[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]



                       COMMITTEE PRINT REGARDING 
                       PATENT QUALITY IMPROVEMENT

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                      APRIL 20 AND APRIL 28, 2005

                               __________

                           Serial No. 109-11

                               __________

         Printed for the use of the Committee on the Judiciary


    Available via the World Wide Web: http://www.house.gov/judiciary


                                 ______

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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  ADAM SMITH, Washington
MIKE PENCE, Indiana                  CHRIS VAN HOLLEN, Maryland
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
ELTON GALLEGLY, California           JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia              RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
SPENCER BACHUS, Alabama              MAXINE WATERS, California
BOB INGLIS, South Carolina           MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
DARRELL ISSA, California             ANTHONY D. WEINER, New York
CHRIS CANNON, Utah                   ADAM B. SCHIFF, California
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
J. RANDY FORBES, Virginia

                     Blaine Merritt, Chief Counsel

                         David Whitney, Counsel

                          Joe Keeley, Counsel

                     Alec French, Minority Counsel


                            C O N T E N T S

                              ----------                              

                             HEARING DATES

                                                                   Page
Wednesday, April 20, 2005first date deg.
  Part I.........................................................     1

Thursday, April 28, 2005second date deg.
  Part II........................................................   119

                           OPENING STATEMENT
                 April 20, 2005first date deg.

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     1
The Honorable Howard L. Berman, a Representative in Congress from 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................     2
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia..........................................     3

                April 28, 2005second date deg.

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................   119
The Honorable Howard L. Berman, a Representative in Congress from 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................   120

                               WITNESSES
                 April 20, 2005first date deg.

Mr. J. Jeffrey Hawley, Legal Division Vice President and 
  Director, Patent Legal Staff, Eastman Kodak Company, on behalf 
  of Intellectual Property Owners Association (IPO)
  Oral Testimony.................................................     6
  Prepared Statement.............................................     8
Mr. Richard J. Lutton, Jr., Chief Patent Counsel, Apple, on 
  behalf of the Business Software Alliance (BSA)
  Oral Testimony.................................................    16
  Prepared Statement.............................................    17
Jeffrey P. Kushan, Esq., Sidley, Austin Brown and Wood, LLP, on 
  behalf of Genentech
  Oral Testimony.................................................    24
  Prepared Statement.............................................    27
Mr. William L. LaFuze, Partner, Vinson & Elkins, LLP, and Chair, 
  Section of Intellectual Property Law, American Bar Association, 
  on behalf of the American Bar Association and the ABA Section 
  of Intellectual Property Law
  Oral Testimony.................................................    36
  Prepared Statement.............................................    39

                April 28, 2005second date deg.

The Honorable Jon W. Dudas, Under Secretary of Commerce for 
  Intellectual Property, and Director of the U.S. Patent and 
  Trademark Office
  Oral Testimony.................................................   121
  Prepared Statement.............................................   124
Mr. Richard C. Levin, President, Yale University, on behalf of 
  the National Research Council
  Oral Testimony.................................................   131
  Prepared Statement.............................................   133
Mr. Nathan P. Myhrvold, Chief Executive Officer, Intellectual 
  Ventures
  Oral Testimony.................................................   136
  Prepared Statement.............................................   138
Mr. Darin E. Bartholomew, Senior Attorney, Patent Department, 
  John Deere & Company, on behalf of the Financial Services 
  Roundtable
  Oral Testimony.................................................   150
  Prepared Statement.............................................   152

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
                 April 20, 2005first date deg.

Prepared Statement of the Honorable Bob Goodlatte, a 
  Representative in Congress from the State of Virginia..........     4

                                APPENDIX
                   Material Submitted for the Record
                 April 20, 2005first date deg.

Prepared Statement of the Honorable Howard L. Berman, a 
  Representative in Congress from the State of California, and 
  Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................   183
Letter to the Honorable Lamar Smith, a Representative in Congress 
  from the State of Texas, and Chairman, Subcommittee on Courts, 
  the Internet, and Intellectual Property, from William L. 
  LaFuze, Partner, Vinson & Elkins, LLP, and Chair, Section of 
  Intellectual Property Law, American Bar Association, on behalf 
  of the American Bar Association and the ABA Section of 
  Intellectual Property Law......................................   185
Response to questions submitted by the Honorable Darrell Issa, a 
  Representative in Congress from the State of California, to J. 
  Jeffrey Hawley, Legal Division Vice President and Director, 
  Patent Legal Staff, Eastman Kodak Company, on behalf of 
  Intellectual Property Owners Association (IPO).................   186
Response to questions submitted by the Honorable Darrell Issa, a 
  Representative in Congress from the State of California, to 
  Richard J. Lutton, Jr., Chief Patent Counsel, Apple, on behalf 
  of the Business Software Alliance (BSA)........................   189
Response to questions submitted by the Honorable Darrell Issa, a 
  Representative in Congress from the State of California, to 
  Jeffrey P. Kushan, Esq., Sidley Austin Brown and Wood, LLP, on 
  behalf of Genetech.............................................   191
Response to questions submitted by the Honorable Darrell Issa, a 
  Representative in Congress from the State of California, to 
  William L. LaFuze, Partner, Vinson & Elkins, LLP, and Chair, 
  Section of Intellectual Property Law, American Bar Association, 
  on behalf of the American Bar Association and the ABA Section 
  of Intellectual Property Law...................................   195

                April 28, 2005second date deg.

Prepared Statement of the Honorable Howard L. Berman, a 
  Representative in Congress from the State of California, and 
  Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................   198
Memorandum to the Honorable Lamar Smith, a Representative in 
  Congress from the State of Texas, and Chairman, Subcommittee on 
  Courts, the Internet, and Intellectual Property and the 
  Honorable Howard Berman, a Representative in Congress from the 
  State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property from Darin E. 
  Bartholomew, Senior Attorney, Patent Department, John Deere & 
  Company........................................................   199
Prepared Statement from Jack Haken, Vice President, Intellectual 
  Property & Standards, U.S. Philips Corporation.................   200
Letter from Ryan M. Fountain, Attorney at Law, Mishawaka, Indiana 
  to Blaine Merritt, Chief Counsel, Subcommittee on Courts, the 
  Internet, and Intellectual Property, Committee on the Judiciary   203

 
                       COMMITTEE PRINT REGARDING 
                       PATENT QUALITY IMPROVEMENT



                                 Part I

                              ----------                              


                       WEDNESDAY, APRIL 20, 2005

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 4:38 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith (Chair of the Subcommittee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order.
    We appreciate all the interest demonstrated by all the 
folks today. This is an important hearing. It is the first of 
several hearings on the subject, but I'm glad for everyone's 
interest.
    Also, let me say that there is a concurrent Members-only 
briefing on Iraq that is being given by the Secretary of 
Defense, and I know we've lost several Members to that 
activity. Nevertheless, it doesn't diminish from what is said 
nor the importance of the meeting itself.
    I'll recognize myself for an opening statement and then 
recognize the Ranking Member, and then we'll get to our 
witnesses as soon thereafter as possible.
    This hearing is the first of two that we will conduct this 
month on patent reform. More specifically, today the 
Subcommittee will explore the merits of a committee print that 
incorporates a number of changes to improve the quality of 
patents issued by the U.S. Patent and Trademark Office.
    The print also speaks to certain patent practices that 
disrupt the operations of manufacturers and other businesses.
    The Subcommittee will hold its second hearing on the print 
next week and a third hearing on a bill that I will introduce 
shortly after that.
    While the Subcommittee has documented a steady increase in 
application pendency and backlogs at the PTO in recent years, 
the consensus view among agency officials and the inventor 
community is that efforts to address these problems should not 
take precedent over improving patent quality.
    Patents of questionable scope or validity waste valuable 
resources by inviting third party challenges and ultimately 
discourage private sector investment.
    Accordingly, our Subcommittee has pursued a number of 
initiatives over the past decade to improve the operations of 
the PTO and the patent system. But concern over patent quality 
and its effect on the economy at large has not been confined to 
Congress and the PTO.
    Comprehensive studies recently issued by the Federal Trade 
Commission and the National Academies generated much discussion 
within inventor, industry, and Government circles about the 
present patent system and how it could be improved.
    Critics of the U.S. patent system became more vocal as 
their ranks swelled. They maintained that the gains of the 
previous decade were too incremental or otherwise insufficient.
    The Subcommittee responded in the last Congress by 
conducting oversight hearings on seven reform proposals.
    While we did not move an omnibus reform bill in 2004, the 
hearings contributed to the growing sentiment that favors 
enactment of such legislation in this Congress.
    The committee print is a first step in that process. It 
contains most of the leading recommendations developed by the 
PTO and a broad cross-section of industry and trade 
associations that are involved in the formulation of patent 
policy.
    It is expected that small businesses, independent 
inventors, and other interested parties also will participate 
in this dialogue and the eventual drafting of a bill based on 
the print that I expect to move this spring.
    I realize many competing interests are affected by our work 
on this broad topic, With so much on our plate, ours is an 
ambitious undertaking, at least by my account, but we still 
expect to succeed.
    With that, I'll recognize the Ranking Member for his 
opening comments as well.
    Mr. Berman. Thank you, Mr. Chairman. Perhaps we can talk 
about patent protection in the new Iraq, and merge the briefing 
with the subject of this hearing.
    I want to thank you for scheduling this hearing and in the 
past my colleague from Virginia, Mr. Boucher, and I have 
introduced legislation on patent quality reforms a number of 
times. I think the general discussion of the need to look at 
many of these questions has attempted--has fostered a 
discussions among diverse industry groups, all of which now 
recognize the need for changes to the patent law.
    While there are many differing views about how to amend the 
law, we all share a common goal, which is improving the quality 
of the patent system. Our patent system was designed to promote 
continual innovation by providing strong protection for 
intellectual property.
    However, if we protect invalid patents, the system will 
have the opposite effect: that of hindering creative output. 
And the introduction of poor quality patents into the 
marketplace actually increases the amount of litigation and has 
a negative effect on the economy.
    The problem of low-quality patents cuts across the entire 
spectrum of art units that the Patent Office examines. But the 
chief culprit seems to be patents in the business methods and 
software area.
    The Patent Office has initiated what it calls a second set 
of eyes review in an effort to address the problem. But this is 
merely a stop gap measure. Without an assurance of sufficient 
funding every year, the PTO can't maintain the staff it needs 
to administer the reviews or implement new quality initiatives.
    So funding for the PTO and an end to diversion I think 
should remain as top priorities in any reform effort.
    Any legislative solution to the problem of patent quality 
must address deficiencies both at the front end of the 
process--that is, the examination stage, which takes place in 
the PTO--and at the back end, which takes place in the 
courtroom.
    The quality of patents system should be addressed both 
from--from both perspectives. Inventors should have confidence 
about the quality of the patents they receive before investing 
further in research and development, and equally secure in the 
knowledge they can properly enforce that patent.
    I have a couple of concerns in this vein relating to the 
committee print. The print primarily describes reforms to 
litigation and remedy provisions. While I think many of the 
suggestions are worthwhile and worthy of support, I'm concerned 
that we are merely treating the symptoms without enough 
emphasis on curbing the underlying--curing the underlying 
disease. Patent quality needs to remain a focus, with an 
objective of minimizing litigation on numerous invalidity 
claims.
    For example, including a provision on allowing submissions 
of additional prior art to an examiner may be helpful in 
addressing this poor quality problem.
    Furthermore, much of the print speaks to harmonization of 
U.S. patent law with patent law in the rest of the world. For 
example, shifting from a first to invent paradigm to one of 
first inventor to file. While this is a very important and 
necessary discussion, having experienced the opposition that 
can be generated on patent reform issues in certain areas in 
the past, in the late 1990's, I'm concerned that opposition to 
those provisions at this point will affect the ability to 
achieve other essential patent reform.
    So I'm looking forward to today's hearings--hearing from 
today's witnesses to identify potential solutions to the 
problems created by questionable patent quality. Just to note, 
some of the suggestions for change, such as the injunction 
provision, may not be palatable to some of the witnesses. But I 
throw out a challenge to those witnesses: if you don't like 
that provision, help us craft a resolution to the problem the 
injunction provision was designed to address, that of the 
patent's role. While the structure of the discussion may be 
centered around the committee print, I hope that the witnesses 
here and in the future hearings will identify additional 
possibilities for resolving patent quality problems. I look 
forward to working with you, Mr. Chairman, in drafting 
effective patent legislation.
    Mr. Smith. Thank you, Mr. Berman.
    The gentleman from Virginia, Mr. Goodlatte is recognized.
    Mr. Goodlatte. Mr. Chairman, thank you for holding this 
important hearing to examine the committee print on improving 
patent quality. As we all know, article I, section 8 of our 
Constitution lays the framework for our Nation's patent laws. 
It grants Congress the power to award inventors for limited 
amounts of time exclusive rights to their inventions.
    The framers had the incredible foresight to realize that 
this type of incentive was crucial to ensure that America would 
become the world's leader in innovation and creativity.
    These incentives as just as important today as they were at 
the founding of country, if not more so. We must make sure the 
incentives our framers put into our Constitution remain 
meaningful and effective. The U.S. patent system must work 
efficiently if America is to remain the world leader in 
innovation.
    It is only right that as more and more inventions with 
increasing complexity emerge that we should examine our 
Nation's patent laws to ensure that they still work efficiently 
and that they still encourage and do not discourage innovation.
    One industry sector which is beginning to showcase the 
potential problems inherent in our Nation's patent system is 
the high tech industry.
    In today's economy, many high tech products involve 
hundreds and even thousands of patented ideas. Technological 
innovators must work to ensure that they obtain the lawful 
rights to use the patents of others through licenses and other 
lawful mechanisms.
    However, it appears that a cottage industry is emerging 
that seeks to take advantage of the complexity of these 
products, combined with loopholes in our patent laws, to extort 
money from high tech companies, both large and small.
    To be sure, these problems are not limited to the high
    tech industry. Inventors in all industries are increasingly 
facing these types of problems. The solution to these problems 
involves both ensuring that quality patents are issued in the 
first place and ensuring that we take a hard look at patent 
litigation and enforcement laws to make sure that they do not 
create incentives for opportunists with invalid claims to 
exploit.
    All inventors will reap the rewards of a streamlined patent 
system that ensures that good quality patents are issued and 
that opportunists cannot take advantage of loopholes in our 
enforcement laws.
    I look forward to exploring the details of the committee 
print with the witnesses.
    Again, Mr. Chairman, I thank you for holding this important 
hearing, and I'd ask that my full opening statement be made a 
part of the record.
    Mr. Smith. And without objection, they will be.
    [The prepared statement of Mr. Goodlatte follows:]

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
                  Congress from the State of Virginia

    Thank you, Mr. Chairman, for holding this important hearing to 
examine the committee print on improving patent quality.
    Article I Section 8 of our Constitution lays the framework for our 
nation's patent laws. It grants Congress the power to award inventors, 
for limited amounts of time, exclusive rights to their inventions. The 
Framers had the incredible foresight to realize that this type of 
incentive was crucial to ensure that America would become the world's 
leader in innovation and creativity.
    These incentives are just as important today as they were at the 
founding of our country. As we continue our journey into the digital 
age, we must make sure that the incentives our Framers put into our 
Constitution remain meaningful and effective. The U.S. Patent system 
must work efficiently if America is to remain the world leader in 
innovation.
    It is only right that as more and more inventions with increasing 
complexity emerge, that we should examine our nation's patent laws to 
ensure that they still work efficiently and that they still encourage, 
and not discourage, innovation.
    One industry sector which is beginning to showcase the potential 
problems inherent in our nation's patent system is the high tech 
industry. In today's economy, many high tech products involve hundreds, 
and even thousands, of patented ideas. Technological innovators must 
work to ensure that they obtain the lawful rights to use the patents of 
others, through licenses and other lawful mechanisms. However, it 
appears that a cottage industry is emerging that seeks to take 
advantage of the complexity of these products, combined with loopholes 
in our patent laws to extort money from high tech companies, both large 
and small. To be sure, these problems are not limited to the high-tech 
industry--inventors in all industries are increasingly facing these 
types of problems.
    The solution to these problems involves both ensuring that quality 
patents are issued in the first place, and ensuring that we take a good 
hard look at patent litigation and enforcement laws to make sure that 
they do not create incentives for opportunists with invalid claims to 
exploit.
    The Committee Print addresses both of these concerns. It would 
create a new post-grant opposition system in which any member of the 
public could request the USPTO to review the scope and validity of a 
patent within nine months from the date of its issuance. While this 
provision would help to ensure that quality patents are issued, the 
nine month limit is intended to prevent third parties from harassing a 
patent owner. In addition, the Committee Print eliminates the provision 
in current law that prohibits a party from raising an issue on appeal 
that could have been raised during a reexamination proceeding. This 
provision is meant to encourage more participation in the reexamination 
process to ensure that only quality patents are issued.
    The Committee Print also includes provisions to ensure that patent 
litigation benefits those with valid claims, but not those opportunists 
who seek to abuse the litigation process. Specifically, the bill 
creates a clear standard for ``willful infringement,'' ensures that 
injunctions are issued only when the patentee is likely to suffer 
irreparable harm that cannot be remedied by the payment of money 
damages, and ensures that damages awarded to a party are proportional 
to the value that the party's invention contributes to the total value 
of the defendant's product.
    All inventors will reap the rewards of a streamlined patent system 
that ensures that good quality patents are issued, and that 
opportunists cannot take advantage of loopholes in our enforcement 
laws.
    Thank you again, Mr. Chairman for holding this hearing. I look 
forward to hearing today from our witnesses.

