is unnecessary. The Second Circuit, to which the case was appealed, overruled that decision on April 27, 1971.3 We recognize that the status of know-how licensing has been left somewhat up in the air in the wake of the questions raised, but not adjudicated, in Lear. It is probably true that know-how and trade secrets can be as significant technologically and competitively as patented invention. Where secret non-patentable innovation of this value is involved, we believe public policy should continue to allow proper incentive for its dissemination on reasonable terms. No case holds to the contrary. No enforcement agency has urged to the contrary. This broad delegation to the states is plainly unnecessary. More seriously, this amendment may be inconsistent with two Supreme Court decisions holding that state unfair competition laws cannot grant exclusive rights to products that do not reach the standard of patentability under the patent laws. Quite apart from the issue of whether in fact the amendment, as drafted, accomplishes this (though that is one possible interpretation) we do not feel it should be done. Sears and Compco stand for the proposition that monopolies are, in our society, the exception rather than the rule. A patent is a monopoly granted by the Federal Government to discoveries meeting the standard of patentability. To permit owners of products or ideas not reaching that standard to wield monopoly power under the guise of a state statute contravenes the basic policy of the patent grant. We do not feel this is wise. It is probably unconstitutional. We therefore oppose Amendment 23. CONCLUSION No one argues that the field of patent-antitrust law is crystal clear. One can argue that it should not be, if clarity is to be obtained at the expense of flexibility. The evolution of the law in this area has been basically satisfactory, as evidenced by the lack of a widespread call for overturning Supreme Court decisions in this area. There is no real basis for accepting the premise of the proposed amendments that current patent-antitrust law stifles invention and innovation. Even if there were, there is even less basis for embracing vague, confusing proposals, based on mere assertion, that would create doubt, uncertainty and, inevitably, litigation. Where such doubt exists on a widespread basis, procedures, either through FTC advisory opinions or, more broadly, by means of generalized trade regulation rules, already exist for removing those doubts. In closing, we reemphasize our doubt that the present state of patent-antitrust law imposes any significant hindrance on patentees' incentives to invent or legitimately exploit patents. The lack of critical empirical data underscores the undesirability at this time of such sweeping legislative proposals. We would urge that before any legislation is undertaken in this field specific information should be obtained from inventors and corporate and other patent holders concerning the impact of antitrust enforcement on their licensing activities. The Commission, we believe, could participate in formulating such an inquiry within the limits imposed by budgetary considerations and available manpower. Mr. BRENNAN. Professors Turner and Blake. STATEMENT OF PROF. DONALD TURNER, HARVARD LAW SCHOOL Mr. TURNER. Yes, Mr. Chairman. I am Prof. Donald F. Turner of Harvard University and with me is Prof. Harlan Blake of Columbia University. Mr. BRENNAN. On May 7 you and a number of associates submitted a statement to the subcommittee on the Scott amendments and I would suggest it be printed at this point in the record. 23 Painton & Co. v. Bourn, Inc., 309 F. Supp. 271 (S.D. N.Y. 1970), rev'd, F.2d (2d Cir., April 27, 1971). - 24 Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225 (1964), Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234 (1964). Senator MCCLELLAN. Very well. The letter may be printed in the record at this point. (The letter referred to follows:) Hon. JOHN L. MCCLELLAN MAY 7, 1971. Chairman, Subcommittee on Patents, Trade-marks and Copyrights, Committee on the Judiciary, Washington, D.C. DEAR SENATOR MCCLELLAN: As professors of law whose experience and scholarship lie in the field of public control of monopoly and competition, we are deeply concerned by and strongly opposed to the proposed amendments to the Patent Reform bill (the so-called McClellan bill) limiting the application of the antitrust laws to patent licensing arrangements. We oppose these amendments because we believe that they are, in general, unwise in their substantive objectives and because they are in many respects drafted in language so opaque and obscure that it is impossible to predict with any certainty the ultimate reach of their intrusion into antitrust policy. We must conclude that their effect would not be, as proponents have urged, to elucidate the law and improve the performance of the legal system in this difficult but important area, but rather to create ambiguities and difficulties of interpretation which would surely require many years of litigation to begin to clarify. The main argument made in favor of the amendments is that greater financial incentive to invention and innovation is needed, and that abating antitrust safeguards is an appropriate way to increase rewards to patent owners. We believe, however, that there has been no economic or other evidence that permitting patent owners to engage more freely in restrictive licensing would increase the progress of technology or the productivity of the economy. Indeed, the limited evidence we have suggests that the social costs would most likely be considerably greater than any resulting benefits. Among other things, the amendments would have the effect of encouraging greater use of patents as a vehicle for bringing together competitors or potential competitors into cartels for the purpose of eliminating competition. In these respects we consider the amendments to be plainly harmful and contrary to the public interest. A further major effect of the amendments would be to call to a halt the case-by-case development of law in important but imperfectly understood areas of restrictive patent licensing and antitrust policy. In these respects we consider such legislation to be premature and ill-advised. The first of the proposed amendments would change the present law with respect to patent licensing in four distinct areas: (1) price fixing; (2) geographical and field of use restrictions; (3) assignor and licensee estoppel; and (4) permissible