DATELINE:

Peter Clout was perusing his electronic mail late last summer when he came across a disturbing piece of news.

Colleagues in his old group at Los Alamos National Laboratory were planning to give away expensive government software to a huge research laboratory in Japan.

Clout fumed. Why would the U.S. government hand over software it had spent millions of dollars developing to a nation it routinely blames for many of America's economic woes?

On a more personal level, Clout was angry because he was trying to sell a similar software system to the Japanese laboratory, KEK. He stood to lose upward of $600,000 if Los Alamos gave the technology away.

Clout and a coworker had left the sprawling laboratory up the mountain in 1988 to set up Vista Control Systems Inc. in an office park nearby. The small company sells specialized computer software to universities, research labs and businesses.

In leaving behind the lab, Clout was trying to do what the government very much wants him, and many hundreds like him, to do - go forth from national laboratories and create wealth and jobs.

But, much to his surprise, Clout has discovered that the very government that encouraged him is now his biggest competition in the marketplace.

"The reality is the biggest enemies of our company aren't (other software companies) elsewhere. They're right here in Los Alamos," he said.

A growing number of small-business owners are discovering the same thing.

Increasingly, they say, the national research labs are becoming competitors, unfairly using their size, power and taxpayer financing to wrestle business away from private companies.

In its yearlong examination of government programs meant to transfer technology to private enterprise and encourage job creation, The Inquirer documented more than 30 cases in which government scientists instead competed directly with private business.

Executives of many other companies complained about unfair competition but were unwilling to be identified, out of fear of losing potential government business.

Complaints cut across a broad spectrum of technologies, including lasers, software, computer and electronic equipment, manufacturing tools, environmental-control devices, even consulting services.

Company executives contend that federal laboratories or agencies have:

• Used taxpayer dollars to market services and programs to private industry for a fee.
• Published proprietary information that seriously damaged companies.
• Stolen ideas or technologies and used them to develop competing products, to write research papers or to protect their programs from funding cuts.
• Arranged to receive nonbid contracts to do work for other federal agencies that could be done by private, tax-paying companies.

"We make a point of bending over backwards not to compete with the private sector. So we go out of our way to avoid those kinds of situations," said Peter B. Lyons, director of the Industrial Partnership Office at Los Alamos, which coordinates research agreements between the lab and industry.

Regarding Clout's complaint, Lyons said Los Alamos is not competing with him because its software system is "distinctly different from other available options."

As for sharing software with foreign laboratories, Los Alamos officials say such collaborations help to further enhance the product.

Officials of other federal laboratories and agencies involved in the government's multibillion-dollar technology-development programs echo that view.

"I don't think we compete with private folks. I think we create business for private folks," said C. Paul Robinson, vice president for laboratory development at Sandia National Laboratories in Albuquerque.

The charges of unfair competition are not without a certain irony. The government is spending an estimated $6 billion a year in an unprecedented effort to help American companies improve their technological skills and compete more effectively.

And it is encouraging its own scientists to go forth and become capitalists. Yet at least some of these companies, such as Peter Clout's, now view the government as a direct competitor.

Small-business owners and university researchers say such conflicts were inevitable.

Federal laboratories have been scrambling to find new sources of revenue in the face of budget cutbacks. Their new mission of boosting U.S. competitiveness offered a way to expand into commercial activities, where they collided with companies already there.

"Some of these government people don't have anything to do now that the Cold War is over," said David Freiwald, a former Los Alamos scientist who is one of the owners of F2 Associates, a small high-tech firm in Albuquerque. ''So you end up with truly absurd situations where the labs use taxpayer money to steal business from small companies like ours."

Freiwald says scientists at Sandia listened to a proposal in 1992 by F2 Associates to jointly build a listening sensor to be used by the Marines. Sandia seemed interested, but the proposal quietly died. Two years later, Sandia began to shop around the idea of building a very similar device, Freiwald said.

"Now I consider that to be blatant competition," Freiwald said.

Sandia officials declined to comment.

Researchers within the nation's vast network of laboratories are under
pressure to find outside income to continue their work, say scientists and entrepreneurs outside the labs.

"What we are starting to see is more and more interest by researchers to seek outside money," says Dale Atkinson, chief executive officer of POD Associates, a small software company in Albuquerque. "The problem is, that puts them in direct competition with us for the same funds."

