350R93902
Final Report of Audit on Use of
Cooperative Research and
Development Agreements by
EMSL - Cincinnati
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON D C 20460
OPCICE OP
THE NSPECTOR GENERAL
March 31, 1993
MEMORANDUM
SUBJECT' Audit Report No. E6ABF2-11-0032-3100153
Use of Cooperative Research and Development
Agreements by EMSLTCincinnati
FROM: •> Kenneth A. Konz JC*~~*^. ^-
Assistant Inspector General foAudit
TO: Gary J. Foley
Acting Assistant Administrator for
Research and Development
Attached is our report entitled "Use of Cooperative Research
and Development Agreements by EMSL-Cincinnati-." The overall
objectives were to determine if officials at Environmental
Monitoring Systems Laboratory in Cincinnati:
— created a Government-controlled monopoly by granting five
CRADA companies the exclusive use of the term "EPA
Certified" and by allowing the use of the EPA logo in
marketing the QA materials,
— complied with all authorizing legislation in establishing
the five CRADAs to manufacture and sell QA materials, and
— misused EPA's regulatory authority by becoming intimately
involved in marketing QA materials being sold to the
regulated industry.
The report contains important findings and recommendations
regarding the subject area.
Action Required
In accordance with EPA Order 2750, we have designated the
Assistant Administrator for Research and Development as the
Action Official for this report. As the Action Official, he is
to provide this office with a written response to the audit
report within 90 days of the final audit report date. For
corrective actions planned but not completed by the response
Printed on Recycled Paper
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date, reference to specific milestone dates will assist this
office in deciding whether to close this report. We have no
objections to further release of this report to the public.
This audit report contains findings and recommendations that
describe problems the Office of Inspector General has identified
and corrective actions that we recommend. The audit report
represents our opinion. Final determinations on matters in this
audit report will be made by EPA managers in accordance with
established EPA audit resolution procedures. Accordingly, the
findings described in this audit report do not necessarily
represent the final EPA position.
Should you have any questions about this report, please contact
me at 260-1106 or Edward Gekosky, Divisional Inspector General
for Audit, Headquarters Audit Division, at 703-308-8222.
Attachment
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EXECUTIVE SUMMARY
The Office of the Inspector General (OIG) received
allegations that officials at the Environmental Monitoring
Systems Laboratory {EMSL-Cin) misused the Federal Technology
Transfer Act (FTTA) by entering into Cooperative Research and
Development Agreements (CRAOAs). The CRADAs granted exclusive
rights to five companies to manufacture and sell quality
assurance (QA) materials that previously had been provided free
of charge. Further, by allowing the five CRADA companies to
advertise their products as "EPA Certified", they disrupted a
thriving U.S. industry, which resulted in Congressional inquiries
and hotline complaints to the OIG. As a result of the
allegations, we initiated a review to determine if officials at
EMSL-Cin:
created a Government-controlled monopoly by granting
five CRADA companies the exclusive use of the term "EPA
Certified" and by allowing the use of the EPA logo in
marketing the QA materials;
complied with all authorizing legislation in
establishing the five CRADAs to manufacture and sell QA
materials; and
misused EPA's regulatory authority by becoming
intimately involved in marketing QA materials being
sold to the regulated industry.
BACKGROUND
In the early 1970s, new regulations required testing for
hazardous chemicals in the environment. EPA began a program to
develop and distribute free of charge the materials needed to
calibrate and test instruments used by the regulated community.
At the time, many of these materials were not available. A
thriving industry emerged over the years because the private
sector developed products to meet market needs and could deliver
them more quickly than EPA.
t
In the mid 1980s, due to a combination of increased costs
and budget reductions, EMSL-Cin began looking for ways to
continue funding its QA program. When FTTA was enacted in 1986,
EMSL-Cin saw an opportunity to obtain funds to offset budget
reductions and continue operating its QA program. FTTA allows
Government-operated laboratories to enter into agreements with
other Federal agencies and private industry to encourage the
development and transfer of technology to the private sector.
The Act, for the first time, permitted Federal laboratories and
employees to collect royalties from patents and licensing
agreements for Government-owned inventions.
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In 1991, EMSL-Cin entered into CRADAs with five companies
for the purpose of developing and selling the QA materials
previously given away by EPA. Under the agreements, the five
companies were required to label their products as "EPA
Certified." EMSL-Cin also made available about 750,000 ampuls of
QA materials valued at $26 million or more (if all were sold) to
the CRADA companies. The agreements stipulated that EMSL-Cin
would receive a percentage of the CRADA companies' sales for both
the transferred inventory and new materials manufactured by the
CRADA companies.
RESULTS-IN-BRIEF
EPA created conditions for the development of a Government-
controlled monopoly by entering into the QA materials CRADAs.
Only the five companies with which EMSL-Cin has cooperative
agreements can advertise the products they manufacture as "EPA
Certified", while other firms which manufacture similar materials
cannot. Under terms of the CRADAs, EMSL-Cin provided the five
companies a substantial inventory of QA materials which had been
produced by EPA and its contractors. EMSL-Cin receives revenues
based on sales of CRADA company products (both the transferred
inventory and subsequently manufactured materials) which will
continue funding its QA program. By establishing these CRADAs,
EMSL-Cin granted an exclusive right to the companies which
created a condition for a monopoly market to develop. Some
indication that a monopoly may be developing is that QA materials
prices increased substantially from ' 1990 to 1991, the year the
CRADAs were established.
By requiring the CRADA companies to market their products as
"EPA Certified", the Agency created the appearance of a conflict
of interest because it placed itself in a situation where it must
choose between fair and equitable regulation and a desire to
increase revenues through sales of QA materials used by the
regulated industry. As a regulator, the Government must not be
biased in any way towards the community it is regulating. When
industry had the capability to provide the QA materials needed by
the user community, EMSL-Cin should have withdrawn from the
marketplace rather than placing itself in a position where it
uses the regulated industry to compete for a share of the market
for QA materials. Also, by making marketable QA materials
available to the CRADA companies, EMSL-Cin provided a source of
funds to the companies, which is not permitted under FTTA. We
consider the inventory of QA materials produced by EPA and its
contractors to be Government property. In our opinion, it is
inappropriate for EPA to retain funds from the sales of QA
materials which were formerly part of EPA's inventory.
Finally, EPA justified these CRADAs under the Federal
Technology Transfer Act. We believe that technology transfer is
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required under the Act, ^ and that no technology transfer occurred
for these five CRADAs. The marketable inventory that was made
available to the companies, and the ability to produce it were
widely available throughout the industry for years. Further, the
FTTA requires that resources provided by a laboratory under a
CRADA be used toward the conduct of "specified research and
development efforts." The transferred inventory was not used in
"specified research and development"; it was transferred, along
with the right to use the EPA logo and use of the term "EPA
Certified", to aid the marketing efforts. Sales meant a return
of funds to the laboratory.
RECOMMENDATION
We want to ensure that the Agency is no longer in a position
in which it competes with private industry, particularly through
inappropriate channels. We recommend that the Acting Assistant
Administrator for Research and Development, instruct the
Director, EMSL-Cin, to take immediate action to cancel the
laboratory's participation in these five CRADAs, recover any
inventory which had been made available to the five companies
under the agreements which has not yet been sold, and determine
the proper method to dispose of those QA materials that are not
needed to meet any existing obligations such as required
regulations or memorandums of understanding with other agencies.
Some methods which should be considered are: continue
distributing the material until supplies are exhausted, auction
off the material to the highest bidder, and/or properly dispose
of the remaining material as hazardous waste.
AGENCY COMMENTS AND QIC EVALUATION
The Office of Research and Development (ORD) did not agree
with the conclusions and recommendations contained in the OIG
draft report. ORD officials were concerned that our draft report
discussed their personal motivations for entering into these five
CRADAs. They claimed that we were implying they had some
ulterior motive for their actions and that they were only
concerned with making money for the laboratory. At best,
individual motive would be difficult to audit, and we did not
intend to imply we had special insight into individual motives.
We formed our conclusion from the results of our audit of the
activities of EMSL-Cin and the CRADA companies over the last 3
years. Consequently, we believed the statement, reiterated to us
many times during the audit, that the CRADAs were the result of
an effort to offset budget cuts and to assure the availability of
high quality reference materials. The discussion in Chapters 2
and 3 does not concern personal motivations. Rather, the
discussion supports our contention that the QA materials CRADAs
are bad policy for EPA because they create a conflict between the
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Agency's ability to regulate and its desire for income from the
sale of reference materials to the regulated industry. In our
opinion, ORD should withdraw from such activity.
ORD officials objected to our assertion that the five QA
materials CRADAs created a condition for a Government-controlled
monopoly to develop. We agree with their assertion that we did
not prove that a monopoly existed. However, based on the results
of our audit, we contend that these CRADAs create the conditions
for the companies to expand their market share to the point that
they will dominate the market. This condition does not exist
now, but the ability of the CRADA companies to sell their
products as "EPA Certified" gives them the marketing edge needed
to ultimately dominate the market.
ORD officials also argued that the CRADAs were legal and
meet the intent of FTTA. We did not allege, nor did we intend to
imply, that these five CRADAs were illegal, or were the result of
any illegal action. We claimed in our draft report that the
CRADAs did not meet the intent of FTTA. We agree with ORD
officials that the FTTA objectives are broadly written and intent
is open to discussion. However, we still believe that these five
CRADAs are an inappropriate use of the FTTA. First, it is
unclear what, if any, technology was transferred. Second,
providing the existing inventory to the CRADA companies,
requiring they be identified as "EPA Certified", and the
activities of the CRADA companies clearly indicate the marketing
emphasis. We, therefore, have not changed our basic position as
discussed in Chapter 4.
On page 12 of ORD's written comments (see Appendix 1) ORD
concluded that the FTTA was the ,proper mechanism for improving
the quality of reference materials available from the private
sector. ORD proposed several alternative actions to our
recommendation. The first three actions include:
improving the technical and managerial oversight of the
CRADA program;
tabulating the inventory made available to the CRADAs,
the number of samples sold, and the number of samples
needed until new samples are manufactured; and
performing an industry-wide survey to determine the
quality and availability of reference materials
available in the marketplace.
These are, obviously, important steps to take. However, we do
not understand why such steps were not performed before the
decision was made to initiate the CRADAs.
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ORD's fourth proposed action is to withdraw the authority to
use the EPA logo in the advertising of CRADA products. We concur
with this proposal. However, we have some concern over its
effectiveness since many catalogs have already been distributed
for 1993. Also, CRADA products will still be advertised as "EPA
Certified", setting them apart from similar quality reference
materials available in the marketplace. In addition, ORD
proposed to begin negotiations to limit sales of the inventory to
only those materials meeting the CRADA specifications to be
effective by August 1, 1993. Thus, ORD will begin taking steps
to ensure the products sold under the CRADAs actually meet the
specifications.
The fifth proposed action is to ensure the activities of the
company holding both a contract and a CRADA are kept separate.
We concur with this effort, but considering the close
relationship between the two operations, we are concerned about
how the separation will be accomplished. As discussed in the
report, this long-term contract effort with EMSL-Cin has resulted
in a subsidization of the company's entry into the retail market.
We concur with ORD's sixth proposal to continue evaluating
the CRADA operations.
In summary, we believe that the actions proposed by ORD are
necessary to determine whether CRADAs are the best way to
continue the reference material program. In our opinion, these
actions should have occurred prior to establishing these CRADAs
which resulted in giving the companies what appears to be carte-
blanche authority to market "EPA Certified" materials. In any
case, when these analyses are completed, EMSL-Cin should be in a
position to determine what materials are available, what
materials are not available and need to be produced, and how they
should be produced— through the marketplace, in-house, through
contracts, or through CRADAs. For example, if a small quantity
of samples are needed they could be produced with in-house
resources or by a contractor, or if a specific research project
is needed then it could be appropriately performed using a CRADA.
The company would be given the marketing rights if they were
successful in the research. Until this occurs, we continue to
believe that these five CRADAs are inappropriate.
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VI
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TABLE OF CONTENTS
EXECUTIVE SUMMARY i
CHAPTERS
1 INTRODUCTION 1
BACKGROUND 1
SCOPE AND METHODOLOGY 4
PRIOR AUDIT COVERAGE 5
2 QA MATERIALS CRADAS ARE UNIQUE AND CONTROVERSIAL ... 7
QA MATERIALS CRADAS ARE SUBSTANTIALLY
DIFFERENT FROM OTHER EPA CRADAS 7
QA MATERIALS CRADAS HAVE MANY
INCONSISTENCIES AND OMISSIONS 12
SUMMARY OF CRADA AGREEMENTS . 14
QA MATERIALS CRADAS RESULT IN
SIGNIFICANT CONTROVERSIES 15
3 QA MATERIALS CRADAS CREATE POTENTIAL
GOVERNMENT-CONTROLLED MONOPOLY 19
QA MATERIALS MARKET HEAVILY WEIGHTED
TOWARDS EMSL-CIN-CONTROLLED CRADAS 19
GOVERNMENT SHOULD NOT COMPETE
WITH THE PRIVATE SECTOR 23
RESULT OF GOVERNMENT-CONTROLLED MONOPOLY
— PRICE INCREASES 24
EXAMPLES OF PRICE INCREASES
FROM PRE-CRADA TO CRADA 25
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DRAFT: FOR REVIEW AND COMMENT PURPOSES ONLY
TABLE OF CONTENTS
Page
CHAPTERS
4 QA MATERIALS CRADAS ARE AN INAPPROPRIATE USE OF FTTA . 27
QA MATERIALS CRADAS DID NOT TRANSFER TECHNOLOGY . . 28
RESEARCH LIMITED TO DEVELOPING
MARKETABLE QA MATERIALS 29
5 CONCLUSIONS AND RECOMMENDATIONS 33
RECOMMENDATION 35
AGENCY COMMENTS AND OIG EVALUATION 35
APPENDICES
APPENDIX l: AGENCY COMMENTS 39
APPENDIX 2: ABBREVIATIONS 74
APPENDIX 3: REPORT DISTRIBUTION 75
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CHAPTER 1
INTRODUCTION
The Office of Inspector General (OIG) received allegations
from an external source that officials at the Environmental
Monitoring Systems Laboratory - Cincinnati (EMSL-Cin) improperly
applied the Federal Technology Transfer Act (FTTA) by entering
into Cooperative Research and Development Agreements (CRADA) with
five private companies. The allegations state that EMSL-Cin
granted the companies exclusive rights to manufacture and sell
quality assurance (QA) materials that previously were provided
free of charge by EMSL-Cin. Further, by allowing the five CRADA
companies to advertise their products as "EPA Certified", they
disrupted a thriving U.S. industry. As a result of these
allegations, we initiated a review to determine if officials at
EMSL-Cin:
— created a Government-controlled monopoly by granting five
CRADA companies the exclusive use of the term "EPA
Certified" and by allowing the use of the EPA logo in
marketing the QA materials;
— complied with all authorizing legislation in establishing
the five CRADAs to manufacture and sell QA materials; and
— misused EPA's regulatory authority by becoming intimately
involved in marketing QA materials being sold to the
regulated industry.
BACKGROUND
In the early 1970s, EPA promulgated new regulations that
required testing for hazardous chemicals in the environment. In
order to test for the various regulated chemicals, laboratories
needed calibration standards to adjust equipment settings and
quality control samples to periodically check the operations of
their test equipment. At the time, many of these QA materials
were not available for many of the regulated chemicals. As a
result, under its Quality Assurance Program, EMSL-Cin began to
develop, manufacture, and distribute these materials free of
charge to qualified users. Eventually, these materials were
largely produced, stored, and distributed by EPA contractors.
