small and large firms. To recognize this finance problem, however, is not necessarily to condone giant size and monopoly power as the solution. Financial aid to small business of the sort envisioned in the establishment of the Small Business Administration and the recent expansion in its activities offers a more hopeful and worthy solution. But such programs must be carried out on a much larger scale if they are to succeed in their goals of maintaining and enlarging the scope of competition in our economy.

APPENDIX I(C)

United States, 1953 expenditure on research and development per company for all companies conducting research and development—by size groups of companies and industries 1

1 Based on National Science Foundation, "Science and Engineering in American Industry," tables A-3 and A-9, cited; Jewkes, Sawers, and Stillerman, "The Sources of Invention."

United States, 1951-Ranking (1–14) of major industrial groups as to research and development expenditure and size of firms

Col. (1) based on tables in "Scientific Research and Development in American Industry, 1953," Bull. 1148, U.S. Department of Labor.

Cols. (2) and (3) based on size characteristics of the business population, "Survey of Current Business, May 1954" cited; Jewkes, Sawers, and Stillerman, "The Sources of Invention, 1958."

49646-60---27

Chemical and allied products-United States, 1951,1 percentage of cost of research and development to value of sales

1"Scientific Research and Development in American Industry, 1951," U.S. Department of Labor, table C-20 cited; Jewkes, Sawers, and Stillerman, "The Sources of Invention, 1958."

PREPARED STATEMENT OF B. G. WEIL, PATENT COUNSEL, THE MARTIN CO., BALTIMORE, MD.

Hon. RUSSELL B. LONG,

Chairman, Subcommittee on Monopoly,

DECEMBER 4, 1959.

Select Comimttee on Small Business, U.S. Senate, Washington, D.C.

DEAR SENATOR LONG: This letter is written in reply to your letter of November 19, 1959, inviting the Martin Co. to submit a written statement of its experience under present Federal policies with respect to patents and technical knowledge resulting from Government-financed contracts. We regret that we were unable

to have this statement to you by December 1 for reasons explained to Mr. Gordon. your staff economist. We also wish to acknowledge advice from Mr. Gordon to the effect that this statement will suffice the needs of the committee and that no witness from the Martin Co. is required at your hearings.

Martin is presently, and has been for some years past, almost wholly engaged in the production of items for sale to the U.S. Government either directly as a prime contractor or indirectly as a subcontractor. Its sales to the Government, under Government contracts, amount to more than 99 percent of Martin's sales. Commercial sales predominantly result from spare parts for commercial aircraft which it produced and sold in and prior to 1953. Consequently, the sale of its products in the commercial market is not a matter of controlling importance or financial significance in the recent operations of the Martin Co.

This intense concentration by Martin on the Government market came about from a change of management at Martin, occurring about the beginning of 1952. Our new management felt that Martin should withdraw from the commercial field and specialize in the field of national defense products such as guided missiles, electronic systems, military aircraft, and special nuclear systems for defense applications.

Furthermore, Martin has undergone other radical changes in its business besides withdrawal from the commercial field since 1952. The trend away from the aircraft business has gone even further in the interim period. Today, Martin is to all practical purposes out of the aircraft business. It does not expect to design and produce another aircraft. Our transition to the space, nuclear, missile, and electronics field is nearly complete.

Your subcommittee has requested a statement of our experience under present Federal policies with respect to patents and technical knowledge resulting from Government contracts and patents applied for or secured thereunder. Because of the previously outlined changes in Martin's business, I feel sure you will agree with me that the period from 1952 to date is the significant period, and that events transpiring prior to 1952 are of historical interest only. Consequently, my statement will be limited to matters occurring from the period 1952 to date as representative of the experience of the Martin Co. as it exists today.

During the period 1952 to November 20, 1959, Martin has filed 104 U.S. patent applications resulting from Government contracts. Of this number 46 patent applications have matured into issued patents and 58 patent applications are still pending.

All the foregoing patents and patent applications are subject to a royalty-free license to the U.S. Government to practice or cause to be practiced by or for the United States the inventions covered by these patents and patent applications. Also, these Government licensed patents and patent applications include, not only patentable inventions directly made in the course of performance of our contracts, but those made in the course of the performance of general research programs financed in whole or in part by the Government through reimbursed overhead.

