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Mr. ARMSTRONG. I think if that were the case you might have more of what you hear now. The man on the street saying, “I'd rather work with DOE and EPA because they have better patent provisions."

Senator SCHMITT. Would the decision by the Government agency not to grant a license to your company cause you to consider not to commercialize a product or technology?

Mr. ARMSTRONG. It certainly would cause us to go cautiously because if we do not have a license then we are very open to being bothered by competition. The whole purpose of the patent policies or patent provisions is to protect the individual or the company during the early years of developing and promoting a new product. I feel that if I understood your question correctly, we as a company could not feel that we had that protection.

Senator SCHMITT. Do you have any examples of where you may have proceeded cautiously in such a way?

Mr. NEAL. Well, we were discussing this just a few days ago. Actually, as we look at the new products that Thermo Electron has developed over the past 10 years, we found that the products we have introduced to the market have been products that were funded by private funds and not by Government funds. This is largely because the Government-funded work has been long term, that which we have been involved in has been a long-term effort, and we are just now getting to the point where we face the prospects of introducing products to the market.

So this is now, I think for the first time, really beginning to be something which can bear on market decisions at Thermo Electron. Senator SCHMITT. Do you see any distinction within your company between an exclusive license and a title?

Mr. ARMSTRONG. Do we see a distinction between those?

Senator SCHMITT. If you did work for the Government and they gave you an exclusive license, would you see any difference between that and a title?

Mr. ARMSTRONG. Certainly title to the patent would be better than an exclusive license.

Senator SCHMITT. Why?

Mr. ARMSTRONG. Well, exclusive license would imply there would be a royalty due-for financial reasons.

Mr. NEAL. There's also, as I pointed out in connection with my discussion of our waiver experiences, a title I think is-ultimately an exclusive license allows you to do, when you have it, the same kind of thing that a title would allow you to do. I think that having title would at least give you a sense of security, in that title would not as quickly-could not as quickly be retracted as an exclusive license could. It would not be subject to the same kinds of actions. So while I think the differences are probably subtle from a contractor's point of view, I think the subtleties weigh in favor of title rather than exclusive license, but the differences are subtle and not basic.

Senator SCHMITT. Do they become less subtle if the field-of-use restriction is added to the restriction?

Mr. NEAL. If the field-of-use restriction is added, particularly if it's added at the beginning so the contractor knows from the beginning what the ground rules are, it can be worked out. I think this

is something that might be difficult to negotiate at the time and it would involve time-consuming effort; but the contractor knows what his areas of interest are and what they are expected to be. If the field of use was broad enough to encompass the contractor's area of interest, once that was established, I think it would probably be workable.

The thing that disturbs me about that is, I wonder how easy it would be to establish a field of use on which the contractor and the agency could agree. I wonder if in a sense you couldn't very easily on that very issue in the negotiation turn the whole process back to where it's roughly the equivalent of the one that now exists in agencies like DOE simply because the agency, on the one hand, would have a tendency to make it as narrow s possible; and the contractor would want it as broad as possible. Who could determine where the proper limits are?

The other question I ask is what would the Government do with that part of the patent rights which it retained lying outside of the license? With respect to those rights, the position would be essentially the same as it is under the current patent policy.

If you look at it from the standpoint of promoting public utilization of the technology and if you accept the proposition that the current patent policy does not have a positive effect in that direction, then I think the net effect of doing that is negative all around, although it's certainly not something with which we couldn't live. I just ask what is the positive benefit in doing it? Senator SCHMITT. Well, of course, I asked the same question, but the advocates of the field-of-use exclusive license policy would add to that a marketing agency, so to speak, within the Federal Government that would try to get other uses identified and underway. Mr. NEAL. That's interesting. In my written statement I thought of that and I wondered if it was even worth saying, but it seems to me that to create a marketing agency inside the Federal Government, using-here again you're using, in addition to funding the research, you're using the taxpayers' money to set up a marketing agency inside the Federal Government, which is going to be susceptible to the political type of pressures as well as the market type of pressures, it seems to me to be a real waste of the tax revenue. It just doesn't seem reasonable to me to believe that an agency of the Federal Government can be more effective in introducing new products on the market than commercial businesses which are established for the purpose of marketing products.

Senator SCHMITT. But the argument is that once corporations have title to commercialize a particular product or invention, they are not aggressive in marketing licenses to that invention.

Mr. NEAL. Well, in some cases they will be and in some cases they won't. As Jack Armstrong pointed out a few minutes ago, we found, from whatever source, the success rate is about 10 percent. I think that figure adjusted up or down a little bit is it.

