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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. 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:]


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 develop ment. 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 DeVinci'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.

Thermo Electron, in conducting Research and Development under government funding looks forward either to commercialization by Thermo Electron or by licensing third parties under technology and patents. It hopes the incentive will be there when the time for commercialization comes. As said before, our experience has shown that potential licensees are interested only if some degree of exclusivity is available.

The patent system has been in operation for a long time. I see no reason to believe that the public would fare any differently from a contractor operating under patents which were obtained through government sponsored research than from a business operating under patent obtained through privately sponsored research. The present bill does not propose a move from a presently known condition to an unknown condition, but proposes a move from a presently known condition toward another known condition. There is a potential for public benefit and I do not see a corresponding potential for public harm.

I would like to comment on several other issues which have been raised in connection with this bill.

Question 1. What have been the effects of federal agency patent policies and practices on the development and commercialization of government sponsored invention?

Answer. In implementation, if not by design, the federal agency patent policies appear to provide to the contractor the minimum right under the federally owned patent which would be sufficient to enable him to enter the market. The contractor appears too often viewed as one whose actions are likely to be contrary to the public interest rather than being viewed as one through whom economic benefits can flow to the public. The present policy does not stand as a bar to commercialization but it does not encourage commercialization and I believe it tends to discourage or impede commercialization.

Question 2. Is there justification for maintaining a title-in-Government policy with respect to research and development for civilian purposes and a policy which provides substantial rights to the contractor for military and other Government research and development?

Answer. I see no reason for a distinction. Commercialization of Government sponsored inventions and commercialization of products which are spin-offs from government sponsored research can be facilitated by granting to both categories of contractors rights under patents which permit the incentive of the patent system to be available to the contractor.

Question 3. Should the government try to recoup some of its research and development funding from a contractor who commercializes a product using a government sponsored invention?

Answer. No. If introduction of new technology to the marketplace is a primary objective we should not be concerned with recoupment of government research and development funding. This requirement will blunt profitability and therefore blunt incentive and will detract from the primary objective. The public benefits through increased employment and increased tax revenue.

Question 4. Would you favor a self-enforcing licensing requirement whereby the contractors exclusive rights to an invention would expire after a reasonable time, unless the contractor demonstrated a need for an extension?

Answer. No. The shorter the time available to the contractor, the smaller will be the incentive.

Question 5. When should the government retain title to government-sponsored inventions?

Answer. When the primary benefit to be obtained from the research is not intended to be achieved through commercial application of the resulting technology. For example, if a product resulting from the research is to be purchased principally or exclusively by the government, ordinary market incentives are not needed to get the product into practical application. The government could retain title in these cases and still achieve its ultimate objective, if these contractors will agree to these terms. Even if the contractors were agreeable, I would expect title in the government to inhibit commercial spin-offs from such government-sponsored research. The spinoffs from this research accounted for significant technical advances.

Question 6. Are field of use restrictions appropriate?

Answer. As long as the field provided to the contractor is that in which he wants and needs to operate, the field of use restriction would probably have less effect on any commercial activity than any other of those mentioned. The difficulty might be in determining how broad or how narrow the field of use restrictions should be. I expect that the contractor and the contracting officer for the agency would frequently find this a most important question on which agreement was difficult. Additionally, I doubt that a substantial public benefit would result from the rights retained by from government. I believe a private contractor is inherently better equipped and more likely to find a commercial market than is a government agency. At present the government agencies are not equipped to perform this marketing function. I do not believe that public funds would be well spent if they were directed to staffing agencies or an agency to perform such a marketing function.

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COMMENTS ON SPECIFIC SECTIONS OF S. 1215 S. 1215 strikes a reasonable balance between incentive to bring scientific and technological developments to practical application on the one hand and legitimate government concerns on the other hand. We can support this Bill in its present form. However we offer the following for your consideration: Section 201(0)4

A central review entity is essential if the Act is to have uniform application across agency lines. This would hopefully provide a single body from which appeals to the judiciary could be taken. Section 301

The agency determination should be at or before the time of entering into the contract. Otherwise, the contractor continues to operate under a cloud of Federal rights competing with his own. The determination statement required by Subsection B should also be filed with the contractor. Section 3026)

The non-exclusive royalty-free license retained by the contractor when the government obtains title to an invention should be applicable to those inventions to which the government obtained title pursuant to Subsection 302(A) as well as those to which it obtained title under Section 301. Additionally, as long as the contractor is actively promoting practical application of an invention under circumstances which are expected to be effective within a reasonable time, the non-exclusive license retained by the Contractor under Subsection 302(B) should not be revoked to the extent that such a license is important to the commercialization of an invention to which title has been retained by the contractor. Section 304(a)

It should be expressly clear that reasonable terms include payment of a reasonable royalty. It should generally be clear that if the contractor has mounted an effort to achieve practical application of the invention it can't be compelled to relinguish its right except upon reasonable terms. Section 305(a)(3)

It should be made clear that the Federal Agencies may agree at the time of entering into the contract that they will withhold from public disclosure information for a reasonable time in order to permit patent applications to be filed. During this period the information should not be obtainable under the Freedom of Information Act. If the determination to withhold from public disclosure is made during work under the contract on a case-by-case basis, it increases the administrative burden and could put the contractor in the position of having to jeopardize its patent rights to comply with its contractual obligation to submit information to the funding agency promptly. If the information is submitted without assurances of confidentiality and exemption from FOIA, it might be construed as publicly available and therefor subject to statutory bars under the patent law as of the time of its submission. Section 307

Under the authority of Section 307, the government should not revoke a nonexclusive license already granted to the contractor where that non-exclusive license is relevant to achieving practical application of an invention to which the contractor has retained title. The non-exclusive license left to the contractor could be limited in scope to that which is necessary for the practice of inventions to which the contractor has title.

Senator STEVENSON. Thank you, sir.

Senator SCHMITT. Our next witness and our final witness this morning is Admiral Rickover, the Deputy Commander for Nuclear Propulsion, Naval Sea Systems Command. Thank you, Admiral, for

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