PATENT POLICIES OF DEPARTMENTS AND AGENCIES OF THE FEDERAL GOVERNMENT TUESDAY, DECEMBER 8, 1959 U.S. SENATE, SUBCOMMITTEE ON MONOPOLY, OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to call, at 10:05 a.m., in room 457, Old Senate Office Building, Senator Russell B. Long presiding. Present: Senator Long (presiding). Also present: Walter B. Stults, staff director; Benjamin Gordon, economist; T. Peter Ansberry, counsel; Hamilton Richardson, legislative assistant to Senator Long; Catherine L. Guyon, legislative assistant to Senator Scott; and Robert L. Wright, chief counsel, Subcommittee on Patents, Trademarks, and Copyrights, of the Senate Judiciary Committee. Senator LONG. The hearing will come to order. Today, tomorrow, and Wednesday the Monopoly Subcommittee of the Senate Small Business Committee is conducting hearings as part of its study of (1) the patent policies of the departments and agencies of the Federal Government, and (2) the closely related problem of Government policies with respect to the acquisition and dissemination of technical information. There is no one Government patent policy. Various Federal agencies and departments have sharply varying policies with regard to taking title to patentable inventions made under research and development contracts with private organizations. These policies range from automatically giving the patent and all commercial rights to the research firm to the other extreme of taking title to all inventions which result from the contract. One primary purpose of our inquiry is to determine if there are valid reasons for these divergent policies. The importance of Federal policy in this connection can be appreciated by examining the magnitude of the Federal contribution for basic and applied scientific research and development. Before the Second World War, between $300 and $400 million a year was spent on scientific research in the United States, and the Government contributed about one-fifth of this total. During World War II, research expenditures increased to $800 million a year with the Government supplying about $600 million of this total. In the last few years Government expenditures for this purpose have made our World War II effort seem piddling by comparison. 1 In fiscal year 1958 federally sponsored research and development contracts totaled approximately $5,900 million. In fiscal year 1959 estimates are that this figure will exceed $7,900 million, almost $8 billion, and for the fiscal year 1960 we will spend approximately $8,150 million on research and development. This does not include the several hundred million dollars of private research expenditures. The magnitude of this effort makes it apparent that the distribution and Federal policies in the handling of the resulting inventions of these contracts have a significant effect upon the organization of the American economy. These hearings will look into three major problems. First, there is the problem of increasing economic concentration brought about by the granting of patent rights to individual firms for discoveries which result from Government-financed research and development contracts. The report of the Attorney General, dated November 8, 1956, insisted that present Federal policy, combined with the disproportionate share of Government research and development contracts going to the largest firms, is strengthening the trend to monopoly and undermining the relative position of small business. The report of the Attorney General, three years later-November 9, 1959-repeats the same warning.1 The advance technological experience of these firms will necessarily have profound effect on their ability to produce the products of the future for civilian markets, and, more importantly, on the ability of smaller firms to compete with them in those markets. Second, there is the problem of assuring that newly acquired technological information developed at Government expense and not of a classified nature is diffused throughout our society. The American people foot the bill. Do they receive commensurate benefits from this work? To be equal to the challenge of our times, all our scientific skills must be fully utilized. The rate of our economic growth, in large measure, depends upon the speed with which new technological developments enable us to produce more goods and services, both for peacetime consumption and to ward off possible armed conflict. The third problem is whether the U.S. Government is getting all that it pays for from its research and development dollar. Is the Government giving away more than it should in the granting of its research and development contracts? Is it possible to recover part, or perhaps all, of our expenditures on research and development? In view of the magnitude of the sums involved it is appropriate that Congress carefully examine this whole field. I have a letter here from Senator Joseph C. O'Mahoney, in answer to my inquiry, inasmuch as his Legislative Subcommittee of the Committee on the Judiciary has been conducting investigations in this matter, and I will insert that in the record at this point. 1 Report of the Attorney General, pursuant to sec. 708 (e) of the Defense Production Act of 1950, as amended, procurement for defense, Nov. 9, 1959. (The document referred to follows:) EXHIBIT I UNITED STATES SENATE, SUBCOMMITTEE ON PATENTS, TRADE-MARKS, AND COPYRIGHTS, Hon. RUSSELL B. LONG, Chairman, Subcommittee on Monopoly, Senate Small Business Committee, Washington, D.O. DEAR SENATOR LONG: I appreciate very much your invitation of November 27 to express my views as to the present patent policies of Government agencies, and recommendations for the improvement of those policies, and I am delighted to know that your committee is going to gather material in this field. From the hearings which we have already held and the reports which we have made, I think it is clear that definite action should be taken by the Congress with respect to the method by which Government agencies should act, and, inasmuch as your subcommittee hearings are to begin on December 9, I should like to have Mr. Robert L. Wright, the chief counsel of our staff, and such others as he may select, attend the hearings. I am personnally not available for attendance at the subcommittee meeting during this month. As you know, the Patents Subcommittee of the Senate Judiciary Committee has, for some time, been engaged in an investigation of this matter, and has issued six preliminary reports with respect to the patent practices of Government agencies, which you may wish to incorporate in your record. These reports deal, respectively, with the patent practices of the Tennessee Valley Authority, National Science Foundation, Veterans' Administration, General Services Administration, Government Patents Board, and the Post Office Department. They cover less than half of the agencies which are under study by the subcommittee, but the information assembled to date shows a strong need for congressional action to correct the haphazard methods by which Government patent policy is how made. While our studies have not been primarily concerned with the impact that these divergent Government patent policies have had on small business, it is apparent to me that small business may have been hurt. For example, where title to patents resulting from a Government-financed contract is retained by the contractor, the effect of the Government research may be to strengthen the power of a corporation which already has a very large patent portfolio to restrict the competition of smaller competitiors with a relatively insignificant patent position. There are, of course, situations