ECONOMIC POLICY COUNCIL MEETING -- DECEMBER 19, 1985 -- 1:00 P.M. -- ROOSEVELT ROOM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87M00539R002303840003-6
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 35
• Document Creation Date: December 22, 2016
• Document Release Date: December 7, 2009
• Sequence Number: 3
• Publication Date: December 18, 1985
• Content Type: MEMO

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EXECUTIVE SECRETARIAT
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THE WHITE HOUSE
WASHINGTON
CABINET AFFAIRS STAFFING MEMORANDUM
Date: 12/18,/RS Number:
317039CA Due By:
Council Meeting -- December 19, 1985.--
Subject: Economic Policy
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
Justice
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Chief of Staff
Education
OMB
Action FYI
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USTR L~l ^
GSA
EPA
NASA
OPM
VA
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The Economic Policy Council will meet on Thursday,
December 19., 1985, at 1:00 P.M. in the Roosevelt Room.
I
The agenda and background papers are attached.
^ Alfred H. Kingon .0 Don Clarey
Cabinet Secretary ^ Rick Davis
456-2823 ^ Ed Stucky
(Ground Floor, West Wing)
McFarlane U
Svahn ^
Chew (For WH Staffing) . Q1-- ^
;3Vd
A-?^-;- Director
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I vi imc w,.abinet Affairs
 MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: EUGENE J. McALLISTER ,q
SUBJECT: Agenda and Papers for the December 19 Meeting
The agenda and papers for the December 19 meeting of the
Economic Policy Council are attached. The meeting is scheduled
for 1:00 p.m. in the Roosevelt Room.
The first agenda item will be a report of the Working Group
on Intellectual Property. The Working Group has developed two
recommendations: exploring the idea of establishing a
multi-national patent and trademark office and proposing an
omnibus intellectual property bill.
The second agenda item will be a report from the Strike
Force on Trade. The Strike Force will present its
recommendations on improving protection of U.S. intellectual
property rights abroad.
The third agenda item will be a report of the Working Group
on Research and Development. The working Group has developed
four recommendations and an exploratory proposal to enhance the
effectiveness of investment in research and development by the
private and public sectors.
A paper on each of these items is attached.
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December 19, 1985
1:00 P.M.
Roosevelt Room
1. Report of the Working Group on Intellectual Property
2. Report of the Strike Force on Trade
3. Report of the Working Group on Research and Development
 THE WHITE HOUSE
WASHINGTON
MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: THE WORKING GROUP ON INTELLECTUAL PROPERTY
SUBJECT: Initiatives for 1986
Integral to improving the domestic and international
competitiveness of American firms is the Federal recognition and
enforcement of intellectual property rights, ensuring vigorous
investment in the innovation and marketing of ideas, products and
services. As a practical step towards achieving this end,
Secretary Baker, as chairman of the Economic Policy Council,
requested in November that the Working Group on Intellectual
Property. review laws and policies protecting intellectual
property. rights to determine how those policies could be improved
with the broadest effect possible.
The Working Group has developed two proposals for the Council's
consideration: -
(1) Exploring with our trading partners the idea of
establishing a joint nation patent office.
(2) Proposing an'omnibus intellectual property bill.
Today, some 30 countries in the Americas alone grant patents
protecting inventions for their territories. There is no
regional patent covering more than one country in the western
Hemisphere, nor does any nation in the West cooperate with
nations outside the hemisphere in issuing patents. Anyone
wishing to protect an invention must file a separate application
in each country and pursue patent protection according to the
laws of each country. The coverage of the patents, their terms,
and how quickly each patent is issued, differ from country to
country.
The countries of Western Europe established in 1978 a European
Patent Office (EPO) after 30 years of discussing how to ease the
burden of multiple patent procedures within the same continent.
The primary advantages of the EPO include:
o A single application can be filed in the EPO and,
following search and examination, can result in a
"European patent" being issued. This patent is
actually a bundle of 'national patents valid in each of
the eleven member states designated by the applicant.
 o The European Patent Convention (EPC), the treaty
establishing, this system, provides for broad coverage,
a term of 20 years from filing, and prompt issuance of
high quality patents.
o Even though the European patent is issued through a
single process, the national law of each member state
applies in enforcing the patent. Also, member states
of the EPO continue to issue national patents.
With competition becoming increasingly global, it is clear that
the trend toward nations cooperating to establish regional patent
offices will continue. The United States could lead a similar
effort affecting the Western Hemisphere by negotiating a treaty
with Canada, Latin American countries, or those in the Pacific
Rim to establish common. (high) standards for the examination and
issuance of patents through an international patent office. The
characteristics of such an office would be:
o Similar to the European Patent Convention, such a
treaty would establish an office which issues
a patent effective in each signing country on the basis
of a single application.
o For purposes of enforcement of such patent, the
national law of each country would apply.
o To protect sensitive technology, applications of U.S.
origin filed with'the joint nation patent office would
first have to undergo a review procedure similar to
that now conducted by the U.S. Patent and Trademark
Office for applications intended to be filed abroad.
o While an effective joint nation patent office would
require multi-lingual staff and publications, costs of
operation could be covered through user fees.
It should be noted that a joint nation patent office will likely
take a substantial amount of time to implement. A presidenti L
invitation to our trading partners to the North or South or in
the Pacific Rim to expore the idea with the U.S. would be a
pioneering first step. Issues which would remain to be resolved
include:
o Subject matter which can be patented. An effective
joint patent office would offer the opportunity to
parallel other countries' patent law with that of the
United States.
