6 Incentives for Innovation

A key challenge to ensuring participation in the innovation process for national security is providing adequate incentives to potential innovators. A large number of diverse innovators will help to enable, accelerate, and enhance technology innovation, which in turn will advance technological superiority and support national security objectives.

Incentives can be difficult because of the complex relationship between the U.S. government and innovators, be they individuals, teams, individuals within a company contracting with the government, or individuals within a company subcontracting to another company that contracts with the government. Analyzing the complex web of interrelationships reveals that the U.S. government may not be able to directly incentivize innovators and it does not exercise control over how intermediaries incentivize innovators.1 The government must incentivize innovators to innovate and also ensure innovations reach the U.S. government to meet national security needs.

When innovators are part of small businesses that must work through established large prime defense contractors, the difficulties become greater—especially since the government does not have control over those relationships (as discussed in chapter 4). Implicitly requiring small businesses to work through these intermediaries has several side effects, including that prime defense contractors may put requirements on small businesses that can in effect preclude them from participating.

Even when innovators are part of companies already working directly with the U.S. government, incentives can be a challenge. Obviously the government can benefit from an innovation only if that innovation becomes known to the government. Such knowledge requires that the innovator employed at a company communicate the innovation’s existence to the right people within the company and that the company then bring it to the government’s attention. The latter can be impeded by government “overreach” (explained below) when it comes to securing rights to innovations that further national security. This “overreach” may further reduce innovators’ incentives to continue innovating.

Since the government does not directly incentivize employees within a company, it must rely on the company to provide the appropriate incentives. Evidence shows that many contractors are unable or unwilling to provide adequate incentives to their employees; concerns include a lack of monetary support during invention disclosure processes, low monetary as well as non-monetary incentives for patents, and a lack of encouragement by management for employees to put forth inventions.

At most large defense contracting companies, employees must account for forty hours of work each week on specific, approved tasks. Submitting documentation as part of an invention disclosure process is typically not an approved task, so employees are left to disclose inventions on their “own time.” On the other hand, when a company uses its internal funds to support an employee’s research and development activities, like completing invention disclosure paperwork, it is called internal R&D (IR&D). Looking across departments of large prime defense contractors, few provide employees charge numbers to which they can allocate such time on their time sheets (which are used for billing the government as part of contracts). This burden on employees results in fewer inventions being properly filed, as evidenced by the high number of incomplete invention disclosures that did not result in either a patent filing or a trade secret. The primary reason cited for an incomplete invention disclosure was a lack of technical detail; this lack of detail accounted for nearly one-third of closed disclosures (see fig. 24). Nearly two-thirds of the invention disclosures that were not completed because of a lack of technical detail were cases in which an employee was required to develop the invention and complete the invention disclosure paperwork on his or her own time without company support (fig. 25). Survey data confirm that employees consider the lack of time or funding support as the primary obstacles to submitting invention disclosures.

Even when there are monetary incentives for employees, they tend to be trivial compared to the revenue the company generates from an invention. Depending on the number of employees involved in a given successful invention disclosure (i.e., one selected for patent filing or as a trade secret), these monetary incentives typically range from a few hundred to a couple thousand dollars per inventor. Employees reported that these monetary incentives were not sufficient, in many cases, to motivate them to complete the process. Non-monetary incentives were considered unremarkable, such as a certificate of achievement or perhaps recognition at a company-sponsored event. Incentives also tend not to be tied to the significance of the national security need the innovation addresses or the financial incentives the company receives from the R&D contract or licensing.

Beyond the lack of financial support for employees, there can also be a lack of management support and encouragement of invention disclosure. Technology managers want their employees to be innovative, but they do not always support the process of identifying innovations to the company so that such innovations can in turn be brought to U.S. government customers. My research into invention disclosures also revealed inconsistent support in terms of defense contractors assigning mentors to support innovators through the invention disclosure process; such support is relevant because the process can be lengthy (several years) and cumbersome, and there can be a perception of favoritism within the selection committees. Several employees spoke of feeling excluded because the selection committee had “favorites.” Overall fewer than half the employees surveyed said that they are encouraged to submit invention disclosures as part of their job responsibilities (fig. 26). Many employees cited the lack of a charge number as a deterrent, as mentioned above, while others working on secure programs cited supervisors’ concerns about leaking classified information, as well as a general lack of encouragement by the leadership of such programs regarding invention submission. Some employees called attention to the specific performance metrics used to calculate their bonuses and salary increases and the lack of a performance metric pertaining to intellectual property. Finally, some employees noted a preference by leadership to hold inventions as trade secrets rather than filing patents.

Such observations comport with my own experience. In 2011 I was working with a large defense contractor on a classified program, while also working on non-classified programs. My supervisors for the latter encouraged me to file invention disclosures and showed me how to do so through a company web portal accessible to all employees. With their support, I filed three.

