by the Department of Justice when a "proper" case can be found. Such pronouncements not only create uncertainties in the minds of those who would grant or take patent licenses, but also lead to a substantial increase in the cost of patent litigation by encouraging indiscriminate use of the misuse defense in patent infringement suits. It is therefore believed important that Congress enact as law a rule of reason for interpreting the reasonableness of restrictions in patents licensing agreements so that those charged with making the business decisions regarding licensing will have clear guidelines concerning the bounds of proper licensing.

From the address of Mr. Chester A. Williams, Jr.:

NOTE. Often, persons who hold positions in the American government when delivering addresses state that the views expressed are those of the speaker and do not necessarily represent those of any governmental agency. This qualification should be borne in mind wherever references are made in the text of this paper to viewpoints of the Department of Justice.

The following is a partial listing of such speeches :

(a) Lionel Kestenbaum, Director of Policy Planning. Antitrust Division, Department of Justice. "Field-of-Use Restrictions in Patent and Know-How Licensing." Address before the Lawyers Institute of the John Marshall Law School on February 21. 1969:

(b) Assistant Attorney General Richard W. McLaren, Head, Antitrust Division, Department of Justice, "Patent Licenses and Antitrust Considerations," Address before the Patent, Trademark and Copyright Research Institute of George Washington University on June 5, 1969, (161 U.S.P.Q. No. 11, dated June 16, 1969, pp. II-VI);

(c) Roland W. Donnem, Director of Policy Planning, Antitrust Division, Department of Justice, "The Antitrust Attack on Restrictive Patent License Provisions," Address before the Michigan State Bar Convention on September 25, 1969 (5 "Les Nouvelles" 32, 1/70) ;

(d) Richard H. Stern, now Chief, Patent Unit, Antitrust Division. Department of Justice, "A Future Look at Patent Fraud and Antitrust Laws," Address before the Federal Bar Association Symposium on September 25, 1969 (52 J.P.O.S. 3, Jan. 1970);

(c) Bruce B. Wilson, Special Assistant to the Assistant Attorney General, Antitrust Division, Department of Justice, "Patents and Antitrust-The Legitimate Bounds of the Lawful Monopoly." Address before the Patent Law Association of Pittsburgh on November 19, 1969 (5 "Les Nouvelles" 2, 1/70);

(f) Bruce B. Wilson, (See his title above in this footnote) "The Legitimate and Illegitimate in Patent and Know-How Licensing." Address before The Lawyers Institute of the John Marshall Law School on February 20, 1970;

(g) Richard W. McLaren, Assistant Attorney General (See title above in this footnote), Address before the National Industrial Conference Board in New York City on March 5, 1970, as reported in CCH Trade Regulation Report, No. 456. dated 3/9/70;

(h) Norman H. Seidler, Chief of New York Office of Antitrust Division, Address before the New York Patent Law Association on March 19, 1970, as reported in Vol. 9, No. 8, May 1970 NYPLA Bulletin ;

(i) Richard H. Stern (See title above in this footnote). Address on territorial limitations in international technology agreements before American Patent Law Association Stated Spring Meeting on May 15, 1970, as reported in APLA Bulletin for July-August 1970 at pp. 306–324;

(j) Richard W. McLaren (See title above in this footnote), Address on antitrust and foreign commerce before the Symposium on Antitrust and Related Issues and Their Solutions in International Trade and Productive Investment on October 16, 1970, as reported in CCH Trade Regulation Report, No. 489, dated 10/26/70 and 6 "Les Nouvelles" 44, 3/71);

(k) Richard H. Stern (See title above in this footnote). "Territorial Limitations in International Technology Agreements." Address before the Federal Bar Association-Government Patent Lawyers Association-Bureau of National Affairs Briefing Conference on November 16, 1970:

(1) Richard H. Stern (See title above in this footnote). "The Antitrust Status of Territorial Limitations in International Patent Licensing." Address before Antitrust Law Section of New York State Bar Association on January 27, 1971: BNA Antitrust & Trade Regulation Report, No. 498, dated 2/2/71, at p. F-1;

(m) Richard H. Stern (See title above in this footnote). Address concerning antitrust implications of international technology agreements before Chicago Bar Association in February 1971 as reported in BNA's Patent, Trademark and Coypright Journal, No. 15, dated 2/18/71 at p. A-3; and

(n) Ronald W. Donnem (See title above in this footnote), Address before Board of Governors of the National Electrical Manufacturers Association in New York City on January 18, 1971, as reported in CCH Trade Regulation Report, No. 504, dated 2/8/71 at p. 10.

