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Mr. BRENNAN. I am saying that one of the recommendations of the President's Commission, No. 22, recommended that the Congress, by statute, should clarify the law with respect to patent licensing. And if that statement is correct, then the two issues have been linked together since inception or conception.

Mr. HOGAN. Mr. Brennan, the President's Commission made so many mistakes, I would not arrive at any solid conclusion on that basis.

Mr. BREYXAN. I am not debating with you the recommendations. I am only asking you a factual question as to what was the recommendation.

I would suggest, Mr. Chairman, it might be useful to have inserted at this point, if it is agreeable to you, that excerpt from the report of the President's Commission.

Senator Hart. We will let the recommendation No. 22 and the accompanying explanation be printed at this point.

[The information referred to follows:]

XXII. The licensable nature of the rights granted by a patent should be clarified by specifically stating in the patent statute that: (1) applications for patents, patents, or any interests therein may be licensed in the whole, or in any specified part, of the field of use to which the subject matter of the claims of the patent are directly applicable, and (2) a patent owner shall not be deemed guilty of patent misuse merely because he agreed to a contractual provision or imposed a condition on a licensee, which has (a) a direct relation to the disclosure and claims of the patent, and (b) the performance of which is reasonable under the circumstances to secure to the patent owner the full benefit of his invention and patent grant. This recommendation is intended to make clear that the “rule of reason” shall constitute the guideline for determining patent misuse.

There is no doubt, in the opinion of the Commission, of the importance to the U.S. economy of both the U.S. patent system and the antitrust laws. Each is essential and each serves its own purpose within the framework of our economic structure. However, conflicts between the two have arisen. But this does not mean that the two systems are mutually exclusive, that a strong patent system is a threat to the antitrust laws, or that the latter cannot be effectively enforced so long as a patent system grants limited monopolies.

On the contrary, the two systems are fully compatible, one checking and prerenting undesirable monopolistic power and the other encouraging and promoting certain limited beneficial monopolies. In this way, each may easily achieve its objectives in a strong economy.

The Commission, therefore, does not favor any proposal which would weaken the enforcement of the antitrust laws or which would curtail in any way the power of the courts to deny relief to a patent owner misusing the patent he seeks to enforce. However, uncertainty exists as to the precise nature of the patent right and there is no clear definition of the patent misuse rule. This has produced confusion in the public mind and a reluctance by patent owners and others to enter into contracts or other arrangements pertaining to patents or related licenses.

No useful purpose would be served by codifying the many decisions dealing with patent misuse into a set of rules or definitions permitting or denying enforeability of patents in given circumstances. The risk of unenforceability is too great and such a codification is wholly unnecessary. All that the Commission believes to be required is explicit statutory language defining, for the purpose of assignments and licenses, the nature of the patent grant heretofore recognized under the patent statute or by decisional law. This is, the right to exclude others from making, using and selling the patented invention.

The mere exercise, conveyance or license of these conferred rights should not in itself constitute misuse of a patent. A patent owner should not be denied relief against infringers because he either refused to grant a license or because he has exercised, transferred or licensed any of the conferred patent rights

himself. This should not include immunity of even these conferred patent rights from the antitrust laws when the patent owner becomes involved in a conspiracy to restrain or monopolize commerce, or when the patent is itself used as an instrument for unreasonably restraining trade.

There are also a number of conditions and provisions long associated with the transfer or license of rights under patents which must be distinguished from the exclusive right to make, use and sell conferred by the patent grant. Among these are improvement grant-backs, cross licenses, package licenses, patent pools, no contest clauses, and many others which are simply matters of private contract, ancillary to the conveyance or license of a patent right. As such, these conditions and provisions must be judged, along with other purely commercial practices, under the antitrust laws and the patent misuse doctrine. The Commission does not recommend immunization of any of these other provisions or conditions from either the antitrust laws or the application of the misuse rule.