Patent coverage in the U.S. and Canada generally
extends to the same subject matter with the exception
that only.process protection can be obtained in
Canada for pharmaceuticals and food stuffs and
Canadian pharmaceutical patents are subject to broad
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compulsory licensing requirements. Minimum standards
in other countries for subject matter protected by a
joint nation patent could he revised.
o Length of patent term. While the U.S. and Canada
recognize similar patent length terms of 17 years,
minimum patent term standards in other countries could
be lengthened. For example, Chile now grants a 20 year
term only to Chilean residents. In Ecuador, the patent
term runs from 3 to 12 years depending on the
importance of the invention.
o Staffing and control. The establishment of a joint
nation patent office would require that the U.S.
share. management and control of patent procedures
with our trading partners. Should the U.S. negotiate a
joint patent treaty with minor, rather than major
trading partners, a weighted system could be
established giving the U.S. management rights in
proportion to the expertise it would provide.
o Language. Patents issued from a joint'nation patent
office would have to be issued in at least summaries of
multiple languages. While this would increase
administrative procedures and costs for the U.S., those
costs could be covered by user fees. The U.S. patent
operation currently relies nearly 60 percent on user
fees to cover its operation.
Recommendation
The Working Group recommends that the U.S. approach informally
certain trading partners in the Western Hemisphere and the
Pacific Rim about exploring the idea of a point patent office
with a goal toward the President announcing publicly such an
invitation.
Advantages
o Streamlines the patent procedure by eliminating th,1
need to prosecute a patent application in the U.S.
subsequently doing the same for protection in Cana(::
and Latin American or Pacific Rim countries.
o Facilitates increased trade and investment between
the U.S. nationals and our trading partners and wnu'.
increase the standard for patent protection between
among signing nations.
Disadvantages
0 Requires that the U.S. give up some management and
control of patent procedures.
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o Would be administratively complex to establish and
operate while resulting in few short term visible
benefits for the U.S.
INTELLECTUAL PROPERTY BILL
The Administration's proposed National Productivity Act of 1983
legislation contained several initiatives for strengthening
intellectual property right protection. The Administration also
has testified in support of legislation clarifying the rights of
licensors and permitting holders of patents covering agricultural
chemical products to recover patent. terms lost due to Federal
regulations. Finally, the President's announcement on September
23, 1985, of a Trade Policy Action Plan included specific
proposals relating to strengthening intellectual property right
protection.
The Administration could signal its resolve to have legislation
strengthening intellectual property rights enacted by proposing a
specific omnibus bill which. includes the following:
1) Extending process patents to cover products;
2) Limiting the "patent misuse doctrine" so that patent misuse
may be found only after the finding of an antitrust vio-
lation;
3). Amending the Clayton Act to provide a rule of reason
standard for reviewing intellectual property licensing
arrangements;
4) Modifying the Supreme Court decision in Lear v. Adkins by
validating contractual agreements between parties to a
licensing arrangement (i) permitting a licensor to terminate
a licensing arrangement if the licensee challenges the
validity of the patent, and (ii) requiring a licensee
litigating the validity of the patent to continue paying
royalties to the licensor until the issue has been
adjudicated or the licensee exercises its option to
terminate the licensing arrangement;
5) Eliminating the current injury requirement from Section 11'
International Trade Commission proceedings to exclude
imports, permitting a presumption of injury where an intel-
lectual property infringement can be shown.
6) Extending the term of patents covering agricultural chemical
products and animal drugs up to a maximum of five years to
account for the period of a patent term lost due to
mandatory Federal premarketing regulatory review and
testing.
The Working Group will continue to review potential proposals
which might be included in the intellectual property bill.
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Recommendation
The Working Group recommends that the Administration propose an
omnibus intellectual property bill, reemphasizing our previous
le islative proposals and endorsements to strengthen recognition
and protection of intellectual property.
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MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: The Trade Strike Force
SUBJECT: Intellectual Property: Executive Summary
ISSUE
The violation of U.S. intellectual property rights -- patents,
trademarks and copyrights -- is a serious impediment to U.S.
international trade and competitiveness. A wide spectrum of
American industries is affected including chemicals,
pharmaceuticals, motion pictures, publications, semiconductors,
computer software, apparel and other consumer goods, and new
industries such as biotechnology. Losses in U.S. sales due to
the problem are estimated at $8-20 billion annually.
Imcomplete laws in many countries, or the inadequate enforcement
of existing laws, present a barrier to American companies selling
their products, and to establishing plants. The impact of
inadequate intellectual property protection on U.S. industries is
particularly acute in, although not confined to, NICs.
What Administration steps would strengthen U.S. intellectual
property owners' rights and secure more adequate foreign
protection of U.S. intellectual property?
SUMMARY OF RECOMMENDATIONS
The Administration should pursue a comprehensive strategy that.
combines a legislative initiative with intensified ongoing
efforts to combat foreign violations of intellectual property
rights. The program would include:
(1) An accelerated program of bilateral consultations on
intellectual property and, where appropriate, considerate n
of additional Section 301 unfair trade cases.
(2) Continued efforts to improve multilateral protection of
intellectual property through the new trade round, the CFr^
and existing conventions on intellectual property
(WIPO/UNESCO).
(3) Issuance of a policy statement on intellectual property that
reflects the Administration's policy and priorities. (Th!
Strike Force has drafted such a statement. It would now I.
reviewed at the staff level by all members of the Economic
Policy Council).
(4) An Administration legislative initiative to close gaps in
U.S. protection of intellectual property and to strengthen
U.S. intellectual property owners' rights against
infringers.
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identification of ways in wnicn existing treaties and U.S.
laws can be used to secure adequate foreign intellectual
property protection, including sending reminders to GSP
.countries that protection for intellectual property rights
will be a critical factor in determining their level of GSP
benefits at the end of the GSP general review.
(6) creation of an advisory committee on intellectual property
rights, co-chaired by USTR and Commerce, to provide a
formal channel for private sector advice.
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MEMORANDUM FOR: THE ECONOMIC POLICY COUNCIL
FdOM: The Trade Strike Force
SUBJECT: Strengthening Protection for Intellectual Property
ISSUE
The violation of U.S. intellectual property rights -- patents,
trademarks and copyrights -- is a serious impediment to U.S.
international trade and competitiveness. Incomplete laws in many
countries, or the inadequate enforcement of existing laws, present a
barrier to American companies selling their products, and to
establisning plants. What Administration steps would strengthen
U.S. intellectual property owners' rights and secure more adequate
foreign protection of U.S. intellectual property?
