Testimony of

Professor Glenn H. Reynolds

Before the

U.S. House of Representatives,

Committee on Science, Space and Technology

Subcommittee on Space

Hearings on the

Status of Space Commercialization

Wednesday, October 20, 1993

Biographical Summary

Glenn Harlan Reynolds is Associate Professor of Law at the University of
Tennessee College of Law, Knoxville, TN. Professor Reynolds is a graduate of
Yale Law School and of the University of Tennessee. He was previously
associated with the Washington, DC office of Dewey, Ballantine, Bushby, Palmer &
Wood. Professor Reynolds is the author (with Prof. Robert P. Merges) of Outer
Space: Problem of Law and Policy (Westview Press, 1989) and of numerous articles
on space law and policy in a variety of journals, including the Harvard Journal
of Law and Technoloqy, the Berkeley High Technoloqy Law Journal, the Journal of
Space Law, Space News, and Law and Policyz? in International Business. In
1992-1993 he served as a member of the Vice President's Space Policy Advisory
Board, a White House advisory panel serving the National Space Council. He is
Executive Vice President of the National Space Society, and chairs its Policy
Committee.

Prepared Testimony of Professor Glenn H. Reynolds

Chair, Policy Committee, National Space Society

MR. CHAIRMAN, MEMBERS OF THE SUBCOMMITTEE:

Thank you very much for having me here to talk about the Omnibus Space
Commercialization Act, and related issues having to do with the commercial space
industries. I am here not only as a la,%, professor at the University of
Tennessee, but as ' Chair of the National Space Society's policy committee.

First, I would like to congratulate you and your colleagues for your
outstanding efforts on behalf of the commercial space industries over the past
several years. From the Patents in Space Act, to the Launch Services Purchase
Act, to those parts of an earlier version of this Omnibus Act that found their
way into the 1992 NASA Authorization Act, to the excellent work represented in
the 1992 Remote Sensing Policy Act, you and your colleagues have shown an
appreciation of the importance of commercial space industries that has not
always been present elsewhere in our government. I believe that your efforts on
this subject will still be remembered, and still be bearing fruit, long after
most of the issues that fill today's headlines are forgotten.

Second, however, I have to say that efforts to promote space
commercialization have not been as successful as the), might have been. The
reason for this is a combination of bureaucratic resistance and sheer inertia. I
will talk about some remedies for this problem later. First, a bit of
background.

For some time now, the United States has been devoted to the creation of a
commercial space sector, one in which goods and services are provided not by the
government, or under the traditional government-contractor system, but by
private entities operating for a profit. Efforts to date have been reasonably
successful: the commercial space industry has annual revenues of about rive
billion dollars, with export earnings of over 700 million dollars,l making it
roughly comparable in size to the domestic motion picture industry.

Commercial space is important for reasons that go beyond its immediate
economic impact, though. It is important to the creation of a spacefaring
civilization - a goal endorsed both by Congress, in the Space Settlements Act of
1988, and by

1/See U.S. Department of Commerce, U.S. Industrial Outlook 1993 at 27-1,
27-2. This represents rapid growth, as overall space commerce levels were only
2.7 billion dollars as recently as 1989. Id

2/Pub. I- 100-684, Title II, Section 217; 102 St2t. 4094; codified at 42
U.S.C.A. 2451 note (1993). This Act explicitly endorsed the "extension of life
beyond Earth's atmosphere, leading ultimately to the establishment of space
settlements," and provided for biannual reports by NASA regarding its efforts to
promote this goal. To my knowledge, no such reports have yet been riled by NASA,
the Executive Branch. It is also vital to our wellbeing here on earth.
Commercial space is vital to the ultimate expansion of humanity beyond earth's
atmosphere because market forces are capable of lowering costs and improving
performance in a way that government programs cannot. Commercial space is vital
to our wellbeing on earth because -- particularly in the aftermath of the Cold
War, with its inevitable reductions in defense aerospace spending - our
aerospace sectors must be fueled by commercial forces or the), will wither,
squandering a great deal of precious built-up technical and human capital.

Although the United States has made significant progress already in
developing a truly commercial space sector, it has a considerable distance yet
to go. For decades, all space activity was undertaken by governments, leading
to the creation of institutional structures, bureaucratic cultures, and ways of
doing business that are poorly adapted to the commercial marketplace. In trying
to promote the growth of commercial space industries, the U.S. government must
overcome these inbuilt biases, and encourage the formation of new structures and
cultures that are well-suited to the realities of the commercial marketplace.

