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mind it is little wonder that the return on R&D investment in the drug industry has dropped sharply since 1960 (it is currently calculated to be 3.3 percent).33

The May 26, 1977 testimony of the Patent Counsel of DHEW, given before the Subcommittee on Science, Research and Technology of the House Committee on Science of Technology includes examples of inventions which have been licensed by universities and nonprofit organizations that have reached or are near reaching the market place. As noted in that testimony most of the examples are pharmaceutical products and medical devices. No comparable examples were known at the time the GAO and Harbridge House ran their studies.

This experience strongly supports the general proposition that the less restrictive the patent policy the greater is the transfer of technology.

Why does such a first-option-in-the-contractor policy promote the transfer of technology:

1. It reduces the uncertainties as to the status of invention rights and thereby permits:

(a) the prompt filing of appropriate patent applications by the contractor-grantee;

(b) an early effort by experienced technology transfer groups and patent management organizations to locate and engage private enterprise in further development of inventions;

(c) an early decision by the industrial developer that the intellectual property rights in the innovation being offered are sufficient to protect its risk investment.

2. It is a recognition by the agency that the nature of the research being supported through funding under a grant or contract is fundamental or basic and that inventions and the making of them are by-products of and not a specific object of the grant or contract.

3. It is a recognition that any invention evolved will require further development to bring it to the marketplace-development which should involve private enterprise since under our free enterprise system private parties and not the Government should engage in such activity.

4. It provides motivation for a contribution by a commercial organization, in cash or in kind, to Government-funded research projects—the certainty of the grantee (contractor) having the first option to any invention arising from such project providing the basis for this now recognized attitudinal change by industry.

5. It provides a climate which encourages the investigator-inventor's continuing participation in the transfer of his inventive technology to the public—a particularly important consideration where university-generated inventions are involved since such inventions tend to be embryonic in nature.

6. It more fairly recognizes the equities and contributions of all of the parties to the inventive technology.

7. It provides the opportunity for the university-contractor to generate income as consideration for the technological innovation being offered, which income is earmarked to support further research at the university-the public thus benefits a second time.

8. It permits timely consideration to be given to foreign patent protection and thereby enhances the possibility of generating payments from foreign sources for the transfer of the patented technology under license with an attendant favorable impact upon the balance of trade. Impact of patent policy on economic growth and jobs

It should be obvious that without the introduction of new products into the economy, economic growth and job expansion would come to an eventual halt. While people can disagree whether particular technological innovations are good or bad, we doubt that anyone would seriously argue that a slow down in technological innovation would not result in slower economic growth. Yet, the fraction of R&D performed in this country that is Government supported has now reached around two-thirds. Hence, it is inescapable that a Government patent policy that discouraged investment in the development of the inventions made during that research would have a negative effect on economic growth.

Although the relationship between innovation and long-term economic growth and job expansion are intuitively and historically obvious, several studies serve to highlight this.

A 1967 Department of Commerce study 34 and a more recent update of that study by John Flender and Richard Morse of the MIT Development Foundation, Inc. 35

33 Schwartzmann, "Innovation in the Pharmaceutical Industry," p. 70.

34 "Technological Innovation: Its Environment and Management”, U.S. Panel on Invention and Innovation. (Washington, D.C. GPO, 1967).

35 John O. Flender and Richard S. Morse, “The Role of New Technical Enterprises in the U.S. Economy", M.I.T. Development Foundation, Inc., Oct. 1, 1975.

lend strong support to the proposition that sales growth and job creation occurs more rapidly in innovative companies than in mature (dominant) companies. And even more significant for purposes of this analysis is the fact that job expansion at young (i.e. small) high technology companies was even more spectacular. For example, the authors found that during a five year period six mature companies with combined annual sales of $36 billion in 1974 experienced a net gain of only 25,000 jobs during the five years, whereas five young, high technology companies with combined sales of only $857 million had a net increase in employment of 35,000 jobs (five “innovative" companies with $21 billion sales total had a net increase in employment of 106,000 jobs). These findings indicate that a patent policy that would deemphasize the needs of smaller firms and emphasize concerns with larger and more dominant firms could have a negative impact on job expansion.

