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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.

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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."

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 disclo sure 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 commerica 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.

contracting. In addition, the government could induce the commercialization of any invention in which it holds title by deciding to grant any necessary exclusive license after the invention had been identified. The administrative burdens created by this policy, however, make it impractical and undesirable. An agency would be required to allocate much of its resources to the negotiation with the contractor of the appropriate allocation of invention rights, a subject of only secondary importance to the agency when compared to the primary purpose of the contract. Moreover, each agency would be required to allocate vast resources to the evaulation and promotion of federally-owned inventions. If an agency failed to grant any necessary exclusive license, the penalty paid by the public would be the noncommercialization of the invention.

The President's patent policy would reduce the administrative burden and the uncertainty that accompany present policies. The proposal, which includes elements of both the government title policy and the contractor title policy, allocates patent rights in federally sponsored or supported inventions according to unambiguous, generally applicable rules. Contractors that are small businesses and nonprofit organizations will receive title in federally-financed inventions, but the government will retain title in inventions made by all other contractors. Ordinarily, the other contractors automatically will receive exclusive licenses in whatever particular fields of use in which they agree to commercialize the invention.

The receipt of title by small businesses and nonprofit organizations is intended to provide these contractors with an advantage over their larger competitors. The advantage is justified by the special place of these organizations in our society. It also is justified by the fact that, unlike larger contractors whose commercial interest in an invention is apt to be limited by the fields in which it already is, or is planning to become, engaged, small businesses and nonprofit organizations share a strong incentive to attempt to commercialize an invention to the widest possible extent.

The President's decision to provide contractors other than small businesses and nonprofit organizations with automatic exclusive licenses in particular fields of use recognizes that a complete transfer of title to the contractor usually is unnecessary to induce its participation in government research and development work and its commercialization of the invention. The government retains the right to license the invention or otherwise make it available to the public in all fields of use not selected by the contractor.

Although the contractor will know at the time of contracting that it automatically will be able to receive exclusive licenses under any forthcoming invention in particular fields of use, it will not actually receive those licenses until the invention has been identified, its intention to commercialize has been announced, and its selection of fields of use have been submitted to the contracting agency. After the contractor has submitted complete information regarding the invention, its intention to commercialize, and its selection of fields of use, the agency has ninety days in which it may determine whether the contractor's acquisition of an exclusive license in any selected field of use would be contrary to the requirements of the agency's mission, national security, or the antitrust laws. To reduce administrative burdens and to increase the security of the contractor's expectations of receiving exclusive commercial rights in the invention, the scope of the agency's possible inquiry underlying this determination is limited. An agency review will focus only on those unforseen circumstances of which it has become aware since the time of contracting that now require it to deny the contractor exclusive commercial rights with respect to a particular field of use. The contractor will not be denied an exclusive license solely on the basis of facts that were known or reasonably foreseeable by the agency at the time of contracting. If such facts do exist at the time of contracting, an agency normally will deviate from the standard patent rights clause so that the contractor will know at that time that it will not receive an exclusive license to practice a forthcoming invention in a particular field of use.

The agency's ability to deviate from the standard patent rights clause and to terminate a contractor's title or exclusive rights in an invention provide it with additional flexibility to fulfill its mission and protect the public interest. Although these powers are intended to be exercised only in unusual circumstances, they are available to assist the agency in fulfilling its mission, protecting the public interest, and promoting the commercialization of contract inventions.

CONCLUSIONS Enactment of this bill would stimulate the industrial innovation process by contributing to the more effective utilization of inventions made in the course of federally sponsored or supported research and development work. Further, the bill would resolve longstanding policy issues, answers to which the Congress, the Executive Branch, industry, and the public actively have sought for a generation. The bill is designed to reduce the administrative burden now imposed upon contractors and Government agencies alike.

Further, the bill responds to the 1972 recommendations to the Congress of the bipartisan Commission on Government Procurement, that legislation be enacted which would make uniform the Federal practices in the area of allocating the rights to contract inventions and make clear the government's authority to grant exclusive licenses under federally-owned inventions. The bill also would codify the basic policy concepts of Executive Order 10096, the provisions of which uniformly would be applicable to all Federal employees.

It is anticipated that, following enactment and implementation of this bill, greater commercial use will be made of the technology resulting from the Federal government's research and development effort, in turn creating additional employment, a higher standard of living, and an overall economic benefit to the United States as a whole, while protecting the public against any possible wrongful contractor conduct.

PROPOSAL

A BILL To establish a uniform Federal system for management, protection, and use of inventions that result from federally sponsored or supported research or develop ment, and for related purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the “Government Patent Policy Act of 1980”.

TABLE OF CONTENTS Title 1-Policy. Sec. 101–Findings. Sec. 102-Purpose. Title II—Contract Inventions. Sec. 201—“Contract Inventions”; Reporting. Sec. 202—Allocation of Rights-Small Businesses and Nonprofit Organizations. Sec. 203—Allocation of Rights-Other Contractors. Sec. 204—Contractor License. Sec. 205-Minimum Government Rights. Sec. 206—March-in Rights. Sec. 207-Deviation and Waiver. Sec. 208–Transfer of Rights to Contractor Employees. Sec. 209–Regulations and Standard Patent Rights Clause. Title III—Inventions of Federal Employees. Sec. 301-Employee Inventions. Sec. 302—Reporting of Inventions. Sec. 303—Criteria for the Allocation of Rights. Sec. 304-Presumptions. Sec. 305—Review of Agency Determinations. Sec. 306—Reassignment of Rights. Sec. 307–Incentive Awards Program. Sec. 308—Income Sharing from Patent Licenses. Sec. 309–Regulations. Title IV-Licensing of Federally-Owned Inventions. Sec. 401-Covered Inventions. Sec. 402–Exclusive or Partially Exclusive Licenses. Sec. 403—Minimum Government Rights. Sec. 404-March-in Rights. Sec. 405-Regulations. Title V-Miscellaneous. Sec. 501-Patent Enforcement Suits and Right of Intervention. Sec. 502-Background Rights. Sec. 503—Notice, Hearing, and Judicial Review. Sec. 504–Relationship to Other Laws. Sec. 505—Authority of Federal Agencies. Sec. 506—Responsibilities of the Secretary of Commerce. Sec. 507-Definitions.

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