DOCUMENT BESUMF 03242 - A2293430' Need to Improve Reviews of Royalty Charges Included in Air Force Contracts. PSAD-77-153; B-133386. August 16, 1977. 7 pp + enclosure (9 pp.). Report to Secretary, Department of the Air Force; by Richard W. Gutmann, Director, Procurement and Systems Acquisition Div. Issue Area: Federal Procurement of Goods and Services (1900); Federal Procurement of Goods and Services: Reasonableness of Prices Under Negotiated Contracts and Subcontracts (1904). Contact: Procurement and Systems Acquisition Div. Budget Function: National Defense: Department of Defense - Procurement Contracts (058),. Organization Concerned: Department of the Air Force: Wright-Patterson AWB, OH; Patent and Trademark Office. Congressional Relevance: House Committee on Armed Services; Senate Committee on Armed Services. The Armed Services Procurement Regulation permits a dea.nsp contractor to include in his proposed contract price ro ilties he must pay a patent owner. Te contracting officer must submit the information about royalties received from the contractor to a patent office for advice on the propriety of the royalties. Findingqs/Conclusions: A review of patent royalty files indicated a general lack of documentation necessary to determine he propriety of royalties approved. About 40 of files xamined did not contain documents showing that the Patent Division: (1) determined if the Government had rights to the patent; (2) obtai.ied engi.neers' comments; or (3) reviewed engineering drawings. The Patent Division recommended approval of about $106,000 under nine license agreements for which there was no evidence that the patents covered items procured. There were several instances in which royalty approvals were questionable. Contracting officers were not familiar with general guidelines for processing royalty requests, nd some Air Force contracts included royalty charges without identification by the contractor. A review of four cases showed that conflicting opinions on the propriety of royalty approvals went unresolved for several years. Failure to obtain and review necessary information on royalty requests can lead to improper contract payments. Recommendations: Procedures should be established to assure that necessary documentation is obtained, revewed, and maintained to support royalty approval action. Such procedures could involve requiring a statement or certification from the contractor regarding the amount of royalties included in a price proposal and the use of a checklist by the contracting officer. Steps should be taken to reevaluate those cases identified where royalties may have been improperly approved and, if appropriate, take measures to recover improper payments. (Author/TW) UNITED STATES GENEAL ACOUNTNG OFFICE p~J ~*/t~3WAYHINGTON, D.C 25 B-133386 AUG16 W7a The Honorable LI The Secretary of the Air Force Dear Mr. Secretary: Thne General Accounting Office reviewed the procedures followed for approving patent royalty charges included in Air Force contracts awarded by the Air Force Logistics Command and other procuring activities at right-Patterson Air Force Base. Our review of patent royalty files ndi- cated a general lack of documentation necessary to determine the propriety of royalties approved. In several instances, questionable approvals were made. we reviewed studies made by Air Force eadquarters on four longstanding royalty cases to determine the propriety of royalties approved. These cases were referred to us by Congressman Clarence J. Brown. Based on our review of these cases, we believe royalties may have been improperly approved in three of the four cases. We are recommending that you requirt procurement and legal review activities to establish procedures to assure that necessary documentation is obtained, reviewed, and maintained to support royalty approval actions. Further, we recommend that steps be taken to reevaluate those cases identified where royalties may have been improperly approved and, if appropriate, take measures to recover any related improper payments. SCOPE OF REVIEW We interviewed officials and reviewed documents at the Office of tne Staff Judge Advocate, Patent and Data Division (Patent Division), Wright-Patterson Air Force Base, and contacted officials at Air Force Headquarters, Air Force Logistics Command, Air Force Systems Command, and te Aeronautical Systems Division. PSAv-77-153 B-133386 ASPR REQUIREMENTS AND AIR FORCE REGULATIONS CONCi;R;ING ROYALTIES The Armed Services Procurement Regulation (ASPR) permits a defense contractor to include in his proposed contract price royalties he or any of hs subcontractors must pay a patent owner for use of a patent. For negotiated contracts which will exceed $100,000, and which will include over $250 in royalties, the ASPR reqiies the contractor to eparately identify the amount of royalties in his price proposal and furnish details concerning the royalties to the contracting officer. The contracting officer is to submit the informaticn received from the contractor to the appropriate patent office for advice on the propriety of the royalties before the contract is awarded. The contracting officer may deviate from the Patent and Data Division's advi with the onsent of the head of the procurement activity. When reviewing the propriety of royalties, an Air Force supplement to the ASPR requires that the Patent Division -- obtain and review the applicable patent and the engineering drawings and consult the project engineer concerning the items being procured to ensure that the patent covers the items; -- obtai n the license agreement to verify that it requires royalty payments and that the rate is reasonable; and -- ensure that the Government does not have a royalty-free license to use the patent (the Government may be entitled to ryalty-free use if the invent'on was first conceived and reduced to practice under a pior Government contract). Th~e contracting officer is to use his best effort to obtain the necessary documents for the Patent Division's review. If the contracting officer is unable to obtain the information, the Patent Division is to obtain it. When the Patent Division receives the information, it must reach a conclusion concerning the propriety ad reasonableness of the royalty charges and transmit its recommendation to the contracting officer. 