Inc., seeking compensation in the Court of Claims under 28 U.S.C. 1498, has been hit with a countersuit by the Government charging Tektronix infringed other patents owned by the Government. The article goes on to say:

The case marks the first time the Government has ever sued a private company charging infringement of its patents.

This is a sad reflection on "due compensation" and alleged relief in the Court of Claims.

(Documents referred to follow :)

STATEMENT OF J. P. PERRY, PRESIDENT, EASTERN ROTORCRAFT CORP., DOYLESTOWN, PA., ON BEHALF OF THE NATIONAL SMALL BUSINESS ASSOCIATION

Mr. Chairman and gentlemen of the committee, my name is J. P. Perry. I am president of Eastern Rotorcraft Corp., of Doylestown, Pa., a small business which for a number of years has been contracting with the Government, chiefly for aircraft parts and accessories. I am a member of the National Small Business Association and am appearing on their behalf.

I appreciate the opportunity to appear before your committee today to discuss some aspects of Government patent policy, which I believe have not previously been brought to the attention of the committee and which, I believe, have a relationship to the issues which the committee is here to resolve.

I would like to present to you today what I believe constitutes the small business point of view in regard to patent infringement problems in the performance of Government contracts. In order to establish a framework for an understanding of this problem I would like to review for you applicable statutes and Government contract clauses which relate to the problem.

The key statute is title 28, United States Code, section 1498, which grants to the Government the right to practice or have practiced in its behalf, without license, any U.S. patent, and in turn grants to the patent holder the right to an action against the Government in the Court of Claims for recovery of reasonable compensation. The basic purpose of this statute, enacted originally in 1918, as I understand it, was to prevent the patent holder form resorting to injunctive relief provided by the patent laws and thereby denying to the Government or its contractors the right to manufacture patented items required for the war. I believe that German-owned patents were the ultimate end in view.

By use of a so-called authorization and consent clause (ASPR 9-102) most contracts extend to contractors the rights of the Government under 28 U.S.C. 1498.

Title 10, United States Code, section 2386, allows administrative settlement by the Government in those cases of infringement where the unlicensed source has not contracted to indemnify the Government for the infringement, or where the contractor consents to settlement and indemnification.

The patent indemnification clause (ASPR 9-103), found in a vast majority of Government contracts, obligates the contractor to indemnify the Government for infringement of U.S. patents. This indemnification does not apply (1) where infringement results from changes to the contract imposed by the Government, (2) where the infringement results from changes made subsequent to delivery of the end item by the contractor, and (3) if the infringement claim is settled without consent of the contractor, except where required by decree of a court.

The Comptroller General through his decision of August 25, 1958 (B-136916), has profoundly altered the position of the private patent holder. This decision in substance requires that in advertised procurement the award be made to an unlicensed low bidder if he has agreed to indemnify the Government against patent infringement. The decision further states that the existence of one or more patents is not a basis for a Government agency to carry forward negotiated procurement with the patent holder or his licensees.

Prior to this decision, in the Department of Defense at least, there existed a clear-cut pattern of negotiated procurement with licensed sources where it was clear that a valid private patent was involved. Subsequent to the Comptroller General's decision the former procedure has been revoked, and the regulations now state that the existence of patents in and of itself no longer constitutes a basis for negotiated procurement.

We have now progressed from a widely accepted position that the Government in the interest of national defense under 28 U.S.C. 1498 could infringe valid private patents to the position that the Government as part of its normal procurement practice must infringe privately held patents. Unfortunately, this rather surprising development, to my knowledge, is not susceptible of being tested by the courts.

What is the position of the private patent holder as a result of the foregoing? His expectation that he would realize at least a slight competitive advantage in manufacturing his brain child, has practically disappeared in connection with Government procurement. In exchange for his patent rights he now has the opportunity to sue the Government in the Court of Claims, a costly and timeconsuming procedure. It is estimated that a patent action in the Court of Claims will cost a minimum of $10,000 and take 3 to 5 years to come to trial. For most individual and small business patent holders, a lawsuit, especially in the Court of Claims, is the last thing they bargained for in applying for a patent. This is completely foreign to normal business operation.

Even more irritating is the fact that the infringer sits comfortable and inaccessible behind the protection of the U.S. Government. As far as the patent holder is concerned the Government is no longer the protector of the rights which it granted to him, but an adversary using all the tricks and power at its command in an unequal struggle.

I would like to present at this time for your consideration two examples of the manner in which the Government has dealt and is dealing with patent holders in advertised procurements.

