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.

Mr. ARNOLD. I certainly share that.

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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Isn't it great that big business has capital for that; financial health of business is vital to everyone's interest; but isn't it sad that the alternative sources of risk capital have dried up.

So we do find a degree in which there is a difference in the big business and the small business approach to these things. Not approach-that's the wrong word-in what happens. The big business has the capital that the small business did not have to fight this time delay and financial burden of litigation, and so the entrepreneurship had a difficulty. But I don't believe we should address that statutorily in the patent law. That should be addressed in tax law and banking law.

What we need, is to do something about capital markets where the entrepreneurship can get access to the capital that it needs, and then maybe some of these things would smooth out.

Senator SCHMITT. Mr. Manbeck, did you have anything further on that subject, that is, small versus large business?

Mr. MANBECK. Well, obviously I'm associated with big business. The costs are horrendous on all of us. This is why we are making some of these suggestions.

We think that sometimes we are attacked by strike suits just because we are big business, and that the patent system sometimes works against us there for that reason. We suggest reexamination. There is no question about it. Mr. Arnold is right. It takes money today in the United States to enforce a patent, although I believe that most corporations are responsive to taking licenses where there is a justified patent. You don't take a suit that you're going to lose.

Senator SCHMITT. Do you think we should draw a distinction between large and small business in the area being dealt with in this bill?

Mr. MANBECK. Absolutely not. Senator, I would like to put in a written statement as to why I think the payback is undesirable, if I may.

Senator SCHMITT. Yes sir. We would appreciate that very much. [The following information was subsequently received for the record:]

COUNTER-PRODUCTIVE EFFECTS OF PAYBACK PROVISIONS IN GOVERNMENT PATENT POLICY

The inclusion of payback provisions in the government patent policy to be established by S. 1215 is undesirable for a number of reasons. These reasons outweigh any benefit to the government or the public that might be produced by the limited revenues in question, and militate strongly against the inclusion of payback provisions. They are as follows:

(a) A significant adminstrative burden would be imposed on the contractor.-Much government-sponsored technology which may be translated to commercial products relates to large, complex equipment such as aircraft, aircraft engines, electronic equipment and transportation equipment. It would be a substantial burden on the contractor to trace any given invention through a commercial program or to allocate any particular contributed value to an invention. Take, for example, a patent on an electronic switch which is used in a complex commercial radar system. It would take considerable time and effort to verify whether, in fact, the patented switch is used, the amount of the use and what portion of the equipment is attributable to the switch. Also, is that switch so much better than an unpatented alternative that any royalties should be justified?

Further, suppose that the overall radar equipment were licensed to a foreign manufacturer with appropriate government approvals. The switch patent would be only a modest part of the total license, the main value of the agreement really being

the technology and technical assistance passing from the licensor to the licensee. In fact, there is probably no value which can be broken out as being attributable to patents as such and certainly no way of determining the value attributable to the particular electronic switch invention.

All in all, the effort required to try to reach some resolution both on the base for the payback and the rate at which the payback would be made, far exceed any benefit to the government possibly resulting from the modest monetary flow that might be created.

(b) A further government bureaucracy would be needed.-Just as it is difficult, if not impossible, for the manufacturer of complex equipment to assign a value to any one patent, so also would it be difficult for the government to monitor the payments. Clearly, more and more people would be needed in the government agencies; in fact, the cost of people added to the government for control purposes might well exceed the amount of money paid to the government.

(c) The government will receive a payback in any case through its tax revenues.— Presumably, the commercialized version of the government-financed technology will earn a profit for the contractor. Otherwise, there is no reason for the contractor to carry the technology to the marketplace. Whatever profit the contractor makes will be taxed at 46 percent, the current corporate tax rate, and the government will get a significant payback through that avenue. The tax structure clearly makes the government a partner as any monies start to flow.

(d) Royalty provisons or profit sharing on top of the tax liability act as a deterrent to commercialization.-Why should a contractor commercialize government-financed technology if there is alternate technology available if it has to pay a premium for the use of the government-financed technology? In fact, a payback provision would be a good reason for a contractor to separate the government-financed technology from its commercial technology in order to avoid any payback liability.

