before the first camera became available. It is our considered opinion that this aerial camera was developed under Government-financed contracts and would not have been produced for or by private industry.

For several years we knew of the requirements by the Government for the KA-20 camera and associated equipment. We made various attempts to obtain technical knowledge of the KA-20 camera so that we could bid on a competitive basis. Drawings were not available. Models were not available. Information was not available. Offers to visit any location where a KA-20 camera could be inspected were of no avail.

There were no security problems. We are convinced that each Government employee involved made a conscientious effort to make the information available so that competitive bidding could be accomplished. As a matter of fact, expressions of opinions by various Government personnel indicated that requirements had to be "sole sourced" because of nonavailability of information for competitive bidding.

In view of the fact that every Government contract requires complete detailed information, i.e., drawings, literature, technical data, manuscripts, spare-parts provisioning, it seems most peculiar that no technical information could be made available after several years of development, after delivery of a number of prototypes, production samples and, in some instances, production quantities.

Our persistence in following this matter finally resulted in creating a competitive situation for a quantity of 355 KA-20 cameras on a negotiated basis. Finally we obtained contract No. DA-36-039-SC-66495, dated June 30, 1958, for 355 KA-20 cameras. We did obtain a GFP model for guidance purposes from the Government. We were unable to obtain any drawings for quite some time

thereafter.

Shortly after receipt of a contract for the KA-20 cameras we made every effort to obtain complete technical data from the Government. This was simply unobtaintable because Hycon had not supplied such data which should be and probably is required under their various contracts with the Government. It appears that Hycon took the position that certain items in the cameras were proprietary and that Hycon would furnish neither drawings nor technical information. We know that various Government personnel, both civilian and military, made serious efforts to induce Hycon to supply the information. We know that the various Government personnel expressed their surprise to Hycon, the opinions that such information was paid for by the Government in the contract, etc. Apparently Government personnel were unable to obtain the necessary information.

Thereafter we contacted Hycon and were unable to obtain any satisfactory arrangement to use the technical knowledge already established by Hycon at what we consider Government costs. We made this position clear to Hycon officials. The best that we could get was a statement to the effect that Hycon would release information only upon an agreement wherein we would pay 7 percent royalty on the total dollar value of the contract.

It should be noted that Hycon was fully aware of the fact that all we were interested in was the valve which is a component of the camera and represents approximately $30 of a total cost of $1,800 per camera. It should also be noted that the valve was not satisfactory insofar as the Government was concerned and that part of the requirements of the contract placed with us was that the problems encountered in the value to date be remedied. Hycon was aware of this. Hycon was aware of the value of the valve, the failure of the valve to meet contract specifications, the cost of the camera, the position of the Government. Despite this, Hycon insisted upon 72 percent royalty on the total dollar value of the contract.

Hycon Manufacturing, its affiliates or subsidiaries, appear to be "war babies." It appears that they started in business in 1946 as a result of the defense re quirements. It appears that their entire business is based on military requirements. From the statistical information available to us it appears that all of their operations, V-loans, tax benefits, etc., are a direct result of defense requirements. There seems to be little room to accept any proprietary claims or interests that could have been financed by private capital in the case of Hycon. We have several suggestions that could very easily eliminate such situations from occurring again in the future.

Another specific example of the control of proprietary interests is that of lenses used in aerial cameras. We were awarded contracts Nos. AF-33-60035785 and AF-33-600-38018 totaling 492 KS-36 cameras at an approximate price of $3,300 each. Each camera was required to be supplied with three lenses, i.e., 4964660- -4

one 6-inch, 12-inch, and 24-inch lens. The approximate value of the three lenses was $1,100 each unit, one-third the total dollar value of the contracts.

Immediately after obtaining the first contract we began to look into the problem of lenses. We were aware of the fact that the Government had spent considerable amounts of money with Eastman Kodak and other lens makers in developing aerial-camera lenses and for the purpose of being in a position to have lens sources available whenever needed. After many telephone calls and visits with various personnel in Washington, Fort Monmouth, and Dayton we were able to locate some of the information but not technical details.

