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of these. NASA said that 193 or about 18.5 percent of its waived inventions were utilized or commercialized.
NASA's data on 523 inventions waived prior to 1975 showed: 84 in use in a commercial process, product, or service; 15 fully developed with Government use; 91 under development; 68 available for licensing; 228 without active commercialization or licensing efforts; and 37 obsolete.
Waiver recipients reported that the 15 fully developed inventions wre ready for commercial use, but they had found only Government use in additon to NASa's use.
Most of the 91 inventions under development were being developed by the waiver recipient. Where development was being done by licensees, the inventions resulted primarily from university and nonprofit research organizations.
The only effort being undertaken for 68 inventions was to find a licensee. Many of these inventions resulted from universities and research organizations which did not have manufacturing capability. In some cases where the waiver recipient was a manufacturer, the invention was reported as being outside of its business or manufacturing activity.
NASA believed the 228 inventions without commercialization or licensing activity may have some utility. The agency, however, attributed the lack of interest in these to the following: no commercial need or market; inventions too costly to develop; inventions not cost competitive; technology too sophisticated; market too small to justify production; funding not available; and invention shelved indefinitely because of other priorities.
Thirty-seven inventions were obsolete because (1) other or better products and methods were available; (2) they were superceded by other technology; (3) they were not compatible with present systems; or (4) the state-of-the-art had passed them by.
MARCH-IN RIGHTS NASA includes march-in rights in its waiver instrument. The Administrator reserves the right to require the granting of a nonexclusive or exclusive license for the practice of the invention:
(1) Unless, within 3 years after the patent is issued, the waiver recipient has taken effective steps to bring the invention to the point of commercial application and thereafter continues to make its benefits reasonably accessible to the public, or
(2) Unless, within 3 years after the patent is issued, the waiver recipient has taken effective steps to make such patent available for licensing on terms that are reasonable, or
(3) As may be appropriate to satisfy governmental regulation for public use or as may be necessary to fulfill health or safety needs or other public purposes.
Under the terms of the waiver instrument, the recipient agrees, if requested by NASA, to provide a written report to the agency not more often than annually on the commercial use of the invention. NASA evaluates these reports to ascertain compliance with conditions of the waiver.
NASA has not enforced its "march-in” rights by directing waiver recipients to license others under the conditions specified in the waiver instrument. Rather, when the recipient does not comply with requirements, the waiver is voided and title to the invention is taken back by NASA. The invention then is made available for licensing to third parties under the agency's licensing regulations. On December 31, 1977, NASA had voided 258 waivers. All of these were voluntary on the part of the waiver recipient. NASA said that most of the waivers were voided at the request of the recipient and not for failure to comply with “march-in” provisions in the waiver instrument.
Senator SCHMITT. Gentlemen, we are going to have to move on to a panel of business representatives.
I want to thank you again for this discussion, and if you happen to be talking with anyone in the administration, whoever they may be, would you make the suggestion-and you can attribute it to me, that they, as soon as they are ready to talk, will find some people over here in the Congress ready and willing to talk with them in the formulation of a Government-wide patent policy.
Mr. DENNY. I will make sure that message is delivered.
Our next panel are four gentlemen representing certain aspects of the inventing and contracting industry, Mr. Peter F. McCloskey,
president, Electronics Industries Association; Karl G. Harr, Jr., president, Aerospace Industries Association of America; Hugh E. Witt, director, Government Liaison, United Technologies Corp.; Harold Lonsdale, president, Bend Research, Inc., Bend, Oreg. STATEMENTS OF PETER F. McCLOSKEY, PRESIDENT, ELEC
TRONIC INDUSTRY ASSOCIATION; KARL G. HARR, JR. PRESI. DENT, AEROSPACE INDUSTRIES ASSOCIATION OF AMERICA, INC.; HUGH E. WITT, DIRECTOR, GOVERNMENT LIAISON, UNITED TECHNOLOGIES CORP.; AND HAROLD K. LONSDALE, PRESIDENT, BEND RESEARCH, INC.
Senator SCHMITT. If you want to submit your full testimony for the record, it will be so included. Please summarize your statement, if you can, so we will have time for some questions and answers. Don't leave out anything that you think is of importance for today's discussion.
Mr. McCloskey, would you begin?
