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is framed there may or may not be presumptions in favor of or against the taking of title by the Government."

3. Title or first option to title in the contractor Under this approach as a normal rule contractors or grantees would be allowed to retain title to inventions made under the award subject to a Government license and “march-in" rights.

The impact which these alternative policies would have on (1) competition, (2) innovation, (3) public health, (4) economic growth and jobs, (5) foreign competition, (6) contractor participation, and (7) and administrative costs entailed by the policy are important to their assessment. Several of what are considered to be the most important of these factors will now be considered. Impact of patent policy on competition

Since those who favor a title-in-the-Government patent policy appear to advocated their position primarily on the basis of a belief that allowing contractors to retain title will be anticompetitive, and since the Antitrust Division of the Department of Justice also espouses this view, 18 it is believed to be one of the two most important considerations for discussion here.

The supposition that seems to underlie this argument is that most Government contractors are large, dominant firms and that if they are allowed to retain rights to inventions their dominance will be enhanced. Retention of “march-in" rights are apparently not deemed sufficient to prevent this. Following this approach, of course, necessitates also taking rights from smaller firms and universities that deal with the Government. However, it is argued that since these firms do a relatively small proportion of Government contracting, it is not worth worrying about the few inventions they make as compared to the great number coming out of the large firms. 19

As an initial observation, it is to be noted that a substantial portion of Government R&D is conducted by universities and other high-technology comercial firms that are not dominant in any commercial markets. Even when Government prime contracts for major systems development are awarded to major corporations, some of the work is subcontracted with the result that some of the new and innovative ideas stem from lower-tier subcontractors. It is extremely unlikely that dominant firms receive even half of the total Federal extramural R&D budget.20

It is also believed likely that a substantial portion of Government R&D that goes to firms that are dominant in commercial markets would be found to be with major air frame and engine manufacturers that dominate both the Government and civilian markets in this area. It appears, however, to be fairly obvious that whether

17 The Federal Nonnuclear Energy Research and Development Act of 1974 (42 U.S.C. 590) is an example of such approach. It places the presumption in favor of the Government's taking title, but given ERDA (now DOE) considerable flexibility to decide otherwise depending on ERDA's evaluation of a variety of factors. In reality, this type of approach, which some claim represents a middle -ground, is not a uniform policy at all since agency practices will vary considerably depending on the predilections of agency officials involved in the process.

18 Ibid. Remarks by Assistant Attorney General John Shenefield before Select Committee on Small Business. (Note 16)

19 For example, Admiral Rickover, a leading proponent of the title-in-the-Government approach, in his statement of Dec. 19, 1977, before the Select Committee on Small Business, U.S. Senate in questioning the wisdom of allowing contractors to retain rights stated, “Since large corporations get the major share of Government contracts, they would be the ones to benefit the most from such a practice.” Later, he claims, "Small business, for its own advantage, should be against a giveaway patent policy. The vast proportion of Government business goes to large contractors. . . If the rights to Government financed inventions are given away to contractors, the Government itself will be promoting the concentration of economic power in the hands of a few large conglomerates.”

20 The “NSF Surveys of Science Resources Series,” NSF 77-301, Vol. XXV, "Federal Funds for Research, Development, and other Scientific Activities," estimates that out of a total Federal budget for basic, applied, and developmental extramural research in fiscal year 1977 of $17.428 billion, 30 percent was performed by universities and other nonindustrial performers. And in the sub areas of basic and applied research the industrial share was only around one-third. These statistics do not, however, provide any breakdown between the types of industrial performers, i.e. what percentage were small businesses. A recent draft study by the Office of Federal Procurement Policy finds that in fiscal year 1975, 7.8 percent of Federal R&D awards to industry from major agencies went to small business. However, this study covers only prime contracts and does not indicate the percentage of prime contracts to large firms that were subcontracted to small firms. It would also seem unlikely that all of the nonsmall business industrial firms dominate or control a substantial share of their commercial markets. Hence, at a minimum around 35 percent of Federal extramural R&D is performed by small business and nonindustrial institutions. Thus, it would be most unlikely that dominant firms actually receive even half of the total R&D extramural budget.

or not the Government takes title to the inventions of these companies the effects on competition in these capital intensive industries will be negligible. Indeed we would note that until the Justice Department recently took action to end this, there was a policy of cross-licensing within that industry which made inventions generally available.21

Whatever may be the exact distribution of the source of inventions made under Government contracts and grants, in the case of those inventions made by dominant firms one would find that in the vast majority of cases those firms' positions would not be affected vis-a-vis other U.S. firms by the disposition of rights in their inventions. Patents would probably be found to be of minor consequence in the maintenance of dominance in their industries (although in some cases they may have been an important factor in the early growth of the firms.)

