Dawson Chemical Co. v. Rohm & Haas Co. - Motion for Leave to File Brief for Chemical Manufacturers



No. 79-669




March 21, 1980


On Writ of Certiorari to the United States Court of Appeals for the Fifth Circuit





Pursuant to Rule 42 of the Rules of this Court, the Chemical Manufacturers Association (CMA) respectfully moves the Court for leave to file the attached brief as amicus curiae in the above-captioned case. Counsel for Respondent has consented to the filing of the attached brief. The consent of Petitioners was requested but refused.

The interest of CMA as amicus curiae is set forth more fully at pp. 1-4 of the attached brief. In summary, CMA is a voluntary, non-profit membership association of 204 chemical companies in the United States and Canada. CMA and its members believe that the patent system provides a critical incentive to innovation and research by industry and that reversal of the decision below would impair this needed incentive in important respects.

The primary purpose of the attached brief is to discuss, more fully and from a broader perspective than the briefs for the parties and for the United States, the economic consequences of reversal of the decision below. CMA filed a similar brief in the Court of Appeals, and respectfully suggests that the attached brief will aid this Court in its consideration of the merits of this case.

Respectfully submitted,

JOHN H. PICKERING, DONALD F. TURNER, ROBERT A. HAMMOND III, A. STEPHEN HUT, JR., THOMAS W. WHITE, WILMER & PICKERING, 1666 K Street, N.W., Washington, D.C. 20006, (202) 872-6000, Counsel for Chemical, Manufacturers Association


JOHN H. PICKERING, DONALD F. TURNER, ROBERT A. HAMMOND III, A. STEPHEN HUT, JR., THOMAS W. WHITE, WILMER & PICKERING, 1666 K Street, N.W., Washington, D.C. 20006, (202) 872-6000, Counsel for Chemical, Manufacturers Association



Whether by virtue of section 271 of the Patent Act of 1952, 35 U.S.C. § 271, or otherwise, the owner of a method patent, who gives an implied license with the sale to users of a non-staple component, may decline to license others to make and sell the component, without committing patent misuse.



The Chemical Manufacturers Association (CMA) is a voluntary non-profit membership association of 204 chemical companies in the United States and Canada representing over 90 percent of the production capacity of basic industrial chemicals within these countries. CMA ha often represented the interests of its member companies in legislative, regulatory and judicial matters.

This case raises important issues concerning whether the patent laws will continue to serve as an effective incentive for research and development that results in new and valuable uses for existing chemical compounds. Patents granted for method of use inventions enjoy the same standing under the patent laws as do patents granted for inventions of machines, articles of manufacture or chemical compounds themselves. Moreover, such inventions play a particularly important role in the chemical industry: a 1975 report, for example, stated that of approximately 33,600 major new chemical developments each year, 8,400 represent new applications for existing chemicals. n1 These new applications require at least as much invention and research as do other types of inventions, and they provide benefits to the public at least as great. The science of organic chemistry has reached a state of development where skilled chemists, using advanced techniques and sophisticated equipment for synthesis, separation and analysis, can call into existence an almost limitless number of new compounds. The true value of chemical research often lies as much in the discovery of a new and valuable application for an existing compound as in the discovery of a new compound. The development of the patented wilson method (at issue in this case) for the herbicidal use of the chemical compound, "propanil" -- a method which has made possible substantial increases in rice production -- provides an excellent example of the importance of such inventions.

n1 Foster D. Snell, Inc., Survey of the Chemical Industry 6 (June 26, 1975).

These issues are particularly significant for the chemical industry, because it has been required to allocate about 50 percent more of its net sales income to research and development than industry generally. n2 As environmental and safety requirements have multiplied, development and testing costs have increased, and the percentage of the innovative products and applications that survive the regulatory hurdles has sharply decreased. Thus, of the approximately 33,600 major new chemicals and new applications for existing chemicals developed each year, only 6,900 have been commercially successful. Of the 8,400 new applications, only 1,800 became commercially successful. n3 Companies therefore have become increasingly dependent on the profitability of the "surviving" innovations in the marketplace to recoup their massive investment in research and development and to maintain a constant level of innovation.

n2 Id. at 41.

n3 Id. at 6.

The Constitution authorized and Congress designed the patent system as an incentive to innovation that would give individuals and firms, for a limited period of time, the exclusive right to the value of their inventions. The patent system thereby provides a means for recouping investment in the development of new products and product applications via those that are commercially successful. As we show in Part II infra, it is often impracticable for the inventor of a new method of use either to practice the invention himself or to give express licenses to (and collect royalties from) users. In those situations, reversal of the decision below will make it more difficult for method patentees to recover the value of their inventions and thus to recoup the costs of research and development. Reversal would be particularly inadvisable because obligatory licensing of competitors would have costs far more serious than the costs of the exploitation method selected by the patentee here; that method, moreover, has no significant adverse competitive consequences. Because the result of reversal would be to limit the incentives provided by the patent laws for the development of new applications, without serving any good purpose, CMA submits this brief on behalf of its members.



Respondent Rohm and Haas Company is the holder of a patent that describes a method of controlling weeds in rice crops. The chemical agent used in this process is "propanil," an unpatented compound for which there is no other commercial use. It was obviously impractical for Rohm and Haas to reserve the practice of this method to itself and prohibitively expensive to collect royalties from direct licenses to thousands of rice producers. Rohm and Haas concluded that the only practicable way by which it could realize the value of its invention was through the sale of propanil, which sales, of course, carry with them implied licenses n4 for its use in the patented process. Rohm and Haas did not offer separate licenses to users, and refused the request of other manufacturers of propanil for licenses which the manufacturers could then sub-license to their customers. When these manufacturers continued to sell propanil, Rohm and Haas brought suit for contributory infringement.

n4 As used herein, the term "implied license" refers to the authorization to use a patented process which arises by operation of law upon the patentee's sale of a component for that purpose.

The district court held that Rohm and Haas' method of exploiting its patent constituted patent misuse. 191 U.S.P.Q. 691, App. 67. The Court of Appeals reversed, 599 F.2d 685, App. 139, holding that this method of exploitation is expressly sanctioned by section 271 of the Patent Act of 1952, 35 U.S.C. § 271.



We argue here that the decision of the Court of Appeals should be affirmed substantially for the reasons set forth in its thorough opinion. The express language of section 271 authorizes Rohm and Haas' conduct. The legislative history demonstrates that Congress intended in enacting that section to overrule this Court's Mercoid decisions, n5 which extended the doctrine of patent misuse to bar actions for contributory infringement against sellers of an unpatented component with no other use save as part of a patented combination.

n5 Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661 (1944); Mercoid Corp. v. Minneapolis-Honeywell Regulator Co., 320 U.S. 680 (1944).

This conclusion is buttressed by an examination of the alternatives available to the holder of a process patent like Rohm and Haas; that examination demonstrates that the method selected by Rohm and Haas is least costly to users and has no significant anticompetitive consequences. We further argue that, quite apart from the application of section 271, refusal by Rohm and Haas to offer separate licenses to users or to its competitors should not be held to constitute patent misuse, because that doctrine should be invoked only with respect to licensing or other practices that are contrary to the policies underlying the patent and antitrust laws, a situation not present here.




Our purpose in this section is merely to highlight certain aspects of the language and legislative history of section 271 that are developed at greater length in the opinion of the Court of Appeals and in Respondent's brief. The careful and thoughtful opinion of the Court of Appeals held that the language of section 271, bolstered by the legislative history, sanctioned Rohm and Haas' chosen method of exploiting its method of use patent by means of implied licenses to users who purchased propanil from it. We submit that the decision below should be affirmed substantially for the reasons set forth in that opinion.

Section 271(c), which defines the cause of action for contributory infringement, n6 clearly applies to the conduct of Petitioners here, and Petitioners have so conceded (Br., p. 6). Petitioners (1) sell a "material for use in practicing a patented process"; (2) the substance is a "material part of the invention"; (3) Petitioners know that the substance is specially adapted for infringement of the patent; and (4) propanil is not a "staple article" as defined.

n6 That section provides:

"Whoever sells a component of a patented machine, manufacture, combination or composition, or a material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringing use, shall be liable as a contributory infringer."

35 U.S.C. § 271(c).

It is equally clear that Rohm and Haas has done no more than those acts permitted by the express terms of section 271(d), which limits the doctrine of patent misuse as a defense to a contributory infringement action. n7 All Rohm and Haas has done, first, is to sell a non-staple component, propanil -- or "derived revenue" from these sales as a "contributory infring[er]" might do -- as Rohm and Haas is permitted to do by section 271(d) (1). Second, Rohm and Haas has brought suit against petitioners for contributory infringement, as it is permitted to do by section 271(d) (3). Section 271(d) (1) and (3), taken together, authorize Rohm and Haas to act precisely as it has acted: to sell propanil itself and to sue to exclude as contributory infringers those persons, like Petitioners, who sell propanil in violation of section 271(c).

n7 It provides:

"No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: (1) derived revenue from acts which if performed by another without his consent would constitute contributory infringement of the patent; (2) licensed or authorized another to perform acts which if performed without his consent would constitute contributory infringement of the patent; (3) sought to enforce his patent rights against infringement or contributory infringement."

35 U.S.C. § 271(d).

Petitioners make no attempt to explain the straightforward language of the statute, and the Government in its brief amicus curiae claims only that section 271(d) does not in terms address the specific facts of this case (Br., p. 13). It argues that even though section 271 (d) (1) permits a process patentee to sell a non-staple component with an implied license to use it in the process, that section does not authorize such a sale as the exclusive method of exploiting such a patent. Thus, the argument runs, to avoid misuse the patentee must also offer separate licenses either to users or to competing manufacturers. The Government, however, cites no language in section 271 that supports its argument that a patentee, in order to avoid misuse by reason of section 271(d), must first take some other action, like the offering of separate licenses.

Indeed, section 271(d), which, as we show below, was enacted in response to the decisions in the Mercoid cases, n8 would have little meaning unless it were read to legitimize sales of a non-staple by a process patentee as the exclusive means of exploiting his patent. Read as the Government would have it, section 271(d) (1) does nothing more than authorize a process patentee to sell a component. While Mercoid had precluded such sales as the exclusive way of exploiting a process patent, nothing in Mercoid or in any other case had ever suggested that a use patentee could not sell a component used in the patented process, as one of many sellers. Thus, even after Mercoid, no statute was necessary to give a patentee this right. n9

n8 Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661 (1944); Mercoid Corp. v. Minneapolis-Honeywell Regulator Co., 320 U.S. 680 (1944).

n9 Giles S. Rich, the principal draftsman of section 271, advised the House Committee that subsection (d)(1) was intended to overrule Barber Asphalt Corp. v. La Fera Grecco Contracting Co., 116 F.2d 211 (3d Cir. 1940), at least insofar as the rule in that case might have been applied to non-staples. See Patent Law Codification and Revision: Hearings on H.R. 3760 Before Subcomm. No. 3 of the House Comm. on the Judiciary, 82d Cong., 1st Sess. 174, 207 (1951) ("1951 Hearings" ) In Barber, the Court of Appeals found misuse where the patentee licensed users but had manipulated its royalty rates by price discrimination in favor of those who also purchased the unpatented goods from it. This is no less calculated to "extend" the patent monopoly than is the express or implied conditioning of a license on the purchase of an unpatented commodity. See BAxter, Legal Restrictions on Exploitation of the Patent Monopoly: An Economic Analysis, 76 Yale L.J. 267, 318 (1966). If section 271(d) (1) was intended to permit a patent-holder to exclude competing sellers of non-staples by charging discriminatory royalties to licensees who purchase non-staple articles from it -- thereby effectively preventing other sellers from competing with it -- there is no reason, as a matter of economic analysis, why the statute should not be construed to permit it to exclude competing sellers by refusing licenses.

