S 1440
CONGRESSIONAL RECORD - SENATE
February 9, 1979

Mr. President, I thank the Senator for yielding to me.

I thank the Senator from Pennsylvania.

—

By Mr. BAYH (for himself, Mr. DOLE, Mr. BELLMON, Mr. COCHRAN, Mr. DECONCINI, Mr. GARN, Mr. HATCH, Mr. HATFIELD, Mr. LUGAR, Mr. MATHIAS, Mr. MAT- SUNAGA, Mr. McGOVERN, Mr. METZENBAUM, Mr. SCHMITT, and Mr. THURMOND):

S. 414. A bill to amend title 35 of the United States Code, to establish a uniform Federal patent procedure for small businesses and nonprofit organizations, to create a consistent policy and procedure concerning patentability of inventions made with Federal assistance, and for other purposes; to the Committee on the Judiciary.

UNIVERSITY AND SMALL BUSINESS PATENT PROCEDURES ACT

• Mr. BAYH. Mr. President, today I am pleased to be reintroducing, along with my very able colleague from Kansas, Senator BOB DOLE, the University and Small Business Patent Procedures Act. As my colleagues know, we introduced similar legislation late last year which received substantial bipartisan support in the last Congress. I am pleased that our colleagues Senators BELLMON, DECONCINI, GARN, HATCH, HATFIELD, LUGAR, MATHIAS, MATSUNAGA, MCGOVERN, METZENBAUM, SCHMITT, and THURMOND have joined as cosponsors of this bill.

Lately there has been a great deal of evidence that America is falling behind in its traditional role of international leadership in technological innovation. Some examples of this disturbing trend are the facts that—

Importation of foreign manufactured goods are second only to foreign oil imports as the biggest drain on U.S. dollars. In the first half of 1978 we suffered a $14.9 billion deficit on this importation;

The number of patents issued each year has steadily declined since 1971;

The number of U.S. patents granted to foreigners has risen since 1973 and now accounts for 35 percent of all patents filed in the United States;

Investment in research and development over the past 10 years, in constant dollars, has failed to increase;

American productivity is growing at a much slower rate than that of our free world competitors;

Small businesses, which have compiled a very impressive record in technological innovation, are receiving a distressingly low percentage of Federal research and development money;

The number of patentable inventions made under federally supported research has been in a steady decline.

There are a number of theories on the cause of this trend, but one area where progress could be made immediately is with inventions arising from federally supported university and small business research.

The bill that we are introducing strikes a careful balance between the rights of the Federal Government to use for itself and the public good inventions arising out of research that the Federal Government helps to support, and the equally important rights of the inventor and the public to see that the inventions receive their full potential in the marketplace and reach the people they may benefit. This bill will allow universities, nonprofit organizations, and small businesses to obtain limited patent protection on discoveries they have made under Government-supported research, if they spend the additional private resources necessary to bring their discoveries to the public. Experience has shown that unless inventors, universities, small businesses, and the private sector generally are given sufficient incentives to work together and bring inventions to the public, new technology is likely to languish.

The problem is substantial in HEW, the Department of Energy, the Department of Agriculture, and the National Science Foundation. But this problem is especially serious in the field of biomedical research programs where delays by the agencies in granting patent waivers for new drugs and processes have condemned many people to needless suffering. Unless universities and small businesses receive the rights to retain patent rights on these inventions, valuable discoveries wind up wasting away on the funding agency's shelves benefiting no one.

The Departments of Energy and HEW frequently take months, and in some cases even years, to review these petitions for patent rights. Many inventions could make singificant contributions to the health and welfare needs of our country if they were utilized. When the Government decides to retain patent rights on these inventions there is a very great chance that they will never be developed. Of the 30,000 patents that the Government presently holds, less than 4 percent are ever successfully licensed. This is very little return on the billions of dollars that we spend every year on research and development.

Another problem that this legislation addresses is the distressingly low percentage of Federal research money that goes to small businesses. The Office of Management and Budget released a study which said that firms with 1,000 employees or less are credited with almost half of the industrial innovations made between 1953 and 1973. This same study estimated that 16 small technology firms created 25,558 jobs for American workers during this 20-year period. In light of these facts it is very disturbing to me that small business receives less than 4 percent of the Federal research and development expenditure. One major reason that many of these innovative small companies have avoided Federal grants is the uncertainty over whether or not they will be allowed to retain patent rights on resulting inventions. The University and Small Business Patent Procedures Act would end this uncertainty.

I hope that my colleagues in the Senate will give this bill very serious consideration and will join us in supporting this important legislation. I would also like publicly to thank the many patent experts and organizations who submitted suggested improvements in the bill during the recess and who have enabled us to introduce a much improved piece of legislation this year.

I would like to ask for unanimous consent to include in the RECORD the text of the bill, along with the following materials at the conclusion of my remarks:

A section-by-section analysis of the bill.

An editorial which appeared in the November 17, 1978, Science magazine entitled "Science in the Political Economy."

My letter to the editor of Science which appeared in the January 12, 1979, issue.

An editorial which appeared in the June 30, 1978, Science magazine entitled "Patent Policy Versus Innovation."

An article by Mr. Sheldon E. Steinbach, "Establishing an Equitable Patent Policy," which explains the unique problems of university research.

A report to the Office of Management and Budget entitled "Small Firms and Federal Research and Development" which details the contributions that small businesses could make to innovation and suggestions for getting more small businesses involved in federally supported research.

And finally, two articles from the Washington Post, "Waning of Innovation Is Seen" which appeared on November 11, 1978, and "U.S. Seen Losing Technological Edge in Some Industries," which appeared on November 24, 1978.

There being no objection, the bill and material were ordered to be printed in the RECORD, as follows:

S. 414
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "University and Small Business Patent Procedures Act".

SEC. 2. AMENDMENTS OF TITLE 35, UNITED STATES CODE, PATENTS.—Title 35 of the United States Code is amended by adding after chapter 17, a new chapter as follows:

"Chapter. 18.—PATENTABILITY OF INVENTIONS MADE WITH FEDERAL ASSISTANCE
"Sec.
"200. Policy and objective.
"201. Definitions.
"202. Disposition of rights.
"203. March-in rights.
"204. Return of Government investment.
"205. Preference for United States industry.
"206. Confidentially.
"207. Uniform clauses.
"208. Domestic and foreign protection of federally owned inventions.
"209. Regulations governing Federal licensing.
"210. Coordination of Federal licensing practices.
"211. Restrictions on licensing of federally owned inventions.
"212. Precedence of chapter.
"213. Relationship to antitrust laws.

"SEC. 200. POLICY AND OBJECTIVE.—It is the policy and objective of the Congress to use the patent system to promote the utilization of inventions arising from federally supported research or development; to encourage maximum participation of small business firms in federally supported research and development efforts; to promote collaboration between commercial concerns and nonprofit organizations, including universities; to ensure that inventions made by non-profit organizations and small business firms are used in a manner to promote free competition and enter-

February 9, 1979
CONGRESSIONAL RECORD - SENATE
S 1441

prise; to promote the commercialization and public availability of inventions made in the United States by United States industry and labor; to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions; and to minimize the costs of administering policies in this area.

"SEC. 201. DEFINITIONS.—As used in this chapter—

"(a) The term 'Federal agency' means any executive agency as defined in section 105 of title 5, United States Code, and the military departments as defined by section 102 of title 5, United States Code.

"(b) The term 'funding agreement' means any contract, grant, or cooperative agreement entered into between any Federal agency and any person for the performance of experimental, developmental, or research work funded in whole or in part by the Federal Government. Such term includes any assignment, substitution of parties, or subcontract of any type entered into for the performance of experimental, developmental, or research work under a funding agreement as herein defined.

"(c) The term 'contractor' means any person that is a party to funding agreement.

"(d) The term 'invention' means any invention or discovery which is or may be patentable or otherwise protectable under this title.

"(e) The term 'subject invention' means any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement.

"(1) The term 'practical application' means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.

"(g) The term 'made' when used in relation to any invention means the conception or first actual reduction to practice of such invention.

"(h) The term 'small business firm' means a small business concern as defined at section 2 of Public Law 85-536 (15 U.S.C. 632) and implementing regulations of the Administrator of the Small Business Administration.

"(i) The term 'nonprofit organization' means universities and other institutions of higher education or an organization of the type described in section 501(c) (3) of the Internal Revenue Code of 1954 (26 U.S.C. 501(c)) and exempt from taxation under section 501 (a) of the Internal Revenue Code (26 U.S.C. 501 (a)).

