2009 Spring Report of the Auditor General of Canada

Main Points

What we examined

Intellectual property includes rights resulting from intellectual activity in the industrial, scientific, literary, or artistic fields. This includes all intellectual creation legally protected through patents, copyright, industrial design, integrated circuit topography, and plant breeders’ rights, or subject to protection under the law as trade secrets and confidential information. The federal government generates intellectual property as a component of activities carried out under federal contracts to procure goods and services. Intellectual property is also generated by the federal government through its own science and research activities.

Our audit looked at how intellectual property is managed in three federal science-based organizations—the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada. We examined to what extent they comply with federal policy in managing intellectual property that arises in the course of contracted activities and how adequately they manage intellectual property generated by their own employees.

Our audit also looked at the roles of Industry Canada and the Treasury Board of Canada Secretariat in monitoring the application of the federal policy governing intellectual property that arises under Crown procurement contracts. In addition, we looked at the roles of the Treasury Board of Canada Secretariat and the Canada Public Service Agency in monitoring compliance with the Award Plan for Inventors and Innovators Policy.

Why it’s important

Intellectual property is a valuable asset that can be bought, sold, licensed, lost, or stolen, and it should therefore be managed effectively. This includes knowing how and when to protect intellectual property. The National Research Council Canada, for example—by far the federal government’s largest producer of inventions—spends more than $1.6 million a year to protect the patents it holds, which produced $5 million in revenue in the 2006–07 fiscal year. In calendar year 2006, billions of dollars in federal contracts were reported to contain some element of intellectual property.

Managed well, intellectual property can lead to economic and social benefits and contribute to Canada’s innovation. Whether used for policy development, decision making, advancement of knowledge, or national security, intellectual property is a strategic asset that can help the federal government better serve the interests of Canadians. For example, the National Research Council Canada developed a vaccine for meningococcal disease that is currently being marketed in Canada and internationally. If intellectual property is managed poorly, however, the government could lose the ability to manage its intellectual property for the benefit of Canada. This includes losing the social benefits, such as improved health care, and the economic benefits, such as having more profitable companies.

The 2007 federal Science and Technology Strategy, Mobilizing Science and Technology to Canada’s Advantage, recognizes that intellectual property is a critical component of the overall innovation system. The creation, development, and protection of intellectual property are critical early steps in the innovation process. Ongoing monitoring of the federal intellectual property regime is important to ensure that the intellectual property arising from federal investments in research translates into value for Canadians.

What we found

• Nearly 20 years after the federal government decentralized the management of intellectual property to federal entities, the mixture of legislation and policies governing it has resulted in a variety of management practices, some of which are inadequate. Neither Health Canada nor Fisheries and Oceans Canada has a department-wide policy, and both lack adequate mechanisms and expertise to consistently identify and disclose intellectual property generated by its employees. Despite their significant expenditures on science and technology, including millions of dollars in research and development, and the number of scientists and researchers they employ, there is very little disclosure of inventions developed by public servants in these two departments. The National Research Council Canada, however, has an entity-wide policy and adequately identifies its inventions by involving and training its researchers and officers at its institutes.
• The federal government is not in a position to know whether the objective of the eight-year-old Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts is being met. It does not know how much intellectual property is generated externally in the course of contracted work. None of the entities we audited adequately identifies and reports whether work performed under contract is likely to generate intellectual property. The three science-based organizations we examined have not assessed whether the Policy has been implemented and applied within their respective organizations. Although the Policy states that intellectual property should rest with the Crown only in exceptional cases, ownership was retained by the Crown in over half the contracts that we reviewed at Health Canada and Fisheries and Oceans Canada, often without clear justification. Industry Canada and the Treasury Board of Canada Secretariat have not adequately fulfilled their obligations to monitor the application of the Policy, with a focus on cases where exceptions were involved, and to evaluate the Policy.
• Since the introduction of the Award Plan for Inventors and Innovators Policy in 1993, the effectiveness of departmental and agency award plans and of the Policy itself have not been assessed. With the exception of one award in 1994, none of the entities we audited has distributed financial awards for the government use of inventions. With no assessment of the award plans and of the Policy itself, the federal government does not know if it has the appropriate financial incentives in place to encourage the commercialization of internally generated intellectual property or the use of inventions within the government.

The entities and the Secretariat have responded. The entities and the Secretariat agree with all of our recommendations. Their detailed responses follow each recommendation throughout the chapter.

Introduction

The importance of managing intellectual property

2.1 Intellectual property includes rights resulting from intellectual activity in the industrial, scientific, literary, or artistic fields including all intellectual creation legally protected through patents, copyright, industrial design, integrated circuit topography, and plant breeders’ rights, or subject to protection under the law as trade secrets and confidential information. It is a valuable asset that can be bought, sold, licensed, lost, or stolen. Intellectual property can yield economic, social, and environmental benefits, and therefore warrants effective management, including appropriate protection. The tools for protecting intellectual property can take different forms. For example, inventions may be protected by patent, while publications and computer software may be protected by copyright.

2.2 Effective management of intellectual property assets allows an organization to improve its operational and financial performance, make better use of its resources, and identify opportunities for transferring and commercializing intellectual property. Inadequate management can result in failure to identify intellectual property and maximize its potential benefits, as well as in duplication in procurement activities. It could also give rise to a range of risks, including legal liabilities and failure to meet organizational objectives when licensing intellectual property. For example, failure to secure the ownership of intellectual property before disclosing that property publicly could lead to lawsuits for copyright infringement by the Crown or its agents. Resolution of these lawsuits is often costly for the Crown. Similarly, before assigning rights of its own intellectual property to a third party, the Crown needs to consider whether it will continue to need to use that property and address that need in an assignment agreement. It could otherwise be in the unfortunate situation of having to pay to procure the rights to use the intellectual property that it had developed.

