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It is too easy to get a patent-there is an “allow the patent and let them fight it out in court mentality'';

It is too time consuming and expensive to get a patent (stressed several times);

The government should standardize its policy towards handling intellectual property with its contractors;

"Patent courts” with technically oriented judges should be instituted; Strict laws against patent infringement should be made (stressed several times); Invention promotion is too risky (stressed twice);

There is too short a time (one year) between conceptualization and filing for a patent;

Products for sale vs. patents for company machinery to make products for sale under the products for sale royalties can be calculated, under the patents for machinery it is more difficult; it can possibly be a percentage of the annual cost reduction achieved or a flat payment and an annual percentage of sales. Other comments:

The U.S should reward inventors and examine the invention incentives now in use in Europe;

Risk capital should be recovered first followed by government expenses;

Strict time and documentation requirements regarding the employees specific assignment and specific concept must be filed by the employer not involved in specific R&D programs in order to acquire full rights to the patent.


Armonk, N. Y., August 6, 1979. Hon. ADLAI E. STEVENSON, Chairman, Hon. HARRISON SCHMITT, Subcommittee on Science, Technology, and Space, Committee on Commerce, Science,

and Transportation, U.S. Senate, Washington, D.C. DEAR CHAIRMAN STEVENSON AND SENATOR SCHMITT: Thank you for inviting our comments on S. 1215 introduced by Senator Cannon and you to establish a uniform Federal policy on the management and use of inventions developed under Federal contracts. In view of the lagging pace of American industrial innovation and productivity, this is an extremely important bill.

As Vice President, Commercial and Industry Relations for IBM, I supervise the company's worldwide patent operations as well as its contracts and licensing activities. In addition, I am a member of the Advisory Committee on Patents to the U.S. Department of Commerce.

We think enactment of S. 1215, with some relatively minor changes suggested below, would be very much in the public interest. In our judgment, the different patent policies of the various departments and agencies are confused and confusing, and tend to discourage commercialization of patents developed under Government contract. Further, they inhibit bids from qualified companies because of the potential demand for access to background patents owned by the contractor, and particularly in those areas where work performed for the Government draws significantly on the experience and knowhow developed with private funds.

The proposed legislation would clarify the conditions under which title to an invention would go to the Government and would give the contractor the option of retaining the title in all other situations, preserving march-in rights for the Government in certain cases. This seems to us to be an eminently sensible approach, assuring that the Government will be able to keep title where necessary and at the same time giving contractors and potential contractors a much clearer understanding of their position.

The legislation will reduce the administrative burdens imposed by the necessity for deciding the type of patent rights clause to be included in thousands of research and development contracts annually and by the processing of large numbers of waiver petitions.

We believe that S. 1215 is a fair and balanced bill overall. It is an improvement over S. 3627 in the last Congress because of the addition of Section 302(b) which guarantees contractors a license to use an invention to which the Government takes title. Since we called attention to this point in our comment on the previous bill, I want to record our appreciation of the change. However, we think Section 302(b) still falls somewhat short of what is needed. It should be amended to allow the coantractor to grant sublicenses to subsidiaries, affiliates and existing licensees. For that purpose, we suggest the addition of the underlined language:

"(b) When the Government obtains title to an invention under Section 301, the Contractor shall retain a non-exclusive, royalty-free license which shall be revocable only to the extent necessary for the Government to grant exclusive license. Contractor's license to practice the invention, or to have it practiced on Contractor's behalf, shall include the right to grant sublicenses of the same scope to subsidiaries and affiliates within the corporate structure of Contractor's organization and to existing licensees who Contractor is legally obligated to license or to assure freedom from infringement liability.”

We think the march-in rights principle, embodied in Section 304, has merit. However, we believe that consideration should always be given in a march-in proceeding to whether the contractor already offers a fair and reasonable license to responsible applicants. We also think that once a license has been granted by the contractor, it should not be abrogated by the Government. Lastly, where the contractor is using the invention or has made a substantial investment toward such use, we propose that the contractor should retain an irrevocable and non-exclusive license, We believe this is extremely important if the incentive for the contractor to engage in commerical use of the invention is to be maintained.