"SEC. 202. DISPOSITION OF RIGHTS.—(a) Each nonprofit organization or small business firm may, within a reasonable time after disclosure as required by paragraph (c) (1) of this section, elect to retain title to any subject invention: Provided, however, That a funding agreement may provide otherwise (1) when the subject invention is made under a contract for the operation of a Government-owned research or production facility, or (ii) in exceptional circumstances when it is determined by the agency that restriction or elimination of the right to retain title to any subject invention will better promote the policy and objectives of this chapter. The rights of the nonprofit organization or small business firm shall be subject to the provisions of paragraph (c) of this section and the other provisions of this chapter.

"(b) (1) Any determination under (ii) of paragraph (a) of this section shall be in writing and accompanied by a written statement of facts justifying the determination. A copy of each such determination and justification shall be sent to the Comptroller General of the United States within thirty days after the award of the applicable funding agreement. In the case of determinations applicable to funding agreements with small business firms copies shall also be sent to the Chief Counsel for Advocacy of the Small Business Administration.

"(2) If the Comptroller General believes that any pattern of determinations by a Federal agency is contrary to the policy and objectives of this chapter or that an agency's policies or practices are otherwise not in conformance with this chapter, the Comptroller General shall so advise the head of the agency. The head of the agency shall advise the Comptroller General in writing within one hundred twenty days of what action, if any, the agency has taken or plans to take with respect to the matters raised by the Comptroller General.

"(3) At least once each year, the Comptroller General shall transmit a report to the Committees on Judiciary of the Senate and House of Representatives on the manner in which this chapter is being implemented by the agencies and on such other aspects of Government patent policies and practices with respect to federally funded inventions as the Comptroller General believes appropriate.

"(c) Each funding agreement with a small business firm or nonprofit organization shall contain appropriate provisions to effectuate the following:

"(1) A requirement that the contractor disclose each subject invention to the Federal agency within a reasonable time after it is made and that the Federal Government may receive title to any subject invention not reported to it within such time.

"(2) A requirement that the contractor make an election to retain title to any subject invention within a reasonable time after disclosure and that the Federal Government may receive title to any subject invention in which the contractor does not elect to retain rights or fails to elect rights within such time.

"(3) A requirement that a contractor electing rights file patent applications within reasonable times and that the Federal Government may receive title to any subject inventions in the United States or other countries in which the contractor has not filed patent applications on the subject invention within such times.

"(4) With respect to any invention in which the contractor elects rights, the Federal agency shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world, and may, if provided in the funding agreement, have additional rights to sublicense any foreign government pursuant to any existing or future treaty or agreement.

"(5) The right of the Federal agency to require periodic reporting on the utilization or efforts at obtaining utilization that are being made by the contractor or his licensees or assignees: Provided, That any such information may be treated by the Federal agency as commercial and financial information obtained from a person and privileged and confidential and not subject to disclosure under the Freedom of Information Act.

"(6) An obligation on the part of the contractor, in the event a United States patent application is filed by or on its behalf or by any assignee of the contractor, to include within the specification of such application and any patent issuing thereon, a statement specifying that the invention was made with Government support and that the Government has certain rights in the invention.

"(7) In the case of a nonprofit organization, (a) a prohibition upon the assignment of rights to a subject invention in the United States without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions and which is not, itself, engaged in or does not have a substantial proprietary interest in the manufacture or sale of products or the use of processes that might utilize the invention or be in competition with embodiments of the invention (provided that such assignee shall be subject to the same provisions as the contractor) (b) a prohibition against the granting of exclusive licenses under United States Patents or Patent Applications in a subject invention by the contractor for a period in excess of the earlier of five years from first commercial sale or use of the invention or eight years from the date of the exclusive license excepting that time before regulatory agencies necessary to obtain premarket clearance unless, on a case-by-case basis, the Federal agency approves a longer exclusive license. If exclusive field of use licenses are granted, commercial sale or use in one field of use shall not be deemed commercial sale or use as to other fields of use; (c) a requirement that the contractor share royalties with the inventor; and (d) a requirement that the balance of any royalties or income earned by the contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidental to the administration of subject inventions, be utilized for the support of scientific research or education.

"(8) The requirements of sections 203, 204, and 205 of this chapter.

"(d) If a contractor does not elect to retain title to a subject invention in cases subject to this section, the Federal agency may consider and after consultation with the contractor grant requests for retention of rights by the inventor subject to the provisions of this Act and regulations promulgated hereunder.

"(e) In any case when a Federal employee is a coinventor of any invention made under a funding agreement with a nonprofit organization or small business firm, the Federal agency employing such coinventor is au- thorized to transfer or assign whatever rights it may acquire in the subject invention from its employee to the contractor subject to the conditions set forth in this chapter.

"SEC. 203. MARCH-IN RIGHTS.—With respect to any subject invention in which a small business firm or nonprofit organization has acquired title under this chapter, the Federal agency under whose funding agreement the subject invention was made shall have the right, in accordance with such procedures as are provided in regulations promulgated hereunder to require the subject inventor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonabe under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself, if the Federal agency determines either—

"(a) that such action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use; or

"(b) that such action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees; or

"(c) that such action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee, or licensees; or

"(d) that such action is necessary because

S 1442
CONGRESSIONAL RECORD - SENATE
February 9, 1979

the agreement required by section 205 has not been obtained or waived or because & licensee of the exclusive right to use or sell any subject invention in the United States is in breach of its agreement obtained pursuant to section 205.

"SEC. 204. RETURN OF GOVERNMENT INVESTMENT.—(a) If a nonprofit organization or small business firm receives $250,000 in after tax profits from the licensing of any subject invention within a period of ten years following disclosure of the invention, the United States shall be entitled to a share, to be negotiated, of up to 50 per centum of all net income during said period from licensing received by the contractor above $250,000: Provided, however, That in no event shall the United States be entitled to an amount greater than that portion of the Federal funding under the funding agreement under which the subject invention was made which was expended on activities related to the making of the invention.

"(b) In addition, if a nonprofit organization or small business firm receives after tax profits in excess of $2,000,000 on sales of products embodying or manufactured by a process employing a subject invention, during a period of ten years commencing with commercial exploitation of the subject invention, the Government shall be entitled to a share, to be negotiated, of all additional income accruing from such sales up to the amount of the portion of the Government funding under the funding agreement under which the invention was made which was expended on activities related to the making of the invention less any amounts received by the Government in accordance with paragraph (a) of this section 204.

"(c) The Director of the Office of Federal Proceurment Policy is authorized and directed to revise the figures of $250,000 and $2,000,000 in paragraphs (a) and (b) of this section at least every three years in light of changes to the Consumer Price Index or other indices which he considers reasonable to use.

"SEC. 205. PREFERENCE FOR UNITED STATES INDUSTRY.—Notwithstanding any other provision of this chapter, no small business firm or nonprofit organization which receives title to any subject invention and no assignee of any such nonprofit organization shall grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention or produced through the (illegible, ink faded) of the subject invention will be manufactured substantially in the United States. However, in individual cases, the requirement for such an agreement may be waived by the Federal agency under whose funding agreement the invention was made upon a showing by the small business firm, nonprofit organization, or assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States.

"SEC. 206. CONFIDENTIALITY.—Federal agencies are authorized to withhold from disclosure to the public information disclosing any invention in which the Federal Government owns or may own a right, title, or interest (including a nonexclusive license) for a reasonable time in order for a patent application to be filed. Furthermore, Federal agencies shall not be required to release copies of any document which is part of an application for patent filed with the United States Patent and Trademark Office or with any foreign patent office.

"SEC. 207. UNIFORM CLAUSES.—The Office of Federal Procurement Policy, after receiving recommendations of the Office of Science and Technology Policy, may issue regulations which may be made applicable to Federal agencies establishing standard funding agreement provisions required under this chapter.

"SEC. 208. DOMESTIC AND FOREIGN PROTECTION OF FEDERALLY OWNED INVENTIONS.—Each Federal agency is authorized to—

"(1) apply for, obtain, and maintain patents or other forms of protection in the United States and in foreign countries on inventions in which the Federal Government owns a right, title, or interest;

"(2) promote the licensing of inventions covered by federally owned patent applications, patents, or other forms of protection obtained with the objective of maximizing utilization by the public of the inventions covered thereby;

"(3) grant nonexclusive, exclusive, or partially exclusive licenses under federally owned patent applications, patents, or other forms of protection obtained, royalty-free or for royalties or other consideration, and on such terms and conditions, including the grant to the licensee of the right of enforcement pursuant to the provisions of chapter 28 of this title as determined appropriate in the public interest;

"(4) make market surveys and other investigations for determining the potential of federally owned inventions for domestic and foreign licensing and other forms of utilization, acquire technical information, and engage in negotiations and other activities for promoting the licensing and for the purpose of enhancing their marketability and public utilization;

"(5) undertake all other suitable and necessary steps to protect and administer rights to federally owned inventions on behalf of the Federal Government either directly or through contract;

"(6) transfer custody and administration, in whole or in part, to the Department of Commerce or to another Federal agency, of the right, title, or interest in any federally owned invention for the purpose of carrying out the provisions of paragraphs (1) through (4), without regard to the provisions of the Federal Property and Administrative Services Act of 1949 (40 U.S.C. 471); and

"(7) designate the Department of Commerce as recipient of any or all funds received from fees, royalties, or other management of federally owned inventions authorized under this chapter.