where the contractor should retain title to insure proper exploitation of a patent, because the Government ordinarily makes no effort to exploit commercially any patent that it may own and does not ordinarily give anyone an exclusive license. However, TVA's experience with its fertilizer patents certainly casts doubt on the thesis that private enterprises are not interested in exploiting Government-owned patents on a nonexclusive basis. I hope that your subcommittee will determine from small businessmen themselves, whether they feel that the Government, by generally licensing the patents it owns to all comers on a royalty-free basis, discourages or encourages the use of these patents. I am sure that you will also explore at your hearings the question of whether an opportunity to obtain an exclusive license would stimulate greater interest int he use of Government-owned patents by small business. The work of this subcommittee has not yet progressed far enough to justify any recommendation by it or by me as to what, if any, specific changes ought to be made in existing Government patent policies. We are convinced, however, that the extent and nature of the changes to be made should be determined by the Congress itself rather than by the individual adminstrators and contracting officers of the Government agencies involved. With kind regards, Sincerely yours, JOSEPH C. O'MAHONEY, Chairman. Senator LONG. The first witness today will be Prof. Daniel Hamberg, of the University of Maryland. Mr. HAMBERG. Thank you, Mr. Chairman. STATEMENT OF DANIEL HAMBERG, UNIVERSITY OF MARYLAND, COLLEGE PARK, MD. Senator LONG. Dr. Hamberg, I believe you have been informed that our procedure will be in accordance with the Legislative Reorganization Act, wherein you are requested to bring a prepared statement, which I would like to put in full in the record, and then to summarize your statement in your testimony today. Mr. HAMBERG. The Senate Small Business Committee is to be warmly congratulated for its investigation of the patent policies of Federal agencies. Especially crying for study is the policy of virtually all Federal agencies (with the exception, I believe, of the Atomic Energy Commission, the Department of Agriculture, and the Tennessee Valley Authority) of permitting private corporations to secure patent rights to inventions developed by the corporations under Federal financial sponsorship. This policy possesses all the inherent and potential disadvantages of the patent system and none of the latter's alleged advantages. Whatever their merits, it is undeniable that patent rights confer monopoly powers on the patentee. Patents enable their owners to restrict the use of inventions, thereby restricting the contributions to the national product that the patented inventions could make, in the hope that the resulting higher market prices will make possible (monopoly) profits in excess of what could be earned under competitive conditions. To deny this feature of the patent system would be tantamount to denial of any usefulness of the patent system. Implicit in this essential characteristic of the patent system is a retardation in the rate of diffusion of inventions. Why has society erected a legal institution that impedes the diffusion of technological knowledge? The answer lies in the belief that the monopoly profits made possible (if not guaranteed) by the patent system will act as an inducement to further, and even raise the rate of, invention and innovation. In a word, the patent system was conceived in the paradoxical expectation that by slowing down the rate of diffusion of inventions, there will be more inventions to diffuse. What is the argument for the patent system and what is its relevance to the problem at hand, namely, the granting of patent rights to corporations conducting research under the financial sponsorship of the Federal Government? Basically, the argument for a patent system, as such, is an incentive argument. The profit expectations connected with the hope for a patent monopoly may induce inventors to exert their inventive efforts, or, in the modern scheme, induce corporations to maintain expert staffs of scientists and engineers and expensive research laboratories; the same profit prospects may induce venturesome capitalists, or their modern counterparts, the great corporations, to risk their money on uncertain and expensive development projects and pilot plants, and on the equally and uncertainty-laden tasks of building up markets. It may be granted that patent-monopoly profits stem from output restrictions, and are thus inherently associated with underutilization of a recently developed piece of technology. But it is argued that this is the price we must pay for a system that fosters the development of new technologies and thereby ultimately permits a more rapid growth in total production than would be possible in its absence. Without pausing to examine the validity of this argument, and there are many grounds for questioning it, let us scrutinize its applicability to the case of Government-financed research carried on in the private sector of the economy. Perhaps the most notable feature of such activity is the total absence of all financial risk on the part of firms conducting the research and development. Virtually all R. & D. contracts let by Federal agencies and departments are on one sort of "cost plus" basis or another. No results are guaranteed, nor can they be, of course. But no mater how difficult or expensive a project turns out to be, the costs are covered by the Government. The contracting firm pays not 1 cent from its own pockets. Not only is it renumerated for the basic invention for which it is responsible, but the Government bears all the costs of development work attached to it. Furthermore, there is no market to be developed. The market is there, waiting eagerly, in the form of the Federal agency or department for whom the R. & D. has been performed. In short, the whole thing is virtually a riskless venture for the contracting corporation. If there is a possible risk, it is that of contract cancellation. But even this can hardly be described as a risk, for it remains true that the firms have invested none of their own funds, and are always granted a return well in excess of costs, to boot. What becomes of the "incentive" argument in this case? The answer, of course, is that it collapses completely. If there are no risks there is no justification for a monopoly profit such as might accrue from patent rights. But since the patent rights are clearly not needed to serve as an inducement to invent and innovate, while they simultaneously impede the diffusion of technological knowledge uncovered at public expense, the granting of patent privileges 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. It is undeniable that the whole basis of a patent system is the power inherent in the monopoly position that the patent grants, that is, the power to slow down, retard the rate of diffusion of inventions, so that the patent owner may receive a higher profit thereby. Consequently, while there might be an argument for accepting this cost of a patent system as the price we pay in order to induce more invention and innovation at private expense, in the case at hand where the Government covers all the financial costs, bears all the financial risks of invention and innovation, we are clearly receiving no advantage here, while accepting the decisive disadvantage or one of the decisive disadvantages of the patent system, namely, the retardation of the diffusion of invention. 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. |