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Mr. Zeidman, we understand Eugene Davidson, Assistant General Counsel, is also here. Gentlemen, welcome to the committee. The committee has your statement, Mr. Zeidman, and if you would like to read it, you may proceed.

STATEMENT OF PHILIP F. ZEIDMAN, GENERAL COUNSEL, SMALL BUSINESS ADMINISTRATION

Mr. ZEIDMAN. Very well, Mr. Chairman.

Mr. Chairman and members of the committee, I appreciate the opportunity to apepar before you today on behalf of the Small Business Administration, in support of H.R. 5924, the Patent Reform Act of 1967. The bill would make extensive modifications in the U.S. patent system in order to improve the effectiveness of its operation in today's rapidly changing technology.

As you know, the bill is largely the product of the recommendations of the President's Commission on the Patent System, which was appointed to study ways to strengthen and improve the system in light of modern needs. President Johnson noted when he transmitted this measure to the Congress, that its primary aims are, first, to raise the quality and reliability of U.S. patents; second, to reduce the time and expense of obtaining and protecting a patent; and third, to speed public disclosure of scientific and technological information.

While the Small Business Administration is by no means appearing in the role of a patent law expert, it seems clear to us that H.R. 5924 would be very helpful in achieving these beneficial purposes. The Small Business Administration was represented on the President's Commission, first, by Administrator Eugene P. Foley, and subsequently by our present Administrator, Bernard L. Boutin and in both cases by the agency's designee, Assistant General Counsel Eugene J. Davidson, who accompanies me here today. The Small Business Administration generally endorses the findings and recommendations of the Commission incorporated in the bill. I am aware that previous witnesses have explained the measure in detail and have emphasized its importance to the improved operation of our patent system and generally to healthy economic progress and growth. SBA's special interest and focus is on the importance of the bill to small business, and my discussion is, therefore, directed to the major effects of the measure on small concerns.

Turning first to the general question of the importance of the patent system to small business. It might initially be wondered what benefits small business can receive today from the patent system. One often hears it said that important inventions must be the product of large and wealthy enterprises, that small business does not have the capital or know-how to develop and market new inventions, and that when a small firm does get a patent, it cannot afford to enforce it against infringers.

Before discussing these matters regarding patent development by small firms, it should be noted that even when small business is not the patent holder, important benefits can flow to it from the patent system. Among these are the general growth of the economy which derives from technological improvements; the more direct benefits which small concerns may obtain as suppliers, customers, or licensees of pat

ent holders; and the opportunities for alert small firms to utilize the information disclosed by patents in connection with their own innovation and invention outside the bounds of the patent.

The contention that only large firms can invent in today's complex and rapidly changing technology is not supported by the data and by the studies that have been made on this point. For example, and I give only a very few examples, a January 1967 report to the Secretary of Commerce by an advisory panel on invention and innovation concluded that "independent inventors and small firms are responsible for an important part of our inventive progress" and that "small technologically based companies are responsible for a remarkable percentage of the important inventions and innovations of this century." The panel based its conclusion on a number of studies, including perhaps, most prominently, the significant and interesting book by Prof. J. Jewkes, D. Sawers, and R. Stillerman, "The Sources of Invention." That book showed that out of 61 important inventions and innovations of the 20th century, over half of them stemmed from independent inventors or small firms. Among these products of the ingenuity of small firms and independent inventors are the mercury dry cell, air conditioning, power steering, FM radio, vacuum tubes, penicillin and streptomycin, and DDT.

Another report, in the April 1966 Digest of the Patent, Trademark, and Copyright Research Institute of the George Washington University, notes that the number of independent inventors was estimated at 225,000, and that even in large companies in various industries about two-thirds of the recently issued patents were contributed by single inventors. Such data, and SBA's own experience, strongly support the conclusion that small concerns can continue to be an important source of inventions.

