ment and a background patent position in the area of the research work. The firm ultimately refused to contract because of its belief that, without exclusive patent rights, it would not be able to compete with the large corporations working in the same area.

The firm in Case 20 originally contracted with Interior in 1960 under a joint sponsorship arrangement where the firm financed one-half of the research effort. This contract apparently permitted the firm to retain title to resulting inventions. In negotiating a follow-on contract, Interior was required to modify the patent clause to conform with the patent provisions of the Saline Water Conversion Act, calling for government ownership of title to foreground inventions. The firm accepted this patent provision, but the contract was changed from a joint-sponsor program to one fully paid for by the Government. When Interior requested a royaltyfree government license to the firm's background patents during negotiations for additional follow-on work, the firm refused to continue because of its inability to recoup its private investment in the research.

In evaluating the impact of patent policy on competition, it is important to distinguish the effects that such a policy might have from the general effects which may result from industrial participation in government R&D programs. Competitive advantages in commercial markets may well accrue to contractors through government funding of R&D work, especially when the work parallels commercial areas of interest. Advantages may also be obtained as a result of this work through knowledge gained in new technologies and through the sharpening of technical skills of the contractor's scientific personnel. However, these advantages are quite separate from the advantages which may result through the ownership of patents to specific inventions. This study attempted to measure only the effects of the patents per se. Measuring the impact of government-sponsored patents on competition is extremely difficult, and not unlike previous attempts that have been made to measure the impact of the patent system in general. An exhaustive analysis of this impact would, of necessity, include the study of several

types of markets and technology, and attempt to measure the
cumulative effect that government patents have had over an
extended period of time. This type of detailed study was
beyond the resources and scope of the study sponsored by
the Committee.

Under this study, an attempt was made to measure the effect on competition of the sample inventions considered in this study, primarily through the data accumulated by the questionnaires, and through the in-depth studies directed toward refusals of contractors to license government-sponsored inventions and attempts to enforce patents.

The questionnaire data provided a considerable amount of general, or background, type of information which would allow for some assessment of the competitive impact of the patents. For example, the questionnaire data indicated that about 95% of the patents resulted from the research of missionoriented agencies, which Harbridge House found to have very small applicability to commercial markets. Fifty-five of the 210 inventions utilized commercially by government contractors were reported to be critical to the end product or process in which they were used. All of these utilized inventions accounted for a reported $406 million in accumulated sales over several years, and the sales of the items involving critical inventions was reported as $241 million -- a relatively small figure when compared to the total sales of these firms over the same number of years and to the industries in which they participated.

1. Licensing of Inventions

The industrial contractors responding to the questionnaire held exclusive rights to 1,618 patents in the response, and 1,539, or 95%, were reported by these firms as being available for licensing. Each firm which reported a refusal

to license was interviewed, and as a result, Harbridge House concluded that there was actually only fifteen patents that were unavailable for licensing. Of the patents reported

as available for licensing, 175 requests were made for licesnes, and 138 resulted in license agreements. Use was reported under 77 of the license agreements.

The data also indicated that, in general, industrial contractors licensed their inventions fairly rapidly, as 58%

of those inventions which were licensed, were licensed within

three years of the date on which an application for patent was filed. In addition, a check was made of the twenty-six inventions used by the contractors and licensed to others to determine if there was any delay experienced in licensing inventions when the contractor himself was using it. For these twenty-six patents, only eleven cases were found where the license agreement was entered into more than one year after the first commercial use by the contractor. Investigation of these cases indicated that, in every instance, a license was granted within a year of the first serious request for a license.

