B-136916, SEPTEMBER 12, 1966, 46 COMP. GEN. 205

B-136916, SEPTEMBER 12, 1966, 46 COMP. GEN. 205

PATENTS - DEVICES, ETC; USED BY GOVERNMENT - PREPROCUREMENT LICENSES. A REGULATORY PROCEDURE ISSUED UNDER THE AUTHORITY OF 42 U.S.C. 2473/B) (3), PROPOSING TO SECURE A PREPROCUREMENT LICENSE FROM A PATENT HOLDER AND PAY A ROYALTY TO THE HOLDER IF THE PATENTED ITEM IS PROCURED FROM AN UNLICENSED SOURCE, THE AMOUNT OF THE ROYALTY TO BE CONSIDERED IN BID EVALUATION, IS APPROVED FOR A TRIAL PERIOD, FUTURE PROBLEMS FOR RESOLUTION ON THE BASIS OF THE EXPERIENCE GAINED UNDER THE PROCEDURE, AND AS ALL POTENTIAL PROCUREMENT SOURCES WILL BE SOLICITED UNDER THE PROCEDURE, THE PURPOSE OF 28 U.S.C. 1498, TO ASSURE THE GOVERNMENT PRIVATE INDUSTRY RESOURCES UNFETTERED BY PRIVATE PATENT RIGHTS WILL NOT BE RESTRICTED, RATHER, THE PROPOSAL TO ADD THE LICENSE FEE TO THE BID OR QUOTATION OF AN UNLICENSED SUPPLIER REPRESENTS A MORE REALISTIC APPROACH IN DETERMINING THE MOST ADVANTAGEOUS PRICE TO THE GOVERNMENT FOR THE ITEM THAN IS POSSIBLE WHEN INFRINGEMENT DAMAGES ARE NOT CONSIDERED.

TO THE ADMINISTRATOR, NATIONAL AERONAUTICS AND SPACE ADMINISTRATION, SEPTEMBER 12, 1966:

WE REFER TO YOUR LETTERS OF JUNE 13 AND JULY 14, 1966, REGARDING A PROPOSED NEW APPROACH TO THE PROCUREMENT OF PATENTED ITEMS. OUR VIEWS ARE REQUESTED ON A PROPOSED SECTION 9.102 OF THE NASA PROCUREMENT REGULATIONS WHICH SETS FORTH THIS NEW APPROACH.

UNDER 28 U.S.C. 1498, GOVERNMENT CONTRACTORS AND SUBCONTRACTORS ARE RELIEVED ENTIRELY OF LIABILITY FOR INFRINGING PATENTS EMBODIED IN ITEMS ACCEPTED OR TO BE ACCEPTED BY THE GOVERNMENT PURSUANT TO ITS CONTRACTS. SECTION 1498 PROVIDES THAT IN SUCH CIRCUMSTANCES THE PATENT HOLDER'S REMEDY IS EXCLUSIVELY AGAINST THE GOVERNMENT BY AN ACTION IN THE COURT OF CLAIMS FOR DAMAGES. THE COURTS HAVE RECOGNIZED SECTION 1498 AS CONSTITUTING IN EFFECT AN EMINENT DOMAIN STATUTE, WHICH VESTS IN THE GOVERNMENT THE RIGHT TO USE ANY PATENT GRANTED BY IT UPON PAYMENT OF REASONABLE COMPENSATION TO THE PATENT HOLDER. RICHMOND SCREW ANCHOR CO. V. UNITED STATES, 275 U.S. 331 (1928); STELMA, INCORPORATED V. BRIDGE ELECTRONICS CO; 300 F. 2D 761 (1962). THE ACT WAS INTENDED TO GIVE PATENT HOLDERS AN ADEQUATE AND EFFECTIVE REMEDY FOR INFRINGEMENT OF THEIR PATENTS WHILE SAVING THE GOVERNMENT FROM HAVING ITS PROCUREMENT PROGRAMS THWARTED, DELAYED OR OBSTRUCTED PENDING LITIGATION OF PATENT DISPUTES. BERESLAVSKY V. ESSO STANDARD OIL CO; 175 F. 2D 148 (1949).

