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the Government spends only like 3 or 4 percent of its R. & D. money with small businesses, we can accomplish the objective with a minimum of bureaucracy by limiting the granting of those rights to small, high technology companies in the United States. It will also tend to keep the large businesses from increasing the monopoly they already have in this country.

Third, I believe in recoupment. It is not a point brought up in your bill, but I believe strongly in recoupment. Otherwise, the charge of a Federal give-away has a great deal of validity. Let us pay for the rights by returning royalties to the Government on the products we sell covered by those patents. That provision is in neither your bill nor Senator Kennedy's bill.

It does cover the question of what to do if someone comes up with a cure for cancer while doing Government-sponsored work. Let the inventing organization pay the Government a royalty on the sale of any patented product.

Fourth, I favor a Federal procurement policy that will increase small business participation in Government-sponsored R. & D. Senator Kennedy's bill does that, but it is not a feature of the BayhDole bill nor is it in S. 1215.

As you are aware, I am sure, the National Science Foundation has instituted a small business innovation program that we favor strongly. That is a key feature of the bill introduced by Senator Kennedy. We now find ourselves holding back some of our ideas so that we can submit them in future rounds of that particular NSF program.

That is the end of my formal remarks. I would be happy to answer questions.

[The statement follows:]


IMPROVING INNOVATION IN THE UNITED STATES: SOME PATENT ASPECTS There is a justificable concern that the United States is losing its once-enormous world lead in technological innovation. To some extent this decline was inevitable. The United States emerged from World War II in far better condition than the other industrialized countries, and those countries have now fully recovered economically. A good portion of our losses, however, have come as a result of selfstrangulation. Excessive Government regulation has decreased our efficiency, and, even more important, we have managed to stifle two of the bastions of the American economic system: incentive, and the small, high technology company.

The innovators in our country are the ones who start or are drawn into these high technology firms. Until recent times, at least, these businesses have been inordinately successful, in part because of the direct relationship between effort and reward. Government-sponsored reports are replete with examples illustrating the fact that independent inventors or small R and D firms have led to a highly disproportionate share of the important innovations of the 20th Century. We can safely conclude that much of our country's economic success derives from the system that has allowed these small, high technology businesses to start and flourish. That system is now in trouble.

Since the Second World War, the genesis and growth of these new companies followed a similar pattern. First, the inventor envisioned some new product, process, or service. Until the early 1970's the inventor could then interest investors in his idea, raise capital by giving up some equity in the new enterprise, and be on his way. However, three factors have completely altered this situation in recent years: changes in tax laws, changes in SEC regulations governing the sale of shares in new issues, and inflation. It is now virtually impossible to find venture capital, and it is frequently necessary for the inventor to relinquish control of his company to acquire the necessary capital, thus reducing his incentive. Increasingly, therefore, these entrepreneurs are turning to the U.S. Government for contract Ř and D funds in order to sustain their organizations while they try to develop their ideas internally. At best, this is a much slower path to success. But the probability of success is also diminished, because the Government usually insists on obtaining background as well as future patent rights before a contract award is made. In trading away these patent rights, the high technology company suffers a serious blow to its incentive. Vesting the patent rights in the Government seems to do no one any good. Where does this leave us? Consider our firm, Bend Research, as an example.

Bend Research was started in 1975 as a contract R and D company. We did not start with a single new product/process/service to offer, but rather with a number of ideas in several areas. One of these is a new method for recovering and concentrating metals from solution, a process expected to find application in extractive metallurgy, pollutiion control, and elsewhere. We call this process "coupled transport". A second area in which we are in the early stages of innovation is controlled release" formulations of biologically-active agents: pesticides, pheromones, pharmaceuticals, and other agents. Despite being highly undercapitalized, we have experienced an annual growth rate of about 50 percent. Our principal client is the U.S. Government, but we are supported by private industry as well, by firms in the United States, Japan, Germany, England and elsewhere.

Consider the "coupled transport" process. This idea was conceived of by us independently, but to obtain Government support for its development we assigned our rights to U.S patents to the Government. We were granted foreign patent rights. Now, after three years and several hundred thousand dollars of R. & D. effort, the process is approaching practical reality. We have explored commercialization with more than ten major U.S. companies, most of them in the mining industry. Not one expressed strong interest, principally because we could not offer them exclusive rights. We have found one interested firm: in Japan. We are in a position to offer them patent rights in their country, and they have taken a favorably aggressive position in their pursuit of commercialization.

If this case can be taken as representative, it would appear that the present U.S. system encourages export of our technology, with its probable ultimate return under a foreign label. There is a straightforward solution to this problem: grant to the inventing firm some form of exclusive U.S. patent rights. As an inducement to investment, the inventors can then offer exclusivity to U.S. firms or, alternately, the inventing firm could pursue the development independently with venture capital. This would keep the innovation here in the United States. And to make the system equitable, we favor a policy of recoupment by the Government of their R. and D. investment.

The present policy of vesting patent rights in the Government is clearly ineffective. Shown in the attached figure is a plot of the number of Government-owned U.S. patents available for licensing, and the number licensed, vs. time. Utilization of this patented technology has been minuscule. Less than 5 percent of the U.S. patents available for licensing have been licensed, and the number of patents licensed did not increase in the twelve year period 1963-75, even though the number available for licensing doubled in that same period.

