[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
      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







                          U.S. GOVERNMENT PRINTING OFFICE
81-424                             WASHINGTON : 2002
_____________________________________________________________________________
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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
JOHN J. DUNCAN, Jr., Tennessee           (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               JIM TURNER, Texas
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
DOUG OSE, California                 PATSY T. MINK, Hawaii
EDWARD L. SCHROCK, Virginia

                               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















                            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











      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 example, private sector R&D spending amounted to 
roughly one-third of the country's total. In 1999, private 
sector R&D was two-thirds 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 
leading-edge 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 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 
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 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 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 Bayh-Dole. 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 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 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 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.
    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 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 Government-funded 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.
    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 Bayh-Dole 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 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 cost-share, 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 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 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.
    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.
    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 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 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 winner-takes-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?
    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 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 
Bayh-Dole 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 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, 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 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 cost-share 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, permanent 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 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.
    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. Cost-sharing 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. 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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