The legislative history of section 271 supports this natural reading of the statute. Prior to the Mercoid cases, this Court had never held that the doctrine of patent misuse provided a defense to an action for contributory infringement where the patentee had conditioned the licensing of its patent on the purchase from it of an unpatented non-staple component. n10 Compare Leeds & Catlin Corp v. Victor Talking Machine Co., 213 U.S. 325 (1909) (recovery for contributory infringement allowed where component was non-staple) with Carbice Corp v. American Patent Development Corp., 283 U.S. 27 (1931) (patent misuse found where component was staple). The decisions in the Mercoid cases, which involved stoker switches used in a combination patent for a heating system, appeared expressly to overrule the Leeds & Catlin case. See Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. at 668. The Court assumed that the stoker switches had no commercial use except in the combination. Nevertheless, the Court found patent misuse by the patentee and its exclusive licensee in refusing to license the combination unless the stoker switches were purchased from them. Furthermore, Mr. Justice Douglas intimated that Mercoid may have eliminated the contributory infringement doctrine altogether. Id. at 669 (dictum).

n10 B. B. Chemical Co. v. Ellis, 314 U.S. 495 (1942), did not involve a non-staple. As the Court of Appeals noted, 599 F.2d at 695, App. 157, this Court in B. B. Chemical did not address the question of the character of the component sold. While the Court of Appeals in that case evidently assumed the component was a non-staple, the district court in B. B. Chemical clearly found that the product was a staple. See B. B. Chemical Co. v. Ellis, 32 F. Supp. 690, 698 (D. Mass. 1940).

Congress in enacting section 271 intended to reinstate the doctrine of contributory infringement as it existed before Mercoid. n11 Giles S. Rich, the principal draftsman of the provisions that became section 271 n12 and now an Associate Judge of the Court of Customs and Patent Appeals, testified extensively on the purpose of the provisions. He more than once indicated that "[t]he exception which we wish to make to the misuse doctrine would reverse the result in the Mercoid case" and would revitalize Leeds & Catlin. Contributory Infringement: Hearings on H.R. 3866 Before Subcomm. No. 4 of the House Comm. on the Judiciary, 81st Cong., 1st Sess. 67, 68-69 (1949) ("1949 Hearings" ) (emphasis added). n13 The Justice Department, opposing the legislation, also recognized the purpose of the bill. Wilbur L. Fugate, testifying in 1951 on behalf of the Antitrust Division, told the Committee that section 271(d) "would have the effect of wiping out a good deal of the law relating to misuse of patents, particularly with reference to tying-in clauses." n14 1951 Hearings 165.

n11 This Court has stated that section 271 overruled Mercoid. In Aro Manufacturing Co. v. Convertible Top Replacement Co., 377 U.S. 476 (1964) (Aro II ), it concluded that

CCongress enacted § 271 for the express purpose of reinstating the doctrine of contributory infringement as it had been developed by decisions prior to Mercoid. . . ." 377 U.S. at 492.

Moreover, the opinion for the Court in Aro II cited with approval both the dissenting opinion of Mr. Justice Harlan (joined by Justices Frankfurter and Stewart) and the concurring opinion of Mr. Justice Brennan in Aro Manufacturing Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961) (Aro I). For Mr. Justice Harlan, the statutory purpose was readily discernible:

"It seems clear from the legislative history of the 1952 Act that Congress intended (1) to reaffirm the doctrine of contributory infringement . . . in cases like Leeds & Catlin, [and] (2) to give that doctrine procedence against a claim of patent misuse as conceived in the Mercoid cases, at least where the misuse is said to inhere simply in assertion of patent rights." 365 U.S. at 378 n.6.

Similarly, in his concurrence, Mr. Justice Brennan left no doubt that, given section 271, the principles of Leeds & Catlin survived Mercoid. See id. at 365-67 & nn.4-10.

n12 Section 271 was an outgrowth of bills, first introduced in 1948 and again in 1949, that were directed solely to the question of contributory infringement. H.R. 5988, 80th Cong., 2d Sess. (1948); H.R. 3866, 81st Cong., 1st Sess. (1949). The bill that became the Patent Act of 1952 incorporated essentially the same provisions, though in different language, into a general codification of the patent laws. See generally Federico, Commentary on the New Patent Act, 35 U.S.C.A., at 6-8 (West 1954).

n13 See also 1951 Hearings 161; Contributory Infringement in Patents: Hearings on H.R. 5988 Before the Subcomm. on Patents, Trade-Marks and Copyrights of the House Comm. on the Judiciary, 80th Cong., 2d Sess. 4-5 (1948) ("1948 Hearings" ). Petitioners imply (Br., p. 20) that there is nothing to suggest Congress was aware of Judge Rich's earlier testimony. However, Judge Rich in his 1951 testimony expressly referred to his earlier testimony. 1951 Hearings 150-51, 161.

n14 See also 1949 Hearings 52 (remarks of John C. Stedman); 1951 Hearings 97 (Statement of T. Hayward Brown). While the statements of opponents of legislation may not always be authoritative, they are entitled to weight, particularly when, as is the case here, both proponents and opponents agree about the effect of proposed legislation. First Nat'l Bank v. Walker Bank & Trust Co., 385 U.S. 252, 261 (1967); Arizona v. California, 373 U.S. 546, 582-83 n.85 (1963).

The congressmen present at the 1951 hearings on the proposed patent legislation understood that section 271 did more than merely codify the case law on contributory infringement. Congressman Rogers, for example, stated his understanding that the purpose of the Act was to "reinstate" the doctrine of contrbutory infringement. 1951 Hearings 159. And, at another point, he expressed his view that the proponents of the bill were asking Congress to "reestablish what you thought you had before the Mercoid case." 1951 Hearings 173.

Judge Rich repeatedly emphasized the important distinction between staples and non-staples in the application of the misuse doctrine. He explained that, while exclusive sales of an unpatented staple component by a patent-holder would permit a court to find misuse, the same would not be true as to non-staples under section 271(d) as proposed:

"MR. WILLIS: All right, what would the bill do to the misuse doctrine? Would it preserve it and to what extent.

"MR. RICH: It would preserve it in such cases as the Carbice case . . . , where the things dealt with are staple commodities of commerce and not especially for use in infringement of patents. . . . The only change made by the decision in the Mercoid case was to extend the misuse doctrine so as to apply to . . . elements having no other use than in an infringement." 1949 Hearings 68. n15

n15 See also 1951 Hearings 166-67; 1948 Hearings 17-18 (1948) (letter from Theodore Kenyon, patent attorney).

Petitioners distort Judge Rich's testimony. They claim (Br., p. 21) that Rich agreed with Congressman Crumpacker that section 271(d) would not prevent a holding of misuse where a patentee was "trying to gain a limited monopoly of unpatented articles." 1951 Hearings 173-74. The hearings indicate that Judge Rich had in mind only monopolization of staples when he answered Congressman Crumpacker's question. Before responding, Judge Rich qualified the question, asking "If we assume that staples are excluded from paragraph (c)?" 1951 Hearings 173. Only then did Judge Rich assent. He evidently contemplated that paragraph (d) permitted a finding of misuse only where the unpatented product sold was a staple.

The Committee reports corroborate Judge Rich's view of the purpose of the statute. The view of the Petitioners (Br., pp. 19, 22) and the Government (Br., pp. 16-17) that these reports show only that Congress intended to codify the law as it existed after Mercoid, is simply not correct. The House Committee stated that while the primary purpose of the Act as a whole was codification, "there are a number of changes in substantive statutory law." Among the "major changes or innovations" was incorporation of the "judicial doctrine of contributory infringement." H.R. Rep. No. 1923, 82d Cong., 1st Sess. 5 (1952).

Both Reports indicate that the clear purpose was to revitalize the doctrine of contributory infringement, which "has been part of our laws for about 80 years." Id. at 9; S. Rep. No. 1979, 82d Cong., 2d Sess. 8 (1952). Congress intended to eliminate the "[c]onsiderable doubt and confusion as to the scope of contributory infringement [that] has resulted from a number of decisions of the courts in recent years." H.R. Rep. No. 1923, at 9; S. Rep. No. 1979, at 8. Further, the Reports stressed, as Judge Rich did, that only non-staples are included in the definition of contributory infringement. Finally, the Reports' discussion of section 271(d) emphasized that the section "provides that one who merely does what he is authorized to do by statute is not guilty of misuse of the patent." H.R. Rep. No. 1923, at 9; S. Rep. No. 1979, at 8 (emphasis supplied). n16

n16 The cursory debate on the floor of the Senate, on which Petitioners (Br., pp. 19-20) and the Government (Br., p. 17) place principal reliance, should not outweigh the considered and lengthy explanation of the legislation's purpose by its principal author. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 202-03 (1976); United States v. Enmons, 410 U.S. 396, 405 n.14 (1973); 2A D. Sands, Sutherland Statutory Construction 214 (4th ed. 1973). As the Court of Appeals properly recognized, 599 F.2d at 698, App. 165, only moments after telling Senator Saltonstall that the bill "codified" the patent laws, Senator McCarran inserted in the record a prepared statement that obviously refers to section 271:

"In view of decisions of the Supreme Court and others as well as trial by practice and error there have been some changes in the law of patents as it now exists. . . ." 98 Cong. Rec. 9323 (1952) (emphasis added).

In sum, a proper reading of section 271 and its legislative history demonstrates that Congress intended to authorize Rohm and Haas' conduct in this case.


The conclusion that section 271(d) permits "use" patentees to collect royalties as Rohm and Haas has done is reinforced by the fact that foreclosing that option would have significant adverse consequences not only for patentees but for users and the economy generally. Unlike Deepsouth Packing, n17 therefore, the result reached below is supported by much more than "mere inference from ambiguous statutory language"; and "a clear and certain signal from Congress" -- though we believe one has been given -- is not required. For the same reason, patent misuse doctrine should not be applied even if section 271 -- which merely states what is not misuse -- were thought to leave the question open. Thus the Government's contention (Br., p. 10 n. 11) that practical considerations favoring Rohm and Haas' method of exploiting its patent "conceivably could persuade Congress to change the legal principle governing this case" is wide of the mark. Such considerations can and should be taken into account in deciding whether the misuse doctrine should be applied.

n17 Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518, 531 (1972).

As the briefs of the Government (Br., pp. 9-10) and the Petitioners (Br., pp. 34-35) recognize, the appropriateness of applying the misuse doctrine to this kind of case requires considering the effect on the pro-innovation policy of the patent law and on the policies served by the antitrust laws, which also seek to foster an innovative and efficient economy and are therefore largely complementary. Neither brief, however, closely examines whether the public interest reflected in those policies would in fact be served by finding misuse here. Neither brief adequately explores the practical economic consequences of preventing a holder of this kind of "use" patent from seeking to recover the value of his invention by granting licenses via the sale of a non-staple component, and thus remitting him to alternative methods of attempting to recover what the patent law entitles him to.

A careful examination of those alternative and their consequences show a clear balance in favor of permitting Rohm and Haas to do what it has done. As compared to its alternatives, that method has obvious and substantial advantages in the form of lower costs to patentees and to users of the patented process -- a result that serves rather than disserves the purposes of the antitrust laws. And in so enhancing the ability of "use" patentees to recover the value of their economic contributions, permitting that method strengthens the incentives to "use" innovations -- the goal of the patent laws. In contrast, the "anticompetitive" effects, if any, are minimal.

A. Compared to Alternatives, Rohm and Haas' Method of Exploiting its Patent Has Significant Economic Advantages.

The economic gains in the method of exploiting a patent chosen by Rohm and Haas become clear when the method is compared to the other options realistically available to the holder of a "use" patent of the kind involved here. We take it as given that a patentee is normally entitled to recover the full economic value of his patent, as determined in the market place. Further, the mere fact that a method of licensing facilitates the patentee's ability to recover that reward is not a basis for condemnation. It is true, of course, that a patent licensing arrangement is not automatically vindicated simply because it assists a patentee in recovering his full reward. That consideration remains highly relevant, however. Before a particular arrangement is condemned, it must be asked whether alternative methods would in fact be economically preferable. That is not the case here.

1. Granting a license to users with purchase of an unpatented component from the patentees (as done in this case). Of the alternative methods of attempting to obtain what a patent is worth, this method is plainly the most efficient. A reward to the invention proportional to use is automatically collected from the user with the sale of the component. There are no transactions costs imposed on either side. The user does not have to keep records of use or make periodic royalty payments. The patentee incurs no cost in auditing users to determine whether they have paid what is due. Users, patentees, and the courts are relieved of the burdens of royalty litigation. Moreover, the patentee can readily vary the royalty rate to reflect any increased value of the patent simply by raising the component price. No other option is as efficient -- for patentees, for users, or for society generally -- as we shall now show; because they all yield rewards lower than the economic value of the patented invention, none would provide as great an incentive to discover new and useful processes, as the Government concedes (Br., p. 10 n.11).