    Mr. Smith. Thank you, Mr. Goodlatte.
    Before I introduce the witnesses, I'd like to invite you to 
stand and be sworn in.
    [Witnesses sworn.]
    Mr. Smith. Thank you. Please be seated. Let's see our first 
witness if Jeff Hawley, President of the Intellectual Property 
Owners Association. Mr. Hawley also serves as Legal Division 
Vice President and Director of the Patent Legal Staff for 
Eastman Kodak in Rochester, New York. He earned a bachelor's 
degree in electrical--excuse me--chemical engineering from the 
New York University School of Engineering, and a law degree 
from George Washington University.
    The next witness is Richard Lutton, Chief Patent Counsel 
for Apple Computer, where he oversees patent development, 
licensing, and litigation for Apple's computer hardware and 
software business. He will testify on behalf of the Business 
Software Alliance. Mr. Lutton earned a bachelor's degree in 
electrical engineering from Rice and a law degree from 
Columbia.
    Our next witness is Jeffrey Kushan, a Partner and Patent 
Attorney at Sidley, Austin Brown and Wood's Washington, D.C. 
office. He is testifying on behalf of Genentech, a 
biotechnology company based in San Francisco. Mr. Kushan is a 
graduate of the George Washington University Law School. He 
also earned a master's in chemistry from the University of 
North Carolina at Chapel Hill, and a bachelor's in chemistry 
from the College of William and Mary.
    Our final witness is William LaFuze, a Partner in the 
Houston Office of Vinson and Elkins, where he specializes in 
intellectual property law, with an emphasis on electronics, oil 
field equipment and computer-related litigation.
    Mr. LaFuze chairs the Intellectual Property Law Section of 
the American Bar Association and will testify on their behalf. 
He earned his undergraduate degree in physics from the 
University of Texas, a master's in applied science from 
Southern Methodist University, and a law degree from Texas as 
well.
    Welcome to you all. We have your written statements, and 
without objection they'll be made a part of the record.
    Let me wish you well as you try to summarize those 
testimonies, and I read every one, in 5 minutes. But do the 
best you can, and then we'll look forward to asking you 
questions about the rest of your testimony as well. Mr. Hawley, 
we'll begin with you.

 TESTIMONY OF J. JEFFREY HAWLEY, LEGAL DIVISION VICE PRESIDENT 
  AND DIRECTOR, PATENT LEGAL STAFF, EASTMAN KODAK COMPANY, ON 
    BEHALF OF INTELLECTUAL PROPERTY OWNERS ASSOCIATION (IPO)

    Mr. Hawley. Thank you, Mr. Chairman and Members of the 
Committee, and I'll do my best to stick to the 5 minutes.
    As you noted, I'm speaking today on behalf of the 
Intellectual Property Owners Association. IPO is a trade 
association that represents companies and individuals in all 
industries and fields of technology who are interested in 
intellectual property rights.
    We would like to compliment the Subcommittee on putting 
together more than a dozen specific proposals for improving the 
patent system in the committee print, and IPO enthusiastically 
endorses the majority of the proposals; is concerned about one 
of them; and is studying others.
    You mentioned in your opening statement that this is indeed 
an ambitious undertaking and with so many individual provisions 
I think that's a bit of an understatement. This is going to be 
a challenging time.
    We believe that the principles underlying the U.S. patent 
system are sound and that the system has served the country 
well for over 200 years.
    This is confirmed by the recent in-depth studies that, Mr. 
Chairman, you mentioned--the FTC study, the National Academy of 
Sciences study--and also a recent publication by the economists 
Jaffey and Lerner. In spite of some popular press criticisms to 
the contrary, the patent system provides important incentives 
for our members and other innovators to create and 
commercialize new technology.
    However, as you have also noted, the U.S. Patent and 
Trademark Office is in a bit of a crisis, caused by 
underfunding, in turn caused by the diversion of user fees to 
non-related Government programs, to the tune of about three-
quarters of a billion dollars in the last 10 years.
    We are optimistic that the situation in the U.S. PTO is 
turning around. We recommend that the highest priorities for 
the patent system going forward, should be improving the patent 
quality, as everyone has mentioned so far, reducing the cost of 
patent litigation and international patenting, and also 
reducing the uncertainty over the scope of patent rights.
    Turning now to the committee print, we support establishing 
a new post-grant opposition proceeding, which will allow the 
public to request an opposition during a period of 9 months 
after the grant of a patent.
    We favor nearly all of the features of the post-grant 
proceeding that are in the committee print. We have attached to 
the appendix of our written statement a listing of the features 
that we recommend for a post-grant opposition system.
    We also support enthusiastically the proposed limitations 
on the award of treble damages for patent infringement. We 
believe these limitations will reduce litigation costs and 
discourage unwarranted suits. The proposal will correct the 
situation that some companies have said causes them to be wary 
of even reading patents of their competitors for fear that the 
company will, thereby, be on notice of patent infringement for 
the purposes of willful infringement.
    A significant improvement over current law is the very 
welcomed clarification of the notice requirements that are also 
found in the committee print, and we applaud you for that.
    We support the awarding of the patent to the first inventor 
to file. This change from first to invent procedure will 
provide more certainty for patent rights. The first inventor to 
file system is the best system for the United States and IPO 
believes that it should be done even outside the context of 
international harmonization. But its adoption is important for 
our participation in the international harmonization efforts.
    Recent studies by former PTO Commissioner Mossinghoff have 
shown that the benefits of the first to invent system do not 
justify its costs, and this very same conclusion was reached by 
the National Academy of Sciences.
    With regard to injunctions, while it may be possible to 
change the balance slightly in favor of the infringer to reduce 
abuses, the proposal in the committee print represents a 
radical change and goes too far.
    Compared to current law, this proposal shifts the burden 
from the--to the patentee from the infringer. It requires that 
an injunction be denied unless there is a reason to grant it; 
whereas, under current law it's granted unless there is a 
reason to deny it. It imports preliminary injunction concepts 
into permanent injunction determinations and it encourages 
courts to give substantial weight to whether or not the 
patentee works the invention.
    Our written statement explains why we believe the 
injunctions proposal would diminish the incentive for 
innovation provided by American patent system. We believe 
exclusive rights should continue to be available to the same 
extent for patented inventions as they are for a copyrighted 
book--work, such as books, motion pictures, sound recoding, and 
software.
    We again want to thank you for the opportunity for being 
here today. I see I made it under 5 minutes comfortably and I 
would be pleased to answer any questions.
    [The prepared statement of Mr. Hawley follows:]

                Prepared Statement of J. Jeffrey Hawley

    Mr. Chairman and Members of the Subcommittee:
    My name is J. Jeffrey Hawley. I am Legal Division Vice President 
and Director, Patent Legal Staff, for Eastman Kodak Co. in Rochester, 
New York. I am speaking today on behalf of Intellectual Property Owners 
Association (IPO), of which I am the current elected President.
    IPO is a trade association representing companies and individuals 
in all industries and fields of technology who own or are interested in 
intellectual property rights. IPO's membership overlaps with the 
membership of many organizations, including BIO and BSA who are here 
today. IPO members include more than 100 large and medium-size 
corporate members and a number of small business and individual 
inventor members. Our members file about 30 percent of the patent 
applications that are filed in the United States Patent and Trademark 
Office (PTO) by U.S. nationals. In addition to our legislative 
interests, we comment frequently and in detail on PTO rules changes and 
file amicus briefs in cases of interest to us. We have more than 850 
people volunteering in 34 standing committees studying trends in IP 
law.
    We appreciate the opportunity to discuss the April 14 Committee 
Print, which contains more than a dozen significant proposals for 
improving the patent system. We compliment the Subcommittee on 
assembling so many promising ideas. IPO enthusiastically endorses a 
majority of the proposals in the Committee Print. I will give an 
overview and then summarize our reaction to each proposal.

              OVERVIEW OF PTO AND PATENT LITIGATION ISSUES

    Our members almost universally believe the patent system needs 
improvement. IPO was one of the first organizations to say that the PTO 
was in a ``crisis,'' when we testified before this Subcommittee in 
2001. We expressed concerns about the quality of patents granted by the 
PTO and the growing length of time required to grant or deny a patent. 
Since that time, reports from the Federal Trade Commission (FTC) and 
from the National Academy of Sciences (NAS) have recommended a number 
of changes to the patent system to improve its effectiveness in 
encouraging innovation in U.S. industry. In 2002 we endorsed the PTO's 
21st Century Strategic Plan, which is directed at improving PTO 
operations and is now being implemented.
    The diversion of more than three-quarters of a billion dollars in 
PTO user fees since 1992 has been a major factor in the PTO crisis. If 
the PTO had had the opportunity to spend the diverted funds, which were 
paid by our members and other PTO users for services they expected to 
receive, today's picture would be very different. We are optimistic 
that the situation at the PTO can be improved. Director Jon W. Dudas is 
acting aggressively with the aid of more than $200 million annually in 
additional funding provided by last December's patent fee increase to 
address the office's problems. We understand that the PTO is hiring 
more patent examiners and making efforts to improve employee recruiting 
and training, recertify examiner skills, and improve patent procedures. 
We are cautiously optimistic that no more user fees will be diverted in 
the short term. The threat of fee diversion remains, however, and IPO 
will therefore continue to support this Subcommittee's work to enact 
legislation to permanently end fee diversion.
    No silver bullet exists, of course, that can turn the PTO around 
overnight. The patent quality problem is complex and not amenable to 
any single solution. The time required to grant or deny a patent will 
continue to increase for some years despite stepped-up patent examiner 
hiring, because new examiners must undergo an extensive training 
program to become productive and because training large numbers of new 
examiners takes experienced examiners off the production line. We are 
in an environment in which confidence in the validity of patents will 
continue to be lower than desirable for the foreseeable future and the 
time required to grant or deny a patent will be far longer than the 
traditional goal that IPO continues to support--an average of 18 months 
after filing the initial application until patent grant or denial.
    The problems with patent quality and long PTO delays create 
uncertainty about legal rights in technology. Uncertainty discourages 
investment by patent owners and their competitors in research, 
development, and commercialization of new products needed to maintain 
the country's technological and economic strength.
    Our members have experienced a sharp rise in patent litigation 
costs. Hildebrandt International's 2004 Law Department Survey reported 
that the companies surveyed spent 32 percent more on outside counsel 
for intellectual property litigation in 2003 than in the previous year. 
They spent only one percent more for outside counsel on non-IP 
litigation. Some IPO members believe a substantial portion of the rise 
in litigation costs can be attributed to organizations that have 
engaged in abusive practices including threatening frivolous 
lawsuits.\1\ A number of suggestions have been made by companies in the 
information technology industry and others for legislation to reform 
patent litigation. IPO believes some of these ideas have merit.
---------------------------------------------------------------------------
    \1\ See generally materials from March 14, 2005 IPO conference 
``Patent Trolls and Patent Property Rights'' (materials available from 
IPO).
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    Our members are also faced with high patent costs for protecting 
their technology internationally. Under the existing system U.S. 
applicants must file separate patent applications in separate countries 
and regions that require different application content and format. This 
process is costly and inefficient. In addition, patent offices around 
the world are wasting large sums by duplicating each others' efforts in 
patent searching.
    A worldwide patent law harmonization treaty is needed. We also 
believe international patent expenses can be reduced through 
administrative and other changes by the U.S., Japanese, and European 
patent offices, which receive the bulk of applications from U.S. 
industry. Last week IPO, the American Intellectual Property Law 
Association (AIPLA), the Japanese Intellectual Property Association 
(JIPA), and the European industry association UNICE held the fourth in 
a series of meetings to develop recommendations to enable the same 
patent application to be filed, searched, and processed in the three 
largest offices without the need for amendment during the granting 
process. We hope to publish our final recommendations before the end of 
the year. Many of the changes required to harmonize the world's patent 
laws will require legislation, and we support the harmonization-related 
legislative proposals in the Committee Print.

                 POST-GRANT OPPOSITION PROCEDURES AND 
                 INTER PARTES REEXAMINATION PROCEDURES

    Section 9 of the Committee Print establishes a new post-grant 
opposition procedure. Establishment of a post-grant opposition feature 
was recommended in both the FTC and NAS reports. Under Section 9, post-
grant opposition would enable any competitor of a patent owner or other 
member of the public to make a request not more than nine months after 
the grant of a patent for the PTO to reconsider whether the patent 
should be granted.\2\ The party requesting an opposition could raise 
any of the statutory requirements for patentability as an issue for 
invalidity of the patent. The PTO Director could dismiss a request 
lacking substantial merit and would be required to complete the 
opposition procedure within one year. Limited discovery would be 
available and appeals could be taken to the U.S. Court of Appeals for 
the Federal Circuit.
---------------------------------------------------------------------------
    \2\ Committee Print, pp. 36-49.
---------------------------------------------------------------------------
    IPO strongly endorses establishing this type of post-grant 
opposition proceeding. We believe the opportunity to request an 
opposition should be available only for nine months after the grant of 
the patent. The alternative view is that oppositions should be 
available at any time after the grant of the patent throughout its life 
or at least for a period of time at any time after the patent owner 
receives a notice of alleged infringement or an offer to license. Those 
favoring a short window of time after patent grant for requesting 
opposition, including IPO, tend to view the opposition procedure as an 
additional review of the patent examination process in the PTO and an 
opportunity for members of the public to submit information and present 
arguments that may not have been available to the Office. Those 
favoring making oppositions available throughout the life of the patent 
tend to view the procedure as an alternative to patent validity 
litigation in U.S. District Courts. This would be similar to the 
``revocation'' process that is found in the procedure of many foreign 
countries. Although an opposition procedure should not be viewed as a 
substitute for the Office performing a thorough initial examination, 
the existence of an opposition procedure will reduce uncertainty and 
increase confidence by patent owners and the public in the quality of 
patents that have survived an opposition or have not been opposed. 
Limiting the time for oppositions will help avoid possible harassment 
of patent owners and avoid large numbers of opposition proceedings that 
would overtax the Office's ability to handle the proceedings. 
Importantly, an indefinite period of opposition exposure would hinder 
the ability of startup companies to receive prompt funding through the 
venture capital system.
    Any opposition proceeding must be carefully balanced to protect the 
interests of patent owners and competitors and to maintain the value of 
patents as an encouragement for invention, research, development, and 
commercialization. Changing one feature of a proceeding may require 
changing other features in order to maintain the desired balance. IPO 
has studied opposition procedures and developed a list of 16 inter-
related attributes that we believe would provide a balanced proceeding 
and improve patent quality. Our list is attached to this statement as 
an Appendix.
    Only a few of our suggested attributes differ from those in the 
Committee Print. We recommend that: (1) the standard of proof applied 
during an opposition proceeding should be the clear and convincing 
evidence standard; (2) the requester of an opposition proceeding should 
be required to publicly disclose its identity in every case; and (3) an 
opposition proceeding requested by an accused infringer should be 
stayed if an infringement suit is filed against the accused infringer 
in a district court before the opposition is requested.
    Section 9 of the Committee Print modifies the existing ``inter 
partes reexamination'' proceeding that was established in 1999 by the 
American Inventors Protection Act.\3\ Inter partes reexamination 
proceedings differ from the proposed post-grant opposition proceedings 
in that inter partes reexaminations are available at any time during 
the life of the patent and are limited to patentability issues based on 
earlier patents or publications describing the invention at issue--
documentary prior art. The Committee Print expands inter partes 
reexaminations by (1) removing the limitation that a requester is 
estopped from asserting at a later time patent invalidity on any ground 
that the requester ``could have raised'' during the reexamination 
proceeding; and (2) making inter partes reexamination available for any 
patent granted on any date. The American Inventors Protection Act 
limited inter partes reexamination proceedings to patents granted on 
applications filed after November 29, 1999. The two limitations on 
inter partes reexamination addressed by the Committee Print have 
prevented significant use of inter partes reexamination to date. Only 
about 75 inter partes patent reexaminations have been requested. IPO 
supports the changes in inter partes reexamination in the Committee 
Print. We believe that with these changes, inter partes reexamination 
will be used more often. It will serve as a useful complement to the 
proposed post-grant opposition proceedings by providing a relatively 
simple and inexpensive proceeding for challenging a patent at any time 
during its life on the limited grounds--documentary prior art--on which 
the PTO has the most experience. With emphasis on prompt reexamination 
announced by Director Dudas recently, inter partes reexamination will 
also be a relatively rapid proceeding for obtaining determinations of 
patentability. Availability of an improved inter partes reexamination 
proceeding bolsters the case for limiting post-grant opposition 
proceedings to a nine-month period after grant.
---------------------------------------------------------------------------
    \3\ Committee Print, p. 35.
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       WILLFUL INFRINGEMENT AS BASIS FOR TREBLE DAMAGE LIABILITY

