In accordance with my proposal with regard to Patent Office пnancing, the third category, namely, "User-Public Services" relates primarily to the examination of patent applications. The benefits derived from the examination of patent applications can be allocated about one-half to patent applicants and about one-half to the public in general on the basis that it is probably equally beneficial to both interests to know the scope of patent coverage at the time the patent is granted. For example, it should be noted that certain patent systems of the world operate without any examination. In this connection, I would mention that the French patent system operated for many years without an examination although patents were still granted to applicants under the system. However, several years ago the French Government concluded that examination was in the public interest and an examination system has recently been established in France.

Roughly, I would estimate that the costs of examining patent applications, based on the proposed 1972 budget of the Patent Office, are in the range of about 34 to 38 million dollars per year. Thus, in accordance with my concepts, fees paid by patent applicants and patentees for examination should bring in, in the range of about 17 to 19 million dollars per year. In order to raise this amount of money through patent fees, I would strongly recommend the early institution of deferred patent fees in the United States. Thus, for example, under a system of deferred fees in the United States there could be perhaps a flat $100.00 issue fee payable within three months after the Notice of Allowance was forwarded to the applicant. Thereafter at periods of say 5, 10 and 15 years, after the earliest U.S. filing date claimed by the applicant, deferred fees in the range of about $150, $200 and $250 might be payable. In the case of patents of independent inventors who had not realized any income from their patents at either the five year or the ten year point, such fees could be waived upon providing the Patent Office with an affidavit stating that no income had been realized by the inventor. By patents of independent inventors I am referring to those patents which are unassigned. The sub-committee may recall that similar proposals were presented with regard to maintenance fees at the time of the hearings on the previous patent fee bill in 1964–65. In accordance with my proposal the issue fee would not only not be increased by it in fact would be reduced as compared with the present fee schedule.

Incidentally, I strongly support the concept of having a flat issue fee regardless of what that fee might be. Although, the present fee structure for issue fees which is variable with respect to the number of pages of specification and drawings, has certain advantages in concept, it has proven to be difficult and complicated to administer in practice for both patent applicants and the Patent Office, and should be dropped.

In accordance with my overall proposal for financing Patent Office operations. the Patent Office would then generally recover fees approximating 50% of the cost of the operation of the Patent Office. Consistent with this approach, paragraph E of Section II of S. 1255 should then be revised to change 65% to 50%.

Finally, with respect to S. 1255 I support the concept of providing a uniform term for design patents.

Senator BURDICK. I do not believe we have any questions. Thank you very much.

The committee will be in recess until 10 o'clock tomorrow morning. (Thereupon, at 3:30 p.m., the hearing recessed, to reconvene tomorrow, May 12, 1971, at 10 a.m.)

PATENT LAW REVISION

WEDNESDAY, MAY 12, 1971

U.S. SENATE,

SUBCOMMITTEE ON PATENTS, TRADEMARKS, AND COPYRIGHTS

COMMITTEE ON THE JUDICIARY,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 3302, New Senate Office Building, Senator John L. McClellan (chairman of the subcommittee), presiding.

Present: Senators McClellan (presiding) and Burdick.

Also present: Thomas C. Brennan, chief counsel and Edd N. Williams, Jr., assistant counsel.

Senator MCCLELLAN. The committee will come to order. Our first witness this morning is Mr. Alan Ward, Director of the Bureau of Competition, Federal Trade Commission.

Mr. BRENNAN. Mr. Ward has a prepared statement which he wishes to file for the record and will summarize his testimony.

Senator MCCLELLAN. All right, Mr. Ward, your statement will be printed in full in the record and you may summarize it if you like. Let's see how many witnesses we have this morning.

Do you have an associate with you? You may identify him for the record.

STATEMENT OF ALAN WARD, DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION, ACCOMPANIED BY ALAN RANSOM

Mr. WARD. Thank you.

My associate is Alan Ransom, Trial Attorney in the Bureau of Competition, Federal Trade Commission.