2. Self-exploitation. A process patentee, like any patentee, is clearly entitled to keep practice of the patent to himself. Unlike the case of a product patent or a manufacturing process patent, however, self-practice of a "use" patent like that involved here -- requiring "on site" application at a multitude of locations -- is not likely to be feasible or efficient. And even if it were, the competitive consequences would be worse than with the alternative followed by Rohm and Haas. Self-exploitation would not only create the same "monopoly" in a single non-staple component that the challenged practice creates, but would also "monopolize" or "tend to monopolize" any other components and the business of practicing the process as well.

3. Licensing users without production and sale of components. If this alternative were utilized, both the patentee and the users would incur substantial transactions costs of the kind we have just described. These additional costs would lead to a higher effective royalty price to users and lower utilization of the patented process -- a clear social loss; with higher costs and more restricted use, net royalty revenues to the patentee would be less than would otherwise be the case. n18 Indeed, the costs to the patentee of insuring the collection of royalties due from hundreds or thousands of users, and of suing those who have not properly paid, may be so disproportionately high as to render this alternative wholly infeasible -- the same reason that led courts to recognize, and Congress to codify, a cause of action for contributory infringement. n19

n18 These points can be illustrated by the following simple diagram: [SEE ILLUSTRATION IN ORIGINAL]

C1 is the cost of producing and selling the component with an implied license to practice the patent; C2 the higher cost of the component plus the transactions costs of separate direct licenses. D is the demand curve for components plus the right to use the process; and MR is the marginal revenue curve, indicating the increased net revenue from expanded sales. At the lower cost (C1) the patentee would maximize profits at an aggregate price of P1 and sales of Q1. At the higher cost (C2) he would maximize at a higher price (P2) and lower sales (Q2). Not only would users suffer, but the patentee's net profits -- shown by the P2 rectangle above C2 -- would be lower than at the lower C1 cost.

n19 See, e.g., Westinghouse Electric & Manufacturing Co. v. Precise Manufacturing Corp., 11 F.2d 209 (2d Cir. 1926); 1951 Hearings 160.

4. Options to users to purchase an express license alone or an implied license with the purchase of a non-staple component. Although Petitioners seek a license from Rohm and Haas, they agree that licenses to competing component producers are not necessary to avoid a charge of misuse (Br., pp. 30-31). A process patentee is clearly entitled to offer would-be users two alternatives: a license at a specified royalty, or an implied license with the purchase of a non-staple component from the patentee at a specified price. In so doing, the patentee is entitled to specify a lower price for the "package" than for a license and the component purchased separately, where the reduction simply reflects the lower transactions costs of collecting the royalty through the sale of the component. n20 Moreover, the effective cost of the license alone would be higher if the royalty rates were the same, because of the subsequent transactions costs to the user -- record keeping, making payments, and litigation disputes over amounts due. Accordingly, users would obviously elect to buy the "package" unless competing component producers charged a component price sufficiently lower than the patentee's to offset the higher effective royalty on the direct license alone. Absent that circumstance, this alternative would produce the same result as "package" selling only. It is, of course, possible that competing component producers would be so much more efficient that they could "undersell" the patentee. But this is unlikely, given the relatively high transactions costs to the patentee and to users under direct licenses. n21

n20 Neither Clayton Act § 3, 15 U.S.C. § 14, nor Sherman Act § 1, 15 U.S.C. § 1, could reasonably be interpreted to prohibit such a cost-justified lower price for the package. It is accepted that "where the buyer is free to take either product by itself there is no tying problem even though the seller may also offer the two items as a unit at a single price." Northern Pacific Ry. v. United States, 356 U.S. 1, 6 n.4 (1958). Courts have found violations of the antitrust laws where, because of rebates or other pricing arrangements, the purchaser, as a practical matter, will always take the package. See, e.g., SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3d Cir.), cert. denied, 439 U.S. 838 1978); Advance Business Systems & Supply Co. v. SCM Corp., 415 F.2d 55 (4th Cir. 1969), cert. denied, 397 U.S. 920 (1970). However, nothing in these cases suggests that cost-justified differential pricing of the separate components and the package would be a violation of the antitrust laws. To rule otherwise would be to deprive customers of the resulting efficiencies.

n21 Moreover as we note below, p. 24 infra, the patentee in that event would find it more profitable to cease production of the component, and license competitors to sell their product to users with an implied license to practice the patent.

In any event, this alternative would be a fertile source of expensive and involved litigation by competing component producers claiming that the patentee's lower "package" price was not cost justified. n22 And, as experience under the Robinson-Patman Act, 15 U.S.C. § 13, has shown, that issue can be a morass. n23 The problems are particularly severe in dealing with transactions costs of the kind we have described, which typically can be only roughly estimated.

n22 Competitors would also be likely to claim that either the express royalty is excessively high, or the patentee is selling the component "below cost." The latter claim would raise the difficulties described at pp. 20-21 infra.

n23 "Proof of a cost justification being what it is, too often no one can ascertain whether a price is cost justified." Automatic Canteen Co. v. FTC, 346 U.S. 61, 79 (1953).

5. Licensing competing component producers with the right to sublicense use of the patent. While this alternative was described by the court below as an "attractive" possibility, 599 F.2d at 702 n.27, App. 177 n.27, it is not as attractive as it may look. It would indeed involve lower transactions costs than direct licenses to a multitude of users, although of course there would be at least some such costs that are not incurred by the method Rohm and Haas uses here. There are, however, other significant disadvantages.

First, the patentee, as a practical matter, would rarely be able to obtain royalties comparable to the value of the invention. To avoid a charge of misuse, the patentee would have to grant licenses and set the royalty rate before beginning to sell the component, when commonly the prospective value of the invention is uncertain and potential licensees will insist on a conservative figure that is likely to be below true value. n24 Moreover, the patentee runs the risk that should he in good faith insist on a higher figure than licensees would accept, he would be faced in any infringement suit against them with a charge of patent misuse for "in effect" having refused to license others and thus "monopolized" the component.

n24 Even if the original royalty were to approximate the value of the invention, the patentee as a practical matter would be unable to change the rate later should the market value of the invention increase. Licensees will rarely if ever accept a license giving the licensor the right to revise the royalty rate upward.

Second, particularly in the case of a non-staple component for which there is no independent market price, it would be extraordinarily difficult to determine whether or not the royalty rate was "unreasonably high," either at the time of license negotiation or at some later time, when licensees claim that they cannot pay the royalty and still profitably sell at the package price charged by the patentee. The claim would be that if a "reasonable price" for the component were deducted from the patentee's package price, the resulting imputed royalty rate would be below the express rate offered competing component producers -- i.e., that the competitors were being discriminated against. That claim of discriminatory royalty rates would force the courts to determine the patentee's "costs" of producing the component. n25 As in cases charging "predatory pricing," resolving that issue would by no means be simple, n26 particularly where there are joint costs in the production of the component and similiar items. n27

n25 This problem was detected by Judge Margruder, concurring in B. B. Chemical Co. v. Ellis, 117 F.2d 829, 839 (1st Cir. 1941), aff'd, 314 U.S. 495 (1942). "If it were sought to extend the doctrine of Leitch [Manufacturing Co v. Barber Co., 302 U.S. 458 (1938) and Carbice Corp. v. American Patent Development Corp., 283 U.S. 27 (1931),] to cover such a situation, many difficulties would at once be presented, not the least of which would be the elusive problems of cost accounting."

n26 While differing in their assessment of the difficulties, protagonists of various tests for "predatory pricing" are agreed on this point. See, e.g., Williamson, Predatory Pricing: A Strategic and Welfare Analysis, 87 Yale L.J. 284, 305 (1977); Areeda & Turner, Williamson on Predatory Pricing, 87 Yale L.J. 1337, 1346, 1351-52 (1978).

n27 The problem described in text would be moderated, though not eliminated, where the component is a staple commodity, and the patentee sells the component separately for other uses. Cf. Ansul Co. v. Uniroyal, Inc., 306 F. Supp. 541, 562-63 (S.D.N.Y. 1969), aff'd in part, 448 F.2d 872 (2d Cir. 1971), cert. denied, 404 U.S. 1018 (1972). Then, at least, the implicit royalty charged by the patentee could be readily determined by subtracting his price of the component alone from the price for the component with an implied license, and if that figure were substantially less than the rate charged competing component producers, illicit "exclusion" would be at least presumptively established. (On the other hand, cost analysis would be required where it appeared that the patentee may simply have made a few low-priced sales of the component in an effort to establish that his implied license royalty was the same as the direct license royalty.) The staple case is academic under current misuse and contributory infringement doctrines, however, as competing producers of a staple cannot be sued for contributory infringement and hence have no reason to seek a license. See 35 U.S.C. § 271(c).

Third, and finally, this alternative would raise another difficult question for both patentees and for courts -- how many competing producers must a patentee license in order to avoid a charge of misuse? n28 Almost by definition, there will be no production in being for a non-staple commodity that has had no known use. The patentee may be the only party willing to invest in production facilities at the outset, or no potential independent producer may be willing to make the investment unless granted exclusive production rights. n29 Yet a requirement that the patentee license all additional comers, or even any more comers, may create wasteful excess capacity or inefficient production scale and destroy the investment of the party or parties who took the initial risks. At best, a sensible rule that took all those factors into account would leave considerable undertainty and promote litigation involving very complex questions of fact.

n28 As the Government notes (Br., p. 5 n.7), the District Court reserved for later proceedings the number of license offers to other propanil producers necessary to dissipate the misuse.

n29 An exclusive license with the right to sublicense use of the patent would be at best indistinguishable from the case in which the patentee reserves that right to himself. Indeed, it would be worse unless the patentee could impose a maximum price. Otherwise, the exclusive licensee would price to obtain monopoly profits on the component; the price to users would be higher than if the patentee were selling the package; and both the patentee and users would suffer. Cf. P. Areeda, antitrust analysis 500 n.4 (1974).

In sum, denying process patentees like Rohm and Haas the right to collect royalties in the way that Rohm and Haas does would force them to employ options considerably more costly and burdensome to them, to those who wish to use the patented process, and to the economy in general. n30 And given the infeasibility of a patentee reserving to himself the business of practicing process patents of this kind, denying this option would be likely to reduce significantly the incentives to invent uses for compounds having no known use.

n30 Compare this Court's response to the claim that promotional activities encouraged by vertical restrictions on dealers decrease interbrand competition by enhancing product differentiation: "Nor is it clear that a per se rule would result in anything more than a shift to less efficient methods of obtaining the same promotional effect." Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 56 n.25 (1977).

B. The Potential Adverse Effects of the Practice are Minimal.

While there may be circumstances in which strong countervailing considerations require that the costs discussed above must be accepted, there are no such countervailing effects here. Indeed, the Government Brief cites only one possible adverse effect from a patentee reserving component sales to itself, namely less efficient production of that component. As we shall shortly explain, that danger is minimal.

No other adverse effect can reasonably be claimed. Unlike price-fixing clauses or similar restrictions in patent licenses to horizontal competitors, which may well enable a patentee to reap monopoly profits unrelated to his patent, n31 Rohm and Haas' system of reserving component sales to itself does not allow it to recover more than the value of its invention, or obtain a "second monopoly profit" on the sale of the component. n32

n31 See, e.g., Baxter, Legal Restrictions on Exploitation of the Patent Monopoly: An Economic Analysis, 76 Yale L.J. 267, 335- 337 (196).

n32 See W. Bowman, Patent and Antitrust Law: A Legal and Economic Appraisal 54-55 (1973).

For a method patent whose practice requires an unpatented component, the value of the invention is measured by the difference between the cost of the component alone and the profit-maximizing price that buyers will pay for both the component and the right to use it in the patented method at a given volume. There is only a single "monopoly profit" that can be obtained from the joint sale of the component and the right to use the patented method; for any given level of demand, that profit is maximized at a particular aggregate price for the two. Whether the patentee-manufacturer can feasibly recover the value of the patent by direct licensing or, as here, by component sales with licenses, it cannot obtain additional profits by excluding others from manufacturing the component. If, for example, the patentee were to raise the price of the component above a competitive level, net profits would be reduced unless the patentee also lowered the price for using the patent method by a corresponding amount. n33

n33 Assume, for example, that users are willing to pay $ 1 per unit of propanil to practice the Wilson method at a volume of use which maximizes net aggregate revenues for the manufacturer-patentee. Assume further that the cost of producing propanil in this volume (including reasonable return on investment) is $ .60 per unit. Since $ .60 would thus be the competitive price of propanil, users would be willing to pay a royalty of $ .40 to use the method -- the value of the invention. In these circumstances, Rohm and Haas cannot sell its propanil for more than $ .60 without reducing its royalty below $ .40, the fair value of the invention. Cf. R. Posner, Antitrust Law 173 (1976).

