ment agencies administering these areas of the law are all closely interrelated, and need to be strengthened in the interest of small business. Whenever remedial legislation appears, nominally directed against big business, small business almost inevitably bears the brunt of its effects. The application of antitrust concepts to the "patent monopoly" is, in our opinion, one of the classic examples of this rule. Attempts to remedy abuses of improper use of patents have generally resulted in the long run in cutting down the rights of the individual and small business but with no noticeable impact upon big business. For this reason we have some fears that even the changes and reforms of the patent system now being proposed may lead eventually to corrosion of the rights of the smalls.

Improper use of patents through patent pools and cross-licensing, in concert with raw economic power, has placed out of bounds many areas of business where small business properly should be competing. The best hope for creative small business is that their rights be strengthened under the patent laws and that the antitrust laws be rigidly enforced.

Recommendations contained in the report of the Attorney General's National Committee To Study the Antitrust Laws (1955) with respect to compulsory licensing of interchanged and pooled patents have never been implemented either by legislation or enforcement policy. These pooled patents, together with large defensive patent portfolios and the threat of litigation, cause much concern to creative small businessmen. I might add parenthetically that, under the first-to-file system, companies seeking merely to establish their right to use an invention will be encouraged to publish rather than patent the invention. This should serve to reduce the defensive patent portfolios of big businesses.

We concur in the analysis of the antitrust patent situation in recommendation XXII of the President's Commission Report. We recommend that implementing language be incorporated in H.R. 5924. Government infringement of private patents. It is most disappointing that the President's Commission failed to study or to make recommendations regarding small business' No. 1 patent problem, government infringement of privately developed patents. This has been a matter of concern to the Congress and the procuring agencies since the Comptroller General's decision in 1957. This decision required infringement of private patents (under 28 U.S.C. 1498) in cases of advertised procurements for patented articles awarded to unlicensed sources. Many attempts have been made to obtain concurrence between procurement agencies regarding an appropriate mechanism to resolve the problem of infringement. We believe an acceptable compromise has been achieved which is now before Congress-H.R. 2898-introduced by Congressman Morris of New Mexico. We recommend that this bill be incorporated into the patent reform bill H.R. 5924. It is our understanding that H.R. 2898 was developed in cooperation with the Bureau of the Budget and is acceptable to the executive branch. Since the provisions of H.R. 2898 relate to general patent administration, it is appropriate to include them in H.R. 5924.

Improving the quality of patents.-Provisions of the legislation directed to improvement of the quality of issued patents include section 137, which would place on the applicant the burden of persuading the

Patent Office that a claim is allowable, and section 148, which would provide a presumption of correctness on claims refused by both the patent examiner and a three-member panel of the Patent Office Board of Appeals. These burdens on the applicant, properly administered, will tend to improve the quality of issued patents.

The availability of appeal from these decisions should be limited, in our opinion, to the Court of Customs and Patent Appeals. We see no real purpose to be served by the present alternative appeal by civil action in the U.S. District Court for the District of Columbia. We believe that an appropriate appeals procedure for all administrative determinations should be limited to: (1) An ex parte presentation of evidence to the examiner (rulemaker); (2) an adversary procedure before an administrative appeals board; (3) a judicial review on the record, with remand available for taking of additional evidence where the evidence is incomplete or unsatisfactory; and (4) a final appeal to the U.S. Supreme Court.

We believe these enumerated limitations represent the optimum procedure for review of technical admnistrative decisions and would provide the best quality of decision with minimum expense to the Government and the individual parties litigant.

One of the greatest costs in prosecuting patent claims before the Court of Customs and Patent Appeals has been the requirement for printing of a voluminous record including cited references such as prior patents. The court, in line with current practice in many courts. of appeal, should be required to accept typewritten copies of the record, copies of the printed patents cited, and files of the Patent Office or copies thereof.

Computer programs. We disagree with the recommendation of the President's Commission that computer programs should not be patentable. The line of demarcation between computer hardware and software is becoming increasingly difficult to define. A body of ad hoc determinations should be developed by the Patent Office which, on an evolutonary basis, will provide criteria for patenting those aspects of computer programing traditionally associated with patentable inventions. Comparable expertise has been developed by the Patent Office in other new areas of technology.