Commercial enterprises don't just spring up like magic. As efforts to build
a market economy in the former Soviet Union illustrate, for commercial
enterprises to flourish you need a particular kind of environment: one in which
capital is available, in which innovators can expect to retain the fruits of
their innovation, in which risks are reasonably predictable, and in which
for-profit enterprises do not have to compete with taxpayer-subsidized programs.
Over the years, 1, and NSS, have supported legislative efforts to create this
kind of environment for commercial space. Our basic philosophy is that if we
produce the right initial conditions, we can expect space industries to grow
mostly on their own. That doesn't mean without any government assistance -- all
new high technology industries, from railroads, to commercial aviation, to
computers, started off with some kind of boost from the government -- but
although almost five years, and two report deadlines, have passed since the Act
was signed into law on November 17, 1988.

3/ This goal was endorsed by President Clinton during the campaign, in his
space position paper and in answers to an Associated Press questionnaire.
Executive Branch support for this goal, like that in Congress, has been
bipartisan. President Bush endorsed the same goal in his speech of July 20,
1989, and former President Ronald Reagan similarly proclaimed that "America must
lead the effort to colonize space, because in the next century leadership on
Earth will come to the n2tion that shows the greatest leadership in space."
Quoted in Cannon, President Salutes Discovery, Bush, Wash. Post, Oct. 15, 1988
at A4 Col. 1. And, though it is not entirely relevant here, at least one
representative of the judicial branch has endorsed the goal of space
colonization. See Justice William J. Brennan, Jr., Space Colonization and the
Law, 3 Harv. J. I- & Tech. 7, 12 (1990) (agreeing with Reagan statement). It
does mean a circumstance in which market forces, not government bureaucrats,
pick winners and losers.

That means procurement reform, for one thing. In the early days, just as in
the early days of computers or aviation, it is inevitable that government will
be one of the largest -- and often the largest -- customer for space goods and
services. But if we want the space industries to adapt to the commercial
marketplace, then in the early days government procurement must mimic the
marketplace, so that companies will become well-adapted to commercial reality
early on. Thus, our support for vouchers and anchor tenancy.

In the same vein, private industries should not have to compete with
programs financed by U.S. taxpayers, which is why we supported the Launch
Services Purchase Act, requiring NASA to procure its launch services
commercially, rather than simply building its own rockets and launching them.
And, having decided that space industries should not have to compete against
government programs financed by U.S. taxpayers, we believe that they should not
have to compete with government programs financed by foreign taxpayers either,
which is why we have supported various freetrade initiatives.4

For space ventures to succeed, innovators must also be able to capture the
value of their innovations. This is why we have supported intellectual property
reforms in the Patents in Space Act' and the Commercial Space Competitiveness
ACt,6 and provisions in the new LANDSAT act permitting market-based pricing and
freedom from government censorship.' No one will invest in space activity,
however

4/ See, eg., Testimony of Professor Glenn H. Reynolds, United States Senate
Finance Committee, Subcommittee on International Trade, June 15, 1993
(describing NSS position on "Super 301" action involving Japanese satellite
procurement); U.S. Congress Congressional Research Service, Commercial Space
Launch Services: The U.S. Competitive Position 65-66 (describing NSS Section 301
petition against Chinese government for breach of the U.S. / China launch
services agreement). I stress that the point of NSS trade actions is not to
protect U.S. companies from foreign competition, but to ensure that competition
is market-based, and not dominated by government subsidies or discrimination.
NSS' efforts to promote open markets abroad should be seen as consistent with
its efforts to open up procurement at home, not as conflicting with those
efforts.

5/ Pub. L. 101-580; 104 St2t. 2863; codified at 35 U.S.C.A. 105 1993).

6/ See Pub. L 102-588; 106 Stat. 5129; codified at 42 U.S.C.A. 2454(b).

7/ Previous language in the land Remote Sensing Commercialization Act of
1984, 15 U.S.C. 4201 et seq., and the regulations implementing it, 15 C.F.R.
960.16(a) (1988) had allowed for extrojudicial remedies against private
remote-sensing operators whose imaging was deemed to infringe national
promising, if it appears likely that "free riders" will get all the benefit
without any of the risk, or that government bureaucrats will have the power of
life and death over an operation.

These are the philosophies that have guided National Space Society positions
on space legislation in the past, and the), are the beliefs that guide our
positions with regard to the Omnibus Space Commercialization Act and other
efforts to promote commercial space industries. In keeping with those beliefs,
I will discuss those aspects of the Act that I believe to be most worthy of
attention.

The Omnibus Space Commercialization Act

I am fortunate enough to have testified on an earlier version of this Act
some years ago, and the general statements that I made at that time remain my
views today.8 I have placed a section-by- section analysis in an Appendix to
this testimony, but will focus here on those aspects of the current bill that I
consider most important. Those are, in my opinion, the tax incentives contained
in section 102 and sections 401-06, and the data and hardware procurement
reforms contained in sections 507 and 508.

