The performance specification that will enable us to get a final examination of title for $100,000 in 2 years will require, among other things, a special set of rules for trial and for appeal of patent cases and the judiciary will howl over the idea of special treatment of patent cases. And lawyers including me will howl over the 2 years along with the courts because such rules will bind them greatly.

But it certainly is going to take some radical surgery in order for us to stop this sequence of half-million-dollar litigations and cut it down to one litigation at $100,000 cost in 2 years, or something on that order of magnitude.

From the point of view of the intelligent investor in innovation, each of the seven performance specifications, some of which I mentioned to you, is a very reasonable thing to ask for. But as of now, the system does not come close to providing him final title in 2 years' time for $100,000.

Now if you're going to invest in a piece of property, is it not reasonable for the investor to say, "I want to know within 2 years' time whether I have title and I don't want to pay more than $100,000 just to find out whether I've got title."

But we don't have that kind of possibility now. We don't have close to that now. And I say to you, therefore, that it is little wonder that investors are moving their money from research and development into more safe investments.

In conclusion, I might say that I have read Mr. Manbeck's presentation and have reviewed the specific recommendations that he will be presenting to you and I will not try to preempt them by saying what I would recommend that preempts his remarks.

I would say that with one exception, which I regard as minor, I and the American Patent Law Association agree 100 percent with everything that he is going to recommend to you.

Perhaps it may be that some of his list of items which he recommends being made out of context of the inner workings of the judicial system which is one of the seats of shortcomings of our functioning system, may be working more or less on the tentacles of the problem-important work, but nevertheless, working on the tentacles and not getting fully at the jugular vein.

But in all events, I suggest to you that we are in critical need of a revision of the standard of patentability of section 103 to establish as a standard of patentability in all of the courts that which the Congress intended when it wrote the present section 103. But that is not being followed by many courts.

In order to get a uniform structure for the standard of patentability, the uniform practice where we can have reasonable reliability, we probably also need a change in court structure, which has been proposed, as you know, by bills currently pending-S. 677 and S. 678-to have a single court of patent appeals so that appeals from all patent cases from all over the Nation can go into one court. Thereby, perhaps we could have a uniform patent law rather than have different patent laws in different sections of the country, as we now have.

We also need an address to the patent statute's section 101: What subject matters are patentable. Are micro-organisms patentable? They are certainly useful arts. We benefit from them.

Isn't it clear that new technology should be as patentable as old ones?

The whole idea of the patent system was to afford us protection for new technology. But the Supreme Court says, "Well, if it is a new technology, we're not sure the Congress wanted to reach that far. So we will not permit the patentability of the new technology because we're not sure the Congress wanted to reach the new technology.

Well, the whole idea of the patent system was to sponsor the new technology. So we need an address to section 101 of the patent statute, the definition of the scope of new technology that should be patentable.

Senator SCHMITT. You're saying that the Constitution reaches that far.

Mr. ARNOLD. The Constitution certainly reaches that far and the sociological functioning of the system reaches that far.

If we are to get the benefit of the system to function to induce the new technology, then we have to let the patent system reach that far. At least we will get an increased value if we let the patent system reach to all new technology.

Then we need correction of some miscellaneous substantive rules of law such as the one that I perceive to be in error, announced by the Supreme Court in Lear v. Atkins, which I won't take time to address.

We also need something in the nature of a speedy trial act for patent cases. The patent bar will howl, and for just cause, for good reason, to have a speedy trial act for patent cases. At the same time, it is necessary because we are not getting good justice for our clients under the present system and we're going to have to make some sacrifices in order to reach the goal of a quieted title to inventions in 2 years time.

We need the in rem judgments as to patent validity, which I've indicated to you, and there will be some howling over that, but I think we've got to have it.

We need-well, I guess I'd better stop there because I'm starting to encroach on Mr. Manbeck's statement. But I suggest to you that the patent system is in need of improvement and it would be my pleasure and the pleasure of the American Patent Law Association to help in any way we can to address the issue of improvements in the patent system.

Thank you.

[The statement follows:]

STATEMENT OF TOM ARNOLD, PRESIDENT, AMERICAN PATENT LAW ASSOCIATION Mr. Chairman, Senator Schmitt, and Members of the Subcommittee, I understand that the Subcommittee has dual concerns today. Firstly the merit of the bill S. 1215, the "Science and Technology Research and Development Utilization Policy Act". And secondly, a broader interest in the effectiveness of the patent law and patent system as each now exists, and how this relates to the current state of industrial innovation in America.

As to S. 1215, the American Patent Law Association supports the bill and urges that it be enacted. S. 1215 will cause greater and faster commercialization of inventions resulting from research, development and experimentation funded with Federal monies, so that such advances can be of direct benefit to and be enjoyed by the American public.

Furthermore, S. 1215 will eliminate the highly negative impact on innovation we are now enduring because of the current lack of a uniform, clear and certain, and effective government wide approach to patent policy. The purpose and thrust of S. 1215 were specifically supported by both the Advisory Subcommittee on Federal Procurement Policy and the Advisory Subcommittee on Patents to the Domestic Policy Review on Industrial Innovation on this ground.