I appreciate the opportunity to appear before the Committee this morning and present the Federal Trade Commission's views on amendments 23 and 24 to S. 643.

I have a prepared statement which I am not going to read at this time, I am just going to summarize some of the more important points.

The basic position of the Commission is opposition to the proposed amendments. The Federal Trade Commission, as you know, has a considerable interest in this sort of proposal. We share with the Justice Department the responsibility for enforcement of the antitrust laws. In addition, the Commission has a broad mandate to prevent unfair commercial practices which restrict competition or injure consumers.

Like the Justice Department, the Commission has a background of experience with patent antitrust laws. Our investigations and cases have frequently dealt with patent licensing and enforcement and Commission decisions have on occasions involved the accommodation of patent and antitrust laws.

We oppose the proposed amendments or similar legislation because we believe such proposals are contrary to the public interest. Taken as a whole, we believe the proposals will encourage unnecessarily broad anticompetitive arrangements and will tend inevitably to higher consumer prices.

The arguments for legislation do not show any real need to accept such consequences to encourage invention. The general state of our technology indicates the contrary.

We understand that the proposals are basically supported on the argument that there is a direct causal relation between the magnitude of the revenue captured by the patent holder and the quantity and quality of invention. Freedom for the patentee to enter into restrictive arrangements, according to this argument, will increase his revenue and spur inventive efforts. Many students of the patent system believe, however, as Commission Jones of the Federal Trade Commission noted in a recent speech, that there is very little evidence that increasing rewards to patentees beyond the considerable rewards already received, would add significantly to our technological progress. What does seem clear, however, is that any significant modifications of the current antitrust restrictions on the use of patents to monopolize industrial markets would impose a staggering cost on the consuming public.

The Federal Trade Commission views the law as evolving in the highly desirable direction of recognizing the rights which holders of patents have to fully exploit their patent grants but preventing misuse or extensions of the patent grants to destroy competition or to monopolize. Any interruption with this basically satisfactory evolution of the law we regard as a mistake.

I understand that the position taken by the proponents of the legislation is that it will not overrule the long line of antitrust cases which have dealt with patent antitrust problems but will merely codify what is the present state of the law.

I think the difficulty with accepting that approach to this legislation, and the reason why the Commission's opposition to the proposal is not based on draftmanship, is that the proposed language would make certain restrictions lawful. For commercially complex patent relationships, which have a direct and important bearing on vital private and public interests, specifying what is and shall remain lawful under all circumstances is a very difficult task. In our view there is no reason for Congress to try to do this for patent licensing.

The primary proposals deal with the rule of reason. Our comments on what we believe the current status of the law of rule of reason is adequately covered in our written statement. All I would add to this is that when there is in fact a broad range of alternatives open to a patentee who is going to be licensing his patent, how he licenses the patent will necessarily be measured against an objective standard of reasonableness under the current law and not against the patentee's subjective view, and it must obviously include matters other than the

profitability of the arrangement to the patentee or some elements of what he regards as the pressures that make him enter into a certain arrangement.

Our position is not that per se illegality should be expanded. We believe that the rule of reason applies in the patent field and we urge the committee to consider that test as an objective test. Any phrasing of that test should not ignore the competitive impact of the alternatives that are open to the patentee.

I believe there is not much serious argument that patent-based price fixing or market division will receive congressional or judicial blessing. The uncertain impact of these amendments will make it inevitable, however, that the broadest construction of the provisions will be urged and that there will be more, not less, uncertainty in establishing valid patent licensing systems.

With respect to field-of-use licensing, it is very difficult to see how provisions of this sort will increase the certainty of what can be done in licensing part but not all of a patent grant. At present the law makes it clear that there are no per se prohibitions on field-of-use licensing. I think that is generally conceded by those who propose the legislation as well as those who are opposed to it. There may be good reasons for field-of-use licensing, and so far as I am aware there is no broad general opposition to that type of licensing practice.

