Intellectual Property: Information on the Federal Framework and  
DOD's Other Transaction Authority (17-JUL-01, GAO-01-980T).	 
								 
The research and development environment has changed dramatically
over the past several decades. The government is no longer in the
driver seat, yet it still needs access to research and technology
advances. At the same time, its effort to compete for access must
be balanced against a range of commercial, economic, legal, and  
other interests. The vehicles discussed in this testimony (the	 
Bayh-Dole Act and Department of Defense "other transaction"	 
authority) are among the tools that the government can use to	 
attract new players to the research and development arena and to 
maintain access to advances. However, effective use of these	 
tools requires good training and a greater exercise of reasoned  
discretion among program officials and contracting officers. The 
Defense Department has taken a very good first step in developing
appropriate guidance. However, the next steps are more critical: 
providing the training and assurances that the guidance will be  
appropriately implemented.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-980T					        
    ACCNO:   A01405						        
  TITLE:     Intellectual Property: Information on the Federal	      
             Framework and DOD's Other Transaction Authority                  
     DATE:   07/17/2001 
  SUBJECT:   Department of Defense contractors			 
	     Intellectual property				 
	     Research and development contracts 		 
	     Cooperative agreements				 

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GAO-01-980T
     
Testimony Before the Subcommittee on Technology and Procurement Policy,
Committee on Government Reform, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m., EDT, Tuesday, July 17,
2001 INTELLECTUAL

PROPERTY Information on the Federal Framework and DOD's Other Transaction
Authority

Statement of Jack L. Brock, Managing Director, Acquisition and Sourcing
Management and John B. Stephenson, Director, Natural Resources and
Environment

GAO- 01- 980T

Page 1 GAO- 01- 980T Intellectual Property

Mr. Chairman and Members of the Subcommittee: Thank you for inviting GAO to
participate in today?s hearing on intellectual property. The U. S.
government has made significant contributions to the world?s science and
technology base, both by supporting basic scientific research and by
pursuing science and technology missions within federal agencies. At one
time, federal agencies largely controlled this research and the patented
products and processes resulting from it- known as intellectual property. In
turn, this work was used to further a wide range of national interests, such
as medical research, economic development, technology advancements, and
national defense.

However, the research and development landscape has changed over the past
two decades. Most research is being done outside of the government?s span of
control, and the federal government must now increasingly compete with
others to obtain the research and technology it needs. And it must do so
amid concerns about the burdens associated with federal controls over
reporting, development, and commercialization of the intellectual property
created under federal contracts. Further, most intellectual property created
through federal research projects is now owned by contractors and grantees.
This has helped to foster development of new products and processes and
ensure that they are available for commercial purposes and scientific study.

I am here today along with John Stephenson, Director, Natural Resources and
Environment, to discuss GAO?s work related to two vehicles that have been
created to bridge this gap. These are (1) the Bayh- Dole Act, which was
passed in 1980 and supplemented by Executive Order 12591 in 1987, and (2)
?other transaction? authority granted to DOD. The Bayh- Dole Act and
Executive Order 12591 allow federal contractors and grantees to own- with
certain restrictions- the inventions they create under federally funded
research projects. DOD?s ?other transaction? authority enables DOD to enter
into agreements that are generally not subject to the federal laws and
regulations governing standard contracts, grants, and cooperative
agreements. DOD has used this authority to increase its flexibility in
negotiating intellectual property provisions and to attract commercial firms
that traditionally did not perform research for the government. However, our
work has shown that DOD needed better guidance to promote more effective use
of the authority. DOD has taken actions to respond to our concerns, which I
will also discuss.

Page 2 GAO- 01- 980T Intellectual Property

Prior to 1980, the government generally retained title to any inventions
created under federal research grants and contracts, although the specific
policies varied among the agencies. Over time this policy became
increasingly a source of dissatisfaction. One, there was a general belief
that the results of government- owned research were not being made available
to those who could use them. Second, advances attributable to university-
based research funded by the government were not pursued because the
universities had little incentive to seek uses for inventions to which the
government held title. Finally, the maze of rules and regulations and the
lack of a uniform policy for government- owned inventions often frustrated
those who did seek to use the research.

