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research and development work. DOD, for instance, uses the following provision, which is also used by NASA 37 and the Department of Transportation: 38

Authorization and Consent (Jan. 1961)

The Government hereby gives its authorization and consent for all use and manufacture of any invention described in and covered by a patent of the United States in the performance of this contract or any part thereof or any amendment hereto or any subcontract hereunder (including any lower-tier subcontract).39

A somewhat more limited clause is used in supply contracts. The DOD clause reads as follows:

Authorization and Consent (Mar. 1964)

The Government hereby gives it authorization and consent (without prejudice to any rights of indemnification) for all use and manufacture, in the performance of this contract or any part hereto or any amendment hereto or any subcontract hereunder (including any lower-tier subcontract), of any invention described in and covered by a patent of the United States (i) embodied in the structure or composition of any article the delivery of which is accepted by the Government under this contract, or (ii) utilized in the machinery, tools, or methods the use of which necessarily results from compliance by the Contractor or the using subcontractor with (a) specifications or written provisions now or hereafter forming a part of this contract, or (b) specific written instructions given by the Contracting Officer directing the manner of performance. The entire liability to the Government for infringement of a patent of the United States shall be determined solely by the provisions of the indemnity clauses, if any, included in this contract or any subcontract hereunder (including any lower-tier subcontract), and the Government assumes liability for all other infringement to the extent of the authorization and consent hereinabove granted.""

NASA PR 9.103.

38 DOTPR 12-9.6106-2.

39 ASPR 9-102.2.

40 ASPR 9-102.1.

A similar clause is also used by NASA "1 and DOT.42

As indicated earlier, even if authorization and consent is not given by way of the above clauses, it may still be implied. Numerous factors, such as knowledge by the contracting officer or other Government official of the use of a patented invention by the contractor and the lack of objection to such use, have been described as indicating that the Government's authorization and consent was given by implication.43

The Comptroller General has ruled that an agency cannot expressly withhold authorization and consent with respect to particular procurements or patents." This ruling was made in response to a protest over the inclusion of a provision in a request for proposals of the Atomic Energy Commission which specifically withdrew the Government's authorization and consent to infringe upon two privately held patents. One was a product patent and one was a process patent.

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The Comptroller General reasoned that the inclusion of such a clause would require proposers to include "contingent costs in their bid prices for fear of having to defend infringement suits which would not occur but for the subject clause, and of having to bear the consequences of possible contract termination due to injunction." 5 However, the decision was not based on policy grounds. Rather, it was concluded that, as a matter of law, a contracting officer has no authority, except in limited situations, to withhold authorization and consent. The AEC clauses were deemed "legally ineffective." 6 This conclusion was based on a detailed analysis of the history of 28 U.S.C. § 1498.

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The Comptroller General ruled that authorization and consent could not be withheld as to any product patent where the specifications called for such item to be embodied in the final item, or as to patents covering processes unless "conditioned by language to the effect that the withholding of consent to its use applies only

41 NASA PR 9.103.

42 DOTPR 12-9.6105-1.

43 R. Nash and J. Lasken, Patents and Technical Data, Government Contracts Monograph No. 10, The George Washington University (1967), at 87-88.

44 46 Comp. Gen. 227 (1966).

45 Ibid. at 242.

Ibid.

if . . . such use is not economically or reasonably necessary to manufacture the article specified in the contract." 47

INDEMNIFICATION

Even where authorization and consent is granted, the Government may still wish to require the contractor to indemnify it for any liability the Government incurs pursuant to 28 U.S.C. § 1498. While 28 U.S.C. § 1498 bars injunctive action, it is not interpreted by the Government as preventing the shifting of ultimate financial liability. For this purpose, patent indemnity clauses are included in many Government contracts.

Practices vary somewhat, but indemnification is generally not required in research and development contracts, though it is normally obtained with respect to supply contracts. Where a contract contains a mix of R&D and supply requirements, indemnity may be used. The AEC provides the most complete set of instructions for tailoring the patent indemnity provisions to accommodate a mix of R&D and supplies. Contracts of the military departments for weapons systems usually do not include patent indemnity clauses, even though standard commercial components may be involved. At one time the ASPR included an indemnity clause which was limited to standard commercial items. This clause was so difficult to administer that it was deleted from the ASPR.

