B-117374, NOVEMBER 4, 1953, 33 COMP. GEN. 203

B-117374: Nov 4, 1953

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PATENTS - ROYALTIES - ALLOWABLE COSTS IN CONTRACT PRICE DETERMINATION PAYMENTS BY A CONTRACTOR OF LICENSE FEES OR ROYALTIES ON A PATENTED ARTICLE NECESSARILY USED IN THE PERFORMANCE OF THE CONTRACT CONSTITUTE AN ALLOWABLE COST IN DETERMINATION OF CONTRACT PRICE SO LONG AS THE PATENT RIGHTS HAVE NOT EXPIRED AND ARE NOT OTHERWISE UNENFORCEABLE. ACTION SHOULD BE TAKEN TO ASSURE THE CONTRACTOR LICENSEE IS NOT GIVEN CREDIT FOR ROYALTY PAYMENTS NOT LEGALLY REQUIRED TO BE PAID THE PATENT OWNER. WHERE THERE IS DOUBT AS TO VALIDITY OF PATENT. CONTRACTS ENTERED INTO WITH LICENSEE SHOULD CONTAIN A PROVISION RESTRICTING ALLOWANCE OF LICENSE FEES OR ROYALTIES AS COSTS TO THOSE WHICH CONTRACTOR-LICENSEE IS OBLIGATED TO PAY PATENTEE.

B-117374, NOVEMBER 4, 1953, 33 COMP. GEN. 203

PATENTS - ROYALTIES - ALLOWABLE COSTS IN CONTRACT PRICE DETERMINATION PAYMENTS BY A CONTRACTOR OF LICENSE FEES OR ROYALTIES ON A PATENTED ARTICLE NECESSARILY USED IN THE PERFORMANCE OF THE CONTRACT CONSTITUTE AN ALLOWABLE COST IN DETERMINATION OF CONTRACT PRICE SO LONG AS THE PATENT RIGHTS HAVE NOT EXPIRED AND ARE NOT OTHERWISE UNENFORCEABLE, HOWEVER IF THE PATENT SHOULD BE DECLARED INVALID DURING THE LIFE OF THE CONTRACT PROVIDING FOR PRICE REDETERMINATION, ACTION SHOULD BE TAKEN TO ASSURE THE CONTRACTOR LICENSEE IS NOT GIVEN CREDIT FOR ROYALTY PAYMENTS NOT LEGALLY REQUIRED TO BE PAID THE PATENT OWNER, AND WHERE THERE IS DOUBT AS TO VALIDITY OF PATENT, CONTRACTS ENTERED INTO WITH LICENSEE SHOULD CONTAIN A PROVISION RESTRICTING ALLOWANCE OF LICENSE FEES OR ROYALTIES AS COSTS TO THOSE WHICH CONTRACTOR-LICENSEE IS OBLIGATED TO PAY PATENTEE.

ACTING COMPTROLLER GENERAL WEITZEL TO SECRETARY OF THE ARMY, NOVEMBER 4, 1953:

REFERENCE IS MADE TO YOUR LETTER OF OCTOBER 14, 1953, ADVISING THAT THE JUDGE ADVOCATE GENERAL OF THE ARMY HAS RECENTLY EXPRESSED AN OPINION THAT A CERTAIN PATENT COVERING AN ITEM OF PROCUREMENT FOR WHICH THE DEPARTMENT OF THE ARMY HAS A FUTURE REQUIREMENT IS INVALID. YOU STATE THAT NO COURT HAS YET RULED ON THE VALIDITY OF THE PATENT, BUT NOTWITHSTANDING THE STATUTORY PRESUMPTION OF PATENT VALIDITY ESTABLISHED BY TITLE 35 U.S. CODE, SEC. 282, A QUESTION HAS ARISEN AS TO WHETHER IT IS PROPER FOR AN ARMY CONTRACTING OFFICER TO AGREE, IN NEGOTIATING A FIXED PRICE CONTRACT WITH PROVISION FOR PRICE REDETERMINATION, TO CONSIDER ROYALTY PAYMENTS MADE BY THE CONTRACTOR LICENSEE TO THE OWNER AS ITEMS OF COST FOR PURPOSES OF PRICE REDETERMINATION. FURTHERMORE, THE ADDITIONAL QUESTION HAS ARISEN AS TO WHETHER IT IS PROPER FOR A CONTRACTING OFFICER, HAVING ALREADY AGREED TO CONSIDER SUCH COSTS, TO ALLOW THEM UPON REDETERMINATION.

