Defense Trade: The Use of Intellectual Property Generated at	 
Department of Energy's Laboratories to Satisfy Offset		 
Requirements (08-JAN-01, GAO-01-271R).				 
								 
This report discusses the use of intellectual property generated 
at the Department of Energy's (DOE) laboratories to satisfy	 
defense contractors' offset requirements. GAO found that DOE's	 
laboratory offset requirements have been limited. GAO's 	 
discussions with DOE and laboratory management contractors	 
uncovered only 14 instances in which the laboratories'		 
intellectual property were involved in offset projects. GAO also 
found that management contractors have the right to intellectual 
property that they produce at DOE laboratories. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-271R					        
    ACCNO:   164386						        
    TITLE:   Defense Trade: The Use of Intellectual Property Generated
             at Department of Energy's Laboratories to Satisfy Offset         
             Requirements                                                     
     DATE:   01/08/2001 
  SUBJECT:   Federal procurement				 
	     Globalization					 
	     Intellectual property				 
	     International trade				 
	     Technology transfer				 

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GAO-01-271R

Defense Trade

United States General Accounting Office Washington, DC 20548

January 8, 2001 The Honorable Russell D. Feingold United States Senate

Subject: Defense Trade: The Use of Intellectual Property Generated at
Department of Energy's Laboratories to Satisfy Offset Requirements

Dear Senator Feingold: Offsets are benefits that defense contractors provide
to foreign governments as inducements or conditions for the countries to
purchase military goods and services. Offsets can include a wide range of
goods and services, including the transfer of U. S. developed technology or
training assistance provided to companies and organizations located in
foreign countries. The Department of Commerce reported that for the 5- year
period from 1993 to 1997, U. S. defense contractors reported about 230 new
offset agreements valued at $19 billion. 1

Because of your interest in identifying emerging trends in the use of
offsets, you asked us to make inquiries concerning the use by defense
contractors of intellectual property generated at the Department of Energy's
laboratories to satisfy their offset requirements. 2 Specifically, you asked
us to identify (1) the use of intellectual property and services of
laboratory personnel to satisfy defense contractors' offset requirements and
(2) the rights that U. S. contractors that manage Department of Energy
laboratories have to intellectual property generated at these laboratories.
Based on discussions with your staff on November 2, 2000, we are also
providing information as to how the laboratories compute charges for their
intellectual property and services. This letter summarizes the results of
our work.

LIMITED USE OF LABORATORIES' INTELLECTUAL PROPERTY AND OTHER SERVICES TO
SATISFY OFFSET REQUIREMENTS

The use of Department of Energy laboratories' intellectual property and
services to satisfy defense contractors' offset requirements has been
limited. Our discussions with Department of Energy and laboratory management
contractor officials surfaced 14 instances from as early as 1995, all at one
laboratory, where the laboratory's intellectual property and services were
involved in offset projects. The 14 instances, valued at about $200 million,
involved 4 intellectual property licenses and 10 service arrangements
through which laboratory

1 The actual costs of offsets to the U. S. contractors are substantially
lower than the total value of the offset requirements. 2 Intellectual
property includes, among other things, patents and copyrights protected by
federal law.

GAO- 01- 271R Defense Trade Page 2

personnel performed training, workshops, and other services for various
foreign countries. The following provides further information on the 14
projects. 3

ï¿½ The 4 projects with intellectual property licenses included two patents
for cryogenic cutting/ cleaning technologies and two copyrights for software
applications and training. The cryogenic technology was developed for
cutting and abrading materials using liquid nitrogen forced through a high-
pressure nozzle. The use of liquid nitrogen eliminates the problem of adding
other waste byproducts generated during the cutting and abrading processes.
The software applications and training were for (1) improving logistics
management within the country's Ministry of Defense and (2) assisting the
country in conducting safety analyses of nuclear power plants.

ï¿½ The 10 service agreements pertained to nuclear power plant safety and
environmental issues. For example, laboratory personnel provided training in
the inspection of nuclear power plants using non- destructive means, which
permits inspection without having to disassemble equipment at the power
plants. In another example, training was provided on converting waste
generated by nuclear power plants into relatively harmless byproducts. As
one last example, technical expertise was provided to a foreign country to
design a waste treatment plant to convert raw sewage into energy.

