Testimony

Before the Subcommittee on Technology and

Procurement Policy, Committee on Government

Reform, House of Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at 10:00 a.m., EDT,

Tuesday, July 17, 2001 INTELLECTUAL

PROPERTY

Information on the Federal

Framework and DOD's

Other Transaction

Authority

Statement of Jack L. Brock, Managing Director, Acquisition

and Sourcing Management and John B. Stephenson,

Director, Natural Resources and Environment

GAO-01-980T
Page 1 GAO-01-980T Intellectual Property

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting GAO to participate in today’s hearing on intellectual

property. The U.S. government has made significant contributions to the

world’s science and technology base, both by supporting basic scientific

research and by pursuing science and technology missions within federal

agencies. At one time, federal agencies largely controlled this research and

the patented products and processes resulting from it—known as

intellectual property. In turn, this work was used to further a wide range of

national interests, such as medical research, economic development,

technology advancements, and national defense.

However, the research and development landscape has changed over the

past two decades. Most research is being done outside of the government’s

span of control, and the federal government must now increasingly

compete with others to obtain the research and technology it needs. And it

must do so amid concerns about the burdens associated with federal

controls over reporting, development, and commercialization of the

intellectual property created under federal contracts. Further, most

intellectual property created through federal research projects is now

owned by contractors and grantees. This has helped to foster development

of new products and processes and ensure that they are available for

commercial purposes and scientific study.

I am here today along with John Stephenson, Director, Natural Resources

and Environment, to discuss GAO’s work related to two vehicles that have

been created to bridge this gap. These are (1) the Bayh-Dole Act, which

was passed in 1980 and supplemented by Executive Order 12591 in 1987,

and (2) “other transaction” authority granted to DOD. The Bayh-Dole Act

and Executive Order 12591 allow federal contractors and grantees to

own—with certain restrictions—the inventions they create under federally

funded research projects. DOD’s “other transaction” authority enables

DOD to enter into agreements that are generally not subject to the federal

laws and regulations governing standard contracts, grants, and

cooperative agreements. DOD has used this authority to increase its

flexibility in negotiating intellectual property provisions and to attract

commercial firms that traditionally did not perform research for the

government. However, our work has shown that DOD needed better

guidance to promote more effective use of the authority. DOD has taken

actions to respond to our concerns, which I will also discuss.
Page 2 GAO-01-980T Intellectual Property

Prior to 1980, the government generally retained title to any inventions

created under federal research grants and contracts, although the specific

policies varied among the agencies. Over time this policy became

increasingly a source of dissatisfaction. One, there was a general belief

that the results of government-owned research were not being made

available to those who could use them. Second, advances attributable to

university-based research funded by the government were not pursued

because the universities had little incentive to seek uses for inventions to

which the government held title. Finally, the maze of rules and regulations

and the lack of a uniform policy for government-owned inventions often

frustrated those who did seek to use the research.

The Bayh-Dole Act1

 was intended to address these concerns by creating a

uniform patent policy for inventions resulting from federally sponsored

research and development agreements. The act was applicable to small

businesses, universities, and other nonprofit organizations and generally

gave them the right to retain title to and profit from their inventions,

provided they adhered to certain requirements. The government retained

nonexclusive, nontransferable, irrevocable, paid-up (royalty-free) licenses

to use the inventions.2

The Bayh-Dole Act was extended to large businesses by a Presidential

Memorandum issued to the executive branch agencies on February 18,

1983. It extended the patent policy of Bayh-Dole to any invention made in

the performance of federally funded research and development contracts,

grants, and cooperative agreements to the extent permitted by law. In

1984, the Congress amended the Bayh-Dole Act to include contractors

operating government-owned laboratories. The 1984 amendments also

specified that the act did not preclude agencies from allocating rights to

inventions, as provided in the Presidential Memorandum, but that

organizations acquiring these rights would be subject to certain

requirements of Bayh-Dole. On April 10, 1987, the President issued

Executive Order 12591, which, among other things, required executive

 1

 The Bayh-Dole Act is the common name for the Patent and Trademark Laws Amendments

of 1980 (P.L. 96-517, Dec. 12, 1980).