What happens is we are focusing on patents here. I think we lose sight of the fact that patents, patent policy and all of this is only one consideration in introducing new products to the market. With respect to some types of products, it's much more important than it is with others. In some products it's crucial. In some products it's just not at all crucial. It's just that if you have it it's nice, but you

can go without it. There will always be plenty of instances under any patent policy at all where products are not commercialized regardless of who holds the title to the patents.

Speaking from Thermo Electron's point of view, I don't see why we wouldn't act on any right we had which we thought had any potential at all for profitable commmercialization. That is a principal part of our business. We have many patents which are not commercialized; not because we don't want to. Everybody knows what they are if they care to look, and they are there. Nobody is asking us for them. It's very unusual when someone comes to you knocking on your door and says, "I see you have a patent. I want it." In my experience we have had that happen once and it was astounding that it even happened once.

Senator SCHMITT. In S. 1215 we outlined five criteria under which it would be presumed that the Government would retain title subject, of course, to final arbitration by the Board of Review. Do you think that this is a workable procedure, particularly if there's a determination made at the time of contracting and, if so, would you comment on the appropriateness of the five criteria? Mr. ARMSTRONG. I think that the five criteria are very appropriate. I would like to emphasize that I would want each of these determinations to be made at the outset so there's no uncertainty during the contract period.

The only one that I would have any hesitation with is the last one. I believe it deals with items being developed which would be necessary for use by the public to meet Government regulations, or words to that effect.

I think there's a bit of vagueness there as to just what is it that determines whether or not something is needed to meet Government regulations. I see some haziness there.

However, if each of those five items are examined at the outset of the contract and all determinations are made then and everybody will live with them, I see no problem.

Senator SCHMITT. In your opinion, should the Government have the authority to negotiate for background rights in exceptional cases?

Mr. ARMSTRONG. In exceptional cases, yes.

Senator SCHMITT. Can you give me an idea of what an exceptional case might be?

Mr. ARMSTRONG. I was just trying to think in my mind.
Senator SCHMITT. So was I as I read the question.

Mr. ARMSTRONG. I think things that are referenced in the bill such as classified activities or something that is absolutely in the interest of public welfare and the public can't do without it. Maybe defense items and classified items.

Senator SCHMITT. Do you think there needs to be a distinction between large, medium, or small business in the bill?

Mr. ARMSTRONG. NO.

Mr. NEAL. Let me elaborate on that just a little bit. I think it's a mistake to fail to view patents and patent policy except as a part of a much larger whole. It seems to me that the Government is basically in control of who performs Government research and development. I don't think it's a proper use of the patent policy to, in a sense, indirectly achieve a bias in the favor of one segment of

business, be that small business or otherwise, by use of the patent policy.

Assistance to small business, the things to advance the interest of small business and create a commercial climate in which small business can develop and grow, is crucial. There are many ways in which this can be done, ways involving the allocation of funds and others. But I think to use the patent policy to do this is rather an indirect way of accomplishing it. If you view it from the perspective of using the patent policy as a tool to promote commercial use or public availability of the fruits of Government research and development, there is no justification for excluding a large or a major portion of the American industry which can be very effective in introducing the fruits of the research to the public.

[The statement follows:]

STATEMENT OF MARSHALL J. ARMSTRONG, ASSISTANT MANAGER, Energy AND INSTRUMENTS GROUP THERMO ELECTRON CORP. AND JAMES L. NEAL, CORPORATE COUNSEL Thermo Electron is pleased to testify in support of S. 1215 "Science and Technology Research and Development Utilization Policy Act".

Founded in 1956 by Dr. George N. Hatsopoulos, then a professor at the Massachusetts Institute of Technology, Thermo Electron Corporation has become a company with sales of over $128 million. The Corporation provides process equipment, monitoring instruments and manufacturing services for energy-intensive industries. Customers include producers of basic materials such as steel, aluminum and paper as well as manufacturers of automobiles, aircraft, industrial equipment, farm and construction machinery and oil and gas drilling tools.

The Company is organized into four functional groups: Papermaking Products, Energy and Instruments, Metallurgical Services and Metallurgical Furnaces. Within these groups are nineteen divisions which sell to specific markets.

The original Company was formed as a research and development organization. In the late 1950's this group performed government funded research in the science of thermionics. As the Company grew other research contracts from government and private industry developed and an aggressive acquisition program expanded the Corporation's markets to their present scope.

Because of the high priorities being accorded to the development of new energy conserving technologies and the Corporation's expertise in these areas, the Research and Development/New Business Division's sponsored research sales rose this year to over $10 million dollars. Work is funded mainly by government agencies and gas utilities and is augmented by corporate and divisional support.

Overall, Thermo Electron's research and development accounts for about 10 cents of each sales dollar, a figure that exceeds the average for United States manufacturing industries by about 5 to 1. The Corporation is currently conducting over 100 individual research projects.