Mr. BRENNAN. Mr. McKinney.

STATEMENT OF JOHN A. MCKINNEY, VICE PRESIDENT, JOHNSMANVILLE CORP., ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS (NAM)

Mr. MCKINNEY. My name is John McKinney. I am vice president of Johns-Manville Corp., a company which is active in licensing. both as licensor and licensee. I am here this morning on behalf of the NAM.

The NAM will submit within the next 2 weeks a detailed written statement in support of the Scott amendments. This morning, I have only a few remarks on what in general we hope the Scott amendments will accomplish.

Now, the detailed purposes of these amendments are set forth very ably in the materials which Senator Scott has presented just now at this hearing. I do not intend to repeat those. My remarks will be from a somewhat different point of view.

The origins of these amendments go back a good many years. Beginning about 40 years ago, there was a concentrated, continuing tide of attacks on the validity of patents. Since that time, almost every conceivable ground for invalidating a patent was devised, and in most of these cases, I think it fair to say that the courts did not address themselves to the question of whether or not in fact an actual advance in the art had been made. They addressed themselves more to technical rules which are almost in the nature of what you might call per se rules of invalidity. This was very perplexing to the people who were involved in the business of innovating and in disseminating the technology relating to those innovations to other people in the manufacturing area and thus ultimately to the public. In general, the response other than anguish, to these attacks on the validity of patents was to become more liberal in licensing. But then, based on a few bad fact cases, a determined attack on the enforceability of patents and license agreements was undertaken. Even on those very. very few patents which were found to be valid, the enforceability of the patents was questioned and it was always questioned in retrospect. It was said years later that what somebody had done that was perfectly proper at the time was now to be looked upon as a misuse of the patents, justifying the patents not being enforced.

The result of all these things was to in effect punish the innovator and reward the infringer. It permitted the licensee to get the benefit of both the technology and the protection of the patent and then at a later time, to avoid payment for either. Because of the attacks on the validity of patents and the growing number of cases relating to the unenforcibility of presumably valid patents, we have come to a point where it is almost inconceivable that a competitively important patent

will be effectively enforced in the courts. I do not really know of one. And in all of this, there has been no rule of reason applied.

Let me give you one example of what I am talking about. And this, in part, will answer the question which Senator Hart has raised. I refer to the Brulotte case in the Supreme Court which related to an agreement having to do with hops-picking machines, in which what the licensee had really done was buy some machines. There happened to be patents on the machines. The method of payment for the machines was stated in terms of a patent royalty. It happened that the patent royalty payment period extended beyond the life of the patents. There is no evidence whatever that this had any effect. on the hops picking industry or in any way resulted in higher selling prices of hops or beer to the public. It was a contract between two parties having almost no effect on anyone else. Yet this was a matter which was taken up as being of great national concern by the Supreme Court. And without going into, really, the reasonableness of whether this particular contract between these parties was justified, they made what amounted to a per se rule: you may not collect royalties beyond expiration of the patents involved.

Now, quite apparently, there could be circumstances in which it was reasonable to both parties to arrange their payments in that way. It was entirely possible that a licensee might say to the licensor, I will make no profits from this invention during the life of the patent but I expect to afterwards and I would like to postpone payment entirely until that time; I will pay you on the basis of what I do after the expiration of the patent for a fixed number of years. Yet for no apparent public purpose, the court has said this is not to be permitted.

So licensing, in response to decisions of this type, has been based more and more on technology rather than on patents. As a businessman, with many hundreds of thousands of dollars invested in the development of a particular business, it is very difficult to come to the decision to risk the whole thing on the validity of patents where the statistics show that particularly where you have developed something that is of real competitive value, your chances of effectively enforcing the patent are almost nil.

So we began selling what was the real asset, the technology. Then in what has been typical of the history for 40 years, along came the Lear case, which presumably related to the narrow issue of whether or not a licensee could challenge the validity of a patent under which he was licensed. But what the Lear case really said and said it several times is, you may not do anything to interfere with the full and free use of ideas in reality in the public domain. And it held specifically that collecting a royalty was such an interference. Dissent went even further and said you cannot have enforcible contracts relating to technology as distinguished from patents.

Following the Lear case, there has been speech after speech by Department of Justice representatives in which they interpret the Lear case to mean that you may not collect royalties for the sale of technology unless the technology is "truly secret and valuable."

We have come to the point where we are about to accomplish exactly what the antitrust professors desired, the virtual destruction of the patent system. If we reach the point where we have to license every

body who asks for a license because we have decided to license one party, the patent system is no longer of any value. If we come to the point where someone cannot sell for a negotiated price a compilation of purely public information which the purchaser does not want to spend the money to compile, we will have virtually destroyed any opportunity for realistic spreading of innovations, knowledge about innovations, to the public.

