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





     INTELLECTUAL PROPERTY AND GOVERNMENT R&D FOR HOMELAND SECURITY

=======================================================================

                                HEARING

                               before the

           SUBCOMMITTEE ON TECHNOLOGY AND PROCUREMENT POLICY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 10, 2002

                               __________

                           Serial No. 107-181

                               __________

       Printed for the use of the Committee on Government Reform


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


                                 ______

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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
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
------ ------                            (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

           Subcommittee on Technology and Procurement Policy

                  THOMAS M. DAVIS, Virginia, Chairman
JO ANN DAVIS, Virginia               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
                           Teddy Kidd, Clerk
          Mark Stephenson, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 10, 2002.....................................     1
Statement of:
    Brock, Jack, Director, Acquisition and Sourcing Management, 
      U.S. General Accounting Office; Anthony J. Tether, 
      Director, Defense Advanced Research Projects Agency; and 
      Ben Wu, Deputy Under Secretary for Technology, Technology 
      Administration, Department of Commerce.....................     9
    Louie, Gilman, president and CEO, In-Q-Tel; Richard Carroll, 
      chairman, Small Business Technology Coalition, president, 
      DSR, Inc.; Stanley Fry, director, contracts & legal 
      affairs, Eastman Kodak Co.; and Stan Soloway, president, 
      Professional Services Council..............................    57
Letters, statements, etc., submitted for the record by:
    Brock, Jack, Director, Acquisition and Sourcing Management, 
      U.S. General Accounting Office, prepared statement of......    12
    Carroll, Richard, chairman, Small Business Technology 
      Coalition, president, DSR, Inc., prepared statement of.....    75
    Davis, Hon. Thomas M., a Representative in Congress from the 
      State of Virginia, prepared statement of...................     4
    Fry, Stanley, director, contracts & legal affairs, Eastman 
      Kodak Co., prepared statement of...........................    84
    Louie, Gilman, president and CEO, In-Q-Tel, prepared 
      statement of...............................................    61
    Soloway, Stan, president, Professional Services Council, 
      prepared statement of......................................    93
    Tether, Anthony J., Director, Defense Advanced Research 
      Projects Agency, prepared statement of.....................    42
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     7
    Wu, Ben, Deputy Under Secretary for Technology, Technology 
      Administration, Department of Commerce, prepared statement 
      of.........................................................    31

 
     INTELLECTUAL PROPERTY AND GOVERNMENT R&D FOR HOMELAND SECURITY

                              ----------                              


                          FRIDAY, MAY 10, 2002

                  House of Representatives,
 Subcommittee on Technology and Procurement Policy,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Thomas M. Davis 
(chairman of the subcommittee) presiding.
    Present: Representatives Tom Davis of Virginia, Jo Ann 
Davis of Virginia, Horn, and Turner.
    Staff present: George Rogers, Chip Nottingham, and Uyen 
Dinh, counsels; Victoria Proctor, professional staff member; 
John Brosnan, GAO counsel; Teddy Kidd, clerk; Mark Stephenson, 
minority professional staff member; and Jean Gosa, minority 
assistant clerk.
    Mr. Tom Davis of Virginia. Good morning. I want to welcome 
everybody to today's oversight hearing on intellectual property 
and government procurement of research and development. 
Acquisition legislation in the 1990's streamlined and improved 
the procurement process. Unfortunately, 92 percent of the 
Fortune 500 industrial do little or no R&D for the government, 
and the Wall Street Journal reports that three-fourths of the 
country's top 75 information technology companies refused to do 
research for the government because of the intellectual 
property and red tape concerns.
    Moreover, none of the firms that plays a valuable role for 
our Nation as traditional defense contractors are among the 
companies that each year receive the most number of patents. 
While agencies continue to find companies that will do R&D 
without negotiating on IP, the question that needs to be 
addressed is why the leading-edge innovative companies are 
refusing to participate.
    During the cold war and space race years, the government in 
general and the Pentagon in particular drove R&D. While the 
President has increased R&D spending in the fiscal year 2003 
budget, recent trends indicate the private sector's investment 
is much greater than the Federal Government's. According to the 
National Science Foundation, the Government share of R&D 
funding was 67 percent in the 1960's; 47 percent in the 1980's; 
and 26 percent in 2000.
    In an environment where private sector R&D spending 
accounts for almost three-fourths of the total spent in the 
United States, the Government's role has changed to become a 
partner in innovation rather than the sole driving force. 
Because intellectual property rights are the most valued assets 
of companies, the government must ensure that its policies and 
procedures reflect this partnership for innovation.
    Agencies have recognized the need to address IP rights as a 
precursor to ensuring access to the very best technologies. For 
example, the Department of Defense published a guide for the 
acquisition community entitled Intellectual Property, 
Navigating Through Commercial Waters. This guide was a good 
first step. However, evidence presented to the subcommittee's 
July 2001 hearing showed that the treatment of intellectual 
property rights in government R&D can be an impediment to 
taking the best innovations possible.
    After September 11th, there has been a dramatic realignment 
in the mission of government. The first priority of the Nation 
has become homeland security. To win this fight, the government 
must be able to prevent, detect, and respond to terrorist 
activity. We also must be ready to manage the consequences of 
future attacks, treat casualties, and protect critical 
infrastructure. R&D will play a critical role in our ability to 
generate the new ideas and the innovations needed to win the 
war on terror and to move the Nation forward.
    Technology now accounts for 50 percent of the Nation's 
long-term growth. And as the Federal Reserve chairman Alan 
Greenspan has recognized, information technology and 
intellectual property have played a substantial role in the 
remarkable U.S. productivity gains. The Government is 
challenged today to find ways to entice innovative companies 
into collaborating with it on vital R&D and information 
technology efforts.
    In addition, it is important for the Government to 
recognize that the treatment of intellectual property rights 
will greatly impact the viability of competing alternatives for 
any government contract as well as the implementation of 
leading-edge innovation.
    Intellectual property and research and development 
procurement are both very complex subjects, and the 
Government's new role as a partner in innovation, contracting 
officers, program managers agency legal staff all need to 
understand how flexibilities for the treatment of intellectual 
property can be used to attract and retain the leading-edge 
companies. Today's hearing will examine public and private 
sector views on intellectual property and research and 
development issues. It will also explore the experiences of 
successful R&D organizations such as DARPA, In-Q-Tel and others 
for lessons that can be learned and problems that need to be 
addressed in the procurement of government R&D and IT.
    The subcommittee will hear testimony today from Mr. Jack 
Brock, the Managing Director for Acquisition and Sourcing 
Management at the U.S. General Accounting Office. Mr. Ben Wu, 
Deputy Undersecretary for Technology at the Department of 
Commerce; and Dr. Anthony Tether, Director of the Defense 
Advanced Research Projects Agency [DARPA].
    On the second panel, we're going to hear from Gilman Louie, 
president and CEO of In-Q-Tel. Mr. Richard Carroll, legislative 
chairman of the Small Business Technology Coalition and 
president of DSR, Inc. Mr. Stanley Fry, director of contracts 
and legal affairs at the Eastman Kodak Co.; and Mr. Stan 
Soloway, the president of the Professional Services Council.
    [The prepared statement of Hon. Thomas M. Davis follows:]

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    Mr. Tom Davis of Virginia. I now yield to Congressman 
Turner for any opening statement he may wish to make.
    Mr. Turner. Thank you, Mr. Chairman. Our purpose, of 
course, today, is to examine the nexus between intellectual 
property and procurement. The underlying issue is whether 
current intellectual property laws and practices prevent the 
Federal Government from gaining access to the very best and 
most up-to-date technological advances. As the hearing's title 
suggests, this issue is particularly important when considered 
in the context of our current war on terrorism. If the 
government's intellectual property laws are inhibiting agencies 
from gaining access to advanced R&D needed for homeland 
security, that is something we need to know about, and I look 
forward to hearing from our witnesses.
    The world of research and development obviously has changed 
dramatically since the 1980's when most of the Federal laws 
governing access to intellectual property were written. Today 
the Federal share of R&D spending is much less than, and 
private sector spending is much more than it was then. While 
the trend has clearly been for greater private sector R&D 
funding, it is important to remember that the Federal 
Government still spends up to $70 billion on research and 
development. Expanding the use of so-called other transactions 
to civilian agencies is one approach that has been suggested to 
increase flexibility in addressing intellectual property 
concerns.
    While I do have an open mind on the subject, I do not feel 
the case has been made to date that civilian agencies need 
other transaction authority. It would be interesting to hear 
from our witnesses regarding this issue. Other transactions 
authority was originally designed to attract nontraditional 
defense contractors who did not want to enter into contracts in 
part because of concerns about how intellectual property rights 
were treated. Unfortunately, other transactions do not seem to 
have achieved this goal.
    As the Department of Defense Inspector General reports, 95 
percent of the money for other transactions from 1994 to 2001 
went to traditional defense contractors. I believe we must be 
cautious about expanding the use of this authority since it 
eliminates many of the safeguards of Federal procurement law.
    Current law and regulation was designed to strike a 
delicate balance between the needs and the rights of government 
as representatives of the people and those of private industry. 
We need to examine the sometime conflicting priorities in 
prospective as we examine these issues. I look forward to 
hearing from all of our witnesses, and I thank the chairman for 
calling this hearing on this very important issue. Thank you, 
Mr. Chairman.
    Mr. Tom Davis of Virginia. Thank you very much.
    [The prepared statement of Hon. Jim Turner follows:]

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    Mr. Tom Davis of Virginia. Mr. Horn, you have no opening 
statement? OK.
    I would now call our first panel to testify. Mr. Brock, Mr. 
Wu and Dr. Tether. As you know, it's the policy of this 
committee that all witnesses be sworn before you testify. If 
you would please rise with me and raise your right hand.
    [Witnesses sworn.]
    Mr. Tom Davis of Virginia. Thank you very much. Please be 
seated. To afford sufficient time for questions, if you'd try 
to limit your comments to 5 minutes. We've got a goal to move 
this along today.
    We've read the testimony, and we'll have questions ready 
for that. So you can just highlight that. And all of the 
written statements are going to be made part of the permanent 
record. We'll start with Mr. Brock, and then Mr. Wu and then 
Dr. Tether. Thank you, and thanks for being with us, Mr. Brock.

