purpose of patent policies how you would effectively differentiate between the two. The Small Business criteria of the Small Business Administration are again set by the number of employees, so if you have more employees you suddenly become a large business. To me, that doesn't relate at all to the incentive or the protection of the rights of business.

Senator STEVENSON. Has the Department exercised march-in rights?

Mr. CHURCH. Only once can I recall there was a case where we exercised march-in rights. It was a case involving two patents held by MIT. There was a complainant who felt as though the patents were not being utilized. As to one of the patents, it was found that MIT was using it and was allowed to retain exclusive title. In the case of the other, we found that MIT was not effectively using it, and they did provide for the complainant to use the patent.

Senator STEVENSON. Are you aware of complaints against contractors for their refusal to license or their monopolization of patents to which they hold title?

Mr. CHURCH. I am aware of no specific complaints. None have been addressed to our office and I have not heard rumors of any either.

Senator STEVENSON. Mr. Rabinow said that all patents are available to the Government for a reasonable royalty with or without expressed licenses. If that's so, why do we need to worry about march-in rights or about licenses back to the Government if patents deriving from Government-financed work and all other patents are subject to such a right in the Government? Isn't that enough to protect the Government's interest?

Mr. CHURCH. The power you speak of that Mr. Rabinow referenced is in fact a statute, 28 U.S.C. 1498, which flows from the doctrine of eminent domain. This allows the Government in fact to go in and take for its own use any patent and then follow the Court of Claims proceedings to decide what is the appropriate compensation if the Government and the aggrieved contractor cannot agree on equitable compensation.

The difference between the above provision and march-in rights is that the former is strictly for Government use. In the march-in rights situation there might be some lack of adequate and aggressive pursuit of exploitation of the patent. This might be a little more subtle than simply the march-in for the specific use of the Government as is now codified under the statute I just mentioned. So I think we need a march-in provision and I think it would be administratively a little more simple if in fact it was included in the bill.

The only suggestion I would have is that there should be a complaint by someone who has a legitimate cause to do a march-in. It shouldn't be just an arbitrary march-in unless there was a complainant who felt aggrieved by the process as there was in MIT. Senator STEVENSON. Senator Schmitt.

Senator SCHMITT. Following up on the chairman's question, in spite of the fact that DOD has only exercised march-in rights on one occasion to your knowledge, you still think it's an important incentive to have built into a Federal patent policy?

Mr. CHURCH. I think it hangs in the back of the contractor's mind perhaps that such a procedure could be utilized in certain cases and it might provide a kind of incentive, although we would want to use it very judiciously. The reservation provided in the statute is also a useful one.

Senator SCHMITT. S. 1215 specifies criteria under which the Government would take title to any inventions developed under a Federal contract. Have you studied those criteria and how do they compare with current DOD policy?

Mr. CHURCH. They are very much in line with DOD practice and we find them totally acceptable; again, with the exception of the classified one which I mentioned earlier, and I think we have already had some discussions with the staff and it will be corrected. Senator SCHMITT. In your opinion, would it ultimately benefit the public interest to change the DOD policy to title in Government approach?

Mr. CHURCH. We believe it would be adverse to the Government's interest, as I commented earlier, on the incentives aspects for the Government to take title in all cases. We think the present policy of splitting it in certain circumstances as prescribed in the bill to take title is adequate to protect the interest when the Government needs to take title, but otherwise the incentive should lay with the contractor in taking title.

Senator SCHMITT. So you basically are saying there would be an adverse impact on contractor participation in DOD contracting activity if the policy was changed to a title in Government policy?

Mr. CHURCH. That may be a little strong to say there would be an adverse impact in participation. I think the adverse impact would come in the quality of the staff and the resources that the contractor would apply in this situation. We may not have fewer contractors bidding for Government work but they may devote resources which would otherwise be devoted to Government work to commercial work and thus we would lose an opportunity to get their very best staff and very best facilities and assets. So I think it's more subtle than just saying they won't accept contracts. I think we won't get the very best effort put forward in our particular contracts.

Senator SCHMITT. So you would basically agree with Mr. Rabinow's discussion earlier that the contractors would tend when it's title in Government to apply different resources to the Government, different quality of resources to the Government side of their business versus the commercial side?

Mr. CHURCH. That would be clearly a concern, although as I say, I don't think we'd see any real diminution of the contractors bidding on the contract.

Senator SCHMITT. Now when I was directing NASA's energy research and development programs, we did run into a problem with the Department of Interior, which has basically a title in Government policy including some background right, when we were trying to negotiate an interagency agreement with them on underground coal mining. We discussed this with a number of major contractors, some of whom did DOD business, and they indicated that they would be very reluctant to bid on contracts administered under the Department of Interior provisions.

