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very thorough examination system-and they respect patents. It is my own impression that it is part of the Japanese way of life that once patents are issued, litigation really does not occur that much. They have a system where, if you think the patent isn't valid or that it is at least too broad, you can go into the Patent Office and ask for a restriction of those claims. Now that has just happened to us in an important chemical patent. Ours has been restricted in the Patent Office. We don't like it. We think they are wrong, and we are continuing, but it is still a good system that this can be done without extensive litigation.
I will say that the one infringement case we have had over there has gone on a long time because of a very great difficulty of proof. Now I would add one thing. I was in Japan some years ago, and one of our local agents arranged a courtsey call in the Patent Office for me with the man who would correspond to our Commissioner of Patents. I was received very graciously, but the point of my story is, the next day he called in all his top people and said, "See how an American company has someone over here trying to learn from us; it shows how much harder we must work to stay ahead of the Americans.” So they have a good patent system, and they work at it.
Senator STEVENSON. Senator Schmitt?
Mr. Arnold, you indicated that you served on the Advisory Committee on Patents for the administration's Domestic Policy Review. Could you, in very general terms, compare the conclusions and findings of that subcommittee with the provisions of S. 1215?
Mr. ARNOLD. Well, I guess I am sufficiently cold on exactly what the subcommittee report was by comparison with the bill that I can't do other than speak in generalities, but I feel confident that the basic concept of our subcommittee's report was square onto S. 1215. There may be some details that were different, but I don't remember what they were.
As a basic concept, I'm sure that the advisory committee's report was fully supportive of S. 1215.
Senator SCHMITT. Has the administration responded to the subcommittee report?
Mr. ARNOLD. I've only rumor information that I would not wish to suggest to you because it is likely to be in error. I am led to believe that our recommendations have not been adopted fully, but I don't know enough about it that I would just-I believe I should not comment on what the administration view has been.
Senator SCHMITT. Gentlemen, I would like to have you both consider this next question. It has been suggested that any governmentwide patent policy should include a statutory payback requirement or recoupment of some kind whereby the Government would recover a portion of its investment when inventions in which the contractor received title are developed and marketed. Do you believe this would be an appropriate provision?
Can you suggest what form such payback requirement might take? Or do you think it ought to be applied on a selective basis?
Mr. MANBECK. In answering this question, one necessarily does it from his own experience and obviously his own viewpoints. We think that the payback provision is undesirable for these reasons. First of all, it will create another bureaucracy.
Second, it is very hard in an awful lot of equipment to figure out how much of it is due to any one patent. Now let me give you an example. Some very successful programs of ours—the General Electric Co.'s in the aircraft engine field-have come, or at least used in part, military-sponsored technology. An aircraft engine is an extremely complex device. You may have a patent covering an important improvement in the blades of the third stage in the turbine. Now how much should the Government get back on a payback if the patent that covers the third stage blades comes out of Government research when there are a lot of other patents covering many other things which came out of private research on the engine? It is a very, very difficult administrative problem to take care of.
Another point is, when something goes commercial, you make money on it. If you don't make money on it, you made a mistake.
Senator SCHMITT. If you don't make money, it ain't commercial.
Mr. MANBECK. Right. I'm not sure what the present tax rate is, but it is around 50 percent, and every dollar of profit that the contractor makes, the Government gets 50 percent. And let me tell you, the contractor is working pretty hard to make profit, and the Government is going to share in that way.
Another thing is that if you are going to say-I shouldn't say you, but if the Government is going to say, “Well, we are going to expect so much payback”-and if there are alternatives, the amount of the payback, if large, is obviously going to tip the contractor toward the other alternative.
Now I can't say this will or won't occur. It is a question. So, all in all, we think the Government will get its money back through the tax revenue, and that to add further complications on top of that is just not desirable.
