Mr. KASTENMEIER. Without objection, your statement will be received.

Mr. MOSSINGHOFF. Mr. Chairman, the administration very much welcomes these hearings on this very important subject.

There are no effective legal means of stopping the copying of semiconductor chips under existing U.S. laws. Patent protection is available for the process of making the chip, for the electronic circuit embodied in the chip, or for the chip itself as an article of manufacture, provided that the process or the circuit or the article of manufacture meets the patentability requirements of being new, useful, and unobvious.

While a patent on the circuit would protect against the manufacture, use, or sale of the circuit, the circuits in chips are usually well known and, therefore, unpatentable. Patents for the process of making the chip or for the chip itself as an article of manufacture would not ordinarily protect against a taking of the design.

Copyright protection is currently not available for chip designs, principally because the design of the chip is considered utilitarian in nature. The Copyright Office presently refuses to register claims to copyright in the design of semiconductor chips or in the chips. themselves.

Trade secret protection is available but only up to the time that the first disclosure or unrestricted sale of the chip is made.

Legislation to protect semiconductor chip designs has been introduced in each of the three previous Congresses. Several approaches have been suggested to provide the additional protection that is needed.

Of these, I believe that the copyright approach is the preferable method for protecting semiconductor chip designs. This approach has several advantages.

The system could take advantage of the well-established procedures and remedies of the copyright law. It would provide prompt, inexpensive protection through a registration system without substantive examination.

In addition, the United States is a party to the Universal Copyright Convention. If the United States protects semiconductor chip designs by copyright, it would be much easier to persuade other members of the UCC to follow the lead of the United States and establish comparable and compatible protection for semiconductor chip designs. Despite a minority view that the copyright law should be reserved for artistic rather than utilitarian creations, the copyright approach is preferable, in my view.

The Cabinet Council on Commerce and Trade has established a working group on Intellectual Property to consider the increasing number of important issues in this field. This working group, which I chair, considered H.R. 1028 and its companion bill, S. 1201. On September 14, 1983, the Cabinet Council, on the recommendation of Secretary Baldrige, unanimously endorsed legislation to protect semiconductor chip designs with the following specific characteristics:

It should provide prompt, inexpensive protection for original semiconductor chip designs through a registration system without substantive examination.

It should grant to the owner of the chip design the exclusive right to copy, for commercial purposes, the chip design, or chip embodied in that design, as well as the exclusive right to distribute such a chip.

The exclusive right should exist for a relatively short term, for example, 10 years.

The legislation should provide an express right of reverse engineering for the purpose of teaching, analyzing or evaluating the concepts or techniques embodied in the design of the semiconductor chip.

Finally, unless there are overriding circumstances to the contrary, the protection should be prospective from the current timeframe.

Thus, the administration strongly supports legislation along the lines of H.R. 1028-amended to include the reverse engineering provision. Such a measure would fill the gap in intellectual property protection which currently exists for an important segment of our economy and would enhance the incentive to create new technology.

Mr. Chairman, that concludes my prepared statement. I would be pleased to answer any questions you or the other members of the subcommittee may have.

[The statement of Mr. Mossinghoff follows:]

PREPARED STATEMENT OF GERALD J. MOSSINGHOFF, ASSISTANT SECRETARY OF
COMMERCE AND COMMISSIONER OF PATENTS AND TRADEMARKS

Mr. Chairman and members of the subcommittee: I welcome this opportunity to testify on the "Semiconductor Chip Protection Act of 1983", H.R. 1028. This bill would amend Title 17 of the United States Code to protect semiconductor chips and masks against unauthorized duplication.

The bill would make available to the semiconductor industry the established procedures and remedies of the copyright law by adding "mask works" as a new category of copyrightable works. It would provide to the owner of the copyright 10 years of exclusive rights to make or distribute the masks, to make chips from the masks or reproduce the mask onto a layer of a chip, and to use or distribute such chips. Innocent good faith purchasers of such chips would be protected and, if they had made a substantial investment, could acquire a compulsory license at a reasonable royalty for continued or future use of the chips.

The semiconductor industry is a vital and rapidly growing part of the U.S. economy. The Bureau of Industrial Economics of the Department of Commerce forecasts that in 1983 the industry will ship more than $12.6 billion worth of semiconductor and related devices. This amount is sharply up from the estimate for 1982 of $10.9 billion.

U.S. companies still dominate the field, accounting for 67 percent of the worldwide semiconductor market. It is projected that in 10 years semiconductors will have sales exceeding $90 billion and will be the basis for two of the four major industries of the 1990's-computers and telecommunications.