EMSL-Cin officials said environmental legislation mandates
their QA program. Although not formally written into the laws,
laboratory officials interpreted the legislation as giving them
the authority to produce and distribute the QA materials to
qualified users. However, the Director, EMSL-Cin told us that,
legally, they could stop the QA materials distribution program at
any time.
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Over time, the number and type of products distributed
continued to grow and costs continued to rise. By 1990, EMSL-Cin
had accumulated a vast inventory of QA materials estimated at
over 750,000 containers or ampuls. Assuming they could all be
sold, we estimated the value of the materials at $26 million or
more.
Thriving QA Materials Industry
Developed in Private Sector
Although free QA materials were available from EMSL-Cin, a
thriving industry developed over the years. The users of these
materials were willing to purchase materials that were otherwise
available for free because the private sector provided materials
more quickly. For example, one user said that an order for free
QA materials could take months to receive and often required
repeat orders because EMSL-Cin had no system for back ordering.
Private companies advertised overnight delivery and provided
dependable and timely back order service. EMSL-Cin's
distribution restrictions to qualified users was another factor
contributing to the growth of the private sector. Due to
increased demand and limited funds, the laboratory gradually
restricted the number of eligible users of free QA materials.
Industry competition caused manufacturers to continuously
improve products in order to gain and hold a niche in the market.
Successful companies developed products to satisfy specific needs
and marketed their products through advertisements in trade
magazines and catalogs to target specific markets. Marketing
innovations developed by these companies included offering
materials in more than one volume, using containers that could be
opened and closed which eliminated waste, and combining several
chemicals in one product which saved laboratory testing time.
Multicomponent materials can be used to test several chemicals at
a time, while single component materials require the user to run
a separate test for each chemical, which takes additional time
and ties up valuable equipment. A competitive industry grew
around EMSL-Cin's program, because private industry developed
products more suitable to user needs and could deliver them more
quickly.
It was common practice for users to order materials from
more than one source, including the free EPA products, as a means
for checking the reliability of the materials being used and to
improve the calibration of laboratory testing equipment.
According to long-time manufacturers, this testing by competitors
can identify poor quality materials, and companies producing
substandard materials are soon exposed and do not remain in
business for long. Today, about 25 companies provide QA
materials to the marketplace, with approximately 12 of these
companies devoted entirely or substantially to this business.
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Several companies started in the 1970s or before, and most have
been in existence for 10 to 15 years.
EMSL-Cin's Need for Funds Grew as OA
Materials DistributionProgram Expanded
The demand for QA materials increased as new regulations
identified additional chemicals to be tested and lowered
tolerance levels for previously identified chemicals. As a
result, the expanding market increased the costs of the program.
In 1986, EPA obtained permission to charge user fees as a means
to defray the costs of providing the QA materials, however, the
Office of Management and Budget ruled that any funds collected
had to be deposited in the U.S. Treasury. As a result, EMSL-Cin
abandoned its plan to sell the materials. Coincidental with the
user fees, funds for the QA materials distribution program were
eliminated. The abrupt elimination of funds forced EMSL-Cin to
look for other sources of funds.
When the FTTA was passed in 1986, EMSL-Cin officials saw an
opportunity to obtain funds to offset budget reductions and
continue the QA materials distribution program. Under the Act,
Federal laboratory directors and others designated by each agency
can enter into CRADAs for the purpose of accelerating the
transfer of patents and technology to the private sector. The
Act, for the first time, permitted Federal laboratories and their
employees to collect royalties from patents and licensing
agreements for Government-owned inventions.
In 1989, using the FTTA as its justification, EMSL-Cin
publicized its desire to "privatize" the research, development,
preparation, and distribution of QA materials and in 1990 asked
for proposals from interested manufacturers. In 1991, EMSL-Cin
entered into CRADAs with five companies for the purpose of
developing and selling QA materials. The CRADAs stipulated that
EMSL-Cin would receive a percentage of the companies' sales for
both the EPA inventory materials made available for sale by the
companies under the agreements and the new materials manufactured
by the companies. More importantly, the CRADAs required the
companies to advertise their products (both the transferred
inventory and new materials) as "EPA Certified", using the EPA
name and logo. CRADA company representatives said association
with the EPA name brought them prestige and credibility and
generated business for their other product lines.
Of the five companies receiving CRADAs, three have been
manufacturing and marketing similar materials for several years.
The fourth CRADA involves two companies; one is a large catalog
house that offers a wide variety of laboratory products of which
these reference materials are only a small part; the other is a
small manufacturer of specialized QA materials. These four CRADA
companies had extensive marketing systems and could easily
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incorporate the CRAOA products into their development,
manufacturing, and distribution systems. The fifth CRADA company
is a long-term EPA contractor that manufactured, tested, stored,
and distributed a substantial portion of the QA materials. The
materials made available for sale by this company were most of
the material it had been paid to manufacture, store, and
distribute under the old free distribution program. This company
had never before competed in the marketplace.
SCOPE AND METHODOLOGY
We conducted our audit work between April 6, 1992, and
December 31, 1992. We reviewed laws, the executive order, and
EPA's delegation of authority and order implementing FTTA. We
reviewed the Code of Federal Regulations concerning requirements
for chemical analyses of municipal and industrial wastewater. We
also reviewed Agency policy regarding the use of the EPA name and
logo.
We interviewed EPA attorneys and officials at the Department
of Commerce which is responsible under the FTTA for furnishing
advice and assistance to other Federal agencies concerning CRADA
programs and projects. We discussed issues regarding the
appropriateness of EMSL-Cin's use of CRADAs to develop and
distribute QA materials. We obtained information on EPA's use of
FTTA to enter into CRADAs with the private sector from officials
of the Office of Technology Transfer and Regulatory Support
within ORD. To determine how the CRADAs affected the private
market, we interviewed officials from the five CRADA companies
and seven other companies that manufacture and sell QA materials
that compete with CRADA products. We gathered information from
these companies concerning the QA materials market and the
CRADAs. To gain an understanding of QA materials programs in
other agencies, we interviewed officials from the National
Institute of Standards and Technology, U.S. Geological Survey,
and Food and Drug Administration. We interviewed officials from
the American Association for Laboratory Accreditation (A2LA) to
gain an understanding of the accreditation process available to
non-CRADA QA materials companies.
We performed our audit in accordance with the Government
Auditing Standards issued by the Comptroller General of the
United States (1988 Revision). We did not perform a
comprehensive evaluation of EMSL-Cin's internal controls and did
not verify data from any management information system. We
reviewed the fiscal 1992 annual Federal Managers' Financial
Integrity Act report on internal controls for (l) the Agency,
(2) ORD, and (3) EMSL-Cin to determine if ORD identified any
applicable weaknesses in their evaluation of internal controls.
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PRIOR AUDIT COVERAGE
No prior audits of EPA's CRADAs came to our attention.
However, in December 1992, the General Accounting Office (GAO)
issued a report, "Technology Transfer, Barriers Limit Royalty
Shanng's1 Effectiveness" (GAO/RCED-93-6), on the effectiveness of
Federal agencies' royalty sharing programs after the first 5
years of FTTA. The report evaluated data from 21 agencies,
including EPA, that (1) represented a cross section of research
and development missions with the potential for producing
patentable technology, (2) obligated funds for intramural
research and development in"fiscal 1991, and (3) employed Federal
scientists. GAO concluded that royalty sharing has had little
impact on the number of patents and the scientists' interest in
obtaining patents. GAO recommended that agencies more adequately
reward inventors and laboratories, and train scientists to
recognize patentable material that has commercial potential.
Because of the recent release of the report, we did not determine
what actions, if any, EPA had taken as a result of the report.
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Chapter 2
QA MATERIALS CRADAS
ARE UNIQUE AND CONTROVERSIAL
This chapter describes the differences between the five QA
materials CRADAs and other EPA CRADAs, the differences among the
five QA materials CRADAs, and the controversy surrounding EPA's
decision to enter into the QA materials CRADAs. Though the QA
materials CRADAs are unique and controversial, they are
apparently legal under the broadly written FTTA.
We reviewed EMSL-Cin's agreements with the five companies
and found that they were substantially different from the
Agency's other CRADAs. In addition, we found significant
differences between these five CRADAs and the other 39 CRADAs the
Agency had established, particularly in the financial
arrangements. We also reviewed the CRADA documents in response
to several allegations received during the course of this review.
We make the point that these CRADAs are unique and
controversial to show that we view them as a separate subset of
all Agency CRADAs and to show that, at a minimum, many question
their validity. We do acknowledge that being unique and
controversial does not necessarily make the CRADAs wrong. To us,
however, it does contribute to making them suspect.
QA MATERIALS CRADAS ARE SUBSTANTIALLY
DIFFERENT FROM OTHER EPA CRADAS
As of December 1992, EPA was involved in 44 CRADAs and 5
licensing agreements. Most of the CRADAs deal with the
development or evaluation of techniques or equipment for
improving environmental conditions. Some provide for the sharing
of specialized equipment or facilities. The EPA patent counsel
said that in most cases, EPA was approached by a potential
cooperator that wanted to work with EPA in a particular
technology area. As a part of the CRADA, a company can provide
funds to EPA, such as the $3.1 million provided by Exxon
Corporation in an EPA CRADA involving work associated with the
Alaskan oil spill. The Agency can also receive funds from
royalties and licensing fees for EPA-owned inventions.
The five QA material CRADAs differ from all the other CRADAs
in very significant ways. Rather than focusing on a specific
technology area or specified research and development efforts,
these CRADAs provide for general research and development,
manufacturing, testing, and marketing of QA materials. The
differences we noted are listed below:
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— they were competed much like contracts,
— EPA receives "indirect funds" only as a result of sales
through these five CRADAs,
— they require the use of the EPA name and allow the use of
the EPA logo, and
— they were questioned repeatedly by Congress and several
Federal agencies on the potential impact to small
businesses; and they caused turmoil and confusion within
the private sector.
Under the terms of the CRADAs, EMSL-Cin made available to
the companies millions of dollars worth of QA materials that it
had paid contractors to manufacture. The CRADAs also provide for
the manufacture of replacement materials and the development of
new marketable materials for which EMSL-Cin will receive a
percentage of sales. These actions will provide EMSL-Cin with a
source of revenues to continue funding its program.
CRADAs Were Competed Much Like Contracts
The FTTA does not require competition and allows Federal
laboratory directors and others designated by each Federal agency
to enter into agreements at their discretion. Officials at EMSL-
Cin opted to award the CRADAs on a competitive basis even though
it was not legally required. They said that competing the CRADAs
was an attempt to make the award as fair and open as possible.
Curiously, they performed no survey prior to the competition to
determine the availability and quality of materials in the
private sector. Eventually, five CRADAs were awarded with one
CRADA going to one of their long-term contractors.
ORD made a strong effort to openly compete the CRADAs. ORD
advertised their interest in entering these CRADAs in the
Commerce Business Daily. Public meetings were held for the
manufacturers of reference materials to answer questions and
address issues. ORD evaluated proposals from 14 manufacturers
and eventually selected five firms. ORD officials 'said they
competed the CRADAs to allow all interested parties to submit
proposals and ensure an open procurement.
We recognize the positive effort ORD made to build integrity
into their award process. We do have concerns, however. For
example, if ORD wanted a repository and distribution system for
its QA materials, it should have continued to contract for that
service. Since ORD was not specific in the research and
development it needed, and the technology widely existed to
manufacture these products, the CRADAs were an inappropriate
vehicle to accomplish the program.
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"Indirect Funds" Received Only
Through QA Materials CRADAs
According to the FTTA Coordinator, EPA can receive funds
through CRADAs in three ways — direct funds, patent funds, and
indirect funds. EPA receives "indirect funds" (a percentage of
the sales of the transferred inventory or the new materials) only
through the five QA materials CRADAs.
— Direct funds are contributed by the private sector and
can be used for a variety of purposes such as pilot
research, field research, equipment, travel, and per
diem. As of August 1992, Exxon Corporation was the
largest contributor of direct funds at $3.1 million for
work associated with the Alaskan oil spill. All other
contributions totaled about $3 million.
— Patent funds are derived from licensing agreements and
royalties paid for EPA-owned patents. The FTTA requires
that individual inventors named in Government-owned
patents receive at least 15 percent of these fees. EPA
Order 3130.1 allocates 35 percent to individual inventors
named on EPA-owned patents. As of August 1992, the
Agency had received licensing fees for three of its
licensing agreements ($2,500, $20,000, and $34,000).
Three employees had received fees from two of the
licensing agreements (one received $7,000 and two co-
inventors received $6,000 each). No royalties resulting
from the licensing agreements had been received.
— Indirect funds are received by EPA from the five QA
materials CRADAs only. Funds are received in quarterly
payments for the CRADA products sold. Payments range
from 8 to 50 percent of the wholesale price for EPA-
produced materials and from 5 to 20 percent of the
wholesale price for materials produced by the CRADA
companies. Annual receipts,,during the first year and a
half totalled slightly over $270,000. Almost all of
these funds were allocated for research and development
and were split between EMSL-Cin's two contractors, one of
which was a QA materials CRADA company. A small part of
the funds was set aside for travel and supplies. No EPA
employee received any of these funds.
These five CRADAs are unique at EPA, as they are the only ones to
receive indirect funds as a percentage of sales. EMSL-Cin's
income is more like a sales commission rather than a royalty for
a patent or a licensing agreement. This is substantially
different from the other CRADAs.
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CRADAs Require the Use of EPA's
Name and Allow Use of EPA's Logo
/
The five QA materials CRADAs allow the use of the EPA logo
for CRADA company advertising and require that the companies'
product labels indicate "EPA Certified" or use similar language
approved by EPA. Thus, the term "EPA Certified" can only apply
to QA materials made by the CRADA companies or the materials
transferred to them by EPA. An April 1989 sample CRADA (also
referred to as a "boilerplate") was given to companies interested
in the QA materials CRADAs. Section "11.11 Use of Name or
Endorsements" makes it very clear that EPA and its laboratories
carefully protect the use of their names and endorsements and
states that:
The Company shall not use the name of the Laboratory or the
Environmental Protection Agency on any product or service
which is directly or indirectly related to either this
Agreement or any patent license or assignment agreement
which implements this Agreement without the prior approval
of the Laboratory.
The section begins with the caption "** This is boilerplate and
should not be changed." In addition, EPA Order 1015.2A prohibits
reproduction and/or use of the EPA logo for commercial purposes.
We could not determine the exact origin of the decision to
require the use of "EPA Certified." ORD officials said that
after statements of qualification were received, but before the
CRADAs were awarded, it was decided the CRADA companies would not
only be permitted, but required, to use the EPA name/endorsement
in advertising and selling the CRADA products.
This was a significant difference from other CRADAs, because
the other CRADAs do not allow this freedom to use the EPA name
and logo. According to the FTTA coordinator, none of the other
CRADAs allowed the use of EPA's name. Officials from both CRADA
and non-CRADA companies told us that the use of the EPA name
carries authority and prestige that substantially improves the
CRADA company's marketing position. Thus, we can only conclude
that the primary purpose for requiring the use of the EPA name
was to establish a marketing advantage over the other products
being produced in the private sector. Whatever the reason, this
requirement sets these CRADAs apart from all the others.