It is possible, as the Government (Br., pp. 10-11) points out, that exclusivity in the production of a nonstaple component may, for its duration, lower the likelihood that more efficient methods of producing that component will be developed. But this effect, if any, is likely to be insubstantial. First, the patentee, like any other producer, has a strong incentive to cut production costs, because lower costs will increase his profits from the licensing of the patented process. n34 Second, for the same reason, the patentee has an incentive to utilize any more efficient methods of production developed by others, or to cease his own production and buy the component from others who could produce more cheaply. Third, for these reasons, a substantial adverse effect is particularly unlikely where the non-staple component is a simple part or chemical mix that the patentee produces interchangeably with similar products in which he faces competition. In such cases, competitive pressures to produce those other products efficiently will affect production of the non- staple as well. Finally, it is unlikely that a non-staple will remain a non-staple for long. New uses are likely to be developed by other users or by would-be producers who would then be free to produce, without threat of contributory infringement, once a new use is found. n35

n35 Indeed, the Government concedes as much (Br., p. 10 n.11).

In short, the sole possible benefit from holding Rohm and Haas' practice to be patent misuse is greatly out- weighed -- from both patent and antitrust law perspectives -- by the substantial economic costs of depriving use patentees of that option. Thus affirmance is appropriate whether or not dictated by section 271 of the Patent Code.

C. Affirmance Here Need Not Be Deterred by the Implications of Such a Holding for Patent Misuse and Antitrust Rules in Other Cases.

The question may be raised whether affirmance of the decision below may not imply broader revision of the patent misuse doctrine and of antitrust rules dealing with "tying" arrangements. It need not. If affirmance is rested solely on the ground that Congress in enacting sections 271(c) and (d) intended to preclude a finding of misuse when a patentee grants licenses only in connection with the sale of a non-staple component, all such issues would be left to another day.

However, we would be les than candid if we did not agree that much of the above analysis is relevant as well to the sale of a staple component with an implied license. Similarly, since patent misuse and antitrust doctrines in this area are closely allied, the analysis as applied to patent misuse also bears on the proper antitrust treatment of such arrangements. And indeed, there is much to be said for the proposition that a reevaluation of patent misuse and antitrust doctrines in this area is in order.

This Court has never reconsidered -- as it did in GTE Sylvania n36 with respect to vertical restrictions on dealers -- whether the necessary economic predicates for per se or virtual per se rules are indeed present with respect to tying arrangements. Yet much as in GTE Sylvania, economic analysis (as our discussion in Part II A, supra, illustrates) has simply refuted the root assumption -- uncritically cited by Petitioners here (Br., pp. 31-32) -- that "[t]ying agreements serve hardly any purpose beyond the suppression of competition." n37

n36 Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

n37 United States v. Loew's, Inc., 371 U.S. 38, 44 (1962), citing Standard Oil Co. v. United States, 337 U.S. 293, 305-06 (1949).

Reexamination seems particularly appropriate for the patent misuse doctrine, which from its inception and as extended is a strict per se rule. With the Mercoid cases, "tying" a license of a combination or process patent to the sale of a component -- staple or non-staple -- constituted misuse without more. In contrast to the inquiries typical of a GTE Sylvania rule of reason approach, misuse cases treat as irrelevant the purpose or effect of the practice, and the consequences of alternative methods of patent exploitation. n38 Given the analysis set forth above, it does seem appropriate that the per se patent misuse doctrine be reconsidered even with respect to staple commodities.

n38 See, e.G., B.B. Chemical Co. v. Ellis, 314 U.S. 495, 498 (1942).

Nor is there anything to preclude the Court from reevaluating its position on patent misuse as applied to staples or non-staples. Patent misuse is a judicially created doctrine that can be judicially revised. Whatever else it means, section 271(d) of the Patent Code merely states what is not patent misuse, not what is. It is thus no bar to judicial contraction of that doctrine. n39

n39 Nor does section 271(c), in foreclosing contributory infringement actions against producers of staple commodities, stand in the way of revising that aspect of patent misuse law. Prohibiting suit for contributory infringement against producers of staple commodities is justified, independently of misuse considerations, as a means of relieving such producers from the burdensome obligation of determining the use to which their customers will put the product. See 1951 Hearings 159-61. Limiting patent misuse thus would not restore contributory infringement rights against producers of staple products. A patentee would, of course, continue to have a right of action for active inducement of infringement, even against producers of staples. 35 U.S.C. § 271(b).

Moreover, a finding of no misuse on the present facts would not necessarily determine the question of whether limiting licenses to purchasers of a staple component should or should not be patent misuse. Exclusive sales of staples may differ, in terms of economic consequences, from exclusive sales of non-staples. For example, there may well be less need for incentives to find new uses for staples than to find uses for products having no known use. Producers of staple commodities have strong incentives to find new uses for their products; and new uses for a product already produced and widely sold are likely to be developed by outside potential users experimenting in the normal course.

Finally, while the above analysis suggests that the prevailing antitrust law on tying arrangements is unduly harsh, those rules are not strict per se rules and the kinds of considerations recognized in such cases as Jerrold Electronics n40 can be expanded or not when antitrust claims raising them later appear.

n40 United States v. Jerrold Electronics Corp., 187 F. Supp. 545 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961). See also FTC v. Sinclair Refining Co., 261 U.S. 463 (1923); Dehydrating Process Co. v. A. O. Smith Corp., 292 F.2d 653 (1st Cir.), cert. denied, 368 U.S. 931 (1961).



For the reasons set forth above, the judgment of the Court of Appeals should be affirmed.

Respectfully submitted,

JOHN H. PICKERING, DONALD F. TURNER, ROBERT A. HAMMOND III, A. STEPHEN HUT, JR., THOMAS W. WHITE, WILMER & PICKERING, 1666 K Street, N.W., Washington, D.C. 20006, (202) 872-6000, Counsel for Chemical, Manufacturers Association



It is hereby certified, as required by Rules 33 and 42 of this Court, that true copies of the foregoing MOTION FOR LEAVE TO FILE BRIEF AND BRIEF FOR THE LICENSING EXECUTIVES SOCIETY (U.S.A.), INC., AS AMICUS CURIAE, with Attachment, were served by first class mail, adequate postage affixed, upon

NED L. CONLEY, 1100 Esperson Buildings, Houston, Texas 77002, Attorney for Petitioners, and,

RUDOLF E. HUTZ, CONNOLLY, BOVE & LODGE, P.O. Box 2207, Wilmington, Delaware 19899, Attorneys for Respondent, on this 21st day of March, 1980.

Counsel for The Licensing, Executives Society (U.S.A.), Inc., as Amicus Curiae


96th Congress 1st Session







Printed for the use of the Committee on Commerce, Science, and Transportation






DEAR COLLEAGUE: The Committee on Commerce, Science, and Transportation has conducted oversight hearings on the state of U.S. industrial technology and innovation, and has a continuing interest in national policy with respect to innovation. The Committee is concerned with the need to stimulate technological and industrial innovation to increase productivity, strengthen America's competitive position in world markets, and contribute to the overall vitality of the U.S. economy.

As part of the Committee's interest in examining various legislative proposals dealing with innovation, Senators Ernest F. Hollings, Adlai E. Stevenson, and I requested that a study conducted by Mr. Ellis R. Mottur, Guest Scholar at the Woodrow Wilson International Center for Scholars, be made available to the Committee. This document contains the report prepared by Mr. Mottur, including the outlines of an omnibus bill.

Although this report has not been considered or endorsed by the Committee or any of its members, I believe it will be of interest to many persons in Government, industry, labor, academia, and the general public. To insure its general availability, I have asked that this document be published as a Committee print.





Technology innovation is the key to conquering our present calamities and discovering future treasures. Without it, we are forever consigned to carving up the same old pie in smaller and smaller slivers. With it, we can expand the real wealth of the pie to provide larger portions for all. This report sets forth a national strategy for stimulating technological innovation.

It establishes the enormous importance of innovation to our economy and national well-being, and underscores the fact that U.S. innovation is lagging compared to foreign competitors and our inherent potential. It delineates the elements necessary to successful innovation and describes the reasons why it is currently lagging. The report then enunciates the policies needed innovation, and sets forth specific legislative proposals to implement them. Each section of the report is summarized below.


The importance of innovation is enormous. It is a key factor in assuring national security, economic vitality, and domestic problem solving. It is essential to increasing productivity; reducing inflation and achieving full employment; meeting international economic competition; developing alternative energy sources and improved methods of conservation; solving environmental problems; providing effective public services in cities and counteis; generating the national wealth required to pay for necessary social services; and in general enhancing the quality of life in our country.


Despite America's impressive past record, innovation in the United States is currently lagging as compared with its challenges, competitors, and potential. Thus, in recent years U.S. capital investment in innovative activities has fallen short; for example, the capital obtained from public offerings by small firms dropped from $ 1.46 billion in 1969 to $ 16.2 million in 1975! Investment in R. & D. has stagnated: Federal funds for R. & D. in 1979 were 16 percent less than what they had been 12 years earlier; at the same time that Japan and West Germany recorded substantial growth in the proportion of their GNP going to R. & D. Similarly, the proportion of scientists and engineers in the U.S. population has dropped since 1969, while it has shown an increase in most other advanced nations. America has shown a decline in its patent balance of 47 percent in recent years, and currently has a negative balance with Japan and West Germany. For the past 20 years U.S. productivity growth has been substantially below that of its foreign competitors: between 1960 and 1976, Japanese productivity gained 5 times more rapidly than America's; and during the most recent quarter of 1979, U.S. productivity fell more precipitously than at any time since we began keeping records in 1947. It is not surprising, therefore, that -- even in technology-intensive items -- we now have a negative trade balance with Japan; and the traditional U.S. surplus in manufactured goods was transformed into a $ 3 billion deficit in the first quarter of last year. Along with these distressing economic indicators, stands our failure to produce the innovations necessary to meet our compelling national needs in fields such as energy, environment, and transportation.


To recognize the causes and devise remedies for our recent decline, we must first elucidate the nature of innovation and the elements required for its success. Innovation is more than an invention or technological development. It is the introduction, sale, or use of a new technology -- whether product, process, or system -- in the consumer or industrial marketplace or public arena. Thus, innovation encompasses the entire spectrum of research, development, invention, engineering, finance, marketing, production, management, and sales. For an innovation to succeed, it must embody the following elements:

(1) The imaginative matching of potential technologies with economic and social needs and opportunities;

(2) Strong leadership on the part of an individual who makes the sustained commitment to persist in pushing the innovation forward;

(3) The possibility of tapping or stimulating sufficient market demand so that the innovation can reach the scale or volume necessary for success;

(4) Individuals or firms, with access to sufficient capital, who are willing and able to take the risks and invest the time, money, and human energy to shape the potential technology to meet the particular market demand:

(5) A combination of potential rewards and risks, along with an expected probability of success, which is attractive enough to justify investment of the necessary capital, when compared with alternative uses to which it could be put:

(6) High caliber management skills to move the innovation successfully through engineering, production, marketing, distribution, and sale; and

(7) Sufficient time and continuing availability of resources to allow the innovation to prove itself out before the final reckoning of success or failure.

To assure that the innovative well does not run dry, the foregoing elements in the innovative process must be solidly grounded in:

(8) An ever-expanding reservoir of scientific knowledge, arising from the unfettered course of basic research and the directed currents of applied research aimed at the needs of the society at large, as well as the special requirements of particular industries;

(9) An abundant supply of highly qualified scientists, engineers, and managers capable of moving the innovations ahead, with the intellectual flexibility and caliber to cope with constant advances in sciences and technology and a high degree of career mobility to redeploy their talents among academic, industry, and government organizations to meet shifting problems and priorities; and

(10) Sufficient high quality facilities, equipment, and instrumentation for conducting the necessary research, development, and engineering.


