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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. Secondly, 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 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 uniformly 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 second deals with some questions and suggestions as to the specifics of S. 1215. The first portion is an attempt to be responsive to the questions presented to us in the letter from Senator Stevenson inviting our participation in these hearings.
Turning now to the 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. More importantly, however, as stated earlier there is a general perception within the industry that where an agency has a policy of taking title to an invention there exists a continuing disincentive. 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. This investment resides in some measure in this reservoir of 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 towards seeking any broad and artificial distinction between these two end-use areas. That would only tend to lead industry back into the current varying and counter-productive policies on an agency-by-agency 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 EIA's 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 over-riding consideration of a patent policy insuring participation by the most qualified firms far outweighs either of these theoretical and somewhat doubtful considerations.
The first part of the fourth question deals with government retention of title. We believe S. 1215 establishes acceptable guidelines 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 our overall endorsement of the legislation.
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 and dissipate 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 patentconsidering that the patent may be used in combination with other patents or knowhow or in licensing packages, or whether the income results from sales expertise or good will. Secondly, 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. In the end the consumer will inevitably pay for the recoupment-an obviously self-defeating proposition.
As the second part of our statement, we now submit several technical comments and questions on S. 1215 as currently drafted.
As to Section 103 “Definitions”, paragraph 9, we are confused as to the difference between the phrase "made under the contract” or “made under a contract”. We believe this Section needs to be clarified as to intent. We recommend the former. Similarly, under paragraph 12 of Section 103 the definition of "practical application” appears too stringent. We would suggest a rewrite to indicate that "application" means “to manufacture in the case of a composition or product, to practice in the case of a process or method or to operate in the case of a machine or system or that the invention is being worked or that its benefits are available to the public either on reasonable terms or through reasonable licensing arrangements”. The same comment could be made with reference to the use of that phrase, i.e., practical application, in Section 304(a)(1) dealing with march-in rights.
We endorse Section 201 which specifically places implementation in the Commerce Department with the corollary hope that the implementation can be handled without creation of a bureaucracy or massive paper work agency which has been the bane of the patent profession.
Again with Section 201(c)(6), we believe that this paragraph should be expanded to include the use of consultants, e.g., "to make or have made market surveys ..."
With reference to Section 301(a)(2), we believe a policy of the government acquiring title because of the “classified” nature of the work is too broad and unnecessary. That is not the practice today and we suggest that a more narrow definition should be developed referencing more limited national defense purposes. For example, if the government acquired title because the work was classified, a subsequent removal of the classified status would still find title resting in the government-unnecessarily. We recommend deletion of this Section.
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With reference to Section 302(b) we would urge that where the government obtains title to an invention, the license to the contractor should include the right to sublicense (1) the contractor's subsidiaries and affiliates within its corporate structure, and (2) existing licensees the contractor was legally obligated to license or indemnify. Where the contractor has licensed others, any revocation by the government should not include revocation of such license. Also we believe the license to the contractor should be irrevocable if the contractor or its licensee is using the invention.
In Section 304(a)(2) we believe the phrase "reasonably satisfied” should be used throughout for consistency. With reference to Subpart (iii) of that same Section we are somewhat at a loss to understand how such judgments on the effects on competition-which are most complex and technical-can be made in any fashion to accommodate the purposes of this legislation.
In Section 305(a)(1) we suggest adding “trade secrets” to the type of information not subject to disclosure. This would be consistent with the Freedom of Information Act.
Finally, in Section (3) of 305(2) we suggest a requirement of “timely disclosure” rather than “prompt disclosure”-as a more realistic requirement.
We thank you for the opportunity to present the views of the Electronic Industries Association on this legislation. We hope that the constructive comments submitted in terms of specific questions and suggested additions to the legislation do not detract from our overall support of S. 1215. Rather, they should be considered as our attempt to mold the best approach to meeting what we perceive to be the three fundamental needs:
1. Attracting the best firms to participate in Federal R&D programs to assure the best opportunity for achieving innovation.
2. Protecting necessary governmental and public prerogatives,
3. Expanding the commercialization of inventions generated under Federal programs which in turn will entail direct benefits to the public and the economy.
Senator SCHMITT. Mr. Harr.
Mr. HARR. I am Karl Harr, president of the Aerospace Industries Association of America.
I appreciate the opportunity to appear today in support of S. 1215. I will be brief.
Because title IV deals with the allocation of rights to inventions of Federal employees, a matter which we believe is between the Government and its employees, my statememt does not address that part of the bill.
AIA is a national trade association of aircraft, spacecraft, missiles, related components and equipment. Being at the leading edge of high technology, our member companies have long recognized incentives contained in the U.S. patent system, in particular the manner in which such incentives have occurred as the development and advancement of our Nation's technological base and industrial innovations.
For these reasons, our association has supported and continues to support proposed legislation on Government policies which maximize such incentives.
In the past, we have urged Congress and the executive branch to promulgate a single Federal patent policy to replace the multiple policies now in existence, and one in which a contractor would have the option to retain title to inventions.
The principal objective in establishing the single Federal patent policy must be to determine and select that policy which will most benefit the public by providing appropriate incentives to the most competent firms to compete for Government contracts and to commercialize the new technology and inventions which may result from such efforts.