In addition to the 14 offset projects, we were informed by three other
laboratories of other offers to use the laboratories' intellectual property
and services of laboratory personnel to meet potential offset requirements.
These offers did not result in specific projects because the weapon system
sales did not take place. They involved assisting countries with (1) the
removal of unexploded ordnance from a site to be transferred from the
military to the private/ public sector, (2) humanitarian de- mining
capability, and (3) the transfer of a state- ofthe- art welding technology
into the United States.

MANAGEMENT CONTRACTORS HAVE THE RIGHT TO INTELLECTUAL PROPERTY

Over the years, Congress has passed legislation to promote the transfer of
technology from the federal laboratories to the private sector. For example,
the National Competitiveness Technology Transfer Act of 1989 (Public Law
101- 189) established technology transfer as a mission for government-
owned, contractor- operated laboratories for purposes of transferring
technology to the private sector. On the basis of this legislation and other
applicable laws and regulations, contractors that manage Department of
Energy laboratories under management and operating

3 Specific information about offsets are considered proprietary by U. S.
contractors. As a result, offset information is provided in general terms,
and contractors are not identified in this report.

GAO- 01- 271R Defense Trade Page 3

contracts 4 have the right to inventions and copyrights generated at the
federal laboratories should they choose to take title. 5 Contractors
generally cannot obtain rights to intellectual property dealing with such
matters as uranium enrichment or certain national security technologies.

COMPUTATION OF CHARGES FOR INTELLECTUAL PROPERTY AND SERVICES Laboratory
management contractor officials told us about the computation of charges for
providing licenses and services to entities and organizations. For licenses,
the charges are normally negotiated on a case by case basis and consider
several factors such as the market value of the technology; the investment
required to bring the technology to market; the financial status of the
licensee; and the income potential for the technology, assuming that it is
successful. For service arrangements, the laboratory is to recover the full
cost of providing the services, including the hourly wages for personnel and
their associated travel costs, if applicable. Unless waived in accordance
with a Department of Energy order, the laboratory is to recover a certain
percentage of administrative costs associated with laboratory facilities and
equipment. The charges for providing licensing and other services by the
laboratory are normally paid by the entity that has sponsored these
projects. For example, we were told that the defense contractor that
sponsored the 14 projects previously discussed paid these charges for most
projects.

AGENCY COMMENTS The Department of Energy provided technical comments on the
information presented in this report. We have included those technical
comments as appropriate. The Department's comments are included in enclosure
1.

SCOPE AND METHODOLOGY To determine the use of the laboratories' intellectual
property and services of laboratory personnel to satisfy defense
contractors' offset requirements, we spoke with Department of Energy
officials and officials managing laboratories to identify situations where
(1) defense contractors managed Department of Energy laboratories and (2)
licenses and services were provided or offered to satisfy offset
requirements. We gathered documents pertaining to offset projects.

To determine the rights that U. S. contractors that manage Department of
Energy laboratories have to intellectual property generated at the
laboratories, we reviewed legislation, regulations, and contract clauses
dealing with technology transfers of intellectual property and other
services. We also discussed these matters with Department of Energy and
laboratory management contractor officials.

4 Management and operating contracts are agreements under which the
government contracts for the operation, maintenance, or support of a
government- owned, research, development, special production, or testing
establishment wholly or principally devoted to one or more major programs of
the federal agency. 5 The contractors must notify the Department within a
specified period of time after discovery of the

invention to elect title to that invention.

GAO- 01- 271R Defense Trade Page 4

To determine how charges for intellectual property and services are
computed, we spoke with laboratory officials about the various factors that
are considered in computing the charges. We did not independently verify
these charges.

We conducted our review from August to November 2000 in accordance with
generally accepted government auditing standards.

We are sending copies of this letter to interested congressional committees
and to the Honorable Bill Richardson, Secretary of Energy. The letter will
also be available on GAO's home page at http:// www. gao. gov. If you have
questions, please contact me on (202) 512- 4383.

Major contributors to this report were Robert L. Pelletier, Charles D.
Groves, Jack G. Perrigo Jr., William T. Woods, and Raymond J. Wyrsch.

Sincerely yours, Katherine V. Schinasi Director Acquisition and Sourcing
Management

Enclosure

GAO- 01- 271R Defense Trade Page 5

ENCLOSURE 1 ENCLOSURE 1 AGENCY COMMENTS

(707542)
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