The recent decline in U.S. innovation is caused by certain conditions prevalent in the overall economy and by a number of shortcomings within the innovative system itself. The principal external conditions which serve to impede innovation include: (a) the high rate of inflation which militates against the kind of long term, risky investments which are required for innovation; (b) the low rate of capital formation in our economy which limits the amount of capital available for investment in innovative ventures, (c) the burgeoning of Government regulations in recent years that slow the innovative process and focus management and technical talent on compliance rather than creation; and (d) the high rate of unemployment which reduces consumer purchasing power and thereby limits the potential consumer markets for innovation. The internal shortcomings in the innovative system include the following elements:

(1) Basic research -- which can thrive only in an atmosphere of free inquiry and which requires long-term stability and continuity of support -- is too much influenced by the inroads of inflation, the fluctuations of the annual appropriation process, and constantly shifting political currents and fads;

(2) Insufficient educational emphasis on pragmatic problem- solving for those engineers who will be working in industry; and inadequate continuing education and career planning, flexibility, and mobilty for scientists and engineers in general;

(3) Inadequate facilities, equipment, and instrumenttation for university-based R.&D., along with difficulties of financing plant and equipment for small business technology firms;

(4) A deficient patent system which: (a) Offers inadequate incentives to induce the risks necessary to bring innovations into the marketplace; (b) provides insufficient stimulus to match potential technologies with economic and social needs and opportunities; (c) contains too many Government held patents which are rarely commercialized; (d) is too narrow in scope to reflect the latest advances in science and technology; (e) maintains an antiquated operation that does not provide timely or legally reliable patents; (f) results in excessive patent litigation that is time-consuming, costly, and riddled with inconsistencies and uncertainties; and (g) sometimes even serves to inhibit innovation;

(5) Not enough applied research on generic problems common to particular industries or industrial processes, such as the steel industry or computer-aided manufacturing;

(6) A lack of institutions to stimulate the design, development, and demonstration of major systems involving advanced technologies in priority national areas such as alternative energy sources, energy conservation. automated mass transit, pollution controls, and toxic waste disposal;

(7) The inability to generate strong, sustained large-scale market demand for public technology systems;

(8) Inadequate sources of venture capital and insufficient incentives and aids to small business technology firms in carrying out innovation and competing with larger established enterprises, despite the overwhelming evidence of small busines'' disproportionately large contribution to innovation in America;

(9) Lack of planning and provisions to aid commnities and workers in averting or adjusting to major economic dislocations due to technological innovation;

(10) Insufficient technical and financial aid to small-scale, community technology projects, despite the spreading interest in this approach throughout the country and the relatively small Federal investment that would be entailed; and

(11) No central, high-level focal point for guiding and coordinating the innovation policies and programs of the Federal Government.


Solutions to the external, macroeconomic impediments to innovation -- such as inflation and inadequate capital formation -- lie beyond the scope of this study. Similarly, the inhibiting effect of excessive regulation requires a major overhaul of the regulatory structure which encompasses a far wider range of considerations than that of the impact on innovation; accordingly, this issue deserves separate treatment and probably requires major legislation of its own.

The specific recommendations of this report are devoted entirely to removing the internal impediments to innovation or -- stated more positively -- to strenthening the innovative infrastructure and incentive system. They are designed primarily to impel the private sector to create the innovations of which it alone is capable; by shoring up market demand, and providing a panapoly of incentives to stimulate corporate and individual commitment to innovative action.

But although it is the private sector which ultimately must produce the innovations, it is government action -- or inaction -- which shapes the framework of institutions, laws, regulations and incentives which, in the final analysis, serves to stifle or to spur innovation.

In designing a strategy whereby Government can stimulate innovation in the private sector, we must recognize at the outset that there are no quick fixes or simple prescriptions to follow. Since innovation encompasses the full spectrum of activities from basic research through development, invention, additional engineering, finance, production, marketing, distribution, and use in society -- any strategy that will prove effective must impact on key elements throughout the entire process. Otherwise isolated improvements at particular points in the system may result in little or no overall effect on innovation.


As stated at the outset, innovation is the key to conquering our present calamities and discovering future treasures. From Thomas Jefferson's inventions at Monticello to the astronauts' landing on the Moon, innovation has always been an integral aspect of the American scene, imparting a powerful impetus to our prosperity and way of life.

Only in the last decade have we begun to lag, as others have accelerated their competition and experimented with new institutional arrangements for fostering innovation. But our underlying innovative capabilities remain solid and strong. Our scientists and engineers represent a magnificent resource of creative ability. Our entrepreneurs and business managers are as enterprising and imaginative as ever. The problem lies not with our people, but with our policies and procedures. The innovative infrastructure has become too bereaucratical and the economic system is not sending out the sort of signals calculated to encourage investment in the future.

Through the proposed legislation, we cannot expect to transform the economic climate overnight. But we can refashion the infrastructure so that it spurs rather than stifles innovation. Because of its many facets and interrelations, the proposed bill may seem extremely complicated. But its central message is clear and simple:

(1) Innovation can come only from the private sector; the Government's role is to stimulate not supplant private initiatives.

(2) Innovation principally responds to market demands. The Nations's pressing needs for improved public technology systems in such fields as energy, transportation, and waste recycling can be met only through the aggregation of sufficient market demand to elicit the requisite technology. The Government's role is to provide technical assistance and matching funds to augment local market demand and to aid in the development and demonstration of advanced technology systems which would not otherwise be launched. The Government must also use its extensive procurement power to stimulate private market demand for desirable innovations in such fields as solar home heating and cooling.

(3) Even more important, the Government should stimulate a vast new marketplace of innovative ideas by reshaping the patent system to expand its scope and force the public auction of innovative ideas when they are not being effectively pursued. Combined with the computerization of the Patent Office and a special innovation tax of only 10 percent on the sale of patents (in lieu of all other taxes), these measures will enable patents to achieve their full potential and become the principal propulsive force for innovation in our economy.

(4) Small business technology firms must also be empowered to realize their full potential in the innovative process through greater access to venture capital and Federal procurement contracts: technical, managerial, and regulatory assistance; and tax incentives to impel them to take the risks necessary to prove innovations out.

(5) Larger technology firms need to be stimulated to make the necessary investments through accelerated depreciation of the facilities and equipment used in innovation.

(6) Finally, the growing grassroots movement for the appropriate use of small-scale, community-based technology should be aided by matching Federal funds and technical assistance; and communities and workers who might be adversely affected by innovation should be aided by community and worker adjustment programs.

In short, innovation only happens when someone puts himself on the line to make it happen. This inevitably entails risks. Few will take such risks unless there is promise of ample market demand and sufficient incentives to make the risks appear worth taking. The policies and programs set forth in this report are aimed at stimulating individuals throughout the private sector to take such risks.

To accomplish this purpose the model legislation includes a number of new institutions and policy mechanism. Admittedly it is not very popular at present to propose the establishment of new institutions. But it is only by imaginative innovation in the institutional infrastructure itself that we can unleash the floodgates of innovation throughout our economy and society at large.

It is hoped that this report, the body of which is presented below, will contribute to informed public debate on these issues.



In the midst of the energy crisis, double digit inflation, the deepening recession, and the President's "crisis of confidence," it may be asked why should one worry about innovation? Aren't there enough more pressing problems to contend with at this time?

But it is the very presence of those other problems which underscores and lends urgency to the innovation issue. For if we had paid sufficient attention to innovation in the past, we wouldn't be in such difficult straits today. If, for example, after the Second World War we had accorded the same priority to solar energy research that we did to nuclear power -- with the same level of financial investment and technical talent -- who could doubt that we would be in a position to meet a significant proportion of our energy needs today through solar power? Yet as late as 1969, the total solar research budget of the National Science Foundation was under $ 1 million, and efforts by the Congress to raise that amount were met with impoundments by the President.

Similarly, in the mid-1960's, a report commissioned by the President's science adviser forecast a major energy shortage in the future, but the Nation's attention was on Vietnam and the Great Society programs, and no one had time to plan for the problems of the future.

And even after the shock of the Arab oil embargo in 1973, when the handwriting on the wall was clear for all who had eyes to see, there was no mobilizing of the Nation's R. & D. resources to advance alternative energy sources, nor any marshalling of political machinery to promote massive conservation of energy.

Moreover, the overriding need for public transportation systems was apparent to those who forecast energy supply and demand as early as the mid-1960's, yet transit R. & D. has never received the all-out national commitment of resources which was required; and subsidies for roadbuilding continued in high gear, while matching funds for mass transit were always suffering from ignition problems and stalling.

So while steps to strengthen the Nation's innovation system may not lead to immediate solution of our current problems, they are essential to help avert similar problems in the future. It should be recognized that the initial thrusts toward innovation must oftentimes be taken before the economics are established as favorable for the new technology. Thus, in the past it had frequently been asserted that solar power and coal liquefication or gasification are not competitive with oil and, therefore, we shouldn't proceed with them. But it is only through continuing R. & D. and innovation that we can make these alternatives competitive in the future.

Ideally, R. & D. programs should be initiated long before their results are required. They should not have to be launched in reaction to present problems (as with the current synfuel proposal), but rather in anticipation of future problems. Thus, they should be started early enough so that the results are ready by the time the needs are upon us. Innovation is a time-consuming process which demands foresight and courage to commit resources before the final balance sheets can be drawn.

In effect, innovation is the cutting edge of our trajectory into the future. As planetary probes explore the reaches of outer space, so innovative technologies extend our reach into the future and create new options for shaping life in the world of tomorrow.

The impact of innovation -- or the lack thereof -- on our social-economic system is both profound and pervasive. Thus, "advances in knowledge have been the biggest single factor in economic growth and productivity gains in the United States over the past four decades." Moreover, "The rate of return on investments in R. & D. is generally high * * *. Private rates of return for innovations (are) generally in the 25-percent to 30-percent range * * * (and) public or social rates of return have been calculated to be * * * over 50 percent * * *. High-technology, R. & D. intensive industries have made an especially strong contribution to the economy * * *. These industries have on the average increased output, productivity, and employment several times as fast as low-technology industries, while raising their prices much less." n1

n1 American Association for the Advancement of Science. "Research and Development, AAAS Report III. R. & D. in the Federal Budget : Fiscal year 1979. R. & D., Industry, and the Economy." Prepared by Willis II. Shapley and Don I. Phillips. Washington. D.C. 1978, pp. 77-78.

In the words of the Comptroller General of the United States, the Honorable Elmer Staats: "technological innovation was responsible for 45 percent of the Nation's economic growth from 1929 to 1969. When high and low technology industries are compared, high technology firms have productivity rates twice as high, real growth rates three times as great, one-sixth of the annual price increases, and nine times the employment growth." n2

n2 National Academy of Sciences. "Technological Innovation and the U.S. Economy." Washington. D.C., Nov. 14, 1978, p. 47.

Technological innovation, then, is clearly essential to increasing productivity and to the continuing creation of new products and industries. Its impact on inflation is equally great; indeed, there can be no lasting solution to the problem of inflation without a significant upsurge in innovation. For without innovation, productivity cannot be significantly improved, and without such an improvement in productivity, inflation will continue to run rampant regardless of palliatives like the wage-price guidelines. Thus, while steps to enhance innovation may have little immediate impact on inflation, they are essential in any sustained, longrun solution to the problem.

On the whole, innovation also contributes to the generation of jobs. It is true, of course, that specific innovations sometimes eliminate the need for certain jobs and result in increased unemployment in particular localities. But the overall impact of innovation is to generate new products, industries, and jobs. Moreover, the effect of innovation on productivity also helps generate jobs: According to Prof. Richard R. Nelson of Yale University, "More rapid technical advance and productivity growth, far from being a threat to employment, would facilitate a reduction in unemployment * * *. The proximate source of today's high unemployment is restrictive Government policies. If more rapid productivity growth can facilitate better control of inflationary pressures, governments will be able to relax their restrains. Far from being a threat to employment, more rapid productivity growth may be a prerequisite for a return to higher levels of employment." n3

n3 Richard R. Nelson. "Technical Advance and Economic Growth: Present Problems and Policy Issues," in Proceeding of the International Conference on Science and Technology at New York University, March 1979. New York Academy of Sciences, New York.

Furthermore, a study by the MIT Development Foundation showed that the average compounded annual growth in jobs for a sample of young high-technology companies, from 1969 to 1974, was 41 percent; whereas a sample of mature companies over the same period showed less than 1 percent growth in jobs. The study, which contrasted job growth for mature companies with innovative companies and with young high-technology companies, showed that:

During the 5-year period the six mature companies with combined sales of $ 36 billion in 1974 experienced a net gain of only 25,000 jobs, whereas the five a net increase in employment of almost 35,000 jobs. The five innovative companies with combined sales of $ 21 billion during the same period created 106,000 net jobs. n4

n4 American Association for the Advancement of Science. "R. & D. in the Federal Budget, R. & D. Industry, and the Economy." AAAS Report No. 78-R-3, September 1978, Washington, D.C., pp. 132-33.