Alan Hill, president of Plasmatronics Inc., another small Albuquerque firm that makes lasers, put it more bluntly.

"They're trying to hold onto what they can at all costs. They're trying to keep people busy," he said.

In fields in which a company is heavily dependent on government business, competition from a federal lab can break a company.

"It ruined us," said Alan A. Vetter, a senior partner in Humbug Mountain Research Laboratory in Duarte, Calif.

The small firm developed a laser-guided landing system for aircraft carriers under a research contract with the Navy. But in 1991, the Naval Engineering Center in Lakehurst, N.J., for which the work was done, began to develop a competing system.

Vetter and his colleagues complained to the Navy. But the time and expense of fighting the system carried a heavy price.

"We have three people now. We had 22 before," Vetter said. "Every profit we ever had went into this system."

Vetter's company appeared to have won its battle by late 1991. At a congressional hearing on issues related to small business, Navy brass promised to cooperate in resolving the controversy with Vetter.

As soon as the hearing ended, "they went backwards," Vetter said.

Since then, the company has been battling with the Navy to receive more than $300,000 it says it is owed. To demonstrate the superiority of its system, Humbug Mountain Research has placed one of its laser landing systems on the USS Constellation - at its own expense.

It was not Congress' intent, though, that the labs themselves should enter the marketplace or compete with private companies.

There is a built-in conflict in the whole effort to make lab scientists entrepreneurs, says Steve Girrens, a manager in the Industrial Partnership Office at Los Alamos, which coordinates cooperative research agreements between the lab and industry.

It grows out of the long-standing research traditions at the labs.

" 'Thou shalt not get rich on taxpayer money,' " he recites, "but you can't create jobs without creating wealth. So, on one day you get beat up for not helping industry and, on the next, you get beat up because you did."

Resolving such conflicts "will be a big stickler," Girrens adds.

"Lawsuits waiting to happen," says another expert.

It all boils down to who owns what. Legally, that's known as intellectual property.

"The hardest things to negotiate on any agreement are the intellectual- property clauses," says Warren D. Siemens, head of technology transfer and commercialization at Sandia, which has entered into more Cooperative Research and Development Agreements (CRADAs) than any other national lab.

"That's the guts of it: Who owns what at the end of all this and how the intellectual property is going to be disposed of," Siemens says. "That's the key to the whole thing."

During the 1980s, laws governing patents and licenses were repeatedly sweetened to give nonprofit research institutions and government laboratories - as well as the scientists working there - rights to the technology they developed. The scientists also were permitted to receive royalty payments and licensing fees as a result of commercial sales growing out of the work they performed.

Backers in Congress believed the new policy would stimulate work on more marketable technologies.

It hasn't.

"Overall, royalty-sharing programs at federal laboratories have not increased scientists' interest in patenting," a 1992 General Accounting Office study concluded.

That remains true today, interviews with scientists and lab managers confirm. Last year, Sandia signed 18 royalty-producing licenses. At a ceremony in December, checks were handed out to the 40 scientists eligible to receive them. Total amount: $105,000, or an average of only $2,625 per employee.

The labs are far from hotbeds of new, commercially attractive inventions. Even so, complaints about the government facilities unfairly competing against private industry are on the rise.

And those complaints are beginning to attract attention.

In April 1994, Rep. Anna G. Eshoo, a Democrat who represents California's technology-rich Silicon Valley, introduced an amendment requiring the Department of Energy to ensure that its labs do not compete with business.

"There is no point in spending tax dollars to repeat the valuable activities already being done by U.S. companies. Nor is there any point in making firms compete against the federal government," Eshoo said at the time.

The legislation to which the amendment was attached never passed the House, however. An aide said Eshoo had not decided whether to reintroduce the bill.

Eshoo made the initial proposal after receiving complaints from companies that Lawrence Livermore National Laboratory in Northern California was selling components for lasers to hospitals and companies.

"Markets worth millions and millions of dollars to these companies have been supplied instead by Livermore, partially through government-funded programs," Breck Hitz, executive director of the Laser and Electro-Optics Manufacturers Association, testifed before a House panel in March 1994.

The labs contended that the materials they supplied were unique, and thus did not take away business from anyone.

"We may occasionally slip up and there are some gray areas," said Alan J. Bennett, director of industrial partnerships at Lawrence Livermore. "But as a matter of policy, we try darn hard not to compete."