 STATEMENTS OF JACK BROCK, DIRECTOR, ACQUISITION AND SOURCING 
MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE; ANTHONY J. TETHER, 
 DIRECTOR, DEFENSE ADVANCED RESEARCH PROJECTS AGENCY; AND BEN 
     WU, DEPUTY UNDER SECRETARY FOR TECHNOLOGY, TECHNOLOGY 
             ADMINISTRATION, DEPARTMENT OF COMMERCE

    Mr. Brock. Thank you very much, Mr. Davis. Good morning Mr. 
Turner, Mr. Horn as well. As my statement today is largely 
focused on rights to intellectual property and related data 
acquired through contracts----
    Mr. Tom Davis of Virginia. You need to turn your microphone 
on.
    Mr. Brock. OK. Is this better? I think it is on.
    Mr. Brock. OK.
    Mr. Tom Davis of Virginia. It should sound like this. Move 
it closer to you.
    Mr. Brock. No, it is not on.
    Mr. Tom Davis of Virginia. This is the technology policy 
committee. This is just unacceptable. Can you see--one of our 
leading technical experts is going to be coming up here. Try it 
now.
    Mr. Brock. OK. Can you hear me, sir? Now, I notice I've 
already used a minute and 10 seconds. I hope----
    Mr. Tom Davis of Virginia. Unanimous consent you'll be able 
to start again.
    Mr. Brock. Thank you.
    Mr. Tom Davis of Virginia. We'll take that out of Mr. 
Turner's time. No problem.
    Mr. Brock. Well, thank you again for inviting us to testify 
here today. The flow of technology from the commercial sector 
to government applications is frequently a source of real 
tension. A concern on both the part of the commercial entities 
as well as the government agencies. Your subcommittee did ask 
us to look at this a while ago, and I'm pleased to report back 
to the subcommittee with our results. And as you indicated, I 
will briefly summarize my statement. And in doing so, I'd 
really like to cover four basic points.
    First, what is the nature of the concern, and is it a real 
concern? Second, what are the challenges or underlying problems 
which require action? Third, what, if any, are the implications 
that might arise or continue if these concerns aren't 
addressed? And fourth, what are some of the options you might 
have for moving forward?
    To address the first point. The current concern is real and 
it is derived from an inherent tension between government needs 
and commercial entities' fears. The tension arises from the 
government's very real need for rights to intellectual property 
and data that is necessary to provide critical services and to 
meet program objectives. These rights were a lot easier to 
secure when the government funded most of the R&D. They flowed 
naturally from that funding. However, as you mentioned in your 
opening statement, now that the government's R&D spending, 
while still substantial, no longer is predominant, the rights 
are no longer as free-flowing, and as such, the government has 
an increasing need to negotiate for rights to commercially 
generated technology. And this trend is only going to increase. 
It's going to become more of an issue rather than less of an 
issue.
    At the same time, the intellectual property sought by the 
government represents the very lifeblood of the commercial 
companies, its crown jewel, so to speak. The companies don't 
always trust the government's intentions, nor its ability to 
protect the data associated with intellectual property.
    The second point I wanted to make are what are the 
underlying issues that really represent the barriers to most 
effectively meeting the government's needs? Agencies--the 
agencies we went to, and we covered almost all of the agencies 
doing over 90 percent of the R&D in the government, had three 
concerns. Its first and most prevalent was they felt that there 
was a lack of awareness and/or willingness within their own 
agency to take advantage of flexibilities that are already in 
place. This was the biggest problem. Second, they felt that 
there was perceived risk--I want to emphasize that word 
``perceived risk'' on the part of commercial companies largely 
associated with Bayh-Dole, which limit their willingness to 
participate in government contracts or in development efforts.
    And finally, there were concerns that both they and the 
commercial sector had in dealing with multiple parties, such as 
subcontractors or universities where they--the data rights or 
the patent rights were not always clear-cut.
    Commercial companies identified some concerns that were 
really very similar. First of all, they also identified a lack 
of understanding or an unwillingness to use flexibilities that 
were available. They frequently stated, or used the term a 
``comfort zone,'' that government contractors would get in, an 
unwillingness to go beyond that comfort zone. Second, they had 
a more defined, not a perceived concern over certain Bayh-Dole 
provisions, such as march-in rights or the definition of what a 
subject invention was.
    Third, cumbersome agency processes and procedures were 
perceived as barriers. And fourth, very strong concerns over 
the span of rights the government wants over technical data and 
equal concerns over the government's protection of proprietary 
data.
    The third point I wanted to make today are the implications 
of these concerns, and before getting into these implications, 
I do want to emphasize that no agency official raised or cited 
a specific instance where they did not have access to 
commercial technology they felt that they needed. But 
nevertheless, there are some implications from this, the most 
simple ones, that if you don't really have a well-defined way 
of acquiring intellectual property rights, you may buy more 
than you need. And that's that comfort zone question, well, 
we're not sure we're going to need. Let's buy everything. If 
you do that, you're going to pay too much.
    On the other hand, if you don't buy enough, you may be 
getting what seems to be a good price now, but you're going to 
pay for it later when you have to go back and secure the data 
rights you might need to maintain a particular system.
    But the most important concern--and this was one that was 
raised more by DOD than by any other agency--was their concern 
that they weren't able to attract some of the leading 
technology companies that they would like to have involved in 
ongoing research and application development. And the problem 
with this is to the extent that companies may not choose to 
participate in Federal contracting, the government may not get 
the best solution, or it may not get the best pricing and that 
is the real implication from this.
    This brings me to the final point, Mr. Chairman, and that 
is the options for moving forward. The first step I think is 
pretty obvious, that agencies clearly need to define their 
intellectual property and data needs and use the available 
flexibilities they already have to meet these needs. And I 
don't think this is a very simple, or it would already be done 
and you wouldn't have to have the hearing this morning. Tools 
such as the Defense's intellectual property guide that you 
referred to are excellent, both as a reference and a how-to 
guide. The problem resides in getting the right people to 
effectively use the tool, and that has been the issue to date. 
More substantive action may be warranted, but not without more 
in-depth examinations of the specific impediments that were 
cited by both the industry and the agencies and the 
effectiveness of flexibilities already available and the 
potential impact of any suggested changes.
    The current framework anchored by the Bayh-Dole Act has 
generally been considered to be a success story and leading to 
greater commercialization of federally sponsored research. And 
more recent additions to that framework, such as DOD's other 
transaction authority, can serve as potential models for 
enhancing the government's contracting flexibility in 
commercial firms that traditionally have not worked for the 
government.
    But in conclusion, the challenge here is to address not 
whether the government should have rights but rather, what 
rights it should hold, when these rights should be exercised 
and what authority should be granted to waive these rights when 
it's in the best interest of the government. That concludes my 
summary.
    Mr. Tom Davis of Virginia. Thank you very much.
    [The prepared statement of Mr. Brock follows:]

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    Mr. Tom Davis of Virginia. Mr. Wu, thanks for being with 
us.
    Mr. Wu. Good morning, Chairman, Ranking Member Turner and 
members of the subcommittee. I'm pleased to be here with you 
today to discuss the Department of Commerce initiatives on 
government research and development and intellectual property 
rights, especially relating to the transfer of government 
technology to the private sector for commercialization, which 
we commonly refer to as technology transfer. I commend you for 
your leadership on this issue and for holding this hearing. 
It's particularly relevant as our Nation has been marshalling 
our R&D resources to winning the war on terrorism and 
protecting our homeland security and defense.
    The Department of Commerce, through our Technology 
Administration, has specific roles and responsibilities in the 
areas of technology transfer, particularly through our Office 
of Technology Policy, OTP. As the agency that represents 
industry, the Department serves as the administration's main 
focal point for the discussion of technology transfer issues. 
Our OTP coordinates and works closely with the Interagency 
Working Group on Technology Transfer. It's a group of 
technology transfer managers from all the Federal agencies.
    With OTP leadership, this working group discusses a wide 
range of agency activities and issues related to technology 
transfer, recommends policies and coordinates the submission of 
congressional reports. In our role as the coordinator and 
leader of the Interagency Working Group, OTP has crafted 
administration support for a number of technology transfer-
related provisions and legislation, including the most recently 
passed Technology Transfer Commercialization Act of 2000.
    As the administration considers ways to improve the 
efficiency and speed of technology transfer, the Interagency 
Working Group will continue to be a strong asset in organizing 
consultations with private and public technology transfer 
organizations, coordinators, identifying recommendation and 
also prioritizing appropriate administrative and regulatory 
action.
    The Working Group is aware of the changing landscape of the 
Federal research and development. As you said, Mr. Chairman, 
there has been a great change in our Federal R&D. And our 
Federal Government is no longer the primary driver for U.S. 
science and technology investment. It has become the private 
sector, and as a result, we must pay greater attention to how 
technology gets developed and how the results of research and 
technology make their way to the marketplace, including the 
important impact of intellectual property rights in these 
priorities, especially from a technology transfer vantage 
point.
    Technology transfer tools, such as cooperative research 
development agreements [CRADA's], and patent licensing, are 
relatively simple ways for U.S. businesses to develop federally 
funded innovations into commercially useful products and 
processes. And Congress has led the way in technology transfer. 
As you know, Mr. Chairman, I had the pleasure of working with 
Congresswoman Morella, who was the sponsor of two significant 
technology transfer laws affecting CRADA's and technology 
licensing, as well as your former committee, the House Science 
Committee, which helped create in 1980 the most seminal 
technology transfer laws, the Stevenson-Wydler Innovation Act 
and the Bayh-Dole Act.
    The manner in which the Federal Government works with the 
private sector in developing and distributing technologies 
changed fundamentally with the passage of Stevenson-Wydler and 
Bayh-Dole. The agencies in the private sector began to find 
ways to partner in the development of technologies that both 
furthered agency missions and advanced competitiveness of 
industry and the overall strength of our economy. And as a 
result, Federal tech transfer has developed everyday products 
such as GPS, the HIV home test kits, stronger materials for 
more fuel-efficient cars; hybrid corn, that are more resistant 
to drought and disease. And these are just few of the many 
hundreds of examples of technologies that the Federal 
Government originally held intellectual property title to and 
either licensed out the technology or have collaborated with 
industry to commercialize.
    And through the years, Congress based on inputs elicited 
from industry and working also with our Interagency Working 
Group has attempted to improve and streamline the technology 
transfer process, because it's clear for a strong and effective 
research and development enterprise, we need to partner with 
the three entities that perform research and development in 
this Nation, and they are the Federal Government, universities 
and industry.
    And for effective commercialization of a new innovation or 
technology, industry must be given adequate incentives to bring 
a product to the marketplace. For commercialization to be 
appropriately incentivized, industry needs to have sufficient 
intellectual property rights and a procedure that is as 
streamlined and impediment-free as possible. And that is 
precisely what Congress tried to do in your most recent 
consideration of technology transfer laws in consultation with 
our Working Group.
    For CRADAs, for example, originally the law was designed to 
protect a great deal of flexibility for intellectual property 
rights, but then they found out that in negotiations with 
CRADA's, which are essentially contracts, that it became too 
cumbersome. There wasn't a uniform standard for intellectual 
property rights, and so a law was passed in 1995, the National 
Technology Transfer Advancement Act, that provided for 
exclusive license in the field of use for a CRADA, and that 
helped provide some uniformity and certainty for intellectual 
property rights. And this also helped decrease the time and 
effort acquired in negotiation that hindered collaboration by 
private sectors at Federal laboratories.
    And the same was the case with the Bayh-Dole Act with 
technology licensing. There was such a long laborious 
negotiation and process time for a company to license at the 
Federal laboratory, that the Technology Transfer 
Commercialization Act of 2000 helped to streamline these 
efforts. So it's clear that we need to remove the procedural 
obstacles, and to the greatest extent possible, within the 
public interest, the uncertainty involved in the licensing and 
also the collaboration of working with Federal partners. And 
given the importance and the benefits of technology transfer, 
the Department of Commerce has assisted Congress to refine the 
technology transfer process, facilitate greater university, 
government and industry collaboration. And as a result, the 
ability of the United States to compete has been strengthened 
and a new paradigm for greater collaboration among the 
scientific enterprises has been created.
    We look forward to working with you, Mr. Chairman, and the 
members of the committee, in our Interagency Working Group to 
try to improve and enhance the technology transfer law so that 
we can meet the national priorities at hand. Thank you very 
much.
    Mr. Tom Davis of Virginia. Thank you very much.
    [The prepared statement of Mr. Wu follows:]