It is also true, however, that through the years the experience of the courts suggests that this type of licensing has in fact been used to extend the patent monopoly beyond the scope of its intended grant and to permit restrictions on competitive opportunities in industrial fields. The court litigation has developed standards for determining those disagreements which are in accord, I think, with both the patent and antitrust laws.

The royalty proposals in our view would introduce considerable uncertainty in a field where certainty is of great value not only to the patentees but to the licensees and to the consuming public.

The difficulty with the several proposals that are contained in the amendment 24 is that their interpretation seems to run counter-I think that this is obvious from any review of the proposal-their interpretation seems to run counter to a great many decided antitrust cases. If that is the interpretation that can be put on these amendments, and if that is in fact not the intent of the proponents of the legislation, it seems that the net effect of the legislation will be to engender uncertainty in an area where there will always be enough uncertainty.

Senator MCCLELLAN. In other words, what you are saying is if that is not the intent of them, then they are not needed?

Mr. WARD. That is right.

Senator MCCLELLAN. I am not taking sides at the moment. It seems that was the thrust of your statement.

Mr. WARD. I think that certainly the statements that have been introduced that I am aware of suggest that there is no intent to overrule the antitrust cases on coercive package licensing or extending the term of the monopoly grant beyond the period that the statute provides, and yet there are provisions, as our written statement makes clear, that are open to that interpretation.

It is the nature of litigation that the broadest possible construction

of legislation will be urged and such interpretations will be urged on the court regardless of the statements that have now been introduced in support of the legislation. The broadest construction of the amendments will be urged if they are passed, and there will be a period of time before the principles of the old cases are reaffirmed when there will be great uncertainty as to what is in fact a lawful licensing arrangement.

The one case that I would comment specifically on in connection with the royalty provisions is the Shrimp Peelers case, which is not a Supreme Court case. There is a suggestion in the proponents' material that the Shrimp Peelers case should be overruled on the ground that it would require uniform royalties. This is a Trade Commission case. It dealt with discriminatory royalties which were imposed by the patentee who was a Gulf Coast shrimp canner that discriminated against shrimp canners on the west coast and had the effect of destroying or severely injuring the west coast canner's business. Under those conditions and on the basis of a rejection of the justifications that were offered for those discriminatory royalty provisions, the Commission held that the discrimination was unlawful. But there was nothing in the Commission's opinion and nothing in the opinion of the courts, the reviewing court of the Commission decision or the treble damage court on the west coast, that implies or holds that uniform royalties are required.

So far as I know there is no statement by any enforcement agency which urges that all royalties should be uniform, and in the face of that I fail to see that legislative correction of the Shrimp Peelers case is warranted.

I come now to the question of licensee estoppel and would like to just briefly comment on the proposition that the Lear case, which is the central case in this controversy, came as a distinct and sharp break with the past current of judicial interpretation.

This was a subject that was discussed at a meeting of the American Bar Association meeting in Dallas in 1969. Professor Handler, who is an outstanding teacher of antitrust law as well as an outstanding antitrust lawyer, made this comment about the estoppel concept which Lear overruled. He said, "The estoppel concept had been so emasculated by a series of exceptions that its explicit obliteration comes as no surprise to the patent and antitrust bars." The erosion process began with a case decided in 1924. It continued through cases that were decided in the early and midforties, and by the time Lear was decided the doctrine of licensee estoppel according to Mr. Justice Harlan was pretty much a a dead letter.

Now, the other proposition is that it is unfair for one who has a benefit to repudiate it to take advantage of the patentee, and I think that that specific principle is one that we can support. But at the very same time that Mr. Handler made his remarks on the Lear decision, he pointed out what was his interpretation of the effect Lear would have. He said the licensee who decides to cross the Rubicon, that is, to challenge the validity of the patent, assumes the risk if his claims of invalidity are judicially rejected, he may thereafter be precluded from practicing the invention.

That, of course, is only one lawyer's interpretation but it certainly seems to be one that fits within the principle of Lear and I know of