This raises the question of whether the Government or the contractor is in a better position to assure that new technology and inventions will be brought to public use. The contractor already has gained experience in the technology in which the invention was made. He already is doing business and has both an existing marketing capability and the profit incentive to commercialize the invention.
On the other hand, unless the Government is prepared to assume a new role in commercial markets, the Government has neither the expertise to determine which of the many inventions have commercial potential nor the capability, but perhaps even the incentive to bring such inventions to the marketplace.
Because it recognizes and balances equities of the bars involved for research and development, the Government parties and contractors, we heartily support S. 1215.
Under the bill, the public would benefit in two ways:
First, by significantly increased responsibility of such inventions being patented;
And, second, by their being made available in the marketplace, the Government would have a royalty-free license and the contractor would, with some exceptions, obtain an option to retain title to inventions made under Government contracts.
Should the contractor fail or be unable to patent or commercialize any such invention, assure the retention of title by contractor to prevent the unlawful monopoly, then the bill has much in it to protect the public.
The bill utilizes incentives for encouraging competition for Government research and development, stimulating private expenditures and research and development efforts, and posture industrial innovations.
S. 1215 is particularly timely in this respect. All of us share the deep concerns of both the Congress and the administration about the sharp decline in industrial innovation in the United States in the resulting adverse impact on our economy and national technological base.
We believe the enactment of S. 1215 would tend to reverse that trend.
In closing, it is worth noting that, for the past 30 years or more, Government contracting has operated under multiple patent policy, most of which is title policy. That is to say, the Government takes title to inventions made under Government research and development contracts.
The title policy has failed to achieve maximum utilization to technology resulting from substantial sums of public funds spent on Government R. & D. The report on public policy issued by the Council on Science and Technology indicates that as of 1976 the U.S. Government had 28,021 unexpired U.S. patents available for licensing, of which only 1,252, or about 492 percent, has been licensed.
Senator, with reference to your questioning of some of the earlier witnesses and to some areas in your opening statement, establish
ing the broad context in which you were placing this bill and considering its purposes, we, too, have been working that vineyard for quite a long time, particularly with respect to trying to get NASA-advances under NASA contracts out into the public domain from the point of view of convincing the public of the valuable spinoffs of the space program. We have spent years on working that, and NASA has done an excellent-absolutely excellent-job in its technical transfer program. But, here again, I think that this bill would help not just to get the information out, but to make sure that it got utilized by commercial sponsors.
STATEMENT OF KARL G. HARR, JR., PRESIDENT, AEROSPACE INDUSTRIES
ASSOCIATION OF AMERICA, INC. Mr. Chairman and members of the subcommittee: I am Karl G. Harr, Jr., president of the Aerospace Industries Association of America, Inc. (AIA). I appreciate the opportunity to appear today in support of S. 1215, introduced by Senators Schmitt, Cannon and Stevenson. Because Title IV deals with the allocation of rights to inventions of federal employees, a matter which we believe is between the government and its employees, my statement does not address that part of the bill.
AIA is the national trade association representing the manufacturers of aircraft, spacecraft, missiles and related components and equipment. Being at the leading edge of high technology, our member companies have long recognized the incentives contained in the U.S. Patent System and, in particular, the manner in which such incentives have encouraged the development and advancement of our nation's technological base and industrial innovation. It is for these reasons that our Association has supported and continues to support proposed legislation and government policies which maximize such incentives. In the past, we have urged Congress and the Executive Branch to promulgate a single Federal Patent Policy to replace the multiple policies now in existence and one in which a contractor would have the option to retain title to inventions.
The principal objective in establishing a single Federal Patent Policy must be to determine and select that policy which will most benefit the public by providing appropriate incentives to the most competent firms to compete for governmentfunded research and development contracts and to commercialize the new technology and inventions which may result from such efforts. This raises the question of whether the government or the contractor is in the better position to assure that new technology and inventions will be brought to public use. The contractor already has gained experience in the technology in which the invention was made. He already is doing business and has both an existing marketing capability and the profit incentive to commercialize the invention. On the other hand, unless the government is preparing to assume a new role as a competitor to American business in commercial markets, the government has neither the expertise to determine which of the many inventions have commercial potential nor the capability (or perhaps even the incentive) to bring such inventions to the marketplace.
Because it recognizes and balances the equities of the parties involved in government contracting for research and development—the public, the government and the contractors—we heartily support S. 1215. Under the bill, the public would benefit in two ways: first, by a significantly increased possibility of such inventions being disclosed in patents, and, second, by their being made available to the marketplace. The government would obtain a royalty-free license under such inventions. A contractor would, with some exceptions, obtain an option to retain title to inventions made under government contracts. Should the contractor fail or be unable to patent or commercialize any such invention, or should the retention of title by a contractor tend to create an unlawful monopoly, the bill provides for appropriate march-in rights to protect the public's interest.
The bill also recognizes and utilizes the incentives contained in our Patent System which encourage competition for government research and development contracts, stimulate private expenditures in research and development efforts and foster industrial innovation. These incentives were aptly described by a prominent jurist, Judge Giles Rich, in In re John A. Nelson, 126 USPQ 242 (CCPA 1960), to wit: "(The patent system) is not like a system of military awards in which medals are given out by the people to their heroes as expressions of gratitude for their exceptional