CRADAs Were Questioned Repeatedly and
Caused Confusion in the Private Sector
The Director, EMSL-Cin, said he had to respond to several
inquiries from members of Congress and the Small Business
Administration to address concerns about the CRADA program
harming small businesses and the questionable quality of the
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materials being sold as "EPA Certified" material. The U.S.
Attorney's Office recently defended ORD and the laboratory
director in a lawsuit which challenged three of the CRADAs. In
addition, EPA's Office of General Counsel questioned the legality
of giving away the QA materials inventory, finally deciding it
was permissible if EPA received something in return. So far, the
CRADAs have retained approval, but they have caused considerable
turmoil and confusion in the process. Officials in other
Government agencies and all non-CRADA companies we contacted
expressed concern about EPA's involvement in the commercial
market. Some of the comments we received included the following:
Certification implies a warranty. I worry that EPA is not
closely controlling EPA certified materials.
With EPA being both the policeman and a participant in the
market, who will police EPA's market activities7
Government should not be in competition with the private
sector.
It is unfair for EMSL-Cin to both regulate/control the user
community and participate in the profits from sales to that
community.
It is improper for EPA to institute, enforce, and profit
from the same regulations.
EPA's involvement in the process slows down the necessary
response to market needs.
Department of Commerce officials (the agency responsible
under FTTA for furnishing advice and assistance to other Federal
agencies concerning CRADA programs) were surprised that EPA was
receiving income from the sale of CRADA products while, as the
regulator, it required the regulated community to use the
products.
Non-CRADA company officials also described confusion by the
user community over whether "EPA Certified" products are required
and how to get them that often resulted in a loss of orders and
ultimately the loss of a customer. When asked if any of the
other CRADAs had received as much attention and scrutiny as the
five QA materials CRADAs, the FTTA Coordinator said there have
been no problems with the other 39 CRADAs and that arrangements
for them have been smooth and "very enjoyable.11
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QA MATERIALS CRADAS HAVEMANY
INCONSISTENCIES AND OMISSIONS
Despite the fact that these CRADAs appear to be different
from all the other CRADAs in the Agency, we expected to find
substantial similarity among the five CRADAs. In fact, we did
find many items to be the same or substantially similar. Such
items as technical competence, termination conditions, and
liability insurance requirements were all basically the same. We
were surprised, however, to find significant differences in
several factors, mostly in the financial arrangements.
Considering the similarity of goals in the five CRADAs, we
thought that the financial arrangements would be standard with
each company paying the same percentage to EMSL-Cin. This was
not the case (see the schedule on page 12). Apparently, each
company negotiated its own bargain and some were better
negotiators than others. For example:
— The percentage of sales paid to EPA on the transferred
inventory varied from 8 percent to 50 percent and, for
new materials, it varied from 5 percent to 20 percent.
— One company, which had been a long-term EMSL-Cin
contractor, negotiated a 5-year agreement, while the
other four obtained 3-year agreements.
— Only two companies were specifically required to provide
EMSL-Cin with free samples from the transferred
inventory. Four companies provided free samples of new
materials; the fifth offered a small discount on EPA
purchases.
— For two companies, EPA paid the laboratory costs for the
required testing of QA materials; one company paid $30 an
hour for laboratory fees; and one paid a set amount up to
about $500 depending on the sample series. One company
paid for all of its laboratory fees.
One of the most important factors we found during our review
of the agreements was a major omission in all five. The CRADAs
did not discuss the value of the inventory being transferred to
the companies, nor was there an accurate count of the quantity of
inventory being transferred. An EPA official told us that the
inventory (approximately 750,000 ampuls) was considered supplies
in the CRADA. We estimate the value of the 750,000 ampuls to be
in excess of $26 million and view them as marketable inventory
rather than supplies.
We noted that the CRADAs also have a clause that, correctly,
allows EPA to audit accounting records and operations of each
company. We reviewed the internal controls utilized by EMSL-Cin
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to monitor the operations. We found substantial weaknesses in
these controls. Specifically, we found that:
— EMSL-Cin officials relied on the CRADA companies to
maintain and control the inventory.
— EMSL-Cin officials did not monitor operations and track
sales to ensure proper payments to the Agency.
In December 1992, we discussed these issues with ORD officials.
Although not resolved, it was agreed that corrective action was
needed. We may address the internal control issues in greater
detail in a subsequent report.
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SUMMARY OF CRADA AGREEMENTS
TERM PERCENT PAID SAMPLES EPA
OF TO EPA PROVIDED EPA FUNDS
DATE CRADA PRODUCT INV NEW INV NEW TEST
1/3/91 3 YRS ORGANIC 25% 20% 100 25 YES
QC
SAMPLES
1/4/91 5 YRS ORGANIC 20% 10% 1 YR 25 YES
SOLUTIONS SUPP
1/21/91 3 YRS ORGANIC 50% 20% N/S * **
NEAT
MATERIALS
5/9/91 3 YRS INORGANIC 15% 5% N/S 25 ***
QA
MATERIALS
9/9/91 3 YRS SOLID 8% 5% N/S 10 NO
MATRIX QA TO
MATERIALS 25%
* Products discounted 10 percent to 15 percent
** Company pays EPA a $30/hour flat rate for laboratory testing
services.
*** Company pays a set fee for each sample series for laboratory
services ranging up to $500.
INV Inventory (made available by EPA to CRADA companies)
N/S Not Stated in agreement.
QC Quality Control
SUPP Supply
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QA MATERIALS CRADAS RESULT IN
SIGNIFICANT CONTROVERSIES
Two significant allegations regarding EMSL-Cin's operations
were brought to our attention during this review. The first was
that EMSL-Cin showed special consideration to the CRADA
companies, and the second was that the inventory of QA materials
did not meet the technical specifications required in the CRADA
and advertised by the CRADA companies.
CRADA Companies Given Special Consideration
During our visits to each of the CRADA companies we observed
that all five had been in the business for several years and had
substantial experience in the manufacture of QA materials.
However, we also noted some unique characteristics about two of
the companies that deserve discussion. One company was a long-
term EMSL-Cin contractor with no marketing experience, and the
other company was allowed to use EPA's name and logo despite the
fact that its products had never been included in EMSL-Cin's
inventory.
CRADA company is a long-term contractor
The company given a CRADA was an experienced engineering
firm that provided analytical support and research and
development services under contract, almost exclusively, with the
U.S. Government. The company had been involved with the QA
materials program since 1976. This CRADA provided the company
with its first commercial marketing experience. At the time of
this report, the company still had an active contract with EMSL-
Cin.
Based on a limited review of the contracting activities of
this company and our on-site observations, we determined that
this company had been intimately involved with EMSL-Cin and its
QA materials program. Under contract with EMSL-Cin, the company
manufactured QA materials, performed verification testing of QA
materials, managed several QA materials repositories (these
repositories consisted of hundreds of thousands of samples in the
inventory), and distributed the free QA materials to qualified
users. Now, with the implementation of the CRADA, the company
received vast stocks of inventory free of charge, and is selling
them on the open market. EMSL-Cin allowed the company to
maintain the inventory in the repository which means the EPA pays
for storage. In contrast, the other CRADA companies are
responsible for storage.
Company officials told us that the Government will receive
many benefits from the company's dual roles as both a contractor
and a CRADA company. They claimed that substantial savings can
be achieved by sharing many functions such as purchasing material
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and equipment. At the end of each month, company officials told
us that they review all invoices and prorate the amount between
the contract and the CRADA operations. Expenses incurred for
contract operations are paid for by the Government, and expenses
incurred for CRADA operations must be paid for by the company.
During our visit, we noted that literally all of the equipment in
the individual laboratories that we toured had EPA property tags.
We also noted that the payments for EPA's share of CRADA sales
(which were always made timely) were given back to the company to
support its contract operations.
CRADA company's products "arandfathered" into program
In another case, two companies were jointly awarded a CRADA.
One company is a large catalog supply house with a wide variety
of products. The other company is a small manufacturer with a
limited number of products that were being listed in the other's
catalog. Company officials told us that sales had been slow, and
they had not manufactured any new products since 1989. The
proposal for a CRADA was an effort to enhance the marketability
of their products. They believed that advertising their products
as "EPA Certified" material would provide the marketing advantage
needed to increase sales.
EMSL-Cin officials subsequently awarded the CRADA and
allowed the companies to use EPA's name and logo in their
advertising. Laboratory officials told us that they
"grandfathered" the products manufactured by the companies prior
to the CRADA into the current QA materials program. EMSL-Cin had
not previously offered such products, and they wanted to have a
product line in this segment of the market.
The CRADA also required the company to market several other
products from EMSL-Cin's inventory that were maintained by
another EMSL-Cin contractor. The CRADA included a list of 23
different QA materials that were to be transferred at EPA
expense. The contractor and the CRADA company were to arrange
for the transfer of the material. The CRADA did not identify the
amount of material to be transferred or its value.
Company officials told us that there was some negotiation
regarding the material, but no agreement was reached. One day a
truck appeared at their facility loaded with material. The
material received included different quantities of 19 QA
materials. Five of the items cannot be sold because they do not
have proper documentation defining the contents of the samples.
One item they received was 17 barrels of oil. Company officials
said they have no idea what to do with such a large quantity of
oil. He thought his company was being used as a free warehouse.
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Inventory Made Available to Companies
Does NotMeet CRADA Specifications
s
During the course of this review, we received additional
allegations that the inventory being sold as "EPA Certified" did
not meet the technical requirements demanded by the CRADA. We
questioned EMSL-Cin officials regarding this issue. They told us
that the QA materials in the EPA inventory were manufactured
prior to the issuance of the current technical requirements
included in the CRADA. This was not an unusual situation as
requirements typically change over time. When they did, it was
common practice to use the old material until it was depleted,
and then to use the new material.
We reviewed the catalogs of the five CRADA companies. The
"EPA Certified" and the EPA logo were prominently displayed on
most pages advertising CRADA products. In addition, the catalogs
stated that the products were designed, produced/ and verified
for accuracy and stability under the CRADAs. We questioned EMSL-
Cin officials about the legitimacy of selling "EPA Certified1'
material and claiming they were manufactured under the CRADA
requirements. We were told that it was proper, and that they
have the "de facto right" to certify these materials.
Based on our discussions with ORD and company officials, and
our observations of the inventory (we found many very old
samples, some dated as far back as 1978), we are reasonably sure
that most, if not all, of this material was manufactured prior to
the new requirements in the CRADAs which were all entered into in
1991. Disregarding any technical issues, a reasonable way to
manage any inventory would be to use the older'material first.
However, any material sold should not be represented as meeting
the new criteria identified in the CRADAs.
In conclusion, there is sufficient reason for the confusion
that surrounds these CRADAs. They are uniquely different from
any other CRADA in the Agency, and they differ substantially from
each other. It appears to us that the controversy over these
CRADAs is justified, and the real objective of these CRADAs is
unclear. Research and development is a stated objective of the
CRADAs, but the apparent real goal is to dispose of the existing
inventory and, by using EPA's name and logo, establish a dominant
position in the QA materials market. This activity, if allowed
to continue, puts EMSL-Cin in competition with private industry
and could result in a Government-controlled monopoly.
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CHAPTER 3
OA MATERIALS CRADAS CREATE POTENTIAL
GOVERNMENT-CONTROLLED MONOPOLY
Before the five QA materials CRADAs were established,
reference materials and QC samples were not identified as "EPA
Certified." The materials were simply manufactured and
distributed by EPA's contractors. In actual practice, alternate
sources for QA materials were clearly condoned and most of the
market was satisfied by alternate sources. Since the
establishment of the CRADAs, there is a developing impression in
the marketplace is that products which carry the EPA name and
logo are superior and are required.
Under the five QA materials CRADAs, the companies are
required to sell their materials (both the inventory made
available by EMSL-Cin and newly manufactured materials) as "EPA
Certified." EMSL-Cin receives a percentage of sales (based on
wholesale prices) of CRADA company QA materials. Other firms in
the industry manufacture similar QA materials. The EPA
certification provides an exclusive status to CRADA products that
gives them a tremendous marketing advantage and ensures future
sales. Officials of several companies in the environmental QA
materials field said that the sale by CRADA companies of "EPA
Certified" materials had damaged sales of non-CRADA companies and
could, in the extreme, put them out of the QA materials business.
This could result in the creation of a Government-controlled
monopoly and a serious conflict between the administration of
fair and equitable regulations and the desire to increase the
laboratory's revenues. Some indication of movement toward a
monopoly market is that prices for QA materials have
substantially risen for CRADA and some non-CRADA company products
since establishment of the CRADAs.
OA MATERIALS MARKET HEAVILY WEIGHTED
TOWARDS EMSL-CIN-CONTROLLED CRADAS
Based on discussions with industry officials, we found that
the impression in the marketplace is that products which carry
the EPA name and logo are superior and required. For example,
the State of Illinois and the Taiwan EPA now require the use of
"EPA Certified" QA materials. Also, U.S. Air Force guidance for
QA/QC audits requires auditors to check that reference materials
are obtained from or traceable to EPA or the National Institute
of Standards and Technology. In April 1993, a conference is
planned at which selection and use of QA materials for work
associated with cleaning up hazardous waste sites at U.S. Air
Force bases will be the central topic. This conference is being
coordinated by one of the CRADA companies. According to an Air
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Force official involved in conference planning, in lieu of other
recognized QA materials standards, it is likely that use of "EPA
Certified" materials will be recommended.
The FTTA permits the Federal government to provide a number
of items under CRADAs without reimbursement. These include
facilities, equipment, services, personnel, and other resources.
The Act specifically prohibits the Government from providing
funding to non-Federal entities. However, it appears that the
five companies received a windfall from EPA and contributed
nothing in return. EPA made available to the CRADA companies
marketable materials from EMSL-Cin's vast inventory. The
inventory included as much as a 6 to 8-year supply of materials,
the value of which has been estimated to be $26 million or more
if all materials could be sold. Also, by making available
marketable QA materials to the five CRADA companies, it is our
opinion that EMSL-Cin provided a source of funding to these
companies, contrary to FTTA provisions which prohibit the
transfer of Federal funds. Such an inventory transfer provided a
substantial benefit to the CRADA companies by (1) giving them
marketable QA materials at no cost, (2) placing non-CRADA
companies, which must cover all materials costs, at a competitive
disadvantage, and (3) further creating conditions for a monopoly
favoring the companies which have CRADAs with EMSL-Cin.
In addition, the FTTA requires that resources provided by a
laboratory under a CRADA must be used toward the conduct of
specified research or development efforts which are consistent
with the mission of the laboratory. Nothing came to our
attention to indicate that the QA materials inventory made
available to the CRADA companies has been used in conducting such
specified research or development. The materials have been made
available to the companies as needed for resale. Also, we
consider the inventory of QA materials provided to the CRADA
companies to be Government property. In our opinion, it is
inappropriate for EPA to retain funds from the sales of QA
materials which were formerly part of EPA's inventory. If EPA
wanted to sell its inventory, it should have used the approach
OMB had approved, that is, established user fees and returned the
proceeds to the Treasury.
ORD officials told us that they took effective action to
preclude the creation of a Government-controlled monopoly.
