size when we first started it-a growth which is approximately 20 percent per year compounded.

I would like to point out that much of that growth, especially in the early years, was financed by royalties from the patents that the firm held. So we share Senator Bayh's view that it is imperative for small businesses to retain title to its patents and not to be constricted in the fields of use in which they can exercise that title. In addition, universities, other 501(c)(3) organizations like the Salk Foundation, Sloan-Kettering, Childrens Hospital, and others should also be treated specially because of the special characteristics they have in our society.

But while we believe in title in small businesses and universities, they are special cases. Small business has testified-and Senator Bayh has just mentioned-that at best small business does only a minute fraction of Government R. & D. Despite the other efforts of the administration and the Congress to increase the share of Government R. & D. in which small business engages, their share will continue to be small.

So if we are to do other than deal only with the very tip of an iceberg, it's imperative that we deal with the larger businesses as well.

In the businesses in which they engage, larger contractors often are the most effective commercializers of patents that they develop. Production efficiencies, economies of scale, and so forth accrue to large businesses and enable them to pursue effectively the fruits of the patents that they develop with Government support.

If we cared only that these patents be utilized in the commerical fields of interest to those contractors, we would not argue about the question of title in the contractor. We want and need, however, to achieve the widest possible use of patents developed under Federal sponsorship of support across a wide range of industries. We particularly want and need to increase the availability of those patents to small businesses to explore new areas of commercialization, often too small, too risky, or requiring too much additional technical input to catch the interest of the large firm.

If one were to design an ideal bill to meet these goals, one would like the larger contractor to have the same degree of exclusivity in its areas of commerical interest that it would have from title and yet have the Government hold title in other areas, so that the Government could pursue an active course in marketing those patents to small businesses and others willing to explore other commerically interesting areas.

Many of the inventions coming out of Government R. & D. represent radical invention. They have extensive potential for use far afield from the commerical interests of the contractor which develops them. The present bill provides for the Government to encourage utilization in those other fields.

It is often said that the Government can't do this job. Evidence is posted by those who say we never have done it. I came down here with a skeptical view of Government's capabilities. My skepticism stemed from contact as an outsider. I got here, I had my nose rubbed in those prejudices.

I find that Government agencies, when challenged by a stimulating task and given the resources to pursue that task, can attract

the kind of people who make it possible for them to do an outstanding job.

We have not yet gotten to the point where we trust the national defense to the private sector. There are other jobs that the Government can do well. Mr. Chairman, Senator Schmitt, I think that the President's bill embodies the best of S. 414, embodies the best of S. 1215, and provides the additional extension for utilization in areas that neither of those bills attempt. I would hope that we can join together in supporting the President's proposal.

Thank you, Mr. Chairman.

[The statement and materials referred to follow:]

STATEMENT OF JORDAN J. BARUCH, ASSISTANT SECRETARY FOR SCIENCE AND TECHOLOGY, U.S. DEPARTMENT OF COMMERCE

Mr. Chairman, members of the Committees, I appreciate this opportunity to appear before you today to discuss government patent policy-the allocation of rights in patentable inventions made in the course of federally sponsored or supported research and development. Government patent policy bears a major responsibility for the pace of industrial innovation in America and for the ability of the Federal agencies to attract the most qualified contractors to participate in their research and development work. In addition, government patent policy provides us with an opportunity to further the special role in our society played by small businesses and nonprofit organizations.

THE INDUSTRIAL INNOVATION PROCESS

President Carter, in his Industrial Innovation Message to the Congress of October 31, 1979, emphasized that:

"Industrial innovation-the development and commericalization of new products and processes-is an essential element of a strong and growing American economy. It helps ensure economic vitality, improved productivity, international competitiveness, job creation, and an improved quality of life for every American. Further, industrial innovation is necessary if we are to solve some of the Nation's most pressing problems-reducing inflation, providing new energy supplies and better conserving existing supplies, ensuring adequate food for the world's population, protecting the environment and our natural resources, and improving health care.' Industrial innovation is primarily the responsibility of the private sector. In our economic system, the management of every firm must decide whether to innovate. Innovation is possible either by developing and marketing new products or by finding and employing new ways of making existing products. Since new products offer opportunities for increased sales, and since new processes can offer cost savings, the profit motive provides a powerful stimulus to innovative activity by the private sector.

