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. 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: (1) 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.

(2) 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 through bills S. 677 and S. 678 introduced by Senator Kennedy.

(3) A statutory re-examination 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. 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 innovation in fields subject to government regulation, examples being the 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.

(1) 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 competititors to get into the field without having to design around the patents or develop competitive new products. 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.

(2) 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. 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.

Besides these two main areas of improvement, we have a couple of other unrelated proposals. One is that better defined protection should be afforded to computer programs. This we believe should be done not through a change in the patent

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system but rather by following a proposal which was made on July 31, 1978 by the National Commission on New Technology Uses of Copyright Work. Specifically, the Commission proposed an amendment to the copyright law to make it explicit that computer programs are proper subjects of copyright. Our other proposal is that the law be changed in respect to process patents so that they can be asserted against products made abroad by the patented process and brought into this country. Again, this would bring U.S. law in conformity with the laws of many other countries and would encourage the process innovator by giving him the protection he deserves. Of course, even with this change, a process patent could not be asserted against identical products not made by the patented process.

Turning now to S. 1215 itself, we strongly endorse its concept whereby government contractors would, in most instances, be afforded title to the patents based on contractor originated inventions. Experience has shown that the entity most likely to carry the results of government-funded R&D to the marketplace is the contractor itself. If the contractor will be subject to a claim by the government under the patents, and/or if its competitors can quickly copy its product (as by reverse engineering) without any patent deterrent, there is much less reason for the contractor to risk its funds in commercialization. The same general theorem applies to the results of government-funded R&D work done by non-profit contractors, such as universities. Unless the universities get substantial rights from patents, there is absolutely no incentive for them to establish technology transfer and patent programs which may lead to commercialization of the research. The government policies should support the profit motive no matter what the class of contractor, for it is the expectation of profits (or licensing income, in the case of the universities) which will encourage the investment of private funds necessary to commercial programs. Thus, to enhance the possibility of government sponsored R&D being using for commercial products, we support the passage of S. 1215.

As my last item, I would like to comment very briefly on funding for the Patent and Trademark Office. During our study, we became aware that a very serious underfunding situation has been building up in the PTO due to its financial support being reduced when taken on a constant dollar basis. This is of considerable concern since a reduction in the level of funding of the PTO would cause a progressive deterioration in pendancy time, and less reliable patents because search files could not receive needed updating. I was very pleased to learn that since our CED paper was written, the Senate Appropriations Subcommittee on State, Justice, Commerce, and related agencies has increased the PTO budget for fiscal year 1980 by $4,400,000. It is very important that this increased funding be made available, and we urge support for it.

If there are any questions, I would be glad to try to answer them.

REVISED POSITION PAPER

CED SUBCOMMITTEE ON TECHNOLOGY POLICY-REPORT OF GROUP 4-PATENTS

This Patent Group, formed and chartered under the auspices of the Committee For Economic Development, was assigned three principal areas of inquiry: (a) the significance of patents in the innovative process; (b) changes in patent laws or regulations which might enhance the climate for innovation; and, (c) inhibitions by Federal patent regulations of the commercial use of government-developed technol

ogy.

Patent group participants

H. F. Manbeck, Jr. (Task Group Leader)-General Electric Company

Paul D Carmichael-IBM

Paul Enlow-AT&T

Floyd H. Henson-Westinghouse Electric Corp.

Robert C. Kline-E. I. duPont de Nemours & Co.

Robert I. Pearlman-Exxon Research & Engineering
Jack Posin-Uniroyal

SIGNIFICANCE OF PATENTS IN THE INNOVATIVE PROCESS

I. The patent system today

The patent laws are one of three branches of law which regulate the ownership and use of intellectual property. Trade secret law and copyright law are the two other branches. In the field of technology the patent and trade secret laws overshadow the copyright law.

Once brought forth, intellectual work can be owned and otherwise assume the elements of "property" only to the extent provided by law. This characteristic of property, or "appropriability of exclusive rights" to innovative work, largely determines whether or not such work is reproduced on a commercial scale. If the results of innovative work were freely available to all who might copy or steal them, then there would be little reason to invest in research and development. The property rights created under the patent and trade secret laws are thus important, if not essential, to the willingness of prudent businessmen to sponsor research and development and to invest in the facilities needed for innovative new products.

A well-functioning patent system meets three criteria. The first is accessibility. The system should be simple, inexpensive, and available to everyone. The second criterion is reliability. The system should allow a person who receives a patent, as well as those who are asked to respect the patent, to know the metes and bounds of the protection and to rely upon the patent's ability to stand up under litigation. The third criterion is selectiveness. The system should protect and encourage singificant discoveries without burdening the public with patents on minor and obvious variants of what was previously known. The inventive contribution must be worthy of the protection provided by the government.

A patent is sometimes referred to as a limited monopoly, but patents truly deserving of that appellation are rare instruments. The usual patent covers only a specific product, product freature or process in such a way that unpatented design alternatives inevitably exist.