    IPO supports the amendment in Section 6 of the Committee Print that 
clarifies and limits the law on awards of treble damages for patent 
infringement.\4\ The section implements recommendations of the FTC, the 
NAS and others including IPO that treble damages should be assessed 
against infringers only in limited situations. Some companies have 
stated that existing judicial interpretations on treble damages have 
caused them to be wary of even permitting their employees to read 
competitors' patent documents for fear the company will be found to be 
on notice of infringement for purposes of treble damages liability. 
Some feel that treble damages are too readily available and encourage 
owners of questionable patents to file law suits and obtain settlements 
in cases in which defendants have not knowingly infringed a valid 
patent.
---------------------------------------------------------------------------
    \4\ Committee Print, pp.29-31.
---------------------------------------------------------------------------
    The Committee Print prohibits an inference of willful infringement 
based on the absence of an opinion of counsel and prohibits treble 
damages based merely on knowledge of a patent or its contents by the 
defendant. The Committee Print limits treble damages to specific 
situations including instances where the defendant has received a 
detailed written notice from the patent owner charging infringement and 
identifying the specific patents, claims, and allegedly infringing 
products or processes. A significant feature of this provision in the 
Committee Print is that the notice from the patentee must be sufficient 
to give declaratory judgment jurisdiction to the receiver of the 
notice. This prevents the current tactic used by abusers of placing the 
receiver of the notice in legal limbo--subject to the possibility of 
treble damages but with no legal remedy to resolve the situation. Other 
circumstances in which the Committee Print approves treble damages are 
those in which (1) the defendant intentionally copied the patent 
subject matter and (2) the patent was asserted against the defendant in 
a previous judicial proceeding.
    We believe these reforms on willfulness and treble damages will 
reduce litigation costs and discourage unwarranted suits. These reforms 
together with limited post-grant opposition proceedings and 
improvements in inter partes reexamination proceedings would constitute 
significant reform of the patent litigation system.

                    RIGHT OF FIRST-INVENTOR-TO-FILE

    Section 3 of the Committee Print awards the patent to the first-
inventor-to-file when two inventors file patent applications, changing 
the traditional U.S. first-to-invent procedure. IPO supports this 
change.\5\
---------------------------------------------------------------------------
    \5\ Committee Print, p. 7, amending 35 U.S.C. 135.
---------------------------------------------------------------------------
    Awarding the patent to the first-inventor-to-file eliminates 
interference proceedings in the USPTO. Fewer than one-tenth of one 
percent of patent applications become involved in interference 
proceedings, but proceedings are costly and the possibility of another 
party proving a date of invention earlier that the invention date of 
the first party to file causes uncertainty for patent rights. Data 
compiled recently by Gerald J. Mossinghoff, a former head of the PTO, 
indicates that small inventors fare no better under the first to invent 
system than they would under a first to file system and perhaps not as 
well.\6\ The Committee Print correctly uses the term ``first-inventor-
to-file'' to avoid any suggestion that a person who is not an inventor 
can obtain a patent by filing an application earlier than the inventor.
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    \6\ Washington Legal Foundation Civil Legal Issues No. 129, April 
15, 2005.
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    IPO supports first-inventor-to-file because it is the best system 
for the U.S. While its adoption would have a less immediate effect on 
the U.S. patent system than many of the other proposals in the 
Committee Print because of the small number of cases involved, adoption 
of first-inventor-to-file system would have important ramifications for 
the current talks on a possible substantive patent law harmonization 
treaty. The U.S. is the only country in the world with a first-to-
invent system. In past harmonization talks the unwillingness of the 
U.S. to change its system has been an emotional issue with other 
countries. Additional visible support for a first-inventor-to-file 
system in the U.S. has come recently in the form of endorsements by the 
American Bar Association and the NAS report. Introduction of a bill in 
Congress would be a positive sign that the U.S. may be prepared to 
eliminate one of the obstacles to substantive patent law harmonization.

                              INJUNCTIONS

    Section 7 of the Committee Print makes it more difficult for patent 
owners to obtain injunctions to stop infringement of patents.\7\ 
Reducing the availability of injunctions was not a feature of either 
the FTC or the NAS report. The IPO position will have to be updated, 
but when this specific proposal was reviewed by the Board of Directors 
in 2001, exactly as worded in Section 7, most members of the board were 
unwilling to support it. I will explain the case against the proposal, 
which contains concepts that IPO has strongly rejected over the years--
compulsory licensing and a requirement for the patent owner to use the 
patented invention.\8\
---------------------------------------------------------------------------
    \7\ Committee Print, pp.31-32.
    \8\ The U.S. Government has also been consistently critical of 
compulsory licensing and working requirements in international 
negotiations.
---------------------------------------------------------------------------
    A fundamental distinguishing feature of American intellectual 
property rights for more than 200 years, embodied in Article I, Section 
8, Clause 8 of the U.S. Constitution, is that patent and copyrights 
rights are EXCLUSIVE rights. Exclusivity comes from the availability of 
permanent injunctions. Many believe the principle of exclusivity has 
contributed mightily to America's leadership in technology, in the case 
of patent rights, and to literary and artistic creativity, in the case 
of copyright. Exclusive rights should be available to the same extent 
for patented inventions and for copyrighted works such as books, motion 
pictures, sound recordings, and software. We expect that because of the 
way it is written, this particular proposal would come under 
constitutional attack.
    We understand the proposal to be directed to permanent injunctions. 
It is sometimes said permanent injunctions issue at as a matter of 
course at the conclusion of patent or copyright litigation. Professor 
William C. Robinson of Yale University explained the distinction 
between preliminary and permanent injunctions in his classic 1890 
treatise The Law of Patents:

        A preliminary injunction is not, like a perpetual injunction, a 
        matter of course, nor can its issue be governed by any 
        formulated and established rules. . . . A permanent injunction 
        issues as a matter of course, at the conclusion of a suit in 
        equity, whenever the plaintiff has sustained the allegations of 
        his bill, provided the patent has not then expired.\9\
---------------------------------------------------------------------------
    \9\ Robinson, The Law of Patents (1890), Sec. Sec. 1170 and 1220.

    This is not precisely today's law, however, and permanent 
injunctions do not issue as a matter of course. A permanent injunction 
is not issued if a case is exceptional--i.e., if a sufficient reason 
exists for denying it. Permanent injunctions have been denied, for 
example, because the defendant agreed to eliminate the infringement 
within a period of time, or because of laches or estoppel, or, in rare 
cases, because of ``public interest.''
    By introducing a standard that, ``A court shall not grant an 
injunction . . . unless . . . the patentee is likely to suffer 
irreparable harm that cannot be remedied by payment of money damages, 
the proposed language in the Committee Print would make a drastic 
change in existing law. A permanent injunction would be denied unless 
there was a reason to grant it--the opposite of the law today, where it 
is granted unless there is a reason to deny it. Also, a major new 
hurdle would be introduced with the requirement for irreparable harm, 
which is a preliminary injunction concept. The likely effect of these 
two changes would be to make patent rights in the U.S., in many cases, 
subject to compulsory licensing, a common feature of patent systems 
abroad. In addition, the Committee Print as presently worded would make 
injunctions more difficult to obtain if a patent owner is not using the 
invention. By encouraging courts to consider the patent owner's use, 
this would essentially establish a requirement similar to ``working 
requirements'' found in patent laws abroad that provide weaker 
incentives for innovation. IPO has consistently been opposed to working 
requirements.
    By removing the prospect of obtaining a permanent injunction in 
many cases, Section 7 would remove an injunction as the patent owner's 
leverage to encourage infringers to settle disputes by taking licenses. 
With reduced prospect of an injunction, voluntary license agreements 
would become more difficult to obtain and royalty rates would be more 
often determined by courts and less often by market forces.
    Supporters of this particular injunction proposal cite with 
approval the fact that it would reduce the bargaining power of patent 
holders and make it less likely that companies would be forced to shut 
down product lines. The supporters feel they are being threatened with 
too many patents of questionable validity or scope. We understand the 
frustrations with the current patent litigation environment, but other 
approaches exist for reducing patent litigation and for avoiding 
becoming subject to a permanent injunction.
    Permanent injunctions often are not issued because the parties can 
negotiate a settlement or else the accused infringer can redesign its 
product during the several years usually required to complete patent 
litigation. If a product cannot be redesigned to avoid a patent, it may 
be an indication the patent is for a fundamental invention and the 
infringer should be prepared to withdraw the product and expect to pay 
large compensation. Manufacturers can help themselves avoid patent 
infringement by monitoring and analyzing patents and patent 
applications as they are published by the PTO and by conducting product 
clearance patent searches before new products are put on the market. 
These practices are followed routinely in many industries.
    The encouragement for courts to consider whether the patent owner 
produces the invention itself, in the second part of Section 7 of the 
Committee Print, is tantamount to a working requirement. This is 
inconsistent with the concept of patents as intellectual property 
rights. A working requirement would greatly diminish the value of 
patents and the incentives for innovation they provide, particularly 
for universities, which are not manufacturers, and for small businesses 
and inventors who may lack resources to have a patented product or 
service on the market before litigation.
    We believe the proposed changes in the law on availability of 
injunctions, as worded in Section 7, would be a major blow to 
incentives for innovation provided by the American patent system and 
would result in a huge decline in the value of patents now in force. 
The role of the patent system in maintaining America's technological 
leadership would be diminished.
    Before deciding whether to adopt this specific proposal on 
injunctions, we recommend that the Subcommittee obtain more information 
than we have been able to collect in advance of this hearing on the 
large number of cases in which patent injunctions have been granted and 
denied, and the effects on various industries of making injunctions 
more difficult to obtain.

                   OTHER PROPOSALS IN COMMITTEE PRINT

Definition of Prior Art
    Section 3 of the Committee Print revises the definition of ``prior 
art.'' \10\ These changes accommodate the first-inventor-to-file 
system. Certain changes are required in the definition of prior art for 
a first-to-file system. The Committee Print makes additional changes in 
the definition of prior art that are not necessary for a first-to-file 
system but which are designed to clarify and improve the law. IPO 
supports these changes as part of the switch to a first-to-file system.
---------------------------------------------------------------------------
    \10\ Committee Print, pp. 3-6, amending 35 U.S.C. 102.
---------------------------------------------------------------------------
Filing of Patent Applications by Assignees
    Section 4 of the Committee Print permits a party to whom the 
inventor has assigned or is under an obligation to assign the invention 
(i.e., the real party in interest) to file the patent application on 
behalf of the inventor.\11\ The Committee Print provides that if a 
patent is granted to the real party at interest, the inventor will be 
given such notice as the USPTO Director considers to be sufficient. IPO 
supports assignee filing as a useful simplification in the procedure 
for filing applications.
---------------------------------------------------------------------------
    \11\ Committee Print, p.9.
---------------------------------------------------------------------------
Elimination of Best Mode Requirement
    Section 4 of the Committee Print amends the patent code to 
eliminate the requirement that an inventor must set forth the best mode 
contemplated of carrying out the invention.\12\ The 2004 National 
Academy of Sciences report identified this change in law as one of 
three changes that might be made to eliminate subjective elements in 
patent litigation and thereby reduce the cost of litigation and 
increase the predictability of litigation outcomes.\13\ IPO supports 
the change.
---------------------------------------------------------------------------
    \12\ Committee Print, p.10.
    \13\ ``A Patent System for the 21st Century,'' National Research 
Council of the National Academies (2004) at 99.
---------------------------------------------------------------------------
Duty of Candor
    Section 5 of the Committee Print codifies a duty of candor owed to 
the PTO by patent applicants and other parties.\14\ IPO is still 
studying the need for legislation on this subject. The NAS report 
recommended duty of candor legislation as a way to limit the subjective 
elements of patent litigation. The duty of candor today is defined by 
PTO rules and court decisions It is important to have a strong duty of 
candor that requires patent applicants to submit relevant prior art 
they know about to the PTO. Prior art submissions are essential to help 
insure the quality of granted patents. We would not favor any 
legislation that would cause fewer relevant prior art references to be 
submitted. If legislation would clarify the duty of candor and make 
patent applicants more comfortable in volunteering explanations and 
opinions about submitted prior art that applicants are reluctant to 
express today because of fear of being charged with fraud, legislation 
could be useful.
---------------------------------------------------------------------------
    \14\ Committee Print, pp.10-29.
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Damages When Invention Incorporated Into Larger Product or Method
    Section 6 of the Committee Print provides that when an invention is 
incorporated into a known method or apparatus any award of damages will 
be based only on such portion of the total value of the method or 
apparatus as is attributable to the invention.\15\ The proposal appears 
to be directed at the so-called ``entire market value'' rule that has 
been applied by courts in cases where the patented feature is the 
entire basis for customer demand for the apparatus or method. Although 
the proposal states a principle that produces the fairest result when 
less than the total value of the method or apparatus is attributable to 
the invention, the proposal as drafted could produce unfair results or 
would not apply in some situations. In some cases the patented feature 
is the entire basis for customer demand for the apparatus or method. 
Some inventions involve eliminating a component from an apparatus or 
method. Some inventions combine two known inventions with the 
combination producing a new result.
---------------------------------------------------------------------------
    \15\ Committee Print, p.31.
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Continuation Applications
    Section 8 of the Committee Print prohibits presentation of a patent 
claim that is broader than claims presented at a specified earlier time 
in the patent application or a predecessor application.\16\ IPO agrees 
with the 2003 Federal Trade Commission Report stating that legitimate 
uses exist for amending claims in continuing applications, thus any 
proposal to address opportunistic broadening of claims should protect 
such legitimate uses. IPO members have expressed some support for 
placing limits on enlarging claims in continuation applications, 
because continuation applications have been used to manipulate the 
patent system in certain cases. Applicants have kept so-called 
``submarine'' patent applications alive in the PTO for many years and 
reshaped the claims as products or processes of others in an industry 
evolved. Concerns about submarine patent applications have subsided as 
a result of (1) the change of the patent term in 1995, so that it 
expires 20 years after the filing of the first application, (2) court 
decisions on ``prosecution laches,'' and (3) publication of most patent 
applications 18 months after filing starting in 2000. Some concerns 
about submarine applications still exist. The issues with the proposal 
in the Committee Print seem to be whether it would be effective, 
because it might be circumvented by presenting unreasonably broad 
claims at the outset in every case, and whether the time periods for 
enlarging claims are too short, given that applicants have legitimate 
needs to amend and enlarge their claims in some circumstances.
---------------------------------------------------------------------------
    \16\ Committee Print, p.32.
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Publication of All Patent Applications After 18 Months
    Section 9 of the Committee Print requires publication of all patent 
applications 18 months after filing.\17\ The American Inventors 
Protection Act exempted applications from publication if the applicant 
requested an exemption because a corresponding application was not 
being filed in another country. Most countries publish all 
applications. We understand that about ten percent of applications 
filed in the USPTO are not being published. IPO supports publication of 
all applications in order to provide more information to the public at 
an earlier date and increase certainty about the scope of patent rights 
being sought.
---------------------------------------------------------------------------
    \17\ Committee Print, p.33. A few applications are not published 
because of their importance to national security, and those application 
would continue to be withheld from publication.
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Prior User Rights
    Section 9 of the Committee Print also amends the section on prior 
user rights in the American Inventors Protection Act by (1) deleting 
limitation to ``methods of doing or conducting businesses,'' (2) 
deleting requirement for reduction to practice ``at least one year 
before the effective filing date,'' and (3) extending rights to 
``substantial preparation for commercial use.'' \18\ IPO supports these 
changes to provide prior user rights for innovators in all fields of 
technology and to make prior user rights more effective. Prior user 
rights strike a balance between the interests of the first-inventor-to-
file a patent application and another party who provided a benefit to 
the public by commercializing the invention early but chose to rely on 
trade secrets, which may be more effective for protecting inventions 
that can be used in secret, such as manufacturing processes.
---------------------------------------------------------------------------
    \18\ Committee Print, p.34
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Combinations of Components Outside U.S.
    Section 10 of the Committee Print amends Section 271(f) to provide 
that an item supplied from the U.S. is not a ``component'' for purposes 
of patent infringement under that section unless it is a tangible item 
that is itself combined physically with other components to create a 
patented combination.\19\ Several IPO members have suggested that the 
recent Eolas and AT&T cases involving Section 271(f) may have been 
wrongly decided. IPO is studying the issue and has not yet taken a 
position. If the cases were wrongly decided, other options may exist in 
addition to the proposal in the Committee Print. IPO traditionally has 
not favored legislation that would create different rules for different 
categories of inventions, such as products and processes. We suggest 
studying the option of outright repeal of Section 271(f), which was 
enacted in 1984 in response to a single Supreme Court decision and may 
not be important in today's global economy. Also, if the cases were 
wrongly decided, organizations in the patent community can be expected 
to file amicus briefs to seek clarification of the scope of existing 
Section 271(f). We cannot take a position on this proposal without 
further study.
---------------------------------------------------------------------------
    \19\ Committee Print, p.49
---------------------------------------------------------------------------
    Thank you again for the opportunity to discuss the Committee Print. 
We believe the Subcommittee has a good start toward a comprehensive 
patent law reform bill that would improve patent quality, increase 
certainty as to the scope of legal rights, and reduce litigation 
burdens.
    We look forward to working with the Subcommittee as it develops 
formal legislation on patent law reform.