"SEC. 209. REGULATIONS GOVERNING FEDERAL LICENSING.—The Administrator of General Services is authorized to promulgate regulations specifying the terms and conditions upon which any federally owned invention may be licensed on a nonexclusive, partially exclusive, or exclusive basis.

"SEC. 210. COORDINATION OF FEDERAL LICENSING PRACTICES.—The Secretary of Commerce is authorized in cooperation with other Federal agencies to—

"(1) coordinate a program for assisting all Federal agencies in carrying out the authority set forth in section 208;

"(2) publish notification of all federally owned inventions that are available for licensing;

"(3) evaluate inventions referred by Federal agencies, and patent applications filed thereon, in order to identify those inventions with the greatest commercial potential and to insure promotion and utilization by the public of inventions so identified;

"(4) assist the Federal agencies in seeking and maintaining protection on inventions in the United States and in foreign countries, including the payment of fees and costs connected therewith;

"(5) accept custody and administration, in whole or in part, of the right, title, and interest in any invention for the purposes set forth in paragraphs (1) through (4) of section 208, with the approval of the Federal agency concerned and without regard to the provisions of the Federal Property and Administrative Service Act of 1949 (40 U.S.C. 471);

"(6) receive funds from fees, royalties, or other management of federally owned inventions authorized under this chapter, but such fund shall be used only for the purposes of this chapter; and

"(7) undertake such other functions directly or through such contracts as are necessary and appropriate to accomplish the purposes of this title.

"SEC. 211. RESTRICTIONS ON LICENSING OF FEDERALLY OWNED INVENTIONS.—(a) No Federal agency shall grant any license under a patent application on a federally owned invention unless the person requesting the license has supplied the agency with a plan for development and/or marketing of the invention.

"(b) A Federal agency shall normally grant any license under a patent or patent application on a federally owned invention unless the person requesting the license has supplied the agency with a plan for development and/or marketing of the invention.

"(b) A Federal agency shall normally grant the right to use or sell any federally owned invention in the United States only to a licensee that agrees that any products embodying the invention or produced through the use of the invention will be manufactured substantially in the United States.

"(c) (1) Each Federal agency may grant exclusive or partially exclusive licenses in any invention covered by a federally owned domestic patent or patent application only if, after public notice and opportunity for filing written objections, it is determined that—

"(A) the interests of the Federal Government and the public will best be served by the proposed license, in view of the applicant's intentions, plans, and ability to bring the invention to practical application or otherwise promote the invention's utilization by the public;

"(B) the desired practical application has not been achieved, or is not likely expeditiously to be achieved, under any nonexclusive license which has been granted, or which may be granted, on the invention;

"(C) exclusive or partially exclusive licensing is a reasonable and necessary incentive to call forth the investment of risk capital and expenditures to bring the invention to practical application or otherwise promote the invention's utilization by the public; and

"(D) the proposed terms and scope of exclusivity are not greater than reasonably necessary to provide the incentive for bringing the invention to practical application or otherwise promote the invention's utilization by the public.

"(2) A Federal agency shall not grant such exclusive or partially exclusive license under paragraph (1) of this subsection if it determines that the grant of such license will tend substantially to lessen competition or result in undue concentration in any section of the country in any line of commerce to which the technology to be licensed relates, or to create or maintain other situations inconsistent with the antitrust laws.

"(3) First preference in the exclusive or partially exclusive licensing of federally owned inventions shall go to small business firms submitting plans that are determined by the agency to be within the capabilities of the firms and as likely, if executed, to bring the invention to practical application as any plans submitted by applicants that are not small business firms.

"(d) After consideration of whether the interests of the Federal Government or United States industry in foreign commerce will be enhanced, any Federal agency may grant exclusive or partially exclusive licenses in any invention covered by a foreign patent application or patent, after public notice and opportunity for filing written objections, except that a Federal agency shall not grant such exclusive or partially exclusive license if it determines that the grant of such li-

February 9, 1979
CONGRESSIONAL RECORD-SENATE
S 1443

sense will tend substantially to lessen competition or result in undue concentration in any section of the country in any line of commerce to which the technology to be licensed relates, or to create or maintain other situations inconsistent with the antitrust laws.

"(e) The Federal agency shall maintain a record of determinations to grant exclusive or partially exclusive licenses.

"(f) Any grant of a license shall contain such terms and conditions as the Federal agency determines appropriate for the protection of the interests of the Federal Government and the public, including provisions for the following:

"(1) periodic reporting on the utilization or efforts at obtaining utilization that are being made by the licensee with particular reference to the plan submitted: Provided, That any such information may be treated by the Federal agency as commercial and financial information obtained from a person and privileged and confidential and not subject to disclosure under the Freedom of Information Act;

"(2) the right of the Federal agency to terminate such license in whole or in part if it determines that the licensee is not executing the plan submitted with its request for a license and the licensee cannot otherwise demonstrate to the satisfaction of the Federal Agency that it has taken or can be expected to take within a reasonable time, effective steps to achieve practical application of the invention;

"(3) the right of the Federal agency to terminate such license in whole or in part if the licensee is in breach of an agreement obtained pursuant to paragraph (b) of this section; and

"(4) the right of the Federal agency to terminate the license in whole or in part if the agency determines that such action is necessary to meet requirements for public use specified by Federal regulations issued after the date of the license and such requirements are not reasonably satisfied by the licensee.

"SEC. 212. PRECEDENCE OF ACT.—(a) This chapter shall take precedence over any other Act which would require a disposition of rights in subject inventions of small business firms or nonprofit organizations contractors in a manner that is inconsistent with this chapter, including but not necessarily limited to the following:

"(1) section 10(a) of the Act of June 29, 1935, as added by title 1 of the Act of August 14, 1946 (7 U.S.C. 427i(a) ; 60 Stat. 1085) ;

"(2) section 205(a) of the Act of August 14, 1946 (7 U.S.C. 1624(a); 60 Stat, 1090);

"(3) section 501(c) of the Federal Coal Mine Health and Safety Act of 1969 (30 U.S.C. 951(c); 83 Stat. 742) ;

"(4) section 106(c) of the National Traffic and Motor Vehicle Safety Act of 1966 (15 U.S.C. 1935(c); 80 Stat. 721) ;

"(5) section 12 of the National Science Foundation Act of 1950 (42 U.S.C. 1871(a); 82 Stat. 360);

"(6) section 152 of the Atomic Energy Act of 1954 (42 U.S.C. 2182; 68 Stat. 943) ;

"(7) section 305 of the National Aeronautics and Space Act of 1958 (42 U.S.C. 2457) ;

"(8) section 6 of the Coal Research Development Act of 1960 (30 U.S.C. 666; 74 Stat. 337);

"(9) section 4 of the Helium Act Amendments of 1960 (50 U.S.C. 167b; 74 Stat. 920) ;

"(10) section 32 of the Arms Control and Disarmament Act of 1961 (22 U.S.C. 2572; 75 Stat. 634);

"(11) subsection (e) of section 302 of the Appalachian Regional Development Act of 1965 (40 U.S.C. App. 302(e); 79 Stat. 5);

"(12) subsection (a) (2) of section 216 of title 38, United States Code;

"(13) section 9 of the Federal Nonnuclear Energy Research and Development Act of 1974 (42 U.S.C. 5901; 88 Stat. 1878) ;

"(14) section 3 of the Act of June 22, 1976 (42 U.S.C. 1959d, note; 90 Stat. 694);

"(15) subsection (d) of section 6 of the Saline Water Conversion Act of 1971 (42 U.S.C. 1959(d) ; 85 Stat. 161);

"(16) section 303 of the Water Resources Research Act of 1964 (42 U.S.C. 1961c-3; 78 Stat. 332);

"(17) section 5(d) of the Consumer Product Safety Act (15 U.S.C. 2054(d); 88 Stat. 1211);

"(18) section 3 of the Act of April 5, 1944 (30 U.S.C. 323; 58 Stat. 191) ; and

"(19) section 8001 of the Solid Waste Dis- posal Act (42 U.S.C. 6981; 90 Stat. 2829).

The Act creating this chapter shall be construed to take precedence over any future Act unless that Act specifically cites this Act and provides that it shall take precedence over this Act.

