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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 all 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 of the 1963 policy saw a definite swing away from strict use by DoD of the license clause. In the years from 1965 through 1970, the number of R&D contract actions containing either the title or deferred clause varied from 20 to 27 percent on the average, about one in every four contracts. Again using FY 1976 as an example, the same measurement of contract actions amounted to 34 percent, or about one in every three. In other words, for every two or three DoD contracts in which we leave title in the contractor, there is one in which we retain for the Government either title or the presumption of title.

In summary, we have found the President's Patent Policy to be sound and workable. The amendments which were made in 1971, we believe, strengthened it.

We are aware that several bills have been introduced in Congress recently, and some may be under active consideration in the current session. We would hope that legislation enacted by Congress would capture the best features of the present system. It has served us well for sixteen years. Perhaps the thoughts shared with you today will help in that regard.

Thank you.

Senator STEVENSON. Our next witness is Marshall J. Armstrong, assistant general manager, Energy and Instruments Group, Thermo Electron Corp., Waltham, Mass.

STATEMENT OF MARSHALL J. ARMSTRONG, ASSISTANT GENER

AL MANAGER, ENERGY AND INSTRUMENTS GROUP, THERMO ELECTRON CORP., WALTHAM, MASS.; ACCOMPANIED BY JAMES NEAL, CORPORATE COUNSEL

Mr. ARMSTRONG. Good morning. I appreciate the opportunity to be here. I am accompanied by James Neal who is the corporate counsel for Themo Electron Corp. Previous to this position, Mr. Neal was our patent attorney, so he has good experience in this area.

I would like to simply make a few points regarding the bill. We have submitted written testimony.

Senator STEVENSON. Your full statement will be entered in the record.

Mr. ARMSTRONG. Following my making a few points, I'd like to ask Mr. Neal to relate to the committee one or two specific experiences of our company with regard to the patent provisions that we have worked with.

To give you a feel for where we are relative to some of the other witnesses, I think it's accurate in saying we represent a mediumsized company. Our sales are approximately $125 million per year. We are considered a high technology company, though our major source of revenue is the sale of industrial products such as heat treating furnaces and equipment for paper mills. Approximately 10 percent of our company's sales is research and development dollars. Of this 10 percent, roughly $3 million is our own companysponsored work; $7 million comes from the Federal Government. Of the $7 million, our largest source of R. & D. revenue is the Department of Energy-about $5 million. This is followed by the National Institutes of Health, which is about $1 million; EPA, NASA, and the National Science Foundation, about $300,000 each; and finally the Department of Defense, about $100,000. These are annual revenues.

I feel that the important thing any patent policy must do is recognize the equities of the various parties involved, and I feel that your proposed legislation, S. 1215, deals with this very fairly, and we are in favor of the bill. The best aspect of the bill from my experience is that it reduces uncertainty. My experience has been

that we have spent countless hours of management time--and this includes legal counsel, contracting officers, both on the Government side and on the industrial side-simply haggling and negotiating over present patent provisions in R. & D. contracts. In many instances, all of this in the long run proves to be of very little value since only about 10 percent of R. & D. projects ever result in what you might call a commercial success.

And this figure of mine of 10 percent is not simply to be applied to R. & D. contracts sponsored by the Federal Government or carried out in Government laboratories, but it applies just as well to R. & D. projects that are sponsored by private industry. The success rate is not very great.

So just to summarize that point, the reduction of uncertainty to the parties involved and the saving of time of important people, both on the Government side and the industrial side, are two things that can be greatly improved by passage of S. 1215.

At this time I'd like to ask Mr. Neal to give us perhaps two examples that might better help you to understand what I have just said.

Mr. NEAL. In the beginning, at the time of contracting, and at the time of requesting a waiver, the administrative burden is heavy. Also the results, at best, in our limited experience, have left

us in an uncerta results, at best, ier, the admin

We have had only two occasions in which we have proceeded with a waiver request or a waiver petition far enough to bear any discussion here.

In one case, Thermo Electron was addressing the issue of how can we better use coal as a fuel. It determined that a slow-speed diesel engine manufactured by Sulzer Brothers in Switzerland was a particularly good engine for the use of coal derived fuels and that it might even, with some small adaptation, be capable of burning coal in the powdered form. We wanted to test the fuels in this engine and carry out a development project for whatever adaptations might be necessary if the first stage was successful.

DOE was contacted with regard to funding and all parties involved were interested and the funding negotiations went very well, and there was no snag until we hit patent policy. At this time it developed that Sulzer had been in this business-I think since the turn of the century—and their engine is indeed unique. To our knowledge, nobody else produces an engine exactly like this.

Sulzer has had an aggressive patent policy over the years and they also license extensively. They choose to license others in various parts of the world to manufacture their engine and they also manufacture themselves. They absolutely could not afford, with this kind of long-standing business policy, to vary it for our project.

Even under this circumstance, where you might think it would be a clear case for a waiver, we still found the going was rather difficult. The end result was that Thermo Electron was granted an irrevocable nonexclusive license, that being an upgraded revocable license that we would have had by virtue of the patent policy. It was determined that since Sulzer, in the first stage, was merely going to be testing fuels in an existing engine, it was not actually conducting research and development and therefore the patent

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