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    Mr. Tom Davis of Virginia. Dr. Tether. Thanks for being 
with us.
    Mr. Tether. Thank you, Chairman Davis, Congressman Turner 
and Horn. I'm pleased to be here. I'm Tony Tether, director of 
DARPA, which is the Secretary of Defense's corporate research 
center, is one way to look at us.
    I'm not an expert on IP. However, I've had experience at 
industry both at Ford where I was the chief technology officer 
in using patents as a measure of success through the internal 
IR&D program, and also at DARPA, where we constantly worry 
about maintaining IP rights and bringing in firms that might 
not want to do business with us.
    In general, the existing policies for allocating IP created 
under Bayh-Dole works reasonably well. Companies that are used 
to working with the government are typically comfortable with 
the policies. But that doesn't mean that everything is perfect. 
The policies and their complexity worry people who are 
unfamiliar with the government.
    Bayh-Dole is uniform, which is good. You know how somebody 
is going to apply it. But it is inflexible, which is bad. The 
terms and conditions are largely defined by regulations. And 
you can't negotiate different terms, even if you think they 
would be sensible.
    DARPA and the services have funding instruments called 
Other Transactions that allow us to avoid these problems in 
some cases. Basically, I agree with Congressman Turner that 
Other Transactions, which were designed to bring in 
nontraditionals, on the surface appears that all you're really 
doing is going to people who most certainly know how to deal 
with the FARS. Since I'm not sure 95 percent--I accept your 
number of 95 percent, but I do know it's a large number. But 
the real value of the Other Transactions is what it allows us 
to do with the prime contractors who are used to dealing with 
the government is to avoid the flow-down provision.
    In other words, we allow them to go out to the small firms 
in their area and not have to flow down Bayh-Dole so they could 
possibly bring in people who have a product and have research 
ongoing and have them enter into a research with the company 
without the small supplier--small business worry that for 50K 
they're going to lose all of their intellectual property rights 
to the government.
    If we didn't allow this flow-down, then the prime 
contractor would have to flow down Bayh-Dole to those small 
companies. It appears basically that is the strongest advantage 
we have of having the OT efforts with respect to intellectual 
properties, allowing the primes to not have to flow down the 
Bayh-Dole provisions, when it makes sense to not do so, and 
thereby bringing in small firms that otherwise would not want 
to deal with them.
    I know that from my own personal experience with Ford, that 
there were many small companies that we really just wanted a 
little bit of help, but they were concerned about doing 
anything with this, if it meant that they had to enter into 
provisions as to what--who would own what they--what they 
learned on that little piece of effort, because all of their 
other intellectual property was now put at risk because of the 
difficulties separating what you knew before and after.
    In short, we do believe that our flexibility in IP and 
other issues through the OT system have really helped us deal 
with people we otherwise couldn't deal with. So with the OT 
provisions at DARPA, I do feel that we do have the flexibility 
to reach out and bring in nontraditional firms directly as 
primes, and even in those cases where we don't reach out and 
have nontraditional--we have a prime contractor, a typical 
defense firm, by allowing them to not have to flow down--that 
the flexibility has really been great.
    At our place speed is everything. We basically have an 
organization that is based upon two premises, replenishment and 
innovation. We do that by basically having people replenished 
at the rate of 25 percent a year. Everyone turns over at DARPA 
about 4 or 5 years. And also speed of execution. And by having 
the capability to have Other Transactions, we are able to get 
to contract with firms, both nontraditionals who we would never 
get the contract with, and also prime contractors that normally 
deal with the FAR much faster than we otherwise would have to. 
We don't force them to have to go and form a separate company, 
a joint venture, which takes time, which they all would have to 
do, and so the other transactions allow a great deal of 
flexibility in that regard.
    And with that, I'll be happy to take any questions.
    [The prepared statement of Mr. Tether follows:]