                                APPENDIX

     IPO Resolution on Establishing a Post-Grant Opposition System
            As revised at the 11/09/2004 Board Meeting and 
                 approved by the IPO Board of Directors

RESOLVED, that the Intellectual Property Owners Association supports 
amendment of the patent laws to establish post-grant opposition 
proceedings in which patentability of issued claims can be reviewed by 
Administrative Patent Judges of the Board of Patent Appeals and 
Interferences of the United States Patent and Trademark Office, 
provided such proceedings include the following attributes:

 1.  [Time for Filing]--Any request for a post-grant opposition must be 
made no later than 9 months after the date of the patent grant;

 2.  [Grounds]--Any ground of patentability, with the exception of 
``best mode'' (35 U.S.C. Sec. 112, 1) and derivation (35 U.S.C. 
Sec. 102(f)), may be raised in the request, but no issues of priority 
of invention (35 U.S.C. Sec. 102(g)) nor enforceability shall be 
considered;

 3.  [Threshold Showing]--Any party requesting initiation of an 
opposition proceeding shall be required to make a threshold showing of 
unpatentability of at least one claim of the patent before the patent 
owner is required to respond to the opposition;

 4.  [Discovery]--Discovery from a party to an opposition shall be 
limited to cross-examination of declarants;

 5.  [Additional Evidence]--Following initiation of a post-grant 
opposition proceeding, the party requesting the proceeding shall not be 
permitted to advance a new ground of unpatentability in the opposition 
proceeding;

 6.  [Claim Amendments]--The patent owner shall have the right to amend 
its claims in its response to the initial request and after any new 
prior art is presented by an opponent after filing its initial request;

 7.  [Other USPTO Proceedings]--No party to the opposition proceeding 
shall be prevented by the opposition proceeding from filing other 
concurrent or subsequent proceedings in the United States Patent and 
Trademark Office;

 8.  [Standard of Proof]--The standard of proof to be applied for 
determining unpatentability of a claim during a post-grant opposition 
proceeding shall be the clear and convincing evidence standard;

 9.  [Estoppel]--A judgment in favor of patentability of any claim in 
the opposition proceeding shall estop the opposer from challenging 
validity of that claim in other proceedings on the basis of evidence 
and prior art presented during the opposition proceeding;

10.  [Duty of Disclosure]--The patent owner's duty of disclosure during 
the opposition shall be no greater than that applicable to a party in 
litigation before a Federal court;

11.  [Length]--The opposition proceeding shall conclude within 12 
months of the expiration of the 9-month post-grant request period and 
any patent claim surviving the opposition proceeding unamended shall be 
subject to day-for-day patent term adjustment for any period of 
pendency of the proceeding beyond the 12 months, excluding delays 
caused by the patent owner;

12.  [Identity of Opposer]--Any party requesting initiation of a post-
grant opposition proceeding must disclose its identity to the patent 
owner in the opposition proceeding;

13.  [Infringement Suit]--In the event an infringement action is 
brought against an accused infringer prior to the filing of a post 
grant opposition request by the accused infringer, then any opposition 
proceedings involving the patent shall be stayed until the infringement 
action is finally resolved;

14.  [Appeal]--Judicial review of a post-grant opposition proceeding 
shall be exclusively by way of appeal to the Court of Appeals for the 
Federal Circuit;

15.  [Consolidation]--Multiple oppositions against a single patent 
shall be consolidated into a single opposition action following the 
expiration of the nine-month filing period; and,

16.  [Right to Hearing]--Parties to an opposition shall have the right 
to a hearing before the decision of USPTO on the opposition is reached.

    Mr. Smith. Thank you, Mr. Hawley.
    Mr. Lutton.

  TESTIMONY OF RICHARD J. LUTTON, JR., CHIEF PATENT COUNSEL, 
       APPLE, ON BEHALF OF THE BUSINESS SOFTWARE ALLIANCE

    Mr. Lutton. Thank you. Mr. Chairman and Members of the 
Subcommittee, I'm Richard Lutton, Chief Patent Counsel for 
Apple. I'm pleased to have the opportunity to present BSA's 
views on patent quality and improvement.
    We commend you for holding these hearings and for your 
continued commitment to improving our patent system.
    We believe the committee print correctly identifies the 
most important areas where reform is timely, and we commend you 
for it.
    The IT industry, like so many others, is encountering the 
enormous costs of dealing with poor quality patents. We are 
also faced with a growing cottage industry of patent 
assertions, orchestrated by entities with no business other 
than acquiring and asserting patents.
    Increasingly, they use the uncertainties of the civil 
litigation system as their primary bargaining chip. The result 
is that bad patents can cause a substantial litigation risks 
and costs. Defendants in these suits now must spend an average 
of $5 million defending themselves and in some courts, the 
average is more like $8 million.
    So what can we do?
    Some witnesses will tell you that patent reform is 
sufficient or that harmonization should be your goal. While my 
written testimony details our support for these goals, we 
believe more is required.
    BSA believes the issues of the patent system cannot be 
addressed by changes at the PTO alone. We're extremely grateful 
to see the committee print recognizes the disruptive effects 
that unwarranted litigation can have on the patent system as a 
whole, and we support the approach the committee print has 
taken with regard to monetary and injunctive remedies.
    I'd like to address three specific provisions.
    First, the law of triple damages for willful infringement. 
We believe these punitive triple damages should be reserved for 
cases of reprehensible conduct, such as copying a patent.
    The current gamesmanship of artfully drafted notice letters 
and opinion writing has little to do with ferreting out cases 
of truly reprehensible conduct. Instead, it creates hardships, 
including forcing a defendant to chose between defending 
against triple damages and, on the other hand, preserving the 
attorney-client privilege.
    These hardships are used increasingly as a leverage point 
by plaintiffs seeking only to maximize settlement value of a 
case. Thus, we suggest that that prong of the willfulness test 
should be deleted from the draft provision.
    Second, BSA strongly supports the committee print's 
proposals to add certainty to the measure of damages on complex 
products. Today, when a small feature of a multifaceted product 
is alleged to infringe a patent, the patentee is often--often 
claims damages on some percentage of the value of the entire 
product rather than only the infringing feature.
    We believe reform is needed to rein in these damages 
claims. The provision included in the committee print 
accomplishes this goal.
    Third, BSA strongly supports the approach taken by the 
committee print to injunctions. That provision directs courts 
to do what the law already says: balance equities before 
issuing an injunction.
    Today, the courts are interpreting this statutory 
requirement very narrowly. Essentially the only reason for not 
granting an injunction is national health emergency. This 
interpretation of the public interest risks turning equity into 
a needles eye that no case in our industry can thread.
    We are mindful of the concerns of some groups that these 
solutions to litigation issues not disrupt monetary injunctive 
relief for appropriate cases.
    We agree with this concern. Any solution must address the 
problem narrowly without creating unintended disruptions in 
other areas, and, of course, any solution must be consistent 
with international norms and obligations.
    Before I close, because I have a little bit of time left, 
I'd like to address comments on--quickly on three provisions 
related to PTO processes or harmonization.
    First, with respect to post-grant opposition, we support 
the proposed procedure, but we believe the issue of timing is 
critical. The current committee print includes a single 9-month 
window after issuance for initiating an opposition.
    We do not believe this is sufficient to identify patents 
requiring challenge.
    We suggest instead two windows, with the second window 
opening if and when a patentee has provided notice to a 
specific infringer.
    Only a noticed party could use this second window.
    Second, with respect to the wholesale redefinition of what 
constitutes prior art, much of this change is not required for 
harmonization with a worldwide first to file system. This new 
definition also injects uncertainty and diminishes the scope of 
what's considered prior art. We believe that could have 
unintended negative impact on patent quality.
    Finally, the committee print includes a provision 
significantly reducing the effect of a patent applicant's 
violating her duty of candor before the PTO. We question 
whether this provision is appropriate, especially in an era of 
increased emphasis on candor and full disclosure in dealing 
with governmental agencies and public institutions.
    Thank you for the opportunity to provide input on this 
critical topic. We pledge our continued support and assistance.
    [The prepared statement of Mr. Lutton follows:]

              Prepared Statement of Richard J. Lutton, Jr.

    Mr. Chairman and members of the Subcommittee, my name is Richard 
Lutton and I am the chief patent counsel for Apple. I appear today 
representing the Business Software Alliance (BSA). BSA welcomes the 
opportunity to appear before you today on this important topic. We 
commend you for holding these hearings and for your commitment to 
improving our patent system.
    The Committee print made available last week correctly addresses 
the two major areas where BSA thinks patent reform is now timely: 
improving the quality of patents issued by the Patent and Trademark 
Office and alleviating the disruptive effects that excessive patent 
litigation now poses. Overall, BSA supports the approach and the issues 
identified in the Committee print and we look forward to working with 
as you proceed with your efforts. As I will describe in greater detail 
in a moment, there are areas where further clarification or changes to 
the language would be positive, and there are some issues that are not 
in the print which we believe merit consideration.
                                 ______
                                 
    The software and computer industry is a creative engine that powers 
innovation and growth. The industry's products and services give 
individuals and organizations the tools they need to operate 
intelligently, efficiently and productively. Indeed, over the past 
thirty years, software and computers have become critical to economic 
success, business competitiveness and personal quality of life. People 
worldwide rely on the software and computer industry's tools to 
communicate, to connect to the world, to get things done more 
efficiently in the workplace, and to more fully enjoy the arts, hobbies 
and leisure activities.
    The members of the Business Software Alliance \1\ have a 
significant stake in this Subcommittee's work regarding patent quality 
and improvement. BSA represents more than twenty-five software and 
computer companies with annual revenues well in excess of $300 billion. 
Together, we hold about 100,000 United States patents. Our members are 
both plaintiffs and defendants in patent suits. Many of our members 
have established licensing programs to encourage the licensed use of 
technology covered by our own patents and to respect the patent rights 
of others. Simply put, patents play an essential role in how 
information technology companies do research and how they develop and 
commercialize products and services.
---------------------------------------------------------------------------
    \1\ BSA members include Adobe, Apple, Autodesk, Avid, Bentley 
Systems, Borland, Cadence Design Systems, Cisco Systems, CNC Software/
Mastercam, Dell, Entrust, HP, IBM, Intel, Internet Security Systems, 
Macromedia, McAfee, Microsoft, PTC, RSA Security, SAP, SolidWorks, 
Sybase, Symantec, UGS and VERITAS Software.
---------------------------------------------------------------------------
    BSA members believe that the patent system is fundamentally sound 
and works well for most innovators, whether they toil in their garage, 
experiment in a university laboratory, or work for a large corporation 
that provides goods and services to consumers. That said, we believe 
that a periodic review and recalibration of the patent law is not only 
a good idea, but also essential to ensuring that patents remain a vital 
part of technological process. The current patent system has given rise 
to too many low quality patents being issued, and a growing pattern of 
assertions of weak patents that threaten to damage productive companies 
and stifle innovation.
    BSA members approach patent reform from a pragmatic, problem-
solving perspective. Our attention is focused on those areas of the law 
and practice that present specific challenges for our companies' day-
to-day businesses. Thus, we believe that reform must address both the 
administrative system responsible for the issuance of patents and the 
litigation system responsible for enforcing patents.

            1. PATENTS IN THE SOFTWARE AND COMPUTER INDUSTRY

    As we enter the 21st Century, intellectual property is an ever more 
critical source of economic value to society, individuals, companies 
and governments. While copyrights have been and will remain a principal 
way that technology companies protect their intellectual property, I 
will limit my comments today to patents.
    The increased importance of patents to technology companies has 
resulted from a mix of legal and marketplace developments.
    The 1981 Supreme Court decision, Diamond v. Diehr, marked a turning 
point in the patentability of computer-implemented inventions. In that 
case, the Supreme Court held that a machine that transforms materials 
physically under the control of a computer program was patentable. The 
Court's decision clarified earlier rulings that had been interpreted to 
suggest that software programs would rarely qualify for patentability. 
Subsequent decisions from lower courts have further clarified the law 
in this area. As a result, U.S. patent applications from inventors in 
the software sector have steadily increased.
    Equally important are marketplace trends. For example, in today's 
diverse technology marketplace, heterogeneity has become an important 
element of technology and network effectiveness. Unlike the early days 
of computing when consumers tended to purchase all their hardware and 
software from only a single firm, consumers now often build systems to 
meet their specific needs based on products sourced from different 
suppliers. The ability of these different systems to work together is 
essential. In this context, patents enable technology companies to 
integrate systems and meet consumer's needs while ensuring a return for 
their inventions.
    Finally, changes made by Congress, especially the creation of the 
Court of Appeals for the Federal Circuit in the early 1980's, have 
brought generally greater importance to patents and more consistent 
respect for the property right granted by a patent.
    Today, patents are a key part of virtually every technology 
company's intellectual property portfolio. The reasons are simple:

          Patents provide critical protection for distinctive 
        technologies that may have been difficult to innovate but could 
        easily be replicated without the protections of a patent.

          Patents ensure that technology companies have the 
        opportunity to be compensated for their contributions to 
        advances in their field of technology.

          At the same time, and reflecting the way in which our 
        industry often operates, patent protection enables technology 
        developers to license or otherwise share key technologies with 
        customers, partners and even competitors, while still 
        preventing third parties from ``free-riding'' on their 
        innovation.

          Patents can encourage cross-fertilization of 
        technology through cross-licensing.

          Collectively, patents provide a repository of 
        accumulated knowledge that allows new generations of innovators 
        to learn from the state of the art and, in some cases, design 
        new solutions that further advance that body of knowledge.

