Senator MCCLELLAN. We originally had the afternoon hearing scheduled for 2 o'clock. Due to some other pressing appointments I have, I am going to advance the afternoon session to 1:30. I hope we will be ready to move at that time so as to finish early.

I want to thank each one of you gentlemen. If you wish to submit additional statements or information to the committee, it will be received and placed in the record.

(Whereupon, at 11:45 a.m., the subcommittee was recessed until 1:30 p.m. of the same day.)

AFTERNOON SESSION

Senator MCCLELLAN. Very well. We have scheduled for this afternoon Mr. James T. Lynn, Under Secretary of Commerce, and Mr. William Schuyler, Commissioner of Patents; Mr. Richard W. McLaren, Assistant Attorney General, Antitrust Division, Department of Justice.

I believe our first witness scheduled is Mr. Lynn.

Mr. Lynn, I note you have a quite lengthy statement. I would hope that you would be willing to insert it in the record and highlight it.

STATEMENT OF JAMES T. LYNN, UNDER SECRETARY OF COMMERCE; ACCOMPANIED BY WILLIAM E. SCHUYLER, JR., COMMISSIONER OF PATENTS, AND RENE D. TEGTMEYER, ASSISTANT COMMISSIONER OF PATENTS

Mr. LYNN. We certainly are willing to do that, Mr. Chairman. I would like to introduce in addition to Commissioner Schuyler, Assistant Commissioner Rene Tegtmeyer as well.

Senator MCCLELLAN. Very well, we are glad to welcome you.

Mr. LYNN. As a starter, let me say, Mr. Chairman, that we have made an effort in our written statement to condense the material that is set forth in some detail, as you have noted, in our letter to the committee, which is attached to the statement. In an effort, however, to save further time of the committee, I would like if I could simply to point out that the discussion on inventors' certificates and Patent Office fees is set forth at the end of my prepared remarks and unless you would desire otherwise, I will not cover those subjects in my oral statement.

Senator MCCLELLAN. I notice what you are now referring to is condensed to about 151⁄2 pages. If you wish to read part of it or most of it, you may proceed to do so if you think that is a better way for you to make your presentation. Any part you do not read will be printed in the record. So you may proceed.

Mr. LYNN. All right. Thank you.

I am pleased to be here this afternoon to discuss the views of the Department of Commerce on amendments Nos. 23 and 24 of S. 643, introduced on March 19, 1971, by Senator Scott.

The views I express here this afternoon are those of the Department of Commerce. The Department of Justice has certain reservations about the positions we have taken and will express its own views on the subject.

Senator MCCLELLAN. I think we can state unequivocally, then, that the Government as such or the administration as such does not have a policy with respect to this legislation; there is a divided opinion in the administration as to the merits of these amendments?

Mr. LYNN. That is right, Mr. Chairman. The administration has decided that the best contribution it can make to the resolution of these important legislative issues is to share with this committee its analysis of the problems and the points of views which express both the interests of patent holders and general antitrust objectives. The latter will be provided by the Justice Department witnesses.

I will also comment upon the proposed repeal of section 308 of the recently enacted Clean Air Act of 1970. Our written statement, as I have said, will cover S. 1255 relating to patent and trademark fees and S. 1252 covering the right to priority with respect to inventors' certificates.

The Department's views on S. 643 and amendments Nos. 23 and 24 thereto are contained in a letter of comment which is appended to my statement. The comments I shall make here this afternoon summarize the views we have put forth in that letter.

Amendments Nos. 23 and 24 clarify the licensable nature of the patent grant, establish equitable rules governing the right of licensees and assignors to contest patent validity and continue the traditional right, put in question by recent court decisions, of States to protect know-how and trade secrets and provide remedies against unfair competition.