The Bayh- Dole Act 1 was intended to address these concerns by creating a
uniform patent policy for inventions resulting from federally sponsored
research and development agreements. The act was applicable to small
businesses, universities, and other nonprofit organizations and generally
gave them the right to retain title to and profit from their inventions,
provided they adhered to certain requirements. The government retained
nonexclusive, nontransferable, irrevocable, paid- up (royalty- free)
licenses to use the inventions. 2

The Bayh- Dole Act was extended to large businesses by a Presidential
Memorandum issued to the executive branch agencies on February 18, 1983. It
extended the patent policy of Bayh- Dole to any invention made in the
performance of federally funded research and development contracts, grants,
and cooperative agreements to the extent permitted by law. In 1984, the
Congress amended the Bayh- Dole Act to include contractors operating
government- owned laboratories. The 1984 amendments also specified that the
act did not preclude agencies from allocating rights to inventions, as
provided in the Presidential Memorandum, but that organizations acquiring
these rights would be subject to certain requirements of Bayh- Dole. On
April 10, 1987, the President issued Executive Order 12591, which, among
other things, required executive

1 The Bayh- Dole Act is the common name for the Patent and Trademark Laws
Amendments of 1980 (P. L. 96- 517, Dec. 12, 1980). 2 The act is implemented
through regulations issued by the Department of Commerce in 1987 (37 C. F.
R. part 401). Similarly, the patent rights policies set out by the act and
Executive Order 12591 are embodied in parts 27 and 52 of the Federal
Acquisition Regulation. The regulations define the rights and
responsibilities of the parties. The Bayh- Dole Act

and Executive Order 12591

Page 3 GAO- 01- 980T Intellectual Property

agencies to promote commercialization in accordance with the 1983
Presidential Memorandum.

Below are highlights of requirements related to the Bayh- Dole Act and
Executive Order 12591.

Figure 1: Highlights of Requirements

 The contractor or grantee must disclose to the appropriate federal agency
any invention created with the use of federal funds within 2 months of the
date the inventor discloses the invention in writing to the contractor or
grantee.

 If the contractor or grantee decides to retain title to the invention, it
generally must notify the agency within 2 years of the date of disclosure
that it has elected to do so.

 The contractor or grantee must apply for a patent on the invention within
1 year of its election to retain title or within 1 year of the publication,
sale, or public use in the United States, whichever is earlier.

 In applying for a patent, the organization must add a government interest
statement that discloses the government?s rights to the invention.

 The contractor or grantee must attempt to develop or commercialize the
invention.

 If the contractor or grantee is a nonprofit organization, it generally
must give priority to small businesses when licensing the invention.

 When granting an exclusive license, the contractor or grantee must ensure
that the invention will be ?manufactured substantially? in the United
States.

No single federal agency is responsible for monitoring compliance with the
Bayh- Dole Act or Executive Order 12591, although the Department of Commerce
was given the responsibility for drafting Bayh- Dole regulations. Rather,
the agency responsible for funding the contract or grant that led to the
invention is responsible for ensuring that the requirements are followed. If
the contractor or grantee does not disclose the invention, does not elect
title within the established periods, or elects not to retain title, the
agency may acquire title to the invention if the agency makes a written
request within 60 days after it learns of the failure of the contractor or
grantee to make the proper disclosures or elections. The agency can also
require the contractor or grantee to grant a nonexclusive, partially
exclusive, or exclusive license in any field of use to a responsible
applicant under terms that are reasonable under the circumstances if, for
example, the organization does not develop or commercialize the invention or
if action is needed to alleviate health or safety concerns. This is known as
the government?s ?march- in? right.

Page 4 GAO- 01- 980T Intellectual Property

Our work on the Bayh- Dole Act has focused on the reporting requirements
contractors and grantees are required to follow. 3 We found that contractors
and grantees were not always abiding by the reporting requirements and that
the royalty- free licenses retained by the government were of little, if
any, use in federal procurements. We noted that the Congress might wish to
consider standardizing, improving, and streamlining the reporting process
under the act and executive order, which we believe would make the process
less burdensome and more useful to both the government and its contractors
and grantees.