"(b) Nothing in this chapter is intended to alter the effect of the laws cited in paragraph (a) of this section or any other laws with respect to the disposition of rights in inventions made in the performance of funding agreements with persons other than non-profit organizations or small business firms.

"(c) Nothing in this chapter is intended to limit the authority of agencies to agree to the distribution of rights in inventions made in the performance of work under funding agreements with persons other than non-profit organizations or small business firms in accordance with the Statement of Government Patent Policy issued by the President on August 23, 1971 (36 Fed. Reg. 16887), agency regulations, or other applicable regulations or to otherwise limit the authority of agencies to agree to allow such persons to retain ownership of such inventions.

"SEC. 213. RELATIONSHIP TO ANTITRUST LAWS.—Nothing in this chapter shall be deemed to convey to any person immunity from civil or criminal liability, or to create any defenses to actions, under any antitrust law.".

SEC. 3. AMENDMENTS TO OTHER ACTS.—The following Acts are amended as follows:

(a) Section 156 of the Atomic Energy Act of 1954 (42 U.S.C. 2186; Stat. 947) is amended by deleting the words "held by the Commission or".

(b) The National Aeronautics and Space Act of 1958 is amended by repealing paragraph (g) of section 305 (42 U.S.C. 2457(g); 72 Stat. 436).

(c) The Federal Nonnuclear Energy Research and Development Act of 1974 is amended by repealing paragraphs (g), (h), and (1) of section 9 (42 U.S.C. 5908 (g), (h), and (1); 88 Stat. 1889-1891).

SEC. 4. EFFECTIVE DATE.—This Act shall take effect one hundred and eighty days after the date of its enactment, except that the regulations referred to in section 2, or other implementing regulations, may be issued prior to that time.

—

(in brackets) SECTION-BY-SECTION ANALYSIS OF THE UNIVERSITY AND SMALL BUSINESS PATENT PROCEDURES ACT

Outlined below are the most important features of the bill:

Section 202: Provides that each nonprofit organization (defined in the bill to include universities) and small business shall have a reasonable amount of time to elect to retain title to subject inventions. The federal agency may retain title if the invention is made under a contract for operation of a government owned research or production facility, or in exceptional circumstances when it is determined that restriction or elimination of the right of the contractor to retain title to a subject invention would better promote the policy and objectives of this bill.

Section 202(b): Provides that whenever the funding agency determines that it should retain title to a subject invention a copy of this decision shall be sent to the Comptroller General. The Comptroller General will then review this decision and inform the head of the agency of his determination as to whether or not this retention of title is justified. The Comptroller General will also submit an annual report to the House and Senate Committees on the Judiciary on agency implementation of this bill.

Section 202(c): Provides that each funding agreement shall contain provisions to: (1) insure the right of the federal government to receive title to any subject invention not reported to it within a reasonable time; (2) insure the government's right to receive title to inventions when the inventor does not intend to file for patent rights; (3) guarantee that the agency shall have a nonexclusive, nontransferable, paid-up license to use the invention; and (4) insure the right of the funding agency to require periodic reports on the utilization or efforts at obtaining utilization of the subject invention.

Section 202(c) (7): Prohibits nonprofit organizations from assigning rights without the approval of the federal agency; prohibits granting such rights in excess of the earlier of 5 years from the date of first commercial use, or 8 years from the date of invention, whichever comes first; requires that the organization have some sort of royalty sharing agreement with the inventor; and says that all proceeds shall be used to support scientific research or education.

Section 203: Gives the federal agency the right to require the subject inventor or his assignee to grant additional licenses if the agency feels that sufficient steps are not being taken to achieve commercialization. Additional licensing may also be required to alleviate health and safety needs, or under provisions for public use as specified by federal regulations.

Section 204: Provides that if the patent holder receives $250,000 in after-tax profits from licensing any subject invention during a ten-year period, or receives in excess of $2,000,000 on the sale of products embodying of manufactured by a process employing the subject invention within the ten year period, that the government shall be entitled to collect up to 50 percent of all net income above these figures until such time as the amount of government research money has been repaid.

Section 205: Specifies that any title holder to a subject invention or his assignee shall not grant to any person the exclusive right to use or sell any subject invention in the United States unless that person agrees that any products embodying the subject inven-tion or produced through its use shall be manufactured substantially within the U.S. unless this provision is waived by the funding agency.

Section 208: Will allow federal agencies to grant exclusive, partially exclusive, or non- exclusive licenses on government owned patents to achieve commercialization; the Department of Commerce is authorized to receive patents held by other agencies and to make the necessary steps to determine the market potential of the patent and to receive any fees or royalties due to the government.

Section 211: Says that after public notification of the government patents available for licensing the agency will then require that potential licensees submit plans outlining how the invention will be developed and marketed. If the agency determines that the granting of an exclusive or partially exclusive license will not lessen competition it will give first preference in its licensing to qualified small businesses.

Section 212: States that all contractors not covered under this bill will continue to operate under the existing agency programs.

— (end brackets)

SCIENCE IN THE POLITICAL ECONOMY

Although scientific research in the United States is not planned and managed after the

S 1444
CONGRESSIONAL RECORD—SENATE
February 9, 1979

fashion of controlled economies, it is still highly sensitive to ups and downs in the political economy. For one thing, government provides half of all the financial outlays that go into research and development. This makes for both stability and instability, for good times and lean times, and we will be reminded of the facts of life as the govern- ment plods toward its war on inflation in an environment of rising taxpayers resistance to public spending. Science, politics, and economics all shade into one another in a score of ways.

One problem is that science is still perceived in government as a discretionary activity buried in a vast and relatively uncontrollable budget. The concept of research as investment gained respectability only this year in President Carter's 1979 Budget Message, and an idea like this has a burdensome prehistory to overcome. Although there are good reasons to believe that the President's Science Adviser and the Office of Management and Budget will continue to view scientific research in this light, the going will get rough when research must compete with powerful client-oriented categories of the budget under the stresses of rationing.

Another problem is the battered state of the political economy itself. Considering the worsening of inflation coupled with low economic growth and lagging productivity, economic logic strongly argues for budgetary restraint and a reduced deficit. If double-digit inflation materializes by the time the 1980 budget is locked up, it will take very heavy doses of appropriations to make up for inflation and allow real budget increases for R&D. Science might be fortunate to escape with a cost of living increase. In short, hard days lie ahead and the scientific community may be in for a refresher on the linkage between resources for science and the capacity limits of the larger political economy.

Given all this, it needs to be said again that more money is not the only strategy by which government can advance science and innovation. There has been an unwise and unthinking tendency to look solely at the curve of federal R&D funding as a kind of Dow-Jones clue to the health of science. Other factors are just as important to the vitality and productivity of R&D. If budget dollars are to be scarce, government can help to the utilization of the R&D it has funded by overhauling its static patent policies. It can make existing research dollars stretch farther by simplifying rather than adding to the dog's breakfast of methods, procedures, and controls that are now imposed on university research at such formidable costs to productivity. Government can apply the brakes to the profusion of regulations that retard risktaking and innovation in industrial R&D. In doing these things, government would reduce inflationary pressure and free budget dollars that are being drawn off from research into defensive administration. The view from this quarter is that genuine progress in these directions would go a long way toward making austere R&D budgets more acceptable.

For the longer run, the function of science and innovation in the performance of the political economy calls for closer examination. As far as the indicative evidence takes us, it appears that industrial growth and competitiveness owe a great deal to scientific and technological vitality. That lesson has not been lost on the developing countries, and the People's Republic of China is the latest and largest of the world's political economies to stake its future on the promises of science and technology. Closer to home, the celebrations of General Electric's centennial and AT&T's three-quarters of a century tell us a great deal about the convergence of scientific creativity, managerial skill, and entrepreneurship in generating growth with productivity. What matters in the end is not so much the quantity of R&D as the conditions and the environment that stimulate or constrain discovery and use. There is a message here for the architects of the political economy.

—

TECHNOLOGICAL INNOVATION

I was extremely interested in William D. Carey's editorial "Science in the political economy" (17 Nov. 1978, p. 703). I agree with the assessment that the budget restraints we are facing make it critical that the money spent by the federal government for research and development bring the greatest possible return. Not only should we be selective in our research funding, but we must also create the best climate for bringing the fruits of federal research to the people in the form of new products and technology. Unfortunately, the present policy of federal government retention of patent rights on inventions arising out of federally supported research has resulted in many promising inventions being left to gather dust on the shelves of government agencies. Less than 4 percent of the patents held by the government are ever successfully licensed. This is not a very good return for the billions of dollars we spend on R. & D.

