fully licensed. This is very little return on the billions of dollars that are spent every year on research and development.

Small businesses should be allowed to obtain limited patent protection on discoveries they have made under government-supported research if they provide the additional resources needed to successfully commercialize the product. This change would provide the American marketplace with additional innovative product developments and remove the disincentive to many small companies from participation in the federal R. & D. process. The benefit is not only for small business, but the American economy, as well, since small firms have been the greatest source of new jobs in the past decade.

Under present practice, the government lets an R. & D. contract to a small business having the expertise as evidenced by background know-how. The patents devolve to the government, but when it comes to supplying the hardware, the conventional practice is for government to go to larger business, who can manufacture with impunity, in derogation of the proprietary rights of the small business contractor. This should be changed by legislation stating that no funding agreement with a small business firm shall contain a provision allowing the federal government to require the licensing to third parties of inventions owned by the small business firm which were not conceived in the performance of work under a federal R. & D. grant. The only exception would be that such a provision had been approved by the head of the agency and a written justification had been signed by the head of the agency. Such action by the agency head should be subject to judicial review.

RESOLVED

The Small Business Legislative Council urges and supports changes in current government patent policy to allow small businesses patent protection on inventions made under government-sponsored research, provided that allowance is made to permit the government to recoup its initial funding under certain circumstances. Small business innovations developed under federal contract should be patentable by the contractor, allowing that business a reasonable time to develop the new idea commercially. Failing that, that government should provide exclusive license to such innovations, with preference to small business. These actions will provide an increased incentive to the traditionally innovative small business sector to seek R. & D. contracts and to commercialize new and beneficial products for the marketplace.

Senator STEVENSON. Thank you, sir.

Senator Schmitt?

Senator SCHMITT. Gentlemen, we have discussed this definition of small business, and we tend-all of us, including myself—to leapfrog the "middle-sized business." When we think about business other than small business, we think about the giants. I presume that most medium-sized businesses were once small businesses. Some of the giants have aggregated a lot of medium or small businesses and therefore became giants in the process.

Would each of you care to comment on whether there ought to be a distinction recognizing the political aspect? Maybe with the distinction, we would get a little bit done that we wouldn't have gotten done otherwise.

But let's set that aside, and just from a theoretical point of view, do you think there should be a distinction, and as Senator Stevenson had said, an implicit penalty, for becoming big?

Mr. HASKELL. Senator Schmitt, as a representative of big business, I'm perhaps prejudiced, but I do not feel that there should be a distinction. I feel that there should be a recognition on the one hand that big business very often is made up of a large number of segments of small business.

Many of us are really conglomerates, managing segments of small businesses. And to the extent that we have big business that does not fall in that category, we have a great deal of support from small business. In some of our product lines, small business pro

vides as much as 70 percent of the materials that go into products that we manufacture.

So I feel for these reasons, it's extremely difficult to find a viable reason for distinguishing between the two, and if you wish, penalizing success.

Senator SCHMITT. Mr. Blair?

Mr. BLAIR. I suppose representing a somewhat in between, medium-type business, I can certainly comment. I want to echo

Senator SCHMITT. Itek was small when they started. Right? Mr. BLAIR. We were very small when we started. We were just a laboratory from a university, about as small as you're going to get. But even today one of our divisions has annual sales of $3 million, which I think is small business by most definitions, and I think that's completely right. Even in some of our divisions that are larger, some parts of them are really a small business.

I certainly am in favor of small business, and I think in general all businesses should be treated alike. I don't see why the big business or the medium-sized business should be discriminated against. Also when you start defining small and big and medium, inflation throws the things out of whack after awhile.

Why not let everybody take the same rights and see what they can do with them?

Mr. BENSON. I don't know whether I represent big, small, or intermediate business, but at any rate our committee that did the investigation, had representatives from every aspect of business. But I find this diversionary. Why don't we keep our eye on the target? What are we trying to accomplish? We're trying to accomplish the commercialization of unused technology.

Then why don't we get out and get the very best firms available to do it, whether they're big, small, or intermediate?

Let's not use this situation as a technique to get preferential treatment for any segment. Let's get the job done, and let's get it done by the best people who are willing to do the job. That's what we ought to be focusing on.

Senator SCHMITT. Mr. Schellin?

Mr. SCHELLIN. I'd like to make a few comments if I may. I think that the only way that we can get the job done, today and in the foreseeable future, to respond to Mr. Benson, is the fact that we're going to have to be limited to a particular area. This area happens to be small business today.

As I indicated to you earlier, small business has the finer track record. No. 2 is, as Jordan Baruch mentioned, less than 4 percent of their R. & D. dollar goes to small business.

We're talking about, in most situations where small business would get title, a minutiae of inventions that may finally go to small business, because if you're only going to have 3.5 percent of the research dollar going to small business, then only 3.5 percent of the inventions will come out of small business. And that's the universe we're talking about.

Now, the White House Conference last week in one of the 60 priorty items-not one of the high-priority 15 items-did come out and espouse the concept that there should be set-asides at each Government agency level, so that the R. & D. amount going to

small business increases incrementally at a rate of 1 percent per year until 10 percent is reached.

The Small Business Legislative Council's point on that-we also have a resolution on that that I won't read to you now-goes to 25 percent, but we are talking about an area-we're talking about S. 414-that is small, a small area that we can test with, so I say that if we can get this going where heretofore we had nothing to go with except the Presidential orders of 1971 and some of the other legislation that's embodied in some of the agencies-I say let's go with this while we can, and then perhaps have oversight hearings sometime in the future to consider whether or not large businesses also ought to be accommodated in this field.