2

 The act is implemented through regulations issued by the Department of Commerce in

1987 (37 C.F.R. part 401). Similarly, the patent rights policies set out by the act and

Executive Order 12591 are embodied in parts 27 and 52 of the Federal Acquisition

Regulation. The regulations define the rights and responsibilities of the parties.

The Bayh-Dole Act

and Executive Order

12591
Page 3 GAO-01-980T Intellectual Property

agencies to promote commercialization in accordance with the 1983

Presidential Memorandum.

Below are highlights of requirements related to the Bayh-Dole Act and

Executive Order 12591.

Figure 1: Highlights of Requirements

• The contractor or grantee must disclose

to the appropriate federal agency any

invention created with the use of federal

funds within 2 months of the date the

inventor discloses the invention in

writing to the contractor or grantee.

• If the contractor or grantee decides to

retain title to the invention, it generally

must notify the agency within 2 years of

the date of disclosure that it has elected

to do so.

• The contractor or grantee must apply for

a patent on the invention within 1 year of

its election to retain title or within 1 year

of the publication, sale, or public use in

the United States, whichever is earlier.

• In applying for a patent, the organization

must add a government interest

statement that discloses the

government’s rights to the invention.

• The contractor or grantee must attempt

to develop or commercialize the

invention.

• If the contractor or grantee is a nonprofit

organization, it generally must give

priority to small businesses when

licensing the invention.

• When granting an exclusive license, the

contractor or grantee must ensure that

the invention will be “manufactured

substantially” in the United States.

No single federal agency is responsible for monitoring compliance with

the Bayh-Dole Act or Executive Order 12591, although the Department of

Commerce was given the responsibility for drafting Bayh-Dole regulations.

Rather, the agency responsible for funding the contract or grant that led to

the invention is responsible for ensuring that the requirements are

followed. If the contractor or grantee does not disclose the invention, does

not elect title within the established periods, or elects not to retain title,

the agency may acquire title to the invention if the agency makes a written

request within 60 days after it learns of the failure of the contractor or

grantee to make the proper disclosures or elections. The agency can also

require the contractor or grantee to grant a nonexclusive, partially

exclusive, or exclusive license in any field of use to a responsible applicant

under terms that are reasonable under the circumstances if, for example,

the organization does not develop or commercialize the invention or if

action is needed to alleviate health or safety concerns. This is known as

the government’s “march-in” right.
Page 4 GAO-01-980T Intellectual Property

Our work on the Bayh-Dole Act has focused on the reporting requirements

contractors and grantees are required to follow.3

 We found that

contractors and grantees were not always abiding by the reporting

requirements and that the royalty-free licenses retained by the government

were of little, if any, use in federal procurements. We noted that the

Congress might wish to consider standardizing, improving, and

streamlining the reporting process under the act and executive order,

which we believe would make the process less burdensome and more

useful to both the government and its contractors and grantees.

Over the past decade, both Congress and DOD expressed concern that

government-unique procurement requirements—often implemented

through specified contract provisions—inhibited DOD’s ability to take

advantage of technological advances made by the private sector and

increased the costs of goods and services DOD acquired. For example,

traditional defense contractors reported that they required additional

personnel to comply with government financial management

requirements, while commercial companies reportedly declined to accept

DOD research contracts in order to protect their intellectual property.

Many requirements could be waived or tailored through existing

contracting procedures, but both DOD officials and potential contractors

found this to be difficult and time consuming.

One approach to address these concerns has been the use of “other

transactions.” Other transactions are not generally subject to the federal

laws and regulations governing standard procurement contracts, grants

and cooperative agreements. DOD officials believe the use of other

transactions provides additional flexibility to negotiate terms and

conditions, including those pertaining to intellectual property; and,

thereby, helped attract firms that traditionally did not perform research for

the government.

