```
                                                                 
Intellectual Property: Industry and Agency Concerns Over	 
Intellectual Property Rights (10-MAY-02, GAO-02-723T).		 
                                                                 
Improperly defined intellectual property rights in a government  
contract can result in the loss of an entity's critical assets or
limit the development of applications critical to public health  
or safety. Conversely, successful contracts can spur economic	 
development, innovation, and growth, and dramatically improve the
quality of delivered goods and services. Contracting for	 
intellectual property rights is difficult. The stakes are high,  
and negotiating positions are frequently ill-defined. Moreover,  
the concerns raised must be tempered with the understanding that 
government contracting can be challenging even without the	 
complexities of intellectual property rights. Further,		 
contractors often have reasons for not wanting to contract with  
the government, including concerns over profitability, capacity, 
accounting and administrative requirements, and opportunity	 
costs. Within the commercial sector, companies identified a	 
number of specific intellectual property concerns that affected  
their willingness to contract with the government. These included
perceived poor definitions of what technical data is needed by	 
the government, issues with the government's ability to protect  
proprietary data adequately, and unwillingness on the part of	 
government officials to exercise the flexibilities available	 
concerning intellectual property rights. Some of these concerns  
were on perception rather than experience, but, according to	 
company officials, they nevertheless influence decisions not to  
seek contracts or  collaborate with federal government entities. 
Agency officials shared many of these concerns. Poor upfront	 
planning and limited experience/expertise among the federal	 
contracting workforce were cited as impediments. Although agency 
officials indicated that intellectual property rights problems	 
may have limited access to particular companies, they did not	 
cite specific instances where the agency was unable to acquire	 
needed technology. Agency officials said that improved training  
and awareness of the flexibility already in place as well as a	 
better definition of data needs on individual contracts would	 
improve the situation.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-723T					        
    ACCNO:   A03309						        
  TITLE:     Intellectual Property: Industry and Agency Concerns Over 
Intellectual Property Rights					 
     DATE:   05/10/2002 
  SUBJECT:   Government contracts				 
	     Intellectual property				 
	     Property rights					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-02-723T
     
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. Friday, May 10, 2002
INTELLECTUAL

PROPERTY Industry and Agency Concerns Over Intellectual Property Rights

Statement of Jack L. Brock, Jr., Managing Director, Acquisition and Sourcing
Management

GAO- 02- 723T

Page 1 GAO- 02- 723T

Mr. Chairman and Members of the Subcommittee: Thank you for inviting me to
participate in today?s hearing on intellectual property. Intellectual
property represents the very essence of the creative process that results in
unique products and processes. As such, any transactions that affect the
ownership, control, or transfer of intellectual property can have enormous
implications for parties on both sides of those transactions. Improperly
defined rights to intellectual property in a government contract can result
in the loss of an entity?s critical assets or in limiting the development of
applications critical to public health or safety. Conversely, successful
contracts can spur economic development, innovation, and growth and
dramatically improve the quality of delivered goods and services.

The government acquires intellectual property in two ways. First, it
typically owns the intellectual property produced by federal employees.
Secondly, it acquires certain rights- although not necessarily ownership- of
the intellectual property produced by others under federal research
contracts, grants, and other agreements. Our statement today is largely
focused on rights to intellectual property and related data acquired through
contracts. Your charge to us, Mr. Chairman, was to determine if the
government?s ability to contract with commercial companies for goods and
services needed to support essential government services, such as homeland
security and national defense, was restricted by concerns over rights to
intellectual property.

It is clearly appropriate to address these concerns. The government?s need
for advanced technologies is growing at a seemingly exponential rate. While
the needs are growing, the government?s control over the development of the
underlying intellectual property supporting those technologies is declining.
The government is no longer the leading supplier of research and development
(R& D) dollars in the United States. While the government?s share of R& D
funding was as high as 67 percent of R& D dollars in the 1960s, its share
fell to below 47 percent in the 1980s and to 26 percent in 2000, according
to the National Science Foundation. Instead of driving research and its
outcomes, the government must increasingly rely on the commercial sector.
The government?s ability to successfully deal with issues over intellectual
property constitutes a key factor in being able to acquire the new
technologies necessary to meet increasingly sophisticated operational needs.

