commercialization. The public will simply never receive the benefits of inventions that are never made or commercialized.

For the above reasons, we urge your support of this legislation.

Thank you.

Senator SCHMITT. Mr. Lonsdale.

Mr. LONSDALE. First, I would like to thank you for inviting me to these hearings. It is gratifying that someone wants to hear our opinion. I have prepared a formal written statement, but I don't plan to read it at this time. I would rather make my remarks informally if I may.

Senator SCHMITT. Your statement will be included in the record. Mr. LONSDALE. I represent Bend Research, Inc., located in Bend, Oreg. We have 25 employees, and most of us are chemists. We are inventors, and would-be innovators.

I believe I am the only representative from small business at these hearings, so in a sense I respresent the 4 million small businesses in the United States.

But more to the point, I represent small, high technology companies, of which there are only a few thousand. I feel some responsibility for speaking for those people, because I think they made substantial contributions to the growth and economic success of this country.

Several Government studies have shown that these small high technology companies have been inordinately successful at technological innovations in this century. They have kept us at the economic forefront of the world and made us a world power.

So, with some respect and humility, I feel that I am representing Frank Carlson before the introduction of xerography, or Edwin Land before the introduction of the Polaroid camera. All of these people started as small entrepreneurial inventors. The development of these small, high technology companies is now stifled for a number of reasons.

Changes in SEC regulations and tax laws have made it difficult. And equally important is inflation. That is, people with capital find it more profitable to speculate in land than they do in investing in small high technology companies at the crucial early stage where seed capital is so important.

It is difficult for us now to raise capital, and this is a widely recognized problem. There have been bills introduced into the Congress to try to solve this problem. Senator Bentsen has introduced four bills recently to try to help small high technology companies in this country. For the first two decades after World War II we were doing very well in technological innovation. We still lead the world, but our lead is shrinking. How can we reverse this trend and thereby create jobs and improve our balance of payments? One way is the way you indicated in your bill, Senator: Give us the exclusive patent rights on our own inventions. We can use these rights to attract the investment needed to get our ideas going.

If the Government retains the rights, as we have seen from other testimony, these patented ideas are essentially lost. That is my own testimony and that of others. I think less than 5 percent of all Government-owned patents have been licensed or used.

I would like to give you an example of our own. We have invented a process that we call "coupled transport". I won't give you a detailed description, but it is a membrane process for recovering metal ions from solution. It is an important new process that has application in hydrometallurgical recovery of metals from lowgrade ores and in pollution control.

The invention is ours. We made it about 4 years ago. But to develop the invention, we went to the Bureau of Mines for support. They insisted on vesting all patent rights in the Government. Senator SCHMITT. You should have talked to me first.

Mr. LONSDALE. I wish we had.

We gave up the domestic patent rights of necessity. We are now 4 years into that development. In that time it has progressed from the concept stage to a very practical thing. We plan to build a pilot plant on a uranium mine in New Mexico this fall. The Government has participated to the extent of about $300,000 to $400,000 in the development up to the present.

We have discussed the process with about 20 American companies, in an attempt to interest them in further development of the process. Several of them are very large firms in the petroleum or mining industries: Gulf Oil, Continental Oil, Kerr-McGee, Westinghouse, Kennecott, Anaconda, and others.

None of them expressed strong interest. As an example, I would like to read two sentences from a letter from the Galagher Corp. of Salt Lake City, a mining company, signed by Hartman Mitchell, vice president for mineral processing.

"The processes which you desribe are very interesting. However, we do not see at this time that there would be enough proprietary equipment for us to be interested."

That is typical of the response we got from all of these people, because we have no exclusive American patent rights to offer any of these American companies.

We do have foreign patent rights, however. We have therefore discussed our process with some foreign companies and we have filed patents on this process in eight countries, the eight most important countries in our opinion. One large Japanese firm has taken a strong interest in the process, and they are in the process of developing it in their country now.

We may well see the process coming back to the United States under a foreign label in due course, which worries me substantially as a citizen.

We favor bills such as S. 1215 which would alter this unfavorable patent situation. Other bills have been introduced, as you know, dealing with this matter. Senator Kennedy has introduced S. 1074. Senators Bayh and Dole introduced S. 414 which also deal with this subject.

