leges to the contracting firms clearly gives society none of the alleged advantages of the patent system while foisting upon us one of its decisive disadvantages. In short, we are faced with the unconscionable situation in which the Federal Government taxes the citizens of this country to secure funds for scientific re search, on the grounds that such research promotes the general welfare, and then turns the results of such research over to some private corporation on an exclusive, monopoly basis. This amounts to public taxation for private privilege, a policy that is clearly in violation of the basic tenets of any democracy. Such a violation might possibly be justified on the grounds that it leads to greater enhancement of the general welfare than adherence to a basic principle would; but in the present case, no offsetting gains are in the offing. Under the circumstances, it seems palpably evident that new discoveries derived from research supported by public funds belong to the people and constitute a part of the public domain to which all citizens should have access on terms of equality. Lest the committee infer that the withdrawal of patent privileges from firms performing R. & D. for the Government at the latter's expense will remove all competitive advantage accruing to such firms, let me hasten to caution against any such inference. There are inherent advantages in performing such work that exist quite apart from patent privileges. (1) Many technological developments resulting from Government-financed R. & D. have direct and immediate commercial applications. In recent years, the application of radioisotopes, the drive toward competitively priced atomic power, jet propulsion, cold sterilization of food by radiation, the formulation and fabrication of titanium and magnesium and other heat and corrosion-resistant metals and alloys, etc., are all examples of such commercial applications. As a result of research financed largely by the Federal Government during World War II, technological developments appeared in the form of new materials such as synthetic rubber, aviation gasoline, plastics, and plywood; new methods such as metal riveting and welding, heattreating procedures, power metallurgy, and casting; and new products such as aircraft design, gas turbines, radar, DDT, and the electron microscope.

Thus the independent commercial contractor, performing R. & D. for the Government, receives in addition to costs and fees all the financial advantages of the commercial applications of inventions, the research for which has been paid almost entirely out of Federal funds. In a considerable number of cases, firms will take R. & D. contracts only when the research and development is relevant to technical (and hence, commercial) problems already confronting them. The result is, again, that although the firm may provide the Government with the sought-for "product," the firm in the meantime gets its R. & D. costs financed at public expense.

(2) A second (nonpatent) advantage associated with the performance of Government-financed R. & D. work is the enhanced ability of the performing firms to acquire scientfic and technical personnel. The most obvious way of course, is via the increased size of R. & D. budgets that such work permits, including allowances for personnel that can be charged off to the Government. In addition, recruiting costs can be charged to overhead costs and are reimbursable in the case of Defense Department contracts. Also, with so much Government R. & D. work standing at the periphery of existing knowledge, the firms can often hold forth the promse of interesting and challenging work.

(3) At least as important as the preceding two advantages is a third one. The performing firm ipso facto acquires a considerable body of information relating to the invention, information that may be unpatentable but possession of which is often indispensable to the proper use of the invention. This information is known colloquially as know-how. In the case of a new product or material, this know-how includes the relevant experience accumulated in the early stages of production, during which many minor modifications may be made in the design or production process. Similarly, invaluable information is often accumulated during the trial runs or pilot-plant testings of new processes. Such information is typically unpublished and remains as confidential information in the possession of the firm's operating personnel. The withdrawal of patent rights from firms performing R. & D. at Government expense would not and could not deprve them of this often priceless know-how.

This same point is also relevant to the roadblocks thrown in the path of diffusion of inventions protected by patent rights. Exponents of the patent system, and presumably these would include the corporations performing research for the Government, often argue that far from retarding the diffusion process,

patents speed it up by providing the information contaned in the patent itself. What is overlooked in this "exchange for secrets" argument for patents is the slipshod method of identifying inventions in the patent applications that make it possible to obtan patents without disclosing all the information that must be known to make use of the patented inventions. As noted above, restrictions on patentability sometimes limit the information relevant to a given design or process embodied in the patent. In other instances, however, managements prefer to withhold certain knowledge from public view, in any form, regardless of patentability. Where this is done the public does not receive the information that presumably partly justifies the grant of monopoly rights to the patentee. Instead, the patentee obtains the bargaining power attached to a legal monopoly and also continues to enjoy whatever bargaining strength he can derive from possession of a trade secret. These strictures apply without qualification to patent rights granted to private corporations on inventions financed by public funds.

It must also be remembered that the granting of patent rights involves a wastage of whatever resources competitors use to "invent around" the patent in order to enable them to compete with the patentee in the same market. Too, it is not uncommon for patentees to devote considerable resources to the quest for patentable alternative solutions, even inferior ones, in the hope of "fencing in" the original patent. It hardly becomes a National Government interested in promoting progress and growth to aid and abet in these resource-wasting activities by granting patent rights to firms performing research for it, especially when nothing is obtained that might offset these drawbacks.