First, there is the case of a patent holder who has conclusively demonstrated to officers of the Government that his valid patent is being infringed and has entered into negotiations for a licensing agreement with the Government. He finds however that unless he forsakes all claims to damages for previous unlicensed manufacture, the Government cannot proceed. The Government's position in such a case is that entering into a license agreement under these circumstances would jeopardize the Government's position in any subsequent Court of Claims action and relieve the infringer from his liability for indemnification. A second example is one where the Government has used drawings prepared by a patent holder of his patented product for competitive procurement. The agency's patent counsel had conclusively determined that the end item of the procurement would infringe on the patent, that the Government had no rights under the patent, and that the patent is valid. The Government's response to the patent holder's protest that the invitation was deficient in not placing bidders on notice that the product was patented, was limited to a statement wherein the Government drew attention to the existence of the patents, but made "no representation that performance in accordance with this invitation for bids would or would not result in infringement of the aforementioned patents."

Is it proper in such circumstances for the Government to avoid its responsibilities or engage in dissemination of half-truths merely because it might thereby gain a lower contract price? Similar dealing or misrepresentation on the part of a contractor would certainly be grounds for the Government rejecting a bid or terminating a contract. The "image" which the Government presents in these dealings is certainly not a flattering one.

Let me cite a further example taken from the experience of another company to illustrate the present state of affairs. A representative of a small concern learned that operational difficulties were being encountered in the field in equipment quite vital to the service in question. A possible solution to the problem was soon developed as a company-sponsored program in the form of actual hardware; and the mechanism was subsequently shown to the interested Government agency. The initial response was favorable; and arrangements were made for detail testing and evaluation by the agency test center. During the course of such tests the developer supplied detailed engineering data of his apparently patentable but yet unpatented design. The data were required, he understood, for use in connection with an evaluation of the end item. Progress reports of tests were most encouraging-indeed, there was evidence that this new solution represented something close to a breakthrough; but the designer encountered difficulty in determining what ensuing program, if any, would be undertaken. Imagine his surprise when he received unannounced an advertised bid set (complete with detailed drawings) calling for the supply of a quantity of this design. When he complained to the agency, he was advised that he was at fault in not obtaining, prior to submittal, written assurance that neither his product nor his drawings would be used in this fashion.

I appreciate that this case was complicated by a proprietary data issue and that it was not a straightforward patent situation as such. I think it was abundantly clear to both parties to this transaction, however, that the designer did not make and supply this material at his own expense for the purpose of creating potential business for others. The fact that he could likely develop a patent position places the agency action in an even more unfavorable light.

The foregoing examples are only a few of many frustrating and unpredictable events which the patent holder may encounter in his efforts to defend his position. As I have already noted it is an unequal struggle. One sage observer has remarked that the sheriff appears to be giving more aid and comfort to the highwayman than to the besieged citizen. I question whether it is in the best interests of society and the Government to so discourage creativity. From the Government's standpoint the present procedures may well be self-defeating. A continuation of the present system, I believe, will inevitably result in the gradual elimination of all privately sponsored development in behalf of the national defense with all of such work being done as Government-financed programs. This trend is already discernible within my own company. While spending similar annual amounts for company-sponsored development, the emphasis demonstrates pronounced change. Whereas, formerly the drive was to develop new products to do new jobs or to do old jobs in a superior fashion, now the goals are increasingly in the direction of reducing the production costs of present products either through redesign or through the design of specialized production equipment. Quite obviously we are losing interest in new frontiers-just old frontiers refurbished.

I believe that the general disposition of Government officials toward this problem is one of sympathy with the patent holder. They are willing and in some cases even anxious to see the law and the regulations revised.

Several approaches to resolution of the problem have been suggested. While some officials believe that the problem is capable of solution by purely administrative changes in regulations and contracting procedures, we have come to the conclusion that the only expeditious and sure means of obtaining relief for patent holders is legislation. It should provide authorization and a mandate to Government agencies to establish administrative procedures whereby the rights of the patent holder, the Government and contractors or subcontractors, may be speedily and efficiently determined and protected. Of course, a right of appeal to the courts, preferably the Court of Claims, should be provided to any party aggrieved by such an administrative determination. I should like to suggest to the committee that an appropriate section to accomplish this purpose be included in any legislation sponsored by the committee for the purpose of protecting smallbusiness interests in the patent area.

I would be remiss if I failed to point out that legislation has been introduced in both the 87th and the present Congress (H.R. 2349 and S. 382, identical bills). It would provide a remedy not currently available to the patent holder-that is the right to sue infringing Government contractors in the district courts. While this legislation has merit, there are certain controversial aspects to it, which in my opinion make its passage rather uncertain. I believe a much less controversial and more effective solution would be that which I have previously suggested, legislative approval and authorization of administrative procedures.