The Administration should pursue a comprenensive strategy that
combines a legislative initiative with intensified ongoing efforts
to combat foreign violations of intellectual property rights. The
program would include:
(1) an accelerated program of bilateral consultations on -
intellectual property and, where appropriate, consideration
of additional Section 301 unfair trade cases.
(2) continued efforts to improve multilateral protection of
intellectual property through the new trade round, t_ne OcCD
and existing conventions on intellectual property
(WIPO/UNESCO).
(3) issuance of a policy statement on intellectual property
that reflects the Administration's policy and priorities.
(4) an Administration legislative initiative to close gaps in
U.S. protection of intellectual property and to stren,;taen
U.S. intellectual property owners' rights against
infringers.
(5) identification of ways in which existing treaties anu U.S.
laws can oe used to secure adequate foreign intellectual
property protection, including sending reminders to CCS?
countries that protection for intellectual property ri;nts
will be a critical factor in determining their level ,t .;SP
cenetits at the end of the GSP general review.
(6) creation of an advisory.committee on intellectual property
rights, co-cnaired oy USTR and Commerce, to provide a
formal channel for private sector advice.
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BACKGROUND
Inadequate Foreign Protection
Theft of intellectual property rights is on the increase worldwide
and causes an estimated loss in U.S. sales of $8-20 billion
annually. Additional substantial losses result from restrictions on
access to foreign markets for U.S. innovations. International
violations of intellectual property rights have become rampant as
communications and markets are now international and intellectual
property has become key to high-tech trade.
The impact of inadequate intellectual property protection on U.S.
industries is particularly acute in, although not confined to, the
NICs. It includes:
o the absence of national patent, trademark or copyright laws
(e.g., Indonesia has no patent law; the People's Republic of
China has no copyright law).
o patent laws that inadequately protect chemicals and
pharmaceuticals (Taiwan, South Korea, Brazil, Mexico and
Canada).
o copyright laws that provide uncertain or inadequate protection
to U.S. works or which exclude or provide overly short-term
protection for computer software (South Korea, France).
o inadequate implementation and enforcement (many countries).
These practices affect a wide spectrum of American industries
including chemicals, pharmaceuticals, motion pictures, publications,
semiconductors, computer software, apparel and other consumer goods.
and new industries such as biotechnology..
o RECOMMENDATION N1: That the United States pursue an aggressty-
ilateral strategy to accelerate discussions with key
countries. This has already been undertaken in accordance *it'i
.a Presidential directive. We should also examine appropriate
additional cases for Section 301 action.
Background: Piracy and counterfeiting have grown
dramatically especially in the newly industrialized
countries of the Pacific Basin and Latin America.
Effective protection of intellectual property rights in
most of these countries lags far behind that provided in
nearly all developed countries.
For example, South Korea's copyright laws do not protect
foreign works or computer software and Singapore's do so
only in limited circumstances. Indonesia has no patent
law. Patent law in South Korea and Taiwan does not cover
chemicals and pharmaceuticals.
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 The U.S. has had a series of bilateral consultations with
Latin American and Asian nations to remedy the problem.
These consultations should be accelerated. Contacts should
include: South Korea, Taiwan, Brazil, Argentina,
Yugoslavia, India, the Philippines, Mexico, Indonesia, _
Malaysia, Singapore and Thailand. Further consultations
also should be held with Canada on its practices with
respect to pharmaceutical patents, and France on its
recently'enacted overly short term of protection for
computer software.
If consultations fail to produce sound and timely progress,
the Strike Force will consider whether the filing of
additional 301 actions is warranted. We have already
initiated a 301 case involving South Korea.
Pro: o Bilateral consultations would build on previous discussions
which have resulted in some positive changes in foreign
countries. This allows countries to address the problem and
change practices before any action is taken.
o We have the precedent of initiating a 501 case on South
Korea. Consultations with other offender countries should
be held before an additional action is taken.
Con: o Bilateral packages would have to be consistent with current
and proposed multilateral agreements, possibly diluting them
because of inadequate minimum standards, at the multilateral
level.
o Some Section 301 cases might he challenged through the ',.1ir.
o Excessive us of 301 by the Strike Force could overload 'l>
circuits'and diminish our ability to bring these cases to i
-successful conclusion.
o RECOMMENDATION NZ: That the Administration increase efforts
aimed at securing multilateral protection of intellectual
property rights througST including the topic as a priority in i
new round of trade negotiations; vigorously pursuing ongoing
efforts to improve existing conventions; and expanding OECD .)rr
on the issue.
Background: The GATT, while addressing intellectual
property in four areas, does so on an exception basis.
Existing multilateral protection comes through a numb-r 't
other international agreements, including the Paris ant
Berne Conventions, administered by the World Intellect'ttl
Property Organization (WIPO), and the Universal Copyri?ht
Convention, administered by UNESCO. These agreements ant-r
generally onensuring national treatment and establishtnl
some minimum standards for the holders of intellectual
property rights, but they lack a proven mechanism for
resolving disputes between countries. Despite the existence
 of international conventions, violations of intellectual
property rights have become rampant. Ongoing efforts to
improve existing conventions, such as WIPO's work on
semiconductor ship protection and biotechnology, should be
pursued vigorously.
Efforts have been underway in the GATT since the end of the
Tokyo Round to.conclude an Anticounterfeiting Code, which
have intensified since the November 1984 Contracting Parties
meeting. These efforts need.to be expanded in the new round
context. As a first step, the U.S. should take the lead in-
seeking to form a "Friends of Intellectual Property" group
in the GATT to advance consideration of the issue in the New
Round.
Multilateral efforts should continue in other arenas as
well, such as investigating efforts to include intellectual
property in the coverage of the Invisibles Code in the OECD.