There are four key features that I would like to see in such legislation, some of which are in your bill, Senator Schmitt. Some are in the other bills, but none of the currently pending bills combine all of these key features. First, give us exclusive U.S. patent rights. All of the bills I have mentioned will do that, with some exceptions, but I think those exceptions are justified.

Second, I favor giving those rights only to small businesses. I don't have a very defensible position here, but I do think that since

the Government spends only like 3 or 4 percent of its R. & D. money with small businesses, we can accomplish the objective with a minimum of bureaucracy by limiting the granting of those rights to small, high technology companies in the United States. It will also tend to keep the large businesses from increasing the monopoly they already have in this country.

Third, I believe in recoupment. It is not a point brought up in your bill, but I believe strongly in recoupment. Otherwise, the charge of a Federal give-away has a great deal of validity. Let us pay for the rights by returning royalties to the Government on the products we sell covered by those patents. That provision is in neither your bill nor Senator Kennedy's bill.

It does cover the question of what to do if someone comes up with a cure for cancer while doing Government-sponsored work. Let the inventing organization pay the Government a royalty on the sale of any patented product.

Fourth, I favor a Federal procurement policy that will increase small business participation in Government-sponsored R. & D. Senator Kennedy's bill does that, but it is not a feature of the BayhDole bill nor is it in S. 1215.

As you are aware, I am sure, the National Science Foundation has instituted a small business innovation program that we favor strongly. That is a key feature of the bill introduced by Senator Kennedy. We now find ourselves holding back some of our ideas so that we can submit them in future rounds of that particular NSF program.

That is the end of my formal remarks. I would be happy to answer questions.

[The statement follows:]

STATEMENT OF Dr. Harold K. LONSDALE, PRESIDENT, BEND RESEARCH, INC.

IMPROVING INNOVATION IN THE UNITED STATES: SOME PATENT ASPECTS

There is a justificable concern that the United States is losing its once-enormous world lead in technological innovation. To some extent this decline was inevitable. The United States emerged from World War II in far better condition than the other industrialized countries, and those countries have now fully recovered economically. A good portion of our losses, however, have come as a result of selfstrangulation. Excessive Government regulation has decreased our efficiency, and, even more important, we have managed to stifle two of the bastions of the American economic system: incentive, and the small, high technology company.

The innovators in our country are the ones who start or are drawn into these high technology firms. Until recent times, at least, these businesses have been inordinately successful, in part because of the direct relationship between effort and reward. Government-sponsored reports are replete with examples illustrating the fact that independent inventors or small R and D firms have led to a highly disproportionate share of the important innovations of the 20th Century. We can safely conclude that much of our country's economic success derives from the system that has allowed these small, high technology businesses to start and flourish. That system is now in trouble.

Since the Second World War, the genesis and growth of these new companies followed a similar pattern. First, the inventor envisioned some new product, process, or service. Until the early 1970's the inventor could then interest investors in his idea, raise capital by giving up some equity in the new enterprise, and be on his way. However, three factors have completely altered this situation in recent years: changes in tax laws, changes in SEC regulations governing the sale of shares in new issues, and inflation. It is now virtually impossible to find venture capital, and it is frequently necessary for the inventor to relinquish control of his company to acquire the necessary capital, thus reducing his incentive. Increasingly, therefore, these entrepreneurs are turning to the U.S. Government for contract R and D funds

in order to sustain their organizations while they try to develop their ideas internally. At best, this is a much slower path to success. But the probability of success is also diminished, because the Government usually insists on obtaining background as well as future patent rights before a contract award is made. In trading away these patent rights, the high technology company suffers a serious blow to its incentive. Vesting the patent rights in the Government seems to do no one any good. Where does this leave us? Consider our firm, Bend Research, as an example. Bend Research was started in 1975 as a contract R and D company. We did not start with a single new product/process/service to offer, but rather with a number of ideas in several areas. One of these is a new method for recovering and concentrating metals from solution, a process expected to find application in extractive metallurgy, pollutiion control, and elsewhere. We call this process "coupled transport". A second area in which we are in the early stages of innovation is "controlled release" formulations of biologically-active agents: pesticides, pheromones, pharmaceuticals, and other agents. Despite being highly undercapitalized, we have experienced an annual growth rate of about 50 percent. Our principal client is the U.S. Government, but we are supported by private industry as well, by firms in the United States, Japan, Germany, England and elsewhere.