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    Mr. Tom Davis of Virginia. Thank you very much. Let me 
start the questioning with Mr. Horn, then Mr. Turner, then Mrs. 
Davis.
    Mr. Horn. Mr. Brock, in your review for the GAO in the 
Bayh-Dole Act on exceptional circumstances, what, if anything, 
did you see was not really an exceptional circumstance? Can you 
give me a feel for whether that clause needs to be expanded 
more or not?
    Mr. Brock. The exceptional circumstances under Bayh-Dole in 
our review, we found very few actually, and the ones that were 
pointed out to us seemed to be appropriate. Just by way of a 
little bit of background, under Bayh-Dole the company--the 
commercial company keeps the patent rights, and the government 
has the license rights to it for government use. The government 
can waive that so that the commercial company does not get the 
patent. Where that has been useful has been particularly at 
NIH, is when a pharmaceutical company has a drug that they're 
testing through NIH, and NIH, in turn, contracts with the 
university or a private lab to test that drug. If they, in 
turn, develop a new use for the drug, under Bayh-Dole, they 
would have rights to the patent for that. Well, that's a 
disincentive to the pharmaceutical company for wanting to do 
the--to do any kind of testing at all with NIH.
    So by having this declaration, NIH removes the patent 
rights from the research lab or the testing lab, and those 
rights would revert back to the pharmaceutical company. So in 
the examples that we identified, that declaration worked very 
well. We did not see--I'm not saying there are no bad examples, 
but in our review, we did not come across any of those. It's 
not widely used.
    Mr. Horn. Mr. Tether, you've got quite a record in the 
private sector. Looking at this type of exceptional bit, should 
it be changed in any way, or is it OK now?
    Mr. Tether. The exception to the----
    Mr. Horn. Yeah.
    Mr. Tether. Quite frankly, I didn't know there was an 
exception.
    Mr. Horn. Well, you could go back and change the language.
    Mr. Tether. But I would--and maybe it's an education 
problem of the contracting officials who negotiate with the 
government. I would really like to almost query them as to how 
many of them realize that there is an exception, and if they 
wanted to ask for a waiver, who did they have to go to to get 
that waiver? Now, if it was a local--in other words, if they 
themselves could do the waiver, then it's a very useful 
provision.
    But if it turns out, as I believe is the case, that in 
order to get the waiver, that they basically have to go two or 
three levels up the chain--and I don't know this--then I think, 
one, they probably don't know about the exception; and two, 
they probably wouldn't try to execute it for the time delay and 
the effort required in going and doing that.
    Mr. Horn. One of the things that's occurred over the last 
10 years and started in this room, as a matter of fact, there's 
a delegation from the every 6 months or sometimes every 8 
months dealing with the European parliament, and of course, one 
of the main things I've said in every one of those missions 
that, you know, you guys have a subsidy now of about $50 
billion for Airbus, and we've got simply a military and 
civilian that are quite separated in many ways, and of course 
they just go, ha, ha, ha.
    You're getting all of this military business than the 
civilian aspects go. Well, it's just the other. In the case of 
the C-17, which was the problem here, and they want today do it 
in with this committee, we beat them on the floor in May 1994 
by 300 votes and 100, and we haven't heard anything around here 
anymore. But they have slowly--looking into a corporate 
formation for Airbus, and we started with President Clinton 
getting some transparency as to at least part of the books. 
Well, it never really worked very well.
    So also in the cockpit of the C-17, those came from the 
civilian side. It wasn't subsidized by the Defense Department 
or anybody else. They just said, this is the kind of thing we 
ought to have in the cockpit. Let's take advantage of it. And 
that was--everybody says Airbus just didn't know what they were 
talking about, and I said, you know, if you let me know, I'll 
get a U.S. attorney to indict a few if, you know, what you're 
saying, it's just baloney.
    So meanwhile, we're facing that $50 billion bit, and it's a 
little tough to make when we get to do it and they really 
don't. So I'm just curious on this type of thing. And Mr. Wu, 
usually when there's a trade secret situation, the--in this 
country on computers, let's say, they'd like to sell abroad, 
and then you get into a fight with State and you get into a 
fight with Commerce and Defense as to should that particular 
object go to China, go to Russia, wherever. How do you deal 
with that? I'm curious, on trade secrets? And the Pentagon 
certainly is a major figure in that. And give us a little idea 
of how that system works.
    Mr. Wu. Well, let me just talk about what is being proposed 
in terms of trade secrets. You know, allowing a contractor to 
treat an invention made with government funds as a trade secret 
we believe would be a major change in government policy. The 
Department of Commerce would object to such a change, because 
the only benefit the public would get is if the company 
exploited the invention when providing a product or a service, 
and since nothing would be published, the public's knowledge of 
that information would also be decreased.
    Further, the government's license and march-in rights would 
be worthless, and on the other hand, if the funding agency 
agreed not to exercise its secondary rights to patent an 
invention which the company did not want to patent, then a 
limited trade secret along with the invention disclosure was 
not unreleasable in FOIA.
    So we believe that the current policy is sufficient, and 
that allowing for trade secret protection would be a major 
shift in our current policy.
    Mr. Horn. Who makes the final decision? Does it go to the 
President?
    Mr. Wu. There would be, I believe, an overarching decision 
with OMB, or at least in consultation with OMB.
    Mr. Horn. Mr. Brock, have you looked at that process in 
terms of how we help American industry to get products abroad 
without giving military secrets, maybe some trade secrets, but 
have you taken a look at that?
    Mr. Brock. Not directly as it relates to intellectual 
property, Mr. Horn. We have done work on looking at the export 
licensing process and those factors that are taken into 
consideration when a decision is made to grant an export 
license. Our views on it have been primarily are national 
defense issues being considered and are we releasing either 
technical data or product that should not be released. We've 
also done some reviews looking at the rather burdensome process 
that exists between Commerce and State and consultation 
processes they have and the unequal nature of those processes, 
but it's never really been focused on the intellectual 
property.
    I'd be glad to provide you with a copies of the reports 
that we've done on the process aspects of that if you would 
like them, sir.
    Mr. Horn. I'd like to see them.
    Thank you, Mr. Chairman.
    Mr. Tom Davis of Virginia. Thank you, Mr. Horn.
    Mr. Turner.
    Mr. Turner. Thank you, Mr. Chairman. Mr. Brock, were you 
able to determine if--and particularly since September 11th--if 
there has been any agency of the Federal Government that has 
had--has been unable to acquire any technology or research that 
it needs because of the concerns about intellectual property 
rights?
    Mr. Brock. We, in the course of our review, Mr. Turner, we 
went to many agencies that have an involvement in homeland 
defense and in addition to DOD, we went to INS. We went to FBI, 
DOT and other agencies as well to question them about concerns 
that they might have over acquiring new technologies. The DOD 
was components of the ones that expressed the most concern 
which has been long-standing before September 11th about 
concerns of getting access to companies that had technologies. 
Those other agencies did not express specific concerns. 
Unfortunately, though, most of them were either at that point 
not in an acquisition phase or were just beginning to do 
acquisitions and did not have a lot of exposure to it.
    So I think our answer is inconclusive at this point. Some 
of them recognize it as a potential problem, but they really 
didn't--had not yet had a chance to explore the implications of 
that problem.
    Mr. Turner. So do I take it that the main conclusion that 
you drew from your report is that a lot of agencies just don't 
understand the flexibility that current law provides them?
    Mr. Brock. Well, that was particularly true at DOD. That's 
where most of the action takes place on this whole area. I 
mean, they do most of the procurements. They do most of the 
research. And they have a lot of flexibility, such as with the 
other transactions authority. Other agencies that are involved 
in research of a similar nature like NASA or FAA also have 
their own variations of other transaction authority that gives 
them some flexibilities, and both of those agencies express 
less concern over getting access to technology than the DOD.
    Mr. Turner. So do you have any suggestions for us about how 
we could better educate our Federal agencies regarding what the 
law does provide for them now? It seems that if we could figure 
out how to do that, then we not only would have addressed some 
of the concerns that we have been looking at, but the agencies 
themselves would seem to me to be able to exercise the rights 
under existing law and wouldn't have near the concerns that we 
seem to be hearing from time to time.
    Mr. Brock. I think it's a long grind. This is pretty 
complex. A lot of people are involved in it, and it's more than 
just the contracting officer. It goes all the way back to the 
program offices. When we were talking particularly to the 
commercial sector, they commented that even within DOD, the 
very real variations among the services about how they 
approached intellectual property rights, that some services 
were noticeably easier to deal with than others. So part of 
this is almost a culturalization issue within the agency about 
what they want to do or not do. Most of it has to go, though, 
with what I referred to as the comfort zone, where agencies are 
fearful of making a mistake, and because of that fear, they 
want all the data rights they can get, and in wanting all the 
data rights they can get, then they began to encroach on the 
lifeblood intellectual property of the commercial companies.
    As I mentioned, the navigating intellectual properties 
guide book that DOD did is a great step. It's my 
understanding--and let me invite my colleagues back here who 
have been doing some more recent research on this--is that 
training in that, it's just now getting going, that the Defense 
Acquisition University is developing a course. It's considering 
offering a variation of what you would call an intellectual 
property warrant that a more limited number of contract 
officers who would be more expert in the area. I think those 
are good steps, but they need to get moving on it.
    Mr. Wu. Mr. Turner, if I could add also and followup on 
Jack's points he raised that there are concerns about the 
culture, and that is a concern that we've had also. The culture 
tends to be very risk-adverse when it comes to technology 
transfer, and oftentimes it require a cutting-edge mindset to 
be able to jump into a project and take that risk, especially 
if there are a great dividends ahead. But because especially 
within NIH, when you're dealing with potential health, a 
medical recovery, drugs, there is great potential, then it 
might be criticized that if you give the intellectual property 
rights to a pharmaceutical company, for example, that partners 
with NIH, then they would get, in essence, the intellectual 
property rights, a monopoly over that drug.
    As a consequence, they would be criticized later on, since 
part of that research that led to the giving of the 
intellectual property rights came from federally funded 
research, and there's always in the back of the minds of a 
number of the technology transfer managers and the negotiators, 
the coordinators, that they need to be very politically 
sensitive. As a result, there is a very risk-adverse culture, 
despite the great latitude that Congress has given in the most 
recent technology transfer laws. And so getting that mindset 
away from being risk-adverse and allowing them to be rewarded 
for taking the right step, emboldening them is very important, 
too.
    Mr. Turner. Thank you. Thank you, Mr. Chairman.
    Mr. Tom Davis of Virginia. Thank you. Good questions.
    Mrs. Davis.
    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Chairman. I 
hear what you're saying about the culture problem and I guess 
my biggest question is do you believe that within the Defense 
Department and other agencies, that there's really an 
understanding of the problem with intellectual property rights, 
or is there is a problem with intellectual property rights, and 
do they appreciate that problem? And is the executive branch 
doing anything to correct the problems, if there are any?
    Mr. Wu. Well, from the Interagency Working Group 
perspective, there doesn't seem to be any direct problems with 
the intellectual property framework for technology transfer. 
Relating to Stevenson-Wydler or Bayh-Dole, both seem to be 
working very well. As a matter of fact, the Association for 
University of Technology Managers just came out with their 
Licensing Survey for 2000, which underscored the great 
successes that Bayh-Dole has had for universities in promoting 
research and development, which is driven by Federal funds and 
bringing them out to the commercial marketplace.
    Additionally, we see countries around the world, most 
recently Japan, France, and Taiwan, replicating our Bayh-Dole 
framework for use in their country. There are a number of 
success stories also that he recount the success of Bayh-Dole, 
but as Tony said, you know while Bayh-Dole may not necessarily 
be a perfect piece of legislation, a lot of it may be just with 
its implementation. And we need to make sure that the 
technology managers that are down on the ground working closest 
with industry and partnering together need to be empowered and 
emboldened with the right attitude, because it seems as if the 
legislative tools seem to be there.
    Within the Interagency Working Group, we'll continue to 
dialog with all of the agencies, including DOD, to see what 
changes we can do to improve Bayh-Dole and Stevenson-Wydler and 
a number of other technology transfer efforts, but it seems 
from the Working Group's perspective, that Bayh-Dole is working 
very well and that the framework that it has established has 
clearly reaped successes.
    Mrs. Jo Ann Davis of Virginia. So you don't think we need 
any reforms at this time to it?