There are two basic types of other transactions. The first type had its

origins in 1989, when Congress enacted legislation—codified at

10 U.S.C. 2371—to provide the Defense Advanced Research Projects

Agency (DARPA) temporary authority to enter into cooperative

 3

 These include our May 1998 report, Technology Transfer: Administration of the

Bayh-Dole Act by Research Universities (GAO/RCED-98-126, May 7, 1998); and our August

1999 report, Technology Transfer: Reporting Requirements for Federally Sponsored

Inventions Need Revision (GAO/RCED-99-242, Aug. 12, 1999).

DOD’s Use of Its

Other Transaction

Authority
Page 5 GAO-01-980T Intellectual Property

agreements4 and “other transactions” for advanced research projects. The

legislation did not define “other transactions,” thus giving DARPA

flexibility to deal with unique situations encountered when fostering

technology, especially dual-use technology. The legislation also required

that, to the extent the Secretary of Defense determined practicable,

recipients should provide at least 50 percent of the project’s funding. In

1991, Congress made the authority permanent and subsequently extended

it to the military services. Other transactions entered into under 10 U.S.C.

2371 are assistance instruments, which are used when the principal

purpose is to stimulate or support research and development activities for

both public and government purposes. Other transactions could only be

used when other instruments were not appropriate or feasible.

In 1993, under Section 845 of the National Defense Authorization Act for

Fiscal Year 1994,5

 Congress authorized a second type of other transaction

to carry out prototype projects directly relevant to weapons or weapon

systems proposed to be acquired or developed by DOD; that is, for

government-unique purposes. The legislation did not require participants

to share in the costs of the project or require that the agreements be used

when a standard contract, grant, or cooperative agreement was not

appropriate or feasible, two conditions required to use an assistance-type

other transaction. These “Section 845 agreements” were initially limited to

use by DARPA for a 3-year period; legislation has since been passed to

extend their use to the military services and other defense agencies and to

extend the authority’s expiration date to September 30, 2004.

We have reported twice on DOD’s general use of its other transaction

authority.6

 Overall, while a number of benefits were cited, including the

ability to tailor intellectual property clauses and to attract firms that

traditionally did not perform research for the government, we also found

that DOD needed more specific guidance to help its personnel select and

 4

 Subsequent legislative changes enabled DOD to use cooperative agreements as part of its

basic authority under 10 U.S.C. 2358 to conduct research.

5

 P.L. 103-160, Nov. 30, 1993.

6

 We have also reviewed DOD’s proposed use of an other transaction for its Evolved

Expendable Launch Vehicle program, but we did not address intellectual property matters

(see Evolved Expendable Launch Vehicle: DOD Guidance Needed to Protect Government’s

Interests (GAO/NSIAD-98-151, June 11, 1998).

GAO Findings Related

to DOD’s Use of Other

Transactions
Page 6 GAO-01-980T Intellectual Property

structure the instruments appropriately and assess the benefits from using

the agreements.

In March 1996, we reported on DOD’s use of 72 cooperative agreements

and other transactions that were entered into under 10 U.S.C. 2371

between fiscal years 1990 and 1994. We found that the instruments

appeared to have provided DOD a tool to leverage the private sector’s

technological know-how and financial investment, and attracted firms that

traditionally did not perform research for the government by enabling

more flexible terms and conditions than the standard provisions found in

DOD contracts and grants.

As an example, we cited a 1994 DARPA other transaction with a HewlettPackard-led consortium to advance the state of the art in the manufacture

of more affordable optoelectronics systems and components. HewlettPackard had previously told us that it declined to accept government

research and development funds to protect its technical data rights.7 Under

the agreement, however, the intellectual property provisions were

structured so that

• the consortium had up to 4 months (rather than the 2 months typically

allowed) after the inventor discloses a subject invention to his company to

notify the government;

• the consortium had up to 24 months (versus 8 months allowed for large

businesses) to inform DARPA whether it intends to take title to inventions

arising from the agreement after its disclosure to the government;

• DARPA agreed to delay exercising its government purpose license rights

to inventions in which the consortium retained title until 5 years after the

agreement was completed; and

• the consortium had the authority to maintain inventions and data as trade

secrets for an unspecified period of time under certain conditions.