I am Peter F. McCloskey, president of the Electronic Industries Association-EIA-and appear today on its behalf.
We appreciate the opportunity to testify on S. 1215, the Science and Technology Research and Development Utilization Policy Act.
EIA is made up of over 300 domestic manufacturers of electronic products with an annual sales volume of $68 billion. The range of companies encompass both small and large firms. The industry engages in research and development of $6 billion a year. Of this amount, $2.7 billion is federally sponsored R. & D.
Therefore, the electronic industry, which is noted as being a high technology industry, has a direct and vested interest in protecting the resulting intellectual property innovations and therefore in the patent policy of the various Federal agencies.
As you can see, it has a direct vested interest in the patent policy of the various Federal agencies.
We support S. 1215. While there are some areas of the legislation we would like to see clarified, or where additions would be helpful to implementing its overall intent to increase innovation, the bill as a whole properly balances the role of Federal R. & D. and the overall U.S. industrial innovation process.
The association has long been involved in the debate on Federal patent policy with a dual interest.
First, member companies have found the diverse policies of the various agencies to be somewhat confusing and at odds with each other.
Consequently, we have long sought a uniform policy in the interest of heightened contractor involvement.
Second, there is a pervasive feeling that the uniform policy should be one to encourage contractor participation. Stated otherwise, the policy should remove disincentives to perform Federal R. & D. work. Satisfaction of these interests would clearly work to the benefit of the economy and the public at large.
S. 1215 appears to be a rational approach in addressing those two interests. Viewed from the public's perspective, this is particularly true when acknowledging the additional safeguards built into the legislation to protect the public's interest through appropriate
shouland, there i contractor in volught a unifo
march-in rights and ancillary provisions to protect fully the Government's interests.
Placing title in the contractor for inventions under federally sponsored R. & D.—and doing so for all agencies—can only work to assure broader contractor participation, a higher quantity and quality of innovation and an attendant flow down to the American consumer of the benefits from commercialization of these inventions.
This point has been obscured in the recent evolution of agency patent policies. This most likely has resulted from attempts to serve ulterior purposes or from a basic misunderstanding of the underlying incentives to innovation. S. 1215, however, refocuses attention to two vitally important points.
First, those existing agencies with a policy calling for the Government taking of title in all cases lessen the incentive to subsequent commercialization which would otherwise be present if the contractor held the patent.
More importantly, however, the taking of title by the Government in those cases traditionally is accompanied by attempts to make rather significant demands on the so-called background rights, and patents, of the participating contractor.
This valuable know-how, involving proprietary information in many cases, was initially developed by the contractor at private expense. It serves as the technological driving force behind innovative companies.
To ask a company to give up some of this know-how unnecessarily in order to undertake a Federal R. & D. project raises a difficult judgment question. Ironically, the most successful firms—the best innovators-are faced with giving up more of this valuable background technology.
This penalty then becomes a greater disincentive to these firms. What results is a dichotomy that those with the most to contribute to the Federal R. & D. effort face the greatest disincentives.
Our statement is made up of two segments. The first deals with some questions and suggestions as to the specifics presented to us in the letter from Senator Stevenson inviting our participation in these hearings.
Turning to those questions—the first deals with the effect of agencies 'patent policies on participation by contractors in federally sponsored R. & D. and the subsequent impact on commercialization of inventions.
It is difficult to quantify the exact effect of such policies. We have been made aware of instances where an agency title policy was a sufficient disincentive to cause a contractor not to participate.
Contractors who have spent private resources to develop valuable technological know-how and background patents must be reticent of participation in a program which tends to dissipate this competitive advantage.
In effect, the contractor must balance the impact of this participation in a Federal R. & D. program with the need to protect the investment of the company's shareholders, represented by background rights and know-how.
The question as to commercialization of inventions can be viewed from a different perspective. While on the one hand it has been our experience that only relatively few Government-held patents are ever commercialized, the failure to leave title in the contractor shuts off a substantial incentive to commercialize.
The second question attempts to draw a distinction between R. & D. intended for military and direct Government use and R. & D. with respect to products intended for civilian purposes.
While there may be some reasons for this distinction, considering varying public interests, we think a more prudent policy is that outlined in this legislation. This would provide for a uniform policy for all agencies but allow for a variance of that policy to protect narrow but appropriate public and Government interests.