As you know, Mr. Chairman, the APLA has offered comment in the past to the staff of this Subcommittee, and to Senator Schmitt's staff to make S. 1215 a practical and workable piece of legislation. As an appendix to this statement, we have included several further amendments to S. 1215 which we believe will strengthen the bill. I know you will give our recommendations careful consideration.

Earlier I mentioned the Domestic Policy Review on Industrial Innovation which is still in progress. I know this Subcommittee has the Advisory Committee Reports to the Review, including the Report on Patent Policy. I was a member of that Advisory Subcommittee, and commend to you the specific recommendations contained therein. You will recognize in the discussion that I present to you this morning a reflection of some of the studies made in my service upon that Advisory Committee, for this morning I will discuss the decline in industrial innovation and the role of the inefficiencies of the patent system in that decline.

There is no longer any room for argument on this point: Industrial innovation in the United States is and for some time has been in a state of significant decline. That fact gives rise to many questions. Today I will touch lightly only, these few of those many questions:

(1) What is the effect of the decline in innovation?

(2) Why the decline?

(3) Is the patent system, or the Patent and Trademark Office, a part of that why?

(1) What is the effect of that decline?

There are many effects of the decline in innovation.

I note here that last year the United States suffered a balance of payments deficit of something like 15 billion dollars in manufactured goods, arms excluded. That, inherently, is in technology goods-the very goods which used to generate such a balance of payments credit as to pay for our imported chromium from Rhodesia, our copper from Chile, our diamonds from South Africa, our oil from OPEC. Just as Japanese exports of technology goods still more than fully support Japan's importation of much more of its raw materials including oil, than we have ever imported. For 100 years the United States exported more electric power systems, cameras, computers, automobiles, television sets-more technology goods-than we imported, and by a large margin. Now we are a net importer of the very goods that have been our source of foreign exchange. That bothers me.

Our reputation for technology goods is now so high among our own peoples, that Chrysler Corporation and General Motors are advertising as an important fact that certain of their cars are made in Japan or Germany. That RCA has its television sets made in Hong Kong or Taiwan or elsewhere. That IBM has many of its computer parts made in similar places. From the point of view of the job market in the United States does that bother you?

Of course it is true that in the innovative design of computers and television sets, the United States is still at least generally competitive with innovation elsewhere. But in manufacturing techniques for such equipment, our former leadership has yielded sufficient that our production costs and quality are commonly in second place.

The trade deficit in manufactured goods as well as oil, has devalued our dollar as against all foreign currencies. So when we buy foreign goods and raw materials, we now pay much more than three years ago. To pay more is to suffer inflation. That bothers me.

To suffer inflation is to suffer high interest rates. That bothers me. Etc., Etc. and Etc.

Any degree of loss of innovation leadership of the world is serious business to all of us. Of course, loss of technology leadership is not the whole cause of all our nation's troubles. But I perceive it to be as important as any other single factor. As important as OPEC oil prices, for example, because our importation of manufactured goods, at least up through 1979 has been greater than our importation of OPEC oil.

(2) Why the decline in innovation?

The reasons are many, both patent-related and non-patent related.

While our government is attending to energy problems by creating a new Department of Energy to address energy problems, and while our government may be now deciding to limit oil imports and ration gasoline, our government is cutting the budget of our Patent and Trademark Office—the already underfunded agency which is a major power source for all our innovation in electronics, chemistry and all other technologies as well as energy.

It is important that we all understand the role of the Patent and Trademark Office as the motive force for innovation, so I will return to that topic in a moment. But to put the role of the patent system and the Patent Office in context we must first observe that much of our nation's decline in innovation is properly attributable to factors which have nothing to do with the patent system or office.

When I first commenced to practice patent and trademark law thirty years ago, the bulk of the patent practice in my home state of Texas descended from a myriad of oil tool and oil field service companies.

These companies were largely privately owned, commonly dominated by the founder—a founder who had been some sort of innovator and/or inventor as well as entrepreneur.

A few of these owner-chief-executive-officers we now call CEOs, had a Bachelor's degree in engineering or the like. Many did not. Not one anywhere had a Master's degree in anything.

They were pragmatic men, not scholars. They were entrepreneurs with a major gambler's spirit at a time when the national philosophy was not so much on security as on opportunity.

These men commonly rendered their "go" or "no-go" decisions on innovation projects while standing on the floor in the shop without consultation with either scholars or accountants-nor computer mathematical models of projected ROI.

They invented radioactivity, well logging, jet perforating, rotary drilling, and all the other tools that enabled our oil industry to set a barrel of crude oil down in Houston for less money than it cost me for a yard of good loam garden dirt set in the backyard of my new house back in 1970. Whatever they may have done wrong, there was at least something these men were doing right, if until 1970 they could make oil price competitive with dirt.

Almost all of those oil field service companies have now merged with others or grown themselves. Almost every profit unit is now presided over by a man with a Master's degree in Business from Harvard, Wharton, or Stanford with access to computer models of future markets.

