a license. All the other hangover clauses, like if he doesn't do enough in 5 years you can force him to abandon the patent and he says 5 years wasn't enough, so you take him to court and you end up with a tremendous administrative problem which is not justified at all.

Senator SCHMITT. As I understand it, some agencies that have a waiver authority such as NASA also have a march-in right.

Mr. RABINOW. Yes, sir.

Senator SCHMITT. It's also my understanding that march-in rights have never been exercised. Do you think it's because they realize the difficulty of exercising it?

Mr. RABINOW. The difficulty is tremendous. You're dealing usually with a group of patents, not one. You're dealing with portfolio of patents when you have an important patent and I don't know how you exercise this. This is like the mandatory licensing laws of Germany. Germany has a law on the books and has had it for many, many years that if another company wants a license and a patent he can go to court and demand the license be sublicensed to him. It's never been exercised in Germany, not in the whole history of Germany has that ever gone to court. They have such laws in Israel. They have never been exercised. There's this business of secondary rights, not of the basic patent or basic license, but some fringe rights which are very difficult to enforce even between industry, and I don't think the Government should get involved in litigation on march-in rights and I don't think they are ever exercised and I don't think they ever will be. I think if the case is strong enough that you want some of the patent rights, I think deals can be made for the secondary rights without having to have lawsuits. In other words, if you build a nuclear submarine and-by the way, Admiral Rickover doesn't seem to realize that the Government can always-he mentioned at the end of his testimony that to insure that the Government is not subsequently barred from using an idea of somebody else's patent-this is nonsense. You cannot bar the Government from using my patent. The Government has an absolute right to use any patent in the United States and I can only sue for reasonable royalties. In most countries of the worldEngland, for example, you do not have a patent against the government. In the United States you do not have a patent against the Government. The Government is always free to use any patent, private or public, by just using it, and all the inventor or the company can do is demand a reasonable royalty and get it settled in court, but he cannot bar the Government. Where Admiral Rickover gets the idea that you can bar Government from using a patent, I don't know. It's simply not so.

Senator SCHMITT. Mr. Chairman, I have a few more questions, but I would yield.

Senator STEVENSON. Go ahead.

Senator SCHMITT. Mr. Rabinow, let me ask if you think that an organization within the Government could effectively market, if you will, the 28,000 or so patents presently under Government jurisdiction?

Mr. RABINOW. It's been trying. The NTIS, that's the group that now tries to sell patent rights. It's very difficult as I can tell you from my own experience in trying to sell patents. I'm now trying to

market, for example, a pick-proof lock and some other patents. Marketing a patent is a very difficult thing. You have to convince a manufacturer to start a new line. He doesn't want to change the line. You come to him with a new venetian blind and he says, "I make $16 million in blinds a year, why should I make your design? It's clever but I don't want to bother." I went to the president of the Hamilton Watch Co. with an invention many, many years ago and he said, "It's brilliant. It's very clever. It will improve the watch, but we don't want to bother." So selling a patent is not just coming in with a patent and saying here's an idea. They'll say, "Why should I buy it? I make a lot of stuff now." You say, "You'll make another $100,000." When you go to a company who has sales of $4 or $5 billion a year and say you have a new gadget that will really make $1 million a year-"$1 million out of $4 billion, doesn't interest me." So selling patents is a very personal business. It's not done on a business basis. It's done by throwing stardust in the buyer's eye. You have to convince the manufacturer that he is a leader. Money doesn't interest him as much as prestige. You have to convince him that he's going to be able to brag to the people with whom he plays golf that he's just got something new and different. You have to make him feel like a leader in the industry. You have to build his ego that the patent is a new toy. You don't sell patents strictly on $1 basis. You don't sell anything else on $1 basis. You have to appeal to his ego. If you just make Government patents free or simply say here's a patent, buy it; it won't sell. It wouldn't even sell if the inventor comes in and is all excited and he knows the business backwards and forwards and even if the prospective customer tells him how brilliant it is.

Senator SCHMITT. What about the National Research Development Corp. in England? Has it been effective?