To address your question, we held extensive interviews with agency
officials, commercial companies, and industry associations involved in

Page 2 GAO- 02- 723T

intellectual property rights. We also analyzed agency and industry studies
on this issue as well as agency guidance and requirements.

Generally, the framework for promoting and protecting intellectual property
rights in the government has been considered a success. However, our work
revealed a broad range of concerns from both agency and industry officials.
Contracting for intellectual property rights is difficult. The stakes are
high, and negotiating positions are frequently illdefined. Moreover, the
concerns raised by both parties must be tempered with the understanding that
government contracting- especially those contracts dealing with new or large
applications or having loosely defined objectives- can be challenging even
without the additional complexities associated with intellectual property.
Further, commercial contractors often have a variety of reasons for not
wanting to contract with the government, including concerns over
profitability, capacity, accounting and administrative requirements, and
opportunity costs.

Nevertheless, our work leads us to the following observations:  First,
within the commercial sector, companies identified a number of

specific intellectual property concerns that affected their willingness to
contract with the government. These included perceived poor definitions of
what technical data is needed by the government, issues with the
government?s ability to protect proprietary data adequately, and
unwillingness on the part of government officials to exercise the
flexibilities available to them concerning intellectual property rights. We
believe some of these concerns were based more on perception than
experience, but, according to company officials, they nevertheless
influenced decisions not to seek contracts or to collaborate with federal
government entities.  Second, agency officials shared many of these
concerns. Poor upfront

planning and limited experience/ expertise among the federal contracting
workforce were cited as impediments to contracting for intellectual property
rights. However, while agency officials indicated that problems related to
intellectual property rights may have limited access to particular
companies, they did not raise or cite specific instances where the agency
was unable to acquire needed technology.  Third, there was general
agreement among agency officials that improved

training and awareness as to the flexibility already in place as well as a
better definition of data needs on individual contracts would generally
improve the situation.

Page 3 GAO- 02- 723T

Intellectual property has a broad range- anywhere from inventions, to
technological enhancements, to methods of doing business, to computer
programs, to literary and musical works and architectural drawings.
Government- sponsored research has an equally broad range- from research in
mathematical and physical sciences, computer and information sciences,
biological and environmental sciences, and medical sciences, to research
supporting military programs of the Department of Defense (DOD) and the
atomic energy defense activity of the Department of Energy. The objective of
some of this research, for example, cancer research, is to gain more
comprehensive knowledge or understanding of the subject under study, without
specific application. According to the National Science Foundation, about 3
percent of DOD?s R& D funding and 41 percent of R& D funding by other
agencies goes toward this type of study. Other research is directed at
either gaining knowledge to meet a specific need or to develop specific
materials, devices, or systems- such as a weapon system or the International
Space Station. About 97 percent of DOD?s R& D dollars and 55 percent of R& D
dollars from other agencies supports applied research.

The primary vehicles for funding research efforts are grants, cooperative
agreements, and contracts. Today, our focus is largely on intellectual
property rights that the government acquires through research done under
contracts, which primarily fund applied research.

As illustrated in the figure below, the R& D landscape has changed
considerably over the past several decades. While the federal government had
once been the main provider of the nation?s R& D funds, accounting for 54
percent in 1953 and as much as 67 percent in 1964, as of 2000, its share
amounted to 26 percent, or about $70 billion, according to the National
Science Foundation. Intellectual Property

and Its Value to Government

Page 4 GAO- 02- 723T

Figure 1: Trends in R& D Funding

Source: National Science Foundation.

Patents, trademarks, copyrights, and trade secrets protect intellectual
property. Only the federal government issues patents and registers
copyrights, while trademarks may also be registered by states that have
their own registration laws. State law governs trade secrets. Anyone who
uses the intellectual property of another without proper authorization is
said to have ?infringed? the property. Traditionally, an intellectual
property owner?s remedy for such unauthorized use would be a lawsuit for
injunctive or monetary relief. Intellectual Property

Protections and Legislation

Page 5 GAO- 02- 723T

Figure 2: Definitions of Patents, Trademarks, Copyrights, and Trade Secrets

Source: U. S. Patent and Trademark Office.

