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81–424 PDF 2002

TOWARD GREATER PUBLIC-PRIVATE COLLABORATION IN RESEARCH AND DEVELOPMENT: HOW

THE TREATMENT OF INTELLECTUAL PROPERTY

RIGHTS IS MINIMIZING INNOVATION IN THE

FEDERAL GOVERNMENT

HEARING

BEFORE THE

SUBCOMMITTEE ON TECHNOLOGY AND

PROCUREMENT POLICY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JULY 17, 2001

Serial No. 107–90

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

JOE SCARBOROUGH, Florida

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

——— ———

———

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

JAMES DECHENE, Clerk

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on July 17, 2001 ............................................................................... 1

Statement of:

Brock, Jack L., Managing Director, Acquisition and Sourcing Management, General Accounting Office, accompanied by John B. Stephenson,

Director, Natural Resources and Environment, General Accounting Office .................................................................................................................. 4

Carroll, Richard W., chairman, Small Business Technology Coalition, and

chief executive officer, Digital System Resources ...................................... 40

Fygi, Eric J., Deputy General Counsel, Department of Energy ................... 26

Hill, Christopher T., vice provost for research and professor of public

policy and technology, George Mason University ....................................... 77

Kuyath, Richard N., counsel, 3M Corp. .......................................................... 70

Lee, Deidre, Director, Defense Procurement, Department of Defense ......... 20

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

Brock, Jack L., Managing Director, Acquisition and Sourcing Management, General Accounting Office, prepared statement of ......................... 7

Carroll, Richard W., chairman, Small Business Technology Coalition, and

chief executive officer, Digital System Resources, prepared statement

of ..................................................................................................................... 43

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

of Virginia, prepared statement of .............................................................. 106

Fygi, Eric J., Deputy General Counsel, Department of Energy, prepared

statement of ................................................................................................... 27

Hill, Christopher T., vice provost for research and professor of public

policy and technology, George Mason University, prepared statement

of ..................................................................................................................... 80

Kuyath, Richard N., counsel, 3M Corp., prepared statement of ................... 73

Lee, Deidre, Director, Defense Procurement, Department of Defense, prepared statement of ........................................................................................ 22

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

prepared statement of ................................................................................... 108

(1)

TOWARD GREATER PUBLIC-PRIVATE COLLABORATION IN RESEARCH AND DEVELOPMENT: HOW THE TREATMENT OF INTELLECTUAL PROPERTY RIGHTS IS MINIMIZING INNOVATION IN THE FEDERAL GOVERNMENT

TUESDAY, JULY 17, 2001

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, Turner, and Mink.

Staff present: Melissa Wojciak, staff director; Amy Heerink, chief

counsel; George Rogers, counsel; Victoria Proctor, professional staff

member; James Dechane, clerk; Mark Stephenson, minority professional staff member; and Jean Gosa, minority assistant clerk.

Mr. TOM DAVIS OF VIRGINIA. Please be seated. I will swear you

in, but we have opening remarks first. So we will try to be quick.

I would like to welcome everybody to today’s hearing about intellectual property and Government-funded research and development. R&D collaboration between the Government, commercial

companies, and universities is widespread. Such collaborative R&D

projects have a long history in the United States with major initiatives in pharmaceuticals, petrochemicals, synthetic rubbers, and

atomic weapons being launched during World War II. Similarly,

university-industry research collaboration was well established in

the U.S. economy of the 1920’s and 1930’s and contributed to the

transformation of the U.S. chemicals industry. There is no doubt

that public-private collaboration makes an important contribution

to the technical and economic well-being of U.S. citizens. Indeed,

statistics show a substantial correlation between research, innovation, and U.S. economic prosperity.

Throughout the cold war years, the Government in general and

agencies such as the Pentagon and the Department of Energy,

drove R&D. However, the Wall Street Journal has reported that

the private sector’s share of total R&D spending in recent years is

soaring, while the share of Government is declining. In 1960, for

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example, private sector R&D spending amounted to roughly onethird of the country’s total. In 1999, private sector R&D was twothirds of the total. Over the same period, the military’s share

dropped from 53 percent to 16 percent. The Journal also notes that

three-fourths of the country’s top 75 information technology companies will not do research for the Government, citing the difficulty

in contracting with the Government and treatment of intellectual

property in R&D contracts. Thus, at the same time that Government is no longer driving technological innovation, many commercial firms that invest billions in R&D every year are refusing to do

business with the Government. This has serious implications for

the well-being of the United States.

Intellectual property rights are the most valued assets of leadingedge technology companies. The Government is challenged today to

find ways to entice commercial industry into collaborating with it

on vital R&D efforts. While acquisition legislation in the 1990’s,

such as the Federal Acquisition and Streamlining Act and the

Clinger-Cohen Act, greatly improved the contracting process, many

companies still refuse to undertake R&D projects because of concern over how intellectual property rights will be treated. The Department of Defense, in its recently issued guide for the acquisition

community entitled, ‘‘Intellectual Property: Navigating Through

Commercial Waters,’’ has recognized the priority of improving the

treatment of intellectual property rights as a precursor to ensuring

its access to the very best technologies.

Today’s hearing is going to address one of the several barriers to

acquisitions and sourcing by the Government: the treatment of intellectual property in R&D funded by the Government. The goals

of this hearing are to gather information about the nature and

scope of intellectual property law and regulation as it relates to

Government-funded R&D. Going past the legal framework, this

hearing also will investigate the actual practice of the Government

in R&D contracts with both commercial industry and universities.

How the Government treats intellectual property has a profound

impact on the competitive environment for R&D. It is axiomatic

that competition increases innovation in an effort to offer more attractive options to the consumer at lower prices. Yet many innovative companies find themselves in a difficult position trying to negotiate with a Government that believes it must have all available

intellectual property rights rather than only those rights that they

need. The paradigm has changed—Government is no longer the

leader in innovation; now it must respond to its new role as partner in innovation by adopting policies for the treatment of intellectual property that are consistent with commercial practice.

Efforts at addressing the difficulty that the Government has had

in attracting innovation in its R&D will be looked at, including existing mechanisms for flexible contracting and whether there is a

need for training of the acquisition work force on intellectual property issues. Finally, reform efforts currently underway in agencies

and proposals for regulatory and legislative change will be examined.

Intellectual property rights are the lifeblood of commercial firms

and are vitally important to universities. Working to improve the

Government’s treatment of intellectual property rights must be a

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priority in order to ensure the ability to access the very best technologies for our future civilian and military needs. I look forward

to the testimony of the witnesses today, and thank you for participation in this important hearing.

I will now turn to our ranking member, Mr. Turner, for any comments he would like to make.

Mr. TURNER. Thank you, Mr. Chairman. As you have stated, this

hearing today is for the purpose of examining the nexus between

intellectual property and procurement practices. Hopefully, we will

learn whether the current intellectual property laws and practices,

including those governing patents, trademarks, copyrights, and

trade secrets, prevent the Federal Government from gaining access

to the best and the most up-to-date technological advances, and if

they do, what solutions might be available to us to allow more

flexible contracting in this area.

As you mentioned, Mr. Chairman, the Federal Government’s

share of R&D funding has decreased since the eighties. The Federal Government still spends close to $80 billion on research and

development. So we are a significant player in that area.

It is important for us to explore ways that the Federal Government can be more flexible in contracting the use of so-called ‘‘other

transactions’’ at the Department of Defense, and the recently published guide on intellectual property seemed to address just this

concern. I believe, however, that we must be cautious as we approach this somewhat complicated issue. Current law and regulation was designed to strike a delicate balance between the needs

and the rights of the Government, as the representative of the public, and those of private industry. We need to keep these sometimes

conflicting priorities in perspective as we examine these issues

today.

I look forward, Mr. Chairman, to hearing from each of our witnesses. Thank you.

Mr. TOM DAVIS OF VIRGINIA. Thank you very much. Ms. Davis,

do you have any opening statement?

Mrs. JO ANN DAVIS OF VIRGINIA. No, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. OK. I would like to now call our

panel of witnesses to testify. We have Mr. Jack Brock, the Managing Director for Acquisition and Sourcing Management at the General Accounting Office; Ms. Dee Lee, the Director of Defense Procurement at the Department of Defense; Mr. Eric Fygi, the Deputy

General Counsel of the Department of Energy; Mr. Richard Carroll,

president of Digital Systems Resources, Inc.; Mr. Richard Kuyath,

the counsel to the 3M Corp.; and Dr. Chris Hill, the vice provost

for research and professor of public policy and technology, George

Mason University.

It is a policy of this committee that all witnesses be sworn before

they may testify. If you have supporting individuals with you from

your agencies that may be answering questions, they should also

stand with you and be sworn.

[Witnesses sworn.]

Mr. TOM DAVIS OF VIRGINIA. To afford sufficient time for questions, pleae try to limit your testimony to 5 minutes each. I have

read everybody’s testimony, believe it or not. So we are ready with

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questions, but we would like you to kind of summarize in 5 minutes, and your total testimony will be put in the record.

Dee, I just want to take a moment to welcome you to the subcommittee. As always, your expertise and judgment about procurement issues are noted by the subcommittee and greatly appreciated

by me. I look forward to hearing your testimony and to working

with you on the many issues facing the acquisition community.

Mr. Brock, I understand you will be testifying for GAO with the

assistance of Mr. John Stephenson, who is the Director of Natural

Resources and the Environment, as he has a special knowledge on

this subject matter.

Mr. BROCK. That’s correct.

Mr. TOM DAVIS OF VIRGINIA. OK. I would also note that the GAO

has done significant work in several areas related to today’s proceedings, but given the timing of this hearing, has not yet conducted specific audits in relation to questions posed by this subcommittee.