First, they required that each CRADA company be a wholesaler of
QA materials. Any retail activity was to be kept separate from
the CRADA. Second, they established an alternative certification
program for non-CRADA companies seeking certification equivalent
to the "EPA Certified" given to the CRADA companies. On the
surface, these actions might appear to resolve the many concerns
raised during the creation of the CRADAs. However, we found that
these actions did not successfully balance the market. Rather,
the market still heavily favors the CRADA products. In fact,
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other actions by EMSL-Cin—making available marketable materials
from EPA's inventory (in effect, a cash infusion to the CRADA
companies), and announcing the availability and the source of
"EPA Certified" CRADA products—continued to direct the market
toward the CRADA companies.
Wholesale Marketing Bv CRADA
Companies Will Not Prevent Monopoly
We found that the QA materials market does not contain
typical wholesale and retail elements. We also found that the
conditions established as a result of the CRADAs do not
contribute to the development of such market elements. In fact,
the conditions established substantially favor the CRADA
companies at the expense of the rest of the industry.
EMSL-Cin officials stated that they established the CRADA
companies as wholesalers of QA materials. Retailers would then
have access to "EPA Certified" materials and a monopoly market
favoring the CRADA companies would not occur. According to ORD
officials, the CRADA companies would sell their products to QA
materials retailers at the wholesale level, and open competition
would remain at the retail level. We found, however, that not
much of a wholesale market exists. According to industry
officials, QA materials companies are primarily
manufacturing/mail order retail businesses. There are no real
"middlemen" involved. The limited wholesale market which does
exist involves the individual companies buying and selling QA
materials among themselves to ensure they have a full complement
of products to satisfy customers' needs. In addition, CRADA
company officials told us that they would not refer customers to
other QA materials retailers unless reguested to do so by the
customer.
We were also told that the wholesale/retail margin offered
by the CRADA companies was not sufficient for other companies to
make a reasonable profit. Most of the other companies' costs are
for advertising and printing and distributing the catalog. The
discount must be large enough to cover these costs. The discount
offered to companies buying CRADA company QA materials is only
about 25 percent, while the typical wholesale discount within the
industry is 35 percent. Thus, the CRADA companies have a
distinct advantage since they have free access to the inventory
and pay nothing whereas the non-CRADA companies must pay the high
wholesale price. According to company officials, it is not
profitable for non-CRADA companies to sell "EPA Certified"
products. Still, some non-CRADA firms stock "EPA Certified"
materials in order to offer a full line of QA materials in their
product catalogs. Many of the non-CRADA firms are also concerned
about the requirement that they retain the CRADA company label on
these products. They are concerned that their customers may
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decide to purchase the "EPA Certified" products directly from the
CRADA companies in the future.
The creation of a wholesale market appears on the surface to
be a legitimate method to avoid a monopoly condition. However,
since no such market existed before the CRADAs and considering
the advantageous conditions established for these CRADAs, it is
not logical to expect that a wholesale market would now flourish.
Alternate Certification is Expensive and Not
Deemed as Good or Recognizable as EPA Certification
Due to concerns that the marketing of "EPA Certified"
materials could result in unfair competition, EMSL-Cin arranged
for establishment of an alternate certification. In June 1991,
the Agency signed a Memorandum of Understanding with A2LA in
order to provide an alternate QA materials certification for
companies wanting to make their materials competitive with CRADA
company products. This certification is referred to as "A2LA
Certified" or "Certified by A2LA to EPA Specifications."
Initial certification by A2LA and annual fees can be
prohibitively expensive for small businesses since the cost of
initial certification is $9,000, and companies certified by A2LA
must pay an annual maintenance of registration fee of $3,000. In
addition, companies must pay between $150 and $200 per product
lot for independent testing. In contrast, the CRADA companies
pay nothing for the preferred EPA certification, and ORD provides
referee analysis of materials produced by four of the five CRADA
companies (two at no additional cost, one at the nominal rate of
$30 per hour, and one at predetermined rates per sample series).
Only one CRADA company is responsible for all costs associated
with its samples.
Industry representatives view A2LA Certified materials as
not as good or as well-recognized as "EPA Certified" materials.
For example, an EPA Regional official said that the general
opinion among QA materials users is that A2LA materials are not
as highly thought of as are the "EPA Certified" materials
produced under the CRADAs. Also, a State of Maryland official
said that she did not have a clear understanding of A2LA's
certification program.
The result of the development of the alternate QA materials
certification is a two-tiered market with "EPA Certified"
products on top. EMSL-Cin officials reinforced this belief in
August and September of 1991 when they sent two separate letters
to the QA materials user community which again appeared to
encourage the use of "EPA Certified" materials. The letters
included only the names and addresses of companies providing the
"EPA Certified" materials, namely, the CRADA companies. A
subsequent letter identified the availability of other products.
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More recently, in a May 1992 letter to the National oceanic and
Atmospheric Administration, EMSL-Cin's Director of Quality
Assurance Research recommended that they specify "EPA Certified
Materials" when ordering QA materials from retailers.
In our opinion, this emphasis on CRADA-produced products is
a marketing effort to ensure future sales. The Director, EMSL-
Cin, in a meeting with OIG staff in December 1992, reinforced
this belief when he said that if EMSL-Cin employees received a
request for QA materials, they would inform the potential buyer
of the names of companies selling "EPA Certified" materials, the
existence of A2LA Certified materials, and the fact that there
are other 'companies which sell QA materials. EMSL-Cin employees
would inform them, however, that the laboratory could only attest
to the quality of "EPA Certified" materials. We suspect a
potential user would interpret these comments as an endorsement
of CRADA materials and a strong indicator from the regulatory
agency that they should be used.
The final result is that the agreement with A2LA did not
eliminate the potential for the development of a monopoly for the
five CRADA companies. The market remains tilted towards the
CRADA companies.
GOVERNMENT SHOULD NOT COMPETE
WITH THE PRIVATE SECTOR
Within the context of contracting outside the Federal
Government for goods and services, the Office of Management and
Budget, Circular A-76 (Revised) states that:
In the process of governing, the Government should not
compete with its citizens. The competitive enterprise
system, characterized by individual freedom and initiative,
is the primary source of national economic strength.
While we realize that the above statement applies to
contracts, it is our opinion that the concept articulated in OMB
Circular A-76, is a good and just policy, and is still valid when
examining the use of CRADAs. The Federal Government should not
be in a role where it is competing with the private sector. The
policy should not change simply because the Government is
involved in a CRADA rather than a contract. After all, the CRADA
is essentially a contract.
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RESULT OF GOVERNMENT-CONTROLLED
MONOPOLY— PRICE INCREASES
ORD officials told us that a primary reason for EMSL-Cin's
involvement in the CRADAs was to collect a percentage of sales of
CRADA company products in order to offset budget reductions and
maintain its QA materials program. The percentage of sales
collected by EMSL-Cin varies with each CRADA, but ranges from 5
to 50 percent. The organic chemical standards market alone has
been estimated as high as $44 million per year and is growing.
As a result, EMSL-Cin could receive millions of dollars each
year. Consequently, a situation has been created where a
regulatory agency could make decisions not in the interest of
fair and equitable regulation, but based on how the decisions
will affect its future revenues. One of these decisions involves
the use of "EPA Certified" which has previously been discussed.
Another decision is to allow the price of the commodity to rise—
a natural phenomenon of monopolies.
Monopolies tend to cause prices to increase by controlling
the supply of commodities. A comparison of QA materials prices
where it is possible to exactly match chemical properties and
volumes shows that prices of the materials increased
dramatically, as much as seven times or more from 1990 to 1991,
the year that EMSL-Cin entered into the CRADAs. For example, the
pre-CRADA price for chlordane, a pesticide standard, increased
from 18 cents per milligram in 1990 to $1.40 per milligram in
1991. The price of DDT, another pesticide standard, increased
from 20 cents to $1.40 per milligram during the same time period.
For additional examples of post-CRADA price increases, see
schedule on page 23. Prior to the establishment of the CRADAs,
prices for QA materials had been relatively stable.
We were unable to obtain a reasonable explanation of why ,
prices increased. In most discussions there was some denial of
any increase or very general comments regarding cost increases to
cover increased expenses. In our opinion, a cost increase cannot
be justified since each company received a substantial inventory
for free, and these companies were already in the business. If
anything, the prices should have been lower.
In conclusion, the conditions surrounding these five CRADAs
have created a potential for the development of a monopoly market
favoring the companies and EMSL-Cin. The laboratory's actions
have resulted in an apparent conflict of interest between fair
and equitable regulation of the industry and a desire to increase
the laboratory's revenues from sales of QA materials used by the
regulated industry.
24
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EXAMPLES OF PRICE INCREASES FROM PRE-CRADA TO CRADA
PRODUCT
Pesticide
Neats
Aldicarb
Chlordane
Methyl
Parathion
Mirex
p,p, '-DDT
Strobane
Quality
Control
samples
Aroclor
1242 T
Aroclor
1254 T
Aroclor
1260 T
Pre-
CRADA
Price
1989
0
0
0
0
0
0
6
6
6
$/mg
.230
.180
.300
.350
.200
.035
$/ml
.400*
.400*
.400*
Pre-
CRADA
Price
1990
0
0
0
0
0
0
6
6
6
$/mg
.230
.180
.300
.350
.200
.035
$/ml
.400*
.400*
.400*
Pre-
CRADA
Price
1991
0
0
0
0
0
0
7
7
7
$/mg
.250
.200
.330
.380
.220
.039
$/ml
.2000*
.2000*
.2000*
CRADA
Price Times
1991/ Price
1992 Increased
1
1
1
1
1
6
17
17
17
$/mg
.400
.400
.400
.400
.400
.000
$/ml
.500**
.500**
.500**
6
7
4
4
7
111
2
2
2
.1
.8
.7
.0
.0
.4
.7
.7
.7
* Packaged in one 5ml ampul
** Packaged in four 1ml ampuls
25
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26
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CHAPTER 4
OA MATERIALS CRADAS ARE AN INAPPROPRIATE USE OF FTTA
The purpose of FTTA is to promote technology transfer by
authorizing Government-operated laboratories to enter into CRADAs
with other Federal agencies, units of State and local government,
industrial organizations, public and private foundations,
nonprofit organizations, or other persons. We are not
questioning the legality of the FTTA or the Agency's authority to
enter into CRADAs. However, we view the five QA materials CRADAs
as an inappropriate use of the FTTA. In our opinion, the primary
purpose of the FTTA was to strengthen U.S. competitiveness both
at home and abroad by encouraging creation and development of new
ideas and products through the utilization of Government-owned
patents and the transfer of Government technology for development
of new products in the private sector. We base this belief on
the following:
— On October 20, 1986, Congress passed the FTTA to amend
the Stevenson-Wydler Technology Innovation Act of 1980 to
promote technology transfer. The legislative history
reveals that the FTTA originated from a concern that only
5 percent of Government-owned patents were utilized in
the private sector. The purpose of the Act was to speed
the transfer of patents and technology to the private
sector and, thus, improve the economic, environmental,
and social well-being of the United States.
— On April 10, 1987, the President signed Executive Order
12592 implementing FTTA. The order stated, "... in order
to ensure that Federal agencies and laboratories assist
universities and the private sector in broadening our
technology base by moving new knowledge from the research
laboratory into the development of new products and
processes." (emphasis added)
— The Decision Memorandum signed by the EPA Administrator
on December 15, 1988, approving the EPA delegation and
the EPA Order to implement the FTTA stated, "The Federal
Technology Transfer Act was designed to foster
collaboration between Federal agencies and State and
local governments, universities, and private industry in
ortder to improve U.S. competitiveness in the world market
place." (emphasis added)
— The previously mentioned GAO report stated that the FTTA
was enacted in response to concern about U.S. industry's
weakened competitive position in domestic and
international markets and, along with earlier
legislation, the Act was intended to promote the
27
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patenting and licensing of suitable invention technology.
(emphasis added).
According to Department of Commerce officials, the law is
broadly written to allow laboratory directors to have broad
discretion in the use of the FTTA. In the case of these CRADAs,
Commerce officials opined that such use of the FTTA was probably
legal because of the way the law was written, but it was doubtful
such use was anticipated when the law was passed. Commerce
officials were surprised that EPA was receiving income from the
sale of CRADA products while, as the regulator, it required the
regulated community to use the products.
It is our opinion that the QA materials CRADAs are an
inappropriate use of the FTTA. The CRADAs provided for (1) the
transfer and sale of the old inventory, (2) the manufacture and
sale of replacement products, and (3) the design, manufacture,
and sale of future materials which historically have been
unpatentable processes or products. It appears officials at
EMSL-Cin used the FTTA as a means to keep their QA program
operating and, in the process, violated the spirit of the FTTA by
creating a situation that could harm and, in the extreme case,
eliminate several small U.S. companies.
QA MATERIALS CRADAS DID NOT TRANSFER TECHNOLOGY
All of the revenue received by the laboratory through these
CRADAs were obtained from sales of QA materials, not through
royalties associated with the patenting and licensing fees
developed from innovative technology as intended by the FTTA.
Although it is not especially clear in the legislation, we agree
with a recent GAO report which indicated that FTTA was enacted in
response to concerns about U.S. industry's weakened competitive
position in domestic and international markets and, along with
earlier legislation, the Act was intended to promote the
patenting and licensing of suitable invention technology.
Executive Order 12591 requires agency heads to "promote the
commercialization ... of patentable results of federally funded
research by granting to all contractors ... the title to patents
made in whole or in part with Federal funds ... " (emphasis
added). Under U.S. patent law (35 U.S.C. Sections 102, 103),
conditions for patentability require an invention to have novelty
and not be obvious to a person having ordinary skill in the art.
*
No patents or patents pending for the design of QA materials
have occurred from these CRADAs. Government and industry
representatives we interviewed stated that the technology being
used by the CRADA companies is not new; therefore, it cannot be
patented. They agreed that no new technologies were being
developed. Several even expressed concern and surprise that EPA
claimed these CRADAs involved a transfer of technology. The
28
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technology supposedly being transferred to the CRADA companies
was already available in the private sector.
The Director, EMSL-Cin, initially described the former QA
materials distribution program as a technical service rather than
a research program. ORD officials now contend that technology
was transferred and research and development occurred in the
design and manufacture of QA materials. In defense of the
decision to allow these CRADAs, EPA's patent counsel adamantly
argued the FTTA did not reguire that technology be new
technology. Common sense, however, dictates that the transfer of
old technology or technology already in use by the industry
serves little purpose.
RESEARCH LIMITED TO DEVELOPING
MARKETABLE OA MATERIALS
EMSL-Cin officials told us that they initiated the CRADAs in
order to continue funding their QA program. They claim that the
income received through the CRADAs will provide continued
research and development. Our concern is that this research was
not directed at developing new and innovative technology, nor
was it directed towards specific research and development which
was consistent with the mission of the laboratory. Rather, it
was directed at expanding market coverage and thus increasing the
income of the five CRADA companies and EMSL-Cin. Their initial
actions in establishing the program clearly indicate that
expansion of the market was their primary motivation. For
instance EMSL-Cin:
— removed all former eligibility restrictions for obtaining
QA materials so that anyone can now procure "EPA
Certified" materials;
— eliminated previous limitations on the number of
materials or particular types that could be ordered;
— provided information on sources of all certified QA
materials through an electronic bulletin board; and
— improved delivery service from several months to l or 2
days under the CRADAs.
We find it interesting that such improvements were made in
conjunction with EMSL-Cin's involvement in the CRADAs, after the
laboratory stood to benefit financially from increased sales of
the "EPA Certified" QA materials.