The web portal specified, “Do not enter classified information,” but it provided no direction to another process for filing a classified disclosure or indication of whom to ask. I had invented many things for the classified program, but my supervisors did not understand why I would want to file invention disclosures on those and discouraged me from doing so. In certain cases they were concerned that it would be a lot of effort to work with security to ensure that classified information was handled properly and could create unnecessary risk, and this effort would be a distraction from working on the program. In such situations I filed nothing.

Of course the government benefitted from the subset of the inventions that were incorporated in the technology we delivered. But by the company’s choosing not to file a patent, the government never got information on how certain things from which it benefited actually worked—and thus was left unable to take those benefits further. In contrast, if the company had filed a patent, the company would have had to explain how the invention worked as required in the patent disclosure process. Inventions that were ultimately not implemented in the technology we delivered were not provided to the government. Thus potentially more effective solutions that were not implemented for other reasons, such as cost, were not disclosed. At some time in the future, when the forward march of technology made those alternative ideas cost effective, the government—and U.S. national security—would not have the benefit of that innovation.

Co-opting Inventions in the Name of National Security

The regulatory regime governing secure U.S. government R&D has afforded certain allowances to government agencies to co-opt or acquire innovations from innovators with the justification of national security. This allowance has significant effects on the ability to incentivize participation in the process of innovating in areas of importance to national security.

The U.S. government has recognized these effects. The DOD Acquisition Law Advisory Panel, commissioned by Congress in 1991 to review and streamline defense acquisition laws, noted that “commercial technology has outpaced DOD technology in a number of areas of vital importance to the development of weapon systems” and that technology owners have an “increasing reluctance to use their best commercial technology if there is a possibility that DOD will take the intellectual property rights in that technology.”2

I explained the concept of classified patents, or patents protected by secrecy orders, in chapter 2. Given that secrecy orders prohibit inventors from publishing or disclosing any information related to an invention, classifying a patent essentially removes all or most commercial benefit a company could have derived from the innovative technology.3 Congress provides a right to compensation for the inventor in such situations under 35 USC § 183: “a sum not exceeding 75 per centum of the sum which the head of the department or agency considers just compensation for the damage and/or use.” But even assuming that all parties agree to the amount that is “just” compensation, awarding only 75 percent of that amount can easily be perceived as less than adequate and may lead to companies either not innovating in national security areas or selecting not to disclose certain innovations to the government to avoid the risk that the government will classify the technology.

I have experience with this issue. I was a co-inventor on four classified invention disclosures while I was an employee of a large defense contractor. During an Invention Review Committee meeting, we inventors were told that the disclosures met the criteria for patentability, except that the subject matter was classified. One committee member said, “Classified patents are useless because they are not enforceable until they are declassified. They are usually declassified only when the invention is useless now anyway.” It was a catch-22. Thus there was a sense that there was no commercial value to a classified patent. Since we were competing with others in the industry, the committee decided to keep the inventions as trade secrets and not file them as classified patents. As inventors, we received about $1,000 per disclosure.

Authorization and Consent

The government allowances to co-opt innovations for national security, which reduce incentives for innovators to participate in the process, go beyond classified patents. They are wrapped up in what is known as “Authorization and Consent,” a law that ensures ready U.S. government access to key national security technology inventions. The law provides statutory immunity to government contractors, absolving them of liability for infringing competitors’ patents when done at the direction of the U.S. government (whether that direction is express or implied).4 Authorization and Consent (A&C) is codified in the law as 28 USC § 1498, along with its corresponding FAR Clause 52.227–1.

The purpose of this World War I–era law was “to facilitate military and other governmental missions.”5 Indeed when Authorization and Consent was first conceived, U.S. Supreme Court chief justice William H. Taft recognized that the protection was needed to “stimulate contractors to furnish what was needed for the War, without fear of becoming liable themselves for infringements.”6

It is important to understand the century-old environment in which the Authorization and Consent law was enacted. The United States had recently entered World War I, which had been raging for nearly half a decade. It was the bloodiest war anyone had ever seen. In the spring of 1918 the Germans had launched a major offensive on the Western Front, a stunning move that shook the confidence of the Allies in their ability to win the war. Then, in the middle of the war, a defense contractor with a patent on turbines (fig. 27) sued another defense contractor, seeking an injunction to keep its patented technology from being used.7

Photographs from the era (figs. 28 and 29) of specific ships cited in court proceedings that fought in World War I will reinforce in readers’ minds just how much time has passed since Authorization and Consent was the “answer” to the government’s problem and how different things are in the twenty-first century.8 As the photographs show, the United States was waging war with ships powered by steam turbine engines.