You can proceed. Thank you.

STATEMENT OF JACK L. BROCK, MANAGING DIRECTOR, ACQUISITION AND SOURCING MANAGEMENT, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY JOHN B. STEPHENSON, DIRECTOR, NATURAL RESOURCES AND ENVIRONMENT,

GENERAL ACCOUNTING OFFICE

Mr. BROCK. Thank you very much, Mr. Chairman, members of

the subcommittee. Mr. Turner talked about the delicate balance between what the Government wants and what it can get, and you

referred to the changing landscape, and that landscape has

changed. I think it’s appropriate that this subcommittee is, in fact,

looking at this question because legislation tends to be static and

can grow stale over time and not reflect actual events.

So the situation we’re in right now is that, for 30, 40, 50 years,

the Government controlled research and development. It was that

simple. If you control it, if you have the money, if you control the

research, you control the agenda, you have the benefit of all of that.

When that balance shifts and more of the research is done in the

private sector, and you maintain the same way of doing business,

then you find that you don’t have the access that you used to do.

So right now we have a situation where the intellectual property—that is, the patents, trademarks, trade secrets, copyrights,

etc.—they all represent seed corn, and no farmer wants to give up

his seed corn. But, yet, the Government wants access to the processes and results of that property in order to promote research and

development activities, which in turn really help address an incredible number of issues, all the way from health to national security,

etc.

So you want to protect the Government’s interest, and in order

to do so, in order to get access to that, then you clearly need to also

be in a position of protecting the intellectual property right of companies and organizations that you deal with. If you don’t do that,

you’re not going to get access. It’s pretty much that simple.

While GAO has not done an exhaustive amount of work in this

area, we have looked at two tools that the Government has available that were designed, in fact, to give them access to information

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and to protect the intellectual property right of the contractors or

the facilities or the grantees. I’m not going to go into great detail

on these. They’re in my testimony. I know that some of the other

witnesses are covering these.

But the first we’ve looked at was the Bayh-Dole, which was implemented in 1980 and then subsequently and significantly modified by Executive Order 12591 in 1987, which essentially gives organizations, grantees, the right to maintain the patent rights for

inventions that are developed by that grantee and, in turn, gives

the Government certain rights to access to that information.

Now we have not looked at Bayh-Dole as it relates to commercial

companies, but we’ve done an extensive amount of work looking at

Bayh-Dole as it relates to universities. We have found that, for the

most part, the major universities are pretty pleased with BayhDole. That’s not to say they like everything about it, but in general

they think that Bayh-Dole has allowed the universities to significantly contribute to the intellectual capital of the Nation and has

allowed both the universities to profit as well as the Government,

and as well as society in whole. So to that extent, it was believed

to be fairly successful.

We also found in subsequent work that the reporting requirements were incredibly complex. While this isn’t maybe the sole reason, we found that both the agencies and the grantees for the most

part did not comply with the reporting requirements. So we have

a situation where we have a piece of legislation that people believe

works, but we don’t have statistics on how agencies are exercising

their rights under Bayh-Dole or statistics we believe that are correct or accurate. We’ve also found that the Government is not always aware of the federally sponsored inventions to which it has

right.

So that some of the benefits of the Bayh-Dole Act that would, in

fact, accrue to the Government are not largely known by the Government, and so that’s a particular problem. We did make some

recommendations on matters for consideration of the Congress to

clarify some of this. As yet, that has not been clarified.

We’ve also done work on looking at something that is mostly

used by the Department of Defense. DOT and NASA also have

availability of it, and DOE is asking for it. This is called other

transaction authority, and essentially, other transaction authority

for limited use, primarily for basic research and development and

for prototype development, gives the Department the authority to

waive the normal procurement rules. As such, you can exercise an

incredible amount of flexibility to provide protection and assurances to commercial companies while at the same time giving the

Department in this case access to technologies that it needs in

order to develop new systems, new weapons, whatever.

The Department has not used this extensively. I think when we

did our report, they had done I think 97 different agreements, totaling $2.6 billion over 5 years. At the same time the total research

budget was about $100 billion. So you can get a sense of the magnitude there.

We found that the Department generally believed that they were

able to get access to firms that had previously not dealt with the

Government and, as such, thought that they were able to get access

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to new technologies. What we also found at the same time, that the

Department was really not exercising all of the flexibility that it

could and, in fact, frequently was trying to use the same methods

and techniques that they had been using under contracts negotiated under the typical FAR provisions. So that, in fact, the Department was not making the best use of the other transaction authority.

We recommended in that report two things. First of all, that better guidance be issued by the Department. I’d like to talk about

that briefly in just a moment. Second, that the Department develop

metrics on this, so that, in fact, they could determine whether or

not there was success being generated from the report. Were you

achieving the results and the objectives of the legislation?

So I think the real issue that the Department faces now in this

is that it has changed; the landscape has changed. The Government does have flexibility. We don’t really know, I think, nor does

the Department know beyond anecdotal information, as to whether

or not the tools that are available are being effectively used. The

Department’s guide, which you referred to in your opening statement, is I think very good, and I think you need to be congratulated for the quality of that guide. That’s just the very first step.

Developing a guide is relatively straightforward, not trivial, but

relatively straightforward. Implementing the guide among literally

thousands and thousands and thousands of people who may be in

a position to, in fact, negotiate contracts with commercial companies and other grantees is very difficult. We’ve found in the past

that the acquisition community tends to become inculcated in existing ways of doing business, and they’ve found it difficult to exercise

the flexibilities they have. That’s a real issue that needs to be addressed before you might consider other alternatives.

That concludes my summary, Mr. Chairman. Thank you.

[The prepared statement of Mr. Brock follows:]

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Mr. TOM DAVIS OF VIRGINIA. Ms. Lee.

STATEMENT OF DEIDRE LEE, DIRECTOR, DEFENSE

PROCUREMENT, DEPARTMENT OF DEFENSE

Ms. LEE. Thank you. Good morning, Chairman Davis, members

of the subcommittee. Thank you for the opportunity today to talk

about the Department’s current practice regarding intellectual

property and the initiatives we’re pursuing in this area. As has

previously been highlighted, this is a very complex area, and we’re

continuing to learn more and evolve and think about what we really need to do to ensure that our commercial counterparts are able

and willing to engage in activities, particularly for the Department

of Defense.

As you know, today’s intellectual property rights and contracts

are largely based in statutes. We have patent laws: the Bayh-Dole

Act of 1980 and Title 35. We have copyright laws in Title 17, and

we have other various provisions in Title 10 regarding technical

data. These intellectual property provisions are intended, just as

Mr. Turner said, to really balance some conflicting needs in the

Government.

First, the wide distribution of information that has been funded

by Government-funded research, we believe it should be widely distributed and shared so all can benefit. The other, second, to provide

incentives to individuals and companies to apply their innovative

technology to Government work. If we protect their creative work,

they are more likely to be willing to share that with us. We’re trying to balance that wide distribution with properly protecting

rights.

Of course, during all this the Department has to get enough information so that we can create an atmosphere where we can

achieve our mission. Examples are, when we have very unique

items out on the ship at sea or something, we have to have enough

information to be able to maintain it. Where does that meet with

commercial rights and departmental information, and how do we

control that and make sure we address that properly?

It’s difficult to determine the correct balance in every acquisition.

As has previously been stated here, in the fifties and sixties our environment has changed. The Government was much more of a leader; now we’re not as much in control of their R&D dollars that are

invested in our economy.

So what have we done so far? We’re taking serious action, looking at intellectual property. We’ve taken several actions, and we’re

trying to, No. 1, start just exactly where Mr. Brock recommended,

with let’s make maximum use of the flexibilities we have today. So

we have issued several memorandum in September 2000 and January 2001. So on Department time, it’s a relatively new issue that

we’re addressing, and we’ve tried to emphasize the need to make

sure that people in the field understand. We have to have people

willing to participate with the Department, and a key environment

of putting that trust forward is ensuring that we can properly protect their data.

As everyone has mentioned, our guide here is kind of the second

piece of things that we’ve put out. In fact, Will Anderson is here

in the field, and he’s got to get a lot of credit for really honchoing

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this through, and he has supported that from putting a guide out.

It basically is trying to be an education tool to our people on what

their flexibilities are.

We also mentioned the other transactions. We’re learning there:

How do we use other transactions? As we’ve been trying to use

other transactions, we’ve also gotten some additional legislation

that we believe kind of limits our scope, including some cost-sharing and some other activities. So we’re having some challenges in

using the other transactions, and we want to also make sure their

people use them appropriately, not as a reason to avoid other procurement laws. So that’s our current push.

We have some other ongoing initiatives. As was mentioned here,

training; we have identified the need for training. Intellectual property is very, very complex. Yet, little training is currently offered,

and we recognize that’s an urgent need and that we need to look

at that.

We’re also taking two steps of rewriting part 27 of the FAR. The

first, humble step that it may be, is to just try to get it more in

plain language. It is now currently written in a very complex fashion. So, again, Will Anderson is helping lead that group. Then, the

second step will be to identify ways that we can simplify those regulations as well.

We’ve also been having numerous discussions with various firms

to try to understand what their issues are, and I think you have

a good representation here today. We’ve been meeting with groups

such as the ABA to talk about reforming intellectual property

rights, and what are their opinions, and there are numerous active

communities that are truly looking at this. So we think that’s a

good way to look to others and get their information.

We are also reviewing input from the subcontractor community,

because it’s not just the Government to the prime; it’s the prime

to the subcontractor, and we have to understand how those intellectual property rights are impacted.

So we’re certainly welcome to be here. I personally am thrilled

with the committee’s interest and support in this area. It is a very

complex area. So, in closing, I’d like to thank the committee for this

opportunity, and we look forward to working with you on finding—

and our industry partners—on finding solutions in the area of intellectual property. Thank you.