Our patent system was established with the recognition that substantial rewards and protection must be provided to encourage exploration, research and development, to encourage the disclosure and publication of new technology, to encourage the development of new inventions and to encourage the often substantial investments needed to bring the fruits of these labors to the marketplace for the common good. It is these incentives that, in turn, encourage businesses to compete in efforts to develop and utilize new technology. The maintenance of technological superiority is crucial to our status as the world's major trading power. And dilution in the incentives to invent and commercialize new inventions can be translated into a decline in our export trade and the substitution of foreign-origin products for those of American industry. Moreover, maintenance and encouragement of research and development is a vital factor in increased productivity. In turn, increased productivity is the vital factor in increased real income.

The Congress in recent years has conducted studies of the patent system, including some 30 studies between 1955 and 1962 under the auspices of the Subcommittee on Patents, Trademarks, and Copyrights of your committee. In 1966, the President's Commission on the Patent System recommended a number of far-reaching changes, many of which are reflected in S. 643 and the Scott amendments. The Department considers that with certain modifications we will discuss, the Scott amendments provide a desirable revision of the patent laws and we strongly support their enactment with such modifications.

62-614-71-pt. 1-16

1. LICENSES AND OTHER TRANSFERS OF PATENT RIGHTS

The patent and antitrust laws are both critically important to the American economic system. It has always been understood that the strong but limited and temporary monopoly accorded inventors under the patent laws serves this system by encouraging the development and exploitation of inventions and the bringing of the benefits thereof to the public. The creation and utilization of new inventions almost always demands risk capital, which will not be available unless patent rights are guaranteed to inventors and investors alike with clarity and certainty.

The freedom and certainty that a patent owner will have in licensing or otherwise transferring his patent is critical to the functioning of the patent system. The greater this freedom and certainty, the greater the incentives to invent and to invest in the commercialization of new inventions and to license others to use the new technology.

Also at issue is whether the validity of particular, commonplace licensing practices ought to be subject to further uncertainties, or whether a statutory clarification of the rights of patent owners is appropriate. In recent years, the patentee's rights under the law have been made uncertain through a series of attacks on wellestablished licensing practices.

Since enactment of the Sherman and Clayton acts there has existed a natural tension between the patent monopoly which is grounded in the Constitution and the antitrust laws which are the product of congressional action regulating commerce. In 1955, a half-century of legal precedents in the patent/antitrust area was summarized in the Report of the Attorney General's National Committee to Study the Antitrust Laws. That report is an acknowledged landmark. It recognized as law and endorsed the correctness of positions, including the rule of reason, that are entirely consistent with the legislative proposals we make in our letter.

Since 1955, however, there have been continuing judicial inroads, through case-by-case "development," on the freedom of patent owners. This movement resulted in the 1966 Report of the President's Commission on the Patent System. This Commission consisted of a bipartisan group of researchers, inventors, academicians, businessmen, and attorneys, with only two of the 14 members coming from the patent bar.

The President's Commission on the Patent System, recommendation XXII, proposed the amendment of the patent laws to clarify certain aspects of the licensable nature of patents. Recommendation XXII recognized that uncertainty had been created as to the legality of common licensing practices and that patentees had become chary of licensing their patents at all. The Commission recommended that field of use licensing and the traditional rule of reason (as recommended hereinafter) should be given statutory recognition in the patent code.

The further erosion of patent rights in the courts since that time has made clarification imperative. There has been little discussion until recently as to the precise form that any clarification should take.

This Department, recognizing the urgency of a statutory clarification to afford some certainty for patent owners without impairing the effectiveness of either the patent or antitrust laws, recommends amendments to sections 261 and 271 of S. 643. With some exceptions, these recommendations correspond to amendments Nos. 23 and 24 to S. 643, introduced by Senator Scott. We are in general agreement with the Scott amendments, but prefer our recommendations for reasons I shall hereinafter discuss.

While we know of no studies that show, with mathematical certainty, the significance of the licensing practices at issue, or the adverse economic impact of the recently generated uncertainties in the law, we believe that what is known supports our view that these practices and developments are important to the value of the patent grant.