The District Court denied the infringement claim, but then the Circuit Court of Appeals reversed the lower court—thus affirming the infringement claim—but did not allow an injunction. The case made it all the way to the U.S. Supreme Court, which affirmed the ruling of the Court of Appeals regarding the infringement and also stated that a 1910 act of Congress written to protect patent owners did not preclude an injunction. The case was remanded back to the District Court to reconsider an injunction.

The established right of a patent owner to seek such an injunction had never before been tested at such a pivotal point during a war. If granted, the injunction would stop the supply of critical turbines to the United States as it sought to fight the enemy. Before that could happen, then secretary of the U. S. Navy, Franklin Delano Roosevelt, wrote an urgent letter to the Senate requesting a statutory amendment to prevent injunctions against defense contractors.9 In unusually swift action, Congress enacted the requested amendment within weeks.

That amendment represents the beginning of Authorization and Consent. Enacted on July 1, 1918, in the heat of wartime (but not limited to wartime), the amendment states that the sole remedy against either the U.S. government or a defense contractor is a suit against the U.S. government. It laid the groundwork for statutory immunity—in other words, that government contractors can intentionally infringe patents. And, it turns out, Authorization and Consent can have a devastating effect on the patent holders who have invested in R&D to develop the innovations at the heart of our nation’s security.

The Authorization and Consent law is not limited to projects involving national security, and “the Government has exercised this right very widely—giving authorization and consent to use private patents on almost all Government contracts.”10 When Authorization and Consent is included in contracts, the contractor can “intentionally infringe patents in the context of government contract work without incurring any liability,” while the patent owner is left to pursue a claim for “reasonable compensation” against the government in the U.S. Court of Federal Claims but cannot seek an injunction or obtain any remedy from the infringer.11

From a patent holder’s perspective the sole remedy of “reasonable compensation” is a significant limitation on the remedies otherwise available for willful patent infringement in a traditional patent case. Under 35 USC § 271, the patent holder in a traditional patent case can seek an injunction preventing continued infringement and can seek damages in the form of a reasonable royalty, lost profits, and even treble damages and attorneys’ fees for willful infringement. Under Authorization and Consent, though, patent owners may not be aware that their inventions are being used. If they do find out, they face high legal fees to obtain compensation (which is limited because they cannot recover damages or their legal fees). Therefore Authorization and Consent can be a disincentive to innovate in national security areas. The disincentive can be seen clearly in the story of Tenebraex, a small company that developed an anti-reflective coating for rifle scopes.

Tenebraex invested its own money; no U.S. government funding was used in the R&D. The company filed for and was granted patents on its invention. Then the U.S. Army found the coating to be essential for the military because it “eliminated the glare from rifle scopes and also prevented the scope lenses from reflecting light that would be visible to the enemy.”12 In fact Tenebraex’s anti-reflective coating was so useful that the army solicited quotes for machine-gun sights with the same coating and even cited the exact specifications in Tenebraex’s patent.

Tenebraex decided to submit a quote in response, partnering with Elcan Optical Technologies, a company experienced in delivering scopes to the army and a subsidiary of Raytheon, one of the Big Five defense contractors. But instead of Tenebraex’s winning the contract, or even being selected as a subcontractor to Elcan, the army made an astounding decision: it awarded Elcan the contract, bypassing Tenebraex altogether. Elcan/Raytheon manufactured the machine-gun sights by openly infringing Tenebraex’s patent.13 “Our procurement,” said the counsel of the Army Materiel Command, “is based on [getting] the best product for the best price, not whether someone has a piece of paper saying he has intellectual property rights.”14

Tenebraex’s CEO was devastated. Describing the impact of Authorization and Consent, he said, “An infringer will always win a competitive bid because the poor sap who invented the technology has to include the often substantial cost of his R&D in his bid price, while the infringer does not. And even if the patent holder after great expense and effort secures a royalty from the Federal Government, that royalty . . . does not pay for employees, ongoing operations or more R&D.”15 The competitive advantage of the infringer was also observed by the DOD Acquisition Law Advisory Panel, which recognized that “the infringer can offer a price which does not include recovery of the costs of making the invention.”16

Tenebraex, like many other companies, had little choice but to spend hundreds of thousands of dollars in legal fees just to obtain a modest compensation from the government for use of its patented technology by a competitor. The result is that companies can be “discouraged [from] figuring out ways of keeping our soldiers safer.”17

Authorization and Consent creates a tension between two goals: on the one hand, the encouraging of robust and open innovation—that is, the finding and development of the best, most innovative technologies to further the government’s mission—and, on the other hand, national security, which requires the government to have access to critical patented technologies. This tension is not trivial to resolve. It is just as important to ensure participation by contractors who did not invent the critical technology but who may be the best suited to deliver it (as noted by Justice Taft) as it is to ensure the participation and continued innovation of the inventing company so that future critical technology is actually developed and brought forth to the government. That is, both national security and innovation interests favor enabling broader participation. The ideal situation, from both the innovation and national security perspectives, would be to incentivize participation from both types of participants: the innovators and those best suited to deliver the innovation. Figure 30 summarizes this.