Tax Incentives

It is difficult to name any new technological industry that has gotten off
the ground without some kind of government assistance, from railroads,9 to
aviation,10 to security. These provisions were challenged time scholars and
media representatives, see Merges & Reynolds, News Media Satellites and the
fourth Amendment: A Case Stud), in the Treatment of New Technologies, 3 High
Tech. LJ. 1 (1988); L'.& Congress Office of Technology Assessment, Commercial
Newsgatbering from Space: A Technical Memorandum (1987). This issue was
addressed in the And Remote Sensing Policyz-t Act of 1"2, Pub. L 102-555; 106
Stat. 4171, sec. 203; codified at 15 U.S.C.A. 5623(a) (1993), would provide
provides that such seizures may only be made pursuant to a warrant from a
magistrate based upon and showing of probable cause, thus avoiding First
Amendment prior restraint problems - and a substantial chilling of investment
interest in satellite newsgathering systems.

8/See Impact of Start Agreements and Other industry Incentives on Commercial
Space Markets, Hearing before the Subcommittee on Space of the Committee on
Science, Space and Technology, U.S. House of Representatives, 102d Cong. lst @
July 31, 1991 at 47-89.

9/See Reynolds, Structuring Development in Outer Space: Problems of How and
Why 19 Law Pol'y in lnt'l Bus. 433, 441 et seq. (1987). computers." That
assistance may come in a number of forms, from outright subsidies (as in the
case of the railroads or aviation under the Air Mail subsidy system) to
large-scale purchasing (as in the jet aircraft industry), to research and
development, as in the case of computers under DARPA.

Such assistance is generally considered justified for two reasons. First,
new industries produce general benefits for society- *, that are not captured by
their investors: this "public good" aspect is a classic reason for governmental
support. Second, new industries, particularly in technological fields, are
characterized by high risks, uncertain returns, and relatively large capital
requirements, all factors that tend to result in underinvestment (and all
factors present to a particularly high degree in space markets).

How should the government assist space enterprises? First, a brief note on
how it should not assist them: through the payment of direct operational
subsidies. Such mechanisms severely distort the market, rewarding inefficient
players and (often) penalizing efficient ones. Although such subsidies have
been used successfully in the past (for example, the per-mile payments made to
the builders of the first transcontinental railroad), they are generally a bad
idea. Government policy should be to assist space industries in getting off the
ground in a way that rewards them for doing a good job, not simply for existing.

One advantage of tax incentives in this direction is that as a general
matter tax incentives only reward companies that make money. Tax reductions for
new industries recognize that if those industries are successful the government
will ultimately recoup its investment many times over through increased economic
activity leading to greater overall tax revenues. But not all tax incentives
are created equal. In general, tax incentives that require companies ultimately
to earn a profit (eg., tax credits, long-term capital gains treatment on stock)
provide better incentives for production than those that, for example, provide
an immediate deduction for investors who purchase stock." Such profit-requiring
incentives have the added advantage

10/See D. Mowery & N. Rosenberg, Technology and the Pursuit of Economic
Growth 169-202 (1989) (describing government assistance to commercial aviation
industry, from Kelly Air Mail Act of 1925 through post World War II military
research, development, and purchases).

11/ See, eg., K. Flamm, Targeting the Computer: Government Support and
International Competition (1987).

12/This is a potential problem with Section 402 of the Walker Omnibus bill,
which makes purchases of commercial space center" stock deductible. While this
approach certainly would attract capital to commercial space centers, it might
(depending on details of implementation and fit with other tax that they only
cost the government money if they work: if the companies in question do not make
money, then giving their (nonexistent) profits favorable tax treatment makes no
difference. Favorable tax treatment attracts capital by making the rewards of
success greater, but it still demands success.

The Omnibus bill generally meets the test for a well-targeted tax incentive.
I should also note that it meets the criteria that the Clinton Administration
has set out for subjects of preferential capital gains treatment. The Clinton
Administration has supported targeted tax incentives, rather than the kind of
across-the-board capital gains cut advocated by the Bush administration.

In general, the guidelines suggested by the Clinton campaign involve (1)
incentives for new businesses and new investments, not existing ones; (2)
support for strategic industries; and (3) support for ventures involving new
technologies. All of these guidelines argue for special tax incentives for
commercial space ventures. There is other precedent for such incentives as
well. We have traditionally provided tax incentives to businesses that locate
in underdeveloped areas - as provided for in Internal Revenue Code section 936,
for example, which provides special tax treatment for investments in Puerto
Rico, U.S. possessions, and certain Caribbean Basin nations. Well, outer space
is an underdeveloped area, and just as with regard to other areas that are short
on infrastructure and track records, and perceived to be high in risk, it makes
sense to provide special tax incentives so that we can see this underdeveloped
area develop. America also has a history of encouraging strategic industries
through tax incentives as a means of promoting its international competitiveness
in hightechnology areas, as illustrated by the research and development tax
credit and other tax incentives for high- technology industries. These
incentives merely continue in that tradition.