    Mr. Wu. There are none immediately that are recommended by 
the Working Group.
    Mrs. Jo Ann Davis of Virginia. Do you think the private 
industry is--why are they not participating more then?
    Mr. Wu. Well, that's the big balance. You know, we're 
trying to create incentives for private industry, because the 
reality is that in order for American taxpayers to benefit from 
our federally funded research, we need to commercialize the 
product to bring it out and improve the quality of life, as 
well as to complete the cycle back to the American taxpayer.
    And so incentivizing the private sector is absolutely the 
key and also streamlining the procedures. However, at the same 
time, you know, we feel that we're stewards of the public 
trust, and this is public financed research which we need to be 
mindful of, and we--if you give away intellectual property 
rights to industry, you want to provide the right incentives, 
but at the same time, we need to make sure that we have 
adequate government march-in rights so that we can force 
utilization of the technology and innovation, if it's not being 
used properly or at all.
    We need to make sure that the government maintains an 
effective license to that technology or innovation, and so 
there are certain things that we need to do as public policy 
that's good public policy that may not be, at least for those 
lawyers or other business people looking at the contract or the 
technology licensing agreement, may not be in their minds to be 
sufficient or helpful to them.
    You know, Lee Buchanan who was a former director of DARPA 
who appeared most recently at one of our innovation roundtable 
series, he said, ``there are still vast numbers of very 
intelligent, very well-informed board members who think that 
engaging in research and development with the Federal 
Government relinquishes all rights to intellectual property of 
the government and gives them march-in rights at a moment's 
notice. It's false, but that's the perception. And so that's 
what we're fighting.''
    You know, industry wants to take advantage of its business 
model, and it's well within their right to do that. They're 
responsive to their shareholders, but at the same time, we 
believe the framework achieves a balance in trying to maintain 
good public policy and also providing for enough incentives to 
private industry.
    Mrs. Jo Ann Davis of Virginia. So if I'm hearing you 
correctly, it's educating the private industries and then 
getting our agencies out of their cultural problem?
    Mr. Wu. Yes.
    Also, I might add that while we have march-in rights as 
part of every agreement in which march-in rights allow for the 
government to come in and essentially march in and take the 
technology if it's not being used properly or at all, it never 
has been utilized by the Federal Government. So that 
requirement is good public policy, but it's really a red 
herring for those businesses who say that they fear working 
with government because of that provision.
    Mrs. Jo Ann Davis of Virginia. Thank you, Mr. Chairman.
    Mr. Tom Davis of Virginia. Again, let me go on to that. 
March-in rights have never been exercised?
    Mr. Wu. No, no.
    Mr. Tom Davis of Virginia. Then why do you insist on it? 
Because it seems to be the major deterrent if you're setting up 
there as a general counsel. You've developed a new product, you 
want to use it, and the government could come in and take it 
over.
    Mr. Wu. Because there are examples in which there will be, 
or may be at times--we hope never--but there may be times in 
which a company may choose, for whatever reason, not to take 
advantage of a technology in which you've given license to, or 
they may purposely----
    Mr. Tom Davis of Virginia. No. I understand. But that's the 
crux of the problem. I mean, it seems to me that the crux of 
the problem is that theoretically you want to have that if 
you're the government, and I understand that, but that's one of 
the major deterrents of the private sector. That's why you have 
92 percent of the Fortune 500 industrials doing little or no 
R&D for the government, three-fourths of the country's top 75 
IT companies refuse to do research for the government, and a 
lot of it boils down to that particular issue.
    And we're insisting on something we've never used. There's 
got to be a way to cut this and allow these companies--I mean, 
you're saying better educate the companies. I was general 
counsel for an IT company. I wouldn't allow my company to sign 
off on something like that. We have to find a way here to make 
it work, because I know that Mr. Brock talked in his testimony 
about, people said, well, we don't know that we've been able to 
get the products we want, but you don't know what products are 
out there when we have some of the top innovators in the world 
not participating.
    Who knows what we've missed because of that opportunity and 
the prices we could get because of competition. I mean, that 
seems to be the hub of the issue. And I understand your 
position. I think, you know, from an intellectual point of view 
and textbook point of view, maybe it's correct from a 
government perspective, but the downside is that seems to be 
the major--one of the major deterrents to getting a whole line 
of products and innovations into the Federal sector that can 
help us fight the war on terrorism. You understand what I'm 
saying?
    And let me ask--again, let me have you give the answer 
first and then have Tony----
    Mr. Wu. That perception can be reality when it comes to 
negotiations for intellectual property rights of the 
government, but what if a company chose to use the technology 
licensing much the same way as the submarine patent in which 
they will just hold on to title, and there's a great potential 
there. And they refuse to commercialize because potentially it 
may conflict with one of their own competing products. There 
needs to be a balance. I'm not sure exactly how to achieve that 
with the march-in rights issue, but certainly we'd be open to 
discussing that with you.
    Mr. Tom Davis of Virginia. OK. Thank you.
    Dr. Tether.
    Mr. Tether. Mr. Chairman, I absolutely agree with you. I 
don't know how--we seem to want to regulate down to that point 
001 percent probability case, and----
    Mr. Tom Davis of Virginia. The four decimal point----
    Mr. Tether. Yes. And what we have found, other reasons for 
OT notwithstanding, but we have found that having the other 
transaction's capability allows us to enter into a business 
decision case with a company. If march-in rights are their 
heartburn, we have the ability to basically negotiate them out, 
because it may be a case where we don't care about it, as you 
said. But without having that flexibility to be able to do 
that, you're stuck with that, and that really is what I was 
trying to say on Bayh-Dole. It's great, it's uniform, but it 
has--leaves little flexibility to go in and piecemeal out and 
create a business deal that is both beneficial to the 
government and beneficial to the company.
    And I also agree that you don't really know who you're 
missing. What we have at DARPA is that people know that DARPA 
have this capability. So consequently, we get people coming to 
us that get us into these conversations over these rights. Now, 
if you don't--aren't known for having the flexibility to do 
anything about it, well, I doubt if you'd go even talk to them, 
and so----
    Mr. Tom Davis of Virginia. I hear you. I think your point 
is well taken.
    The other part of it, in Mr. Wu's defense, is the march-in 
rights to make sure this is done appropriately with waivers or 
giving that flexibility, you really have to train your people. 
I mean, then it comes down--as you said, they--a lot of these 
contracting officers are--they have that risk-averse mindset. 
But with the appropriate education, it seems we could get the 
best of both worlds here, maybe with the kind of things that 
you do without major changes to the statute.
    Mr. Brock, do you have any comment on that?
    Mr. Brock. Yeah. The--Ben is right. The government has 
never exercised march-in rights, although it has threatened to 
exercise them before. I mean, it's had the effect of the 
company moving forward. Some of the companies we talk to flat 
out said that they realize that the government did not exercise 
that right, but nevertheless, it represented a--it made them 
make a business decision not to engage with the government 
because of that threat, and so they chose not to do it.
    They made a business case for that, and maybe other reasons 
as we, they made a business reason not to participate. And a 
lot of the contracts that we were looking at or talking about, 
too, weren't as clearly defined. I mean, if the government is 
paying you money to do research and you develop a patent, I 
think it's clear that the--what Bayh-Dole is supposed to do. 
Many of the things that we're talking about, there's not a 
bright line that many of the companies are already bringing 
their own background inventions to the table, and their concern 
about the government's ability to draw the line to separate 
what they're bringing to the table versus what's being 
developed on the contract and how do you separate those things 
out, and I think that's a big part of the concern that many of 
the commercial companies we've talked to had in doling with the 
government. It wasn't just the black and white case as, OK, you 
pay for the research; we're concerned you're going to march in 
and make this--and take away our rights. It's more of the 
case----
    Mr. Tom Davis of Virginia. Preexisting research.
    Mr. Brock. Preexisting research that is commingled with new 
research and how do you begin to separate that out, that was 
more of the issue that we saw.
    Mr. Tom Davis of Virginia. All right.
    Mr. Tether. Same here.
    Mr. Tom Davis of Virginia. It's a complicated issue, and 
frankly, you know, whenever you allow that waiver--that kind of 
flexibility, you're going to have contracting officers that may 
make what people consider the wrong decision. It gets blown up 
in the media, and then we come back and say, all right, we 
overreact, but in the meantime we're losing--you know, because 
of a few bucks that go out the window here, we're losing 
billions of dollars over here and not getting other things 
through the doors and these are judgment calls that get 
difficult to make, but every time there is a mistake--I found 
this in procurement. Every time there's a mistake, it gets 
blown up. And the billions you could save for the times that it 
works, you get no credit for.
    So we go back to basically structuring government so that 
we restrict the ability of contractors to do a lot of things. 
Make it clear that nobody is going to steal any dollars, but 
you can't do much of anything else. I understand the politics 
of that, but from a management perspective and coming out of 
the private sector, it just--it doesn't seem the appropriate 
tradeoff in all cases. But I think you all highlighted it very 
well and the sides to it from my perspective, and that you were 
for that.
    Mr. Horn.
    Mr. Horn. Just one fast question to Mr. Wu. The Commerce 
Department, like all other cabinet departments, have a real 
problem, and that is a lot of very good people that have been 
there for 10, 20, 30 years, and they're retiring, and what are 
you doing now to get new blood in the Commerce Department?
    Mr. Wu. Well, Mr. Horn, as you mentioned, it's not just 
endemic of the Commerce Department. We see that in our Federal 
laboratories throughout the country, where you have top 
managers who are on the cusp of retirement and who will be 
leaving. That's a major problem with each of the Office of 
Research Technology, which is the major office within each of 
the Federal laboratories that is supposed to administer the 
technology transfer programs.
    We've seen a number of the agencies and Federal 
laboratories often, as a result, just make the responsibilities 
of the ORTA office a supplement to someone else's job, and 
therefore you don't get the right people. You don't get the 
people who need to have the backbone to make some of these 
tough choices, who need to be educated. And that's a concern 
that we have. The Working Group is looking at the issue, and 
we're working with the Federal laboratories, as well as all of 
the agencies to try to fix that problem within our Federal 
laboratories.
    But right now, you know, there isn't a fixed problem in 
that there's a general awareness that this is coming in a few 
years and we need to look into it.
    Mr. Horn. Good. I think everybody that--in your position 
that goes around the country, you ought to stop by either a 
public administration, a business administration and go into 
the classroom and tap for those people to help get us where we 
were in the 1930's and the 1940's with very bright people that 
came here. And the Depression sort of drove them here. And so, 
we've lived on that for a long time.
    Mr. Wu. It's also not just our science and education work 
force, increasing that, but also making sure that our Federal 
laboratories have the adequate resources and infrastructure to 
get the job done that will attract those people to the 
positions as well.
    Mr. Horn. Thank you, Mr. Chairman.
    Mr. Tom Davis of Virginia. Mr. Horn, thank you very much.
    Any other questions?
    Let me thank the panel very much for your testimony.
    We'll move to the next panel, unless anybody wants to add 
anything.
    Mr. Tether. Only one thing. I guess on the ability to waive 
Bayh-Dole, which I will ask my staff why I didn't know that, 
but I'm sure they'll tell me they told me that, and I just 
didn't remember that----
    Mr. Tom Davis of Virginia. You don't have to have that on 
the record if you don't want.
    Mr. Tether. But the real issue is the flexibility. I mean, 
if the situation is no Bayh-Dole or full Bayh-Dole, that's the 
wrong flexibility. You really want the flexibility to go there 
piecemeal what is truly bothering the person you're dealing 
with, because you may not care about that little particular 
provision, but the rest of it you may still want.
    Mr. Tom Davis of Virginia. I think in most cases you don't 
care about that particular provision. If you do care about it, 
it's that important to the government, then you stick to your 
guns.
    Mr. Tether. Thank you very much.
    Mr. Tom Davis of Virginia. Thank you. You've crystallized 
it.
    Now, let's welcome our second panel to the witness table. 
Mr. Louie, Mr. Carroll, Mr. Fry and Mr. Soloway, as we change 
the name tags. Why don't you--Louie, Carroll, Fry, Soloway. If 
you just stand and raise your right hand.
    [Witnesses sworn.]
    Mr. Tom Davis of Virginia. Again, to afford sufficient time 
for questions, if you would limit your testimony to no more 
than 5 minutes for any statement. Your total statements are in 
the record. That will allow sufficient time for questions and 
answers. As I said, all written statements will be in the 
record.
    Let me start with Mr. Louie. Thank you very much for being 
here today.