Pro: o Would signal multilateral 'commitment to the issue and would
supplement bilateral initiatives.
o Would bring trade-related intellectual property disputes
into the clear purview of the institution charged with
addressing trade disputes, the GATT.
o Would build on over 100 years of effort internationally, for
instance the Paris Convention was adopted in 1883.
Con: o Multilateral solutions are by their nature slow.and
deliberate. They do not show immediate results as can
bilateral initiatives. Thus they would not be responsive to
the shoat-term concerns of the business community or
Congress. Multilateral efforts need to be supplemented by
bilateral and unilateral actions aimed at short-term
remedies.
o There is substantial doubt that NICs and other offending
nations would adhere to new multilateral agreements
strengthening intellectual property protections.
0 RECOMMENDATION #3: That the Administration issue a policy
Background: Such an action is supported by industry and
labor. A policy statement would provide a focal point 3n.i a
touchstone for the implementation of the programs described
in this document, similar to the previous Administration
trade and investment policy statements.
 j I
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o RECOMMENDATION #4:
o (A) That the Administration introduce an Administration bill
amending domestic law to strengthen intellectual property
protection for U.S. producers. Alternatively, the Administration
could announce active support for intellectual property
legislation introduced on the Hill.
Pro: o Would put us out in front on the issue and make clear that
this is an Administration priority.
o Would gain faster action on proposals we have supported for
some time.
Con: o Would introduce the risk that the bill could be put into
legislation the Administration does not support, creating
problems for President action.
o (B) The legislation would contain the following provisions:
--
Amend Section 337 of Tariff Act of
injury test and necessity to show
industry is economically run.
1930
that
to
the
delete
domestic
Extend patent protection to cover, products of patented
processes.
Subject aspects of patent licensing arrangements to
"rule of reason" in antitrust cases instead of "per se"
rule.
-- Increase procedural safeguards to prevent inappropriate
release of privately-owned proprietary information h.ld
by the Government.
?
Back round: These provisions have already been approve'1 in
tative package.
Pro: o Would remove burdensome administrative requirements that
hamper the effectiveness of existing statutes (particularly
in the case of Section 337).
o Would close loopholes now benefitting foreign producers it
the expense of U.S. property rights holders (particularly in
the case of current process patent law).
o Would make U.S. law consistent in recognizing the need c'nn
compensate patent holders for the patent life lost due to
pre-marketing regulatory clearance proceedings.
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o. RECOMMENDATION #5: That the U.S..Government use existing laws
,and agreements more aggressively to ensure greater protection for
U.S. holders o intellectual property rights worldwide. This
could-include sending reminders to GSP beneficiary countries that
our review-of their,practices relating to intellectual property
will be a key factor in deciding their level of GSP benefits at
the end of the GSP general review.
Background: We should examine existing bilateral treaties
such as FCNs and BITs to determine whether any of the rights
and obligations they create can be used to enforce the
rights of U.S. owners of intellectual property rights. A
failure to enact laws which enable a nation to live up to
its treaty,ob.ligations, or using liberal definitions of such
terms as "property" in existing treaties to include
intellectual property, might be grounds for trade action.
In addition, we should examine the applicability of
anti-expropriation provisions of various U.S. statutes in
cases where foreigners impose compulsory licensing on
American patent and copyright owners without prompt,
adequate and effective compensation.
Perhaps the strongest incentive for positive change in
developing and newly industrialized nations is the amendment
of GSP in the 1984 Trade and Tariff Act giving the President
increased authority to act to protect U.S. intellectual
property rights under this program. New GSP provisions
require consideration of a nation's treatment of
intellectual property rights in the general review of each
country's level of eligibility for tariff concessions.
Pro: o Would be a strong indication to our trading partners an-1 the
U.S. business community that we are serious about pushing
for increased protection in this area.
o Reminder to GSP countries that adequate intellectual
property rights will be a significant review criterion ?,utd
push infringer countries into making earlier and more
fundamental changes.
Con: o Some NICs may learn that GSP benefits are not as crucial to
their welfare as continued copying of others' intellectual
property.
0 RECOMMENDATION #6: That the USG pursue formal lines of
communication with the private sector through the Advisory
Committee on Trade Negotiations AC TN) task force on intellectual
property rights and establish a private.sector advisory committee
on intellectual property rights co-chaired by USTR and Commerce.
Background:- The business community and labor groups are
strongly committed to improving intellectual property
 protection. The Presidentially appointed Advisory Committee
on Trade Negotiations has formed a task force on
intellectual property. This task force has split its work
into two stages: first it will make recommendations to the
full ACTN on multilateral approaches to trade policy, and
then it will work to identify major-bilateral initiatives
and approaches. Their objectives are 1) higher standards,
transparency and removal of current practices such as
compulsory licensing; 2) adequate enforcement mechanisms;
and 3) dispute settlement procedures.
Pro: o During the past year the Administration has informally
worked with private sector through individual companies, the
ISACs and umbrella organizations established by U.S.
industry on intellectual property rights. Work by the ACTH
task force and a private sector advisory committee would
complement these efforts.
Con: o Once communication is formalized-, the business community may
have false expectations on how. quickly the USG can make
changes.
Attachments: A. Timetable for Action Plan Initiatives
B. Draft Administration Policy Statement
C. Summary of Current U.S. Law and International 2jlrs
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 a. Intellectual Property Policy Statement:
.S-taff 'draft with private sector comments reflected:
December 1, 1985
b. Action on Legislation Related to Strengthening Domestic Practices
of Intellectual Property:
Fall 1985
c. Acceleration of Bilateral Negotiations
Target plan for Brazil plan for Brazil/Mexico and other countries
with IPR problems: December 1, 1985
d. Review Obligations of our Tradin Partners Existing in Current
Bi atera Agreements: December
e. Review of Korea 301 Case and Consideration of other Possible
Immediate Intellectual Pro ert -related-301 Actions:
January 1986.
f. Completion of Full ACTH Report on Priority Countries, Issues for
Consultation, and 301 an GSP Action Programs:
February 28, 1986. g. Review of Private Sector Report for Possible Section 301 Actions:
March 1, 1986.
h.. Initiation of GSP-related Review Based on Intellectual Property
Criteria of Tra e Act:
Summer 1986.