CONSIDERING THE ACT AND ITS PURPOSES, THIS OFFICE HAS CONCLUDED THAT GOVERNMENT CONTRACTS SHOULD NOT BE RESTRICTED TO PATENT HOLDERS AND THEIR LICENSEES WHERE PATENTS ARE HELD, BUT RATHER ALL POTENTIAL SOURCES SHOULD BE PERMITTED TO COMPETE FOR GOVERNMENT CONTRACTS REGARDLESS OF POSSIBLE PATENT INFRINGEMENT. 38 COMP. GEN. 276; 39 ID. 760. SPECIFICALLY, WE HELD IN 38 COMP. GEN. 276 THAT A PROCURING AGENCY MAY NOT REFUSE TO ADVERTISE FOR AN ITEM BECAUSE OF A PATENT NOR REFUSE TO MAKE AWARD TO THE LOW BIDDER BECAUSE HE WAS NOT LICENSED BY THE PATENT HOLDER TO MANUFACTURE THE PATENTED ARTICLE. THE PROCURING AGENCY, OF COURSE, IS FREE TO REQUIRE PATENT INDEMNITY AGREEMENTS FROM ITS SUPPLIERS, PERHAPS SHOULD REQUIRE SUCH AGREEMENTS IN SOME CASES. EVEN THOUGH PATENT INDEMNITY IS NOT PROVIDED FOR IN THE INVITATION, IT HAS BEEN OUR VIEW THAT A LOW BID MAY NOT BE REJECTED ON THE BASIS THAT THE GOVERNMENT MIGHT INCUR LIABILITY FOR PATENT INFRINGEMENT. 45 COMP. GEN. 13.

YOU REPORT THAT, IN ACCORDANCE WITH OUR VIEW, YOUR AGENCY DOES NOT CONSIDER THE POSSIBLE INFRINGEMENT LIABILITY OF THE GOVERNMENT AS A FACTOR IN EVALUATING COMPETING BIDS OR PROPOSALS IN THE PROCUREMENT OF PATENTED ITEMS; THAT NASA CONTRACTS ARE CURRENTLY AWARDED WITHOUT REGARD TO PRIVATE PATENT RIGHTS; AND THAT IF A PATENT HOLDER FEELS THAT HIS PATENT HAS BEEN INFRINGED, HE MAY FILE AN ADMINISTRATIVE CLAIM FOR PATENT INFRINGEMENT WITH NASA UNDER 42 U.S.C. 2473/B) (3), AS COMPLEMENTED BY SECTION 9.104 OF THE NASA PROCUREMENT REGULATIONS, OR SUE THE GOVERNMENT FOR PATENT INFRINGEMENT IN THE COURT OF CLAIMS UNDER 28 U.S.C. 1498.

YOU ADVISE THAT AS A PRACTICAL MATTER SECTION 1498 DOES NOT ALWAYS AFFORD AN ADEQUATE AND EFFECTIVE REMEDY TO THE PATENT HOLDER. SMALL BUSINESS CONCERNS, FOR EXAMPLE, OFTEN ARE LOATH TO ENGAGE IN PROTRACTED BUSINESS CONCERNS, FOR EXAMPLE, OFTEN ARE LOATH TO ENGAGE IN PROTRACTED LITIGATION WITH THE GOVERNMENT, AND ADMINISTRATIVE SETTLEMENTS TEND TO BE TIME CONSUMING AND COSTLY.

