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PATENT POLICY

THURSDAY, OCTOBER 25, 1979

U.S. SENATE, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, SUBCOMMITTEE ON SCIENCE, TECHNOLOGY, AND SPACE,

Washington, D.C. The subcommittee met 10:30 a.m. in room 318, Russell Sena Office Building, Hon. Adlai E. Stevenson (chairman of the subcommittee) presiding.

OPENING STATEMENT BY SENATOR STEVENSON Senator STEVENSON. The subcommittee will come to order. Today we continue hearings on Government patent policy, in particular S. 1215, introduced by Senator Schmitt, to establish a uniform policy for determining the rights of Government, its contractors, and employees to publicly financed inventions.

This bill basically extends the policy of the Department of Defense to the Federal Government's civilian research and development programs. Senator Schmitt.

OPENING STATEMENT BY SENATOR SCHMITT Senator SCHMITT. Thank you, Mr. Chairman. I again welcome this opportunity to participate in these hearings, the third day of subcommittee hearings on Government patent policies and the impact of such policies on the governmental innovation process.

Testimony to date from a broad range of witnesses representing both the Government and private sectors has underscored the need to reevaluate the basic assumptions underlying the policy for managing our national investment in science and technology research and development. Experience has shown that current policies have failed miserably to effectuate the transfer of new technologies to the marketplace. Federal patent policies which were originally designed to protect the public interest by preventing the so-called giveaway have in fact operated to discourage contractor bidding, eliminate incentives to innovate or disclose new ideas, and delay the commercialization of inventions developed under Federal contracts. The real loser has been the consumer and the taxpayer.

Current Federal patent policy is scattered throughout a hodgepodge of statutes, Executive orders, and regulations which have formed a costly maze of bureaucratic redtape-all falsely in the name of the public interest. Delays in the processing of normal waiver applications can take several years, at a cost to both the contractor and the Government. Despite sizable patent staffs and aggressive technology transfer programs, the commercialization rate for agency-owned inventions is disappointingly low-in fact, less than 2 percent of NASA-owned inventions have been transferred to the marketplace. Governmentwide, nearly 3,000 inventions are collecting dust on agency shelves and less than 5 percent have been effectively utilized. The time is long past for questioning who should own the inventions created by use of billions of tax dollars. We have a right to benefit from the fruits of those expenditures by demanding that potentially significant new inventions be allowed to reach the marketplace. The inventor is obviously the most likely person to see that this happens. His or her pride and livelihood is at stake.

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It is not surprising that increased interest in reform of our Government's patent policy is being shown by both the executive and legislative branches. This past week the House Science and Technology Committee initiated its own investigation of the Government's patent policies and it appears willing to move forward in this area. As you well know, Mr. Chairman, the bill that you cosponsored along with the chairman of the full committee, Senator Cannon, has been introduced in the House. The administration has also conducted an extensive evaluation of the patent policy issue together with its domestic policy review. I understand that we can expect to receive the President's recommendations any day now. Whether you and I would agree with that policy remains to be seen.

Too often we seek solutions which require new and expensive programs rather than taking the time to reexamine and adjust existing policies which have been ineffective and oftentimes counterproductive. Mr. Chairman, the bill that you and Senator Cannon joined with me in sponsoring was offered as a moderate approach to bring some uniformity and commonsense to this much debated and controversial issue. It stands between the approaches of the past and I think takes advantage of the debate that has occurred up until this time. I have been encouraged by the thoughtful testimony of our previous witnesses, and I look forward to what promises to be a stimulating dialog today. Thank you, Mr. Chairman.

Senator STEVENSON. Thank you, Senator. Not all of our witnesses are here. I will call first Mr. Jacob Rabinow to continue his testimony. Mr. Rabinow is a former vice president of Control Data Corp., an electrical engineer with some 200 patents, and a consultant to the National Bureau of Standards. Your testimony was interrupted at our last meeting for which we both apologize.

