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inventions, agency promotion within industry was important in achieving utilization of Agriculture and TVA patents because of the need to convince firms of their commercial value. In several instances, utilizing firms acquired some measure of patent protection by developing patcntable improvement to the government inventions.

Two causes predominated in cases where the inventions of these agencies did not achieve commercial utilization. Lack of full technical development of the inventions was the most frequent and important. No market need due to the complexity of the invention, its high cost compared with other methods or the availability of more practica alternatives was second in importance. It is probable that some measure of exclusive rights might have encouraged private firms to complete technical development of some inventions not fully developed by the government where adequate demand existed to make them attractive investment opportunities.

The R&D programs of HEW and Interior illustrate still another effect of mission on utilization. The programs of these two agencies are oriented to civilian needs, but in many aspects, are directed toward basic rather than applied research. The sample inventions that have resulted from their work have not, for the most part, been sufficiently developed to prove their commercial value. However, should their inventions reach that stage in programs like water desalination, and medicinal chemistry, broad commercial utilization could reasonably be anticipated because of the strong potential demand for commercial innovations in these fields.

2. Private Development costs

Information on private development costs required to apply sample inventions commercially was somewhat sketchy due to the age of the sample and the confidential nature of the data. But the information gathered showed significant differences in the types of costs incurred on DOD oriented inventions (with exclusive rights owned by the contractor/utilizer in almost all cases), and civilian-oriented agency inventions (with nonexclusive licenses owned by the utilizers).

Private investment was heavily concentrated in technical development of DOD inventions. Fifty-six and eight tenths (56.8) percent of private dollars were spent for development compared with 22.7 percent for production facilities and 20.5 percent for marketing the product. In contrast, only 21.1 percent of private investment was required for technical development of civilian-agency inventions, while 52.2 percent was spent on production facilities and 26.7 percent on marketing.

The data confirms the relationships observed above between agency R&D mission and commercial potential of sample inventions. Civilian agency inventions, in general, are closer to commercial products when government development is complete than are DOD inventions. Thus, users of civilian agency inventions

assume less financial risks in applying them than users of DOD inventions. This has a bearing on the degree of patent protection that may be needed as an incentive to utilization. All other factors being equal, more protection is required where the technical costs and financial risks are greater than where they are not.

3. Patent Rights as Incentives to Commercial Utilization

The study data show that patent rights play widely different roles in the business affairs of organizations in the sample. The sharpest distinction occurs between educational and nonprofit institutions, on the one hand, who can only achieve utilization of their inventions by licensing others, and industrial firins, on the other, who can promote utilization through direct use and licensing.

· Educational institutions in the past have been much more concerned with publishing the results of their research than with promoting patents that may arise from it. Today, however, schools with large government research progranis are taking greater inte rest in their patent portfolios and are seeking through a variety of means to promote them through licenses with industry. Nonprofit research firms also view their patents as a potentially useful source of income and actively seek to license others. In both cases, the inventions inost frequently arise from basic research and require substantial private development before reaching the stage where they are commercially useful. Some measure of exclusive rights appears necessary to motivate licensees to invest in the work necessary to commercialize these inventions. Where the institution has an active promotional program and the government has none, commercial utilization would appear to be promoted more effectively by permitting the institution to retain exclusive rights. Where this is not so, more individual analysis is needed to determine what allocation of rights would best foster utilization.

Industrial firms in the sample place differing weights on the need for exclusive rights in using government inventions. At one extreme were f is who rely heavily on patent rights to establish their proprietary position in commercial markets and would hesitate to invest in an invention in which they could not obtain exclusive rights. At the other, were firms so completely in the government market that they attach little or no importance to patent rights for commercial purposes. In between were firms for whom patents provide a variety of incentives. The nature and importance of these incentives to firms in the sample arc outlined below.

A lack of interest in patents was characteristic of some researchoriented and manufacturing firms that do a preponderance of their business in the government aerospace and defense markets.] No desire to expand into commercial markets and no mechanism for the commercialization of inventions were noted. Then these firms obtain patents, their sole purpose is recognition within the company of technical competence.

In a second group of firms patents were seconda ry to broad technical ind management competence in maintaining their position in commercial marki!.. Firins expressing this attitude toward patents were generally manufacturers of complex systems and technical products, such as aircrafts, jet engines, computers, or communications equipment. Although as much as 75 percent of their sales may be direct to the government, these firms frequently sell similar products to commercial markets. Inventions developed during the course of R&D activities tend to be auxiliary components and subsystems or incremental improvements to the basic product. These inventions are not as important to these companies in susta ining sales or selling new products as is the basic engineering management and production capability of the firm. New ideas and inventions are incorporated in product modifications or in new models with little consideration given to the protection offered by patent rights. Using a new idea to enhance product performance is regarded as more important than assuring that the company owns the exclusive right to use it.