                          2. REFORM IS TIMELY

    While patents are critical tools for the technology industry, there 
are aspects of the patent system that present on-going challenges for 
our industry.
    First, prior art (which is the totality of previously known 
technologies against which a new invention is measured to ensure that 
it merits a patent) is not as well documented for the computing field 
as it is in some other areas. In part this is because, for many years, 
patents were not readily available for software. It is also 
attributable to the nature of large-scale commercial software and 
computing--millions of lines of software code or billions of 
transistors or other components that may require significant effort to 
identify or understand. This makes the task of the patent examiner 
difficult: she must determine the patentability of software inventions 
without always having a complete understanding of what is already known 
in the art. The result can be poor quality patents.
    Second, the software and computer industry, like many high 
technology industries, is a field with an extremely high concentration 
of patents. For example, there may be as many as 200 patents that are 
relevant to a single multifunction computer program; for example, the 
Federal Trade Commission recently received testimony stating that there 
are more than 90,000 patents that relate generally to 
microprocessors.\2\ This concentration of patents within a technologic 
field presents specific challenges not only for the software industry, 
but also for biotechnology and other sectors.
---------------------------------------------------------------------------
    \2\ See To Promote Innovation: The Proper Balance Of Competition 
and Patent Law Policy, Report by the Federal Trade Commission, section 
II.B., available at http://www.ftc.gov/reports/index.htm.
---------------------------------------------------------------------------
    Finally, software and computers are examples of ``system'' 
products--they comprise thousands, even hundreds of thousands, of 
individually functioning components and features all assembled in a 
package for a customer. Because many of these features could be the 
subjects of a patent, it is often the case that thousands of patents 
may be relevant to a particular computer or software product. This 
phenomenon--sometimes referred to as ``co-location of patents''--means 
that any single patent covering a computer or piece of software 
accounts for only a small fraction of the intellectual property value 
of the entire system. Yet, too often, patent holders seek to recover 
large percentages of the revenue generated by these complex systems in 
exchange for only a single or small group of patents.
    In combination, these issues make our industry susceptible to the 
problems of poor quality patents and the uncertainties of litigation. 
We approach reform from this perspective.

                           3. QUALITY PATENTS

    BSA strongly supports the Committee for making improving patent 
quality one of its key focal points. The Committee print clearly shows 
that you understand this problem, and the legislative changes set out 
in the print would go a long way towards making this situation better. 
Poor quality patents, as detailed in recent studies by the National 
Academy of Sciences and the Federal Trade Commission, hamper 
competition and harm innovation. A questionable patent may lead 
competitors to forego research and development in a particular area, 
fearful of the risks that may be involved. Poor quality patents may 
also require innovators to license unnecessarily thousands of patents.
    BSA believes Congress should focus on four key areas that will 
facilitate the issuance of higher quality patents:

        (1)  enhanced post-issuance processes to provide a second 
        chance to intercept bad patents;

        (2)  curtailment of abusive continuation practices that lead to 
        endless chains of patents with ever-broader claims;

        (3)  better support for receiving prior art, and better 
        processes for building a contemporaneous record that reflects 
        the extent of the examination by the patent examiner; and

        (4)  adequate PTO training and funding.
Post-Issuance Processes
    BSA commends the Subcommittee for including within its Committee 
print specific and meaningful ways to improve the post issuance 
process.
    Currently, the primary way to challenge the validity of an issued 
patent is through litigation, a costly and difficult approach. BSA 
supports the proposal in the Committee print to create a meaningful and 
balanced opposition procedure enabling third parties to challenge 
issued patents. Such a process would permit the Patent and Trademark 
Office to take a careful look at any challenged patent in the context 
of an adversarial proceeding likely to bring out the strongest 
arguments in favor of, and against, continued existence of the patent. 
This process augments a patent's initial examination and provides a 
second, more granular filter through which a patent may pass if it is 
to be used against an alleged infringer.
    BSA recommends a number of areas where the language in the 
Committee print can be improved. Most importantly, the timeframe for 
initiating an opposition should be sufficiently long to permit the 
relevant public to identify and assess the patent at issue. The single, 
nine month window proposed in the Committee print is too short. In many 
industries, a single window will not permit accurate assessment of the 
validity and impact of a newly issued patent on products. We recommend 
instead two windows. The first window should be two years from 
issuance. The second window should be open for a period of one year 
after a patent owner sends notice of infringement. This second window 
is essential to allow companies to challenge a patent when, and if, it 
is asserted even if a prior search would never have revealed a threat 
from that patent.
    In addition, under current law, the inter partes reexamination 
process is so restricted as to severely limit its usefulness. In fact, 
since the inception of this process, the Patent and Trademark Office 
has received fewer than one hundred requests for inter partes 
reexamination. BSA supports the Committee print provision relaxing the 
current law's estoppel provisions and expanding its scope to include 
patents filed before 1999, as well as those filed later.
Abuses of Continuation Practice
    BSA supports the changes in the Committee print aimed at ending 
abuses of continuation practices. Currently, a patent applicant may 
file follow-on patent applications with broader and broader claims long 
after the publication or issuance of its original patent application. 
Through these mechanisms, some applicants keep their applications 
pending for extended periods while monitoring the developments in the 
relevant market. By modifying their claims to cover other companies' 
products, often after those other companies have invested significant 
funds in their products, such applicants can abuse the system.\3\ In 
some cases, the patentees seek to obtain patent protection for ideas 
that never occurred to the applicant before seeing them in the 
marketplace. While this practice is currently permitted and even 
sanctioned by the courts, a reform curtailing the ability to broaden 
claims beyond the scope of the broadest claim previously published or 
issued would roll back significantly the invitation to abuse created by 
the current system.
---------------------------------------------------------------------------
    \3\ See generally Mark A. Lemley and Kimberly A. Moore, Ending 
Abuse of Patent Continuations, 84 Boston University Law Review 63 
(2004), available at http://papers.ssrn.com/sol3/papers.cfm?abstract--
id=462404
---------------------------------------------------------------------------
Availability and Consideration of Prior Art
    An important step toward better patent quality would be to improve 
the availability of prior art in the examination process. This issue is 
not now addressed in the Committee print, and we urge you to consider 
its addition as you proceed with your work.
    Under current law, members of the public with relevant prior art 
information have limited options to submit that information to the 
examiner. The prior art may be submitted, but without comment on the 
relevance of what may be hundreds of pages of carefully developed 
disclosure. The result is that patents are often granted on the basis 
of incomplete prior art information as an examiner has only 17 hours, 
on average, to examine a patent. To address this issue, BSA believes 
Congress should establish a mechanism for the public to submit prior 
art and other information relevant to patentability, together with 
commentary on that art and information.
Adequate Training and Funding.
    Underlying any attempt to improve the quality of patent examination 
must be a commitment to adequate funding for the Patent and Trademark 
Office. The Committee print does not address directly this persistent 
issue, but we are aware of and appreciate the Subcommittee's commitment 
on this matter. Adequate funding is inextricably tied in with 
permanently ending the practice of diverting patent fees to programs 
outside the scope of the core PTO mission. Allowing the Patent and 
Trademark Office to retain the fees that it generates would help ensure 
that the PTO is able to provide high-quality examinations and to fund 
further improvements.

             4. REDUCE THE DISRUPTIONS CAUSED BY LITIGATION

    BSA is extremely grateful to see that the Committee print 
recognizes the disruptive effects that bad litigation practices can 
have on the patent system as a whole. BSA supports the approach you 
have taken in the print with respect to monetary and injunctive 
remedies. This is an area of utmost concern to all technology 
companies.
    The reform provisions identified in the Committee print focus on 
abuses of the current patent system that cannot be fixed by only 
quality-enhancing changes. Congress must act directly to address the 
most onerous sources of uncertainty in the civil litigation system.
    Today, hundreds of patent infringement cases are pending against 
hardware and software companies, and these companies spend hundreds of 
millions of dollars each year defending themselves in these cases. This 
is not to say that all of these cases are without merit, but that is 
too often the case.
    BSA commends you and strongly supports the Committee print for its 
approach to these issues. BSA believes there are five key areas where 
changes are needed:

        (1)  making clear that a patentee is entitled to claim damages 
        only on the proportion of the allegedly infringing product 
        attributable to the patent, and not including all the other 
        features and elements that may be also contained within a 
        multi-faceted product or system;

        (2)  recalibrating the standard for an award of punitive 
        damages for willful infringement to focus on truly 
        reprehensible conduct;

        (3)  clarifying and reiterating the current black letter 
        statutory requirement that the issuance of an injunction is 
        permissive and should be based on ``principles of equity;''

        (4)  reducing the burden of proving a patent invalid to a 
        ``preponderance of the evidence'' in cases where the Patent and 
        Trademark Office did not consider the allegedly invalidating 
        prior art; and

        (5)  clarifying section 271(f) of the existing patent statute 
        to avoid discouraging research and development work done inside 
        the United States.

Apportionment of Patent Value in a Complex System or Product
    BSA strongly supports the Committee print's proposals to ensure 
damages reflect the actual harm. Today, when a small component of a 
multi-faceted system or product is alleged to infringe a patent, the 
damage claim often seeks some portion of the value of the product as a 
whole rather than being limited to only the value of the infringing 
feature or functionality. This often leads to unduly inflated verdicts 
or settlement demands.
    BSA supports the Committee print's approach to provide courts with 
a statutory basis for requiring that patentees (and their expert 
witnesses) present damages calculations based on the proportional value 
of a patented invention alone, rather than on the cumulative value of 
all features included with a larger product. The provision included in 
the Committee print accomplishes this goal.

Punitive Damages for Willful Infringement
    BSA supports the approach taken in the Committee print to address 
the issue of willful infringement, and suggest that further changes be 
made in the language to avoid perpetuating the need to have dueling 
opinions from counsel.
    The current law allows the courts to impose punitive increased 
damages (up to three times actual damages) in cases involving willful 
infringement. However, the standard on which they may be awarded under 
current jurisprudence is far less than what is required for punitive 
damages in other areas of law.\4\ In fact, merely knowing that the 
patent exists is often the basis for an allegation of ``willfulness'' 
and a claim for triple damages, shifting to the defendant the burden of 
showing the exercise of due care.
---------------------------------------------------------------------------
    \4\ See Knorr-Bremse Systeme Fuer Nutzfahrzeuge Gmbh v. Dana et 
al., 383 F.3d 1337 (Fed Cir. 2004) (Dyk, Circuit Judge, concurring-in-
part, dissenting-in-part).
---------------------------------------------------------------------------
    Trying to satisfy this duty of care, patent defendants will often 
seek the opinion of counsel. But reliance on that opinion in defense of 
a charge of willfulness requires pre-trial disclosure of that opinion 
to the other side, waiver of the attorney-client privilege and often 
waiver of privileged materials relating to the subject matter of the 
opinion generally. In some cases, this threatens even the integrity of 
trial preparations. Thus, the existence of an opinion presents 
defendants with a dilemma of whether to waive privilege in order to 
defend against the charge of willfulness or, alternatively, preserve 
the privilege.\5\ This choice can be especially unfair when plaintiffs 
are allowed to use discovery obtained pursuant to the waiver to help 
establish or color underlying liability for patent infringement.
---------------------------------------------------------------------------
    \5\ See generally Mark A. Lemley and Ragesh K. Tangri, Ending 
Patent's Willfulness Game, 18 Berkeley Technology Law Journal 1085 
(2003), available at http://papers.ssrn.com/sol3/papers.cfm?abstract--
id=472901
---------------------------------------------------------------------------
    The uncertainty about willfulness has also led to the undermining 
of one of the fundamental points of the patent system: that is, 
disclosing to the public the invention. To avoid ``knowledge'' and 
charges of willfulness, too many companies now instruct their employees 
to avoid reading patents. This too can lead to reduced patent quality.
    BSA believes that Congress should change the statute to make clear 
that punitive increased damages should be imposed only when there is 
evidence of reprehensible conduct, such as copying the patent or 
violating a prior court order. The provision included in the Committee 
print includes these concepts, and we support these changes. But it 
also includes countervailing provisions that we fear would perpetuate 
the current inefficient and costly practice. We fear the draft 
provision would perpetuate the current gamesmanship by permitting a 
well-drafted notice letter from the patentee to give rise to a charge 
of willfulness. It would also continue the practice of having to obtain 
counsel's opinions by making an ``informed good faith belief'' the 
touchstone of liability. We fear, based on experience, that this 
standard may be manipulated and does not reflect the sort of 
reprehensible conduct by the infringer that should warrant punitive 
damages.

Principles of Equity in Granting Injunctive Relief
    BSA strongly supports the approach taken by the Committee print 
directing courts to do what the law says: balance equities before 
issuing an injunction. Section 283 of the current patent statute 
provides that the courts ``may grant injunctions in accordance with the 
principles of equity to prevent the violation of any right secured by 
patent.''
    The Federal Circuit has in recent times interpreted very narrowly 
the ability of a district court to consider equitable factors (largely 
limited to health emergencies) when deciding whether or not to grant an 
injunction. Only weeks ago, the Court overturned a district court's 
judgment, based on the specific facts of the case, that a permanent 
injunction was not warranted because of the patentee's demonstrated 
willingness to license the patent.\6\ Only in cases of public health 
emergencies or well-being has the Court readily considered non-issuance 
of an injunction. Thus, the courts seldom engage in a balance of the 
equities, and the granting of an injunction has become nearly 
automatic. Moreover, there is no automatic stay of an injunction 
pending appeal.
---------------------------------------------------------------------------
    \6\ MercExchange v. eBay, Inc. et al, 401 F.3d 1323, 2005 U.S. App. 
LEXIS 4308, *41 (Fed. Cir. March 16, 2005).
---------------------------------------------------------------------------
    Combined, these factors mean that an accused infringer must go into 
a patent infringement trial prepared for the possibility of an 
immediate injunction at the end of trial. This leverage point is 
recognized and exploited by patentees who do not actually desire 
injunctive relief, but use its threat to extract disproportionately 
high payments from defendants. This problem is especially burdensome 
for vendors of ``system products'' that, as explained above, may have 
thousands of patented or patentable features contained within them. A 
trial on any of those patents threatens to shut down the entire 
product.
    BSA applauds the Subcommittee's inclusion of a provision 
reestablishing an incrementally broader consideration of equitable 
principles than is currently being practiced by the courts. We believe 
this provision, while certainly not applicable in most cases, will be 
meaningful in a small, but economically significant, set of the most 
abusive patent assertions.

Burden of Proving Invalidity
    An area not included in the Committee print, but which BSA thinks 
requires attention, is the burden of proving invalidity. Under current 
law, an issued patent is presumed valid and any party challenging 
validity must overcome this presumption with ``clear and convincing 
evidence.'' This is true even when it is clear that the patent examiner 
did not have an opportunity to consider all of the prior art that forms 
the basis for a later validity challenge. To address this issue, we 
recommend that the evidentiary burden for challenging the validity of a 
patent based in whole or in part on information or references not 
considered during examination should be lowered to ``preponderance of 
the evidence,'' to reflect the fact that the validity of the patent was 
not in fact fully vetted relative to those prior art references.

Disincentives to Domestic R&D
    The Committee print correctly recognizes that Section 271(f), as 
interpreted by the Courts, presents potentially serious problems for 
developers of software, and indeed for developers of any information-
based products. BSA supports the changes proposed in the Committee 
print on this issue. Given marketplace developments since the enactment 
of section 271(f), the Committee may want to consider repealing this 
provision.
    In 1984, Congress added Section 271(f) to prevent companies from 
manufacturing components of an infringing product in the United States, 
and exporting those parts for assembly abroad to avoid the claim of 
infringement. Today, the provision has been interpreted by the courts 
in ways that deter domestic development of software. Under recent court 
holdings, a copy of a computer program made outside the United States 
may in some cases nonetheless be included as part of United States 
damages if the software is made from a ``master disk'' developed in the 
United States. If the software had been developed outside the US, this 
rule would not apply. The same issue may exist with respect to 
development of other information-based products that are made wholly 
outside the United States based on information developed in the United 
States. We believe this application of the law creates an unintended 
incentive to move valuable development activity outside the US, and 
should be clarified or removed from the law.

Harmonization
    The Committee print includes a number of provisions harmonizing 
United States patent law with a worldwide first-to-file patent system. 
BSA fully supports this goal: BSA member companies derive a substantial 
portion of their revenues from overseas and hold numerous patents in 
all major jurisdictions.
    We fear, however, that the provisions in the Committee print could 
have unintended consequences by making changes that go beyond what is 
needed to normalize our laws with those of other countries. 
Specifically, by reformulating the current law on the conditions for 
patentability, these changes would call in to question decades of 
established case law on prior art. This change could spur unnecessary 
litigation to reformulate standards of prior art.
    Specifically, by shifting away from the current categories of prior 
art--especially subject matter that was used or offered for sale--the 
provision included in the print risks the possibility that subject 
matter already being used and commercialized within the United States 
will nonetheless be patentable by a third party. The injection of an 
inquiry whether subject matter was ``readily and effectively 
accessible'' contemplates that subject matter that is harder to access, 
even if widely deployed, will be unavailable as prior art. This could 
result in an unintended new gamesmanship of patenting concepts already 
in deployment commercially and may significantly increase the number of 
patent filings for all manner of inventions. We question whether this 
is a step that should be taken.
    Instead, BSA encourages Congress to take an approach towards 
harmonization that brings the United States into alignment with other 
countries' laws without unnecessarily also diminishing the scope of 
prior art by excluding materials that may have been difficult to 
access, but were nonetheless publicly available.