Patents are normally obtained for three purposes. First, they are filed for offensive purposes to exclude your competitors from making, using, or selling a product covered by your own patent. Second, they are filed for defensive purposes to protect the patent owner's right to market a product covered by a patent, and insure freedom from charges of infringement by third parties. Thirdly, they are filed with the objective of obtaining royalty income through licensing inventions to others for a consideration. As will be hereinafter pointed out in detail, these conventional economic benefits normally derived from patents in their ordinary aspect are not present in the case of the Martin Co.

First, with respect to offensive patenting, our patents are available for use by all Government contractors on a royalty-free basis through the Government license. Since Martin is wholly concerned with Government contract work for all practical purpose, all these patents derived from Government contracts are available to our competition, big or small, without charge. There is no carryover of patent rights resulting from Government-financed work into commercial work with resultant advantages to Martin's commercial product line because Martin is not doing business in the commercial field. Thus, the advantages of offensive patenting do not accrue to Martin.

Secondly, under Government contracts made with agencies that do not require transfer of title to the Government, a contractor has the option to report an invention to the Government and indicate that the contractor does not desire to file a patent application. In such cases, title to the invention passes to the Government, who then has the right to patent the invention, subject to a royaltyfree license to the contractor. The foregoing procedure suffices to satisfy the normal requirement for defensive patenting.

Lastly, there remains the matter of royalty income derived through licensing inventions to third parties. Naturally Martin receives no royalty income from the use of contract inventions by Government contractors. This leaves royalty income only derived from licensing of commercial rights to be considered. While our inventions quite logically relate to our defense products and are primarily adapted for use therein, the prospect of their commercial usage is present and royalty income from such usages should not be summarily dismissed as an improbable contingency. Such royalties are shared by the company and the inventor under our patent incentive plan, and the possibility of the individual inventor receiving his share of such royalties is an important incentive to the making of inventions. However, for the period under study royalty income derived from inventions to which the Government has contributed financially has been credited to Government contracts until the Government's contribution has been recouped. It is only after the Government's financial contribution is retired that Martin can retain any royalty income for its own account. This procedure serves to make the Government whole financially. It also provides an incentive to our inventors to invent by allowing some royalty income, at least, to be made available to them through our royalty-sharing plan. However, it should be realized that in many cases the Government's contribution is sub

stantial and since it must be refunded before any benefits accrue to Martin, the normal royalty income potentialities available to patent owners generally are severely limited in the case of Martin's contract patents. Lastly, recent changes in procurement regulations indicate that the sharing royalty arrangement referred to above may no longer be permitted in the future and that all royalty income derived from patents derived from Government contract financing may be credited to the Government. If such proves to be the case, even the limited royalty benefits allowable to Martin at present will no longer exist.

While we are on the subject of patent licenses, I would like to state that all of these Martin patents derived during the period under consideration are available for licensing in the commercial field to business generally upon reasonable terms and upon conventional conditions. We do not pursue an active program of seeking out licenses as there is little economic incentive to do so in most cases because of the treatment of our royalty income previously explained. However, Martin's management has never refused to license any business, large or small, which has requested a license under these patents.

You may logically wonder why Martin applies for and obtains patents under the conditions outlined above. The answer, although unconventional, is simple. In the type of business we are in, creative engineering is of paramount importance. The highest type of creative engineering is inventive engineering. The obtaining of patents is an official recognition of such creative inventive work product of an engineer and, for that reason, patents are highly regarded by the individual engineers who consider them to be primary evidence of their scientific achievements. Also, the obtaining of a patent not only is desired by engineers from a scientific status point of view, but they are sought after as concrete evidence that an engineer is performing his duties in a manner which would merit employment benefits such as salary increases, promotions or both. We, therefore, primarily apply for patents to provide an attractive incentive for engineers to demonstrate their creative ability and to provide tangible recognition thereof. We also obtain patents to demonstrate the company's capacity for creative engineering, exercise of inventive ingenuity, and ability to advance the state of the art. Lastly, we apply for patents in order to provide a further incentive to our inventors through the payment of a share of royalties derived therefrom under our patent incentive plan. We do not obtain patents for the purpose of monopolizing areas of technology and to obtain a corner on a defined product line.

Martin is a prime contractor for the Air Force, Army, Navy, Atomic Energy Commission, and NASA under research and development contracts. These procurement agencies have widely divergent practices with respect to patents and proprietary data. So far, we have been able to live with them all. However, we have certain recommendations to make with regard to improvement of this situation which will be discussed at the end of this statement.

