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INTELLECTUAL PROPERTY AND GOVERNMENT

R&D FOR HOMELAND SECURITY

HEARING

BEFORE THE

SUBCOMMITTEE ON TECHNOLOGY AND

PROCUREMENT POLICY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MAY 10, 2002

Serial No. 107–181

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON TECHNOLOGY AND PROCUREMENT POLICY

THOMAS M. DAVIS, Virginia, Chairman

JO ANN DAVIS, Virginia

STEPHEN HORN, California

DOUG OSE, California

EDWARD L. SCHROCK, Virginia

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

MELISSA WOJCIAK, Staff Director

VICTORIA PROCTOR, Professional Staff Member

TEDDY KIDD, Clerk

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on May 10, 2002 ............................................................................... 1

Statement of:

Brock, Jack, Director, Acquisition and Sourcing Management, U.S. General Accounting Office; Anthony J. Tether, Director, Defense Advanced

Research Projects Agency; and Ben Wu, Deputy Under Secretary for

Technology, Technology Administration, Department of Commerce ........ 9

Louie, Gilman, president and CEO, In-Q-Tel; Richard Carroll, chairman,

Small Business Technology Coalition, president, DSR, Inc.; Stanley

Fry, director, contracts & legal affairs, Eastman Kodak Co.; and Stan

Soloway, president, Professional Services Council ..................................... 57

Letters, statements, etc., submitted for the record by:

Brock, Jack, Director, Acquisition and Sourcing Management, U.S. General Accounting Office, prepared statement of ........................................... 12

Carroll, Richard, chairman, Small Business Technology Coalition, president, DSR, Inc., prepared statement of ....................................................... 75

Davis, Hon. Thomas M., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 4

Fry, Stanley, director, contracts & legal affairs, Eastman Kodak Co.,

prepared statement of ................................................................................... 84

Louie, Gilman, president and CEO, In-Q-Tel, prepared statement of ......... 61

Soloway, Stan, president, Professional Services Council, prepared statement of ........................................................................................................... 93

Tether, Anthony J., Director, Defense Advanced Research Projects Agency, prepared statement of ............................................................................. 42

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 7

Wu, Ben, Deputy Under Secretary for Technology, Technology Administration, Department of Commerce, prepared statement of ....................... 31

(1)

INTELLECTUAL PROPERTY AND GOVERNMENT R&D FOR HOMELAND SECURITY

FRIDAY, MAY 10, 2002

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TECHNOLOGY AND PROCUREMENT

POLICY, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2154, Rayburn House Office Building, Hon. Thomas M. Davis

(chairman of the subcommittee) presiding.

Present: Representatives Tom Davis of Virginia, Jo Ann Davis of

Virginia, Horn, and Turner.

Staff present: George Rogers, Chip Nottingham, and Uyen Dinh,

counsels; Victoria Proctor, professional staff member; John

Brosnan, GAO counsel; Teddy Kidd, clerk; Mark Stephenson, minority professional staff member; and Jean Gosa, minority assistant clerk.

Mr. TOM DAVIS OF VIRGINIA. Good morning. I want to welcome

everybody to today’s oversight hearing on intellectual property and

government procurement of research and development. Acquisition

legislation in the 1990’s streamlined and improved the procurement process. Unfortunately, 92 percent of the Fortune 500 industrial do little or no R&D for the government, and the Wall Street

Journal reports that three-fourths of the country’s top 75 information technology companies refused to do research for the government because of the intellectual property and red tape concerns.

Moreover, none of the firms that plays a valuable role for our Nation as traditional defense contractors are among the companies

that each year receive the most number of patents. While agencies

continue to find companies that will do R&D without negotiating

on IP, the question that needs to be addressed is why the leadingedge innovative companies are refusing to participate.

During the cold war and space race years, the government in

general and the Pentagon in particular drove R&D. While the

President has increased R&D spending in the fiscal year 2003

budget, recent trends indicate the private sector’s investment is

much greater than the Federal Government’s. According to the National Science Foundation, the Government share of R&D funding

was 67 percent in the 1960’s; 47 percent in the 1980’s; and 26 percent in 2000.

In an environment where private sector R&D spending accounts

for almost three-fourths of the total spent in the United States, the

Government’s role has changed to become a partner in innovation

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rather than the sole driving force. Because intellectual property

rights are the most valued assets of companies, the government

must ensure that its policies and procedures reflect this partnership for innovation.

Agencies have recognized the need to address IP rights as a precursor to ensuring access to the very best technologies. For example, the Department of Defense published a guide for the acquisition community entitled Intellectual Property, Navigating Through

Commercial Waters. This guide was a good first step. However, evidence presented to the subcommittee’s July 2001 hearing showed

that the treatment of intellectual property rights in government

R&D can be an impediment to taking the best innovations possible.

After September 11th, there has been a dramatic realignment in

the mission of government. The first priority of the Nation has become homeland security. To win this fight, the government must be

able to prevent, detect, and respond to terrorist activity. We also

must be ready to manage the consequences of future attacks, treat

casualties, and protect critical infrastructure. R&D will play a critical role in our ability to generate the new ideas and the innovations needed to win the war on terror and to move the Nation forward.

Technology now accounts for 50 percent of the Nation’s long-term

growth. And as the Federal Reserve chairman Alan Greenspan has

recognized, information technology and intellectual property have

played a substantial role in the remarkable U.S. productivity gains.

The Government is challenged today to find ways to entice innovative companies into collaborating with it on vital R&D and information technology efforts.

In addition, it is important for the Government to recognize that

the treatment of intellectual property rights will greatly impact the

viability of competing alternatives for any government contract as

well as the implementation of leading-edge innovation.

Intellectual property and research and development procurement

are both very complex subjects, and the Government’s new role as

a partner in innovation, contracting officers, program managers

agency legal staff all need to understand how flexibilities for the

treatment of intellectual property can be used to attract and retain

the leading-edge companies. Today’s hearing will examine public

and private sector views on intellectual property and research and

development issues. It will also explore the experiences of successful R&D organizations such as DARPA, In-Q-Tel and others for lessons that can be learned and problems that need to be addressed

in the procurement of government R&D and IT.

The subcommittee will hear testimony today from Mr. Jack

Brock, the Managing Director for Acquisition and Sourcing Management at the U.S. General Accounting Office. Mr. Ben Wu, Deputy Undersecretary for Technology at the Department of Commerce; and Dr. Anthony Tether, Director of the Defense Advanced

Research Projects Agency [DARPA].

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On the second panel, we’re going to hear from Gilman Louie,

president and CEO of In-Q-Tel. Mr. Richard Carroll, legislative

chairman of the Small Business Technology Coalition and president of DSR, Inc. Mr. Stanley Fry, director of contracts and legal

affairs at the Eastman Kodak Co.; and Mr. Stan Soloway, the

president of the Professional Services Council.

[The prepared statement of Hon. Thomas M. Davis follows:]

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Mr. TOM DAVIS OF VIRGINIA. I now yield to Congressman Turner

for any opening statement he may wish to make.

Mr. TURNER. Thank you, Mr. Chairman. Our purpose, of course,

today, is to examine the nexus between intellectual property and

procurement. The underlying issue is whether current intellectual

property laws and practices prevent the Federal Government from

gaining access to the very best and most up-to-date technological

advances. As the hearing’s title suggests, this issue is particularly

important when considered in the context of our current war on

terrorism. If the government’s intellectual property laws are inhibiting agencies from gaining access to advanced R&D needed for

homeland security, that is something we need to know about, and

I look forward to hearing from our witnesses.

The world of research and development obviously has changed

dramatically since the 1980’s when most of the Federal laws governing access to intellectual property were written. Today the Federal share of R&D spending is much less than, and private sector

spending is much more than it was then. While the trend has

clearly been for greater private sector R&D funding, it is important

to remember that the Federal Government still spends up to $70

billion on research and development. Expanding the use of socalled other transactions to civilian agencies is one approach that

has been suggested to increase flexibility in addressing intellectual

property concerns.

While I do have an open mind on the subject, I do not feel the

case has been made to date that civilian agencies need other transaction authority. It would be interesting to hear from our witnesses

regarding this issue. Other transactions authority was originally

designed to attract nontraditional defense contractors who did not

want to enter into contracts in part because of concerns about how

intellectual property rights were treated. Unfortunately, other

transactions do not seem to have achieved this goal.

As the Department of Defense Inspector General reports, 95 percent of the money for other transactions from 1994 to 2001 went

to traditional defense contractors. I believe we must be cautious

about expanding the use of this authority since it eliminates many

of the safeguards of Federal procurement law.

Current law and regulation was designed to strike a delicate balance between the needs and the rights of government as representatives of the people and those of private industry. We need to examine the sometime conflicting priorities in prospective as we examine these issues. I look forward to hearing from all of our witnesses, and I thank the chairman for calling this hearing on this

very important issue. Thank you, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Thank you very much.

[The prepared statement of Hon. Jim Turner follows:]

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Mr. TOM DAVIS OF VIRGINIA. Mr. Horn, you have no opening

statement? OK.

I would now call our first panel to testify. Mr. Brock, Mr. Wu and

Dr. Tether. As you know, it’s the policy of this committee that all

witnesses be sworn before you testify. If you would please rise with

me and raise your right hand.

[Witnesses sworn.]

Mr. TOM DAVIS OF VIRGINIA. Thank you very much. Please be

seated. To afford sufficient time for questions, if you’d try to limit

your comments to 5 minutes. We’ve got a goal to move this along

today.

We’ve read the testimony, and we’ll have questions ready for

that. So you can just highlight that. And all of the written statements are going to be made part of the permanent record. We’ll

start with Mr. Brock, and then Mr. Wu and then Dr. Tether.

Thank you, and thanks for being with us, Mr. Brock.

STATEMENTS OF JACK BROCK, DIRECTOR, ACQUISITION AND

SOURCING MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE; ANTHONY J. TETHER, DIRECTOR, DEFENSE ADVANCED

RESEARCH PROJECTS AGENCY; AND BEN WU, DEPUTY

UNDER SECRETARY FOR TECHNOLOGY, TECHNOLOGY ADMINISTRATION, DEPARTMENT OF COMMERCE

Mr. BROCK. Thank you very much, Mr. Davis. Good morning Mr.

Turner, Mr. Horn as well. As my statement today is largely focused

on rights to intellectual property and related data acquired through

contracts——

Mr. TOM DAVIS OF VIRGINIA. You need to turn your microphone

on.

Mr. BROCK. OK. Is this better? I think it is on.

Mr. BROCK. OK.

Mr. TOM DAVIS OF VIRGINIA. It should sound like this. Move it

closer to you.

