Federal Research: DOE Is Addressing Invention Disclosure and Other Challenges but Needs a Plan to Guide Data Management Improvements
Released: 2015-03-02T00:00:00

Letter

Background

Prior to the Bayh-Dole Act, the government generally retained ownership of federally funded inventions regardless of whether the research was performed in federal laboratories, at universities, or by individual companies, and only 5 percent of the patents on these inventions were ever used in the private sector, according to a Congressional Research Service report. The Bayh-Dole Act allows nonprofits, small businesses, and universities to retain ownership of federally funded inventions to promote the utilization of inventions created through federal research and development programs, and to provide an incentive for contractors to commercialize federally funded inventions for sale in the marketplace. The Bayh-Dole Act applies to universities, nonprofit organizations, and small businesses that receive federal research funding. Federal agencies that enter into financial assistance awards with these types of entities must adhere to the requirements of the Bayh-Dole Act and its implementing regulation developed by the Department of Commerce.particular, the Bayh-Dole Act requires agencies, including DOE, to incorporate specific provisions into research and development financial assistance awards that contractors must comply with to help protect the government’s interests in any resulting inventions.

Federal Nonnuclear Energy Research and Development Act of 1974 § 9, 42 U.S.C. § 5908.

3. apply for a patent on an invention, typically within 1 year of electing to retain ownership.

DOE generally requires similar actions from large businesses in order to retain ownership of agency funded inventions, but the time frames can vary depending on the specific provisions of an individual financial assistance agreement.

Compliance with these provisions informs agencies, such as DOE, of an invention’s existence, and helps ensure that a contractor takes timely steps to patent the intellectual property embodied in the invention, should the contractor wish to retain ownership of it. If a contractor does not comply with these requirements, agencies have the authority to demand ownership of a federally funded invention to provide the government the opportunity to take steps to protect its interests in it. Once contractors own a patented invention, they are generally free to use or transfer their patent rights at their discretion, in compliance with applicable laws, such as those regarding export control.

The Bayh-Dole Act also identifies certain interests the government has in federally funded inventions, including their utilization and domestic manufacture. DOE’s Patent Waiver Regulation does not explicitly identify these interests with regard to inventions developed by large business contractors, but the waivers themselves generally will outline specific requirements related to invention utilization and domestic manufacture as shown below.

Utilization. DOE can use the authority, known as march-in authority, to require a contractor or licensee to grant a license to any responsible entity or entities when an agency determines that certain conditions identified in the act have been met. Additionally, the government has a nonexclusive royalty-free license to practice, and have practiced on its behalf, any invention created with federal funding.

Domestic manufacture. Under the Bayh-Dole Act and DOE regulations and policy, DOE has established certain requirements in financial assistance awards for contractors to manufacture federally funded inventions in the United States. These requirements vary depending on the type of contractor involved in a financial assistance award. Domestic manufacture requirements for federally funded inventions include:

U.S. Preference. U.S. Preference provisions generally require small business and nonprofit contractors’ exclusive licensees to substantially manufacture federally funded inventions domestically in order to use or sell the inventions in the United States. These requirements apply only to a contractor’s exclusive licensee; the contractor that developed the invention faces no limitations on manufacturing location. Federal agencies may use their march-in authority in instances where contractors’ licensees do not comply with U.S. Preference requirements.

U.S. Competitiveness. U.S. Competitiveness provisions generally require that the manufacture of inventions developed by large businesses must occur substantially in the United States unless otherwise approved by DOE. DOE may require forfeiture of invention ownership or refund of its investment when contractors do not comply with these requirements if such penalties are included in the patent rights clause of the financial assistance award.

U.S. Manufacturing Plan. U.S. Manufacturing Plan provisions generally require that contractors submit plans as part of a funding application specifying how they intend to domestically manufacture any potential inventions developed in the course of the financial assistance award. Where this provision is part of a financial assistance award, DOE may take ownership of the invention, require refund of its investment,reporting requirements in instances of noncompliance.