 7

 With regard to technical data, DOD generally obtains unlimited rights when technical data

were developed or created exclusively with government funds, government purpose rights

when the data were created with mixed funding, and limited rights when the data were

created exclusively at private expense. These rights differ in the degree to which DOD may

provide or authorize parties outside of the government to use the data. Unlimited rights

provide the government the ability to use, modify, reproduce, perform, display, release, or

disclose technical data in whole or in part, in any manner, and for any purpose whatsoever,

and to have or authorize others to do so. Government purpose rights enable the

government to allow others to use the data for government purposes, while limited rights

generally require the government to obtain the contractor’s written permission before

doing so.
Page 7 GAO-01-980T Intellectual Property

Further, under the agreement, DARPA did not receive any rights to any

technical data produced under the agreement unless DARPA invoked its

“march-in” rights. In combination, these terms provided the consortium

additional time to commercialize the technology, while limiting the

government’s rights to that technology.

Overall, we estimated that 42 percent of the 275 firms commercial firms

that participated in 1 or more agreements were firms that traditionally had

not performed research for DOD. We did not, however, attempt to

determine to what extent more flexible intellectual property provisions

played a role in each firm’s decision to participate or evaluate how each of

the agreements addressed intellectual property issues.

We identified two emerging issues that pertained to instrument selection

and structure of cooperative agreements and other transactions.8

 First,

DARPA and the military services were selecting different instruments and

treating specific issues, such as audit requirements, differently, thereby

resulting in some confusion among firms that were negotiating agreements

with both DARPA and the services. Additionally, we found that there

remained disagreement between the military services and DARPA on

whether the Bayh-Dole Act applied to other transactions. Consequently,

we recommended that DOD provide revised guidance, in part, to promote

increased consistency among DOD components on the selection and

structure of the instruments. DOD has since issued guidance on several

occasions, most recently in February 1999. In general, this guidance

established a single class of assistance instruments called “technology

investment agreements” to reduce confusion and increase consistency in

the types of assistance instruments used by DOD, and clarified that DOD

personnel could provide more flexible terms than would be available

under Bayh-Dole should the situation warrant it.

In April 2000, we reported on DOD’s use of 97 Section 845 agreements that

had been awarded as of October 1998.9

 As part of this review, we

discussed the extent to which DOD had used Section 845 agreements, for

 8

 We also noted that about 10 percent of the recipients’ planned contributions was

attributable to the value of past research efforts, rather than concurrent financial or in-kind

contributions. We noted that this practice may not provide accurate depiction of the

relative financial contributions of the parties under the agreement. Current DOD guidance

does not allow the cost of prior research to count as part of a recipient’s cost-share.

9 Acquisition Reform: DOD’s Guidance on Using Section 845 Agreements Could be

Improved (GAO/NSIAD-00-33, Apr. 7, 2000).
Page 8 GAO-01-980T Intellectual Property

what types of projects, their dollar value, and the reasons cited by DOD

components for using Section 845 agreements, among other things. We

also reported on how DOD tailored these agreements to address

intellectual property issues and the degree to which DOD attracted

commercial firms.

To determine how the agreements addressed intellectual property issues,

we compared the agreement’s language with the standard contract

provisions required under the Federal Acquisition Regulation to assess

whether and how they differed. We found that DOD personnel

incorporated the applicable standard contract provision governing patent

rights in 25 agreements. In the other 72 agreements, DOD incorporated

language that varied widely. For example, DOD personnel often provided

contractors between 4 to 12 months to notify the government of an

invention under Section 845 agreements, compared to 2 months provided

in a standard procurement contract. In some cases, the contractor was

allowed to maintain inventions as trade secrets; in other cases, the

government declined patent rights altogether. Finally, some agreements

clarified the definition of an invention to specifically exclude pre-existing

inventions. With regard to obtaining rights to technical data under Section

845 agreements, most agreements used tailored clauses, which could

involve DOD declining any rights to data or accepting government purpose

rights for 10 years.