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Current U.S. Law
The Administration has favored certain improvements relating to
intellectual property, e.g., process patents, chemicals, and patent
misuse rules, and remedies against infringement.
U.S. intellectual property owners have two remedies against
infringement:
oSeeking damages and injunctions against infringers in federal
courts. Because the courts must have jurisdiction over the
infringer, this remedy applies chiefly to violations in the U.S.
o Filing an unfair practice case under Section 337 of the Tariff
Act of 1930. Under Section 337, the ITC may issue an exclusion
order barring imports of items that infringe U.S. patents,
trademarks and copyrights. To obtain relief, the petitioner must
demonstrate that the import or sale of the infringing product
substantially injures an industry that is efficiently and
economically operated in: the U.S.
International Rules
The GATT covers intellectual property only on an exception basis.
The effectiveness of existing international intellectual property
conventions is in some cases limited due to lack of signatory
countries,, lack of minimum standards, lack of coverage, and lack of
enforcement.
The Paris Convention on patents and trademarks provides for national
treatment and priority for filing dates, but generally does not set
minimum level of crotection.
For copyrights, the Berne Convention provides for national treatment
and generally a minimum copyright term of the author's life'plus ;I
years. (The U.S. is not a signatory, but the Administration has
supported joining.) The Universal Copyright Convention (UCC), to
which the U.S. is signatory, provides for national treatment and ,
term of the author's life plus 25 years. Both the Berne and UCC
contain substantial minimum standards. Significant countries (e.g.,
South Korea, Indonesia) are signatory to neither copyright conventi n.
 MEMORANDUM FOR THE ECONOMIC POLICY COUNCIL
FROM: Working Group on Research and Development
SUBJECT: Recommendations to Encourage R&D
Background
There has long been an awareness in the United States.that
increased research and development (R&D) and innovation produces
significant benefits to the economy. More rapid rates of
innovation increase productivity and economic growth, reduce the
rate of inflation, create new jobs, and strengthen the
competitiveness of U.S. goods and services.
The R&D and innovation process is complex and frequently
involves a relatively high degree risk. Generally, the market
mechanism provides adequate incentives for private firms to fund
the R&D needed to sustain rapid rates of innovation. In certain
instances, however, all of the benefits from some types of R&D,
particularly basic research, may not accrue to private investors
although they would be available to society as a whole. In such
cases there may be underinvestment of private resources in R&D,
and society is the loser. The presence of these externalities
has long been viewed as justifying government intervention in the
R&D process, particularly basic research.
The Government has both a direct and indirect role in R&D and
innovation. Government policies, including tax incentives,
antitrust, procurement practices, and patent and copyright laws,
indirectly influence, but to a significant degree, R&D and
innovation. Strong, sustained economic growth is also very
beneficial.
Government R&D spending generally has a more direct impact on
R&D. The current budgetary situation may require that Federal
R&D programs share with other programs the need to scale back the
growth of spending. There are ways, however, in which the
Federal Government can encourage increased R&D efforts by the
private sector without adding to the budget deficit.
The Working Group on R&D reviewed a number of proposals for
encouraging R&D and improving the effectiveness of our overall
R&D effort. The following are four unanimous recommendations and
one exploratory proposal for EPC consideration.
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Recommendations
. 1'. The.existing R&D tax credit is intended to provide
companies. incentives to increase their R&D efforts. However, the
three-year ."creeping-base"..provision of the credit may provide
less incentive for increases in R&D than an alternative base
because the additional R&D performed in the current year will
increase the base in each of.the three succeeding years, thus
reducing the credit the company could claim in subsequent years.
The Working Group recommends that Treasury consider an
amendment that would replace the present 3-year moving base for
the credit by a fixed three-year period, indexed annually for
inflation. The rate of credit would be adjusted to maintain
revenue. neutrality equivalent to present law.
2. Many types of commercially valuable information such as
computer software, engineering drawings and other technical data
are generated under Federal grants and contracts or in con-
junction with them. This information often has great commercial
importance to the private sector, but private sector partici- .
pation in Government-funded research projects may be discouraged
because of the uncertainty created by the fact that agencies have
a multiplicity of policies governing copyright ownership of this
information.
The Working Grou recommends that a uniform Federal copyright
policy be developed by OMB allowing all contractors including
those medium and large size businesses not now explicitly covered
by a February 1983 Presidential memo ownership of software,
engineering drawings and other technical data in exchange for
royalty-free use by the Government.
3. Federal laboratories perform more than $17 billion in :NW)
annually, of which about two-thirds goes to government-operate!,
institutions and one-third to contractor-operated institutions.
At present, both kinds of laboratories have authority to gra::-
exclusive licenses for their inventions to the private sector
only contractor-operated labs and their employees may receive ,
share of the royalties. Thus, there is no incentive for
researchers in government-operated laboratories to transfer
technology to the private sector for commercialization and t
contribute to U.S. industrial competitiveness. Legislation :5
now pending in the Congress that could improve this situation.
The Working Group recommends that the Administration shout!
take administrative action or propose or endorse legislation chit
would:
incorporate contribution to U.S. industrial
competitiveness as an explicit laboratory mission
wherever that has not already been done and is not
inconsistent with the primary laboratory mission;
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allow agencies to delegate significant authorities to
their laboratories for managing the technologies they
produce, including licensing inventions made by
laboratory employees;
allow the laboratories to further their research
objectives by entering into cooperative research
agreements with universities and industry that specify
what rights the Government and the other collaborators
have to any inventions that may result;
allow inventors and their laboratories to share the
royalties their inventions produce as an incentive to
move new technologies out of the laboratories and into
the marketplace and to do so without reducing incentives
to work on mission projects with little or no commercial
use.
