tented 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 practi cal, 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. It may very well be that this sponsorship of competitive R. & D. out of fear that the competitor will develop a protected market advantage, is the most important service that the patent system renders to promoting progress of the useful arts. Your question. What, if any, trends in the patenting process or patent litigation have diminished utility of patents? Answer. This, or course, was the central theme of my written paper and oral testimony delivered to your sub-committee on July 27, 1979. The increasing delays in Patent Office action, the unreliability of Patent Office actions due in part to underfunding of its search facility, the sharply increased delays in litigation time, the increased cost in litigation, and the increased uncertainty of the result of it all owing to such factors as some courts applying one standard of patentability while other courts apply different standards of patentability-these are the trends which have a tremendously debilitating effect upon the utility of patents to aid small business development and contribute to technology development, generally. In a phrase, cost, time delay, uncertainty of result, and the view in some courts that only a once-in-a-generation-break-through is of patentable stature, are the four heavy burdens that the patent system carries, and all of them seem currently to be on the substantial rise. By mentioning those four, I do not intend to belittle the significance of the circumstance that we also have several simply bad rules of law that need correction, such as that made by the Supreme Court in Lear Inc. v. Adkins,1 and the Supreme Court's announcement that patents are not favored in public policy and therefore reasonable doubt in patent cases should always be resolved against the patentee whether on a lawful license issue or a validity of the patent issue, etc. It seems clear to me that the public interest is well served by resolution of those reasonable doubts in favor of those who indulge high risk investment in R. & D. The statute enacted by Congress connotes that enforcement of good patents is favored by public policy, but most courts no longer practice that theme. Your question. Is the so-called "weakness" of American patents a serious deterrent to domestic invention, patenting, licensing and commercial exploitation, or, alternatively, an incentive to the transfer of technology abroad? Answer. I consider that the weakness of the American patent system-I focus on "system" because it is the lawyers and the judicial address to the patents as well as the poorly examined patents themselves that give rise to the weakness-is a serious deterrent to domestic innovation, patenting, licensing and commercial exploitation. I myself have sat with clients and have advised them that, in this area we cannot expect reasonable patent protection and therefore you should not spend your money doing research and development in this area or seeking to patent this subject matter, and without protection you are not sharp or strong enough to crack this market. I have advised that "your patents have issued but are so subject to question in the court that you should not afford the cost of licensing undertaking, because competitors will not honor the patent and we will spend all of the potential license income on negotiation and litigation". I myself have advised clients that this is a technology which we are better off to try to keep secret, than to patent, because we cannot trust the patent system to give us reasonable protection at reasonable costs within a reasonable time frame. These advices are not the uniform rule but they are very common. Since I find myself giving that advice to one client or another every two months or so, I feel very strongly that the weakness of the system is a significant deterrent to domestic innovation. The United States Patent System weakness has a more indirect effect upon the incentives to technology transfer abroad, but even there the connection is very real. Not uncommonly, a company is simply not equipped to build a factory and market abroad, but would like to sell its know-how and license its patents to a foreign manufacture to reach markets that owner simply cannot reach. One important fear that discourages licensing of such technology abroad, is fear that the licensee will then manufacture and export back to the United States in competition with the original technology owner's business, taking jobs away from American workers who would have manufactured every item but for its being bought from the foreign licensee, etc. In this connection, recall also that the profit from manufacture and sale commonly exceeds greatly the income from license of the same sale. Accordingly, if we had strong domestic patents that the United States licensor could refrain from licensing to foreign manufacturers, the United States manufacturer might then license his 'See my Texas Law Review article on the mischief of Lear Inc. v. Adkins at Vol. 48, No. 7, November 1970. technology abroad with confidence that he would not be destroying his own profits and the jobs of his own workers by the foreign licensee taking over the licensor's market with imports into the United States. By affording license-reach to the otherwise unserved foreign markets, these foreign licenses would also provide more return on the R. & D. investment, and thereby be an incentive for more research and development by the licensor to the benefit of the United States pool of technology and competitive posture with the rest of the world. Your question. What should Congress do to strengthen the patent system? Answer. In simplistic terms, do all of those things that are necessary to reach the seven performance specifications that I outlined in the paper I delivered to your Sub-Committee on July 27, that was drafted before I received your set of questions. To merely itemize a few future particulars: Re-draft Section 103 in more positive terminology to tell the courts what you are going to tell them, what you are telling them, and what you have told them, so that they will more uniformally follow the standard of patentability that was intended when 35 U.S.C. 103 was first enacted in 1952. Establish a court structure by which all appeals from patent application and patent infringement trials are handled by a single court of patent appeals which will thereby come to have a uniform set of patent law, by contrast with the widely divergent patent law of the many courts of appeal that now hear patent cases. Provide affirmatively in Section 101 of present title 35 that new technologies, such as micro-organisms, are as much within the "useful arts" as old technologies, and that the whole concept of the patent system is to help foster new technologies, thereby to reverse the Supereme Court's philosophy that it will not extend the patent system to new technologies unless and until Congress specifically so writes. Provide for the 17- or 20-year copywrite protection of electronic "chips" and computer programs as well as patent protection of both, these being among our most vital new technologies are in need for different reasons of