Hitz's trade group was fortunate even to get a hearing. Often companies with complaints have been stonewalled.

Consider what Peter Clout went through.

VISTA CONTROL SYSTEMS INC.

The software systems he had helped develop at Los Alamos, and before that at laboratories in Germany and England, seemed to offer the perfect vehicle.

Clout and a colleague decided to take the leap. Clout put up half the initial funds, an amount he prefers to keep private, and an investor in England provided the other half. Vista Control Systems Inc. was born in early 1989 and made its first payroll that March.

One of the founders' first steps was to apply for an exclusive license to use a software system they had helped develop at Los Alamos. The system was designed to control and monitor massive particle accelerators used in research.

Eighteen months after applying, Vista received a three-year license, paying $4,342.38. They since have signed a new license.

"There were a lot of internal delays, red tape, bureaucratic stuff," said Clout, 52. "We basically operated 18 months with the promise of a license."

"We were all pretty frustrated," said Mike Thuot, Clout's former boss at Los Alamos.

Clout said trouble surfaced when Los Alamos circulated the firm's business plan for comment during those negotiations. "That was a little disconcerting," he said.

More alarming was his old group's efforts to market a similar software system, called EPICS - or Experimental Physics and Industrial Control System.

Clout helped to develop EPICS while at the lab. The work continued after he left.

As early as 1990, Clout said, he was told that lab employees were bad- mouthing Vista Control's software to potential customers - a claim denied by Los Alamos officials. Clout based his claim in part on telephone records he obtained under the Freedom of Information Act.

Clout said he also has encountered former colleagues at foreign conferences and at laboratories in Germany and France, attempting to market the EPICS software.

More recently, he says, Los Alamos has promoted its software to other Department of Energy labs - potential customers for Clout.

Clout says his biggest shock came when he learned in 1994 that Los Alamos scientists were offering to install and service a free copy of EPICS at the KEK research laboratory owned by the Japanese government in Tsukuba, a town about two hours north of Tokyo.

Vista Control previously had sold KEK one of its software systems for about $150,000. Now it was trying to sell the lab a larger system for monitoring and controlling a particle accelerator - "a very big deal for a small outfit like Vista," Clout says.

In September 1994, Clout fired off a letter of protest to Energy Secretary Hazel R. O'Leary. Sen. Jeff Bingaman (D., N.M.) also wrote O'Leary on Clout's behalf.

He heard back from a department official, who assured him the EPICS system wasn't the same as his own and wasn't being commercially marketed by the lab.

Clout responded that Los Alamos was straying from its mission of doing basic science and into the commercial marketplace.

"If an existing customer . . . is choosing between EPICS and Vsystem (Vista Control's product) for a new project - how is that other than competition? And if that customer is a government research laboratory of a country, Japan, that runs large surpluses both in trade and in government budgets, why is our government giving them software?"

KEK officials announced last month that they would use Los Alamos' software for their particle-accelerator project.

Clout estimates that the lost sale will cost him between $300,000 and $600,000.

"My cynical observation is that it's kind of nice that the U.S. Department of Energy is helping large Japanese industry over American small business," he said.

Clout worries that KEK officials might allow Japanese companies to work with the software. "Once their engineers get ahold of it, it's gone," he said.

Thuot does not dismiss Clout's concerns about competition.

"I'm not standing here and saying this is a black-and-white case of the lab being right and Peter wrong," he said.

"There is a particular problem with the market area that Peter is pursuing. It is a place . . . where these two labs and Vista overlap.

"So that is an issue. He has a point. I guess my response would be that we do science for society and he has a company with commercial interests."

The government has interests, too. Sharing software saves money, says Thuot. "It's a way of doing science on a shoestring."

TRIANGLE RESEARCH & DEVELOPMENT CORP.

The company had finished the first phase of the project and was hoping for a second, larger grant. It got a "no" from NASA.

"They would never answer our questions or say what the problem was," said David P. Colvin, president of Triangle Research & Development Corp.

Colvin had worked at the Manned Space Center in Houston during the final phase of the Apollo program. Since forming Triangle Research in 1979, his firm had won nearly 60 government grants to develop technology for NASA and five other federal agencies.