The intricate patterns or designs of semiconductor chips can be copied and used to produce duplicate chips at the fraction of the large initial research and development costs necessary to create a functioning chip. As the level of complexity of the circuits has grown, so has the cost of creating chip designs embodying those circuits. The research and development costs of a single complex chip is estimated to cost approximately $4 million. Such a chip could be copied photographically for as little as $100,000. A relatively simple chip would cost approximately $425,000 for research and development, and this chip could be duplicated and placed on the market in 3 to 6 months with an investment of $30,000 to $50,000, or approximately one-tenth of the investment of the chip originator.

The net effect of chip copying is to shorten the period during which research and development costs can be recovered. This can only discourage companies from making the large investments necessary for advancing this technology. Instead, it

encourages them to engage in chip copying to the detriment of worldwide technological advancement in this important field.

There are no effective legal means of stopping the copying of chips under existing United States laws. Patent protection is available for the process of making the chip, for the electronic circuit embodied in the chip, or for the chip itself as an article of manufacture, provided that the process or the circuit or the article of manufacture meets the patentability requirements of being new, useful and unobvious. While a patent on the circuit would protect against the manufacture, use or sale of the circuit, the circuits in chips are usually well-known and therefore unpatentable. Patents for the process of making the chip or for the chip itself as an article of manufacture would not ordinarily protect against a taking of the design.

Copyright protection is currently not available for chip designs, principally because the design of the chip is considered utilitarian in nature. The Copyright Office presently refuses to register claims to copyright in the design of semiconductor chips or in the chips themselves.

Trade secret protection is available but only up to the time that the first disclosure or unrestricted sale of the chip is made.

Legislation to protect semiconductor chip designs has been introduced in each of the three previous Congresses. Several approaches have been suggested to provide the additional protection that is needed. Of these, I believe that the copyright approach is the preferable method for protecting semiconductor chip designs. This approach has several advantages. The system could take advantage of the well-established procedures and remedies of the copyright law. It would provide prompt, inexpensive protection through a registration system without substantive examination. In addition, the United States is a party to the Universal Copyright Convention (UCC). If the United States protects semiconductor chip designs by copyright, it would be much easier to persuade other members of the UCC to follow the lead of the United States and establish comparable and compatible protection for semiconductor chip designs. Despite a minority view that the copyright law should be reserved for artistic rather than utilitarian creations, the copyright approach is preferable, in my view.

The Cabinet Council on Commerce and Trade has established a Working Group on Intellectual Property to consider the increasing number of important issues in this field. This Working Group, which I chair, considered H.R. 1028 and its companion bill, S. 1201. On September 14, 1983, the Cabinet Council, on the recommendation of Secretary Baldrige, unanimously endorsed legislation to protect semiconductor chip designs, with the following specific characteristics:

It should provide prompt, inexpensive protection for original semiconductor chip designs through a registration system without substantive examination.

It should grant to the owner of the chip design the exclusive right to copy, for commercial purposes, the chip design, or chip embodied in that design, as well as the exclusive right to distribute such a chip.

The exclusive right should exist for a relatively short term, e.g., 10 years;

The legislation should provide an express right of reverse engineering for the purpose of teaching, analyzing or evaluating the concepts or techniques embodied in the design of the semiconductor chip.

Finally, unless there are overriding circumstances to the contrary, the protection should be prospective from the current timeframe.

In testimony before the Senate Subcommittee on Patents, Copyrights, and Trademarks, at the May 19 hearing, several witnesses mentioned the desirability of an exception for "reverse engineering". The Senate subcommittee staff circulated proposed amendments in the form of a draft subcommittee print that would provide an option for an express right of reverse engineering for the purpose of teaching, analyzing or evaluating the concepts or techniques embodied in the design of the semiconductor chip. The Senate Subcommittee reported out a bill last month which contains such a reverse engineering provision.

This reverse engineering exception essentially incorporates a desirable feature of the copyright law. Making a limited number of copies for teaching purposes generally constitutes "fair use" under the copyright law.

Thus, the administration strongly supports legislation along the lines of H.R. 1028 (amended to include the “reverse engineering" provision). Such a measure would fill the gap in intellectual property protection which currently exists for an important segment of our economy and would enhance the incentive to create new technology. Mr. Chairman, that concludes my prepared statement. I would be pleased to answer any questions you or the other members of the subcommittee may have.

Mr. KASTENMEIER. That certainly was concise, but to the point.

Is there any bill or prototype of a bill which might not have yet been introduced which embodies the recommendations of the Council, other than the provisions as you cite them one by one?