There is another trend that has been commented upon in the past in Science and is succinctly expressed by this headline, which appeared in the Washington Post on 24 November 1978: "U.S. Seen Losing Technological Edge in Some Industries." Because the government provides such a large percentage of all the R & D expenditures in the United States, an inefficient policy which stifles inventiveness hurts our companies who need new technological ideas to compete successfully with Increasingly tough foreign businesses.

In the last Congress, I joined a bipartisan group of senators in introducing a bill we feel will answer at least part of these problems. This legislation, the University and Small Business Patent Procedures Act, will allow universities, small businesses, and non-profit institutions in most cases to retain patent rights for those inventions and processes if they are willing to spend the necessary private funds to develop and market a final product. At the same time, the bill will protect the legitimate rights of the government to enjoy the fruits of the research it helped to fund.

There are now 20 statutes and regulations in effect that give contradictory instructions to the agencies about their ability to grant patent petitions. Sometimes, even within the same agency, there can be different policies among various divisions. The result has been that researchers face a costly maze of confusing rules, many of which require the agency that helped fund the research to also retain the patent rights for any inventions arising from it.

Early in the next Congress, Senator Robert Dole (R-Kan.) and I again will lead the bipartisan effort to pass this legislation. I realize that getting the most out of our R & D money and the problem of our slumping rate of technological innovation are extremely complex areas. This bill would be an important first step in turning this situation around.

—
PATENT POLICY VERSUS INNOVATION

The United States is engaged in a massive research and development effort which, measured in current dollars, is edging close to the level of $50 billion annually, counting outlays in both the federal and the private sector. The budget for R & D in government calls for more than $28 billion in the next fiscal year. There is no doubt that the R & D input is strong. The output side may be a very different story.

We support R & D to learn something that we do not know, and to make use of what we learn. Like any other type of investment, R & D is expected to yield returns. In the case of government-financed R & D the question arises. Are the investors getting full and timely return? Are the results of federally funded R & D finding their way into the market?

The evidence, as usual, seems mixed. About 8,000 inventions are said to be generated each year from government-financed R & D many of which are patentable. Not enough of these apparently reach the market. Some 30,000 government-owned patents are piled up awaiting takers. To that extent, the national economy is not being enriched and utilization is forestalled. It is a baffling situation until one realizes that the blockage occurs largely in the government's patent policy.

The government operates on the proposition that the economic rewards from federally funded R & D should be captured by the government, or shared only grudgingly with others, since public funds were used. The view prevails that if rights to the discovery were released to private developers on an exclusive basis unreasonable private enrichment could occur. There is scant evidence to support these apprehensions, but the doctrine is riveted into government's thinking. The effect is that the market incentive to develop government-financed discoveries Is circumscribed and inventions are isolated from normal risk-taking and pursuit.

It is not hard to see how this can inhibit the prospects for pass-through of discoveries from biomedical research or energy-related R & D. We see a prodigious R & D enterprise, fueled by tax dollars, constrained from diffusing its results because of a public policy barrier. Throughout the enterprise, discoveries sit stranded and aging. Meanwhile, we search for clues as to what is wrong with U.S. technological innovation, and how it is that foreign industry can undercut American competitiveness and employment.

As usual, public policies are muddled, conflicting more often than complementing one another. In the new study ordered by President Carter of the problems assailing industrial innovation, a fresh opportunity is provided to reexamine both the premises and the consequences of government patent policies. There is ample evidence that the costs of producing and marketing an invention are many times as great as the outlays on the R & D that led to the invention. Not many developers will take these risks with inventions resulting from federal R & D, in the absence of clear ownership.

It begins to appear that we have thought of "science policy" too much in terms of stimulating R & D and too little in terms of liberating its results. The benefits of federally funded R & D are hard enough to realize without the added drag of a dubious policy on patents. A public which is regularly lectured on the promise and performance of science may not be grateful to learn that government's rules are blocking research applications. That could be far more harmful to science than the Golden Fleece awards.

Public policy, if wisely designed, can stimulate economic pursuit of government-financed inventions while at the same time minimizing the risk of abuses. What is clear is that the present patent policies will not get us innovation, nor health and energy benefits, nor economic growth, nor trade competitiveness. We can hardly make the case that R & D contributes significantly to the nation's economy if, at the same time, we isolate its results from utilization. Here is a notable "Catch 22" in federal R & D policy. and it is time to bring it into the open.

—

ESTABLISHING AN EQUITABLE PATENT POLICY

(By Sheldon E. Steinbach)

Inventions resulting from federally funded esearch constitute a valuable national resource. The large amount of federal funds

February 9, 1979
CONGRESSIONAL RECORD — SENATE
S 1445

supporting research dictates the necessity of examining the government's patent policy in order to ensure that inventions are delivered to the public and that the equities of all parties are protected. Because of their special mission, colleges and universities have unique patent concerns that warrant detailed exploration, particularly with regard to ownership of patent rights on inventions developed on campus under federal contracts and grants.

The federal government sponsors research in universities to expand the boundaries of existing knowledge in areas or on problems deemed to be in the public interest or to be related to national goals. Universities are free to publish research results, which are generally made available to all. The right to publish is normally preserved in the negotiation of grants and contracts, as is the sponsoring agency's right to receive certain reports.

Generating inventions is almost never the main objective of research conducted with federal funds; rather, an invention is generally an incidental by-product of the research activity, largely attributable to serendipity, to the personal creativity of the investigator backed by his years of professional training and experience, and to the scholarly environment and research resources provided by the university. When patentable discoveries are made, the equities to be considered include those of the inventor, the university, and, very properly, the financial sponsors.

When a patentable invention is made by an investigator in an academic institution with the help of federal funds, rarely are the federal funds the sole or even the major element contributing to the invention. Beyond the critical contribution of the investigator, the university itself virtually always helps to finance the laboratories, equipment, and personnel contributing to an invention. It also provides a scholarly atmosphere and often the infusion of funds obtained from nongovernment sources. Accordingly, each of the parties has a claim in equity.

A policy that assigns patent rights to the government for all federally supported research, however large or small the federal contribution, eliminates the universities' ability to recognize the equities of other sponsors and contributions of the institutions themselves. Because inventions resulting from federally sponsored research involve equities of the government, the contractor (on his own behalf or as the result of inter-mingled funds derived from other than federal agency sources), and the inventor, many fateors must be considered in making a decision about where the primary right in such inventions should be vested. In making that decision, however, only one consideration should be paramount—that being in whose hands will the vestiture of primary rights serve to transfer most quickly and economically the invention technology to the public for its use and benefit.

Educational institutions are, of course, not organized to manufacture, produce, or market a patentable invention. Accordingly, if university-generated inventions are to be used, such institutions must interest those in the industrial world who have the commercial capability for invention and marked development, which the university lacks. Interesting the right parties is often a difficult task because few inventions coming out of university research offer readily recognizable prospects of a large market or a high return on investment. University-based inventions, be- cause they most often correlate with the results of basic research, tend to be at best in the early stages of development, and therefore they require a substantial capital in order to develop the invention enough to be marketable.

At the same time, universities are in a unique position objectively to seek the best qualified lindustrial developer and, under appropriate licensing arrangements, to monitor the diligence of the developmental efforts. If universities cannot furnish, if appropriate, an exclusive license to developers for a limited period and thereby secure the investment of necessary capital, inventions resulting from government contracts are less likely to be developed to the point of marketability, and thus the public is less likely to receive the benefits from such inventions, or at least may not receive them as quickly as otherwise would be the case.

WHAT HAPPENS WHEN DELAYS ARE ENCOUNTERED?

When the right to seek patents resides in universities, appropriate patent applications can be filed promptly and negotiations can be begun immediately with prospective developer/licensees with the assistance of the inventor. When this right does not exist at the time of contracting, but must await a determination after the invention has been identified, substantial time is usually required to prepare the necessary documentation for the sponsoring agency and for the agency in turn to make a determination. While awaiting the outcome of such administrative process, the invention lies dormant, with the attendant risks that the inventor's interest in assisting in the development becomes attenuated and that intervening rights of others may foreclose successful transfer of the invention to the public.

Because deadlines for domestic and foreign patent applications are affected by publication of patentable ideas in scientific journals, delays in determining the disposition of rights to an invention can result either in delay of publication of research results or risk of expiration of the time limit in which patent applications can be filed. Neither choice is beneficial to the public interest.

Although the university's primary motivation in filing and prosecuting applications for patents is the timely promotion of actual availability of new products or processes to the general public, if, in the course of such transfer, income to support further research at the institution can be generated, the pub- lic benefits a second time.

The public benefits from university-generated patents through the efforts of agencies that offer inducement to those who can recast the fruits of basic research into a useful form. Mere exclusivity in patent rights does not automatically create artificially high prices for related products, and royalties usually represent only a very small fraction of the retail price of marketed goods. More- over, one must face the inescapable conclusion that the development of inventions under a reasonable government patent policy will benefit the public by making available products that would otherwise not have been available at any price.