   STATEMENTS OF GILMAN LOUIE, PRESIDENT AND CEO, IN-Q-TEL; 
RICHARD CARROLL, CHAIRMAN, SMALL BUSINESS TECHNOLOGY COALITION, 
PRESIDENT, DSR, INC.; STANLEY FRY, DIRECTOR, CONTRACTS & LEGAL 
   AFFAIRS, EASTMAN KODAK CO.; AND STAN SOLOWAY, PRESIDENT, 
                 PROFESSIONAL SERVICES COUNCIL

    Mr. Louie. Thank you, Mr. Chairman.
    Mr. Chairman, members of the committee, it's a privilege to 
appear before you this morning to discuss the question of how 
government may obtain access to the most innovative research 
and development in our country.
    Mr. Chairman, you have asked questions of whether or not 
there are barriers, including the treatment of intellectual 
property rights, to the government in obtaining the research 
and development innovation it needs. I'm happy to address this 
question because I believe that the independent company that I 
lead, In-Q-Tel, the CIA's venture catalyst nonprofit 
corporation, is a unique and innovative approach for acquiring 
the best technology for one of our government's most important 
functions, the collection, analysis, and dissemination of 
intelligence.
    Let me first say I'm not a lawyer, nor a government expert 
on IP, nor an expert on the FAR. I am your typical entrepreneur 
who founded a computer software company in the early 1980's on 
my kitchen table, raised venture capital, built it, merged it 
into a public company in the 1990's. I developed products 
primarily for the consumer markets, but also for defense. I 
finally sold it to one of the largest toy companies in America 
before joining In-Q-Tel as its CEO and president.
    I was asked by the Director of the CIA and by my members 
who serve on my board of trustees, which includes captains of 
industry, past innovators in government, to lead this new and 
unique effort to run a nonprofit 501(c)(3) with the purpose of 
attracting the resources and talents of the high-technology 
industry to help solve some of the CIA's most vexing 
information technology needs.
    In-Q-Tel was founded in 1999 after the DCI realized that 
the nature of the potential threats to the United States had 
changed, and in many cases these new threats were technology-
equipped, working across national boundaries, and using a very 
different framework for operations than those used during the 
cold war.
    At the same time the Intelligence Community was facing a 
growing information technology challenge. The agency was facing 
information overload, better known as the ``volume problem.'' 
The stovepiping of information was making it difficult to share 
and leverage the data. The growing need for real-time 
decisionmaking and security. The speed of innovation in IT was 
overtaking the speed of the government's acquisition and 
integration. Increasingly, the growing information and high-
technology industry base that are actually leading the IT 
revolution were no longer engaged with government.
    While the CIA has always had a proud tradition of 
innovation with such successes as Corona, U-2 and the SR-71, 
CIA realized that today is a very different time. As you had 
stated, in 1995 the Federal Government was funding over two-
thirds of the Nation's R&D budget. By 2000, the role of 
government and industry's R&D investments flipped, with the 
industry now closing in on 70 percent of the Nation's R&D 
budget.
    In 1999, when the DCI formed In-Q-Tel, he stated, ``we are 
working with industry to leverage their expertise and 
revolutionize the way we acquire technology. Everyone knows 
what an arms race is. We are in a continuous intelligence race. 
Harnessing capabilities of the private sector to deal with 
tough intelligence problems is part of a very proud tradition 
going back to the early days of our Intelligence Community.''
    The need is great, but the world has changed. Our mission 
is discovering new information technologies that address the 
CIA's most pressing problems. We do this by engaging with 
industry, by aligning the strategic interests of corporations 
and industry with the strategic needs of the Central 
Intelligence Agency. We define the agency needs for industry, 
using commercial analogs to the agency's challenges. For 
example, instead of finding point solutions for the CIA 
information security needs, we ask the industry for the best-
in-class and new security technologies that could help solve 
financial institutions' needs. Instead of using contract 
vehicles that look like traditional government procurement 
contracts, the CIA worked hard with us, spent over a year with 
us so we could engage with industry, using contractual as well 
as equity vehicles that closely resemble commercially accepted 
practices, while still operating within the scope of the FAR 
and protecting the interest of government.
    We've also spent a significant amount of time educating our 
industrial partners on the needs of government in relation to 
intellectual property while working with our industrial 
partners to protect their most precious assets.
    In-Q-Tel's business process has seven steps. We identify 
the IT and work flow challenges within the Central Intelligence 
Agency. We discover and analyze commercial technology market 
trends. We aggressively reachout to industry and academia. We 
negotiate and align the needs of industry with that of the 
Central Intelligence Agency. We then nurture the technologies 
and incubate the business models. Then we reach back into the 
CIA, identify customers within the agency who have significant 
mission needs, and we transfer those solutions into the agency 
along with best practices from the commercial word.
    We measure success by delivering technologies to the 
agency. So you ask, has In-Q-Tel been successful? Since 
becoming operational in late 1999, we have delivered 19 
deliverables to the agency, including technologies which are 
directly relevant to the war on terrorism. We've found 18 
technologies, in addition to those 19 deliverables, and we 
referred them to the CIA.
    We have received close to 2,000 business plans. We have 
contracted with companies that range from small startups with 
just a few employees to multibillion-dollar corporations. We 
work with startups, midsize to large size, privately held as 
well as publicly held companies, professional services 
companies, universities, national private labs. We have 
received submissions from almost every U.S. State as well as 
from 26 different countries. We network with over 200 venture 
capital funds, universities and labs. Since September 11th 
alone we've received over 1,000 business plans. Seventy-five 
percent of these companies have never done work with the 
government before.
    Mr. Chairman, your second question of how has In-Q-Tel 
obtained technologies including IP issues, let me say once 
again I'm not a lawyer in IP or the FAR. The challenge for 
government in the IP markets is that government is only one of 
many competing sources of funding. Therefore, for government to 
engage, it must be attractive to industry--because in our case 
the technologies we seek are critical for national security. In 
response, the agency enabled In-Q-Tel to speak the language of 
industry and to be able to work with the best IT companies.
    Under the forward-looking leadership of the CIA, the CIA 
developed a set of tools and provisions within the four corners 
of the FAR. The agency worked hard, studied the market 
requirements and the needs of companies. The framework that the 
agency provided us in our charter allows us to craft agreements 
that allow companies to pursue commercial markets while 
providing fair and appropriate deals for the government.
    In-Q-Tel has also the advantage, given the nature of 
venture capital, to be funding in mixed funding environments. 
That means that we're usually a minority stake investment in 
these companies, and we leverage other people's financial 
resources. As such, the agency permits us to negotiate IT 
provisions that protect both government as well as industrial 
needs.
    The last question you asked is the challenge of the war on 
terrorism in light of the new homeland security mission. Let me 
say this: If there is any challenge, it is how to best engage 
and apply American resources and technologies on the war on 
terrorism. There is no shortage of high-impact, high-value 
technologies potentially available to our government today. The 
government needs to articulate its needs and engage with new 
vehicles that resemble those found in industry. Government must 
align and articulate its strategic needs within the strategic 
direction of industry and become partners, not adversaries, 
within industry.
    If you want industry to provide government with the best 
technologies, and if government wants and needs early exposure 
to these technologies, it must find a way to do so while 
protecting the intellectual capital and property of industry. 
Government must also think out of its own box, look creatively 
toward industry for commercial solutions rather than 
government-unique solutions. Companies are confused about how 
best to contribute, how to be heard and how to get involved.
    In fact, government needs to start moving much faster. 
Post-September 11th, industry was ready to serve, but they are 
getting very frustrated. If government is unable to engage 
these companies, and if it's unable to develop a streamlined, 
straightforward way for industry to help, industry will focus 
resources it once offered to fight the war on terrorism back to 
the consumer and commercial marketplaces.
    So, Mr. Chairman, in conclusion, I can say that In-Q-Tel 
has been very fortunate. By working with the CIA, we have been 
able to devise acquisition strategies that have encouraged 
companies that have never previously dealt with the U.S. 
Government to step forward and make their technologies 
available. I believe that other government agencies can use 
approaches we have taken as well as those by other innovators 
in government to adopt a similar strategy to acquire these 
technologies that are needed for government purposes while 
leaving the industrial base free to pursue the extremely 
valuable commercial marketplaces.
    Mr. Tom Davis of Virginia. Thank you very much.
    [The prepared statement of Mr. Louie follows:]

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    Mr. Tom Davis of Virginia. Mr. Carroll. Thanks for being 
with us.
    Mr. Carroll. Thank you, Mr. Chairman. I want to thank 
Chairman Davis and Ranking Member Turner for holding this 
hearing and giving me the opportunity to testify.
    My name is Richard Carroll. I'm the president of a high-
technology company called Digital System Resources. I'm also 
the legislative chairman of the Small Business Technology 
Coalition representing hundreds of small high-tech firms across 
the country dedicated to improving Federal policies and 
research and development for the Federal Government.
    I want to just take a moment and recognize that I thought 
the previous panel when they addressed the culture issues hit 
the nail right on the head. In fact, what good does it do to 
have regulations that, in essence, build roads to go where you 
want to go when the culture is to walk? And that's what we 
have.
    I want to talk about the culture, ``we paid for it, we own 
it.'' The government's official policy regarding intellectual 
property rights is to obtain the minimum rights required for an 
acquisition, which is a sound and reasonable position. If that 
former intellectual property rights policy were actual practice 
for the government, I don't believe we'd be even holding this 
hearing. But the pervasive view, in my experience, is one of we 
paid for it, we own it. It's the simple premise that the 
government owns the intellectual property rights to any 
research and development funded with government dollars, and 
this seems on the face of it to be a reasonable government 
policy, which is why it is such a difficult mindset to change. 
But if you're trying to create an environment that encourages 
innovation, the application of we paid for it, we own it to the 
intellectual property of innovators is a huge obstacle and not 
consistent with the spirit of the Constitution to foster 
innovation and invention.
    My conversations with large and small companies make it 
clear to me that the government control of intellectual 
property can seriously smother incentives for innovators to 
offer their products to the government. For small high-tech 
companies in particular, the government culture of we paid for 
it, we own it has a chilling effect on their interest in 
innovating for the government. Understand that these companies 
are the most likely to bring forth the innovations needed to 
transform our defense systems and to meet the needs of the 
homeland defense with rapid innovative and affordable 
solutions. These new ideas represent the heart of the company's 
assets, and their ability to offer strong competitive 
alternatives to the status quo is clearly predicated on some 
level of intellectual property protection. If they lose that 
intellectual property, or the government provides it to their 
competitors, the very survival of the company is threatened.
    Protecting government rights. I believe that the 
government's intellectual property regulations and procedures 
must seek to strike a balance between the legitimate needs of 
the government and the legitimate needs of private sector. It's 
a fine tightrope that these regulations and clauses must walk 
between the competing interests of the government that wants to 
gain rights to intellectual property it is paid to develop and 
commercial firms that want to retain and protect their creative 
ideas from disclosure to competitors. I think that while in 
general the regulations as written do strike a reasonable 
balance between protecting the government's interest and 
affording industry rights to data, the culture created by 
implementation of these regulations seriously undermines 
creative transformation through the development of competitive 
alternatives and as a result does not support the best 
interests of the government or the Nation.
    Government contracting and program management personnel are 
not trained well on intellectual property rights or the concept 
that creative transformation, new ideas destroying old 
paradigms, is important to them. But what they are trained very 
well on is their abiding responsibility as agents for the 
government to protect the rights of the government. 
Unfortunately, this sometimes takes unnatural and 
counterproductive directions. Despite the government's official 
policy to obtain only the minimum rights for any acquisition, 
some government personnel assume it's in the best interest of 
the government to select every last right that can be obtained 
in every circumstance from the contractors, and to do less is 
to fail to protect the government interest.
    It is not hard to see how government personnel will be 
naturally inclined to slant the intellectual property rights 
balance toward the government. After all, very few government 
employees are penalized for being overprotective of government 
interests, and rightly so. In addition, there's a belief among 
some government personnel that they must be able to disclose 
technologies to foster competition. This runs counter to the 
business advantage concept that patents and copyrights are 
intended to give. This problem is exacerbated for smaller 
companies as they are less equipped to deal with pressure from 
government to give up their intellectual property. Yet it is 
these smaller firms that require the protection of well-crafted 
and implemented intellectual property policies, for they are 
the ones most likely to deliver the kinds of creative 
transformation that will rapidly advance capabilities.
    Our Nation's history is filled with examples of small 
technology companies transforming the way Americans work and 
play using the power of creative affordable innovation and 
intellectual property protection. Why does this not seem to 
happen in the government marketplace or in the Department of 
Defense? Why don't we find small, innovative DOD contractors 
transforming our defense through their innovative products 
protected by intellectual property rights in the same way 
small, innovative companies have transformed the private 
sector, companies like Intel, AOL, Microsoft, Dell, many, many 
others? They're just not in the public sector. Intellectual 
property protection is the reason they're not.
    Let me just mention one myth that exists in the government 
sector regarding intellectual property protection. That myth is 
if we don't acquire all the intellectual property associated 
with our procurement, in time we may be overcharged or held 
hostage to a sole source supplier. The reality is that the 
government doesn't acquire adequate intellectual property in 
most large procurements to level the playing field like that 
sufficient for competition. And do we really want to level all 
our alternatives anyway?
    Government practice, current government practice, attempts 
to acquire intellectual property and fails to do so in most 
large procurements, but does acquire intellectual property when 
contracting with small, innovative high-technology firms or 
outside commercial firms. The result of this practice is to 
significantly dampen the likelihood of innovation and creative 
transformation.
    We have invested in you, now run with it. New ideas are 
indeed threatening. As we see in the commercial marketplace 
every day, new ideas are remorseless. They disrupt and reorder 
old ways of doing things without conscience. A new technology 
idea or approach destroys the old technology, the old idea and 
the old approach simply by being better. This kind of rapid 
change is frightening to many people.
    We talk about it, thinking out of the box and no business 
as usual, but let's be honest; thinking in the box and business 
as usual are a lot more comfortable and feel a lot safer. So 
when we seek to create an environment where innovation can 
thrive within the government, we must recognize that we are 
trying to create an environment that challenges the status quo 
and that appears risky to many people. I want to acknowledge 
that we are trying to do something hard here, to change 
entrenched thinking and processes to accept the kind of change 
that protecting intellectual property will bring.
    Finally, and perhaps most importantly, the government needs 
to send a message that it will protect intellectual property 
rights of innovators, and when innovators feel their ideas will 
be protected, they will come out of the woodwork to provide 
their ideas for government application. The government will get 
the best ideas faster, better and cheaper with this approach.
    Thank you for the opportunity to testify. I would be happy 
to answer any questions.
    Mr. Tom Davis of Virginia. Thank you very much.
    [The prepared statement of Mr. Carroll follows:]

