Contractor, if unable to comply with the requirement that such a patent rights clause be included in a subcontract after exerting all reasonable effort to do so, may submit to the Contracting Officer a written request for waiver or modification of such requirement. If, within thirty-five (35) days after the receipt of such request, the Contracting Officer does not mail or otherwise furnish the Contractor written denial of such request or modification that the Government requests the Contractor's cooperaion with the Government, which the Contractor agrees to provide, in negotiating with the subcontractor for the acceptance of a suitable patent rights clause, the requirement shall be deemed to have been waived by the Contracting Officer as to all patent rights provisions with respect to Subject Inventions, except such provisions, if any, relating to the production or utilization of special nuclear material or atomic energy. Such request shall specifically state that the Contractor has used all reasonable effort to comply with said requirement and shall cite the waiver provision hereinabove set forth. The Contractor is not required, when negotiating with a subcontractor, to obtain in behalf of the Government any rights in Subject Inventions other than as provided herein. However, the Contractor is not precluded from separately negotiating with a subcontractor for rights in Subject Inventions for the Contractor's own behalf, but any costs so incurred shall not be considered as an allowable charge or cost under this contract. Reports, instruments, and other information required to be furnished by a subcontractor to the Contracting Officer under the provisions of such a patent rights clause in a subcontract hereunder may, upon mutual consent of the Contractor and the subcontractor (or by direction of the Contracting Officer) be furnished to the Contractor for transmission to the Contracting Officer.

(h) The Contractor shall, at the earliest practicable date, notify the Contracting Officer in writing of any subcontract containing one or more patent rights clauses; furnish the Contracting Officer a copy of such clauses; and notify the Contracting Officer when such subcontract is completed. It is understood that with respect to any subcontract clause granting rights to the Government in Subject Inventions, the Government is a third party beneficiary; and the Contractor hereby assigns to the Government all the rights that the Cotractor would have to enforce the subcontractor's obligations for the benefit of the Government with respect to Subject Inventions. If there are on subcontracts containing patent rights clauses, a negative report is required. The Contractor shall not be obligated to enforce the agreements of any subcontractor hereunder relating to the obligations of the subcontractor to the Government in regard to Subject Inventions.

(i) When the Contractor shows that it has been delayed in the performance of this contract by reason of the Contractor's inability to obtain, in accordance with the requirements of (g) above, the prescribed or other authorized suitable patent rights clause from a qualified subcontractor for any item or service required under this contract for which the Contractor itself does not have available facilities or qualified personnel, the Contractor's delivery dates shall be extended for a period of time equal to the duration of such delay. Upon request of the Contractor, the Contracting Officer shall determine to what extent, if any, an additional extension of the delivery dates and increase in contract prices based upon additional costs incurred by such delay are proper under the circumstances; and the contract shall be modified accordingly.

9-107.3 License Rights-Foreign Contracts. A patent rights clause shall be included in every contract having as one of its purposes experimental, developmental, or research work which is to be performed outside the United States, its Territories, its possessions, or Puerto Rico. The clause set forth below may be used except as provided in ASPR 9-107.7 with respect to contracts on behalf of the National Aeronautics and Space Agency; however, any other clause tailored to meet requirements peculiar to foreign procurement may be used in lieu thereof provided it incorporates the principles of the clause below, except that principles of paragraphs (c) and (d) thereof may be omitted if, in the opinion of the contracting officer (on a case-by-case basis), the inclusion of withholding or other enforcement provisions is neither desirable nor necessary.

(Prepared statement of Mr. Reichard follows:)

PREPARED STATEMENT ON BEHALF OF AEROJET-GENERAL CORP., PRESENTED BY EMERSON S. REICHARD, JR., DIRECTOR OF CONTRACTS

Aerojet-General Corp. wishes to express its appreciation for the opportunity to present its views before this committee.

We understand that your committee is primarily interested at this time in determining whether the policy of certain Government agencies, in particular the Department of Defense, with respect to the disposition of patent rights arising out of Government sponsored research and development contracts, should be continued. Such contracts now permit retention of title to inventions arising out of such research by the contractor, subject to the granting of a nonexclusive royalty-free license to the Government. This arrangement effectively prohibits the establishment of any monopoly on such inventions with respect to sales to the United States Government, but permits the retention of a commercial monopoly in the contractor with respect to such inventions.