Prior to 1980, the government generally retained title to any inventions
created under federal research grants and contracts, although the specific
policies varied among agencies. Over time, this policy increasingly became a
source of dissatisfaction. First, 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 use 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 Act 1 was passed in 1980 to address these concerns by
creating a uniform patent policy for inventions resulting from federally
sponsored research and development agreements. The act applied 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.

A presidential memorandum issued to the executive branch agencies on
February 18, 1983, extended the Bayh- Dole Act to large businesses. 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. On April 10,
1987, the president issued Executive Order 12591, which, among

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).

Page 6 GAO- 02- 723T

other things, required executive 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 3: Highlights of Requirements

The contractor or grantee must disclose to the appropriate 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.

In addition to the traditional categories of intellectual property
protections, government procurement regulations provide a layer of rights
and obligations known as ?data rights.? These regulations describe the
rights that the government may obtain to two types of data, computer
software and technical data, delivered or produced under a government
contract. These rights may include permission to use, reproduce, disclose,
modify, adapt, or disseminate the technical data. A key feature of the DOD
framework for data rights, and one implicit in the civilian agency
framework, is that the extent of the government?s rights is related to the
degree of funding the government is providing. 2

2 For a contract with DOD, the Defense Federal Acquisition Regulation
Supplement (DFARS) contains the applicable data rights framework. The
Federal Acquisition Regulation (FAR) provides the framework for civilian
agencies and the National Aeronautics and Space Administration.

Page 7 GAO- 02- 723T

Figure 4: Highlights of Technical Data Requirements DOD Framework

Type of Data Rights Definition Applies to Unlimited Rights Right to use and
disclose

the data publicly, in any manner and for any purpose and to permit others to
do so.

Data created exclusively with government funds and certain types of other
data delivered to the government regardless of funding. Government Purpose
Rights Right to use or disclose

within the government without restriction or disclose to third parties for
government purposes only. Third parties cannot use the data for commercial
purposes.

Data developed with a mix of government and private funds.

Limited Rights Right to use or disclose data internally. No disclosure to
third parties without written permission except under limited conditions (e.
g., emergency repair)

Data pertaining to items, components, or processes developed at private
expense.

Civilian Agency Framework

Unlimited Rights Right to use and disclose the data publicly, in any manner
and for any purpose and to permit others to do so.

Data first produced or delivered in the performance of the contract; form,
fit and function data; and data needed for repairs or maintenance.
Negotiated Rights a Right to use data for

agreed- to governmental purposes. Other rights may be tailored as needed and
negotiated.

Data developed with a mix of government and private funds.

Limited Rights Right to use or disclose internally. Cannot disclose outside
the government without permission except for certain agreed- on purposes.

Data (other than computer software) developed at private expense that embody
trade secrets, or are commercial or financial and confidential or
privileged. a The term ?negotiated rights? does not actually appear in the
Federal Acquisition Regulation.

However, the regulation allows for the tailoring of rights for cosponsored
research and development activities.

In some cases, the government may decide that it is in its best interest to
forgo rights to technical data. For example, if the government wants to
minimize its costs of having supercomputers developed exclusively for

Page 8 GAO- 02- 723T

government use, it could waive its rights in order to spur commercial
development. At the same time, situations arise where the government has a
strong interest in obtaining and retaining data rights- either unlimited
rights or government- purpose rights. These include long- term projects,
such as cleanup at nuclear weapon sites, where the government may want to
avoid disrupting the program if a change in contractors occurs. These also
include projects that affect safety and security. For example, the
Transportation Security Administration recently purchased the data rights
for an explosives detection system manufactured by one company. The agency
believed data rights were necessary in order to expand production of these
machines and meet the congressionally mandated deadline for creating an
explosives detection capability at airports.

We contacted multiple agencies responsible for $191 billion or 88 percent of
federal procurements in fiscal year 2001. 3 At these agencies, we met with
those officials responsible for procurement, management and oversight of
contractor- derived intellectual property. We also analyzed agency and
industry studies as well as agency guidance and requirements. In addition,
we met with representatives from (1) commercial enterprises that either
contract with the government or develop technologies of interest to the
government as well as (2) associations representing commercial firms doing
business with the government.

