a patentee to agree with his licensee that he would not, without the licensee's consent, grant further licenses to any other person.* The proposed amendment to create a new § 271 (f) (1) might be construed to make explicit and to implement what is implicit in the proposed amendment to § 261 (b), as just discussed. The Department of Justice strongly opposes enactment of these two sections. Extension of the Patent Monopoly.-Section 271(g). Specific amendments dealing with the right to license and exact royalties (found mainly in proposed § 271 (g)) might be construed to permit an extension of the patent monopoly beyond that statutorily granted-both in time and in technology covered. These, too, we oppose. Subsection (1) of the proposed amendment might make legal all non-exclusive exchanges of patent rights, however concentrated the markets involved or however discriminatory the conduct of the exchanging firms might be. To preclude an examination of the effect or overall purpose of such a non-exclusive exchange runs counter to the thrust of antitrust analysis, which stresses effect rather than form. Subsection (2) of the proposed amendment could be construed to sanction, without qualification, package licensing, whether or not coerced; exaction of royalties not based on any patented subject matter; extension of the patent monopoly beyond the patent's expiration date; and discriminatory royalties, regardless of anticompetitive intent or effect. The first proposal in this subsection would authorize any royalty in "any amount, however paid," except for royalties based on activities after a patent has expired. No court has ever suggested that any royalty was illegal-whatever its size-except in a single case where the court originally thought the effect of an excessive royalty was the equivalent of resale price maintenance; thus, no amendment is needed to protect excessive royalties that are not being used as a means of furthering some other antitrust abuse. In addition, this proposal does not purport to overrule the doctrine that post-expiration royalties are illegal. Under present law collection of royalties after a patent expires is not illegal, if the royalties clearly relate to pre-expiration use; the crucial question is when post-expiration collection is based on pre-expiration activity. The proposed amendment will only add confusion here by its very existence. The second proposal would authorize collection of royalties "not measured by the subject matter of the patent." This obscure language is capable of being interpreted as making legitimate royalties that are based on the use of unpatented supplies or on the total sales of patented and unpatented products made by the licensee. The courts have condemned such practices, and I believe rightly so, when they were used as instruments of oppression or coercion, or used to create tie-ins, to deter competition with the patented product or process involved, to collect royalties for post-expiration use, when they are coerced, or when they otherwise injure competition in products beyond the scope of the patented invention. Proponents of these amendments have claimed that these practices would continue to be held illegal, and, therefore, we believe the proposed amendment to be unnecessary and confusing. We therefore favor retention of the present law and oppose adoption of the proposed amendment. The third proposal in this subsection suggests that royalties are not illegal simply because they are not segregated by patent or claim. Here, again, the courts have condemned such arrangements only when used coercively to create tie-ins, or to exact post-expiration royalties; so the amendment is unnecessary and confusing. The fourth proposal suggests that royalties may not be illegal solely because they differ from those provided in some other arrangement. The courts have not held that differing royalties always constitute discrimination, nor have they held that where discriminatory royalties exist they are always illegal. The courts have held that royalty discriminations which are predatorily motivated or which monopolistically restrain competition in other markets are illegal, and it is unclear whether the proposed amendment would change these rules. The proposal is thus unnecessary, and if adopted might result in needless confusion and useless litigation. See e.g., United States v. Krasnov, 143 F. Supp. 184 (E.D. Pa. 1956), aff'd per Curiam, 855 U.S. 5 (1957), and United States v. Besser Mfg. Co., 96 F. Supp. 304 (E.D. Mich. 1951), aff'd, 343 U.S. 444 (1952). Challenging Patent Validity.-Sections 271(e) and (f). Proposed §§ 271(e) and (f) would impose limitations upon the ability of a licensee to challenge the validity of a patent under which he is licensed. Such challenges have been permitted since the Supreme Court finally abolished the doctrine of "Licensee estoppel" in Lear, Inc. v. Adkins, 395 U.S. 693 (1969). We recognize that unfairness to patentees could result if the courts should extend Lear-which we do not believe they will-and hold that a patent licensee may continue to enjoy the full benefits of a patent license while at the same time challenging the patent's validity. On the other hand, as pointed out by Lear, licensees may often be the only persons having enough economic incentive to challenge a patent and thus protect the public from the burden of an invalid patent. We also recognize that patent validity litigation could be disrupted because, under Lear, the validity of patents may apparently be challenged in state court actions brought by licensors for royalties owing to them. Patent validity should be litigated exclusively in the federal courts. Accordingly, although we oppose subsections (e) and (f) as presently formulated, we would be prepared to support a provision which would make it clear that nothing inheres in the law of patent conveyancing which negates the usual state contract rules dealing with such matters as repudiation, anticipatory breach, failure of consideration, and the like. Similarly, we would support a provision that, when the validity of a patent is challenged in an action brought in a state court, the action may be removed to an appropriate federal forum. We have prepared suggested