It has been suggested that the continuance of this policy will eventually result in a concentration of economic power in a few very large firms to the exclusion of small business. We do not believe that this will come about.

This contrary opinion is based on our own experience as a company almost exclusively engaged in defense activities. In pursuance of this, we wish to

present a brief summary of our experience in respect to patent rights and Government contracts since our beginning in 1942 as a small business.

Aerojet-General Corp. has been granted a total of 110 United States patents of which 87 were either made or conceived in the course of Government sponsored research. We have currently pending before the United States Patent Office 307 patent applications of which 250 were either made or conceived in the performance of Government-sponsored research. Our records show that of all the inventions for which Aerojet-General Corp. is entitled to obtain patent protection, including those for which patent applications have not been filed as yet, some 60 percent were either made or conceived in the performance of Government-sponsored research and development. Since this committee is probably most interested in the commercial advantage obtained by us as a Government contractor engaged in research and development activities, we consider it appropriate and important to point out that of our 400 or more pending and issued United States patents only three products are involved of any significance which can properly be described as "commercial." These are our 15KS-1000 commercial JATO unit, our 15NS-250 Junior JATO unit and a pressure sensing device which is the principal product of a small business in Pasadena, Calif. whose principal customer is ultimately the U.S. Government. We feel that our experience in terms of acquiring a commercial patent position is significant and demonstrates the fact that, although a substantial number of inventive contributions have been made by Aerojet-General Corp. in the performance of research and development contracts, it has not resulted in the creation of any substantial commercial monopoly. We might go further and state that in our opinion whether or not we were able to obtain patent protection for our commercial JATO units, (for which no patents have been issued to date), our sales of these items would not have been affected in any respect. This is emphasized by the fact that patents protecting these units have not been granted to date. Nor do we think that the sales of the small business to which we referred above have been affected in the least way by the issuance of a patent for the device which is their principal product. The truth of this assertion is demonstrated by the fact that the company to which we refer was established without patent protection, although it has since acquired the exclusive rights in the commercial field to the device mentioned.

Why then does Aerojet-General Corp. continue to file patent applications when it obtains no commercial advantage? There are a number of reasons for this. One, of course, is the hope that at some future time a commercial market for one or more of the products involved will be developed, which would permit this company to broaden its line of commercial products. Another important reason is the fact that we are faced with the problem of preventing others from rediscovering an invention made by us in the performance of classified work and obtaining a patent which would hinder or impair our activities under United States Government contracts or induce the Government to grant production contracts to the later discoverer by reason of the patent obtained by him. This problem stems from the fact that an organization such as ours is not permitted in the usual course of events to publish articles disclosing simple improvements and discoveries so as to place them within the public domain because of security restrictions governing most of our work. Thus the only certain way open to us for preventing the acquisition of an adverse patent by another and perhaps later discoverer is to file an application before the U.S. Patent Office to obtain a firm record date for the invention, thus establishing our priority. Another reason, often overlooked, is the professional stimulus which results from the maintenance of an aggressive patent policy by a corporation such as Aerojet-General Corp. The professional esteem which is associated with the issuance of a U.S. patent to an inventor as well as the modest financial remuneration given the inventor under Aerojet-General Corp's Patent Award Plan is considered by us to be a substantial stimulus to original and inventive thinking in the performance of our work. We consider this stimulus important in view of the practical impossibility of monitoring the thoughts and work of individuals in an organization as large as ours to be certain that all inventions are promptly reported so that appropriate action can be taken toward obtaining patent protection and also to insure that inventive contributions are brought to the attention of those who are in a position to implement and use them to advace the state of the art.

We think it most important to bring to your attention our experience in subcontracting activities, in particular our subcontracting relationships with small businesses. In 1958 about 55 percent of our total business was derived from

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Government-sponsored research and development contracts. In 1958 about 46 percent of all of our total work was subcontracted. Of this amount some 70 percent went to small businesses. Of the total dollar amount of Governmentsponsored research and development carried out by Aerojet-General in 1958, we estimate that 30 percent was further subcontracted to small business.

