CUTTING CORPORATE WELFARE
GOVERNMENT RESEARCH AND DEVELOPMENT
The federal government invests tens of billions of dollars annually in research and development (R&D), most prominently through the Department of Defense, the Department of Energy, and the Department of Health and Human Services. These investments lead to new inventions and the awarding of thousands of patents -- publicly financed, and frequently publicly owned intellectual property.
Since the early 1980s, the government has routinely given away the fruits of the research it sponsors, granting private corporations exclusive, royalty-free rights to commercialize government-financed inventions while failing to include and/or enforce reasonable pricing requirements in the licenses. The result: a corporate welfare bonanza for biotech, computer, aerospace, pharmaceutical, and other firms.
In the critical area of pharmaceuticals, for example, this research giveaway policy leads to superprofiteering by giant drug manufacturers, who charge unconscionably high prices for important medicines -- costing consumers, and often resulting in the denial of treatments to consumers who are unable to pay high prices. In an irony that must keep the staff of the Pharmaceutical Researchers and Manufacturers Association in stitches, perhaps the largest ripped-off consumer is the federal government -- the same federal government that paid for the drugs' invention -- which must pay extravagant fees through the Veterans' Administration and Medicaid (although the government-brokered prices are lower than those paid by individuals).
It wasn't always so. Following the creation of a major federal role in research sponsorship in World War II, the Justice Department concluded in 1947 that "where patentable inventions are made in the course of performing a Government-financed contract for research and development, the public interest requires that all rights to such inventions be assigned to the Government and not left to the private ownership of the contractor." The Justice Department recommended also that "as a basic policy all Government-owned inventions should be made fully, freely and unconditionally available to the public without charge, by public dedication or by royalty-free, non-exclusive licensing." 
The Justice Department offered what remains a compelling case for non-exclusive licensing: "Public control will assure free and equal availability of the inventions to American industry and science; will eliminate any competitive advantage to the contractor chosen to perform the research work; will avoid undue concentration of economic power in the hands of a few large corporations; will tend to increase and diversify available research facilities within the United States to the advantage of the Government and of the national economy; and will thus strengthen our American system of free, competitive enterprise."
Even in 1947, the Justice Department position was not the uniform standpoint of the federal government. The Defense Department consistently maintained a policy of allowing contractors to gain title to government-sponsored inventions, so long as the Pentagon was able to maintain a royalty-free right to use the invention.
In the ensuing decades, government policy evolved unevenly between different agencies, with some gradual increase in exclusive rights transfers to private parties. The various agency policies favoring exclusive licensing were done without Congressional authorization. Seven Members of Congress and Public Citizen filed suit in 1974 against the disposition of government property without Congressional authorization, but the case was dismissed procedurally on lack of standing grounds.
Beginning in the mid-1970s, however, big business, in collaboration with partners at major research universities, began lobbying for a major transformation in government patent policy. Based on highly questionable evidence, the business-university alliance argued that exclusive licensing was necessary to spur private sector innovation and development of government-funded inventions.
The concerted business-university campaign succeeded in 1980 with passage of the Bayh- Dole Act, which transferred exclusive control over many government-sponsored inventions to universities and small business contractors. Universities were in turn permitted to exclusively license to private corporations, including big businesses.
The Bayh-Dole Act was contentious at the time of passage. Other alternatives proposed at the time included a suggestion by Admiral Hyman Rickover that government inventions be licensed non-exclusively for a period of six months, and that if no party had indicated an interest in commercialization, that the patent then be open to competitive bidding for an exclusive license. A proposal by President Carter, which passed the House of Representatives prior to passage of the Bayh-Dole Act, would have limited the exclusive license granted by government to designated "fields of use." But presented with the Bayh- Dole Act, President Carter signed it.
In 1983, President Reagan issued a Presidential memorandum that instructed executive agencies to grant exclusive rights to inventions to contractors of all sizes.
In 1986, Congress passed the Federal Technology Transfer Act, which authorized federal laboratories to enter into exclusive contracts with corporations to develop and market inventions originating in the federal labs. The federal labs have enormous discretion in working out exclusive licensing arrangements and, without even the universities' interest in earning some reasonable royalty, the labs have effectively given away hugely profitable taxpayer-financed inventions with no public return either in the form of royalties or, more importantly, meaningful restraints on company pricing.