Without some degree of exclusivity, private sources are unlikely to have sufficient incentive to develop a product or process. Indeed, the investment required to make a product or process marketable and actually to market it is almost always far greater than the investment in the original research.

To bring an invention to public use, further development or engineering is usually required, such as testing or screening a prototype of the new product or process. Before the efforts and expenses incident to testing or screening are undertaken, investors want to know who has the title to or ownership of the invention (that is, the right secured to inventors and their assignees or licensees, for limited times, as provided in the Constitution). Sometimes, prospective licensees have refused to undertake the testing, screening, or development of inventions unless the licensor granted an exclusive license for commercial sale or use. In some cases, no alternative has been available, and, in the absence of an exclusive license, the use of the product, process, or machine has been denied to the public. Universities usually do not possess the resources, critical facilities, or controls necessary to bring drug products, for example, through the clinical testing stages to marketability. Thus,. it is imperative that universities be able to interest through appropriate licensing arrangements those organizations which have those facilities and control capabilities.

Because government personnel would not be as intimately familiar with an invention as those who have developed it in a university, they would be in a much less favorable position to ascertain or pursue the commercial marketability of an invention. The time that would have to be invested in such activity could well cause a significant reduction in invention disclosures from university researchers, with a consequent reduction in public access to potential fruits of research. Thus, the primary result of the economic stimuli afforded by a realistic licensing policy is a public benefit-the production and introduction of a good or service that otherwise might not become available in the context of our free enterprise system.

Under the policies of some government agencies, the agency, on behalf of the government, normally asserts its rights to ownership of any inventions and patents generated in the course of research sponsored and funded by the agency. But regulations do exist under which such right can be waived to the contractor or grantee. If an institution desires to acquire title to a particular invention, it must request a waiver in accordance with the regulations of such agency. Granting a waiver generally depends on a determination by the agency, based on evidence submitted by the contractor or grantee, that the invention will be more adequately and quickly developed in the public interest if title to the invention is waived to the contractor of grantee. Such waivers are given with a reservation of a license to the government to practice the invention for governmental purposes and with other provisions which adequately protect the public interest.

An alternative to the "waiver" approach is the "Institution Patent Agreement" approach, available since 1968. (reference 1) This approach, endorsed by a 1968 GAO Report, (reference 2) permits the grantee institution to retain title and to administer the principal ownership rights in inventions made under department grants and awards, clearly defines the rights of the parties with respect to such inventions, and sets forth general guidelines governing the licensing of inventions. It includes limitations on the duration of exclusive licenses to be granted; it reserves a royalty-free license to the government for governmental use; and it provides other appropriate safeguards to protect the public interest. These latter safeguards include a reservation to the government of the right to require the granting of additional licenses on a royalty-free basis or on other terms that are reasonable under the circumstances, where such licenses are necessary to fulfill public health, welfare, or safety requirements.

With the assistance of inventors, the universities are in a better position than the federal government to transfer technology to

(footnote 1) Institutions Patent Agreement Governing Grants and Awards from the Department of Health, Education, and Welfare," HEW Standard Form Rev. August 26, 1968.
(footnote 2) See Report to the Congress, Comptroller General of the United States, Problem Areas Affecting Usefulness of Results of Government-Sponsored Research in Medicinal Chemistry (Washington: Government Printing Office, 1968).

S 1446
CONGRESSIONAL RECORD — SENATE
February 9, 1979

the public through the economy. A government "title" policy, however, would preclude the university from recognizing the equities of others, including inventors and nongovernmental sponsors, and would fail to acknowledge the benefits that now accrue to the tax-paying public for its contribution to the institutions' research efforts.

Consequently, qualified universities that have developed a technology transfer capability should be given, with the award of a contract or grant, a first option to title in inventions generated with federal funds on their respective campuses with appropriate safeguards to prevent abuse of patent rights retained by any such institution and to minimize any anticompetitive effects.

—

SMALL FIRMS AND FEDERAL RESEARCH AND DEVELOPMENT INTRODUCTION

There is increasing concern that the capability of the United States to continue its historic successes in technology is in a serious decline. While astonishing achievements have occurred since World War II, there is now considerable evidence that product innovation has either leveled off or declined in many industries. Predictions of a weakened military posture and a less favorable economic position in world trade are associated with analyses showing that the U.S. is losing a significant part of its capability to invent new products essential for the country's defense and for its international sales market.

Analysis of technological capability is an exceptionally complex matter affected by many diverse factors involving individual and organizational motivations, economics, and governmental actions. Since the Federal Government is the biggest source of research and development (R&D) ($26.3 billion proposed for expenditure in 1978), Government acquisition procedures have a large impact on the country's utilization of its best technical and management talents. (reference 1) One part of this problem—the role and difficulties of the small firm in selling R&D to the Government—was given particular attention by an ad hoc interagency panel under Mr. Jacob Rabinow, nationally known inventor, lecturer and writer, in 1976. The Panel was composed of representatives from the National Science Foundation, Department of Defense, National Space and Aeronautics Administration, Energy Research and Development Administration, Small Business Administration, and the Office of Federal Procurement Policy.

To assist the Rabinow Panel in its inquiry, the services of Mr. William K. Scheirer, an economist, were obtained to perform a literature search and analysis of the role of small firms in fulfilling Government contractual requirements for research and development. Significant findings of Mr. Scheirer are summarized below. His report, with an extensive bibliography, is available for inspection at the National Technical Information Service, Department of Commerce, as Report Number OMB/OFPP/CA-77/1 and in the Office of Federal Procurement Policy.

SUMMARY OF REPORT OF WILLIAM K. SCHEIRER

Importance of small R&D firms

Many analysts believe that small firms have a better record for innovation than large firms. Richard Morse recently wrote that "a disproportionate number of innovative ideas emanate from our smaller technically based companies." (reference 2) The reasons for this phenomenon are varied. Some believe that managers of small R&D firms have a greater incentive to innovate while conversely, in some cases, the marketing plans

——

(footnote 1) Op Cit.
(footnote 2) "A Government Takeover of R. and D.?" Richard Morse, Pres., MIT Development Foundation, N.Y. Times, Dec. 19, 1976.

of large firms dictate that technical improvements to their products be held to a minimum. There also is a possibility that researchers in large firms tend to overspecialize to a greater extent than researchers in small firms. Mr. Rabinow has observed that, "when one narrows his specialization, he probably comes up with fewer ideas. If one loads the dice in favor of a certain art, one cuts off analogous arts, which I think are important. The more an inventor can pull out of related and unrelated arts, the more original his ideas are likely to be."

Empirical evidence indicates that in a comparison of firms with less than 1,000 employees and those with over 1,000 employees: Firms with less than 1,000 employees accounted for almost one-half of major U.S. innovations during 1953-73.

The ratio of innovations to sales is about one-third greater in firms with less than 1,000 employees.
Firms of less than 1,000 employees have a ratio of innovations to R&D employment which is approximately four times greater.

The cost per R&D scientist or engineer is almost twice as great in firms of over 1,000 employees.

Federal Government utilization of small firm capabilities

A striking disparity appears to exist between the capabilities of small technology based firms and their utilization by Federal agencies. Data collected by the National Science Foundation and supplemented by the Office of Federal Procurement Policy shows that only eight percent of Federal R&D contract awards to industry and only about three and one-half percent of obligations to all R&D performers (reference 3) were made to small firms in FY 1975; that Government R&D obligations to industrial firms vary from less than one-half of one percent for the Department of Agriculture to 62 percent for the Department of Defense; and that reliance on industry for Federal R&D has declined from 59.6% in 1966 to 50.7% in 1976 in current dollars.

The overwhelming percentage of the dollars in Federal R&D goes to development as opposed to research (basic and applied). Although the industry share of development is substantial, most of this goes to large businesses capable of performing very large development contracts. On the other hand, in the research area where its capability is high, small firms lose awards to colleges and universities, federally funded research and development centers (FFRDCs), as well as to large firms.

Summary conclusions reached are that (i) Federal agencies tend to use sources other than industrial firms for basic and applied research; (ii) a significant portion (64%) of Government R&D is for development normally involving large industrial firms; and (iii) the percentages of both total expenditures for R&D and R&D contract awards to small firms are very low.

Small firm impediments

As indicated above, large firms are favored in the award of development contracts on the basis that they are essential for the production phase of the program. However, this is not the only restriction to a greater use of small firms. Mr. Scheirer found that policies and procedures followed by Federal buying activities also restrict the use of small technology based firms. Following are some of the more significant impediments encountered by small companies:

It is difficult to identify and respond to Government R&D requirements. On a competitive basis, large firms have a greater capability to determine what the Government is interested in researching and to unravel

——

(footnote 3) Industry, in-house laboratories, educational institutions, and federally financed R&D centers.


the complexities of "Requests for Proposals" for R&D work.