2.3 Whether the intellectual property is used for policy formulation, decision making, advancement of knowledge, or commercial exploitation, it is a corporate asset that allows organizations to better serve their stakeholders. Within the federal government, the National Research Council Canada is the largest generator of inventions. Health Canada and Fisheries and Oceans Canada generate smaller amounts of intellectual property internally. However, with respect to externally generated intellectual property, in the 2006 calendar year, Health Canada had $36 million and Fisheries and Oceans Canada had almost $26 million in contracts reported to contain some element of intellectual property.

2.4 The National Research Council Canada recognizes that intellectual property is a corporate asset that needs to be managed and exploited. The effective exploitation of intellectual property and its transfer to users, who commercialize it for the benefit of Canadian society, are an integral part of the National Research Council Canada’s mandate. Exhibit 2.1 illustrates examples of the benefits derived from the successful management of intellectual property at two institutes within the National Research Council Canada.

Exhibit 2.1—Intellectual property can create economic and socio-economic benefits

2.5 Health Canada, which conducts research and development in support of its policy and regulatory mandate, depends on a foundation of science to help Canadians maintain and improve their health. Scientific and technical knowledge and expertise contribute to decisions about health standards, health policy, regulations, and health programs. On occasion, the Department develops technologies with commercial implications for the private sector. For example, Health Canada has developed a new patented technology that serves as an alternative to the artificial stomach to measure the dissolution rate of tablets and pills. Drug dissolution testing is conducted to establish and monitor the safety, efficacy, and quality of pharmaceutical products.

2.6 Fisheries and Oceans Canada also conducts research and development in support of its policy and regulatory mandate. Canadians rely on Fisheries and Oceans Canada to conduct scientific research to monitor and promote the health of fish stocks and the marine environment. An example of an invention that Fisheries and Oceans Canada has developed is an underwater digital sound recorder system. Its initial application was to record whale sounds, but it can also be used for any application that requires continuous underwater sound recording.

2.7 The federal government recognizes that intellectual property is a valuable asset and has made several commitments related to intellectual property in its 1996 and 2007 Science and Technology strategies. Managing and exploiting intellectual property are becoming more important to ensuring Canada’s competitiveness. As the Canadian economy becomes increasingly knowledge-based, intellectual property assets can play a significant role in fostering a competitive and dynamic business environment.

The Government of Canada’s intellectual property

2.8 The federal government creates intellectual property in two distinct ways: by contractors during contracting activities and by federal government employees during the course of their work.

2.9 Intellectual property resulting from Crown procurement contracts. The Government of Canada enters into Crown procurement contracts in order to receive and use deliverables for government activities, including any intellectual property expected to result from the contract. In this chapter, we refer to this as externally generated intellectual property. One of the socio-economic objectives pursued through Crown procurement contracts is the commercialization of intellectual property by the private sector to create jobs and generate economic growth. In the 2006 calendar year, billions of dollars in Crown procurement contracts were reported to contain some element of intellectual property.

2.10 Intellectual property generated by public servants. In this chapter, we refer to intellectual property that is created by public servants during the course of their work, and which is owned by the Crown, as internally generated intellectual property. While it is difficult to estimate the total value of intellectual property generated internally by the federal government, the National Research Council Canada spends more than $1.6 million a year to protect the patents it holds. The National Research Council Canada patents produced $5 million in revenue in the 2006–07 fiscal year.

Policies to manage intellectual property

2.11 From the 1940s to the early 1990s, the Government of Canada’s management of intellectual property had been centralized under a Crown corporation known as Canadian Patents and Development Limited. Inventions developed by public servants and derived from Crown procurement contracts were transferred to the Corporation for processing, patentability assessments, and licensing. After the dissolution of Canadian Patents and Development Limited in 1993, the federal government decentralized the management of intellectual property and did not provide coordinated central guidance or support to federal entities. This presented challenges for federal government organizations, which had to develop their own infrastructure, including internal policies and appropriate staffing for managing intellectual property.

2.12 A number of acts and federal policies cover key issues related to intellectual property or articulate responsibilities and accountabilities for its management (Exhibit 2.2).

Exhibit 2.2—Key intellectual property legislation and policies

2.13 Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts. In the past, the federal government retained ownership of all intellectual property resulting from Crown procurement contracts. In 1991, the Treasury Board of Canada’s Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts was introduced to govern intellectual property generated from research and development contracts. The objective of the Policy was to allow the contractor to keep ownership of the intellectual property developed through contracting activities to increase its potential for commercialization. The Policy also provides exceptions for the Crown to retain ownership of the intellectual property under certain circumstances. These exceptions are intended to ensure that the Crown’s interest is protected (Exhibit 2.3). In 2000, the scope of the Policy was expanded from covering only intellectual property generated from research and development contracts to including all Crown procurement contracts that would result in the development of intellectual property. The Policy also included greater reporting requirements in an attempt to monitor compliance with it.

Exhibit 2.3—The Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts includes exceptions and an exemption to contractor ownership

2.14 Retention of Royalties and Fees from the Licensing of Crown-owned Intellectual Property policy. Also in 1993, the government adopted the Retention of Royalties and Fees from the Licensing of Crown-owned Intellectual Property. Through this policy, entities can receive an annual appropriation, equal to all the revenues they received from licensing Crown-owned intellectual property, to use toward intellectual property activities.

2.15 Award Plan for Inventors and Innovators Policy. In 1993, the Award Plan for Inventors and Innovators Policy came into effect with an objective to encourage scientists and researchers to pursue the commercialization of inventions. The Policy allows for inventors to receive a financial award stemming from the licensing or government use of their invention.

Focus of the audit

2.16 We conducted our audit to determine whether the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada could demonstrate that they manage Crown-owned intellectual property assets effectively.