2 B-133386 LACK OF DOCUMENTATION IN FILES In 1975 and 1976, the Patent Division received 79 royalty requests and recommended that 68 requests be approved. Many of these approvals were multiple requests under 28 separate license agreements. These approved royalties totaled about $356,000. We reviewed the Patent Division's files containing the 28 license agreements and found many of the files to be incomplete. The chart below summarizes our analysis of the contents of the file;. Analysis of 28 Files Containing Requests Recommended For Approval Required data Number of files containing data Patent 24 License agreement 23 Engineering drawings 11 Project engineers' comments 11 Determination of Government's rights 12 About 40 percent of the files did not contain documents showing that the Patent Division (1) determined if the Govern- ment had rights to the patent, i2' obtained engineers' comments, or (3) reviewed engineering drawings of the patented items. Only three of the files contained the entire complement of required data. We found that the Patent Division rcommended approval of about $106,000 under nine separate license agreements for which there is no eviJence in the files that the patents cover the items procured. By examining the data in the files, plus additional information we obtained, we also found several instances in which royalty approvals were questionable. For example, the Patent Division -- recommended the wrong royalty rates because it apparently did not review the license agreement or know the terms of the contract; 3 B-133386 -- recommended approval of royalties based on the rise of a patent that had expired; -- recommended approval of royalties without knowing whether license agreements had expired; and -- recommended approval of royalties even though chardes were for technical assistance and the amortization of development costs rather than patents. These cascz were identified and discussed with Patent Division officials at the close of ur.review. CONTRACTING OFFICERS DO NOT ALWAYS OBTAIN AND SUBIIT REQUIRED DATA TO THE DVIS:ON We found that contracting officers were not familiar with the general guidelines for processing royalty requests which are contained in the ASPR and were unaware of any responsibility to obtain more information than was volun- teered by the contractor. Contracting officers stated they have no way of determining whether royalties will be paid unless the contractor identified them in the proposal. Even though the contractor may identify the royalties in his proposal, the contracting officer may not always obtain and forward the required information to the Patent Division in a timely manner. Our analysis of selected Air Force contracts showed that royalty charges have been included i contract prices without identification by the contractor, and that royalty charges have been included in contract prices but not iderti- fied until after negotiations were complete. For example, about $24,000 in royalties were included in contracts for sensors used in the F-15 air inlet controller but were not reported to the contracting officer. Additional ryalties for the sensors totaling about $116,000 were reported to the contracting officer and the Patent Division after negotiations had Deen completed. In 1974, the Air Force Audit Agency reported to the Commander of the Aeronautical Systems Division that con- tracting officers failed to obtain and forward complete information concerning royalties to the Patent Division. 4 B-133386 As a result, the Aeronautical Systems Division office responsible for procurement issued a memorandum to procurement personnel emphasizing the need to follow the established procedures of the Air Force supplement to ASPR. The Air Force Audit Agency has not conducted a followup review. In early 1977, contracting officers and officials respon- sible for procurement policy at the Aeronautical Systems Division, Wright-Patterson Air Force ase, told us that the Air Force has not established internal controls to ensure that contractors properly identify royalties in proposals to the Government. REVIEW OF FOUR LONGSTANDING ROYALTY CASES During our study, Congressman Clarence J. Brown referred information to us where it was alleged that the Air Force had approved about $5.9 million in royalties over a number of years without legal support. A review of the files on these four cases showed that Air Force attorneys, contractors, and patent owners expressed con- flicting opinions on the propriety of the royalty approvals. These differences went unresolved for everal years. We did not attempt to resolve the differences of opinion. In 1975, the Patent Division requested Air Force Headquarters to study one of the four cases. We requested studies of the three remaining cases to resolve specific issues which were still open. In Case 1, royalties have been paid over a 20-year period without determining if the components were patented. In Case 2, steps were not taken to recover