While of course patents alone are not enough for a small concern to be successful-sufficient capital and good management are always necessary-and I should add at this point that SBA's own program takes these needs into consideration in the case of small businesses seeking or holding patents-this does not mean that inventions cannot be developed and marketed by small firms. Patent protection is frequently a major element enabling small firms to raise equity and debt financing, and capable management is often available in these small concerns. Moreover, it appears that a small business which is heavily dependent on the successful exploitation of one or a few patents in many cases would be more likely to vigorously pursue their development and market potential than a large firm which may have numerous other business opportunities and may therefore choose not to develop certain of its inventions. Many instances of successful economic implementation of their patents by small businesses have come to the attention of the SBA. Outstanding examples of small firms which have grown into large public corporations through the development of an invention include the Xerox Co. and the Polaroid Co. It is clear then that patents are a valuable incentive and asset to many small firms. I was particularly interested in Judge Rifkind's comment that in his judgment and final analysis the patent system is more important to small firms and the independent inventor than to large national complexes.

90-355-68-pt. 1—13

Turning to the importance of the bill itself to small businesses we must concede that nevertheless, the question of whether a particular small firm which has an invention will be able to utilize the patent system effectively under existing law is frequently a real problem to that concern. Factors which can severely limit the value of the system to small concerns include lengthy delays in obtaining patents, uncertainty as to the validity of the patent which is obtained, and the costs and problems of interference proceedings and infringement litigation. We believe that the provisions of H.R. 5924 would greatly aid in making the patent system more efficient and more useful to small business concerns, and that the measure would thus promote technological invention, innovation, and development by small firms.

As I indicated earlier, both research-minded small concerns and other small firms can benefit from an improved patent system. Absent a patent system, we would have an industrial society which has been described as a "cesspool of secrecy an industrial environment filled with spies, an environment in which the true scientist would be embarrassed to participate because he could not use freely what he had learned." The bill would encourage early filing and early disclosure of patent applications; would aid in the issuance of valid patents and the denial of unsound applications; and would provide simpler, less expensive procedures to test validity and infringement. All these benefits, we believe, would be particularly helpful to small firms.

I shall not review the detailed provisions which would accomplish these ends, since previous witnesses have fully explained them. But I would like to comment briefly on what is clearly the chief feature of the bill, its first-to-file provision.

This provision is the heart of the bill. In effect, as to competing claims for a patent on the same invention it changes the rule from a first-to-invent rule (with all its attendant complexities and uncertainties) to a first-to-file rule. This has the advantage of a simpler, clearer test as to who is entitled to the patent. Of course, the new rule would thus make easier both obtaining and enforcing a valid patent. In addition, the new rule (in conjunction with other provisions of the bill) would serve the important public purpose of prompt filing and disclosure of inventions.

On balance, we believe that in most cases this prompt filing requirement would not present serious problems for small concerns. Not infrequently the present approach of a small concern to the patent system is as though the first-to-file rule already governed. This rule would also have the benefit of eliminating the need for elaborate recordkeeping a need which is of particular concern to small businesses. Small concerns too often do not have the knowledge of their larger and more sophisticated competitors as to the ground rules determining which records will be effective in proving prior inventorship and which will not qualify.

Of particular importance to small concerns is the provision the bill makes for a preliminary application, which would be an informal description of the invention which could be filed so as to secure an early filing date. The applicant would then have a year to perfect his claim by filing the complete formal application. We note that the Patent Office has indicated that it believes short forms can be de

veloped for this preliminary application. Such forms should allow as uncomplicated descriptions as possible in providing for disclosure of the features of the invention. The preliminary application would also require only a nominal filing fee, which would be a significant benefit to small concerns who may wish to establish an early filing date, but who are not ready to pay substantial fees for preparation and filing of a formal patent application.

There is one additional matter which we believe may warrant particular exploration by the committee from the viewpoint of its effect upon small business.

Under the present law, an inventor is entitled to a patent even though there was public use or sale or public disclosure of the invention before an application for the patent was filed, provided such public use did not antedate the application by more than 1 year. The Commission's Report and the bill make no provision for a similar grace period. The Commission's first recommendation which is reflected in section 102 of the bill states: "Prior art shall comprise any information, known to the public, or made available to the public by means of disclosure in tangible form or by use or placing on sale, anywhere in the world, prior to the effective filing date of the application. A disclosure in a U.S. patent or published complete application shall constitute prior art as of its effective (United States or foreign) filing date." Thus, the Commission's Report and the bill would abolish the existing grace period under today's law.