2.17 Our audit covered the management of externally generated intellectual property resulting from its Crown procurement contracts, including when Public Works and Government Services Canada acts as the contracting authority on behalf of the entity, and internally generated intellectual property. We looked at inventions, some of which resulted in patents, and copyright, which are the most prevalent types of intellectual property in the federal government. We did not look at trademarks or other types of intellectual property.

2.18 Our audit also covered how the federal government manages the internally generated intellectual property it develops according to its own policies including how entities implement the Retention of Royalties and Fees from the Licensing of Crown-owned Intellectual Property and whether the Treasury Board of Canada Secretariat and the Canada Public Service Agency had monitored compliance with the Award Plan for Inventors and Innovators Policy. We also audited Industry Canada and the Treasury Board of Canada Secretariat in terms of their obligations outlined in the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts.

2.19 Exhibit 2.4 describes the roles and responsibilities of the audited entities with respect to the intellectual property policies covered by the scope of this audit.

Exhibit 2.4—Roles and responsibilities of the audited entities with respect to the intellectual property policies covered by the scope of the audit

2.20 More details on the audit objectives, scope, approach, and criteria are in About the Audit at the end of this chapter.

Observations and Recommendations

Federal intellectual property policies

There are significant problems with the implementation, application, and monitoring of two key policies to manage intellectual property

2.21 The mixture of policies governing the management of intellectual property has resulted in a variety of management practices, some of which are inadequate. We found significant problems in the implementation, application, and monitoring of the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts and the Award Plan for Inventors and Innovators Policy. The federal government does not know whether these policies are meeting their objectives of encouraging the commercialization of intellectual property or protecting the intellectual property where appropriate. Ongoing monitoring of the policies the federal government uses to manage intellectual property is important to ensure that the intellectual property arising from federal investments in research translates into value for Canadians.

2.22 Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts. Industry Canada and the Treasury Board of Canada Secretariat are responsible for monitoring the application of the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts. The Policy was approved in 2000 on the condition that it be evaluated in 2003 to determine if it was achieving its objective of transferring intellectual property to contractors to increase the potential for its commercial exploitation. An assessment of the Policy, commissioned by Industry Canada and finalized in 2004, identified difficulties with its implementation, including a lack of understanding of the Policy and misreporting of intellectual property resulting from procurement contracts. The resulting action plan proposed a number of measures, including making changes to the systems used by entities to report annually on intellectual property created through Crown procurement contracts to Public Works and Government Services Canada, which then transmits intellectual property ownership data to the Treasury Board of Canada Secretariat.

2.23 In 2007, the central reporting system was modified and entities were formally advised by the Treasury Board of Canada Secretariat to modify their own internal intellectual property reporting systems to reflect the correction, starting in January 2008. Consequently, Industry Canada and the Treasury Board of Canada Secretariat delayed the Policy evaluation until 2011.

2.24 We found that the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada modified their reporting systems between March and September 2008. Despite the recommended changes to the reporting systems, we found that much more needs to be done to ensure that the intellectual property data is accurately interpreted and correctly entered into reporting systems. Without increased efforts and adequate control over data by federal entities, an accurate account of intellectual property will not be possible in the future. Until these problems are fixed, it will be difficult to undertake an effective evaluation of the Policy.

2.25 Recommendation. Industry Canada and the Treasury Board of Canada Secretariat should work with federal entities to improve the monitoring of the application of the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts, with a focus on cases where exceptions were invoked. They should work with federal entities to ensure that intellectual property data is accurately interpreted and that reporting systems correctly report ownership to support a future evaluation of the Policy.

Industry Canada and the Treasury Board of Canada Secretariat’s response. Industry Canada and the Treasury Board of Canada Secretariat agree with the recommendation. Industry Canada and the Treasury Board of Canada Secretariat agree to work with federal entities to ensure that they are aware of the need for accurate and comprehensive data collection, to allow for a future evaluation of the Policy’s effectiveness. Pursuant to the Treasury Board of Canada Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts (Section 10), deputy heads are accountable for implementing the Policy and ensuring that reporting responsibilities are met.

In 2007, Industry Canada and the Treasury Board of Canada Secretariat took action to ensure necessary modifications were made to the reporting systems for procurement contracts. A Contracting Policy Notice was subsequently sent to departments and agencies, advising of these changes. In addition, activities were undertaken to help federal entities understand these modifications, including a revision of the Implementation Guide for the Policy, the preparation of frequently asked questions, and the development of an e-learning product on intellectual property. These actions will help ensure the collection of more accurate data, which will be examined on an annual basis, to support an evaluation of the Policy, as planned, in 2011.

2.26 Retention of Royalties and Fees from the Licensing of Crown-owned Intellectual Property. We found that the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada record and monitor information on disclosed inventions and collect and report licensing revenues. These revenues are ultimately used to support intellectual property activities such as financial awards to inventors and intellectual property training initiatives.

2.27 Award Plan for Inventors and Innovators Policy. According to the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada, offering financial incentives to scientists and researchers in the public service is important to pursuing the commercialization of inventions. The Award Plan for Inventors and Innovators Policy specifies that entities must establish their own award plan and must report annually on the financial awards distributed. The National Research Council Canada has implemented its own award plan, which Health Canada also uses. Fisheries and Oceans Canada does not have a plan but uses the Policy as a guide to offering financial awards.

2.28 We found that inventors had been awarded for the commercialization of inventions based on the revenues from royalties and licence fees. In the 2006–07 fiscal year, the National Research Council Canada awarded $1.7 million to its scientists and researchers for the commercialization of internally generated intellectual property, while Health Canada and Fisheries and Oceans Canada awarded $2,000 and $24,000 respectively.

2.29 Under the Policy, inventors can also receive up to $5,000 when the government uses their inventions. We found that the entities do not give financial incentives for inventions used by the government, with the exception of a financial award the National Research Council Canada gave to an employee in 1994 for the invention of a disposable ballot box.

