SECTION 201 (c) (9)

This subsection authorizes the Secretary to retain the income from the Government licensing program to use to further the purposes of the Act.

We are sympathetic to the view that such authority will give financial flexibility and freedom to the Administrator of this new program. Such authority may well be desirable in an established Executive branch program where the services provided, the cost, and the income can be ascertained with relative certainty. However, in this new program, we believe that annual authorization and appropriation functions by the Congress would have a continual and effective "oversight" effect on the operation, and particularly the financial operation, of this new program.

Therefore, we recommend that in subsection 201(c)(9) on line 9, the word "Provided" and all that follows in that subsection be struck out. The monies collected by the Secretary should be directly deposited in the general fund of the United States Treasury.

SECTION 302 (b)

We support the clearly intended purpose of this Section. However, we believe the Section as intended could be made more effective and clear by the addition of the following sentence to be inserted as a new last sentence of 302(b):

"Contractor's license to practice the invention, or to have it practiced on contractor's behalf, shall include the right to grant sublicenses of the same scope to subsidiaries and affiliates within the corporate structure of contractor's organization, and to existing licensees whom contractor is legally obligated to sublicense or assure freedom from infringement liability."

SECTION 304

We offer the following two amendments which are clarifying in nature and which we believe comport with the intent of the Section.

(1) On page 15, line 18, strike out "or" and add, "and has refused to offer a license to the invention to responsible applicants upon terms reasonable under the circumstances."

(2) After subsection (a), renumber (b) as "(c)" and insert the following new subsection:

"(b) A contractor whose title to an invention has been affected pursuant to the exercise of authority granted in (a) shall retain an irrevocable non-exclusive and royalty free license under such invention if such contractor is using or has made substantial investment leading to the use of the invention."

SECTION 305 (a) (2)

This subsection as drafted in certain narrow circumstances could act as a serious barrier to the development and commercialization of practical and useful inventions, and thus be counterproductive to achieving the purposes of the Act. Our fear goes to products invented or improved, the nature of which limit the potential buyers to governmental entities; for example, highway safety devices and equipment. If the statute provides that the potential purchasers of these new products are reserved a paid up license to make, use, and sell the invention, there will be a serious chilling effect on inducing a private manufacturer to invest capital to develop the product to the point of commercialization.

We recommend that the contractor have the right to petition the government agency to withhold this grant of rights to State or municipal governments, "if the agency determines that such a grant would substantially interfere with the commercialization of the patented invention." While this standard is more narrow than "not in the public interest" currently in S. 1215, we think it more precisely identifies the public interest in the context of the bill and, therefore, in the few meritorious cases which are likely to arise, would be more attainable.

Senator STEVENSON. Thank you, sir.

Mr. Manbeck?

STATEMENT OF H. F. MANBECK, JR., GENERAL PATENT
COUNSEL, GENERAL ELECTRIC CO.

Mr. MANBECK. Thank you, Senator.

My name is Harry Manbeck. I am general patent counsel of General Electric Co.

My purpose in testifying here today is to present some thoughts and recommendations on needed improvements in the patent system.

The changes which I will suggest were developed as part of a study on technology policy currently being conducted by the Committee for Economic Development.

The Committee for Economic Development, a nonprofit organization, is composed of 200 trustees, including many corporate executives and university presidents, and its study is intended to determine what policy changes are needed to stimulate technical progress in the United States.

The patent working group, chartered as a part of this study, was given the opportunity to consider the effect of the patent system in the innovation process and what changes should be made in the system to enable it to support innovation more effectively.

The report of the working group has been submitted and accepted in principle, and a copy of it is being furnished for the hearing record. I should emphasize, however, that at this time the report has not yet received final approval from CED.

The overall summary chapter of the CED study, which includes much more than patents, tax policy, regulatory policy, et cetera, has been presented to the executive branch of the Government. We had a meeting on Wednesday of this week in Dr. Press' office with a number of people. So the same recommendations have been made on the executive side, too.

The first conclusion reached by our group is that the patent system unquestionably serves as a stimulus to industrial innovation. The protection provided by patents encourages the investment of funds, not only in research and development, but also in facilities to commercialize the R. & D. output.