Mr. RABINOW. It's always an honor to speak to you, even if the time is short.

Senator STEVENSON. You're very kind.

STATEMENT OF JACOB RABINOW, BETHESDA, MD. Mr. RABINOW. I'm sorry that I'm first. I would have loved to hear Admiral Rickover, not because I agree with anything he says; as a matter of fact, I disagree most heartily with everything he says about patents. I read his testimony this morning. The difficulty is that he equates all patents with nuclear patents. I think they are not equatable. Nuclear submarines are not exactly the same kind of thing as a cure for a disease or an automotive clutch, and I will have something more to say about that.

I was asked to repeat or summarize briefly what I said last time and can I do this or should I?

Senator STEVENSON. Yes.

Mr. RABINOW. First, I'm an electrical engineer. I was born in Kharkov, Russia, but I was educated in New York City. I have been in the United States since I was 11. I've spent one-half my engineering lifetime in government and half in industry. I had two of my own companies and that's how I became eventually vice president of Control Data. They bought one of my companies.

My patents cover ordnance, post office equipment, sound reproduction, electrical equipment, photography, computer equipment and many other things. I have 215 U.S. patents and perhaps something like 100 in foreign countries. These are duplicates. About 60 of my patens were obtained when I was a Government employee, which I still am, part time. I'm rather proud of the work I did, although my experience with those patents could have been bé much better as far as utilization of the patents goes.

I agree in general with the proposed bill, S. 1215, because I think that's the correct way to approach the problem. There are things that bother me a little about some of the mechanics, but I believe that the general philosophy that the Government should not take title to patents is correct.

I believe that you need flexibility, that you cannot treat all patents alike, but certainly a patent on a nuclear submarine or a weapon where the Government is the only user and where secrecy or, at least control is important has to be treated differently from a patent on a medicine where development costs may be 1,000 times greater than the cost of the original invention.

I think, for example, that the Government has done well in many of the things it developed and where it gave commercial rights to the inventor or his company. For example, this was done in the computer business. The Univac computer was ordered by the Government from the University of Pennsylvania. It was designed by Eckert and Mauchly. They formed a corporation based on their patent rights and sold the first Univac to Census. The Bureau of Standards helped with the purchasing of the first Univac and I was involved in that. Later their company needed money and eventually it joined Remington Rand or Sperry Rand. The fact here is that if the Government had taken title to the patents that company would not have been formed. It was the patent position that started the computer business of the United States.

I have seen comparison between agricultural patents and patents on weapons, and again you can't make comparisons like this. Agriculture is a different kind of business entirely from manufacturing done in a factory. A farmer cannot monopolize a market.

The bill proposes that the Government can, if it wishes, receive royalties and fees for patents. To this, I object most violently, not because of any unfairness or because the Government doesn't have the right; it's just that the mechanics are silly. The Government is a 50-percent partner in any business that I have or any business that I hope to have. It collects income taxes on the profits of the corporation. It collects taxes on the dividends. It collects social security taxes on the wages, State taxes are also collected, and so on. For the Government to say it deserves a 2- or 3-percent royalty on an invention that stems from Government R. & D. is nonsense. I would be very happy, any time I license anything under my patents, to take 50 percent of the profits in lieu of royalties. Also, it should be remembered that the Government taxes go on, not for the life of the patent, but forever, and they also are levied not only against the patent itself but on all subsequent patents, all future developments made by the same company or any other company.

So for people to worry, as Admiral Rickover worries, that the Government should collect royalties, or have some interest in the patent, is nonsense and I believe that this bill says this, partly. I think the political pressure is put upon you gentlemen that you shouldn't "give away" anything is unfortunate. I object to this giveaway nonsense. It seems perfectly proper for the Government to give me a free education, but for some reason it's improper to give me the rights to my own inventions and collect 50 percent royalties on it later, forever.