These objectives can be attained by adding the following language to the end of Section 304(b) after the word "Secretary”:

"Provided, such rules, regulations, and procedures shall include a provision that agency action under subsection (a) may not be proper whenever Contractor offers a license to responsible applicants upon terms reasonable under the circumstances; and shall not be proper to the extent that such action would cause termination of any license previously granted by Contractor other than licenses to subsidiaries and affiliates within the corporate structure of Contractor's organization; and Provided further, such rules, regulations, and procedures shall reserve to the Contractor an irrevocable, non-exclusive and royalty-free license under such invention where Contractor is using or has made a substantial investment leading to the use of such invention

In our view S. 1215 represents a logical culmination of efforts which began in the Kennedy Administration and continued in the Nixon Administration to deal with problems resulting from a title-in-Government policy. We believe the legislation which you and your co-sponsor have introduced is a reasonable balance-increasing the incentive for contractors to commercialize inventions made on Government contract while protecting the Government's interests and rights.

With the changes suggested in this letter, we support S. 1215 and urge its enactment. If you or your staff wish to discuss this matter further, I will be happy to provide additional information and clarification as needed. Very truly yours,



Arlington, Va., August 8, 1979. Hon. ADLAI E. STEVENSON, Chairman, Hon. HARRISON SCHMITT, Subcommittee on Science, Technology, and Space, U.S. Senate, Washington, D.C.

GENTLEMEN: I received your letter of invitation to testify before you on July 27 after I had already prepared my written paper, and since I felt that my subject was addressed to these specific questions in your letter of invitation in generality, and was short on time to address your questions specifically, I proceeded to deliver what I had previously prepared.

However, your letter contained some specific questions that perhaps I might answer, seratim, by dictating more or less off the top of my head.

Your question. What is the utility of patents to individual inventors, entrepreneurs, investors, and small medium and large firms?

Answer. The Constitutionally recited purpose is a real purpose for all these different participants in technology. You will recall the Constitutional phrase is that "the Congress will have the power * * * to promote the progress of science and the useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”.

The concept, of course, is that if you hold out the carrot of a property right in the results of an investment in research and development, you will induce persons to invest sweat, intellect, and capital, not only in the technical undertaking of conceiving an invention but in the market and technical undertaking of developing the invention for useful applications and bringing it to market-these latter steps sometimes being the more expensive and higher risk undertaking, giving the nature of today's market place.

There are, however, some differences in the way the patent system functions with respect to the different classes of interested parties, inventors, entrepreneurs, investors, and small, medium-size and large firms.

Large firms often use patents in the conventional patterns known to entrepreneurs and inventors, but in some industries the large firms have tended sometimes to develop a portfolio of patents in the area of their major business competition with other large firms, and then to use this portfolio in patterns that are referred to as “defensively”. In this pattern, we find that the several major oil companies are unlikely to sue each other for infringement of their patents on secondary oil recovery methods. Why? Because each company knows that he is infringing the other companies' patents in this area; a suit will beget a counter-suit; the expense will be great; the result will be uncertain; and we are better off spending our money on research in this area than paying lawyers to try to sort out the relative values of our respective rights as against each other, using the judicial system which is not really competent to do this job well, anyway.

Even this defensive use of a patent portfolio purchases for the proprietor a freedom from charge of infringment by the similar portfolios of patents owned by large competing firms, and thereby the “defensive" portfolio purchases a freedom from royalty obligation to others, and this is an important part of the value that such firms get for their R. & D. in these areas where the “defensive” pattern has developed. Only if they compete significantly in research and development in the subject areas, can they maintain a good defensive portfolio, so the defensive practice that some firms slip into is still serving the public interest in fostering R. & D.

In response to your question it is to be noted that the defensive value of a portfolio of patents is not commonly available to the new entrepreneur or investor. These persons much more commonly are forced to take their patent to court and seek to enforce it in order to realize the value they absolutely need from it, to protect their high risk investment in a new business endeavor. Thus, to whatever extent big companies live by defensive use of patents without going to court, to that extent the significant costs and shortcomings of the judicial system of patent enforcement tend in a way to be visited more heavily upon inventors, entrepreneurs and investors in new entrepreneurship-all of the smaller business undertakingthan upon the larger firms. This, of course, is no fault of the big firms but an unhappy result of the short-comings of judicial enforcement of patents. And indeed, when the big firms depart from the heart of their major competitive lines into new entrepreneurship, they too tend to slip into the same mode of patent system utilization as described for the smaller entrepreneurships.