In addition, DOE may include provisions within a financial assistance award that require reports from contractors to provide information on how Specifically, DOE programs can federally funded inventions are utilized. request that contractors provide periodic reports with information regarding patent status (e.g., filing date, application number and title, and patent number and issue date), and invention utilization (e.g., the status of development, date of first commercial sale or use, and gross royalties received). DOE may request these reports at its discretion but not more than annually.

DOE Relies on Contractor Self- Reporting and Agency Procedures to Help Ensure Disclosure of Agency Funded Inventions During Fiscal Years 2009 through 2013, DOE Initiated Nearly 6,000 Financial Assistance Awards

During fiscal years 2009 through 2013, DOE initiated nearly 6,000 financial assistance awards. DOE relies primarily on contractor self- reporting and financial assistance award closeout procedures to ensure that contractors disclose agency funded inventions.

During fiscal years 2009 through 2013, DOE initiated a total of nearly 6,000 financial assistance awards worth at least $11 billion with contractors, according to data provided by DOE. During this period, according to DOE patent counsel, contractors reported approximately 5,800 inventions, elected to take ownership of about 2,800 inventions, and were issued more than 700 patents.

37 C.F.R. § 401.8. DOE’s large business patent waivers may contain similar reporting requirements. amount and number of financial assistance awards DOE established with different types of contractors for fiscal years 2009 through 2013. In fiscal year 2013, the most recent year data were available, DOE provided a majority of funds to universities and nonprofits (nearly $1 billion across 580 agreements), followed by large businesses (approximately $304 million across 79 agreements) and small businesses (approximately $290 million across 370 agreements).

DOE Relies on Contractor Self-Disclosure and Agency Procedures to Help Ensure Disclosure of Agency Funded Inventions

Contractors disclose agency funded inventions to DOE through a variety of reporting mechanisms including e-mail, regular mail, and Interagency Edison (iEdison)—which is an electronic reporting system that allows federal grantees and contractors to report federally funded inventions, patents, and utilization data.contractor discloses an invention developed with DOE funds, patent staff create a file for that invention. According to DOE procedures, patent counsel then monitor compliance with time frames related to the contractor’s determination of whether to retain ownership and pursue According to DOE procedures, when a patent protection. From this point forward, according to DOE procedures, whenever a contractor submits additional information about an invention, DOE patent counsel review the invention’s file to ensure compliance with all invention disclosure provisions. If DOE patent counsel determine that a contractor has not met the specified time frames for disclosing and electing ownership of an invention, they send the contractor a letter— known as a demand letter—demanding that the contractor give DOE ownership of the invention.

DOE patent counsel told us that they recently upgraded one of the agency’s data management systems—IP Master—to a new system called IP Manager, which became operational in November 2014. noncompliance with invention disclosure requirements during closeout.They added that nondisclosure, particularly from contractors with more limited resources, is generally inadvertent. They told us that nondisclosure is more often due to limited contractor familiarity with the legal requirements or experience in working with the federal government than an intentional attempt to avoid disclosing an agency funded invention. DOE patent counsel said if a contractor failed to disclose an agency funded invention but did so inadvertently, they would generally work with the contractor to meet disclosure requirements rather than demand ownership for noncompliance with disclosure requirements. They said that approach better meets their view of the intent of the Bayh-Dole Act to commercialize federally funded inventions, while ensuring the government protects its interests in them.

The closeout of a financial assistance award is also the point when DOE monitors whether contractors have patented agency funded inventions. For example, according to DOE procedures, a contractor must send DOE patent counsel a patent certification form—a document that discloses all inventions that resulted from the financial assistance award. In turn, according to DOE procedures, patent counsel use this information to ensure contractor compliance with the terms of the financial assistance award before issuing a patent clearance letter—a document in which DOE acknowledges the contractor’s ownership of the patented invention. In addition to the required certification form, upon request from DOE, contractors must provide information about patents for any invention they elected to own. When a contractor submits such information, DOE patent counsel verify that the reported patents include a statement of government interest—standard language in a patent that acknowledges the government’s role in funding its development—and that the invention’s file is complete and up-to-date in the relevant data system.