The potential harm that could accrue from discounting the need to be concerned with inventions from nondominant firms is further emphasized by a study done by Gelman Research Associates. An international panel of experts selected the 500 major innovations that were introduced into the market during 1953–73 in the U.S., U.K., Japan, W. Germany, France, or Canada. Of the 319 innovations produced by U.S. industries, 24 percent were produced by companies with less than 100 employees. Another 24 percent were introduced by companies with 100 to 999 employees.

Inasmuch as it seems apparent from the foregoing discussion that a first option to title to inventions in the contractor is much more likely to bring about innovation, it is indisputable that it is also much more likely to encourage economic growth and job expansion. Impact of patent policy on foreign competition

American industry is in increasing competition with foreign corporations in hightechnology areas and a title-in-the-Government patent policy must inevitably work to the advantage of foreign firms at the expense of American industry and labor.

The taking of title by the Government will effectively prevent the American inventing corporation from obtaining foreign patent protection. Without Government foreign filings no American firm could gain any exclusive rights in foreign markets. Moreover, historically, the Government agencies have had neither the incentive, the staff, the budget, nor sufficient knowledge of market conditions to file for foreign patents in anything more than a small number of cases.36

If the Government takes title to U.S. rights in inventions and dedicates them, these inventions are equally available to foreign based firms that would export commercial embodiments of these inventions into the U.S.

If one combines these facts with the difference in the relationship between business and Government in certain foreign countries as compared to relations in the U.S., certain disturbing implications arise. In some foreign countries industry is highly socialistic and state controlled. In others, major companies may enjoy state subsidies and support. The result of all this is that the same invention that U.S. firms may not develop without the exclusivity afforded by patent rights may be developed by Japanese, German, or other foreign firms that enjoy monopoly advantages in their home markets through means quite apart from patents. In turn these products are exported into the United States and displace American products and American jobs.

In short, given the difference in industry-Government relations in many of the technologically advanced foreign countries as compared to the United States, a titlein-the-Government policy is most likely to favor foreign companies. The mere speculative concern that there might be a few isolated cases where leaving title in a contractor might result in activities by that contractor which are in violation of the antitrust laws should not control the whole of Government patent policy when other remedies are available through those laws. The U.S. economy does not operate in a vacuum and to formulate a policy of title-in-the-Government primarily upon hypothetical and mistaken concerns about the impact that policy will have on competition within the United States ignores the many adverse effects such policy would have. The case-by-case approach

Where the disposition of patent rights in inventions made in whole or in part with Federal funds is deferred until there has been an identification of the invention the certainties associated with title-in-the-contractor are lost. As pointed out before such certainty is a strong incentive to the transfer of technology.

36 Statistics by the Committee on Government Patent Policy show that during the period of Fiscal year 1970-75 the Government filed for foreign patents on an average of 77 contractor inventions, and the preponderance of these were by only two agencies, DOE and NASA. This is approximately one-tenth the number of contractor inventions upon which the Government filed U.S. patent applications.

Thus, any attempt to transfer the inventive technology would have to await the decision by the Government that title will be left with the contractor. As a consequence, valuable time will be lost in transferring the technology because it is seldom that a bureaucratic decision is made expeditiously. Moreover, the administrative and associated paperwork burden in the deferred determination approach militate heavily against the viability of this approach as a realistic alternative to the title-in-the-contractor approach. For example, a preponderance of DOD contracts now include clauses allowing the contractor to retain patent rights. As was mentioned before, it is unlikely that DOD could expeditiously process each contractor request for patent rights under a deferred determination procedure with present staffing.

Deferred determination advocates would claim that the Government can make a better judgment after the invention is identified, and that exclusivity will not always be needed. Implicit in this claim is the assumption that Government personnel will either be in a position: (i) to determine if the existence of exclusive patent rights is needed as an incentive to further development; or (ii) to find a better qualified firm to commercialize the invention through a Government licensing effort after taking title to the invention.