Over the past decade, both Congress and DOD expressed concern that
government- unique procurement requirements- often implemented through
specified contract provisions- inhibited DOD?s ability to take advantage of
technological advances made by the private sector and increased the costs of
goods and services DOD acquired. For example, traditional defense
contractors reported that they required additional personnel to comply with
government financial management requirements, while commercial companies
reportedly declined to accept DOD research contracts in order to protect
their intellectual property. Many requirements could be waived or tailored
through existing contracting procedures, but both DOD officials and
potential contractors found this to be difficult and time consuming.

One approach to address these concerns has been the use of ?other

transactions.? Other transactions are not generally subject to the federal
laws and regulations governing standard procurement contracts, grants and
cooperative agreements. DOD officials believe the use of other transactions
provides additional flexibility to negotiate terms and conditions, including
those pertaining to intellectual property; and, thereby, helped attract
firms that traditionally did not perform research for the government.

There are two basic types of other transactions. The first type had its
origins in 1989, when Congress enacted legislation- codified at 10 U. S. C.
2371- to provide the Defense Advanced Research Projects Agency (DARPA)
temporary authority to enter into cooperative

3 These include our May 1998 report, Technology Transfer: Administration of
the Bayh- Dole Act by Research Universities (GAO/ RCED- 98- 126, May 7,
1998); and our August 1999 report, Technology Transfer: Reporting
Requirements for Federally Sponsored Inventions Need Revision (GAO/ RCED-
99- 242, Aug. 12, 1999). DOD?s Use of Its

Other Transaction Authority

Page 5 GAO- 01- 980T Intellectual Property

agreements 4 and ?other transactions? for advanced research projects. The
legislation did not define ?other transactions,? thus giving DARPA
flexibility to deal with unique situations encountered when fostering
technology, especially dual- use technology. The legislation also required
that, to the extent the Secretary of Defense determined practicable,
recipients should provide at least 50 percent of the project?s funding. In
1991, Congress made the authority permanent and subsequently extended it to
the military services. Other transactions entered into under 10 U. S. C.
2371 are assistance instruments, which are used when the principal purpose
is to stimulate or support research and development activities for both
public and government purposes. Other transactions could only be used when
other instruments were not appropriate or feasible.

In 1993, under Section 845 of the National Defense Authorization Act for
Fiscal Year 1994, 5 Congress authorized a second type of other transaction
to carry out prototype projects directly relevant to weapons or weapon
systems proposed to be acquired or developed by DOD; that is, for
government- unique purposes. The legislation did not require participants to
share in the costs of the project or require that the agreements be used
when a standard contract, grant, or cooperative agreement was not
appropriate or feasible, two conditions required to use an assistance- type
other transaction. These ?Section 845 agreements? were initially limited to
use by DARPA for a 3- year period; legislation has since been passed to
extend their use to the military services and other defense agencies and to
extend the authority?s expiration date to September 30, 2004.

We have reported twice on DOD?s general use of its other transaction
authority. 6 Overall, while a number of benefits were cited, including the
ability to tailor intellectual property clauses and to attract firms that
traditionally did not perform research for the government, we also found
that DOD needed more specific guidance to help its personnel select and

4 Subsequent legislative changes enabled DOD to use cooperative agreements
as part of its basic authority under 10 U. S. C. 2358 to conduct research. 5
P. L. 103- 160, Nov. 30, 1993.

6 We have also reviewed DOD?s proposed use of an other transaction for its
Evolved Expendable Launch Vehicle program, but we did not address
intellectual property matters (see Evolved Expendable Launch Vehicle: DOD
Guidance Needed to Protect Government?s Interests (GAO/ NSIAD- 98- 151, June
11, 1998). GAO Findings Related

to DOD?s Use of Other Transactions

Page 6 GAO- 01- 980T Intellectual Property

structure the instruments appropriately and assess the benefits from using
the agreements.

In March 1996, we reported on DOD?s use of 72 cooperative agreements and
other transactions that were entered into under 10 U. S. C. 2371 between
fiscal years 1990 and 1994. We found that the instruments appeared to have
provided DOD a tool to leverage the private sector?s technological know- how
and financial investment, and attracted firms that traditionally did not
perform research for the government by enabling more flexible terms and
conditions than the standard provisions found in DOD contracts and grants.