The current Authorization and Consent system does not always achieve the national security goal. Instead it creates additional tensions with innovation by placing control over innovator participation with the government agency overseeing a contract. Federal regulation 48 CFR 27.201-1 requires that the Authorization and Consent clause be included in contracts, except when the complete performance and delivery are outside the United States or when simplified acquisition procedures are used, situations that represent only 2 percent of contracts.18 There are several variants of the clause that offer varying degrees of protection to contractors. The most favorable variant to a potentially infringing contractor is Alternate 1: “The Government authorizes and consents to all use and manufacture of any invention described in and covered by a United States patent in the performance of this contract or any subcontract at any tier.”19 In addition to selecting which variant to include, contracting officers also have the discretion to include the accompanying patent indemnity clause, which “transfers liability to compensate the patent owner on to the contractor.”20 Further, contracting officers can also include a waiver of indemnity for specific patents the contracting officer identifies.21

Therefore, when an agency “wants patented technology, but does not want to pay the premium associated with contracting with the patent owner,” the agency can include the Authorization and Consent clause variant in the contract with the most protection for the infringing contractor and write contract specifications that make it necessary to infringe the patent to perform the contract.22 Such an approach hurts the patent owner while encouraging participation by low bidders. If the agency does not want to invite full competition and instead wants to work directly with the patent owner, the agency can include a more restrictive variant of the Authorization and Consent clause and include the patent indemnity clause, thus deterring competition for the bid “without having to address public concerns about favoritism and economy.”23 Competition is deterred in such a situation because bidders are forced to internalize the cost of potential infringement through the indemnity provision that shifts liability back to the contractor.

It is not clear whether such manipulation over participation advances national security interests or how widespread this practice is, but it is certainly difficult to detect, measure, or deter under the current system. Approaches that limit such agency discretion and provide a more purposeful, directed framework would be helpful.24 Such approaches would require addressing the degree of discretion government agencies have over which variant of the Authorization and Consent FAR clause is included in contracts, whether to include the patent indemnity clause, and whether to include a waiver of indemnity for specifically identified patents. Congress should provide guidance to agencies on how they must apply the Authorization and Consent clauses in contracts to level the playing field and increase participation by key players in areas of importance to national security.

One principle that emerges from evaluating this issue is that the tension is perhaps created more by the government’s unwillingness to compensate for innovation adequately rather than from the tension between national security and innovation. That is, it is understandable that both the innovator and the contractor best suited to deliver the innovation should be incentivized to participate, and therefore immunity for the delivering contractor may be necessary to balance interests. Problems arise, however, because the Authorization and Consent rules seem to protect the contractor that delivers the innovation over and at the expense of the innovator. This does not mean that the innovator is not compensated (recall that the patent holder can seek reasonable compensation by filing suit in the U.S. Court of Federal Claims) but that the patent holder is not compensated sufficiently to ensure a continued incentive to participate. Thus the challenge becomes finding the answer to these questions: What is reasonable compensation? What type of compensation system is needed to ensure continued participation from innovators?

The feeling of property owners that they have not been justly compensated when their property has been taken has long been an issue; the taking of land through eminent domain may be the most familiar example. Case law shows that patent owners such as Tenebraex are not alone in feeling inadequately compensated for the “taking” of their intellectual property under the Authorization and Consent system.25 The issue takes on additional significance when it results in reduced incentives for inventors to innovate in areas of importance to national security. For example, in Robishaw Engineering v. United States—a dispute related to patent license negotiations between the U.S. Army and a patent holder—the District Court focused on an entitlement to “reasonable compensation” rather than a right to be “made whole” (a type of remedy requiring compensation to fully account for a wrong).26 While the inventing company got only “reasonable compensation,” the competitor that was selected was “able to generate revenue, earn profits (which would never be disgorged), and build business relationships that would give it an economic advantage in future competition with [the inventing company].”27 Similarly the Federal Circuit Court held in another case that a limited royalty of 10 percent was reasonable even though it was less than the “full compensation” that a traditional suit would have provided.28 In another Federal Circuit case the court held that “a reasonable royalty is not equivalent to either the patent owner’s lost profits or the cost savings realized by the government in selecting a different contractor than the patent owner.”29 In each situation the innovating company was limited to “reasonable compensation” and missed out on the additional economic upside of its inventions.

These cases show that “reasonable compensation” is simply not sufficient as an incentive for a company to remain in the business of innovating for the U.S. government. Unless the innovating company can reap benefits such as ongoing profits and business relationships, it will not have an incentive to continue to compete for government contracts. From a policy perspective, the goal should be not merely legally adequate compensation, but rather the provision of the compensation necessary to ensure a continued incentive to innovate. Such a policy would also be aligned with the economic reality that innovation is not free and that the cost of R&D must be internalized somewhere.

