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ADDITIONAL ARTICLES, LETTERS, AND STATEMENTS

ALLEN NEECE,

MOLECULON RESEARCH CORP., Cambridge, Mass., January 4, 1980.

Legislative Counsel, Select Committee on Small Business,
U.S. Senate, Washington, D.C.

DEAR ALLEN: This letter is in response to your request for comments on the Commerce Department draft of the "Government Patent Policy Act of 1979." I have examined it only from a small business perspective and have not considered its effect on universities or large companies.

On the whole I find the small business provisions reasonable, but I am quite concerned that tying large companies into the same bill will cause considerable delay and loss of support for the current legislation (S. 1860 Title II and S. 414). It has been over twenty-five years since the last significant piece of patent legislation was passed by the Congress, and it has taken a long time to get to the point where a politically acceptable bill has evolved for small business. I am under the impression that a number of public interest groups and liberal Senators would not support a bill that provides additional patent benefits to large companies. The small business aspect of the current bills seems to be a politically important feature. On the other hand, I understand that large companies have no objection to S. 1860 Title II or S. 414.

Although I could compare specific provisions of the bills, the overriding consideration is whether we want to see a small business and university patent bill become law during this session of Congress, or whether we are prepared to wait for some future time when it might be possible for a broader scope patent bill to be passed. I personally have talked with enough people about the small business/large business distinction to feel confident it is a critically important factor.

I am sorry I cannot join your meeting on January 10, but this letter should convey the thrust of my viewpoint. If you wish to discuss this further during the following week, I shall be at the White House Conference on Small Business staying at the Washington Hilton.

Sincerely,

ARTHUR S. OBERMAYER, President.

INTERNATIONAL BUSINESS MACHINES CORP.,
Armonk, N. Y., February 5, 1980.

Hon. ADLAI E. STEVENSON,

Chairman, Subcommittee on Science, Technology and Space,
U.S. Senate, Washington, D.C.

DEAR CHAIRMAN STEVENSON: On August 6, 1979, I wrote you to offer IBM's support for S. 1215 introduced by Senators Cannon, Schmitt and yourself to establish a uniform Federal patent policy.

This letter is in a sense a follow-up to my earlier one; in this case, to express a concern regarding President Carter's approach to Federal patent policy in his recently announced Industrial Innovation Initiative. Specifically, my concern with the President's approach is that it would establish a basic policy of title in the government, with an exclusive license to a contractor only when the contractor agrees to commercialize the invention. That approach would not provide appropriate freedom of action for contractors and would act as a disincentive for technically competent organizations to participate in government contracts.

Your approach, which normally leaves title with the contractor but provides for title to the government in certain essential cases, is a more preferable approach. The Administration's approach will be burdensome for both the government and the contractor because of the inherent uncertainty in determining in advance who is going to have what rights. Your approach, with the suggestions for modification which I made in my letter of August 6, would have a far more positive impact on industrial innovation.

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If you or your staff wish to discuss this matter further, I will be happy to provide additional information as needed, or meet with you or your staff for discussions of the issue.

Sincerely,

WALLACE C. DOUD,

Vice President.

AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA, INC.,
Washington, D.C., February 14, 1980.

Hon. HOWARD W. CANNON,

Chairman, Committee on Commerce, Science and Transportation,
U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: It is understood that the Record of the joint hearings held on January 25, 1980 on Federal Patent Policy has been left open to receive Statements from interested parties. It would be appreciated if you would include the attached Statement of this Association in the Record.

Very truly yours,

Attachment.

KARL G. HARR, Jr.

STATEMENT OF AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA, INC.

The Aerospace Industries Association of American, Inc. (AIA) is the national trade association representing the manufacturers of aircraft, spacecraft, missiles and related components and equipment. Being at the leading edge of high technology, our member companies have long recognized the incentives of the U.S. Patent System and, in particular, the manner in which such incentives have fostered and continue to foster the development and advancement of our nation's technological base and industrial innovation. It is for such reasons that AIA has supported and will continue to support proposed legislation and government policies which best utilize such incentives.

The many years of combined experience of AIA member companies in industrial innovation, corporate diversification and government research and development (R. & D.) contracting have led to the conclusion that a Federal Patent Policy allocating the rights to inventions made under government research and development contracts should balance the equities of the parties involved, i.e., the government, the public and the contractors, both large and small. Such a policy should utilize the incentives inherent in the U.S. Patent System, in order to reduce the most competent firms to compete for government research and development contracts and to apply the most talented personnel to the performance of such contracts, as well as to commercialize the new technology in inventions which may result from such efforts.