What these speeches, these series of cases and speeches, have done is to make the businessman very uncertain about what it is he can. and can't do in licensing. It makes business people very reluctant to invest risk capital in the development of products which can readily be copied by other people or where, if we cannot recover part of our money by way of selling the technology, it is not worthwhile to go into the development to begin with.

I would simply like to state at this point that the development and commercialization of a new product is not the simple matter which the antitrust professors, the Department of Justice, and many judges appear to think it is. And furthermore, the smallest cost in that process is the development in the laboratory. The biggest cost is in developing a market, distribution, and making a success out of the business. And you cannot expect the first licensee to put the money into doing the initial phase of a development program if he is immediately going to be subject where he builds a market to other people being licensed to come in and say, "me, too, I have the same product." But they do not spend the money to develop the market, the distribution, and they have not risked what the first licensee did.

The Scott amendments are intended to do two things: Make a start toward applying the rule of reason to patent and know-how licensing. It is, in effect, a start toward discouraging these per se rules of unenforcibility and invalidity, to stop stacking the cards. always in favor of the licensee. And the other purpose is to set out a few of the basic things which a licensor can safely do, on which he can safely invest time and money and energy.

One thing about what the amendments are not intended to do. They are not intended as an attempt to turn back the clock. I do not know of a single case which would be directly overruled by these amendments.

And take the Brulotte case to which I referred as an example. As ridiculous as most of the people who wrote the basic things on which these amendments are based thought that Brulotte case was. they did not ask to directly overrule it. In a subsequent case, the Supreme Court had made some remarks indicating recognition of the fact that perhaps you could collect royalties after the expiration of a patent for activities which occurred before the expiration. This is the standard which has been written into the proposed Scott amendments. That is merely an example. That has been the treatment with respect to all of the portions of these amendments. It is an attempt to stop the Justice Department and the courts in their 40-year program of making bad law based on carefully selected bad fact cases. It is an attempt to say, this is still the law, let us stop it here. Thank you, sir.

Senator MCCLELLAN. Thank you very much, Mr. McKinney.
Counsel?

Mr. BRENNAN. Dr. Herwald?

Senator MCCLELLAN. I may say, not having had the opportunity to read your statements in advance, I am not prepared to interrogate you very much today. However, after I have had the opportunity to study your testimony, there may very well be a desire to submit to each of you or some one of you, questions for you to answer for the record. But for today, generally, we will move along and let you get your views in the record right in the beginning of these hearings.

STATEMENT OF S. W. HERWALD, VICE PRESIDENT, ENGINEERING AND DEVELOPMENT, WESTINGHOUSE ELECTRIC CORP.

Mr. HERWALD. Thank you, Mr. Chairman. I am S. W. Herwald, vice president, engineering and development of Westinghouse Electric Corp. Previously, I served as vice president of research and as vice president for the electronic components and specialty product group. I was president of the Institute of Electrical and Electronic Engineers.

Since our patent department reports to my office, I am familiar not only with licensing but also with many other aspects of inventing and patenting. I am an engineer by education and an inventor, with six patents issued in my name.

Today, I am here to support Amendments 23 and 24 offered by Senator Scott to S. 643, because Westinghouse believes they are necessary to protect the public interest in the development of American technology, as well as the interests of individual inventors and their supporters.

At the outset, permit me to express, on behalf of Westinghouse, our appreciation to you, Mr. Chairman, and other members of the subcommittee, for your long and painstaking work on this intricate subject. There is public confusion about the patent system. Your thorough approach-and indeed your enduring patience-are therefore most reassuring to us, especially when we realize that the public policy you are formulating will affect the very foundations of the American economic and social system.

It was largely because of the current public confusion and uncertainties about our patent system that I felt obliged to appear here today to offer the benefits of my experience to whatever extent it may be helpful to you.

Attempts, some of them successful in the courts, to undermine the patent system have been attempted.

It is the objective of the Scott amendments to halt by statute the further erosion of the ability of patentees, asignees, and exclusive licensees, to license patents upon a variety of terms and conditions and, in a few instances, to revive or return to the law as it existed only a few years ago.

As you know, the Scott amendments grew out of the report of the 1966 President's Commission on the Patent System which emphatically recognized the uncertainty that had developed in the law on patent licensing. The Commission, in recommendation XXII, specifically called for statutory clarification of the licensable nature of the rights granted by a patent or patent application, and concluded that

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