B-156692, JUL. 2, 1965, 45 COMP. GEN. 13

B-156692, JUL. 2, 1965, 45 COMP. GEN. 13

PATENTS - INFRINGEMENT - GOVERNMENT LIABILITY - CONSIDERATION IN BID EVALUATION THE OMISSION IN AN INVITATION TO BID ON RADIO EQUIPMENT OF PROVISIONS FOR PATENT INDEMNIFICATION AND THE EVALUATION OF PATENT INFRINGEMENT LIABILITY IN ACCORDANCE WITH 10 U.S.C. 2305 (C), PROVIDING FOR CONSIDERATION OF "PRICE AND OTHER FACTORS" IN ASCERTAINING THE LOW BID, DOES NOT INVALIDATE THE INVITATION FOR IN ADDITION TO THE ABSENCE OF A PATENT INDEMNITY PROVISION CONTRIBUTING TO A REDUCTION IN PRICE, THE END PRODUCT, INCLUDING THE "BASIC CIRCUITRY" OF THE EQUIPMENT--- A COMPONENT OF THE END PRODUCT ON WHICH THE GOVERNMENT HAS A ROYALTY-FREE LICENSE--- HAVING BEEN DEVELOPED FOR MILITARY USE, PARAGRAPH 9-103 OF THE ARMED SERVICES PROCUREMENT REGULATION, PRESCRIBING PATENT INDEMNITY COVERAGE FOR SUPPLIES SOLD OR OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL MARKET, HAS NO APPLICATION, AND THE MATTER OF PATENT INFRINGEMENT IS FOR RESOLUTION BY THE COURT OF CLAIMS AS PROVIDED BY 28 U.S.C. 1498, EXCEPT WHEN ADMINISTRATIVELY SETTLED PURSUANT TO 10 U.S.C. 2386.

TO RICHARD V. KEARNEY, JULY 2, 1965:

REFERENCE IS MADE TO YOUR LETTERS OF APRIL 29 AND JUNE 11, 1965, PROTESTING THAT NAVY PURCHASING OFFICE INVITATION FOR BIDS IFB-600-625 65'S DOES NOT PROVIDE FOR PATENT INDEMNIFICATION OF THE GOVERNMENT NOR FOR CONSIDERATION OF THE GOVERNMENT'S PATENT INFRINGEMENT LIABILITY IN THE EVALUATION OF BIDS.

THE SUBJECT INVITATION SOLICITED BIDS FOR AN/URC-35 RADIO TRANSCEIVERS WHICH SET, TOGETHER WITH THE AN/WRC-1 RADIO TRANSMITTER RECEIVER SET, WAS DEVELOPED FOR THE NAVY BY GENERAL DYNAMICS) ELECTRONICS ( GD/E ( UNDER CONTRACT NOBSR-77628 ISSUED IN JUNE 1959. THE PROCUREMENT EXPERIENCE RELATED BY THE BUREAU OF SHIPS IN REPORT DATED JUNE 1, 1965, COPY OF WHICH WAS FURNISHED TO YOU, IN PURCHASING PRODUCTION QUANTITIES OF THE AN/WRC-1, FURNISHED THE BASIS IN PART FOR THE BUREAU'S DETERMINATION TO OMIT A PATENT INDEMNIFICATION PROVISION FROM THE INVITATION AND PATENT INFRINGEMENT LIABILITY FROM BID EVALUATION. THE BUREAU HAS SHOWN THAT THE AN/WRC-1 HAS BEEN PURCHASED IN PRODUCTION QUANTITIES UNDER THREE CONTRACTS SUBSEQUENT TO THE DEVELOPMENT CONTRACT. THE FIRST CONTRACT WAS CONSUMMATED WITH YOUR FIRM ON A SOLE-SOURCE BASIS. THE SECOND CONTRACT WAS AWARDED AFTER ADVERTISING FOR BIDS ON ALTERNATE BASES OF PATENT INDEMNITY AND NO PATENT INDEMNITY. YOUR COMPANY BID ON IDENTICAL PRICE ON EITHER BASIS AND WAS AWARDED THE CONTRACT AS THE LOWEST RESPONSIBLE AND RESPONSIVE BIDDER. AS A RESULT OF A CLAIM TO PATENT RIGHTS BY YOU, THE PATENT INDEMNITY BASIS WAS INCLUDED IN THE INVITATION ALTHOUGH THE INVITATION FURTHER DISCLAIMED THAT ANY DETERMINATION HAD BEEN MADE AS TO THE VALIDITY OF THE CLAIM. THE BID PRICE DIFFERENTIALS DUE TO THE INCLUSION OF THE PATENT INDEMNITY PROVISION RANGED FROM ZERO TO $738,716. THE THIRD CONTRACT WAS AWARDED TO THE BENDIX CORPORATION AFTER ADVERTISING FOR BIDS ON THE SAME BASIS AS IS NOW PROVIDED IN THE INVITATION FOR AN/URC -35. THIS UNRESTRICTED BASIS WAS CHOSEN AS IT WAS BELIEVED THAT IT WOULD PRODUCE MORE THAN THE USUAL DOLLAR SAVINGS IF BIDDERS WERE ASSURED THAT THERE WAS NO CHANCE AT ALL THAT THEY WOULD BE SUBJECT TO ANY INFRINGEMENT LIABILITY. THE UNIT PRICE ON THE AN/WRC-1 DROPPED FROM $20,997 UNDER THE FIRST PRODUCTION CONTRACT TO $8,850 UNDER THE SECOND PRODUCTION CONTRACT TO $6,043 UNDER THE THIRD PRODUCTION CONTRACT.