Eastman Kodak and Bausch & Lomb were extremely careful in their approach, indicated that certain information was available, that such information had been supplied to the Government, that certain Government-owned tools were available, but would not supply technical details, drawings, etc.

We worked with several smaller optical companies capable of producing lenses. We finally were able to place an order for our lens requirements at what we considered a reasonable price with Wollensak Optical Co. in Rochester. We understand that it was necessary for Wollensak to arrange to pay a license fee to Eastman Kodak in order to manufacture some of our lenses. It is our recollection that Eastman Kodak indicated by letter to us that tools made under Government-financed contracts were available, that lenses could be made by Eastman Kodak with permission of the Government to use such tools, etc., but the conditions and prices made this completely impractical.

Since we have been unable to collect all of the information concerning lenses for the KS-36 camera within the alloted time, we feel it advisable not to go into further detail until we can get more specific information. We hope to have this available for you in the near future.

We readily agree that in the case of Eastman Kodak and Bausch & Lomb there is some justification for the "zealous guarding" of "trade secrets” and insisting on proprietary rights. Certainly there is no question that both companies carry on independent research and development paid for by company funds. The ability to draw a clear line of demarcation as to which is and which is not Government financed can become complicated but is readily solvable in our opinion.

Another instance of control by proprietary interests is that of the KA-30 camera system. This has been in development for approximately 4 years. Drawings are not available. Models are not available. Neither specifications nor even meager details are available. Deliveries have been made, some Government agencies have units for service tests, but every effort to obtain information meets with complete failure.

Rumors regarding the KA-30 system and the handling of the entire matter so that only one contractor, i.e., Chicago Aerial Industries, remains the sole source on a noncompetitive basis have been rife. In view of the fact that the entire camera and system was developed under Government contracts and funds it seems odd that the technical knowledge, drawings, and other information which makes possible competitive bidding has not yet been accomplished. It is peculiar that the specific instances quoted herein all emanate from the same Agency, i.e., Combat Surveillance Division, but this is probably coincidental.

Mr. J. E. Welch, Deputy General Council of the U.S. Government Accounting Office, delivered the views of the GAO on subcontractor's problems under the "Weapon System Concept and Related Purchasing Policies and Procedures" on October 8th, 1959, at Monterey, Calif., in his talk Mr. Welch said, "To further develop the point on the effect of weapons-system concept on the competitive structure of our defense industry, it is necessary to examine the question of proprietary rights and how this problem could adversely affect the Defense Department's control over technical characteristics and quality of defense procurement. Under more conventional methods of procurement, i.e., where the military department retains primary responsibility over design and development of a weapon or a weapons system, the Department contracts directly for major subassemblies, systems, and subsystems with the result that a large number of suppliers participate in the development of a particular weapons system. Thus, many firms are given an opportunity to do research work and expand their capabilities in both military and commercial production. Broad participation increases the likelihood of more rapid advancement in the state of the art. These firms generally have no hesitancy to disclose to the military department their designs, drawings, manufacturing processes and other technical information relating to the item being produced or developed. They know that new

scientific discoveries and techniques developed through the use of Government funds are generally made available for the use of American industry and that the Department of Defense will or should take reasonable precautions to respect their proprietary rights on any manufacturing processes or patents developed for application in their manufacture of commercial goods.

While the protection of proprietary rights has created some problems in the past, a procurement concept which tends to shift the administrative responsibility for design and development of large complex systems from the military to a few prime contractors may now present an entirely different situation. Can the system prime contractor be relied on to protect the proprietary rights of his subcontractor? Will the system prime contractor expand or constrict the distribution of research and development funds?

The practice of pirating or proselyting technical skills and knowledge has always been a possible evil in competitive indutry. There is serious question as to whether or not tendencies to monopolize advanced skills and manufacturing processes through the proselyting of subcontractor technical information and know how might tend to discourage subcontractors from participation in the defense effort and thus the base for technical advancement would be narrowed. Can the military departments afford to abdicate their responsibilities in this area? Reluctance on the part of subcontractors to disclose technical information, cost and pricing information, and other proprietary information could lead to inferior products at exorbitant prices and a gradual deterioration in the competitive structure.

