shield AI, and others that are using private research and development budgets to build dual-use technologies designed to serve both military and commercial customers. The parties recently settled for $2.25 billion, with $1.3 billion contingent on how the appeals court resolves the patent immunity question. If the Delaware court’s interpretation holds, these companies may find that their defining business model makes them more vulnerable to patent litigation than their legacy competitors.
Section 1498 Immunity: A Century-Old Litigation Shield
Section 1498 immunity works like this: When a contractor uses or manufactures a patented invention “for the Government and with the authorization or consent of the Government,” the patent holder’s only recourse is to sue the United States itself in the Court of Federal Claims for reasonable compensation. The contractor is shielded entirely from litigation. The statute originated in 1910 and was expanded in 1918 precisely because patent infringement lawsuits were disrupting wartime production. Courts have historically interpreted Section 1498 broadly, extending it over the decades to cover products manufactured abroad and to preclude other types of infringement claims like inducement. Today, explicit government consent to patent infringement is a standard clause in bid solicitations and procurement contracts.
When Arbutus Biopharma sued Moderna in Delaware federal court, alleging that Moderna’s COVID-19 vaccine used its patented mRNA delivery technology, Moderna invoked Section 1498 immunity. Because Moderna’s vaccine was developed under a government contract during Operation Warp Speed, and with the express authorization and consent of the United States, Moderna asked the court to dismiss the case against it.
In a February order, the Delaware court rejected this argument for the vast majority of Moderna’s vaccine sales. The key distinction: the phrase “for the Government” in Section 1498, the court held, requires the product to benefit the government itself. The government ordered over $8.2 billion worth of Moderna vaccines during the pandemic, but those doses were distributed to ordinary citizens, not consumed by government employees in their official capacity. Only a narrow slice of doses administered directly to government personnel qualified for statutory immunity.
The ruling drew a line that prior courts had not: The government can pay for something, contract for something, authorize its production, even include the standard Federal Acquisition Regulation Authorization and Consent clause in the procurement contract, and the contractor still stands alone against patent claims if the end beneficiary is the public rather than the government itself.
The stakes of that interpretation became concrete on March 3, when Arbutus and Moderna announced a $2.25 billion global settlement — the second-largest disclosed patent settlement in history. Moderna will pay $950 million upfront, with an additional $1.3 billion contingent on the United States Court of Appeals for the Federal Circuit affirming the district court’s Section 1498 ruling on appeal. That contingency sends the legal question to the appeals court, which has nationwide jurisdiction.
Why Neoprimes Should Pay Attention
At first glance, a vaccine patent dispute seems entirely divorced from defense procurement. But the Delaware court’s reasoning raises a difficult question for a growing segment of the defense industry. The Department of Defense increasingly relies on “neoprimes” to rapidly develop dual-use software and autonomous systems using private venture capital. Unlike legacy contractors building fighter jets exclusively for the military, these companies design platforms that serve both government and commercial customers. If the Delaware court’s interpretation of “for the Government” takes hold, it could create meaningful litigation risk and uncertainty for the startups the Pentagon needs most.
Consider a patent holder suing a neoprime over an algorithm embedded in an AI platform that controls autonomous systems across multiple industries. A court applying the Delaware ruling might ask: Does the government itself benefit from this product, or does the benefit flow to the broader public? If the same autonomous surveillance system protects a military base in one deployment but manages civilian disaster relief in another, the technology might be shielded in the first application and exposed in the second. Because neoprimes develop these dual-use platforms long before formal procurement contracts are signed, the ruling introduces uncertainty into a business model the statute was never designed to address.
No neoprime has yet faced this precise litigation scenario, but defense patent holders have probed the limits of Section 1498 immunity before. AeroVironment, a defense contractor and the developer of NASA’s Ingenuity Mars helicopter, was recently sued for patent infringement over promotional demonstrations of a terrestrial version of the helicopter. AeroVironment invoked Section 1498 and ultimately prevailed, but largely because the court found that mere demonstrations were not commercial conduct. A dual-use platform with commercial sales would not have the same clean facts.
Congress Has Fixed This Before
Section 1498 has a history of amendments designed to close gaps in contractor protection. Congress created its predecessor in 1910, and when the Supreme Court ruled it didn’t extend to contractors building naval warships, Congress expanded the statute within months. In 1942, with World War II production ramping up, Congress proactively eliminated any remaining ambiguity to ensure intellectual property disputes would not disrupt the arsenal of democracy.
Today, Congress is in the early stages of developing the Fiscal Year 2027 National Defense Authorization Act. Last year’s National Defense Authorization Act incorporated portions of the Senate’s Fostering Reform and Government Efficiency in Defense Act and the House’s Streamlining Procurement for Effective Execution and Delivery Act, lowering barriers for nontraditional defense contractors and making commercial procurement the default. Yet neither bill addressed patent immunity. Congress is actively reforming procurement to attract dual-use innovators, but leaving unresolved a legal interpretation that could turn that exact dual-use model into a source of litigation risk. A clarifying amendment to Section 1498 specifying that products developed or manufactured with government authorization qualify for immunity, regardless of whether the end-use benefits the government directly or the broader public, would be a natural addition to this year’s appropriations bill.
Patent holders will object that expanding Section 1498 immunity forces them into the Court of Federal Claims, where there is no right to a jury, and proceedings can be protracted. And while the statute guarantees “reasonable and entire compensation,” in practice, damages awards may be lower when fair market value is assessed with the government as the hypothetical licensor, rather than a profitable private company. These are real costs. But that is the balance Congress has struck each time it has amended this statute to adjust to the needs of an evolving defense industrial base. Expanding it to dual-use products would be consistent with Congress’s broader efforts to put commercial developers on equal footing with traditional primes. Patent holders would still be compensated — they would simply collect from the government rather than the contractor.
Some may argue that the Federal Circuit will resolve the uncertainty. The $1.3 billion contingent payment in the Moderna settlement guarantees a fully briefed appeal on the precise question at issue, and the Federal Circuit just recently affirmed broad immunity in the AeroVironment case. But defense tech companies should not count on the ruling to solve their problem. If Moderna prevails and the court reinstates broad immunity, the decision may rely on facts unique to pandemic vaccine procurement and Operation Warp Speed’s emergency authorities. A neoprime citing that ruling to defend a dual-use autonomous platform would still need to convince a court that its situation is analogous.
If Arbutus prevails and the court endorses the district court’s narrow reading, the consequences for defense contractors are more serious. A binding Federal Circuit decision establishing that public benefit does not equal government benefit would give patent holders a new theory to deploy against dual-use contractors across the defense industrial base. As the exclusive appellate court for patent cases nationwide, the Federal Circuit’s interpretation would be difficult to dislodge. A statutory fix remains the most direct path to certainty.
The fact that $1.3 billion turns on how the Federal Circuit interprets three words tells you everything about the stakes in the Moderna case. But the courts will answer the Moderna question, not the defense tech question. In 1918, the Navy warned that litigation risk made contractors hesitant to build what the government needed. Congress listened. The contractors have changed, but the problem has not.
Tony Rowles is a partner at Irell & Manella, where he handles high-stakes patent litigation and advises clients on licensing and patent portfolio management. Prior to his legal career, Tony served in the U.S. Army as an enlisted intelligence analyst. Connect with him on LinkedIn.
Irell & Manella has previously represented Moderna in other patent matters.
**Please note, as a matter of house style, War on the Rocks will not use a different name for the U.S. Department of Defense until and unless the name is changed by statute by the U.S. Congress.
Image: Tony Webster via Wikimedia Commons.
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