The marketing emphasis of the program was further
demonstrated in a February 1992 memorandum to the Director, EMSL-
Cin. The laboratory's Director of Quality Assurance Research
29
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summarized the research activities being conducted under the
CRADAs as:
— developing high quality calibration standard solutions,
neat standards, and quality control samples;
— developing multiple component calibration standard
solutions for analyses of volatile organics; and
— determining the long-term stability of QA material
designs
The activities described were the types of activities that were
being conducted by the QA materials industry for some time
according to representatives of both CRADA and non-CRADA firms.
They were neither new nor innovative.
The company officials we interviewed told us that they
performed research, and the major emphasis of this research was
market analyses and the development of new QA materials to meet
evolving user needs. One official indicated that the research
associated with developing and producing QA materials does not
require new knowledge or sophisticated scientific research
techniques. A person with a bachelors degree in chemistry and
some minimal experience could produce the samples.
The emphasis on marketing is further demonstrated by the
activities being conducted under the CRADAs:
One official indicated that the company's primary
responsibilities were to: (1) assist EMSL-Cin in selecting
marketable QA materials, and (2) invest in the marketing and
development of new products.
Another official told us that his company's primary
responsibility was to identify new sources of reference
materials and research new markets. He forecast the real
growth in this market will occur when other agencies, such
as the Department of Energy, begin to require "EPA
Certified" QA materials.
According to an Air Force official, a CRADA company is
coordinating a conference scheduled in April 1993 where it
is likely that use of "EPA Certified" materials will be
recommended for use by Air Force supporting laboratories.
One CRADA company, a long-term contractor that formerly
manufactured and distributed single component solutions for
EMSL-Cin, was actively developing multicomponent solutions
in order to compete with materials already for sale and
preferred by the user community.
30
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In our opinion, research can and should occur in many forms
and is a necessary part of any regulatory effort. The extent and
type of research would vary with the function being regulated.
However, the funds to finance any research are best obtained
through the normal budget review process. In this process, the
applicability of the research can be reviewed and determined. We
have no concerns with research and development activities
conducted by ORD or its CRADA partners which are consistent with
the laboratory's mission. However, research whose primary
objective is to increase market share, is not appropriate for a
regulatory agency. In our opinion, these CRADAs are an
inappropriate use of the FTTA and the executive order to promote
the development and transfer of new technology. Rather, their
primary purpose was the marketing and sale of QA materials.
31
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32
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CHAPTER 5
CONCLUSIONS AND RECOMMENDATIONS
CONCLUSIONS
We conclude that the evidence is overwhelming that FTTA was
intended to encourage creation and development of new and
innovative technology through monetary incentives for
laboratories and individual inventors in an effort to strengthen
competition in the U.S. and international markets. The five QA
materials are an inappropriate use of the FTTA. They created the
highly unusual and, in our opinion, improper QA materials CRADAs
in order to continue funding EMSL-Cin's QA materials program. In
the process, they created a situation that could potentially harm
several small businesses currently participating in the QA
materials market.
Although the justification for the establishment of the
CRADAs was based on FTTA, the CRADAs are an inappropriate use of
the Act because (l) no new technology had been transferred to the
private sector (only QA materials that were made available from
EPA's inventory); (2) any research conducted was directed at
developing and marketing QA materials; and (3) all revenues
received by EMSL-Cin were derived from sales of QA materials. We
have no concerns with research and development activities
conducted by ORD or its CRADA partners which are consistent with
the laboratory's mission. However, research whose primary
objective is to increase market share is not appropriate for a
regulatory agency. Finally, in our opinion, making available to
the CRADA companies marketable QA materials from EPA's inventory
was tantamount to a cash contribution, which is not allowed under
FTTA.
In addition to funding their program, EMSL-Cin officials
claimed that ensuring quality products was a major concern. This
is an appropriate concern for a regulatory agency. There are
ways a regulatory agency could ensure quality without competing
in the marketplace. For instance, it is appropriate for EPA to
establish basic regulatory requirements and to perform some form
of testing to ensure compliance. The establishment of an
accreditation program open to all manufacturers would be
appropriate.
The Government, as a regulator, must be neutral, not biased
in any way. In this case, ORD does not appear to be neutral.
EMSL-Cin entered into these five CRADAs with the intention of
increasing its income in order to fund its QA materials program.
The laboratory even took action to expand its marketing efforts
into new areas not previously covered. Also, by requiring the
companies to label the QA materials as "EPA Certified", the
33
-------
laboratory created a significant competitive advantage over the
non-CRADA products. Thus, conditions were established for a
monopoly market to develop favoring the five CRADA companies.
These conditions, if allowed to develop, have the potential for
EMSL-Cin to receive substantial income. This could result in a
serious conflict of interest between the Agency's need to
administer fair and equitable regulation and a desire to increase
revenues from the sale of reference materials used by the
regulated industry.
In order to avoid an appearance of any conflict of interest,
the Director, EMSL-Cin, in December 1992, proposed a plan to the
OIG to remit to the U.S. Treasury any funds received from sales
of CRADA company products which exceed the cost of overseeing the
QA program. We object to this proposal for three reasons.
First, regardless of how the funds are handled, the CRADAs are an
inappropriate use of the FTTA. Second, it would be difficult to
determine the amount required to operate the program. Third, the
proposal would not eliminate the appearance of a conflict of
interest. Private industry would still interpret such action to
mean that the Federal government, the industry regulator, was
receiving revenue from companies within the regulated industry.
It would not matter to them which agency within the Government
received the funds.
Finally, EMSL-Cin officials used FTTA as the justification
to enter into CRADAs that would finance a program that was no
longer being funded in the budgetary process. In our opinion,
the budget for any research performed by laboratories should be
reviewed and monitored by ORD and the Agency to ensure
consistency with the Agency's legislative mandates. These CRADAs
removed EMSL-Cin from this necessary and proper review cycle.
In our opinion, EMSL-Cin officials should have first
determined the availability of QA reference materials from other
sources before entering the market as a competitor. A second,
and obvious step, should have been to determine what materials
they needed to meet their regulatory requirements and any
agreements with other agencies. The difference between what is
needed and what is already available or could be available from
other sources is what needs to be produced. With this
information, EMSL-Cin officials could then determine how best to
provide these materials. A CRADA could be a legitimate choice
for some specific research that could not be performed by EMSL-
Cin. Allowing the company to develop and market any product that
resulted from the research would also be appropriate. Low use
items, or orphans as they are called, may not be practical for a
CRADA. Producing them in-house or by contract, however, would be
proper. One of our primary objections with these CRADAs is that
EMSL-Cin officials have allowed the CRADA companies almost total
freedom in marketing "EPA Certified" materials in any way they
wanted.
34
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RECOMMENDATION
We recommend that the Acting Assistant Administrator for
Research and Development, instruct the Director, EMSL-Cin, to
take immediate action to cancel the laboratory's participation in
these five CRADAs, recover any inventory which had been made
available to the five companies under the agreements which has
not yet been sold, and determine the proper method to dispose of
those QA materials that are not needed to meet any existing
obligations such as required regulations or memorandums of
understanding with other agencies. Some methods which should be
considered are: continue distributing the material until
supplies are exhausted, auction off the material to the highest
bidder, and/or properly dispose of the remaining material as
hazardous waste.
AGENCY COMMENTS AND PIG EVALUATION
The Office of Research and Development (ORD) did not agree
with the conclusions and recommendations contained in the OIG
draft report. ORD officials were concerned that our draft report
discussed their personal motivations for entering into these five
CRADAs. They claimed that we were implying they had some
ulterior motive for their actions and that they were only
concerned with making money for the laboratory. At best,
individual motive would be difficult to audit, and we did not
intend to imply we had special any insight into individual
motives. We formed our conclusion from the results of our audit
of the activities of EMSL-Cin and the CRADA companies over the
last 3 years. Consequently, we believed the statement,
reiterated to us many times during the audit, that the CRADAs
were the result of an effort to offset budget cuts and to assure
the availability of high quality reference materials. The
discussion in Chapters 2 and 3 does not concern personal
motivations. Rather, the discussion supports our contention that
the QA materials CRADAs are bad policy for EPA because they
create a conflict between the Agency's ability to regulate and
its desire for income from the sale of reference materials to the
regulated industry. In our opinion, ORD should withdraw from
such activity.
ORD officials objected to our assertion that the five QA
materials CRADAs created a condition for a Government-controlled
monopoly to develop. We agree with their assertion that we did
not prove that a monopoly existed. However, based on the results
of our audit, we contend that these CRADAs create the conditions
for the companies to expand their market share to the point that
they will dominate the market. This condition does not exist
now, but the ability of the CRADA companies to sell their
products as "EPA Certified'1 gives them the marketing edge needed
to ultimately dominate the market.
35
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In our report,, we used testimonial evidence to support the
reasons for EMSL-Cin's involvement in the CRADAs. Information
that became available subsequent to our draft report lends
credence to our position. The Air Force's workshop for
analytical services being conducted by one of the CRADA companies
is scheduled to begin April 1, 1993. The agenda for the -
reference material portion of the workshop is dominated by three
of the CRADA companies. If they are successful in convincing the
Air Force to require "EPA Certified" material for what will
become a very large market, their market share will be greatly
enhanced. In another case, the Food and Drug Administration
(FDA) must now purchase from a CRADA company the neat materials
that were previously provided free in accordance with a long-
standing agreement. These activities, those already discussed in
the report, and the statements made by the company officials
clearly indicate that marketing is the primary goal of the
CRADAs; and the companies are being required to label their
products as "EPA Certified" to dominate what apparently will
become a very lucrative market. This, in our opinion, is an
untenable position for the Agency—profiting from the sale of
reference materials used by other Federal agencies and the
industry being regulated.
ORD officials also argued that the CRADAs were legal and
meet the intent of FTTA. We did not allege, nor did we intend to
imply, that these five CRADAs were illegal, or were the result of
any illegal action. We claimed in our draft report that the
CRADAs did not meet the intent of FTTA. We agree with ORD
officials that the FTTA objectives are broadly written and intent
is open to discussion. However, we still believe that these five
CRADAs are an inappropriate use of the FTTA. It is unclear what,
if any, technology was transferred. Making available 750,000
ampuls of EPA inventory to the CRADA companies and granting them
the right to use the Agency logo and label the products as "EPA
Certified" demonstrates the marketing emphasis. We, therefore,
have not changed our basic position as discussed in Chapter 4.
On page 12 of ORD's written comments (see Appendix 1) ORD
concluded that the FTTA was the proper mechanism for improving
the quality of reference materials available from the private
sector. ORD proposed several alternative actions to our
recommendation. The first three actions include:
— improving the technical and managerial oversight of the
CRADA program;
— tabulating the inventory made available to the CRADAs,
the number of samples sold, and the number of samples
needed until new samples are manufactured; and
36
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— performing an industry-wide survey to determine the
quality and availability of reference materials available
in the marketplace.
These are, obviously, important steps to take. However, we do
not understand why such steps were not performed before the
decision was made to initiate the CRADAs.
ORD's fourth proposed action is to withdraw the authority to
use the EPA logo in the advertising of CRADA products. We concur
with this proposal. However, we have some concern over its
effectiveness since many catalogs have already been distributed
for 1993. Also, products will still be advertised as "EPA
Certified", setting them apart from similar quality reference
materials in the marketplace. In addition, ORD proposed to begin
negotiations to limit sales of the inventory to only those
materials meeting the CRADA specifications to be effective by
August 1, 1993. Thus, ORD will begin taking steps to ensure the
products sold under the CRADAs actually meet the specifications.
s
The fifth proposed action is to ensure the activities of the
company holding both a contract and a CRADA are kept separate.
We concur with this effort, but considering the close
relationship between the two operations, we are concerned about
how the separation will be accomplished. As discussed in the
report, this long term contract effort with EMSL-Cin has resulted
in a subsidization of the company's entry into the retail market.
We concur with ORD's sixth proposal to continue evaluating
the CRADA operations.
In summary, we believe that the actions proposed by ORD are
necessary to determine whether CRADAs are the best way to
continue the reference material program. In our opinion, these
actions should have occurred prior to establishing these CRADAs
which resulted in giving the companies what appears to be carte-
blanche authority to market "EPA Certified" materials. In any
case, when these analyses are completed, EMSL-Cin should be in a
position to determine what materials are available, what
materials are not available and need to be produced, and how they
should be produced— through the marketplace, in-house, through
contracts, or through CRADAs. For example, if a small quantity
of samples are needed they could be produced with in-house
resources or by a contractor, or if a specific research project
is needed then it could be appropriately performed using a CRADA.
The company would be given the marketing rights if they were
successful in the research. Until this occurs, we continue to
believe that these five CRADAs are inappropriate.
37
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38
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APHMDIX 1
PAGE 1 OF 35
04
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
, , WASHINGTON, 0 C 20460
A
-------
APPH®IX 1
PAGE 2 OF 35
We agree that our management and control system on
inventories and sales of CRADA products could be improved. Our
improvements are detailed in our response The Office of
Research and Development believes that measures other than to
cancel
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APPENDIX 1
PAGE 3 OF 35
March_25, 1993
ORD RESPONSE TO OIG ADDIT REPORT NO. E6ABF2-11-0032
1. Introduction
' Reference Material Mission of ORD
Soon after its formation, USEPA recognized that one critical
need of the Administrator, in order to make decisions with'
confidence, was assurance of the quality of the Agency and state
environmental measurements made in research, monitoring and
regulatory compliance activities It is the Office of Research
and Development's (ORD's) mission to develop the tools to ensure
that high quality monitoring data were available for Agency
decisions. In order to fulfill this mission ORD must
(1} conduct research to develop stable reference materials
needed for environmental measurements. (This includes
processes for stabilizing and delivering these materials
to measurement systems), and
(2) ensure that a supply of high quality reference materials
were available on a continuing basis to organizations
making environmental measurements. Reference materials,
in the form of calibration standards and quality control
samples, are the tools or benchmarks which validate the
truth of the data generated by or for the Agency.
Consequently, the Agency's data are only as good as its
reference materials.
Initially EPA could fulfill this mission from its own
resources, but as the Agency promulgated additional regulations
under the numerous environmental laws for which it was
responsible, the list of contaminants and hence the number and
kinds of needed reference materials grew As a result, the
available resources were being consumed in maintaining and
distributing the reference materials repositories, with little or
no resources left to conduct the research and development of new
reference materials for new analytes, new matrices and new
analytical methods USEPA needed to solve the problem of
providing increased QA support, and doing the needed research,
within its shrinking resources
Evaluation of Options for Providing Reference Materials
In 1989, ORD established a task group on privatization which
reviewed and evaluated options for a reference materials program,
with consideration of advantages and disadvantages A summary of
their evaluation of the options follows here. The complete
description of their findings and conclusions is included as
Attachment 2
-------
APPENDIX 1
PAGE 4 OF 35
Qptipn Pro/Con
l. Continued Distribution for Free Not viable with
limited
resources
2. User Fee Program Fees not retained by
EPA therefore cannot
sustain program
Open Market with EPA Accreditation Greatly-increased
EPA Costs and staff
drain - Exceeds
Resources by 10X
Only commercially -
profitable samples
available; not fully
responsive to EPA
needs.
4. Open Market without EPA Accreditation No assurance of
uniform high quality
materials only
coronercia1 ly
profitable samples
available. Not
/ fully responsive to
EPA needs.
5. Cooperative Research and Development EPA oversight
; ensures
Agreements (CRADAs) under FTTA completeness,
quality and
timeliness.
Program
addresses EPA
needs.
