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and in which the first contractors might obtain preferred or dominant positions, title should be taken to help avoid that result. On the other hand, if the purpose was to develop a product for the Government's use and the contractor had an established commercial position in the field of technology involved, the Government would take only a license to inventions, leaving ownership and the commercial rights to the contractor, who was thought most likely to develop the inventions for commercial use and practical benefit to the public.

In cases which did not fall into either category, the rights were to be determined only after the invention was made and reported, and the decision was to be based on the extent to which incentives were needed to bring the invention to commercial application. Moreover, if the Government did not obtain title, it was to obtain what were called march-in rights, namely, the power to march in on the patent owner, obtain the title from the patent owner, and license others if, after a certain number of years, the patent owner was not taking active steps to commercialize the invention and if someone else wanted to do so. Thus, the march-in rights were intended to deal with the dog in the manger and prevent it from sitting on a good idea while preventing others from using it.

I have sometimes thought of the Kennedy statement as a treaty of peace. Despite its imperfections, it served that function. The debate on patent policy thereafter became quiet for a period of years. In 1971, President Nixon reaffirmed the Kennedy statement but amplified it to encourage agencies to grant exclusive licenses to Government owned patents where necessary to stimulate commercial applications of these patented inventions. In addition, agencies working in areas of public safety, health, or welfare, which were normally instructed to seek title, were encouraged to consider leaving title to contractors in exceptional circumstances. Thus, for example, the Department of Health, Education, and Welfare felt authorized to enter into a number of institutional patent agreements with universities which had established programs for licensing their inventions for commercial use on reasonable terms.

There was also carried out the Harbridge House study, which other witnesses will be able to discuss in greater detail. Suffice it to say that the results of the study, which is the most extensive ever attempted, did not conclusively resolve to everyone's satisfaction the title-license issue. Each side found something to argue about. However, the study did not identify factual harm to the public interest arising out of the policy to leave commercial rights with contractors and did support, with factual examples, certain benefits in terms of developed inventions.

The most significant recent statutory enactment is section 9 of the Non-nuclear Energy R. & D. Act of 1974. This act governs nonnuclear contracting by the Deapartment of Energy and has also been made to apply to certain other programs like water desalinification as well. Succeeding witnesses will describe this statute in greater detail. Essentially, it requires the Department to acquire title to inventions but permits the Secretary, in accordance with prescribed considerations, to waive commercial rights back to the contractor, either at the time of contracting or when individual inventions are recorded. March-in rights are provided as well as

power to issue exclusive licenses to Department-owned inventions. One of the features of the statute is that it provides detailed criteria for the division of rights between Government and contractor.

In implementing the act, the Energy R. & D. Administration and now the Department, state in the regulations that patent incentives are among the incentives made available to the Government to stimulate commercial development of new energy technologies. The regulations go on to state that it is, "Intended, therefore, that waivers will be provided in appropriate situations to encourage industrial participation and foster rapid commercial utilization in the overall best interest of the United States and the general public."

However, the waiver procedure is necessarily cumbersome, and in practice, waivers have been increasingly difficult to obtain.

In 1970-72, the Commission on Government Procurement considered Government patent policy along with the myriad other aspects of procurement policy. The Commission's judgment was that the Presidential statement of patent policy as modified in 1971 should be given more time to work.

However, the Commission considered an alternative patent policy, and the Commission staff actually drafted a statute to put it into effect. It was generally to allow contractors to retain title to their inventions but a strong Patent Control Board was provided to exercise march-in rights in the interest of assuring usage of the patents and avoidance of situations inconsistent with the antitrust laws.

This alternative was further refined by an interagency committee in 1975 and 1976 but was not introduced as a legislative proposal. Today the Congress is awaiting recommendations which may emerge from the various studies which the President has set in motion on arresting the perceived decline in American technological innovation to which Senator Schmitt has referred. Changes in patent policy may be among such recommendations.

On the basis of my own experience in Government, Senator Schmitt, I very much support the objectives and provisions of S. 1215. It carefully defines the limited instances in which agencies are to acquire title, permits waivers even in these situations, and gives the contractor the option to retain commercial rights in other situations. I would delete the requirement of title in classified situations, since patents related to national security may more properly be protected in the Invention Secrecy Act.

Were S. 1215 to be enacted, I believe the commercialization of new ideas would be stimulated while, at the same time, the public interest in competition could be protected. Needless destruction of patent incentives by taking title for the Government would be avoided, and a greater willingness to participate in Government programs on the part of industry would be promoted.

In some instances, title in the Government may be justified, but I think relatively few. One I would add is when the contractor's job is to guide and direct others. Taking title in this instance assures the other contractors of the lead contractor's disinterestedness toward their ideas.

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I believe, in general, that ideas owned by all will be developed by none. I also think that trying to decide at the time of contracting whether an invention which might be made in performing the contract will later more likely be commercialized if title is kept by the Government or by contractor is not a rewarding exercise.

My personal feeling is that patent incentives generally work best if they remain in private hands. I honestly believe that most inventions made in Government contracts are not significant enough to worry about or to create bureaucracy and paper work procedures to deal with.

Furthermore, I doubt whether the procurement agencies are well suited to run licensing programs for purposes of commercializing their Government-owned inventions.

Nevertheless, I also believe that effective means should be proIvided to induce Government contractors to license use of their inventions to others on reasonable terms and that the Government should have, through a strong march-in procedure, power to deal with the few bad actors or dogs in the manger. Thus, I would recommend creating a Patents Board to exercise the march-in rights, rather than the procurement agency.

Would-be licensees, if turned down for a license by a patent owner, could apply to the Board for relief. Government agencies seeking to compel wider licensing of significant inventions orginated in Government R. & D. work and avoidance of situations inconsistent with the antitrust laws would make their case to the Board as well. The patent owner and its licensees would be heard in addition.