Mr. RABINOW. Yes. As a matter of fact, it supported the British computer industry. It takes stock in corporations. It promotes patents, but it also spends money. It isn't just a selling agency that just supports development of inventions. In other words, it's a working corporation and it does succeed and it has done quite well. There's some real question whether it's a good thing for the United States to set up a thing that really produces inventions in the sense of a research lab. We do this only for the needs of the Government. Agriculture laboratories do it for agriculture; military laboratories for the military, and the Bureau of Standards does it for Standards and Commerce. I don't believe Government should, as a matter of policy, set up development laboratories, but I think the Government should as a matter of policy support small business with risk capital, which is not happening in the United States, and this is not the subject we were supposed to discuss today. Unless we support small business, the big businesses will undoubtedly become stronger; they will probably get stronger anyway, but unless we support small businesses to keep the big boys honest, the big boys will do less innovating and the management will get more conservative, more of the bookkeeping types, more business types who don't really care about inventions, and I think in this respect Admiral Rickover is correct. If you want to promote inventions in the United States you have to support small business. Don't worry about who gets the patents. Small business will get their share. But

small business simply cannot raise money. At 15 percent prime rate, I couldn't hope to raise money for an invention. Why should anybody with money support a risky thing when he can get 15 percent without risk?

Senator SCHMITT. Well, that kind of support can come in two different directions, either through reform of tax laws and regulatory law, or through direct support, the former being preferable. Mr. RABINOW. Tax laws will not help. One of the curious things, when I get patents, is that the last thing I worry about is taxes. I have good tax attorneys and my attorneys can always help me later when I make money. But when I invent something, that's the last thing I worry about. You worry first about the technology and then if the technology and the patent looks good, you worry about whether you should make it yourself or sell it to somebody.

Senator SCHMITT. It's been our understanding that just the change in the capital gains tax law last year has increased the venture capital for small business.

Mr. RABINOW. That's right, because the very rich man paying 25 percent in taxes is different from paying 50 percent in taxes. Today you have the terrible problem that you can get Government bonds that pay you 12 percent and you can get very good bonds at 16 percent or 15 percent. You can get real estate that pays you 30 percent. That's the real trouble.

Senator SCHMITT. So you're saying we have negated the results? Mr. RABINOW. That's right. When I went to Wall Street the second time-I received money from them very easily in the 1950's. When I came to them in the late 1960's they said that investment in inventions doesn't pay anymore. We're not interested. The same people who gave money to me the first time. I think today's interest rates are essentially killing the possibility of raising money for small business and unless small business can get 2- or 3-percent money it will simply not be able to exist and this is going to kill American innovation. The number of patents to small businesses is dropping, the number to the individuals is falling very rapidly. Our competitors in other countries are doing much better and I think that unless risk capital is available from the Government or from industry at reasonable terms, small businesses will not start. The number of starts now has essentially gone to zero. In the old days there would be three or four companies started each day. Today it's one or two per year. It fell gradually and the National Science Foundation reports that by 1974 or 1975 the number of starts went to zero and this is tragic because it's the small companies that do the great innovations, not the big ones.

The stories that the laboratories of large corporations produce great innovations is simply not true. Computer, atomic energy, laser, guided missile work, all of these things did not come from the large laboratories. Xerox did not come from large laboratories. The exception is the transistor which did come from a laboratory, Bell Labs, and RCA did produce television as we know it today because David Sarnoff liked it. Today's management will not do that sort of thing.

Senator SCHMITT. Should Federal policy distinguish between large and small businesses?

Mr. RABINOW. Yes, it should.

Senator SCHMITT. In patent policy?

Mr. RABINOW. Yes, it should distinguish in patent policy. I think it's time to codify the thing that's happened with the antitrust law decisions for many years. I think it's silly to talk about patents to me and to IBM in the same way. I think one could very well propose that any corporation that does half the business of an industry and whose sales exceed $12 billion, whatever number you like, should not get exclusive patents. They don't now, in fact. They do license others because of the antitrust agreements and my feeling is it should be made a law not be a case of court decisions. Senator SCHMITT. So in that case you would disagree with S. 1215?

Mr. RABINOW. Yes, I would disagree. If you give a contract to a company like General Motors, I think in practice they would license anybody else but I would make that specific. The Government would give a nonexclusive license. But this is only true for very large corporations, those that have, say, half the industry or a quarter of the industry, and there are very few of those.