IN ADDITION TO BELIEVING THAT THE ABSENCE OF A PATENT INDEMNITY PROVISION EFFECTIVELY CONTRIBUTED TO A REDUCTION IN PRICES IN THE AN/WRC-1 AND WOULD RESULT IN A SUBSTANTIAL SAVINGS TO THE GOVERNMENT UNDER THE IMMEDIATE INVITATION WHICH COVERS A FIRST-TIME PRODUCTION OF AN/URC-35, THE BUREAU BELIEVES THAT THE IMMEDIATE SITUATION IS NOT THE KIND FOR WHICH THE ARMED SERVICES PROCUREMENT REGULATION (ASPR) REQUIRES PATENT INDEMNITY COVERAGE IN THE INVITATION.

IN THAT CONNECTION, ASPR, IN PARAGRAPH 9-103, PROVIDES:

PATENT INDEMNIFICATION OF GOVERNMENT BY CONTRACTOR. IN ORDER THAT THE GOVERNMENT MAY BE REIMBURSED FOR LIABILITY FOR PATENT INFRINGEMENT ARISING OUT OF OR RESULTING FROM THE PERFORMANCE OF CONSTRUCTION CONTRACTS OR CONTRACTS FOR SUPPLIES WHICH NORMALLY ARE OR HAVE BEEN SOLD OR OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET OR WHICH ARE THE SAME AS SUCH SUPPLIES WITH A RELATIVELY MINOR MODIFICATION THEREOF A CLAUSE PROVIDING FOR INDEMNIFICATION OF THE GOVERNMENT IS TO BE INCLUDED IN SUCH CONTRACTS IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH BELOW. * * * ADDITIONALLY, PARAGRAPH 9-103.1 PROVIDES:

(A) EXCEPT AS PROHIBITED BY 9-103, THE (PATENT INDEMNITY) CLAUSE * * * IS APPROPRIATE IN FORMALLY ADVERTISED CONSTRUCTION CONTRACTS AND SHALL BE INCLUDED IN FORMALLY ADVERTISED CONTRACTS FOR SUPPLIES WHEN IT HAS BEEN DETERMINED IN ADVANCE OF ISSUING THE INVITATION FOR BIDS THAT THE SUPPLIES (OR SUCH SUPPLIES APART FROM RELATIVELY MINOR MODIFICATIONS TO BE MADE THERETO) NORMALLY ARE OR HAVE BEEN SOLD OR OFFERED FOR SALE BY ANY SUPPLIER TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET.