Duty of Candor
    The Committee print includes a provision significantly reducing the 
effect of a patent applicant's violating her duty of candor in front of 
the Patent and Trademark Office. We question whether this provision is 
appropriate, particularly in this era of increased emphasis on candor 
and full disclosure in dealing with governmental agencies and public 
institutions.
    The purpose of the duty of candor is to compel a patent applicant 
to provide the Patent and Trademark Office with as much information 
known to the applicant as may be helpful to the examiner. The related 
litigation defense of inequitable conduct asks whether the patentee 
effectively commit fraud on the Patent and Trademark Office by 
intentionally withholding such key information that the PTO's ability 
to examine the patent was compromised. This current structure provides 
a powerful incentive for applicants to act with utmost candor in front 
of the Patent and Trademark Office.
    The changes included in the Committee print risk undermining this 
incentive in a number of ways. First, by moving to a ``but for'' test 
for inequitable conduct, the proposed law would lower the incentive for 
an applicant to err on the side of over-inclusion in disclosure, thus 
potentially depriving the patent examiner of information that could be 
material to examination. In addition, the changes to existing law on 
who can be held liable for inequitable conduct seem to create the risk 
that parties could participate in a fraud on the Patent and Trademark 
Office, but avoid any adverse consequences of such behavior by 
transferring the patent to a third party. Finally, by removing the 
issue of breach of duty of candor from the court and placing it with 
the Patent and Trademark Office, the proposal risks further overloading 
the PTO.
    We do believe, however, that it could be efficient and useful to 
bifurcate the issue of inequitable conduct in litigation and present 
that issue solely to a court after liability has been adjudicated.

                               CONCLUSION

    Thank you again for the opportunity to provide input on the 
critical topic of patent quality and improvement. BSA strongly supports 
your efforts and commends you for the excellent Committee print. We 
look forward to working with you in your efforts to improve the United 
States patent system and ensure that it continues to serve this 
country's great interest in promoting innovation and providing the 
public with the benefit of that innovation.

    Mr. Smith. Mr. Kushan?

TESTIMONY OF JEFFREY P. KUSHAN, SIDLEY, AUSTIN BROWN AND WOOD, 
                  LLP, ON BEHALF OF GENENTECH

    Mr. Kushan. Thank you, Mr. Chairman. I'm appearing today on 
behalf of Genentech, a biotech company based in south San 
Francisco, California.
    Genentech appreciates the opportunity to provide its views 
to you on the issue of patent law reform.
    We commend you, Mr. Chairman, along with Mr. Berman and Ms. 
Lofgren, and Mr. Boucher and your colleagues for starting this 
important legislative discussion. We also want to thank the 
Committee leadership, in particular Representatives 
Sensenbrenner and Conyers for their significant efforts to curb 
the diversion of patent fees.
    Patent reform is a timely and important issue. Like many 
other companies, the health of the patent system is a 
critically important issue for Genentech.
    To appreciate Genentech's perspective on the patent system, 
you have to understand the challenges of developing a new 
biotech drug.
    Biotech drug development is an extremely risky, expensive, 
and long process. Genentech scientists must not only discover a 
new viable drug candidate, but must spend many years testing 
the drug to prove it's safe and effective.
    It must also figure out how to produce the drug in large 
volumes, while preserving the safety and effectiveness of that 
drug. The time it takes from discovery to market entry 
routinely exceeds a decade or more.
    A good recent example is Genentech's Avastin product. This 
product was--the product development effort for this product 
started in 1989. Avastin was approved in 2004. That's 15 years 
of effort and hundreds of millions of dollars of cost to 
getting this product to market. And it wasn't until the FDA 
approved this product was it clear that this product would be a 
commercial success.
    The length of and the unpredictable nature of the drug 
development process raises important patent implications for 
Genentech.
    First, the effective patent life for a biotech drug is, as 
a consequence of this long development process, very short.
    Second, it is very challenging to ensure that the patents 
filed in year one of the drug development process are going to 
protect the drug product when it finally reaches the market 10 
or 15 years later.
    The patent system plays a critically important role for the 
American public as well. Patients are the direct beneficiaries 
of the patent system. It is the patent system that makes it 
commercially feasible for companies like Genentech to discover, 
develop, and bring to market new drugs to treat unmet medical 
needs. It should not be surprising that Genentech is a frequent 
user of the patent system. They file hundreds of applications 
every year, and have been granted nearly a thousand U.S. 
patents.
    Genentech also has its fair share of patent litigation, 
both offensive and defensive. Genentech, thus, has a 
perspective of a company that has to protect its innovations 
and a company that must frequently resolve conflicts over 
patents owned by others.
    In general terms, Genentech sees three significant 
challenges to the health of the patent system.
    First, the overall health of the patent system depends on 
the PTO issuing valid patents in a timely fashion. If a mistake 
is made by the PTO, it cost a company accused of an 
infringement millions of dollars to fix that mistake.
    Second invalid patents are not the only problem. Delays in 
patents issuing is a significant problem, and is very 
disruptive in the market. And it's disruptive to the process of 
planning for development.
    The PTO's ability to improve its examination process is 
hindered by the ongoing problem of fee diversion. It's also 
hindered by the structure of the current fee schedule and by 
certain PTO practices, such as the restriction.
    In the absence of an effective--the second major problem we 
see challenging the health of the patent system is the absence 
of an effective administrative procedure to review the validity 
of a patent.
    The only practical option today for challenging the 
validity of a patent is litigation in the Federal courts. That, 
as I said, can cost several million dollars. The other members 
of the panel have also observed this.
    An effective administrative procedure for reviewing patent 
validity is long overdue. Genentech believes the system 
proposed in the committee print is a good start. However, 
several changes are needed to make this a more balanced and 
effective procedure, and we invite the Subcommittee to review 
our written testimony which sets out a number of the 
improvements we think are appropriate. I'll just briefly note 
two significant ones.
    First, the way that post-grant oppositions would be started 
and conducted as set forth in the committee print must be 
changed.
    The proposed system would permit an opposer to start a 
proceeding simply by paying a fee. The patent owner would then 
have to convince the Patent Office to not to conduct the 
proceeding because it's meritless. This approach will induce 
far too many unjustified opposition proceedings. It also 
unfairly puts the burden on the patent owner to stop the 
proceeding instead of putting the burden on the opposer to 
justify starting the proceeding.
    The second concern concerns the authority the PTO should 
have to regulate the conduct of parties in the proceeding.
    We believe the PTO should regulate the conduct of parties 
using the same authority that courts use to regulate the 
conduct of parties in litigation. Events that occurred during 
the opposition proceeding should not be capable of rendering a 
patent unenforceable, but if warranted should be addressed by 
conventional sanctions.
    The third factor adversely affecting the health of the 
patent system is the inefficient and unpredictable process of 
resolving patent disputes through litigation in the Federal 
courts. We acknowledge that the Federal Circuit has improved 
much in the area of patent standards and clarity, but there's a 
lot left to be done.
    As a result, it's very difficult to predict if a patent 
will be held valid, infringed, or enforceable. It's also 
impossible to predict what the damage liability would be when 
you are found to infringe a patent.
    The uncertainty in today's litigation environment 
unfortunately is being exploited by many to distort the value 
of patents. In this respect, we'd strongly support reforms to 
three areas. Willful infringement. We strongly support reforms 
to that topic. We believe more must be done to regulate how 
that type of pleading can be raised in litigation, because 
there are litigation abuses possible.
    Second, we think that reforms are need to the inequitable 
conduct doctrine to adopt a much more objective standard.
    The last point I'd like to make if you would give me 15 to 
20 seconds is to address the issue of injunctive relief. And I 
apologize for my inefficiencies compared to the first two 
sectors.
    Mr. Smith. That's okay. We'll grant you that extra 30 
seconds.
    Mr. Kushan. Thank you. The specific issue raised in the 
committee print is who bears the burden of justifying the grant 
of an injunction when a patent has been proven valid and 
infringed. Genentech sees no reason why the burden should not 
be placed on the shoulders of a proven infringer of a valid 
U.S. patent to prove why an injunction should not issue. That 
change that's being proposed would undo more than a century of 
precedent and a very sound public policy reason, which puts the 
burden on the infringer to justify why there is not going to be 
an injunction. We're talking, as has been mentioned before, 
about permanent injunctions. We are not insensitive to the 
concerns about litigation problems, and we're willing to work 
with the Committee to explore options to address the abuse that 
is possible through that litigation environment that exists 
today.
    And finally, I'll just indicate we do support moving to a 
first invent system, and we're willing to work with the 
Committee to improve the language to do that in the committee 
print. Thank you.
    [The prepared statement of Mr. Kushan follows:]

                Prepared Statement of Jeffrey P. Kushan

    Mr. Chairman and distinguished Members of the Subcommittee,
    My name is Jeff Kushan. I am a partner in the Washington office of 
the law firm of Sidley Austin Brown and Wood, LLP. I am also a 
registered patent attorney, and specialize in the areas of 
biotechnology, pharmaceuticals and software-related inventions.
    Today, I have the privilege of offering testimony on behalf of 
Genentech, Inc. Genentech was the first biotechnology company, founded 
in 1976, in South San Francisco, California. Genentech's mission is to 
be the leading biotechnology company, using human genetic information 
to discover, develop, manufacture and commercialize biotherapeutics 
that address significant unmet medical needs. Genentech presently 
markets 13 products, with more than 30 more in development.
    Genentech very much appreciates the opportunity to provide 
testimony to the Subcommittee today on the topic of patent law reform. 
We commend you, Mr. Chairman, for your initiative in opening this 
legislative dialogue on the topic of patent law reform. We also want to 
recognize the past efforts of your colleagues on this topic, including 
Mr. Berman and Ms. Lofgren.
    Genentech is a company that was founded on innovation. It should 
come as no surprise that patent protection and the health of the patent 
system are thus crucially important to Genentech. The availability of 
patent protection for its inventions is an important consideration to 
Genentech in its research and product development activities. Assured 
patent exclusivity encourages the investment of hundreds of millions of 
dollars each year on efforts to research and develop new 
biotherapeutics.
    Genentech also recognizes that the patent system faces several 
serious challenges.
    First, the Patent and Trademark Office (PTO) faces serious 
challenges in performing its statutory function of issuing valid 
patents in a timely fashion. The primary cause of this problem is the 
ongoing problem of fee diversion. The unpredictable nature of patent 
fee diversion has made it difficult for the PTO to engage in the long-
term restructuring of its operations that is necessary to make the 
patent examination process more reliable and efficient. We cannot 
stress more emphatically that the most important legislative 
deliverable for Congress in the effort to improve the patent system is 
to ensure predictable and adequate funding for PTO operations.
    Second, the current model used by the PTO in conducting examination 
of patent applications needs to be seriously reevaluated. Presently, 
every application that is filed today is placed into the queue for 
examination. This requires the PTO to budget for and engage in an 
unnecessary examination of many thousands of patent applications. The 
United States is unique in the world in this respect--every other major 
office conducts examination of applications only upon request and 
payment of a fee. Exacerbating this problem is the approach the PTO 
employs in ``restricting'' patent applications. The PTO requires 
applicants to file additional patent applications when it believes a 
first application has claimed more than one patentably distinct 
invention. The PTO examiners, however, use an exceedingly narrow and 
strict standard for restriction, which has led to a multiplicity of 
unnecessary filings in the biotechnology area. These extra applications 
make coherent and efficient examination of inventions very difficult, 
and contribute to an artificial backlog of unexamined applications. 
Restructuring the patent examination process to address these two 
problems would result in examiners having more time to examine each 
invention, and would thus significantly improve patent quality. We 
encourage Congress to pursue such legislation in conjunction with the 
current legislative effort.
    Finally, the process of resolving disputes over patents through 
litigation in the Federal Courts produces a high degree of uncertainty 
for businesses such as Genentech. Although the Court of Appeals for the 
Federal Circuit has done much over the years to clarify the 
requirements and standards for patentable inventions, there still 
remains a significant amount of uncertainty in how those requirements 
and standards will be applied to biotechnology inventions by trial 
courts and juries. As a result, it remains difficult to predict if a 
patent will be held valid, if it will be infringed or if it will be 
held unenforceable. Similarly, it is often impossible to predict what 
damages a company will face if it is found to infringe a patent. The 
uncertainty in today's patent litigation environment, unfortunately, is 
being exploited by certain patent owners to distort the value of their 
patent rights and to undermine the legitimate use of patents. Reforms 
to the patent system--both as to the standards governing patent 
validity and as to outcomes and consequences in litigation--are 
necessary and timely.
    Your hearing today provides a timely opportunity to engage on the 
issue of legislative reform to our patent system. We welcome your 
initiative in starting this discussion, and believe it will yield 
fruitful results.
    The draft committee print proposes reforms across a broad spectrum 
of elements of the patent system. Our comments today will focus on 
those areas of greatest importance to Genentech; namely, proposed 
reforms to the rights and remedies provided with the grant of a patent, 
standards governing patentability, reforms to the inequitable conduct 
doctrine, and post-grant opposition procedures.
    In general, Genentech supports reforms in many of the areas 
addressed in the Committee Print. However, certain proposals, 
particularly those that could operate to deprive the owner of a valid 
U.S. patent of its ability to prevent the unauthorized use of a 
patented invention, would seriously alter the nature of the patent 
right. Genentech opposes reforms of this nature, as they would 
undermine the foundation upon which many of this company's business 
decisions have been based; namely, the guarantee of exclusivity.

     PROPOSED REFORMS TO THE STANDARDS GOVERNING INJUNCTIVE RELIEF

    Section seven of the Committee Print would fundamentally alter the 
nature of a United States patent by altering the standards governing 
entitlement to permanent injunctive relief under section 283. While 
Genentech is sympathetic to the problems associated with the 
unpredictability of patent litigation, it cannot support legislation 
that would call into question the basic premise under current law that 
infringement of a valid patent can be enjoined.
    Section 7 begins by incorporating into section 283 in express terms 
the standard governing entitlement of any litigant to injunctive 
relief. However, section seven then would prohibit a court from 
presuming that there will be irreparable harm to the patent owner as a 
consequence of a finding of infringement of the patent. The proposed 
legislation also directs courts to consider evidence that would support 
or negate any of the equitable factors governing the award of 
injunctive relief, including whether or not the patent owner makes use 
of the invention.
    Section seven of the Committee Print thus would overrule the well-
established and long-standing precedent that the owner of a patent is 
presumed to be irreparably harmed by an infringement of a valid United 
States patent. The existing presumption is based on sound public policy 
reasons, and we see no justification for altering this existing 
precedent. The reason is simple--the value of a patent derives from its 
status as a property right. There is nothing more essential to the 
character of the patent as a property right than its capacity to 
prevent unauthorized use of the patented invention.
    More than a century ago, our courts recognized that the capacity of 
a patent to prevent the unauthorized use of the patented invention was 
the fundamental attribute that gives the patent its economic value. 
This premise has been repeatedly affirmed by courts since that time. 
See, for example, Polymer Technologies, Inc v. Bridwell, 103 F.3d 970 
(Fed. Cir. 1996) (``The right to exclude others from a specific market, 
no matter how large or small that market, is an essential element of 
the patent right''). The recognition that the right to exclude is the 
essential attribute of the patent right gave rise to the legal 
presumption that is a foundation of the U.S. patent system; namely, 
that the owner of a valid United States patent is irreparably harmed by 
an infringement of that valid patent, in the absence of any further 
evidence. There is no sound reason for not continuing to rely on this 
premise. Genentech also sees no reason why the burden should not be 
placed on the shoulders of the infringer of a valid United States 
patent to show why that infringer should not be enjoined from its 
continued infringement of the patent.
    The specific issue implicated by the proposed modifications to 
section 283 is who bears the burden of putting forward evidence to 
establish that an injunction is appropriate once the patent has been 
fully adjudicated and found to be valid and infringed. The standard 
thus speaks to valid patents, not to patents that are of questionable 
validity. It also concerns the question of permanent injunctive relief, 
not preliminary injunctions that may be awarded pending resolution of 
the litigation over whether the patent is valid or infringed. As a 
standard governing the burdens that are to be applied with respect to 
valid and infringed patents, it is appropriate to maintain the standard 
in the form it exists today. Genentech believes the law appropriately 
places the burden on the shoulders of the infringer to establish why an 
injunction should not be granted. Whether that infringer is able to do 
so or not will turn on the facts and circumstances of each case.
    Genentech is not insensitive to the concerns expressed by many over 
the disruption of ongoing business activities as a consequence of the 
grant of a permanent injunction. Genentech certainly has its fair share 
of defensive patent litigation. The question of permanent injunctive 
relief, however, is one that is best left to the courts upon the body 
of precedent that exists today. Genentech remains open, of course, to 
measures that remove some of the uncertainty of patent litigation, or 
which address the truly unique situations faced by those who advocate 
for change of the law.
    In this respect, Genentech encourages the Congress to focus on the 
specific and unique concerns being expressed that have led to this 
proposal. For example, one scenario that has been identified is the 
potential grant of a permanent injunction in favor of a patent owner 
that has taken no steps to bring a competing product to market, or who 
has extensively licensed the patent on a non-exclusive basis to other 
parties, and who can be fully compensated through money damages. 
Genentech believes courts presently do consider such factors in 
determining whether to award a permanent injunction. Similarly, some 
concerns arise from the situation of a company facing the requirement 
to immediately comply with an injunction issued by a District court. In 
many instances, courts will stay the effect of the injunction pending 
appeal of the judgment on validity or infringement, which provides the 
infringer the time needed to alter its product or take other steps.
    The most significant concern, however, appears to be the use by a 
party that is not in the market of the accused infringer of the threat 
of an injunction solely for the purpose of increasing the risk of 
liability to a manufacturer, and to increase the amount of a potential 
settlement. In that setting, significant questions of validity or 
enforceability of the patent often exist. These problems have led to 
more refined jurisprudence addressing issues such as prosecution 
laches, enhanced obligations for written description and the like. 
Certainly, if a patent owner elects to seek injunctive relief against 
an accused infringer, and causes harm by such an assertion, that party 
should face some consequences if the patent is shown to be invalid, 
unenforceable or not infringed. One approach may be to simply alter the 
amount of discretion given to courts to award fees and costs incurred 
in defending against such a claim, and to ensure that such liability 
extends to all parties that stand to gain economically from the 
infringement action. Congress also may wish to consider legislative 
solutions that specifically address the unique circumstances faced by 
specific industries, but which will leave intact the well-established 
body of law that ensures that a patent owner can rely on the 
presumption of irreparable harm stemming from proven infringement of a 
valid U.S. patent to establish entitlement to permanent injunctive 
relief. Genentech believes such approaches may prove to be a more 
fruitful avenue in deliberations for reform than the approach taken in 
section seven of the Committee Print.