improper royalty payments identified. In Case 3, royalties may have been approved after the license agreement expired. There were no problems with Case 4. Overal, we believe that royalties of about $349,000 may have been improperly approved. Details on each case are contained in enclosure I. AGENCY COMMENTS AND OUR EVALUATION The Patent Division officials commented that our draft report accurately portrayed the handling of royalty payments under Air Force contracts. They agreed that there appears to be a lack of communication between their division and the 5 B-133386 contracting officer on the approval of royalty payments. They also ointed out that the contracting officer has the final responsibility for determiiaing action to be taken on their recommendations. The Director of Procurement and Manufacturing, Aeronau- tical Systems Division, commented that it would be difficult, if not impossible, to establish further internal controls to assure that contractors identify royalties in the contract's cost breakdown. He felt that sufficient local internal con- trols existed for identifying applicable royalty charges. CONCLUSIONS Failure to obtain and fully review the necessary infor- mation on royalty requests can lead to improper -contract payments. Several license agreements were rought to our attention under which the Air Force had paid royalties for up t 20 years without obtaining the necessary information to determine the propriety of royaltes. Unless the Air Force obtains and fully reviews the necessary data and re- solves pertinent questions efore contracts are awarded, similar problem3 may arise regarding the propriety of royalties. Since contractors do not always identify royalties when appropriate, there is uncertainty as to the total amount of royalties the Patent Division should aave reviewed in 1975 and 1976, although $356,000 in royalties were identified and paid in these years. Also, lack of contro and incomplete reviews may result in unidentified royalties, improperly approved royalties and/or disagreements which could take years and considerable expense to resolve. RECOMMENDATIO':S we recommend that you require the procurement and legal review activities discussed in this report to establish proce- dures tc assure that necessary documentation is obtained, reviewed, and maintained to support royalty approval action. Such procedures could involve requiring a statement or certi- fication from the contractor regarding the amount of rryalties included in a price proposal and the use of a checklist by the contracting officer to remind him of the documentation needed to support royalty charges. Also, the reviewing patent official could have a list of the things he would need to support a royalty approval. 6 B-133386 With regard to the cases identified where royalties may have been improperly approved, we recommend that the Patent Division reevaluate its actions on those cases mentioned on pages 3 and 4, and if appropriate, recover those royalties improperly paid. Regarding the four longstanding cases in which royalties of about $349,000 may have been improperly approved, we have made specific recommendations on each case in the enclosure to this report. We are sending copies of this letter to the Secretary o' Defense, the Director, Office of Management and Budget, Bouse and Senate Committees on Armed Services, and Appropriations, House Committee on Government Operations, Senate Committee on Governmental Affairs, and Congressman Clarence J. Brown. With regard to these recommendations, as you know, section 236 of the Legislative Reorganization Act of 1970 requires the head of a Federal agency to submit a written statement on actions taken on our recommendations to the ouse Committee on Government Operations, and the Senate Conimittee on Governmental Affairs not later than 60 days after the ate of the report and to the House and Senate Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of the report. Sincerely yours, R. W. Gutmann Directo: Enclosure 7 ENCLOSURE ENCLOSURE DETAILS ON FOUR LONGSTANDING ROYALTY CASES The following describes the specific issues of the four cases, the results of studies performed by Air Force Beadquar- ters (Headquarters), and our conclusions and recommendations. CASE 1 - ROYALTIES PAID FOR SWITCHES IN AIRCRAFT NGINES The main issue in this case involved whether or not the components were actually patented. The royalties applied to switches used in certain aircraft engines. The payments were made to patent owners who were affiliated with the manufacturer of the patented items (elf-royalties). The first request for royalties, according to the Patent Division's files, was dated March 1956 and totaled about $5,400. The Patent Division recommended approval. The switches were supplied to the prime contractor b a sub- contractor who was licensed to produce them by the patent owners in 1951. From 1955 through 1976, about $277,000 in royalties were recommended for approval. During this period the Patent Division's advice to the contracting officer was not consistent, as it recommended approval of some requests, recommended disapproval of some and consented to others provided that a royalty reservation clause was placed in the contracts. The clause enabled the Government to with- hold final payment in an amount equal to reported royalties until they were found to be proper. In 1962, the Patent Division recommended that the con- tracting officer disallow the royalties for the switches because the royalty rate of 7.5 percent seemed too high, the royalties appeared to be self-royalties, and the rate was applied to the entire cost of the switches instead of the patented components. The contracting officer notified the contractor that the royalties would be disapproved and the contractor appealed to the Armed Services Board of Con.