III. Arbitration of patent disputes

Commercially important patents often invite controversy. Competitors interested in the patented product or its equivalents frequently disagree with the patent owner as to the true scope and value of the patent. The result may be a suit in the federal courts. Unfortunately, fully contested patent litigation is very expensive, often $500,000 or more for each party. Protracted pretrial procedures coupled with the difficulties of dealing with technical subjects tend to make the litigation very expensive.

Patent litigation is also protracted. A suit on an important patent will commonly take years to resolve. The cost and time required for litigation detract from the ability of patents to foster innovation. The cost of enforcing patents may very well influence business to invest in less risky programs than in the research and development needed for innovation and productivity gains.

In order to reduce the cost and time required for the resolution of certain patent disputes, arbitration should be available for those who wish to use it. In certain judicial decisions, it has been held that patent validity has too great a public impact to allow it to be submitted to arbitration. In other words, only federal judges should rule on it. We believe, however, that arbitration should be a legitimate method for solving patent problems. Arbitration is a common method of resolving disputes in almost all other commecial areas including very large labor settlements, and it is difficult to see why it should not be allowed for patent questions.

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 validity. We recommend that a similar statutory provision be passed promptly. Arbitration cannot be required since such a requirement would be a violation of due process, but it should be available when both parties wish to use it. The results of arbitration are, of course, binding only on the participants.

To our knowledge there is very little data on arbitration in patent cases. However, information provided by the American Arbitration Association showed that in a sample of 200 commercial arbitrations in the construction field, it averaged less than four months from filing to issuance of an arbitrator's award. The savings in time and money would be substantial if anything like this could be attained in patent cases. It is certainly worth a try.

IV Special patent court

Honest irreconcilable differences occasionally dictate the need to litigate patent questions. Unfortunately, there are sometimes material differences in legal precedents about patents among different judicial circuits. The precedents in one circuit may indicate a favorable result for the plaintiff while the precedents in another circuit may not. Because the result of the litigation can be affected, or even determined, by the circuit selected, the selection process (forum shopping) frequently becomes a major added complication in the controversy.

Proposals have been made for a single court of appeals for patent litigation. This change would be particularly useful in eliminating much of the costly procedural maneuvering at the early stages of patent litigation devoted solely to selection of the forum.

A single court of appeals should also contribute to greater certainty in the predicted outcome of patent litigation. A single court would tend to develop a more cohesive body of precedents than would the many independent circuit courts. This greater certainty in expected result might also reduce the number of patent suits brought. Few suits are brought or accepted with the expectation of losing.

In a single court there could be difficulties in the handling of issues ancillary to patent validity and infringment. We believe, however, that a single court of appeals for patent litigation would contribute far more to the value of the patent system than it would detract from it. We recommend that passage of legislation establishing such a court.

V. Computer software protection

An increasing proportion of money invested in research and development work is being applied to the information processing field. The resulting computer software has not found legal protection in the same manner as afforded other technology. While some of the software may find limited protection under the patent system, much of it appears to be protected by its owners as trade secrets. Some industries have sought to protect computer programs by copyrights. There has been an increasing need for legislation which would better define the protection which is, or should be, available for computer programs under the copyright law. To date no such legislation has been forthcoming.

There have been numerous recommendations that the present copyright statute be amended so as to clearly afford protection for computer programs. One such recommendation is set forth in NBS Publication 500-17 by Roy G. Saltman of the National Bureau of Standards entitled Copyright in Computer-Readable Works: Policy Impacts of Technological Change. Subsequently the National Commission on New Technological Uses of Copyrighted Works recommended on July 31, 1978, to the President of the United States that the copyright laws be amended to make explicit that computer programs are proper subject matter of copyrights:

"The new copyright law should be amended (1) to make it explicit that computer programs, to the extent that they embody an author's original creation are proper subject matter of copyright; (2) apply to all computer uses of copyrighted programs by the deletion of the present Section 117; and (3) to assure that rightful processors of copies of computer programs can use or adapt these copies of their use."