DOE Faces Challenges in Ensuring that Contractors Disclose Agency Funded Inventions and Is Taking Actions to Address Them

DOE faces challenges in ensuring that contractors disclose inventions they develop with agency funding and is taking actions to address them. Specifically, one challenge DOE faces is not having a documented process for ensuring that contractors disclose agency funded inventions after financial assistance awards end, and the agency has initiated two pilot projects to identify the extent of potentially undisclosed inventions. Additionally, DOE faces a challenge in managing invention disclosure information because its data systems for doing so have limited capabilities. While the agency has begun to upgrade those systems, DOE has not developed an implementation plan with specific milestones for certain key steps to guide these efforts.

DOE Is Implementing Pilot Projects to Address Challenges in Identifying Undisclosed Inventions

One challenge that DOE faces is not having a documented process for ensuring that contractors disclose agency funded inventions after financial assistance awards end. DOE’s closeout procedures are designed to, among other things, ensure that contractors disclose all inventions developed during a DOE financial assistance award and that DOE’s interests in them are documented. However, DOE has no documented process to monitor inventions after award closeout. Due to the time that may elapse between when a contractor files a patent application and when a patent is granted by the U.S. Patent and Trademark Office, DOE funded inventions may exist that are not identifiable through public searches at the time a financial assistance award ends. Under such a scenario, if the contractor did not voluntarily disclose an invention, the invention would not be identifiable during DOE’s closeout procedures. Instead, DOE patent counsel told us they rely on contractors to voluntarily disclose such information following financial assistance award closeout. As a result, the potential exists for DOE to be unaware of inventions that it funded and in which it would retain interests.

To address this challenge, DOE recently launched two pilot projects aimed at better understanding the extent of undisclosed inventions. One pilot project is an audit of a sample of previously completed financial assistance awards to determine the extent to which contractors did not disclose DOE funded inventions. The second pilot project involves cross- referencing U.S. Patent and Trademark Office data against DOE information on inventions it funded.

In the first pilot project, which began in December 2013, DOE developed draft audit procedures to sample previously completed financial assistance awards and determine the extent to which contractors did not disclose agency funded inventions. Under the draft audit procedures, DOE patent counsel (1) audit contractor activities for any indication of patents, patent applications, or inventions that might have been developed with DOE funding but were not disclosed to DOE; (2) submit demand letters to contractors to obtain ownership of any potentially undisclosed inventions; and (3) work with contractors, depending on the circumstances of nondisclosure, to allow them to retain ownership of the inventions. The draft audit procedures set a target of annually sampling 100 randomly selected financial assistance awards completed during the previous 5 years, which represents approximately 5 percent of the agreements closed out during that period, according to DOE documentation. As of December 2014, DOE patent counsel told us that they had reviewed 99 financial assistance awards completed during the previous 5 years and identified three undisclosed inventions for which they sent demand letters to the relevant contractors. DOE patent counsel told us that they granted one of the contractors an extension of time to retain ownership of the undisclosed invention because DOE determined that the nondisclosure was an oversight. DOE patent counsel said that they resolved another as a data entry error. As of December 2014, DOE had not received a response to the third demand letter. DOE modified its draft audit procedures based on initial testing, and patent counsel told us that they might conduct another phase of pilot testing before assessing the overall results of the audit procedures and making a determination about whether to implement the pilot project on a permanent basis. They told us that this decision will depend on the extent to which the pilot project identifies undisclosed inventions compared with the resources— principally staff hours—necessary to conduct it. For example, if the audit procedures identify few undisclosed inventions, DOE could be less likely to implement it permanently.