[The prepared statement of Ms. Lee follows:]

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Mr. TOM DAVIS OF VIRGINIA. Mr. Fygi.

STATEMENT OF ERIC J. FYGI, DEPUTY GENERAL COUNSEL,

DEPARTMENT OF ENERGY

Mr. FYGI. Thank you, Mr. Chairman. I’ve listened with interest

to these introductory remarks as well as yours and Mr. Turner’s.

The Energy Department’s predecessor of the Atomic Energy Commission was distinctive in that its first organic act in 1946 was

very substantially directed to intellectual property and, in particular, the allocation of rights to inventions in the nuclear field that

first was receiving a statutory charter at that time. That event,

and the fact that much of the Department’s mission is actually the

conduct of basic research itself, which it does through entities like

the National Laboratories that happen to be operated by contractors, has resulted in the intellectual property matters being prominent and occasionally controversial in all of the Department’s activities.

That had been reflected in a series of statutory charters, beginning with the Atomic Energy Act, extending through the Non-Nuclear Energy Research and Development Act of 1974, in which, contrary to then-emerging trends, we were required to retain Government ownership of all patents as a general starting point, and only

thereafter able to have some statutory waiver authority to make

the result conform as much as possible to the President’s patent

policy first issued in the early eighties, to which you’ve already alluded.

That’s the background and, further, that’s a factor that further

complicates the already intricate statutory matrix that has been

overlaid by subsequent enactments such as the Bayh-Dole Act and

the Technology Transfer Act of 1989, as has been eloquently attested to by my colleague from the Defense Department.

Whether, however, it’s entirely correct to understand the problem

as this intricacy comprising an inappropriate impediment to private sector participation and Government-funded research activities raises a somewhat more difficult question, and that is: how one

harmonizes what ordinarily would be a perfectly logical business

plan and practices held by a private industrial or commercial entity

regarding its conduct of its own intellectual property portfolio with

the principle that the reason these Government contractors receive

public funds is to pursue a public purpose, frequently established

explicitly in statutes that may well mandate results at odds with

that particular corporate entity’s own patent portfolio of intellectual property practices.

It’s harmonizing those occasionally competing considerations that

is the essence of the task that the subcommittee has described. I

very much appreciate the fact that the subcommittee is beginning

that task in a careful and measured manner, and we certainly in

the Energy Department will contribute in any way the subcommittee should wish in this respect.

[The prepared statement of Mr. Fygi follows:]

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

STATEMENT OF RICHARD W. CARROLL, CHAIRMAN, SMALL

BUSINESS TECHNOLOGY COALITION, AND CHIEF EXECUTIVE OFFICER, DIGITAL SYSTEM RESOURCES

Mr. CARROLL. Thank you, Mr. Chairman, Ranking Member Turner, members of the subcommittee, for the opportunity to testify

about the intellectual property issues affecting commercial firms

doing business with the Federal Government. My name is Richard

Carroll, and I’m chairman of the Small Business Technology Coalition, an association of hundreds of high-technology firms located

across the country and dedicated to improving Federal policies and

practices for smaller firms engaged in Federal scientific research,

technical and professional services.

In addition, I’m chief executive officer of a high-technology company called DSR, Digital System Resources. DSR offers information

technology and complex software solutions to the Department of

Defense. As the CEO of a small, high-tech company, our people and

the intellectual property they create are our single most important

commodities. In the process of delivering services and products to

our Government customer, I have learned firsthand how absolutely

essential intellectual property is to my business and the challenges

of dealing with intellectual property in the Federal contracting.

I’m going to talk about the dramatic shift, and what the implications are of that shift, of where R&D comes from in this country.

I’ll explain further that the real loss from the nonparticipation

from leading commercial R&D firms in DOD programs is the loss

of alternatives, the loss of ideas, and the loss of competitive solutions for DOD programs and needs. I’m going to concentrate on

DOD because that’s where I have most of my experience and the

experience of our association.

The DOD regulations and procedures governing the allocation of

intellectual property rights are for the most part contained in the

Federal Acquisition Regulation and the Defense Regulation Supplement, DFARS. I’m not going to attempt to summarize the technical

aspects of these complex regulations. Instead, I have provided an

attachment which will be included in the record, appendix A, and

that does this.

It is the prime function of the regulations and clauses to balance

the competing interests of the Government that wants to gain

rights to intellectual property it has paid to develop and commercial firms that want to retain and protect their creative ideas from

unauthorized disclosure to competitors. Indeed, the FAR provision

27.402 states that ‘‘in applying these policies, agencies shall strike

a balance between the Government’s need and the contractor’s legitimate proprietary interest.’’

By and large, the current regulations affect that balance. While

there are many changes that the industry probably would like to

make to the regulations, if they had ultimate say in the matter,

most would admit, in my opinion, that the regulations as written

effect a reasonable balance between industry and DOD.

Having said that the allocation of rights under the applicable

regulations and clauses is basically fair is not to say that the industry does not desire changes. I have included another appendix

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in my written testimony of technical concerns that industry has

with the regulations and clauses, and I won’t go over those. They’re

in my testimony.

These are important, but my primary concern is with the implementation of these very complex clauses and regulations, which is

a far greater problem than the matter in which they are written.

The practices and behavior of contracting and programming personnel in implementing these regulations and clauses can undermine the balance these written regulations attempt to strike. Some

Government personnel assume that it is in the Government’s interest to take every last right that can be obtained in every circumstance from contractors, and to do less would fail to protect the

Government’s interest. Others seek to pressure contractors to release their proprietary rights or property rights as a condition of

getting a major contract. People in my organization have experienced that. It’s not uncommon.

Additionally, large firms can move aggressively against the

rights of small firms who have neither the resources nor the knowledge to defend them. All of these situations tilt the playing field

against the commercial firm seeking to preserve its intellectual

property rights. Consider this behavior in light of the fact that recently it is the Government’s written policy to obtain only the minimum rights necessary for any acquisition.

Let me hasten to add that many well-meaning Government personnel struggle every day to do the right thing in this area. However, even a small minority of individuals can affect the overall desire of thousands of firms to participate or not participate in DOD

R&D programs. It is not enough to say, ‘‘only a small minority of

personnel do such things.’’ Few commercial firms will gamble with

their intellectual property.

It is my experience that the Government’s insistence on obtaining data rights has more to do with the potential competition that

these new ideas give incumbents than it has to do with the Government’s needs in an acquisition. The paradigm is not reflective of

any one individual, but instead reflects the enormous strength that

current incumbencies have within the institution and the fear that

technological innovation could displace them, as they have seen it

displace very powerful incumbencies in our commercial sector.

That’s a big fear.

Let me concentrate on protecting the rights of small businesses.

The problem of protecting intellectual property is more acute for

small firms. Small firms cannot afford to challenge large bureaucracies. Yet, small firms are critical to the success of any organization such as DOD which seeks to incorporate new technologies into

its missions.

Recently, Congress reauthorized the SBIR Program, and that

program is a very good program to take a look at when it comes

to intellectual property rights. The SBIR Program is unique in that

it grants special rights to small firms when they do R&D for the

Federal Government. Unlike other contracts where the FAR

clauses give essentially unlimited rights to the Government, these

don’t. It tests the ability of the Government to trust the competitive

environment that’s created when small firms gather rights with

Federal R&D.

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The SBIR Reauthorization Act of 2000 had special provisions

dealing with this problem, and the SBA is rewriting their directive

for how that’s dealt with. In general, they’re doing a very good job.

It’s in the review stage right now.

Let me say that I had a number of recommendations that I

would like to offer and propose solutions in this area, although I

certainly can’t recommend solutions to all of these problems.

They’re very complex.

First, I want to commend Ms. Lee for their guide, ‘‘Intellectual

Property: Navigating through Commercial Waters.’’ That’s a very

well-written document, and I would recommend that a section be

included on SBIR data rights and the intent of Congress in enacting the SBIR program in this area.

With those modifications, I would also recommend that the committee give her all the support and encouragement to get that out

and get people trained in this area. That’s a big step.

I also would recommend that the committee work with the SBA

to bring focus to its SBIR policy directive to protect the intellectual

property of participating business.

Finally, I would like to recommend a nonjudicial source of redress for intellectual property disputes for both large and small

companies in the departments.

I thank you for the opportunity to testify and look forward to answering your questions.

[The prepared statement of Mr. Carroll follows:]

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

STATEMENT OF RICHARD N. KUYATH, COUNSEL, 3M CORP.

Mr. KUYATH. The first overhead, please.

Mr. Chairman and members of the subcommittee, I want to

thank you for this opportunity to discuss patent rights as a barrier

to Federal procurement. I’m Richard Kuyath from 3M’s Office of

General Counsel, and I’ve practice Government contract law for

about 26 years. I think I offer a unique perspective in that I practiced for a traditional defense contractor for about 14 years, and

the last 12 years with 3M, which is probably a 99 percent commercial company.

Let me first give you some background regarding barriers to

doing business with the Government in general. First, many commercial companies either cannot or will not accept Government

contract requirements. They don’t have the systems or the trained

people needed to comply. There are many barriers that still continue to exist for R&D contracts. Procurement reform really hasn’t

addressed these issues. They include the FAR cost principles, the

Truth-in-Negotiations Act, the cost accounting standards, and, last

but not least, intellectual property rights.

Some of the reasons why commercial companies won’t add these

compliance systems are, first, the high cost to add these compliance

systems. It makes them less competitive in their commercial marketplace, where Government business may be 1 to 2 percent of

their business. It interferes with their commercial business.

Next overhead, please.

