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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 ovir so percent of both sample inventions and litilization were concentrated in 50 firms, only 55 inventions owned by contractors --2.7 percent of the sample--plavud il 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 toral 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 sponsoriel inventions refuse to license their patents. Only 15 inventions --less than 1 percent of the sample - involved such refusals, and these 15 refusals involved just live companies.

The study did show that government retention of vide, when coupled with full development and indive government promotion of inventions having high commercial potential, has promoted competition. A striking example of this is the fertilizer industry where I VA developed higli-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 utle cin 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 grcater 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 itilization of governmentsponsored inventions. The Dipartment of Agriculture, for (xample, has an active program of devcloping; inventions to the point of commercial feasibility. Plato flakes and frozen orange juice are two of its well known successes. That igncy, in promoting potato flinke's, 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 invi ntions h:'S promoted competition. The's learest 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. Jusi suh a case is described in Volume IV, Part \', 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)

The agencies such as TVA and Agriculture, whose inventions
are most likely to be utilized--either developed them in-house
or took title to them when developed under contract.

(iii)

And industrial owners of government-sponsored inventions have
been willing to license them upon request or, where they were
unwilling to license, alternative technologies were available to
to competitors in the great majority of cases.

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 Goverment 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
government R&D work--either entirely or in selected
areas--beause of government patent policy?

(ii)

What effect does policy have on application of a contractor's
most advanced private technology to government programs?

(iii)

Does patent policy have any influence on the flow of information
concerning new developments between a contractor's govern-
ment and privately sponsored work?

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 compronise of private investment in research and invention. Frequent objection was made the "peephole" effect of government programs, whereby the government receive's righis 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 live 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 inpair 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

proprietary lines.

Firms which follow this policy even more fully try to assure corporate ownership of patents before initiating work on a government contract or may consciously isolate government work from their commercial operations. In the latter case, there is usually little interchange of technical innovations between the government and commercial activities of the firm and there may be some loss of relevant technical experience and applications to the government work.

Lastly, large diversified firms often follow different patent policies in different divisions of the organization. Accordingly, they may be willing to participate in government programs with small concern for patents in some areas but with great concern for patent rights in others. It is difficult to generalize about these firms except to notice that their policies tend to follow the patterns of the industries in which their divisions participate. Their behavior may, therefore, resemble any of the categories of firms described above if their divisions have similar business profiles.

With respect to educational and nonprofit institutions refusal to participate for patent reasons is not normally a problem. However, instances were found in Department of Interior programs where patent problems were encountered because of conflicting institutional obligations arising from joint support of a research program or where rights in background patents were sought as a condition of the project. With the rising interest in nonprofit institutions in patents as a source of revenue, greater concern over patent rights can be expected from institutions with large research programs as financial pressures on these organizations continue to increase.

Viewing the participation problem from the standpoint of individual government agencies, the effect of patent policy varies with the nature of their R&D programs and the contractors that participate in them. Participation problems are not a concern to TVA which performs virtually all its research and development itself and, therefore, has little or no contractual interface with industry. They are also minimal in Agriculture programs since that agency contracts almost all its extramural research and development with educational and nonprofit institutions. In addition, the firms that do participate in its programs do relatively little research and development on their own and tend to be less patent conscious than those participating in defense/aerospace work.

The direct effect of policy on NSF and HEW programs also appears to be small because most of their contract research is eit her basic in nature, offering limited opportunities to develop patentable inventions, or is performed by nonprofit institutions who, for the most part, are interested in the research for itself. However, some problems may be encountered in instances of joint or overlapping research at nonprofit institutions where the rights of other parties may be involved. And, a significant indirect effect has been noted in an important HEW health program where voluntary

noncontractual participation by a patent sensitive industry was curtailed because of patent consideration,

The Department of Interior, like HEW and NSF, has a number of programs --such as watcr desalination--which are oriented toward developing basic technologies, The Agency contracts in these areas with research-oriented industrial firms (many of whom are patent conscious), as well as educational and nonprofit institutions, and acquires title to patents arising under its programs, Under some programs, statutes on which they are based have been interpreted to require the agency to acquire rights in existing patents owned by contractors because of their relevance to the contract effort and future utilization of contract results. These factors--patent conscious organizations and acquisition of rights to contract inventions and existing patents -- have resulted in several instances of hesitation or refusal to participate in the government program. Insufficient data was avail able to establish how widespread the reaction was or its overall effect on Interior programs.

The largest number of opportunities for participation problems occur, of course, in DOD, NASA, and AEC programs because of the size and scope of their contract effort. Only a limited amount of data was available on this question for these agencies but a few general observations may be made. At least as to the majoi ity of DOD inventions, to which contractors are normally permitted to retain title, no problem arises. In addition, NASA's policy of waiving title to inventions to promote utilization under appropriate circumstances provides a method for resolving competing government and industry objectives with regard to patents arising under contract. Lastly, interviews with industrial firms in the survey sample indicate that -- except where a large investment in private research, know-how, inventions and/or patents considered to be valuable in commercial markets exist--acquisition or improvement of technical skills is sufficiently important to them in most cases to justify participating in government programs in their areas of interest even though patent provisions are not completely suitable to them.

However, this does not mean that either a title or license policy will equally serve the government's interests under all the above circumstances, since the policy selected may also affect industrial decisions to use contract inventions commercially. Here again, a balancing of government objectives appears necessary to ensure that the nct cfcct of the patent policy promotes the government's overall goals.

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