DOE’s second pilot project involves cross-referencing U.S. Patent and Trademark Office data against DOE information on inventions it funded. For this pilot project, DOE patent counsel analyzed data from a U.S. Patent and Trademark Office database to identify inventions or patents with a government interest clause indicating the patent stemmed from DOE funding. Then, DOE patent counsel reviewed the data to determine if information on issued patents or published patent applications also existed in DOE’s PATMIS data system, with patent files not identified in DOE’s data system representing possible unreported inventions or patents. For the pilot, DOE patent counsel told us that they reviewed 549 patented inventions that they identified as absent from DOE’s data system. Through this effort, DOE patent counsel told us they identified 100 patented inventions that may have been undisclosed and issued 40 demand letters covering 64 undisclosed inventions to contractors. As of December 2014, they said DOE resolved 16 demand letters—covering 22 inventions—and is awaiting response from the other 24—covering the remaining 42 inventions. According to DOE patent counsel, 11 of the contractors had not properly disclosed the patented inventions, generally due to misunderstandings regarding what their responsibilities were to the government. They told us that, in each instance, DOE determined that the contractor had acted in good faith and allowed an extension of time for the contractors to file the required disclosure paperwork to retain ownership. According to DOE patent counsel, the 5 other contractors to which DOE issued demand letters demonstrated that they had not failed to comply with invention disclosure requirements. DOE patent counsel explained that the related inventions were either disclosed to DOE but not logged into its data systems, or were logged incorrectly into its data systems, among other reasons. DOE patent counsel said that this effort helped DOE identify several inventions that were not properly disclosed. DOE patent counsel also indicated that the pilot revealed that the contractors’ failure to report inventions to DOE appeared to have been in good faith, but that the contractors were unaware of all invention reporting obligations. DOE patent counsel told us that, in turn, the agency is reviewing the compliance assistance resources available to contractors and periodically reminds them of their obligations to DOE. They also said that, after these compliance assistance actions have been implemented, DOE anticipates reevaluating the usefulness of the pilot audit project.

DOE Is Planning to Update Data Systems to Address Challenges in Managing Invention Disclosure Information but Does Not Have an Implementation Plan with Key Milestones

DOE faces a challenge in managing information on disclosed inventions, which underpins its ability to protect its interests in agency funded inventions. This is because, according to DOE patent counsel, the department’s two older invention data management systems—IP Master and PATMIS—are outdated, unable to communicate with each other, and do not have functionality for electronically updating invention disclosure or patent status, hampering their ability to manage information and data related to inventions developed with DOE funding. For example, DOE patent counsel told us that IP Master will soon be obsolete because, among other reasons, the vendor is discontinuing support for it. Additionally, DOE patent counsel told us that the existence of two separate systems can lead to duplicative entries and make it difficult to track invention disclosures on a department-wide basis. Further, DOE patent counsel explained that the systems do not have the functionality for electronic reporting. That means contractors submit information—such as invention disclosure reports—in mail, faxes, and e-mails, and DOE patent counsel must then manually enter that information in DOE’s systems. The DOE patent counsel described this as a time-consuming, labor-intensive process that can increase the likelihood of data errors.

DOE patent counsel stated that they recognized the need to transition to a unified data tracking and monitoring system with functionality for electronic reporting and have begun efforts to do so. Specifically, DOE patent counsel told us that they recently upgraded one of the agency’s data management systems—IP Master—to a new system called IP Manager, which became operational in November 2014. DOE patent counsel said they intend to migrate the agency’s other system— PATMIS—to the new IP Manager system in the near future so there will be only one data tracking and monitoring system. However, prior to any such migration of PATMIS, DOE officials told us that they want to ensure that there are no technical problems with the new IP Manager system and evaluate its performance in case modifications are necessary.

DOE patent counsel told us that integrating DOE’s existing systems into the IP Manager system will provide a consolidated, DOE-wide invention management database that will significantly reduce administrative costs associated with invention management and improve data quality by reducing duplicative entry of inventions. Also, according to documentation DOE provided about the IP Manager system, some of its features may help address DOE’s current data management challenges including automated generation of legal forms to reduce the need to draft unique documentation for every invention. Additionally, DOE plans to develop a “one click invention reporting” capability that would be designed to, among other things, give contractors the ability to electronically report and update invention records directly from their own databases and provide DOE with enhanced reporting functions to monitor contractor actions, including invention disclosure. DOE patent counsel explained that this would enhance DOE’s ability to share invention information across the agency to better enable it to manage information to track contractor compliance with financial assistance award provisions. DOE patent counsel told us the agency has created a workgroup composed of representatives from federal agencies and DOE laboratories to determine the requirements for this new “one click invention reporting” capability and tentatively plans to begin software development in the spring of 2015, with an initial pilot capability scheduled for fall of 2015 and full deployment in early 2016, subject to available funding.

