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assume less financial risks in applying them than users of DOD inventions. This has a bearing on the degree of patent protection that may be needed as an incentive to utilization. All other factors being equal, more protection is required where the technical costs and financial risks are greater than where they are not.

3. Patent Rights as Incentives to Commercial Utilization

The study data show that patent rights play widely different roles in the business affairs of organizations in the sample. The sharpest distinction occurs between educational and nonprofit institutions, on the one hand, who can only achieve utilization of their inventions by licensing others, and industrial firins, on the other, who can promote utilization through direct use and licensing.

Educational institutions in the past have been much more concerned with publishing the results of their research than with promoting patents that may arise from it. Today, however, schools with large government research progranis are taking greater inte rest in their patent portfolios and are seeking through a variety of means to promote them through licenses with industry. Nonprofit research firms also view their patents as a potentially useful source of income and actively seek to license others. In both cases, the inventions most frequently arise from basic research and require substantial private development before reaching the stage where they are commercially useful. Some measure of exclusive rights appears necessary to motivate licensees to invest in the work nccessary to commercialize these inventions. Livhere the institution has an active promotional program and the government has none, commercial utilization would appear to be promoted more effectively by permitting the institution to retain exclusive rights. Where this is not so, more individual analysis is needed to determine what allocation of rights would best foster utilization.

Industrial firms in the sample place differing weights on the need for exclusive rights in using government inventions. At one cxtreme were f is who rely heavily on patent rights to establish their proprietary position in commercial markets and would hesitate to invest in an invention in which they could not obtain exclusive rights. At the other, were firms so completely in the government market that they attach little or no importance to patent rights for commercial purposes. In between were firms for whom patents provide a variety of incentives. The nature and importance of these incentives to firms in the sample are outlined below.

A' lack of interest in patents was characteristic of some researchoriented and manufacturing firms that do a preponderance of their business in the government aerospace and defense markets. No desire to expand into commercial markets and no mechanism for the commercialization of inventions were noted. these firms obtain patents, their sole purpose is recognition within the company of technical competence.

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In a second group of firms patents were seconda ry to broad technical ind management competence in maintaining their position in commercial market.i. Firins expressing this attitude toward patents were generally manufacturers of complex systems and technical products, such as aircrafts, jet engines, computers, or communications equipment. Although as much as 75 percent of their sales may be direct to the government, these firms frequently sell similar products to commercial markets. Inventions developed during the course of R&D activities tend to be auxiliary components and subsystems or incremental improvements to the basic product. These inventions are not as important to these companies in sustaining sales or selling new products as is the basic engineering management and production capability of the firm. New ideas and inventions are incorporated in product modifications or in new models with little consideration given to the protection offered by patent rights. Using a new idea to enhance product performance is regarded as more important than assuring that the company owns the exclusive right to use it.

A third group of firms believe that corporat e ownership of patents offers flexibility in design, both in the United States and abroad (through ownership of corresponding foreign patent righis), and provides trading material for cross-licenses with competitive firnis. Ownership of a patent, however, as a prerequisite for new product development is a relatively minor factor compared with market considerations and investment requirements associated with commercialization of the invention. A change in government patent policy may affect firms in this category by causing them to choose more carefully the areas in which they are willing to undertake government research. Faced with the possibility of being unable to obtain title to patents they develop, these firms may refuse to contract in research areas that would impair their operational flexibility.

A fourth group of firms actively seek ownership of patents, to establish and maintain proprietary positions in new technologies, as well as in established product areas. Invariably, however, estimates of market potential and corporate investment requirements determine which product areas are developed. The makeup of the patent portfolio may indicate the direction for product development in order to strengthen proprietary positions, but development is rarely, if ever, undertaken solely because patent protection is available. A change in government policy from license rights to title rights would limit the government-sponsored R&D activity of firms in this category because of possible conflict with company-sponsored research activities. Contract opportunities would be examined on an individual basis and, in many cases, the government might be refused.

A fifth group of firms regard patent rights essential their business activities, and are careful to avoid government claims or conflicts over ownership of inventions. Their policies generally lead them into one of two business patterns. In the first pattern, firms will assure corporate ownership of patents before initiating work on a government contract. They may assure ownership either by negotiating contracts that permit them to acquire title to patents on inventions they may develop, or by developing and patenting basic inventions with limited private funds and then seeking contract work in order to develop additional

technical competence', push the state of the alt, explore a new technology, or determine if conim rcial applications may begin to be drawn vit. In these situa tions, firms deliberishi ly select areas of government research to match their commercial interests in order to generate product ideas with commercial possibilities. New research firms with ng technical abilities and limited capital typically follow this pattern, as ito specialized firms that have concentrated their business in a limited area of technology.

In the second pattern, firms consciously isolate government work from their commercial operations and pursue these activities sepa rately. The sample firms in this category did only a small percent of their business with the government and were quite independent of it. Frequently, inventions derived from government contract work by these firms will be assigned automatically to the government to avoid title conilicts or conmingling with company-sponsored R&D. In other cases, government R&D will be undertaken only in areas where there is no potential conflict with corporate proprictary objectives and in order to enhance the corporate image. The technical value of government contracts to the commercial interests of these firms is rarely considered a va luable supplement to in-house research and development.