Mr. BROCK. No, it is not on.

Mr. TOM DAVIS OF VIRGINIA. This is the technology policy committee. This is just unacceptable. Can you see—one of our leading

technical experts is going to be coming up here. Try it now.

Mr. BROCK. OK. Can you hear me, sir? Now, I notice I’ve already

used a minute and 10 seconds. I hope——

Mr. TOM DAVIS OF VIRGINIA. Unanimous consent you’ll be able

to start again.

Mr. BROCK. Thank you.

Mr. TOM DAVIS OF VIRGINIA. We’ll take that out of Mr. Turner’s

time. No problem.

Mr. BROCK. Well, thank you again for inviting us to testify here

today. The flow of technology from the commercial sector to government applications is frequently a source of real tension. A concern

on both the part of the commercial entities as well as the government agencies. Your subcommittee did ask us to look at this a

while ago, and I’m pleased to report back to the subcommittee with

our results. And as you indicated, I will briefly summarize my

statement. And in doing so, I’d really like to cover four basic points.

First, what is the nature of the concern, and is it a real concern?

Second, what are the challenges or underlying problems which reVerDate 11-MAY-2000 08:35 Jul 14, 2003 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 D:\DOCS\85839.TXT HGOVREF1 PsN: HGOVREF1
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quire action? Third, what, if any, are the implications that might

arise or continue if these concerns aren’t addressed? And fourth,

what are some of the options you might have for moving forward?

To address the first point. The current concern is real and it is

derived from an inherent tension between government needs and

commercial entities’ fears. The tension arises from the government’s very real need for rights to intellectual property and data

that is necessary to provide critical services and to meet program

objectives. These rights were a lot easier to secure when the government funded most of the R&D. They flowed naturally from that

funding. However, as you mentioned in your opening statement,

now that the government’s R&D spending, while still substantial,

no longer is predominant, the rights are no longer as free-flowing,

and as such, the government has an increasing need to negotiate

for rights to commercially generated technology. And this trend is

only going to increase. It’s going to become more of an issue rather

than less of an issue.

At the same time, the intellectual property sought by the government represents the very lifeblood of the commercial companies, its

crown jewel, so to speak. The companies don’t always trust the government’s intentions, nor its ability to protect the data associated

with intellectual property.

The second point I wanted to make are what are the underlying

issues that really represent the barriers to most effectively meeting

the government’s needs? Agencies—the agencies we went to, and

we covered almost all of the agencies doing over 90 percent of the

R&D in the government, had three concerns. Its first and most

prevalent was they felt that there was a lack of awareness and/or

willingness within their own agency to take advantage of flexibilities that are already in place. This was the biggest problem. Second, they felt that there was perceived risk—I want to emphasize

that word ‘‘perceived risk’’ on the part of commercial companies

largely associated with Bayh-Dole, which limit their willingness to

participate in government contracts or in development efforts.

And finally, there were concerns that both they and the commercial sector had in dealing with multiple parties, such as subcontractors or universities where they—the data rights or the patent

rights were not always clear-cut.

Commercial companies identified some concerns that were really

very similar. First of all, they also identified a lack of understanding or an unwillingness to use flexibilities that were available.

They frequently stated, or used the term a ‘‘comfort zone,’’ that government contractors would get in, an unwillingness to go beyond

that comfort zone. Second, they had a more defined, not a perceived

concern over certain Bayh-Dole provisions, such as march-in rights

or the definition of what a subject invention was.

Third, cumbersome agency processes and procedures were perceived as barriers. And fourth, very strong concerns over the span

of rights the government wants over technical data and equal concerns over the government’s protection of proprietary data.

The third point I wanted to make today are the implications of

these concerns, and before getting into these implications, I do

want to emphasize that no agency official raised or cited a specific

instance where they did not have access to commercial technology

11

they felt that they needed. But nevertheless, there are some implications from this, the most simple ones, that if you don’t really

have a well-defined way of acquiring intellectual property rights,

you may buy more than you need. And that’s that comfort zone

question, well, we’re not sure we’re going to need. Let’s buy everything. If you do that, you’re going to pay too much.

On the other hand, if you don’t buy enough, you may be getting

what seems to be a good price now, but you’re going to pay for it

later when you have to go back and secure the data rights you

might need to maintain a particular system.

But the most important concern—and this was one that was

raised more by DOD than by any other agency—was their concern

that they weren’t able to attract some of the leading technology

companies that they would like to have involved in ongoing research and application development. And the problem with this is

to the extent that companies may not choose to participate in Federal contracting, the government may not get the best solution, or

it may not get the best pricing and that is the real implication from

this.

This brings me to the final point, Mr. Chairman, and that is the

options for moving forward. The first step I think is pretty obvious,

that agencies clearly need to define their intellectual property and

data needs and use the available flexibilities they already have to

meet these needs. And I don’t think this is a very simple, or it

would already be done and you wouldn’t have to have the hearing

this morning. Tools such as the Defense’s intellectual property

guide that you referred to are excellent, both as a reference and a

how-to guide. The problem resides in getting the right people to effectively use the tool, and that has been the issue to date. More

substantive action may be warranted, but not without more indepth examinations of the specific impediments that were cited by

both the industry and the agencies and the effectiveness of flexibilities already available and the potential impact of any suggested

changes.

The current framework anchored by the Bayh-Dole Act has generally been considered to be a success story and leading to greater

commercialization of federally sponsored research. And more recent

additions to that framework, such as DOD’s other transaction authority, can serve as potential models for enhancing the government’s contracting flexibility in commercial firms that traditionally

have not worked for the government.

But in conclusion, the challenge here is to address 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’s in the

best interest of the government. That concludes my summary.

Mr. TOM DAVIS OF VIRGINIA. Thank you very much.

[The prepared statement of Mr. Brock follows:]

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Mr. TOM DAVIS OF VIRGINIA. Mr. Wu, thanks for being with us.

Mr. WU. Good morning, Chairman, Ranking Member Turner and

members of the subcommittee. I’m pleased to be here with you

today to discuss the Department of Commerce initiatives on government research and development and intellectual property

rights, especially relating to the transfer of government technology

to the private sector for commercialization, which we commonly

refer to as technology transfer. I commend you for your leadership

on this issue and for holding this hearing. It’s particularly relevant

as our Nation has been marshalling our R&D resources to winning

the war on terrorism and protecting our homeland security and defense.

The Department of Commerce, through our Technology Administration, has specific roles and responsibilities in the areas of technology transfer, particularly through our Office of Technology Policy, OTP. As the agency that represents industry, the Department

serves as the administration’s main focal point for the discussion

of technology transfer issues. Our OTP coordinates and works

closely with the Interagency Working Group on Technology Transfer. It’s a group of technology transfer managers from all the Federal agencies.

With OTP leadership, this working group discusses a wide range

of agency activities and issues related to technology transfer, recommends policies and coordinates the submission of congressional

reports. In our role as the coordinator and leader of the Interagency Working Group, OTP has crafted administration support for

a number of technology transfer-related provisions and legislation,

including the most recently passed Technology Transfer Commercialization Act of 2000.

As the administration considers ways to improve the efficiency

and speed of technology transfer, the Interagency Working Group

will continue to be a strong asset in organizing consultations with

private and public technology transfer organizations, coordinators,

identifying recommendation and also prioritizing appropriate administrative and regulatory action.

The Working Group is aware of the changing landscape of the

Federal research and development. As you said, Mr. Chairman,

there has been a great change in our Federal R&D. And our Federal Government is no longer the primary driver for U.S. science

and technology investment. It has become the private sector, and

as a result, we must pay greater attention to how technology gets

developed and how the results of research and technology make

their way to the marketplace, including the important impact of intellectual property rights in these priorities, especially from a technology transfer vantage point.

Technology transfer tools, such as cooperative research development agreements [CRADA’s], and patent licensing, are relatively

simple ways for U.S. businesses to develop federally funded innovations into commercially useful products and processes. And Congress has led the way in technology transfer. As you know, Mr.

Chairman, I had the pleasure of working with Congresswoman

Morella, who was the sponsor of two significant technology transfer

laws affecting CRADA’s and technology licensing, as well as your

former committee, the House Science Committee, which helped creVerDate 11-MAY-2000 08:35 Jul 14, 2003 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 D:\DOCS\85839.TXT HGOVREF1 PsN: HGOVREF1
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ate in 1980 the most seminal technology transfer laws, the Stevenson-Wydler Innovation Act and the Bayh-Dole Act.

The manner in which the Federal Government works with the

private sector in developing and distributing technologies changed

fundamentally with the passage of Stevenson-Wydler and BayhDole. The agencies in the private sector began to find ways to partner in the development of technologies that both furthered agency

missions and advanced competitiveness of industry and the overall

strength of our economy. And as a result, Federal tech transfer has

developed everyday products such as GPS, the HIV home test kits,

stronger materials for more fuel-efficient cars; hybrid corn, that are

more resistant to drought and disease. And these are just few of

the many hundreds of examples of technologies that the Federal

Government originally held intellectual property title to and either

licensed out the technology or have collaborated with industry to

commercialize.

And through the years, Congress based on inputs elicited from

industry and working also with our Interagency Working Group

has attempted to improve and streamline the technology transfer

process, because it’s clear for a strong and effective research and

development enterprise, we need to partner with the three entities

that perform research and development in this Nation, and they

are the Federal Government, universities and industry.

And for effective commercialization of a new innovation or technology, industry must be given adequate incentives to bring a product to the marketplace. For commercialization to be appropriately

incentivized, industry needs to have sufficient intellectual property

rights and a procedure that is as streamlined and impediment-free

as possible. And that is precisely what Congress tried to do in your

most recent consideration of technology transfer laws in consultation with our Working Group.

For CRADAs, for example, originally the law was designed to

protect a great deal of flexibility for intellectual property rights,

but then they found out that in negotiations with CRADA’s, which

are essentially contracts, that it became too cumbersome. There

wasn’t a uniform standard for intellectual property rights, and so

a law was passed in 1995, the National Technology Transfer Advancement Act, that provided for exclusive license in the field of

use for a CRADA, and that helped provide some uniformity and

certainty for intellectual property rights. And this also helped decrease the time and effort acquired in negotiation that hindered

collaboration by private sectors at Federal laboratories.