In the past, AIA has urged Congress, the Executive Branch and the Commission on Government Procurement to promulgate a single Federal Patent Policy to replace the several policies now in existence. AIA believes that such a policy should make maximum use of the incentives of the patent system by providing that a contractor would have the option to retain title to inventions made in the performance of government contracts for research and development (R. & D.).

AIA strongly believes that the real issue, as to the allocation of title, is whether the government or the contractor is in a better position to assure that new technology and inventions will be brought to public use. Clearly, the contractor has working experience in the technology of his patentable inventions. In fact, one of the major factors in the government's decision to award a contract to a particular contractor is the background knowledge and know-how of that contractor. Moreover, the contractor generally has both an existing marketing capability and the profit incentive to commercialize such inventions.

On the other hand, unless the government contemplates a new role as a competitor to American business in commercial markets, the government has neither the expertise to determine which of the many inventions that are made under government R. & D. contracts have a commercial potential nor the capability (or perhaps even the incentive) to bring such inventions to the marketplace. History has proved that it is rare for other companies to develop marketable products from government-provided patents in any more productive fashion than the firms which created the new technology in the first place.

Because S. 1215 introduced by Senator Harrison Schmitt, with the bipartisan support of Senators Howard Cannon, Adlai Stevenson and John Warner, would establish such a policy AIA supprts the enactment of S. 1215 into law.

The Administration's proposed Patent Policy seeks to improve the present situation by contemplating a single policy that is to be uniformly administered by all federal agencies. It also attempts to minimize, to some extent, the current uncertainties as to the allocation of rights to inventions under government (R. & D.) contracts. It is respectfully submitted, however, that the Administration's proposed policy does not achieve the full utilization of the patent incentives as does S. 1215. Further, the proposed policy would create many significant problems, both practical and legal.

As to fostering competition for government R. & D. contracts, the Administration's proposed policy proceeds on the false premise that "larger" business will be satisfied with exclusive licenses in selected fields of an identified invention. Such licenses would be based upon a promise by the contractor to commercialize the invention in the selected fields and his filing of a patent application. This concept is apparently based on the reasoning, as explained by Dr. Jordan Baruch, Assistant Secretary for Science and Technology, Department of Commerce on January 25, 1980 in testifying before this joint hearing that "larger" companies are less flexible in diversifying into multiple fields of endeavor. One has only to review the histories of those companies which form the aerospace industry to recognize the error in such reasoning.

This concept appears also to be based on the assumption that a company, large or small, can predict with any degree of certainty, in which field or fields an invention may enjoy commercial success. With the ever present threat of a government bureaucracy standing by to grant exclusive licenses in any field not selected by the inventing company, the concept of exclusive licensing is in most instances less acceptable to industry than current practices.

In regard to the management of the proposed exclusive license policy, it should be noted that a patent generally has utility in many fields. In fact, the Administration's proposed policy recognizes this facet of a patent. At present the Government has title in over thirty thousand patents. It is entirely probably that these patents could find use in hundreds of thousands of fields. Therefore, it is probable that the management of an "exclusive license" policy would probably require a substantial bureaucracy rather than the small group contemplated by Dr. Baruch. And, that would be directly contrary to the stated objective of President Carter to reduce the size of government bureaucracy and to get the government out of the private sector. The distinction drawn in this proposed policy between small contractors and nonprofit organizations on the one hand and large contractors on the other clearly indicates that the same patent incentives to innovate and commercialize are not to be provided to all contractors. The obvious corollary is that less than the maximum patent incentive is to be enjoyed by the large contractor. A policy of patent title in all contractors large or small would clearly appear to maximize the incentive for all to innovate and commercialize with minimum administrative burden and yet with adequate safeguards as provided by Government march-in rights (Sec. 206).

The Administration's proposed policy also gives rise to several legal problems. For example, it requires that larger contractors file patent applications even though the government has title to the inventions. In many jurisdictions that would comprise the unlicensed practice of law by a business corporation and would expose the contractor to possible criminal penalties. It is also apparent that contractors legally barred from filing applications would be limited to receiving a non-exclusive license and even that would be subject to revocation. Clearly the Administration's proposed policy would offer little or no incentive to contractors in this situation.

