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In my opinion, the bill overemphasizes the importance of patents and, if enacted, would tend to divert attention and resources of the Government agencies away from their main functions. Most agencies have enough trouble doing the job they were established to do; they should not be required to spend their time and resources trying to promote patents of dubious value. I believe that the decision to use or not use Government financed inventions is one best left for the private sector.

The bill includes some safeguards which I believe would be cumbersome and ineffective. The first involves the Government's ability to force wide spread licensing under its so-called "march-in" rights, if a contractor who holds title to a Government financed invention were not satisfactorily developing and promoting it. The Government has had march-in rights since 1963, but to my knowledge has never used them. To be in a position to exercise these rights a Government agency would have to stay involved in the plans and actions of its patent holders and check up on them. If a Government agency ever decided to exercise its march-in rights and the patent holder contested the action, no doubt the dispute could be litigated for years. For this reason I believe this safeguard is largely cosmetic. It would result in much additional paperwork but would probably be used no more than in the past.

A second cumbersome and probably ineffective safeguard involves the provisions for return of Government investment. The proposed procedure involves keeping track of how much the Government invested in the invention and what after-tax profits a contractor has made over a ten year period from licensing agreements or direct manufacturing associated with the invention. Since there are no firm standards for calculating these figures, the likelihood of manipulation and disputes is great. To comply with provisions of this bill, Government agencies would have to set up organizations, issue and implement regulations; promote patents; review and audit contractor patent development and utilization plans; intervene when these plans are not carried out; negotiate agreements; audit books and records. I believe that these requirements will be effective only in adding much unnecessary paperwork.

Contractors and patent lawyers often claim that contractors will decline Government work if they are not given title to patents they develop under the Government contract. My experience has been that Government patent policy is rarely the dominent factor in company decisions to accept or reject work. Businessmen tend to value the tangible benefits of profits and technical know-how from Government orders more than the speculative benefits of patent rights. For more than 30 years I have been able to obtain the R&D and manufacturing work needed for the Naval Nuclear Propulsion Program without having to give away Government patent

rights.

Although S.414 is supposed to be about universities and small businesses, there is another part of the bill, Section 208, which would establish patent licensing procedures applicable to all contractors, both large and small. Under this Section, Government agencies would be specifically authorized to grant exclusive licenses to use Government-owned inventions. Under the bill, the General Services Administration is authorized to prescribe the regulations governing such licensing. In the past, questions have arisen as to the legal authority of various Government agencies to grant exclusive licenses to Government owned inventions or to waive the Government's rights to title in such inventions. This bill would resolve these questions in favor of being able to give away Government patent rights.

Judging from the past performance of many Government agencies, the attitude of the Department of Commerce, and the influence of large contractors in individual Government agencies, there is no doubt in my mind that the regulations would be written to encourage the granting of exclusive patent rights to Government contractors. The bill requires Government officials to make certain formal determinations prior to granting exclusive licenses. However, the bill provides a framework under which Government agencies could rationalize the granting of exclusive licenses to large contractors. Either by getting Government agencies to waive its patent rights, as authorized under some of the present laws, or under the licensing regulations that would evolve under the proposed bill, many large contractors would be able to obtain-perhaps at the outset of the contract-title or exclusive licenses to inventions developed under their contracts with the Government. This should be prohibited.

These licensing provisions of this bill are identical to the language proposed to the House Science and Technology Committee during the previous session of Congress as part of a bill to promote technology. That bill and a similar one that was reintroduced recently are aimed at giving both large and small contractors exclusive rights to inventions developed under their Government contracts. It appears that these same interests are trying to take advantage of the small business and University title of S.414 to achieve what they so far have failed to achieve in these other bills.

In summary, I believe that inventions paid for by the Government should belong to the public, and all citizens should have an equal opportunity to use the inventions, private firms, particularly large companies, should not be able to get a 17-year monopoly on inventions they develop with tax dollars. When Government agencies routinely grant contractors exclusive rights to use such inventions, it promotes greater concentration of economic power in the hands of large corporations; it impedes the development and dissemination of technology; it is costly to the taxpayer; and it hurts small business.

I testified in more detail on the general subject of Government patent policy as it affects small business before the Senate Small Business Committee on December 19, 1977. With your permission, Mr. Chairman, I would appeciate having that statement included as part of my testimony today.