In regard to the question of whether exclusivity is needed for private investment to be made in an identified invention, it should be recognized that if the Government determines that exclusivity is not needed but is wrong, no further development may take place.

Moreover, for the Government to be right more often than not when making a deferred determination would require extensive technical, marketing, and economic studies of the firms, technology, industries and market involved. The cost to taxpayers of such programs could be more than any savings they would produce for consumers. This appears to be true, since in most deferred determination cases exclusivity has been deemed necessary, and the costly determination process has been engaged in simply to confirm this fact. This has been substantiated in practice by NASA, DHEW and NSF (the three agencies who have historically made the largest number of deferred determinations) by the grant of over 90 percent of the requests for "greater rights” over a period spanning ten years.

Similarly, the ability of Government personnel to decide after an invention is identified that utilization will best be promoted by the Government's taking title and offering the invention for licensing, assumes that commercial developers, other than the inventing contractor, can be found (presumably but not necessarily on a nonexclusive basis). There is really no effective means for Government personnel to ensure that other firms, whether licensed exclusively or nonexclusively, would do a better job of developing the invention than a willing contractor or a licensee of the contractor. As noted previously, other firms often lack some of the "know-how" of the contractor and will not have the inventor or co-inventors working for them. One can be sure that in most cases the inventing organization will have little interest or incentive to transfer its know-how to another firm, possibly a competitor. Moreover, the very process of attempting to find alternative developers will simply serve to delay private investment and cool the interest of the inventing contractor. It will also force the Government into the expense of filing patent applications in order to assure that a patent is available if exclusive licensing is ultimately deemed necessary.

It is important also to emphasize that a deferred determination that is truly geared to resolve the questions that trouble opponents of the title-in-the-contractor approach would be so costly, complex, and time consuming as to discourage many contractors from requesting rights in the first instance, especially small busnesses and universities. They may even neglect to report the invention under such circumstances. In all likelihood, without a request for rights to trigger the deferred determination process, most agencies will have no incentive to do anything with the disclosure, and the invention will fall into the public domain to be available to all and, in most cases, practiced by no one, as seems to be the case with a very substantial portion of the 28,000 patents now in the Government's patent portfolio. Indeed, under a deferred determination approach the agencies would probably be devoting so many resources to those cases where rights were requested that they would have insufficient personnel or interest to study inventions and encourage development and marketing where rights were not requested. Summary and commentary

It is believed apparent from careful examination of the impact of alternative patent policies on the various objectives of Government patent policy that the title or first option to title in the contractor approach is superior to any other approach on every count. Thus, public patents-public benefits are antonymous.

In reaching this conclusion it should be kept firmly in mind that we are not dealing in abstractions.

The number of patents granted to citizens of the United States has fallen off. In 1961 only 17 percent of the patents issued in the country were issued to nonAmericans; currently the ratio is up to about 35 percent. The statistics also indicate fewer "big" inventions—the rate of new drug introductions today is about onefourth the rate of 15 or 20 years ago—and it takes longer to put them in the market. In the chemical field it averages about seven years from the laboratory to the market; 15 years ago it took an average of two years.

We as a nation spending less on research, using fewer people, and producing fewer inventions; and fewer of the inventions we do produce reach the marketplace, and it takes them longer to reach it.

Under the accepted definition of an underdeveloped country which is "one that exports raw materials to maintain its balance of payments, while it imports finished goods to maintain its standard of living” we are now an underdeveloped nation. We are exporting our cotton, timber, grain, coal and other raw materials in order to pay for cameras, TV sets, radios, tools, steel, clothing and a host of other finished products.

Today science is being made subservient to politics with decisions being made not on scientific facts but on political opportunity. And efforts go forward to discredit and weaken our patent system which, over the history of our country, has provided the incentive for innovation. It is indeed a noble motive to give to the people the benefits of publicly supported research and we can agree that tax dollars should not be used as a means of enriching private parties. We must, however, be vigilant, for the views on the issues involved lend themselves to emotional molding. Outspoken claims to the guardianship of the public interest or public welfare is a rich field for cultivating political power. A deadening result of political emphasis on such guardianship is the proliferation and growth of the bureaucratic maze where accountability becomes the fear. Under such conditions the atmosphere generated tends to be one of self-protective caution with the danger that operation of the system will become a disproportionate part of the objective.