Finally, I must save that some of your colleagues are heading in exactly the
wrong direction on this topic. It is my understanding that some members of the
Senate are proposing special taxes on companies in the GPS (Global Positioning
System) industry. This fledgling commercial space industry is just beginning to
look like a success - as the military's reliance on commercial GPS handsets
during the Gulf War illustrates. It sends exactly the wrong signal to target
such an industry with new taxes just as it is beginning to take off. I hope
that your committee will do its best to prevent such efforts from taking effect.

provisions) lead to the creation of commercial space centers whose primary
purpose was as tax shelters. In light of the many changes made since the 1986
tax act this b unlikely, but not impossible, and the general point remains valid
regardless.

Procurement Reform

The existing procurement environment hurts companies in several ways.
First, they cannot deal with the government on the same kinds of terms and
conditions applicable to their commercial customers. 13 Second, if they adapt
to the unique environment of government contracting, they are likely to become
less competitive in the commercial arena -- letting a program "slip" a year is
typical in a cost-plus environment, but often lethal in a commercial one.
Third, they cannot trust the government officials with whom they deal, because
those officials cannot make promises without the risk -- indeed the likelihood
-- that Congress will change the rules.14

These are problems that are endemic to the government procurement system,
which is based on an enormous unwillingness to grant government contracting
officials the kind of discretion commonly granted to procurement personnel in
the private sector. This has the salutary effect of limiting corruption, but
produces enormous costs in return." Reforming the entire government procurement
system will be a colossal task, but many people have urged that the government
experiment with streamlined systems in particular areas, 1 6and the commercial
space area -- given its enormous importance, the existing national commitment to
its flourishing, and its relatively small size compared to other sectors like
health or defense - seems like a good place to start. I believe that it would
be an excellent laboratory for procurement reform experiments.

13/To provide simple example, if a commercial company approaches NASA or
NOAA and says "we have a better, way to address your problem," and convinces the
responsible officers that its approach really is better, current law and
practice will likely require that the new approach be put out for bids - both
undermining the company's intellectual property, and reducing incentives for
Such companies to approach the government in the first place. This is not how
things are done in the private sector.

14/ Spacelab seems to have faced this problem.

15/ See generally S. Kelmon, Procurement and Public Management: The Fear of
Discretion and the Quality of Government Performance (I 990). Kelman, a
professor at the Kennedy School of Government, argues that the detailed rules
imposed on government contracts In the hopes of preventing waste and abuse have
the paradoxical effect of wasting large amounts of government money and
rendering government contractors less competitive in the private sector. I
believe that he is correct; certainly this phenomenon exists in the space field.

16/ See, eg., Jerry Mashaw, 7he Fear of discretion In Government
Procurement, 8 Yale Journal on Regulation 511, 519 (1991) (arguing for
experiments in procurement reform in selected areas).

Ideally, such reforms would involve the government acting exactly like a
commercial customer. After all, we want our commercial space companies to be
well adapted to competitive markets. But, often, the government will be among
their first and largest customers. Thus, if commercial space companies are to
become welladapted to serving commercial customers, the government must mimic
those customers in its dealings with them. This might require significant
changes in existing procurement laws and practices (or at least exceptions to
them), but such changes would certainly be worthwhile if they helped the
commercial sector to flourish.

The voucher scheme previously implemented by this Committee represents a
start in this direction. I know from many telephone conversations that the
National Performance Review team thought that an expansion of voucher-type
procurement in the space area would make an excellent "reinvention lab"
experiment for procurement reform. Unfortunately, I understand that they and
NASA were unable to agree on an implementation plan in time, though such efforts
appear to be going ahead now under the direction of NASA Administrator Goldin.
That, however, is no reason why the Congress should not create such a
farther-reaching plan on its own.

One plausible approach would be a graduated system of microgravity research
vouchers, in which experimenters could progress logically from laboratory work,
to drop-to,w-er research, to parabolic aircraft flights, to suborbital flights,
to orbital flights, all under a voucher-based system. Under such a system,
vouchers for most of these experiments -- drop-towers and aircraft flights --
would be very cheap, measured in the thousands of dollars. Vouchers for the
suborbital flights would be somewhat more expensive, but less common (since only
the promising experimental approaches would get this far), and orbital flights,
the most expensive, would be the least common. The key to such a program would
be to keep control in the hands of the customer -that is, the experimenter -- so
that companies competing for voucher business would devote their efforts to
serving experimenters' needs. The advantage of this approach is twofold: first,
experimenters would get better service, for less money, as a result of
competition; second -- and more important -- companies that succeed in competing
for voucher business will have developed exactly the skills necessary for
success in competing for commercial business as it develops. In short, such an
approach will allow us to "grow" a commercial industry gradually, with
government procurement providing the initial impetus for markets that will
ultimately flourish on their own.