Similar to what we found in our earlier report, DOD personnel attributed,

in part, the participation of commercial firms to their ability to tailor the

agreement’s terms and conditions, including the intellectual property

provisions. For example:

• A small commercial firm submitted an unsolicited proposal to DARPA to

develop and demonstrate an unmanned aerial vehicle capable of vertical

take-off and landing based on the company’s existing proprietary

technology. The company, however, was unwilling to work under a

standard contract, citing, among other factors, intellectual property

concerns. DARPA agreed to not accept any technical data in the

$16.7 million agreement; however, the agreement provided DARPA options

to subsequently acquire government purpose rights to the data at a cost

ranging from $20 million to $45 million or by purchasing 300 vehicles.

According to the agreement, the rights would be sufficient to establish a

second source for competition.

• In January 1997, the National Imagery and Mapping Agency solicited

proposals to develop and exploit commercial information technologies for

national security purposes. Contractor representatives suggested that
Page 9 GAO-01-980T Intellectual Property

using a Section 845 agreement would help their consortium attract

commercial firms, in part by being able to provide more flexible

intellectual property provisions. The resulting Section 845 agreement had

a potential value of $75 million. Contractor officials indicated that about

half of the work is being performed by business units that for various

reasons would not have participated under a standard contract.

Overall, however, we reported that Section 845 agreements achieved

mixed results in attracting commercial firms that traditionally did not do

research for the government at either the prime contractor or

subcontractor level. For example, 84 of the 97 agreements were awarded

to traditional defense firms. At the subcontractor level, DOD officials

indicated that traditional defense firms attracted commercial firms in 24 of

the 84 agreements they were awarded. For the remaining agreements,

DOD officials reported that either the prime contractor did not attract

commercial firms at the subcontract level (20 agreements) or they did not

know whether the prime contractors had attempted to do so

(34 agreements). Agreement officers did not provide information on six

agreements.

Additionally, we found that DOD analyses supporting these arrangements

often did not address why either the standard contract provision or a

tailored approach was selected, or discuss the anticipated benefits of the

approach selected. In part, this was due to the use of a model agreement

that was developed by DARPA and which formed the basis for many of the

agreements. Consequently, our review of the agreement officers’ analyses

found that discussions were often limited to how the terms differed from

the model agreement.

At the time of our review, DOD was in the process of developing

additional guidance to enable its personnel to both take advantage of the

flexibility afforded by the agreements and protect the government’s

interests. We recommended that this guidance, among other things,

provide a framework to tailor the terms and conditions appropriate for

each agreement. We also recommended that DOD establish and use a set

of metrics, including the number of commercial firms participating in

Section 845 agreements, which are measurable and directly related to the

agreement’s use.

In December 2000, DOD issued guidance that is intended to provide a

framework for DOD personnel to consider when using Section 845

agreements. Our initial observations of the section dealing with

intellectual property indicated that it does provide various factors for DOD
Page 10 GAO-01-980T Intellectual Property

personnel to consider when structuring and negotiating intellectual

property provisions. In general, the guide indicates that DOD personnel

should seek to obtain intellectual property rights consistent with the BayhDole Act for patents and 10 U.S.C. 2320 and 10 U.S.C. 2321 for technical

data, but notes that they may also negotiate rights of a different scope

when necessary to accomplish program objectives and foster government

interests. For example, the guide notes that when the government

overestimates the intellectual property rights it will need, the government

might pay for unused rights and dissuade new business units from entering

into an agreement. At the same time, DOD personnel needed to consider

such factors as the costs associated with the inability to obtain

competition for the future production, maintenance, upgrade and

modification of prototype technology, or the inability of the government to

adapt the developed technology for use outside the initial scope of the

prototype project. The guide also requires DOD personnel to collect

information on the prime contractor and commercial firms that participate

to a significant extent in the prototype project.

