A second major issue to be explored during these hearings is whether it is necessary to make any modification in the traditional functioning of the patent system in order to advance the national commitment of improving the quality of the environment. It may be that conditions do exist, or will develop in the future, that will warrant some adjustment of the patent laws. However, such alterations should only occur after careful study and adequate hearings. Unfortunately, this did not occur during the consideration of the Clean Air Amendments Act of 1970. Sweeping and unprecedented provisions relating to the compulsory licensing of patents and trade secrets were added to that legislation without any notice or hearings and without consultation with this subcommittee. I did not seek to have that bill referred to the Judiciary Committee because of the overriding public interest in early enactment of the clean air legislation. I appreciate the position taken by those members of the Public Works Committee who subsequently indicated that it was a mistake to have included such provisions without a review by this subcommittee. I am advised by the staff that no one has expressed a desire to testify in support of the retention of section 308 of the Clean Air Act, but that many statements have been received urging its repeal on the grounds that it is unsound and unnecessary.

The third major issue to be considered in these hearings is the adjustment of patent fees. After protracted study the Congress determined in 1965 that the Patent Office should recover about twothirds of its operating costs through the payment of fees. The recovery in fees has now dropped to approximately 50 percent. In order to provide a basis for these hearings, I introduced S. 1255 which retains the structure of the existing fee schedule but increases most fees to produce the rate of recovery previously desired by the Congress and the executive branch. I am not committed to any particular formula, but it is my view that the taxpayers should not be required to support more than one-third of the costs of the Patent Office.

Senator Fong, any statement?

Senator FONG. I have no statement, Mr. Chairman. I am very happy that you have called this meeting on these bills. Thank you. Senator MCCLELLAN. I note Senator Scott has arrived.

Senator, we opened the hearings and I have made an opening statement.

Senator SCOTT. Mr. Chairman, I appreciate this and I do want to say to those who are here as witnesses that I would appreciate their indulgence as I am caught between the opening of the Senate and the meeting of another committee. I will be very brief because we have made great strides in the fields of technology and science in recent years. I may say that I will simply read my statement and ask the Chairman's approval to submit a number of attachments and enclosures after I have finished.

Senator MCCLELLAN. All of the documents and materials submitted will be made part of the record at the end of the Senator's statement. Senator SCOTT. I thank the chairman.

The United States has made great strides in the fields of technology and science in recent years. Much of the credit for these advances must be given to the American patent system which has stimulated and encouraged innovation and invention. To insure that the patent system continues to play this vital role, it is necessary to periodically revise and update the patent laws.

It is my privilege to serve on this subcommittee and to work with the Chairman and other members of the subcommittee to bring about needed revision in our patent laws.

During the last Congress, I introduced two amendments to the then-pending patent revision bill. I reintroduced these amendments, the so-called Scott amendments, on March 19 of this year.

I noted during the last Congress that I was introducing these amendments so that they might appropriately be the subject of wide discussion and debate by all interested parties. I was not wed then, nor am I wed now, to the specific language set out in my amendments. I am, however, in full accord with the general thrust and purpose of these amendments. I, therefore, reintroduced these two amendments with the hope that a chance for full congressional consideration and action will be enhanced by the early date of their reintroduction. I am, therefore, very pleased that Senator McClellan is holding these hearings.

Although I will submit substantial explanatory and supporting data at the conclusion of my remarks for the hearing record, I am taking this opportunity to briefly explain the purpose of my amendments.

The amendment (No. 23) proposed to section 301 is intended to make it clear that the patent laws shall not be construed to preempt the right of the courts under State or Federal law to decide issues with respect to enforcement of contracts involving rights to intellectual property such as trade secrets, technical know-how, and unfair competition.

The amendment (No. 24) proposed to sections 261 and 271 deals with patent license provisions and is intended primarily to implement recommendation XXII of the report of the President's Commission on the Patent System.

I believe these amendments address themselves to extremely important questions in the patent law field. There is merit to their underlying principles. It is for this reason that I proposed them to S. 643. However, I harbor no pride of authorship in the specific language and stand ready to examine alternative approaches to meet the needs to which my amendments are addressed. It is my hope, however, that these amendments will serve to further stimulate thought and discussion on the action needed in these important areas.

For purposes of background and clarification, it should be noted that the General Patent Revision bill introduced in the 91st Congress was S. 2756 and is identical to the current bill, S. 643, in all areas affected by the Scott amendments. My amendment No. 23 to S. 643 is identical to my amendment No. 579 to S. 2756. My amendment No. 24 to S. 643 is identical to my amendment No. 578 to S. 2756.

In order to further illuminate the need for these amendments, I ask unanimous consent that the following materials, which I inserted

in the Congressional Record when I introduced these amendments in the 91st Congress, be printed at the conclusion of my remarks: Detailed explanations of the amendments to sections 261 and 271; a detailed explanation of the amendment to section 301; that section of the Report of the President's Commission on the Patent System dealing with recommendation XXII; a letter from the Honorable Merl Sceales, chairman of the section of Patent, Trademark, and Copyright Law of the American Bar Association, discussing recommendation XXII; a letter from the Honorable Philip G. Cooper, president of the Philadelphia Patent Law Association, discussing recommendation XXII; a lengthy memorandum prepared by the American Patent Law Association "on the need for legislative clarification of the law relating to patent license provisions"-summary and full memorandum.