(B) WHERE A SUPPLY CONTRACT CALLS IN PART FOR SPECIFIC COMPONENTS OR SPARE PARTS WHICH NORMALLY ARE OR HAVE BEEN SOLD OR OFFERED FOR SALE BY ANY SUPPLIER TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET, OR SUCH ITEMS WITH RELATIVELY MINOR MODIFICATIONS, THE PATENT INDEMNITY CLAUSE OF (A) ABOVE SHALL BE MODIFIED BY ADDING TO THE END OF THE CLAUSE EITHER OF THE FOLLOWING SENTENCES:

THE FOREGOING SHALL NOT APPLY TO THE FOLLOWING:

(SPECIFICALLY IDENTIFY THE ITEMS TO BE EXCLUDED FROM THE PATENT INDEMNITY CLAUSE.)

THE FOREGOING SHALL APPLY ONLY TO THE FOLLOWING:

(SPECIFICALLY IDENTIFY THE ITEMS TO WHICH THE PATENT INDEMNITY CLAUSE APPLIES.)

THE BUREAU'S POSITION IS THAT THE SUPPLIES INVOLVED IN THE PROCUREMENT ARE THE AN/URC-35 SETS; THAT SUCH SETS ARE NOT COMMERCIAL ITEMS, BUT ARE MILITARY ITEMS DEVELOPED FOR MILITARY USE FOR THE GOVERNMENT; AND THAT PATENT INDEMNIFICATION IS NOT REQUIRED FOR THESE ARTICLES UNDER ASPR 9- 103, SINCE THEY ARE NOT NORMALLY OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL MARKET, DESPITE YOUR PREPARATION AND DISTRIBUTION OF A CATALOGUE SHEET DESCRIBING THE EQUIPMENT AFTER ITS DEVELOPMENT UNDER GOVERNMENT CONTRACTS. FURTHER THE BUREAU POINTS OUT THAT ASPR 9-103 SPEAKS OF "SUPPLIES" WHEREAS YOUR CONCERN IS FOR THE "BASIC CIRCUITRY" FOR WHICH YOU ASSERT A PATENT CLAIM.

ASSUMING THAT THE BUREAU IS CORRECT THAT THE PATENT CLAIM DOES NOT GO TO THE "SUPPLIES" BUT TO THE "BASIC CIRCUITRY," THE CONCLUSION IS REQUIRED THAT, IF THE BASIC CIRCUITRY IS NOT THE SUPPLY ITEM, IT IS A COMPONENT OF THE SUPPLY ITEM AND, WITH RESPECT TO "COMPONENTS," ASPR 9 103.1 (B) PROVIDES THE SAME TEST OF COMMERCIAL APPLICATION AS IS APPLIED TO "SUPPLIES.' IN THAT REGARD, THE "INTERCHANGEABILITY" SECTION OF THE INVITATION REQUIRES THAT TO MAINTAIN THE COMMONALITY OF RELATED EQUIPMENTS INTERCHANGEABILITY SHALL EXTEND TO INCLUDE ALL THE CONSTITUENT CIRCUITS OF THE GOVERNMENT-FURNISHED AN/WRC-1, WHICH, AS NOTED AT THE OUTSET, WAS DEVELOPED TOGETHER WITH THE AN/URC-35 UNDER THE SAME CONTRACT.

WE OBSERVE THAT YOU HAVE REPRESENTED THAT YOU HAVE ENTERED INTO LICENSING AGREEMENTS WITH FOREIGN MANUFACTURERS AUTHORIZING THEM TO UTILIZE THE PATENTS WHICH YOU CLAIM TO BE APPLICABLE AND THAT THE LICENSEES HAVE INCURRED LIABILITY FOR $1,200,000 ROYALTIES THEREUNDER.