This recommendation also makes it clear that a patent may not be used to control commerce in subject matter beyond the scope of the patent. For example, it could not be considered "reasonably necessary" to secure full benefit to the owner of a machine patent that he attempt to control any of the commerce in an unpatented raw material to be used in the machine. Neither could it be held that such an attempt had a direct relation to the machine claims in his patent. By the same standards, the patent owner could not control commerce in one of the unpatented elements of his combination invention where his claims are to the whole combination.

Mr. BRENNAN. I want to compliment you for an extremely effective presentation. I think it is one of the best I have heard over a period of time.

Mr. Hogan. Thank you, sir.

Mr. BRENNAN. In your prepared statement you indicate there is criteria that ought to be employed by the Office of Patent Counsel in deciding what cases they ought to explore.

Do you contemplate having this criteria set forth in the statute, or would this be left to the discretion of the Office of Public Counsel?

Mr. HOGAN. Counselor, I would despair–Senator and Counselor, I would despair of the possibility of perfection in this. I would adrocate setting down some criteria, yes.

It seems to me that in some of the constitutions of some of the States there are set forth criteria defining cases of great public interest, cases that their supreme courts, courts of last resort, should consider on certiorari. They indicate that it is practical for legislative draftsmen to think up worthwhile criteria.

I think that is an excellent thought, that the criteria be set forth in the statute; that it should be the exceptional case for public counsel to get into.

Mr. BRENNAX. Thank you.

Mr. Hogan. Analogous to the certiorari process; analogous to the censor—I do not like to use this word=but under the Chinese emperors they had a censor. His job was to see what was going on wrong in the government.

This public counsel has to be a most discreet, judicious person and must conduct his office in a most discreet way. I like the thought that has been expressed and would certainly advocate that statutory criteria be employed to define this discretion; also that he be totally independent of the Commissioner and the Solicitor; he is a watchdog.

Senator Hart. It is not just patents; it is everything. When you have an idea that it would make good sense to have someone playing that kind of role, you always argue that there are plenty of people that have those qualities. But then if the notion offends you, then you are always suggesting that that is a very rare breed and you cannot assume you will get that kind.

Even with statutory guidelines there would be a sincere argument made that the odds would be against finding a person of that quality.

Since I would think it would be desirable to have that office, I would argue that you would be very likely to get that kind of fellow.

Vr. Nash.
Mr. Vash. No questions.
Senator Hart. Mr. Hogan, thank you so much.
Mr. Hogan. Thank you very much, Senator. Thank you, counselor.

Mr. BRENNAN. Mr. Chairman, the last witness is Mr. John Pederson.

Senator Hart. Before you begin let me thank you for your willingness to change your schedule to accommodate the committee.

Mr. PEDERSON. Senator, I appreciate the opportunity to appear. It is the least I can do.

Mr. BRENNAN. I assume we will have the statement printed in full at this point ?

Senator HART. Yes.
[The prepared statement of John Pederson follows:]

STATEMENT OF JOHN J. PEDERSON CONCERNING S. 1321 Nr. Chairman and Members of the Subcommittee, my name is John J. Pederson. I am General Patent Counsel and Director of Patents for Zenith Radio Corporation, a major producer of radios, television sets and related consumer products.

I am here today because of my firm belief in the wisdom of the constitutional provision for a patent system to promote progress in science and the useful arts and because I recognize the urgent need for patent reform if this basic constitutional purpose is to continue to be served. One need only look to the patent invalidity statistics in Federal court litigation--more than 70% of the litigated patents are held invalid—to know that extensive reform is needed to provide enhanced credibility for patents.