THE TAXOL CASE
Consider the case of taxol, a leading anti-cancer drug.  In January 1991, the National Cancer Institute licensed taxol to Bristol-Myers Squibb. In the Cooperative Research and Development Agreement (CRADA), NCI agreed to abandon its model "reasonable pricing" language. Instead, it used the following:
This exhortatory phrasing set the stage for Bristol-Myers Squibb's profiteering.
Bristol-Myers Squibb now markets Taxol at a wholesale price that is nearly 20 times its manufacturing cost. A single injection of Taxol can cost patients considerably more than $2,000 -- and treatment requires multiple injections.
That NCI gave such total control of pricing decisions to Bristol-Myers Squibb is all the more remarkable because of the extraordinarily minor contribution that the company made to the development of the drug (BMS would claim it has done important collateral research). NCI discovered, manufactured, and tested Taxol in humans. BMS's only contribution to the New Drug Application (NDA) to the Food and Drug Administration was to provide 17 kilograms of Taxol to NCI and to process paperwork. The value of the 17 kilograms was probably less than $5 million. Bristol-Myers did not pay any fee to NCI in entering into the CRADA, and it does not pay royalties to the U.S. government on its billion dollar annual sales revenue from Taxol.
Bristol-Myers Squibb maintains exclusive rights over Taxol due to its control over the health registration data (clinical trial data used for regulatory approval of pharmaceutical drugs), which it gained as a result of the CRADA. The company does not have a patent on the drug, because it was invented by federal researchers. Bristol-Myers Squibb is now leading a major effort -- in the United States and around the world -- to extend the period during which it maintains exclusive control over the data submitted to receive FDA approval. A National Economic Research Associates study found the consumer cost of an additional two years of Bristol-Myers market exclusivity for Taxol will be $1.27 billion, including $288 million paid by Medicare. Some of those without insurance are simply unable to afford the drug. The cost of preventing generic competition throughout much of the rest of the world is to deny most patients access to the medicine altogether.
Though particularly stark, the Taxol case is not unique. Because the federal government is responsible for the resources leading to the invention of a very high percentage of the most important new drugs, especially anti-cancer drugs, the problem of government licensing is frequently posed. 
Where the government hands an annual billion-dollar revenue earner to a private company for a pittance, is it too much to ask the relevant federal agency to enforce reasonable pricing requirements?
This corporate welfare boondoggle has cost consumers hundreds of millions of dollars and almost certainly resulted in treatment denied and a failure to avert preventable cancer deaths. Shame clearly will not work as a disciplinary force to limit corporate welfare abuses.
THE PARTNERSHIP FOR A NEW GENERATION OF VEHICLES (PNGV)
The Partnership for a New Generation of Vehicles (PNGV) is a public/private partnership between seven federal agencies and 20 federal laboratories, and the big three automakers -- General Motors, Ford, and what is now DaimlerChrysler. According to the Department of Commerce, the PNGV "aims to strengthen America's competitiveness by developing technologies for a new generation of vehicles." The program was announced on September 29, 1993 by President Clinton, Vice President Gore and the CEOs of the domestic auto makers.
PNGV's main long term goal is to develop a "Supercar," which is described as "an environmentally friendly car with up to triple the fuel efficiency of today's midsize cars -- that doesn't sacrifice affordability, performance, or safety." The program represents an effort to coordinate the transfer of property rights for federally funded research and development to the automotive industry. The agencies involved include the Department of Commerce, the Department of Defense (U.S. Army Tank Automotive Research, Development, and Engineering Center and the Advanced Research Projects Agency), the Department of Energy (various national laboratories), the Department of Transportation (including the National Highway and Traffic Safety Administration, the Research and Special Projects Administration, and the Federal Transit Administration), the Environmental Protection Agency (the National Vehicle and Fuel Emissions Laboratory), NASA, and the National Science Foundation.
It is hard to imagine an industry less in need of government support for research than the highly capitalized auto industry, which is reporting record profits year after year. Ford pulled in profits of $5.4 billion in the first three quarters of 1999. GM earned $4.8 billion over the same period. The government is supporting research that the industry would or should do on its own in response to market demands, or could easily be required to do in order to meet tougher environmental standards.