2.30 Entities must submit an annual report to the Treasury Board of Canada Secretariat on the financial awards they distribute to their employees. The Treasury Board of Canada Secretariat is responsible for monitoring the effectiveness of entity award plans and the Policy itself. In 2004, the responsibility for monitoring the effectiveness of the Policy was transferred from the Treasury Board of Canada Secretariat to the Canada Public Service Agency. However, the Policy was not modified to reflect this change and there was no formal communication of the change to entities. Consequently, federal entities were not given an appropriate contact to send their reports on financial awards distributed to inventors. As of 2 March 2009, a new Office of the Chief Human Resources Officer was created to combine the functions of the Canada Public Service Agency and parts of the Treasury Board of Canada Secretariat that deal with pensions and benefits, labour relations, and compensation.

2.31 We found that neither the Treasury Board of Canada Secretariat nor the Canada Public Service Agency has monitored the effectiveness of the entities’ award plans or the effectiveness of the Policy itself. We also found that the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada distributed financial awards to inventors but did not report on them to the Treasury Board of Canada Secretariat or the Canada Public Service Agency. As a consequence, the federal government does not know if it has the appropriate financial incentives in place to encourage the commercialization of internally generated intellectual property or the government’s use of inventions developed by public servants.

2.32 The Treasury Board of Canada Secretariat informed us that, as part of its Policy Suite Renewal exercise to clarify the responsibilities and accountabilities of ministers and deputy heads in key areas of public service work, it is planning to review the Retention of Royalties and Fees from the Licensing of Crown-Owned Intellectual Property and the Award Plan for Inventors and Innovators Policy. As well, in response to the commitment on intellectual property in the 2007 Science and Technology Strategy, Industry Canada and the National Research Council Canada co-chair an interdepartmental working group on knowledge translation and commercialization. The working group’s top priority is to review the federal government’s intellectual property policies to ensure they do not impede science and technology collaboration and commercialization through technology transfer. However, these efforts are independent from each other and thus will not provide a comprehensive overview assessment of the existing suite of policy tools to ensure they are meeting their objectives.

2.33 Recommendation. Industry Canada and the Treasury Board of Canada Secretariat should coordinate their ongoing and planned assessments of the existing intellectual property policies to provide better and more efficient support for common issues relating to the management of intellectual property.

Industry Canada and the Treasury Board of Canada Secretariat’s response. Industry Canada and the Treasury Board of Canada Secretariat agree with the recommendation. Industry Canada and the Treasury Board of Canada Secretariat will work together to ensure assessments of existing intellectual property policies are coordinated and comprehensively address common issues. Industry Canada will share with the Treasury Board of Canada Secretariat and other departments, through the Assistant Deputy Minister Committee on Science and Technology, assessments of federal intellectual property policies emanating from the work of the interdepartmental Knowledge Translation and Commercialization Working Group, which is co-chaired by Industry Canada and the National Research Council Canada. The Working Group was established following the release of the 2007 federal Science and Technology Strategy.

Externally generated intellectual property

Entities do not accurately identify and report on intellectual property

2.34 When intellectual property is expected to result from a contract, entities are responsible for identifying the intellectual property and determining who owns it—either the contractor or the Crown—before the contract is negotiated, and for reporting on it.

2.35 We found that the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada did not consistently identify whether intellectual property was expected to result from contracts. We found numerous contracts that had been reported to contain intellectual property but did not have any intellectual property. Among these was a service contract for the maintenance of a generator at the National Research Council Canada, and at Health Canada, numerous contracts for goods and services that included a vehicle, event planning, catering, and medical services. At Fisheries and Oceans Canada, we found a contract for language training services, which cited an exemption to the Policy that would require Treasury Board of Canada approval. This contract did not result in intellectual property and did not qualify for a Treasury Board of Canada-approved exemption.

2.36 We also found a number of contracts that did not contain intellectual property but were structured to include modified intellectual property clauses, statements of intellectual property ownership, and intellectual property licensing provisions, including provisions for copyright. These contracts were also reported to contain intellectual property to Public Works and Government Services Canada, although they contained none. At the National Research Council Canada, we found contracts for the acquisition, delivery, and management of printed publications and for the delivery of telescope parts. At Health Canada, we found contracts for office movers and printing services for a marketing campaign. At Fisheries and Oceans Canada, we found contracts for radios and engine parts.

2.37 In many of the contracts that we reviewed, intellectual property was not a component of the contracts; however, all of the entities inaccurately identified and reported them as having intellectual property (Exhibit 2.5). This demonstrates a lack of understanding of how to identify intellectual property produced as the result of a contract. In addition, the three science-based organizations we examined have not assessed whether the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts has been implemented and applied within their respective organizations.

2.38 All the contracts we reviewed at the National Research Council Canada and several at Health Canada and Fisheries and Oceans Canada did not actually result in intellectual property (Exhibit 2.5). As a result, we did not analyze these contracts further.

Exhibit 2.5—The National Research Council Canada, Health Canada, and Fisheries and Oceans Canada did not identify and report intellectual property accurately

2.39 Recommendation. The National Research Council Canada, Health Canada, and Fisheries and Oceans Canada should ensure that they accurately identify the intellectual property expected to result from their Crown procurement contracts and ensure that the intellectual property is accurately reported.

The National Research Council Canada’s response. The National Research Council Canada agrees with the recommendation. The National Research Council Canada’s Procurement Office is already working with the National Research Council Canada’s Central Business Office to review existing procedures in this area with a view to implementing improved practices, training, and guidelines. These improvements are aimed at the National Research Council Canada’s procurement officers as well as the business development officers and scientists involved in contracting throughout the National Research Council Canada’s institutes, programs, and branches. The result will be the accurate identification of intellectual property arising under contracts as well as the proper management and exploitation of such intellectual property. We expect all improvements to be in place by November 2009.