While there are specific provisions in the Patent Reform Act of 1973 (S.1321) which I believe to be unworkable or impracticable as presently drafted and others which in my view are unwise, I believe that as a whole this draft bill constitutes a bold and imaginative effort to provide the reform which is so sorely needed. The bill is designed to enhance the credibility of patents by augmenting the present and traditional ex parte patentability proceedings with adversary proceedings which are better adapted to elicit the relerant prior art and to apply the statutory patentability standards. From my 25 years of practice before the Patent Office, I have come to the firm conviction that the establishment of an adversary system is absolutely essential if the credibility and integrity of U.S. patents is to be restored. In many cases, only the applicant's competitors or other potential users of the invention upon which patent protection is sought are in a position to identify and bring forward the most relevant prior art against which the statutory requirements of novelty and unobviousness are to be measured. Neither the applicant nor the Patent Office Examiners have an effective basis for identifying specific prior art in the category of subject matter in public use or on sale (Section 102b), to say nothing of that embodied in unpublished pending patent applications (Section 102e) or that falling in the category of unpublished prior knowledge or use by others (Section 102a). But a competitor or an industry member who has possession of such unpublished prior knowledge, or who owns the unpublished pending patent application, or who has produced or sold a product

embodying the invention, can identify this relevant prior art with relative ease. The present law makes no provision for using these channels to identify the most relevant prior art in the Patent Office examination proceedings. It is only by permitting competitors and industry members to oppose the patent grant that this can be achieved.

However, it is not enough to provide a vehicle for permitting competitors and industry members to come forward in opposition to the patent grant. The opposer as well as the applicant must be given an equal opportunity for argument and for appeal of erroneous Patent Office decisions, and failure to oppose when proper grounds for opposition exist must carry sufficiently serious consequences to assure proper use of the opposition system. If a competitor or industry member has nothing to lose by standing off, in the sense that he can make the same defense in court later if called upon to do so, many oppositions that should be brought will not be brought, and spurious patents will continue to issue.

On the other hand, safeguards must be provided to protect an applicant against oppressive abuse of the opposition process. An applicant with a good invention should not have to withstand the delay and expense of defending against specious oppositions filed with the purpose of inducing settlement on the basis of a royalty-free or reduced-royalty license, or with the hope of inducing abandonment to avoid heavy defense costs, nor should he be deprived of his "day in court" because he cannot afford such legal expenses.

To satisfy all of these criteria, an ideal opposition system should contain built-in effective sanctions against misuse or abuse of the opposition process, should provide at least some measure of incontestability or increased credibility for the patent which survives, and should contain provisions for financial assistance in connection with legal services in cases of proper need. Failure to satisfy these conditions can so distort the system as to frustrate the constitutional purpose of promoting progress in the useful arts and sciences.

The Patent Reform Act of 1973–S.1321—provides a basis for opposition proceedings from which the opposer as well as the applicant has effective appeal remedies, and it also contains other provisions designed to compel the applicant to identify relevant prior art known to him and to provide the Patent Office with both system and procedure for eliciting a better overall knowledge of the relevant prior art, but it does not provide any specific benefit to the successful patentee or detriment to the unsuccessful opposer, it does not contain effective sanctions against oppressive misuse or abuse of the opposition process, and it fails to provide financial or other assistance to the applicant who cannot afford the burden of defending either a specious or bona fide opposition. Moreover, there is additional inequity which may deter inventors from using the patent system for its intended purpose. As presently drafted, S.1321 contemplates publication of the application in advance of any preliminary examination or determination of prima facie patentability. Since a patent is a quasi-contract between the inventor and the government-a disclosure in exchange for a limited-term monopoly-any statutory requirement for public disclosure in advance of a prima facie patentability determination would be unfair and even arguably unconstitutional.