There are other important values in the so-called defensive portfolio of patents. Commonly, larger companies build up a portfolio of patents and knowhow but for a variety of international regulation and foreign investment reasons cannot attempt, or do not want to attempt, to build a foreign plant or launch major sales efforts abroad. Thereby, major markets for the technology are not being reached and no income is being derived from those markets. The know-how is kept confidential from all who might use it competitively with the owner who developed it.

But if the owner can license its know-how (whether or not protected by foreign patents) and not license its United States patents, the owner protects its local profiton-sales (often two to five times what royalty income is on the same sales) while reaching new markets with its technology. Thus, the defenisve portfolio of patents when it becomes commercially valuable, also becomes its own pressure for foreign licensing, and a pressure for licensing not just patents but know-how which often has its own great importance.

Similarly, when a technology has use, shall we say, on aircraft propellers and also on motorboat propellers, the defensive portfolio of patents becomes a pressure for licensing domestically in field of use not served by the proprietor of the technology.

One of the least understood but still tremendously important aspects of technology economics, is the role of know-how and the importance and unpatented knowhow in the total picture, together with the relationship of patents to that know-how. So perhaps I should spend a paragraph on that topic.

Patents address primarily new concepts by contrast with masses of detailed knowhow, the "wrinkle technology” which permits one to take the patented concept of, for example, the internal combustion turbine (a subject of my 1940's engineering degree paper) and make it into the J-59 jumbo jet aircraft engine with high power7 weight ratio, low noise levels, high fuel efficiency, etc. After the second wave of patents relating to internal combustion turbines as applied to aircraft engines had expired, it still took half a billion dollars to develop the J-59, and Rolls-Royce's effort to develop a competitive engine flat bankrupted the company.-Mostly unpatented know-how of value equal to or much greater than the still-patented knowhow.

A few improvement patents scattered amongst the mass of know-how are often THE critical thing which precipitates the foreign licensing not just as patents, but the entire valuable know-how package that otherwise would be kept largely secret, forcing competitors to re-develop the same know-how.

Domestic patents, you see, are often key to foreign know-how licensing and foreign know-how licensing is a multi-billion dollar value for U.S. companies and thereby a major contributor to our balance of payments credits.

It is often observed that there are many motivations for research, particularly among big businesses, more than just the motivations delivered by patents. This, of course, is true. Whether competitor A is copying from competitor B or is doing his own independent research, he cannot get too far behind, and so there is a natural degree of competition in R. & D., and this is aided by the degree wherein the knowhow thereby developed can be preserved in some degree of effective secrecy for at least a very few years.

But, the patent protection of the significant concepts so developed, adds a frosting on the cake of considerable significance, increases the profit margin on research and development, and particularly sponsors the movement of research and development into the higher risk more basic areas, by comparison with lower risks “re-packaging” developments that are likely to be indulged without the benefit of a patent system.

Make no mistake about it: Patents are important to the motivation for research, to motivation to start the research into higher risk areas, and to the motivation for licensing among big businesses, medium businesses, small businesses, and particularly new business ventures whether undertaken by small or large business.

I can tell three dramatic tales of the way the patent system functions, in context of the dried-up risk capital market which also seems critically relevant to the total picture.

One of my current tales from current practice relates to lawn care equipment, one to environmental control power plant wastes, and one severe service valves for the chemical industry.

In two of these instances the private inventor, in one of these instances a very small business inventor, created major new businesses that without doubt would never have come into being but for faith that the patents would protect the R. & D. and new business investment. Expanding entrepreneurships have critical need for high risk venture capital that in 1969 came to 3.5 billion dollars from public stock offerings. In 1978 however, public stock offerings by new entrepreneurships were not a viable financing alternative. What is the result?

In each of these three instances, the cost and delay and uncertainty of patent protection afforded by the court system (part of the fault being weak examination of applications for patent by the Patent Office), virtually forced the new entrepreneurs to sell out to big business which had the money and staying power for the protracted court fights. If the cost of patent enforcement in time and money and the certainty of patent enforcement had been much more benign, and/or if there had been a ready source of venture capital from public sources that could be tapped by small high technology new entrepreneurships as was the case in 1969, these three new companies would likely have remained growing new high technology business ventures, soon to become major competitive forces in technology industry.