The procurement reform provisions of the Omnibus bill are somewhat less
ambitious than the approach that I have just suggested -- although they are not
at all inconsistent with it. may be that a smaller start is necessary.
However, I stress that any "experiment"i" procurement reform program must be
large enough, involving enough procurements over enough time, to develop a
meaningful experience base or it is a waste of time. And I am not sure that any
program advertised as "experimental"

Statement of Prof. Glenn H. Reynolds

Subcommittee an Space

October 20, 1993 will succeed in attracting enough capital to develop a
self-sustaining industrial base in the field, as investors are likely to be
cautious about putting money at risk for something labelled experimental, and
rightly so.

I wish in particular to praise the scientific data purchase provisions in
Section 507 of the Omnibus bill. It has been my opinion for some time that NASA
should be a research and development agency, not a trucking company, not a
construction company, and not an airline. I believe that NASA should do only
those things that no one else can do, and should focus its intellectual and
technical resources where they do the most good. Everywhere else, it should let
the private sector do as much as possible.

A data-purchase approach provides contractors the incentives that we want
them to have. Contractors who sell hardware have an incentive to deliver
hardware, whether it works or not -- and the current NASA procurement system
provides little in the way of penalties when it does not. (17) Contractors who
sell data, on the other hand, have every incentive to see that the hardware
works long enough to deliver the data, or they don't get paid. Furthermore,
when the contract is for the provision of data, with how those data are gathered
being up to the contractor, the contractor has every incentive to perform the
mission as cheaply as possible: being paid for results, rather than effort, the
contractor will be concerned with producing those results with as little effort
as possible. Although those efficiency gains are captured by contractors in the
short run, they will benefit all space activity over the longer term. In
recognition of exactly these factors, Vice President Gore's National Performance
Review has recommended just such an approach for NASA. The NPR's Recommendation
No. NASA01 calls for "contracting out for data instead of hardware whenever
appropriate." So I think it fair to say that there is bipartisan support for the
notion that this is a sensible approach.

This approach, however sensible, may not sit well within the
business-as-usual constituencies of the space community, since it represents a
substantial departure from business as usual. I would submit, however, that
business as usual in this field is lousy. After the Hubble Space Telescope and
Mars Observer fiascoes, and the recent LANDSAT crash, the business as usual
approach appears to be a "failure as usual" approach. Perhaps it is time to try
something different.

17. See, eg., Liz Tucci, NASA Settles with Maker of Flawed Hubble Mirror,
Space News, Oct. 11-17, 1993, at 4 (reporting that NASA has settled with
Perkin-Elmer for S25 million, although cost of Hubble repairs will reach $250
million not counting the cost of the shuttle flight needed for the repair work).

In fact -- though this appears to go beyond the four corners of the Omnibus
Bill's provision -- the LANDSAT situation offers an excellent opportunity for
the government to try a data-purchase approach. An announcement by the
government that it would purchase LANDSAT-like multi-spectral imagery to fill
the gap until LANDSAT 7 is launched (and perhaps afterward) would almost
certainly bring a number of competitors forward. Such an approach would be very
likely to produce high-quality), imagery long before LANDSAT 7 is operational,
and would help ensure that we are not held hostage by a de facto monopoly on the
part of the French system, SPOT.

Although these are the most important aspects of the Omnibus Bill, I would
like to touch on a few others that I think important.

Legal Environment

Section 503 of the bill calls for a "report on laws that affect space
commercialization." I believe that although this section has little "sex
appeal," except perhaps to the occasional professor of space law, it is
nonetheless very important. Right now, the mass of domestic law affecting space
business, ranging from tax law to intellectual property to antitrust, is not
well understood. Furthermore, many issues of state law are unclear. One
concrete action that Congress could take to benefit space
commercialization would be to clarify the legal environment for space activity."
Some aspects of space activity are covered by federal law now, of course, under
the 1984 launch act, as amended, the 1992 Remote Sensing Policy Act, and so on.
But much important law applicable to space activity is state law, not federal
law: the laws governing security interests, or torts, or trade secrets, (19) for
example. (20) Yet as some

18. The Walker Omnibus bill recognizes the importance of this issue by
calling for a legal survey to be conducted by the National Space Council and the
Office of Space Commerce, with the goal of identifying legal impediments to
space business and ways of addressing them. See discussion in Appendix 1,
infra. I heartily endorse this approach, which is not at all inconsistent with
the one I outline here.

19. See Dan L. Burk, Protection of Trade Secrets in Outer Space Activity: A
Study In Federal Preemption, 23 Seton Hall L. Rev. 560, 579 (1993).