The Board would decide in accordance with statutory criteria favoring utilization of patent incentives and the equities of the particular situation. Would-be licensees would have greater ability to obtain licenses on reasonable terms, since the patent owner would in all likelihood seek to make a suitable deal and avoid a hearing before the Board.

On the other hand, patent owners would have some protection against unreasonable demands for free licenses where the considerations favoring private investment warranted protection. Thus, patent owners and potential licensees would know that inventions which were largely financed by Government funds would be the most likely to be required to be licensed widely-even royalty-free in some cases. On the other hand, inventions whose commercial application more heavily depends on private investment would receive correspondingly greater protection from the Board.

In this way, the Government could concentrate its attention on the relatively few inventions which really matter and not waste its energies in disputes at the time of contracting over inventions not yet in being whose actual significance is unknown.

I personally believe that this function of a Patents Board would be preferable to the procedure in S. 1215 where a contractor would appeal to a Board a decision of a procurement agency to take title. As I have indicated, the likelihood of sound judgments at the time of contracting as to the future significance of inventions is slight. The procedure would also introduce an extraneous third party into what is fundamentally a bargaining situation, and the third party's

primary interest would be in uniformity, rather than in accomplishment of agency mission.

I also believe that march-in rights are preferable to a policy that a contractor's exclusive rights would be extinguished after a specific number of years unless the contractor justified an extension. I think that the extinguishing of rights would make it difficult to find others willing to develop the invention, and I am skeptical that the Government would be an effective licensing agent.

In certain instances as, for example, in an energy production demonstration plan in which the Government shares costs with private industry, provision would-and I think properly should-be made to provide a recoupment of the Government investment through sharing of proceeds of the enterprise. However, to uniformly make this a requirement for every invention would simply cost more in paperwork in both industry and Government than it would return to the Public Treasury.

I also believe that Government efforts to acquire background patents—that is, privately held inventions developed outside or before the Government work but necessary to it-should be limited to those situations in which the Government is expressly trying to develop a particular technical solution to the point where it can be applied by many different people with no need for further development expense on their part. Again, I think this is best handled by having the contractor agree to license others to use the background patents for the specific technical solution, rather than having the Government acquire and distribute the rights themselves. I would handle these situations administratively, rather than by statute. Mr. Chairman, Senator Schmitt, this concludes my statement. I would be happy to discuss any matter in more detail or respond to any questions. I wish to commend the subcommittee for focusing attention on this difficult problem in a most constructive way. Senator SCHMITT. Thank you, Mr. Johnson.

I would just say that the bill's provisions relative to your discussion of the Patents Board are certainly tentative. Your suggestions are going to be very useful in the final markup of this measure.

S. 1215 applies to all Federal contractors regardless of the size of the contracting firm. Do you believe the distinction between large and small business is such that there should be different policies, depending on the size of the firm?

Mr. JOHNSON. Mr. Chairman, I think that distinction has little to recommend it other than that it may be possible to sell it to people. I think that giving small businesses rights to inventions while denying medium sized businesses or large businesses the rights to their inventions could be counterproductive, particularly for some of the smaller firms. And I don't mean small business as defined by the SBA, but medium sized companies of over 500 employees but not necessarily the "Fortune 500". This would put such companies in quite a difficult position.

Also the policy in implementation would become very difficult as companies pass the magic threshold as defined by the Small Business Administration for totally different purposes than inventions. So I think as a policy dividing the question of who gets rights between big business and small business is not a good policy. It does not relate to what we should be trying to do in patent policy,

namely get the most rapid commercialization of ideas for the public use, and at the same time, avoiding situations such as dogs in the manger, of which there are only a few.

Senator SCHMITT. It has been suggested that a legitimate distinction can be made in applying different patent policy approaches depending on the end use of the technology receiving Government support. That is, it is argued that when the end use is for the Government itself, as is typically the case in military R. & D. and some others, 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 retaining title. Do you agree with this distinction?

Mr. JOHNSON. This is the distinction made in President Kennedy's patent policy of 1963. I think the better distinction is the extent to which the inventions are developed to the point of commercial application, rather than the nature of the agency's mission. I think the rationale can be made for taking title in areas which generally concern the public welfare, but I think patent incentives are needed in that field as much as in any other. Not every invention that is made, for example, in an FAA program will be developed to the point of commercial application. But such a program, if they are developing ground control equipment that would be mandated for use at airports, I can see a reason for the Government taking title, because the very act of the FAA's creating a market for this equipment has removed the need for patent incentives.

On the other hand, I know that the Department of Health, Education, and Welfare has had a difficult time attracting the best contractors in various health fields when it followed a policy of taking only title as required by the Kennedy statement. They found it necessary and in fact desirable and defensible to allow the contractors-including universities-to keep commercial rights, where that procedure would more quickly bring about utilization of inventions.

So I think the better distinction should be the extent to which the Government intends to bring the inventions under contract to the point of commercial application without the use of additional private investment. If so, then there would be no reason to leave patent titles with contractors. However, I think a strong march-in procedure would accomplish the same goals as Government title. It is often said, incidentally, that the march-in procedure set into effect in 1963 has been ineffective because it has never been utilized. The answer I think is that it

Senator SCHMITT. Sometimes that is a sign of success.

Mr. JOHNSON. It never needed to be used. No one ever came up with any instance of a Government contractor retaining title to an invention and proving to be a dog in the manger. It just has not happened since that policy, but of course it took a while for that policy to come into effect, because inventions had to be made and contracts had to be written. So there was a natural lag period of between 5 and 10 years at that point.

But the main purpose of a Patents Control Board seems to me is to act as an incentive on the private sector to make suitable arrangements without involving the Government, to give both sides