I would also like to note that on April 30, 2001, DOD issued a guide that

specifically focused on intellectual property issues. This guide was in

response to a September 2000 memorandum issued by the Under

Secretary of Defense (Acquisition, Technology and Logistics) that called

for DOD to create an environment where industry is willing to share

commercially generated research with defense communities so that

weapons systems can keep pace with technology. The guide provides a

description of the fundamental principles and concepts of negotiating

intellectual property rights, a framework of the key aspects of intellectual

property and how it is treated in government contracting, a description of

the major intellectual property issues that keep some companies from

responding to solicitations, as well as possible solutions to attract their

involvement. The guide provides DOD personnel another resource to

identify ways to negotiate provisions that meet each parties’ needs,

whether on standard procurement contracts or on other transactions.

Before concluding, I would like to note two recent legislative changes that

affect DOD’s use of Section 845 agreements that were not related to

intellectual property issues, but more to the overall management and

oversight of Section 845 agreements. First, Congress passed legislation in

October 1999 that required that agreements that provide for payments in

excess of $5 million include a clause providing GAO the right to examine
Page 11 GAO-01-980T Intellectual Property

the records of participants.10 This requirement can be waived under certain

circumstances. In recommending the provision, the Senate Armed Services

Committee noted that DOD had used Section 845 authority to fund such

efforts as the billion dollar Evolved Expendable Launch Vehicle program

and a new Navy oceanographic research ship, and had sought legislation

to extend the authority to production contracts. Consequently, as the size,

costs and complexity of programs being funded using other transactions

increased, the committee wanted to ensure that GAO had audit access in

relation to the higher levels of spending and risk.

Additionally, in October 2000, Congress passed legislation that required

that a Section 845 agreement include at least one nontraditional defense

contractor participating to a significant extent in the effort; if not, at least

one third of the total cost of the project was to be provided by parties

other than the federal government.11 The requirement for cost-sharing

could be waived by DOD’s senior procurement executive. The legislation

also defined what constituted a nontraditional defense contractor and

clarified our audit access rights to exclude commercial firms who had

done business with government only under other transactions or through

cooperative agreements, and clarified the types of records to which we

had access. In recommending a similar provision, the Senate Armed

Services Committee noted it would support using Section 845 agreements

to attract companies that typically do not do business with DOD, and

encourage cost sharing and experimentation in potentially more efficient

ways of doing business with traditional defense contractors. The

committee also noted that it was important for DOD to have the flexibility

to use innovative instruments to provide access to advanced commercial

technology, but that there were improvements that could be made in

managing and overseeing Section 845 agreements.

The research and development environment has changed dramatically

over the past several decades. The government is no longer in the driver

seat, yet it still needs access to research and technology advances. At the

same time, its effort to compete for access must be balanced against a

range of commercial, economic, legal and other interests. The vehicles I’ve

discussed today are among the tools that the government can use to

attract new players to the research and development arena and to

 10 P.L. 106-65, October 5, 1999.

11 P.L. 106-398, October 30, 2000.

Conclusion
Page 12 GAO-01-980T Intellectual Property

maintain access to advances. However, effective use of these tools

requires good training and a greater exercise of reasoned discretion

among program officials and contracting officers. The Department of

Defense has taken a very good first step in developing appropriate

guidance. However, the next steps are more critical: providing the training

and assurances that the guidance will be appropriately implemented.

Mr. Chairman, this concludes our prepared statement. We will be happy to

respond to any questions you or other Members of the Subcommittee may

have.

Contact and Acknowledgment

For further information, please contact Jack L. Brock, Jr., at

(202) 512-4841 or John B. Stephenson at (202) 512-6225. Individuals

making key contributions to this testimony included Timothy DiNapoli,

Doreen Feldman, Frank Fulton, John Hunt, Shannon Luik, John Van

Schaik, Cristina Chaplain, and Karen Zuckerstein.

(120086)

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