4. R&D to develop specific products and processes for the
market is the job of industry. But industrial firms cannot be
expected to fund more than a small. share of the type of research
that provides the knowledge base for work across whole
technologies, particularly those. that are new and rapidly
developing.
United States research universities are unequaled in their
research and training in the traditional science and engineering
disciplines. However, university basic research has inadequately
nurtured research on basic technologies, which is typically
multidisciplinary and differently focused from the traditional
disciplines., As a result, the U.S. has underinvested in
university research on basic technologies, and the movement of
people, and therefore of ideas and know-how, between universities
and industry where multidisciplinary research is needed has been
limited.
The University Research Initiative of the Department of
Defense and the Engineering Research Centers of the National
Science Foundation (NSF) and other agencies have helped address
this problem. The initial NSF solicitation for multidisciplinary
university-industry engineering. research centers generated a
great deal of interest but NSF funding was severely limited.
The Working Group recommends that within the constraints of
the President s budget, all major R&D agencies should be directed
to make a stronger commitment to build up university-based
scientific and engineering research that bears on technology and
industrial competitiveness, especially through multidisciplinary
asic science and technology centers.
5. It is also recommended that the Council consider an
a genuine bidding cess
exploratory proposal that would apply pro
to the selection of Federally-funded applied R&D projects.
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Introduction
Research and development (R&D) is the principal activity
leading to new products and processes and improvements in exist-
ing ones. Industrial innovation -- the development and commer-
cialization of R&D -- accounts for a significant part of our
increased productivity, which helps to reduce the costs of pro-
ducing goods and services and is responsible for a sizable share
of the Nation's economic growth. It is critical that the United
States continue to increase its efforts at all phases of R&D in
order to increase productivity and economic growth, reduce the
rate of inflation, create new jobs, and strengthen the competi-
tiveness of U.S. goods and services.
R&D is itself an important component of the U.S. economy,
accounting for an estimated $106.6 billion or 2.7 percent of the
Gross National Product (GNP) in 1985.
Twenty years ago the U.S. clearly had a lead over other
countries in the share of the GNP allocated to total R&D
spending. Over the past 20 years, however, there has been a
convergence between the U.S. R&D/GNP ratio and the ratio in other
countries.
A relatively high degree of risk is generally associated with
many aspects of R&D. In addition, all of the benefits from some
types of R&D, particularly basic research, may not accrue to
private investors although they would be available to society as
a whole. In such cases, there may be significant underinvestment
of private resources in R&D, and society is the loser. The
presence of externalities -- the availability of benefits to d
broader group than the private investor undertaking the R&D has long been viewed as justifying government intervention in the
R&D process, particularly basic research.
Government policies can have a significant influence on
and innovation. Tax incentives, for example, can be used to
reduce the cost of R&D activities to firms, thereby making s.:
activities more attractive. In addition, antitrust and pat,?:.--
and copyright policies can help lower some of the barriers t.)
private innovation and R&D and enable firms to compete more
effectively in domestic and international product markets.
Government procurement activity can provide a large market
private output and in the process influence the development
new technologies and encourage the investment necessary to apply
it.
Other factors are thought to also have a significant imp?-!,
-- both positive and negative -- on R&D and innovation. Exp.e.::
tions.about macroeconomic conditions and the intensity of coup.-t-
ition, both domestic and international, are particularly
important. A strong, robust economy encourages investment and
innovation; it generates increased business cash flow to help
finance R&D internally, rather than by borrowing, and makes 1-
easier to market new products.
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In a strong economy innovations are diffused more rapidly
throughout the economy because new capital equipment and new
processes are likely to embody improved technology. Also,
increased investment tends to encourage innovation in the capital
goods industries by increasing the demand for business
investments. Alternatively, a robust economy may lessen the
urgency to pursue new products and processes, while slack
economic conditions can provide an incentive for businesses to
seek out new technologies and processes to help reduce costs of
production. On balance, the evidence suggests that R&D spending
is positively correlated with economic growth.
The Administration has been very supportive of R&D, partic-
ularly basic research where, because of significant externalities,
the private sector may be underinvesting. Between 1981 and 1985,
Federal investment in basic research will have increased by almost
30 percent in real terms. The Administration also worked with the
.Congress to enact the National Cooperative Research Act of 1984,
which permits two or more persons to undertake joint research and
development ventures with less concern that such cooperative
efforts will be found to be in violation of our antitrust laws.
The current budgetary situation may require that R&D, like
most other government programs, share in the need to scale back
the growth of spending. Nevertheless, a reallocation of the
government's R&D resources toward multidisciplinary long-term
research on basic technologies would increase the effectiveness of
the U.S. research effort. At the same time there are ways in
which the Federal Government can encourage increased R&D efforts
by the private sector without adding to the budget deficit, and in
fact-would help reduce the deficit through increased economic
growth, job creation and lower inflation.
The Working Group on R&D reviewed a number of proposals for
encouraging R&D. These proposals involved issues concerning the
cost of R&D capital, regulatory and legal barriers to R&D and
public/private R&D relationships.
The Working Group reviewed the possibility of further lowering
the capital gains tax but did not include it in the Group's
recommendations because of the current status of consideration of
the President's proposal for tax reform. However, this change
should be considered at a later time.
The following are four unanimous recommendations and one
exploratory proposal of the R&D Working Group for encouraging
industrial investment in research and development and improving
the effectiveness of our overall R&D effort.
 Problem/Issue
The existing tax credit for research and experimentation is
intended to provide a real incentive for additional (incremental)
R&D. The Treasury Department has just negotiated with the Ways
and Means Committee an extension of the R&D credit. This could
make it awkward to initiate a major revision in the credit at this
time. However, it is appropriate to consider changes in the
incremental structure that could increase considerably the
marginal incentive while maintaining revenue neutrality.
