technical competence, push the state of the att, explore a new technology, or determine if commercial applications may begin to be drawn off. In these situa tions, firms deliberately 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 do 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 separately. 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 conflicts 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 proprietary positions in commercial markets and express a relative lack of interest in patents arising from government work. The primary purpose of securing patents on government-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 are 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 laboratory 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 balance, promote utilization better than acquisition of title by gov ernment. The study data indicate that the answer is yes in at least the following circumstances: (i) Where the inventions as developed under government contracts are (ii) Where the invention is commercially oriented but requires C. Effect of Government Patent Policy on Business Competition To evaluate the effects of government patent policy on business competi tion, the study tried to answer three questions: (i) What are the effects on competition of the acquisition (ii) of exclusive commercial rights to government-sponsored Do they increase or decrease concentration in commercial (iii) Do they create or eliminate significant areas of market 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 a representative and useful picture of the effects of patent policy on competition. The study indicates that both in number of inventions utilized and in sales volume, the patents sampled appear to have had small impact on commercial markets. Although over 80 percent of both sample inventions and utilization were concentrated in 50 firms, only 55 inventions owned by contractors--2.7 percent of the sample--played a critical role in their commercial use, and five were responsible for $201 million out of the $400 million in cumulative sales attributable to contractor inventions. This utilization of critical-role contractor-owned inventions is low compared with the total sales of these firms and the industries in which they participate. Of equal importance is the fact that very few instances were reported where owners of government sponsored inventions refused to license their patents. Only 15 inventions--less than 1 percent of the sample--involved such refusals, and these 15 refusals involved just five companies. The study did show that government retention of title, when coupled with full development and active government promotion of inventions having high commercial potential, has promoted competition. A striking example of this is the fertilizer industry where 'I VA developed high-concentrate fertilizers, patented them, proved their effectiveness on pilot farms and their commercial feasibility in pilot production, and aggressively promoted their use among farmers and fertilizer manufacturers. Industry sales have increased greatly through the manufacture of these fertilizers by many small regional producers. In circumstances like these, government retention of title can be an effective spur to competition because licenses are available to all comers. But several additional factors must be present for patent policy to have this effect. It must be evident to licensees that the invention has good commercial potential. The invention must be producible in commercial quantities and marketable at a cost that is competitive with alternative product. And the risks of recouping development costs must be no greater than similar investment opportunities available to the licensee. In most cases, government agencies have to go far beyond discovery of an invention to create these conditions. Some agencies do- as described in the Volume III report on government efforts to promote utilization of government sponsored inventions. The Department of Agriculture, for example, has an active program of developing inventions to the point of commercial feasibility. Potato flakes and frozen orange juice are two of its well-known successes. That agency, in promoting potato flakes, sponsored pilot production of the product's consumer appeal. The study was then made available to the food industry to stimulate interest in the product. In other cases, allowing industry to retain title to inventions has promoted competition. The clearest example of this is the small firm which penetrates a market of large competitors on the strength of a patent on a government sponsored invention. Just such a case is described in Volume IV, Part V, Section C. Notwithstanding the utilization programs employed by government agencies, none except AEC has an express statutory mission to increase business competition in commercial markets for its own sake. When it does occur, however, it is an indirect result of their efforts to accomplish their basic mission. From our observations of the study inventions and insofar as the effect of patent policy is involved, competition does not appear to have been adversely affected by this lack of direct concern, for three reasons: (i) The rate of utilization of government inventions has been low. (ii) (iii) The agencies--such as TVA and Agriculture, whose inventions And industrial owners of government-sponsored inventions have Based on all observations of the sample inventions we have found little evidence of adverse effects on business competition by permitting contractors to retain title to government-sponsored inventions. D. Effect of Government Patent Policy on Industry Participation in Government R&D Programs The effect of government patent policy on industry participation in R&D programs was the most difficult factor to measure because of the difficulty of obtaining data on the question. However, a useful understanding of problems in this area was obtained by studying the medicinal chemistry program of the National Institutes of Health (HEW) and various contracts of the Department of the Interior. This aspect of the study attempted to answer such questions as: (i) Do competent business organizations refuse to undertake (ii) (iii) What effect does policy have on application of a contractor's Does patent policy have any influence on the flow of information The data available to us only allows us to define some first-order effects of the policy in this area. Industry's main concern about participating in government research has been the compromise of private investment in research and invention. Frequent objection was made to the "peephole" effect of government programs, whereby the government receives rights in the accumulated results of private work. The "peephole" effect has its counterpart in patent matters where an invention has been conceived at private expense, but reduced to practice under a government program. The traditional patent provisions classify this as a government invention and dispose of its rights under the terms of the contract. The reach of the contract has been extended in some program to background patents owned by the contractor at the time of contracting. This practice causes the sharpest industry reaction of all because firms feel caught between their wish to participate in government programs and the need to protect their private investment and competitive position. The major adverse effects of patent policy on participation are program delay, loss of participants, diversion of private funds from government lines of research, and refusal to use government inventions and research when questions regarding a company's proprietary position are raised. These adverse effects occur selectively, but they have occurred at important points in government programs observed in the study. The key to the participation question, however, lies in the attitude of prospective contractors toward the role of patents in their activities. As noted in connection with utilization, patents have varying importance to organizations doing business with the government. Industrial firms whose major business objective is participation in government work and systems-oriented companies in the study sample were at one end of the scale and were found to assign patents a secondary role compared with technical and management competence. Patents typically were used by the former to provide recognitition to technical personnel and to project the creative quality of their work to their government customers. Systems firms, on the other hand, were found to rely on patents to ensure design freedom, provide material for cross licensing agreements as well as to recognize creativity in their technical personnel. The data indicates that firms in these two categories are not likely to refuse to participate in government R&D for patent reasons. However, systems firms may encounter participation problems at the subcontract level if the government acquires title to all inventions developed under its program. On the other hand, firms which place a high value on patents for defensive purposes tend to choose among the areas in which they are willing to undertake government research and may decline to participate in programs which impair their operational flexibility. And, firms in research-intensive industries like electronics and new technically-oriented firms seeking to develop a proprietary product-line through government research were found to rely on patents to establish proprietary positions. These firms tend to be selective in their government-sponsored research and may decline to participate in programs which conflict with their privately sponsored research and development or which do not promote their growth objectives for |