Today, as we have heard, much of the leading-edge technology is

commercial. A recent study has shown that over 92 percent of Fortune 500 U.S. industrial firms have few or absolutely none R&D

contracts with the Department of Defense, and most of those companies that do are the traditional defense contractors.

A key point also to note is that, even these commercial companies that do participate, it’s often in only a few business units of

those commercial companies. The Government is not getting the

entire commercial company to participate. Most of this commercial

technology is walled off. As a result, two different industries have

emerged: commercial and defense. And the Department of Defense

is not getting the technology it needs.

The next overhead, I wish you could see this more clearly because it’s very enlightening. It shows the top 25 companies receiving U.S. patents for 1998. If you could look at this overhead, you

would see that the traditional defense contractor is conspicuously

absent. The top three U.S. companies—IBM, Motorola, and

Kodak—gathered a total of over 5,000 patents, whereas the top five

traditional defense contractors only received 579 patents and didn’t

even make the list. I think that says a lot for where R&D is today.

Next overhead.

Let’s discuss a little bit the Bayh-Dole Act because it’s the background regarding the patent rights. It’s a very rigid statute. It dictates what patents apply to funding agreements with the Government, and those are procurement contracts, grants, and cooperative

agreements. This law applies to small businesses and nonprofits by

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statute, and it applies to large, for-profit businesses by Executive

order.

The contractor retains title to subject inventions, those inventions made under the Government R&D contract, and the Government obtains a paid-up Government purpose license, but only for

Government purposes. The contractor retains exclusive commercial

rights, and this is generally very acceptable to commercial companies.

Next overhead, please.

The Bayh-Dole Act had two principal goals when it was enacted:

first, to establish a uniform patent policy for all Government agencies. Before that, there were about 26 different policies being followed. Second, to encourage commercialization of Governmentfunded inventions by permitting the contractor to retain title, to

incentivize that contractor to commercialize the invention. The

Bayh-Dole Act has generally been very, very successful in commercializing Government-funded inventions.

Next overhead, please.

However, despite its success, commercial companies have five

major problems with the Bayh-Dole and its implementing patent

clauses. Perhaps the biggest problem is there is no ability to keep

a patentable invention a trade secret. Under this law, the contractor must either elect title to the patentable invention it develops

or pass the baton to the Government and give the Government that

right. If it fails to do so, it will forfeit all rights in that invention.

This requirement to patent patentable inventions conflicts with

some companies’ intellectual property strategy. Some companies do

not patent any inventions whatsoever. They prefer to keep them as

trade secrets. For one reason, patents, the general life is 20 years,

but if you keep a trade secret, it can last virtually forever. Look

at the formula for Coca-Cola, for example.

There are other reasons why trade secrets are important for commercial companies versus patenting, but I don’t have time to get

into them. They are in my materials.

Another problem for commercial companies, the Government obtains a paid-up Government purpose license and other rights, such

as march-in rights in the patentable invention. These rights dilute

the value of the patent, especially for those companies that license

out the technology to a third party.

Another problem is the term ‘‘Government purpose’’ is undefined,

and it could include, for example, foreign military sales or sales to

State and local Governments, other areas where commercial companies may want to get involved and sell their products.

Another key problem is the definition of ‘‘subject invention’’ itself

in the Bayh-Dole Act. It includes any patentable invention either

conceived or first actually reduced to practice in the performance

of the R&D contract. If either event occurs, the Government gets

rights. However, under U.S. law, an invention can be conceived and

patented prior to entering into this Government R&D contract, but

the Government will still get rights if the invention is first actually

reduced to practice in the performance of the R&D contract. Commercial companies look at this as, in effect, the Government getting

rights in their background inventions.

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They also see there is no equity necessarily. The contractor may

have invested millions of dollars to come up with that conception.

Yet, the Government contract where the reduction to practice occurred may only involve a couple of hundred thousand dollars. Interestingly, the former chief intellectual property counsel for 3M

Co. testified before Congress in 1981 that this right was too broad

under the Bayh-Dole Act and discouraged participation in Government R&D by commercial companies.

Also, use of ‘‘first actually reduced to practice’’ is inconsistent

with commercial R&D agreements. In commercial R&D agreements, the rights to inventions are determined by whoever conceives the invention, not whoever reduces it to practice.

Next overhead, please.

Another problem with the act is march-in rights, which are compulsory licensing to third parties of inventions made under the contract for failure to commercialize the invention within a reasonable

period of time. The Government has very broad rights under

march-in rights. The Government determines what is a reasonable

time to commercialize, whether the invention has been reduced to

core practical application. In other words, has it been adequately

commercialized within a reasonable period of time?

The Government also determines who’s going to be the licensee.

The licensor, the inventor, has no control over this, and this could

be a competitor of the inventing company. This is a major concern

for commercial companies. Commentators question whether the

Government has the expertise to make these types of determinations.

The fact that march-in rights have never been exercised since

they’ve existed since 1964 still doesn’t eliminate this concern. I had

one business unit drop out of a Government R&D program because

of the concern over march-in rights.

The last major problem with the Bayh-Dole Act is that it has

mandatory disclosure, election of title, and filing requirements that

have to be accomplished within certain time periods for subject inventions. For example, a contractor must elect title within 8

months of disclosure of that invention to the Government. These

time periods are often too short and they conflict with a company’s

internal commercial practices. A company may need much more

time to decide whether to elect title. It costs a lot of money to file

and maintain patents, and this has to be done not only in the

United States, but worldwide. You have to figure out which countries throughout the world you want to file and maintain patents,

and it costs a lot of money to do that in each country. So more time

is needed here. Also, under the terms of the patent clause, you can

forfeit title for failure to meet these requirements, these time requirements, and this is a major concern for commercial companies.

I want to thank you for the opportunity to present my views, and

I’ll be pleased to answer any questions.

[The prepared statement of Mr. Kuyath follows:]

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

STATEMENT OF CHRISTOPHER T. HILL, VICE PROVOST FOR

RESEARCH AND PROFESSOR OF PUBLIC POLICY AND TECHNOLOGY, GEORGE MASON UNIVERSITY

Mr. HILL. Mr. Chairman and members of the committee, I want

to thank you for giving us the opportunity to talk to you this morning about it from a university point of view on issues affecting participation in Government R&D procurement. I’d like to tell you a

little bit about research at George Mason, comment on the BayhDole Act, and raise a couple of issues that affect our ability to participate, cost-sharing requirements and publication limitations. Last year George Mason earned more than $50 million in new

grants and contracts, of which direct Federal funding supported

about 60 percent and Federal funds that flow to us through subcontractors supported another 15. George Mason’s research is

strong in areas of interest to Federal mission agencies like DOD,

NASA, and FAA. DOD is our largest supporter. Our strengths include information technology and information security, remote

sensing from space, simulation of explosions like that which occurred on the USS COLE, intelligent transportation, and human

factors engineering. Our partners include such firms as SAIC,

Raytheon, Boeing, and Lockheed Martin, small firms, and other

universities.

We engage in R&D procurement contracting for a variety of reasons.

First, we made a decision 20 years ago to focus on information

technology in support of the needs of our region in northern Virginia. IT funding occurs in mission agencies, so our faculty are naturally drawn there to seek funds for their research.

Second, George Mason faculty are often asked by prime contractors like the ones I mentioned to participate in Federal contract

proposals.

Third, we go after Federal research contract procurements because there’s where the money is.

The Bayh-Dole Act of 1980 let universities patent, own, and commercialize inventions made with Federal funds. We believe this act

is very beneficial to universities and certainly agree with earlier

comments from GAO in that regard. It has changed how universities do research, and it has contributed to the emergence of an

entrepreneurial culture there.

Bayh-Dole works well when the university receives Federal funds

directly and faculty or students use them to make an invention. If

a patent results, we can license it to industry or use it to help establish a startup. But there are problems.

First, prime contractors do not always flow the Bayh-Dole provisions down to university subcontractors, and they sometimes claim

title to all inventions made under the prime contract, even those

we make. We cannot accept such provisions. And I am very pleased

that the DOD report mentioned earlier makes clear on page 4–10

that we should own this intellectual property.

A second problem with Bayh-Dole can come up when software is

developed with Federal R&D funds. The software may be patentable and it may also be copyrightable. The patent may belong to

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us under Bayh-Dole; the copyright can be taken by the Government

under rights-in-data clauses, creating an intolerable situation of

joint ownership of the same piece of property by two widely divergent authors. We think this needs to be fixed, perhaps by establishing in statute that patent law takes precedence over data rights in

the case of software.

Let me turn to the cost-sharing problem. Since World War II, the

Government has paid the full cost of research at universities, because we don’t have any other way to pay the costs of research. We

don’t get State funding, and we don’t get private gifts in support

of research. Increasingly, however, the mission agencies require or,

what’s worse, strongly suggest but don’t specify cost-sharing by

contractors to win R&D contracts. This puts a heavy burden on

university bidders and sometimes keeps us out altogether. To costshare, we have to dip into very scarce discretionary funds, and the

burden is even worse when we are a subcontractor to an industrial

prime that finds it a good business decision to cost-share and then

asks us to assume our share of the cost-sharing.

Cost-sharing also comes up under cooperative agreements. We’ve

been asked to pay as much as half the cost of Federal projects

under these cooperative agreements. We can’t handle many of

these without a trip either to the poorhouse or the casino, where

we would hope to win.

Universities should not have to cost-share on contract procurements or under cooperative agreements. The principle of full cost

reimbursement should apply. If cost-sharing must be used, the

agency should state the amount or proportion of cost-sharing that

will be recognized, so we don’t get involved in damaging bidding

wars with our fellows.