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The ASPR differs from most other regulations in that it specifically negates the applicability of Uniform Commercial Code-type implied warranties against patent infringement. The "Authorization and Consent" clause of ASPR 9-102.1, in part, states:

The entire liability to the Government for infringement of a patent of the United States shall be determined solely by the provisions of the indemnity clauses, if any, included in this contract or any subcontract hereunder (including any lower-tier subcontract), and the Government assumes liability for all other infringement to the extent of the authorization and consent hereinabove granted.

47 Ibid.

48 AECPR 9-9.5010.

Section 2-312 of the Uniform Commercial Code, in part, states:

(3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

The Department of Justice has given some indication that it would rely on commercial warranties alone or as a supplement to express contractual warranty or indemnity provisions, in order to attempt to bring contractors before the Court of Claims as third party indemnitors in patent suits against the Government.49

There is evidence that in some cases, despite the inclusion of indemnity clauses in contracts, contractors have avoided liability for infringement. The cost to the Government of bringing suit against uncooperative contractor/indemnitors may result in their avoiding full indemnification.50

ADMINISTRATIVE SETTLEMENTS

There are some alternative methods of limited scope available by which a patent owner can receive compensation for the use of his patents without resorting to suit under 28 U.S.C. § 1498. The AEC and NASA have, by statute, special boards which may grant compensation for patent infringement in some cases. An administrative remedy is available from the military departments, which rely on

49 Expression of such intent is found in the following language in a letter from the Civil Division to an electronics manufacturer in connection with Technitrol, Inc. v. U.S., F.2d 1362 (Ct. Cl., 1971), which stated: ". . . Even where there may be no express indemnity obligation, the Government in some situations may take the position that there is an implied indemnity under the Uniform Commercial Code or other applicable laws. . ."

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50 ASPR 9-408 provides, settlement of claims involving payment for past infringement shall not be made without the consent of, and equitable contribution by, each indemnifying contractor involved, unless such settlement is determined to be in the best interests of the Government and is coordinated with the Department of Justice with a view to preserving any rights of the Government against the contractors involved. If consent of and equitable contribution by the contractors are obtained, the settlement need not be coordinated with the Department of Justice."

51 42 U.S.C. § 2187 (1970), AEC; and 42 U.S.C. § 2457 (1970). NASA.

10 U.S.C. § 2386 for their authority in this area. NASA and the AEC also have similar authority in this regard, though not quite as clearcut as that of DOD.52 Finally, NASA has developed a procedure known as "Preprocurement Licensing," though this has rarely been used.

As indicated above, an administrative claim procedure is not available to a patentee with respect to all Government procurements. In many instances, a patentee is required to sue in the Court of Claims in order to obtain redress for the unauthorized use of his patent by the Government. The General Services Administration expends millions of dollars on supplies and services each year. Yet, no authority has been vested in GSA to negotiate or settle, prior to suit, any alleged patent infringement arising in its procurements, regardless of the merits. As a result, administrative claims procedures are not universal and are limited by statute and practical application to but a few sectors of Government procurement. Some of the more significant of these are discussed next.

DOD Administrative Claim Procedures

The Department of Defense administrative claim procedure is an informal procedure for processing an administrative claim for patent infringement against the military agencies. This procedure, while broad enough in scope to encompass licensing prior to procurement, in practice involves settlement for past infringement, with or without a license for further infringement.

The existing statutes are silent as to what essentials must be present to constitute a "claim." 35 U.S.C. § 286 (1970) provides that running of the six year statute of limitations in the U.S. Court of Claims will be stopped if a "written claim" has been received by an agency. Therefore, DOD has adopted a set of rules to govern action in the receipt, investigation, and settlement of such claims. The rules for presentation of a claim are minimal and

52 42 U.S.C. § 2201 (g) (1970), AEC; 42 U.S.C. § 2473 (b) (3) (1970), NASA.

53 ASPR 9-404. These procedures are used extensively. Task Force 2 of our Study Group 6 found that 240 claims were pending in the Department of Defense during May 1971. See Task Force No. 2 Report to our Study Group 6, at C-5.

can be met by the patentee without the need of legal counsel.