There are ways in which the present draft bill can be strengthened to overcome these objections. A prospective opposer may be required to make a prima facie showing sufficient to establish probable cause for instituting the opposi. tion, before the applicant is subjected to the burden of such a proceeding. An unsuccessful opposer may be required to bear the applicant's costs of defending the opposition. A substantial opposition fee may be imposed on the opposer at the time of filing the opposition. All of these measures would reduce the likelihood of specious proceedings designed for harassment or shake-down purposes. On the other hand, unless there is some serious consequence of with holding a bona fide opposition, all of these other provisions would tend to dis. courage competitors or industry members from coming forward during the examination process. To overcome this negative bias, and to provide for the integrity of issued patents which withstand the opposition process or go to issue without opposition, a really strong presumption of validity must be established. This can be done in various ways but in any event, to be effective, the statute must give more than mere lip service to the presumption of valid. ity. Total incontestability would serve the purpose but would be found by most

to be too harsh if not unconstitutional. However, there would seem to be no good reason why a competitor or an industry member having actual grounds for opposition at the time the application is published should not be estopped from contesting validity on the basis of such grounds if he elects not to bring the opposition. A middle-ground approach, which I have not seen advanced elsewhere, and which has the advantage of being more objective in nature than personal estoppels, might provide for the unavailability of Section 103— the unobviousness section-as a defense against patents surviving the opposition process or issuing without opposition; this would leave Section 102—the novelty requirement-as well as other technical defenses open to all. Especially in view of the inclusion of Section 138(b), a separate section should be incorporated to define the scope of the enhanced presumption of validity and the consequences of failing to oppose or of unsuccessful opposition.

And finally, for the independent inventor or the small business unable to afford the burdensome costs of defending patent oppositions, partial or full subsidization of legal expenses, on the basis of need, might be provided. Incidentally, this might also be made available to a needy opposer as well as a needy applicant.

S.1321 also includes provisions for enhancing the presumption of validity by establishing the Patent Office as an independent governmental agency, by providing Public Counsel in the Patent Office to argue for the public interest, and by providing for greatly improved library and mechanized search facilities. These are laudable measures when provided to augment the availability of inter partes proceedings instituted by competitors or industry members; in my opinion, they would not be sufficient of themselves without also providing for such opposition proceedings.

Section 135 of the draft bill provides for notification proceedings whereby any person, whether or not he may be adversely affected by the grant of a patent, may bring prior art to the attention of the Patent Office in connection with a previously published pending application. The person making the notification may, if he so elects, remain anonymous or he may elect to participate in the examination or re-examinati proceeding as a party. I do not believe it appropriate for uninterested persons to serve in the capacity of private attorneys general, as the section would seem to permit, but in other respects I favor the provisions of this section. I do think, however, that if an office of Public Counsel is to be established, at least the anonymous notification proceedings should be routed through the Public Counsel's office, and the Public Counsel should be required to argue the patentability question before the Primary Examiner; otherwise the Primary Examiner's patentability determination may still be strictly ex parte and none of the benefits of adversary proceedings will be realized.

While on this subject, I would like to address the patentability brief requirement (Section 131) and the attorney's oath requirement (Section 115). Much opposition has been voiced against provisions of this sort because they are burdensome and, some say, demeaning to the legal profession. Nevertheless, if such measures will improve the credibility of the patent system, they should certainly be adopted. However, the establishment of an opposition system as well as the Public Counsel provisions and the mechanized search provisions are all addressed to the same purpose and are much better adopted to achieve that purpose than the patentability brief and attorney's oath requirements. As pointed out earlier in this statement, it is literally impossible for an applicant or his attorney to know of all of the relevant prior art in a given case. A patentability brief or an attorney's oath is no better than the knowledge upon which it is based. The cumulative knowledge of competitors and other industry members and their ability to identify relevant prior art is much greater than that of the applicant and his attorney, and the institution of an effective opposition system may be expected to bring to the surface all of the relevant prior art which could reasonably be expected to be identified in any patentability brief or attorney's oath, and more. In other words, I believe that an effective opposition system meeting the criteria set forth in my foregoing comments would obviate the necessity for a patentability brief or attorney's oath, and that elimination of these requirements would serve the constitutional purpose hetter by reducing the burden and therefore the cost of required legal services in connection with the filing of patent applications.

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