The current system does not force the government to internalize innovation costs into its pricing and instead offloads those costs onto the innovator. The consequence should not be a surprise: innovating companies lose their incentive to continue to innovate while their competitors enjoy a huge incentive to leverage those same innovations—which are not their own—without having to internalize the costs.

As of this writing, Congress has yet to amend the statute. As a result, even competing contractors have acknowledged the beneficial position in which it puts them. For instance, as Elcan/Raytheon patent counsel William Schubert wrote to Tenebraex, “Due to the Authorization and Consent clause of the Federal Acquisition Regulation 52.227–1, we have no need to examine either the coverage of the referenced patent or its validity.”30 That sentiment is not unique. Key personnel at defense contractors told me in interviews that the Authorization and Consent clause has affected their business models and R&D investment areas. As one general counsel of a Big Five defense contractor put it, “Authorization and Consent makes patents useless for defense contractors.”

In summary, the Authorization and Consent clause may be discouraging participation by innovators in the innovation process for areas important to national security. Because the U.S. government is not forced to internalize the cost of innovation, there are consequences for long-term access to innovations that support national security. The Authorization and Consent system could be said to be compromising long-term national security success for short-term gain. Taking an invention to solve a near-term national security problem may be important, but doing so without providing corresponding compensation to the innovator may well result in a future reduction in the number of innovations available to the U.S. government.

The Authorization and Consent Workaround

The government’s national security interests are best served by access to innovations and the ability to select the companies best suited to deliver those innovations to meet national security needs. Some companies, however, have taken measures into their own hands and find workarounds to let them hold on to their innovations. The most common method I came across is for innovating companies to designate innovations as trade secrets (a practice that sometimes requires creative accounting). This practice jeopardizes the government’s national security interests because it prevents the government from having the innovation delivered by any other source. I call this practice the Authorization and Consent workaround. Some contractors work around the bind in which Authorization and Consent places them by keeping innovations in house—meaning they do not allow the core innovation or “secret sauce” to be disclosed through a patent or in some other form to the government. Training courses offered by prime defense contractors to their employees even include information about the trade secret option and its benefits over patenting given the Authorization and Consent regulatory regime. One such IP training course notes the following about Authorization and Consent:

It means we have to actually sue the government in order to get paid for our invention. It is not something we like to do—sue the government. So this Authorization & Consent statute is a significant limitation to the power of patent enforcement in some of the markets where we serve. What this means is that [Company A] can openly copy a [Company B] patented technology in a fighter jet that they deliver to the U.S. government and we cannot use patent law to stop that infringement. On the other hand, should [Company A] employ this same technology in a jet delivered to a commercial customer, they would have to obtain a patent license from us or face the consequences of a patent suit.

Of course companies cannot withhold access to innovations if the government paid for the R&D that led to the innovation. But if the innovation resulted from either internal R&D funds or the efforts of an employee working independently (on his or her “own time”), the company is afforded stronger IP rights. The U.S. government generally receives only “limited” or “restricted” rights to intellectual property that defense contractors develop “at private expense,” as negotiated in a U.S. government “IP Assertion Table” in all government contracts (these terms are common in U.S. government contracting).31

Four of the Big Five defense contractors receive greater than 80 percent of their sales revenue from the U.S. government, and they each spend less than 5 percent of sales revenue on internal R&D (the exception is Boeing, which has high commercial sales).32 But some defense contractors are notorious for using “creative accounting” to show that most of their employees’ inventions were developed at private expense—as figure 31 shows—even though those same employees spend the vast majority of their time working on government contracts.

The Authorization and Consent workaround illustrates how defense contractors can choose not to participate in the process of innovating for the U.S. government, a choice that does not serve the interests of national security. It is a direct result of flawed incentives. Efforts to overcome it would benefit from a focused analysis on the Authorization and Consent incentive system, including the development of metrics and collection of data. Such an investigation could reveal the broader and deeper effects of the workaround practice and could help identify solutions to correct it.

Government Handling of Proprietary Data

The struggle over incentivizing both types of participants—the inventing company and the company best suited to deliver the invention—has also played out in the handling of contractors’ proprietary data. The 1947 Army Procurement Regulations favored the company best suited to deliver the technology; the government could take a company’s proprietary data and share it with competitors. The 1955 Armed Services Procurement Regulation (ASPR) § 9-202 favored the inventing company instead, stating, “It is the policy of DOD to encourage inventiveness and to provide incentive therefor by honoring the ‘proprietary data’ resulting from private developments and hence to limit demands for data to that which is essential for Government purposes.” So an inventor would not have to say how the product it delivered to the government accomplished a task as long as the product accomplished the task successfully. Further favoring the inventing company, in 1964 the data rights policy changed to prevent the government from sharing proprietary data with competitors of the inventor. However, under public pressure regarding the high cost of military procurements, the pendulum swung back in the 1980s to favor the company best suited to deliver technology at a low cost. Although protecting contractors’ proprietary data can bring innovators to the table, it can also lead to entrenched positions and can reduce future competition. Laws and regulations continue to evolve.