I recognize that despite my convictions on this subject, there often is strong sentiment in the Congress to do something special for small businesses or Universities. If you do decide to provide more favorable treatment for them, I recommend that you do so in a manner which ensures that small businesses and Universities, rather than large contractors, in fact have priority or at least equal access to inventions developed at Government expense. To accomplish this, I recommend that S.414 be modified as follows:

(1) Require that the Government retain title to all inventions developed at Government expense.

(2) Give small businesses and Universities an automatic 5-year exclusive license to inventions they develop under their Government contracts. At the end of this period the invention would fall in the public domain. This would provide limited protection but not a 17-year monopoly. It would also obviate the need for the cumbersome safeguard provisions of the present bill, e.g. “March-in rights,” “return of Government investment,” and the vast administrative effort associated with them.

(3) Revise the preamble to eliminate any implication that Government agencies should (a) actively and indiscriminately promote all inventions arising from Federally supported research or development, and (b) "protect the public against nonuse . . . of inventions.” Only a small portion of the inventions patented by Government or industry turn out to be worthwhile.

(4) Prohibit agencies from waiving the Government's rights to take title to patents development at Government expense. Whenever such waivers are granted, small businesses or other firms are foreclosed from the opportunity to use the invention.

(5) Prohibit contracts which automatically provide to the contractor exclusive licenses to any inventions developed under the contract, except as indicated in paragraph (2) above. Other firms should at least have an equal opportunity to use the invention non-exclusively or bid for the exclusive right to use it.

(6) Require that the Commerce Department publicize the availability of patents to which the Government has title for a period of six months. If no one requests a nonexclusive license, the rights to an exclusive license could be granted to the highest bidder with small businesses having priority in the bidding.

(7) Eliminate the statutory requirement for the GAO to conduct an annual review of agency performance in the area of patents. It does not seem appropriate to include this as a permanent requirement of the law.

In my opinion the effects of Government patent policy are continually exaggerated and overplayed by the patent lawyers and contractors who have a vested interest in the matter. Proposed changes regarding ownership and use of patents developed at Government expense are always presented under the banner of high sounding principles and purposes. Having observed this issue for many years, I am thoroughly convinced that almost all of such proposed changes are contrary to the best interests of the United States.

The basic principle embodied in present laws is that the Government should have title to inventions developed with Government funds. That is a sound principle I fully support. It should be modified, waived, or otherwise tampered with only for compelling reasons--and even then with great care and in the most limited way needed to accomplish the purpose.

[The following information was subsequently received for the record:)

QUESTIONS OF SENATOR SCHMITT AND THE ANSWERS THERETO Question. As you are undoubtedly aware, there has been a growing concern over what is an apparent decline in the rate of American innovation and productivity. Numerous indicators point to a slowing down of U.S. productivity gains relative to our major foreign competitors. For example, the difference between foreign patents granted to Americans and American patents granted to foreigners has dropped 47% between 1966 and 1975. Moreover, from the mid-1950's to the mid-1960's, the U.S. share of major innovations dropped from 80% to 54%. Do you agree there is a need to stimulate innovation and productivity growth, and, if so, what role does the Federal Government's patent policy play in this process?

Answer. The statistics reflect the growing technological sophistication of other industrial nations and is not necessarily indicative of declining U.S. technology. I believe the concept of public ownership and free availability of publicly-funded inventions as embodied in existing U.S. laws leads to the widest dissemination and use of new technology.

From an historical perspective, increased R&D competition should have been anticipated. The U.S. created and nurtured its own competition. At the conclusion of World War II, the economies of the industrialized nations, with the exception of the U.S., were essentially destroyed. The U.S. had a large, intact industrial base and extensive R&D programs. It provided technical and economic aid to other countries and helped them build modern industrial facilities. It should not be surprising that these nations are now competitive with the U.S. in the world marketplace.

Question. Current Federal patent policy is reflected in more than 20 different statutory provisions, two executive orders, and innumberable regulations. Oftentime, a single agency operates under several different patent policies. Delays in processing normal waiver applications can take up to several years. Witnesses before our Subcommittee have complained that this situation is confusing, costly, and counterproductive. In your view, are the Government's current patent policies effective and do they operate in the "public interest”? If not, what changes would you suggest?