The company decided not to fight. It had more than enough work to keep busy. And Colvin and his colleagues had grown frustrated with NASA bureaucrats - especially in Houston.

"It's a bad business investment to deal with that group," Colvin said.

More than three years passed and Colvin forgot about the space-suit proposal. Then one day in 1992 he was reading NASA Tech Briefs, an agency publication, when he came upon an article about an innovative idea for an advanced space-suit cooling system.

Colvin read on. As he read, he became more and more angry.

"It was the same thing we had been proposing," Colvin said. "I was blown away. I had really assumed there was no need for this in NASA. Now I read they were applying for a patent. They were pirating our idea."

He complained to numerous NASA officials; finally, one listened.

John Glaab, who ran the program that had funded Colvin's space-suit research, decided that a review was warranted and turned Colvin's materials over to NASA's Office of Inspector General.

"I think it is fair to say David Colvin's allegations are probably accurate," Glaab said.

Now, more than a year later, Colvin isn't even sure there is an investigation.

No one has contacted him. The Office of Inspector General refuses to talk with him, let alone confirm or deny that there is an investigation. The office wouldn't answer questions from The Inquirer, either.

Glaab, who since has retired, says that's standard procedure.

Colvin says it's outrageous.

"They told me to file a Freedom of Information Act. That's nuts. This is an investigation that involves me. They can't tell me they're investigating or not? I suspect nothing happened and they're just wishing this would go away," Colvin said.

Colvin says the biggest loss to Triangle Research was a potentially valuable product.

"As soon as you disclose information in a public manner, your foreign patent rights are lost. With their publication of a lot of our ideas, there could be real damage."

It may be too late to recover anything. At this point, Colvin said, the issue is NASA's "disgraceful handling" of his complaint.

"At the very least, they owe me a formal apology."

MAQUILADORAS

Under a recently signed agreement, Sandia scientists would help the estimated 2,000 manufacturers who employ Mexican laborers along the border solve serious environmental problems there, in return for a fee paid up front to the lab.

To Probst, owner of a small Albuquerque consulting company that does environmental work, the deal was troublesome.

Here was a government research facility out beating the bushes for work that Probst felt could be done by companies like his. Moreover, the companies had not even been contacted before the deal was signed.

"That was wrong," Probst said. "Nowhere was it clear in the process that industry was going to be invited to participate. Industry should lead. The labs should only get involved if industry can't do something."

Gil Cano, Sandia manager in charge of the program, said the lab did not solicit the border companies, called Maquiladoras. Rather, he said, the lab was approached by a nonprofit organization in El Paso, Texas, the Maquila- Sandia Technology Consortium, representing border firms.

To companies such as Probst's Core Group Inc., the issue of federal research labs' using their size and taxpayer subsidies to pull in work is a serious one - and getting more so as the labs search for business opportunities to replace lost defense work.

Executives of small companies say the labs are marketing their equipment and skills to private companies and government agencies under their Work for Others and User Facilities programs.

In the Work for Others program, scientists contract to do work for outsiders. In the User Facilities program, the labs open select research facilities and equipment to corporations for a fee.

Even if there is no direct competition, the labs are "walking a very thin line," said Lee W. Rivers, executive director of the National Technology Transfer Center, run by NASA in Wheeling, W.Va. The center runs a referral service, matching companies seeking research assistance with federal scientists and labs.

"If I were a small company and aware I was losing business to a federal laboratory, I'd parade myself right in to the director . . . and lay out that case. And I'd let my congressman know . . . I was unhappy that public dollars were being used to compete with me in the private sector."

Sandia's Ted Dellin said it was his experience that "these programs have been well-received by industry and there's a lot of excitement." Dellin calls them "a valuable way for the labs to aid industry."

Maybe so, but the Sandia deal with the nonprofit group from El Paso suggests otherwise. Under the agreement, each border company was tapped for a $5,000 fee to join the consortium; that entitled the company to 33 hours of consulting from a Sandia scientist. The Sandia lab got $3,300 from it; the nonprofit consortium kept $1,700.

Apparently, the fee was too stiff.

Not many companies have signed up, Cano said. "I suspect they determined the cost-benefit was not what they had anticipated."

That's fine with Kevin Probst.

"I don't believe they should be doing work for others as an excuse for keeping the national lab people employed," he said. "It's not in their charter. It's not what the country needs."