As an example, we cited a 1994 DARPA other transaction with a
HewlettPackard- led consortium to advance the state of the art in the
manufacture of more affordable optoelectronics systems and components.
HewlettPackard had previously told us that it declined to accept government
research and development funds to protect its technical data rights. 7 Under
the agreement, however, the intellectual property provisions were structured
so that

 the consortium had up to 4 months (rather than the 2 months typically
allowed) after the inventor discloses a subject invention to his company to
notify the government;

 the consortium had up to 24 months (versus 8 months allowed for large
businesses) to inform DARPA whether it intends to take title to inventions
arising from the agreement after its disclosure to the government;

 DARPA agreed to delay exercising its government purpose license rights to
inventions in which the consortium retained title until 5 years after the
agreement was completed; and

 the consortium had the authority to maintain inventions and data as trade
secrets for an unspecified period of time under certain conditions.

7 With regard to technical data, DOD generally obtains unlimited rights when
technical data were developed or created exclusively with government funds,
government purpose rights when the data were created with mixed funding, and
limited rights when the data were created exclusively at private expense.
These rights differ in the degree to which DOD may provide or authorize
parties outside of the government to use the data. Unlimited rights provide
the government the ability to use, modify, reproduce, perform, display,
release, or disclose technical data in whole or in part, in any manner, and
for any purpose whatsoever, and to have or authorize others to do so.
Government purpose rights enable the government to allow others to use the
data for government purposes, while limited rights generally require the
government to obtain the contractor?s written permission before doing so.

Page 7 GAO- 01- 980T Intellectual Property

Further, under the agreement, DARPA did not receive any rights to any
technical data produced under the agreement unless DARPA invoked its

?march- in? rights. In combination, these terms provided the consortium
additional time to commercialize the technology, while limiting the
government?s rights to that technology.

Overall, we estimated that 42 percent of the 275 firms commercial firms that
participated in 1 or more agreements were firms that traditionally had not
performed research for DOD. We did not, however, attempt to determine to
what extent more flexible intellectual property provisions played a role in
each firm?s decision to participate or evaluate how each of the agreements
addressed intellectual property issues.

We identified two emerging issues that pertained to instrument selection and
structure of cooperative agreements and other transactions. 8 First, DARPA
and the military services were selecting different instruments and treating
specific issues, such as audit requirements, differently, thereby resulting
in some confusion among firms that were negotiating agreements with both
DARPA and the services. Additionally, we found that there remained
disagreement between the military services and DARPA on whether the Bayh-
Dole Act applied to other transactions. Consequently, we recommended that
DOD provide revised guidance, in part, to promote increased consistency
among DOD components on the selection and structure of the instruments. DOD
has since issued guidance on several occasions, most recently in February
1999. In general, this guidance established a single class of assistance
instruments called ?technology

investment agreements? to reduce confusion and increase consistency in the
types of assistance instruments used by DOD, and clarified that DOD
personnel could provide more flexible terms than would be available under
Bayh- Dole should the situation warrant it.

In April 2000, we reported on DOD?s use of 97 Section 845 agreements that
had been awarded as of October 1998. 9 As part of this review, we discussed
the extent to which DOD had used Section 845 agreements, for

8 We also noted that about 10 percent of the recipients? planned
contributions was attributable to the value of past research efforts, rather
than concurrent financial or in- kind contributions. We noted that this
practice may not provide accurate depiction of the relative financial
contributions of the parties under the agreement. Current DOD guidance does
not allow the cost of prior research to count as part of a recipient?s cost-
share.

9 Acquisition Reform: DOD?s Guidance on Using Section 845 Agreements Could
be Improved (GAO/ NSIAD- 00- 33, Apr. 7, 2000).

Page 8 GAO- 01- 980T Intellectual Property

what types of projects, their dollar value, and the reasons cited by DOD
components for using Section 845 agreements, among other things. We also
reported on how DOD tailored these agreements to address intellectual
property issues and the degree to which DOD attracted commercial firms.