Now I will depart from my prepared text here just to emphasize the two-step process we're talking about. Mr. Arnold spoke particularly of funds for research and development but it is much more than that.

It is the commitment often of much, much larger funds, millions to hundreds of millions of dollars to put in a plant to bring out new products, to put new processes in place that we're talking about, that the patent system supports.

If businessmen were to lose confidence in this protection, many innovative products might never be developed or reach that marketplace. To maintain that confidence, we propose a number of changes in the patent system which should increase its effectiveness and strengthen its supportive role in the innovative process. These changes relate primarily to two key areas of improvement. The first area involves the resolution of disputes over issued patents while the second area lies in the timing of the patent grant and thereby its reliability in business planning.

Turning first to the resolution of disputes, it is believed that the cost and time currently required to resolve contested situations seriously detract from the prompt and effective functioning of the system.

When patents relate to commercially important products or processes, differences often arise between competitors as to the validity and scope of the patent coverage.

Most of these differences are settled by negotiation between the companies involved, but sometimes irreconcilable positions are taken which require resolution by a third party.

Unfortunately, because of certain court decisions, these differences cannot normally be taken to arbitration, and if they are taken to court, the decisional process becomes very time consuming and very expensive.

A patent lawsuit ordinarily takes years to complete and will involve hundreds of thousands of dollars in expense.

As an aside here, I can mention in the last 3 years we've had two cases in my own company in which we've spent over $500,000 in each case and we have yet to have 1 day of trial in either case. In fact, one case has now been terminated. The other one contin

ues.

So these things are very, very expensive.

Also, the results are often not as predictable as they should be due to differences in legal precedents among the various Federal appellate courts. Given these factors, we suggest three changes: First, arbitration should be endorsed by statute as an acceptable way of settling patent controversies. Arbitration is widely used in labor and other commercial matters, which often involve far greater amounts of money than most patent disputes.

It is extremely unfortunate that arbitration is not available in the patent field for those who wish to use it. Section 294 of the McClellan bill, S. 2255 of the 94th Congress which passed the Senate in 1976, would have provided for voluntary arbitration of patent disputes, including questions of both infringement and invalidity.

We recommend that a similar statutory provision be enacted promptly.

Second, a single court of appeals for patent cases should be established to provide nationwide uniformity of the patent law. Not only would this make litigation results more predictable; it would also get rid of the expensive and time-consuming forum shopping that often occurs in patent litigation. Legislation providing for such a court has been sponsored by the Department of Justice and the Senate currently has it under active consideration.

Now my prepared text mentions S. 677 and S. 678. There is a successor bill to these bills which has been introduced as a result of the hearings which occurred on those bills, and I'm sorry, I don't have the number. It is more restricted to patent cases than the first bills were, which I believe included tax and trademarks, too. And we urge support for that bill.

Third, a statutory reexamination procedure should be instituted to enable the Patent and Trademark Office to strike invalid patents from the rolls. As our system now stands, a businessman faced with a baseless charge under a worthless patent has no avenue except to sue or be sued, or to make an unjustified settlement. There should be a procedure available allowing him to take his evidence of prior patenting or prior publication to the Patent Office and have the patent struck from the rolls.

Obviously, it would take very convincing evidence for this to happen, but it should be available.

Coming now to a second area of improvement, the timing of the patent grant, here two changes are important. The first deals with the protection of agricultural chemical industry and the pharmaceutical industry. The second is concerned with the uncertainties which are caused when patents are held up in the Patent Office for years because of interference contests between two inventors claiming the same subject matter.

To protect innovation adequately in fields subject to Government regulation, a procedure should be established providing for an appropriate adjustment in the patent term when commercialization is held up due to regulatory delay.

As matters now stand, patents in some industries may issue a number of years before the products involved can appear on the market.

Thus, the patents expire relatively early in the commercial lives of the products, enabling potential competitors to get into the field without having to design around the patents or develop competitive new products.

Gentlemen, here let me mention a point of the patent system which is rarely emphasized.