Finally, although they are familiar to students of the patent system, it may be well for the record to catalog briefly some of the more important past abuses of patent privileges, so that the committee will once more be reminded, if indeed it needs to be, of the potential dangers inhering in the present patent policies of most Federal agencies and departments with respect to R. & D. performed for them. Although the nominal length of time of patent grants is 17 years in the United States, patentees have not infrequently succeeded in extending the time period of control through procedural delays in the pendency of the patent between application and issuance; through secret use of the invention prior to application or through incomplete disclosure, mentioned earlier; through supplemental patent improvements that make the unimproved invention commercially worthless after expiration of the original patent; through creation of a monopolistic market position based on the goodwill associated with a patented process or product, so that buyer loyalty continues after expiration of the patent; and through licensing agreements that extend beyond the original patent because they apply to a stream of patent improvements.

The scope of the patentee's monopolistic control has been extended beyond the patented invention to the control of entire industries by the acquisition of a basic patent; by an "umbrella" patent, where illegitimately broad and ambiguous claims covering an entire industry have been allowed; and by a "bottleneck" patent, which is not basic but good enough to hold up or close an entire industry. Because much of current research being performed for the Government, particularly defense-related research, is on the frontiers of existing knowledge, the possibilities of firms acquiring basic or bottleneck patents, and thereby acquiring monopolistic controls of "infant" industries or even industries not yet in being, are especially important today. These same considerations suggest that firms engaged in continuing research for the Government in a given field may also be enabled to employ the time-proven device of accumulating significant aggregations of patents to secure domination of entire industries. And where they are not responsible for all important inventions, their possession of certain crucial patents may force the holders of other patents to sell them, or else enter into cross-license agreements, which in the past have also provided the base for industry cartelization.

The foregoing are just some of the more important abuses of patent monopolies in the past. Some may be willing to argue that the incentives to invent and innovate that the patent system offers have more than offset these abuses; this is a moot question, and this is hardly the place to enter the debate. But it is worth reemphasizing that in view of the absence of risks associated with R. & D. performed for Government by private firms, no such claims can be made for patent rights that are permitted to revert to the firms. The granting of

patent rights to these firms continues to expose society to the various potential abuses just listed without providing us with any compensating advantages. In concluding this statement, I should like to draw the committee's attention to one other problem created by the present pattern of the Government's research expenditures. Whether by design, or chance, or more likely, administrative expediency, Government R. & D. contracts have been let primarily to the giant corporations, to the virtual exclusion of small and medium-size firms. Of the 77 percent of total Government R. & D. contracts let by the Defense Department during fiscal 1956, only 6 percent were let to firms employing less than 500 persons. Of the 21 percent of total Government R. & D. contracts let by the Atomic Energy Commission during the fiscal years 1953, 1954, and 1955, only 1 percent were let to small firms. As we have noted above, either with or, in view of the commercial applications of Government-financed R. & D., the enhanced ability to secure scientific personnel, and the know-how that automatically accrues to the performing firms, even without patent rights, this practice automatically confers great competitive advantages on the giant firms vis-a-vis their smaller competitors, thereby promoting already extant monopolistic tendencies. The withdrawal of patent privileges from the giant firms would only moderate this effect; it would fall far short of eliminating it. The enhancement of monopolistic tendencies is an intrinsic characteristic of the present practice of concentrating R. & D. contracts in the hands of the giant corporations. (For the 5 years ended June 30, 1956, of 6,788 pending patent applications that resulted from Government-sponsored R. & D. work, 52 percent belonged to 15 large companies.)

The committee would therefore do well to look into ways of getting Federal agencies and departments to distribute R. & D. contracts on a very much broader basis than is now done in the interests of fostering more competition in the economy generally and, more specifically, in the new industries arising under the spur of new discoveries associated with R. & D. financed with Federal funds. One suggested way that warrants serious consideration is a reduction in the broad responsibilities of the contracting officers. With the terrific responsibilities under which the latter now operate, they tend to shy away from relatively unknown small firms and rely, instead, on the well-known large firms. For then if anything goes wrong, it is much easier for them to disclaim responsibility than would be the case were they to let contracts to small firms. It has been proposed that advisory review boards be set up to help the contracting officers make their decisions and advise whether a contract could feasibly be awarded to a small firm.

Another suggested way of spreading R. & D. contracts is to substitute a fixedfee contract for the present cost-plus type of contract. The reason for this suggested change is that too often a small firm cannot make anything from the present 7-12 percent or so fee range on the cost-plus contracts, because they may be able to put only 5 to 10 or so men at work on the contract compared to the hundreds that large firms can often put on it; the cost base is thus much larger for the larger than the smaller firm. But this does not mean that the large firm will necessarily do a better job. Usually, one or two very able men spark a project with the rest largely "hanging around." Quite frequently, a project could be carried out just as well and quickly by small firms with their small teams and fewer "hangers-on." It is also apparently common practice for the large companies to put their least able men on Government contracts because of the cost-plus nature of the latter. It has come to my attention that many small firms would feel much freer to bid on Government R. & D. contracts, with full guarantees of performance, if they could bid on a fixed-fee instead of the present cost-plus basis. They seem to feel that in many cases, with the altered bid basis, they could significantly underbid the large firms without any impairment of results.

In any event, it is clear that achievement of the committee's announced goals and objectives of encouraging small business and promoting more competition requires not only the withdrawal of patent rights from firms performing R. & D. at Government expense, but no less important, a considerable broadening of access of small and medium-size firms to Government R. & D. contracts.