UNDER THE EXPRESS TERMS OF THE STATUTE TO WHICH YOU REFER, IT IS PROVIDED THAT "A PATENT SHALL BE PRESUMED TO BE VALID" AND " THE BURDEN OF ESTABLISHING INVALIDITY OF A PATENT SHALL REST ON A PARTY ASSERTING IT.' SEE, ALSO, IN THIS CONNECTION MARCH V. SEYMOUR, 97 U.S. 348; WESTINGHOUSE ELECTRIC AND MANUFACTURING CO. V. FORMICA INSULATING CO., 266 U.S. 342, 348, AND AMER. JUR. PATENTS, SECTION 174. FURTHERMORE, IN THE CASE OF MCCORMICK HARVESTING MACH. CO. V. C. AULTMAN O., 169 U.S. 606, THE SUPREME COURT OF THE UNITED STATES EXPRESSED AS SETTLED THE RULE THAT WHEN A PATENT HAS BEEN REGULARLY ISSUED BY THE PATENT OFFICE, IT HAS PASSED BEYOND THE CONTROL AND JURISDICTION OF THAT OFFICE, AND IS NOT SUBJECT TO BE REVOKED OR CANCELED BY THE PRESIDENT OR ANY OTHER EXECUTIVE OFFICER OF THE GOVERNMENT; THAT IT HAS BECOME THE PROPERTY OF THE PATENTEE, AND AS SUCH IS ENTITLED TO THE SAME LEGAL PROTECTION AS ANY OTHER PROPERTY; THAT THE ONLY AUTHORITY COMPETENT TO SET A PATENT ASIDE OR TO ANNUL IT IS VESTED IN THE JUDICIAL BRANCH OF THE GOVERNMENT; AND THAT THIS CAN BE EFFECTED ONLY BY PROPER PROCEEDING TAKEN IN THE COURTS OF THE UNITED STATES.

ACCORDINGLY, I HAVE TO ADVISE THAT YOU PROPERLY MAY DETERMINE THAT PAYMENTS BY A CONTRACTOR OF LICENSE FEES OR ROYALTIES ON A PATENTED ARTICLE NECESSARILY USED IN THE PERFORMANCE OF HIS CONTRACT CONSTITUTE AN ALLOWABLE COST, SO LONG AS THE PATENT RIGHTS HAVE NOT EXPIRED AND ARE NOT OTHERWISE UNENFORCEABLE.

HOWEVER, IF DURING THE LIFE OF A CONTRACT PROVIDING FOR PRICE REDETERMINATION, THE PATENT SHOULD BE DECLARED INVALID, NECESSARY ACTION SHOULD BE TAKEN TO ASSURE THAT THE CONTRACTOR-LICENSEE IS NOT GIVEN CREDIT FOR ROYALTY PAYMENTS NOT LEGALLY REQUIRED TO BE PAID TO THE PATENT OWNER. ALSO, IT IS SUGGESTED THAT IN THOSE CASES WHERE DOUBT EXISTS AS TO THE VALIDITY OF A PATENT, CONTRACTS ENTERED INTO WITH LICENSEES UNDER SUCH A PATENT SHOULD CONTAIN A PROVISION RESTRICTING THE ALLOWANCE OF LICENSE FEES OR ROYALTIES AS COSTS TO THOSE WHICH THE CONTRACTOR-LICENSEE IS LEGALLY OBLIGATED TO PAY THE PATENTEE.