We urge that the recommendation of the National Commission be implemented. VI. Process patent protection against imports

A problem of patent enforcement which may discourage investment in process development, is the powerlessness of a United States patent over products produced abroad by that process and brought into this country. There is a proceeding available before the U.S. International Trade Commission which may lead to the exclusion of such goods but it has not proven satisfactory to many patent owners. Other major countries, unlike the U.S., do allow a process patent to be enforced through an infringment suit against foreign-made goods brought into the home country of the patent.

In order to encourage investment in process innovation, we recommend expanding the rights available under process patents. Specifically, a patent owner should be able to enforce his patent against goods, made abroad by use of the patended process and then imported into the U.S. Such a right would not bar the importation of identical goods not made by the patented process but would secure to the patent owner what should be rightfully his.

VII. Adjustment of patent term for Government-caused delays

Governmental regulatory requirements and resultant delays in clearing products for commercialization often undermine the value of patents obtained on such products by diminishing the effective life of the patent. This is particularly true in the cases of agricultural chemical products (which must be registered by the Environmental Protection Agency before commercialization) and pharmaceutical products (which must be cleared by the Food and Drug Administration before commercialization), and is also true in other fields, such as the electronics industry in connection with the standardization of a particular color television system by the Federal Communications Commission.

The reduced values of such patents occur because, in many cases, they issue a number of years before the products themselves can appear on the market. The patents thus expire relatively early in the commercial lives of the products, and potential infringers are enabled to get into the field quite soon without having to 'design around" the patents or develop competing new products. The time in which the innovators of the products can recoup their investments is corresponding shortened and this possibility acts as yet another deterrent to innovation in these fields. We recommend, therefore, that provisions be added to the patent laws which would allow patent owners to receive extensions, equal to the lengths of the regulatory delays, of the lives of patents which have been prevented by governmental regulatory delays from reaching their full economic potential. To balance this proposed extension of patent rights, there probably should be some maximum total length of time for any extension as well as a precise definition of the kind and causes of regulatory delays which might qualify patents for extensions. An alternate recommendation to solve the problem of regulatory delays would be to allow a patent owner to delay the effective date of his patent protection until any necessary governmental approvals for marketing the patented product are obtained.

RECOMMENDATIONS FOR GOVERNMENT-DEVELOPED TECHNOLOGY

I. Uniform Government contractor policy

It is estimated that in 1979 approximately $51 billion will be spent on research and development in the United States. The federal government will provide $25.8 billion of that sum. Until the 1970's, much, if not most, of such federal funding was spent on military and space programs. In recent years, there has been a growing emphasis on development programs in other areas, such as energy. It is clearly in the national interest that the technology developed by the federal funding be made

available for use by private industry in providing products and services for the general public, In many areas of the government, however, patent policies have been instituted either through statute or agency rule making, which seem to discourage commercialization of the federally funded R. & D.

Experience has shown that the entity most likely to carry the results of government-funded R. & D. to the market place 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 governmentfunded 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 a 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.

To enhance the possibility of government-funded R. & D. being used for commercial products, contractors should in most instances receive title to the inventions and patents made under government contract. This is not to say that the government should not keep a non-exclusive license for government programs and marchin rights allowing it to require the contractor to license others in certain circumstances, that is, if the contractor fails to produce enough products to supply the market.

There are some instances in which the government taking title may be the best course. For example, an agency may fund a development and then by regulation adopt it as a national standard for commercial products. To prevent economic dislocation, it is desirable that all competitors receive the same royalty-free right to use the required technology or feature.

A uniform government patent policy could be attained by passing a statute similar to the Thornton bill H.R. 6249, introduced in the 95th Congress, At the time, the Thornton bill received the support of various industry associations and various patent law associations.