FURTHER, YOU REPORT THAT NASA DOES NOT GENERALLY INCLUDE "PATENT INDEMNITY" CLAUSES IN ITS CONTRACTS. YOU EXPLAIN THAT THERE ARE SEVERAL REASONS FOR THIS. SUCH CLAUSES MAY HAVE THE EFFECT OF UNNECESSARILY INCREASING CONTRACT COSTS BECAUSE OF THE INCLUSION OF A CONTINGENCY FOR PATENT INFRINGEMENT. THEY DISCOURAGE SOME PROSPECTIVE BIDDERS FROM BIDDING. IN ADDITION, THEY TEND TO ENCOURAGE THE USE OF INFERIOR MATERIALS TO AVOID POSSIBLE PATENT INFRINGEMENT. ALSO, SUCH CLAUSES ARE NOT CONSIDERED ENTIRELY APPROPRIATE FOR R AND D CONTRACTS, WHICH CONSTITUTE THE MAJOR TYPE OF CONTRACT USED BY NASA; AND, FINALLY, THEY MAKE IT DIFFICULT FOR THE AGENCY TO SETTLE ADMINISTRATIVE CLAIMS FOR PATENT INFRINGEMENT, SINCE THE INDEMNITOR'S CONSENT WOULD HAVE TO BE OBTAINED FOR THE SETTLEMENT. MARTIN CO. V. UNITED STATES, 143 CT. CL. 551, 163 F. SUPP. 376.

UNDER CURRENT NASA PRACTICE, (1) PATENT INFRINGEMENT LIABILITY IS NOT CONSIDERED IN EVALUATING COMPETING BIDS OR PROPOSALS, AND (2) MERITORIOUS CLAIMS FOR PATENT INFRINGEMENT RESULTING FROM A PROCUREMENT ARE SETTLED BY ENTERING INTO EITHER A PAID-UP OR ROYALTY BEARING LICENSE AGREEMENT WITH THE PATENT OWNER. IF A ROYALTY BEARING LICENSE AGREEMENT HAS BEEN ENTERED INTO AND THE ITEM IS BEING RE PROCURED, NASA WILL CONSIDER THE ROYALTY FEE AS A FACTOR IN THE EVALUATION OF A BID OR PROPOSAL FROM AN UNLICENSED SOURCE.

YOU POINT OUT THAT AFTER PURCHASING FROM AN UNLICENSED SOURCE ON THE INITIAL PROCUREMENT, YOUR AGENCY MUST THEN SETTLE WITH THE PATENT HOLDER. HENCE THE TOTAL COST OF THE ITEM COULD WELL EXCEED WHAT THE COST WOULD HAVE BEEN IF THE ITEM HAD BEEN PURCHASED FROM THE PATENT OWNER OR ONE OF HIS LICENSEES IN THE FIRST PLACE. MORE IMPORTANT, YOU FEEL THAT THE PRESENT PRACTICE HAS AN ADVERSE EFFECT ON PRIVATE RESEARCH EFFORTS IN THE AEROSPACE FIELD. IN THIS AREA THE GOVERNMENT IS OFTEN THE PRIMARY CUSTOMER. AT PRESENT, THE UNLICENSED FIRM IS OFFERED FREE USE OF A PATENT ON A GOVERNMENT CONTRACT. CONSEQUENTLY, WHERE A PATENTED INVENTION WOULD BE USEFUL ON GOVERNMENT PROGRAMS, A PROSPECTIVE LICENSEE WOULD BE DISCOURAGED FROM TAKING OUT A LICENSE ON THE PATENT WHEN FREE USE OF IT IS LIKELY TO BE OFFERED BY THE GOVERNMENT. YOU FEEL THAT PRIVATELY FINANCED RESEARCH IS DEFINITELY DISCOURAGED UNDER THE CURRENT PRACTICES, WITH THE GOVERNMENT AS THE ULTIMATE LOSER.