Preparation of proposals is expensive and time-consuming to a point frequently exceeding the capabilities of small firms.

A bias in favor of large firms can exist when awarding R&D contracts. The tendency is to consider awards to large well-established firms "safer" than to small firms.

Funding for Federal R&D work frequently lacks stability. This condition strains the financial capabilities of small firms.

Submittal of unsolicited proposals is frequently discouraged.

Burdensome administrative requirements for contract solicitation, evaluation, award, and performance impair the ability and desire of small firms to compete for R&D contracts.

Conclusions

Though the responsibility for retention of a high technology capability in the United States is shared by both the private and public sectors, the large annual Federal expenditures for R&D places a unique responsibility on Federal agencies. New techniques must be devised to encourage innovation by all sources, with particular emphasis on small R&D firms. In the placement of R&D work, Government managers should carefully consider the ultimate beneficial effect of using small firms and not give undue consideration the immediate security that may appear to exist by awarding R&D contracts to large firms.

RECOMMENDATIONS OF AD HOC INTERAGENCY PANEL

The interagency panel chaired by Mr. Rabinow developed the following recommendations based on its analysis of this problem:

1. Federal agencies should develop formal programs which encourage the increase of Federal R&D awards to small technology based firms.

2. Large research and technology programs should be divided where feasible into discrete parts to permit solicitation of proposals, and award of contracts to small technology based firms in lieu of making a limited number of awards with consolidated requirements that only large firms can accomplish.

3. Subcontracting to small firms should be encouraged in contract solicitations, source selection criteria, and negotiations for R&D work. A prime contractor's record in subcontracting to small technology based firms should be a factor in fee awarded in award fee and incentive type contracts.

4. Intensive efforts should be made by Federal agencies to reduce or compensate for impediments experienced by small technology based firms. These efforts may include but not be limited to the following:

a. Early identification and publication of agency R&D requirements.

b. Coordination of R&D requirements with Small Business representatives early in the acquisition process.

c. Use of the Commerce Business Daily to provide advance information on anticipated contractual requirements for R&D.

d. Providing methods for small technology based firms to obtain an understanding of requirements which may not be possible through the written solicitation, For example, some buying activities currently provide research and technology libraries, catalogs for technical requirements, and special briefings to explain their research and technology needs.

e. Providing sufficient time for firms to prepare and submit proposals.

f. Reducing to the extent feasible the time and supplemental data required between receipt of proposals and award of contracts.

g. Providing agency R&D points of contact for small firms.

5. Agency policies and procedures should

February 9, 1979
CONGRESSIONAL RECORD — SENATE
S 1447

encourage unsolicited proposals. Contracts should be awarded for research and technology efforts based upon the merit of such proposals without converting the requirements to competitive solicitationis.

6. The agencies, including the Small Business Administration, should use more technically trained personnel to serve as advocates for and advisors to small technology based firms. Special emphasis should be given by such persons to the advance procurement planning process for R&D requirements.

7. Profit-making firms should not be excluded from making proposals or receiving awards on R&D work that is not assigned to in-house laboratories.

8. Agencies should consider allowing greater amounts of independent research and development and bid and proposal costs than currently authorized when negotiating contracts with small technology based firms.

9. Methods should be developed for collecting and reporting data on small business share of R&D contract awards.

10. Establish small business set-aside programs (similar to those existing for supplies).

—

[From the Washington Post, Nov. 16, 1978]
WANING OF INNOVATION IS SEEN
(By Bradley Graham)

It is hardly a matter of doubt anymore: America's ability to innovate just isn't what it used to be. And a panel of distinguished researchers and professionals says America herself is to blame.

In a somber forum Tuesday night sponsored by the National Academy of Sciences, six representatives of business, government and academia added their concern to that expressed by others in recent months over the disturbing realization that something's happened to Yankee ingenuity.

Signs of America's innovative spirit on the wane are everywhere, the panelists noted. Among the evidence cited was:

The declining growth rate of the U.S. economy and only minimal gains in productivity.

The worsening U.S. balance of trade caused in part by increasing imports of foreign-manufactured goods.

The decreasing number of U.S. patents issued to U.S. inventors and an increase in patents issued to foreign inventors.

The declining amount of real dollars being spent on research and development by industry and the high degree of concentration of the R&D that is done in a few i dustries and a few companies.

"These indicators are distressing", said Elmer B. Staats, U.S. comptroller general. Stressing the historical importance of technological innovation in powering America's economic growth, Staats warned that unless specific steps are taken to stimulate innovation, Americans can expect their standard of living to stagnate and their competitive ranking in the world to weaken.

How has the U.S., which once placed a premium on inventiveness and made national heroes out of its pioneers, reached this state of affairs? Although no one could offer a complete explanation, the panelists generally agreed that government actions were largely to blame—specifically, restrictive tax and regulatory policies, along with complex and confused antitrust and patent laws, that together have eliminated financial incentives for industrial innovation and have discouraged investment in R&D.

"Innovations affect the economy, but the reverse is also true," declared Ivar Giaever, a Nobel Laureate who supervises R&D for General Electric and the panel moderator. "The economic climate affects the amount of innovation, and the climate recently has not been encouraging."

In addition to legal impediments and financial disincentives, the waning of U.S. innovation also has been attributed to business managers' defeatist attitude and lessened inclination to take risks.

Business leaders on the panel conceded that U.S. companies are focusing more on short-term results in their planning, preferring to concentrate on innovations that will improve existing processes and reduce costs rather than yield a major breakthrough. But they said this is simply the result of having to cope with a more uncertain marketplace.

"As much as anything, it is uncertainty that affects industry's inclination to invest in innovations," stated N. Bruce Hanay, vice president of Bell Telephone Laboratories.

President Carter appointed a 28-agency task force last spring to spend a year studying the innovation dilemma, and a spokesman for the National Academy said a report on Tuesday's panel would be forwarded to the study group. The panel left no doubt what its major recommendation would be.

"We must restore incentives, or remove disincentives, for entrepeneurs to take risks," concluded Ralph Landau, chairman of Halcon International. "Our industry is good at invention and entrepreneurship if you give it a chance."

—

UNITED STATES SEEN LOSING TECHNOLOGICAL EDGE IN SOME INDUSTRIES

(By Thomas O'Toole)

The United States has lost its world leadership role to Japan in opties, electron microscopes and stainless steels. Korea and Taiwan threaten U.S. leadership in man-made fibers, long the private province of the American chemical industry. American domination of the world's nuclear power industry has ended. Sweden, France, West Germany and Canada are now major forces in this high-technology business.

Is the United States losing its edge in technology? Is it suffering what some call an "innovation recession?" While there are signs that the U.S. has never been stronger technologically, there are other signs that the United States is lagging badly behind the rest of the world.

"There are trends that are worrisome," White House science adviser Frank Press sald in an interview. "The research investments of American industry are up ... but what are they spending it on? They are not developing the kinds of new products they were famous for."

One of the most striking examples of lagging U.S. technology lies in home video tape recorders business, where sales this year have doubled and are on the way to reaching $1 billion. Not one of the 12 machines sold in America today was made in America, even though the U.S. broadcast industry pioneered the device. They are produced in Japan, even those trademarked RCA, GE, Zenith, Magnavox and Sylvania.

"The Japanese brought the machine down in size and price so the consumer could afford it," and an RCA executive who asked not to be named. "Sony and Panasonic focused all their technology on this machine and they now own the hottest market there is in the television industry today."

There are other signs to cause concern. The three largest chemical companies in West Germany last year introduced more new products than the five largest chemical com- panies in the United States. This is the first time that has happened since World War II. Japan now casts the largest steel ingots in the world, surpassing what American steel companies could do five years ago.

"The SST is French and British, the fast breeder [reactor] is French and Russian and the cameras we carry, the TV sets we watch and the cassettes we listen to are Japanese," says General Electric Co.'s Dr. Ivar Giaever, a Nobel laureate in physics. "It's no wonder we're all worried."

So worried is the White House that it has split 100 technological leaders into six task forces to assess where the United States stands among the world's innovators. Their conclusions will be passed on for review to 28 federal agencies and then to universities and other interested groups for comment.

"If we're losing our edge, we want to know where we're losing it and why we're losing it," said Press. "What I think this study will show is that we're strong in high technologies like aircraft and computers and not so strong in middle-level technologies like chemicals and electrical machinery."

Statistics tell a confusing tale. Fewer patents were granted by the U.S. Patent Office to Americans last year than at any time in the past 15 years, but in the field of electronics, where invention is commonplace, fewer scientists are applying for patents.