Senator SCHMITT. So you wouldn't use the traditional distinction of small business?

Mr. RABINOW. No, sir. You mean the Small Business Administration legal decision? I think that is a very curious-for instance, American Motors is considered small business by them because legally it is in that industry. I have no objection if you have to use that because it's a readymade formula that's available, but the philosophy should be that the large corporations really don't need exclusive licenses. Their power depends on other things. But small companies must get exclusive licenses; otherwise they can't exist. You can't start a small company today in technology unless you have a patent. I would not have been able to start a phonograph company unless I had patents. It would be unthinkable to do so. Senator SCHMITT. Thank you, Mr. Chairman.

Senator STEVENSON. Thank you, sir. We appreciate it.

Our next witness is Dale W. Church, Deputy Under Secretary of Defense for Acquisition Policy, and he is accompanied by Walter Henderson, staff assistant, Office of the Deputy Under Secretary. I will invite all of our witnesses today to summarize their statements. The full statements will be entered in the record.

STATEMENT OF DALE W. CHURCH, DEPUTY UNDER SECRETARY OF DEFENSE FOR ACQUISITION POLICY, DEPARTMENT OF DEFENSE; ACCOMPANIED BY WALTER HENDERSON, STAFF ASSISTANT, OFFICE OF THE DEPUTY UNDER SECRETARY

Mr. CHURCH. Good morning, Mr. Chairman. I will summarize the statement, although I have presented a full statement for the record to be entered in the record.

Senator STEVENSON. It will be entered in the record.

Mr. CHURCH. Over the years the patent policy of the Department of Defense has been driven by the mainspring of incentive. Our policy, we believe, should maximize the incentive to both the large and small companies to seek out and compete for defense contracts. We want to bring forth the best privately developed background, their most promising ideas, the most talented people, and to report

freely and readily the full results of their work without fear of losing commercial rights. If we can accomplish this and still retain our ability to utilize freely the technology that we have sponsored, then we have acquired what we bargained for and the public interest has been served.

Prior to 1963, we had rather a straight forward policy that said we left title to the contract inventions in the contractor, reserving a royalty-free license in the Government. With the advent of President Kennedy's policy in 1963 we modified the earlier policy somewhat. It recognized a single presumption of ownership was not appropriate in all situations in which the Government contracts were R. & D. So by virtue of that policy change wherein 99 percent of such contracts had title going to the contractor, it was reversed to about 25 to 30 percent. That is, after the advent of the 1963 policy, the split became about 3 to 1 or 4 to 1, depending on the particular year, wherein the majority share still left title with the contractor. The smaller percentage is where the Government retained the title giving a royalty-free license back to the contractor. In the statement you will see some statistics of how those changed and how those oscillated through the years for which we have records. At the present time we only have records for 1976. We are now compiling records for 1977 and 1978. We have found this to be a most workable policy for the DOD and we would support any kind of legislation which in fact codified this kind of policy.

We think it does serve the interest of providing incentive to our contractors. It fulfills our objectives and still protects our interest to be able to use the intellectual properties developed in this manner for whatever purpose we need.

That's a quick capsule summary of my statement. I will be prepared to answer any questions.

Senator STEVENSON. Thank you, sir.

Have you reviewed S. 1215 and, if so, does it codify the DOD policy?

Mr. CHURCH. Yes, it generally does. We might have a few minor editorial corrections, for example, involving classified information. We believe there is an adequate procedure for handling classified information. We have managed under this system for some years.

I think the committee staff is better aware now of how classified matters are handled than when the bill was offered and I think we would like some change in this area.

But in general, I believe we can endorse the bill.

Senator SCHMITT. Have you provided the specific suggestions to the staff?

Mr. CHURCH. We are now reviewing the bill for the official position of the DOD to be coordinated through the administration. That review is not yet complete.

Senator STEVENSON. In the DOD policy do you distinguish between large and small corporations to determine whether there should be exclusive licenses or nonexclusive licenses as Mr. Rabinow suggested?

Mr. CHURCH. No, we do not differentiate between large and small with respect to patent policy. We find often the lines between small and large are very arbitrarily drawn and I don't know for the