A 2006 court case highlights the tension between incentivizing the innovator versus the company best suited to deliver the innovation. The case concerns a small business, Night Vision Corp., which developed prototype night vision goggles under the SBIR program and successfully met the government’s requirement by expanding the field-of-view of the googles without compromising image quality. In Night Vision Corp. v. U.S., the small business complained that though it successfully completed SBIR Phases I and II, it was deprived of Phase III, which instead was awarded to its competitor, an established defense contractor.33 The success of the small business in the Phase I and II contracts was undisputed. Night Vision Corp. sued for breach of contract, claiming that the success of Phases I and II should have resulted in the Phase III contract award. The court, though, held that the government agency was able to award Phase III to a competitor of the small business. Technical data owned by the small business was provided to the competitor. This case is particularly surprising given that Congress had an intention and policy goal for the SBIR program to be favorable to small businesses.34

Government Overreach in IP Policies

The U.S. government may have overreached in how it set IP policies in its early-stage implementations of open technology innovation strategies. The IP policy of the DARPA FANG-1 challenge, introduced in chapter 3, provides an illustration.

The baseline IP rights policy for the FANG-1 challenge was that the U.S. government would retain “unlimited rights” to all designs, even those not selected or awarded prize money. If participants wanted to retain stronger IP rights, they would first need to understand the policy and the FAR and DFARS well enough to understand that they needed to submit particular documents about the specific IP they wished to retain for negotiation in advance of entering the competition and generating the IP. To ensure the particular documents were submitted correctly and to negotiate those rights with the U.S. government, a participant would most likely need to retain an attorney. Further, the IP policy stated that trying to assert IP rights could affect the U.S. government’s evaluation of the potential participant. It is not difficult to imagine that these regulations dissuaded at least some potential innovators from participating in the process. In fact a 2017 GAO report found that IP concerns were dissuading companies from working with the DOD.35

A direct comparison of the FANG-1 IP policy and that of a challenge on the open innovation platform Innocentive (discussed in chapter 1) amplifies this point. Here is an excerpt of the original FANG-1 policy language:

Offerors responding to this BAA requesting a procurement contract to be issued under the FAR/DFARS shall identify all noncommercial technical data and noncommercial computer software that it plans to generate, develop, and/or deliver under any proposed award instrument in which the Government will acquire less than unlimited rights, and to assert specific restrictions on those deliverables. . . .

In the event that offerors do not submit the list, the Government will assume that it automatically has “unlimited rights” to all noncommercial technical data and noncommercial computer software generated. . . .

In accordance with DFARS 252.227-7013 Rights in Technical Data–Noncommercial Items, and DFARS 252.227-7014 Rights in Noncommercial Computer Software and Noncommercial Computer Software Documentation, the Government will automatically assume that any such GPR [Government Purpose Rights] restriction is limited to a period of five (5) years in accordance with the applicable DFARS clauses, at which time the Government will acquire “unlimited rights” unless the parties agree otherwise. Offerors are admonished that the Government will use the list during the evaluation process to evaluate the impact of any identified restrictions and may request additional information from the offeror, as may be necessary, to evaluate the offeror’s assertions.36

In sharp contrast, Innocentive explains its IP policy in plain English—a procedure that ought to lead to increased participation. Perhaps more important, however, is that Innocentive does not afford the sponsor (what it calls the “seeker”) IP rights to any of the ideas generated by participants (the “solvers”) that were not selected/awarded. Here is an example of Innocentive’s IP policy language in its description of a “theoretical IP transfer challenge”:

This Challenge is a Theoretical-IP Transfer Challenge, meaning that Solvers must relinquish all rights to the Intellectual Property (IP) for which they are awarded. By contrast, Theoretical-Licensing means that the Seeker is requesting non-exclusive rights to use the winning solution. For these forms of a Theoretical Challenge, Solvers that do not win retain the rights to their solution after the evaluation period is complete. The Seeker retains no rights to any IP not awarded.37

This seems like a fairer policy and one that may encourage Innocentive solvers to be less risk averse in their proposed approaches. For instance, consider a hypothetical situation in which a solver has an innovative, risky design idea for FANG-1, one that has a low probability of winning because of the lack of clarity on the metrics for evaluation (discussed in chapter 3). Nevertheless, the solver wants to try. Under DARPA’s FANG-1 IP policy, the solver submitting such a design would give up some IP rights regardless of whether any prize money was won. With Innocentive, a solver could feel safe submitting ideas irrespective of their likelihood of winning without fear of losing some of the IP rights. In other words, the Innocentive participant has nothing to lose. The DARPA FANG-1 participant has everything to lose. Rational participants may drop out or fail to submit riskier ideas in the latter case—to the detriment of national security needs.