- tract Appeals. In 1964, the Air Force and the contractor stipulated tefore the Board to a 5-percent royalty rate on the entire switch. Because of this stipulation, the Air Force was to receive a refund of royalties amounting to about $21,800. ENCLOSURE ENCLOSURE Again in 1969 and 1970, a Patent Division patent attorney opposed the royalty payments because he con- sidered them to be self-royalties and to be improperly computed on the entire switch rather than on the com- ponents. He also questioned whether the patents even covered the components. From 1970 to 1976, these issues continued to surface. We requested Headquarters to re- solve the issues involved. Beadgarters study The resulting eadqua-ters' study concluded that the Govelnment's legal position would be tenuous if it attempted to isallow royalt:y costs on the basis of self-royalties. Ta study indicated that self-royaltis are not always improper but must be evaluated on the facts of each case. Also, the s, .- royalty issue in this case was discussed and resolved during negotiations leading to the settlement of the appeal in 1964. With respect to payment of roy.lties on the entire switch, Headquarters stated they were reasonable because there is no "proper" royalty base or rate for the use of a patented item. A patent owne~ may fix any convenient base he desres and obtain royalties as high as he can nrgotiate. Beadquarters could not determine from the available engineering drawings and other file materials if the patents covered the switch components. Conclusions and recommendations The files related to this case did not contain suffi- cient information to resolve the issue. Beadquarters did not conclude that the royalty payments were proper or that they should bave been approved because it could not deter- mine if the components were patented. Therefore, we believe the Air Force has approved $277,000 in royalties over a 20-year period without documenting the legal basis of its actions. We recommend that the Patent Division approve no further royalties under the license agreements until it is determined that the items are covered by the patents. If the Patent Division cannot satisfy itself, we recom- mend that the procuring activity take whatever action is available to recover royalties previously paid. 9 ENCLOSURE ENCLOSURE CASE 2 - ROYALTIES PAID FOR JET ENGINE AFTERBURNING ACTUATOR ASSEMBLIES The issue in this case involved a question of whether the patents cited the requests for royalty approval cover- ed actuator assemblies used in 79 engines purchased by the Air Force. The engine contractor purchased the actua- tor assemblies from a subcontractor who was licensed by the patent owner to manufacture the assemblies. Each engine has four actuators with pistons connected by a flexible shaft. The pistons position the flaps of the engine's afterburner nozzle and their movement is synchronized by the shaft. From 1961 through September 1970, the requests for royalties generally cited patent number 2,657,539, which expired November 3, 1970. The Patent Division did not request copies of engineering drawings until 1968 and determined in early 1969 that the assemblies were covered by the patent. After November 3, 1970, the Patent Divi- sion reviewed seven requests. Five of the requests cited another patent--number 2,606,450--as the basis of the royalty charge; one cited the expired patent, and one did not cite any patents. The Patent Division recommended that the request which cited the expired patent be disapproved. For the other six requests tctaling $39,334, the Patent Division did not determine if the new patent covered the actuator assembly, but recommended that the royalties be allowed provided a royalty reservation clause was placed in the contract. The clause permitted the Government to recover the royalties if they were found to be improper. Through 1973, the Patent Division recommended approval of about $510,000 in royalties for actuator assemblies used in jet engines. In October 1974, a Patent Division attorney ques- tioned the propriety of the royalties that were paid on patent 2,657,539 through September 1970. In his opinion, the flexible shaft or cable used to connect the actuator pistons was not covered by the patent claims since the description of the invention identified the connector as a solid shaft. He recommended the prime contractor make an independent investigation regarding patent coverage. There were no documents in the file which showed that the investigation was made or that the Air Force took any further action. 10 ENCLOSURE ENCLOSURE Headquarters study In September 1975, the Patent Division requested Air Force Headquarters to review this royalty case and deter- mine whether the actuator assemblies were covered by the patents. Concerning the question of whether the flexible shaft was covered by patent 2,657,539, Headquarters con- cluded in its study, dated November 1976r that the patent covered the actuator assembly as it was used between September 1961 and November 3, 1970. Headquarters noted that in engineering terms the word "shaft" may be defined as camshaf, drive shaft and flexible shaft, Also, the Headquarters' report indicated the courts have held that (1) a pent claim is not avoided by use of a different material than that identified in the description section to the patent, and (2) the limits of a patent claim may be interpreted to include equivalent mechanisms that substantially perform the same function