The second question concerning the distribution of research and development funds is, of course, closely related to the first question of protection of proprietary rights of subcontractors. It is a problem involving competition. A company that develops a device under a Government contract may retain commercial patent rights although yielding to the Government a royalty-free license to have the item manufactured for military use. The company may have to spend additional sums of money to adopt or develop a military item for commercial use, yet a Government research and development contract often enables it to investigate fields that would be too expensive for them to explore with their own resources. Can system prime contractors be expected to show impartiality in the selection of subcontractors to engage in research in competitive fields? The channeling of all this patent potential to a few major system prime contractors could lead to monopolistic trends. It would appear that if the military departments are to let their inhouse capabilities lag to the point of letting major prime contractors dominate the field of design research and development of advanced and complex systems the U.S. Government would be contributing to these trends rather than striving to prevent them. While a few of the large companies may possess extremely high capabilities for advancement in scientific endeavors, it is doubtful that the effort of the same few companies would be as effective as the combined efforts of a much larger segment of industry achieved through employment of the forces of full, free, and open competition."

We have purposely quoted Mr. Welch directly to avoid any question of taking statements out of context. We urge that you consider carefully the additional avenues you are opening to abuses by contractors for the many reasons indicated by us previously.

We

Hearsay or rumors are dangerous and we prefer not to quote such items. However, complete records and documentation is readily available to you. feel that you would be well rewarded if you were to take one situation and look into it from its inception. Interoffice memorandums, notes, differences of opinions and methods of procurement on the KA-20 camera should be most interesting to you. For example, you will find that despite the efforts of many Government civilian employees to place contracts for the KA-20 on a competitivebidding basis, awards were made continuously on a sole-source basis to Hycon until the first award was made to us on a negotiated basis. Your study of this case will further indicate that on a subsequent award made to Chicago Aerial Industries, again on a negotiated basis, the necessary technical information was not yet available to the Government insofar as Hycon was concerned. You will find, however, that we, Viewlex, had supplied complete drawings including the development of a new valve and other items. You will also find that we had more right to claim proprietary interests on the valve and several other items since we had taken the contract on a firm fixed-price basis. You will find that at no time did we claim proprietary rights.

You will also find that we suggested an IFB type of bid and that we formally protested continued negotiated type of awards. You will find that there was a

considerable difference of opinion as to how these cameras should be procured! between various Government agencies and that one or more agencies insisted on IFB competitive bidding but was overridden and that authorization to procure first on sole source and finally on negotiated bids was issued.

The inherent dangers in the present weapon system procurement program are apparently minimized and appear to be completely ignored. Mr. Welch has clearly stated some of the dangers that exist in this program. There can be no question that under the weapon system procurement program almost all developments wil be controlled by the few "giant" industries. There will be no way for the Government to determine which items were developed by the various independent subcontractors. As a matter of fact, there is serious doubt as to whether there will be any part under this program for independent subcontractors and even more so in the case of small business.

Under present Government procurement methods drawings are required. However, drawings are generally furnished only after completion of the contract. The purpose of this is to assure the Government of obtaining the very latest drawings complete with revisions, changes, etc. This may be excellent in theory but works to the extreme disadvantage of the Government. When the interest, and in some cases the avarice, of the individual contractor is taken into consideration, drawings are furnished at the latest possible date so that information will be kept from the Government and the public for as long a time as is possible.