       PROPOSED REFORMS TO THE STANDARD FOR WILLFUL INFRINGEMENT

    In contrast to its views on proposals that would alter the standard 
for injunctive relief, Genentech does support reforms to the law 
governing the doctrine of willful infringement. The Committee Print 
proposes to alter the standard by identifying three specific types of 
actions as being indicative of situations of ``willful'' infringement 
of a patent that are sufficient to justify the award of enhanced 
damages.
    Genentech believes that the articulation of the three scenarios 
found in the legislation is a sound basis for proceeding. Genentech, 
however, believes that these scenarios should be the only situations 
that warrant a finding of ``willful'' infringement. Part of the problem 
with the existing standard is that it is difficult to ascertain what 
will constitute willful infringement under present law. Making a more 
specific and explicit definition of those acts that will constitute 
willful infringement will help address part of the problem. Genentech 
also supports the approach in proposed legislation that precludes a 
court from drawing an inference of willful infringement from the 
absence of opinion of counsel, and that willful infringement may not be 
established solely upon proof of knowledge of the patent by the 
defendant prior to suit.
    The changes proposed by section six of the Committee Print, 
however, do not go far enough. A significant problem with the existing 
willful infringement doctrine is that parties often claim willful 
infringement simply as a litigation tactic. The claim then manifests 
itself in demands for production of opinions of counsel as to the 
validity or infringement of the patent, and efforts to place into 
evidence information that is unnecessary and irrelevant to the question 
of infringement. Genentech believes that in addition to establishing 
more objectively defined standards for willful infringement, three 
additional measures are needed.
    First, the law should preclude a court from addressing the question 
of willful infringement until after a party had been found to have 
infringed the patent. Taking up the question of willfulness only after 
a party has been found in a final unappealable judgment to have 
infringed the patent will go far in helping to curb some of the abuses 
that exist in today's modern litigation environment. Second, the 
question of willfulness should be addressed only by the court, and not 
by a jury. Finally, the law should preclude a party from attempting to 
obtain discovery of opinions of counsel incidental to a claim of 
willful infringement until after the court has first determined that 
infringement was established. With these additional changes, Genentech 
can support the reforms to willful infringement being proposed in 
section 6 of the Committee Print.

            REFORMS TO PRECLUDE LATE CLAIMING OF INVENTIONS

    Section 8 of the Committee Print would treat as unpatentable 
certain types of claims that are presented at a certain point in time. 
The legislation appears to be focused on the problem of parties that 
present broad claims long after an initial application has been filed, 
with the intent of capturing the intervening market entry by a 
competitor who believed that there would not be a patent obstacle. 
While Genentech is sympathetic to some of the concerns raised with 
respect to late-presented claims, it does not believe the proposed 
legislation will provide a practical solution, and instead will create 
significant problems for legitimate patent applicants.
    Genentech notes that under existing PTO practices, biotechnology 
patent applicants are often subjected to extensive restriction 
requirements. This means that for each invention that is pursued in a 
first application, Genentech often must file dozens of additional 
applications to obtain meaningful and sufficient claim coverage. Under 
existing law (35 U.S.C. 121), Genentech has the right to defer the 
filing of these additional applications. If the law required the 
immediate filing of dozens of voluntary divisional applications, as 
proposed in the Committee Print as a solution to the late-claiming 
problem, it would place unjustified additional expenses on 
biotechnology applicants such as Genentech. More significantly, in many 
cases, new questions of law or practice arise during the examination of 
an application. These new standards not only cause applications to 
undergo a protracted examination process, they also clarify what types 
of claims a patent applicant may pursue.
    The proposed solution also suffers from the practical problem of 
determining when a claim is ``broader'' than a claim that was 
published, issued or presented in a priority application. In most 
instances, claims will be both broader and narrower than previously 
presented claims. Forcing the patent examiner, and then the courts, to 
determine if sets of claims are broader or narrower than earlier filed 
claims will present immense challenges. Moreover, while many other 
provisions in the legislation would go far in eliminating uncertainty 
in the standards governing patentability, this measure would have 
precisely the opposite effect.
    For these reasons, Genentech generally opposes the approach 
reflected in section 8 of the Committee Print, and encourages the 
Committee to explore other ways of curbing the problem of late 
claiming. Genentech also notes that courts are taking steps to address 
late-claiming situations. See, e.g., Symbol Technologies v. Lemelson, 
277 F.3d 1361, 161 Ed. Law Rep. 57, 61 U.S.P.Q.2d 1515 (Fed. Cir. 
2002).

      REFORMS TO THE STANDARDS GOVERNING ENFORCEABILITY OF PATENTS

    Section five of the Committee Print proposes to reform the doctrine 
governing inequitable conduct. Genentech strongly supports legislative 
reforms in this area.
    Section 282 provides that a party accused of infringement may raise 
a defense that the patent is unenforceable. Unenforceability is a 
defense distinct from invalidity of the patent or from non-
infringement. It operates to preclude the patent owner from enforcing a 
patent that is otherwise meritorious--meaning that the invention 
claimed in the patent is novel, not obvious, useful, and adequately 
described. It has evolved over the years from several equitable 
doctrines, the most dominant of which is the assertion by a defendant 
that the patent is unenforceable because the patent owner committed a 
fraud on the PTO in the process of obtaining the patent. From this 
legitimate foundation, the doctrine of ``inequitable conduct'' has 
arisen and flourished to an inappropriate degree.
    As several courts have observed, claims of inequitable conduct have 
become what is justifiably labeled as a ``plague'' on modern patent 
litigation. Inequitable conduct is routinely raised in patent cases, 
and often is based on the flimsiest of assertions. The reason is 
simple--by pursuing this defense, a patent on an invention that is 
otherwise meritorious can be nullified by making it impossible to 
enforce.
    The inequitable conduct doctrine, however, has created significant 
problems for patent applicants and for the PTO during the examination 
of applications. The most significant is that communications between 
the patent applicant and the patent examiner are now a contorted and 
restricted dialogue, primarily because of the risk that these 
communications made honestly and in good faith will be turned into a 
story of inequitable conduct when the patents are put into litigation 
in the future. Concerns about creating a foundation for a claim of 
inequitable conduct may cause applicants to be overly inclusive in 
citing information to the PTO. This often results in situations where 
the patent examiner is given an immense amount of information solely 
for the purpose of foreclosing a claim that the applicant was 
concealing information from the examiner, thereby imposing unnecessary 
burdens on the patent examination process. Moreover, applicants can be 
put into a ``Catch 22'' situation in that they can later be accused of 
``burying'' a reference if they cite many references to the PTO to 
satisfy their Rule 56 obligation as defined by the courts.
    Plainly, reforms to this doctrine are necessary. In general terms, 
Genentech would support reforms that provide that a party could not 
raise an assertion of inequitable conduct in respect of a patent unless 
at least one claim of the patent were shown to be invalid on the basis 
of the disputed prior art or information. Such a change would establish 
a more objective threshold finding of significance for the disputed 
subject matter and would supplant the existing ``materiality'' 
standard. Genentech would also support retaining the requirement in 
present law that there be a distinct finding of a specific intent of 
the applicant to mislead the PTO. Such reforms would change how parties 
could raise inequitable conduct assertions in litigation, and would 
reduce the opportunistic uses of such pleadings in litigation.
    Genentech also would support enactment of measures to ensure that 
patent applicants are forthcoming during the original examination of 
patent applications. For example, Genentech would support measures that 
provide the PTO or the courts with some authority to sanction parties 
which it had determined had engaged in misleading or inappropriate 
conduct before the PTO. The sanction of unenforceability of the patent 
is not the only type of sanction that can be employed to ensure that 
parties act with good faith and candor in the PTO. The approach taken 
in the Committee Print reflects the type of authority that may prove 
useful in this regard, although Genentech believes the present language 
of section 6 can be substantially improved.
    Genentech also believes that a more transparent examination process 
can also be pursued in conjunction with these reforms. Genentech notes 
that the United States patent system is structured to deliver reliable 
results in a cost-effective and timely manner. Examination is conducted 
on an ``ex parte'' basis--meaning that the PTO and the patent applicant 
are the only participants in the examination process. The advent of 
publication of patent applications prior to grant from the 1999 
American Inventors Protection Act (AIPA) has shed some light onto 
ongoing examinations, but, fundamentally, the patent examination 
process remains closed to substantive participation by parties other 
than the patent applicant.
    Practical considerations mandate that this model continue. The PTO, 
given its resource constraints, simply cannot administer a system that 
permits third parties to intervene in the examination of pending 
applications. Experiences in other countries that do permit substantive 
intervention in the examination of applications are uniformly negative. 
These experiences show that in many instances, third parties intervene 
to simply delay the issuance of a patent, which disrupts business 
expectations of patent applicants and consumes limited patent office 
resources. Allowing that type of public intervention in the examination 
of pending U.S. applications would create immense practical problems, 
given the volume of applications now pending before the PTO, and the 
limited amount of examination resources that are available.
    However, there is no good basis for not publishing all applications 
18 months after they have been filed. Publication provides access to 
the public of the contents of the application during the examination 
process. Genentech thus would support amendments that would mandate 18-
month publication of all applications, and which enable third parties 
to submit information, accompanied with a brief explanation of the 
relevance of the information, on issues implicated during the 
examination of the application. Of course, that right to submit 
information must not entitle the third party to disrupt the examination 
process, or to formally oppose the grant of the patent. Genentech 
believes that such safeguards as 18-month publication of all 
applications and limited third-party submissions during ex parte 
examination, combined with the opportunity of more third-party 
involvement during post-grant opposition proceedings, warrant revisions 
to the inequitable conduct standards that give rise to so many baseless 
claims today. Such reforms also would place the U.S. more on par with 
the practices of other major countries including those that are members 
of the European Patent Convention and Japan.

               REFORMS TO THE STANDARDS OF PATENTABILITY

    Sections 2 to 4 of the Committee Print would make substantial 
changes to portions of title 35 that govern patent eligibility. In 
principle, Genentech supports the approach taken in these sections, 
with certain exceptions.
    Genentech supports reforms that would implement a ``first inventor 
to file'' standard in the U.S. patent system. Such a standard would 
address what many improperly perceive to be an assured right of a first 
inventor to obtain a patent. For reasons articulated well by the 
National Academies of Science in their 2004 report on the patent 
system, the existing ``first to invent'' standard creates immense 
challenges for patent applicants and the public, in part, because it 
requires the incorporation of many subjective criteria for 
patentability into the patent system. It also necessitates inventorship 
contests, known as interference proceedings, which are expensive, 
complex and usually result in award of the patent to the first inventor 
to file an application. Given the low frequency of these types of 
conflicts, the expenses associated with them, and the immense record 
keeping requirements they implicate, there is no sound reason for not 
shifting to a first inventor to file standard.
    The reforms being proposed would retain a requirement that any 
applicant for a United States patent be filed by or on behalf of an 
inventor of the subject matter being claimed. This approach will ensure 
that the interests of inventors will be effectively protected. 
Genentech supports these types of safeguards in the patent system. With 
such a standard, however, conflicts may still arise over entitlement to 
a patent. Section two of the Committee Print would propose to address 
these conflicts through an interference proceeding. Such proceedings, 
as proposed under a modified section 135(a), would be based on 
``disputes'' over who is an inventor. Genentech believes a more precise 
and specific standard, with specifically articulated outcomes of such a 
proceeding, is needed, rather than what has been proposed for section 
135(a). In particular, a dispute over entitlement of a true inventor to 
a patent should be based on a proof of derivation of the invention by 
the first party to file from the inventor. The proceedings should 
result either in an entitlement to joint and several ownership of the 
patent in dispute, or in the award of a patent to the second inventor 
that files an application. Genentech is prepared to work with the 
Committee to devise an appropriately focused and limited procedure for 
resolving such disputes.
    The conversion to a first-inventor-to-file patent system 
necessitates reforms to sections 102 and 103 of the patent statute, 
among other provisions. The approach taken in section two of the 
Committee Print is a good start toward these reforms. A number of 
specific issues, however, are not satisfactorily addressed in the 
proposed legislation.

          The revised law should confirm that subject matter in 
        a published patent application or in a patent shall have prior 
        art effect as from the actual or effective filing date of the 
        patent or published application only if that subject matter has 
        been described in a manner that complies with section 112, 
        first paragraph. This will maintain the existing law that 
        provides that the ``secret'' prior art effect of a patent or 
        published patent application (i.e., for the period before the 
        contents of the patent application are publicly known) is to be 
        limited to that subject matter that has been described in a 
        manner sufficient to justify the grant of a patent on that 
        subject matter. Revisions to proposed section 102(d) of title 
        35 are required to give effect to this change.

          The standard for public accessibility of information 
        to qualify that information as prior art should be specifically 
        exemplified using more objectively defined criteria. In 
        particular, Genentech would support revision of proposed 
        section 102(c) to incorporate more precise and objective 
        language for the concepts of ``reasonable and effective 
        accessibility'' of prior art. Genentech also believes it will 
        be important to exemplify these concepts in the legislative 
        history of the proposed legislation.

          Genentech supports elimination of the ``best mode'' 
        requirement of section 112, first paragraph. This measure has 
        proven unnecessary and unhelpful in the patent system, 
        particularly in view of the enhanced obligations on disclosure 
        imposed by modern judicial interpretation of the requirements 
        for written description and enablement under section 112. 
        Genentech encourages the Congress to affirm the independent and 
        distinct nature of these two remaining elements of section 112, 
        first paragraph, as part of the legislative history explaining 
        the reform that would be made to this provision of title 35.

    Certain changes being proposed, however, are unnecessary to 
implement a first-inventor-to-file system. For example, Genentech would 
oppose amendments to section 101 of title 35, which are unnecessary to 
give effect to a first-inventor-to-file system. Genentech also 
encourages the Subcommittee to further evaluate all of the changes 
being proposed to ensure that the most efficient path is taken to 
implementing these reforms. Changes that are not necessary to give 
effect to the new standard should be avoided, particularly when they 
may disrupt long-established concepts and definitions.