Senator SCHMITT. Mr. Arnold? Mr. ARNOLD. I would subscribe to everything that has been said. I might say that I have litigated the allocation of cost and profits as among different elements of a commercial undertaking, and I find that it is a game. At least in the substantial majority of instances, our accounting processes simply do not admit to a realistic allocation of how much of the cost and how much of the profit was attributable to this element or that of a total technology. We make judgments and come up with a conclusion that, when you get through, you realize, “Gee, we went to all of this expense and all of this trouble, and we maintained all of this accounting for all of these years, and in truth we haven't accomplished anything that you can sink your teeth into and say, Yes, this is right.”
So I emphasize to you that frequently the nature of the intertwining of all of the different technologies are such that this allocation is commonly not a feasible thing to do. The pessimism about the reliability of the accountings and the like will be a discouraging bias to some potential contractors. And for these reasons, among the others that Mr. Manbeck has mentioned to you, the bureaucracy-I hazard a guess that the total cost both inside the Government and in the contractor undertaking the accounting for these purposes will exceed the amount of money the Government will get back.
Senator SCHMITT. Would you say the same thing about just a royalty agreement, say, which I think in some NASA aircraft engine joint development programs with industry there have been royalty recoupments?
Mr. ARNOLD. I guess I'm not as confident about that because the royalty provisions have the advantage of being somewhat more easily arrived at, somewhat more mechanically arrived at on the one hand, with costs passed on. But let's come right back to the example that Mr. Manbeck gave. What is a reasonable royalty on the improvement of the blade in the third stage?
Here the J-59 engine cost half a billion dollars to develop.
Senator SCHMITT. That is probably not an appropriate use of royalty recoupment. But let's say it's a brandnew engine development, a new engine is going to be marketed, and there is a joint use of test facilities and development capabilities. Would it be reasonable to collect a royalty on the profits?
Mr. ARNOLD. I guess I would want to look more specifically at specific cases than I am able to, right off the top of my head. I'm still suspicious of it, but at least I don't want to kick it out until I would study it some more.
Senator SCHMITT. Then let me pursue this just a little bit farther. As I'm sure you are well aware, one of the criticisms that will be raised against my bill and other attempts to allow more rapid use of technology in the private sector is that it is a give-away, that is, that the company or the inventor is going to have a windfall. How do you address this? What are the alternative mechanisms that we can use to address this concern?
Mr. ARNOLD. Both of us want to jump on that one, but it is Harry's turn.
Mr. MANBECK. Senator, I would not want to mislead you. In the aircraft engine business of which I spoke, there are a couple of cases where we are subject to recoupment of development cost clauses where the, let's call it the core engine, has been to a very large degree Government-sponsored. And you can say, well, this whole package of technology is going into use in the commercial thing, and, all right, therefore, you will pay us so much an engine, or something like that.
I still think it is counterproductive, but we have learned to live with it. And the administrative burden is not so bad, because you're not going through the engine and picking out piece by piece and this sort of thing.
But this whole concept of give-away bothers me to a great degree. If the contractor doesn't take it to the commercial stage, there is no give-away because nobody has done anything. If he does take it to the commercial stage, the Government will get half of every dollar of profit that he's going to make.
Now, if the Government says, well, on top of that, I can't go through the numbers, because I did not come prepared to testify on that-but if the Government says, well, we want some more on top of that, again, I come back to the point that it tends to tip you to the other line of research that you may have or other line of product development.
Mr. ARNOLD. I agree 100 percent, and I feel that the basic concept of give-away is misspoken. What's our goal; what are we trying to do? Are we trying to focus our attention on getting the technology into use, by which the public will benefit the most? Then, we ought not to be pennypinching or nitpicking about something that is as small in the overall picture as the difference between what the Government is going to get back by some strings attached to a special royalty and what the Government is going to get back through taxes and through the public enjoying the invention.
I just feel like we are indulging in overkill of an idea that is not that real. I do not believe the so-called windfall profit that is to be made from the give-away is that real.
Senator SCHMITT. Well, gentlemen, it is very real, because that has killed every attempt in the last few years to get a uniform patent policy and one which puts the presumption of title in the private sector. We can't say it is not real, because it is a real issue. Even though you and I may think it is a nonissue, it is a real one.