These facts were no doubt instrumental in the current attempts in the U.S. Congress to drastically alter our patent policy. We refer here to the so-called BayhDole bill, S. 414; a bill recently introduced by Senator Kennety, S. 1074; and the bill being discussed at these hearings, S. 1215, introduced by Senators Schmitt, Cannon, and Stevenson. We applaud all of these efforts. A key provision in each of these bills is the vesting of patent rights in the firms making the inventions, even though the R. & D. is Government funded. This makes eminent good sense. The rights remain in the hands of the inventors and developers, those people who have labored with the idea from the beginning and who will best champion its further development and commercialization. Government ownership means nonexclusivity and we have found that no one is willing to offer very much for a nonexclusive patent. One government agency has already instituted an enlightened patent policy, at least on an experimental basis. That is a provision of the National Science Foundation "Small Business Innovation Program”. We favor extending that program throughout all of Federal R. & D.

This is admittedly a radical departure from the traditional patent policy on Government-sponsored R. & D. The charge has been levelled that it constitutes a Federal giveaway. Speaking for myself and many other small, high technology firms, I would say that we do not need any gifts. We propose to pay the Government a royalty for these patent rights, just as royalties are paid from one firm to another. While we feel that royalties should be delayed until the new industry is on its feet, we also feel that the royalties should be substantial, i.e., the Government's investment should ultimately be returned, with interest. It may be reasonable to collect additional royalties so that the winners at least partially offset the losses incurred by the losers.

We also feel strongly that any such new patent policy should be extended only to small, high technology firms and not to all of U.S. industry. Big business already dominates the country economically, and their dominance has increased markedly in the past three decades. Small businesses, on the other hand, create the vast majority of the new jobs in this country, even though they receive only 3.5 percent of Federal R. & D. expenditures. We believe, therefore, that by limiting the new patent policy to small businesses, it could have its full impact on the economy, on the creation of new jobs, and on our balance of payments, with a minimum of bureaucracy and without increasing the dominance of big business.

One might ask: Why does the Government support R. & D. in the first place? Excluding our defense requirements, it does this presumably to strengthen the American economy through the development and introduction of new technology. The principal direct return to the Government traditionally has come from the corporate income taxes paid by the industries it helps to create. Under the patent policy we favor, this return would be supplemented by royalties. The alternative to allowing small innovative businesses greater patent rights, in our opinion, is continued flight of new technology and jobs away from American inventors and the country as a whole and to our foreign economic competitors.

Government-owned unexpired U.S. patents available for licensing, and number li

censed, at the end of fiscal years 1963-75. Taken from "Report on Government Patent Policy, Combined December 31, 1973 through December 31, 1976", Federal Council for Science and Technology, U.S. Government Printing Office, Washington, D.C., p. 405.

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Senator SCHMITT. Thank you all for those very useful comments. I will ask a few questions and anyone who feels they would like to comment on these questions should feel free to do so.

It has been suggested that any Government-wide patent policy should include a statutory payback or recoupment requirement whereby the Government would get a portion of its investment back when there are inventions in which the contractor received title and then are developed and marketed.

Now before I ask the question, I want to make sure that we agree that there is a distinction between recoupment and royalty. Royalty is something that continues essentially indefinitely unless modified in some way. Recoupment means you are trying to get some portion of your cost, if not all of your costs, back. There are excellent examples of recoupment in various contracts. NASA tends to do that routinely on their recent contracts for aircraft

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Now, do you believe this would be an appropriate provision in this bill, and can you suggest what form it should take-that is, an incentive for recoupment or for some royalty payments? Mr. Lonsdale, you just mentioned that?

Mr. HARR. Just to kick it off, Senator, it has been addressed several times this morning in fairly uniform agreement up until Mr. Lonsdale's testimony that the payback scheme, as suggested, constitutes a reversal of the philosophy of what is trying to be done by the patent system, namely incentive. You may be pricing a sponsor out of the commercial market. You are, in effect, putting an uncertainty into the contracting procedure between the contractor and the Government.

You are probably up against a situation in which only in the exceptional rare case would there be sound reason for identifying the contribution of a particular patent to the commercial sale. You are adding another burden to the-well, you are putting an excess burden on the investment costs for commercializing and so forth.

But this seems to be a step in the wrong direction, as far as I am concerned.

Mr. McCLOSKEY. The company that has the most to lose in this situation is the one furthest along in the development process before he gets the Government contract. That is the company that has the best background position, and instead of being rewarded for the amount of investment that he has made to that point in time, he stands the risk, at the very conclusion of some development for which he has sought Government funds to continue or to conclude, of the whole development itself being subject to, in some way, a recoupment theory or royalty theory, depending on which way you go. It would be a cause for concern on their part. And they may say they would prefer not to participate at this point in time, and so the Government would be forced to look to the second or third company that isn't quite as far along.

So I can see some disincentives and some contrary indications, if you will, from the overall thrust of the policy that you have enunciated in S. 1215.

Mr. WITT. I concur, of course, with what these gentlemen stated. There is no question. It is a disincentive. Just looking at the practical side of sitting down at the contracting table, and the man

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