The program also poses the issue of the terms under which patents and other taxpayer-funded intellectual property are transferred to Ford, Chrysler, General Motors, and other large firms. This poses the same problems of monopolistic or oligopolistic control over government-funded research as the biomedical research example, and, if any part of the program is deemed worthy of preservation, similar calls for remedies of nonexclusive licenses. The PNGV program is clouded by secrecy, with negotiations over these and other important issues undertaken in secret, with no public comment. 
The structure of the PNGV program creates special anti-competitive problems. The program gives participants an effective exemption from antitrust laws, even though competition in research and development is more likely to yield innovation than bureaucratized collaborative arrangements such as the PNGV initiative.
History provides a clear warning against such arrangements. In the 1960s, the Justice Department filed suit against the automakers for product fixing -- for refusing to introduce air quality enhancing technologies. It is instructive to review excerpts from the complaint in the case. It alleged that the U.S. automakers and their trade association had conspired (a) to eliminate all competition among themselves in the research, development, manufacture and installation of motor vehicle air pollution control equipment; and (b) to eliminate competition in the purchase of patents and patent rights from other parties covering motor vehicle air pollution control equipment."  The auto companies subsequently signed a consent decree that stipulated they would not engage in collusive behavior among themselves and their trade association. The Reagan Administration released the car makers from the consent decree; and now the Clinton Administration, acting as if the collusive history never occurred and was not known, has waived antitrust laws and assisted the automakers in resuming non-competitive research and development.
Today, the PNGV initiative is serving as a smokescreen behind which the automakers hide to protect themselves from more stringent air quality standards. U.S. fuel efficiency standards (known as CAFE) have stagnated under the Clinton Administration, even as global warming and rising gas prices demand sharp improvements in auto fuel efficiency. "Cynics think that the PNGV was simply a politically astute 10-year reprieve for the domestic auto industry from threats of higher Corporate Average Fuel Efficiency standards," writes Earth Day founder Denis Hayes in his book, The Official Earth Day Guide to Planet Repair. (Exacerbating the problem, the Green Scissors Coalition points out, is the fact that the Department of Energy's expenditures on diesel vehicles directs funding into a highly polluting technology.) Deployment of existing technologies could dramatically enhance auto fuel efficiency and reduce greenhouse gas emissions, but the automakers choose not to make these technologies widely available. Notably, the PNGV program itself does not require the deployment in mass production of the technologies it seeks to develop. The leading innovators in fuel efficiency have been Toyota and Honda, which notably do not participate in the PNGV program. Progress from the PNGV participants only seems to come in response to new announcements from non-participants -- again illustrating the importance of competition. 
Despite the failures and setbacks of the PNGV, the Clinton Administration is set to replicate it in a truck research program -- a way to avoid coming to terms with the poor fuel efficiency of the SUVs and light trucks that now make up about half of U.S. vehicle sales.
The PNGV is not the only example of a federal research program that should be eliminated. Research and development programs in areas like fossil fuel (among them the clean coal technology program, and the Department of Energy's coal and petroleum R&D programs) and nuclear power (the Nuclear Energy Research Initiative) invest funds in support of highly capitalized industries to promote undesirable non-renewable technologies. Such programs are not defensible.
More interesting questions arise in areas where the government is legitimately involved in the research and development sphere, such as in biomedical research. There are several potential ways to resolve the giveaway problem embedded in current policy.
One way is to revitalize the Rickover proposal of immediate non-exclusive licensing, followed by the possibility of exclusive licensing if no party accepts a nonexclusive license. This arrangement would guarantee competition and keep prices down. If exclusive licensing proves necessary, in a Rickover-style scheme or otherwise, the license should be granted on the basis of an auction. The auction should consider factors such as: the strongest guarantees of low price marketing of the final product, buyer commitment to invest profits in research and development, and royalties to the government. The weight attached to these factors should perhaps vary according to the type of invention. For example, in the case of pharmaceuticals, reasonable pricing should take priority over royalty returns to the government.
Federal agencies should be able to adopt these policies on their own, but the recent history of cozy relationships between manufacturers, universities and federal laboratories has led federal agencies and universities alike to cut sweetheart deals that boost corporate profits while punishing consumers and failing to recoup government investments. Congressional action is needed, and citizens should be guaranteed procedural opportunities to challenge sweetheart arrangements that do not comport with statutory requirements.