We, of course, by our prime contracts are obligated to pass on to our subcontractors certain contractual obligations with respect to patents, proprietary data, and reproduction rights. We have experienced only very isolated difficulties in obtaining our subcontractors' consent to incorporating such clauses in our subcontracts and we have had no case of any subcontractor refusing to accept these clauses.

We make every reasonable effort to protect our subcontractors' proprietary rights. We scrupulously avoid "pirating" and "bleeding" of our vendors' engineering know-how and design ingenuity. Our reasons for doing this are simple. Our business is selling creative engineering and its embodiment in our defense. To plagiarize the creative efforts of others would be practicing intellectual dishonesty. No company, whose business is creative engineering, tainted with the stigma of such practices could hope to remain in business very long. We also make every effort to avoid dilution of our potential subcontractors' proprietary rights by allowing their proprietary information to get into the possession of their competitors. The following extract from our procurement manual used by all our buyers reflects our company policy and procedures to insure that this be accomplished:

"1. Treat any property right or intangible right of others with the same regard as the company expects others to treat its property right.

"2. Do not make prints or drawings of one vendor available to another vendor as a "favor" (because they will expect the same treatment of their property and the buyer will lose the vendor's respect for the company).

"3. Do not make prints and drawings of one vendor available to another for the purpose of securing bids for any company purpose, or for the purposes of

establishing a second source. Where proprietary rights are concerned, the problem of second sources should be discussed with the contracting officer (through the procurement contracts administrator) and the question of second sources will be worked out by the Government.

"4. Do not 'hint at' or disclose the fact that any vendor is working on any new product or along a new design, if there is any reason to believe that the first vendor's right may be injured. Resolve doubt in favor of refusing any confidential disclosure of drawings and data. However, if they are necessary in company business, then they should be marked and so treated within the company. It is common practice for one vendor to try to find out through buyers what the competition is doing. Buyers will gain the respect of vendors if such information cannot be obtained from them. A buyer will be in a much better position if he will listen to what potential vendors propose. It is not good technique to try for a better bargain by talking even in general terms about what the competition may or will do. The buyer may inadvertently guess very closely, and at some subsequent time be accused of having divulged information obtained from other vendors.

"5. If it is established that a vendor is the owner or licensee of patent rights in inventions required in equipment, then every effort should be made to buy from him. You will probably get better value because of the background or know-how that the vendor will have. The price may not be the lowest because the patent owner or licensee will want to retire some of his capital investment in the research and/or development, but such vendor will be more reliable source, and the company's requirement will be fulfilled without interference with deliveries by patent owners."

In conclusion, we would like to make a recommendation in view of our experience under Government research and development contracts. As previously stated, contract requirements concerning proprietary rights, patent rights, and reproduction rights vary markedly between the various procurement agencies. We realize there are divergent views in such held by the various procurement agencies with which we do business and that in the cases of the AEC and NASA, they are bound by statutory enactments.

We also do not care to become involved in any intragovernmental disagreements as to these matters. However, we do wish to recommend a policy of uniformity in such matters. The present situation favors inventors who work under contracts whereby the contractor keeps title over inventors working under contracts with agencies that require title to be conveyed to the Government. This is depressing to morale and stifles the urge to invent by making some inventors a second class of inventors not having the benefits of our patent system. We would prefer to see the policies of the Department of Defense uniformly adopted throughout the Government. We believe that these policies that permit the contractor to retain title to inventions made under contracts are best both for the inventor and for the contractor. This system provides the strongest incentive to invent by providing recognition by and within the company for whom an inventor works through the obtaining of company-held patents. We are always impressed by the creative "flash or genius" evidenced by patentable inventions made by our employees, and we feel it is our duty to give our employees internal company recognition for their important contributions to the company, and to the Government by ourselves obtaining patents evidencing their inventive creations. Such personal attention produces an atmosphere of creativity which we believe will insure the success of research and development work undertaken for the Government.

We are pleased to have had this opportunity to submit our statement on these subjects and hope they will be of assistance to your subcommittee.

Very truly yours,

PREPARED STATEMENT OF W. BIGELOW HALL, PRESIDENT, THE BOSTON PATENT LAW ASSOCIATION, BOSTON, MASS.

The Boston Patent Law Association has been informed by the National Council of Patent Law Associations that the Senate Select Committee on Small Business is planning to hold public hearings on December 8 and 9 of this year to find out