language which we think is appropriate language to effect these results. A copy has been furnished to the reporter, and the Chairman may wish to have it inserted in the record at this point. Finally, it has been proposed by some that an agreement not to contest the validity of a licensed claim or patent should not be a basis for a finding of misuse or illegal extension of the patent grant. Such a proposal would be directly contrary to the Seventh Circuit decision in Bendix v. Balax, 421 F.2d 809 (1970). There, the court remanded for trial the defendant's antitrust counterclaim based upon a license provision prohibiting licensees from ever asserting the invalidity of the licensed patent, and thereby foreclosing a competitor (the defendant) from supplying the market. On remand, the district court found that the effect of this provision had been to foreclose the market and that, therefore, it violated the antitrust laws. We believe that agreements not to challenge the validity of patents can be used to insulate invalid patents from public ventilation. Collusion of this type in the past has led to frauds upon the Patent Office and the consuming public. We therefore oppose any proposal to immunize such agreements from the antitrust laws. AMENDMENT NO. 23 Both amendment No. 23 and Section 301 of S. 643 provide, in effect, that the Patent Code shall not be construed to pre-empt or otherwise affect in any way various types of state laws that deal with the protection of intellectual property or technology. Both versions of this provision would be said to draw into question Supreme Court holdings that state unfair competition doctrines cannot support a claim of the exclusive right to unpatentable or unpatented goods.* Depending on what rights are thought to be "not in the nature of patent rights", the proposal may well be unconstitutional as exceeding the limited circumstances in which a grant of exclusive right is authorized by the Patent and Copyright Clause. The proposed statute would in any event permit, if not encourage, developments inconsistent with the substantive policies recognized in many years of well-reasoned lower court decisions. In the Sears-Comco cases, the Supreme Court stated that the states could not prohibit non-deceptive copying but could require labelling to prevent deception of purchasers as to the source of goods. Neither Sears nor Compco involved trade secrets or know-how. Lear did involve trade secrets and know-how, and the Supreme Court specifically declined to consider the issue, due to its "difficulty and importance," until the state courts had "after fully focussed inquiry, *Sears, Roebuck & Co. v. Stiffel Co.. 376 U.S. 225 (1964); Compco Corp. v. Day-Brite Lighting. Inc., 376 U.S. 334 (1964). See, to the same effect, Blonder-Tongue Labs, Inc., v. University of Illinois Foundation, (May 3, 1971). U.S. determined the extent to which they will respect the contractual rights of inventors [of unpatented secret ideas] in the future." A single lower court case, decided last year, held that the states have no right to protect unpatented intellectual property (Painton & Co. v. Bourns, Inc., 309 F. Supp. 271 (D.D.N.Y. 1970). This case-quite rightly, we thinkwas reversed on appeal by the Second Circuit on April 27, 1971. Thus, nothing the courts have done in the area of preemption warrants legislative action at this time. Moreover, the Sears-Compco decisions have no effect upon the right of the states to impose labeling and other requirements in order to prevent consumer confusion. They do hold, however, that state law may not set up a local patent system to prevent one company from copying or duplicating unpatented products sold by another company; we believe this holding is correct and one compelled by federal patent policy. Accordingly, we oppose legislation in this area at this time. REPEAL OF MANDATORY LICENSING PROVISISIONS OF CLEAN AIR ACT AMENDMENTS Section 6 of S. 643 would amend section 308 of the Clean Air Act Amendments Act of 1970 by repealing the procedure set forth in that section for the licensing of patents which may be necessary to enable persons to comply with the anti-pollution provisions of that Act. In general, section 308 provides that the Administrator is to advise the Attorney General that the implementation of clean air standards requires a right under a patent which is not reasonably available, that there are no reasonable alternative methods to meet the clean air standards, and that the unavailability of such a right may adversely affect competition. On this basis, the Attorney General may certify the matter to a court, and the court after hearing, may issue an order requiring the patentee to license the patent on reasonable terms and conditions. We believe that these provisions should be retained. Where anti-pollution standards imposed by the Government are such as to require the use of a patented device, the Government has by regulation created a situation in which the patentee's device must be used. It has thus artificially expanded his market beyond that which could be expected from normal competitive conditions. In this situation, we believe that the provisions of section 308 are necessary and contain adequate safeguards to protect the patent owner's legitimate interest. Finally, I would note that many foreign countries, including the United Kingdom, France, Germany and Japan have provisions for compulsory licensing in the public interest. Mr. Chairman, I regret that it has taken me some time to discuss the very important issues which are involved in this bill and the Scott Amendments. Even so, I have not been able to provide the Committee with a detailed legal analysis in support of our positions. I would, therefore, request the opportunity to supplement my testimony by providing the Subcommittee with an appropriate Memorandum of Law. Senator MCCLELLAN. Thank you very much, Mr. McLaren. Mr. STERN. No; Mr. Chairman. Mr. WILSON. No; Mr. Chairman. Senator MCCLELLAN. The Chair will make this announcement: I have a rather heavy schedule and I have to be somewhere else within the next few minutes. I had understood that another Senator, another member of the committee would be here at 3 o'clock to relieve me. So I must go. But