Finally, let me address publication limitation problems. Publication is our lifeblood. However, R&D funders frequently seek to

limit the rights of our faculty and students to publish. We can live

with temporary restrictions to permit review of draft publications,

but we will not agree to limitations on publication to protect the

reputation of the sponsor. When Government-funded research is

classified, or a discovery on an unclassified project is deemed ‘‘born

classified’’—this rarely happens—publication restrictions are burdensome, but we understand why they have to be there.

Sometimes, however, DOD contract officers assert the right to review and to delay publication indefinitely at their discretion without recourse to security classification. The DFARS at section

252.204–7000 incorporates this power on their part.

Now in recognition of the special needs of universities to publish,

the OSD issued an instruction back in 1987 that gave contract officers the authority to waive such requirements at their discretion

for ‘‘fundamental research activities.’’ Section 35 of the instruction

states, ‘‘Papers resulting from unclassified contracted fundamental

research are exempt from prepublication controls and this review

requirement.’’

Now we can usually, but not always, successfully argue for removal of 204–7000 from mission R&D contracts, but a major problem comes up if we are a subcontractor to a prime who’s already

accepted that clause without consulting with us. Unless the prime

will go back to the agency to seek its removal, we must either

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refuse the contract or find some sort of awkward temporary fix to

bridge an unsatisfactory situation.

This is not just a George Mason problem. We recently consulted

with 11 major research universities, including MIT, Penn State,

the University of Texas, and others on this clause. Most of them

refused to accept it, and thus, forgo participation in contracts that

include it.

We would prefer to see the instruction I mentioned above, the

concepts at least, adopted as a standard clause in the DFARS, with

mandatory application to university performers as partners or subcontractors to private firms when doing fundamental research. The

DOD report addresses this issue at page 4–24, but, frankly, it fails

to address university concerns when it does so, and we would hope

that in a revision it could be addressed there.

Thank you. I would be glad to take your questions.

[The prepared statement of Mr. Hill follows:]

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Mr. TOM DAVIS OF VIRGINIA. Well, thank you very much for a

great round of testimony.

The problem we get out in politics is you go out and the taxpayers say, ‘‘We paid for this. It belongs to us.’’ We see this whether it is in pharmaceuticals or in other inventions and the like, and

they seem to feel that somehow, if taxpayers pay for the development of these inventions, and so on, that it ought to belong to

them, and companies shouldn’t go off and make money. If the company that benefits from that somehow gave you a contribution or

did you a favor, then it looks like a payoff. So that has been the

politics of this for a long time. I think until we got into this, we

didn’t realize the intricacies that go into this and how the Government is really losing out in terms of a lot of innovation because we

have rules that companies are in a position, just like 3M, saying,

‘‘Forget it. We have other markets that we can go to and protect

ourselves.’’ I think the way we talk about the difference between trade secrets and patents is very, very important to understand because

Bayh-Dole really doesn’t contemplate that. I don’t know right

now—it would take a pretty sophisticated contracting agent to understand those differences and try to work through that, it seems

to me.

I have a lot of questions, and I am going to try to limit myself

to 5 minutes for the first round. Let me start, Mr. Carroll, with

you.

I gather from what you have talked about, is one of the concerns

of the small business coming up with innovation sharing it with

the Government? The Government could take that and then they

could go to one of the regular large guys and say, ‘‘Why don’t you

produce this for me?’’ and you’re out of the loop altogether. You

have spent all the time. You brought the innovation and you carved

that niche that the larger companies fail to do, but you are out of

it because of marketing and everything else, and you really have

no protections in this. Is that fair?

Mr. CARROLL. Even when you have protections, the pressure is

enormous for that to occur, like under the SBIR Program. The real

loss of that—and I can understand the Government’s immediate

need. You see, they’ve got a small business that has come up with

a clever way, say, of implementing a new capability. Let’s talk

about DOD and say a clever way of implementing a new capability

in a system, and they’ve got a large company with a system that

could really use that. What they want to do is they want to say,

well, gee, let’s give that to the large company and let that company

implement that capability.

The result of that is to gut the small business’ ability to negotiate its position in that acquisition because, once disclosed to the

large company, two things generally happen. One is they generally

do not implement it because it wasn’t invented there, and there is

a strong bias against outside ideas in anyone’s organization. That’s

just human nature. The second is that the small business no longer

has adequate protection to attempt to offer that to other places,

and they certainly will never get a venture capitalist to come in

and say, ‘‘I’m willing to invest in your product and, oh, by the way,

a lot of people have that intellectual property now that, if you’re

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successful commercializing it, they can jump on the bandwagon

without having to invest any additional money.’’ And they lose the

ability for creative destruction. They lose the ability for a small

business to gain its intellectual property strength to threaten incumbencies with alternatives, and that is such a powerful loss.

In the cases that you can find where this hasn’t occurred and

small businesses have protection and can offer alternatives that

threaten incumbencies, the incumbencies change and offer better

alternatives. That’s what you’re really looking for. What the Government’s interest ought to be, in my opinion, is to create these

competitive environments that foster innovation, not to get access

to the intellectual property.

Mr. TOM DAVIS OF VIRGINIA. The Government’s position has been

basically, ‘‘Look, Small Business, we funded you through maybe

three stages of this, and now we’ve got what we’ve wanted from

you, and we’re going to use it the way we think is best.’’ What you

are saying is they may think they are using it the best way, but

because of just inertia factors in some of the larger companies and

the fact that they really aren’t into the culture of implementing

this, they are not really getting what they want. Is that fair?

Mr. CARROLL. That’s fair, and they’re losing the benefit of creative destruction. They’re losing the benefit of a small business

growing to threaten existing ideas and cultures and alternatives,

and that’s the big payoff. The big payoff isn’t taking what was initially conceived of and spreading it out and leveling the playing

field. That’s not the way the world works. People innovate best

when they have competition.

Mr. TOM DAVIS OF VIRGINIA. Just when you finally get a competitor up there that can go toe-to-toe, you knock them back down?

Mr. CARROLL. That’s exactly right, and that’s where I think, as

the world has changed in who’s funding the R&D and where these

ideas are coming from, I think the Government’s interests, which

they want to protect, are in creative competitive environments, not

in spreading the information around to everybody. The Government’s interest is best served by creating competitive alternatives

which fosters innovation, affordability, faster time to markets—all

of the things we see that created the explosion in the information

technology world that we see out there today.

Mr. TOM DAVIS OF VIRGINIA. But that is just not part of Government’s culture. I mean, that is not the way Government really approaches these things.

Mr. CARROLL. That’s correct.

Mr. TOM DAVIS OF VIRGINIA. Ms. Lee, let me ask you, any reaction to that?

Ms. LEE. I agree wholeheartedly. If we could change the dynamic

to say we really want to bring in the competitors and the new competition, that would make a significant difference. As we’re trying

to buy more commercial items, we’re even finding that there’s a

commercial item out there and we want to incorporate it into the

system, and we’re getting this, ‘‘No, because we have all this back

investment, and once it comes into your system, we lose that intellectual property.’’ So we’re trying to figure out how to balance this,

how to maximize.

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Mr. TOM DAVIS OF VIRGINIA. Mr. Carroll made an art form of the

SBIR. I mean, he has been a national leader on this and his company has been good. I think they go through three stages, but then

it is like, ‘‘Thank you, Little Guy. We appreciate what you’ve done.

We’re going to now hand it back to the people who couldn’t innovate in the first place.’’ I think that is a concern, and how the contracting officer—I can understand why they would want to go with

an established group that may look like they can use it. I mean,

I think we understand that, but I don’t think until today we have

really heard how that is not maximizing the potential the SBIR

has. I appreciate your bringing that out. I think it is something we

need to come back and try to look at and give appropriate flexibility.

My 5 minutes are up. Let me turn to Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

Following up on the chairman’s comments, Ms. Lee, doesn’t the

other transactions authority give the Department the ability to

work through these issues that we are talking about?

Ms. LEE. Yes, sir, the other transactions authority is available.

Currently, we have had some change in legislation the last year

that also requires cost-sharing, particularly with nontraditional

users. Also, we’re only allowed to use it for the R&D phase. So if

you bring a company in and you say, ‘‘Come forth and we’ll negotiate this unusual intellectual property right’’—and I think Mr.

Kuyath highlighted that there are other issues as well, cost accounting, some other issues. We negotiate this unique deal, but we

don’t have the authority, then, to cross over and go in production.

So we say, that was fun working in the R&D part, but the minute

you cross over into production we go into a traditional procurement

contract, and they have to then be able to assume all the activities

that we previously had specifically exempted under other transactions. So we’re trying to work out how we can go the whole cycle

from that standpoint.

Mr. TURNER. So are you prohibited from going beyond the initial

R&D phase——

Ms. LEE. Yes.

Mr. TURNER [continuing]. By current law?

Ms. LEE. Yes.

Mr. TURNER. Are you suggesting that should be changed?

Ms. LEE. We have some requests for change, and we have been

working with—previously working with the committee to try to get

that language perhaps considered.

Mr. TURNER. Mr. Brock, does that change represent a positive

step, the change that Ms. Lee is proposing?

Mr. BROCK. It could be. One of the concerns that we would have

is I think in part because of a limited evaluation on how well the

other transaction authority has worked within the Department,

that if you extend it past prototype into production, you’re now assuming a new dynamic where there is opportunity for contract

abuse. We would certainly like to see what sort of controls are in

place to make sure that there’s an appropriate level of oversight

over that. I think in the absence of seeing what it would look like

beyond just an idea, I’d be reluctant to say at this point that it is

something you should pursue.

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Mr. TURNER. Mr. Carroll, have you been working on these suggestions that Ms. Lee is talking about?

Mr. CARROLL. In the other transaction authority?

Mr. TURNER. Yes.