THE NAVY HAS POINTED OUT THAT, UNDER THE DEVELOPMENT CONTRACT, THE GOVERNMENT OBTAINED A ROYALTY-FREE LICENSE TO ANY INVENTION CONCEIVED OR FIRST ACTUALLY REDUCED TO PRACTICE IN THE PERFORMANCE OF THE WORK REQUIRED UNDER THE CONTRACT. THE NAVY MAINTAINS THAT UNDER THAT CONTRACT IT OBTAINED A ROYALTY-FREE LICENSE TO USE THE BASIC CIRCUITRY. ON THE OTHER HAND, YOU ALLEGE THAT THE INVENTION WAS REDUCED TO PRACTICE PRIOR TO AWARD OF THE CONTRACT AND HAVE SUBMITTED AFFIDAVITS AND PICTURES IN SUPPORT OF YOUR ASSERTION. THE NAVY REPORTS THAT IT HAS BEEN UNABLE TO ACCEPT THE CONCLUSIONS IN THE AFFIDAVITS BECAUSE PATENTS WERE NOT OBTAINED UNTIL 3 YEARS AFTER THE ISSUE OF THE DEVELOPMENT CONTRACT. MOREOVER, IT INDICATES THAT CONSIDERATION OF THE MATTER WILL TAKE SEVERAL MONTHS BECAUSE OF COMPLEX TECHNICAL AND LEGAL PROBLEMS.

HAVING REGARD FOR THE FACTS RELATED ABOVE IT IS OUR VIEW THAT THE NAVY WAS NOT LEGALLY REQUIRED TO INCLUDE A PATENT INDEMNITY PROVISION IN THE INVITATION FOR BIDS. THE CITED PROVISIONS OF ASPR 9-103 ONLY REQUIRE THE INDEMNITY CLAUSE TO BE INCLUDED IN CONTRACTS FOR SUPPLIES WHICH NORMALLY ARE SOLD OR OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET. THE EQUIPMENT HERE INVOLVED DOES NOT FALL WITHIN THAT CATEGORY. INSOFAR AS THE "BASIC CIRCUITRY," WHICH IS A COMPONENT OF THE END PRODUCT, IS CONCERNED, SINCE THE NAVY IS CONTENDING THAT IT HAS A ROYALTY-FREE LICENSE TO USE IT, THERE OBVIOUSLY WOULD BE NO LEGAL REQUIREMENT THAT AN INDEMNIFICATION CLAUSE BE INCLUDED IN THE INVITATION TO COVER THAT ITEM.

REGARDING YOUR CONTENTION THAT IF PATENT INDEMNITY IS NOT PROVIDED IN THE INVITATION POSSIBLE PATENT INFRINGEMENT LIABILITY MUST BE PROVIDED FOR IN THE EVALUATION OF BIDS IN ACCORDANCE WITH 10 U.S.C. 2305 (C) PROVIDING FOR CONSIDERATION OF "PRICE AND OTHER FACTORS" IN ASCERTAINING THE LOW BID, WE CONCUR WITH THE BUREAU THAT PATENT INFRINGEMENT LIABILITY IS NOT FOR EVALUATION IN THE CONSIDERATION OF BIDS. THE MATTER OF INFRINGEMENT AND THE ULTIMATE FIXING OF A REASONABLE COMPENSATION THEREFOR IS FOR ULTIMATE RESOLUTION BY THE COURT OF CLAIMS AS PROVIDED BY 28 U.S.C. 1498, WITH THE POSSIBLE EXCEPTION OF AN ADMINISTRATIVE SETTLEMENT UNDER THE AUTHORITY OF 10 U.S.C. 2386. UNTIL A SETTLEMENT IS REACHED THE MATTER IS SPECULATIVE. IN THAT CONNECTION SEE B-141459, MARCH 29, 1962, WHEREIN OUR OFFICE HELD THAT IT WAS NOT NECESSARY TO INCLUDE A REASONABLE AMOUNT OF DAMAGES FOR PATENT INFRINGEMENT IN THE LOW BID SINCE THERE HAD BEEN NO SHOWING OF ANY LIABILITY ON THE PART OF THE GOVERNMENT FOR REASONABLE COMPENSATION UNDER 28 U.S.C. 1498 IN CONNECTION WITH PREVIOUS PURCHASES MADE UNDER LIKE CIRCUMSTANCES. WHILE IN B-77738, JANUARY 10, 1949, OUR OFFICE STATED THAT THESE UNCERTAIN COSTS SHOULD BE CONSIDERED, WE DO NOT FIND THAT OUR OFFICE HAS EVER RELIED UPON THAT DECISION IN A SIMILAR PATENT SITUATION AND WE HAVE IN FACT EXPRESSED A DIFFERENT VIEW IN B-141459 CITED.