In addition, I request that the following articles dealing with amendment No. 23 be made part of the hearing record: "A Philosophy on the Protections Afforded by Patent, Trademark, Copyright, and Unfair Competition Law: The Sources and Nature of Product Simulation Law," by Tom Arnold, reprinted from The Trademark Reporter: "Painton v. Bourns, The Progeny of Lear v. Adkins: A Commentary on Know-how Law and Practice," by Tom Arnold and Jack Goldstein in Trade Secrets Today, Practising Law Institute; "Life Under Lear," by Tom Arnold and Jack Goldstein, Texas Law Review, November 1970, vol. 48, No. 7.

I thank you very much, Mr. Chairman. (Material referred to follows:)

[From the Congressional Record]

RE SECTIONS 261 AND 271 (RECOMMENDATION XXII)

The amendments proposed to Sections 261 and 271 of S. 2756 are intended primarily to implement Recommendation XXII of the Report of the President's Commission on the Patent System. The net effect of those amendments, with regard to patents or applications for patent, would be to:

A. Re-arrange Section 261 (b) to make clear, in the first paragraph, a patent (or a patent application) owner's right to assign or license his patent (or application) exclusively, and in the second paragraph to limit the license to: (1) specified fields of use covered by the patent (or application), (2) specified geographical territories, (3) exclusive or non-exclusive practice of the invention, and/or (4) any desired number of licenses as he may please.

B. Add new subparagraph 261(e) so as to specify that an assignor cannot challenge the validity of the patent he has assigned unless he first returns the price paid and bases his attack on grounds not available at the time of the assignment.

C. Add a new subparagraph 261(f) to stipulate that no party to a license can contest validity of a licensed patent unless he (1) first surrenders all future benefits and (2) then or thereafter settles all past obligations due under the license.

D. Add new Section 271(f) and 271(g) to provide a statutory basis for the following licensing practices, as follows:

(f) (1) the granting or prohibiting of certain fields of use of the (patented) invention, and permitting or prohibiting one or more of the primary functions of the patent, namely the right to exclude others from making, using or selling the (patented) invention.

(2) the granting of a license which contains a provision excluding or restricting any conduct reasonable under the circumstances.

(g) (1) the granting of non-exclusive cross licenses and the granting of a license containing a provision requiring the grant back of a non-exclusive license under improvements on the licensed invention.

(2) the granting of a license which requires a royalty fee or price:

(i) of any amount, however paid, on any desired royalty base;

(ii) computed on any basis convenient to the parties;

(iii) covers a single patent or a single package consisting of a multiple number of patents; or

(iv) which differs from that agreed to with other parties.

Section 271(f) (1) would make it just as legal to license less than all of the right to exclude others from making, using and selling the subject matter patented (35 USC 154) as it is to license the entirety of the right. It would assure continued freedom of the patent owner to license for a term less than the remaining term of the patent, license to make and use without licensing sale, license to make use and sell in specified sizes or for specified purposes or fields, etc.

The Supreme Court sustained a limited field license in General Talking Pictures v. Western Electric Co., Inc., 305 U.S. 124 (1938). Other decisions on the subject are collected in Oppenheim, Federal Antitrust Laws (1968), pp. 706-8. In Atlas Imperial Diesel Engine Co. v. Lanova Corporation, 79 Fed. Supp. 1002 (D. Del., 1948), the court sustained a license to a patent to engines which was limited to a specified maximum size.

Limited licenses have, at least until recently, been considered legal in the same respect as unlimited licenses. They are useful in many situations. For example, the Government takes at least a license to make, have made, and use for Government purposes in connection with inventions made during the course of Government financed research. Many antitrust decrees provide for compulsory licenses under all the patents of the defendant for certain limited purposes such as "to make use and vend lamps, lamp parts or lamp machinery". U.S. v. General Electric Co., 115 F.Supp. 835, 848 (D.N.J., 1953).

Under the proposed statute there would be no inquiry as to the "reasonableness" of the particular portion of the total patent right to exclude that is offered for license or is licensed-any more than there is inquiry as to the "reasonableness" of the price a patent owner proposes to charge or charges for a license or whether a refusal to license at all is "reasonable".

The proposed language would not make legal those contracts or combinations that go beyond the grant of a limited license and restrain trade. Conduct such as occurred in Hartford-Empire Co. v. U.S., 323 U.S. 386 (1945), where limited licenses were part of an overall combination to restrain trade, would continue to be illegal.

Section 271(f) (2) would continue the right of the patentee to include in licenses such reasonable terms as are necessary to secure the full benefit of the invention and patent grant. For example, 35 USC 287 provides for a limitation on recoverable damages for patent infringement unless certain notice is on the patented articles. Under the proposed language a license requirement to this end would be legal. Similarly, a common form of license royalty is a percentage of the sales price. To secure the full benefit of the invention and patent grant with such license arrangement, the patentee should be entitled to receive necessary data as to what is sold by the licensee so as to determine that the royalties are correctly paid. The proposed language would assure that such provisions are free from challenge under the antitrust or any other laws.