Health Canada’s response. Health Canada agrees with the recommendation. Health Canada will be enhancing the procurement process in order to accurately identify the intellectual property from Crown procurement contracts. In support of this, Health Canada procurement specialists will review and challenge the existence of intellectual property in contracts at the stage of the Contract and Requisition Control Committee review. In addition, Health Canada is currently developing a training strategy for procurement specialists and managers on the application of intellectual property and reporting of intellectual property in contracts. Health Canada will implement the corrective actions for the process improvement and training by end of the 2009–10 fiscal year.

Fisheries and Oceans Canada’s response. Fisheries and Oceans Canada agrees with the recommendation. Over the next 6 to 12 months, the Department will ensure that intellectual property generated through Crown procurement contracts is identified, accurately recorded in the Departments’s financial system, and reported to central agencies. The Department will ensure that intellectual property is properly identified in all contract documents.

Health Canada and Fisheries and Oceans Canada do not adequately justify Crown ownership of intellectual property

2.40 When intellectual property is expected to result from a contract, the entity has to determine its ownership. We found that the Crown took ownership of the intellectual property in over half of all the contracts that we reviewed and, in many cases, without justification. At Health Canada, we found 20 out of 31 Crown-owned contracts, totalling $2.2 million for the 2006 calendar year, where the Crown took ownership of the intellectual property without citing an exception or by citing exceptions that do not exist under the Policy. We found the same problems in 11 out of 26 Crown-owned contracts totalling $0.7 million at Fisheries and Oceans Canada. As a result, Crown ownership of the intellectual property was not clearly justified and the contractors did not have access to intellectual property that may have had commercial potential.

2.41 Recommendation. When the Crown takes ownership of the intellectual property produced as the result of a contract, Health Canada and Fisheries and Oceans Canada should justify this decision using the exceptions provided for in, and required by, the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts.

Health Canada’s response. Health Canada agrees with the recommendation. Health Canada will be providing its procurement specialists and managers with training and communication material with respect to intellectual property identification and application of exceptions in the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts. Health Canada will implement the corrective actions for training by the end of the 2009–10 fiscal year.

Fisheries and Oceans Canada’s response. Fisheries and Oceans Canada agrees with the recommendation. The Department will fully support and record all intellectual property ownership decisions. Over the next 6 to 12 months, the Department will implement measures to ensure that where it wishes to invoke one or more exceptions toward claiming Crown ownership of intellectual property arising under Crown procurement contracts, it will state and justify the exceptions as per the Treasury Board of Canada Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts.

Health Canada and Fisheries and Oceans Canada are not fulfilling their obligations as a contracting authority

2.42 Before requesting bids from contractors as part of the Crown procurement process, federal entities need to determine the intellectual property rights they may want to exercise. In a software procurement contract, for example, the entity has to consider the possible uses for the software developed and secure the rights it needs to use, modify, and license the software. If it foresees that the software might need to be modified or licensed, it is important to ensure the contract reflects this. While an entity may want to develop software for its own use, before entering into a software development contract, it should consider whether the software might be of use to other government departments.

2.43 The management of intellectual property rights requires careful consideration. Not doing so may lead to extended negotiations resulting in termination of the contract, the contractor developing a competitive product, an inability to license the intellectual property to other federal departments, or an inability to guarantee title to the intellectual property resulting in the contractor backing out of the contract.

2.44 A contracting authority should ensure that both the document soliciting bids and the contract clearly state who would own the intellectual property produced as a result of the contract, including the exception invoked when the Crown decides to take ownership of the intellectual property. The contracting authority should also ensure that all contracts include clauses stating that the Crown’s ownership or the licensing rights provided for in the contract would be protected in sub-contracts.

2.45 We found problems when Health Canada and Fisheries and Oceans Canada functioned as the contracting authority for their own contracts. In 34 out of 51 Health Canada files and in 15 out of 19 Fisheries and Oceans Canada files that we reviewed, we observed that the ownership of the intellectual property was not stated or was contradictorily stated in the advanced negotiation or bid solicitation documents.

2.46 Also, in 33 out of the 51 Health Canada files and 8 out of the 19 Fisheries and Oceans Canada files, there was no clause requiring sub-contracting arrangements to reflect the Crown’s ownership or licensing rights. Adherence to the contracting authority obligations is important to ensure proper contract administration when intellectual property is expected to result from a contract.

2.47 When Public Works and Government Services Canada enters into Crown procurement contracts on behalf of other entities, Public Works and Government Services Canada acts as the contracting authority for those entities. However, departments remain responsible for decisions regarding the ownership of intellectual property. We found that Public Works and Government Services Canada fulfilled its responsibilities relating to intellectual property when it acted as the contracting authority on behalf of National Research Council Canada, Health Canada, and Fisheries and Oceans Canada.

2.48 Recommendation. Health Canada and Fisheries and Oceans Canada should state in both the documents soliciting bids and in the contract itself who will own the intellectual property, including the exception invoked when the Crown decides to take ownership of the intellectual property expected to result from the Crown procurement contract. These departments should also ensure that the Crown’s ownership and/or licensing rights are protected in sub-contracts where applicable.

Health Canada’s response. Health Canada agrees with the recommendation. Health Canada is updating a mandatory questionnaire on intellectual property, which is completed by managers, as part of the training on intellectual property. This mandatory questionnaire is completed during the pre-contractual phase of procurement, which addresses contracting policy issues including intellectual property. This key control document identifies ownership of intellectual property resulting from a contract; it is being amended to provide additional controls such as the requirement to record exemptions invoked when the Crown takes ownership of the intellectual property produced as a result of a Crown procurement contract. The questionnaire will be implemented by end of April 2009.