Background/Analysis
The R&D tax credit is intended to give companies incentive to
increase their R&D efforts. Otherwise firms are likely to under-
invest in R&D because of its potential externalities and delayed
return on investment. The current credit establishes such an
incentive by providing a 25%.credit on the increment of a
corporation's R&D. for the taxable year over the average of its R&D.
for the three preceding years. In. other words, the credit is 25%
of the increment over a "creeping" three-year R&D base.
This "creeping-base" structure may provide less incentive for
increases in R&D than alternative structures. The basic reason
for this is that the additional R&D performed in the current year
will increase the base in each of the three succeeding years, thus
reducing the credit the company could claim in subsequent years
for maintaining that level of R&D.
This incentive effect of the credit could be increased by a
shift to an "indexed base" structure. The credit would continue
to be allowed on the increment over a base. Instead of a moving
base consisting of R&D for the three years immediately preceding
the taxable year, however, the base would be R&D for a fixed
three-year period, indexed annually for inflation or some other
indexing factor different from the company's own R&D record.
Research indicates that with appropriate accompanying adjustments
such a structure could provide several times the marginal incen-
tive for extra R&D without increasing the revenue loss.
This alternative structure should be examined carefully by tax
and R&D experts and, if it proves practicable and administrable,
implemented.
Treasury, in collaboration with other interested agencies,
should consider an amendment that:
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? minimizes any associated problems;
adjusts the credit rate to maintain revenue neutrality
equivalent to present law.
Treasury should report to the Economic Policy Council on
whether such an amendment would have policy or political draw-
backs.
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Recommendation 2. Ownership of Software and other Technical Data
Produced Under Contract to the Federal Government
Problem /Issue
Many types of commercially valuable information such as
computer software, engineering drawings, etc. are generated under
Federal grants and contracts or in conjunction with them.
Agencies now have a multiplicity of policies governing copyright
ownership of this information. Such information often has great
commercial importance to the private sector. However, the threat
that the Government will hold all copyrights that derive in any
way from work produced under contract can have a chilling effect
on private sector participation in Government funded research
projects. Copyrightable information developed in Government
funded research projects does not receive the same protection
afforded patentable products or processes developed under the same
circumstances. This threat is especially great to researchers
seeking to commercialize valuable copyrights such as software
Background/Analysis
Passage of the Bayh-Dole Act (Public Law 96-517) in 1980
marked a turning point in Federal policy on patent rights to
inventions. Congress sought to increase technology transfer from
Federal research and development to the private sector by allowing
universities and small business contractors to manage patentable
inventions they made under Government grants and contracts.
Subsequently, a number of university and private contractors have
established technology licensing programs. The President's Memo-
randum on Government Patent Policy, February 18, 1983, extended
the principals of the 1980 Bayh-Dole Act to all businesses,
consistent with existing law; some medium and large business
contractors still do not receive the benefits of this policy
because of preexisting laws that were not affected by the 1980
Act. In 1984, PL 98-620-extended the 1980 Act to include most
contractors who operate Federal laboratories. However, the patent
protection afforded to these contractors and grantees does not
extend to copyrightable software and other technical
information. The absence of a uniform Federal policy allowing
contractor ownership of copyrights that may be generated under
grants and contracts in exchange for royalty-free use by the
Government inhibits contractors working in fields where such
protection is needed for commercialization. This slows the
transfer of new ideas to the commercial sector.
Recommendation
A uniform Federal copyright policy should be developed by OMB
allowing all contractors (including medium and large size
businessesT ownership of software, engineering drawings and other
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 technical data in exchange for royalty-free use by the Government;
it could be modeled on the President's memorandum of February 13,
1983. Such a policy would be consistent with the Administration's
technology transfer goals by encouraging commercialization of
copyrightable products by the private sector. This policy would
also encourage the most innovative small, medium and large
companies and universities to participate in Federally sponsored
R&D projects, thereby benefiting the Federal agencies and the
public.
 Recommendation 3. Greater U.S. Competitiveness Through Federal
Laboratory Cooperation with industry
Federal laboratories perform more than $17 billion in R&D
annually and employ about one-sixth of our research scientists and
engineers. They represent a substantial yet insufficiently
utilized resource for U.S. industrial competitiveness. Further-
more, present Federal pay and incentive systems for researchers
neither attract and retain the quality personnel required for
laboratory missions nor stimulate technology transfer to the.
private sector.
Background/Analysis
About two-thirds of funding for Federal laboratories goes to
government-operated institutions. The rest goes to contractor-
operated institutions. At present, both kinds of laboratories
have authority to grant exclusive licenses for their inventions to
the private sector. However, only contractor-operated labora-
tories and their employees may receive a share of the royalties.
There is little or no incentive for researchers in government-
operated laboratories to transfer technology and contribute to
U.S. industrial competitiveness. All Federal laboratories share
the'problem of removing barriers to increased collaborative
research with U.S. industry. Issues such as protection of
proprietary information and definition of government rights to
products of collaborative research have not been fully resolved.
The 1983 White House Science Council's report on Federal,
laboratories (Packard Report) recommended that: R&D interactions
between Federal laboratories and industry should be greatly
increased by more exchange of knowledge and personnel, collahor-a-
tive projects, and industry funding of laboratory work, provi::e.;
an oversight mechanism is established to prevent unfair
competitive practices.
Legislation is now being considered in Congress to enhance
Federal laboratory collaboration with the private sector by 3iviny
government operated laboratories the same incentives as are now
available to contractor operated facilities.
Recommendation
The Administration should take administrative action or
propose or endorse legislation that would:
? incorporate contribution to U.S. industrial
competitiveness as an explicit laboratory mission wherever
that has not already been done and is not inconsistent
with the primary laboratory mission;
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allow agencies to delegate significant authorities to
their laboratories for managing the technologies they
produce, including licensing inventions made by laboratory
employees;
allow the laboratories to further their research
objectives by entering into cooperative research
agreements with universities and industry that specify
what rights the Government and the other collaborators
have to any inventions that may result;
? allow inventors and their laboratories to share the
royalties their inventions, produce as an incentive to move
new technologies out of the laboratories and into the
marketplace and to do so without reducing incentives to
work on mission projects with little or no commercial use.