The fact is, today, contrary to the evidence that Admiral Rickover will give-and I'm using the evidence that I have in front of me in his written statement—that many corporations refuse, perfectly correctly, to take Government contracts in fields in which they are experts. They are perfectly willing to do Government research in new fields where they have no vested interest, but large corporations who are good in specific fields very often will refuse to do Government R. & D. work or take any Government contracts because of the fact that they don't want to lose their patent rights.

The other thing that happens with Government contracts under present rules is the tendency to follow questionable ethics. Companies will make sure that parallel with Government R. & D. they have a program in the back, someplace, where the really important developments take place so that the Government never gets the patent rights that Admiral Rickover thinks it would get.

What happens is that the great inventions are made just accidentally at the time when the employees are on company salaries, and the minor developments, technically speaking, during the large production contracts are happening to be done on the Government contract. This is a fact of life; that if I were working as a contractor for the Government I would make sure that my basic inventions were made on my own money.

The other thing that happens is that because of the patent policy of the Government most large industries today use the two-platoon system for Government research and development. They have a first platoon of very brilliant people who write the proposals and negotiate the contracts. When the contracts are let, the second platoon, which has much less technical skill, does the work. A friend of mine who was a proposal writer for one of our largest corporations many years ago, told me—and I don't know whether it's still true, but I suspect it's true in most companies—that he only wrote the proposals. He's a brilliant inventor. When I asked him, “Larry, who does the work after you get the contract," he said, “I haven't the vaguest idea.”

I once mentioned this to the president of a very large corporation and he said, “We have a third platoon to explain to the Government later why the gadget didn't work.”

I think that if the patents were left with the corporations so the benefits of this brilliance could be their own, these two platoons would not exist. They would be perfectly happy to do Government research with the same quality people they use on their own research. This is not true today.

Let me tell you about the Government experience when it owns good patents. During the war we confiscated all the patents belonging to enemy aliens that is, patents belonging to Germany, Italy, Austria, and many others. There were about 15,000 such patents. These were not Government patents. These were patents which were applied for in the United States by the industries of the world. These patents were administered after_the war by John Green, who was then Chief of the Office of Technical Services. These patents died. Nobody asked for a license. They were available on a nonexclusive basis for the payment of $7 and I can assure you that if you didn't pay the $7, you certainly could use the patents. And John Green told me that the patents "died on the vine." These were his words because, he said, "Nobody wants to develop and put into production something his competitor will do after him for less money and do it better." The reason the competitor can do it for less money is because the market is established; he knows what people are buying; he therefore can do it without the usual market risks. The reason he can do it better is because he's second, and the second model is always better than the first.

People have asked me, as an inventor, why don't I invent the second model first? I'd like to do that but I don't know how.

The experience with Government patents, besides these 15,000, has been very informative. As mentioned by Senator Schmitt, the Government owns more than 20,000-nobody knows exactly how many—and these patents are doing very badly. I'll give you some cases from my own experience.

In 1947, I invented the magnetic particle clutch. It consisted of two metal plates and some iron dust. The patent was basic. This contradicts the testimony of Admiral Rickover that everything that needs to be done will be done anyway. I have also heard this from the Department of Justice people many years ago, that "anything that needs to be done will be done." Here's a clutch that could have been done by any kid in 1850. There was no principle of physics that wasn't known for 200 years, except it just didn't happen. I invented this clutch and it started a new subclass in the Patent Office. The Government issued no exclusive licenses so no one wanted to spend the millions of dollars it would have taken to get rid of the problems that arose, problems of the heat dissipation, shielding of shafts, settling of the powder, and many other problems that arise in industrial applications. I was given the foreign rights, however, and I sold these to Eaton and Eaton licensed many European companies. It was developed in Europe to a much higher extent than here. It was used in four European automobiles. It was never used in a car in the United States. It's used in airplanes only when absolutely necessary. This was a basic invention, simple, but

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