Protection for individual inventors. We urge that study be given to the recommendation of the American Society of Inventors that some form of general insurance protection be made available by the Government for nonassigned patents, to cover attorney's fees, and other costs incident to litigation involving validity or infringement of the patent. It is estimated that the cost of $100,000 of insurance would be about $50 per year per patent or $500 for the life of the patent. We are advised that the average cost for litigating a patent is about $50,000. Perhaps a worthwhile social and economic purpose would be achieved if the patentee were required to bear the first $500 of such expense plus 10 percent of the balance, if he does not prevail in the litigation. Another recommendation by the society worthy of study is that captive inventors be protected by discouraging outright assignment of their inventions. It is suggested by the society that the patent laws be amended to require all inventions to be licensed, rather than assigned, at minimum royalties of one-half of 1 percent for captive inventors and 3 percent for independent inventors. Of course, the economic value

of an invention introduced into a complex manufacturing and marketing operation is difficult to assess, but assessment is not impossible. Such a system in Germany has operated to benefit substantially many deserving inventors without unduly handicapping industry.

Conclusions.-Our hope is that this committee and the Congress will proceed with deliberate speed to enact changes in the patent laws to correct the present deplorable state of affairs relating to the interests of the inventor and small business. Without reform, there will be increasing deterioration of incentive. It is incentive that triggers the flow of creation and enriches our Nation and its people.

Chairman KASTEN MEIER. Thank you, Mr. Cappello, for your very enlightening and effective presentation. It stands in some respect in contrast with Judge Rifkind's analysis yesterday, particularly with respect to the comparative aspects of the district court and specialized patent courts. I would first like to ask you something of your organization, the National Small Business Association, something about its membership and its aims and objectives. Can you tell us about that?

Mr. CAPPELLO. Well, I do not have a great deal of detailed information on the internal organization of the association since I am only a consultant. We represent basically about 35,000 small businessmen, many of whom are creative small businessmen engaged in manufacture, invention, and so forth.

Chairman KASTEN MEIER. Essentially this is not an organization of retail businesses?

Mr. CAPPELLO. We have a number of retail businesses. We represent the broad spectrum of small business, as far as I can determine. I might state, parenthetically, that we recognize that there are many diverse interests in the small business community, particularly in the area of patent exploitation and patents in general. Many small businessmen, of course, have no use for patents. Our position is based on what we regard as the fundamental justification for the patent system and the national interest in connection with patents. Therefore, we do not speak for people who might wish to be allowed to infringe any and all patents or who might desire to have the patent system eliminated entirely. We do not believe this is socially or economically a desirable situation.

Chairman KASTEN MEIER. I note that you will present in due course to the committee some proposed statutory language as amendments to the bill. I appreciate that you might not have that language today. Many of those interested in this field are not necessarily prepared to give final or definitive suggestions as to what changes they might recommend in the bill. I hope that at an early date you will make available to the committee these recommendations.

Mr. CAPPELLO. We recognize the committee does desire specific language. Because of the complexity of the bill, the amount of time that we have had did not permit us to submit our recommendations as to the language of the amendments at this time. But we will attempt to provide that for the committee.

Chairman KASTEN MEIER. AS I understand it, you do favor the firstto-file concept but you state that it is necessary to have a personal grace period. Is it your position that that grace period be in lieu of the proposed preliminary application?

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Mr. CAPPELLO. We think it could operate in either fashion, but we believe that the personal grace period could serve to eliminate, on the part of most of the small applicants, requirement for filing a preliminary application. With the personal grace period the smaller inventor, small businessman within the 1-year period would be able to present a final, complete application which would serve as the first-tofile application.

Chairman KASTEN MEIER. In the example that you cited of your own company, would the 1-year period have been sufficient?

Mr. CAPPELLO. I think it would have, sir, if we had had the opportunity to have filed a continuation-in-part application, and the other means which we now have to amend the orginal application. I think that anything that would cut down the ability of the small inventor or the small business to amend his complete application would be very unfortunate. It would tend to produce filings which are incomplete and probably would not stand the test of litigation, and claims which would really not cover the entire scope of the invention.