Upon receipt of a claim, the agency begins what in effect is an ex parte proceeding, the extent of which may be dependent upon whether patent indemnification is involved. The agency may then initiate an extensive investigation into the merits of the allegation including an infringement study, a patent validity study, if warranted, and other appropriate investigations, including a review of contract records for determinations of license rights in the Government.

If infringement is clearly establishable, the validity of the patent reasonably certain, and the amount involved reasonably determinable and available from existing appropriations, the administrative claim procedure may result in satisfactory settlement. In 1970, the Air Force disposed of 39 patent claims by denial or settlement. Of these, seven were settled. It took an average of two years and five months to reach each settlement. In addition to the 39 disposals, another 26 potential claims were disposed of in 1970 because the claimant failed to complete his claim or for other reasons.54 One aspect of the administrative settlement process that is worthy of note is that in many cases where a claim is made against the Government for the unauthorized use of an invention by a Government contractor, the contractor may bear ultimate liability via an indemnity clause. Hence, after a tentative settlement agreement between the patent owner and the Government has been reached, the Government has to determine whether the indemnitor/ contractor or contractors will pay their proportionate shares. If they will not, the Government may decide to deny the claim, rendering the entire process fruitless. This leaves the patent owner with two alternatives. He can accept the agreed-upon sum less the indemnitor's portion (which may be the major portion), or he can file suit. However, a Government refusal to settle is rarely based solely on the refusal of the contractor/indemnitor to agree to the settlement.55

See Task Force No. 2 Report to our Study Group 6, at C-6. 55 For instance, the Task Force No. 2 Report to our Study Group 6 reported, at B-18, that of approximately 80 administrative claims reviewed by the Defense Supply Agency, only one was denied solely on the basis of refusal of the indemnitor to contribute what was considered to be equitable. This unpublished report is part of the Commission's files.

Patent Compensation Board

A second alternative to litigation to enforce the patent rights of an individual is the Patent Compensation Board of the Atomic Energy Commission. Obviously, this procedure is of limited use. Under the Atomic Energy Act of 1954, the Commission may declare certain patents to be affected with the public interest and thereby provide for the compulsory licensing of such patents in the atomic energy field.56 The procedure also covers claims for awards for use of an invention in the atomic energy field even though not declared affected with the public interest. The proceedings before the Patent Compensation Board therefore are not solely in the nature of a patent infringement procedure, but rather are for the grant of an award. The questions of infringement and validity are presented and do enter into the consideration of such an award. The proceedings entail the filing of formal briefs and the taking of testimony with cross-examination. Due to the nature of the proceedings, much time, effort, and presumably money are expended by both Government and patentee to reach a satisfactory accord.

"Preprocurement Licensing"

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Another alternative is the preprocurement licensing procedures of the National Aeronautics and Space Administration. Briefly stated, this procedure provides that if a privatelyowned patent which will be infringed by a specific procurement meets certain requirements of enforceability and commercial acceptance, NASA may take a license under the patent, effective only for the identified procurement, and consider the royalty in evaluating competing bids. In the event an unlicensed bidder is awarded the contract, the patent owner will receive the royalty payment from NASA.58 An expedited procedure for obtaining patent licenses before the infringing acts occur is required by this policy. This differs from the

5642 U.S.C. § 2183 (a) (1970).

57 NASA PR 9.102 (Rev. 4, 1970 Ed.).

For the GAO's reaction to and comments on the NASA policy, see 46 Comp. Gen. 206 (1966), and Comp. Gen. Dec. B136916 (Apr. 15, 1968, and May 28, 1970). For a detailed discussion of the background to the development of NASA's policy, see Mossinghoff and Allnutt, "Patent Infringement in Government Procurement: A Remedy Without a Right?," 42 Notre Dame Law Review 5 (1966).

policies of other agencies, where privatelyheld patents are ignored in procurement award and reliance is placed on the consideration of infringement claims many years later as the normal method of compensating patentees.