In most cases superior financial resources, economies of scale, access to resources, and well-developed marketing and distribution systems will be found of much more consequence to the maintenance of dominant firms' market position. These are the factors that prevent new firms from entering the market and which prevent smaller firms from effectively competing and increasing their share of the market. Even if the Government took title to inventions of dominant firms, we believe that in most cases the factors listed above would prevent smaller firms from making any effective use of the inventions, the great bulk of which, in any case, are merely minor improvements on existing technology controlled by the inventing firms.

Conversely, smaller firms do not enjoy the advantages described above. For such firms, patent protection is a much more significant tool. When a smaller firm makes a new invention that has the potential of being developed into a new product which might increase that firm's share of the market, patent protection may be the only defense that that firm has to prevent larger firms from undercutting its market. Without patent protection, larger firms could, because of the advantages noted above, undercut any market developed by the smaller firms.

Thus it appears that a title-in-the-Government policy will have, at most, a marginal effect on the market position of already dominant firms, but that it will almost surely destroy the competition that might result from smaller firms developing inventions coming out of Government work.

There is another major shortcoming with the proposition that taking title from dominant firms will allow other firms to use the inventions so as to increase competition. First, it seems likely that the number of inventions reported to the Government would decrease if contractors saw no advantage to reporting them. Second, it is unclear just how other firms would learn of those inventions that were reported. Typically, invention reports come in as separate items or addendums to progress reports. Nor does there appear to be any systematic publication of reported inventions, per se, by the Government, and even if there were it is doubtful that this would be an effective means of achieving technology transfer of specific inventions. The closest approach currently available is the NTIS publication of Government-owned inventions available for licensing. However, publication, unless it is combined with other techniques, is not really a particularly effective way of alerting and interesting commercial firms in inventions (even if one assumes such firms would be willing to invest without exclusive rights). Then too, such publication serves to make foreign firms and countries aware of the technology and because of the relationship and cooperation between certain governments in foreign countries and firms within that country, competition from such foreign source based on the technology published could further adversely affect the balance of trade.

Notwithstanding the use of catch-words such as "patent give-away", "windfall” and, that most appealing to the uninformed, "what the Government pays for it should own” by the proponents of title-in-the-Government, there is no hard evidence to show that the "title" policy results in the transfer of any appreciable amount of technology for the public benefit. Quite to the contrary, there is strong evidence of the poor utilization of the technology of Government owned patents.22

The title-in-the-Government policy rejects out-of-hand the need for the patent incentive in the contractor in all situations and also rejects continuing participation by the investigator-inventor-an imperative consideration with university-generated inventions which tend to be embryonic in nature and which almost always require additional extensive development.

21 See the well-known "smog" case (U.S. v. Automobile Manufacturers Association, Civil No. 69-75 JWC (C.D. Cal. 1969)) and the complaint against the 40-year pooling arrangement in the aircraft industry (U.S. v. Manufacturer's Aircraft Association, 5 Trad. Reg. Rep. para. 45,072 (S.N.N.Y. 1972). It would appear that required nonexclusive licensing of undeveloped technology results in a "governmental patent pool" with the same negative effect upon innovation.

22 Ibid. Resumé of U.S. Technology Policies (Note 8).

The economic health of the nation, long-term economic growth, and the maintenance of competition is much more dependent on stimulating the introduction of new products and technologies than it is on ensuring maximum competition in the manufacture and sale of a given product.

On balance, it must be concluded that a title-in-the-Government patent policy would prove anti-competitive as compared to the title or first option in the contractor policy. The impact of patent policy on innovation

At the outset it is to be understood that innovation means the conversion of inventions made with Government support to commercial products and processes. The following remarks are to be considered in isolation from the competition objective discussed before and are intended to address only whether the chances of inventions being developed by anyone will be enhanced or diminished by one policy or the other.

It should also be clearly understood that many inventions that are reported under Government grants and contracts are by-products of the research being supported. This is certainly true of almost all university inventions. Similarly, very rarely does the Government support research and development to the point where a given product intended for the commercial market has been proven both technically and economically feasible so that private firms would view investment in the manufacture and marketing of the product as virtually risk-free. And even where a Government contract does have this objective, many of the inventions reported under that contract may still be by-products of the research or may have potential uses in areas not being tested by the Government. In those few cases where the Government is supporting full development, the supporting agency should have the discretion to use a deferred determination or other more restrictive patent clause.

Given the fact that the vast majority of Government-supported inventions have not been developed beyond the laboratory stage and will not be through Government support, it should be obvious that substantial private investment will be needed to bring the invention to the market. 23 This is particularly true with regard to inventions made at universities under Government funding and it is relatively rare for a firm to be willing to invest in the development of a university invention without being afforded some exclusivity. 24

Similarly, in the case of inventions made directly by smaller firms under Government contracts or subcontracts, it is difficult to believe that such firms would normally be willing to invest in the further development of the invention without some exclusive rights.