Fisheries and Oceans Canada’s response. Fisheries and Oceans Canada agrees with the recommendation. The Department will implement measures, over the next 6 to 12 months, to ensure the following:

• Documents soliciting bids and corresponding procurement contracts state whether intellectual property arising under contracts will be vested in the Crown or owned by the contractor, to ensure that the Crown’s ownership and licensing rights are protected.
• In cases where the Crown elects to own the intellectual property, these exceptions will be set out in those documents and recorded in the Department’s financial system for reporting purposes. The Project Authority of these contracts will also ensure protection of this Crown-owned intellectual property.
• Crown ownership and/or licensing rights are protected/secured in subcontracts, where applicable.

Fisheries and Oceans Canada will include standardized intellectual property clauses in all procurement contracts.

Internally generated intellectual property 

Health Canada and Fisheries and Oceans Canada lack a department-wide policy for managing their intellectual property

2.49 An entity-wide intellectual property policy forms the framework for managing intellectual property assets appropriately. It provides linkages to government direction and policies; provides strategic corporate direction to ensure that the management of intellectual property relates to the entity’s mandate, goals, and priorities; outlines responsibilities for intellectual property; and facilitates consistent management of intellectual property throughout the entity. Since the federal government does not have an overall policy for managing internally generated intellectual property, it is even more important that entities develop their own entity-wide intellectual property policy.

2.50 The National Research Council Canada’s intellectual property policy provides a basis for managing internally generated intellectual property and includes guidance on roles and responsibilities for managing intellectual property, as well as for disclosure, ownership, and protection. Following the examination phase of the audit, the National Research Council Canada told us that it is interested in leveraging its expertise and management framework to support the federal government’s management of internally generated intellectual property, and plans to engage senior level entity officials to explore opportunities and possible options.

2.51 Health Canada developed a draft version of an intellectual property policy in 2005, but has not implemented it due to a lack of resources. Fisheries and Oceans Canada has an intellectual property policy, but it is not department-wide. The Canadian Hydrographic Service, part of Fisheries and Oceans Canada’s Science Sector, and the Canadian Coast Guard do not use the Department’s policy and do not have their own intellectual property policy. In the summer of 2008, during our audit, Fisheries and Oceans Canada created a departmental working group to develop a department-wide intellectual property policy.

2.52 In the absence of central guidance on licensing and commercialization, entities need to develop their own policies, guidelines, and procedures for licensing intellectual property to help ensure that they consider commercialization opportunities. We found that the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada all license internally generated intellectual property. However, Health Canada and Fisheries and Oceans Canada lack guidelines for doing so. While these departments had smaller licensing revenues than the National Research Council Canada did in the 2006–07 fiscal year, guidance is needed to ensure that staff know how to proceed with licensing and commercializing intellectual property.

2.53 At the time of our audit, the National Research Council Canada was developing more comprehensive guidelines on licensing and commercialization. Health Canada has not yet developed guidelines on licensing intellectual property. Fisheries and Oceans Canada’s Science sector has outdated procedures for managing intellectual property that contain some guidelines on licensing. Department officials informed us that following the finalization and approval of Fisheries and Oceans Canada’s new intellectual property policy, the Department plans to develop accompanying licensing guidelines.

2.54 Recommendation. Health Canada and Fisheries and Oceans Canada should develop and approve a department-wide intellectual property policy, including guidelines for licensing and commercializing intellectual property.

Health Canada’s response. Health Canada agrees with the recommendation to develop a department-wide intellectual property policy that will be appropriate for its regulator mandate to protect and maintain the health of Canadians. The Department has initiated a review of its draft 2005 policy and its current situation, which will lead to the development of the departmental policy. Health Canada intends to have an approved policy including guidelines for licensing and commercialization by summer 2011.

Fisheries and Oceans Canada’s response. Fisheries and Oceans Canada agrees with the recommendation. The Department has created a working group to expedite the development of a Fisheries and Oceans Canada intellectual property policy for managing, licensing, and commercializing intellectual property. Guidelines supporting implementation of the policy will also be developed. The policy and the guidelines should be completed in the 2009–10 fiscal year.

Health Canada and Fisheries and Oceans Canada need to improve their identification and disclosure of inventions

2.55 Effective management of intellectual property assets requires that the entity understands what intellectual property it holds. Identifying the intellectual property an entity generates in the course of its research activity is challenging, particularly when the intellectual property emerges as a by-product of an activity. However, identification is crucial for making subsequent decisions regarding the ongoing management of these assets or their transfer to the private sector.

2.56 When public servants develop an invention, they must submit an invention disclosure form. Failure to identify and disclose inventions may result in loss of potential intellectual property benefits to the entity, government, and society as a whole. The average number of invention disclosures varies among entities with significant science and technology expenditures, including millions of dollars in research and development (Exhibit 2.6).

Exhibit 2.6—The average number of invention disclosures varied among entities during the fiscal years 2003–06

2.57 We found that the National Research Council Canada has a process for identifying inventions that involves its researchers, business development officers at its institutes, and its central intellectual property office. In addition, it systematically reviews its research papers before publication to identify and prevent accidental disclosure of any intellectual property. It also provides ongoing training in how to identify and disclose intellectual property.

2.58 Conversely, Health Canada and Fisheries and Oceans Canada do not have a process for identifying inventions (Exhibit 2.7). The departments do not have formal mechanisms to assist staff in determining what constitutes internally generated intellectual property. They primarily rely on their sole intellectual property advisor to offer some training on the subject to departmental staff.

Exhibit 2.7—The adequacy of identification and disclosure of internally generated inventions varies among and within entities

2.59 Department officials at Health Canada and Fisheries and Oceans Canada told us that they were not certain if all department staff disclosed all inventions. In the 2006 calendar year, we found only one disclosed invention at Health Canada and only two at Fisheries and Oceans Canada. Despite the innovative work conducted in these departments, their significant expenditures on science and technology, including millions of dollars in research and development, and the number of scientists and researchers they employ, these entities do not know whether all intellectual property is being disclosed.

2.60 Recommendation. Health Canada and Fisheries and Oceans Canada should establish a mechanism to ensure that inventions are adequately identified and disclosed.