Both industry and agency officials covered by our review had concerns about
the effectiveness and the efficiency of successfully negotiating contracts
with intellectual property issues. These concerns include a lack of good
planning and expertise within the government and industry?s apprehensions
over certain government rights to data and inventions as well as the
government?s ability to protect proprietary data.

Industry officials were particularly concerned about the span of rights the
government wants over technical data. Industry officials asserted that
rather than making a careful assessment of its needs, some contracting
officers wanted to operate in a ?comfort zone? by asking for unlimited
rights to data, even when the research built on existing company

3 These included major participants in R& D efforts at the Defense
Department, such as the Defense Advanced Research Projects Agency, the Army,
the Air Force and the Navy, and civilian agencies such as the National
Aeronautics and Space Administration, the Department of Energy, the National
Institutes of Health, the General Services Administration, and the
Departments of Justice and Transportation. Agency and

Commercial Sector Concerns over Intellectual Property Rights

Page 9 GAO- 02- 723T

technology. This was disconcerting to potential contractors because it meant
that the government could give data to anyone it chose, including potential
competitors. Some companies mentioned specific instances in which they
delayed or declined participation in government contracts. These situations
occurred when companies believed their core technologies would be at risk
and the benefits from working with the government did not outweigh the risk
of losing their rights to these technologies.

Most agency officials said that intellectual property issues were at times
hotly contested and could become the subject of intense negotiations. While
agency officials indicated that problems related to intellectual property
rights may have limited access to particular companies, they did not raise
or cite specific instances where the agency was unable to acquire needed
technology. In some situations, agencies exerted flexibility to overcome
particular concerns and keep industry engaged in research efforts.

DOD officials viewed intellectual property requirements and the manner in
which these requirements are implemented as significantly affecting their
ability to attract leading technology firms to DOD research and development
activities. This concerns DOD, which believes it needs to engage leading
firms in joint research efforts in order to promote development of
commercial technologies that meet military needs.

Last, agency officials, particularly DOD officials, voiced concerns about
having access to technical data necessary to support and maintain systems
over their useful life as well as the ability to procure some systems
competitively, especially smaller systems. These officials stated that if
they did not obtain sufficient data rights, they could not use competitive
approaches to acquire support functions or additional units. We have
reported 4 on the difficulties that occurred when appropriate data rights
were not obtained. In one instance, when the Army tried to procure data
rights later in the system?s life cycle, the manufacturer?s price for the
data was $100 million- almost as much as the entire program cost ($ 120
million) from 1996 through 2001. We have recommended, among other things,
that DOD place greater emphasis on obtaining priced options for

4 U. S. General Accounting Office. Defense Logistics: Opportunities to
Improve the Army?s and Navy?s Decision- making Process for Weapons Systems
Support, GAO- 02- 306, (Washington, D. C., February 2002).

Page 10 GAO- 02- 723T

the purchase of technical data at the time proposals for new weapon systems
are being considered- when the government?s negotiating leverage is the
greatest.

Figure 5: Specific Concerns Cited By Agency and Industry Officials Agency
Industry

Limited awareness of flexibilities and expertise. Contracting and
programming officials are not always aware of options they have in
negotiating rights to intellectual property. They also do not adequately
define data requirements.

Limited awareness of flexibilities and expertise. Government contracting and
programming officials are not always aware of options they have in
negotiating rights to intellectual property. They also do not adequately
define their data requirements. The government?s fallback position, or
?comfort zone? is to resort to standard clauses. Unlimited rights or even
government- purpose rights can dissuade companies from participating in
contracts because it raises the possibility that sensitive data will end up
with competitors.

Concerns over perceived risks. Industry perceives risks that sometimes limit
their participation in contracts. These involve requirements related to
patentable inventions, including

?march- in rights,? the definition of subject inventions, and protection of
trade secrets.

Apprehensions over the government?s ?march- in rights.? Inventions coming
out of federally funded research become the property of the contractor;
however, the contractor must attempt to commercialize the invention. If the
contractor breaches this obligation, the government may ?march in? and grant
a license to a third party to use the patent. This action may also be taken
to alleviate health and safety concerns. While ?march- in rights? have
reportedly never been exercised, some companies claim these rights deter
them from doing business with the government.