Chairman KASTEN MEIER. Let me ask a slightly different question. At least one witness yesterday suggested that a standardized simple preliminary application could be worked out. However, I gather it is your position that the language of the bill would not permit such a simple procedure; is that correct?

Mr. CAPPELLO. Yes. I think this language requires a complete application to be filed and I believe it requires the work of a patent attorney to file such a preliminary application. I can't see that the preliminary and complete application could significantly differ.

Chairman KASTENMEIER. If it does require a patent attorney, that would discourage capricious preliminary application filing, would it not?

Mr. CAPPELLO. Well I think that the people who wish to incorporate prior art into the patent system by filing preliminary applications which have no real merit would be discouraged by a high fee. I think a $10 fee would encourage anyone and everyone to file applications regardless of whether they intended to apply ultimately for a patent. I think people refer to these as trash filings and I believe an appropriate fee level would tend to reduce this.

Chairman KASTENMEIER. Yet, paradoxically, Mr. Cappello, you seem to recommend what is really the old maintenance fee system, which would defer some fees over the life of the patent.

Mr. CAPPELLO. Well, I am not talking about the deferment of fees: I am not talking about a particular level of fees. I am talking about the concept of spreading out the cost of the fees and the cost of running the Patent Office over those who are most able to bear the cost; that is those who are receiving an economic return from the patents which they are exploiting. I think one of the big shortcomings from the standpoint of a small man is that the fee structure may be too high (even that contemplated now for filings) and that the small patent owner who may have one, ten, or a hundred patents does not receive any substantial return from this stable of patents compared with the large patent holder who may have a thousand or more patents. Those people whose businesses are basically patent-oriented and who have a large number of patents should bear a large proportion of the total costs of the Patent Office.

Chairman KASTENMEIER. Just one other question, on the thousand dollar limitation on page 10 on the amount of recovery of costs and attorney's fees, is it your position that small business competitively would do better if the penalty the large corporations would have to pay would be more than minimal?

Mr. CAPPELLO. That's exactly it, Mr. Chairman. We think the small company that goes into litigation in any area in connection with patents has a pretty good idea its patents are sound, or they are not going to engage in it. With the larger companies and their larger resources, $1,000 does not mean very much to them. They can litigate you to death. The $1,000 maximum is practically no maximum as far as they are concerned. The worst that could happen to a small business if he gets tagged with large litigation fees is that he will go out of business. He would probably be out of business anyway.

Chairman KASTEN MEIER. H.R. 2898 which you recommend is now before the Government Operations Committee of the House of Representatives and isn't before this committee. Nevertheless, I think it is obviously relevant that you should draw our attention to it.

I appreciate your testimony Mr. Cappello. Mr. Edwards?

Mr. EDWARDS. Thank you Mr. Chairman. Mr. Cappello, the chairman mentioned that you feel that a $10 preliminary filing fee is too low; do you have a figure in mind?

Mr. CAPPELLO. I do not have any particular figure in mind. I merely suggested that this was a low figure. The $10 fee is the figure that I believe Commissioner Brenner suggested would be the fee the Patent Office would contemplate imposing on these filings. I don't think that we are in a position to suggest what an appropriate level would be. All we are saying is that the level should be directed toward reducing spurious filings and toward encouraging legitimate filings, and this level is obviously too low. I don't know what the appropriate level would be. I think this is something that should be considered and that the Patent Office will have to manipulate this within their authority and see that the interest of the public is served thereby. Mr. EDWARDS. On page 12 of your statement you mentioned that your association had some fears that this bill may lead eventually to the corrosion of the rights of the smalls. Do you feel that the small business community was fairly represented on the Commission?

Mr. CAPPELLO. The small business community was represented basically by the Small Business Administration. There were other personsthere were attorneys and other businessmen-who had had experience with small business problems and who should have been aware of our problems in this area. I think a great deal of compromise was achieved in coming forth with as good a report as was produced. I don't think that the report is primarily directed toward the interests of the small business community. I think it is a balanced approach to the problem. Our comments in general, I think, reflect this. They reflect certain additional things that need to be done for the small business community. I am personally acquainted with at least two of the people who served on this panel and I am sure they did the best they could to get the small business community's point of view across. But I think in the interest of compromise, perhaps some of the small business interests were lost and, in particular, I might point to this