Senator LONG. The next witness will be Mr. Louis A. Peirez, of Viewlex Corp.

We are pleased to welcome you here today.

STATEMENT OF LOUIS A. PEIREZ, PRESIDENT, VIEWLEX, INC.,
LONG ISLAND CITY, N.Y.

Senator LONG. What is your capacity with the Viewlex Corp?
Mr. PEIREZ. Thank you. I am president, sir.

Senator LONG. Do you think you could summarize your statement, Mr. Peirez?

Mr. PEIREZ. I will try to. I did not prepare a summarized statement. I was under the impression

go

Senator LONG. If you cannot summarize it, you might just as well ahead and read it.

You might find it profitable to leave out one or two points in there that might not be as important as the rest of it, but if you cannot summarize it, you just go ahead and read your statement.

Mr. PEIREZ. Well, I might add this, that the reason that I am here today is because we initially had an item to take up, and still have, with the Small Business Administration, on the question of what is and what is not small business, and apparently some of our statements led to your committee asking us to send you our statement. Senator LONG. You have a very significant statement here, Mr. Peirez, and you just go ahead and present your statement in your own fashion.

Mr. PEIREZ. Well, I was going to say this: In our experience we have run into what substantially corroborates what Professor Hamberg has just said.

For example, we are in the photographic business, and the lens situation is one that was pretty tightly controlled in Germany, and immediately after the last war all of the information on lenses and other such photographic items were brought over here.

During the following 4 or 5 years up to the Korean situation, it was evident that there was not enough lens knowledge available here, and the Government, and in our opinion, rightly so, issued what I think was called stand-by contracts for lenses, and at considerable cost the lens business was developed for aerial cameras, aerial photography, which is reconnaissance and mapping, and it is obvious that is highly limited to Government use.

As we bid on these items we were told that such information was available, and we assumed that it would be made available, but we found it almost impossible to obtain it.

As I said in my statement, and I did not know of this until some two weeks or so ago, in the early 1950's, when we looked into it, we had correspondence, and as recently as 1954 we had a contract that ran about $2 million, of which more than one-third was for lenses.

We found that the cost of the lenses, despite all of this development, was such that it was just impossible to get them specifically from Eastman Kodak and, as a result, we wound up with Wollensak, and Wollensak has paid a license fee on the identical lens which was developed under the Government contract.

Now, Eastman Kodak does not in any way say this is not so. They say that the lens was developed, and it was paid for by the Government, that they have the tooling for it; that the tooling is available, and if the Government will release authority they will use the tooling.

Then they surround it with a number of other conditions, so that by the time you have the answers you are far better off paying the price to Wollensak, plus the royalty on it, and getting it over with. That is one example.

Senator LONG. Let me see if I get this straight. The Eastman Kodak Co. had the information that is necessary to manufacture the lens?

Mr. PEIREZ. That is true, sir.

Senator LONG. Eastman got the information, if I understand this correctly, based on the fact that they had a Government contract for research and development?

Mr. PEIREZ. That is true; and, in fairness to Eastman, I think Bausch & Lomb was another that had more or less

Senator LONG, Eastman and Bausch & Lomb both had it?
Mr. PEIREZ. That is right, sir.

Senator LONG. As I understand it, you were trying to sell cameras?
Mr. PEIREZ. A complete camera.

Senator LONG. A complete camera; and you were trying to bid on a Government camera, a camera the Government wanted; is that correct?

Mr. PEIREZ. That is right; and specifically it had absolutely no use other than for Government use.

Senator LONG. Yes.

Do I understand you correctly that this camera would be useful to no one but the Government?

Mr. PEIREZ. To the best of my information, it has absolutely no value to anyone but the Government.

Senator LONG. Yes.

Then, in order for you to bid on it and provide this to the Government you would have to get the information about making the lens from Eastman Kodak Co. or Bausch & Lomb; is that correct? Mr. PEIREZ. That is essentially correct.

Senator LONG. In order to get this the Government would ask them to provide it, and while they would technically comply, as a practical matter, you just could not get the information; is that right? Mr. PEIREZ. That is right, sir.

Senator LONG. Not in time to fulfill your contract, at least?

Mr. PEIREZ. Not only not in time, but never within a reasonable cost. Senator LONG. So, based on the time and cost factors it was cheaper for you to go ahead and pay someone to produce the lens for you who, in turn, would pay Eastman 712 percent on that contract?

Mr. PEIREZ. That is exactly what happened, except for the percentage. I do not know the exact amount of percentage.

Now, the 712 was in another instance, sir.

Senator LONG. Your statement uses the figure of 72 percent. Can we sum it up in this way: The U.S. Government paid Eastman to develop this information once. Having bought it the first time, the Government then proceeds to pay Eastman a second time because somewhere in your costs you have got to cover the royalty that is paid Eastman again when you get the lenses.

Mr. PEIREZ. That is absolutely correct.

Senator LONG. So, in effect, Eastman did this research for the Government, for which it got paid, and then sold the results back to the