20. Some lawsuits over space activity have been filed in state courts
already. Appalachian Ins. Co. v. McDonnell Douglas Corp., 214 Cal. App. 3d 1,
262 Cal. Rptr. 716 (1989); Lexington Ins. Co. v. McDonnell Douglas Corp., No.
481713 (Cal. Super. Ct, Orange Cty., May 23, 1990). Others have been filed in
federal district courts, but invoked state law. See, eg., Martin Marietta v.
INTELSAT, 991 F.2d 94 (4th Cir. 1993). The Fourth Circuit's poorly-thought-out
handling of this case is an excellent argument for clarifying the law governing
space activities. For a brief and clear discussion of the problems created by
the Fourth Circuit's reliance on Maryland law in this case, see J.E. Curtin,
Wave Goodbye to Cross-Waivers, Space News, Oct 11-17, 1993 at 15. 1 believe that
Congress should correct the Fourth Circuit's reading of the Commercial Space
Launch Act Amendments through appropriate legislation. cases have already
illustrated, state law is often poorly suited to space activities. Furthermore
it is often unclear what state law -- or which state's law -- would apply. And
much space activity has, at least potentially, important international
ramifications that argue against the application of state law, or decisions by
state courts. Given the difficulty of addressing such matters piecemeal through
legislation -- something of which I am sure I need not convince anyone here
today - perhaps Congress should try a more comprehensive approach.

Creating a New Legal Jurisdiction

A recent Office of Technology Assessment study" voiced two key legal
concerns: (1) the need for an evolutionary system that would allow space law to
develop as needed without the rigidity of some sort of all-encompassing a priori
Space Code; and (2) the need for space activity to be free from conflicting,
inconsistent (and possibly parochial) state law so as to minimize legal
uncertainty and reduce litigation.

These needs have been met before in the context of a special industry, the
maritime industry, by the creation of a special jurisdiction, the Admiralty
jurisdiction granted to federal courts over maritime matters. And while I
certainly would not recommend simply transplanting the existing maritime law
into the space context, I believe that Congress should seriously consider doing
something analogous.

Why did we create a special federal jurisdiction over maritime matters?
Essentially, in response to the same kinds of factors I have set out with regard
to space. The shipping industry, and maritime commerce generally, were seen as
being particularly important to the nation. The success of these industries was
seen as depending, in part, on the existence of stable yet flexible law at a
national level, free from inconsistent and possibly self-serving state laws. It
was thought that a special federal jurisdiction would allow the federal courts
to address these concerns in the context of a national forum, so that practical
law, attuned to the real needs and practices of the industry, could develop as
required without either the balkanizing effect of multiple state laws or the
need for each provision to survive the vagaries of the legislative process. In
addition, by placing maritime cases (which often have important international
implications) in federal courts, this jurisdictional grant was

21. U.S. Congress Office of Technology Assessment, Space Stations and the
Law: Selected Legal Issues (1986). See also Reynolds, Book Review, 27
Jurimetrics J. 431 (1987) (discussing OTA report and offering suggested
responses). also thought likely to promote smoother international relations,
since the decisions of federal courts were likely to receive greater respect
from foreign nations than were those of state Courts. (22)

Since all of these concerns exist in the space context, and since the
Admiralty approach is generally regarded as having been successful, we should
think about doing something similar in the space context. Although this is not
the proper place to set forth a detailed proposal, I believe that Congress
should look into the matter further. A reasonable approach would be to vest
jurisdiction in the District Court for the District of Columbia (where many
space suits have been filed already), with appeal to the District of Columbia
Circuit, whose considerable expertise in technology-related administrative law
cases would ensure competence in understanding space cases as well. Such a
jurisdictional grant should be accompanied by language providing general
guidance for the courts in this area. This topic is not covered in the Omnibus
bill, and I do not believe that it is quite time to propose such legislation,
but I think that it should be considered as a follow-on to the study proposed in
the Omnibus bill.

Antitrust Protection for Joint Ventures

The Omnibus bill provides substantial antitrust protection for joint
research and development ventures. Such protection seems entirely warranted,
since with foreign concerns controlling most of the world commercial-launch
market there is little reason to fear monopolization. This approach is also
consistent with that of the Clinton Administration, which has promoted such
joint ventures in other strategic industries, such as automobiles and jet
aircraft. I recognize that some argue that the National Cooperative Research
Act provides sufficient protection in this area; my own experience while in law
practice, however, indicates that many members of the business community are not
sufficiently reassured by that Act. And there is reason to believe that joint
production ventures, going beyond joint research and development, may be
worthwhile as well.

22. For discussions of this history see Black, Admiralty Jurisdiction:
Critique and Suggestions, 50 Colum. I- Rev. 259 (1950); Putnam, How the Federal
Courts Were Given Admiralty Jurisdiction, 10 Cornell L.Q. 460 (1925); Frank,
Historical Bases of the Federal Judicial System, 13 Law & Contemp. Probs. 3
(1948) (suggesting special connection between maritime industry and
international relations as a key justification for admiralty jurisdiction). For
a student Note making a proposal somewhat similar to the one I make here, see
Pucciarelli, The Case for a Federal Common Low of Space, 33 N.Y.L.S. L. Rev.
509 (1988).