Thermo Electron's technology efforts are directed towards three main ojectives: developing new products to support the growth of the Company's present businesses; providing technical support to the marketing, engineering and business planning functions; and exploring new opportunities for applying the Company's technology and know-how to new market sectors.

The basic long-range technical efforts, directed towards exploring new opportunities for the Company's technology, are carried out at its research and development facility in Waltham, Massachusetts. There are ongoing basic and applied research programs in thermodynamics, instrumentation, and materials technologies. Engineering, economic planning studies in energy productivity, environmental policy and health systems research are being conducted as well as conceptual design, engineering development, laboratory testing, and analysis of prototype hardware and devices for energy systems.

Specific programs include organic Rankine cycle systems, stationary coal fired diesel engines, thermionics, solar energy, environmental carcinogen detection and biomedical research. Research at the Corporation's divisional level is in the areas of industrial furnaces, and paper forming and drying.

The primary sponsors for this work include federal, state and local government agencies; gas and electric utilities; private research institutes; and foreign and domestic producers of manufactured products.

The growth of Thermo Electron can be traced to its ability in applying basic energy technologies to its products and services. This application of energy technologies is achieved in some cases through building and internal manufacturing and marketing capability and in other cases through acquisition of an existing company which has manufacturing and marketing capability in areas where Thermo Electron already has technical expertise.

This focus of the company has given it a particularly good view of the interface between technology and the marketplace. This interface is dominated by a variety of uncertainties. Any uncertainty regarding proprietary rights clearly acts as a deterrent to commercialization. Experience indicates that potential licensees are usually not interested in introducing new products unless an area of exclusivity can be provided.

Viewed from the standpoint of the investor at the time the decision to invest is made, the product faces lack of customer acceptance and failure on one hand and on the other hand customer acceptance and early competition from those who may copy or essentially copy the product. The early competition places the one who develops the product at a distinct competitive disadvantage. The developer bears the costs of innovation (if privately funded), product development and market development. These costs are very large by the time a product is actually offered for sale to the public. Any investor supplying investment realizes that while the produce is in its infancy it is extremely vulnerable. As is well understood, the fundamental purpose of the patent laws is to stimulate innovation by providing to the innovator limited and temporary market protection. This provides an environment in which a new product has a better chance to mature before facing the full force of the competitive marketplace.

The "Science and Technology Research and Development Utilization Policy Act", S.1215, assures that title to patentable inventions will be available to the contractor at the time the contract is signed. This effectively applies the positive incentive of the patent system to the contractor. Under present contracting provisions which place title in the government, the non-exclusive license initially reserved to the contractor typically does not provide positive incentive either to the contractor or to other parties who might also be eligible for non-exclusive licenses. None of them are afforded the exclusivity of the patent system. Additionally, the prospect that an exclusive license might be awarded to someone other than the contractor is certainly not an incentive or an inducement to the contractor.

Under current government patent policy the opportunity for the contactor to obtain greater rights than a non-exclusive license by waiver may have been intended to apply the incentives of the patent system to the contractor but its effect is unnecessarily limited. Our experience has been that the agencies do not readily grant waivers of patent rights. The criteria for obtaining a waiver are stringent. The contractor has little incentive to develop a market at its own expense before being assured that the rights will be available if it is successful. On the other hand, the rights are not available until the contractor demonstrates a reasonably high probability of success. It is somewhat like not being allowed in the water until you learn how to swim.

If the goal is to stimulate the introduction of innovative ideas to the marketplace, why not go ahead and let incentives operate without becoming unduly concerned. Senate Bill 414 “University and Small Business Patent Procedures Act", from the standpoint of assisting small business, is a worthy bill. However, I believe S.1215 provides essentially the same advantages for small business as does S.414. From the standpoint of putting new developments to practical application, S.414 excludes some of those who can be very effective.

The greatest stimulant to technical innovation is a climate where innovation is rewarded and therefore encouraged and where advances in one technology can spill over into another. Each innovative step sets the stage for new innovation. New products, especially those involving a significant scientific or technological advance, involve a multitude of innovative steps which are typically taken by different people at different times. The steps may be seemingly unrelated. For example, Leonardo De Vinci's "aeroplane" is impressive but was of no practical use until the advent of a lightweight internal combustion engine. Edison's invention of the light bulb was made possible by the advent of a new vacuum pump from Germany. Celluloid set the stage for still photography, and so it goes. Scientific and technological advancement is sometimes commercially motivated and sometimes motivated by a zest for finding the unknown. Translation of the scientific or technological development to products for the consumer is commercially motivated. The contractor normally has a distinct commercial advantage because of its background and the work performed under the government contract. It should not be disregarded.

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