Innovation is also central to the United States' international economic competitive position.

The U.S. trade balance for R. & D. intensive manufactured products has been positive and rising since 1960 : the 1976 balance was five times that of 1960 and two and a half times the 1970 level. n5

n5 National Science Board, National Science Foundation. "Science Indicators 1976". Washington. D.C. 1977. p. 3.


the trade balance for research and development-intensive manufactured products * * * is now over $ 28 billion. The trade balance for nonresearch and development-intensive products is down from a breakeven level in 1960 to a $ 16 billion deficit. n6

n6 NAS. "Technological Innovation and the U.S. Economy," p. 47.

Clearly the technology-intensive product group has been responsible for yielding surpluses and largely covering deficits in trade from specific non-R. & D.- intensive product groups * * *. Its importance in maintaining an overall favorable trade balance is unquestionable. n7

n7 NSB. "Science Indicators" 1976. pp. 37-38.

Thus it is innovation-engendered technology which has made for a favorable trade balance in recent decades, and which is essential to regaining a favorable balance in the future. The importance of foreign trade to the overall U.S. economy is seen from the fact that "the United States remains the world's largest exporter as well as its biggest importer." According to Hon. C. Fred Bergsten, Assistant Secretary of the Treasury for International Affairs:

One out of every five jobs in this country now produces for exports to other countries. One out of three dollars of corporate profit in this country derives from international activities of American firms. n8

n8 Helen Dewar, "The Impact of Exports and Imports," in the Washington Post, Washington, D.C., July 17, 1978, p. A22.

Essential as it is to maintaining a strong economy at home and competitive position abroad, innovation is equally important to meeting many of our pressing national needs. Thus technological innovation is required in order to develop: (1) Alternative energy sources such as solar, wind, geothermal, ocean thermal, coal liquification and gasification, and fusion power; (2) solutions to environmental problems such as air and water pollution and toxic waste disposal; (3) means for providing effective public services at reasonable costs in fields such as transportation, communications, fire fighting, public safety, and home utilities; and (4) effective defense and arms control technology to promote national security.

In a more fundamental sense, innovation may be seen as central to the generation of wealth in our society. First described by Fritz Machlup in "The Production and Distribution of Knowledge in the United States" n9 and by Danield Bell in "The Coming of Post Industrial Society" n10, it is now generally recognized that we live in a knowledge society where the basic commodity is information. In such a society the most valuable information of all is the knowledge capacity to innovate. This capacity, rather than natural resources or industrial plant and equipment, becomes the key to generating new wealth. Therefore, if over the long haul we want to be able to afford to provide our citizens with necessary social services such as welfare, health care, and social security, we must foster sustained technological innovation throughout our economy.

n9 Fritz Machlup, "The Production and Distribution of Knowledge in the United States". Princeton : Princeton University Press. 1962.

n10 Daniel Bell, "The Coming of Post Industrial Society". New York : Basic Books. 1973.

In short, the significance of innovation is enormous. It is a key factor in insuring national security, the vitality of the economy, and fulfillment of our social needs. Specifically, it is essential to productivity; the creation of new products and industries; reducing inflation; achieving full employment; meeting international economic competition; developing alternative energy sources and improved methods of conservation; solving environmental problems; providing effective public services; generating the national wealth required to pay for necessary social services; and in general enhancing the quality of life in our country.


Despite America's impressive record of innovation over the past century, the consensus of informed judgment today is that U.S. innovation is lagging; as compared with its past, its potential, its current challenges, and its foreign competitors. The past year has witnessed a spate of articles on innovation, not only in the business and technical press, but in the popular media as well. The burden of these articles has been uniformly negative: That we are not innovating as rapidly and effectively as necessary to spur economic vitality and meet foreign competition. For example, the cover of a weekly newsmagazine was recently devoted entirely to innovation. The headline read: "Innovation -- Has America Lost Its Edge?" The remainder of the cover consisted of a cartoon which attempted to convey the lackadaisical pace of U.S. innovation. n11 Similar articles laced the business, technical, and popular press throughout the year.

n11 "Innovation : Has America Lots Its Edge?" in Newsweek, June 4, 1979, cover page and pp. 58-68.

At the same time a salvo of policy studies on innovation was launched by Government and business groups, along with a steady supporting fire of speeches on the topic by leaders of industry and the technical community. Thus, three of four congressional analytical arms have undertaken major studies of innovation: The General Accounting Office (GAO), the Congressional Research Service (CRS), and the Office of Technology Assessment (OTA). The prestigious business policy analysis organization, the Committee for Economic Development (CED) is carrying out a major study on innovation. But the most extensive effort is the administration's Domestic Policy Review of Innovation, chaired by the Secretary of Commerce and involving inputs from all affected Government departments and agencies, as well as from a large number of outside advisory panelists. The outside inputs were in the form of separate reports from special subcommittees on: Economic and Trade Policy; Regulation of Industry Structure and Competition; Patent Policy; Federal Procurement Policy; Environment, Health, and Safety Regulations; Direct Support of Research and Development; and statements from the Labor Advisory Subcommittee and the Public Interest Advisory Subcommittee. Throughout these reports

there was general agreement * * * that american productivity is lagging, particularly in comparison with major competitors such as Japan and West Germany. The decline in the growth rate of productivity * * * is regarded as a major factor contributing to inflation and the decline of the dollar. n12

n12 John Walsh, "What Can Government Do For Innovation?" in "Science". Washington: American Association for the Advancement of Science p. 380.

And the reports underscored the link between innovation and productivity.

In short, there is a strong consensus of opinion that innovation in the United States is lagging. To the extent that relevant data are available, they all support this conclusion. Such data deal with the inputs or resources made available for the innovation process in the United States, the outputs from the process, the effects of innovation on the economy, and comparisons with foreign nations. Relevant data from these areas are summarized below.

A key input to the innovation process is capital investment. This is, of course, critical in all business activity, but it is especially significant in innovative undertakings, which frequently involve the development of ancillary instrumentation and techniques, as well as the introduction of new facilities and equipment. In his major study of the relationship between inventions and economic activity, Jacob Schmookler showed that capital investment was a necessary precondition of inventive activity, or at least that capital investment and the market demands associated with such investment preceded the development of inventions. n13 However, the investment which precedes an invention is only the tip of the iceberg; for "90 percent of the investment necessary to bring innovation successfully to market comes after the invention process is complete." n14 In short, significant continuing capital investment is an essential prerequisite for healthy innovative activity.

n13 Jacob Schmookler, "Invention and Economic Growth". Cambridge, Massachusetts: Harvard University Press, 1966.

n14 Final Report of the Subcommittee on Economic and Trade Policy of the Advisory Committee on Federal Policy on Industrial Innovation to the Secretary of Commerce. Washington. Feb. 15, 1979, p. 6.

But in recent years capital investment in innovative activities has fallen short of what is needed. This is partially due to the pervasive climate of uncertainty which has cloaked business decisionmaking in our society over the past decade. As long as the overall economic situation is uncertain, businessmen find it more difficult to make long-term commitments of capital. This is greatly exacerbated by the rampant inflation which has "meant that the cost of capital has reached all time highs, acting as a deterrent to capital spending," and which "has drastically altered the rates of return for new investments that businesses can accept. Faster recovery of capital costs has become a watchword in investment decisions by business, with an eye on the importance of profitability over the short term." n15 This is particularly important with respect to investment decisions on innovation, since innovations typically take long time periods to reach fruition. "It is rare that an important innovation can have a major impact short of 4 or 5 years, and, more frequently, the impact of a major innovation may not be felt for a decade or two." n16

n15 Ibid., pp. 5-6.

n16 Final Report of the Subcommittee on Procurement and Direct Support of Research and Development of the Advisory Committee on Federal Policy on Industrial Innovation to the Secretary of Commerce, entitled "Federal Procurement Policy." Washington, January 26, 1979. p. 2.

The problem is underscored by considering "the recycling time of risk capital for entrepreneurial types of investments." as noted by James Hillier the former Executive Vice President of RCA Corporation:

If you invested in a standard innovation, say, in the mid-sixties, you could expect to get back your purchasing power so that you could recycle it into another innovation in about seven to nine years. For exactly the same innovation under today's conditions, it takes fourteen to fifteen years to recoup the original purchasing power. This means that we have to use twice as many constant dollars, twice as much purchasing power to achieve the same number of innovations today as it would have taken fifteen years ago. n17

n17 NAS. Technological Innoration and the U.S. Economy, p. 57.

In any event, capital investment for innovation has fallen short over the past decade. "Capital expenditures by American businesses expanded by an average of 3.8 percent per year in real terms (from 1945 to 1970), but by only 0.9 per year since then. n18 Concurrently, "from 1969 to 1975, the total number of companies seeking equity funds for growth dropped 92 percent -- from 1.800 to 150. n19 The capital acquired by firms with less than $ 5 million in net worth from public offerings since 1969 dropped from $ 1.46 billion in 1969 (with 548 offerings) to $ 16.2 million in 1975 (with 4 offerings) ! The catastrophic decline in capital obtained by small businesses * * * extends to other sources of small business financing, including professional managed venture capital sources and high-risk investments by individuals." n20 "A recent survey by the American Electronics Association (AEA) documents the increasing difficulty that new, small companies are having in gaining access to capital markets. Of the firms they studied: Companies founded between 1971 and 1975 were able to raise only half as much equity capital, on the average, as firms founded between 1966 and 1970; and firms founded in the more recent period had an average debt to equity ratio of more than 2:1, compared to the more secure 1 :1 ratio that had prevailed for the previous fifteen years. * * * For the small businessman, the availability of capital has become the greatest unaddressed problem." n21 The significant of this shortage of capital for small business is underscored by the finding that small firms produce proportionately more innovations than do larger firms. n22

n18 Report of Subcommittee on Economic and Trade Policy, p. 6.

n19 Report of Subcommittee on Procurement. p. 17.

n20 Final Report on Patent Policy of the Subcommittee on Patent and Information Policy of the Advisory Committee on Federal Policy on Industrial Innovation to the Secretary of Commerce. Washington, February 6, 1979, pp. 1-2.

n21 Report of the Subcommittee on Economic and Trade Policy, pp. 3-4.

n22 "Technological Innovation : Its Environment and Management." U.S. Department of Commerce. Washington. January 1967, pp. 16-18.

Another striking indication of the decline the capital investment in innovative activities is the fact that: "as recently as 1968, 300 to 400 high technology firms were founded. But in 1976 the number was zero." n23

n23 NAS. "Technological Innovation and the U.S. Economy." p. 48.

Along with capital investment, the key indicators for input to innovation derive from specific statistics on the allocation of financial and human resources to R. & D. activity; for R. & D. is the underpinning of innovation. R. & D. by itself will not automatically produce or guarantee innovation; but without the reservoir of knowledge which derives and is replenished from R. & D., sustained innovation is unlikely. "All available evidence indicates that R. & D. is an important contributor to economic growth and productivity * * * the contribution of R. & D. to economic growth/productivity is positive, significant, and high," n24

n24 "A Review of the Relationship between Research and Development and Economic Growth/Productivity." Washington. National Science Foundation. February 1971, p. 3.

But resources for R. & D. over the past decade have lagged considerably. Thus "total (Federal) funds budgeted for fiscal year 1979 for the conduct of R. & D. * * * in constant dollar terms (are) * * * actually 16 percent below fiscal year 1967." n25 "As a fraction of the Gross National Product (GNP), national R. & D. spending has dropped from the high of 2.97 percent reached in 1964, falling to an estimated 2.23 percent in 1976 * * *. (In constant dollars) Federally supported R. & D. expenditures * * * in 1976 (were 18 percent below the peak reached in 1967. * * * As a fraction of the total Federal budget, R. & D. funds have declined substantially, falling, to an estimated 6 percent in 1976 from a high or 13 percent in 1965. As a fraction of the "relatively controllable" portion of the Federal budget, R. & D. outlays amounted to 13.5 percent in 1976 -- the lowest level since 1967 when they were 16.3 percent. n26

n25 AAAS Report III. p. 14.

n26 NSB. "Science Indicators 1976", p. 44.