Mr. CARROLL. No, I have not really worked in that area. My experience in observing other transaction authority implementations

like DARPA did with a ship is that it really is engaging the larger

businesses at this point in time. I am not aware of a lot of small

businesses that are engaged in other transaction authority.

Mr. TURNER. I notice that there is not a lot of use of the other

transactions authority. Is that a problem within the Department,

Mr. Brock? Should they be more aggressive in using it?

Mr. BROCK. I think other transactions authority gives the Department a great deal of flexibility. As I mentioned in my longer

statement, our concern over the use of that flexibility is the ability

of the acquisition work force to appropriately use it and to take advantage of the opportunities it can give you and the flexibility it

can give you. This is a longstanding concern that we have had in

GAO on acquisition work force and in terms of their capabilities to

operate in a rapidly changing environment.

I think several of the witnesses have talked about the difficulties

in dealing maybe with the Department and other agencies as well,

not so much the laws, rules, and regulations, but how the folks

that try to make this work take advantage or don’t take advantage

of these and keep doing things in the old way. So, as I said—and

in our report it was brought out more—that the lack of training,

the lack of knowledge, and maybe in some cases a lack of ability,

a lack of keeping up with the times is potentially limiting the Department from making effective use of what they already have.

Mr. TURNER. And what is the remedy for that? What kind of

training initiative do we have to solve that problem?

Mr. BROCK. Well, the first remedy, the first step in the remedy,

I think, has been taken. If I could borrow your book—[laughter]— I should have brought mine. This is a good first step: ‘‘Intellectual

Property: Navigating through Commercial Waters.’’ We’ve taken a

look at it. I couldn’t vouch that it’s all legally accurate. We haven’t

gone down to that level of parsing, but I would say that it’s really

a good step.

The point is, as you take this, you give it to a contracting official

and say, ‘‘OK, here it is. Start working with this,’’ I think you’re

doomed to failure. I think it remains to be seen now as to what sort

of training will be provided, what sort of resources will be made

available to the Department to provide that training, and what sort

of oversight will be given to the contract officers/acquisition officials

to make sure that they are taking advantage of the authorities

they have. That’s a lot of big steps.

Mr. TURNER. Ms. Lee, what is the Department doing to try to

take those steps Mr. Brock referred to?

Ms. LEE. Training has been a continuing issue, everything from

intellectual property and a lot of other areas, and how do we get

people to basically shift in paradigm from the way we used to do

things to a new business environment, and trying to consider a

host of other things among intellectual property. We’re looking at

basically totally revamping the current way we train acquisition

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professionals. We’re looking at the fundamental core courses, adding electives. We have 80 hours of continuous learning. Trying to

stand all that up, how do we deliver it electronically to save on the

money, travel, etc.? So we’re revamping the education program.

Simple as it may sound, we hadn’t always done a very good job

at linking our initiative to the classroom. We would pop out these

initiatives and talk about them for a while, and then we would go

look at our classes and find out they weren’t there. So we’ve now

changed where we actually have the educators come in while we’re

doing the policymaking, so they can be prepared when we finally

get the initiative out, that it will actually show up in the classroom

at the same time. So we’re doing those kinds of things.

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

Mr. TOM DAVIS OF VIRGINIA. Thank you very much. Mrs. Davis?

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

thank you, panel, for being here to testify to us today.

Mr. Kuyath, my question is going to be to you. If you could tell

us how the Civil False Claim Act works and its effect on commercial companies that are considering contracting with the Government for R&D?

Mr. KUYATH. The Civil False Claim Act, the intent to defraud requirement, all that needs to be proven is gross negligence or willful

disregard for the truth. It discourages many commercial companies

from doing business with the Government because of the lack of

the requirement to prove intent to defraud.

Simple mistakes are sometimes accused of being fraud. There

was a recent decision where a contractor had a reasonable interpretation of what the contract said, but the court held that he had

committed a violation of the Civil False Claims Act because, even

though his interpretation was reasonable, it was wrong under the

terms of the contract.

These types of decisions scare commercial companies. Frankly,

my general counsel at my company, if he had his way, would not

do any business with the Government; he is so afraid of the Civil

False Claims Act and the ramifications that could result because

of no intent to prove fraud under this law.

Also, the qui tam actions are very frightening because it enables

a third party to bring a suit on behalf of the Government, and the

Government doesn’t even have to believe in the case. Yet, the contractor is going to have to fight this case. In some cases these companies, frankly, settle to eliminate the bad publicity even though

they may not believe that there is a case against them. It’s a huge

club the way the law is written and it does discourage commercial

companies from participating in contracting with the Government.

Mrs. JO ANN DAVIS OF VIRGINIA. What can we do to correct that?

Mr. KUYATH. I think you should go back to the way the law was

originally promulgated, where the intent standard was much higher. You had to prove intent to defraud, and it was beyond a preponderance of the evidence. I can’t remember exactly what the standard was, but it was a strict standard. So it was clear that there

was intent to defraud the Government when violating this law.

That would go a great way.

There are huge penalties that result from violation of this act,

and I think they go way beyond what actions now can constitute

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a civil false claim; i.e., no intent to defraud, just reckless disregard

or gross negligence.

Mrs. JO ANN DAVIS OF VIRGINIA. Ms. Lee, do you have any comments on that?

Ms. LEE. Civil false claims has been—one of the things that we

have been doing through acquisition reform is trying to go to companies and say, ‘‘What are the barriers? Explain them to us.’’ We

do hear, as we have mentioned here, we hear intellectual property.

I would generally say it’s always in the top five. Cost accounting

standards hits in the top five, and we hear a lot about civil false

claims and general oversight and standards for those. They do hit

from that standpoint, as perceived barriers to doing business with

the Government.

Mrs. JO ANN DAVIS OF VIRGINIA. Mr. Carroll, I think, if I heard

your testimony correctly, you’re somewhat OK with the approach

that DOD has taken in its guide to help you——

Mr. CARROLL. Yes, I think that the guide is a well-written guide,

and it begins to take the shift from the perception that all of the

rights should be owned by the Government to let’s just get what

we really need here.

Mrs. JO ANN DAVIS OF VIRGINIA. Are there any other non-intellectual property concerns that are causing commercial companies to

refrain from doing business with the Government, in your opinion?

Mr. CARROLL. Non-intellectual property concerns? The marketing

cycle for working with the Government is much longer than the

marketing cycle in a commercial activity, and I think that discourages a number of people. There are a lot of barriers, procurement

barriers, to access.

Another fundamental concept I think could be improved on is the

concept of a competition. People think of fairness if you win a competition is what is prescribed by the Competition in Contracting

Act, and I think ongoing competitive alternatives is a better fundamental to work off of, as opposed to a competition, where a winner takes all. Because once the competition is over in a winnertakes-all activity, so is competitive pressure to innovate. So I would

like to see, as the Government formulates its competitive strategies, training to teach program managers and contracting officers

that if they can keep ongoing competitive alternatives in the game,

that they’ll foster more innovation and affordability and quicker

time to market.

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

Mr. TOM DAVIS OF VIRGINIA. Thank you very much. Mrs. Mink?

Mrs. MINK. Thank you, Mr. Chairman. This is an extremely interesting area which creates a massive amount of confusion in

terms of what appropriate principles ought to be that we apply to

Government contracting.

I would assume that everybody on the panel, notwithstanding

their views on existing rules and laws and regulations, still adheres to the principle that, if the Government funds research and

development and procurement of a product, that it should have

ownership rights with reference to whatever is produced in terms

of an intellectual product. Is that a principle that is still a sufficient principle and premise upon which we start this debate? Yes?

97

Mr. KUYATH. It’s just the opposite. The Government only gets a

license right. The inventing company gets title. The old scheme,

prior to the Bayh-Dole Act, most agencies provided that the Government would get title, and that sounded great because the taxpayer funded this. So maybe the title should go to the Government.

Unfortunately, what happened was the inventions, the Government-owned inventions would just sit idle because there was no incentive to commercialize these inventions. Unless a company has

an exclusive license or has title to that invention, that invention is

not going to get commercialized.

That was one of the key benefits of the Bayh-Dole Act. It reversed that paradigm and put title into the contractor, and as a result, inventions became commercialized to a much higher degree.

We saw the universities benefiting by this, by them able to transfer

technologies to the commercial sector. They patented many more

inventions. So that’s the current situation that we exist under

today.

It’s the same with data rights as well. The Government does not

own the data rights. They only get a license, a certain type of license right. The inventing company gets title.

Mrs. MINK. With the evolution, then, to the concept of ownership

of only licenses, what is wrong with the Bayh-Dole Act in terms of

protecting the rights of the contractors and subcontractors and the

university?

Mr. KUYATH. Well, as I mentioned, many companies find the

Government purpose license to be fine because their exclusive market is primarily commercial. However, some companies and business units, particularly when you’re dealing with the core technologies of the company, they don’t want anybody to get any rights

in those inventions.

Remember that the rights not only go for Government purposes;

there are other rights that attach such as march-in rights and preference for U.S. industry, and all of those rights are strengths that

attach that make the company have less control over its intellectual property, where it’s going to manufacture the product, who it’s

going to license the product to, and all those restrictions can at

times be a negative.

Mrs. MINK. With those comments, then, Mr. Brock and Ms. Lee,

the concern that I have is the suggestion that major changes need

to be made to the Bayh-Dole Act. With the comments that were

just made, why is the solution not simply going after the exemption

which already exists in the other transaction authority? Why is

that not a way in which we can enlarge the protections of the commercial interests in their participation in R&D contracts?

Mr. BROCK. Mrs. Mink, we would not recommend at this point

big changes in the Bayh-Dole Act. We think some of the administrative procedures, particularly the reporting procedures, need to

be simplified so that people can more easily comply. But we think

that, based on our reviews, which primarily have been focused on

universities, that the Bayh-Dole Act is largely working in that environment.