(e) If the payback provision should extend to inventions only as contrasted to patents, then the contractor would be placed at a disadvantage compared to anyone else. He would pay for commercializing something which others could then follow without any liability for payments.

The use of government technology with payment to the government through tax revenues is not a windfall for the contractor. To utilize the government technology commercially, it must invest its own funds in product redesign, in manufacturing facilities and in marketing and servicing activities. If the government really wants its patent policy to act as an incentive to commercialization, it should not restrict that incentive so as to remove much of its attractiveness. That is exactly what payback provisions would do.

Senator SCHMITT. I would welcome your suggestions as to any alternative approaches which counter this argument that somehow there is going to be a windfall. I do not believe the argument that the Government reaps a windfall by the commercialization of the invention, but, unfortunately, the argument will continue to be raised.

The final point I would like to have you comment briefly on is something that was said by a previous witness from NASA. One of the principal justifications for an approach such as in S. 1215 is that it will tap the enthusiasm of the inventor toward commercialization, rather than what is now the case with most Government inventions or Government-sponsored inventions, that is, that they are sitting around with nobody very enthusiastic about using them. Do you agree there is a psychological reservoir? You've talked about investment capital and that kind of thing, but is there a reservoir of enthusiasm that we must tap also?

Mr. ARNOLD. It's very critical. I agree 100 percent. There are many, many inventions that can be offered by A and B and C and fail, but offered by D who is enthusiastic, it will succeed.

Senator SCHMITT. Is the inventor the one most likely to be enthusiastic?

Mr. ARNOLD. He certainly is the most likely. It's his baby. We find that, for example, in the outside disclosure, to many corpora

tions and we have named the psychological phenomena "NIH,” for "not invented here," which is an expression I am sure you know. Inside the corporation a man comes with idea A and he takes it to the budget committee for R. & D., and they start punching holes in it and say it will never work, and he says, "Oh, but you're just looking at the wrong side. We can solve that problem, we can solve that problem, we can solve that problem."

The outsider tries to present the same idea. He has a very difficult time because he is not there to argue with the budget committee that "We can solve that problem, we can solve that problem, we can solve that problem."

The idea that is sitting on the shelf is dead. It has no communication capacity to sell itself over the natural reaction that we all have, to look at an idea and see first what is wrong with it. That is the first thing we see: We always see what is wrong with it and say what's wrong with it, and leave it alone, unless it has a champion to advocate its merit and be enthusiastic.

So, every idea needs a champion to sell it, to attract capital support, whether it's inside a corporation or inside a Government agency. You need a chance for that idea to attract capital support. And the most likely person to do that, is the inventor or his group at the contractor's place.

Mr. MANBECK. I would only add that unless the inventor or the contractor has the rights, his enthusiasm won't do any good. Let's look at it from the other viewpoint because nobody is going to put any money in, no matter how enthusiastic he is, unless they can go forward with it without interference.

Senator SCHMITT. Thank you, gentlemen. We appreciate your testimony. We will ask you some questions for the record. Mr. ARNOLD. It's been our pleasure to be here.

Mr. MANBECK. Thank you very much.

Senator SCHMITT. If I may, I would like to ask the final four witnesses to come forward as a panel: Mr. Jerome H. Lemelson, president, Licensing Management Corp.; Herbert G. Burkard, corporate patent counsel, Raychem Corp.; Gerald A. Lodge, chairman, Innoven Capital Corp.; and Jacob Rabinow, consultant, National Bureau of Standards.

Gentlemen, if you would correct me on any mispronunciations I may have made. We will go with Mr. Lemelson first. If you have prepared testimony and you wish to summarize that, your prepared testimony will be in our record in its entirety.

STATEMENT OF JEROME H. LEMELSON, PRESIDENT,
LICENSING MANAGEMENT CORP.

Mr. LEMELSON. Good morning, ladies and gentlemen. My name is Jerome Lemelson. I am a professional inventor. I am a member of the Patent and Trademark Office Advisory Committee. A licensed invention of mine that you may be familiar with is the mechanical drive that made the cassette tape recorder a commercial reality. I have been asked to reflect on some of my experiences in the field of technology, licensing, and patents. I would like to apologize for my close adherence to the written text of my statement. The subject matter of this statement is of such great importance to me, both emotionally as well as from a business point of view, that I