With respect to basic research (which comprises about 13 percent of all R. & D. spending), "national spending * * * in constant dollars * * * in 1976 * * * remained nearly 11 percent below the peak year of 1968 * * *. In constant dollars, estimated Federal and Industrial support for basic research in 1976 was 15 percent below the peak levels which each had reached in 1968 * * *. In 1976 basic research expenditures by universities and colleges (in constant dollars) * * * were roughly equal to the level reached in 1969 * * *. In constant dollars, Federal spending for academic basic research peaked in 1968, but real dollar expenditures for 1976 remained an estimated 10 percent below that peak year." n27

n27 Ibid., p. 66.

With respect to industrial R. & D., "total funding for industrial R. & D. has barely kept up with inflation for the last 10 years. Increases in private industry funding of R. & D. have largely been offset by decreases in Federal funding of industrial R. & D. * * *. We see some signs of our decline in that the average constant dollar investment in R. & D. by industry has increased by less than two-tenths of a percent per year from 1967 to 1977." n28 Moreover, "there has been recent evidence * * * of a shrinking of time horizons and a growing conservatism regarding industrial R. & D." n29 "There has been an increased private- sector R. & D. emphasis in recent years on low-risk, short term projects directed at incremental product changes, and a decreased emphasis in the longer term research that could lead to radically improved products and processes." n30

n28 Industrial Innovation and Its Relation to the U.S. Domestic Economy and International Trade Competitiveness. Washington, Congressional Research Service Report No. 78-204 SPR. October 13, 1978, p. 7.

n29 Nelson, p. 9.

n30 CRS Report No. 78-204 SPR. p. 14.

With respect to human resources, "in 1975, approximately 531,000 scientists and engineers (on a full-time equivalent basis) were engaged in R. & D. * * * almost 28,000 fewer than the peak employment level reached in 1969 * * *. The number of R. & D. scientists and engineers in industry * * * reached almost 360,000 * * * in 1975, (but) was still nearly 7 percent less than the peak employment reached in 1969." A particularly disquieting aspect of the human resources situation is the fact that there has been an aging of the academic workforce. Thus "of all the doctoral faculty involved in R. & D., the proportion of young science and engineering investigators decreased from 44 percent in 1968 to 30 percent in 1974." n31

n31 NSB, Science Indicators 1976, p. 130.

Another important indicator of inputs to innovation are Federal funds provided for the dissemination of scientific and technical information. For innovation cannot occur if the results of R. & D. are not incorporated in technology and used in the economy and the society at large. This process is facilitated through the dissemination of scientific and technical information. Thus it is disquieting to note that "Federal obligations for the dissemination of scientific and technical information, measured in real dollars, peaked in 1968 at $ 435 million but fell to an estimated $ 321 million in 1976." n32

n32 Ibid., p. 45.

Thus far we have considered data reflecting inputs to the process of innovation, or resources made available to R. & D. and innovation activities. Now we shall turn to those data relating to outputs of the process, its effect on the economy, and comparisons with foreign nations.

Although the current scope of patents is such that they do not adequately reflect the full range of innovation occurring in our economy, they nevertheless provide one of the best indicators available for gaging the extent of inventive activity which is taking place. The data on patents is not reassuring. Thus, "the total number of patents issued annually has declined since 1971." n33 At the same time, "although positive, the U.S. patent balance declined almost 47 percent between 1966 and 1975. This was due to the 91-percent increase of foreign-origin patenting, coupled with the leveling off and eventual decline in the number of foreign patents awarded to U.S. citizens. The United States has a favorable but declining patent balace with Canada, the United Kingdom, and five European Economic Community countries, but a negative balance with West Germany and Japan. The share of U.S. patents granted to foreign residents has more than doubled in the last 15 years, reaching a level of more than 35 percent in 1975 * * *. The percent of patents due to foreign inventors increased in nearly every product field from 1965 to 1975." n34 "In the 1950's, according to an analysis by the Stanford Research Institute, 82 percent of the major inventions brought to market were developed in the United States. By the late 1960's, the figure had declined to 55 percent." n35

n33 Report on Patent Policy. p. 2.

n34 NSB. "Science Indicators 1976," pp. 2, 3, 92.

n35 Newsweek. p. 2p.

Perhaps the most important indicator of the extent and effectiveness of innovation consists of data relating to productivity gains. For although productivity gains are generated by other factors besides technical change (such as increased skills in the work force and improved organization of production): and although technological innovation not only enhances productivity, but also can lead to new goods and services -- nevertheless, the date of productivity growth is as good an indicator of the extent and quality of innovation in our economy as we have available.

It is, therefore, distressing to note that "productivity gains * * * have averaged only 1.6 percent during the last decade, a discouragingly low figure compared to the 3.2 percent average for the first two decades in the postwar period (and) compared to the 5 and 6 percent figures of our major trading partners * * *. If productivity over the last 10 years had increased at the same 3.2-percent annual rate of growth of the two previous decades, then output per hour would have been 11-percent higher in 1977. The difference would have meant more than a $ 100 billion increase in terms of real gross national product at the 1977 employment level." n36 It is disturbing not only that productivity growth is substantially less than it had been in past decades, but that it is significantly lower than that of our trading partners. "Economists generally agree that the rate of productivity growth in the American economy has been substantially below that of America's major foreign competitors." n37

n36 NAS. "Technological Innovation". p. 45.

n37 Robert Gilpin. "Technology, Economic Growth, and International Competitiveness", a report to the Joint Economic committee, U.S. Congress. Washington, July 9, 1975, p. 10.

Thus, while U.S. productivity grew 2.8 percent from 1960 to 1970, during the same period productivity grew 3.3 percent in the United Kingdom, 3.7 percent in Canada, 5.5 percent in West Germany, 5.9 percent in France, 7.4 percent in Italy, and 10.8 percent in Japan.

Productivity levels in the United States (currently) exceed those of France, West Germany, and the United Kingdom, but U.S. productivity gains between 1960 and 1976 were the smallest of the rive countries. Japanese productivity gains were more than five times greater than U.S. increases. n38 Finally, productivity of U.S. businesses fell more rapidly in the second quarter of this year (1979) than at any time since the Government began keeping records in 1947. n39

n38 NSB. "Science Indicators 1976", p. 3.

n39 John M. Berry. "Productivity Fell Sharply in 2d Quarter," in Washington Post, Washington. July 31, 1979. p. A1.

This disappointing record of U.S. productivity growth is a clear indication that U.S. innovation is not achieving all that one could reasonably expect of it.

Comparison with foreign nations along other dimensions serves to underscore the overall impression that U.S. innovation is lagging. For example, since 1964, the proportion of the gross national product devoted to R. & D. in the United States has substantially decreased; whereas "during the decade 1962-72, both Japan and West Germany recorded substantial growth in the proportion of their gross national product directed toward R. & D." n40 Although West Germany has recently leveled off and started to decline in its ratio of R. & D. expenditures of gross national product, Japan is still continuing to increase.

n40 NSB "Science Indicators 1976," p. 5.

Another comparative measure of a country's R. & D. effort is the relationship between the number of scientists and engineers (S. & E.'s) and the population. The number of S. & E.'s per 10.000 population in the United States has remained constant since 1972. The 1975 level is 10 percent lower than that of 1969, when this ratio peaked in the United States . . . (but) data from the other countries studied showed a general increase in this ratio. n41

n41 Ibid., p. 2.

While the U.S. trade balance for R. & D.-intensive manufactured products has been positive since 1960 and while surplases from these product groups, until 1976, have been sufficient to cover the increasing deficits from non-R. & D. intensive products, nevertheless the situation is shifting to a less favorable stance for the United States. Thus, the United States now has a "negative trade balance in R. & D. intensive products with Japan * * * due mainly to U.S. imports of electrical machinery and to a lesser degree to imports of professional and scientific instruments and nonelectrical machinery." n42 In 1977, this amounted to "a $ 3.6 billion trade deficit with Japan in high-technology goods * * * about two-thirds of (which) was accounted for by imports of consumer electronic goods." n43 Even more foreboding is the fact that the newest bridge across the Mississippi River "is soon to be fabricated in Japan at a cost of $ 42 million, one-third less than the lowest American bid, and floated by barge in pieces the size of ship hulls to its destination at Luling, La." Moreover, in the first quarter of 1978, "the traditional U.S. surplus in trade of manufactured goods declined to the point of a $ 3 billion deficit," and "imports of machinery, transportation equiment and manufactured goods rose dramatically, suddenly overtaking oil as the biggest component of the country's trade deficit." n44

n42 Ibid., p. 3.

n43 "Vanishing Innovation" in Business Week, July 3, 1978. p. 48.

n44 Dewar, pp. A1 and A22.

In the words of Dr. Philip Handler, President of the National Academy of Sciences:

The topic of technological innovation is on the front page of the newspaper day after day. It is debated on talk shows, a concern of the Congress, and a central concern of the executive branch * * * if American streets did not abound in Datsuns, Toyotas, Mercedes, and Hondas, if most of our purchases of household electronics were those made by General Electric, Westinghouse, and Zenith rather than by Sony and Panasonic, if those cameras and pocket calculators we carry were of domestic manufacturer * * * we would feel rather differently about this.

The inroads of foreign manufacturers in consumer products are tangible indicators of the U.S. lag in innovation. But we can infer the lag just as well from the intangible, potential products, processes, and services which our society needs, but which technology has not yet created. These intangible indicators are just as valid for assessing the effectiveness of innovation in our society as are the other indicators discussed above.

Thus, we all recognize the need for new technologies to aid in energy conservation and in the production of alternative energy sources; in pollution control technology; in automobile propulsion systems; in mass transit; waste recycling systems; rural telecommunications; health care delivery systems; public safety systems; and a host of other areas. In many instances, the basic science is adequate for substantial progress; yet innovation does not take off and move ahead as it should and could. Sometimes it may be due to the difficulty to aggregating sufficient market demand; sometimes to the inability to marshall sufficient incentives for enrepreneurs; sometimes to the presence of institutional or regulatory barriers; sometimes to the unavailability of sufficient capital; or the absence of managerial skills where they are needed.

A 19th century sage once remarked that if you built a better mousetrap, the world would beat a path to your door. But in the complex 20th century an improved solar collector, for example, may prove to be of no avail if it does not meet local building codes or FHA standards, if insufficient capital is available to exploit it, if an adequate market cannot be readily stimulated, or if the inventor or inventing organization does not have proper incentives or managerial skills to promote and produce the product. But whatever the reason or combination of reasons, the simple fact is that innovation is not occurring rapidly or effectively enough to meet many critical national and social needs.

Thus whether we consider past performance or present potential, current challenges or foreign competition -- whether we examine patterns of capital investment or R. & D. funding, patents, productivity, international trade, or compelling national needs for new technology -- we inescapably arrive at the same conclusion: That U.S. innovation is lagging.

Yet we know the enormous significance of innovation to national security, economic vitality, and social progress. And we know that the impediments to innovation are not intrinsic obstacles or insuperable barriers: They can be overcome. What then should we do about them? How should we proceed to ameliorate innovation?


Before we can delineate a national strategy for stimulating innovation, we must examine the innovative process, establish overall policy guidelines, and identify target areas for Federal action, along with the goals to be pursued in each area.

First, we must be clear on what we mean by technological innovation. We do not mean merely the conception of a new scientific idea or research discovery. Nor do we mean merely an invention, or completion of a technological development, or even its incorporation in an engineering system capable of producing it.

At the heart of every innovation is a unique coupling or matching of some technological capability with a market need or opportunity. When this conceptual coupling has been turned into a tangible product, process, or system -- which has been disturbed and used successfully within the market -- then, and only then, can we say that an innovation has occurred.

So the notion of innovation is extremely broad and encompassing and involves elements of basic scientific research, invention, engineering know-how, marketing, finance, production, and management; but in all cases depends on the imaginative matching of technological capabilities with economic and social needs or opportunities.

Now how does this process occur? At one time innovation was naively viewed as a simple, linear progression whereby basic research led to applied research which in turn led to development or invention, which engendered further engineering, and then production and use. This is now recognized as a simplistic, misleading characterization.

Technological innovation is not a simple, straightforward sequence of events that proceeds with deterministic regularity toward predictable ends. The singular term "process" ascribes too much simplicity and uniformity to what is in reality an exceedingly involved set of processes that follow a complex course of events that is often highly creative and unpredictable. n46

n46 Ellis R. Mottur. "Technological Innovation for Civilian, Social Purposes". Washington: George Washington University. July 1971, p. 162.