Health Canada’s response. Health Canada agrees with the recommendation. The Department-wide intellectual property policy will address the issues around invention identification and disclosure, including appropriate mechanisms to do so. This will be developed in accordance with the strong regulatory mandate of the Department, which directs the focus of the science and technology activities performed at Health Canada.

Fisheries and Oceans Canada’s response. Fisheries and Oceans Canada agrees with the recommendation. It will develop a departmental intellectual property policy that will include measures to identify and disclose inventions and other intellectual property arising from Crown procurement contracts that it awards or that are awarded by Public Works and Government Services Canada on its behalf. Fisheries and Oceans Canada will develop guidelines consistent with its intellectual property policy, which will incorporate measures to ensure that in-house inventions and other intellectual property are adequately identified and disclosed. It will implement the guidelines immediately following their approval, and ensure that they are understood by all managers. As the policy and guidelines will be completed in 2009–10, implementation will be initiated subsequently.

In Health Canada and Fisheries and Oceans Canada, Crown-owned copyright is not being adequately disclosed

2.61 Crown-owned copyright is assigned to written materials produced by public servants. While a federal mechanism exists for disclosing inventions, there is no formal mechanism in place for public servants to disclose their Crown-owned copyright material. The lack of a formal disclosure mechanism makes it difficult for entities to systematically identify and obtain information on the potentially valuable copyright material their employees produce. This creates several potential risks, including lost opportunities for protection and for commercialization by not identifying intellectual property contained in publications.

2.62 The National Research Council Canada has a mechanism for identifying and disclosing Crown-owned copyright material. We found that Health Canada did not know how much Crown-owned copyright material its employees produce and that employees are not aware that they should be informing the intellectual property office about the material they have produced for publication. Similarly, at Fisheries and Oceans Canada, with the exception of the Canadian Hydrographic Service, we found that the Department did not know how much Crown-owned copyright material its employees produce (Exhibit 2.8).

Exhibit 2.8—The adequacy of identification and disclosure of internally generated Crown-owned copyright varies among and within entities

2.63 Recommendation. Health Canada and Fisheries and Oceans Canada should ensure that Crown-owned copyright material that has potential intellectual property value is properly disclosed.

Health Canada’s response. Health Canada agrees with the recommendation to ensure that Crown-owned copyright material that has potential value is properly disclosed as this will be addressed in the department-wide intellectual property policy to be developed. This policy will take into account the predominant public good nature of the intellectual property generated at Health Canada. Furthermore, training will be developed for the scientific community at Health Canada to support the implementation of the department-wide intellectual property policy by summer 2011.

Fisheries and Oceans Canada’s response. Fisheries and Oceans Canada agrees with the recommendation. It will ensure that mechanisms are developed to ensure that Crown-owned copyright assets that have potential value can be properly disclosed. The Department’s Canadian Hydrographic Service data and data products are disclosed automatically upon incorporation in data management systems that are used by the Canadian Hydrographic Service to process the data and create data products.

The Department intends, over the next 6 to 12 months, to raise awareness among staff of the potential value of intellectual property associated with scientific papers, including software and data products that are subject to copyright and technology that might be disclosed therein.

It is believed that enhanced awareness among staff on the potential value of intellectual property will substantially contribute to addressing the recommendation as staff would generally be better informed and more cautious about publishing any copyright material that might jeopardize the commercialization of the copyright material or of any invention described therein.

Conclusion

2.64 Eight years after the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts was revised and expanded, the federal government is still not in a position to know if the objective of the Policy is being realized. Industry Canada and the Treasury Board of Canada Secretariat have not adequately monitored the application of the Policy, with a focus on cases where exceptions were invoked. In addition, Industry Canada and the Treasury Board of Canada Secretariat have not yet evaluated the Policy. Preparations for the 2011 evaluation of the Policy are ongoing. Our audit work found that there are significant errors in the data due to a lack of understanding of intellectual property management. These errors will undermine a future evaluation of the Policy unless data validity is established at the entity level.

2.65 The National Research Council Canada, Health Canada, and Fisheries and Oceans Canada distribute awards to inventors based on the guidance provided in the Award Plan for Inventors and Innovators Policy. Neither the Treasury Board of Canada Secretariat nor the Canada Public Service Agency has monitored the effectiveness of the entities’ award plans, or the effectiveness of the Policy itself. As a result, the federal government does not know if it has the appropriate financial incentives in place to encourage the commercialization of internally generated intellectual property or the use of inventions within the government. The National Research Council Canada has its own award plan in place, while Health Canada and Fisheries and Oceans Canada do not. None of the three entities reported to the Treasury Board of Canada Secretariat or the Canada Public Service Agency on the financial awards distributed.

2.66 We found that the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada did not accurately identify or report their intellectual property resulting from Crown procurement contracts. Given that the entire sample for the National Research Council of Canada did not actually contain intellectual property, we do not have a basis for further assessing how it managed intellectual property resulting from Crown procurement contracts. Health Canada and Fisheries and Oceans Canada do not accurately justify Crown ownership of intellectual property and are not fulfilling their obligations as a contracting authority.

2.67 When Public Works and Government Services Canada functioned as the contracting authority for the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada, we found that it fulfilled its responsibilities relating to intellectual property.

2.68 The National Research Council of Canada has mechanisms in place to adequately manage its internally generated intellectual property assets, including an entity-wide intellectual property policy and mechanisms to identify intellectual property, while Health Canada and Fisheries and Oceans Canada do not.

About the Audit

All of the audit work in this chapter was conducted in accordance with the standards for assurance engagements set by The Canadian Institute of Chartered Accountants. While the Office adopts these standards as the minimum requirement for our audits, we also draw upon the standards and practices of other disciplines.