Although DARPA leaders sought to develop a favorable IP policy to encourage broad participation, they were constrained to operate within the confines of the FAR and DFARS.38 At minimum the IP policy should be understandable and clearly communicated to participants. The new prize competition law, 15 USC § 3719, should be amended to include the provision to disclose the IP policy to participants “in a clear and reasonable manner,” as is required in the new crowdsourcing and citizen science law, 15 USC § 3724.39

As was the case with the government handling of proprietary data discussed above, Congress can set the policy for managing IP rights. Section 10 USC § 2320, Rights in Technical Data, states that the secretary of defense shall prescribe regulations regarding technical data rights. However, the statute does not explicitly say that innovators have the burden of listing exhaustively or losing their rights; placing the burden on the innovators is how the regulation was written, specifically DFARS 252,227-7013(e). In the example of Night Vision Corp., failure to adequately mark the data rights on the goggles was how the government justified sharing the small business’s information with a competitor. This regulation benefits the government by putting the onus on the innovator; however, it disincentivizes participation. Thus there is an opportunity for Congress or the agency regulators to modify this regulation to better incentivize participation.

Fixing the Flawed Incentives

What should the U.S. government do to confront the challenge of incentivizing participation in areas of importance to national security? As with the tension between secrecy and open innovation, the answer will not be found within the confines of a specific open innovation strategy implemented in a particular organization or even a particular U.S. government agency. A broader approach is required.

Over the years the U.S. Court of Appeals for the Federal Circuit has issued decisions related to the Authorization and Consent clause that have significantly limited a patent owner’s protection against infringement by government contractors by reinforcing the idea that “reasonable compensation” is not the same as being made whole for infringement. Rulings from the Federal Circuit have also permitted the government to escape liability altogether in certain cases. For example, in Zoltek Corp. v. United States, the government awarded a contract to Lockheed Martin that infringed a manufacturing process patented by Zoltek.40 Zoltek sought compensation under the Authorization and Consent framework. However, the Federal Circuit determined that Authorization and Consent did not apply, even if there was infringement, because some of the manufacturing had been outside the United States (in Japan), so no compensation was owed.41

On the other hand, the Court of Federal Claims has shown movement toward closing some loopholes that may have previously allowed the government to escape liability, once even going as far as finding “implied” Authorization and Consent because the government had previously negotiated with the patent owner and therefore was found to have been aware of its obligation to pay royalties.42 “The Court of Federal Claims, since 2008, has reacted to the Federal Circuit’s strict application of immunity by discovering creative approaches for protecting patent owners.”43 For example, in a 2009 case brought against the U.S. government by Boeing over a contract award given to its competitor, Lockheed Martin, the Court of Federal Claims took a broader view on reasonable compensation and awarded “the full compensation that [Boeing] could expect in a private infringement action.”

Addressing the problem through the courts rather than through Congress or the agencies administering secure programs is not an effective, long-term, sustainable solution. The U.S. Court of Appeals for the Federal Circuit is not bound by decisions of the Court of Federal Claims, and each is limited in the avenues available to balance the needs of the patent owner and government. More important, their functions are to apply the law rather than to decide policy; it is up to Congress to weigh interests and develop a framework for incentives. While the Court of Federal Claims lacks the authority to provide non-monetary incentives, Congress could, for example, provide authority for the agencies to condition the award on the contractor’s public acknowledgment of the inventor. That recognition may be valuable to certain innovators.

Congressional action is needed for success, given that Congress has the power to create necessary incentives to ensure participation from the right parties, and congressional action would be required to modify the existing Authorization and Consent law.

Several approaches that could strengthen the rights of the patent owner have been proposed. For example, awarding a mandatory 15 percent royalty has been proposed as an alternative approach to the long and expensive legal debates over reasonable royalty rates while ensuring a large enough incentive for innovators (as is done in a different U.S. law).44 Although there are potential benefits to this approach (15 percent could be a large enough royalty to incentivize innovation), there are also drawbacks: so high a royalty could create difficulties for the government, and with some very large contracts involving multiple tasks it could lead to costly litigation regarding what portion of the total should be used as the base in calculating the royalty. Recent debates in commercial sector patent litigation have shown how hotly contested these royalty damages calculations can be (e.g., Apple v. Samsung smart phone wars over design patents).

Another approach that could strengthen the rights of the patent owner would be to enhance the due process or procedure required before the government can invoke Authorization and Consent. A variety of amendments to Authorization and Consent have been proposed but not implemented. One, for example, is that the government should notify the patent holder of infringement and the right to seek compensation. This proposal was not implemented because the government does not always know when it is infringing a patent. The question of infringement is itself not always clear. Also “because defense contracts typically have security classification and export control requirements, the government would often be able to claim that ‘notification would be contrary to the public interest.’”45 Another proposal was to limit Authorization and Consent to wartime. This was not implemented because the government can assert, at any time, that Authorization and Consent furthers national security.