Mr. CHURCH. Clearly, if you bring in background rights, I think you would have a serious problem.

Senator SCHMITT. Do you collect statistics on the success of transfer of inventions developed under Government contract to commercial use?

Mr. CHURCH. There have been some studies but to my knowledge there's no data that specifically gives you any percentages as to that kind of exploitation.

Senator SCHMITT. What's your gut feeling? You obviously have been in the business for a while. Do you have any personal information on the transfer of these technologies into the private sector?

Mr. CHURCH. I have found when I was in industry examining these, the cost of prosecuting a patent was so high you certainly make an affirmative decision that you're going to utilize a patent before you invest those kind of resources. So most contractors who do go through the cost of obtaining a patent from the Patent Office certainly, at least at the time they pursue that course, have the intention of exploiting it and usually do.

Senator SCHMITT. I realize percentages can be misleading, but NASA has conducted a study of the relative success rate of the commercial use of patents, those to which NASA has title versus those to which they have waived title. For those that they have waived title I believe the figure is 20 percent that have been commercialized in some way, whereas overall only 2 percent of NASA patents have been commercialized. Do you have a gut feeling that that may be comparable to DOD's experience?

Mr. CHURCH. I really have no data and a gut feeling— I can only base it on as I say, if a private individual goes out and spends the money to develop a patent, he certainly intends to use it. And so if the contractors do proceed, which they would in the case of a title in contractor-patent situation, I would say there would be a much higher utilization than if the Government went out to simply do it for the Government's interest.

Senator SCHMITT. Are you aware of any instances where the implementation of a DOD policy has had an adverse anticompetitive effect within the industry?

Mr. CHURCH. None.

Senator SCHMITT. It's been suggested that a legitimate distinction can be made to applying a different patent policy approach, depending on the end use of the technology receiving Government support. For example, it was argued that where the end use is for the Government, as is typically the case with DOD activities, the patent should be given to the contractor; whereas if the subject of the contract is for general public use, the Government should have the option of obtaining the title. What would be your view of this policy distinction?

Mr. CHURCH. I think that would be an even more difficult situation to administer than small versus large business. Defining end use-I don't know how you do that. As you well know, Senator, in the process of high-technology businesses the many multitude of uses to which it can be put are so diverse-particularly in the space field where you saw them. We've got them anywhere now from frying pans to so on and so forth. So it really is a very diverse

sort of thing even within the context of the Government and the uses we may decide in DOD to apply throughout. So I don't know how you adequately define that and there would likely be a tendency to create a bureaucracy to try to define it, which would rival the Small Business Administration's attempt to differentiate large and small businesses.

Senator SCHMITT. So you're saying that at the time of the development of materials, such as the insulation on the holddown arms of the Saturn V, it would be difficult to have anticipated that it might be used to rebuild human bone structures?

Mr. CHURCH. That's right.

Senator SCHMITT. Thank you, Mr. Chairman.
Senator STEVENSON. Thank you very much.

Senator SCHMITT. Mr. Chairman, I have one more question, just to make sure that the record is clear. You would then say that it would be very difficult to determine a bounded use, exclusive license policy that is?

Mr. CHURCH. Difficult, if not impossible.

Senator SCHMITT. Certainly difficult. You could define it, but you might not be able to administer it?

Mr. CHURCH. That's right.

Senator SCHMITT. Thank you.

Senator STEVENSON. Thank you, gentlemen. Your testimony is very helpful.

[The statement follows:]

STATEMENT OF DALE W. CHURCH, DEPUTY UNDER SECRETARY OF DEFENSE (ACQUISITION POLICY), DEPARTMENT OF DEFENSE

Mr. Chairman and members of the committee, it is a pleasure to present to you today the views of the Department of Defense concerning government policies for acquiring patent rights under research and development contracts.

Over the years, the patent policy of the Department of Defense has been driven by the mainspring of incentive. The patent system was established to encourage invention, disclosure, and exploitation of new ideas. It is a fundamental part of the economic framework within which American industry thrives. In contracting for R&D, the Department of Defense has sought to take advantage of the incentives implicit in this system. Our policy, we feel, should maximize the incentive to both large and small companies to seek out and compete for Defense work, to bring forth their best privately developed background, their most promising ideas, their most talented people, and to report freely and readily the full results of their work, without fear of losing commercial rights. If we can do this and still retain our ability to utilize freely the technology that our contracts have sponsored, then we have acquired what we bargained for, and the public interest has been best served. In the years prior to 1963, the Department of Defense pursued a general policy of leaving title to contract inventions in the contractor, reserving a royalty-free license in the Government. In this way, DOD sought to preserve the Government's interest in inventions arising under Defense contracts, while providing an incentive for the contractor to seek commercial applications of these inventions, and their wider availability to the public.