in the meantime, we shall simply recess for a few minutes, and when Senator Burdick arrives, he will preside and the hearing will then proceed, possibly to the conclusion of the witnesses scheduled for today. After that, when we adjourn today, we shall be in recess until 10 o'clock in the morning. Off the record. [Discussion off the record.] Senator BURDICK (presiding). The next witness will be Mr. Edward J. Brenner. Mr. BRENNAN. Mr. Brenner, you have a prepared statement. Do you wish to have that filed for the record and just summarize your remarks? STATEMENT OF EDWARD J. BRENNER, U.S. COMMISSIONER OF PATENTS (1964-69) Mr. BRENNER. Yes, sir; I would prefer to have the statement filed for the record and present a summarized statement orally. Senator BURDICK. Your full statement will be printed in the record. Mr. BRENNER. Mr. Chairman, I very much appreciate this opportunity to testify before this subcommittee on what are important matters relating to patent legislation. I would like to testify briefly on the Scott amendments, on the amendments to the clean air bill, and briefly on the Patent Office fees and financing bill. I might say initially that I have been in patent and related activities for approimately 20 years, including having served as U.S. Commissioner of Patents from 1964 to 1969. As a backdrop for my comments on all of these bills, I would like to mention the following matters of national importance which I think are closely related to the matters under discussion. First of all, costs and time for research and development and for commercializing inventions is increasing. Second, our rate of increase of national productivity is decreasing. Third, our balance of payments problem is continuing. Fourth, international competition is increasing. Fifth, inflation continues. And finally, we are faced with a number of problems in the areas of health, safety, environment, housing, and transportation. In my mind, invention and innovation are the key to the future of the United States in all these matters. We must compete on American ingenuity, not really on our labor costs. And finally, incentives are the key to invention and innovation in the United States, such as provided under the patent system and other legal forms of protection of intellectual property. Now, moving on to the amendments introduced by Senator Scott, I strongly support these in principle. I am not committed to the particular wording, and I believe that the wording of these amendments can be improved as a result of these hearings. First of all, I address myself to the proposed amendments to sections 261 and 271, and I would like to comment on two main points: First of all, what is the problem; and second, what is the solution to the problem. The problem in my mind is a process that has been going on for many years, which has resulted in an erosion of incentives through the erosion of values of patent rights and the rights to license patents on a reasonable basis. This is going on in a number of areas. First of all, the process goes on in the courts in the form of a variety of court decisions that have resulted in this erosion. Second, actions and many pronouncements of the Antitrust Division of the Justice Department, as well as, recently, the Federal Trade Commission, are involved in this process. The resultant problem is that there is a tremendous turmoil and uncertainty in this country as to what are the values of patent rights and what you can do with regard to licensing your patents on a reasonable basis. The result is that businessmen cannot plan effectively their research and their commercial activities. The result is that progress of the useful arts, in my mind, is being definitely hindered in many areas. Businessmen would probably speak out more on this particular subject, but I believe they have a fear of being singled out for possible Government action if they speak out too loudly. Senator BURDICK. I wonder if you would elaborate? You said the court decisions. How do they contribute to this confusion? Mr. BRENNER. Well, I shall give you one example, Senator. This is a particular point of law that is not presently involved in the proposed amendments to 261 and 271. It has been held by the courts that it is misuse of your patent to require a customer to buy an unpatented product from you in order to practice a patented invention on which you have a patent. I have had some personal experience in this field of trying to commercialize or utilize patents on that particular subject. The result has been that it has been impossible to develop any interest because of a great deal of difficulty that is involved in licensing certain specific improvements on your products. The result was that I advised my company that they were wasting their time, in effect, in trying to develop new uses of old products because you could not get effective patent coverage, and to divert their efforts in other directions because they were not able to realize a fair return for their efforts. The result was that research was considerably cut back, and I believe that is true in other cases. In my judgment, the purpose of the patent system, and what we should be doing for the country, is providing incentives to do research to bring out improved products, new uses of old products, for the benefit of the country, because these will be either lower priced, or they will be better quality, or there will be new uses of old products. I just mention that as one specific example. As I mentioned, this is not directly involved in 261 or 271. Senator BURDICK. Would the Scott amendments improve or correct that situation? Mr. BRENNER. No; the Scott amendments are not directed to that specific matter of patent law, but they are directed to many other areas which are different aspects of patents and licensing, which I think are in the same situation as far as being eroded further, the result being less incentive to do the invention and innovation that we need in this country. Moving on to the solution to this problem, it seems to me that there are two fields of thought. One is that you could proceed on a case-bycase basis through the Justice Department bringing actions against business and having these settled in the courts. |