times have the second inventor getting the patent instead of the first.

So I personally now agree with Mr. Manbeck's position. I must advise you that there is a lot of thought which I honor and respect, which is to the contrary view.

Senator STEVENSON. Mr. Arnold, Mr. Manbeck, at the close of his remarks, supported S. 1215.

We've heard that the administration may recommend legislation that would maintain the Government use public use distinctionthat is to say, in the case of military and perhaps space R. & D. contracts, the contractor would generally retain title.

With respect to civil R. & D. contracts, the Government would generally retain title.

We are told that the rationale for this distinction is that the commercialization of military-related inventions entails additional private investment and risk. But in the case of civil R. & D., the argument goes, Government assumes responsibility for carrying an invention to the marketplace and, therefore, exclusive contractor rights are unnecessary to achieve commercialization.

What do you think of that rationalization?

Mr. ARNOLD. I am sure that examples exist to support it. But I believe that those examples are far too de minimus in number as a proportion of the whole to persuade as to general policy. My personal experience suggests to the contrary, that in civil R. & D., whether it be in the work that I was involved in for Project Molehole that ended up aborting, or whether it be the electrodes that had to do with monitoring the health of the astronauts in space, that then became a technology to be transferred into local hospital operations.

In each of these instances, it has seemed to me, you still needed the extra effort of the private investor to successfully commercialize the invention.

Whether it be civil research or military research, in the vast majority of instances, I believe you still have the same need for some commercial undertaking to have the incentive to spend developmental money, technical or market developmental money.

Mr. Manbeck made reference to that when he said that the patent system not only supports research and development in the sense of technical development, but also the market development. And typically, the market development need is still there.

Senator STEVENSON. Mr. Manbeck said that most industrialized countries, except Canada, have the first-to-file system. Can you tell us more about the systems of other industrialized countries?

I address this to both of you. Do they have stronger patent systems that put us at a competitive disadvantage?

Mr. MANBECK. It varies from country to country, Senator. The Germans and the Swedes, I would say, have very strong patent systems, stronger than ours, perhaps.

Senator STEVENSON. What makes them stronger?

Mr. MANBECK. In the first place, they have very rigorous examination systems in the Patent Office. The examiners are highly trained. They have excellent technical libraries and they do a very good job.

That is one thing.

Second, there is a respect given to patents, and I'm speaking particularly of Germany, I must say in my experience, we have never been faced with a real controversy in Sweden.

In Germany, the courts are very respectful of the patent grant. In fact, to invalidate or nullify the patent, you have to go back to the Patent Office there. You can't even raise invalidity in the litigation, although it will be delayed until the Patent Office has had a chance to look at the invalidity question.

But they issue the patent only after very thorough examination and they give it very considerable respect after it's issued.

Now Great Britain, in my opinion, does not provide as good an examination. Their system is just plain different. Holland has good examination. France, in effect, and Belgium are registration systems. You litigate when you are done.

Really, everybody tends to look at the German patent. There is a new patent convention over there now, the European patent convention, however, where you can handle all your patents, all your prosecution through one central examination system. And this is probably going to take over more and more in the future because it is a cheaper way to get your overall bundle of patents which you must get to have adequate protection in the European countries. And again, this will be a very thorough, well financed examining staff.

May I add just one more thing? So that we understand what we're talking about by the first-to-file system, we're talking about a system whereby the first inventor to present his application to the Patent Office becomes the owner of the patent-he still must invent it himself and not derive it from somebody else.

And the benefit here, as I said before, is certainty to investors, and also, certainty to the public in that there is in this way an early disclosure of the invention through the patent, which, after all, is one of the purposes of the system.

And to the extent that there are perceived inequities, this can be taken by giving a prior inventor who didn't submit his application quickly, a right to commercialize, provided he has been putting the funds in.

Remember, an inventor, small or large, can get to the Patent Office quickly.

Mr. ARNOLD. In Germany, you would typically spend $50,000 to $100,000 in the same litigation that in this country you would spend $400,000 to $500,000 on. That difference is representative of something important in what you give up in litigation sophistry. I would not give up as much as they do in Germany to keep those costs down, but I would sure like to save a lot of that money. I feel like we overdo our litigation, and their system functions better in part just because you can get a final decision for $50,000 when here you can not get a final one for $500,000 on some occasions.

Senator STEVENSON. If the patents are strong and the courts respect them, there is probably much less litigation, isn't there? Mr. ARNOLD. Correct.

Senator STEVENSON. Can you give us information about the Japanese system?

Mr. MANBECK. I don't want to seem to be an expert. I will tell you what I understand. The Japanese, too, have a strong system-a

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?

Senator SCHMITT. Thank you, Mr. Chairman.

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