Provides
opportunity for
shared R/D on
new EPA needs.
42
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APPENDIX 1
PAGE 5 OF 35
As the result of their evaluations, the taskgroup concluded
that ORO could best achieve its goals by establishing CRADAs
because
1. CRADAs were the best option to ensure availability of the wide
breadth and expanding numbers of chemical compounds, regardless
of their commercial saleability.
2 The(costs to ensure the availability of high quality reference
materials are significantly lower than by other options
3. CRADAs were the only feasible path, under limited resources,
to assure fulfillment of EPA emergency and quick response
needs.
4. The CRADAs included a close and continuing oversight by USEPA
on a lot-by-lot and batch-by-batch basis
The CRADAs permit the Agency to cooperate with the private
sector In conducting the research necessary to develop the extended
series of stable and exact replicate reference materials required
under its expanding regulations Based on EPA's oversight role and
the extensive testing of the materials, these CRADA products were
designated as "EPA Certified" reference materials to distinguish
them from other reference materials sold by the CRADA firms.
gRADAs were pet_ermjLned_to_ Comply with Leg a j. Requirements
Before Environmental Monitoring Systems Laboratory - Cincinnati
pursued the CRADA process further for USEPA, it explored the
legality of the proposed agreements. Its plans were reviewed by
the managers of EPA's Federal Technology Transfer Act (FTTA Program
with USEPA's Office of General Counsel (OGC) and the Office of
Grants and Debarment (OGD). All agreed as to the appropriateness
of the plans to use CRADAs as a mechanism for providing high
quality reference materials. The plans were also sent to the
Office of the Inspector General for comments but none were
received.
ORD Steps to Ensure an Open Procurement and Open Market
During the development and negotiations on the CRADAs, a
representative of the Small Business Administration (SBA) and a
number of Congressional Offices requested clarification based on
concerns of their constituents. Consequently, discussions were
held with SBA, briefings were given to Congressional staffs and
specific questions were answered in formal correspondence to them.
Their concerns were satisfied.
43
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APPENDIX 1
PAGE 6 OF 35
Although CRADAs established under the FTTA do not require
competitive bidding, the open bidding process was used for awarding
the CRADAs because of ORD's concern for fairness, quality of
service, manufacturing and distribution. USEPA placed an
advertisement in the Commerce Business Daily in August 1989,
announcing our interest in entering into cooperative agreements for
the research and development of new reference material samples for
subsequent production and sale. To assure complete understanding,
haIf-day meetings were announced publicly and presented in
Cincinnati to the manufacturers of reference materials in October
1989 and February 1990, to answer questions and address issues. At
the latter meeting, formal Requests for Proposals (RFPs) on the
five CRADAs were distributed, which contained the criteria to be
used in the selection process Based on these criteria, proposals
returned to USEPA from the manufacturers were evaluated separately
for each CRADA area and the five cooper a tor-firms were selected
with the clear understanding and public knowledge that the CRADA
firms were to be the producers and wholesalers of reference
materials, who might also serve as retailers. They were also
required to sell reference materials to other interested retailers
at the wholesale prices so as to allow reasonable retail level
profits and thus avoid a monopoly Further, their own retail
prices could not undercut the market, but were to be set at similar
retail levels.
At the request of one Congressional member and because of ORD's
wish to assure a "level playing field" for all commercial
suppliers, EMSL-Cincinnati entered into a Memorandum of
Understanding (MOU) with the American Association for Laboratory
Accreditation (A2LA) to establish generic specifications
(equivalent to CRADA specifications) from which non-CRADA firms
could produce "A2LA Certified" reference materials which would be
acceptable to the USEPA. These specifications are also for use by
other accrediting organizations to evaluate reference materials.
If the accrediting organization certifies that the specifications
are met, the materials are acceptable to USEPA. Thus ORD believed
it took steps before establishing the CRADA's to ensure an open
market.
Implementation Issues
ORD chose a phased approach to implement the CRADA's in order
to have a smooth transition from ORD supplying standards for free
to high quality reference materials supplied by the CRADA's
Phase I. Let the existing ORD inventory serve as a bridge between
EPA being the supplier and the CRADA's being the supplier for high
quality reference materials.
Phase II. CRADA's produce and ORD certify new batches of standards
and eliminate and properly dispose of the old EPA inventory.
44
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APPENDIX 1
PAGE 7 OF 35
Phase III CRADA operator and ORO conduct cooperative research on
new processes and materials. CRADA operators routinely produce new
and replacement batches of reference materials and EPA certifies
these materials.
The Inspector General's audit occurred during phase I and the
early part of phase II and has identified many of the issue
associated with the transition and start-up period. In fact each
CRADA has had its own unique set of start-up issues causing the
whole process to move more slowly then originally anticipated.
2. Specific Comments on 1C Report
Paragraph 10 - PIG Allegation' ". by allowing the five CRADA
companies to advertise their products as 'EPA Certified', they
disrupted a thriving U s Industry "
ORD Position; The actual distribution figures appear to contradict
this statement. The number of samples now being sold under the
CRADAs is less than 20% of what the USEPA was providing for free
each year. We find it difficult to see how this is disrupting the
market. (See following Table).
45
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APPHOIX 1
PAGE 8 OF 35
Reference Materials Distribution
Pre-CRADA During FV89 and FY90 Average Yearly Distribution -
267,000
CRADA 1991-1993 Total Distribution to Date - 58,000
Paragraph 17 - PIG Allegation; "OMB eliminated funds for the QA
Materials Distribution Program"
ORD Position; OMB did not eliminate funds for the QA Materials
Distribution Program The Assistant Administrator for Research and
Development decided to redirect QA repository resources to other
ORD research areas in anticipation of a user fee program. OMB did
agree with this redirection and evaluated EPA's program in future
years to see that funds were not requested for QA repository
efforts.
other Specific Comments; ORD requested a review of the findings of
the draft audit report by the OGC's General and Information Law
Division and by OGD's Grants Administration Division. Their
comments, included here by reference, express our concerns as well.
See detailed comments of OGC in Attachment 3 and OGD's in
Attachment 4.
3. Ongoing and Completed Research
EMSL-Cincinnati and the CRADA cooperators have been and
continue to perform research which is an essential requirement of
the CRADAs and is essential to the Agency in fulfilling the needs
for high quality reference materials Examples of completed
research activities and ongoing research activities follow
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APPENDIX 1
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Completed Research Activities
Development of a new sample design containing seven anions
(nitrite, nitrate, fluoride, chloride, bromide, phosphate and
sulfate) for analyses by the latest instrumentation (ion
chromatographic) The sample design was tested for and
successfully passed tests which include stability, chromatographic
separation, and applicability to the older technologies.
Verification analyses of molybdenum in a solution of other
trace metals using atomic absorption techniques yielded low
recoveries which were not found by other newer techniques such as
induced coupled plasma (ICP) techniques Further research showed
that for atomic absorption analyses of molybdenum, an aluminum
enhancer is necessary
To reflect current regulations, the trace metals quality
control sample for ICP was modified and research performed which
resulted in the use of a new form of silica (ammonium
hexafluorosilicate instead of sodium silicate) to increase the
silica content and retain stability. This change also required the
solution to be put into plastic vials rather than conventional
glass ampuls
An apparatus was developed to minimize the head space in the
ampul during the filling and sealing process. The head space
causes a decrease in concentration of the analyte in solution by
outgassing. The apparatus minimizes the difference in
concentration between ampuls from the early portion of production
to the latter portion of production; effecting an improvement in
homogeneity.
A purity analyses scheme for checking the starting materials
has been developed which optimizes the instrumentation to detect
possible impurities (isomers, contamination, degradation products)
instead of optimizing the instrumentation to analyze the analyte
Dibutyl chlorendate, bis-2-isopropyl ether, heptachlor epoxide, o-
chlorobenzaldehyde and endrin had problems elucidated by using this
scheme.
An approach was developed to characterize specific
polychlorinated biphenyl (PCB) isomers using mass spectra,
synthesis route and reactants, relative retention times and melting
point/boiling point data This approach exceeds the minimum
specifications stated in the CRADA
10
47
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APPENDIX 1
PAGE 10 OF 35
Numerous stability analyses have been performed on both EPA
inventory products and new CRADA products Some products were
found to be unstable and were discontinued. Analyses that were
performed which showed the samples to be stable were added to the
base of information. This base of information was used to set the
acceptance criteria of data now in the CRADA specifications.
Ongoing Research Activities
i
Many of EPA's methods call for the analyses of fairly unstable
compounds. Development work is required to find appropriate forms
and compounds that are stable Current work is being performed on
derivatized compounds, examples are the trichloroacetic acids, the
acid forms of which are unstable while the methyl ester forms are
stable. These changes save the user the time and expense of
derivitizing the acids selves and results in more stable and useful
solutions.
PCBs are a mixture of many congeners. Research is ongoing to
determine the range of difference between various PCS batches, with
the goal to define the characteristics of particular PCBs and
declare these definitions as a "primarily" standards. Example
would be to describe the homologs of a PCS and the percent ranges
of each homolog, e.g., 10-20% dichlorobiphyenyls, 20-25%
trichlorobiphenyls, 40-50% tetrachlorobiphenyls, and 20-25%
pentachlorobiphenyls This approach would allow the analyst to
know if a particular batch of PCB is representative of other PCB
batches. This is important because there can be no "pure" PCB.
EPA is continuing to develop new sample designs for new
analytes through its Performance Evaluation Study Program and its
Interlaboratory Method Validation Study Program which are also
applicable to the reference materials program. Recent studies
revealed stability problems with low levels of arsenic and
breakdown of carbon tetrachloride. The CRADA firms are also
researching new sample designs. Multiple component solutions for
newer instrumentation which can perform simultaneous analyses is
one example.
Stability analyses continue on all samples being sold by the
CRADA firms as described in the CRADA specifications.
Purity analyses scheme for starting materials continue to be
performed.
Improvements to the specific PCB congener identification by
using FTXR/GC is ongoing
11
48
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APPENDIX 1
PAGE 11 OF 35
4. PRO Conclusions and Recommendations
ORD has made a strong effort to openly compete the CRAOAs and
through the independent A2LA agreement, to assure an open
competitive market for suppliers of reference materials who were
not awarded the CRADAs. We believe we have taken every reasonable
action to avoid a monopoly and, at the same time, to assure the
USEPA and the environmental monitoring community that a continued,
reliable source of reference materials is available.
Based on the review of our CRAOA efforts by ORD, OGC, OGO and
the FTTA Program, we believe that the FTTA is the proper mechanism
for improving the quality of reference material available from the
private sector by capitalizing on the 20+ years of experience EPA
has in developing and testing these reference materials ORD has
briefed a number of congressional staffs on the program and has
answered written congressional inquiries In every instance the
congressional staffs expressed satisfaction with the briefing and
written responses ORD also believes that most of the OIG concerns
can be addressed without destroying the EPA Reference Materials
Program which is so vital to the Agency's mission We urge the OIG
to consider the following proposals
ORD Proposals
ORD appreciates the indepth review and critique which the OIG
has provided on the Reference Materials CRADAs ORD proposes the
following actions based on the OIG Audit report
1. EMSL-Cincinnati (for ORD) will continue to improve its
technical and managerial oversight of the CRADA program by
reviewing the quarterly reports of sales of all CRADA products,
by expanding the annual onsite audits of each CRADA to include
management, number accounting (total inventory minus sold
inventory - remaining inventory) and actual physical counting
of inventory remaining. At the close of each CRADA period, a
final records accounting and physical count audit will be
performed to reconfirm the correctness of the previous reports
and audits and final settlement of accounts By October 1,
1993, this improved oversight system will be in operation for
all CRADAs
2 By June 30, 1993, EMSL-Cincinnati (for ORD) will prepare a
report which tabulates the EPA inventory available to the CRADA
firms at the signing of the CRADAs, the number of samples sold,
the estimated number of samples which will be needed until a
new CRADA product replaces the series and the number of samples
that will not be used by the CRADA and will be properly
disposed of by EPA These accounting data will be correlated
and combined into the above audit system
12
49
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APPENDIX 1
PAGE 12 OF 35
3. EMSL-Cincinnati (for ORD) will initiate and complete an
industry-wide survey which addresses the quality of EPA
Certified/A2LA Certified products/non-certified products, the
number of products available in the marketplace and by which
category (EPA, Certified, A2LA Certified, other); costs; and
EPA's market share This will be done before awarding new
CRADAs for
-------
APPENDIX. 1
PAGE 13 OF 35
ATTACHMENT 1
SEQUENCE OF EVENTS/CORRESPONDENCE IV OIG AUDIT
OF ORD'S REFERENCE MATERIALS PROGRAM
June 11, 1992 memo, Clark to ORD Audit Follow-up Coordinator.
Record of DIG Contacts 12/31/91 - 5/22/92
June 15,, 1992 and June 26, 1992 - OIG Phone Call Records setting
up August 1992 Audit Meetings
August 4, 1992 - EMSL-Cincinnati Memo to OIG, Response to their
Telephone Request for Information on QC Sample Inventory.
August 6, 1992 - Draft Agenda Established for August 1992 OIG Audit
Meetings in Cincinnati
August 10-14, 1992 - OIG Audit Team at EMSL-Cincinnati
August 18, 1992 - EMSL-Cincinnati response to OIG Request for QA
Resource Information
September 2, 1992 - OIG follow-up questions for clarification
Responses by EMSL-Cincinnati
November 19, 1992 - OIG Position Paper sent to M. Bills for ORD
comments.
December 2, 1992 - ORD met with OIG at EPA Headquarters to discuss
Position Paper and plan response timing.
January 5, 1993 - Formal ORD Response made to Position Paper
February 26, 1993 - Draft Audit Report No E6ABF2-11-0032 written
(Konz to Foley)
14
51
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APPENDIX 1
PAGE 14 OF 35
HAR-25-93 THU 9-28 EttSl CINCINNATI
FAX NO 84204799
ATTACHMENT 2
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF RESEARCH AND DEVELOPMENT
ENVIRONMENTAL MONfTORINQ AND SUPPORT LABORATORY
CINCINNATI OHIO
DATE* Decamber 6, 1989
SUBJECT. Reviled Privatization Options
T=- Tw
FROM, Ton Clark and Ton Hidd, Co-Chairs
TO. Erich Brttthauer and John Skinner
As a result of the Options Briefing MB gave John on November 9, we had a
netting \n Cincinnati on November 16 and discussed a revised options package.
This has resulted In the attached revised privatization options.
After careful consideration of all four options and consultation with the
Office of the General Counsel, we continue to recommend privatization through
use of the Federal Technology Transfer Act (FTTAJ of 1966 (Option *3). We
request your approval to move forward with its Implementation.