While it is the private decision-maker who determines whether innovation takes place, the Federal government can establish a climate which either encourages or discourages innovative activity. Federal actions affect innovation within the firm to the degree that they affect the ability of the firm to innovate or the decision calculus of its executives.

The importance of patent rights

The progress of an invention from idea to commercial product or process ordinarily is long and expensive. The temporary patent monopoly provided for by the Constitution encourages an enterpreneur to invest risk capital to develop an invention secure in the knowledge that, if his efforts are successful, he will have an opportunity to obtain a return on his investment before his competitors are free to copy cheaply what he produced with such difficulty.

Patent rights affect positively the entrepreneur's ability to raise risk capital. Patent rights offer the successful inventor-entrepreneur a respite from competition in which to enjoy the fruits of success.

Patent rights are particularly important to small firms. Firms which do not already possess competitive advantages such as a popular trade name, manufacturing experience, established channels of distribution, or size, are more likely to need exclusive commercial rights to attract risk capital and recover commercialization costs than firms which do enjoy such advantages. Given our present concerns, this is an important point.

The record of small innovative firms

While the record of large innovative firms is substantial, the record of small businesses based on technological innovation-especially those in high technology areas-is even more impressive. A 1975 study commissioned by the National Science Foundation reported that in the period from 1953 to 1973 about one-half of the major innovations produced by United States industry were made by firms with fewer than one thousand employees and about one-quarter were made by firms with fewer than 100 employees.

Many of you are familiar with the study of the Department of Commerce Technical Advisory Board which showed that in the years from 1969 to 1974, a group of large innovative firms experienced sales growth of 13.2 percent while a similar group of mature firms had 11.4 percent sales growth. Despite the similarity of their growth in sales, employment in the mature firms grew by only 0.6 percent while employment in the innovative firms grew by 4.3 percent-over seven times as much. In this same period, a group of young, high technology businesses enjoyed a sales growth of 42.5 percent-roughly three times as great as their larger counterparts. Their employment in that period grew by 40.7 percent-almost ten times the rate of the large innovative firms, and some 65 times as much as the large mature firms. Turning to the actual numbers for the period studied, six large mature firms having combined sales of 36 billion dollars created twenty-five thousand new jobs. At the same time, five young high technology firms with one-fortieth their sales875 million dollars-created thirty-five thousand new jobs. Five large innovative firms with sales of 21 billion dollars created 106 thousand new jobs.

This evidence runs contrary to the conventional wisdom which holds that innovation, especially when applied to the production process, throws people out of work. In fact, over time innovations that improve the productivity of an industry commonly increase the number of workers employed within the industry.

GOVERNMENT PATENT POLICY

The Federal government provides about one-half of all the money spent each year in this country on research and development. The allocation of rights in patentable inventions made during the course of that work affects the pace of industrial innovation in the Nation through its effect on firms' incentives and ability to innovate. This allocation affects the willingness of firms to undertake government research and development work because they must weigh the benefits of the government dollar against the impact on their commercial business of diverting resources to do government work.

As President Carter observed in his Industrial Innovation Message:

"For over thirty years the Federal agencies supporting research and development in industry and universities have had conflicting policies governing the disposition of [patent] rights resulting from that work. This confusion has seriously inhibited the use of those patents in industry."

There has been much debate on what Administration policy should be. There has been wide support, however, for nine propositions about a desirable government patent policy. Government patent policy should strive to:

(1) Obtain the best contractor effort for the government;

(2) Maximize technological innovation;

(3) Promote competition within the private sector;

(4) Recognize the public's equity in the products of federally sponsored or supported research and development;

(5) Strengthen the research programs of universities; and

(6) Provide special incentives for small businesses; and should:

(7) Be uniform, in the sense that like cases should be treated alike no matter which government agency provides the support and in the sense that there should be only a single set of patent regulations with which potential government contractors must deal;

(8) Be flexible, in the sense that differing cases should be treated appropriately, that is, not necessarily identically; and

(9) Be as clear and as simple as possible.