Objectives

This audit examined whether selected federal entities can demonstrate that they manage Crown intellectual property assets effectively. Our specific objectives were the following:

• Determine whether the Treasury Board of Canada Secretariat and Industry Canada are fulfilling their policy obligations with respect to monitoring the application of the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts.
• Determine whether the Treasury Board of Canada Secretariat and the Canada Public Service Agency have fulfilled their policy obligations with respect to the Award Plan for Inventors and Innovators Policy.
• Determine the extent to which the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada can demonstrate compliance with the Treasury Board of Canada Secretariat’s Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts.
• Determine whether the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada can demonstrate that they have mechanisms in place to adequately manage their internally generated intellectual property assets.

Scope

The audit included the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada. At the National Research Council Canada, we looked at the Central Business Support Office, Administrative Services and Property Management Branch, and its institutes. At Health Canada, we looked at the Intellectual Property and Technology Transfer Office and the Procurement and Contracting Division. At Fisheries and Oceans Canada, we looked at Integrated Business Management and the Canadian Hydrographic Service, which are part of the Sciences Sector; the Canadian Coast Guard; the Accounting, Materiel and Administrative Services Branch; and the Finance and Administration Directorate. The audit also included the Acquisition Program Integrity Secretariat at Public Works and Government Services Canada, the Federal Science and Technology Policy Branch at Industry Canada, the Investment Project Management and Procurement Policy Division and the Strategic Policy Branch at the Treasury Board of Canada Secretariat, and the Learning and Leadership Development Branch at the Canada Public Service Agency.

The sample of contracts we reviewed for this audit was drawn from 1 January 2006 to 31 December 2006, the most current year at the time of the audit where we had an entire calendar year of data. We excluded all data that had previously identified coding errors. We reviewed 147 Crown procurement contracts drawn from a sample that excluded contracts that the government had previously identified as being inaccurately coded. We also looked at contracts from 1 January 2000 to 31 December 2006 in which the Treasury Board of Canada exemption was invoked. We also reviewed 55 invention disclosures and 37 licence agreements.

Approach

We used the Government Wide Procurement Reporting System database of Crown procurement contracts to find contracts valued at $25,000 or more and that were reported to contain intellectual property. This allowed us to

• determine the extent to which the National Research Council Canada, Health Canada, and Fisheries and Oceans Canada had complied with the Treasury Board of Canada Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts;
• identify the contracts where Public Works and Government Services Canada acted as the contracting authority for each of the above mentioned entities; and
• examine the extent to which Public Works and Government Services Canada complied with the contracting authority functions identified in the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts.

We identified 345 Crown procurement contracts that had been reported during the period from 1 January 2006 to 31 December 2006. The contracts that we identified were as follows:

• 7 contracts with contractor-owned intellectual property at the National Research Council Canada
• 262 contracts with contractor-owned intellectual property and 38 contracts with Crown-owned intellectual property at Health Canada
• 12 contracts with contractor-owned intellectual property and 26 contracts with Crown-owned intellectual property at Fisheries and Oceans Canada

Of the 345 contracts, we examined a total of 147 contracts:

• 4 contracts were at the National Research Council Canada with contractor-owned intellectual property (in two of which Public Works and Government Services Canada was the contracting authority) and three contracts with Crown-owned intellectual property (in 2 of which Public Works and Government Services Canada was the contracting authority).
• 50 contracts with contractor-owned intellectual property were at Health Canada (in 7 of which Public Works and Government Services Canada was the contracting authority) and 50 contracts with Crown-owned intellectual property (in 4 of which Public Works and Government Services Canada was the contracting authority). Health Canada could not provide us with 13 contracts from our sample of 113, so we could not assess whether these contracts complied with the Policy on Title to Intellectual Property Arising Under Crown Procurement Contracts. According to Health Canada, one file was deleted from the system and four others had no invoices.
• 12 contracts with contractor-owned intellectual property were at Fisheries and Oceans Canada (in 6 of which Public Works and Government Services Canada was the contracting authority) and 26 contracts with Crown-owned intellectual property (in 14 of which Public Works and Government Services Canada was the contracting authority). We reviewed an additional 2 contracts at Fisheries and Oceans Canada that contained intellectual property, which we found should have been reported but were not.

Out of a total of 255 contractor-owned files available in Health Canada’s records, we took a random sample of 60 where Health Canada was the contracting authority in such a way as to give a margin of sampling error (a confidence interval) of plus or minus 10 percent at a 90 percent confidence level.

We also assessed all Crown procurement contracts valued at $25,000 or more and reported to contain intellectual property where the Crown had invoked an exemption requiring Treasury Board approval during the period 1 January 2000 to 31 December 2006. Our sample contained one such Crown procurement contract at Fisheries and Oceans Canada.

We reviewed a total of 55 invention disclosure forms (one form at Health Canada, two forms at Fisheries and Oceans Canada, and 52 forms at the National Research Council Canada) that had been signed in the 2006 calendar year, to determine if there was an adequate process in place for identifying internally generated intellectual property.

We reviewed a total of 37 licence agreements (30 licences at the National Research Council Canada and 7 licences at Fisheries and Oceans Canada; there were no licences at Health Canada) that had been signed in the 2006 calendar year, to determine whether there was an adequate process in place to license, transfer, and/or commercialize internally generated intellectual property.

Criteria

Listed below are the criteria that were used to conduct this audit and their sources.

Audit work completed

Audit work for this chapter was substantially completed on 19 September 2008.

Audit team

Assistant Auditor General: Nancy Y. Cheng
Principal: John Affleck
Director: Milan Duvnjak

Laurent Bergeron Collin
Hersi Hujaleh
Sophia Khan
Maxine Leduc
Chantal Turgeon

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Appendix—List of recommendations

The following is a list of recommendations found in Chapter 2. The number in front of the recommendation indicates the paragraph where it appears in the chapter. The numbers in parentheses indicate the paragraphs where the topic is discussed.