GAO-01-271R Defense Trade

United States General Accounting Office

Washington, DC 20548

January 8, 2001

The Honorable Russell D. Feingold

United States Senate

Subject: Defense Trade: The Use of Intellectual Property Generated at Department

 of Energy’s Laboratories to Satisfy Offset Requirements

Dear Senator Feingold:

Offsets are benefits that defense contractors provide to foreign governments as inducements

or conditions for the countries to purchase military goods and services. Offsets can include a

wide range of goods and services, including the transfer of U.S. developed technology or

training assistance provided to companies and organizations located in foreign countries.

The Department of Commerce reported that for the 5-year period from 1993 to 1997, U.S.

defense contractors reported about 230 new offset agreements valued at $19 billion.1

Because of your interest in identifying emerging trends in the use of offsets, you asked us to

make inquiries concerning the use by defense contractors of intellectual property generated at

the Department of Energy’s laboratories to satisfy their offset requirements.2 Specifically,

you asked us to identify (1) the use of intellectual property and services of laboratory

personnel to satisfy defense contractors’ offset requirements and (2) the rights that U.S.

contractors that manage Department of Energy laboratories have to intellectual property

generated at these laboratories. Based on discussions with your staff on November 2, 2000,

we are also providing information as to how the laboratories compute charges for their

intellectual property and services. This letter summarizes the results of our work.

LIMITED USE OF LABORATORIES’ INTELLECTUAL PROPERTY AND OTHER

SERVICES TO SATISFY OFFSET REQUIREMENTS

The use of Department of Energy laboratories’ intellectual property and services to satisfy

defense contractors’ offset requirements has been limited. Our discussions with Department

of Energy and laboratory management contractor officials surfaced 14 instances from as

early as 1995, all at one laboratory, where the laboratory’s intellectual property and services

were involved in offset projects. The 14 instances, valued at about $200 million, involved 4

intellectual property licenses and 10 service arrangements through which laboratory

 

1

 The actual costs of offsets to the U.S. contractors are substantially lower than the total value of the

offset requirements.

2

 Intellectual property includes, among other things, patents and copyrights protected by federal law.
Page 2 GAO-01-271R Defense Trade

personnel performed training, workshops, and other services for various foreign countries.

The following provides further information on the 14 projects. 3

• The 4 projects with intellectual property licenses included two patents for

cryogenic cutting/cleaning technologies and two copyrights for software

applications and training. The cryogenic technology was developed

for cutting and abrading materials using liquid nitrogen forced through a high-pressure

nozzle. The use of liquid nitrogen eliminates the problem of adding other waste byproducts generated during the cutting and abrading processes. The software applications

and training were for (1) improving logistics management within the country’s Ministry

of Defense and (2) assisting the country in conducting safety analyses of nuclear power

plants.

• The 10 service agreements pertained to nuclear power plant safety and environmental

issues. For example, laboratory personnel provided training in the inspection of nuclear

power plants using non-destructive means, which permits inspection without having to

disassemble equipment at the power plants. In another example, training was provided

on converting waste generated by nuclear power plants into relatively harmless byproducts. As one last example, technical expertise was provided to a foreign country to

design a waste treatment plant to convert raw sewage into energy.

In addition to the 14 offset projects, we were informed by three other laboratories of other

offers to use the laboratories’ intellectual property and services of laboratory personnel to

meet potential offset requirements. These offers did not result in specific projects because

the weapon system sales did not take place. They involved assisting countries with (1) the

removal of unexploded ordnance from a site to be transferred from the military to the

private/public sector, (2) humanitarian de-mining capability, and (3) the transfer of a state-ofthe-art welding technology into the United States.

MANAGEMENT CONTRACTORS HAVE THE RIGHT TO INTELLECTUAL

PROPERTY

Over the years, Congress has passed legislation to promote the transfer of technology from

the federal laboratories to the private sector. For example, the National Competitiveness

Technology Transfer Act of 1989 (Public Law 101-189) established technology transfer as a

mission for government-owned, contractor-operated laboratories for purposes of transferring

technology to the private sector. On the basis of this legislation and other applicable laws

and regulations, contractors that manage Department of Energy laboratories under

management and operating

 

3

 Specific information about offsets are considered proprietary by U.S. contractors. As a result, offset

information is provided in general terms, and contractors are not identified in this report.
Page 3 GAO-01-271R Defense Trade

contracts4 have the right to inventions and copyrights generated at the federal laboratories

should they choose to take title.5 Contractors generally cannot obtain rights to intellectual

property dealing with such matters as uranium enrichment or certain national security

technologies. 

COMPUTATION OF CHARGES FOR INTELLECTUAL PROPERTY AND SERVICES

Laboratory management contractor officials told us about the computation of charges for

providing licenses and services to entities and organizations. For licenses, the charges are

normally negotiated on a case by case basis and consider several factors such as the market

value of the technology; the investment required to bring the technology to market; the

financial status of the licensee; and the income potential for the technology, assuming that it

is successful. For service arrangements, the laboratory is to recover the full cost of providing

the services, including the hourly wages for personnel and their associated travel costs, if

applicable. Unless waived in accordance with a Department of Energy order, the laboratory

is to recover a certain percentage of administrative costs associated with laboratory facilities

and equipment. The charges for providing licensing and other services by the laboratory are

normally paid by the entity that has sponsored these projects. For example, we were told that

the defense contractor that sponsored the 14 projects previously discussed paid these charges

for most projects.

AGENCY COMMENTS

The Department of Energy provided technical comments on the information presented in this

report. We have included those technical comments as appropriate. The Department’s

comments are included in enclosure 1.

SCOPE AND METHODOLOGY

To determine the use of the laboratories’ intellectual property and services of laboratory

personnel to satisfy defense contractors’ offset requirements, we spoke with Department of

Energy officials and officials managing laboratories to identify situations where (1) defense

contractors managed Department of Energy laboratories and (2) licenses and services were

provided or offered to satisfy offset requirements. We gathered documents pertaining to

offset projects.

To determine the rights that U.S. contractors that manage Department of Energy laboratories

have to intellectual property generated at the laboratories, we reviewed legislation,

regulations, and contract clauses dealing with technology transfers of intellectual property

and other services. We also discussed these matters with Department of Energy and

laboratory management contractor officials.

 

4

 Management and operating contracts are agreements under which the government contracts for the

operation, maintenance, or support of a government-owned, research, development, special

production, or testing establishment wholly or principally devoted to one or more major programs of

the federal agency.

5

 The contractors must notify the Department within a specified period of time after discovery of the

invention to elect title to that invention.
Page 4 GAO-01-271R Defense Trade

To determine how charges for intellectual property and services are computed, we spoke with

laboratory officials about the various factors that are considered in computing the charges.

We did not independently verify these charges.

We conducted our review from August to November 2000 in accordance with generally

accepted government auditing standards.

We are sending copies of this letter to interested congressional committees and to the

Honorable Bill Richardson, Secretary of Energy. The letter will also be available on GAO’s

home page at http://www.gao.gov. If you have questions, please contact me on (202) 512-

4383.

Major contributors to this report were Robert L. Pelletier, Charles D. Groves, Jack G.

Perrigo Jr., William T. Woods, and Raymond J. Wyrsch.

Sincerely yours,

Katherine V. Schinasi

Director

Acquisition and Sourcing Management

Enclosure
Page 5 GAO-01-271R Defense Trade

ENCLOSURE 1 ENCLOSURE 1

AGENCY COMMENTS

(707542)