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    Mr. Tom Davis of Virginia. Mr. Fry. Thanks for being with 
us.
    Mr. Fry. Can you hear me OK? My name is Stan Fry. I'm the 
director of contracts and legal affairs for the commercial and 
government systems division of Eastman Kodak Co. I want to kind 
of make the point Kodak is a high-tech, we're a technology 
rich, technology dependent company. We're not just about film 
and prints anymore. We employ over 42,000 people in the United 
States. We did over $13 billion in business last year, and of 
that we spent about 5.9 percent, or $779 million, in R&D. We 
were granted over 700 patents, making us No. 10 of U.S. 
companies getting U.S. patents, and 20th overall of companies 
getting U.S. patents.
    Patents and our intellectual property are extremely 
important to our competitive position, and to highlight that 
I'd note that recently we organized a separate business unit 
whose sole purpose is to keep track of our patent portfolio and 
to make intelligent decisions on how to license, use, sell or 
use that technology for our benefit and make revenue for the 
company.
    I'm also here as chairman of the Integrated Dual-use 
Commercial Companies, or IDCC. It's an informal coalition of a 
few large high-tech companies formed in 1991. Our mission is to 
work to modify the laws, to improve the relationship and make 
it easier for commercial companies to do business with the 
Federal Government, and one of the ways to do that is to 
collaborate more on a commercial practice methodology, and 
that's really my message here today.
    We believe that intellectual property is the most important 
issue that our companies face in dealing with the government, 
particularly with DOD, and we think if the government adopted 
more of a commercial model, that it would be a lot easier to 
attract technology-rich companies and their products to DOD and 
to the government. Such a model would provide that ownership 
and licensing of IP would be fully negotiable, but generally, 
as in the commercial world, the contractor or seller would 
continue to own the data, and in most cases the buyer would not 
be granted extensive patent or data rights, although sometimes 
restrictive licenses or rights are granted even in the 
commercial world.
    The commercial model uses nondisclosure agreements to 
provide a basis for enforcing technology or forcing 
confidentiality and trade secret protection. We believe that a 
method of using nondisclosure agreements, limiting disclosure 
to those few people who have a legitimate need to know, would 
work as well with the government.
    Another issue that arises is that many companies keep 
inventions and discoveries as trade secrets, and as has been 
mentioned before, you can't really do that under the current 
Bayh-Dole Act model for dealing with government IP.
    So what's the problem? As I've already alluded to, it's 
primarily we believe statutes like Bayh-Dole, which set a model 
for the minimum amount of rights, data rights, ``march-in'' 
rights that the government has to have--we originally 
recommended that we do away with Bayh-Dole, but since that time 
we've learned that there's a large constituency that depends on 
Bayh-Dole. So we believe that a waiver, a generous or liberally 
applied waiver, and policies that would encourage use of those 
waivers would be the best way to encourage technology-rich 
companies to work for the government.
    In addition to the waiver issue on Bayh-Dole, I also wanted 
to mention another two of our issues with--in this region, are 
the definition of a subject invention. We believe that if a 
company applies for or receives a patent independent of 
government contract work, the government shouldn't have any 
rights. But under the definition of subject invention, there's 
a possibility.
    The other thing is we believe there could be some changes 
to the American competitive provisions that are in Bayh-Dole 
and similar statutes that don't allow companies to use their 
full global capabilities as they would in a normal commercial 
issue.
    I wanted to just mention that IPs have worked. They've 
worked well in certain limited circumstances where we are--we 
have some concern that benefits of using them have been 
eroding, most recently with the addition of audit rights and 
then requirements for use of nontraditional defense 
contractors.
    The bright spot, however, I'd like to highlight, I think 
others have, is the manual, the guide book put out by DOD. It's 
been of great use to us in dealing with government agencies, 
and we'll be really happy when more of the government agencies 
and procurement people are fully trained in it. Thank you.
    [The prepared statement of Mr. Fry follows:]

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    Mr. Davis of Virginia. Thank you very much. Mr. Soloway, 
thanks for being with us.
    Mr. Soloway. Thank you, Mr. Chairman and Mr. Turner. I am 
pleased to be here today. As you know, the Professional 
Services Council is the principal national trade association 
representing the full scope of the government technology 
services market. Our membership includes both large and small 
companies and, in fact, includes as many companies with 
revenues under $5 million as those with revenues in the 
billions.
    For professional technical services companies, intellectual 
property is most frequently found in the skills and experience 
of the firm's work force. Regrettably, Federal policies are 
neither clear nor flexible enough to foster the type of 
partnership for innovation and innovative solutions needed to 
assist the government in meeting its needs. Moreover, 
throughout the government there remains, as has been said by 
many witnesses today, a genuine lack of understanding of how 
such relationships can be fostered while continuing to protect 
the government's equities.
    We applaud you and the subcommittee for launching this 
important policy review and for following up on the July 
hearing you held on this topic. Much has changed in the world 
since then, but the challenges remain much the same. For 
starters, I think it's important that we not underestimate the 
meaning of the massive shift of R&D development from public to 
private sources, for it's only been over the last 25 years that 
the private sector has outspent the government in R&D. Equally, 
we should not underestimate the degree to which there is 
commonality between government technology needs and 
technologies being developed for principally commercial 
purposes. Third, we should not underestimate the impact and 
relationship of that shift of resources to the government's 
human capital challenges alluded to by Mr. Horn.
    The fact is that there is a technology gap, it is growing, 
the government is not often enough a customer at the principal 
R&D tables, and intellectual property issues continue to be the 
dominant factor in whether and how to put innovative private 
sector solutions to work for the government. Traditional 
thinking and traditional approaches to intellectual property do 
not allow for timely and successful solutions.
    The debate becomes all the more important as the solutions 
being sought by the government and offered by the private 
sector are becoming more typically services solutions rather 
than purely hardware solutions. IP laws and regulations have 
simply not kept pace with innovations that have taken place in 
the private sector and the growth of complex technology-based 
services requirements in the Federal arena.
    In my remarks today, I will focus on a couple of 
overarching issues of concern. PSC's General Counsels Committee 
is currently reviewing the proposed changes to the Bayh-Dole 
Act as well as recently proposed changes to the rules governing 
technology investment agreements. As those reviews are not yet 
complete, I'm not able to share with you any firm conclusions 
except to say we will provide the committee with our thoughts 
in a timely manner.
    People have mentioned culture, and that is the critical 
issue. The principal problem here is the lack of understanding 
of key underlying principles of intellectual property law and a 
concurrent unwillingness to exercise existing flexibilities in 
current regulations such as the difference between ownership of 
the intellectual property and license rights to use the data 
for government purposes.
    As is the case in many other areas, there's a lack of 
adequate training for the contracts community, and most prefer 
to treat intellectual property matters, with all due respect, 
Mr. Chairman, as legalese and refer the issue to their lawyers. 
Also, too often an ownership mentality prevails. That mentality 
perhaps more than anything else drives companies away from the 
government marketplace because it presents levels of risk that 
are simply unacceptable. It remains all too rare for the 
government to clearly define its needs and build them into a 
well-defined performance statement of work and licensing 
agreement, even though doing so represents a common best 
commercial practice and can fully protect the government's 
equities. There is a critically important point here, and that 
is understanding the difference between the government's needs 
and overreaching, believing that your needs equal complete and 
full control of all intellectual property and technical data.
    Second, as technology partnerships are formed to bid on 
Federal work, the prime contractor is sometimes caught in a 
squeeze between government contracting officers who are 
unwilling to accept commercial terms and conditions for 
intellectual property and commercial subcontractors who insist, 
rightfully so, on following commercial terms and conditions in 
their IP agreements. As a result, the prime contractors often 
face the choice of accepting greater liability than their 
subcontractors will accept, walking away from the government 
requirement or not accessing those commercial cutting-edge 
solutions. Obviously such circumstances can cause the 
government to lose much-needed access to cutting-edge 
technologies and technology-based solutions.
    Indeed, this issue and the ownership issue are inextricably 
linked. Unfortunately, few Defense Department or other 
contracting officers have agreed to accept nonstandard 
intellectual property terms and conditions largely because they 
have not been given adequate training to understand them and 
because, frankly, the strongest opposition to them often comes 
from the internal oversight community which remains rooted in 
past practices. I believe that makes the role of the General 
Accounting Office, which has been an active and constructive 
participant in this issue for several years, critically 
important, because they have developed a keen understanding of 
the challenges that exist and ways to move forward.
    Mr. Chairman, I also note with interest the legislation you 
introduced on May 1st to establish a program at OFPP to speed 
the government's evaluation and implementation of technologies 
for homeland security and antiterrorism efforts. While PSC is 
currently reviewing the bill in detail, we certainly applaud 
your focus on critical issues including waivers from existing 
laws and the Federal acquisition regulations for a limited 
number of pilot projects and contracts. We will carefully study 
the bill and offer our recommendations to this subcommittee 
shortly.
    I would add one cautionary note regarding DOD's statutes 
and last year's emergency procurement act that granted special 
authorities, including the use of other transaction authorities 
to the civilian agencies. As important as such steps are, they 
will yield little significant progress until the issues 
associated with intellectual property and the broader issues 
associated with government R&D business models are more fully 
addressed.
    On a positive note, Mr. Chairman, I'd like to compliment 
the Department of Defense on its issuance of the ``Navigating 
Through Commercial Waters'' guide book, its guidance on smart 
and best practices associated with intellectual property. I am 
pleased to say that DOD began work on that guide during my 
tenure there and I personally know how difficult it was to 
develop and publish. PSC has had the opportunity more recently 
to review and comment on its many drafts, to broadly distribute 
the guide to our membership, and to support the Department's 
publicity surrounding it.
    Regrettably, however, there are two significant limitations 
to the guide. First and most significantly, it is a guide to 
existing authorities and not a regulation or policy on which 
the defense contracting community can rely. Second, we are just 
beginning to see the initial training on the guide and it will 
take precious time under current course and speed to reach a 
meaningful number of the affected acquisition work force. 
Unfortunately, given the pace of technology development, 
current course and speed is simply not fast enough.
    The sad fact is that while DOD's regulations were altered a 
number of years ago, particularly with regard to rights in 
technical data for the development of products and software, no 
similar changes have been made to the statutes governing the 
rights and the technical data applicable to the civilian 
agencies; and the FAR continues to reflect 25-year-old policies 
as the basis for negotiating intellectual property clauses in 
the civilian agencies. As noted earlier, times and requirements 
have changed significantly, but not solely as a result of 
September 11th, and it is therefore time to undertake a 
thorough review of those statutes and rules as well.
    Thank you very much, Mr. Chairman. I would be happy to 
answer any questions.
    Mr. Davis of Virginia. Thank you very much.
    [The prepared statement of Mr. Soloway follows:]

