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Big Business Cries Foul

Small companies can patent government-funded inventions -- and the big guys don't like it.
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What's good for small business should be good for all business, argued corporate executives and patent lawyers recently before a Senate subcommittee. A little monopoly, they suggested, without using the word, could rejuvenate innovation in the United States.

All they want is repeal of one of the basic tenets of American patent law.

In business, by convention and usually by contract, the results of an employee's creativity belong not to the creative thinker but to his employer, who, after all, pays him to be creative.

The same convention applies when the government finances creative work in the private sector. Generally, when an invention is made during the course of government-funded research and development, the patent rights to it belong to the government, not the R&D contractor. But there are two exceptions, which we'll get to shortly.

First you have to know that applying this convention to federally funded R&D creates some problems. Except for things like tanks and space shuttles, the government doesn't use those patented ideas to build much of anything. So most government-owned patents go unused unless they're licensed to private firms for the purpose of commercial development.

To be fair with its licenses, though, the government must make its technology available to anyone who wants it and can use it. And that creates another problem. Few companies will invest money in commercializing a technology that anybody else can have just for the asking.A public secret is no secret at all.

Hence the two exceptions. They're supposed to solve these problems of underutilized government technology.

The first one is the big business exception. In 1971, President Nixon issued an executive order giving government agencies authority to exercise "judgment and flexibility" in granting patent rights to private firms that perform government R&D. That means corporate attorneys can negotiate with the government for patent rights or exclusive licensing agreements. A company, if it has a good legal department and the government agency wants to award it the contract, can usually secure at least some commercial rights to an invention made at government expense.

Then last year small business convinced Congress that what worked for big companies didn't work for them. Rarely were government agencies eager to award R&D contracts to small companies, and even less often did a small firm have the legal clout to jawbone government attorneys into granting them commercial rights. So Congress approved one more exception to the general convention. When the R&D contractor is a small business, a non-profit corporation, or a university, the law now says, the government must, in most cases, automatically surrender its rights to commercial development of any patents issued.

This year, big business is taking its turn at bat again, but it isn't looking for another exception. It wants to eliminate the convention altogether.

If it was a good idea to give small business automatic rights to technology developed at government expense, big business argues, then granting the same automatic rights to all businesses would be even better. Sen. Harrison Schmitt, a New Mexico Republican and former astronaut, is sponsoring legislation to that effect. "Why discriminate against mid-sized and large companies?" asks a staff member of Schmitt's subcommittee on science, technology, and space.

But small firms are lucky to get about 3.7% of the federal government's R&D dollars. To suggest that an exception made for this group constitutes discrimination against the part of the business community that collects the bulk of the government's $40-billion R&D budget, is to engage in doubletalk.

The premise of the convention the Schmitt bill would destroy is that ideas developed at public expense belong to the public. In almost identical statements made two years ago during a congressional hearing, Sen. Howard Metzenbaum (D-Ohio) and Adm. Hyman Rickover, chief of the Navy's nuclear power program, pointed out that a patent or an exclusive license grants a monopoly to the holder. "Since the vast majority of government R&D expenditures go to the largest corporations, the granting of exclusive licenses to such corporations for government-financed inventions runs the risk of furthering concentration of economic power in the hands of large companies," warned Metzenbaum. It would, added Rickover, impede the development and dissemination of technology, be costly to the taxpayer, and hurt small business.

Blanket marketing or patent rights would be a backdoor subsidy to large companies, suggests an official in the Office of Management and Budget, who speaks for himself and not the Reagan Administration. The government will soon find itself paying for research the company would have done on its own, he explains. Ann Eskesen, director of the Bentley College Small Business Resource Development Center, says there would be no incentive for major corporations to continue to support their own research "if they can gain all rights and take public funding."

Eskesen adds that passage of the Schmitt bill would guarantee big business's continued receipt of virtually all federal R&D contracts given to private firms. "The government bureaucrat prefers to do business with major firms now," she says, "and the Schmitt bill would offer him every good reason to continue the process."

On the other hand, there probably is merit in the argument made by Senator Schmitt and business executives who support his legislation that strict adherence to the convention -- public funding demands public ownership -- inhibits some technological development that the United States needs in order to stay competitive in world markets. "Yes, we do have problems getting R&D contracts," says Robert Benson, director of Allis-Chalmers Corp.'s patent law department. His company has turned down contracts, he says, when the government insisted on access to even background technology already developed by Allis-Chalmers. Though Benson acknowledges the possibility that passage of the Schmitt bill may contribute to economic concentration, he suggests that accelerated technological development might be an offsetting benefit.

Who's right? Most of the arguments on either side are theoretical and intuitive, based on not much more than opinion and interpretation. Is it fair -- or ultimately wise -- to give to all business the special exception small business won last year? If everyone is a special exception, of course, the convention itself is moot.

"Unfortunately, there are no answers," says a government policy analyst charged with drafting one agency's position on the Schmitt bill. "We'll support it," the analyst says, "but we can't make a case one way or another. There are some serious questions here, and Congress would be foolish to pass legislation without answering them."

What is surprising (and disappointing) to learn is that small business won't be asking any questions of its own. "We probably just won't participate in this debate," says Mike Roush, a senate lobbyist for the National Federation of Independent Business. Neither will the National Small Business Association, according to Eric Schellin, a patent attorney who fought hard for last year's legislation that provided the special exception for small business. Does he see any problems with the Schmitt bill? "Not really," Schellin says. The Smaller Business Association of New England, whose members usually play a leading role in lobbying for legislation to enhance the environment for small company innovation, hasn't decided whether to participate in this issue.

"It's a shame," says Eskesen, "but the spirit of activism that emerged in the small business community after the White House Conference [in January 1980] seems to have diminised."

Last updated: Nov 1, 1981




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