royalty arrangements. We will briefly discuss the effects and shortcomings of the proposed amendment in each of these areas. a. Price Fixing. The language of the amendment, by following closely the wording of the Supreme Court in United States v. General Electric, 272 U.S. 476, 490 (1926), would appear to seek to rehabilitate that case and, to that degree, overturn a number of subsequent decisions which have greatly reduced the scope of possible price fixing in patent licensing arrangements. As it stands, General Electric no longer presents a major antitrust problem. To the extent that the proposed legislation revitalizes General Electric, we are opposed to it. Legislation which would overrule or limit the cases which have narrowly restricted its scope would seriously increase the danger that patents could be made to serve as the organizational focus of powerful price fixing cartels. The history of antitrust enforcement in the heyday of General Electric makes it clear that this danger is a very real one, which could have seriously adverse effects on the economy, and on consumer price levels. 2. Geographical and field of use restrictions. If antitrust enforcement makes price fixing too risky an undertaking, similar effects can often be achieved through licensing restrictions by which competitors effectively divide the market either by geographic area or by field of application of the patent. Exclusive licenses so limited may have even stronger anti-competitive effects than price fixing arrangements. The explicit conferral of a position of exclusivity upon a 62-614-71-pt. 1-21 licensee, either in a particular field or within a particular geographic area, should be struck down as a violation of Section 1 of the Sherman Act, except where exclusivity for a limited period of time is shown to be necessary to attract licensees at all. The argument, sometimes made, that Section 261 of the Patent Code authorizes territorial market divisions, is unsound. The history of Section 261 shows that its only purpose was to serve as a conveyancing rule that articulated the line between a patent assignment on the one hand a patent license on the other, thus permitting the patentee to control certain collateral rights. The conveyancing rule which Section 261 represents was passed before the Sherman Act was enacted; plainly neither its drafters nor the legislature addressed itself to the potential policy conflict between Section 261 and the rule of competition later to be embodied in the antitrust laws. If this amendment is adopted, Section 261 would in fact do what it is now often incorrectly asserted to do: it would legalize the creation of sub-monopolies within geographic market divisions. Furthermore, the amendment would extend Section 261 to include applications as well as patents themselves; and to enable the patentee to license as well as to assign on an exclusive territorial basis. Neither does the holding in General Talking Pictures Corp. v. Western Electric Co., 305 U.S. 124 (1938), constitute an unassailable rule that all field of use arrangements are immune from antitrust surveillance. But the proposed amendment would both rigidify its holding into a permanent barrier against the development of a sounder patent-antitrust policy in this area and extend its scope in an uncertain degree. 3. Assignor and licensee estoppel. Since there is no public agency which can be depended upon to determine the validity of patents with any degree of thoroughness and regularity, the public interest requires that private parties be afforded adequate opportunities to secure judicial scrutiny of questionable patents. And with regard to private parties, assignors and licensees rank high among those possessing both the knowledge and the interest to challenge a patent's validity. The proposed amendment, however, would increase the durability of cartels formed under dubious patents by making it more difficult for a licensee who has a change of heart to free himself from the cartel. Under present law he may challenge the validity of the patent, thus destroying the cartel if he is successful, without risking loss of his license in the event that his attack is not successful. The amendment would deprive him of that opportunity. We therefore believe it to be undesirable. If the elimination of licensee or assignor estoppel opens up possibilities for unfairness inter partes, as has been suggested, the courts can be expected to devise protective rules; the solution is surely not to restore and rigidify by legislation old doctrines which have not served the public interest. 4. Permissible royalty arrangements. The proposed amendment would exempt from the misuse rule assignments and licenses, whether or not the result of insistence of "conditioning" by the patentee, providing for non-exclusive grant backs or for "a royalty, fee, or purchase price." (a) In any amount, however, paid or measured (with a requirement that amounts paid after expiration of the patent must be based on activities prior to expiration), (b) Not measured by the subject matter of the patent or the extent of the licensee's use thereof. (c) Undifferentiated in the case of a license under plural patents, and (d) differing from licensee to licensee. These provisions would appear to extend blanket antitrust immunity to a large but not clearly defined array of licensing and royalty arrangements which have long been regarded as outside the scope of patent law protection. For example, they would appear to overturn all those cases, since A. B. Dick Co. was overruled in 1917, prohibiting use of the patent lease or license as a vehicle for tying in the sale of other patented or unpatented products. Although the economic theory of tying agreements and similar arrangements is now well-developed, little is known empirically about their actual impact under diverse market conditions. It seems likely to use that there may be situations in which patent tie-ins (like others) can operate so as to injure competition in the market for the tied product, or make more difficult entry into the market for the tying product. The amendment would nonetheless give blanket sanction to such arrangements. We believe this to be undesirable, and prefer that the antitrust enforcement agencies and courts retain flexibility to adapt the law to new situations and better information about the effects of tie-ins. These provisions of the amendment would apparently permit the patentee (1) to insist on mandatory packages of patents