In commercial environments such as the Department of Defense,

where they’re trying to develop prototypes, the other transaction

authority has given the Department a great deal more flexibility in

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dealing with companies who might have had concerns over the provisions in the Bayh-Dole Act.

Mrs. MINK. What can be done to enlarge the applicability of the

other transactions authority?

Mr. BROCK. You could do a number of things. One that we have

been talking about a lot is making sure that the acquisition work

force understands it and how to use it. That could expand its use

appropriately. You could also begin to examine, depending on the

results of evaluations, about whether you wanted to extend that

past prototype development and into production activities, and you

could also examine the feasibility, the possibility, of giving other

transaction authorities to other agencies as well. Right now it’s

limited to just a handful of agencies.

Mrs. MINK. I know my 5 minutes are over, but I have one final

question to Professor Hill. With reference to university participation in R&D, I assume from your statement that you are generally

satisfied with the way in which the Bayh-Dole statute has applied

to university-type research?

Mr. HILL. Mrs. Mink, I would say that we’d say that the BayhDole Act is the best thing since sliced bread, yes. I mean, it’s a fine

piece of legislation. It serves us well and certainly has, I think,

served the Nation well, in addition.

Mrs. MINK. Thank you, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Thank you very much. Let me continue the questioning. Mr. Kuyath, let me ask you a couple of questions.

I gather from your testimony you believe that the DOD’s IP

guide is a good first step, but that statutory remedies may be needed in order to bring about real changes in the interest of commercial firms in doing business in R&D. In other words, one of the

problems is you can train people all day, but you can train your

contracting officers, but by the time it gets down to program managers, you have to do several levels of folks involved with this to

make sure this is filtering throughout the system.

The problem with Government is not that they don’t have rights

to use this. It is just they are not using it correctly. They are taking small innovators and they are spreading it on to larger folks

where you have cultural clashes and the like. They are tying it up.

I would hope that the goal would be in procurement that the

largest innovators in the world who are filing the most patents,

that we could get those people to contract with the Government, so

we could be up-to-date and get the latest. I think that would be our

goal. I know that flies in the face of some folks who would look at,

gee, if the Government funds it, we ought to get it, but you have

to look at the market realities. When these companies are refusing

to do business with the Federal Government, I think that is a problem. I think we are deprived of a lot of innovation and intellectual

power that we ought to be having, so that Government could stay

up-to-date. Any reaction to that?

Mr. KUYATH. Well, I agree 100 percent with what you’re saying.

One possible solution is, when the Bayh-Dole Act was first issued,

it applied just to small businesses and nonprofits. Then in 1983 a

Presidential statement was issued that extended the policy to large

for-profit business concerns. Included within that statement was

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the ability, under appropriate circumstances, to permit waiver or

omission of any Government right or contractor obligation under

the appropriate circumstances.

Mr. TOM DAVIS OF VIRGINIA. You have to ask yourself what Government manager is going to waive those kind of rights. I’m not

looking for cover on that one.

Mr. KUYATH. Well, that gave the type of flexibility that perhaps

is needed instead of a wholesale amendment of the Bayh-Dole Act.

This was something that existed until 1984. In 1984, the Bayh-Dole

Act was amended to make two provisions of the act mandatory for

large businesses, and that was the Government purpose right and

march-in rights. However, everything else, as stated in that Presidential statement, everything else in the Bayh-Dole Act still only

applied by policy to large for-profit business concerns and could be

waived under the appropriate circumstances. I’m not aware of it

ever being exercised. However, if that right was made statutory

and freely used in the right circumstances, that might go a long

way toward addressing a lot of the concerns of commercial companies, and it would not harm the interests of universities, because

we are talking about waiving Government rights and contractor obligations, not get ridding of contractor obligations—or rights rather.

So it’s just lessening the rights that the inventing entity might

have to give up or making it less—putting less burdens on them

in the patent process.

By having that flexibility which was in there originally when this

law was created, or shortly thereafter, that is something that you

might want to consider as a fix. It would not result in a wholesale

amendment of the Bayh-Dole Act.

Mr. TOM DAVIS OF VIRGINIA. Let me ask Ms. Lee or Mr. Brock,

how often are march-in rights utilized? Are they ever utilized?

Ms. LEE. To the best of my knowledge, we have not used them

extensively, if at all.

Mr. TOM DAVIS OF VIRGINIA. I think there is one pending instance I’m aware of.

Mr. FYGI. Mr. Chairman, we have one pending before the Energy

Department.

Mr. TOM DAVIS OF VIRGINIA. I saw that in your testimony, and

that is pending. That is the only one anybody knows about?

Mr. FYGI. That’s the only one, and, anecdotally—— Mr. TOM DAVIS OF VIRGINIA. But the threat of it I think is a concern, is that right?

Mr. KUYATH. Yes, it is. We have had my company back away

from a program.

Mr. FYGI. Anecdotally, I’m informed that there may have been a

grand total of two since the concept was first created statutorily,

which I believe was in 1974 with the Non-Nuclear Act originally.

It was then perceived as a means of avoiding potential antitrust

policy concerns in federally funded R&D activities. That segment,

however, was repealed from the Non-Nuclear Act in 1980 coincident with the adoption initially of the Bayh-Dole Act.

Mr. TOM DAVIS OF VIRGINIA. OK, my time has vanished again.

OK, Mr. Turner?

Mr. TURNER. Well, I am not sure that I’m too clear on who recommends statutory change here. From our Government witnesses,

100

do we have Ms. Lee suggesting perhaps there should be some

change? We have Mr. Brock saying he is not ready to endorse any.

Has the Department of Energy taken a position?

Mr. FYGI. Our position is as stated in our prepared statement,

which does not include any legislative recommendations. Therefore,

we’re not certain, or I’m not certain, that all of the factors that

have been focused on in this hearing that bear on a particular kind

of availability to the Government of the commercial technology

community—I’m not sure that it necessarily corresponds to the entire spectrum of the Energy Department’s various contracting relationships and activities. So we don’t have a single legislative remedy to suggest to the subcommittee at this time.

Mr. TURNER. Now, Mr. Carroll, you had several suggestions

which would require legislation, as I recall?

Mr. CARROLL. Oh, actually, I only had one suggestion in the legislative area. The rest of the suggestions were relative to the DOD

training guide and the committee working with the SBA.

But one thing I wonder about, which might be an effective legislative change, is to make it clear what is in the best interest of the

Government when negotiating intellectual property. Because I do

feel like that can be a very confusing thing. By human nature, the

people paying for it take ownership; they want to take ownership.

I don’t know whether this is a good analogy or not, but it comes

to mind: It’s kind of like raising your children. You know, you invest an awful lot in them during the early years, and in the end

you have to let go and see what good they do out there in our country. Intellectual property rights are a similar thing for the Federal

Government in many ways. Notwithstanding the fact that they

have to have rights to be able to protect any products that they

may be using in the Department of Defense or other places, letting

go in many cases is the best answer, and letting those intellectual

property rights work their will in our country. Because we’ve seen

in the commercial world they work their will very well. We’ve seen

dramatic shifts and dramatic changes which have added to the productivity.

Chairman Greenspan talks about the increase in our productivity

as a result of technological innovation. That would not occur if that

intellectual property was not owned by those people—ownership

meaning the general sense of ownership where they have the protections necessary to invest the money to create the productivity

enhancements.

Mr. TURNER. Thank you, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Mrs. Davis?

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

Mr. Carroll, I’m a mom; it’s tough to let go. [Laughter.]

Ms. Lee, in Dr. Hill’s testimony he talked about the matching

fund requirement with regards to the university obtaining R&D

contracts. Do you have any comments on that?

Ms. LEE. We currently have two types of other transactions:

845’s and 2371’s. Right now both have some fund-matching required. So that is absolutely what we require in those transactions.

Mrs. JO ANN DAVIS OF VIRGINIA. How would you feel about universities not having to have matching funds? They have a wealth

of information. I know I have been at William and Mary touring

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around and listening to some of the things that they have going in

order to help the Department of Defense, but I also know that it

is tough to get the matching funds as a university. Not many people, you’re right, donate for that purpose. How would you feel at

DOD about having something like that with the universities not

having to have that requirement?

Ms. LEE. We will certainly work with any legislation or guidance

that we are given. Currently, we are following what the current requirements are. So any changes we would step up and address

those as well.

Mrs. JO ANN DAVIS OF VIRGINIA. Well, then, I would go to the

commercial sector. How would you all feel about the universities

not having to have matching funds?

Mr. KUYATH. Would you repeat the question, please? [Laughter.]

Mrs. JO ANN DAVIS OF VIRGINIA. How would you all feel if it

were not a requirement for the university to have matching funds?

Mr. KUYATH. Well, I guess I could understand it because they

don’t necessarily have the resources to cost-share, but you have to

remember a lot of commercial companies don’t have those resources

either.

Mrs. JO ANN DAVIS OF VIRGINIA. I was curious as to the small

business sector?

Mr. CARROLL. Well, I would think many, many small businesses

would have a very difficult time with the cost-share provisions. I

wonder whether the cost-share provisions really are effective at

creating innovation.

Earlier Chairman Davis mentioned that he wants to invest the

money in the marketplace that provides the innovation. With only

5 percent, a little under 5 percent, of the R&D funds the Federal

Government spends, small high-technology businesses under the

size of 500 people generate 38 percent of the patents associated

with that 5 percent, and they’re not able to cost-share in general.

So we would like certainly to see that segment not required to costshare as well.

Mrs. JO ANN DAVIS OF VIRGINIA. And a level playing field, I

would assume. Yes, Dr. Hill?

