I would say that in view of the fact that before 1953 we had a very high rapid rate of growth for about a half dozen years, well above the historical average, and the practice of, the Government contract practices, were the same then as now, this institutional feature of the situation has not changed and, therefore, I am inclined to say that it is probably for other reasons that the rate of growth has slowed down. Nevertheless, I would say that insofar as the governmental policies have this particular Government policy has prevailed, let us say, from the period 1947 to 1953, and from 1953 to 1959; in both cases for the whole period, the whole 12-year period, let us say, the practice has had the effect of retarding economic growth, of slowing down. the potential rate of economic growth, because ipso facto a patent right has this effect. Senator LONG. Here is a statement, I believe, you might want to correct, a statement that you made, Professor. I think our thinking was parallel, but I think you were, perhaps, in error when you stated that It is my impression that commercial rights to inventions made by the subcontractor are usually retained by that subcontractor. Mr. HAMBERG. No, no; by the firm that lets the subcontract. Senator LONG. I would imagine that it would depend upon the company. Some companies probably insist on retaining any patent rights that a subcontractor comes across and others do not. But I do have, I have seen, at least one statement where a company clearly spells out their policy which is to permit the subcontractor to retain any patent rights that he develops. Mr. HAMBERG. I would say my impression would be that would be the exception to the general case. Senator LONG. Perhaps that is so. Mr. HAMBERG. In general, subject to some exceptions a private corporation that lets contracts to other firms for R. & D. retains the patent rights. Senator LONG. I believe it is correct. I believe that my statement is completely true, that any corporation that hires any scientist or research personnel to work in their laboratories, certainly would insist that they would have any patent rights that this person would develop working in the laboratory. I think that much would be incontestable, would it not? Mr. HAMBERG. Yes. Senator, it seems to me that we are indulging, to a certain extent, in needless speculation. It would seem to me, and I would recommend, that the committee investigate the costs of R. & D. by the Atomic Energy Commission, let us say, with the costs of R. & D. from the Defense Department. Here we have, we already have, and I would guess that the Atomic Energy Commission's contracts run in the neighborhood of a minimum of $300 million a year, that is a minimum-this is a substantial amount, I would suggest and, therefore, we have an important case where contracts are let by an agency that does retain the patent rights and we, therefore, have the basis for making an outright statistical comparison of, let us say, the costs to the Government agency of R. & D. contracts where that agency retains rights, and the costs of R. & D. to another agency where that agency permits the contractor to retain the patent rights. It seems to me the committee ought to make a statistical study, so far as that is possible, of the relative costs in these two situations. I have not heard, incidentally, it has not been brought to my attention on any widespread basis, that the Atomic Energy Commission is confronted with significant refusals by private corporations to perform research for them, even though the private corporations do not retain the rights. I might also add that there are a sufficient number of cases wherein corporations agree to do R. & D. work for the Government at the Government's expense only when the research and development involved is relevant to technical and, therefore, commercial problems already confronting the firm. What I mean to say is that in many cases these firms turn down Government R. & D. contracts, even with the patent rights, because the research and development involved does not have any clear relevance to their present problems, let us say, and interests. The mere granting of patent rights is no guarantee that these firms will jump at these contracts, and from the AEC experience, the Atomic Energy Commission's experience, clearly the retainment of patent rights by a Government agency is no indication that the contracting firms will refuse to perform R. & D. Senator LONG. Would you, in addition to what you have provided for us here, and the information that I asked about as to the percentage of Government expenditures in other fields for research and development, would you be so kind as to supply for our committee files the various works and writings you have done in this field, Dr. Hamberg? Mr. HAMBERG. Yes. I just presented a paper at the end of September to the Joint Economic Committee. Mr. GORDON. Could you submit that for the record? Mr. HAMBERG. Yes, I can have a copy for you.2 Senator LONG. Thank you very much, Dr. Hamberg, for your testimony here this morning. Mr. HAMBERG. I was glad to be of help, Senator. GOVERNMENT PATENT POLICIES AND GOVERNMENT-FINANCED R. & D. Prepared statement of Daniel Hamberg, University of Maryland 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 2 See app. I, p.397. 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 characteristics 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. The mental route by which this conclusion has been reached should be familiar to all. It is first of all assumed that economic progress is desirable. Secondly, it is assumed that economic progress rests essentially on technological progress, the development of new processes and products. Thirdly, it is assumed that technological progress rests in the main on inventions and innovations (the industrial exploitation of inventions) that are patentable. Invention and innovation involve often much time and effort and frequently heavy financial outlays. This is particularly true of the postinventive stage, because costly development work, experimentation in production and in marketing may be needed before the commercial exploitation of the invention can begin. The risks involved may be too great to be undertaken unless the shelter of a patent is granted. It is assumed that the profits that would accrue from the exploitation of inventions under competitive conditions would not be sufficient to induce inventors and innovators to undertake these risks. Hence, to provide inventors and their financial backers with sufficient incentive to undertake the risks associated with invention and innovation, it is necessary to hold out the prospect of monopoly profits. I believe that the foregoing can safely be said to embody the essentials of the modern case for the granting of patent privileges. It will be seen to be basically 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 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 matter how difficult or expensive a project turns out to be, the costs are covered by the Government. The contracting firms pays not 1 cent from its own pockets. Not only is it remunerated 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 an innovate, while they simulateously impede the diffusion of technological knowledge uncovered at public expense, the granting of patent privi 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 |