And the same was the case with the Bayh-Dole Act with technology licensing. There was such a long laborious negotiation and

process time for a company to license at the Federal laboratory,

that the Technology Transfer Commercialization Act of 2000 helped

to streamline these efforts. So it’s clear that we need to remove the

procedural obstacles, and to the greatest extent possible, within the

public interest, the uncertainty involved in the licensing and also

the collaboration of working with Federal partners. And given the

importance and the benefits of technology transfer, the Department

of Commerce has assisted Congress to refine the technology transfer process, facilitate greater university, government and industry

collaboration. And as a result, the ability of the United States to

30

compete has been strengthened and a new paradigm for greater

collaboration among the scientific enterprises has been created.

We look forward to working with you, Mr. Chairman, and the

members of the committee, in our Interagency Working Group to

try to improve and enhance the technology transfer law so that we

can meet the national priorities at hand. Thank you very much.

Mr. TOM DAVIS OF VIRGINIA. Thank you very much.

[The prepared statement of Mr. Wu follows:]

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Mr. TOM DAVIS OF VIRGINIA. Dr. Tether. Thanks for being with

us.

Mr. TETHER. Thank you, Chairman Davis, Congressman Turner

and Horn. I’m pleased to be here. I’m Tony Tether, director of

DARPA, which is the Secretary of Defense’s corporate research center, is one way to look at us.

I’m not an expert on IP. However, I’ve had experience at industry

both at Ford where I was the chief technology officer in using patents as a measure of success through the internal IR&D program,

and also at DARPA, where we constantly worry about maintaining

IP rights and bringing in firms that might not want to do business

with us.

In general, the existing policies for allocating IP created under

Bayh-Dole works reasonably well. Companies that are used to

working with the government are typically comfortable with the

policies. But that doesn’t mean that everything is perfect. The policies and their complexity worry people who are unfamiliar with the

government.

Bayh-Dole is uniform, which is good. You know how somebody is

going to apply it. But it is inflexible, which is bad. The terms and

conditions are largely defined by regulations. And you can’t negotiate different terms, even if you think they would be sensible.

DARPA and the services have funding instruments called Other

Transactions that allow us to avoid these problems in some cases.

Basically, I agree with Congressman Turner that Other Transactions, which were designed to bring in nontraditionals, on the

surface appears that all you’re really doing is going to people who

most certainly know how to deal with the FARS. Since I’m not sure

95 percent—I accept your number of 95 percent, but I do know it’s

a large number. But the real value of the Other Transactions is

what it allows us to do with the prime contractors who are used

to dealing with the government is to avoid the flow-down provision.

In other words, we allow them to go out to the small firms in

their area and not have to flow down Bayh-Dole so they could possibly bring in people who have a product and have research ongoing and have them enter into a research with the company without

the small supplier—small business worry that for 50K they’re

going to lose all of their intellectual property rights to the government.

If we didn’t allow this flow-down, then the prime contractor

would have to flow down Bayh-Dole to those small companies. It

appears basically that is the strongest advantage we have of having the OT efforts with respect to intellectual properties, allowing

the primes to not have to flow down the Bayh-Dole provisions,

when it makes sense to not do so, and thereby bringing in small

firms that otherwise would not want to deal with them.

I know that from my own personal experience with Ford, that

there were many small companies that we really just wanted a little bit of help, but they were concerned about doing anything with

this, if it meant that they had to enter into provisions as to what—

who would own what they—what they learned on that little piece

of effort, because all of their other intellectual property was now

put at risk because of the difficulties separating what you knew before and after.

41

In short, we do believe that our flexibility in IP and other issues

through the OT system have really helped us deal with people we

otherwise couldn’t deal with. So with the OT provisions at DARPA,

I do feel that we do have the flexibility to reach out and bring in

nontraditional firms directly as primes, and even in those cases

where we don’t reach out and have nontraditional—we have a

prime contractor, a typical defense firm, by allowing them to not

have to flow down—that the flexibility has really been great.

At our place speed is everything. We basically have an organization that is based upon two premises, replenishment and innovation. We do that by basically having people replenished at the rate

of 25 percent a year. Everyone turns over at DARPA about 4 or 5

years. And also speed of execution. And by having the capability

to have Other Transactions, we are able to get to contract with

firms, both nontraditionals who we would never get the contract

with, and also prime contractors that normally deal with the FAR

much faster than we otherwise would have to. We don’t force them

to have to go and form a separate company, a joint venture, which

takes time, which they all would have to do, and so the other

transactions allow a great deal of flexibility in that regard.

And with that, I’ll be happy to take any questions.

[The prepared statement of Mr. Tether follows:]

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Mr. TOM DAVIS OF VIRGINIA. Thank you very much. Let me start

the questioning with Mr. Horn, then Mr. Turner, then Mrs. Davis.

Mr. HORN. Mr. Brock, in your review for the GAO in the BayhDole Act on exceptional circumstances, what, if anything, did you

see was not really an exceptional circumstance? Can you give me

a feel for whether that clause needs to be expanded more or not?

Mr. BROCK. The exceptional circumstances under Bayh-Dole in

our review, we found very few actually, and the ones that were

pointed out to us seemed to be appropriate. Just by way of a little

bit of background, under Bayh-Dole the company—the commercial

company keeps the patent rights, and the government has the license rights to it for government use. The government can waive

that so that the commercial company does not get the patent.

Where that has been useful has been particularly at NIH, is when

a pharmaceutical company has a drug that they’re testing through

NIH, and NIH, in turn, contracts with the university or a private

lab to test that drug. If they, in turn, develop a new use for the

drug, under Bayh-Dole, they would have rights to the patent for

that. Well, that’s a disincentive to the pharmaceutical company for

wanting to do the—to do any kind of testing at all with NIH.

So by having this declaration, NIH removes the patent rights

from the research lab or the testing lab, and those rights would revert back to the pharmaceutical company. So in the examples that

we identified, that declaration worked very well. We did not see—

I’m not saying there are no bad examples, but in our review, we

did not come across any of those. It’s not widely used.

Mr. HORN. Mr. Tether, you’ve got quite a record in the private

sector. Looking at this type of exceptional bit, should it be changed

in any way, or is it OK now?

Mr. TETHER. The exception to the——

Mr. HORN. Yeah.

Mr. TETHER. Quite frankly, I didn’t know there was an exception.

Mr. HORN. Well, you could go back and change the language.

Mr. TETHER. But I would—and maybe it’s an education problem

of the contracting officials who negotiate with the government. I

would really like to almost query them as to how many of them realize that there is an exception, and if they wanted to ask for a

waiver, who did they have to go to to get that waiver? Now, if it

was a local—in other words, if they themselves could do the waiver,

then it’s a very useful provision.

But if it turns out, as I believe is the case, that in order to get

the waiver, that they basically have to go two or three levels up

the chain—and I don’t know this—then I think, one, they probably

don’t know about the exception; and two, they probably wouldn’t

try to execute it for the time delay and the effort required in going

and doing that.

Mr. HORN. One of the things that’s occurred over the last 10

years and started in this room, as a matter of fact, there’s a delegation from the every 6 months or sometimes every 8 months dealing

with the European parliament, and of course, one of the main

things I’ve said in every one of those missions that, you know, you

guys have a subsidy now of about $50 billion for Airbus, and we’ve

got simply a military and civilian that are quite separated in many

ways, and of course they just go, ha, ha, ha.

49

You’re getting all of this military business than the civilian aspects go. Well, it’s just the other. In the case of the C–17, which

was the problem here, and they want today do it in with this committee, we beat them on the floor in May 1994 by 300 votes and

100, and we haven’t heard anything around here anymore. But

they have slowly—looking into a corporate formation for Airbus,

and we started with President Clinton getting some transparency

as to at least part of the books. Well, it never really worked very

well.

So also in the cockpit of the C–17, those came from the civilian

side. It wasn’t subsidized by the Defense Department or anybody

else. They just said, this is the kind of thing we ought to have in

the cockpit. Let’s take advantage of it. And that was—everybody

says Airbus just didn’t know what they were talking about, and I

said, you know, if you let me know, I’ll get a U.S. attorney to indict

a few if, you know, what you’re saying, it’s just baloney. So meanwhile, we’re facing that $50 billion bit, and it’s a little

tough to make when we get to do it and they really don’t. So I’m

just curious on this type of thing. And Mr. Wu, usually when

there’s a trade secret situation, the—in this country on computers,

let’s say, they’d like to sell abroad, and then you get into a fight

with State and you get into a fight with Commerce and Defense as

to should that particular object go to China, go to Russia, wherever. How do you deal with that? I’m curious, on trade secrets? And

the Pentagon certainly is a major figure in that. And give us a little idea of how that system works.

Mr. WU. Well, let me just talk about what is being proposed in

terms of trade secrets. You know, allowing a contractor to treat an

invention made with government funds as a trade secret we believe

would be a major change in government policy. The Department of

Commerce would object to such a change, because the only benefit

the public would get is if the company exploited the invention when

providing a product or a service, and since nothing would be published, the public’s knowledge of that information would also be decreased.

Further, the government’s license and march-in rights would be

worthless, and on the other hand, if the funding agency agreed not

to exercise its secondary rights to patent an invention which the

company did not want to patent, then a limited trade secret along

with the invention disclosure was not unreleasable in FOIA.

So we believe that the current policy is sufficient, and that allowing for trade secret protection would be a major shift in our current

policy.

Mr. HORN. Who makes the final decision? Does it go to the President?

Mr. WU. There would be, I believe, an overarching decision with

OMB, or at least in consultation with OMB.

Mr. HORN. Mr. Brock, have you looked at that process in terms

of how we help American industry to get products abroad without

giving military secrets, maybe some trade secrets, but have you

taken a look at that?

Mr. BROCK. Not directly as it relates to intellectual property, Mr.

Horn. We have done work on looking at the export licensing process and those factors that are taken into consideration when a deciVerDate 11-MAY-2000 08:35 Jul 14, 2003 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 D:\DOCS\85839.TXT HGOVREF1 PsN: HGOVREF1
50

sion is made to grant an export license. Our views on it have been

primarily are national defense issues being considered and are we

releasing either technical data or product that should not be released. We’ve also done some reviews looking at the rather burdensome process that exists between Commerce and State and consultation processes they have and the unequal nature of those processes, but it’s never really been focused on the intellectual property.

I’d be glad to provide you with a copies of the reports that we’ve

done on the process aspects of that if you would like them, sir.

Mr. HORN. I’d like to see them.

Thank you, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Thank you, Mr. Horn.

Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman. Mr. Brock, were you

able to determine if—and particularly since September 11th—if

there has been any agency of the Federal Government that has

had—has been unable to acquire any technology or research that

it needs because of the concerns about intellectual property rights?