As it happens, however, through no fault of big business, the big businesses who had the source of capital critically needed for these companies to fight their necessary patent infringement fights in the court room over long periods of time, were asked to buy out the young entrepreneurships and they did so, and our economy lost the three new businesses in favor of industry concentration.

I think it is important that big businesses have access to money and capital, and I do not fault big businesses for spending some of that money and capital in acquisition of high risk ventures that must fail for lack of capital if big businesses do not make it available. The point here is that, if we could make venture capital available in the public market place once again, and could reduce the cost in time, money and uncertainty of the enforcement of the new entrepreneurship's patents, we could have preserved these new independent businesses as viable operations, rather than having them absorbed by big business.

Your question. In what circumstance is patent protection essential or not to the commercialization of innovation technologies, either by new companies or established firms?

Answer. As implied by the stories outlined just above, the new entrepreneurships and small and intermediate size businesses frequently are in critical need of practical, prompt and inexpensive patent protection if they are to survive immediate competition from others who are entrenched in given product lines. How does a small new company take on a Eastman Kodak in the camera market unless it has patents on its "instant snap-shot” cameras and films to give it a protection while it is trying to develop its manufacturing facilities, its marketing organization, public acceptance of its trademark, a reputation for quality and reliability equal to those same strengths as held by an Eastman Kodak.

In significant degree large companies undertake commercialization of their new inventions independently of whether they have patent protection on their particular invention. In doing this to a significant degree, they can, not infrequently, rely for the degree of protection that they really need to get a product marketed, upon their previously established trademarks, established risk distribution systems, reputation for good quality, available capital—that is always important-and the like. Having available capital to risk and a manufacturing and marketing strength, they assume a lower risk than the new entrepreneurship in proportion to availability and therefore are better able to bring new products to market without patent protection, even though ROI typically would be higher if they had patent protection.

By comparison with the big company, contrast the real estate man who invented the Weed Eater, the nylon line lawn trimming device that has sold many millions of dollars worth in the last few years since its first introduction. And contrast the private engineer who invented the severe service refine re-valves that are so critical to many of our modern chemical plants, and the small lime company that provided the first and only environmental disposal of masses of pollutants from coal burning power plants. Each of these needed hundreds of thousands of dollars for technical development, plus hundreds of thousands of dollars for market development.

Investors I know, and their bankers I feel sure, were interested in the patent protection that seemed available or not available to them, were interested in whether they would have their strength drained by protracted patent litigation. And when the dollars in litigation got too steep in context of the uncertainty and delay in result, the private investor, small business and banker types had to drop out in favor of the strength of big business. [Let me not mislead by over-simplification; obviously there were other factors involved too, ranging from A to Z and including things like the age of the early investors who wanted to retire from the fight; but the factors I have reported were assuredly very important factors in what happened in each of the three examples I am alluding to.]

The small firm or new entrepreneurship by an inventor and his financial backer is, at least commonly though certainty not uniformly, not even undertaken unless there is some reasonable measure of confidence that, having spent the money to commence the new business or new product line, they will not be promptly driven from the market by big competitors with established market might (trademarks, distribution systems, production capacity, reputation for good quality, etc., that the new business might not have). My experience teaches me that the fear of the big business competition is probably greater than reality, that entrepreneurs who have the courage to take on established competition find that they can do so. But confidence is a very important part of encouraging the entrepreneur to try, and patents that can be relied upon are a very important part of that confidence.

There is another aspect of the patent system providing an essential catalyst to the development and marketing of new technologies which can be referred to as competitive research or competitive leap frogging.

Whenever one company has a dominant market position and finds its market being lost to a new competitor, the first company has the alternative of copying the new competitor's development if not protected by patent, or doing original research of its own.

If the new competitor's entry into the market is protected by patent, the established company must indulge a competitive research to design around those patents. Since the design around will not normally sell well unless it is also an improvement, the competitive research by the first company to meet competition continues until a better alternative is produced and offered into the market.

Necessarily, the second company finding its strength being taken away by this new development, must in turn commit more of its dollars to research and development to recapture the market advantage it was using as its basis for earlier growth.

Taking turn about, so to speak, the two companies-or in many instances 10, 12 or 15 companies-are all goaded to competitive research in order to be sure that their competitors do not come up with an important market advantage that is protected for the competitor by the competitor's patent.

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