The patent system forces people to do their own work. And you often get progress in America simply because one businessman has to design around another businessman's patent. It is important that we don't cut into the life of patents in these industries which are subject to regulation. Otherwise, why not wait, then poach on what the other guy has done.

To continue with the last sentence of my prepared text on this, the time in which the innovators of the products can recoup their investments is correspondingly shortened and this possibility acts as yet another deterrent to innovation in these fields.

Now to the second point on timing. To prevent prolonged, extended controversies and long delays in the issuance of patents when two or more inventors are claiming the same improvement, the Nation should change to a first-to-file system where the first inventor to file his application would receive the patent, although a personal right of use could be preserved for anyone filing later who, in fact, invented first and took steps leading to commercialization.

With this system, the present interference practice in the Patent Office would be eliminated and the ownership of all patents would be determined promptly.

It seems incredible, but you can have interference litigation that goes on for years and years and years to determine who is entitled to the patent.

The reliability and predictability of the system would be increased and businessmen and the public would benefit by early publication of the patent disclosure.

The rest of the industrialized western world with the exception of Canada uses the first-to-file system that we propose, and even in Canada, the government has proposed changing to a first-to-file system.

I must note, however, that CED members from the pharmaceutical and agricultural chemical industries have indicated that they would prefer to stay with the present system, believing it is better

for them. However, allowing for adjustment in the patent term to compensate for regulatory delays might make the first-to-file system more acceptable to them.

I have besides these two main areas of improvements some other ones which are less important. They are in the text.

Would you like me to go forward, or have I taken enough time? Senator STEVENSON. Let's put them all in the record, and maybe we will get to them in the course of questions. After examining the record, we may have additional questions.

Mr. MANBECK. I have two or three other things. One, we strongly support S. 1215 because my own company experience shows us, proves to us, that the contractors are the ones who are most likely to carry the Government-sponsored technology into commercial practice.

If the contractor doesn't do it, nobody's going to do it, really. And if the contractor is subject to a claim by the Government under patents, or if the competitors can quickly copy the product without a patent deterrent, there's much less reason for the contractor to risk his funds in commercialization.

And my last point doesn't have to do with the changes in the patent system but merely to say that we were very pleased to see the Senate pass in the appropriations bill an item which increased the Patent and Trademark Office budget. It was very badly needed, and we do appreciate it and hope that you will hang in tough with the House and get it through there, too.

Thank you.

[The statement and material referred to follow:]

STATEMENT OF HARRY F. MANBECK, JR., CHAIRMAN OF TASK GROUP ON PATENT POLICY

My name is Harry F. Manbeck, Jr., and I am General Patent Counsel of General Electric Company. My purpose in testifying today is to present some thoughts and recommendations on needed improvements to the U.S. patent system.

The changes which I will suggest were developed as part of a study on technology policy currently being conducted by the Committee For Economic Development. The Committee For Economic Development, a non-profit organization, is composed of 200 trustees, including many corporate executives and university presidents, and its study is intended to determine what policy changes are needed to stimulate technical progress in the United States. The patent working group, chartered as a part of this study, was given the opportunity to consider the effect of the patent system in the innovation process and what changes should be made in the system to enable it to support innovation more effectively. The report of the working group has been submitted and accepted in principle, and a copy of it is being furnished for the hearing record. I should emphasize, however, that at this time the report has not yet received final approval from CED.

The first conclusion reached by our group is that the patent system unquestionably serves as a stimulus to industrial innovation. The protection provided by patents encourages the investment of funds, not only in research and development but also in facilities to commercialize the R&D output. If businessmen were to lose confidence in this protection, many innovative products might never be developed or reach the marketplace. To maintain that confidence, we propose a number of changes in the patent system which should increase its effectiveness and strengthen its supportive role in the innovative process.

These changes relate primarily to two key areas of improvement. The first area involves the resolution of disputes over issued patents while the second area lies in the timing of the patent grant and thereby its reliability in business planning. Turning first to the resolution of disputes, it is believed that the cost and time currently required to resolve contested situations seriously detract from the prompt and effective functioning of the system. When patents relate to commercially important products or processes, differences often arise between competitors as to the