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 GENERAL 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 rev

enues.

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 uncertain situation.

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

policy did not apply to it at all and the question of a waiver for Sulzer was moot.

The result of the waiver petition, therefore, was to grant the absolute minimum that could be given to secure participation of the contractor. It didn't solve any of the ultimate issues. So far, this program has been of significant interest, and Jack can correct me but I think we could characterize it at this point as successful. If we go on beyond the initial state, we still have to face the question of how to handle patents. We have simply sidestepped the issue because that was necessary to get to the first stage. Down the road we are faced with complete uncertainty as to whether we will be able to continue the research, to say nothing of whether we would ever have meaningful rights under which the results of this research could be commercialized.

Under the existing patent policy, commercialization of Government patent rights is not prohibited. If all parties involved really work at it and are really and truly interested enough and persistent enough, a way can be found. Nevertheless, by no stretch of the imagination, can this be considered an encouragement to commercialization. I don't think it can even be considered neutral. I think it discourages. But if you want to encourage consumer use of the fruits of Government research, the present policy under no circumstances in our experience could be construed as an encouragement. Focusing again on uncertainty, I would like to address the other waiver, which goes back a few more years than the one I just mentioned. Thermo Electron has over many years conducted Government-funded research and development for a heart-assist device. This is funded by HEW. There have been occasional patents which were assigned to the Government, but there's not been an aggressive patent program in this area because Thermo Electron's view was that the Government owned the patent rights and therefore we had no incentive to file. For reasons of its own, the Government had chosen not to file any patent applications also.

The results of the research had, of course, been published as we went along. At one point HEW determined that it would be good if there was patent protection covering some inventions that were coming out of the program and the result was-well, Thermo Electron indicated it didn't have any interest in filing applications unless it could obtain a waiver. There were some preliminary discussions. In the meantime, HEW filed one patent application and then decided that this would be an appropriate case for a waiver. This was in informal conversation and Thermo Electron filed-I believe the number of applications was five-on a group of inventions that came out during a certain period of time in this work.

Then we started to negotiate the license. We got to the point where the complete agreement was agreed upon, as between Thermo Electron and the contracting officers who were negotiating this matter. It was ready to be presented for signature. This was done, and then there was a delay.

Then after some time we received a call informing us that notice of the agency's decision to grant this license to Thermo Electron was going to be published in the Federal Register with invitations for other people to comment, object, or apply for licenses them

selves. This was done and, interestingly enough, on the same day there was another person in the same circumstance. The name of this company was American Science and Engineering and they had invented an improvement for CT scanners. CT scanners are X-ray devices which in effect give you a picture of a cross-section of the human body. I believe just recently the people who did the fundamental work, not the people who invented the improvement but the basic work, received the Nobel Prize.

Charles Hieken, an attorney in Waltham, Mass., not far from where we are, called me shortly after that. He represented A.S. & E. and we discussed our common problems. In a nutshell, to look to the end and then come back to where I now am, the status is that Thermo Electron has been informally advised that its waiver request cannot be granted and it's just now shelved on that basis. A.S. & E. problems are now in the courts and neither of us have any benefit flowing from this.

Just to give you an idea of how difficult this can be and how difficulties can come from quarters that you would never expect, I would like to relate some of the understanding I have of the A.S. & E. situation as explained to me by Mr. Hieken. I understand that all of this is on the public record in the court documents.

A.S. & E. had requested a limited exclusive license. I believe the term was for 5 years. They got to the point we did. Just before the Federal Register notice their contract was ready to sign and it was before the Assistant Secretary. After the publications in the Federal Register, there were objections to the grant to both their license and ours. After the objections to the grant of American Science and Engineering they continued their negotiations and the objectors continued to make their views known. Nevertheless, after some, I understand, rather protracted and difficult negotiations, it was determined that the license would be granted to American Science and Engineering. I believe the term was shortened to 3 years. This was done. The license was signed. They were all-go, and they began to focus on their efforts to sell the improved scanner. Then there was a change in personnel in the agency. I think this happened rather quickly after the license was granted. I'm not sure of the time, but I think it was just a matter of a few months. Anyway, there was a change in personnel and meanwhile, apparently, there was still some discussion of the merits of this case. An Assistant Secretary who just had come in to office unilaterally revoked the license that had been granted to A.S. & E. and granted nonexclusive licenses to several other parties. A.S. & E. sued and asked for a temporary injunction. It was given. There was an appeal. On appeal, A.S. & E. was told the injunction was not proper and my understanding is that their remedy was to go to the Court of Claims and sue for damages. According to my understanding, that's where the situation now stands.

This is just how uncertain and how dangerous a situation can be. I don't portray this as typical by any means, but certainly this puts you on notice that you proceed at your peril. When the question was asked earlier today, do you favor a license policy or a title policy, I thought of this situation. This would provide a good justification for having a title-in-the-contractor policy rather than a license-in-the-contractor policy because the title could not be unilat

erally snatched back. The contractor would be in a position to know that he had what he had, and not to feel that he had it perhaps by leave and approval.

These things, Government decisions, are always subject to political pressures, and I don't use that in any derogatory sense. They respond to the input that comes from the public. This is a proper function. But when you're trying to commercialize technology, there comes a time when you have to say the decision has been made and we have to give the contractor a position which he understands and in which he's secure.

Just to recap this situation, two events occurred which didn't have to occur and in my opinion should not have occurred. To my knowledge, there was not and never has been and still is not a requirement that, upon request for a waiver, the decision to grant a license under a waiver should be published in the Federal Register. If an invention has real commercial advantage there will always be people who will object, and I would point out that this product was already on the market. This was not a question of whether or not a product would be marketed, but it was a question of exactly how it would be handled and what incentives would be given for adapting this particular improvement.

The unilateral revocation of the license to me just-I'm at a complete loss to explain that. It seems to me self-evident that that should not have happened.

Mr. ARMSTRONG. I might add with regard to the first examplethe slow speed diesel engine-to examine the possibility of ultimately burning pulverized coal. You might say, well, perhaps because there was a European company involved there was some reason to go very slow and cautiously; but that was examined thoroughly and there is no such engine available in the United States by a U.S. manufacturer. We had thoroughly gone through that prior to our contract negotiations.

We would be happy_now to discuss or answer any questions. Senator STEVENSON. Thank you, gentlemen. Senator Schmitt. Senator SCHMITT. Thank you. I would just say that that's very similar to the experience I had with the Department of Interior on underground coal mining. We eventually found a way to go around it to do very little compared to what could have been done.

Title II of S. 1215 establishes a review entity to monitor agency compliance with the policy given by the act and to assure uniform implementation of its provisions. This review entity would have the authority to determine with administrative finality any dispute between a Federal agency and a contractor. In your view, is this a worthwhile provision?

Mr. NEAL. In my view, it's a worthwhile provision. I think this would be necessary to establish uniformity of agencies' application of the patent policy. It would provide a single place from which appeals could be taken to the courts rather than perhaps having multiple sites from which appeals could be taken.

Senator SCHMITT. You then feel it's consistent with a uniform policy to have a single point of review?

Mr. NEAL. Yes, probably necessary.

Senator SCHMITT. Well, one could leave it up to each agency to interpret the uniform policy in their own way.