A third group of firms believe that corporat e ownership of patents offers flexibility in design, both in the United States and abroad (through ownership of corresponding foreign patent rights), and provides trading material for cross-licenses with competitive firnis. Ownership of a patent, however, as a prerequisite for new product development is a relatively minor factor compared with market considerations and investment requirements associated with commercialization of the invention, A change in government patent policy may affect firms in this category by causing them to choose more carefully the areas in which they are willing to undertake government research. Faced with the possibility of being unable to obtain title to patents they develop, these firms may refuse to contract in research areas that would impair their operational flexibility.

A fourth group of firms actively seek ownership of patents, to establish and maintain proprietary positions in new technologies, as well as in established product areas. Invariably, however, estimates of market potential and corporate investment requirements determine which product areas are developed. The makeup of the patent portfolio may indicate the direction for product development in order to strengthen proprietary positions, but development is rarely, if ever, undertaken solely because patent protection is available. A change in government policy from license rights to title rights would limit the government-sponsored R&D activity of firms in this category because of possible conflict with company-sponsored research activities. Contract opportunities would be examined on an individual basis and, in many cases, the government might be refused.

A fifth group of firms regard patent rights as essential to their business activities, and are careful to avoid government claims or conflicts over ownership of inventions. Their policies generally lead them into one of two business patterns. In the first pattern, firms will assure corporate ownership of patents before initiating work on a government contract. They may assure ownership either by negotiating contracts that permit them to acquire title to patents on inventions they may develop, or by developing and patenting basic inventions with limited private funds and then seeking contract work in order to develop additional

technical competence, push the state of the alt, explore a new technology, or determine if commercial applications may begin to be drawn off. In these situa tions, firms deluxrilli ly select areas of government research to match their commercial interests in order to generate product ideas with commercial possibilities. New research firms with strong technical abilities and limited capital typically follow this pattern, as it specialized firms that have concentrated their business in a limited area of technology.

In the second pattern, firms consciously isolate government work from their commercial operations and pursue these activities sepa rately. The sample firms in this category did only a small percent of their business with the government and were quite independent of it. Frequently, inventions derived from government contract work by these firms will be assigned automatically to the government to avoid title conilicts or commingling with company-sponsored R&D. In other cases, government R&D will be undertaken only in areas where there is no potential conflict with corporate proprietary objectives and in order to enhance the corporate image. The technical value of government contracts to the commercial interests of these firms is rarely considered a valuable supplement to in-house research and development.

Many diversified companies follow different patent policies in their commercial and government markets. These firms may place a strong emphasis on maintaining propriwry positions in commercial markets and express a relative lack of interest in paients arising from government work. The primary purpose of securing patents on governinent-sponsored research discoveries as in the case of the wholly government-oriented firms, is to provide professional recognition for technical personnel,

lastly, an important difference was observed between the researchoriented firms doing business with DOD, NASA and AEC, and the product-oriented firms whose interests ara aligned with Agriculture and TVA. The former were much more aggressive in their search for useful innovations in the work they performed than the latter who tended to rely on the results of government labora tory programs for innovations in their fields. Thus, although the food, textile, and fertilizer industries are less patent-conscious, they are also more conservative in the risks they are willing to take in applying new inventions. This accounts for the frequent need for active government promotion of Agriculture and TVA inventions even when the inventions appear to have clear commercial applications,

4. Effect of Patent Policy

Notwithstanding the varying roles assigned patent rights by the firms described above, the key questions is whether permitting them to retain exclusive rights will, on bilance, promote utilization better than acquisition of title by government.

circumstances:

(i) Where the uverons as developed under government contracts are

not direcily applicable to commercial uses and the inventing contractor
has commercial experience in the field of the invention. This
occurs most frequently with DOD, NA SA and AEC inventions.
In the case of DOD, the fact that it does not actively promote
cominercial use of its patents is an added factor. In these
instances the inventing contractor with commercial experience
appears to be the logical candidate to attempt utilization either
directly or by licensing other; and

(ii) Where the invention is commercially oriented but requires

substantial private development to perfect it, applies to a
small inarkit, or is in a field occupied by patent sensitive
firms and its market potential is not alone sufficient to
bring about utilization. Inventions in this category may arise

development toward a commercial application.

C. Effect of Government Patent Policy on Business Competition

To evaluate the effects of government patent policy on business competition, the study tried to answer three questions:

(i) What are the effects on competition of the acquisition

of exclusive commercial rights to government-sponsored
inventions?

(ii) Do they increase or decrease concentration in commercial

industries?

(iii) Do they create or eliminate significant areas of market

power?

In evaluating the impact of government patent policy on competition, it is important to distinguish the effects of patent policy from other effects which may result from industry participation in government programs. Competitive advantages in commercial markets may well accrue to government contractors through knowledge gained in new technologies, through sharpening of technical skills, and through government funding of R&D work, which has parallel commercial areas of interest. But these are quite separate from the advantages of owning patents to specific inventions. This study has tried to measure only the latter. And, it has tried to measure it in terms of the inventions included in the survey sample. While a broader study of the cumulative effect of government - sponsored inventions patented over several years might have provided more definitive data, we believe that the study data provides

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