Effort is fundamental to the transfer of technology to the marketplace and wherever effort is needed incentive is required. In this country the patent system has provided that incentive through its exclusion privileges and can be considered to figure prominently in the economic equation.

E(x)=Px f(x) where E(x) is the expected return, Px is the probability of success and f(x) is the total value of return.

The probability of success is most certainly enhanced by the existence of an intellectual property right-a patent. In today's technologically intensive atmosphere some protection for the heavy investment required in development is more than ever necessary. The lead time given by exclusive knowledge or patents is shorter than ever before. If that lead time disappears, through further weakening of the patent system, or weakening of the ability to extend exclusive rights to intellectual property, it may become economically sound to be second in the field. There is some evidence of that second-place philosophy in the medically-oriented and other fields today. Further erosion of the exclusive rights to intellectual property afforded under the Constitution could lead to a second-position attitude in U.S. industry. The next step is willingness to be a second-place nation.

Senator SCHMITT. Mr. Marcy, would you proceed, please-Dr. Marcy?

Dr. MARCY. I'm not a real doctor; I'm only a Ph. D.

Senator SCHMITT. Somebody stuck another title in front of my name and I lost track of the other ones.

Go ahead.

Dr. MARCY. My name is Willard Marcy. I am vice president of invention administration program, Research Corp..

Research Corp. is a private foundation. It is a nonprofit organization founded in 1912 and chartered by the State of New York. It is dedicated to the support of science and technology. In its present embodiment, it provides educational and scientific research institu

tions with invention evaluation, patenting and licensing services in accordance with the terms of prearranged invention administration agreements, and it devotes all of its income after expenses to support further research in college and university laboratories.

I am honored to be asked to testify today regarding the provisions of S. 1215 and the need for a uniform policy directed toward the encouragement of participation by private industry in Federal research and development programs and commercial use of their results. In so doing, I should make it clear that the views I present here are mine as a private citizen, but I believe they reflect, in general, the feelings of my employing organization.

The basis for my thoughts and observations is grounded in over 15 years experience in the constructive use of the patent system for the transfer of technology primarily from nonprofit educational and scientific research institutions to industrial corporations. During this time I have worked intimately with universities, Government agencies and industry in attempting to translate the differing policies of Government contracting agencies into positive action to develop innovative concepts for public use.

Recently, in hearings on S. 1250, Chemical & Engineering News reported that Senator Brown identified 12 problem areas connected with innovation which warranted further congressional attention. I venture to say that there are at least another dozen and probably another dozen on top of that. I mean to imply that innovation, how to foster it and how to use it to the best advantage of the country, is exceedingly complex.

This is borne out by contemplation of the hundreds of thousands of man-hours spent on studying innovation, and the tons of reports analyzing the results of these studies. One recent report commissioned by the Office of Federal Procurement Policy, for example, contains a bibliography of no less than 206 references to various publications relating to the narrow area of the activity, or lack thereof, of small firms relating to Federal research and development.

I think the citizens of this country have now come to realize that past innovative activity has played a key role in making this country great, and that continued innovation is a necessity for keeping it great and for increasing its citizens' standards of living. In today's highly specialized society, it is no longer possible to take a laissez-faire attitude toward innovation, as was done at the beginning of this country's history; we must consciously and assiduously promote innovation. Not control it in an absolute sense, but promote it, for to control it unduly is to stifle it.

In my opinion therein lies the basic problem. Ever since the Federal Government began to finance research and development in a massive way, during and since World War II, greater and greater control of scientific and technological research, its development and the use of its results have been exercised by Government bureaucrats until innovation itself has become stultified and suppressed.

What seems necessary to me is to loosen these controls, and in addition, to provide incentives and encouragement to the large pools of scientists, engineers, entrepreneurs, managers and workers available in this country to innovate.

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