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    Mr. Davis of Virginia. This is a question for everybody. 
Several witnesses have raised the human capital management 
issues today. What does the panel think about the idea of 
designating certain personnel in the acquisition community to 
do IP as a speciality, make sure these people get extra 
training in this area. We'll start and go down the line.
    Mr. Louie. I'm totally supportive of that. The In-Q-Tel 
model works fundamentally because there are two sets of 
individuals who actually participate in our negotiations. One 
is In-Q-Tel's executives who are well trained in industry's 
best practices in negotiating IP. They work closely with one or 
two designated people at the agency whose job it is in 
procurement to understand these particular issues. We work 
together to craft these commercially familiar documents that 
still operate within the FAR but address industry's needs. 
Without having that capability, for example if I had a normal 
contract officer who was not trained in this particular 
approach, it becomes very difficult to work with these 
companies, particularly some of these younger, smaller 
companies whose lifeblood is dependent upon the IP that is 
created.
    Mr. Davis of Virginia. The risk aversion that they have, I 
guess, would----
    Mr. Louie. Absolutely. The fundamental problem, 
particularly in information technologies, is that there are 
competing sources of funding. In fact, most companies believe a 
dollar from government is the most expensive dollar you can 
ever take. My office--my California office--is on Sand Hill 
Road. You can just go down the street or up the hall, ring 
another doorbell, and get a dollar for a lower cost in terms of 
IP rights than taking a dollar from us.
    So it's really important to understand that government is 
not alone in terms of funding these technologies. If we need 
it, we have to get to it first.
    Mr. Davis of Virginia. Thanks.
    Mr. Carroll. I would also be very supportive of that. I 
would just repeat everything he said, plus I would add to it 
that the training is not necessarily just needed in 
understanding the regulations or the flexibility, but it's in 
understanding the benefits of allowing innovators to innovate 
and allowing intellectual property to work its will in their 
own community.
    What I find missing completely is that concept, where, you 
know, you create a competitor by allowing them to buildup 
intellectual property over time that can compete with 
incumbents that you've got that haven't been innovative in 
years. And it will make everybody innovative. The whole world 
becomes innovative when you have that kind of competition. So 
that kind of training, I think, will be very productive.
    Mr. Davis of Virginia. Anybody else?
    Mr. Fry. I would support that concept 100 percent. 
Essentially in practice, that's a commercial model. In my 
company, I'm the only attorney in our legal department that 
really understands government data rights, government 
contracting. And ultimately if questions arise anywhere else in 
the company, they come to me for that. I do run a contracting 
group. My contracting people understand contracts, they 
understand the data rights to some extent. But ultimately, if 
there's anything other than standard, they come to me as well. 
So I would welcome that, and I think the government should do 
it as well.
    Mr. Soloway. If I may make one brief addition. I associate 
myself with all of the previous comments. I'll go back to the 
development and publication of the IP guide at DOD. When we 
started that process, Stan Fry's organization was involved, and 
GAO was heavily involved. We had a lot of really smart people 
in the room, trying to figure out how to go forward, and we had 
some of the smartest legal minds around trying to figure out 
how to go forward.
    One comment made by an attorney for a large technology 
company really stuck with me. He said that the regulations are 
there, but nobody understands them, and he has 125 lawyers on 
staff, none of whom have ever done a government contract, and 
he's not going to invest the thousands of man hours necessary 
to figure out what the rules really are. This is a matter of 
training not only acquisition people, but also training 
acquisition people in commercial best practices, and then 
relating them back to the FAR, rather than training them on the 
FAR and having them figure a way to wiggle out from under the 
FAR.
    I think it is equally important to include the oversight 
community in this process. There have been far too many 
examples of very innovative, well-constructed business deals 
that fully protected the government's equities that have been 
stopped because of an oversight community that continues to 
hold a lot of the frontline folks back.
    Mr. Davis of Virginia. OK. Mr. Louie, let me ask you, do 
you have a sense of the deluge of ideas that are coming into 
the Homeland Security Office right now? We've been working on 
legislation to help government kind of screen this wealth of 
ideas coming into the Homeland Security Office, give them 
priority, and move them out where they can do some good as 
quickly as possible.
    How does In-Q-Tel deal with this issue, because you're 
faced with the same kind of thing?
    Mr. Louie. Literally, we get hundreds of submissions in any 
particular month that come in ``over the transom,'' from 
referrals from venture funds to Members of Congress, to just 
entrepreneurs saying I have a great idea, as well as large 
corporations.
    Mr. Davis of Virginia. Do you ever get a good idea from a 
Member of Congress?
    Mr. Louie. Actually, I got two this last week so I can 
actually say that for a fact.
    Mr. Davis of Virginia. We want that on the record.
    Mr. Louie. There's a whole process that we use that vets 
the technology. We have technology experts on our staff, we tie 
into the agency's technology experts and users to look at these 
technologies to make sure they are best-of-class. We work with 
large organizations, including professional service 
organizations, to see what they have in a particular space. We 
actually have what we call a Q-1 process that examines the 
market opportunites before we go forward and make any 
investment.
    That's not where the challenge is. Commercial companies, 
commercial venture capital funds, know how to do that. The real 
challenge right now in homeland defense is that there is no 
``there'' there. For many of these companies who say I have a 
technology, I have a staff, I'm good to go and I am committed, 
there is nobody on the other end to do the contract. There are 
only a few other agencies right now, that are willing to pull 
the trigger to act now on behalf of homeland security. It's a 
real challenge. I get CEO phone calls from Fortune 100 
companies saying, what do I do?
    The problem for In-Q-Tel, quite frankly, is we are a little 
organization in the midst of one of a bigger organization--the 
Federal Government. So In-Q-Tel, with a $30 million budget and 
20 deals a year, can't be the front office for all of homeland 
security. We refer companies to other agencies. Those other 
agencies are sympathetic but they say they don't have the 
budget, they don't have the authority, they can't pull the 
trigger.
    Mr. Soloway. May I add one thing to Mr. Louie's comment? On 
the homeland security issue, aside from all the issues he 
raised which are critical, we need to step back and, as I 
mentioned in my testimony, look at the broader business model 
associated with research and development; because now we're not 
just talking about commercial off-the-shelf technology, we're 
talking about technology that is a commercial analog to unique 
government needs. We're going to have developmental dollars 
involved. So now you're in the government statutes and 
regulations governing how we do R&D. IP is one critical issue 
in there, but it's not the only issue.
    I'll relate one interesting conversation that highlights 
this. It is a conversation I had with the general counsel of a 
leading biotechnology firm when we were speaking together at a 
conference. I said to him, ``With this whole focus on homeland 
security, my guess is that you all are thinking very seriously 
about expanding into the government market because biotech 
obviously is one of those areas that the government desperately 
needs your assistance.'' I was thinking very parochially that 
he should join the Professional Services Council. His response 
to me was, ``No, we're actually not thinking about that, 
because of IP issues and the limitations under R&D rules, such 
as Other Transactions where I can only take it to a prototype 
level, and then I stop and have to come back under the original 
Federal Acquisition Regulation, and therefore can't take a 
product all the way through to production.'' He said, ``It's 
really an unattractive market.'' This was the leading 
biotechnology company in the country. So there's an overarching 
business model within which IP is just one of many really 
critical issues.
    Mr. Davis of Virginia. Thank you.
    Mr. Fry, let me ask you a question. We've heard members at 
these hearings before--just basically the argument is that when 
the taxpayers pay for this research, they should get the 
benefits from it, not allow--not have to pay for something 
twice by allowing you to go out and market and having them pay 
for it again.
    How do you answer that, and how should the government allow 
its R&D partners to use trade secrets protection?
    Mr. Fry. Quite frankly, we hear the same argument from 
other companies that come into us and want something built. And 
the real answer is, you know, we have the technology; you come 
to us because we can build what you need, want done, and we can 
do what you want done. If you take the rights, you take the 
data, if you dilute our patent position, we won't be there next 
time.
    So I kind of answer it in the same way. You need to leave 
the technology with us, you have to help us protect it, and 
we'll be there next time when you need the same technology. We 
need protection to maintain our competitive position is really 
the key aspect.
    In the case--in the commercial world, the other thing that 
when you get down to it, these buyers want protection from the 
competitive standpoint. They don't want to give you a lot of 
money for a nonrecurring--or for design, development, tests 
that you would then use to build the same system for half the 
cost for their competitor.
    So we work out some limitation, or we work out some 
restriction that protects their competitive position, say, for 
a number of years, for example, or some other type of limited 
license or something. But in the end, we don't compromise our 
technology, we don't compromise our patent position.
    Mr. Davis of Virginia. Mr. Carroll, let me ask you, in the 
last panel we heard some questions raised about the idea of 
extending trade secret protection to companies doing Government 
R&D. Do you have any thoughts on that?
    Mr. Carroll. Yes. I think that trade secrets, the 
importance of trade secret protection is really underestimated 
by the government. The trade secrets are, I think, a very, very 
large part of most R&D companies' portfolio. And to not permit 
those trade secrets to be a viable pathway by which they 
protect their property is really, I think, probably one of the 
largest obstacles in the way. Once disclosure of trade secrets 
is made, it's over. And patent does that. And you just can't do 
that in many cases.
    Mr. Davis of Virginia. Mr. Turner.
    Mr. Turner. Just one question, Mr. Chairman.
    Mr. Louie, we've had 3 years, I guess, of experience now 
with In-Q-Tel. Is there a model there that could be replicated 
for other agencies? I mean, obviously you tried to be the 
bridge for the CIA into the private sector as a nonprofit. Is 
there something here that we ought to be expanding upon to try 
to bring the private sector and the ideas that are there into 
other agencies of government? Could you grow, or should other 
entities grow to serve other agencies of government in this 
way?
    Mr. Louie. I think the good news is that because of our 
existence, a lot of other agencies are beginning to look at 
that model, either by asking us to scale or seeing if it can be 
replicated.
    Let me say this: The In-Q-Tel model is not a solution that 
solves all of Government's problems, nor is it a replacement 
for traditional acquisition. It's a place to solve a particular 
market need of government to solve a certain set of problems--
problems that are being addressed by technologies that are 
fundamentally commercial. In-Q-Tel gains access and early 
exposure of these technologies back into government.
    In this particular case, the reason why In-Q-Tel works--and 
I tell this to all the different agencies who approach us and 
are interested in the model--is that as important as the model 
is, what is more important is leadership. The reason why In-Q-
Tel works is that the Director of Central Intelligence has made 
this his model. It is one of the many vehicles that he is 
personally interested in. If an agency adopts this model and 
doesn't have the leadership working with that model, the model 
will fail, like many other R&D style models in the past. Where 
there is commitment, this model can have huge leverage because 
it fundamentally talks the language of business.
    Most of my staff come from the business world. Many of my 
seinor staff were CEOs. So when they sit down and talk to a 
high-technology company, they are sympathetic with the 
companies, but at the same time know that their mission is to 
get services and goods and technologies for the U.S. 
Government. That is a great model for government to use. It is 
another tool in its belt to answer the challenge that we're 
facing, particularly in homeland security.
    Mr. Turner. Thank you, Mr. Chairman.
    Mr. Davis of Virginia. Thank you all very much. Anybody 
want to add anything before we go? Let me thank all of you for 
contributing to this hearing.
    And I want to thank the witnesses, I want to thank 
Representative Turner and the other member of the subcommittee 
for participating. I also want to thank my staff for organizing 
this. I think it's been very productive. I want to enter into 
the record the briefing memo distributed to subcommittee 
members.
    We'll hold the record open till 2 weeks from today for 
those who may want to forward submissions for possible 
inclusion. I suggest with the delay of regular mail going into 
and out of the Capitol campus, that you e-mail any additional 
submissions to the attention of my counsel, George Rogers, here 
at [email protected].
    These proceedings are closed. Thank you.
    [Whereupon, at 11:50 a.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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