YOU PROPOSE TO REMEDY THE PRESENT SITUATION BY ADOPTING A REGULATORY PROCEDURE FOR THE PROCUREMENT OF PATENTED ITEMS. UNDER 42 U.S.C. 2473/B)(3), YOUR AGENCY HAS AUTHORITTY "TO ACQUIRE (BY PURCHASE, LEASE, CONDEMNATION, OR OTHERWISE) * * * REAL AND PERSONAL PROPERTY (INCLUDING PATENTS), OR ANY INTEREST THEREIN, AS THE ADMINISTRATION DEEMS NECESSARY * * *;, ACTING UNDER THIS AUTHORITY YOUR AGENCY WOULD SECURE A LICENSE (A PREPROCUREMENT LICENSE) FROM A PATENT HOLDER, IN APPROPRIATE CASES, PRIOR TO A NASA PROCUREMENT FOR A PATENTED ITEM. A ROYALTY WOULD BE ESTABLISHED WHICH WOULD BE PAYABLE TO THE PATENT HOLDER IF THE ITEM WERE PROCURED FROM AN UNLICENSED SOURCE. THE AMOUNT OF THIS ROYALTY WOULD BE INCLUDED IN THE EVALUATION. THAT IS, THE AMOUNT OF THE ROYALTY WOULD BE ADDED TO THE BID OF THE UNLICENSED SUPPLIER. THE ,PREPROCUREMENT LICENSE", IT SHOULD BE EMPHASIZED, WOULD BE APPLICABLE ONLY FOR THE SINGLE PROCUREMENT.

THE PROCEDURE WOULD BE INVOLVED WHERE A PATENT OWNER FURNISHES TIMELY NOTICE TO NASA THAT A PROPOSED NASA PROCUREMENT (EITHER ADVERTISED OR NEGOTIATED) WILL INFRINGE HIS PATENT. IF THE CONTRACTING OFFICER DETERMINES THAT ENTERING INTO A LICENSE AGREEMENT WILL NOT UNDULY DELAY THE PROCUREMENT, HE WOULD REFER THE MATTER TO NASA PATENT COUNSEL TO DETERMINE THE VALIDITY OF THE CLAIM. A COURT DECISION UPHOLDING THE PATENT, THE FACT THAT LICENSES HAVE BEEN GRANTED UNDER THE PATENT, AND OTHER SUCH FACTORS WOULD BE CONSIDERED PERSUASIVE AS TO THE VALIDITY OF THE PATENT. IF (1) THE CONTRACTING OFFICER HAS DETERMINED THAT ENTERING INTO THE LICENSE AGREEMENT WILL NOT UNDULY DELAY THE PROCUREMENT, (2) NASA COUNSEL IS SATISFIED A VALID PATENT RIGHT IS INVOLVED, AND (3) THE PATENT OWNER IS WILLING TO ENTER INTO A LICENSE AGREEMENT PRIOR TO THE AWARD TO LICENSE NASA AT A REASONABLE RATE (IN NO EVENT TO EXCEED THE LOWEST RATE AT WHICH HE HAS LICENSED A PRIVATE CONCERN), A PREPROCUREMENT LICENSE AGREEMENT WOULD BE ENTERED INTO, ROYALTIES TO BE PAYABLE TO THE PATENT OWNER UPON AWARD TO AN UNLICENSED SOURCE. THE ROYALTY FEE WHICH WOULD BE PAYABLE IN THE EVENT OF AN AWARD TO AN UNLICENSED SOURCE WOULD BE CONSIDERED AS A FACTOR IN THE BID EVALUATION. IN ORDER TO NOTIFY PROSPECTIVE BIDDERS OF THIS FACTOR, ALL INVITATIONS WOULD CONTAIN THE FOLLOWING CLAUSE:

PATENT ROYALTIES (NOVEMBER 1965)