Apprehensions about the definition of ?subject invention.? Industry was
concerned that this provision could mean that the government could have
rights to inventions that get to the company?s core technology. This
particular concern caused some companies to decide not to engage in
government- sponsored research at all.

Concerns about protecting trade secrets. There is some information companies
may want to keep secret to maintain an advantage over competitors. Yet the
Bayh- Dole Act requires companies to disclose to the government inventions
created with federal funds.

Projects involving multiple parties can be difficult. Projects involving
multiple parties may also complicate negotiations because of competing
interests for intellectual property rights.

Projects involving universities can be difficult. Universities may demand
patent rights that industry is not willing to give up.

Cumbersome agency processes. Agencies have cumbersome acquisition processes,
which lengthen contract negotiations. The rapid pace of technological change
and advances demand quicker turnaround times. Otherwise, industry will lose
its competitive advantage.

Inadvertent disclosure of proprietary data. Research projects often involve
a range of contractors- some that work in a research capacity and others
that work to support management, contract, or logistics- related functions.
The concern of companies responsible for research is that their data will be
improperly disclosed to or misused by these other contractors, or even the
public. This could be the fault of either the government or the company
itself for not properly marking data as proprietary. In either case, if the
data is inadvertently disclosed, there is no remedy, and the company?s
intellectual capital may be devalued.

Page 11 GAO- 02- 723T

Agency officials we spoke with generally agreed that some actions could be
taken to address concerns about limited awareness of flexibilities and
expertise without any legislative changes. Specifically, agencies could
promote greater use of the flexibilities already available to them. DOD, for
example, is advocating greater use of its ?other transaction authority.?
This 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. By using this authority, where
appropriate, DOD can increase its flexibility in negotiating intellectual
property provisions and attract commercial firms that traditionally did not
perform research for the government.

A second example of agency flexibility to address industry concerns over the
allocation of rights under the Bayh- Dole Act is a form of waiver, known as
a determination of exceptional circumstances. This waiver has been used, for
example, to work out intellectual property rights between pharmaceutical
companies and universities or other firms. In these cases, pharmaceutical
companies provide compounds that NIH tests to identify whether these
compounds are effective in treating additional diseases or ailments.
Universities and other commercial firms perform these tests. The exceptional
circumstances determination allows the pharmaceutical companies to retain
the intellectual property rights to any discoveries coming out of these
tests, rather than the performer of the tests. An NIH official explained
that a determination of exceptional circumstances could be made in these
cases because the program would not exist in the absence of such a
determination.

Agencies could also strengthen advance planning on data requirements. For
example, attention needs to be paid to what types of maintenance or support
strategies will be pursued and what data rights are needed to support
alternative strategies. Also, consideration could be given to obtaining
priced options for the purchase of data rights that may be needed later.

Moreover, agencies could provide guidance on intellectual property issues to
alert the workforce of potential concerns and solutions. Last year, for
example, DOD issued an intellectual property guide that 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, and 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. Lastly, agencies could undertake training and Actions that Can
Be

Taken to Address Concerns

Page 12 GAO- 02- 723T

outreach programs to reinforce their guidance and further develop workforce
expertise. DOD, for example, is developing training targeted at contracting
officers and attorneys.

More substantive action may be warranted, but not without more in- depth
examination of specific impediments cited by industry, the effectiveness of
flexibilities already available, and the potential impact of suggested
changes. The current framework, anchored by the Bayh- Dole Act, has
generally been considered a success story in leading to greater
commercialization of federally sponsored research. Further, more recent
additions to that framework, such as DOD?s other transaction authority, can
serve as models for enhancing government?s contracting flexibility in
attracting commercial firms that traditionally have not worked for the
government.

The challenge to address is not whether the government should have rights,
but rather what rights it should hold, when these rights should be
exercised, and what authority should be granted to waive these rights when
it is in the best interest of the government.

Mr. Chairman, this concludes my statement. I would be happy to answer any
questions that you or members of the subcommittee may have.

Contact and Acknowledgement

For further information, please contact Jack L. Brock, Jr., at (202) 512-
4841. Individuals making key contributions to this testimony include
Cristina Chaplain, Frank Fulton, John Hunt, Lorene Sarne, Christina Sklarew,
Ralph White, and Karen Zuckerstein,

(120139)
*** End of document. ***
```