"An invention in electronics can be obsolete in the two or so years it takes to be patented," said Science magazine this week. "By that time, the company filing the patent can have lost whatever edge it had by developing the thing in the first place."

The Commerce Department points out that American exports of products requiring a low or middle level of technology grew from $14 billion in 1968 to $36 billion in 1974. But Japanese exports of similar products grew from $9 billion to $35 billion while Germany raised its export total from $16 billion to $54 billion in the same period.

At the same time, the United States came out well in the battle for exports labeled "technology intensive." The U.S. total was $9.6 billion in 1968 and $26.6 billion in 1974. Japan's total in 1974 was $13.2 billion and West Germany's was $22 billion.

The National Science Foundation points out that the United States dominates the worldwide electronics industry despite Japan's take over of the radio and television markets. The pocket calculator is an American invention. So is the digital watch, whose sales last year were almost $2 billion worldwide. Digital watches now make up one third of the $2.8 billion U.S. watch market.

"A lot of people fussed when the European airbus made inroads into the jetliner market the United States once had to itself," the NSF's Dr. Alton Bean said. "But don't forget the engines on that airbus are American and don't forget that the airbus is a twin-engined wide-body jet designed for the European market. The tri-jet the United States makes still has most of the wide-body market."

Nevertheless, there are still disquieting signs of a U.S. innovation recession. The question is why. Massachusetts Institute of Technology President Jerome B. Wiesner blames it on the thaw in the Cold War and a new skepticism in the Congress about spiraling research budgets, especially in the field of medicine and health.

"There were two things that made research grow in this coutnry in the 1950s and 1960s—"The Cold War and Congressional support of national health research," Wiesner said.

The end of the Apollo program that put 12 men on the moon is also a cause of research decline, as is the end of the Vietnam war, where American weaponry was often inspired by Pentagon research. Some scientists believe the antinuclear movement and increasing hostility toward technology are also behind the innovation recession.

Many blame an outdated patent policy that does not provide enough protection to inventors and federal regulation that slows new product development.

More subtle reasons include impatience to wait the 5 to 10 years for a new product to develop from research. N. Bruce Hannay, vice president of research for Bell Telephone Laboratories explained: "I see on the research scene a greatly shortened time

S 1448
CONGRESSIONAL RECORD — SENATE
February 9, 1979

horizon. As a result, there is a decline in the effort on major innovation that produces an entirely new class of technology or a new class of service." •

(in brackets) • Mr. DOLE. Mr. President, today, Senator BIRCH BAYH, myself, and several of our colleagues are introducing the University and Small Business Patent Procedures Act. This bill aims at facilitating the transfer to the private sector of technology from the federally funded innovation stage. More specifically, it allows universities, nonprofit organizations, and industry to obtain limited patent protection on discoveries they have made under Government-supported research. It also establishes a uniform policy to replace the multiplicity of statutes that now regulate the granting of patent rights throughout governmental agencies.

PROBLEM

Under the present Federal patent policy, the Government generally retains the rights to inventions it has neither the financial resources nor the expertise to develop into marketable products. The taxpayers invest in research without receiving dividends in the form of products available to them. The problem is particularly serious at agencies such as HEW where inventions for potential cures of cancer, arthritis, and hepatitis sit on the shelves unused, while millions of Americans are subjected to needless suffering.

EFFECTS OF GOVERNMENT PATENT POLICY

The Government's policy of retaining ownership of invention rights has hindered collaboration with the private sector. Nonexclusive licensing is clearly anticompetitive in that it discourages the promotion of inventions. The Government research grants represent only a small fraction of the product development cost which exceeds the funds contributed by the Government toward the initial research by a factor of at least 10 to 1.

The development process is risky as well as expensive. Is it any question, then, that industry is reluctant to engage in development and marketing unless provided with a modicum of protection through the granting of patent rights for a limited period of time? Particularly vulnerable are small businesses, which lack the financial resources and market power to engage in the development process of Government-supported inventions, without the protection of short-term exclusive rights. Traditionally, innovative and creative programs have emanated from small businesses and companies which, in turn, have engendered job creation and promotion. Xerox and Polaroid were small concerns when they developed xerography and the Polaroid camera. By deemphasizing the needs of smaller firms, the present policy has a negative impact on this process and the economy at large.

ECONOMIC FACTORS

The deterrent factor that the Government places in the path of American business—the refusal to grant patent rights—is removed in the case of foreign firms whose government policies, by establishing a strong collaboration with the private sector, guarantee the development of inventions to which equal access is insured through our Freedom of Information Act. As a result, American research is made available to foreign and domestic firms alike.

That we have lost our leadership role to Japan in the fields of electronics and shipbuilding is no accident. Our trade deficit with Japan amounts to $13 billion. Annual growth is 3 percent in the United States, 8 percent in Japan, Our newly established ties with China make the People's Republic a candidate for emulation of the Japanese example. With a population of 900 million people, China could become, through the potential development of U.S. technology, a most formidable competitor.

It is essential that the U.S. Government make available to U.S. firms the same incentives enjoyed by foreign industry. The answer to foreign competition lies, not in an increase of export subsidies, but in an increase in productivity. And only through a genuine partnership of Government and the private sector can productivity be raised.

Such is the objective of our bill. Patents are crucial in the development of technology. More technology means more business and more business translates into more jobs, a decrease in inflation and a strengthening of the dollar.

IN SUPPORT OF EXCLUSIVE RIGHTS

The time has come to abandon our outdated patent policy. What is at stake is insuring dissemination of technology while reducing the amount of redtape and bureauracy for maximum benefit to the public. We must use all possible incentives, including exclusive rights, in order to increase the flow of technology from the Government R. & D. programs into the commercial sector and the consumer. The uncertainty now fostered by a multiplicity of statutes and incoherent regulations must be replaced by certainty in the form of a uniform policy providing incentives and guaranteeing protection to contractors. A committee appointed by President Carter to study the problems of U.S. industry has recently released the results of its study. Their recommendation is that title be with the contractor. Their conclusion concurs with an earlier study conducted by the Federal Council for Science and Technology, the Harbridge House Report, which indicated that the enforcement of exclusive patent rights stimulates research.

AIM OF THE BILL

The bill that we are introducing today goes a long way in meeting President Carter's objectives, as spelled out in his state of the Union address to this Congress, that "we reduce Government interference and give (the American economic system) a chance to work" so that we can "reassert our Nation's technological leadership." If we have lost that leadership role, it is not because American genius has suddenly dried up. It is, in fact, alive and well, if languishing on the bureaucratic shelves of Government agencies. A patent policy that will provide incentives and encouragement to industry could be a turning point in our ability to complete. That is what we propose today.• (end brackets)

Mr. MATSUNAGA. Mr. President, I am very pleased to join Senator BAYH, Senator DOLE and others in introducing the University and Small Business Patent Procedures Act.

As noted earlier by my distinguished colleagues on both sides of the aisle, the purpose of this bipartisan measure is to encourage the maximum utilization of inventions arising from Government-supported university and small business research.

In a nut shell, the bill addresses a serious and growing problem. Recently, it has been brought to the attention of Congress that literally hundreds of valuable medical, energy, and other technological discoveries are sitting unused under Government control. The reasons for this sad circumstance are twofold. First, the Government lacks the resources necessary for development and marketing of new technologies derived from Government funded research. And second, the Government has been adamantly unwilling to relinquish patent rights that would encourage and stimulate private industry to develop these discoveries and make them widely available to the public.

At first glance, I suspect that many hardworking American taxpayers may react negatively to this proposal, harboring the thought that it is just another Government giveaway at the taxpayers' expense. After all, one might reason, why should the Government use my money to fund costly research and then make the resulting technologies available for private profit?

Upon closer examination, however, the inevitable conclusion one reaches is that this is a remarkably good bill, that it makes a lot of sense, and that its passage will eminently serve a public purpose and the common good.

The key to this conclusion is found in the little-known fact that product development and marketing of new-found technologies is 10 times more expensive than the actual cost incurred for the initial research. This bill recognizes thalt fact and provides what I believe are both adequate safeguards to protect the Government's own investment, as well as necessary incentives to encourage universities and small businesses to proceed with marketing and development.

Mr. President, the University and Small Business Patent Procedures Act is, in my judgment, a good bill and it deserves to be passed.

Mr. SCHMITT. Mr. President. mv distinguished colleagues, Senators BAYH and DOLE, today introduced the University and Small Business Patent Procedures Act. As a cosponsor of this bill. I wish to commend my colleagues for their effort and offer my support for this legislative initiative.

The United States has recently experienced a disturbing decline in the rate of technological innovation and economic productivity. Integrally related to this decline is the failure of the Federal Government to formulate a consistent policy and procedure concerning the patentability of inventions made with