Conclusion

I would like to conclude by once again congratulating the Subcommittee for
its excellent work in support of commercial space industries. At a time when
the Congress, and government in general, suffers from criticism for gridlock and
porkbarrelling, your work in support of commercial space industries demonstrates
that bipartisanship and concern for the public interest are still very
important. That, in itself, is no small thing.

There is more to commercial space than that, however. In the 1920s and
1930s, and again in the 1950s, a group of farsighted legislators and
administration officials worked to accomplish the legal and regulatory changes
that established U.S. dominance in the civil aviation field. Although their
work received relatively little attention at the time, it laid the foundation
for decades of U.S. dominance in civil aviation -- a dominance that in large
part continues to this day.

At the time they did their work, aviation didn't look very important. Many
experts believed that airplanes -- whatever their military value or scientific
interest -- would never be very important as a part of economic activity. Now,
of course, aviation is one of America's few export leaders, and is an
underpinning to many of the world's largest industries. I believe that space
will be for the next century what aviation has been for this one, and that you
and your colleagues are playing an important part in establishing a strong
future for the United States. I, and the National Space Society, look forward
to working with you.

Appendix

The Omnibus Space Commercialization Act of 1993

First, I would like to congratulate Representative Walker and his staff on
this bill. Identifying the key issues, and ways of addressing them, is very
difficult in this complex and confusing area, and my criticism of specific
sections should not be taken as criticism of the overall effort, which was
excellent. I will discuss the sections that I believe are most significant in
order.

Section 3 - Definitions: The definition of "commercial provider" should be
amended to read "any person other than a governmental entity providing space
transportation services or other space-related activities." The definition of
"payload" correctly includes suborbital payloads, thus bringing suborbital
flights within the purview of the new Space Transportation Services Act
language. This is appropriate, as suborbital launches, being the cheapest and
most numerous, offer the most fertile ground for new entrepreneurial ventures.
The definitions of "space launch and launch support facilities," "space
transportation services," and "space transportation vehicle" likewise recognize
suborbital launches. However, the definition of "space-related activities" does
not clearly include activities related to suborbital missions, and could itself
be clarified. I recommend the following: "the term 'space-related activities'
includes research and development, manufacturing, processing, service, and other
activities associated with, or in support of, orbital and suborbital launches
and activities in space."

Section 101 - Inventory of Facilities: I strongly support the idea of making
surplus government facilities available to commercial entities. However, my own
experience in how bureaucracies work suggests that no project manager is
inclined to identify equipment in his/her possession as "surplus" -- instead,
the attitude is generally "we might need it sometime." Thus, this inventory
should not be carried out by survey or questionnaire; some mechanism to overcome
this phenomenon should be employed. It might also be worthwhile to make the
entire inventory of equipment (surplus and non-surplus) available for public
inspection, with some mechanism to have equipment desired by particular
enterprises identified and its status as surplus or non-surplus reevaluated at
their request.

Section 102 - Commercial Space Centers: This is one of several interesting
tax incentives contained in the bill. I believe that this incentive would
certainly succeed in attracting more capital to the field, which is its obvious
purpose. I will discuss this provision in more detail in my later discussion of
tax incentives.

It would seem more logical to place this section in Title IV, as that is
where other issues pertaining to Commercial Space Centers are addressed. To
avoid problems of excessive delegation of legislative authority, this section
(or, failing that, the accompanying legislative history) should provide some
guidance to the Secretary regarding criteria for use in designating Commercial
Space Centers.

Sections 201-03 - Purchase of Space Transportation Services: This section
would amend language contained in the existing Launch Services Purchase Act,
Pub. L. 101-611, Title 11, Section 204, codified at 42 U.S.C.A. 2465b-2465f, to
remove a number of loopholes and limitations. Most significantly, this section
would extend coverage from NASA payloads only to all federal government payloads
not meeting strict criteria. This extension is entirely justified. This will
help to promote the overall goal of making government act as a commercial-type
customer, and is thus desirable.

Sections 401-06 - Tax Incentives for Commercial Space Activities: Together
with Section 102 supra this Title creates a number of special tax incentives for
commercial space activities. All would, in my judgment, result in additional
capital flowing to commercial space enterprises, at relatively low cost to the
Treasury. In short, the total tax package would do the following:

(Section 102): Make virtually all space-related activities and space
transportation services as defined in the act exempt from federal corporate
taxes and federal excises, imposts, etc., so long as they are conducted within
(or, when off-earth connected with) a commercial space center.

(Section 402): Make stock in commercial space centers deductible, subject to
certain dollar and eligibility limitations and recapture provisions.

(Section 403): Make gain on sale of stock in "space corporations" (defined,
roughly, as those receiving at least 75% of gross receipts from space-related
activities) excludable from gross income, subject to a $100,000 per-taxpayer
limitation and a requirement that the gain be long-term capital gain.

(Section 404): Allow states to issue tax-exempt "exempt facility bonds" in
support of space launch and space launch support facilities.