The prosecution of such an application by a larger contractor may also give rise to conflicts of interest. The contractor may be prosecuting a patent application on a subject matter in which the government has title and at the same time be prosecuting another application on similar subject matter but in which the contractor has title. Also, the larger contractor prosecuting an application in which the government has taken title might later be charged with failure to obtain claims of sufficient scope to cover the invention appropriately, e.g., claims broader than the field or fields selected by such contractor.

Another legal problem which could result from the proposed "exclusive license" policy of the Administration is the enforceability of an exclusive license. Thus, there is a question as to whether the "exclusive License" granted by the government is more illusory than real. Although the draft legislation to establish the proposed patent policy contains provisions which would authorize an exclusive licensee to bring a legal action to enjoin an infringer, it is extremely doubtful that such

provisions would survive judicial examination. A defense of patent invalidity would require the patent owner, the government, to be before the Court in order that judgment be rendered on the patent. There is nothing in the draft legislation requiring the government to join in such legal proceedings. Can one envisage the government joining with a larger contractor to obtain an injunction against a disadvantaged minority enterprise? In any event, should the government join a larger contractor in seeking injunctive relief to enforce an exclusive license, the government would be in the impolitic position of assisting one member of the public to prevent another member of the public from answering a public need by increasing the availability of an invention made with public funds.

There are many other vexatious legal problems which could result from the proposed policy. For example, if an exclusive licensee threatens an injunctive action against an alleged infringer who then seeks to bring a declaratory judgment suit to hold the patent (owned by the government) invalid, would the government accept service? Is the exclusive licensee a necessary party? Should other exclusive licensees in other fields also be joined? If an exclusive licensee causes a patent to be exposed to judicial review the result of which is that the patent is held invalid, do other exclusive licensees have a cause of action to recover for economic loss-and against whom?

The Administration's proposed Patent Policy is apparently intended as a stimulus to industrial innovation. However, it does not reflect the findings of several important studies conducted for the government and which considered our Patent System an industrial innovation.

In 1966, President Johnson established "The President's Commission on the Patent System". That Commission, formed of distinguished representatives from both the public and government, found "* * * that the Patent System has in the past performed well its Constitutional mandate 'to promote the progress of *** useful arts'," and most importantly, unanimously agreed that “* a patent system today is capable of continuing to provide an incentive to research, development and innovation "-and that "** no practical substitute for the unique service it renders *

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In 1968, Harbridge House, Inc., conducted a study sponsored by the Committee on Government Patent Policy, Federal Council for Science and Technology. That Study clearly indicates that the major adverse effects of a patent policy in which the government takes title to inventions made in the performance of R&D contacts are program delay, loss of participants, diversion of private funds from government lines of research and refusal to use government inventions and research when questions regarding a company's proprietary position are raised

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Finally, in the final report of the Advisory Committee on Industrial Innovation, dated September 1979 (p. 156) which was established as a part of the Domestic Policy Review at the direction of President Carter, stated that in the case of universities or private contractor work sponsored by the Government the members of this Subcommittee recommend that title to the patents should go to the universities or private contractor These findings from industry and government experts are apparently rejected in the Administration's proposed patent policy. For the foregoing reasons, AIA respectfully submits that the proposed Administration's Patent Policy would not balance the equities of the parties involved in government R&D contracting and would not be as effective in fostering competition for such contracts as would S. 1215. Accordingly, we recommend that S. 1215 be enacted into law as promptly as possible in order that it may begin to solve the problems now being experienced in connection with declining industrial innovation.

ASSOCIATION FOR THE ADVANCEMENT OF INVENTION & INNOVATION,
Arlington, Va., February 20, 1980.

Hon. ADLAI E. STEVENSON AND Hon. HARRISON SCHMITT,
U.S. Senators, Washington, D.C.

DEAR SENATOR STEVENSON AND SENATOR SCHMITT: The interest of A2I2 to promote a better climate for invention and innovation leads me to submit to you three documents which appear to seek to answer the question, what is a "small" business?, and presumably by difference, what is a "large" business?

The documents are listed below. In our testimony given before the Subcommittee on Science, Research and Technology of the House Committee on Science and Technology on October 17, copy of which you have, we discussed the various then pending bills.