To address the last concern noted above, and to narrow the application of Authorization and Consent more generally, Congress could limit it to programs critical to national security and then impose additional procedures that would require the government to justify the national security reason for using the patent (such as presenting it to an independent review board or court with appropriate secrecy assurances until a determination is made). The government could also be required to explore opportunities to bring an innovator into the fold to contribute to addressing the national security need or at least offering the inventor the opportunity to be heard on the issue.

Perhaps such a proposal would be analogous to the Foreign Intelligence Surveillance Act (FISA) courts, which oversee requests for surveillance justified on national security grounds. While views may differ as to whether FISA courts (or something similar) become “rubber stamp” overseers, at least such tribunals would offer some mechanism for protecting patent holders’ interests with some “independent” oversight, which currently does not exist in the context of Authorization and Consent. Perhaps Congress would be willing to create a FISA court “equivalent.” Now might be an opportune time for the recent public debate on reform of the FISA court system to extend further and potentially inform development of an analogous system for Authorization and Consent determinations, in turn helping to reduce uncertainty and encourage investment in innovation from both new and existing players to benefit national security. Unfortunately no fix appears on the horizon—even though Congress has known of the risks since at least the time of the 1993 DOD Acquisition Law Advisory Panel report.

Expand the Pie?

Modulating the level of IP rights demanded by the government is one way to further the goal of realizing technology innovation. Another is to go beyond IP rights to incentivize participation from innovators.

In and of themselves IP rights are not a goal. So why do potential participants want them in the first place? There are a variety of motivations, such as obtaining future business that derives from the invention, earning royalties from future contracts, and gaining a competitive advantage from being the one to bring about an innovation. What if the government could address these underlying motivations without compromising on the IP rights it feels it needs? It is not necessarily a zero-sum game.

Any recommendation on the IP rights for an open innovation effort cannot be made without understanding the entire incentive framework. First, the government must recognize the different types of groups that must be satisfied by the incentives. In general these may include private individuals and companies, as well as the employees within a company who are developing ideas and innovating. A system-level evaluation approach would be helpful, looking at the interdependence and interactive nature of elements of the system within and external to the government agency and the innovator organization. Such an approach could consider the full panoply of factors that influence an innovator or other demands on the innovator’s time and energy—including, for example, that the innovator might be part of a company whose incentives are also relevant.

In that regard it is important to consider the employees within a company, not just the competing companies themselves. This consideration can be difficult because the government is generally not able to incentivize employees directly within a company and must rely on the company to provide appropriate incentives. It is also important to incentivize the company, such as with the promise of future business, or else the company may not allow an employee the flexibility to shift focus from a current project that is generating revenue to an innovation project proposal with no guarantee of success. Without such an incentive the company may be hesitant to provide the idea to the government.

There are also ways to reward participants even if they do not win. In the DARPA FANG-1 challenge a single team of three individuals won, but what about participants that contributed beneficial ideas and advanced the state of the art but did not win? Indeed the competition results show that some non-winning teams actually performed better on certain metrics than the winning team, but those metrics may not have been weighted as heavily.46 Other prizes would be an incentive for participants to keep trying and innovating even when their chances of coming in first are low. Of course this option will require broader prize authority approvals that enable flexibility across open innovation strategy design variables.

It is also important to motivate participants to keep trying in future competitions. For example, a participant that does not win but performs better on certain metrics than the winner could receive a subcontract from the winner to contribute in those areas. Such an incentive structure, which could mimic the crowdsourcing incentive structures used by MIT and other competing teams in the DARPA Red Balloon Challenge (introduced in chapter 1), could also ensure that the final results for the government include the best solutions across metrics, not just those most highly weighted.

Participants might also be motivated to contribute in a beneficial way were the government to help them with security clearances, which is an onerous and expensive process, especially for smaller companies or new entrants to the defense contracting industry. It would be a recognition by the government that the participants show potential for contributing to national security projects in the future and a tangible demonstration of the government’s interest in including them in future efforts. Such help is an example of an incentive that is not purely monetary and can have reputational and other benefits for the innovator.

Individual inventors and teams of inventors have specific needs (such as recognition, curiosity, patriotism), which are not necessarily monetary. Policymakers can benefit from in-depth analysis of these motivations and must recognize that incentivizing innovation does not need to be a distributive negotiation; instead we can expand the pie. Motivations go beyond IP rights as well. The debate about IP rights may be obscuring the underlying concern that participants must be incentivized to participate and that IP, while very powerful, is just one of the levers that can be adjusted to do that.