Answer. I agree that current Federal patent policy is complicated, disjointed, and in many cases does not benefit the public. I have recommended a uniform Federal patent policy under which the Government would retain title to all inventions developed at public expense; Government agencies would be prohibited from waiving Government patent rights; and the Commerce Department would be required to publicize the availability of each Government patent and to grant non-exclusive licenses to those who express an interest in using the invention on this basis. Exclusive license could be granted on a competitive bidding basis in the event no one requests a non-exclusive license.

Question. In your statement, you express the opinion that the Government should take title to inventions to preclude the establishment of a private monopoly for a publicly financed invention. Can you provide the Committee with any data, statistics, or other evidence which would substantiate your belief?

Answer. The Government creates a monopoly any time it grants a contractor exclusive rights to a publicly funded invention. From that point on, the contractor can prevent others from using the invention except on terms the contractor dictates. Sound public policy dictates that inventions developed at Government expense should be freely available for use by any citizen. In cases where the Government concludes the public interest would be best served by granting exclusive rights, every citizen should be given an equal opportunity to bid on them.

Question. A recently released Report on Government Patent Policy prepared by the Federal Council for Science and Technology concluded that there has been a steady decline in the rate of inventive activity for both Government contractors and Federal employees. The number of invention disclosures reported as a result of the Government's R&D effort has dropped nearly 50% from 12,869 in FY 1968 to a low of 6,839 in FY 1975. What significance would you attach to these figures? To what would you attribute this apparent decline in domestic inventive activity.

Answer. There is no way to know why Government patent disclosures declined through 1975. However, the decline in patent disclosures is not necessarily indicative of a loss in creativity. There are several reasons that could account for the decline.

It can reflect the fact that many Federal agencies are lax in seeing that their contractors disclose inventions developed under their Government contracts. The technical people in charge of individual programs must be encouraged to have an interest in, and a sense of responsibility for invention disclosures.

It can also reflect selective disclosure by contractors. Contractors involved in Government and commercial work may be taking credit on commercial work for inventions that actually had their origin under Government contracts. For example, contractors participating in Government-funded Independent Research and Development programs are able to claim inventions as their own that are developed in this program and to slide inventions originating in other Government work under this umbrella.

Question. As you know, Senators Bayh and Dole have introduced a bill, S. 414, the Small Business and Universities Patent Procedures Act, which, with certain exceptions, would permit small business and university contractors to retain patent rights to inventions made in the course of Federal contracts. Would you give the Subcommittee your views on this legislation?

Answer. I testified before Senator Bayh's subcommittee on the Constitution regarding S. 414 on June 6, 1979. I testified that while I believed Government funded inventions should be freely made available to the public, I recognized that Congress sometimes felt the need to provide special assistance to small businesses. Under the guse of helping small businesses however, S. 414 included provisions which instead give large contractors the advantage. If that is not the intent, and the purpose of S. 414 is to help small businesses, it should be revised as follows:

(1) require that the Government retain title to all inventions developed at Government expense.

(2) give small businesses and universities an automatic 5-year exclusive license to inventions they develop under their Government contracts. At the end of this period the invention would fall in the public domain. This would provide limited protection, but not a 17 year monopoly. It would also obviate the need for the cumbersome safeguard provisions of the present bill, e.t. “march-in rights," "return of Government investment," and the vast administrative effort associated with them.

(3) revise the preamble to eliminate any implication that Government agencies should (a) actively and indiscriminately promote all inventions arising from Federally supported research or development, and (b) “protect the public against non-use ... of inventions.” Only a small portion of the inventions patented by Government or industry turn out to be worthwhile.

(4) prohibit agencies from waiving the Government's rights to take title to patents developed at Government expense. Whenever such waivers are granted, small businesses or other firms are foreclosed from the opportunity to use the inventions.

(5) prohibit contracts which automatically provide to the contractor exclusive licenses to any inventions developed under the contract, except as indicated in paragraph (2) above. Other firms should at least have an equal opportunity to use the invention non-exclusively or bid for the exclusive right to use it.

(6) require that the Commerce Department publicize the availability of patents to which the Government has title for a period of six months. If no one requests a nonexclusive license, the rights to an exclusive license could be granted to the highest bidder with small businesses having priority in the bidding.

(7) eliminate the statutory requirement for the GAO to conduct an annual review of agency performance in the area of patents. It does not seem appropriate to include this as a permanent requirement of the law.