To summarize, there are several methods of protecting the Government. The "shotgun" or "cure all" method of simply declaring by congressional act, Executive order, or by any other legal means that there will be no consideration given to prorietary rights is undemocratic and unnecessary. The simple and proper method is to ask for a clearcut statement from every contractor prior to award as to what proprietary rights exists and will be used in the completion of the award under consideration and what portion of the costs represents such proprietary rights. In addition, each contractor should be required to state that any item developed thereafter that has any proprietary rights will be disclosed to the Government immediately. Further that such proprietary items that were developed during the life of the contract were either developed as part of the contract and are absorbed in the charges under the contract or were developed independently of the contract and at company costs. Further that in the event the item is developed a company costs, the item is being supplied on either a nocost basis or at some nominal sum. In addition, each contract should contain a clause stating that the Government has a right to all technical information and drawings at any time requested. In other words, such technical information and drawings must be furnished during any stage of the contract so that the Government will be in a position to supply such information to other contractors for competitive bidding purposes. In fairness to the contractor it should be stated that the information and drawings supplied are not guaranteed to be accurate and are without recourse to the contractor as to accuracy. A limit to the number of times such information can be requested by the Government would eliminate any questions as to costs. A limit to a nominal number of times (i.e., 5 or 10 times) during the life of the contract would not in any way increase the costs if made known at the time of bidding. Further it would eliminate the need for the Government of having voluminous correspondence and drawings on hand since it would be necessary to call for such information only as required.

Senator LONG. I believe we will have time to hear Mr. Harry Stern of Action Manufacturing Co.

I will ask you, Mr. Stern, to just proceed and read your statement. STATEMENT OF HARRY STERN, PRESIDENT, ACTION MANUFACTURING CO., PHILADELPHIA, PA.

Mr. STERN. Thank you, Mr. Chairman.

Action Manufacturing Co. is a small business situated in the northeast section of Philadelphia and employing approximately 125 men and women. We are primarily engaged in producing electro-mechanical mechanisms and instruments and in the overhaul and repair of

aircraft instruments. Our business was established in 1946 and has been operating since this inception.

The president and writer of this statement, namely, Harry Stern, is a journeyman toolmaker and a graduate mechanical engineer.

The purpose of this report is to bring to the attention of the proper people the difficulties experienced by our company, as well as other small businesses, in competing with the original manufacturers of aircraft instruments for the overhaul and repair of these aircraft instruments. The major reasons for our inability to compete in the overhaul and repair of certain instruments is due to the difficulty or impossibility of obtaining replacement parts and/or test equipment to meet the required Government delivery dates. Failure to meet the Government delivery dates has been the basis for rejecting our proposals or proposals by manufacturers in the same situation as our company. As a result of the long delivery dates promised by the manufacturers of these instruments who are in the only position to supply these parts and test equipment and due to the claim of some of these manufacturers that they have proprietary rights, a situation exists which is untenable as far as we are concerned. This claim of proprietary rights either results in an outright rejection to sell replacement parts and/or test equipment or the delayed delivery seems purposely designed to cause rejection of our proposal by the Government who has previously established the required delivery dates.

We believe that the Government has financed the majority (if not all) research and development work on the aircraft instruments for which we are trying to receive contracts for the overhaul and repair and that the claim of proprietary rights are strictly in the hands of the Government. It is inconceivable that any company would or could undertake the expenditures of millions in the development of an aircraft instrument based on the hopes of ultimately selling it to the Government or private industry. We believe that all of this research and development would be contracted by the Government through prime or subcontracts and therefore all developments, designs, parts drawings, tooling, specifications, test designs and test equipment, all belong to the Government and, if not turned over to the Government completely, should be available upon Government request on the behalf of the Government or on the behalf of an aircraft instrument overhaul shop contracted to do the overhaul and repair for the Government.

A monopoly in this situation is a simple matter where the manufacturer of the original equipment controls both the parts manufacturing and the retention of the test equipment design because any aircraft instrument overhaul shop would have to go to these firms and these firms only to purchase all parts and test equipment. By giving the overhaul shop unrealistic deliveries (if any) and by establishing exorbitant prices for their test equipment, if they entertain any desire at all to sell this equipment, they automatically disqualify any overhaul shop other than their own due to the inability of their competitors to obtain parts or equipment on time to meet the required deliveries (see Kollsman Instrument Corp. letter dated August 18, 1959, and our letter to them dated July 13, 1959).

Senator LONG. I will have the reporter insert your exhibits at the end of your statement. (See exhibit II, beginning p. 47.)