Government patent policy should further extend to improved procedures within the government through which it can more promptly and more readily recognize valid patents of others bearing on government activities. Also important is discouragement of any contracting practices needlessly tending to appropriate background rights of the contractor in existing patents or data.

II. Government-owned patents

A substantial portion of the government R. & D. funding goes to support laboratories and other acitivities which are integral parts of the government agencies. The unclassified technology developed by these laboratories has normally been patented, presumably to make sure that it becomes known to the public.

The administration of patents on technology generated in government laboratories, however, presents a situation which is conceptually less straightforward than administration of patents generated from contractor-developed technology. Not having developed the technology, the commercially oriented engineers are likely to have, or at least envision, different ways of accomplishing the same end. Thus, there is at least some question as to whether the internally generated government patents serve as an effective tool for commercialization.

Such patents can certainly discourage manufacturers if they fear a claim being made under the patents by the government. The best course, therefore, is probably to license the patents on a royalty-free basis to all domestic manufacturers. In this way, the patents would serve to publish the technology, and at the same time, would not deter commercialization. (The patents could, however, serve to protect efficient domestic production from foreign dumping or the like; and in the rare instance where exclusive licensing might be needed to elicit money for commercialization, such licensing could be contemplated.)

In many instances, government patents are taken out solely for defensive reasons, that is, to publish results of the technical work without any thought of the patents having commercial value. Considering the very large number of patent applications filed by the government each year on inventions made by government employees (averaging 1332 applications per year for fiscal years 1963 through 1975), we believe that the workload of the Patent and Trademark Office could be substantially reduced if this so-called defensive filing were eliminated by the government agencies.

To do this, we suggest that a technical journal be established for publishing selected government inventions. This journal would publish descriptions of those inventions on which patents are not needed for national purposes. In this way the government would be protected against adverse claims by later inventors; the technology would be made available to those interested; the government inventors would receive recognition; the Patent and Trademark Office workload problems would be greatly reduced; and the government patenting costs would be decreased.

OTHER SUBJECTS CONSIDERED BY TASK GROUP

I. Funding of Patent and Trademark Office

It was assumed for purposes of this report that there would be adequate funding of the PTO, since the level of funding bears a direct relationship to the quality of patent examination and, consequently, of issued patents. Despite this obvious relationship, the PTO's financial support is diminishing when taken on a constant dollar basis. Specifically, the 1979 budget results in a decrease of $1.692 million in constant dollars for the PTO, and the proposed 1980 budget will result in a further decrease of $1.633 million. The consequences, already started, will be a progressive deterioration in pendency time, and less reliable patents because search files will not receive needed updating.

We believe that funding of the PTO operating budget should at very least keep up with inflation. The imposition of addition duties (new reissue provisions and proposed reexamination of issued patents) makes this condition especially important, and additional funding beyond adjustment for inflation will be essential in the relatively near future if we are to avoid a substantial increase in the pendency time and in the PTO backlog.

II. Mandatory licensing

Foreign patent systems often include provisions for compulsory licensing of patents, normally in the event of insufficient local use of the invention. Numerous studies of mandatory licensing for use in the United States have been made and, so far as is known, all have rejected the idea for one reason or another. We agree with this. A recent such study entitled "The Economic Effects Of Mandatory Patent Licensing" was reported by Prof. F. M. Scherer of Northwestern University at a public meeting of ERDA at Germantown, Maryland, on January 12, 1977.

III. Return of Government seed money

At least one legislative effort was made in the last Congress to consider reimbursement of the Government for money it devoted to the making of inventions that later proved to be a commercial success. This effort took the form of the proposed "Small Business Nonprofit Organization Patent Procedures Act"-S. 3496. Section 204 of that Bill provided that when the commercial success involving utilization of any invention based on government-funded work reaches a designated threshold, the patent owner should begin to return to the government the money which the government originally invested.