While DOE transitioned its IP Master system to IP Manager, and has developed an implementation plan with milestones for the additional capability it wants to add to the IP Manager system, DOE patent counsel said the agency does not have an implementation plan with milestones for when PATMIS would be migrated to IP Manager. They said that PATMIS contains the majority of the agency’s invention records and estimated that, given the amount of data contained in the system, it could cost as much as $100,000 to move the data from PATMIS into IP Manager. According to DOE patent counsel, as of November 2014, DOE had not prioritized funding to migrate the data and consolidate the databases. DOE also has not established milestones for its efforts to (1) identify requirements for the “one click invention reporting” capability it plans to add to IP Manager or (2) evaluate any system modifications necessary as a result of migrating IP Master to IP Manager and associated system requirements.

Under federal standards for internal control, information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. In addition, best practices for information technology system acquisition emphasize developing requirements, among other practices, to guide software engineering investments. By planning to transition to a unified data tracking and monitoring system with functionality for electronic reporting, DOE is taking a step in the right direction. Also, the implementation plan with milestones DOE developed for the additional capability it wants to add to the IP Manager system will help it track and communicate progress toward completing this effort. By developing a comprehensive implementation plan with milestones that cover all aspects of the steps DOE is taking to transition to a unified data tracking and monitoring system with functionality for electronic reporting, DOE would have greater assurance that it will be able to track progress toward completing all of these steps in a timely manner.

DOE Proposed Regulatory Changes to Address Challenges to Monitoring and Influencing Contractor Utilization and Domestic Manufacture of Agency Funded Inventions

DOE faces challenges in monitoring and influencing contractor utilization and domestic manufacture of agency funded inventions to protect its interests in them, and the agency has proposed regulatory changes to address these challenges. Specifically, DOE does not have a standard for invention utilization and manufacture reporting, has a limited ability to compel domestic manufacture of agency funded inventions, and has a limited ability to influence changes in control of contractors receiving DOE funds. In turn, DOE’s proposed regulatory changes address, with respect to for-profit contractors, the frequency and duration of invention utilization and manufacturing reporting, use of U.S. Manufacturing Plans, and DOE influence over changes in contractor control.indicated that the agency anticipates issuing a final rule to implement these changes in fiscal year 2015.

DOE Does Not Have a Standard for Invention Utilization and Manufacture Reporting

DOE faces a challenge in understanding how inventions it funds are utilized and manufactured because it does not have a standard for collecting such information from contractors. Currently, DOE can, at its discretion, request such information, but DOE regulations do not specify the duration of this reporting. DOE patent counsel told us that there are no established procedures regarding the frequency and duration of requests for information on invention utilization and manufacturing of agency funded inventions, which could hamper DOE’s efforts to protect its interests. To address this challenge, DOE’s proposed regulatory change would require annual contractor reporting on the utilization and manufacture of any products that use a DOE funded invention. This reporting would include information on the status of technology development, date of first commercial sale or use, gross royalties received, and manufacturing locations of those products, and it would be required for at least 10 years following invention disclosure. DOE patent counsel said that requiring this reporting for all DOE financial assistance awards to for-profit contractors would enhance the agency’s ability to protect its interests by providing it additional information with which to monitor compliance with financial assistance award provisions.

DOE Has Limited Ability to Compel Domestic Manufacture of Agency Funded Inventions