Mr. MOSSINGHOFF. No, Mr. Chairman. We took this matter to the Cabinet Council in sort of a broad conceptual framework and the decision that they made is as outlined in my statement. The bill itself, H.R. 1028, would satisfy these criteria that the Cabinet Council unanimously recommended.

That is not to say other pieces of legislation might not also satisfy those.

Mr. KASTENMEIER. How about retroactivity? Do you think the law ought to be retroactive?

Mr. MOSSINGHOFF. That would be an area that we think you should examine very carefully. The basis for that decision of the Cabinet Council was two strongly held views. One of the views was that it is a very appropriate thing for the Federal Government to do, to stimulate private investment in the creation of new wealth in the form of net technology.

A second view was that it is not an appropriate function of the Federal Government to be in the business in this area of distributing wealth. And the second principle is what led the Cabinet Council to its view that the protection should be in general prospective from the current timeframe.

That is kind of loosely worded and, indeed, was loosely worded in the minutes of the Cabinet Council. We would, of course, defer to the committee.

But it would seem to me personally that the current timeframe could well be the time when Congress began serious consideration of this, so you don't have, in effect, a rush to copy in order to come in under some threshold that is determined by the actual date of enactment.

So that is the reason for the less than crisp statement.

Mr. KASTENMEIER. The matter has been approached with some urgency, but other commentators suggest, as you observe in your statement, that American companies dominate the semiconductor market worldwide and currently account for 67 percent of the world market and all these things have taken place under the existing legal framework. What is the great urgency about moving into legislation when industry has fared so well notwithstanding the lack of protection?

Mr. MOSSINGHOFF. I think a couple of factors enter into this, Mr. Chairman. One is the fact that these chips are becoming increasingly expensive to sell. For example, there are two cases that I know of-there may be more-but there is a case of Zilog v. The Nippon Electric Co. that I think is still pending before the International Trade Commission. The chip in that case sold somewhere between, say, $2 and $7 million. A second case, Intersil v. Teledyne, the chip in that case would sell for $5 or $6 million. However, as these chips become increasingly complex, the economic payoff of the copying becomes increasingly attractive to those who would copy.

Second, I think the chips themselves in a commercial form only entered the marketplace in the early- to mid-seventies. They are

now becoming ubiquitous. There is not a thing you can buy these days that doesn't somehow have a chip in it.

In addition to that, the technology to copy the chips is becoming well understood. So we think we are in a period of exponential growth of chips-that is, exponential growth in the return one could reap if one were to copy the chips.

Finally, it seems to me this is probably the best time to act when there are-I don't want this remark to be misunderstood—not a lot of vested interests on the other side.

If there were to be a body of vested interest of copiers, you would have a much more difficult time, I think, legislating what is generally agreed, and I believe just about unanimously agreed, to be a very appropriate kind of protection for this new technology.

Mr. KASTENMEIER. That is about what happened 4 years ago or so. We looked at this question. I think you are quite right to say it has been around awhile. We found that we were not talking about foreign corporations, but there were as many domestic computer corporations that used or reverse engineered chips in contrast to the creation of new chips. These corporations were able to have a sort of industrial deadlock on the question that apparently has been resolved; but a conflict certainly did exist at one point in time.

Mr. MOSSINGHOFF. I am aware of no significant opposition to the concept that these chips are deserving of some form of protection against copying.

Mr. KASTENMEIER. You are speaking from the perspective of the Patent Office, and you are not claiming this area, for whatever reasons, for the Patent Office. You are willing to let some other agency handle this one.

Mr. MOSSINGHOFF. We have enough paper in the Patent Office to deal with, Mr. Chairman.

Mr. KASTENMEIER. Between the concept of whether this is copyright, industrial copyright, or covered by what might be termed design protection, similar to Congressman Moorhead's bill.

Mr. MOSSINGHOFF. As I indicated, this was not an issue, again. We did not bring that specific issue to the Cabinet Council for a resolution. I think it really is something that the experts-this subcommittee is the expert subcommittee on the copyright law-can decide.

So we purposely-and Secretary Baldrige agreed, we would bring the broad concepts to the Cabinet Council and then work as closely as we could to work out the details. I think the copyright protection has some advantages that the subcommittee should clearly consider.

First, I am not an expert in copyright law, but I don't think copyright was intended even from the Founding Fathers' point of view simply to cover artistic things. I believe that in the 1790 act they specifically provided for the copyright of nautical charts.

Mathematical tables are copyrighted, they are very valuable. Anyone can produce them themselves, but they have to go through the labor or use calculators to produce them. City directories are copyrighted. A book of nautical charts, for example, clearly is a utilitarian device more than something of an artistic creation.