Consider the "coupled transport" process. This idea was conceived of by us independently, but to obtain Government support for its development we assigned our rights to U.S patents to the Government. We were granted foreign patent rights. Now, after three years and several hundred thousand dollars of R. & D. effort, the process is approaching practical reality. We have explored commercialization with more than ten major U.S. companies, most of them in the mining industry. Not one expressed strong interest, principally because we could not offer them exclusive rights. We have found one interested firm: in Japan. We are in a position to offer them patent rights in their country, and they have taken a favorably aggressive position in their pursuit of commercialization.

If this case can be taken as representative, it would appear that the present U.S. system encourages export of our technology, with its probable ultimate return under a foreign label. There is a straightforward solution to this problem: grant to the inventing firm some form of exclusive U.S. patent rights. As an inducement to investment, the inventors can then offer exclusivity to U.S. firms or, alternately, the inventing firm could pursue the development independently with venture capital. This would keep the innovation here in the United States. And to make the system equitable, we favor a policy of recoupment by the Government of their R. and D. investment.

The present policy of vesting patent rights in the Government is clearly ineffective. Shown in the attached figure is a plot of the number of Government-owned U.S. patents available for licensing, and the number licensed, vs. time. Utilization of this patented technology has been minuscule. Less than 5 percent of the U.S. patents available for licensing have been licensed, and the number of patents licensed did not increase in the twelve year period 1963–75, even though the number available for licensing doubled in that same period.

These facts were no doubt instrumental in the current attempts in the U.S. Congress to drastically alter our patent policy. We refer here to the so-called BayhDole bill, S. 414; a bill recently introduced by Senator Kennety, S. 1074; and the bill being discussed at these hearings, S. 1215, introduced by Senators Schmitt, Cannon, and Stevenson. We applaud all of these efforts. A key provision in each of these bills is the vesting of patent rights in the firms making the inventions, even though the R. & D. is Government funded. This makes eminent good sense. The rights remain in the hands of the inventors and developers, those people who have labored with the idea from the beginning and who will best champion its further development and commercialization. Government ownership means nonexclusivity and we have found that no one is willing to offer very much for a nonexclusive patent. One government agency has already instituted an enlightened patent policy, at least on an experimental basis. That is a provision of the National Science Foundation "Small Business Innovation Program". We favor extending that program throughout all of Federal R. & D.

This is admittedly a radical departure from the traditional patent policy on Government-sponsored R. & D. The charge has been levelled that it constitutes a Federal giveaway. Speaking for myself and many other small, high technology firms, I would say that we do not need any gifts. We propose to pay the Government a royalty for these patent rights, just as royalties are paid from one firm to another. While we feel that royalties should be delayed until the new industry is on its feet, we also feel that the royalties should be substantial, i.e., the Government's investment should ultimately be returned, with interest. It may be reasonable to collect

additional royalties so that the winners at least partially offset the losses incurred by the losers.

We also feel strongly that any such new patent policy should be extended only to small, high technology firms and not to all of U.S. industry. Big business already dominates the country economically, and their dominance has increased markedly in the past three decades. Small businesses, on the other hand, create the vast majority of the new jobs in this country, even though they receive only 3.5 percent of Federal R. & D. expenditures. We believe, therefore, that by limiting the new patent policy to small businesses, it could have its full impact on the economy, on the creation of new jobs, and on our balance of payments, with a minimum of bureaucracy and without increasing the dominance of big business.

One might ask: Why does the Government support R. & D. in the first place? Excluding our defense requirements, it does this presumably to strengthen the American economy through the development and introduction of new technology. The principal direct return to the Government traditionally has come from the corporate income taxes paid by the industries it helps to create. Under the patent policy we favor, this return would be supplemented by royalties. The alternative to allowing small innovative businesses greater patent rights, in our opinion, is continued flight of new technology and jobs away from American inventors and the country as a whole and to our foreign economic competitors.