The fifteen patents that Harbridge House identified as being unavailable for licensing involved only five companies. One of the five companies, holding eight of the fifteen patents, categorically refused to license competitors. when patents were associated with his commercial market. This company was using three of the eight patents which it held. The remaining four companies selectively refused to license patents which they were using, depending upon their evaluation of the patent and the specific market condition. Summarizing the results of the identified refusals, it was found that only three of the patents involved inventions which had a critical role in the products sold, and only one of the critical role patents had substantial sales. This patent was owned by a large contractor and was critical to the scroll structure of a gas turbine motor which had enjoyed sales of $60 million. million. The study indicated that the patentee had several active competitors in this field which used alternative technology, although the study provided no information on the relative market positions of the competitors or on the relative economics of the technologies used. The second critical invention was owned by a small firm (under $5 million in annual sales) and accounted for $66,000 in sales, with a development cost of $2,000. The third critical invention had realized sales of only $11,000 in both commercial and government markets.

Of the supporting role inventions, three involved features
for a jet fuel flowmeter, representing improvement in a
basic patent already owned by the company. The company
had invested $1.45 million to commercialize the product
and had accumulated sales amounting to $1.8 million. A
fourth supporting role invention owned by the same company
had been developed at a reported cost of $300,000 and had

produced sales of only $13,000. Because of this, the company indicated that this invention is now available for licensing.

When the overall questionnaire response was considered, Harbridge House found that only 1% of the patents owned by the large contractors (over $50 million in sales) were reported as unavailable for licensing, whereas smaller firms (under $50 million in sales) indicated that 7.6% of their inventions were unavailable for licensing. When the patents were in use by the contractor, the tendency to refuse to license others increased -- larger firms refusing to license 3.8% of the inventions they themselves were using, and the smaller firms refusing to license 13%. In summary, Harbridge House concluded that the effects of the refusal to license was negligible. In the one case where the patent appeared to have an appreciable commercial market, there were competing alternative methods for performing the same function.

All of the patents in the sample were checked to identify any attempts to enforce them through litigation. Sixteen suits involving eleven patent owners were found, but further study indicated that only ten of the suits involved patent infringement the others involving primarily claims for misappropriation of trade secrets. The se ten suits were covered in eight case studies conducted by Harbridge House.

Except for one case, Harbridge House concluded that there were no adverse competitive effects resulting from these cases. All of the cases which had been terminated were settled out of court, with no injunctive relief being requested or granted. Also, it was found that, in general, the patent owners were willing to license the inventions, and that the biggest problem was their attempt to identify possible infringers.

One case, involving a synthetic process for producing an important mineral, was identified as having an adverse effect on competition.. This process was instrumental in creating a small, but growing industry. The exclusive licensee is willing to license those in the industry which are presently using the invention, but at a royalty rate which will apparently make their operations unprofitable. Harbridge House concluded, as a result of the study of this case, that it is untypical of government inventions in general.

Part III

Application of the Study Results to the Presidential Policy

A. General Conclusions

The Presidential Memorandum and Statement on Government Patent Policy was developed over an eighteen-month period by the Office of Science and Technology in consultation with representatives of twenty federal agencies. The policy was based on more than twenty years operating experience of the agencies with the policy issue, and in light of the information and facts gathered through numerous Congressional hearings and studies. In the last three annual reports on government patent policy issued by the Federal Council for Science and Technology, it was found that the Presidential Policy had been effective in several respects, particularly in bringing the patent policies and practices of the federal agencies into greater consistency and in obtaining a greater degree of protection of the public interest.

Because of this extensive background on which the Presidential Policy is based, it was not anticipated that the results of this single study effort would be decisive in indicating the need for a major policy change. Rather, the study was intended to gather facts and information which would assist in reaffirming or suggesting modifications to the basic criteria underlying the policy. In the June 1966 Annual Report on Government Patent Policy, the Federal Council, after stating that the policy had been effective in several respects, indicated the need for more information as follows:

"There are, however, three key areas where few facts have been accumulated and in which there is need for considerably more information. These areas pertain to the effects government patent policy has on (a) contractor cooperation and contract performance, (b) the utilization of government-financed inventions in the civilian economy, and (c) competition in commercial markets."

It is precisely in these three areas that the efforts and findings of the Harbridge House study were directed. Accordingly, the following sections of this Part correlate the results of this study effort with the provisions of the Presidential Policy, and provides the Committee's opinion on whether the data collected either supports the provision, or indicates the need for possible modification.