Department of Transportation (DOT)-title policy. Environmental Protection Agency (EPA)-title policy. Department of Defense (DOD)-deferred determination (for health-oriented inven tions). Agency for International Development (AID)-title policy with waiver possibility. Department of Agriculture-title policy (statute interpretation by Department as permitting only the taking of title). Veteran's Administration (VA)-title policy with waiver possibility (generally a VA employee is involved and waiver therefore difficult). The expression of patent policy for each of the foregoing Agencies is stated not necessarily in terms of its written policy, but in terms of its practical operation under that policy and the President's Statement. There is no real consistency among the Agencies, or even within an Agency, or even necessarily from one contract to the next within an Agency, as to what the disposition of patent rights will be. It has become apparent that decisions regarding the disposition of patent rights are often made on an attitudinal or philosophical basis, for the decisions are not a function of law but of men. Operating under these policies, which in the main has been a royalty-free nonexclusive licensing policy, the Government has accumulated in its patent portfolio about 28,000 patents of which only about 5 percent have been licensed and of this 5 percent only a small portion have resulted in commerical products. Thus, the economic benefits intended to be stimulated by the patent system have not been derived by the Government or the public through such licensing of Government owned patents. 9 An interesting comparison along these lines was made by Harbridge House in its 1968 study of Government-funded patents put into use in 1957 and 1962. It was found that contractor-held inventions were 10.7 times as likely as Government-held inventions to be utilized in products or processes employed in the private sector for the benefit of the public. Government-owned patent-An anomaly What is the situation that pertains when the Government takes ownership of a patent? It is in a sense an anomaly. The patent system was created as an incentive to invent, develop and exploit new technology—to promote science and useful arts for the public benefit. When the Government holds the patent under the aegis that the inventions of the patent should be freely available to all, much the same as if the disclosure of the invention had been merely published, the patent system cannot operate in the manner in which it was intended. The incentives inherent in the right to exclude conferred upon the private owner of a patent, and which are the inducement to development efforts, are simply not available. With regard to Government ownership of patents an interesting bit of history is presented by Marcus B. Finnegan1o in which he calls attention to the famous case of United States v. Dubilier Condenser Corporation. The court issued its original opinion on April 10, 1933.11 Then on May 8, 1933, the court, on motion of the Solicitor General, struck from its opinion 12 a paragraph which questioned the authority of the Government to hold ownership to a patent thereby giving, by negative implication, judicial sanction to the Government's practice of taking title to patents. Of importance to the issue presented in the title to this paper is the following language from the stricken paragraph with respect to the question of whether title to the patented invention in dispute should be awarded to the Government: "In these circumstances no public policy requires us to deprive the inventor of his exclusive rights as respects the general public and to lodge them in a dead hand incapable of turning the patent to account for the benefit of the public." The experience with licensing of Government-owned patents, 13 with the Government in the main espousing a nonexclusive licensing policy, has irrefutably been one of non-use. Indeed, when title to patents are vested in the Government under See Résumé of U.S. Technology Polices-Dr. Betsy Ancker-Johnson Les Nouvelles (Journel of the Licensing Executives Society) Dec. 1976, Vol. XI, No. 4, p. 186; Statement before the National Commission for the Protection of Human Subjects of Biomedical and Behavioral Research, Dec. 11, 1976. (This latter document also contrasts the experience of universities in licensing patents owned by them some or most of which may have resulted from research supported in whole or part by Federal monies.) Harbridge House Inc., Government Patent Policy Study for the FCST Committee on Government Patent Policy, May 15, 1968. 10 "The Folly of Compulsory Licensing" Les Nouvelles (Journal of the Licensing Executives Society) Vol. XII, No. 2, June 1977. 11 289 U.S. 178 (1933). 12 289 U.S. 706 (1933). 13 Ibid-Resumé of U.S. Technology Policies (Note 8). 52-476 0 80 17 such a licensing policy one can conclude that they are lodged "in a dead hand incapable of turning the patent to account for the benefit of the public." Optimum patent policy presumption At the outset it must be presumed that Government research dollars are made available in the expectation of not only developing basic knowledge, but also in the expectation that the funded research will lead to products, processes and techniques which will be useful and acceptable in all or part of our society to improve the wellbeing of the society in general. In the face of this presumption it is apparent that inventions, whether made through the expenditure of private or governmental funds, are of little value to society unless and until they are utilized by society. In order to achieve such utilization it is essential that the invention be placed in a form or condition which will be acceptable and beneficial to the public. In other words, the technology must somehow be transferred to the public sector. In a free enterprise system such transfer is normally accomplished as the result of pertinent and appropriate activities of private enterprise. Since such activities obviously entail the commitment and expenditure of substantial monies many times the amount needed to make the invention "-adequate and appropriate incentives to such commitment and expenditures must be afforded. Consequently, and since the patent system provides such incentives and is the most viable vehicle for accomplishing the transfer of technology, full and careful consideration must be given to the making of any policy which will affect the transfer of technology that has been generated in whole or in part by Government-funded research. Objectives of government patent policy There is general agreement that the primary objectives of Government patent policy should be to (1) promote further private development and utilization of Government-supported inventions, (2) ensure that the Government's interest in practicing inventions resulting from its support is protected, (3) ensure that patent rights in Government-owned inventions are not used for unfair, anticompetitive or suppressive purposes, (4) minimize the cost of administering patent policies through uniform principles, and (5) attract the best qualified contractors. However, of all of the considerations attendant upon the establishment of a Governmental patent policy only one consideration should be paramount: "In whose hands will the vestiture of primary rights to inventions serve to transfer the inventive technology most quickly to the public for its use and benefit?" Recognition of this paramount consideration was plainly evident from the provisions of the National Science and Technology Policy, Organization and Priorities Action of 1976 15 which directs OSTP to review current legislation and agency practices with the view of recommending and developing, "Federal patent policies * based on uniform principles, which have as their objective the preservation of incentives for technological innovation and the application of procedures which will continue to assure the full use of beneficial technology to serve the public.” Alternatives Three major approaches to Government patent policy are available and all three are currently in use by various of the Agencies of the Government as pointed out above. These are: 1. Strict title in the Government 16 Under this approach, as a condition of receiving a Government research grant or contract, the contractor would have to agree to transfer rights in all inventions made under the contract to the Government. The Government, in turn, would either dedicate the inventions to the public or license them itself. 2. A case-by-case approach Under this approach individual agencies would select the patent clause to be used in each grant or contract on a case-by-case basis, and agencies would also in many cases delay the determination of whether contractors would retain rights until after inventions have been identified. Depending on the exact manner in which the policy 14 Ibid-Harbridge House Inc. Report, May 15, 1968. (Note 9). 15 Title I, Section 101(c)(4) of P.L. 94-282. 16 Assistant Attorney General John Shenefield, in advocating a title-in-the-Government approach in his appearance of December 20, 1977, before the Select Committee on Small Business, U.S. Senate, stated, "The competitive risk to the public in transferring title to the contractor may be especially high where transfer carries a danger of further entrenching the already strong market positions of many Government contractors.' is framed there may or may not be presumptions in favor of or against the taking of title by the Government.1 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). 24 See Report of the University Patent Policy ad hoc Subcommittee, Appendix H, Report on Government Patent Policy referred to above. 25 Ibid. (Note 9) |