IN THE EVENT OF A DETERMINATION BY NASA THAT THIS PROCUREMENT WILL INFRINGE PRIVATE PATENT RIGHTS. NASA MAY ENTER INTO A PATENT LICENSE AGREEMENT WITH THE OWNER OF THE PATENT PRIOR TO AN AWARD OF A CONTRACT PURSUANT TO THIS INVITATION FOR BIDS. IN SUCH A CASE ROYALTIES WHICH WILL BE PAYABLE UNDER SUCH A LICENSE AGREEMENT TO THE PATENT OWNER SHOULD THE CONTRACT BE AWARDED TO AN UNLICENSED SUPPLIER WILL BE CONSIDERED BY NASA IN DETERMINING WHICH BID IS MOST ADVANTAGEOUS TO THE UNITED STATES. BEFORE ANY ROYALTY PAYMENTS ARE CONSIDERED FOR EVALUATION PURPOSES, EACH BIDDER WILL BE GIVEN AN OPPORTUNITY TO SHOW THAT HE IS A LICENSEE UNDER THE PATENT DETERMINED BY NASA TO BE INFRINGED BY THE PROCUREMENT.

AN APPROPRIATE "PATENT ROYALTIES" CLAUSE WOULD BE INSERTED IN NEGOTIATED PROCUREMENTS ALSO. IN THE EVENT THAT NO LICENSE AGREEMENT IS ENTERED INTO, BIDS OR PROPOSALS WOULD BE EVALUATED WITHOUT REGARD TO PATENT INFRINGEMENT LIABILITY AND THE PATENT OWNER WOULD BE LEFT TO HIS ADMINISTRATIVE CLAIM OR LEGAL REMEDY.

YOU BELIEVE THAT THE PROPOSED PROCEDURE WOULD BE APPLICABLE ONLY IN A LIMITED NUMBER OF CASES IN VIEW OF THE CONDITIONS WHICH MUST BE SATISFIED UNDER THE REGULATIONS, BUT THAT WHERE IT IS USED IT WOULD SERVE A SALUTARY PURPOSE, BOTH FOR THE PATENT OWNER AND FOR THE GOVERNMENT. YOU REGARD THIS AS A "MIDDLE-GROUND APPROACH TO THE PROCUREMENT OF PATENTED ITEMS WHICH IS WORKABLE FROM A PROCUREMENT STANDPOINT AND AT THE SAME TIME NOT AT ODDS WITH OUR EFFORTS TO SPUR PRIVATE COMPANIES ON TO SPEND THEIR OWN MONEY ON RESEARCH AND DEVELOPMENT;, HOWEVER, YOU PLAN TO INITIATE THIS PROCEDURE ON AN EXPERIMENTAL BASIS FOR AN UNSPECIFIED TRIAL PERIOD TO TEST ITS EFFICACY. ON THIS BASIS, YOU ASK FOR OUR VIEWS.

AS NOTED, WE HAVE OBJECTED TO THE INCLUSION IN A BID EVALUATION OF A FACTOR FOR POSSIBLE PATENT INFRINGEMENT DAMAGES. B-156692, SUPRA. IT HAS BEEN OUR VIEW THAT THE MATTER OF INFRINGEMENT AND THE ULTIMATE FIXING OF REASONABLE COMPENSATION THEREFOR IS TOO SPECULATIVE TO BE CONSIDERED AS A BID EVALUATION FACTOR. YOUR PROPOSAL DOES NOT INVOLVE THE EVALUATION OF SPECULATIVE INFRINGEMENT DAMAGES. YOU WOULD ACQUIRE THE RIGHT TO USE A PATENT BEFORE THE AWARD OF THE CONTRACT AND EVALUATE THE COST OF SUCH ACQUISITION IN MAKING THE AWARD. THERE IS NO QUESTION OF YOUR AUTHORITY TO ACQUIRE A PATENT LICENSE. THERE IS NO SPECULATION INVOLVED. THE COST OF MAKING AWARD TO AN UNLICENSED SOURCE WOULD BE FIXED BEFOREHAND.