The source of the confusion noted by the President has been the inability, until now, of any Administration to resolve the diverse considerations involved into a single policy. The historical development of existing government patent policies is described briefly in the statement of purpose and need for the Administration's draft Government Patent Policy Act of 1980. At this point, I request that the official draft of the bill, with its accompanying statement of purpose and need and sectionby-section analysis, be included in the record. The bill formally will be transmitted to the Congress next week.

58-551 - 80 - 2

This bill implements the President's announcement in his Industrial Innovation Message of support for uniform government patent policy legislation. Participants in the policy debate which preceded the drafting of the Adminstration bill have argued that the government should implement some form of either a "contractor title" or a "government title" policy. Under a contractor title policy, the contractor would receive title in any invention resulting from federally sponsored or supported research and development, and the government would receive a nonexclusive license to practice the invention. Under the government title policy, the government would receive title in any invention, and the contractor would receive a nonexclusive license to practice the invention.

Proponents of each policy have presented several distinct reasons in favor of their viewpoints. Those in favor of a government title policy argue that the primary purpose of the patent laws is to create an incentive for businesses to engage in research and development activities. A patent provides its owner with the right to foreclose competition for a limited period in the marketing of the covered invention; consequently, if the patent holder is able to commercialize the patented invention, it may be able to recover not only its original research and development costs but also to achieve an advantage over its competitors who are unable to use the invention. Government sponsorship of research and development, however, generally eliminates some of the risk associated with such activities. The contractor's incentive to perform the work is provided by the payment it receives under the government contract, not by the mere possibility that it may be able to exploit a patented invention at some future time. To provide the contractor with title in the invention, it is claimed, would unjustly enrich the contractor at the expense of the public, which has paid for the research and development from which the invention was made.

Government title supporters further argue that government ownership of inventions will ensure the widest possible availability to the public of the technological knowledge embodied therein. Moreover, contractors do not necessarily need to receive title in federally-financed inventions to induce them to commercialize the resulting inventions. They receive other competitive benefits through their participation in government contracts, such as the opportunity to train key personnel, expand their research facilities, develop know-how, and obtain access to government technology. These benefits could provide any necessary competitive advantage to induce the contractor to commercialize the invention. Even if some form of exclusive rights in the invention is necessary to induce its commercialization, the government contractor is not necessarily the firm most capable of achieving the desired result. Rather, any need for exclusivity could be satisfied by issuing exclusive licenses after the invention has been identified.

Finally, it has been argued that contractor ownership of inventions may tend to enhance the recipient's market power and therefore may contribute to the concentration of economic power in a limited number of corporations.1

Advocates of contractor title point out that government ownership with the offer of unrestricted public use has resulted in an exceptionally low rate of commercial application of federal-owned inventions. The costs and risks of commercializing an invention, developing it and its market, often are so substantial that commercialization will not take place or even be attempted in the absence of exclusive commercial rights. Ironically, the free public right to use a federally-owned patent thus results, in practical terms, in a denial of the opportunity to use the invention.

Contractor title proponents also assert that a government title policy discourages the most qualified firms from participating in government research and development projects. These firms often have invested heavily in research and development related to the government project; consequently, their experience and technological advancement would enable them to perform the government contract more inexpen

There is little evidence, however, that patent policy has had any impact on market structure. A 1968 study by Harbridge House, Inc., probably the most extensive study of government patent policy ever done, indicates that most contractors have been willing to license patents obtained from government research, thereby enabling new or small firms to establish a position in the market. Further, a 1977 study by Utterback and Murray, of the M.I.T. Center for Policy Alternatives, revealed that government procurement of innovative products from small firms was a much more important influence on industry development than government patent policy. Even if there were evidence indicating that research under a contractor-rights policy increases the market power of large firms, this more effectively could be considered in the selection of contractors. By adopting this strategy, competition would be improved not just through the allocation of patent rights but also through the allocation of contract funds, where most of the competitive impact appears to occur. Moreover, explicit "march-in" rights to address instances where demonstrable anticompetitive effects result from the granting of exclusive commercial rights are a final assurance that a properly designed policy of giving contractors exclusive commercial rights need have no significant anticompetitive potential.