We reiterate our statements made in the testimony and now extend that testimony to include H.R. 5715 introduced by Representative Ertel October 26, 1979, which

we support in principle for its provision which would vest title in the contractor in an across-the-board manner. This letter is not intended to be inclusive of all comments on H.R. 5715.

However, our comments presented in our statement of October 17 in discussion of specific portions of S. 1215 Schmitt, S. 414 Bayh-Dole, H.R. 8596 Thornton, H.R. 5427 Ertel, extended in the comments as presented to S. 1860 Nelson, and now to H.R. 5607 Neal Smith, introduced October 16, 1979, are to the extent there presented applicable to similar provisions of the bills not therein specifically addressed.

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As you probably already know, Chairman, George E. Brown, Jr. of the Subcommittee on Science, Research and Technology of the House and Chairman, Allan E. Ertel of the Task Force on Federal Patent Policy were concerned at the hearing on February 8 on ** how to draw the line between a small business and a large business Further, they were concerned that "small" businesses wanted to become "large" businesses and would be "penalized" for having successfully done so. The enclosed materials were acquired specifically with a view to supplement pages 6-11 of our October 31 testimony, included here for your convenient, ready reference, as reproduced from the Journal of our Association, September-October, 1979, pages 117-123.

We would be pleased to find that this information has been helpful and that this letter and its enclosures have been made a part of the record.1

Enclosed are:

Part 121 SBA Rules and Regulations, Revision 13 (includes amendments 1 thru 26) Consolidated: October 5, 1978

Part 121-Small Business Size Standards SBA Rules and Regulations, Revision 13, Amendment 27, Sections 121.3-3 and 121.3-6 Published, May 8, 1979, Effective, May 8, 1979, Cite, 44 FR 26852

Part 121-Small Business Size Standards SBA Rules and Regulations, Revision 13, Amendment 28, Schedule D Published, August 10, 1979, Effective, August 10, 1979, Cite, FR 44 FR 47039

Part 121-Small Business Size Standards SBA Rules and Regulations, Revision 13, Amendment 29, Section 121.3-11 Published, September 28, 1979, Effective, September 28, 1979, Cite, 44 FR 55815

Part 121-Small Business Size Standards SBA Rules and Regulations, Revision 13, Amendment 30, Section 121.3-10 Published, October 9, 1979, Effective, October 9, 1979, Cite, 44 FR 57914

Part 121-Small Business Size Standards SBA Rules and Regulations, Revision 13, Amendment 31, Section 121.3-9, Published, October 16, 1979, Effective, October 16, 1979, Cite, 44 FR 59504

Part 121-Small Business Size Standards SBA Rules and Regulations, Revision 13, Amendment 32, Section 121.3-6 Published, October 30, 1979, Effective, October 30, 1979, Cite, 44 FR 62280

The foregoing documents, which may not be all there are, give an idea of the present manner of how to draw the line between "small" and "large" business. Please see the extensive tabulations beginning on page 22 and ending on page 29 of the first above mentioned document.

Also enclosed is a final draft which I understand is to supersede all of the above documents. It is now before the administrator of the Small Business Administration. He may approve the "draft" in a "week or 10 days" for publication in the Federal Register. Opposition to the proposed revisions, I understand, has been received and can be expected to swell.

Senator Stevenson's letter of January 29, 1980, addressed to me is acknowledged with thanks and appreciation. As you already have a copy of our October 17 statement, above mentioned, I do not now include it. However, should you need an additional copy or so, I will gladly supply the same.

At the hearing on February 8, testimony was given on the proposed administration bill. This bill is fraught with great disincentives to bid for Government contracts because it would not vest title in a "large" Government contractor. It would only grant an exclusive license requiring complex field-of-use negoatiations, including down-the-road negotiations for fields of use becoming apparent at a date well beyond the date of the negotiated contract by which time the then desired field may have been licensed elsewhere. The administrative and bureaucratic involvements and the risks also to be considered are, in our opinion, factors making the administration bill impossible to support.

Copies of the SBA regulations referred to in the above letter have been retained in the files of the Commerce, Science, and Transportation Committee. Readers are referred to the Federal Register citations for the size standards currently applied in various SBA programs. At the time of printing, the proposed uniform size standards referred to in the letter had not been published in the Federal Register for public comment.

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