THE LEGISLATIVE INTENT OF SECTION 1498 IS TO ASSURE THAT THE GOVERNMENT WILL HAVE AVAILABLE TO IT THE RESOURCES OF PRIVATE INDUSTRY UNFETTERED BY PRIVATE PATENT RIGHTS. SEE CASES COLLECTED IN THE ANNOTATIONS TO 28 U.S.C. 1498. YOU DO NOT PROPOSE TO INHIBIT THE GOVERNMENT'S RIGHT TO SOLICIT ALL POTENTIAL SOURCES FOR GOVERNMENT CONTRACTS. EVERY FIRM, WHETHER LICENSED BY THE PATENT OWNER OR NOT, WOULD STILL BE FREE TO SUBMIT A BID OR PROPOSAL ON A PATENTED ITEM. YOUR INVITATION OR PROPOSAL WOULD PROVIDE, HOWEVER, THAT ANY AGREED UPON LICENSE FEE WOULD BE ADDED TO THE BID OR QUOTATION OF AN UNLICENSED SUPPLIER FOR EVALUATION PURPOSES. THIS IS NOT A RESTRICTION ON COMPETITION. INDEED, THE PROPOSED EVALUATION OF THE LICENSE FEE REPRESENTS PERHAPS A MORE REALISTIC APPROACH IN DETERMINING THE MOST ADVANTAGEOUS PRICE THAN EXISTS UNDER THE CURRENT PROCEDURE WHERE POSSIBLE INFRINGEMENT DAMAGES ARE NOT CONSIDERED.

ACCORDINGLY, YOUR PLAN APPEARS TO BE THEORETICALLY SOUND. WE DO SEE A POSSIBLE PROBLEM WITH RESPECT TO EVALUATION. AS PROPOSED THE PREPROCUREMENT LICENSE RATE NEGOTIATION MUST OCCUR BEFORE THE AWARD, BUT COULD TAKE PALCE AFTER THE BID OPENING WHEN THE BIDS ARE EXPOSED. THE RESULTS OF THE LICENSE RATE NEGOTIATION ENTER INTO THE EVALUATION AND COULD AFFECT THE AWARD DETERMINATION. WHILE IT IS PROVIDED THAT THE LICENSE RATE MAY NOT EXCEED THE PATENT OWNER'S LOWEST COMMERCIAL RATE, NEVERTHELESS THE PATENT OWNER AND THE CONTRACTING OFFICER COULD WELL BE IN A POSITION TO INFLUENCE THE AWARD DETERMINATION IN A WAY INIMICAL TO THE INTEGRITY OF THE BIDDING SYSTEM. AT THE VERY LEAST, CHARGES OF FAVORITISM AND BAD FAITH COULD ARISE. THE PROBLEM IS NOT AS ACUTE IN A NEGOTIATED PROCUREMENT WHERE PRICES GENERALLY ARE NOT REVEALED.

WE HAVE NO RECOMMENDATIONS ON THIS POSSIBLE PROBLEM AT THE PRESENT TIME, AND THERE MAY BE OTHER PROBLEMS WHICH WILL ARISE. HOWEVER, WE DO NOT OBJECT TO THE ISSUANCE OF THE PROPOSED REGULATION FOR A TRIAL PERIOD, LEAVING RESOLUTION OF ANY PROBLEMS WHICH MAY ARISE FOR A LATER DATE, WHEN EXPERIENCED IS GAINED.

WE UNDERSTAND THAT THE ARMED SERVICES PROCUREMENT REGULATION COMMITTEE IS PRESENTLY CONCERNED WITH PROTECTING THE RIGHTS OF PRIVATE INNOVATORS, AND HAS CIRCULARIZED INDUSTRY FOR COMMENTS ON THE NEED FOR SUCH PROTECTION AND ON TENTATIVE PROPOSED PROCEDURES. CONSEQUENTLY, CONSULTATION BETWEEN YOUR AGENCY AND THE DEPARTMENT OF DEFENSE MIGHT BE MUTUALLY HELPFUL. ALSO, IN VIEW OF OUR MUTUAL INTEREST IN THIS AREA, WE WOULD APPRECIATE RECEIVING INFORMATION ON THE RESULTS OF YOUR EVALUATION OF THE NEW REGULATION AFTER THE TRIAL PERIOD IS OVER.