In all of such subcontracts the same disposition of patent rights is made as in the case of Government prime contractors. In other words, all commercial rights to inventions made in the course of the work are retained by the subcontractor. For our own protection, we customarily request a nonexclusive right to practice such inventions in the commercial field, but never insist upon such a grant.

In light of our experience, we do not feel that a disproportionate amount of Government research and development contracts is going to a few large concerns. The committee will be interested in knowing that we have recently established a Coordinator for Small Business and Labor Surplus Areas at our Sacramento Plant for the express purpose of aiding and counseling small businesses in obtaining an even greater share of the work subcontracted by Aerojet-General Corp. We would like at this time to elaborate on the reasons for this conclusion. First of all, it is to be noted that the Department of Defense does not give title to inventions to Government contractors. It is important to keep in mind the fact that rights in inventions made by the contractor are a part of the consideration bargained for by the Government. The question of disposition of patent rights arises only in research and development contracts which are, generally speaking, high risk, low potential, and low profit contracts, the maximum profit being on the order of 7 percent of cost. There is no assurance that production orders will result from such work and there is no assurance that production orders will be placed with the original contractor in any event. Years of experience and the know-how, which is the life blood of corporate existence, becomes freely available to competitors in return for a maximum of a 7 percent fee. Small businesses and large can freely draw upon the experience and know-how embodied in such developments in competing with the orignator of the same for the manufacture and sale of the product to the Government. The only thing left to the originator is the commercial market which in most instances is relatively insignificant in relation to the military market.

The low profit margins and the lack of any assurance of production orders is in our opinion the explanation for the fact that the greater portion of research and development contracts go to the larger companies. There is obviously little incentive for small businesses to have their generally limited 'research staffs devote their time to work which is not likely to result in production business. The economic position, and in particular the productive capabilities of big business as compared to small, place small business at a disadvantage in competing for contracts for the production of items licensed to the Government. For this reason, small businesses tend to develop their own proprietary products, necessarily at their own expense, to insure future production rather than actively seek low profit research and development defense contracts, realizing that the Govenrment must seek to obtain the goods it needs at the lowest price. It is important in this connection to note that commercialization of products, especially those having military uses, is beneficial to society as a whole and to the Government in particular by virtue of the reduced costs which inevitably accompany a broadened production base. Having a proprietary position gives small business some assurance (please note, Government purchasing agents are not bound to respect patent rights and often do not) of continuing production business. Only in those infrequent instances where the research involved may lead to a product which has both a military and a commercial potential can small business benefit substantially in accepting a Government contract because then there is some chance of obtaining production business as a result of the commercial patent position which the small business contractor is permitted to retain. Obviously, if contractors are totally deprived of the commercial patent rights, an even greater proportion of Government financed research will be left to the larger firms and small business will be compelled to an even greater extent to sponsor its own research in order to acquire the proprietary position which they must have in order to compete. Our contention can be summed up as follows:

1. So-called commercial patent rights derived from Government-sponsored research have had little to do with the growth of the larger firms.

2. Small businesses obtain a substantial portion of Government research and development contracts by way of subcontracts and obtain the same commercial rights in inventions as do prime contractors.

3. Large firms with substantial production capabilities do not rely upon patents as a rule for the maintenance of their positions because the principal source of their competitive greatness is derived from their economic strength. 4. Small businesses are in most instances dependent upon a proprietary position of some sort whether it be patents or unique know-how for their continued existence and future growth. They could not survive and grow if forced to compete with so-called big business in an open freely competitive market.

5. Because of the relatively low profits involved, particularly since personnel are required whose talents may be used for more profitable activities, there is little incentive for most small businesses to seek Government research and development contracts other than the hope of acquiring a patent position in the commercial field.

6. The acquisition of commercial patent rights for developments made in the performance of Government-sponsored research is, of course, an important and attractive inducement. But, it is far more important to small businesses than to large. A change in Government policy eliminating this incentive would undoubtedly result in an increase in the cost of such work and would have serious and more far-reaching effects upon small business.