The preprocurement licensing procedure, while favorably accepted by industry, has received little actual use by NASA because of the R&D nature of NASA procurement. Preprocurement licensing has been considered for adoption by other agencies, but has not been accepted either because of the lack of statutory authority to purchase licenses in patents, the lack of trained patent personnel to evaluate infringements, the probable burdens involved in this expedited procedure, or the effect of this procedure on the use of patent indemnity provisions.60

The Underlying Considerations and Issues Involved

Two factors must be considered in arriving at a sound policy in this area. First is the extent to which the Government or its contractors should be free to avoid the normal consequences of patent infringement and, in particular, injunctive relief against infringement. The second is whether policies which discount the rights of patent owners will tend to discourage invention, especially invention related to Governmental needs.

Allowing injunctive relief against Government contractors could disrupt Government programs. Where a patent is vital to the performance of the contract, it would tend to limit competition to the patentee or those whom he chooses to license. In some cases the Government would be forced to use a high-cost producer rather than a low-cost producer simply because the former controlled a patent vital to only one subsystem of the entire item. We believe these are real and important considerations that form a backdrop to any recommended policy.

59 NASA's revision to its preprocurement licensing policy limited its applicability in the research and development area to those R&D contracts wherein the delivery of hardware or the use of a specific process is contemplated at the time the proposals are solicited (NASA PRD No. 70-14, Nov. 2, 1970).

60 See ASPR Case No. 66-196 and 68-148 and Comp. Gen. Dec. B162385 (Nov. 20, 1967).

We are less impressed with the arguments that failure to recognize private patent rights will make private parties unwilling to risk their own funds, time, and effort in the development of products to fulfill a governmental need. While there may be such an effect, it is highly problematical. In the first place, the immediate effect of the particular policy chosen is not on future invention, but on the rights of current patentees. Certain policies would improve their bargaining positions vis-a-vis the Government or its contractors or potential contractors. Others will weaken their positions. In any case, it is a fact that the invention under dispute has already been made.

The question that remains, then, is to what extent Government policy in this area can influence future invention and innovation. We believe that the possible patent protection a company will obtain with respect to inventions it might develop from its own research and development effort aimed exclusively at the Government market is, at most, but one factor out of many bearing on the decision to engage in the research. If the research also has potential commercial application, this factor becomes even more diluted. Further, where the particular company or division of the company is already directly involved in Government contracting or subcontracting, it would seem that patent protection would become an even more minor factor.

The fact that we discount the argument that Government policy in this area plays a significant role in the incentives for development of inventions does not mean that we reject completely the idea that it has some effect. We merely wish to emphasize that this effect is insufficient to overcome the need for maintaining an atmosphere where Government procurement can proceed without costly interruptions. However, we see no sound reason why an atmosphere cannot be created which would give greater assurance to patent holders that they will be compensated for their efforts and not put at a disadvantage by having to compete with persons who make use of their patents without bearing, through royalties, the costs of developing them.

Appendix B of this part includes draft legislation which would accomplish the legislative recommendations that follow.

AUTHORIZATION AND CONSENT

Recommendation 4. Amend 28 U.S.C. § 1498 to make authorization and consent automatic in all cases except where an agency expressly withholds its authorization and consent as to a specific patent.

We see a need to continue the antiinjunctive aspects of 28 U.S.C. § 1498. In fact, the law should be strengthened to make it clear that authorization and consent is automatically given, with the proviso that it may be withdrawn as to specifically identified patents. We would make authorization and consent automatic in order to eliminate any doubts regarding the interpretation of these provisions given by the Comptroller General. Making consent automatic except where specifically withdrawn should eliminate uncertainties in some cases as to whether there is authorization and consent. Such doubts can lead to additional contingent costs in bids.

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We would, however, make it clear that agencies could specifically withdraw authorization and consent as to patents identified at the time of contracting. There are a few circumstances when this would be useful and, in any case, in the course of specifically identifying the patent, the possible effects of withdrawing authorization and consent would become clear. We reject the concept that agencies should be allowed to withdraw authorization and consent as to broad classes of contracts or items (such as supply contracts for standard commercial items). Such a policy could have substantial anticompetitive effects which would not be visible in many cases. This would be especially true where the technical specifications are such that the use of a patented invention is necessary if a responsive bid is to be submitted.

PATENT INDEMNITY

Recommendation 5. Amend agency regulations and clauses to provide that all contractual warranties against patent infringement be provided by specific contractual language and not by implication.

Agencies should take steps similar to those

61 46 Comp. Gen. 277 (1966).

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