DOE faces a challenge in protecting the agency’s interest in the domestic manufacture of agency funded inventions. DOE patent counsel stated that the agency’s ability to compel domestic manufacture of agency funded inventions is limited because the agency can only require substantial domestic manufacture from certain contractors under certain circumstances. In particular, they said that the process for determining an “exceptional circumstance”—which DOE can use to broaden the domestic manufacture requirements beyond those included in award provisions— can be difficult. Specifically, they noted that it is not a routine process and often requires substantial internal agency analysis, as well as coordination with other agencies, including the Department of Commerce. Additionally, any broadened requirements apply only to the specific programs or activities covered by the determination. For example, in 2011, DOE determined that an exceptional circumstance existed regarding DOE’s SunShot Initiative. Specifically, DOE proposed requiring a certain level of domestic manufacture for all inventions developed under the SunShot Initiative by all contractors, as well as their licensees.following a review to identify international trade and other issues, However, this proposed requirement was not implemented according to DOE patent counsel. DOE patent counsel also said that the limitations of U.S. Preference provisions—which apply to small businesses, academia, and nonprofits—constitute a challenge to protecting the agency’s interest in domestic manufacture. Specifically, such provisions require the exclusive licensees of contractors, but not the contractors themselves, to substantially manufacture agency funded inventions domestically. To address this limitation, DOE’s proposed regulatory change would allow programs to require that potential for-profit contractors submit a U.S. Manufacturing Plan as part of any funding proposal. In turn, DOE would be able to use these plans as criteria in assessing funding proposals and making financial assistance award decisions. Under the proposed regulatory change, and consistent with applicable law, DOE could make such plans binding for any licensee or entity that subsequently acquired ownership of an invention or technology developed under a DOE financial assistance award. DOE patent counsel explained that requiring and enforcing U.S. Manufacturing Plans increases the agency’s ability to influence the domestic manufacture of inventions it funded.

DOE Has Limited Ability to Influence Changes in Control of Contractors

DOE faces a challenge in influencing the change in control—such as ownership—of contractors engaged in DOE financial assistance awards. A change in control may affect a contractor’s ability to carry out the project that DOE is funding and, according to DOE patent counsel, the agency currently does not require contractors to notify it of such changes. DOE’s proposed regulation would require contractors to notify the agency of changes in their control in certain circumstances.regulation would establish procedures for the change of control, including ownership, of a contractor that received a DOE funding award of more The proposed than $10 million. The affected contractor would be required to notify the agency within 30 days of a change of control, or within 30 days if the contractor had a reason to know that such a change is likely. Failure to notify DOE would be grounds for suspension or termination of the financial assistance award. Further, without DOE authorization of the change of control, the award funding could cease to continue.such penalties would only apply to the current award.

Conclusions

DOE is taking actions to update its data systems and move to a consolidated, DOE-wide invention management database to improve its ability to monitor and manage information regarding contractor disclosure of agency funded inventions. Currently, its two data systems are outdated, unable to communicate with each other, and do not have functionality for electronically updating invention disclosure or patent status, hampering DOE’s ability to manage information and data on agency funded inventions. DOE recently upgraded one of its data systems—IP Master—to a new system called IP Manager, which became operational in November 2014 and has developed an implementation plan with milestones for the additional capability it wants to add to the IP Manager system. However, DOE has not developed an implementation plan with appropriate milestones to help assess its progress toward completing key steps, such as moving the data in its primary PATMIS database—which contains the majority of the agency’s invention records—into the new IP Manager system, or for defining the requirements for planned or potential upgrades to that system. Without such a plan, DOE may not have assurance that it is making timely progress toward obtaining the information management capabilities it needs to protect its interests in agency funded inventions by monitoring information regarding contractor disclosure of these inventions.

Recommendation for Executive Action

To help provide greater assurance that DOE is making timely progress toward obtaining the information management capabilities it needs to protect its interests by monitoring contractor disclosure of agency funded inventions, we recommend that the Secretary of Energy develop an implementation plan, including appropriate milestones, to guide DOE’s efforts to improve its data management capabilities.

Agency Comments

We provided a draft of this report to the Department of Energy and Department of Commerce for review and comment. In its written comments, the Department of Energy agreed with our findings and recommendation. The Department indicated that it would develop an implementation plan to guide data management improvements. The Department of Commerce neither agreed nor disagreed with our findings but noted that it provided background information on intellectual property issues related to the review. The Department of Energy’s and Department of Commerce’s written comments are reproduced in appendixes I and II, respectively. Both agencies also provided technical comments that we incorporated, as appropriate.

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Appendix I: Comments from the Department of Energy

Appendix II: Comments from the Department of Commerce

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Christopher Murray, Assistant Director; Richard P. Johnson; Gerald B. Leverich; Matthew D. Tabbert; and Michelle R. Wong made significant contributions to this report. Cheryl Arvidson and Kiki Theodoropoulos provided technical assistance.