Mr. ARNOLD. Senator, I would say to that that you have to indulge the practicality of what can be done politically. And it may be that we have to yield to some things as a matter of practical politics that I do not believe are real in terms of the economics of the marketplace. And I certainly honor the circumstance that you, who make the legislation, have to include some considerations that I do not have in my mind.
But I suggest to you that, as a matter of what is real in the marketplace, this idea is not going to have a substantial net benefit to the Government. The "give-away” is an expression which has a lot of political appeal, but you are not really giving it awayanything important. And, therefore, on the merits the public would be well served not to worry about the alleged give-away. If, for political reasons, we have to do something else, then we will live with it.
Mr. MANBECK. May I suggest-I think we all realize the political problems, but that to tie payback to a per patent basis—that is, on each patent—is a very difficult thing. The patent is an expression of the technology. If the technology is really important and can be pinned down, it seems to me-and I am speaking about my own personal views; I'm not testifying at this point for the company or the Committee on Economic Development-it would seem to me that if there is an important piece of technology which can be identified, and it is necessary for political reasons to include something, that that approach might be considered rather than trying to tie it on each patent.
And another thing, you will even get the patents not covering what they should for fear the owners might have to pay back on them. They won't take the patents out, which is undesirable, because that, gentlemen-I don't mean to be xenophobic, but it opens our country up to foreign competition on some stuff where it shouldn't be. And I just think that this whole business of tying it patent by patent is self-defeating. I really do.
Senator SCHMITT. Do you gentlemen think that the availability to the Government of march-in rights provides an effective self-enforcing mechanism to promote the commercialization of an invention?
Mr. MANBECK. Our report supports march-in rights. We think it is part of the answer to the so-called windfall situation. And quite frankly, if the contractor does not go to commercialization with the technology and there is somebody else who wants to-I think it unlikely—but if there is somebody else that wants to, it seems to me that the Government should-it seems to us, this is more than personally—that the Government should have that right.
Senator SCHMITT. Should there be a provision for exceptional circumstances before the march-in right is operable?
Mr. MANBECK. It seems to me that before you go to the march-in rights, before the march-in right is exercised, that the contractor or the inventor should have an opportunity to explain in a fair hearing as to why he hasn't done it and to how he is going to do it in the future. Does that answer your question, Senator?
Senator SCHMITT. Yes.
Senator SCHMITT. Mr. Arnold, do you think there should be a distinction between large and small businesses in a bill of this kind?
Mr. ARNOLD. I do not. I do believe that there exists a de facto distinction that works now in the way the patent system is working. But I don't believe we should treat that statutorily. An example of this distinction that I referred to was the small entrepreneurship, and I can give you three examples in 3 minutes, if I can have that time, that is current in my law practice.
The inventor of the Weed-Eater that you may be acquainted with created a whole new industry, lawn trimmers with a swinging line. Another inventor founded a business in severe service valves for the chemical industry. And there is the invention of the technique disposal of the major wastes from coal burning power plants. When we scrub the SO2 and fly ash out of the blue gas and sky, we create tons and tons-millions of tons-of waste. These inventions were all made by the private entrepreneur or the very small company.
Now those three inventions all made by the private entrepreneur and the very small company needed capital to expand. In 1969, the inventors could have gone public with a stock offering and gotten that capital. In 1969, 3.5 billion dollars' worth of capital was raised from the public trough-venture capital, risk capital. Last year, according to the Washington Post that I read the other day, $214 million of the dollars that have been inflated since 1969 by a tremendous amount, was all that new businesses could get from the public trough.
So as to these three inventions that I referred to, when the crunch came in terms of need of the private entrepreneurships to expand, they went to the only available source of risk capital-big business. Big business could afford the litigation costs which the entrepreneur could not afford. The litigation costs were there. All of these patents were in litigation. All of these litigations were costing a half a million dollars and up apiece. The small entrepreneur with no source of big venture capital simply could not afford the burdens and uncertainty of the litigation and plant expansion without going to the source of capital. The only source of capital they had was big business.
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