The proposed language would not legalize agreement provisions that are not reasonable to secure the patent owner the full benefit of the invention and patent grant. For example, it would still be improper for a license to require that the licensee abstain from making or selling products that compete with the patented product. See National Lockwasher Co. v. George K. Garrett Co., 137 F(2d) 255 (3d Cir., 1943). Also, limitations on the patentee, such as occurred in United States v. Besser, 96 Fed. Supn. 304 (F.D. Mich., 1951) (Aff’d. 343 U.S. 444 (1952)) and United States v. Krasnov, 143 Fed. Supp. 184 (E. D. Pa.. 1956) (aff'd. 355 U.S. 5 (1957)), do not secure to the patent owner the full benefit of his invention and patent right in a reasonable manner and would continue to be invalid.

Section 271(g) deals with a number of common arrangements that up to now have been considered generally legal but have been recently questioned to at least some degree.

Paragraph (g) (2) (i) continues the present law that the amount of royalties a nonexclusive license back. If the patentee is to grant a license it is only equitable that the licensee be prepared to reciprocate. This consideration had

led the courts to approve nonexclusive grantbacks even in antitrust decrees rendered after proven violations of the Sherman Act. See, e.g., United States v. National Lead, 332 U.S. 319, 359 (1947).

Paragraph (g) (2) (i) continues the present law that the amount of royalties is purely a matter of private bargaining. In American Photocopy v. Rovico, Inc., 359 F (2d) 745 (7th Cir., 19), the court held, in overruling a preliminary injunction, that excessive royalties were a patent misuse and antitrust violation. After trial on the merits it was concluded that there was no misuse. 257 Fed. Supp. 192 (N.D. Ill., 1966) and 384 F(2d) 812 (7th Cir., 1967.) While the effects of this decision are now largely dissipated, it is believed appropriate to have a statutory provision that will avoid future such holdings.

Paragraph (g) (2) (ii) continues the present law that consideration need not be measured by the extent of use of the patented invention. Minimum royalties, for example, are a proper nad very useful way to handle license fees. Although such royalties were specifically held valid in Automatic Radio Mfg. Co. v. Hazeltine Research, 339 U.S. 827 (1950), questions have been raised and the matter is believed best clarified by statute.

Paragraph (g) (2) (iii) makes it clear that the principle of paragraph (g) (2) (ii) applies to the analogous case where an arrangement involves a plurality of patents or patent claims and the royalty charge is not segregated as to any particular patent or patent claim.

Paragraph (g) (2) (iv) deals with differing royalty fees or purchase price figures. In LaPeyre v. FTC, 366 F(2d) 117 (5th Cir., 1966), and a number of other cases involving the same facts, dissimilar royalty rates were found to offend Section 5 of the Federal Trade Commission Act or the Sherman Act. These cases rest on an exceptional fact situation not likely to be repeated. Paragraph (g) (2) (iv) would make certain that the LaPeyre and companion cases are limited to their particular facts. A patent owner is not and should not be in the position of a public utility. The Congress has consistently and properly refused to enact compulsory licensing statutes. An endless number of considerations affect the royalty rate or purchase price to be arrived at as a matter of private bargaining, including the particular field of use by the licensee, the licensee's sales volume, the extent the licensee grants a license back, and many others. Paragraph (g) (2) (iv) assures that this bargaining can continue.

RE SECTION 301

There is at present in S. 2756 a Section 301 which sets forth the traditional provisions that the Federal patent laws do not preempt contractual or other rights or obligations not in the nature of patent rights, imposed by State or Federal law on particular parties in connection with inventions or discoveries, whether or not subject to the Federal patent statutes. In view of recent judicial decisions which cast a shadow of doubt on the propriety of entering into contracts for the protection of trade secrets, technical know-how, and the like, and which suggest that such private contracts are preempted by the patent laws, it is recommended that this point be legislatively clarified by rewording Section 301 along the following lines:

This title shall not be construed to preempt, or otherwise affect in any manner, rights or obligations not expressly arising by operation of this title whether arising by operation of state or federal law of contracts, of confidential or proprietary information, or trade secrets, of unfair competition or of other nature.

In the absence of such a provision in the statutes it may be presumed that any body of technical knowledge, which by its very nature normally would constitute patentable subject matter, would be subject to application of the federal patent laws. But this would be unfair and unreasonable if the subject matter consisted of information that is available in the prior art or which, no matter how valuable it may be commercially, lacks the element of unobviousness required for it to be eligible for patent protection (e.g. a literature study to determine from the prior art the best process route to a certain item of manufacture, and a plant design based thereon: a computer program based upon preexisting know-how; exact product simulation of form, color, size, etc.). In the absence of protection for such subject matter in the patent laws there is, nonetheless, a critical need for protection that should be avail