The Commission, however, recognized the need for a technique whereby the inventor could seek support of or test his invention and whereby the scientific community could engage in discussions of new discoveries, before completing application filing. It, therefore, recommended the preliminary application as a substitute for the grace period. As noted, the preliminary application concept is contained in the bill, and it is a valuable addition to the patent system. But, in order that small concerns and independent inventors may effectively experiment, market test, and otherwise determine whether they should file patent applications, the committee may wish to consider a personal grace period which would permit the inventor a period of time during which he may use or disclose his invention without being barred from obtaining a patent.

In conclusion and summary, Mr. Chairman and members of the committee, the Small Business Administration strongly supports H.R. 5924. We believe it would strengthen the patent system and increase its usefulness to small business and the economy. I would like to stress that the Small Business Administration is closely following the information and views submitted at these hearings. We would be happy of course to attempt to provide the committee with any additional comments or data within our knowledge on what might be called the small business aspects of the bill.

Mr. Chairman, that completes my prepared statement; however, Mr. Davidson or I would be happy to attempt to answer any questions for the record that you wish to submit to us.

Chairman KASTENMEIER. Mr. Zeidman, to restate your presentation, you do support the bill before the committee except insofar as it fails to include a grace period, and there you have a modified recommendation; is that correct?

Mr. ZEIDMAN. I would not say "except." We endorse the bill. We also suggested, with respect to the bill, that you may wish to consider a personal grace period as an additional provision.

Chairman KASTEN MEIER. Are there any exceptions or additions to this present bill that you would recommend?

Mr. ZEIDMAN. Mr. Chairman, on a matter as complex and as interwoven as the Commission report on this bill, there are areas in which individuals feel more strongly than in other areas. And in some cases, particularly in view of the large nature of the small business community, there are areas in which there have been some conflicts. But on balance we support the Commission report and we strongly endorse the bill in its present form.

Chairman KASTEN METER. I take it your views not only reflect the views of the small inventor, but also the views of the small businessman who perhaps wants to become a licensee. So on balance you are considering both the holder of the patent and the user of the patent, the subsequent licensee?

Mr. ZEIDMAN. We have sought to represent the views of small businessmen who fall in both those categories and others as well; which is a large job, but we will say that we have tried to accommodate those interests.

Chairman KASTEN MEIER. Generally, how do you react to the 20-year term? Do you prefer a longer or a shorter term balancing all these equities and interests?

Mr. ZEIDMAN. On balance we believe that the existing 17-year term. from patent issuance makes sense, and the 20-year term makes sense if the term is to run from application filing. We support that provision of the bill.

Chairman KASTEN MEIER. Could a personal grace period be included without losing the benefits that you get from moving over from the first-to-invent to the first-to-file concept? Do you lose some of the benefits?

Mr. ZEIDMAN. We believe that a personal grace period of a sort which was suggested for study and consideration could be accommodated without losing significant benefit from the proposed law. But I do think this requires study by the committee and I think you may wish to obtain the views of other groups before you decide. We will be following that testimony with interest, as well.

Chairman KASTEN MEIER. On page 2 of your statement summarizing the benefits to small businesses, you speak of opportunities for alert small firms to utilize the information disclosed by patents in connection with their own innovation and invention outside the bounds of the patent. Would you enlarge upon that; what are these opportunities? Mr. ZEIDMAN. Well, we believe much as Judge Rifkind noted; many large firms today are pretty well able to pursue their own interests and needs without the benefit of a system such as the patent system. They have the capability, they have the resources, they have the knowledge of what is going on in their fields of endeavor. It is much more difficult for the small firm to do that, and to the extent to which the patent system facilitates that by making information available, the patent system helps them. The proposed changes in the bill would increase these benefits through more rapid publication of information and more rapid disclosure of technological innovation. We believe therefore that a small firm which can build upon or around existing invention and

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