Mr. BROCK. We, in the course of our review, Mr. Turner, we went

to many agencies that have an involvement in homeland defense

and in addition to DOD, we went to INS. We went to FBI, DOT

and other agencies as well to question them about concerns that

they might have over acquiring new technologies. The DOD was

components of the ones that expressed the most concern which has

been long-standing before September 11th about concerns of getting access to companies that had technologies. Those other agencies did not express specific concerns. Unfortunately, though, most

of them were either at that point not in an acquisition phase or

were just beginning to do acquisitions and did not have a lot of exposure to it.

So I think our answer is inconclusive at this point. Some of them

recognize it as a potential problem, but they really didn’t—had not

yet had a chance to explore the implications of that problem.

Mr. TURNER. So do I take it that the main conclusion that you

drew from your report is that a lot of agencies just don’t understand the flexibility that current law provides them?

Mr. BROCK. Well, that was particularly true at DOD. That’s

where most of the action takes place on this whole area. I mean,

they do most of the procurements. They do most of the research.

And they have a lot of flexibility, such as with the other transactions authority. Other agencies that are involved in research of

a similar nature like NASA or FAA also have their own variations

of other transaction authority that gives them some flexibilities,

and both of those agencies express less concern over getting access

to technology than the DOD.

Mr. TURNER. So do you have any suggestions for us about how

we could better educate our Federal agencies regarding what the

law does provide for them now? It seems that if we could figure out

how to do that, then we not only would have addressed some of the

concerns that we have been looking at, but the agencies themselves

would seem to me to be able to exercise the rights under existing

law and wouldn’t have near the concerns that we seem to be hearing from time to time.

51

Mr. BROCK. I think it’s a long grind. This is pretty complex. A

lot of people are involved in it, and it’s more than just the contracting officer. It goes all the way back to the program offices. When

we were talking particularly to the commercial sector, they commented that even within DOD, the very real variations among the

services about how they approached intellectual property rights,

that some services were noticeably easier to deal with than others.

So part of this is almost a culturalization issue within the agency

about what they want to do or not do. Most of it has to go, though,

with what I referred to as the comfort zone, where agencies are

fearful of making a mistake, and because of that fear, they want

all the data rights they can get, and in wanting all the data rights

they can get, then they began to encroach on the lifeblood intellectual property of the commercial companies.

As I mentioned, the navigating intellectual properties guide book

that DOD did is a great step. It’s my understanding—and let me

invite my colleagues back here who have been doing some more recent research on this—is that training in that, it’s just now getting

going, that the Defense Acquisition University is developing a

course. It’s considering offering a variation of what you would call

an intellectual property warrant that a more limited number of

contract officers who would be more expert in the area. I think

those are good steps, but they need to get moving on it.

Mr. WU. Mr. Turner, if I could add also and followup on Jack’s

points he raised that there are concerns about the culture, and that

is a concern that we’ve had also. The culture tends to be very riskadverse when it comes to technology transfer, and oftentimes it require a cutting-edge mindset to be able to jump into a project and

take that risk, especially if there are a great dividends ahead. But

because especially within NIH, when you’re dealing with potential

health, a medical recovery, drugs, there is great potential, then it

might be criticized that if you give the intellectual property rights

to a pharmaceutical company, for example, that partners with NIH,

then they would get, in essence, the intellectual property rights, a

monopoly over that drug.

As a consequence, they would be criticized later on, since part of

that research that led to the giving of the intellectual property

rights came from federally funded research, and there’s always in

the back of the minds of a number of the technology transfer managers and the negotiators, the coordinators, that they need to be

very politically sensitive. As a result, there is a very risk-adverse

culture, despite the great latitude that Congress has given in the

most recent technology transfer laws. And so getting that mindset

away from being risk-adverse and allowing them to be rewarded for

taking the right step, emboldening them is very important, too.

Mr. TURNER. Thank you. Thank you, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Thank you. Good questions.

Mrs. Davis.

Mrs. JO ANN DAVIS OF VIRGINIA. Thank you, Mr. Chairman. I

hear what you’re saying about the culture problem and I guess my

biggest question is do you believe that within the Defense Department and other agencies, that there’s really an understanding of

the problem with intellectual property rights, or is there is a problem with intellectual property rights, and do they appreciate that

52

problem? And is the executive branch doing anything to correct the

problems, if there are any?

Mr. WU. Well, from the Interagency Working Group perspective,

there doesn’t seem to be any direct problems with the intellectual

property framework for technology transfer. Relating to StevensonWydler or Bayh-Dole, both seem to be working very well. As a matter of fact, the Association for University of Technology Managers

just came out with their Licensing Survey for 2000, which underscored the great successes that Bayh-Dole has had for universities

in promoting research and development, which is driven by Federal

funds and bringing them out to the commercial marketplace.

Additionally, we see countries around the world, most recently

Japan, France, and Taiwan, replicating our Bayh-Dole framework

for use in their country. There are a number of success stories also

that he recount the success of Bayh-Dole, but as Tony said, you

know while Bayh-Dole may not necessarily be a perfect piece of legislation, a lot of it may be just with its implementation. And we

need to make sure that the technology managers that are down on

the ground working closest with industry and partnering together

need to be empowered and emboldened with the right attitude, because it seems as if the legislative tools seem to be there.

Within the Interagency Working Group, we’ll continue to dialog

with all of the agencies, including DOD, to see what changes we

can do to improve Bayh-Dole and Stevenson-Wydler and a number

of other technology transfer efforts, but it seems from the Working

Group’s perspective, that Bayh-Dole is working very well and that

the framework that it has established has clearly reaped successes.

Mrs. JO ANN DAVIS OF VIRGINIA. So you don’t think we need any

reforms at this time to it?

Mr. WU. There are none immediately that are recommended by

the Working Group.

Mrs. JO ANN DAVIS OF VIRGINIA. Do you think the private industry is—why are they not participating more then?

Mr. WU. Well, that’s the big balance. You know, we’re trying to

create incentives for private industry, because the reality is that in

order for American taxpayers to benefit from our federally funded

research, we need to commercialize the product to bring it out and

improve the quality of life, as well as to complete the cycle back

to the American taxpayer.

And so incentivizing the private sector is absolutely the key and

also streamlining the procedures. However, at the same time, you

know, we feel that we’re stewards of the public trust, and this is

public financed research which we need to be mindful of, and we—

if you give away intellectual property rights to industry, you want

to provide the right incentives, but at the same time, we need to

make sure that we have adequate government march-in rights so

that we can force utilization of the technology and innovation, if it’s

not being used properly or at all.

We need to make sure that the government maintains an effective license to that technology or innovation, and so there are certain things that we need to do as public policy that’s good public

policy that may not be, at least for those lawyers or other business

people looking at the contract or the technology licensing agreement, may not be in their minds to be sufficient or helpful to them.

53

You know, Lee Buchanan who was a former director of DARPA

who appeared most recently at one of our innovation roundtable series, he said, ‘‘there are still vast numbers of very intelligent, very

well-informed board members who think that engaging in research

and development with the Federal Government relinquishes all

rights to intellectual property of the government and gives them

march-in rights at a moment’s notice. It’s false, but that’s the perception. And so that’s what we’re fighting.’’

You know, industry wants to take advantage of its business

model, and it’s well within their right to do that. They’re responsive to their shareholders, but at the same time, we believe the

framework achieves a balance in trying to maintain good public

policy and also providing for enough incentives to private industry.

Mrs. JO ANN DAVIS OF VIRGINIA. So if I’m hearing you correctly,

it’s educating the private industries and then getting our agencies

out of their cultural problem?

Mr. WU. Yes.

Also, I might add that while we have march-in rights as part of

every agreement in which march-in rights allow for the government to come in and essentially march in and take the technology

if it’s not being used properly or at all, it never has been utilized

by the Federal Government. So that requirement is good public policy, but it’s really a red herring for those businesses who say that

they fear working with government because of that provision.

Mrs. JO ANN DAVIS OF VIRGINIA. Thank you, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Again, let me go on to that. Marchin rights have never been exercised?

Mr. WU. No, no.

Mr. TOM DAVIS OF VIRGINIA. Then why do you insist on it? Because it seems to be the major deterrent if you’re setting up there

as a general counsel. You’ve developed a new product, you want to

use it, and the government could come in and take it over.

Mr. WU. Because there are examples in which there will be, or

may be at times—we hope never—but there may be times in which

a company may choose, for whatever reason, not to take advantage

of a technology in which you’ve given license to, or they may

purposely——

Mr. TOM DAVIS OF VIRGINIA. No. I understand. But that’s the

crux of the problem. I mean, it seems to me that the crux of the

problem is that theoretically you want to have that if you’re the

government, and I understand that, but that’s one of the major deterrents of the private sector. That’s why you have 92 percent of

the Fortune 500 industrials doing little or no R&D for the government, three-fourths of the country’s top 75 IT companies refuse to

do research for the government, and a lot of it boils down to that

particular issue.

And we’re insisting on something we’ve never used. There’s got

to be a way to cut this and allow these companies—I mean, you’re

saying better educate the companies. I was general counsel for an

IT company. I wouldn’t allow my company to sign off on something

like that. We have to find a way here to make it work, because I

know that Mr. Brock talked in his testimony about, people said,

well, we don’t know that we’ve been able to get the products we

54

want, but you don’t know what products are out there when we

have some of the top innovators in the world not participating.

Who knows what we’ve missed because of that opportunity and

the prices we could get because of competition. I mean, that seems

to be the hub of the issue. And I understand your position. I think,

you know, from an intellectual point of view and textbook point of

view, maybe it’s correct from a government perspective, but the

downside is that seems to be the major—one of the major deterrents to getting a whole line of products and innovations into the

Federal sector that can help us fight the war on terrorism. You understand what I’m saying?

And let me ask—again, let me have you give the answer first and

then have Tony——

Mr. WU. That perception can be reality when it comes to negotiations for intellectual property rights of the government, but what

if a company chose to use the technology licensing much the same

way as the submarine patent in which they will just hold on to

title, and there’s a great potential there. And they refuse to commercialize because potentially it may conflict with one of their own

competing products. There needs to be a balance. I’m not sure exactly how to achieve that with the march-in rights issue, but certainly we’d be open to discussing that with you.

Mr. TOM DAVIS OF VIRGINIA. OK. Thank you.

Dr. Tether.

Mr. TETHER. Mr. Chairman, I absolutely agree with you. I don’t

know how—we seem to want to regulate down to that point 001

percent probability case, and——

Mr. TOM DAVIS OF VIRGINIA. The four decimal point——

Mr. TETHER. Yes. And what we have found, other reasons for OT

notwithstanding, but we have found that having the other transaction’s capability allows us to enter into a business decision case

with a company. If march-in rights are their heartburn, we have

the ability to basically negotiate them out, because it may be a case

where we don’t care about it, as you said. But without having that

flexibility to be able to do that, you’re stuck with that, and that

really is what I was trying to say on Bayh-Dole. It’s great, it’s uniform, but it has—leaves little flexibility to go in and piecemeal out

and create a business deal that is both beneficial to the government and beneficial to the company.