Concurrence
Non-Concurrence*
(•Please specify other
option pref erred:___
52
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1
PAGE 15 OF 35
KAR-25-93 THU 9 29 EflSL CINCIKNfiTl FAX NO. 84204799 P 03
-1- 1Z/6/89
ORO PRIVATIZATION DEMONSTRATION
GOALS
1. - assure dependable supply of all samples/standards
2. • assure timely development of new samples/standards and protocols
3. • assure quality
4. - timely distribution (assured response to requests)
5. • subsidy to EPA labs
6. - United subsidy to selected other Federal labs
7. • limited subsidy to State principal labs
8. - limited subsidy to selected Industrial eooperitors
9. - eliminate R/0 outlay for QA services
10. . reprogran S/E outlay for QA/QC to core research program
\
II. « minimize disruption 1n operation of other interested parties
(through phase - 1n of charges and provision of advance notice, etc }
12. • avoid/minimize creating competitive disadvantages 1n the
commercial narket
13. - assure demonstration project model Is appropriate to all
EPA sample/repository activity (1 e a basis for future
expansion of the demonstration)
53
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APPENDIX 1
PAGE 16 OF 35
HAR-25-93 THU 9-29
EHSL CINCINNATI
FAX NO 84204799
P 04
•I-
iZ/6/89
Option fl EPA Contractor - Fees for Simples
Description
<
continue existing EPA contrtctor activity
establish fee schedule for ill non-exempt Ubi using User F««
Statute and new (FY90) fee retention authority
retain all current program rules and 11n1tat1on on
distributions
fees collected and administered by EPA
Pro
Con
no disruption 1n supply to current recipients or development
of new standards
maintains present high level of EPA oversight and quality
assurance
nay provide vehicle for recovering some or all of current R/D
outlays back to EHSL-C1
no significant market competition issues
fees collected and retained by EPA not available to EPA for
expenditure until FY91
use of retained fees by EPA probably subject to OMB
Apportionment, although FY90 appropriation language provides
a permanent appropriation
added R/0 funding require;) to support progru throughout
FY90/FYS1
public notice 1n Federal Register, comment, etc., would be
required
54
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APPENDIX 1
PAGE 17 OF 35
hAR-25-93 THU 9'30
EflSL CINCINNATI
FAX NO 84204799
12/6/89
Option »2EPA Contractor/EPA Fees/EPA Accreditation of Other
Manufacturers/Distributors
Description
EPA contractor authorized to nuke unlimited distributions In
response to requests f>o» wholesalers, retailers andfinal
us«rs
fee schedule for all non-exempt labs under User Fee statute
and new (FY90) fee retention authority
fees collected and administered by EPA
contractor distributes free to EPA labs and designated
•exempt" labs and cooperators
EPA accreditation of non-EPA contractor production processes,
protocols and analytical verification of products;
accreditation costs to be paid by benefiting organization
Pro
Con
no limitations on distribution of samples/standards
no disruption 1n supply or development of new samples/standards
achieves EPA outlay reduction goals In 2nd year
expands EPA 'retail' distribution activity and competition
with private retail vendors
retained fees not available until FY91 and subject to OMB
apportionment
added R/D funding required to sustain current program through
FY90/FY91
accreditation process my be complex, d<*ficu1t to design and
a drain on S/E resources, niw EPA mintgenent arrangement will
bt required
costs of accreditation could result In significant prlci
Increases to other manufacturers/distributors
55
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APPHTODf 1
PAGE 18 OF 35
I1M-25-93 THU 9 30 EflSL CINCINNATI FAX NO 84204799 D 06
-4- 12/6/89
Opt1on
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APPENDIX 1
PAGE 19 OF 35
HAR-25-93TKU 9:31
EttSL CINCINNATI
FAX NO. 84204799
P 0?
-5-
12/6/89
(Option 13 - continued)
Pro
provides effective vehicle far timely development and
manufacture of quality analytical products to meet all requests
relies on private firms for retail marketing and distribution
except for EPA and designated labs.
provides vehicle for collaborative research In developing new
products required by law
avoids increased EPA revenue collection and administration
activities
program can be phased-1n during FY90
FTTA provides administrative flexibility; agreements can be
developed and executed 1n a most timely manner
accreditation process minimizes potential competitive
disadvantages among private sector producers
disruption of operation of other Interested producers minimized
by phase*In and notice
no additional R/D funds needed in FY90
Con
some congressional staff have raised questions on the use of
FTTA authorities for this purpose
some allege that activities contemplated under the agreement
are not really 'research1 In terns of FTTA
requirement of 'reconpetUlon* each three- five years may
Unit the range of potential cooperators and could
b* disruptive of production/distribution process
accreditation process may bt complex, difficult to design and
a drain on S/E resources
accreditation ict1vK1«t not appropriate to FTTA. separate EPA
management arrangement Mill be required
accreditation costs coj'd i^ni'lctrtljr irc'tase retail pnc«
of samples/standards chargeo by other producers
57
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APPHIDIX 1
PAGE 20 OF 35
ttftR-25-93 THU 9:32
EHSL CINCINNATI
FAX NO. 84204799
P 08
-6- 12/6/89
Option 14 Open Market with Accreditation
Description
EPA will iccredH any qutllflid Industrial firm, firm* to pay
costs; on-going EPA Q/A oversight
EPA stops production and distribution of standards/samples
EPA provides all firms protocols and development data
EPA provides specialized Agency needs and orphan compounds
based on funds availability
Pro
Con
Simplified process with United Federal Involvement In
production and marketing processes
no direct adverse Impact on competition
looted late reduction In R/0 outlays
projected 'temporary1 drop In quality of privately produced
analytical samples
uncertainty 1n quality of products actually used 1n
environmental monitoring
only commercially - profitable standards/samples would be
available
accreditation process may be complex, difficult to design and
a drain on S/E resources
process nay discriminate against snail firms due to market
entry requirements
no guarantee that full range of samples will be produced for
the public market
continued R/0 resourcn will be required to sustain reduced
EPA role
serious objection on be expected from EPA program offices
and regions/states
recovery of accreditatlon/QA costs will be under the new
authority and subject to Development of new rules, etc > aid
fees not available fo- -euss unt
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APPENDIX 1
PAGE 21 OF 35
yr£*.
f t§071 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
l^Nr/ WASHINGTON, 0 C 20460
\«x
PRIVILEGED XMP COW7IDZHTIXL
SENEMl COUNSEL
MEMORANDUM
SUBJECT:
FROM:
TO
Conunents on Draft Audit Report No. E6ABF2-11-0032 —
Use of Cooperative Research /and Development Agreements
by EMSL - Cincinnati,
Andrew J
Associate Genera couns
General and Information/ Law Division
Office of General Counsel (LE-132K)
Gary J Foley, Acting Assistant Administrator for
Research and Development (RD-672)
On February 24, 1993, the Office of Inspector General sent
the Acting General Counsel a draft audit report entitled "Draft
Report: Use of Cooperative Research and Development Agreements By
EMSL - Cincinnati The Acting General Counsel asked my Division
to provide you with comments on the Draft Report Our comments
are attached.
Attachment
P^nTO o* RecycttO Paper
59
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i
PAGE 22 OF 35
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D C 20460
PRIVILBQBD AKP CQMTIDEKTIXL
GENEBAtCOUNSEL
MEMOHAMPDM
SUBJECT: Comments on Draft Audit Report No. E6ABF2-11-0032 —
Use of Cooperative Research and Development Agreements
by EMSL - Cincinnati
FROM: Thomas W. Gorman , —-<£.•,. .^_ f, ^^—_ -~ .— -
Patent Counsel
General and Information Law Division
Office of General Counsel (LE-132K)
TO: Andrew J. Moran
Associate General Counsel
General and Information Law Division
Office of General Counsel (LE-132K)
On February 24, 1993, the Office of Inspector General sent
the Acting General Counsel a draft audit report entitled "Draft
Report: Use of Cooperative Research and Development Agreements By
EMSL - Cincinnati. You asked me to provide you with comments on
the Draft Report.
The Draft Report identifies a number of serious questions
regarding five Cooperative Research and Development Agreements
(CRADAs) entered between EPA's Environmental Monitoring Systems
Laboratory - Cincinnati (EMSL-CI) and private companies In
addressing the questions raised by the five CRADAs, the Draft
Report makes a broad array of findings and conclusions regarding
the Federal Technology Transfer Act (FTTA) and the FTTA's
applicability to the five EMSL-CI CRADAs. The auditors, in their
earnest desire to address the legal and policy questions raised
by the EMSL-CI CRADAs, have misinterpreted the FTTA and have
imposed numerous nonstatutory obstacles to future EPA cooperative
research or development efforts with outside parties
President Clinton outlined the Administration's new
initiative: "Technology tor America's Economic Growth, a New
Direction to Build Economic Strength" in a White House report
dated February 22, 1993 The President's report instructs that
"Agencies will make it a priority to remove obstacles to
Cooperative RSD Agreements iCKADAs) and to facilitate induatry-
lab cooperation through other means." (p 9}(Emphasis in
original.; The OIG's Diaft Report appears to push EPA *r> iu;t
the opposite direction by attempting to impose a half dozen ne~
to an lecyaea Paps'
60
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APPENDIX 1
PAGE 23 OF 35
nonstatutory requirements for EPA CRADAs.1 These comments
address each of the new CRADA requirements proposed' in the Draft
Report.
These comments also address the following findings that
appear in the Draft Report for which there is no sound legal
basis:
1. that the transfer of marketable property to a CRADA
cooperator is tantamount to providing funds to the
CRADA cooperator and therefore is in violation of the
FTTA (See p. IS),
2. that an apparent conflict of interest exists when the
laboratory of a regulatory agency receives a financial
benefit from a CRADA if the CRADA relates to an
industry regulated by the agency (See p. 22), and
3 that the five EMSL-CI CRADAs create a potential
government-controlled monopoly (See pp 17-23)
In preparing these comments, I have attempted to accurately
characterize the Draft Report's reasoning and findings However,
the Report's almost exclusive use of the' passive voice, its
absence of attribution, and its failure to express the logical
process followed in reaching conclusions make the Report very
difficult to interpret and evaluate.
These comments recognize that the EMSL-CI CRADAs do raise a
number of genuine legal issues and important policy questions.
The comments include a brief synopsis of the genuine legal
issues, as I see them, that require resolution. However, these
comments also request that the final report explain why the legal
issues and policy concerns raised by the EMSL-CI CRADAs cannot be
addressed with measures short .of outright cancellation of the
CRADAs. The Draft Report does not explain why measures less
radical than complete cancellation of the CRADAs are not
recommended. These comments list a number of the more obvious
alternatives to cancelling the five EMSL-CI CRADAs. ORD should
request that the final audit report address such alternative
resolutions. ,
1 Although the DIG does not nave the power to impose
requirements on EPA's CRAOA activities, acceptance of the Draft
Report's findings as a toasts for cancelling the five EMSL-ci
CRADAs is likely to have the sane practical effect If the Draft
Report findings are accepted, Agency officials will be very
hesitant to pursue CRADAs that do not meet each of the ie.
nonstatutory CRADA requirements proposed in the Draft Report
61
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1
PAGE 24 OF 35
A. NEW NONSTATUTORY OBSTACLES TO EPA CRADAs
1. CRADAs Must Result in Patents
or Patent Applications
One of the reasons that the Draft Report recommends
cancellation of the five EHSL-CI CRADAs is that "fn)o patent or
patents pending for the design of QA materials have occurred from
these CRADAs." (See p. 25.)
This proposed requirement for patenting appears nowhere in
the FTTA. The Draft Report's authority for its proposed patent
requirement is Section l(b)(4) of Executive Order No 12591.
This Section ordered Federal agencies to promote the
commercialization of the patentable results of Federally-funded
research by granting to Government contractors, regardless of
size, the title to patents made in whole or in part with Federal
funds
The Executive Order provision cited in the Draft Report has
nothing whatsoever to do with CRADAs or the FTTA. The provision
is directed to inventions made by Government contractors using
Government funds, not to CRADA cooperators who are not permitted
to receive Government funds.2 Equally important, there is
nothing in the Executive Order that can be read as requiring
CRADAs to result in patents. Finally, there is no practical way
to implement this ZG-proposed requirement if the requirement is
to be applied to EPA CRADAs. EPA would not know the time, in the
life of a CRADA, by which a patent application must be filed.
Only a handful of EPA's existing CRADAs would meet this proposed
requirement if it were applied today.
It is true that one of the general aims of the FTTA is to
encourage the development and commercialization of patentable
technologies developed through the cooperative efforts of Federal
laboratories and private parties. However, by attempting to turn
a general goal of the FTTA into a specific requirement for every
CRADA, the Draft Report misinterprets the FTTA in a way that
would, if accepted, greatly constrain EPA's ability to facilitate
industry-lab cooperation through CRADAs.
2 section i{b}(4) u£ Executive Order Ho 12591 was
significant because it required Federal agencies to give all
Government contractors a first option to contractor inventions
made in whole or in part with Federal funds Prior to the
subject Executive Order, only small contractors and nonprofits
could retain patent rights to their inventions made while working
under Federal contracts The FTTA explicitly states ti?at a '.RAC»A
is not "a procurement contract " 15 U.S.C. S 37iOa(d)(l»
62
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APPHOIX 1
PAGE 25 OF 35
2. CRADAs Must Result in Technology That Meets
the Requirements of the Patent Statute
A second reason that the Draft Report recommends
cancellation of the five EMSL-CI CRADAs is that the CRAOAs have
not resulted in technology that meets the patentability
requirements of the patent statute's 35 U.S.C. $ 102. (See
p. 25.)
This proposed requirement appears nowhere in the FTTA in
addition, EPA has no organizational body to determine it CRADA-
generated technology is novel and not obvious to a person of
ordinary skill in the art 3 EPA also has no guidance for
deciding when this determination should be made. Nor does EPA
have any guidance for deciding how much of the research coming
out of a CRADA must meet the patent statute's requirements. The
FTTA and its legislative history are of no help on these issues
because the auditor's proposed patentability requirement is not a
part of the Act
3. CRADAs Must Result in New Technology
A third reason that the Draft Report recommends cancellation
of the five EMSL-CI CRAOAs is that the CRAOAs are "not directed
to new and innovative technologies." (See pp. 24-28 }
Like auditor-proposed requirements 1 and 2, above, this
proposed requirement appears nowhere in the FTTA. congress
intentionally gave Federal laboratories great flexibility in
selecting what research or development activities to conduct
under a CRADA. The FTTA merely requires that CRAOAs be directed
to "specified research or development efforts which are
consistent with the missions of the laboratory." 15 u.S.c
S 3710a(c).
The IG auditors do not cite to any authority for their
proposed "newness" requirement Rather, the auditors rely upon
their own "common sense " (See p 26 } Perhaps the reason that
Congress had the sense to make "new" inventions a general goal of
Federal technology transfer rather than a specific requirement of
every CRADA, is that determining newness has the same inherent
problems as determining patentability. There is no party at a
Federal agency equipped to determine what is "new". There is no
newness standard for agsicies to apply Neither is chore a
schedule for deciding when such a newness determination is to be
J It takes the examining corps at the United States Patent
and Trademark Office between one and three years to determine if
an invention meats the -c clti and renobviousness requirements of
the Patent Statute
63
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APPENDIX 1
PAGE 26 OF 35
made. Finally, there is no formula mandating how much of the
research coning out of a CRADA must be new There is no guidance
in the FTTA for resolving these issues because the drafters of
the Act never intended that the general FTTA goal of stimulating
technology development be interpreted as a requirement that all
CRADAs must result in "new" technology.
The FTTA's absence of a requirement for "newness" permits
EPA to engage in CRADAa directed to such non-new research as
duplicating the pollution abatement claims made by the producers
of a wide variety of pollution control technologies. If the
Draft Report's proposed newness requirement is accepted, the
Agency will lose this very important flexibility
4. A Portion of Outside CRADA Funding Should
Arise From Patent and Licensing Activities
A fourth reason that the Draft Report recommends
cancellation of the five EMSL-CI CRADAs is that "[a]11 of the
revenues received by the laboratory through these CRADAs were
obtained from sales of QA materials, not through royalties
associated with the patenting and licensing fees developed from
innovative technology as intended by the FTTA " (See p.25.)