But let's get the small business people out there and give them that extra break that they need that they don't get now.

As I said before at the very end, if you treat us all equally, then you're going to treat small business unequally, because this has happened time and time again. I think, Senator Stevenson, you mentioned that yourself that this kind of happenstance occurs with regard to Federal regulations, et cetera, that we need not go into today.

But small business, I feel, because of its track record should be preferred at this time in the existence of the Republic.

Senator SCHMITT. I'm sure some of the recommendations—I haven't had a chance to study them all-at the White House Conference would imply, if not explicitly state, that the principal problems that small business has today is capital formation and handling the regulatory environment in which they're trying to compete with everybody else.

Large businesses do have an advantage in that respect in terms of internal financing and in terms of being able to handle administrative overhead. I hope that the Congress in general can treat those two problems very soon in very specific ways.

Mr. Blair, when Itek was formed did you spin off with title to a specific technology or was that licensed to you by the university? Mr. BLAIR. I think in our case, Boston University permitted the individuals in the laboratory to form a corporation. The university got no return from it. The individuals formed the corporation separately. The corporation obtained contracts based on their expertise and their past background, and they went on from there. They had no continuing relationship with the university, and there were no patents involved when they were originally formed. It was just because of their general expertise in designing these very large and sophisticated optics.

I think some parts of the Government felt that there wasn't really anybody in industry at that time that had the capability of designing and manufacturing the things that these people had designed. So they encouraged them, and some Rockefeller money helped them get off the ground, and then they went out and got Government contracts.

Senator SCHMITT. Mr. Chairman, the panel has selectively and in aggregate covered almost all of the questions that I had put together.

I would like a final comment, though, from those of you that do a great deal of DOD contracting. Mr. Haskell has already to some

extent commented on that, but can you say that your approach to competing for DOD contracts would change if the policy proposed by the President became the law of the land?

Mr. HASKELL. Yes, sir.

Senator SCHMITT. Would you stop competing?

Mr. HASKELL. No, sir. We would compete less vigorously and with less of our best technology.

Senator SCHMITT. You would give up that area to somebody else? Mr. HASKELL. What we would try to do-

Senator SCHMITT. I want you to be as objective as you can. Mr. HASKELL. What we'd try to do-I discussed this subject with our chief executive officer and chairman of the Board, and the general view is that what we would try to do is do all the good things on independent R. & D. and then try to do whatever we could in the way of contracting.

Senator SCHMITT. With the Government?

Mr. HASKELL. With the Government or whatever customer we could find.

Senator SCHMITT. So you'd try to get the patents before you went into the competition for contracts?

Mr. HASKELL. Yes, sir. We would otherwise feel we would not have sufficient protection for our investment.

Senator SCHMITT. Mr. Blair, your company does a considerable amount of DOD contracting.

Mr. BLAIR. I think the net result would be something like Mr. Haskell. We would certainly compete just as vigorously for the contracts. We might have a little bit of difference in a corporate sense in putting more of our good things into our commercial business and less into the government contracts business. But our Government divisions operate very independently within the company.

The Government-oriented divisions want to get those contracts in the worst way, but they might very well consider some internal changes as to what people are putting into the Government contract.

Senator SCHMITT. You're saying that what this would force you to do is not so much to back away from Federal contracting completely, but to try to end run the problems you defined within it, that is, the legal problems as well as the basic marketing problems?

Mr. BLAIR. Right. We would still definitely go out and get contracts, but we would probably handle our internal matters somewhat differently.

If we can get title, that's something we can use. We can license that if we don't use those things ourselves. If we have part of the title, if you want to call it that, the exclusive part in some limited areas, that's better than not getting anything, but it's certainly not as good as title and permitting us then to develop the technology. If we ourselves can't use it, fine. We'll license it to somebody else in other fields, but we can often use the basic technology—which we have, as I mentioned in my example-to show other people what we have, and they can modify our technology and make the things that they can do.

In the example mentioned in my testimony if we only had the exclusive right in the aerial reconnaisance field, the rest of that technology would never have been developed, and this would never have had the products that these other people were able to make and pay taxes to the Government on them.

Senator SCHMITT. Mr. Benson, would you care to comment?

Mr. BENSON. We do not do a lot of DOD work. In fact, we do not do an awful lot of Government work.

Senator SCHMITT. Is that by choice or because you can't compete? Mr. BENSON. No, we can compete. It's by choice.

We have some different problems than just patent problems, which maybe it's inappropriate to talk about now, but we have technology problems.

We have a wealth of know-how, and many of the reasons that we would be a desirable contractor under Government contracts is because of maybe 30 or 40 years of work in a particular process. We know how to do things.

But when you get involved with the Government, aside from patent problems, they want your background technology, and they want to give that away and for, say, a modest, $100,000, or $150,000 contract, they want maybe a million dollars worth of background technology, and it doesn't make any sense.

In the experience we've had with the Government, we have more often than not pursued our development to the point where we really pretty well had it made, and where our amount of investment in a particular area was so high relative to what we were asking from the Government, we were able to work out a position where we could portect our technology in a particular area. I think it's different in every situation. If you're going to go into an area where you have absolutely no background and no rights to protect, so to speak, take the Government money. But when you have a great risk because of prior work and investment, then you have to take a second look at what you're doing.

Senator SCHMITT. Thank you.

Senator STEVENSON. Gentlemen, you've been very helpful to both of these committees. It's been a good discussion, and we are grateful.

Thank you. The committee stands adjourned.

[Whereupon, at 1 p.m., the hearing was adjourned.]