We would prefer not to see the legislation reoriented toward making a broad and artificial distinction between these two enduse areas. That would only tend to lead industry back into the current varying and counter-productive policies on an agency-byagency basis.
As an observation, it must be remembered that an invention in one area may find greater use in yet another area. Thus a form of an electronic resistor developed under a military contract may have a greater use in the commercial marketplace. To draw a general distinction as suggested by this question would be a mistake.
As to the third question, proposing different policies in allocating rights to large and small firms, it is our view that such a policy is not warranted.
If the intention of the Federal patent policy is to draw upon the talents of the best contractors and technology, then the theory of increased participation derived by leaving title in the contractor would apply equally to all sizes of firms.
Clearly, in terms of removing disincentives and opening the door to subsequent commercialization, small and large companies are similarly situated. Arguments have been raised that major contractors have a larger reservoir of know-how which would warrant a separate treatment in allocating rights.
Similarly, it has been suggested that obtaining the patent itself is not actually as important to a large firm as to a small firm.
We think, however, the overriding consideration of a patent policy insuring participation by the most qualified firms far outweighs either of these theoretical and somewhat doubtful considerations.
Senator SCHMITT. For the record, at that point, would you state the involvement of small business in your association?
Mr. McCLOSKEY. We have approximately 300 members, Senator. And of those, well over half would be small business.
The first part of the fourth question deals with Government retention of title. We believe S. 1215 establishes acceptable guide lines spelling out those areas where the Government should retain title to protect specific governmental or public interests except that section related to classified work. EIA endorses this approach in ur overall endorsement of the legislation. And we will refer to the classified exemption later on in our comments.
The second part of the fourth question deals with contractors' surrendering of background patents. I would merely reiterate our earlier statement that the background patents, and technological know-how possessed by innovative contractors, were all developed at private expense. This know-how represents the “life blood” of a high technology company.
The Government should avoid placing the contractor in a position of choosing either to participate in a program thereby dissipating these rights or not to participate.
Simply put, if it is the Government's objective to obtain the best R. & D. talent available, then there must be a strict limitation on those circumstances where a contractor is forced to surrender background patents or know-how.
The fifth question deals in essence with a recoupment theory or a payback to the Federal Government for Government-sponsored inventions. We are opposed to such a policy for three reasons.
First, it is extremely impractical, if not impossible, to determine what particular revenue or return is generated from a specific patent-considering that the patent may be used in combination with other patents or know-how in licensing packages, or whether the income results from sales expertise or good will.
Second, it should be understood that the public benefits from the commercialization of patents not only from taxes on a corporation's income but in the creation of new jobs and stimulus to the economy. These are not insubstantial contributions.
Finally, a contractor faced with a recoupment theory will necessarily build that cost into his pricing policy anyway. In the end the consumer will inevitably pay for the recoupment-an obviously self-defeating proposition.
The remainder of our statement deals with technical questions. We want to commend you, Senators Stevenson and Cannon, for the thrust of your legislation, which is a constructive step and appropriate at this time, when our innovative process seems to be slowing down.
Thank you very much.
Senator SCHMITT. You will have that opportunity. The record will be open for such additional comments as you or any others may wish to make.
[The statement follows:]
STATEMENT OF PETER F. McCLOSKEY, PRESIDENT, ELECTRONIC INDUSTRIES
ASSOCIATION Mr. Chairman and members of the committee: I am Peter F. McCloskey, President of the Electronics Industries Association (EIA) and appear today on its behalf. We appreciate the opportunity to testify on S. 1215, the Science and Technology Research and Development Utilization Policy Act.
EIA is made up of over 300 domestic manufacturers of electronic products with an annual sales volume of 68 billion dollars. The range of companies encompasses both small and large firms. The industry engages in research and development of 6 billion dollars a year. Of this amount 2.7 billion dollars is federally sponsored R&D. Therefore the electronics industry, which is noted as being a high technology industry, has a direct and vested interest in protecting the resulting intellectual property innovations and therefore in the patent policy of the various Federal agencies.
We support S. 1215. While there are some areas of the legislation we would like to see clarified, or where additions would be helpful to implementing its overall intent