each of these two varieties of concurrent, moderate term protection. Establish some effective program for speeding trial of patent cases wherein they may be finally disposed of within two years, including appeals. Establish a mechanism for inviting participants in an industry into a first patent litigation following which an In Rem judgment of patent validity is granted so that the patent owner does not have to re-litigate his patent again and again against every potential infringer that comes down the pike. Provide special rules for litigation of patent cases that will aid both a more speedy trial and a less expensive trial. Provide statutorily for the legality of arbitration of patent cases (by present court decision patent subject matter may not be arbitrated) in order that parties may get a cheaper and more prompt disposal of their controversies than the present typical many years and many hundreds of thousands of dollars. Improve the Patent and Trademark Office function by computerized search facilities; integrity checks of the search shoes; indexing of technical literature as well as patents in the search data base; providing for reexamination on request (though with no delay of litigation for the re-examination); increasing time allotted to each examination; shortening response time by the PTO to applications for patent and amendments thereto, to 30 days, issuing patents with any allowed claims within 18 months even though other claims remain pending in examination. I should emphasize that a number of my proposals have never been submitted to the American Patent Law Association and do not have their endorsement, although assuredly the association champions the goals which give rise to even those proposals which do not have APLA endorsement. The accomplishment of the performance specifications mentioned in my presentation to you on July 27, or of the individual specifics outlined above, is not nearly as easy as might appear, for a number of reasons. Even the Bar, itself will be sharply divided on whether we should give up what it perceived to be the quality of justice given up in order to get a lower cost and more timely decision-this though the businessman's focus tells us that somehow we must find a lower cost and more prompt decision making process. The courts will howl over special rules for one class of case or another and certainly can be expected to smart under a compulsion that they decide a patent case after trial before sitting on other cases-as of now, it is at least as common as not that a court takes a full year to render an opinion in a patent case, after the trial is concluded. I could write a full book on those things that need to be done statutorily to make a major move toward each of the performance specifications, and included in that book will be several chapters of adverse reactions that can be expected from the Bar and from members of Congress and/or the Administration. I mention this problem because a small timid approach will fail to accomplish the seven performance specifications which seem so eminently reasonable, even loose and not-adequately-tight from the point of view of the investor in innovation. The job of accomplishing something even close to those performance specifications will be difficult as a matter of statutory concept, and hideously more difficult as a matter of political reality, but it is oh so tremendously important. Hopefully you will find that this letter rounds out the presentation that I presented to you on July 27. You know that if I can, I and the American Patent Law Association will be glad to offer additional help. Yours truly, TOM ARNOLD. LICENSING MANAGEMENT CORP., Senator ADLAI STEVENSON, Washington, D.C. DEAR SENATOR STEVENSON: I was pleased to have had the opportunity to add my voice to those distinguished witnesses testifying at the July 27th Subcommittee on Science, Technology and Space hearing. I believe that our patent system is based on sound principles, although it is in poor health at the moment. Õur patent system's ills are reflected in how we, as a nation, are able to invent and to innovate creating progress and prosperity. The present decline in innovation is indicative of an ailment not requiring radical surgery. Though the disease is serious, I believe a few simple but potent changes will bring back its former vitality. The serious problems within our patent system are attributable, in varying degrees, to a single source-chronic underfunding of the Patent and Trademark Office (PTO). Insufficient support by Congress of the PTO causes inadequate searches with a substantial incidence of prior art not being reviewed by the PTO. These inadequate searches cause a definite court hostility to patents indicated by a de facto overruling of the statutory presumption of validity and increased uncertainty in the patent system. Uncertainty within the patent system is inversely related to the amount of venture capital that investors are willing to risk. The resulting limitation of invested venture capital causes a lack of developmental products and a decline in the United States commerce. In order to reverse this destruction of innovation, I recommend that the funding mechanism of the PTO be added to in the following manner: The Internal Revenue Code should be amended to provide for additional funding of the Patent and Trademark Office from taxes of those utilizing the office. Inventors, companies and all parties reaping royalty benefits would, on a separate, supplemental tax form, enter information concerning the income from licensing and sales of patents and trademarks. A percentage of the income tax normally paid on royalty income would then be directly allotted to the PTO. The tax form would also be broken down to provide information of value regarding exclusive licenses, nonexclusive licenses, sales, income on patents held within and without the United States, as well as foreign and domestic trademark licensing. This provision for funding in combination with the information obtained by the required form could have many advantages over the present system. For example, it would provide an income mechanism which would finance the PTO in proportion to the benefits contributed by those intellectual property systems provided for the public; it would provide, that funds come on a direct basis from the system; the financial structure would remove the PTO, to some extent, from Congressional politics. (In the past, the PTO, without a large special interest group to influence legislation, has been a victim of budget cuts that have impaired its proper administrative function.) Funding would be self-adjusting, thereby accounting for inflation and be somewhat dependent upon the quality of the administrative office functions. Information provided on the tax forms would allow for accurate feedback on the vitality of the patent system and of the economic benefits of the system. Additionally, reliable information concerning the dependence on foreign technology relative to the U.S. system will be provided. Also the supplemental funding would enable the Patent and Trademark Office to modernize and strengthen its search and examination procedures; the modernization techniques would result in a higher degree of reli |