in the same way to produce the same results. With respect to the use of patent 2,806,450 after November 1970, Headquarters concluded that none of the actuator assemblies were covered by any of the patent claims. In December 1976, the Patent Division sent a letter to the Aeronautical Systems Division contract- ing officer recommending that royalty payments after November 3, 1970, be considered for recoupment. As of May 9, 1977, no action had been taken to recover the royalty payments. Conclusions and recommendations The Air Force did not document the basis for its approvals of requests submitted between 1961 and September 1970. From November 19, 1970, to April 19, 1973, six requests for royalties were recommended for approval by the Patent Division without a determination that the assemblies were covered by the patent. Rather, the Patent Division recommended that the royalties be allowed, provided that a royalty reservation clause was included in the contracts. Not until late 1976, about 6 years after the initial request for royalty approval citing the new patent, did the Air Force establish a position that the $39,334 n royalties allowed were improper. These improper payments could have been avoided had the Air Force documented the basis of its royalty approials and conducted complete reviews of the propriety and reasonableness of the royalties before or shortly after contract awards. 11 ENCLOSURE ENCLOSURF We recommend that the Commander of the Aeronautical Systems Division promptly take whatever action is available to recover these royalties paid since November 19, 1970, which have been determined to be improper. CASE 3 - ROYALTIES PAID FOR PARTS OF TE TF-41 ENGINE The issue in this case is whether the Air Force should pay royalties when the contractor manufactures some of the parts and combines them with other parts supplied by the patent owner to fabricate a patented device. In August 1966, the Air Force entered into a contract with a domestic corporation to develop and produce the TF-41 jet engine. The TF-41 engine was a modification of a jet engine previously developed by a foreign company. A license agreement, effective July 15, 1966, established a variable royalty rate for use of patents and technical data. The royalty rate was 4 percent on te first 500 engines and decreased to 1 percent for engines in excess of 5,000. The Patent Division recommended approval of royalties at the licensed rates in November 1966 and May 1969. Through December 1976, the Air Force approved over $5 million for use of the foreign company's patents and for technical data. In June 1970, the Patent Division reanalyzed the royalty charges. The Patent Division found that the foreign company held five United States patents being used in the manufacture of the jet engines for which royalties were being charged. The domestic corporation made all of the components for the device cove:ed by one of the patents. Under the four other patents, the domestic corporation made some of the parts and combined them with others supplied by the licensor to fabricate the patented devices. For example, one of the four patents covered a valve which contained five separate parts. The domestic corporation made the manifold and valve assemblies and combined them with a bearing housing, valve actuator and shaft housing assembly supplied by the foreign company to fabricate the patented valve. The Patent Division was unable to identify court cases which covered a similar situation and was unsure if royalties should e paid for the use of the four patents. 12 ENCLOSURE ENCLOSURE Since the royalty rate included in the license agreement was intended to cover both the use of patents and technical data, the Patent Division recommended approval of 7 percent of the rate as attributable to patent royalties. The remain- ing 93 percent would cover technical data and assistance, which is under the purview of the contracting office. The contracting officer included as royalties in contract prices the total rate specified in the license agreement because -- the Air Force wanted the complete transfer of all technical data necessary to manufacture the engine and to design corrective parts when needed; and -- it was essential to retain the assistance of the foreign company and to maintain its capability so that it could support the jet engine in service. In early 1973, a Patent Division attorney continued to question the legal basis for paying royalties on the TF-41 engine and believed that the royalty rate was pro- bably too high. e recommended that a complete review of the royalties be conducted. Later in 1973, at the request of the Air Force Logistics Command Staff Judge Advocate, another Patent Division attorney made a study of this case file and recommended that the Patent Division continue to recommend approval of the royalties. He also recommended approval of royalties computed under the method established in June 1970--7 percent of the licensed royalty rate for royalties, 93 percent of the rate for technical data and assistance. The contracting officer continued to include the total licensed royalty rate in the contract prices. Headquarters study In a March 1977 analysis conducted at our request, Headquarters noted that the five patents covered only cer- tain components of the engine. Under one of the patents, the domestic contractor made all of the parts and assembled them into the patented device. For the four remaining patents, the domestic contractor made some of the parts and combined them with others purchased from the patent owner to make the patented devices. The study noted that 13 ENCLOSURE ENCLOSURE 'ourts have eld