We strongly urge your committee to take positive action to preserve and maintain the existing policies of the Department of Defense with respect to patent rights and to consider, in the light of this testimony, the advisability of perpetuating the policies relative to patents and inventions embodied in the National Aeronautics and Space Act of 1958 and the Atomic Energy Act of 1954. We invite particular attention to the very limited number of small businesses engaged in the nuclear field and suggest that this is largely the result of the almost complete elimination of private patents in this field.

We think that the patent system of the United States which has contributed greatly to the industrial strength of this country has been badly maligned in recent years and woefully underestimated in terms of its value to society. We feel that the principles that have made this system work and which have made our country great have somehow been forgotten. The same principles that have made our patent system work for well over a century apply with equal force to the issue before this committee. Private patents are essential to the creation and establishment of new business enterprises. Like infants, small businesses must be protected if they are to mature. Destroy the ability to acquire a proprietary position in any field and you will find higher mortality rates in all.

Senator LONG. We have two witnesses. I don't know whether we will be able to hear both of them today. If either Mr. Robert Lent or Mr. Burton Smith, for one reason or the other, cannot be available tomorrow, then I will take that witness.

Mr. LENT. Mr. Chairman, I am Mr. Lent. I have appointments in New York tomorrow.

Senator LONG. Fine. Take the witness seat there, Mr. Lent.

STATEMENT OF ROBERT R. LENT, MARKETING CONSULTANT, STRATEGIC INDUSTRIES ASSOCIATION, LOS ANGELES, CALIF.; ACCOMPANIED BY HARVEY RIGGS, PRESIDENT, INTERNATIONAL ELECTRONIC RESEARCH CORP., AND WILLIAM PATTERSON, VICE PRESIDENT, ELECTRODYNAMICS CORP.

Mr. LENT. Mr. Chairman, I would like to have the record show that Mr. Harvey Riggs, president of the International Electronic Research Corp., and also the president of the Strategic Industries Association, is here with me, Mr. William Patterson, also a member of Strategic Industries Association, and a vice president of the Electrodynamics Corp.

Mr. J. P. Perry, who is the president of the Eastern Rotorcraft Corp., in Doylestown, Pa., is here."

Mr. Marshall Lewis, vice president of marketing for the Eastern Rotorcraft Corp. is in the audience.

Mr. Robert L. Davis, vice president of Davis Aircraft, of Philadelphia, is present, and Mr. David Saunders, legal counsel for the Strategic Industries is present.

Strategic Industries is a group of organizations in excess of 100 companies who primarily are involved in defense activities. They are by nature small. Our largest corporation, I think, is approximately $10 million and less than 1,000, but our average corporation is approximately $300,000 a year.

We are in contact with many corporations throughout the country who resemble us in size and effort, and we believe that our position represents approximately 6,000 small companies in the United States who do business with the Government on defense and space activities. I will brief my speech because I think that many of the points can be developed more likely in questions.

It is my earnest desire in this meeting with you today to demonstrate to you that beyond any question our Federal patent policies, far from aiding "big business" through their liberality, actually most seriously impair our rate of scientific and technological progress in the missile weapon systems, and space exploration fields through their tight repression of creativity.

All business, big and small, today suffers most drastic compromise to its creative productivity through virtual elimination of the incentive for progress engendered by the recent rapid erosion of our constitutional patent privilege.

I do not exaggerate, Mr. Chairman, when I summarize Federal patent policy in this field as one which says: "We will take from you the fruits of your labors, while we beg you to increase them with all your energies." This approach to our scientific community borders perilously close to those of foreign ideologies with which we are locked in uncompromising conflict.

The companies for whom I speak today have suffered the consequences of present patent practices in usurpation of their present patent privileges in award of contracts, in renegotiation of their profits away from them, in disallowance of direct cost chargeable no place else, and in ultimate complete frustration of their creativity and even their desire to be of further direct service to the country. Today the tangible results of this confiscatory Federal patent policy is manifest in the flat refusal of many of my principals together with hundreds of similar small business firms in the defense fields across the Nation to accept Government research and development assignments.

So let us see how this is so and examine its consequences to the defense effort. One of the companies with which I am associated typifies not only the member of our association but hundreds of like firms across the Nation. It was founded in the immediate postwar years on the basis of a patented device which measures force pressure acceleration in a simple, accurate way under severe environmental conditions.

See app. VII, p. 419, for Mr. Perry's statement.