Question. In your statement you expressed the opinion that most patents are of little or no significance. If this is so, what is the justification for the costly programs which are currently needed to administer the present patent policies? Also, if the inventions are worthless, why are you so concerned about the rights which the contractor might acquire in these supposedly worthless inventions?

Answer. My experience has been that most patents have little or no significance. However, it does not follow that all patents under government contracts are, or will be, worthless.

For those that are worthwhile, it would be wrong to give one contractor exclusive control over that invention simply because the contractor was fortunate enough to have obtained a Government contract to do the work. Another important consideration is that if contractors were allowed to retain patent rights under Government contracts, many contractors would patent trivial ideas not because they thought the concept important but to further encumber other companies from being able to enter into that line of business.

If the Government were to adopt a policy of giving its contractors exclusive rights to inventions developed under their government contracts, those contractors with the largest amount of Government-funded R&D work would undoubtedly end up with the most patents. In effect, the government would be helping to limit competition rather than enhance it. Such a policy would encourage even greater concentration of economic power in the hands of large corporations.

Question. The President's recently announced proposal for Government patent policy would, as you have suggested, give title to the Government but it would also give the contractor an automatic exclusive license for the life of the patents in the "field of use" of the contractor. What is your personal view of that policy approach? Answer. For all the reasons outlined in my statement and in the answers to the prior questions, I do not agree that contractors should be given an automatic exclusive license for the life of a government owned patent in the "field of use.” The proposal to retain public ownership of a patent's title while granting exclusive use to a contractor is a facade. I do not think that it is wise for the government to get in the position where it invests billions of dollars in research and development programs—which are supposedly aimed at the nation's foremost problem areas-only to give contractors sole control over the application of the results for the next 17 years.

"March-in rights” are once again advanced in the proposal as the means to protect the public. As I have noted before, march-in rights have been in existence since 1963 and have not been used. This lack of use speaks stronger than any theoretical argument over the protection they provide. Furthermore, concern has been expressed over the administrative system currently required to oversee Government patents, yet no consideration has been given to the far larger system that would be necessary for the Government to adequately police publicly owned patents controlled by Government contractors.

Question. In the United States the typical employment contract requires the employee to assign his or her rights to the company pursuant to the a pre-employment agreement. As presently drafted, S. 1215 would not affect the existing contractual relationship between the Government contractor and the employee-inventor. In your view, is there a need to provide greater incentives to the employee-inventor who has assigned his rights to the company? Is this a matter which should be dealt with by Federal legislation?

Answer. I do not believe there is a need for the federal government to provide greater incentive to the employee-inventor who has assigned his rights to the company. My experience has been that good ideas will come to the surface without the need for special incentives.

In any event, most companies have incentive programs for their employees. Moreover, any company concerned about increasing its size or enhancing its profitability will encourage and aggressively pursue ideas generated by its employees. Often overlooked in the continuing debate over Government patent policy is the need for any R&D contractor to demonstrate its ability to originate new processes and to make improvements to existing processes in order to justify follow-on contracts. This alone requires a contractor to encourage its employees to be innovative.

It is worth noting the double standard that pertains in this area. The patent lobby creates the impression that companies cannot be creative unless they can get exclusive rights to patents developed under government contracts. Yet, they apparently find no difficulty in reconciling this position with the fact that companies require their employees to assign patent rights without any apparent concern over employee creativity.

QUESTIONS OF SENATOR LONG AND THE ANSWERS THERETO Question. As I understand it, contractors who do research for the Government get a share of their research overhead paid for by the Government. Often they can train a staff of research workers and hold them in reserve for the time when they use them on their own private research projects. In addition, the research staff and the records of the contractor constitute a body of "know-how” which inevitably remains the property of the contractor and may be a very valuable asset.

Am I correct in this understanding?

Answer. Yes, sir. Government contractors receive funds, primarily through the DOD, for Independent Research and Development. These funds are given to the contractors to do any R&D they wish with only a broad requirement that there be some potential application to Government programs.

Contractors consistently abuse this concept. I have testified many times concerning these abuses.

Question. It is also riskless: is it not?

Answer. Yes, sir. There is no risk involved because no product is required from the contractor.

Question. Then, the contractor has a substantial competitive edge on possible competitors both in the commercialization of an invention or in securing future research contracts. Isn't that so?

Answer. There is no doubt that the Independent Research and Development payments give Government contractors advantages over companies without Government contracts.

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