It would be a substantial administrative burden to trace any given subject invention through a complex license program or to allocate appropriately any particular contributed value to such an invention. While patents are occasionally licensed alone, the more significant license programs tend to involve many patents, related technology and technical assistance in the form of person-to-person contacts. In that setting there is no value which is broken out as being attributable to rights under inventions in general, and certainly no allocation is made in respect to any given invention. Similarly, there is no reasonable way to determine the profits attributable to the use of any particular invention in any given product which incorporates varied technologies.

The cost of attempting to administer a broad repayment program would almost surely exceed any returns that might be expected. Thus, we urge that the government continue to regard increased general tax revenues and the better business health of the country as its return for priming the pump used by the contractors. Although not related to the seed money concept, the Task Group notes that it sees no logic to the line drawn by S. 3496 between large and small government contractors. If it is desirable (as we believe it is) to place title to contract inventions in the contractors' hands for purposes of commercialization, the size of the contractor is irrelevant.

IV. Petty patents

A number of other countries (notably Germany and Japan) have provisions for the grant of shorter term "lesser patents", suited for the protection of more minor

advances in technology. The introduction of lesser patents might reduce the workload in the Patent and Trademark Office. In any event, experience with such patents in other countries should be studied and evaluated to determine if similar patents would foster innovation in the United States.

V. Maintenance fees

Many other countries have patent systems under which the patent owner must make payments at fixed periods during the patent term to keep the patent in effect. Besides producing revenue, such a system tends to force reexamination of the worth of patents and thereby rid the patent rolls of worthless patents. We believe, however, that the institution of maintenance fees in the U.S. would not increase innovation.

VI. Patents in third-world countries

Public officials in some foreign countries assert that their patent systems benefit only foreigners, leading to the conclusion that strong, national patent systems are not in their best interest. As a result there is little or no effective patent protection in large geographical areas of the world-notably, in Latin America, Asia, and Oceania (with the exception of Japan, Australia, and New Zealand) and in Africa (with the exception of South Africa). This movement toward ineffective patent systems can have an adverse effect on the more research-intensive segments of United States industry.

A U.S. posture looking toward improved patent protection in third-world countries probably would be supported by other western nations, and would be in the enlightened interest of the developing countries themselves. Specifically, reliable patent systems should help the third-world countries to enjoy more rapid industrial development. This is because the optimum transfer of technology between countries occurs through voluntary cooperation between the transferor and the transferee in a climate where valuable industrial property rights are protectable.

During the past ten to fifteen years, it appears that a number of inter-governmental organizations, particularly agencies of the United Nations, have been prime movers in skeptically viewing strong patent systems for third-world countries. Without any improper interference in the affairs of other countries, we believe that the United States should encourage, where appropriate, the establishment of effective laws to protect property rights in inventions and innovation.

Senator STEVENSON. Thank you, sir.

Mr. Arnold, you said that you took exception to one of the recommendations. Which recommendation?

Mr. ARNOLD. Senator, you've used a vague and indefinite word— "you." I am here on behalf of the American Patent Law Association, that has adopted a position contrary to one that I personally hold myself.

The first-to-file issue is a very controversial issue among the bar. Ten years or so ago I was active in fighting first to file in favor of our present first-to-invent system. And the American Patent Law Association, the last time they addressed the issue some years back, was divided on it but decided that they like the present firstto-invent concept.

Let me take just one minute to explain why.

The present system is the one of higher sophistication in pursuit of justice. Everybody would agree that it is a better effort to find the just patent owner.

The difficulty with it is that the cost of administering the first-toinvent system, as we call it, seems to me now as it did not 10 years ago when I was testifying on the same topic, to outweigh the value of chasing that extra justice.

It seems to me now-contrary to the majority of the Association, on behalf of whom I'm here-that first-to-file does have enough advantage in its simplicity, in its time-saving, in its money saving, in its certainty, to outweigh the circumstance that we may some