We hasten to say that the Department of Defense has always recognized that a general policy of seeking only a license to use its contractors' inventions is not necessarily the only appropriate policy for the entire Government. Other agencies have different missions and roles to play in the national economy, and these different missions and roles may require a different patent policy. Early legislative mandates on the Atomic Energy Commission and the National Aeronautics and Space Administration are illustrative of special patent policy following the perception at that time of special public interest in the missions of such agencies:

A monumental step toward resolving the many disparate factors in the patent policy equation was the issuance, on October 10, 1963, of the Presidential Memorandum and Statement of Government Patent Policy. The President's Patent Policy recognized that a single presumption of ownership was not appropriate to

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situations in which the Government contracts for R&D. The basic objectives of the President's Policy recognize that inventions arising from Federally financed research and development are an important and valuable national resource; that these inventions should be developed, and used, and thus contribute to the growth of the civilian economy.

The 1963 President's Policy, amended somewhat in 1971, was immediately adopted by the Department of Defense, and has remained in effect since. The Policy itself in incorporated practically verbatim in the Defense Acquisition Regulation (DAR), which goes on to implement that policy by prescribing clauses for use in contracts. An appropriate clause is prescribed when the purpose and circumstances of the contract fall within one of three categories:

The first, or so-called "title" category, calls for the Government to retain the principle or exclusive rights to inventions made in the course of or under the contract.

In the second, usually referred to as the "license" category, the contractor normally retains the principal or exclusive rights, subject to a nonexclusive paid-up license in the Government.

The third category is a "deferred" approach, in which the allocation of rights is decided on a case-by-base basis after each invention is identified, and under guidelines set forth in the policy.

With regard to the last category, the Government, under our clause in this situation, takes title to all contract inventions pending disposition otherwise as to any particular case. In effect, then, the deferred approach is tantamount to a title approach.

The criteria for use of a title clause were mainly drawn to cover R&D for which the public is to be the user. Contracts in this category have as their purpose, for example, the creation of products or processes intended for commercial use by the general public; or for public health, safety, or welfare; or in fields where the Government has been the principal developer, and we seek to insure access to and use of it by the public. While Government research does at times fall into this category, it is not the general rule in the case of DoD.

Defense R&D is, of course, most often aimed at producing military systems and equipment for use by the Armed Services. The public is not the principal intended user of military technology, and so would not be likely to benefit by Government ownership of an invention emanating from it. Moreover, whereas the military application of such an invention is manifest, coming as it does from a military project, its commercial application, if it has any, is less obvious, especially to the military agency. The Department of Defense has no expertise in the commercial marketing of inventions. Indeed, if any one is likely to recognize commercial potential of an invention, and thus to move it into the economy, it is the contractor. Thus, the majority of our R&D contracts utilize a license clause, leaving the principal rights to the contractor with a paid-up license in the Government.

Beyond the benefits of this approach to the Government and to the public which we have already described, there is a dividend which often goes unnoticed. The DoD has a very limited capability of prosecuting patent applications. And yet we have a need, and indeed a duty, to assure that we can move freely through technology which we have sponsored out of the public treasury. We accomplish this beyond the Government's capability through the instrumentality of our contractors. Motivated by the commercial potential, contractors file a number of patent applications on inventions made under our R&D contracts which otherwise would go unprotected; and the Government receives a paid-up license to those applications and the patents which issue on them. By way of illustration, in FY 1976, the last year for which statistics have been published, the DoD was able to file 1,523 patent applications on its inventions made both in-house and under contract. But we received licenses to an additional 739 patent applications filed by our contractors. These additional inventions represent technology over which, due to the limitations on our capability, third parties could have secured patent protection, to the exclusion of the Government.

However, our experience with the license clause is far from the complete picture. It is perhaps well to emphasize at this point that there is a common misconception that DoD is entirely, or almost entirely, dedicated to the use of the license clause. This simply is not supported by the facts. When the criteria for the title clause applies, we use it. Likewise, if the criteria for the license clause does not apply, we use the deferred clause, which, as we have said, is tantamount to a title approach. It is interesting to note the shift in DoD contract practice which followed the introduction of the President's Policy. Prior to that time, 99 percent of Defense R&D contracts contained the license clause. But the years following the implementation