And I also agree that you don’t really know who you’re missing.

What we have at DARPA is that people know that DARPA have

this capability. So consequently, we get people coming to us that

get us into these conversations over these rights. Now, if you

don’t—aren’t known for having the flexibility to do anything about

it, well, I doubt if you’d go even talk to them, and so——

Mr. TOM DAVIS OF VIRGINIA. I hear you. I think your point is

well taken.

The other part of it, in Mr. Wu’s defense, is the march-in rights

to make sure this is done appropriately with waivers or giving that

flexibility, you really have to train your people. I mean, then it

comes down—as you said, they—a lot of these contracting officers

are—they have that risk-averse mindset. But with the appropriate

education, it seems we could get the best of both worlds here,

55

maybe with the kind of things that you do without major changes

to the statute.

Mr. Brock, do you have any comment on that?

Mr. BROCK. Yeah. The—Ben is right. The government has never

exercised march-in rights, although it has threatened to exercise

them before. I mean, it’s had the effect of the company moving forward. Some of the companies we talk to flat out said that they realize that the government did not exercise that right, but nevertheless, it represented a—it made them make a business decision not

to engage with the government because of that threat, and so they

chose not to do it.

They made a business case for that, and maybe other reasons as

we, they made a business reason not to participate. And a lot of

the contracts that we were looking at or talking about, too, weren’t

as clearly defined. I mean, if the government is paying you money

to do research and you develop a patent, I think it’s clear that

the—what Bayh-Dole is supposed to do. Many of the things that

we’re talking about, there’s not a bright line that many of the companies are already bringing their own background inventions to the

table, and their concern about the government’s ability to draw the

line to separate what they’re bringing to the table versus what’s

being developed on the contract and how do you separate those

things out, and I think that’s a big part of the concern that many

of the commercial companies we’ve talked to had in doling with the

government. It wasn’t just the black and white case as, OK, you

pay for the research; we’re concerned you’re going to march in and

make this—and take away our rights. It’s more of the case——

Mr. TOM DAVIS OF VIRGINIA. Preexisting research.

Mr. BROCK. Preexisting research that is commingled with new

research and how do you begin to separate that out, that was more

of the issue that we saw.

Mr. TOM DAVIS OF VIRGINIA. All right.

Mr. TETHER. Same here.

Mr. TOM DAVIS OF VIRGINIA. It’s a complicated issue, and frankly, you know, whenever you allow that waiver—that kind of flexibility, you’re going to have contracting officers that may make what

people consider the wrong decision. It gets blown up in the media,

and then we come back and say, all right, we overreact, but in the

meantime we’re losing—you know, because of a few bucks that go

out the window here, we’re losing billions of dollars over here and

not getting other things through the doors and these are judgment

calls that get difficult to make, but every time there is a mistake—

I found this in procurement. Every time there’s a mistake, it gets

blown up. And the billions you could save for the times that it

works, you get no credit for.

So we go back to basically structuring government so that we restrict the ability of contractors to do a lot of things. Make it clear

that nobody is going to steal any dollars, but you can’t do much of

anything else. I understand the politics of that, but from a management perspective and coming out of the private sector, it just—it

doesn’t seem the appropriate tradeoff in all cases. But I think you

all highlighted it very well and the sides to it from my perspective,

and that you were for that.

Mr. Horn.

56

Mr. HORN. Just one fast question to Mr. Wu. The Commerce Department, like all other cabinet departments, have a real problem,

and that is a lot of very good people that have been there for 10,

20, 30 years, and they’re retiring, and what are you doing now to

get new blood in the Commerce Department?

Mr. WU. Well, Mr. Horn, as you mentioned, it’s not just endemic

of the Commerce Department. We see that in our Federal laboratories throughout the country, where you have top managers who

are on the cusp of retirement and who will be leaving. That’s a

major problem with each of the Office of Research Technology,

which is the major office within each of the Federal laboratories

that is supposed to administer the technology transfer programs.

We’ve seen a number of the agencies and Federal laboratories

often, as a result, just make the responsibilities of the ORTA office

a supplement to someone else’s job, and therefore you don’t get the

right people. You don’t get the people who need to have the backbone to make some of these tough choices, who need to be educated. And that’s a concern that we have. The Working Group is

looking at the issue, and we’re working with the Federal laboratories, as well as all of the agencies to try to fix that problem within our Federal laboratories.

But right now, you know, there isn’t a fixed problem in that

there’s a general awareness that this is coming in a few years and

we need to look into it.

Mr. HORN. Good. I think everybody that—in your position that

goes around the country, you ought to stop by either a public administration, a business administration and go into the classroom

and tap for those people to help get us where we were in the 1930’s

and the 1940’s with very bright people that came here. And the Depression sort of drove them here. And so, we’ve lived on that for

a long time.

Mr. WU. It’s also not just our science and education work force,

increasing that, but also making sure that our Federal laboratories

have the adequate resources and infrastructure to get the job done

that will attract those people to the positions as well.

Mr. HORN. Thank you, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Mr. Horn, thank you very much.

Any other questions?

Let me thank the panel very much for your testimony.

We’ll move to the next panel, unless anybody wants to add anything.

Mr. TETHER. Only one thing. I guess on the ability to waive

Bayh-Dole, which I will ask my staff why I didn’t know that, but

I’m sure they’ll tell me they told me that, and I just didn’t remember that——

Mr. TOM DAVIS OF VIRGINIA. You don’t have to have that on the

record if you don’t want.

Mr. TETHER. But the real issue is the flexibility. I mean, if the

situation is no Bayh-Dole or full Bayh-Dole, that’s the wrong flexibility. You really want the flexibility to go there piecemeal what is

truly bothering the person you’re dealing with, because you may

not care about that little particular provision, but the rest of it you

may still want.

57

Mr. TOM DAVIS OF VIRGINIA. I think in most cases you don’t care

about that particular provision. If you do care about it, it’s that important to the government, then you stick to your guns.

Mr. TETHER. Thank you very much.

Mr. TOM DAVIS OF VIRGINIA. Thank you. You’ve crystallized it.

Now, let’s welcome our second panel to the witness table. Mr.

Louie, Mr. Carroll, Mr. Fry and Mr. Soloway, as we change the

name tags. Why don’t you—Louie, Carroll, Fry, Soloway. If you just

stand and raise your right hand.

[Witnesses sworn.]

Mr. TOM DAVIS OF VIRGINIA. Again, to afford sufficient time for

questions, if you would limit your testimony to no more than 5

minutes for any statement. Your total statements are in the record.

That will allow sufficient time for questions and answers. As I said,

all written statements will be in the record.

Let me start with Mr. Louie. Thank you very much for being

here today.

STATEMENTS OF GILMAN LOUIE, PRESIDENT AND CEO, IN-QTEL; RICHARD CARROLL, CHAIRMAN, SMALL BUSINESS

TECHNOLOGY COALITION, PRESIDENT, DSR, INC.; STANLEY

FRY, DIRECTOR, CONTRACTS & LEGAL AFFAIRS, EASTMAN

KODAK CO.; AND STAN SOLOWAY, PRESIDENT, PROFESSIONAL SERVICES COUNCIL

Mr. LOUIE. Thank you, Mr. Chairman.

Mr. Chairman, members of the committee, it’s a privilege to appear before you this morning to discuss the question of how government may obtain access to the most innovative research and development in our country.

Mr. Chairman, you have asked questions of whether or not there

are barriers, including the treatment of intellectual property rights,

to the government in obtaining the research and development innovation it needs. I’m happy to address this question because I believe that the independent company that I lead, In-Q-Tel, the CIA’s

venture catalyst nonprofit corporation, is a unique and innovative

approach for acquiring the best technology for one of our government’s most important functions, the collection, analysis, and dissemination of intelligence.

Let me first say I’m not a lawyer, nor a government expert on

IP, nor an expert on the FAR. I am your typical entrepreneur who

founded a computer software company in the early 1980’s on my

kitchen table, raised venture capital, built it, merged it into a public company in the 1990’s. I developed products primarily for the

consumer markets, but also for defense. I finally sold it to one of

the largest toy companies in America before joining In-Q-Tel as its

CEO and president.

I was asked by the Director of the CIA and by my members who

serve on my board of trustees, which includes captains of industry,

past innovators in government, to lead this new and unique effort

to run a nonprofit 501(c)(3) with the purpose of attracting the resources and talents of the high-technology industry to help solve

some of the CIA’s most vexing information technology needs.

In-Q-Tel was founded in 1999 after the DCI realized that the nature of the potential threats to the United States had changed, and

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in many cases these new threats were technology-equipped, working across national boundaries, and using a very different framework for operations than those used during the cold war.

At the same time the Intelligence Community was facing a growing information technology challenge. The agency was facing information overload, better known as the ‘‘volume problem.’’ The

stovepiping of information was making it difficult to share and leverage the data. The growing need for real-time decisionmaking

and security. The speed of innovation in IT was overtaking the

speed of the government’s acquisition and integration. Increasingly,

the growing information and high-technology industry base that

are actually leading the IT revolution were no longer engaged with

government.

While the CIA has always had a proud tradition of innovation

with such successes as Corona, U–2 and the SR–71, CIA realized

that today is a very different time. As you had stated, in 1995 the

Federal Government was funding over two-thirds of the Nation’s

R&D budget. By 2000, the role of government and industry’s R&D

investments flipped, with the industry now closing in on 70 percent

of the Nation’s R&D budget.

In 1999, when the DCI formed In-Q-Tel, he stated, ‘‘we are working with industry to leverage their expertise and revolutionize the

way we acquire technology. Everyone knows what an arms race is.

We are in a continuous intelligence race. Harnessing capabilities of

the private sector to deal with tough intelligence problems is part

of a very proud tradition going back to the early days of our Intelligence Community.’’

The need is great, but the world has changed. Our mission is discovering new information technologies that address the CIA’s most

pressing problems. We do this by engaging with industry, by aligning the strategic interests of corporations and industry with the

strategic needs of the Central Intelligence Agency. We define the

agency needs for industry, using commercial analogs to the agency’s challenges. For example, instead of finding point solutions for

the CIA information security needs, we ask the industry for the

best-in-class and new security technologies that could help solve financial institutions’ needs. Instead of using contract vehicles that

look like traditional government procurement contracts, the CIA

worked hard with us, spent over a year with us so we could engage

with industry, using contractual as well as equity vehicles that

closely resemble commercially accepted practices, while still operating within the scope of the FAR and protecting the interest of government.