sively and more effectively than could other potential contractors. These firms refuse to bid on the government work, however, because the cost to them of publicly disclosing their independently acquired information in conjunction with the disclosure of an invention made under the government contract would be much greater than the profits they could expect to receive under the contract.2

Another problem with the policy of government ownership is that it provides little incentive for contractors to disclose their inventions to the government. Rather, the contractor either may maintain the invention's secrecy or make an incomplete disclosure and subsequently attempt to seek its own patent of the federally-financed technology. The incentive for nondisclosure is especially great for those contractors that would be required to divulge independently-acquired information when they revealed a federally-financed invention to the government. A contractor title policy would ameliorate the disclosure disincentive by eliminating the financial penalty associated with disclosure. Further, a contractor title policy would create an incentive to disclose by providing contractors with property rights in federally-financed inventions on the condition that such inventions are reported to the government.

The conflicting arguments of the government title and contractor title proponents lead to one conclusion: neither policy, alone, provides the most beneficial means for allocating rights to federally sponsored or supported inventions. Although a contractor title policy may induce both an increased participation in government research and development projects and a higher commercialization rate of federally-financed inventions, such a policy would be unnecessary to induce participation or commercialization in many instances. Under a government title policy, many qualified contractors nevertheless would participate in the government contracting process and some federally-financed inventions would be commercialized. In such situations, implementation of a contractor title policy could be necessary and possibly might conflict with the public interest. Strict adherence to a government title policy, on the other hand, would prevent not only the most qualified contractors from participating in certain government research and development projects but also the commercialization of certain inventions.

One possible resolution would be a general government title policy under which the agencies possessed liberal authority to induce the participation of the most competent contractors by waiving government rights in the invention at the time of

To some, the degree to which Government patent policy encourages or discourages contractor participation in Government research and development programs is the single most important consideration. Advocates of one and another policy have disagreed over the extent to which the ancillary benefits from government sponsorship and support assure adequate participation. These benefits include the Government dollar itself, the know-how developed by the firm, and the attendant advantage over other firms in competition for follow-up development and procurement by the Government. There is very little empirical evidence on the effect of government patent policy on firm participation in the contracting process. The Harbridge House study contains case studies in which firms refused to undertake Government contracts under a Government title, no rights to the contractor, policy. However, the study gives no indication of the significance of the problem beyond stating that the policy choice is most important where the prospective contractors is engaged in similar research for a commerical business in which patent protection is important.

This seems a reasonable conclusion. Presumably, the Government only sponsors or supports research that is not being pursued adequately by the private sector on its own. This research represents projects for which the expected return without Government support is less than the research and development cost required for invention. If many firms are capable of performing the research, they compete by announcing the lowest payment for which they will undertake a particular project. Firms will have similar perceptions of expected benefits because any rights to inventions can be sold. Moreover, if firms value their inventive inputs at opportunity costs reflecting their productivity in related research, then estimates of cost will be very similar. That is, firms with skilled research staffs will require less of their more valuable time to complete a project than those with inferior personnel. Consequently, the breakeven payment for all firms will be approximately the same, and competition for the award will drive down the required Government funding to that level.

The only difference between policies which do or do not assure the contractor exclusive commerical rights is that the firm includes the value of the patent in its calculation of expected return when it operates under the more favorable policy. Without the prospect of exclusive commerical rights, firms will require a larger payment from the Government to breakeven. Under either policy, however, the Government should be able to offer most qualified firms adequate economic incentives to participate in the contracting process.

Contractor rights advocates argues, however, that a firm which has invested its own resources in the field of research will not participate under an unfavorable policy because proprietary information used in completing the contract must also be turned over to the Government. The value of that information includes monopoly profits from other inventions that the firm could market in the private sector. Therefore, the opportunity cost and breakeven payment for the contract will be higher for the advanced firms then for other firms. As a result, the advanced firm will choose in some cases not to particpate in the contracting process.