(Section 405): Make income from space manufacturing excludable from gross
income, and products of such manufacturing exempt from all federal excises, etc.

(Section 406): Encourage states to offer tax and other incentives in support
of commercial space activities.

Taken together, these constitute a powerful collection of incentives, and I
have no doubt that they would encourage the flow of investment capital into the
industry. Sections 404 and 405 appear to me to be eminently logical and
uncontroversial. Section 404 adds space facilities to the collection of other
infrastructure - things like airports, wharfs, etc. -- that have traditionally
been considered appropriate for tax-free financing. Adding spaceports and
similar facilities to this collection is consistent with the policy behind
exempt facility bonds, and would certainly help the industry; it also seems
unlikely that enough such facilities will be constructed to make the tax-free
bonds supporting them numerous enough to have much revenue impact. Section 405,
by making income from space manufacturing tax exempt, would provide a mild
stimulus to space manufacturing, and is unlikely to have any major revenue
impact. There is simply little of this activity going on, and its dollar value
is unlikely to be great enough to have much revenue impact anytime soon.

Sections 102, 402, and 403 are likely to be somewhat more controversial.
Depending on the criteria for designating "commercial space centers" and "space
corporations," these provisions could result in a substantial influx of capital.
This is both good and bad. It is good, to the extent that the industry can
absorb the capital in promising enterprises, because capital shortage is a key
problem for space industries. It is bad, or at least difficult, because these
provisions are much more likely to cause political controversy. Opponents will
argue that these provisions will result in the creation of commercial space
centers and space corporations by investors primarily interested in tax
benefits, and this -- though the Subcommittee is undoubtedly better-equipped to
judge than I -- is likely to create problems with Ways and Means, OMB, and so
on. I do feel, however, that tax incentives are the best way of encouraging
these industries because they require companies to produce something, since if
they fail to make a profit the tax benefits (except for stock deductibility) are
largely worthless. And, to the extent that companies fail to make a profit, the
tax benefits cost the government little.

Section 501 - Antitrust Exemptions: This section is designed to protect
joint ventures in space fields from excessive antitrust limitations. That is
certainly worthwhile: for example, in the space launch field one foreign
competitor, Arianespace, controls more than half the market. Limiting
cooperation among American companies thus would seem self-defeating -- and many
experts have identified joint ventures, in both research and production, as
particularly important in high-technology fields. (23) It is not clear to me,
however, that the language provided here would be adequate to reach all joint
ventures in the field. Although I am not an antitrust specialist, specific
exemptions for joint production, at least under some circumstances, would be
worth considering.

Section 503 - Report on Laws: This section provides that the National Space
Council, together with the Office of Space Commerce, shall report on laws and
treaties that affect space commercialization. I believe that this is a very
important section, as one of our great weaknesses in this field is our lack of
knowledge concerning the overall legal environment and its impact on actual
enterprises. It is one thing to parse a statute: it is another to see how it
affects the decisionmaking of commercial actors. However, I believe that it
should be made clear that in this context the term "laws" includes regulations,
as administrative regulations -- and even informal administrative practices -
may have effects that are just as important as statutes or treaties, and less
obvious. I am, however, unclear as to how the National Space Council will
participate in this venture. Although to my knowledge the Administration has
not formally abolished it (which would require legislation from Congress), I do
not believe that there is a "Director of the National Space Council"
identifiable within the White House at the moment. Perhaps this should be
amended to read "Assistant Director for Space of the Office of Science and
Technology Policy."

Section 507 - Purchase of Space Science Data: This section requires that to
the maximum extent possible, NASA shall purchase space science data from
commercial vendors rather than undertaking the gathering of such data itself.
This proposal will help to promote the growth of commercial industries in this
area, and is likely to result in the federal government getting more science for
less money. In light of embarrassing -- and expensive -- failures like the
Hubble Space Telescope and the Mars Observer spacecraft, an approach like this
makes eminent sense. Contractors who sell data, as opposed to hardware, have a
much greater incentive to ensure that the hardware works long enough to gather
the data that they are selling, and is cheap, since that will increase their
profits. This approach, like many in this bill, is consistent with the
principles laid down in the National Performance Review's report.

23. See, eg., Joel Eisen, Antitrust Reform for Joint Production Ventures,
30 JurimetriC3 J. 253 (1990); Jorde & Teece, Innovation, Cooperation, and
Antitrust: Striking the Right Balance, 4 High Tech. I-J. 1 (1989).

Section 508 - Procurement: This section is designed to promote the
commercial procurement of space goods and services by establishing an
experimental program for innovative procurements utilizing advanced technology.
The idea is excellent; my only concern is whether the size of this program is
great enough to make it a valid demonstration. Although this section sets a
floor, not a ceiling, for such efforts, I am concerned that the floor should be
higher, and urge that you investigate this issue.