We’ve also spent a significant amount of time educating our industrial partners on the needs of government in relation to intellectual property while working with our industrial partners to protect

their most precious assets.

In-Q-Tel’s business process has seven steps. We identify the IT

and work flow challenges within the Central Intelligence Agency.

We discover and analyze commercial technology market trends. We

aggressively reachout to industry and academia. We negotiate and

align the needs of industry with that of the Central Intelligence

Agency. We then nurture the technologies and incubate the business models. Then we reach back into the CIA, identify customers

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within the agency who have significant mission needs, and we

transfer those solutions into the agency along with best practices

from the commercial word.

We measure success by delivering technologies to the agency. So

you ask, has In-Q-Tel been successful? Since becoming operational

in late 1999, we have delivered 19 deliverables to the agency, including technologies which are directly relevant to the war on terrorism. We’ve found 18 technologies, in addition to those 19

deliverables, and we referred them to the CIA.

We have received close to 2,000 business plans. We have contracted with companies that range from small startups with just a

few employees to multibillion-dollar corporations. We work with

startups, midsize to large size, privately held as well as publicly

held companies, professional services companies, universities, national private labs. We have received submissions from almost

every U.S. State as well as from 26 different countries. We network

with over 200 venture capital funds, universities and labs. Since

September 11th alone we’ve received over 1,000 business plans.

Seventy-five percent of these companies have never done work with

the government before.

Mr. Chairman, your second question of how has In-Q-Tel obtained technologies including IP issues, let me say once again I’m

not a lawyer in IP or the FAR. The challenge for government in

the IP markets is that government is only one of many competing

sources of funding. Therefore, for government to engage, it must be

attractive to industry—because in our case the technologies we

seek are critical for national security. In response, the agency enabled In-Q-Tel to speak the language of industry and to be able to

work with the best IT companies.

Under the forward-looking leadership of the CIA, the CIA developed a set of tools and provisions within the four corners of the

FAR. The agency worked hard, studied the market requirements

and the needs of companies. The framework that the agency provided us in our charter allows us to craft agreements that allow

companies to pursue commercial markets while providing fair and

appropriate deals for the government.

In-Q-Tel has also the advantage, given the nature of venture capital, to be funding in mixed funding environments. That means

that we’re usually a minority stake investment in these companies,

and we leverage other people’s financial resources. As such, the

agency permits us to negotiate IT provisions that protect both government as well as industrial needs.

The last question you asked is the challenge of the war on terrorism in light of the new homeland security mission. Let me say this:

If there is any challenge, it is how to best engage and apply American resources and technologies on the war on terrorism. There is

no shortage of high-impact, high-value technologies potentially

available to our government today. The government needs to articulate its needs and engage with new vehicles that resemble

those found in industry. Government must align and articulate its

strategic needs within the strategic direction of industry and become partners, not adversaries, within industry.

If you want industry to provide government with the best technologies, and if government wants and needs early exposure to

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these technologies, it must find a way to do so while protecting the

intellectual capital and property of industry. Government must also

think out of its own box, look creatively toward industry for commercial solutions rather than government-unique solutions. Companies are confused about how best to contribute, how to be heard

and how to get involved.

In fact, government needs to start moving much faster. Post-September 11th, industry was ready to serve, but they are getting very

frustrated. If government is unable to engage these companies, and

if it’s unable to develop a streamlined, straightforward way for industry to help, industry will focus resources it once offered to fight

the war on terrorism back to the consumer and commercial marketplaces.

So, Mr. Chairman, in conclusion, I can say that In-Q-Tel has

been very fortunate. By working with the CIA, we have been able

to devise acquisition strategies that have encouraged companies

that have never previously dealt with the U.S. Government to step

forward and make their technologies available. I believe that other

government agencies can use approaches we have taken as well as

those by other innovators in government to adopt a similar strategy to acquire these technologies that are needed for government

purposes while leaving the industrial base free to pursue the extremely valuable commercial marketplaces.

Mr. TOM DAVIS OF VIRGINIA. Thank you very much.

[The prepared statement of Mr. Louie follows:]

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Mr. TOM DAVIS OF VIRGINIA. Mr. Carroll. Thanks for being with

us.

Mr. CARROLL. Thank you, Mr. Chairman. I want to thank Chairman Davis and Ranking Member Turner for holding this hearing

and giving me the opportunity to testify.

My name is Richard Carroll. I’m the president of a high-technology company called Digital System Resources. I’m also the legislative chairman of the Small Business Technology Coalition representing hundreds of small high-tech firms across the country

dedicated to improving Federal policies and research and development for the Federal Government.

I want to just take a moment and recognize that I thought the

previous panel when they addressed the culture issues hit the nail

right on the head. In fact, what good does it do to have regulations

that, in essence, build roads to go where you want to go when the

culture is to walk? And that’s what we have.

I want to talk about the culture, ‘‘we paid for it, we own it.’’ The

government’s official policy regarding intellectual property rights is

to obtain the minimum rights required for an acquisition, which is

a sound and reasonable position. If that former intellectual property rights policy were actual practice for the government, I don’t

believe we’d be even holding this hearing. But the pervasive view,

in my experience, is one of we paid for it, we own it. It’s the simple

premise that the government owns the intellectual property rights

to any research and development funded with government dollars,

and this seems on the face of it to be a reasonable government policy, which is why it is such a difficult mindset to change. But if

you’re trying to create an environment that encourages innovation,

the application of we paid for it, we own it to the intellectual property of innovators is a huge obstacle and not consistent with the

spirit of the Constitution to foster innovation and invention.

My conversations with large and small companies make it clear

to me that the government control of intellectual property can seriously smother incentives for innovators to offer their products to

the government. For small high-tech companies in particular, the

government culture of we paid for it, we own it has a chilling effect

on their interest in innovating for the government. Understand

that these companies are the most likely to bring forth the innovations needed to transform our defense systems and to meet the

needs of the homeland defense with rapid innovative and affordable solutions. These new ideas represent the heart of the company’s assets, and their ability to offer strong competitive alternatives

to the status quo is clearly predicated on some level of intellectual

property protection. If they lose that intellectual property, or the

government provides it to their competitors, the very survival of

the company is threatened.

Protecting government rights. I believe that the government’s intellectual property regulations and procedures must seek to strike

a balance between the legitimate needs of the government and the

legitimate needs of private sector. It’s a fine tightrope that these

regulations and clauses must walk between the competing interests

of the government that wants to gain rights to intellectual property

it is paid to develop and commercial firms that want to retain and

protect their creative ideas from disclosure to competitors. I think

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that while in general the regulations as written do strike a reasonable balance between protecting the government’s interest and affording industry rights to data, the culture created by implementation of these regulations seriously undermines creative transformation through the development of competitive alternatives and

as a result does not support the best interests of the government

or the Nation.

Government contracting and program management personnel are

not trained well on intellectual property rights or the concept that

creative transformation, new ideas destroying old paradigms, is important to them. But what they are trained very well on is their

abiding responsibility as agents for the government to protect the

rights of the government. Unfortunately, this sometimes takes unnatural and counterproductive directions. Despite the government’s

official policy to obtain only the minimum rights for any acquisition, some government personnel assume it’s in the best interest of

the government to select every last right that can be obtained in

every circumstance from the contractors, and to do less is to fail

to protect the government interest.

It is not hard to see how government personnel will be naturally

inclined to slant the intellectual property rights balance toward the

government. After all, very few government employees are penalized for being overprotective of government interests, and rightly

so. In addition, there’s a belief among some government personnel

that they must be able to disclose technologies to foster competition. This runs counter to the business advantage concept that patents and copyrights are intended to give. This problem is exacerbated for smaller companies as they are less equipped to deal with

pressure from government to give up their intellectual property.

Yet it is these smaller firms that require the protection of wellcrafted and implemented intellectual property policies, for they are

the ones most likely to deliver the kinds of creative transformation

that will rapidly advance capabilities.

Our Nation’s history is filled with examples of small technology

companies transforming the way Americans work and play using

the power of creative affordable innovation and intellectual property protection. Why does this not seem to happen in the government marketplace or in the Department of Defense? Why don’t we

find small, innovative DOD contractors transforming our defense

through their innovative products protected by intellectual property

rights in the same way small, innovative companies have transformed the private sector, companies like Intel, AOL, Microsoft,

Dell, many, many others? They’re just not in the public sector. Intellectual property protection is the reason they’re not.

Let me just mention one myth that exists in the government sector regarding intellectual property protection. That myth is if we

don’t acquire all the intellectual property associated with our procurement, in time we may be overcharged or held hostage to a sole

source supplier. The reality is that the government doesn’t acquire

adequate intellectual property in most large procurements to level

the playing field like that sufficient for competition. And do we

really want to level all our alternatives anyway?

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curements, but does acquire intellectual property when contracting

with small, innovative high-technology firms or outside commercial

firms. The result of this practice is to significantly dampen the likelihood of innovation and creative transformation.

We have invested in you, now run with it. New ideas are indeed

threatening. As we see in the commercial marketplace every day,

new ideas are remorseless. They disrupt and reorder old ways of

doing things without conscience. A new technology idea or approach destroys the old technology, the old idea and the old approach simply by being better. This kind of rapid change is frightening to many people.

We talk about it, thinking out of the box and no business as

usual, but let’s be honest; thinking in the box and business as

usual are a lot more comfortable and feel a lot safer. So when we

seek to create an environment where innovation can thrive within

the government, we must recognize that we are trying to create an

environment that challenges the status quo and that appears risky

to many people. I want to acknowledge that we are trying to do

something hard here, to change entrenched thinking and processes

to accept the kind of change that protecting intellectual property

will bring.

Finally, and perhaps most importantly, the government needs to

send a message that it will protect intellectual property rights of

innovators, and when innovators feel their ideas will be protected,

they will come out of the woodwork to provide their ideas for government application. The government will get the best ideas faster,

better and cheaper with this approach.

Thank you for the opportunity to testify. I would be happy to answer any questions.

Mr. TOM DAVIS OF VIRGINIA. Thank you very much.

[The prepared statement of Mr. Carroll follows:]

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Mr. TOM DAVIS OF VIRGINIA. Mr. Fry. Thanks for being with us.