To determine how the agreements addressed intellectual property issues, we
compared the agreement?s language with the standard contract provisions
required under the Federal Acquisition Regulation to assess whether and how
they differed. We found that DOD personnel incorporated the applicable
standard contract provision governing patent rights in 25 agreements. In the
other 72 agreements, DOD incorporated language that varied widely. For
example, DOD personnel often provided contractors between 4 to 12 months to
notify the government of an invention under Section 845 agreements, compared
to 2 months provided in a standard procurement contract. In some cases, the
contractor was allowed to maintain inventions as trade secrets; in other
cases, the government declined patent rights altogether. Finally, some
agreements clarified the definition of an invention to specifically exclude
pre- existing inventions. With regard to obtaining rights to technical data
under Section 845 agreements, most agreements used tailored clauses, which
could involve DOD declining any rights to data or accepting government
purpose rights for 10 years.

Similar to what we found in our earlier report, DOD personnel attributed, in
part, the participation of commercial firms to their ability to tailor the
agreement?s terms and conditions, including the intellectual property
provisions. For example:

 A small commercial firm submitted an unsolicited proposal to DARPA to
develop and demonstrate an unmanned aerial vehicle capable of vertical take-
off and landing based on the company?s existing proprietary technology. The
company, however, was unwilling to work under a standard contract, citing,
among other factors, intellectual property concerns. DARPA agreed to not
accept any technical data in the $16.7 million agreement; however, the
agreement provided DARPA options to subsequently acquire government purpose
rights to the data at a cost ranging from $20 million to $45 million or by
purchasing 300 vehicles. According to the agreement, the rights would be
sufficient to establish a second source for competition.

 In January 1997, the National Imagery and Mapping Agency solicited
proposals to develop and exploit commercial information technologies for
national security purposes. Contractor representatives suggested that

Page 9 GAO- 01- 980T Intellectual Property

using a Section 845 agreement would help their consortium attract commercial
firms, in part by being able to provide more flexible intellectual property
provisions. The resulting Section 845 agreement had a potential value of $75
million. Contractor officials indicated that about half of the work is being
performed by business units that for various reasons would not have
participated under a standard contract.

Overall, however, we reported that Section 845 agreements achieved mixed
results in attracting commercial firms that traditionally did not do
research for the government at either the prime contractor or subcontractor
level. For example, 84 of the 97 agreements were awarded to traditional
defense firms. At the subcontractor level, DOD officials indicated that
traditional defense firms attracted commercial firms in 24 of the 84
agreements they were awarded. For the remaining agreements, DOD officials
reported that either the prime contractor did not attract commercial firms
at the subcontract level (20 agreements) or they did not know whether the
prime contractors had attempted to do so (34 agreements). Agreement officers
did not provide information on six agreements.

Additionally, we found that DOD analyses supporting these arrangements often
did not address why either the standard contract provision or a tailored
approach was selected, or discuss the anticipated benefits of the approach
selected. In part, this was due to the use of a model agreement that was
developed by DARPA and which formed the basis for many of the agreements.
Consequently, our review of the agreement officers? analyses found that
discussions were often limited to how the terms differed from the model
agreement.

At the time of our review, DOD was in the process of developing additional
guidance to enable its personnel to both take advantage of the flexibility
afforded by the agreements and protect the government?s interests. We
recommended that this guidance, among other things, provide a framework to
tailor the terms and conditions appropriate for each agreement. We also
recommended that DOD establish and use a set of metrics, including the
number of commercial firms participating in Section 845 agreements, which
are measurable and directly related to the agreement?s use.

In December 2000, DOD issued guidance that is intended to provide a
framework for DOD personnel to consider when using Section 845 agreements.
Our initial observations of the section dealing with intellectual property
indicated that it does provide various factors for DOD

Page 10 GAO- 01- 980T Intellectual Property

personnel to consider when structuring and negotiating intellectual property
provisions. In general, the guide indicates that DOD personnel should seek
to obtain intellectual property rights consistent with the BayhDole Act for
patents and 10 U. S. C. 2320 and 10 U. S. C. 2321 for technical data, but
notes that they may also negotiate rights of a different scope when
necessary to accomplish program objectives and foster government interests.
For example, the guide notes that when the government overestimates the
intellectual property rights it will need, the government might pay for
unused rights and dissuade new business units from entering into an
agreement. At the same time, DOD personnel needed to consider such factors
as the costs associated with the inability to obtain competition for the
future production, maintenance, upgrade and modification of prototype
technology, or the inability of the government to adapt the developed
technology for use outside the initial scope of the prototype project. The
guide also requires DOD personnel to collect information on the prime
contractor and commercial firms that participate to a significant extent in
the prototype project.