2. LICENSEE AND ASSIGNOR ESTOPPEL

A patent confers on the patent owner the right to exclude others. from making, using, or selling his invention for a period presently established at 17 years. A person who infringes the patent by practicing the invention without the patentee's permission may be enjoined or sued for damages, or both. When a patentee licenses his patent, he is in effect agreeing not to exercise his right to exclude the licensee from practicing the invention, in exchange for legal consideration from the licensee, usually by the payment of royalties. Occasionally, a licensee decides for one reason or another that his license is a bad bargain and attempts to void it by asserting in court that the licensed patent is invalid. Courts, in upholding rights and obligations under patent licenses, have historically, under the doctrine of licensee estoppel, prohibited attacks by a licensee on the validity of the licensed patent.

A related doctrine is that of assignor estoppel. Assignor estoppel comes into consideration when a patentee, after selling his patent to another, attempts to practice the invention and avoid infringement by asserting that the patent is invalid.

The recent Supreme Court decision in Lear, Inc. v. Adkins, 395 U.S. 653 (1969), overruled a host of earlier cases and held that a licensee is not estopped from challenging the validity of a patent under which he is licensed. This decision is generally thought to have completely overruled the long-standing doctrines of licensee and assignor estoppel. In our view, legislative modification of the Lear decision is necessary in the interest of both fairness and encouragement of transfers of patent rights.

The unfairness results because a licensee may refuse to pay agreed-upon patent royalties while enjoying immunity from injunction as an infringer because of his status as a licensee.

Although the moderating influence of the estoppel doctrine discouraged such practices by licensees before Lear, it is already becoming common practice for would-be infringers to accept the shield of a patent license and then challenge the validity of a patent.

In order to eliminate the unfairness of the Lear case, we have drafted a new provision which is set forth, with supporting reasons, at pages 27 through 30 of our letter.

3. RULE OF REASON

Amendment No. 24 would codify a "rule of reason" for determining the legality of agreements transferring patent rights. A revised version of a similar rule that we endorse is set forth at pages 30-31 of our letter.

Our rule would not change existing decisional law, but it would settle uncertainties that have been created by the writings of numer

ous commentators.

There are a number of licensing practices in common use today; e.g., package licenses, various kinds of royalty arrangements, and patent pools, about which doubts exist as to their enforceability in light of the patent misuse doctrine. In our opinion, a rule of reason should be adopted in judging the propriety of these and other commercial practices. Each licensing situation should be judged on its merits in light of all the surrounding circumstances in determining whether or not the license in question goes beyond the reasonable reward a patentee may receive for his patent. Also, the legality of yet untested practices should be judged in accordance with a rule of reason.

This proposal is supported by the leading case of United States v. General Electric Co., 272 U.S. 476 (1926), and the later decided cases, and by both the 1955 Attorney General's Report and the 1966 Report of the President's Commission.

Our provision takes into account a number of exceptions to the rule of reason, thereby continuing the prevalent line of judicial reasoning as to these enumerated exceptions. The fact that these exceptions are excluded from consideration under the standard of our proposed subsection does not automatically make them per se illegal. Rather, they would be treated as if no patent exists. Therefore, they would retain their present legal status under court decisions. We point out that none of the five licensing practices enumerated as falling outside the rule of reason we propose are now judicially condemned as per se illegal.

4. ROYALTIES

Amendment No. 24 relates to the legality of various royalty and payment provisions. Somewhat different language that we support can be found at pages 33-34 of our letter.

Royalty and payment provisions are the subject of proposed section 271 (i). Provisions of this kind have been closely examined by courts, and a considerable body of law has developed around their legality or illegality. Our proposed section identifies commonly used royalty or pricing practices which, standing alone, parties should be able to include in patent licensing agreements. If other factors or circumstances are present in a license, the rule of reason would be applied in considering the legality and enforcibility of the license."

The specific applications of the proposed provision, and the existing case law are discussed in detail at pages 34 through 38 of our letter.