In the case of larger firms the impact of the Government's obtaining patent rights to their inventions is less clear. It is certainly indisputable that many firms, especially in certain industries, would not invest without exclusive rights, and neither would any other firms with the possible exception of certain foreign firms that enjoy state-supported monopolies (having nothing to do with patents) in their home markets. On the other hand, there would undoubtedly be some cases when larger firms would work their inventions even without exclusive rights. Minor improvements might be integrated into on-going product lines, or new products might be developed by larger firms where the market potential was clear.

- The conclusion that leaving title in contractors is much more likely to result in commercialization than is the Government's taking title is supported by the data developed by Harbridge House, Inc. in its 1968 study. 25 For example, Harbridge House examined all Government-supported inventions patented in 1957 and 1962. Of all the inventions utilized in this group, they found that the contractor held title to 203 and the Government to 7. In the total sample the Government held title to around 27 percent of the inventions.

The Harbridge House analysis indicates that all other things equal a firm with title is about twice as likely as a firm without title to commercialize an invention. It can also be documented that in the over-whelming number of instances in which universities have obtained licenses for their inventions an agreement could only be consumated on an exclusive basis.

It thus seems clear that the result of the Government keeping title will be to deter investment (innovation) in some cases, and to have a neutral effect in others. The only question that remains is whether this might be counterbalanced by some larger firms using their patent rights to suppress or defer the development of

23 U.S. Panel on Inventions and Innovations, “Technological Innovation: Environment and Management,” pp. 8-9 (GPO, Jan. 1967).

2- See Report of the University Patent Policy ad hoc Subcommittee, Appendix H, Report on Government Patent Policy referred to above.

25 Ibid. (Note 9)

inventions that others might have been willing go develop had the Government held title. Experience indicates that such fears are largely unfounded and that, in any case, even if the Government held title, the likelihood of other firms developing most inventions would be small without some exclusive rights. It would seem that the Government would have to do more than merely take title. It would, in turn, in most cases have to grant someone else an exclusive license. But it could be asked what advantage there is to going through the cost and effort of such an exclusive licensing effort as opposed to allowing the inventing contractor, who is intimately familiar with the invention to retain rights with appropriate march-in provisions if no work is done on the invention to commercialize it?

For a variety of practical reasons, it would be a mistake to believe that a title-inthe-Government licensing approach could be as effective in promoting utilization as leaving title-in-contractors. First, as mentioned previously, a title-in-the-Government approach might eliminate the incentive for many grantees and contractors to report inventions. In the case of the university community it is the principal investigator who normally starts the process moving by identifying inventions. Since publication, and not patents, are critical to the careers of university investigators many are not motivated to report inventions. 26 However, this can be overcome by aggressive programs at the university to induce reporting, especially by an active licensing program that offers some possibility of financial reward for the inventor. Such incentives to the inventor are completely lost when the Government automatically takes title. Within the business sector, a similar decrease in reporting might result, although probably for different reasons.

Secondly, the government would be faced with an enormous increase in workload. For example, under a title-in-the-Government approach DOD would be faced with some 1500-2500 inventions a year on which a decision would have to be made concerning the filing of patents. If DOD continued to base that decision solely on potential military applications, it ought to be obvious that patent applications will not be filed on a number of inventions that have commercial potential but not military potential. Therefore, if one is to honestly argue that a title-in-the-Government approach will not have negative impacts on innovation, one must be prepared to say that DOD and other agencies must screen invention disclosures for commercial application, a task which is now done by DOD contractors who have the opportunity to elect rights (i.e., a first option on rights to inventions). However, that would require a substantial increase in DOD staff and resources devoted to such task.

To duplicate the efforts now undertaken by many contractors and a number of universities, the Government agencies would have to be prepared to discuss the inventions with various industrial experts, to run patent searches, and to undertake a substantial amount of sophisticated market and technology analysis that is beyond their normal missions and capabilites.

Thirdly, Government licensing efforts will be hampered by the fact that the Government wili not have available to it the expertise and know-how of the inventor and the technical team that conceived the invention. Successful patent licensing often requires transfer of more than a bare right in patent. Agreements to provide technical assistance may be required which the Government could not offer. Moreover, in the case of many inventions coming from the larger firms, the invention may simply be an improvement on existing technology controlled by the inventing firm. Because of the existence of dominant background patents, the invention will be of no use to anyone but the inventing corporation.