I would also like to note that on April 30, 2001, DOD issued a guide that
specifically focused on intellectual property issues. This guide was in
response to a September 2000 memorandum issued by the Under Secretary of
Defense (Acquisition, Technology and Logistics) that called for DOD to
create an environment where industry is willing to share commercially
generated research with defense communities so that weapons systems can keep
pace with technology. The guide provides a description of the fundamental
principles and concepts of negotiating intellectual property rights, a
framework of the key aspects of intellectual property and how it is treated
in government contracting, a description of the major intellectual property
issues that keep some companies from responding to solicitations, as well as
possible solutions to attract their involvement. The guide provides DOD
personnel another resource to identify ways to negotiate provisions that
meet each parties? needs, whether on standard procurement contracts or on
other transactions.

Before concluding, I would like to note two recent legislative changes that
affect DOD?s use of Section 845 agreements that were not related to
intellectual property issues, but more to the overall management and
oversight of Section 845 agreements. First, Congress passed legislation in
October 1999 that required that agreements that provide for payments in
excess of $5 million include a clause providing GAO the right to examine

Page 11 GAO- 01- 980T Intellectual Property

the records of participants. 10 This requirement can be waived under certain
circumstances. In recommending the provision, the Senate Armed Services
Committee noted that DOD had used Section 845 authority to fund such efforts
as the billion dollar Evolved Expendable Launch Vehicle program and a new
Navy oceanographic research ship, and had sought legislation to extend the
authority to production contracts. Consequently, as the size, costs and
complexity of programs being funded using other transactions increased, the
committee wanted to ensure that GAO had audit access in relation to the
higher levels of spending and risk.

Additionally, in October 2000, Congress passed legislation that required
that a Section 845 agreement include at least one nontraditional defense
contractor participating to a significant extent in the effort; if not, at
least one third of the total cost of the project was to be provided by
parties other than the federal government. 11 The requirement for cost-
sharing could be waived by DOD?s senior procurement executive. The
legislation also defined what constituted a nontraditional defense
contractor and clarified our audit access rights to exclude commercial firms
who had done business with government only under other transactions or
through cooperative agreements, and clarified the types of records to which
we had access. In recommending a similar provision, the Senate Armed
Services Committee noted it would support using Section 845 agreements to
attract companies that typically do not do business with DOD, and encourage
cost sharing and experimentation in potentially more efficient ways of doing
business with traditional defense contractors. The committee also noted that
it was important for DOD to have the flexibility to use innovative
instruments to provide access to advanced commercial technology, but that
there were improvements that could be made in managing and overseeing
Section 845 agreements.

The research and development environment has changed dramatically over the
past several decades. The government is no longer in the driver seat, yet it
still needs access to research and technology advances. At the same time,
its effort to compete for access must be balanced against a range of
commercial, economic, legal and other interests. The vehicles I?ve discussed
today are among the tools that the government can use to attract new players
to the research and development arena and to

10 P. L. 106- 65, October 5, 1999. 11 P. L. 106- 398, October 30, 2000.
Conclusion

Page 12 GAO- 01- 980T Intellectual Property

maintain access to advances. However, effective use of these tools requires
good training and a greater exercise of reasoned discretion among program
officials and contracting officers. The Department of Defense has taken a
very good first step in developing appropriate guidance. However, the next
steps are more critical: providing the training and assurances that the
guidance will be appropriately implemented.

Mr. Chairman, this concludes our prepared statement. We will be happy to
respond to any questions you or other Members of the Subcommittee may have.

Contact and Acknowledgment

For further information, please contact Jack L. Brock, Jr., at (202) 512-
4841 or John B. Stephenson at (202) 512- 6225. Individuals making key
contributions to this testimony included Timothy DiNapoli, Doreen Feldman,
Frank Fulton, John Hunt, Shannon Luik, John Van Schaik, Cristina Chaplain,
and Karen Zuckerstein.

(120086) (360119)
*** End of document. ***