Is this not an improvement?

Well, perhaps more no than yes, if your target is innovation.

By the peculiar nature of the inputs to computer mathematical models of future markets not yet in existence, no computer model could ever have projected before Xerography that the market for plain paper copiers would ever be as big as one percent of what now exists. That failure to appreciate the market is the key reason that companies like IBM declined to take on the Xerox invention when its inventor, Chester Carlson, tried to interest them in his baby.

This is but one example of the fact that computer models of ROI on inventions not yet made, are subject to horrifying errors, most commonly errors on the negative or no-go side. So if innovation is your target, computer projections of ROI may generate as much mischief as merit.

But surely these new whizzes with Master's degrees, knowing that, can more than off-set that problem?

Not hardly, if innovation is your target.

The business schools teach management of established businesses efficiently; but most of them are totally incompetent in the entrepreneurship of new technology and teach little or nothing of that or of venturesome new departures for business. Personalities of the scholar type commonly get through the Master degree level in college. Entrepreneurial types—if indeed there are many new men of that type coming along in our present security-conscious society-rarely have the patience to stay in school for a Master's degree. The scholarly types who get Master's degrees have a relatively low sense of adventure, discovery, opportunity.

Not only has society generally moved more security-conscious in the last 30 years, we now filter out the adventurous from having much chance to head up a technology profit unit-this by the schooling processes we insist upon for men to be eligible for such jobs.

Adventuresome courage is neither on the grade sheet of the job applicant nor on his résumé, critically important though it is.

Innovation being a high risk adventure into the unknown, the new managers of business are by our selection process not as likely either to explore the length and

breadth of the Grand Canyon on a raft, or to innovate, as were their predecessors. It's just too adventuresome for at least many of them.

What is the remedy for these personality, education, and tools-of-the-analysis problems which I have been discussing? The only ones I can suggest are: (a) better training in entrepreneurship and the free enterprise system in our schools and colleges, and (b) a better, more efficiently functioning patent system to provide security in R&D investments by which to induce more money there.

I will skip all the other non-patent-system oriented factors causing decline in innovation, except one: Money markets.

In 1969, 1,298 new stock issues sold to 31,000,000 U.S. stock-buyers to raise 3.5 billion dollars of fresh venture capital.' In 1978 only 58 new issues were offered vs. 1,298 nine years earlier.1 In 1978 only $214 million was raised, vs. 3.5 billion nine years earlier. In the last five years together only 100 firms were able to sell a stock offering to the public for their first time.1

Do those figures bother you? They bother me.

In 1969 and before, innovators generally found venture capital readily available for investment in instant snap shot inventions, plain paper office copiers, and even Weed Eaters. In the last five years, innovators have generally found the venture capital for them was simply not obtainable.

Thus they have not entrepreneured their own innovation. Often they did not make the invention at all, seeing no place to go with it. When they did innovate, they have commonly been forced just to try to sell their innovations to established corporations with surplus money.

The capital for innovation venture is unavailable for many reasons, including in part, deficiencies in the patent system.

(3) Is the patent system or the Patent and Trademark Office a part of the problem? Where does the patent system fit into all of this?

Well, the Constitutional concept of the patent system, was not to make inventors wealthy at the expense of the public, but by holding out the carrot of a property right in any inventions, to induce investors of either sweat, intellect or capital to invest in R&D, whereby public would enjoy a wealth of new and better things. As the Constitution phrased it:

"Congress shall have the power. . . To promote the progress of science and the useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."

That system has worked well for us, over most of our history. In anticipation of a property right in any inventions produced, Americans have invested heavily their sweat, their intellect and their capital in innovation. And the nation has prospered-through technology. If innovators also prospered, what a happy coincidence, and who could criticize their profiting by their service to the nation.

If the patent system has worked so well, and if there are many important nonpatent-related factors that have contributed to decline in innvocation, then it must be that none of the fault that produced the decline is attributable to the patent system. Right? Well, no. Wrong!

President Johnson's 1966 Commission on the Patent System, and the 1978 Patent Advisory Committee to the Domestic Policy Review on Industrial Innovation, like every other responsible study of the system and its concepts, have judged the patent system to be in fact operating as an important net plus. I concur. But loyalty to the value and power to be derived from a valuable V8 engine, should not be permitted to blind us to its great deficiencies which I perceive to be growing, and therefor in special need of attention.

The Constitution and patent statue promise to the inventor and his financial backer, the exclusive right to their invention. You make an invention, it's your property just like your car. And no one can use it without your permission. And you can ask anything you want, as the price for giving your permission.

But the modern egalitarian sophistry of our dividend-power system of government, now makes the promise of the Constitution and the statute, into a deception upon anybody who relies upon their promise of an exclusive right.

Because the system does not but rarely function to fulfill that promise. At best, the system offers a right to license-only half a loaf of what was promised.

The patent system is now fairly well riddled with deficiencies of which I can here identify only a very few.

The defiencies include:

(a) poor Patent and Trademark Office search facilities, a direct result of chronic underfunding of the Office for years;

1 Washington Post, May 24, 1979.