Fourthly, it is not always obvious at the time an invention is made that it will ultimately have commercial importance. In many cases, it is the perserverence of the inventor or other technical personnel with the firm who foresee an invention's possibilities that persuades a company to go ahead with development.

For example, Battelle Columbus Laboratories did a study to identify the factors which influenced the movement of ten current technologies from their original conception state into actual use. They concluded: "The technical entrepreneur, whose importance was highlighted in the study of the "factors”, is also a "characteristic" important in nine of the ten innovations. This is the strongest conclusion that emerges from the study. In fact, in three innovations, the technical entrepreneur persisted in the face of the inhibiting effect of an unfavorable market analysis. If

36 In this regard it should be kept in mind that about two-thirds of the basic and applied extramural research supported by the Government is performed by universities and other nonprofit institutions.

any suggestion were to be made as to what should be done to promote innovation, it would be to find-if one can, technical entrepreneurs."27

We believe "technical entrepreneurship’ will largely be lost under a title-in-theGovernment approach. Accordingly, it is unreasonable to believe that Government licensing would be as effective in promoting the development of contractor inventions as leaving title-in-the-contractor. Impact of patent policy on public health

The following discussion provides a clear case study of the impact of patent policy since one can compare the results of the Department of Health, Education, and Welfare's (DHEW) pre-1968 title-in-the-Government oriented policy with its experience since that time when a more title-in-the-contractor oriented approach was adopted

A significant portion of Government R&D is devoted to medical research.28 DHEW, NSF, the Department of Agriculture and to a lesser extent other agencies such as DOD and the Veterans Administration support extramural research in the medical life sciences. Out of such research new compounds are often synthesized which may have pharmaceutical potential. Experience at NIH and studies by the General Accounting Office 29 and Harbridge House 30 clearly support the conclusion that a title-in-the-Government patent policy that did not make an exception for medical research would endanger the public health. However, proponents of a titlein-the-Government approach have never suggested that medical research be excepted from the policy. Indeed, even the President's Statement on Government Patent Policy unfortunately specifically singles out health as an area in which the Government should take title.

The GAO and Harbridge House reports noted above, which were based on extensive interviews with National Institutes of Health grantees and staff, concluded that the pharmaceutical industry would not utilize its risk capital to pursue further development of potential pharmaceutical agents generated with DHEW support without a guarantee of some patent exclusivity. (With the passage of the Medical Devices Act of 1976, which requires premarket clearance of many medical devices, it is becoming increasingly apparent that the same need for patent protection applies to the medical device area.) In some situations, the GAO discovered investigators with hundreds of compounds with potential therapeutic value on their shelves with no source to test their market potential. The GAO criticized DHEW for its failure to use its discretion to enter into Institutional Patent Agreements (which it had not done since 1958) or to make timely determinations of rights after identification of inventions.

Since 1969, when DHEW began using its discretion as suggested by the GAO, until the fall of 1974, DHEW estimates that the intellectual property rights to 329 inventions made in performance of DHEW-funded research were being managed by institutions with Institutional Patent Agreements (IPA) or by successful nonprofit petitioners for the purpose of soliciting further industrial support. During this period, these organizations have negotiated 44 nonexclusive and 78 exclusive licenses under patent applications filed on the 329 inventions. Since 1974, to the end of fiscal year 1976, the number of inventions held by such organizations has increased to 517. DHEW estimates that the risk capital generated under the licenses on these 517 inventions has been approximately $150,000,000.31

An example of the stake which an innovating company has in the development of a new drug may be seen from the following. Prior to the 1962 amendments to the Food and Drug Laws the average cost of developing a new drug was estimated to be $534,000.32 The development cost of a new drug in 1973 was estimated to be $11,500,000, a figure which escalates to $24,400,000 when the cost of research on projects which do not result in marketed drugs in included. With these figures in

27 Battelle Columbus Laboratories, "Science, Technology and Innovation, Summary Report”, Feb. 1973, p. 8.

28 Over one-third of the Federal R&D budget for basic research in FY 1977 went for the life sciences which include medical and related research. 20 GAO Report B-164031. Ibid (Note 7) 30 Harbridge House Report. Ibid (Note 9)

31 Science Policy Implications of DNA Recombinant Molecule Research. Hearings before the Subcommittee on Science, Research and Technology of the Committee on Science and Technology, U.S. House of Representatives, 95th Cong., 1st Sess. (No. 24), p. 965. It should also be noted that over 60 percent of the inventions retained by IPA holders or petitioners have not yet been licensed and many will never be licensed or brought to ultimate use. Accordingly, the mere retention of patent rights is clearly no guarantee that commercialization will occur.

32 Scherer, “The Economic Effect of Mandatory Patent Licensing,” p. 59, U.S. Energy Research and Development Administration, Public Meeting 11277.

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