Patents are generally granted about two years following filing of the patent application. Interferences, a highly technical quasi-judicial proceeding for resolving priority of inventorship between two or more contestants, can extend the Patent and Trademark Office (PTO) proceeding by many years, as can appeals from adverse decisions by PTO Examiners. The seventeen-year term of a patent is, however, measured from the date of grant, regardless of delays in the patenting process, whether caused by the Government or not. Many innovations are introduced rapidly and so the timing of commencement of the patent right, which must await grant of the patent, is of great importance. The length of the patent term, seventeen years, is generally not considered controversial today except where government actions delay the commercialization of the patented innovation.

There are a number of key distinctions between patents, with which this paper is concerned, and trade secrets, which are not this paper's subject. A patent owner has rights superior to those of a second inventor who makes the same invention, whereas the trade secret proprietor has no rights against a later discoverer of the same trade secret. U.S. patents run for a term of seventeen years from the date of grant, whereas the life of a trade secret is indeterminate. Patents are obtainable only thorugh disclosing to the public the invention and the preferred manner in which it is practiced, whereas trade secrets depend for their existence upon being closely held and known only to a few. Thus, if an invention is ascertainable from a product as sold, the only real protection available is through the patent system. The patent owner shoulders the burden of detecting infringement and enforcement of his patent. Such enforcement lies through the bringing of a civil action in a federal district court. The federal courts have not been inclined to share their exclusive jurisdiction over patents. The validity of a patent is said to hold such public interest that settlement of a controversy through arbitration is inappropriate. The cost of enforcing or defending against a patent in court is often high, usually amounting to several hundred thousand dollars for each party.

About half of the research and development in the United States is paid for by the federal government. How do government contracts affect patents? Some people favor ownership by the government of most patents on inventions arising out of govenment-funded work. Others, equally numerous, favor retention of patent rights by the contractor. In a later Section, this paper takes up the pros and cons of this controversy and its implications for the generation and utilization of new technology.

The number of U.S. patents issued per year has reached a plateau at approximately 75,000. However, the patents issued to foreign corporations have been increasing for some time by more than 1,000 patents per year and are presently nearing a level of 30,000 patents per year. Thirty-seven percent of all U.S. patents issued in 1977 were issued to foreigners. There has been a steady and noticeable decline in U.S. patents granted to U.S. residents.

II. Role of patents

The role of the patent, and of the trade secret law, when applicable, is to give to developed technology the element of controllable property, i.e., appropriability. As already noted, the element of appropriability probably determines in large measure

whether or not new technology development will be undertaken at all. To be sure, all advancement of technology would not cease if the patent and trade secret law were repealed. Such advancement would probably continue unaffected in universities, but research and development directly funded by commercial enterprises would decline. Today the commercial sector accounts for about fifty percent of the total R&D funded by all sources in the United States and for most of the R&D directed toward future commercial products.

Patents are used in a number of different ways to reward the innovator. One use of patents is licensing, under which others are permitted to practice the invention in return for royalty payments. Patents also are used to reserve a particular product feature or process for the exclusive use of the patent owner, although probably not as often as commonly believed. Patents occasionally are used as trading stock for freedom to operate under the corresponding patents of others. Another common role of patents is to provide the basis for acquiring counterpart patents in other countries for use in connection with product sales in those countries. Where export sales may be impractical, patents can be used to support licensing in foreign countries.

There is an obvious correlation between patents granted and R&D undertaken, although few would argue that the correlation is exact. The decline in U.S. patents issued to U.S. residents has been publicly reported for some time. A number of explanations have been advanced, but perhaps the most plausible theory is that while total R&D activity has not decreased, the work in potentially patentable areas has fallen off. Diversions of technology to areas which will not result in patents include research done to protect the environment, to reduce energy consumption, or to comply with certain government requirments and also work done to develop computer software. Diversion of technology to short-range "fire fighting" from longer range, more creative work, has also been called a cause of the decline. The following sections describe several possible solutions to enhance the contribution that our patent system makes to the invention and innovation processes.

RECOMMENDED CHANGES IN PATENT LAWS OR REGULATIONS TO ENHANCE THE INNOVATIVE CLIMATE

I. First-to-file patent system

The U.S. Patent System provides for "interferences" between two or more patent applicants who seek a patent for substantially the same invention. The interference is a procedure to determine who first made the invention. That party will be entitled to the patent to the exclusion of those who invented later. The interference starts out as a "mini-litigation", that is, a quasi-judicial proceeding in the PTO, and occasionally proceeds into the Federal Courts as full scale litigation.

Patent interferences are highly technical proceedings of questionable efficacy in terms of reaching equitable determinations of priority of invention. Much time is spent proving what happened before the filing dates; trying to prove that the inventor was incorrectly named, did not really have the invention in hand, failed to discharge various obligations, etc. In a significant majority of interferences the patent is awarded to the first to file after all. According to one informal survey, while approximately 110,000 U.S. patent applications are presently filed per year, our interference practice produces a result different from a first-to-file system in only 75 to 80 instances per year.