Many diversified companies follow different patent policies in their commercial and government markets. These firms may place a strong emphasis on maintaining propriewry positions in commercial markets and express a relative lack of interest in parents arising from government work. The primary purpose of securing patents on government-sponsored research discoveries as in the case of the wholly government-oriented firms, is to provide professional recognition for technical personnel.

Lastly, an important difference was observed between the researchoriented firms doing business with DOD, NASA and AEC, and the product-oriented firms whose interests arı: aligned with Agriculture and TVA. The former were much more aggressive in their search for useful innovations in the work they performed than the latter who tended to rely on the results of government laboratory programs for innovations in their fields. Thus, a lthough the food, textile, and fertilizer industries are less patent-conscious, they are also more conserva tive in the risks they are willing to take in applying new inventions. This accounts for the frequent need for active government promotion of Agriculture and TVA inventions even when the inventions appear to have clear commercial applications.

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Notwithstanding the varying roles assigned patent rights by the firms described above, the key questions is whether permitting them to retain exclusive rights will, on bulance, promote utilization better than acquisition of title by government,

The study datis indicate that the answer is yes in at least the following circumstances:

(i) Where the minions as developed under government contracts are

not direcily applicable to commercial uses and the inventing contractor
has commercial experience in the field of the invention. This
occurs most frequently with DOD, NA SA and AEC inventions,
In the case of DOD, the fact that it does not actively promote
commercial use of its patents is an added factor. In these
instances the inventing contractor with commercial experience
appears to be the logical candidate to attempt utilization either
directly or by licensing other; and

(ii) Where the invention is commercially oriented but requires

substantial private development to perfect it, applies to a
small inarket, or is in a field occupied by patent sensitive
firms and its market potential is not alone sufficient to
bring about utilization. Inventions in this category may arise
with any agency and may have had only limited government
development toward a commercial application.

C. Effect of Government Patent Policy on Business Competition

To evaluate the effects of government patent policy on business competition, the study tried to answer three questions:

(i) What are the effects on competition of the acquisition

of exclusive commercial rights to government - sponsored
inventions?

(ii) Do they increase or decrease concentration in commercial

industries?

(iii) Do they create or eliminate significant areas of market

power?

In evaluating the impact of government patent policy on competition, it is important to distinguish the effects of patent policy from other effects which may result from industry participation in government programs. Competitive advantages in commercial markets may well accrue to government contractors through knowledge gained in new technologies, through sharpening of technical skills, and through government funding of R&D work, which has parallel commercial areas of interest.

But these are quite separate from the advantages of owning patents to specific inventions. This study has tried to measure only the latter. And, it has tried to measure it in terms of the inventions included in the survey sample. While a broader study of the cumulative effect of government - sponsored inventions patented over several years might have provided more definitive data, we believe that the study data provides

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a representative and useful picture of the effects of patent policy on competition.

The study indicates that both in number of inventions utilized and in sales volume, the patents sampled appear to have had small impact on commercial markets. Although over So percent of both sample inventions and utilization were concentrated in 50 firms, only 55 inventions owned by contractors --2.7 percent of the sample--played in critical role in their commercial use, and five were responsible for $201 million out of the $406 million in cumulative sales attributable to contractor inventions. This utilization of critical-role contractor-owned inventions is low compared with the total sales of these firms and the industries in which they participate. Of equal importance is the fact that very few instances were reported where owners of government sponsoreed inventions refuse 110 license their patents. Only 15 inventions --less than i percent of the sample-- involved such refusals, and these 15 refusals involved just five companies.

The study did show that government retention of vile, when coupled with full development and alive government promotion of inventions having high commercial potential, has promoted competition. A striking example of this is the fertilizer industry where I VA developed higli-concentrate fertilizers, patented them, proved their effectiveness on pilot farms and their commercial feasibility in pilot production, and aggressively promoted their use among farmers and fertilizer manufacturers. Industry sale: have increased greatly through the manufacture of these fertilizers by many small regional producers. In circumstances like these, government retention of utle can be un effective spur to competition because licenses are available to all comers. But several additional factors must be present for patent policy to have this cffcct. It must be evident to licensees that the invention has good commercial potential. The invention must be producible in commercial quantities and marketable at a cost that is competitive with alternative product. And the risks of recouping development costs must be no greater than similar investment opportunities available to the license'c.

In most cases, government agencies have in go far beyond discovery of an invention to create these conditions. Some agencies (o- as described in the Volume III report on government efforts to promote litilization of government sponsored inventions. The Department of Agriculture, for (xample, has an active program of developing in vi iitions to the point of commercial feasibility. Potato flakes and frozen orange juice are two of its well-known successes.

That gency, in promoting potato 11:1he's, sponsored pilot production of the product's co appeal. The study was then made available to the food industry to stimulate interest in the product.

COISUNT

In other lises, allowing industry to retain title to inv. ntions his promoted competition. The clearest example of this is the small firm which penetrates a marker of large competitors on the strength of a pillent on a government sponsored invention. Jusi su! case is described in Volume IV, Part 1, Section C.

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