In conclusion I would like to suggest a further area of potential benefit for the small business patent holder. Before the Comptroller General's opinion of August 25, 1958, the common form of procurement for patented articles was on a negotiated basis. As a matter of fact, it was recognized in DOD regulations that this was one of the authorized exceptions to the requirement for advertised procurement. I would like to suggest to the committee that negotiated procuremen for patented items may well be the least expensive method, in the long run. The tremendous overhead involved in advertised procurement, particularly in the light of costs associated with controversies between patent holders and infringers, indemnity agreements, and other factors which I have previously discussed, must add a significant amount to the real costs of this type of procurement.

Certainly from the standpoint of fundamental fairness to the small businessman, within the philosophy of the patent provisions of the Constitution, the patent holder, if otherwise qualified should be permitted to manufacture his patented item for the Government at a reasonable return.

Thank you, Mr. Chairman and gentlemen of the committee, for the opportunity to appear before you, and for your attention.

[From Electronic News, July 6, 1964]

TRIAL DATE SET IN SUIT ON UNITED STATES BY TEKTRONIX

(By James Lee)

WASHINGTON.-A U.S. Court of Claims Commissioner Friday set a November 4 trial date for Tektronix, Inc.'s 3-year-old patent infringement suit against the Government.

Commissioner Donald E. Lane also ruled the Government's countersuit against the Beaverton, Oreg., firm would be settled by a summary judgment. The case marks the first time the Government has ever sued a private company charging infringement of its patents.

Three firms holding Government contracts have joined the Government as third-party defendants in fighting the suit filed in March 21 by the manufacturer of electronic laboratory instruments.

The three companies are the Hickok Electrical Instrument Co., Cleveland, contractor for Hickok 1805A and A/N/USM-81 electronic instruments; Jetronics, Philadelphia, and Lavoie Laboratories, Inc., Morganville, N.J.

Tektronix contends that the Government ordered unauthorized use and manufacture of inventions covered by eight patents claimed by the firm : Nos. 2,769,904; 2,769,905; 2,826,694; 2,853609; 2,804,571; 3,061,788, 2,833,619, and 2,930,986.

The Government in its countersuit charges that Tektronix misappropriated Government property for improvements claimed by the firm for its patents by incorporating the invention of Government Patent Nos. 2,562,295 and 2,594,104 "in large numbers of infringing devices including Tektronix Oscilloscope, Model No. 545."

The Government claimed its two patents were issued on inventions relating to electronic circuits used extensively in such devices as cathode ray oscilloscopes. It claimed the two patents were issued to individuals for sawtooth synchronizing circuits and linear sweep circuits in 1945 and 1953, respectively.

Justice Department attorneys claimed the Government-supported and financed research and development efforts that led to the "background circuitry and knowhow" for the improvements claimed by Tektronix for its patents.

Tektronix has denied that the Government owned any interest in the two patents and claimed they were invalid because of prior use.

Mr. MARCHESCHI. We have two recommendations:

First, 10 U.S.C. 2304 (a) should indicate the clear intent of Congress-that is, negotiated procurement is permitted if there is prior knowledge of potential patent infringement and reasonable proof that patent validity exists. This would restore the situation to what existed prior to the Comptroller General's decision.

Further, patent owners should be permitted to sue Government contractors who infringe their patents in the district court. In no case should the supply of goods and services be interrupted through injunction.

It is necessary for Congress to remedy this situation.

We recommend humbly this committee lead the way-for the sake of small business.

VII. THE NEGATIVE INCENTIVES IN SUBCONTRACTING

It is the policy of the Department of Defense to utilize profit to stimulate efficient contract performance. Profit generally is the basic motive of business enterprise (from ASPR 3-801.1).

In fiscal year 1963 DOD prime contracts not awarded to small business totaled $15.4 billion. This represented about 85 percent of the total expenditure.

The justification for why $13.1 billion of this $15.4 billion or the great majority of it did not go to small business was: "No small business source." This $13.1 billion, in the main, covers missiles, aircraft,

and other major weapon systems contracts-business that will never get to small business unless it gets there as a subcontract through the primes.

It follows that increased subcontracting by the primes of this $13.1 billion demands our highest attention.

Although countless factors have an impact on subcontracting incentives, our testimony, limited by time, will restrict itself to two key

areas.

Before proceeding, let us again establish the primary motivations for subcontracting specialized areas of effort to small business: small business can do it better; small business can do it cheaper; and small business can do it quicker.

Added together, they add up to the primary and only true motivation for subcontracting: a prime contractor subcontracts because he should be able to make more money subcontracting than if he did the work in-house.

Weighted guidelines

The first key area which is suspect of producing negative subcontracting incentives is the weighted guidelines. Controversy exists whether this new Department of Defense profit negotiation technique is a deterrent to subcontracting.

The following table sets forth the weighted guidelines profit factors to be considered by DOD contracting officers when establishing a target profit fee for a prime contractor. I will not read it, but request it be made part of the record.