Mr. FRY. Can you hear me OK? My name is Stan Fry. I’m the

director of contracts and legal affairs for the commercial and government systems division of Eastman Kodak Co. I want to kind of

make the point Kodak is a high-tech, we’re a technology rich, technology dependent company. We’re not just about film and prints

anymore. We employ over 42,000 people in the United States. We

did over $13 billion in business last year, and of that we spent

about 5.9 percent, or $779 million, in R&D. We were granted over

700 patents, making us No. 10 of U.S. companies getting U.S. patents, and 20th overall of companies getting U.S. patents.

Patents and our intellectual property are extremely important to

our competitive position, and to highlight that I’d note that recently we organized a separate business unit whose sole purpose is

to keep track of our patent portfolio and to make intelligent decisions on how to license, use, sell or use that technology for our benefit and make revenue for the company.

I’m also here as chairman of the Integrated Dual-use Commercial

Companies, or IDCC. It’s an informal coalition of a few large hightech companies formed in 1991. Our mission is to work to modify

the laws, to improve the relationship and make it easier for commercial companies to do business with the Federal Government,

and one of the ways to do that is to collaborate more on a commercial practice methodology, and that’s really my message here today.

We believe that intellectual property is the most important issue

that our companies face in dealing with the government, particularly with DOD, and we think if the government adopted more of

a commercial model, that it would be a lot easier to attract technology-rich companies and their products to DOD and to the government. Such a model would provide that ownership and licensing

of IP would be fully negotiable, but generally, as in the commercial

world, the contractor or seller would continue to own the data, and

in most cases the buyer would not be granted extensive patent or

data rights, although sometimes restrictive licenses or rights are

granted even in the commercial world.

The commercial model uses nondisclosure agreements to provide

a basis for enforcing technology or forcing confidentiality and trade

secret protection. We believe that a method of using nondisclosure

agreements, limiting disclosure to those few people who have a legitimate need to know, would work as well with the government.

Another issue that arises is that many companies keep inventions and discoveries as trade secrets, and as has been mentioned

before, you can’t really do that under the current Bayh-Dole Act

model for dealing with government IP.

So what’s the problem? As I’ve already alluded to, it’s primarily

we believe statutes like Bayh-Dole, which set a model for the minimum amount of rights, data rights, ‘‘march-in’’ rights that the government has to have—we originally recommended that we do away

with Bayh-Dole, but since that time we’ve learned that there’s a

large constituency that depends on Bayh-Dole. So we believe that

a waiver, a generous or liberally applied waiver, and policies that

would encourage use of those waivers would be the best way to encourage technology-rich companies to work for the government.

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In addition to the waiver issue on Bayh-Dole, I also wanted to

mention another two of our issues with—in this region, are the definition of a subject invention. We believe that if a company applies

for or receives a patent independent of government contract work,

the government shouldn’t have any rights. But under the definition

of subject invention, there’s a possibility.

The other thing is we believe there could be some changes to the

American competitive provisions that are in Bayh-Dole and similar

statutes that don’t allow companies to use their full global capabilities as they would in a normal commercial issue.

I wanted to just mention that IPs have worked. They’ve worked

well in certain limited circumstances where we are—we have some

concern that benefits of using them have been eroding, most recently with the addition of audit rights and then requirements for

use of nontraditional defense contractors.

The bright spot, however, I’d like to highlight, I think others

have, is the manual, the guide book put out by DOD. It’s been of

great use to us in dealing with government agencies, and we’ll be

really happy when more of the government agencies and procurement people are fully trained in it. Thank you.

[The prepared statement of Mr. Fry follows:]

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Mr. DAVIS OF VIRGINIA. Thank you very much. Mr. Soloway,

thanks for being with us.

Mr. SOLOWAY. Thank you, Mr. Chairman and Mr. Turner. I am

pleased to be here today. As you know, the Professional Services

Council is the principal national trade association representing the

full scope of the government technology services market. Our membership includes both large and small companies and, in fact, includes as many companies with revenues under $5 million as those

with revenues in the billions.

For professional technical services companies, intellectual property is most frequently found in the skills and experience of the

firm’s work force. Regrettably, Federal policies are neither clear

nor flexible enough to foster the type of partnership for innovation

and innovative solutions needed to assist the government in meeting its needs. Moreover, throughout the government there remains,

as has been said by many witnesses today, a genuine lack of understanding of how such relationships can be fostered while continuing

to protect the government’s equities.

We applaud you and the subcommittee for launching this important policy review and for following up on the July hearing you

held on this topic. Much has changed in the world since then, but

the challenges remain much the same. For starters, I think it’s important that we not underestimate the meaning of the massive

shift of R&D development from public to private sources, for it’s

only been over the last 25 years that the private sector has outspent the government in R&D. Equally, we should not underestimate the degree to which there is commonality between government technology needs and technologies being developed for principally commercial purposes. Third, we should not underestimate

the impact and relationship of that shift of resources to the government’s human capital challenges alluded to by Mr. Horn.

The fact is that there is a technology gap, it is growing, the government is not often enough a customer at the principal R&D tables, and intellectual property issues continue to be the dominant

factor in whether and how to put innovative private sector solutions to work for the government. Traditional thinking and traditional approaches to intellectual property do not allow for timely

and successful solutions.

The debate becomes all the more important as the solutions

being sought by the government and offered by the private sector

are becoming more typically services solutions rather than purely

hardware solutions. IP laws and regulations have simply not kept

pace with innovations that have taken place in the private sector

and the growth of complex technology-based services requirements

in the Federal arena.

In my remarks today, I will focus on a couple of overarching

issues of concern. PSC’s General Counsels Committee is currently

reviewing the proposed changes to the Bayh-Dole Act as well as recently proposed changes to the rules governing technology investment agreements. As those reviews are not yet complete, I’m not

able to share with you any firm conclusions except to say we will

provide the committee with our thoughts in a timely manner.

People have mentioned culture, and that is the critical issue. The

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ing principles of intellectual property law and a concurrent unwillingness to exercise existing flexibilities in current regulations such

as the difference between ownership of the intellectual property

and license rights to use the data for government purposes.

As is the case in many other areas, there’s a lack of adequate

training for the contracts community, and most prefer to treat intellectual property matters, with all due respect, Mr. Chairman, as

legalese and refer the issue to their lawyers. Also, too often an

ownership mentality prevails. That mentality perhaps more than

anything else drives companies away from the government marketplace because it presents levels of risk that are simply unacceptable. It remains all too rare for the government to clearly define

its needs and build them into a well-defined performance statement

of work and licensing agreement, even though doing so represents

a common best commercial practice and can fully protect the government’s equities. There is a critically important point here, and

that is understanding the difference between the government’s

needs and overreaching, believing that your needs equal complete

and full control of all intellectual property and technical data.

Second, as technology partnerships are formed to bid on Federal

work, the prime contractor is sometimes caught in a squeeze between government contracting officers who are unwilling to accept

commercial terms and conditions for intellectual property and commercial subcontractors who insist, rightfully so, on following commercial terms and conditions in their IP agreements. As a result,

the prime contractors often face the choice of accepting greater liability than their subcontractors will accept, walking away from

the government requirement or not accessing those commercial cutting-edge solutions. Obviously such circumstances can cause the

government to lose much-needed access to cutting-edge technologies and technology-based solutions.

Indeed, this issue and the ownership issue are inextricably

linked. Unfortunately, few Defense Department or other contracting officers have agreed to accept nonstandard intellectual property

terms and conditions largely because they have not been given adequate training to understand them and because, frankly, the

strongest opposition to them often comes from the internal oversight community which remains rooted in past practices. I believe

that makes the role of the General Accounting Office, which has

been an active and constructive participant in this issue for several

years, critically important, because they have developed a keen understanding of the challenges that exist and ways to move forward.

Mr. Chairman, I also note with interest the legislation you introduced on May 1st to establish a program at OFPP to speed the government’s evaluation and implementation of technologies for homeland security and antiterrorism efforts. While PSC is currently reviewing the bill in detail, we certainly applaud your focus on critical issues including waivers from existing laws and the Federal acquisition regulations for a limited number of pilot projects and contracts. We will carefully study the bill and offer our recommendations to this subcommittee shortly.

I would add one cautionary note regarding DOD’s statutes and

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ian agencies. As important as such steps are, they will yield little

significant progress until the issues associated with intellectual

property and the broader issues associated with government R&D

business models are more fully addressed.

On a positive note, Mr. Chairman, I’d like to compliment the Department of Defense on its issuance of the ‘‘Navigating Through

Commercial Waters’’ guide book, its guidance on smart and best

practices associated with intellectual property. I am pleased to say

that DOD began work on that guide during my tenure there and

I personally know how difficult it was to develop and publish. PSC

has had the opportunity more recently to review and comment on

its many drafts, to broadly distribute the guide to our membership,

and to support the Department’s publicity surrounding it.

Regrettably, however, there are two significant limitations to the

guide. First and most significantly, it is a guide to existing authorities and not a regulation or policy on which the defense contracting

community can rely. Second, we are just beginning to see the initial training on the guide and it will take precious time under current course and speed to reach a meaningful number of the affected

acquisition work force. Unfortunately, given the pace of technology

development, current course and speed is simply not fast enough.

The sad fact is that while DOD’s regulations were altered a number of years ago, particularly with regard to rights in technical

data for the development of products and software, no similar

changes have been made to the statutes governing the rights and

the technical data applicable to the civilian agencies; and the FAR

continues to reflect 25-year-old policies as the basis for negotiating

intellectual property clauses in the civilian agencies. As noted earlier, times and requirements have changed significantly, but not

solely as a result of September 11th, and it is therefore time to undertake a thorough review of those statutes and rules as well.

Thank you very much, Mr. Chairman. I would be happy to answer any questions.

Mr. DAVIS OF VIRGINIA. Thank you very much.

[The prepared statement of Mr. Soloway follows:]

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Mr. DAVIS OF VIRGINIA. This is a question for everybody. Several

witnesses have raised the human capital management issues today.

What does the panel think about the idea of designating certain

personnel in the acquisition community to do IP as a speciality,

make sure these people get extra training in this area. We’ll start

and go down the line.

Mr. LOUIE. I’m totally supportive of that. The In-Q-Tel model

works fundamentally because there are two sets of individuals who

actually participate in our negotiations. One is In-Q-Tel’s executives who are well trained in industry’s best practices in negotiating IP. They work closely with one or two designated people at the

agency whose job it is in procurement to understand these particular issues. We work together to craft these commercially familiar

documents that still operate within the FAR but address industry’s

needs. Without having that capability, for example if I had a normal contract officer who was not trained in this particular approach, it becomes very difficult to work with these companies, particularly some of these younger, smaller companies whose lifeblood

is dependent upon the IP that is created.