and (2) to define the license royalty base in any way he desires. They thus overturn or modify a substantial number of cases which have limited the patentee's freedom to tie unwanted patents to those which are needed, and to exact royalties on a licensee's output not subject to the licensed patent. Very little is yet known about the effects of these practices, but some analysis suggests that if a patentee is free to insist on mandatory packages and to define the royalty base in an arbitrary manner, at least two undesirable results are likely to follow: (1) the licensee will be unlikely to adopt the most efficient methods of production of the goods included in the royalty base; and (2) the incentive of the licensee to find new and more efficient ways of producing these goods, i.e., by "inventing around" existing patents, will be eliminated or reduced. Once again, we feel tht it is undesirable to call a halt to the traditional case-by-case development of antitrust experience and law in these areas. Subsection (d) of the proposed amendment would apparently further offer blanket legitimation to all forms of price or royalty discriminations in patent arrangements. Since discriminatory patent licensing provisions by their nature impose a continuing and systematic differential, they have at least a potential for significant impact upon competition among licensees. This is a new area of antitrust development in which virtually no economic analysis or research has been done. Yet the proposed legislation would remove this important problem area, as well, from the scope of case-by-case antitrust surveillance. Although this is an area in which economic considerations are more debatable than with respect to the others we have discussed, our analysis suggests that here, as well, the public interest has not been consulted by the proponents of the amendment. The second proposed amendment would, among other things not clearly spelled out, limit the Sears and Compco cases, 376 U.S. 225 (1964) and 376 U.S. 234 (1964), and thus leave it to the states, if they wish, to attach tort liability to the copying of non-functional features of unpatented articles which have acquired "secondary meaning" and thereby serve a trademark function as an indication of origin. Although we would not undertake to defend the language of these decisions in toto, and believe that state action is appropriate in protecting confidential relations and trade symbols, and in facilitating the transfer of unpatented or unpatentable techniques and knowledge, we have misgivings about state remedies against product simulation. In our judgment, state courts have granted relief in this area without confining themselves to purely non-functional features, and the result is equivalent to (indeed, in excess of) patent protection. Accordingly, we believe that Sears and Compco are correct in limiting the states to restrictions relating to advertising, trade symbols and trade dress, and requirements of labeling. If the product originator wants more, he should satisfy federal patent standards. For these reasons, we hope that your Committee will reject the proposed amendments. But if legislation in the patent-antitrust area is regarded as desirable at this time, we suggest careful consideration of proposals recently made by the White House Task Force on Antitrust Policy (the Neal committee report), and other studies more adequately reflecting a public interest approach. We note also that the Federal Trade Commission in its statement opposing the amendments, has expressed an interest in participating in such an inquiry. We would be happy, individually or collectively, to provide more detailed comments should you desire to have them. Very sincerely, Stephen G. Bryer, Donald F. Turner, Harvard; Robert Pitofsky, New Yale; Louis B. Schwartz, University of Pennsylvania: Hal M. Senator MCCLELLAN. Gentlemen, do you have prepared statements? Mr. TURNER. Neither of us has prepared statements. Both of us would like to make some running comments of an extemporaneous variety on the principal issues that are before you on the proposed amendments, and we would welcome questioning at any point during our comments or at the end if you so prefer. Senator MCCLELLAN. The sponsor of the amendments and the chief opponent of the subcommittee to the amendments are not present to ask questions. You just cover whatever you want to, we will make the record and the committee can then make an evaluation. We have one member on each side of the committee taking a firm position, one opposing the amendments and one for. Apparently this is a pretty complicated issue. I don't know how important it is. But it is not one that is easily resolved because the administration can't even find its position. Mr. TURNER. You are absolutely correct, Mr. Chairman, and this is one of the difficulties with this area. It is extremely complex; it is not an area that people unfamiliar with it would readily understand. Senator MCCLELLAN. It is not an area in which there is common knowledge. Mr. TURNER. That is right; all of which would lead me to suggest with deference that in my view it would be very wise for Congress to separate these issues off from the patent reform bill which concerns a lot of major issues that have nothing to do with the debates on these amendments. It seems to me it would be wholly appropriate, in part for the reasons that Mr. Ward recently just stated, that the kinds of issues raised by the proposed amendments be deferred for full consideration on their own merits at some later time, and that the Congress not endeavor to solve what are obviously very strong conflicts over these issues in a way sort of ancillary to the patent reform bill, which has many issues of importance that ought to be handled as expeditiously as possible. That would be my first comment. Senator MCCLELLAN. All right; you may proceed to discuss the merits. Mr. TURNER. Now, as Mr. Brennan indicated, a group of us in academic life have submitted a letter to the committee in which we have indicated in general the reasons why we object to the specific proposals that have been made. I should say in passing that the objections that we raise to Senator Scott's proposals are probably as applicable to the proposals that the Department of Commerce submitted to the committee, as I understand it, in testimony yesterday. In some respects, I believe rather minor respects, I would find those proposals somewhat less objectionable, but the main objections that |