There is nothing linear about the process of innovation. It can start from many points; it involves many dead ends, new starts, and innumerable feedback loops; and it is riddled through and through with risk. At its most crucial points, it entails creative leaps of imagination which can't be predicted or planned. When this author 10 years ago constructed a comprehensive systems model of the processes of technological innovation, the result was a model which depicted the interrelationships among 93 separate functions and hundreds of subfunctions. n47

n47 Ibid., "Part II -- Systems Model of the Processes of Technological Innovations," pp. 161-34S.

To understand the variations possible in patterns of innovation, one need only consider the starting point of particular innovations. Some for example, do not start from new research knowledge, but draw on knowledge which has been available for long periods. Thus, the reflection of radio waves by metallic objects was first demonstrated by Hertz in 1887, but the development of radar did not commence in earnest until 1934. n48 In other situations, however, new research findings can lead rapidly to innovation. Thus, Shockley theoretically predicted the possibility of the transistor in 1949; by 1951, Bell Telephone Laboratories announced the actual invention of the junction transistor; and by the mid-1950's, transistors were being mass-produced throughout the Nation. n49 However, in most instances the vast majority of necessary scientific advances have been made long before the innovation gets underway: a study by Illinois Institute of Technology, for example, showed that 90 percent of the essential scientific base had been established 10 years or more before the innovations occurred. n50

n48 Robert M. Page. "The Origin of Radar." New York: Doubleday. 1962. pp. 13-40.

n49 Richard R. Nelson. "The Link Between Science and Invention: The Case of the Transistor," in National Bureau of Economic Research. "The Rate and Direction of Inventive Activity." Princeton: Princeton University Press. 1962. pp. 549-583.

n50 Illinois Institute of Technology. "Technology in Retrospect and Cultural Events in Science (TRACES)," Report for the National Science Foundation. Washington: NSF C535, Dec. 5. 1968.

Another variable which affects the rate and focus of innovative activity is the stage of development of the firms involved. Thus, "following the birth of a new product, the product design changes rapidly and radically: it is fluid, the manufacturing process is loosely organized and unsettled, and the organization is adaptive. Conditions at this point constitute the initial or "Fluid" stage of development and at this "Fluid" stage, major product innovations are rather frequent. * * * A turning point occurs with the emergence of a "dominant design" * * * that offers superior performance. * * * As the product and the manufacturing process develop over time, costs decrease, product designs become more standardized and suitable for broad market segments and change becomes less fluid. At the same time production processes, designed increasingly for efficiency, offer higher levels of productivity. * * * The nature and sources of technological innovation shift with these structural changes in product and process. Innovation becomes more incremental and technological progress takes the form of steady evolutionary development. Major innovations with potential to reshape the product or greatly improve productivity originate more frequently outside the firm and industry." n51

n51 William J. Abernathy. "The Productivity Dilemma: Roadblock to Innovation in the Automobile Industry," report of the Harvard University Graduate School of Business Administration. 1977. Executive Summary. pp. 7-8.

Sometimes new technological developments virtually generate their own markets as in the case of computers and lasers. n52 Sometimes national needs serve to stimulate innovation as in the case of synthetic rubber during World War II or pollution controls at the present time. But in all cases, someone has to match the market need with the technological capability.

n52 Nathan Rosenberg. "Science, Invention, and Economic Growth," Economic Journal, vol. 84. March. 1973. March 1974. pp. 90-10S.

Generally, innovations don't happen by themselves. Moreover, in most cases a single individual has to take the lead in pushing the innovation forward against the innumerable obstacles that invariably arise. This entrepreneur or "innovation champion" (as Donald Schon has dubbed him) must serve as the change agent who makes the innovation happen in practice. n53 For in the final analysis, the success of most innovations depends on the initiative, imagination, judgment, commitment, and courage of particular individuals who are willing to place their time, talent, reputations, and careers on the line in situations of considerable uncertainty and risk. Providing such individuals with effective incentives must be a paramount imperative of public policy for innovation.

n53 Donald A. Schon, "Champions for Radical New Inventions," Harvard Business Review, vol. 41. No. 2 (March - April 1963). pp. 77-86.

A point which cannot be overemphasized is that "uncertainty is inherent in technical innovation." n54 along with this uncertainty factor goes an extremely high failure rate for innovations. Thus, a study by Edwin Mansfied showed that for every 100 projects which were initiated, only 57 were completed technically; 31 of these were commercialized, and only 12 of the original 100 eventuated in market success. n55

n54 Donald A. Schon, "Technology and Change". New York: Delacorte Press, 1967, pp. 24-32.

n55 Edwin Mansfield. "Research and Innovation in the Modern Corporation." New York: W. W. Norton & Co., 1971.

In any case, in order for a particular innovation to succeed, it must embody the following elements:

First, there must be the creative coupling within someone's mind: Involving the perception of a new way in which a possible technological capability can be shaped to meet some economic, social, or human need; or to take advantage of some opportunity. This imaginative coupling or matching within the human mind is at the heart of the innovative process, but it must be accompanied by all of the following elements if it is to produce success.

Thus, second, there must be an effective change agent or "champion" -- who may not be identical with the inventor or originator of the innovative concept, but who could be an individual enterpreneur, investor, or corporate or Government official -- who persists in the commitment to make the innovation happen.

Third, it must be possible to tap or stimulate a sufficient market, in which the innovation can reach the scale or volume necessary for success, and in which the innovation can withstand the buffeting of competition.

Fourth, there must be access to sufficient capital to obtain the resources necessary to enable the innovation to succeed.

Fifth, the combination of potential rewards and risks, along with the perceived probability of success for the innovation, must be sufficiently attractive to justify investment of the necessary capital when compared with alternative uses to which it could be put.

Sixth, adequate managerial skills must be brought to bear on the shaping of the innovation from research, invention, or initial development through any additional engineering that may be required, and through production, marketing, distribution, and sale within the market.

Some Tales of 'Copycat' Products Are Best Left Untold, Sterling Drug Learns



If you steal it, don't flaunt it.

That's marketing advice Steven W. Lapham would do well to remember. If he had heeded it last November, he might have kept himself and his employer out of court.

Mr. Lapham is new products director of Lehn & Fink Products Co., the Sterling Drug Inc. division that makes Lysol and other household cleansers. Four months ago he was a guest speaker at an American Marketing Association new products conference.

"Replicate, don't innovate," was Mr. Lapham's theme. "Trying to innovate as the only way to success is one of the greatest myths of new products ever created," he said.

Instead, he suggested, be a copycat. "Someone else has gone and done your homework for you," he said. "They have taken the risk, the time, and spent the dollars."

His example of successful mimicry: Lehn & Fink's own Love My Carpet rug and room deodorant, a copy of Airwick Industries Inc.'s Carpet Fresh.

Mr. Lapham told how Lehn & Fink was skeptical at first about Carpet Fresh, which was test-marketed by Airwick in mid-1977, and introduced nationally a year later. "We found it pretty hard to believe that Carpet Fresh had any potential at all," he said. "What housewife in her right mind would sprinkle white powder into her carpeting before vacuuming? Who dirties their carpet first? The whole idea had to be wrong."

A Quick Copy

It wasn't. When Lehn & Fink monitored Airwick's test markets, it found that Carpet Fresh was "a terrific idea," Mr. Lapham explained. In December 1978, Lehn & Fink began a crash project to duplicate Carpet Fresh. A copy was on supermarket shelves within six months-far sooner than the two years or more it usually takes to develop a new product.

Mr. Lapham's candor may have startled his audience, but he didn't create much of a stir until a month later when Advertising Age, a trade publication, reported his remarks.

Then the harrumphing began. Marketing executives privately scorned Mr. Lapham's approach as one that did little to promote economic growth; some were surprised that such an important name in consumer products as Sterling Drug would stoop to mimicry. An Ad Age editorial said. "Where would the replicators be without the innovators? They wouldn't even have material on which to base their speeches."

Four weeks after the Ad Age story, Airwick finally spoke up-in federal district court in New Jersey. The company charged Lehn & Fink with patent infringement and asked for damages totaling triple the profits from Love My Carpet. Although Airwick officials say they had been contemplating litigation before Mr. Lapham's speech, the sult quotes his remarks extensively.

Imitation, of course, isn't unusual in marketing. Mr. Lapham's thesis had been put forth 13 years earlier in a Harvard Business Review article, "Innovative Imitation," by Harvard marketing theoretician Theodore Levitt. He urged companies to search for products they could copy through "reverse R&D - working backwards from what others have done, and trying to do the same thing for oneself."

Ample Examples

Examples of successful copycats abound. International Business Machines Corp. wasn't first in computers nor RCA Corp. in television sets, Mr. Levitt noted. Mr. Lapham pointed to General Foods Corp.'s Jell-O pudding following R. J. Reynolds Industries Inc.'s My-T-Fine and Schick Inc. razor blades imitating Gillette Co.'s.

Even Airwick says it sometimes follows other companies's ideas. "When we see something successful, we try to put a unique twist on it," says Michael Sheets, president of Airwick's consumer products division. The company's new Air Wand room freshener, for example, is strikingly similar, except for its package shape and scent, to Clorox Co.'s Twice as Fresh.

Nonetheless, Airwick executives say that they were surprised by Lehn & Fink. "We were upset about the fact that they came in with an exact copy," says Frank Conkling, Airwick chairman. "If they had gone us one better in technology, we would have said, 'c'est la guerre'."

Lehn & Fink's quick copy also stung Airwick's price. Airwick, which had been acquired by Ciba-Geigy Ltd. in 1974, had only recently begun transforming itself from a stodgy one-product company into an innovator. And with Carpet Fresh, it had created more than a new product; it started an entirely new product type. Before, people simply vacuumed or shampooed their rugs. Carpet Fresh was a deodorizer; Airwick asserts that it removes smells from carpets, and as the powder passes through the vacuum's exhaust, perfumes the entire room.

It was also a rapid success, especially among households with infants, puppies and cigar smokers. Sales grew to about $ 60 million last year, and with other competitors jumping into the market, Carpet Fresh's market share was roughly 609, Airwick says.

Airwick has also sued a manufacturer of store-brand versions of Carpet Fresh for patent infringement, but it is Lehn & Fink that has caused all the ruckus in the industry.

Did Mr. Lapham or Lehn & Fink anticipate such a strong reaction to the marketing association speech? Sterling has since silenced Mr. Lapham and says only that it has a "defensive case" against Airwick; Lehn & Fink's answer to the Airwick complaint is due soon.

To new product executives at other companies, though, the Lehn & Fink affair is mostly a case of indiscretion. "If you can imitate and get away with it, you should hide what you're doing." says a marketing expert versed in the law. "You don't win anything by shooting your mouth off in the marketplace."

As this Court balances the various public policies in favor of patent protection and competition, it should bear in mind that, in 1944, when Mercoid was decided, no nation on earth approached this country in its rate of technological innovation. However, today the rate of technological development in the United States is steadily falling behind that of other countries, such as West Germany and Japan. According to a report to the Senate Commerce Committee: n17

Despite America's impressive past record, innovation in the United States is currently lagging as compared with its challenges, competitors, and potential. Thus, in recent years, U.S. capital investment in innovative activities has fallen short; for example, the capital obtained from public offerings by small firms dropped from $ 1.46 billion in 1969 to $ 16.2 million in 1975; Investment in R.&D. has stagnated: Federal funds for R.&D. in 1979 were 16 percent less than what they had been 12 years earlier; at the same time that Japan and West Germany recorded substantial growth in proportion of their GNP going to R.&D. Similarly, the proportion of scientists and engineers in the U.S. population has dropped since 1969, while it has shown an increase in most other advanced nations. America has shown a decline in its patent balance of 47 percent in recent years, and currently has a negative balance with Japan and West Germany. . . . Along with these distressing economic indicators, stands our failure to produce the innovations necessary to meet our compelling national needs in fields such as energy, environment, and transportation.

n17 Id. at 1-2.

Experts have traced the nation's current economic woes to declining productivity and innovation. The Court would needlessly accelerate this downward spiral if it reverses the Court of Appeals and discourage technological development by small business technology firms. Now, more than ever, we urge this Court to recognize the plain meaning of Section 271 in order to maintain a major incentive for the discovery and innovation upon which our country depends.


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