that the sale of a component part of a patented device does not imply that the seller has given the buyer a license to use the entire device. Head- quarters concluded that the domestic contractor was not entitled to free use of the patented devices just because components were procured from the patent owner and, con- sequently, that the royalties were legally proper. Headquarters also noted that the license agreement of July 15, 1966, was to expire on July 15, 1976, subject to an extension for an additional 5-year period. We found that about $33,000 in royalties (based on 7 percent of the rate) was approved from August 5, 1976, through December 14, 1976, although the Patent Division's file did not indicate that the agreement had been extended. Conclusions and recommendations Headquarters stated that patent royalties paid by the contractor were legally proper. In 1970, the Patent Division adjusted the method of computing royalties under the contracts because the licensed royalty rate included charges for technical data. The contracting officer continued to approve royalties at the licensed rate to obtain complete transferral of all necessary technical data and to maintain the assistance of the foreign com- pany even though they were not technically royalties. From August through December 1976, however, the Patent Division recommended royalties for approval totaling about $33,000 without documenting that the license agreement had been extended. Before the Air Force approves additional royalty requests under this license agreement, we recommend that the Patent Division determine whether the license agreement has been extended. If the agreement has not been extended, we recommend that the Patent Division take whatever action is available to recover the royal- ties approved since July 1976. CASE 4 - ROYALTIES PAID FOR MONOCULARS The license agreement in this case involves 15 United States patents, of which only 2 were claimed to apply to the monoculars being procured. The issues concern the limits of patent coverage and validity of one of the patents. 14 ENCLOSURE ENCLOSURE A request for royalty approval under the license agreement dated January 1971 was for a 5-percent royalty on 100 monoc.,- lars. The request totaled about $20,000 and was based on the use of ona patent. The contracting officer notified the Patent Division that the patented parts made up only 22 percent of the price of the items. Based on this advice, the Patent sion recommended to the contracting officer that royalties Divi- be limited to 5 percent on 22 percent of the unit price. The contractor later revised his price proposal because the costs of purchased parts, engineering labor and subcon- tracted parts had increased. The contractor submitted revised royalty information increasing the royalties to about $21,000. Royalty charges in this report were based on the patent cited previously and on one additional patent. The Patent Division informed the contracting officer that the additional patent had errors in its language which made it invalid and that it did not cover the items being procured. Again, the Patent Division recommended to the contracting officer that royalties be limited to 5 percent on 22 percent of the monocular unit price. A Patent Division attorney discussed this case with Headquarters who told the Patent Division that if requested in writing, it would state that the second patent was valid and that the royalties should be approved. Based on this conversation, the Patent Division recommended that the re- quest for about $2,.000 be approved. Because of allegations that the royalties were approved improperly, we requested Headquarters to study the royalties paid in this case. Headquarters study Headquarters concluded that the patent which allegedly contained errors was valid, and that royalties paid on the price of the entire monocular were proper. A patent contains two sections: one describing what the invention is and another containing a series of claims which specify what the invention ds. According to Beadquarters, one of the claims of the patent incorrectly described a physics principle and, therefore, contained errors in its language. The eadquarters' report indicated that court decisions, however, consistently hold errors in a claim do not make it invalid when the that the intended meaning is apparent from the description of the invention. The study indicated that the patent was valid because the inventor identified what he meant to claim in his descrip- tion of the device. 15 ENCLOSURE ENCLOSURE Beadquarters also maintained that it was immaterial what portion of the monoculars was covered by the claims of the two patents cited in the requests for royalty approval. As long as some portion was covered, a reason- able royalty could be negotiated on the cost of all or any portion of the monocular. If the file documents were correct, Headquarters stated that the monoculars contained the patented parts identified in one of the patents, a- the royalty payments on the price of the entire item were reasonable and proper. Conclusions The Patent Division recommended approval of the royalty requests in 1971, based on advice from Bead- quarters, and established the Air l'orce position that the royalties were proper. In its March 1977 study, Beadqutrters concluded that th~ patents involved in this case were valid and that the royalties were reasonable and proper. Therefore, we are making no recommendation. 16
Need to Improve Reviews of Royalty Charges Included in Air Force Contracts
Published by the Government Accountability Office on 1977-08-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)