The Draft Report's proposed requirement that a portion of
outside CRADA funding must come from patent licensing is not a
requirement under the FTTA. To the contrary, the FTTA
specifically provides for receipt of funds from either of two
sources: from a CRADA cooperator (15 U.S.C $ 3710a(b)(1) and
(d)(l)), or from licensees (15 U.S.C. $ 37lOc(a))/
The FTTA also includes explicit provisions that specify how
income from licensing is to be distributed. (15 U.S C $ 37ioc.)
The FTTA includes just one limitation relating to the use of
funds received from a CRADA cooperator — that such funds be used
toward the conduct of specified research or development efforts
consistent with the missions of the laboratory. (IS U S C
5 37lOa(d).) The FTTA makes no distinction between outright
payments received from a CRADA cooperator and payments from a
CRADA cooperator based on the sale of products arising from the
CRADA.5
* In most, if not all, EPA CRADAs under wnich a laoorstory
has received funds, the funds have come in the form of outright
payments from the CRADA cooperator, not as licensing fees or
royalties.
5 There is no legal distinction under the FTTA between
"direct" and "indirect* fjr-is received from a CRADA roope *•*»•.--
as discussed on pages 8 and 9 of the Draft Report.
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To the best of our Knowledge, the auditors are correct in
their observation that,of EPA's forty four CRADAs, the five EMSL-
CI CRADAs are the only agreements in which a CRADA cooperator's
funding is based on the sale of products arising from the CRADA
However, the auditor's statement that these CRADAs are "unique"
in this regard is not correct We are aware of other Federal
CRADAs under which payments by CRADA cooperators are based on
sales of products arising from the CRADA.
5. CRADA Funds Should Not Be Used
To Finance Agency Research
A fifth reason that the Draft Report recommends cancellation
of the five EMSL-CI CRADAs is that "the funds to finance any
research are best obtained through the budget review process "
(See p. 28.)
This finding is directly contrary to the FTTA and the Act's
purpose. As discussed above, the FTTA is explicit in its
provision of two nonbudgetary channels for funding Federal agency
research. Congress wrote the law this way to give Federal
laboratory directors and their employees an incentive for seeking
out opportunities for cooperative research with outside parties
and for engaging in the time-consuming process required to make
such public-private cooperative efforts a reality. If the
auditors are allowed to strip the FTTA of its financial incentive
for entering CRADAs, very few EPA CRADAs are likely to be entered
into in the future
6. EPA Should Not Enter CRADAs With
Companies That Use the Fruits of the
CRADA to Competein the Private Sector
A sixth reason that the Draft Report recommends cancellation
of the EMSL-CI CRADAs is that the Government should not compete
with the private sector. (See p 21.)
This section of the Draft Report is undeveloped and does not
cite authority for the proposed "no competition" requirement
The Draft Report simply concludes that if in contracting for
goods and services, the Government should not compete with
citizens, then the Government should not be involved in CRADAs
wherein the CRADA coopeiatoi competes in the private sector
This principle, if accented, could be used to attack every EPA
CRADA with a private company If Congress did not want Federal
agencies to enter CRADAs with companies that compete in the
private sector, it clearly would not have enacted the FTTA The
auditor's proposed noncompetition standard is incompatible witH
the Draft Report's finding that a primary purpose of tne F7~\ .s
"to improve U.S. competitiveness in the world marketplace " (See
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p. 24) CRADAs cannot "be used to improve competitiveness if
agencies are not allowed to enter CRADAs directed to technologies
that will compete in the marketplace
B. OTHER DRAFT REPORT FINDINGS
THAT DESERVE RECONSIDERATION
1. The Transfer of Property to a CRADA
Cooperator Is Tantamount to Providing Funds
to the Coonerator ^mcL Therefore Violates the FTTA
The Draft Report states that "by transferring marketable QA
materials to the five CRADA companies, it is our opinion that
EMSL-Cin provided a source of funding to these companies,
contrary to FTTA provisions which prohibit the transfer of
Federal funds." (See p. 18)6
The FTTA explicitly provides that under CRADAs, Federal
laboratories may provide "personnel, services, facilities,
equipment, intellectual property, or other resources with or
without reimbursement (but not .funds) ... toward the conduct of
specified research or development efforts which are consistent
with the missions of the laboratory." (15 u.S.c § 37iOa(d)(i) )
In finding that providing CRADA cooperators with marketable
resources is equivalent to providing the cooperator with funds in
violation of the FTTA, the Draft Report ignores the Act's express
language which permits a Federal laboratory to provide any
resources under a CRADA as long as those resources are not direct
Government funds.
If EPA is to apply the Draft Report's finding that some
kinds of "personnel, services, facilities, equipment,
intellectual property, or other resources" are funds banned by
the FTTA, it will be exceedingly difficult for EPA to determine
which allowable "resources" are in reality banned "funds". EPA
will have to decide which organization(s) within the Agency will
be assigned the role of making this determination. The Draft
Report's finding that the provision of marketable resources
violates the FTTA is both legally wrong and practically
unworkable.
* The five EMSL-CI CRADAs specify that samples from the EPA
inventory continue to be the property of EPA and are not
"transferred" to the CRADA cooperators until the cooperator
receives an order for products from the inventory and pays EPA
for those products. See, 9 g , Paragraphs 4.5 and 8.3 of the
CRADA with NSI. This misunderstanding regarding the CRADAs
should be rectified xn the final auait report.
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2. The EMSL-CI CRADAs Have Resulted
in an Apparent Conflict of Interest
The Draft Report concludes that the EMSL-CI CRADAs "have
resulted in an apparent conflict of interest between fair and
equitable regulation of the industry and a desire to increase the
laboratory's revenues from sales of QA materials used by the
regulated industry." (See pp. 17, 22 and 30.)
Congress, in passing the Federal Technology Transfer Act,
and in making the FTTA applicable to regulatory agencies such as
EPA, intended to create incentives for the transfer of Federal
technology. The Draft Report, without citation to legal
authority or any analysis, concludes that the FTTA's technology
transfer incentives are "apparent conflicts of interest" when
acted upon by a regulatory agency. This office has already
provided the IG auditors with recent opinions from the Office of
Government Ethics and EPA's Principal Deputy General Counsel that
suggest that a general conflict of interest does not exist when a
regulatory agency engages in CRADAs
3 The Five EMSL-CI CRADAs Create A
Potential Government-Controlled Monopoly
Another reason that the Draft Report recommends cancellation
of the five EMSL-CI CRADAs is that the CRADAs "could result in
the creation of a Government-controlled monopoly " (See pp 17-
23.)
Under the antitrust laws, monopolies exist only if a party
has substantial market share and substantial market power (the
power to control prices) While every company that produces a
product is a "potential" monopolist, the antitrust law is
concerned only with the relatively few companies that turn this
"potential" monopoly into a reality Similarly, one must
question the Draft Report's recommendation that the EMSL-CI
CRADAs should be cancelled due to a "possible" monopoly, the
evidence for which is wholly lacking in the Report.
The Draft Report does not attempt to support its potential
monopoly finding with data relating to the estimated market share
or market power of the CRADA cooperators. The auditors appear to
have some of the information they would need to make this
determination For example, page 22 of the Draft Report states
that the organic chemical standards market is estimated to be $44
million per year and growing. The auditors have the sales
figures for the EMSL-ci CRADA cooperators serving this market
The auditors should state what share of this market is controlled
by the CRADA coopeiators If the CRADA cooperator's aarrst- snare
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is the less than 10%, as EMSL-CI estimates, there is no actual or
potential monopoly.
As evidence for an alleged potential monopoly, the Draft
Report notes recent price increases for certain standard
materials. The Draft Report does not say whether the reported
price increases are for products of the CRADA cooperators only or
if the price increases are industry-wide. This information is
very important for evaluating whether the data supports the Draft
Report's impending monopoly finding. The final report should
explain why the price increases are a result of a potential
monopoly and not a result of more rigorous testing requirements
imposed by the CRADAs, a result of EPA's stopping its practice of
giving out free samples, or a result of increased value that the
market attributes to standard materials produced in cooperation
with EPA. The evidence presented in the Draft Report does not
support a conclusion of actual or impending monopoly.
Some of the confusion in this section of the Draft Report
appears to stem from the auditors' use of the word "monopoly"
when they may mean something else. Perhaps what is troubling the
IG auditors is that only the CRADA cooperators have the
opportunity to wholesale "EPA Certified" reference materials.
This may be an important policy question to be addressed
However, posing this policy question as a question of potential
monopoly only obscures the question at hand,
C. GENERAL OBSERVATIONS
The Draft Report demonstrates that the IG auditors are
uncomfortable with the five EMSL-CI CRADAs. However, the
auditors appear to be unable to articulate a sound basis for
requiring cancellation of the CRADAs. The legal and policy
questions raised by the EMSL-CI CRADAs are more straightforward
than the Draft Report would indicate The following is my brief
analysis of the genuine legal and policy questions raised by the
five EMSL-CI CRADAS
1. EMSL-CI CRADA Legal Issues
a) Issue: Are EPA inventory reference materials that have
been made available to the CRADA eooperators being used toward
the conduct of research and development efforts specified in the
CRADAs?
Resolution The FTTA requires that resources provided by
a laboratory under a CRADA must be used toward the conduct of
specified research or development efforts which are consistent
with the missions of th* laboiatorv (15 U.S.C. S 3">10a;d)(l) )
The OIG should determine *f the EPA inventory samples are being
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10
so used. If the inventory samples are not being used for
research and development purposes specified in the CRADAs or if
they are not being used for purposes that are consistent with
EHSL-CI's missions, then the CRADAs should be amended such that
old EPA inventory will no longer be made available to the EMSL-CI
cooperators
<
b) Issue: The Draft Report notes that one of the five CRADA
cooperators is also an active contractor for BM8L-CI in the
reference materials area. (See pp. 13-14.)
Resolution Under the FTTA, CRADA cooperators may not
receive funds from the laboratory for work done under the CRADA
(15 U S.C S 3710a(d)(1).) The OIG should determine if the
referenced CRADA cooperator is receiving any funds through its
contracts for activities that fall under the CRADA If so, the
CRADA cooperator's contract should be amended to correct this
situation.
c) Issue The Draft Report states that the CRADA
coeperators have been allowed to use the EVA logo in their
advertising. (See p. 14.)
Resolution EPA Order No 1015.2A instructs that EPA
officials should not give outside parties permission to use the
EPA logo or seal for commercial purposes. The OIG should
determine if the EMSL-CI CRADA cooperators are being allowed to
use the EPA logo or seal in their advertising. If so, the
practice should be stopped
*
2 EMSL-CI CRADA Policy Questions
a) What are the benefits to EPA, EMSL-CI and the public
from the EMSL-CI CRADAs' What are the detriments arising from
continuing the EMSL-CI CRADAs9 Are the benefits sufficient to
justify continued acceptance of the detriments'
b) Assuming that making the inventory of EPA reference
materials available to the CRADA cooperators is legal under the
FTTA, is this something that EPA wants to do' When the CRADAs
were entered two years ago, EMSL-CI contemplated that the CRADA
cooperator's use of EPA inventory would be a temporary transition
measure. EPA may want to consider establishing a schedule for
bringing this transition period to a close
c) The Draft Report presents evidence that the EMSL-CI
CRADAs give the five CRADA cooperators an advantage in the
marketplace. While this is ordinarily the case for CRADA
cooperators (most private parties entering CRADAs would not do so
if they did not celiev rne i RAD* was to then c&iT,mercisl
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11
benefit), EPA may want to consider modifying the CRADAs in an
effort to reduce these advantages.
d) Assuming that making the inventory of EPA reference
materials available to the CRADA cooperators is legal under the
FTTA,
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ATTACHMENT 4
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D C 20460
25 1993
Of FCE OF
ADMINISTRATION
WC HE SOURCES
MANAGEMENT
MEMORANDUM
SUBJECT: Comments on Draft Audit Report— Use of Cooperative
Development Agreements by EMSL-Cincinnati
FROM: Harvey
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APPENDIX 1
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- 2 -
recommendations, the laboratory published its intent,
held bidders conferences, published formal requests for
proposals, and selected cooperators with the best
< technical capabilities and most advantageous financial
terms. The report commends these efforts to assure
fairness and openness (pg 7) but goes on to state "(t]he
fact they were competed makes then different."
(Actually, however, we have advertised intent and sought
statements of capabilities from interested parties on
other agreements including the agreement with Vulcan Iron
Works, Xnc , and Chapman, Inc ) This difference from
other CRADAs does not mean they are wrong.
o The report states these CRADAs differ from others in that
they generate only "indirect funds" (pg. 6). This is not
an actual difference since EPA agreements provide options
for the split of royalties and other income (EPA Order
3130 1, 12/15/88). Our other agreements have not yet
produced marketable products, but when and if they do,
comparable other income will result.
o The draft report notes that allowing these QA materials
cooperators to use the name of EPA is another difference.
This is true, but our guidance only prohibits "use of
name or endorsement without the prior approval of the
laboratory". Prior approval was granted in these
instances. Again, while these agreements are different,
they are not wrong.
Also, the draft report states that, since no new technology
was transferred, the agreements are inconsistent with FTTA. EPA's
Office of General Counsel concluded when these agreements were
approved, however, that FTTA did not require that the technology
transferred be "new technology".
On the other hand, I am concerned with the draft audit report
conclusions that the CRADAs are creating a government controlled
monopoly. I believe, however, that this shortcoming can be
overcome without resorting to termination of the agreements. Since
use of the EPA name appears to create market imbalances, some EPA
corrective action may be necessary. I think you should-recommend
the ZG revise the recommendation to suggest that we either—
o Amend the existing agreements to prohibit cooperators
from using the EPA name, or
o Revise the Memorandum of Undeistanding with the Anerican
Association for Laboratory Accreditation (A2LA) to allow
QA materials producers who become certified to use the
name.
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- 3 -
The EMSL cooperators have invested a great deal in these joint
ventures and should not be disadvantaged because of EPA's imperfect
actions.
GCJ Sa'llyanne Harper (HQ-QARM)
Tom Gorman (HQ-OGC)
Tom Clark (EMSL-CIN)
Michael Moore (HQ-ORD)
Larry Fradkin (ORD-CIN)
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ABBREVIATIONS
A2LA
CRADA
EMSL-Cin
FTTA
OIG
OMB
ORD
QA
American Association for Laboratory
Accreditation
Cooperative Research and Development
Agreement
Environmental Monitoring Systems Laboratory
Cincinnati
v
Federal Technology Transfer Act
Office of Inspector General
Office of Management and Budget
Office of Research and Development
Quality Assurance
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REPORT DISTRIBUTION
Acting Assistant Administrator for Research and Development
(RD-672)
Director, Office of Research Program Management (RD-674)
Director, Office of Technology Transfer and Regulatory Support
(H8105)
Director, Office of Modeling, Monitoring Systems, and Quality
Assurance (RD-680)
Acting General Counsel (LE-130)
Deputy Assistant Administrator for Finance and Acquisition
(PM-208)
Director, Office of Grants and Debarment (PM-216F)
Acting Director, Financial Management Division (PM-226F)
Chief, Financial Compliance and Quality Assurance Staff (PM-226F)
Comptroller (PM-225)
Director, Environmental Monitoring Systems Laboratory -
Cincinnati (MD-591)
ORD Audit Liaison (RD-674)
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