Mr. DAVIS OF VIRGINIA. The risk aversion that they have, I

guess, would——

Mr. LOUIE. Absolutely. The fundamental problem, particularly in

information technologies, is that there are competing sources of

funding. In fact, most companies believe a dollar from government

is the most expensive dollar you can ever take. My office—my California office—is on Sand Hill Road. You can just go down the street

or up the hall, ring another doorbell, and get a dollar for a lower

cost in terms of IP rights than taking a dollar from us.

So it’s really important to understand that government is not

alone in terms of funding these technologies. If we need it, we have

to get to it first.

Mr. DAVIS OF VIRGINIA. Thanks.

Mr. CARROLL. I would also be very supportive of that. I would

just repeat everything he said, plus I would add to it that the

training is not necessarily just needed in understanding the regulations or the flexibility, but it’s in understanding the benefits of allowing innovators to innovate and allowing intellectual property to

work its will in their own community.

What I find missing completely is that concept, where, you know,

you create a competitor by allowing them to buildup intellectual

property over time that can compete with incumbents that you’ve

got that haven’t been innovative in years. And it will make everybody innovative. The whole world becomes innovative when you

have that kind of competition. So that kind of training, I think, will

be very productive.

Mr. DAVIS OF VIRGINIA. Anybody else?

Mr. FRY. I would support that concept 100 percent. Essentially

in practice, that’s a commercial model. In my company, I’m the

only attorney in our legal department that really understands government data rights, government contracting. And ultimately if

questions arise anywhere else in the company, they come to me for

that. I do run a contracting group. My contracting people understand contracts, they understand the data rights to some extent.

But ultimately, if there’s anything other than standard, they come

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to me as well. So I would welcome that, and I think the government should do it as well.

Mr. SOLOWAY. If I may make one brief addition. I associate myself with all of the previous comments. I’ll go back to the development and publication of the IP guide at DOD. When we started

that process, Stan Fry’s organization was involved, and GAO was

heavily involved. We had a lot of really smart people in the room,

trying to figure out how to go forward, and we had some of the

smartest legal minds around trying to figure out how to go forward.

One comment made by an attorney for a large technology company really stuck with me. He said that the regulations are there,

but nobody understands them, and he has 125 lawyers on staff,

none of whom have ever done a government contract, and he’s not

going to invest the thousands of man hours necessary to figure out

what the rules really are. This is a matter of training not only acquisition people, but also training acquisition people in commercial

best practices, and then relating them back to the FAR, rather

than training them on the FAR and having them figure a way to

wiggle out from under the FAR.

I think it is equally important to include the oversight community in this process. There have been far too many examples of very

innovative, well-constructed business deals that fully protected the

government’s equities that have been stopped because of an oversight community that continues to hold a lot of the frontline folks

back.

Mr. DAVIS OF VIRGINIA. OK. Mr. Louie, let me ask you, do you

have a sense of the deluge of ideas that are coming into the Homeland Security Office right now? We’ve been working on legislation

to help government kind of screen this wealth of ideas coming into

the Homeland Security Office, give them priority, and move them

out where they can do some good as quickly as possible.

How does In-Q-Tel deal with this issue, because you’re faced with

the same kind of thing?

Mr. LOUIE. Literally, we get hundreds of submissions in any particular month that come in ‘‘over the transom,’’ from referrals from

venture funds to Members of Congress, to just entrepreneurs saying I have a great idea, as well as large corporations.

Mr. DAVIS OF VIRGINIA. Do you ever get a good idea from a Member of Congress?

Mr. LOUIE. Actually, I got two this last week so I can actually

say that for a fact.

Mr. DAVIS OF VIRGINIA. We want that on the record.

Mr. LOUIE. There’s a whole process that we use that vets the

technology. We have technology experts on our staff, we tie into the

agency’s technology experts and users to look at these technologies

to make sure they are best-of-class. We work with large organizations, including professional service organizations, to see what they

have in a particular space. We actually have what we call a Q–1

process that examines the market opportunites before we go forward and make any investment.

That’s not where the challenge is. Commercial companies, commercial venture capital funds, know how to do that. The real challenge right now in homeland defense is that there is no ‘‘there’’

there. For many of these companies who say I have a technology,

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I have a staff, I’m good to go and I am committed, there is nobody

on the other end to do the contract. There are only a few other

agencies right now, that are willing to pull the trigger to act now

on behalf of homeland security. It’s a real challenge. I get CEO

phone calls from Fortune 100 companies saying, what do I do?

The problem for In-Q-Tel, quite frankly, is we are a little organization in the midst of one of a bigger organization—the Federal

Government. So In-Q-Tel, with a $30 million budget and 20 deals

a year, can’t be the front office for all of homeland security. We

refer companies to other agencies. Those other agencies are sympathetic but they say they don’t have the budget, they don’t have the

authority, they can’t pull the trigger.

Mr. SOLOWAY. May I add one thing to Mr. Louie’s comment? On

the homeland security issue, aside from all the issues he raised

which are critical, we need to step back and, as I mentioned in my

testimony, look at the broader business model associated with research and development; because now we’re not just talking about

commercial off-the-shelf technology, we’re talking about technology

that is a commercial analog to unique government needs. We’re

going to have developmental dollars involved. So now you’re in the

government statutes and regulations governing how we do R&D. IP

is one critical issue in there, but it’s not the only issue.

I’ll relate one interesting conversation that highlights this. It is

a conversation I had with the general counsel of a leading biotechnology firm when we were speaking together at a conference.

I said to him, ‘‘With this whole focus on homeland security, my

guess is that you all are thinking very seriously about expanding

into the government market because biotech obviously is one of

those areas that the government desperately needs your assistance.’’ I was thinking very parochially that he should join the Professional Services Council. His response to me was, ‘‘No, we’re actually not thinking about that, because of IP issues and the limitations under R&D rules, such as Other Transactions where I can

only take it to a prototype level, and then I stop and have to come

back under the original Federal Acquisition Regulation, and therefore can’t take a product all the way through to production.’’ He

said, ‘‘It’s really an unattractive market.’’ This was the leading biotechnology company in the country. So there’s an overarching business model within which IP is just one of many really critical

issues.

Mr. DAVIS OF VIRGINIA. Thank you.

Mr. Fry, let me ask you a question. We’ve heard members at

these hearings before—just basically the argument is that when

the taxpayers pay for this research, they should get the benefits

from it, not allow—not have to pay for something twice by allowing

you to go out and market and having them pay for it again.

How do you answer that, and how should the government allow

its R&D partners to use trade secrets protection?

Mr. FRY. Quite frankly, we hear the same argument from other

companies that come into us and want something built. And the

real answer is, you know, we have the technology; you come to us

because we can build what you need, want done, and we can do

what you want done. If you take the rights, you take the data, if

you dilute our patent position, we won’t be there next time.

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So I kind of answer it in the same way. You need to leave the

technology with us, you have to help us protect it, and we’ll be

there next time when you need the same technology. We need protection to maintain our competitive position is really the key aspect.

In the case—in the commercial world, the other thing that when

you get down to it, these buyers want protection from the competitive standpoint. They don’t want to give you a lot of money for a

nonrecurring—or for design, development, tests that you would

then use to build the same system for half the cost for their competitor.

So we work out some limitation, or we work out some restriction

that protects their competitive position, say, for a number of years,

for example, or some other type of limited license or something.

But in the end, we don’t compromise our technology, we don’t compromise our patent position.

Mr. DAVIS OF VIRGINIA. Mr. Carroll, let me ask you, in the last

panel we heard some questions raised about the idea of extending

trade secret protection to companies doing Government R&D. Do

you have any thoughts on that?

Mr. CARROLL. Yes. I think that trade secrets, the importance of

trade secret protection is really underestimated by the government.

The trade secrets are, I think, a very, very large part of most R&D

companies’ portfolio. And to not permit those trade secrets to be a

viable pathway by which they protect their property is really, I

think, probably one of the largest obstacles in the way. Once disclosure of trade secrets is made, it’s over. And patent does that. And

you just can’t do that in many cases.

Mr. DAVIS OF VIRGINIA. Mr. Turner.

Mr. TURNER. Just one question, Mr. Chairman.

Mr. Louie, we’ve had 3 years, I guess, of experience now with InQ-Tel. Is there a model there that could be replicated for other

agencies? I mean, obviously you tried to be the bridge for the CIA

into the private sector as a nonprofit. Is there something here that

we ought to be expanding upon to try to bring the private sector

and the ideas that are there into other agencies of government?

Could you grow, or should other entities grow to serve other agencies of government in this way?

Mr. LOUIE. I think the good news is that because of our existence, a lot of other agencies are beginning to look at that model,

either by asking us to scale or seeing if it can be replicated.

Let me say this: The In-Q-Tel model is not a solution that solves

all of Government’s problems, nor is it a replacement for traditional acquisition. It’s a place to solve a particular market need of

government to solve a certain set of problems—problems that are

being addressed by technologies that are fundamentally commercial. In-Q-Tel gains access and early exposure of these technologies

back into government.

In this particular case, the reason why In-Q-Tel works—and I

tell this to all the different agencies who approach us and are interested in the model—is that as important as the model is, what

is more important is leadership. The reason why In-Q-Tel works is

that the Director of Central Intelligence has made this his model.

It is one of the many vehicles that he is personally interested in.

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If an agency adopts this model and doesn’t have the leadership

working with that model, the model will fail, like many other R&D

style models in the past. Where there is commitment, this model

can have huge leverage because it fundamentally talks the language of business.

Most of my staff come from the business world. Many of my

seinor staff were CEOs. So when they sit down and talk to a hightechnology company, they are sympathetic with the companies, but

at the same time know that their mission is to get services and

goods and technologies for the U.S. Government. That is a great

model for government to use. It is another tool in its belt to answer

the challenge that we’re facing, particularly in homeland security.

Mr. TURNER. Thank you, Mr. Chairman.

Mr. DAVIS OF VIRGINIA. Thank you all very much. Anybody want

to add anything before we go? Let me thank all of you for contributing to this hearing.

And I want to thank the witnesses, I want to thank Representative Turner and the other member of the subcommittee for participating. I also want to thank my staff for organizing this. I think

it’s been very productive. I want to enter into the record the briefing memo distributed to subcommittee members.

We’ll hold the record open till 2 weeks from today for those who

may want to forward submissions for possible inclusion. I suggest

with the delay of regular mail going into and out of the Capitol

campus, that you e-mail any additional submissions to the attention of my counsel, George Rogers, here at

George.Rogers@mail.house.gov.

These proceedings are closed. Thank you.

[Whereupon, at 11:50 a.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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