Mr. HILL. Ms. Davis, if I might comment, we encounter cost-sharing in all sorts of arrangements that are not just in the category

of so-called other transactions authority, but rather in routine contracts, cooperative agreements, and, for that matter, in grant programs. So it’s not as though it’s a rare thing that arises in some

exotic transactions. It’s all over the place, and it’s growing rapidly.

Our sense—when I say ‘‘our,’’ I’m referring, I think, to a general

consensus in the academic world—is that the cost-sharing requirements increasingly are being used by program managers whose

budgets are squeezed. One way to multiple what you can do with

a reduced or inadequate budget, or what you view as an adequate

budget, is to try to get someone else to pay for part of the cost. The

only person standing around who might conceivably want to pay

the cost is the contractor.

Let me say further, in certain cases where we have a clear benefit that is long-lasting for our institution from participating in a

Government program, we don’t object to cost-sharing. For example,

if in a research program we’re going to be able to buy a large, perVerDate 11-MAY-2000 09:21 Nov 20, 2002 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 C:\DOCS\81424.TXT HGOVREF1 PsN: HGOVREF1
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manent piece of capital equipment that will have a lifetime well beyond the Government project, we’re pleased to be asked to share

the cost on that. Or, if it’s contributing to the education of our students, that’s our main business. We get State money; we get private money for that, and we think it’s appropriate, directly or indirectly, to cost-share.

But when the outcome is a piece of technology or a new set of

ideas or data that the Government only is going to use, we can’t

build a business on it. My colleagues to the right conceivably can.

We can’t and we don’t, and we have no reason to want to put up

on our own money in the hopes, as I think, if I’m not being too cynical, at least in the prime contractor/large firm world it often

makes sense to take a loss on the R&D contract to cost-share because waiting in the wings is a multi-billion dollar, multi-year construction or procurement contract that’s much more important than

the R&D, and it makes it worthwhile to cost-share the R&D. We

don’t enjoy that downstream benefit.

So, if I may put it bluntly, we basically have to tax the parents

who are working two jobs to put their kids through school to raise

the money to cost-share on Government contracts. It just doesn’t

quite seem right.

Mrs. JO ANN DAVIS OF VIRGINIA. Thank you.

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

Mr. Brock, let me just ask a question. Would GAO be willing to

study and report to this subcommittee about barriers to obtaining

R&D, including IP? Is that your pay grade level?

Mr. BROCK. There’s only one way I can answer that, Mr. Chairman. [Laughter.]

Of course we would.

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

Ms. Lee, let me ask you, on this guide that’s been provided, proclaimed here today as a great improvement, do you think your

guide will become part of the continuing education requirements of

the acquisition work force? And are there any policy changes being

made as a result of the guide?

Ms. LEE. Yes, sir, it certainly will, and more to come. We’ve got

to figure out how to get this into the education process earlier, and

as you so eloquently said, and the program managers; it can’t just

be the contracting folks.

Mr. TOM DAVIS OF VIRGINIA. Yes, training is the toughest part

of this business, as you know. You can preach it and then keeping

your people. Well, that’s good. I think that is going to be helpful.

Mr. Carroll, could you elaborate on the problem you mentioned

in your testimony regarding the SBA’s SBIR policy directive?

Mr. CARROLL. Yes. The small businesses in the SBIR Program go

through three phases: phase one, two, and three. Phase one and

two are part of the program where moneys are set aside from acquisition programs, from what’s called extramural R&D, to go into

the initial stages of research and development. That is a pretty

clear and very successful activity throughout the Department of

Defense and other agencies.

The third phase of the SBIR Program is where small businesses

commercialize what they’ve done in the first two phases with either

Federal R&D continuation of the activity or with just commercially

103

with venture capitalists or other sources of money. What I’m commenting on is, when they choose to do that with Federal R&D

funds, by legislation they continue to get the protection of data

rights under that situation. Those data rights continue to accumulate over time, strengthening the position of this competitive alternative that is being built up. At any time that can be diluted significantly by taking that intellectual property and spreading it

around and leveling the playing field.

So, as the benefit is being accumulated of a competitive alternative with new ideas entering the marketplace, at any time it can

be significantly or essentially completely diluted by spreading its

intellectual property around. So in the law, the SBIR Reauthorization Act, it was made clear that that was not the intent of Congress.

It still is, though, in the agencies a human nature to want, as

that becomes valuable to other people, to start spreading it around.

They feel like they can get to market quicker with it. I mean, it’s

not people doing bad things. It’s people trying to take this creative

activity and spread it around, get it to good markets, but it’s shortsightedness.

Mr. TOM DAVIS OF VIRGINIA. Government inherently doesn’t understand markets as well, though, do they?

Mr. CARROLL. That’s right.

Mr. TOM DAVIS OF VIRGINIA. Isn’t that one of the problems, that

they just look at the world differently?

Mr. CARROLL. That’s right. They’re trying to do the best they can

at the moment with what they consider to be a good product, an

innovation, but the result is that they dilute its ability to really

grow and threaten.

Take Microsoft as an example. Suppose after the first 3 years of

introducing DOS, DOS was given away; the intellectual property

rights of DOS were given away. Well, it wouldn’t have turned out

to be the paradigm shifter that it turned out to be.

Take AOL. After 3 years of being out there in the market, suppose everybody could have AOL software and use it anywhere they

wanted to use it. Well, AOL wouldn’t have changed the way that

we think of the world today either.

If we’re going to change the way that organizations like DOD

think about how things are done, we have to allow for intellectual

property to protect and accumulate over time, to build strong, powerful competitors. I can’t think of a single DOD large company that

can attribute its initial formation or its growth to the protection of

intellectual property. They’re there because they acquired themselves into those positions. They didn’t grow like Microsoft and

AOL and Netscape and Compaq and all of these information technology companies that have grown through the protection of their

intellectual property.

What I’m putting forth is we should work to enable that to occur

in Government. We should have the ability to have information

protection to strengthen the growth of competitive alternatives.

That’s essentially the foundation, and I think the SBIR Program is

trying to do that. I think the SBA can help it.

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Mr. TOM DAVIS OF VIRGINIA. But inherent in that is the fact that

maybe Government doesn’t use the information, the licensing,

whatever they have, as well as they could?

Mr. CARROLL. Oh, no, they don’t, and it’s not—— Mr. TOM DAVIS OF VIRGINIA. That they have a right to it, we

don’t disagree with that, but they’re just not utilizing it the way— please, Mr. Kuyath.

Mr. KUYATH. Could I add to that?

Mr. TOM DAVIS OF VIRGINIA. Sure.

Mr. KUYATH. Cost-sharing can be a real negative even for a

large, successful commercial company. If the Government wants a

company to perform a long-term, high-risk research program where

the payoff may be 5 or 10 years down the road, and the payoff is

very risky, the market may never develop—for example, to develop

a battery to power an electric car, that may never happen. Costsharing can be a real negative because the company has limited resources for its researchers. It only has so many scientists. It may

want to devote its resources to a project that’s going to have a

much higher payoff. If the Government’s willing to pay the full rate

and take the higher risk, a commercial company may be more willing to take that risk, but those types of things have to be taken

in mind. There aren’t any automatic litmus tests that apply here

as to cost-sharing. You have to take that into account.

Mr. TOM DAVIS OF VIRGINIA. I understand all that and I don’t

disagree with it, but you’re asking from your Government procurement officials just an awful lot of insight and tea reading to know

where—— Mr. KUYATH. Right, but now their hands are tied. For example,

prototype, other transactions—— Mr. TOM DAVIS OF VIRGINIA. That’s right. They don’t even have

to——

Mr. KUYATH. They have to cost-share unless a nontraditional defense contractor is involved to a significant degree. Unfortunately,

the way the law is written, for example, 3M and several other commercial companies are considered to be a traditional defense contractor because we have one R&D contract over $500,000 out of our

billion dollar research internal budget. We are considered to be a

traditional defense contractor and we’ll have to cost-share, if we

would ever accept a section 845 other transaction. I don’t think

that’s what Congress intended, but that’s the way the law is written. I know there are many other commercial companies in the

same boat as 3M.

Mr. TOM DAVIS OF VIRGINIA. Well, we will work with you to look

at some language and work with Ms. Lee and some others to try

to get some language that can make this situation better.

Any questions, Mr. Turner?

Mr. TURNER. No questions, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Any questions, Mrs. Davis?

Mrs. JO ANN DAVIS OF VIRGINIA. No, Mr. Chairman.

Mr. TOM DAVIS OF VIRGINIA. Well, let me just say, before we

close this hearing, I just want to take a moment to thank everybody for attending today. I want to thank all the witnesses, Congressman Turner, Mrs. Davis, and the other Members for participating. I also want to thank my staff for organizing this hearing.

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I think it has been very productive; it has been for me in terms

of understanding this a lot better than I did last night before I

started reading the testimony.

Anybody want to add anything before we stop?

Ms. LEE. Sir, as you know, from a procurement professional

standpoint, we all talk about other transactions. I’m constantly

asking myself, why do we need to create these extra contractual activities and how can we learn from the benefits of other transactions and bring that back into the majority of our transactions

which are procurement contracts? So I’m always looking to how do

we learn that, and then how do we bring those good flexibilities or

changes, or whatever, into the mainstream contracting as well?

Mr. TOM DAVIS OF VIRGINIA. OK, thank you.

Let me enter into the record now the briefing memo distributed

to subcommittee members.

We will hold the record open for 2 weeks from this date for anybody who wants to forward submissions for possible inclusion.

Thank you again. These proceedings are closed.

[Whereupon, at 11:40 a.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

[The prepared statements of Hon. Thomas M. Davis and Hon.

Jim Turner follow:]

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