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 Recommendation 4. Increase Federal Investment in University
Research on Basic Technologies
Problem/Issue
The U.S. has insufficiently tied together our great strength
in university research with R&D in industry, and it has under-
invested in long-term research on basic technologies.
R&D to develop specific products and processes for the market
is the. job of industry.' But industrial firms cannot be expected
to fund more than a small share of the type of research that
provides the knowledge base for work across whole technologies,
particularly those that are new and rapidly developing.
United States research universities lead the world in research
and training in the traditional science and engineering
disciplines --.physics, chemistry, biology, mechanical
engineering, etc. However, university basic research has
inadequately nurtured research on basic technologies, which is
typically multidisciplinary and differently focused from the
traditional disciplines. As a result, the U.S. has underinvested
in university research on basic technologies. In addition,
scientists and engineers trained in a single discipline have ''been
poorly prepared to collaborate in multidisciplinary work that
characterizes corporate R&D. Also, movement of people, and
therefore of ideas and know-how, between universities and in:luscry
where multidisciplinary research is needed, has been too limictl.
The Administration has taken important first steps in
addressing this in the University Research Initiative of the
Department of Defense and the Engineering Research Centers of ?n-~
National Science Foundation (NSF) and other agencies. These +r,r
helping universities address the needs of the country for mor?:
multidisciplinary basic research, and encouraging greatly enh.,n:el
collaboration and interaction between universities and industry.
The initial NSF solicitation for multidisciplinary,
university-industry engineering research centers, despite
relatively short notice, evoked 142 proposals for investing
$2.2 billion of Federal funds. The NSF actually had funds
to establish only 6 centers for $10 million. The universities
remain painfully short of resources with which to make the
necessary transition.
Within the constraints of the President's budget, all major
R&D agencies should be directed to make a stronger commitment t?:j
build up university-based scientific and engineering research c'ndt
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bears on technology and industrial competitiveness, especially
through multidisciplinary basic science and technology centers.
This would accelerate Administration initiatives already
started on a small scale to encourage university fundamental
research that is (1) focused more on current or potential
technologies than on traditional disciplines, (2) able to attract
support from industry as well as Government, and (3) effective in
encouraging university-industry collaboration in research and in
the movement of people between university and industry.
Heads of agencies with major research and development programs
should be directed to report to the President on their specific
plans to implement this recommendation.
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 Issue
Should the Administration explore applying on a demonstration
basis to a specific program a bidding process for selecting
Federally-funded applied R&D projects close to commercialization?
Background
Clearly, the best approach for financing applied R&D projects
close to commercialization is to turn the responsibility for such
financing to the private sector. However, the Congress often
requires the Administration to finance such projects. Although
private firms now share-the costs with government in many applied
R&D projects and the government consults with industry and
academia on the technical and economic feasibility of projects,
the government ultimately determines which applied R&D projects
will be pursued.
Proposal
A better approach to financing these. projects is to assure that
the government finances only those applied R&D projects the
-market believes hold the most promise. Rather than having the
Congress or a. Federal department determine which specific
technologies should be financed and then. soliciting private
support, the government would solicit bids from private firms cr.
I the amount of Federal funds they need to produce a given amount
of coal, for example, that would meet certain environmental
standards.. The government would thus allow the market to choc;'
the specific technologies on which research should be conducted.
The firm offering the lowest bid, i.e., asking the government
.the least funds, must believe that it has the most promising
technology for producing the good. A firm might offer the lc?ae;t
bid because it has a low-cost technology or it forsees benef:?.;
to itself from developing the technology.
The key feature of this system is that the government would .+
the funds only after the firm demonstrated it could produce
good. With this government guarantee of future payment, the :..
could obtain financing by convincing the market that its
technology was most feasible. The firm would have to persuad-
banks, venture capitalists, and individuals that it could prc.:?__e
the good.. This system shifts from the government to the mar.'.(.-!t
the burden of determining a technology's economic feasibility.
In this system, there would be no immediate budget outlays sin:-
the government would not provide the firm funds until it can
demonstrate the production of that good. In fact, if "the firm
fails to produce the good, the government need not provide the
funds at all. The government would thus only finance research -n
those technologies that actually work. If no firm offered a h:d
to produce the good or if the bids required enormous Federal
support, the government would have a signal that the market
believes the technologies for producing the good are currently
economically infeasible. The government should then either con-
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Advantages
o The government finances only those applied R&D projects the
market believes are most economically feasible. The private
sector is more capable than the government of determining
the economic feasibility of projects.
o immediate budget outlays are reduced since the government
would award funds for projects only after a firm
demonstrates it can produce the good meeting the standards.
v,.
Future budget outlays may decline as well since if the firm
,,-cannot produce the good meeting the standards, the
.government does not have to award funds for the project.
Disadvantages
o This approach would radically change the system of
government selection of applied R&D projects close to
commercialization. It would take much time to show the
Congress how and why this approach would work.
o This approach would likely face strong. opposition from
Federal departments conducting such research because.it
would obviate the need.for government personnel who now
decide which applied R&D projects should be financed.
Although both the current and bidding systems of selecting those applied R&D
projects government will finance involve private firm contributions and
govermnent consulting with industry and academia about the technical and
economic feasibility of projects, they differ in the following key ways.
Importance of
private firm funds
in selection of proj.
When govt funds
awarded to firm
Effect on administra-
tive budget
Laaest private bid
determines which proj govt
will finance.
Awarded only after firm
shows it can meet stand.
No immediate budget outlays.
Outlays only if firm shows
it can meet stand.
Reduces administrative costs
because obviates need for
some govt personnel to
evaluate proj feasibility.
Only one of a number
criteria weighed '_7
determination.
Awarded to firm be:'-
proj starts.
Immediate budget
outlays even if pry;
eventually fails.
Spends funds on govt
personnel to evaluj,'-e.
proj feasibility.