The U.S. and Canada are unique among all the industrial countries of the world in utilizing the interference approach. The European, countries have always considered that the patent should go to the party first to disclose to the public by filing a patent application. Many countries provide a personal defense to one who can show he was actually the first to invent and use rather than the first to file. Examples include the United Kingdom, France, Germany and Holland. The new European patent system carries along these principles.

Since the purpose of the patent system is to encourage disclosure to the public, the party first to file should be rewarded. The U.S. patent system should be changed accordingly. While converting to a first-to-file principle could result in filing a less complete patent application, it would serve the Constitutional purpose of early disclosure. All other industrial countries (except Canada) have been willing to accept such a possible disadvantage in return for the advantages of a first-to-file system. Even in Canada the Canadian government has proposed a revision in the Canadian Patent Law which would provide for a first-to-file system.

Adoption of a first-to-file system would eliminate patent interference proceedings, simplify patent litigation, enhance certainty with respect to patent validity and generally make the patent system serve the interests of the inventor and the public

in a more efficient manner. Some might object to this recommendation,' but most of the objections could be answered by the further adoption of provision in the law which would grant a prior inventor a personal right to use the invention. Such a right would be contingent on not having abandoned the invention and should require the taking of steps leading to commercialization of the invention.

II. Reexamination of patents

A serious problem affecting the predictability of litigation is that the United States Patent and Trademark Office has often not taken into account certain prior patents or other background material in its examination of the patent. In the relatively short time a patent examiner has to search for pertinent references, it cannot be expected that he or she will find all the prior references, particularly those from foreign countries, which a potential defendant in an infringement suit may be able to uncover. At present, a patent owner faced with new references brought forward by an infringer can ask for a reissue of his patent to overcome these references. The reissue patent is a substitute for the original patent that expires on the same date as the original patent would have expired but which differs in scope of coverage from the original patent. On the other hand, the infringer or other party advancing the new references must await a lawsuit or bring a declaratory judgment suit.

The present procedure, allowing a patent owner to solicit reissue of his patent when faced with new references in a contested situation, should be continued and encouraged. Anyone opposed to the reissue, either wholly or in part, has the opportunity to submit references and to present written arguments. This practice, too, should be continued. We do not suggest that a full inter partes (adversary) proceeding be established in the PTO since this would increase both the time and expense involved in the reissue proceedings.

If the patent for which reissue is sought is already in the courts, the judge should retain the discretion to stay the action in order to allow for the reissue. Allowing the reissue to be completed, while staying the judicial process, may often allow for greater certainty in the proper coverage of the patent with an attendant reduction in the amount of judicial time required. On other occasions, the reissue procedure may be insufficient because oral testimony, for example, may be essential to explain the references and other background matter submitted by the defendant. In such cases, the judge might properly refuse to stay the suit. The present procedures is reasonably satisfactory insofar as the patent owner is concerned, and it should not be changed with respect to his opportunities.

A new right should be provided to a defendant or potential defendant faced with an adverse patent claim, however. If the defendant feels that his references are so strong as to invalidate the patent without the need for or expense of a trial, he should have the opportunity to take his references to the PTO and ask for reexamination of the patent in light of those references. In other words, he should be able to call for a PTO action akin to the reissue proceedings which might result in a PTO decision that the patent should not have been granted. Such proceedings would in certain situations, particularly when baseless patents are involved, avoid the time and expense of a trial. To that end, the judge should have the discretion to stay any trial proceeding pending the outcome of a PTO reexamination requested by the defendant.

The reexamination procedure should require payment of fees, by the person requesting reexamination, which will approximate the PTO costs involved.

The concept of a reexamination of issued patents has appeared in the last few years in various Congressional bills. The version of a reexamination statute that received the support of the American Patent Law Association, the Patent, Copyright and Trademark Section of the American Bar Association, the New York Patent Law Association and others is contained in the Wiggins Bill H.R. 14632 of the 96th Congress. We recommend that steps be taken to encourage Congress to pass legislation resembling the Wiggins Bill since a reexamination procedure will increase certainty in the patent system at a relatively modest cost to all involved.

Through proposed rules published at 43 Fed. Reg. 59401 (December 20, 1978), and later withdrawn, the Commissioner of Patents and Trademarks raised the possibility that a limited reexamination procedure could be established in the PTO based on his rule making authority. However, we believe a statute is needed since the Commissioner cannot provide for court review of the PTO decisions or authorize cancellation of patents found to be invalid, features which are required for an acceptable reexamination system.

It should be noted that the pharmaceutical and agricultural chemical industries have questioned the "first-to-file" system as applied to them. They believe that the present system is preferable in their businesses, given the extensive testing needed to prove practical results.