                    POST-GRANT OPPOSITION PROCEDURES

    As we have previously testified before this Subcommittee, Genentech 
strongly supports legislation that would create a cost-effective, 
vigorous and fair procedure to review the validity of issued patents. 
Our experiences teach us that claims of infringement of invalid patents 
are increasing, and have the potential for causing significant, 
unwarranted business disruptions. A cost-effective procedure that 
allows for robust participation by third parties yet is appropriately 
limited to avoid prejudice and the problems of litigation before a 
Federal court, would provide immense value for patent owners and the 
public alike. Genentech thus supports the effort of the Subcommittee to 
establish an effective and efficient post-grant opposition procedure, 
and to revise the inter partes reexamination authority to make that 
system viable.
    As Congress begins its deliberations on section 9 of the Committee 
Print, it should keep certain fundamental principles in mind. First, 
there is no right of a member of the public to retain and enforce an 
invalid patent. It also is not appropriate to permit entities to use 
the high cost and complexity of patent litigation to forestall 
discovery of the invalidity of a patent. Invalid patents impose an 
immense and unjustified cost on American businesses, including 
companies in the biotechnology industry.
    Second, we believe a properly designed system must incorporate 
safeguards to ensure that it will not be abused by third parties. As 
noted in our prior testimony, the devil is in the details. The 
challenge is for Congress to create a procedure that provides a 
rigorous and balanced inquiry into the validity of a patent, and to 
make that procedure feasible for the PTO to administer. A system that 
permits a third party to paralyze a patent by initiating an open-ended 
administrative proceeding would seriously undermine the incentives and 
purpose of our patent system. Likewise, a proceeding that becomes 
comparable in complexity, burden and cost to litigation in the Federal 
courts would yield no benefits.
    Finally, a patent review system administered by the PTO must remain 
focused on those issues that the PTO has special expertise in 
evaluating, and work within the practical constraints of an 
administrative proceeding that is designed to be efficient but 
thorough. In particular, the system should avoid having the PTO 
evaluate questions of compliance with the ``best mode'' requirement of 
35 U.S.C. Sec. 112, or compliance with the duty of disclosure under 37 
CFR Sec. 1.56. The system should also build on the recognition that the 
PTO can bring a special technical expertise to independently evaluate 
scientific and technical questions that bear on patentability. At the 
same time, the PTO is not well-equipped to manage contentious 
proceedings that will turn on critical evidentiary questions. As such, 
we encourage the Congress to incorporate safeguards that take account 
of these limitations, and to not create a system that the PTO is 
incapable of effectively managing, or which leads to unjustified costs.
    It is appropriate for this Congress to take up the task of devising 
and implementing an effective post-grant opposition system. Options 
that exist today--so-called ex parte and inter partes reexamination--do 
not present a viable alternative to litigation in the Federal courts, 
primarily because these procedures do not provide third parties with a 
fair and balanced degree of participation relative to patent owners. 
The fact that only a handful of patents have been the subject of inter 
partes reexamination proceedings, despite the existence of thousands of 
eligible patents, is a telling indication of the problems with the 
current system. The absence of a fair and efficient administrative 
procedure to review patent validity makes it possible for owners of 
invalid patents to use the often enormous expense of patent litigation 
to effectively shield invalid patents from challenge. An improperly 
granted patent that cannot be reviewed in a cost-effective manner 
creates unjustified burdens and risks for American companies, including 
those in the biotechnology industry.
    Genentech believes that the availability of an appropriately 
structured post-grant review system will enhance public confidence in 
the patent system, and provide the public with a much needed 
administrative alternative for resolving questions of patent validity. 
The recent reports from the Federal Trade Commission (FTC) and the 
National Academies of Science (NAS) reinforce this conclusion. Each 
organization recognizes that the PTO has a special expertise in 
evaluating certain patentability issues, such as anticipation, 
nonobviousness, enablement, written description and utility and that an 
administrative patent validity review proceeding can be conducted more 
rapidly than litigation in a Federal court. They correctly find that 
the public would significantly benefit from the availability of a 
procedure that does not present the burden, duration and associated 
expenses of patent litigation. These organizations also appreciate that 
any new system should not permit third parties to harass patent owners, 
or initiate groundless attacks on patents.
    Past Congressional efforts to establish a procedure by which the 
PTO can review the validity of an issued patent have been well-
intentioned, but have not produced a procedure that is viable. The 
first such system adopted by Congress was the ``ex parte'' 
reexamination system, enacted in 1982. In the ex parte reexamination 
system, any person, including the patent owner, may commence a 
reexamination of any issued patent on the basis of a patent or a 
printed publication that raises a substantial new question of 
patentability. See, 35 U.S.C. Sec. 302. The ex parte reexamination 
procedure, like original examination, is a closed procedure--only the 
patent owner and the PTO participate substantively in the proceeding. 
As a result, most third parties avoid use of this procedure for 
commercially significant patents, since it does not afford those third 
parties a meaningful opportunity to participate in the proceeding.
    In 1999, Congress created an enhanced version of reexamination, 
termed ``inter partes'' reexamination. The inter partes reexamination 
procedure does provide more of an opportunity for third parties to 
participate in the proceeding. However, due to the limitations built 
into the system, this ``enhanced'' version of reexamination has fallen 
short of expectations. The limited number of inter partes reexamination 
requests that have been commenced--despite the fact that hundreds of 
thousands of otherwise eligible patents have issued since enactment of 
the legislation--suggests that the design of this procedure will 
continue to limit its use by the members of the public. The most 
significant deficiencies of the inter partes reexamination system can 
be summarized as follows.

          It is not possible to use the procedure to review 
        patentability issues that are most commonly encountered in 
        biotechnology patents and applications; namely, compliance with 
        35 U.S.C. 'Sec. 101, and 112, first paragraph. It has been our 
        experience that issues of compliance with the written 
        description and enablement provisions of 35 U.S.C. Sec. 112, 
        first paragraph, and the utility requirement of Sec. 101, 
        frequently are significant inquiries affecting the validity of 
        many biotechnology patents and patent applications. Not 
        permitting these grounds to be raised in a post-grant review 
        procedure renders the system far inferior as an alternative to 
        litigation in a Federal court.

          The law imposes two distinct ``statutory estoppels'' 
        that in combination make the procedure unattractive as an 
        alternative to litigation in a Federal court. The first, found 
        in 35 U.S.C. Sec. 315(c), prohibits a requestor from raising in 
        a Federal court any issues of validity that ``could have been 
        raised'' at the time of the request for reexamination in view 
        of art known to the requestor. This broad estoppel attaches by 
        the mere filing of a request for inter partes reexamination. 
        The second ``estoppel'' is found in an uncodified section of 
        the AIPA (Sec. 4607 of the Intellectual Property and 
        Communications Omnibus Reform Act of 1999, as enacted by 
        Sec. 1000(a)(9) of Public Law 106-113), and is designed to 
        prohibit a third party who participates in a reexamination 
        proceeding from later contesting the legitimacy of any 
        ``facts'' determined in the proceeding. These statutory 
        estoppel provisions impose an unacceptable price on use of the 
        inter partes reexamination procedure in almost all situations.

          The inter partes reexamination system does not permit 
        third parties to use certain evidentiary procedures that would 
        ensure that the procedure is sufficiently rigorous. For 
        example, it is not possible to cross-examine expert witnesses 
        used in the proceeding or direct questions to the opposing 
        party.

          Finally, the system cannot be used to review issues 
        of validity involving patents issued on applications filed 
        before November 29, 1999. We note that this limitation, in 
        particular, has rendered the system of marginal value to many 
        companies in the biotechnology industry, in part because there 
        still remain a significant number of biotechnology patent 
        applications pending before the PTO that were filed before this 
        date.

These limitations in the inter partes reexamination system have made 
the procedure of marginal value to the public. It simply is not an 
effective alternative to expensive, unpredictable and protracted 
litigation in the Federal courts.
    Genentech thus encourages the Congress to pass legislation now to 
create a viable, cost-effective, and fairly balanced post-grant 
administrative patent review procedure. The approach set forth in 
section nine of the Committee is a good starting point, but several 
important variables need to be revised to make that system acceptable.

          Threshold Showing to Initiate Procedure--Genentech 
        believes that an opposition system should require any party 
        wishing to commence a proceeding to provide a cogent and well-
        supported showing that at least one claim in the patent is 
        invalid, and require the PTO to make an independent 
        determination that the showing meets a threshold level of 
        question as to the validity of one or more claims in the 
        patent. If the initial showing is not sufficient, the Office 
        should not commence the proceeding. Genentech is flexible as to 
        the specific standard employed to make this assessment. One 
        possible standard is that the claim is ``prima facie'' 
        invalid--meaning that, assuming the cited evidence is accepted 
        as true, the claim would be invalid. Other standards could be 
        employed as an alternative to the prima facie standard. The 
        approach taken in the legislation, however, is not viable. It 
        would permit an opposer to commence an opposition upon any 
        showing. The burden would then fall to the patent owner to 
        prove that the opposition proceeding is groundless. Genentech 
        believes this ``initial proof'' requirement is an important 
        part of any post-grant review procedure that could result in 
        invalidation of one or more claims of a patent. Without this 
        initial determination, patent owners could be subjected to 
        groundless challenges to their patents.

          Estoppel. Participation in a post-grant review system 
        must not create any barrier for the participants to litigate 
        patent validity on issues that were not actually raised and 
        addressed in the post-grant review proceeding before the PTO. 
        While Genentech believes Congress should not include express 
        estoppel provisions in the post-grant review legislation, if 
        included, those provisions should not be comparable to the 
        codified and uncodified estoppel provisions applicable to inter 
        partes reexamination proceedings. Instead, they should apply 
        only to those issues actually addressed in the opposition 
        proceeding, and which were necessary to the final determination 
        of the Office.

          Time Limits to Initiate and Conclude Proceeding. A 
        third party should be allowed to initiate a post-grant review 
        proceeding provided it has made an appropriate preliminary 
        showing only within a fixed period following issuance of the 
        patent. In our view, the optimal period is nine months. 
        Genentech believes a limited authority to commence an 
        opposition proceeding if the patent owner consents may also 
        merit consideration, if sufficient safeguards against 
        ``coerced'' consent can be devised. To be viable, the post-
        grant proceeding must be concluded within a reasonable period, 
        namely, 12 to 18 months. The legislation should confirm that 
        this deadline will be respected by the PTO.

          Applicable to Any Patent that Can Be Enforced. The 
        system should permit review of any patent that is capable of 
        being enforced, subject to the threshold showings and 
        limitations noted above.

          Limited Additional Evidentiary Procedures. Genentech 
        believes a viable post-grant review procedure should permit use 
        of evidentiary procedures that will provide a more rigorous 
        review of issues pertinent to the validity of a patent than are 
        permitted under the current inter partes reexamination 
        authority. At the same time, we recognize that if all the 
        evidentiary procedures available in litigation before a Federal 
        Court were allowed to be used in a post-grant review procedure, 
        no benefits would be realized from using the PTO-based 
        procedure. As a result, Genentech believes it would be 
        appropriate to make available only certain limited additional 
        procedures in a post-grant review procedure; namely, the right 
        to cross-examine a witness who offers testimony in the 
        proceeding, and, if the presiding authority finds it 
        appropriate, limited requests for admissions and an opportunity 
        for an oral hearing. Other measures, however, should be 
        expressly prohibited in the law. In particular, parties to a 
        post-grant proceeding should not be subject to document 
        production, or forced to produce fact witnesses for 
        depositions. Such restrictions are appropriate and will not 
        undermine the effectiveness of the procedure. Proposed section 
        328 should thus be amended to foreclose discovery other than 
        those types enumerated above.

          Prohibit inequitable conduct challenges based on 
        actions of parties during post-grant proceedings. The 
        inequitable conduct doctrine operates to ensure that patent 
        applicants during ex parte examination of their applications 
        are held to a higher standard of dealing with the PTO. A party 
        that does not meet his or her duty of disclosure to the Office 
        can cause that party's patent to be held unenforceable. The 
        reason for this enhanced duty of disclosure is that the ex 
        parte examination procedure is closed and the public cannot 
        participate. Unlike ex parte examination, however, post-grant 
        review procedures being proposed in section 9 of the Committee 
        Print would be public and would include the active 
        participation of one or more parties opposed to the patent 
        owner. These factors eliminate the need for any enhanced 
        disclosure standards comparable those imposed during original 
        examination. Moreover, there is no comparable sanction that can 
        be imposed on third parties in such a proceeding (i.e., those 
        parties will be free to litigate infringement, enforcement and 
        invalidity in the future largely unfettered by their 
        participation in the proceeding). In view of this, Genentech 
        believes the legislation should impose identical obligations 
        and responsibilities on parties to an opposition proceeding. 
        This means, in part, that the legislation should include a 
        provision which holds that a patent may not be held 
        unenforceable due to those events that arise during the 
        opposition proceeding. Such a provision should also confirm 
        that if the PTO finds that one party has made a 
        misrepresentation, it should have the authority to take actions 
        to sanction that party appropriately. Where such 
        misrepresentations are discovered after the patent emerges from 
        the proceeding, courts may give due consideration to the 
        actions of the party, but should not be allowed to hold the 
        patent unenforceable.

Genentech stands ready to work with the Committee to improve section 9 
of the Committee Print to create a well-structured and effective post-
grant opposition procedure.

                               CONCLUSION

    Genentech thanks the subcommittee for the opportunity to present 
its views on the topic of patent reform. As a significant user of the 
patent system, Genentech believes it is desirable to pursue legislative 
reform to improve this critically important system. We encourage 
Congress to work with all sectors of the patent community to ensure 
that the best package of reforms can be pursued and enacted into law.

    Mr. Smith. Thank you, Mr. Kushan.
    Mr. LaFuze.

TESTIMONY OF WILLIAM L. LaFUZE, PARTNER, VINSON & ELKINS, LLP, 
 AND CHAIR, SECTION OF INTELLECTUAL PROPERTY LAW, AMERICAN BAR 
ASSOCIATION, ON BEHALF OF THE AMERICAN BAR ASSOCIATION AND THE 
            ABA SECTION OF INTELLECTUAL PROPERTY LAW

    Mr. LaFuze. Thank you, Chairman Smith and Members of the 
Subcommittee, and thank you for this opportunity to testify on 
behalf of the American Bar Association and that Association's 
Section of Intellectual Property Law.
    I currently serve as the chair of the ABA Section of 
Intellectual Property Law. The views that I'm going to express 
here today on awarding a patent to the first inventor to file 
have been adopted as ABA policy, and, therefore, represent the 
views of the entire 400,000 member Association.
    Views expressed on other issues have not been approved by 
the ABA and are, therefore, those of the Section of 
Intellectual Property standing alone.
    At the outset, it's important that you note that our 
members represent a diverse cross section of interests. Our 
members are attorneys who represent universities, individual 
inventors, small businesses, and large businesses. Our members 
are hired to assert patents against infringers. Our members are 
hired to defend infringers against such claims.
    Our members are typically on both sides of any patent 
license negotiation, patent dispute, or patent litigation. 
Given that our members represent virtually everyone impacted by 
the patent system, I offer my testimony today as representing 
really the best interests of the United States patent system, 
and given the importance to our Nation, the best interests of 
this country.
    I would like to comment briefly on two distinct areas of 
particular importance to the continued success of the U.S. 
patent system.
    One area relates to the capabilities of the United States 
Patent and Trademark Office; the second relates to substantive 
patent law.
    As to the first topic, the U.S. PTO must have the financial 
and human resources needed for it to undertake its crucial role 
effectively and efficiently. The ABA IPL Section appears here 
today to endorse major reforms to the patent system. These 
reforms will impact the operation of the U.S. PTO. These 
reforms, if enacted, will require the U.S. PTO to perform 
expanded duties and responsibilities in a timely way. It will 
need to do so with a high level of accuracy. Unless its 
resources are sustained at adequate levels, many proposed 
reforms, even though well designed could be frustrated.
    While the committee print does not address U.S. PTO 
capabilities, its proposed reforms will underscore the urgent 
need to address this topic.
    Let me now turn to the second topic, substantive patent 
law.
    In February of this year, the ABA took the position that 
the United States should now move from its current patent law, 
the first to invent system, which is based on proofs of dates 
of invention, to a first inventor to file principle.
    The position of the ABA is two-pronged on the subject of 
first inventor to file reforms, with the first prong calling 
for adoption of the principles as domestic law and the second 
advocating its incorporation into international harmonization 
agreements. Let me briefly outline why the Association took 
this important step.
    The existing patent law, which is best described as a proof 
of invention date system, is unacceptably expensive, 
complicated, and unpredictable. The U.S. patent law today 
requires that rival inventors fight for the right to patent an 
invention in a so-called patent interference. An interference 
fight proceeds at enormous expense with prolonged uncertainty 
and little predictability as to the outcome.
    Recent commentators have confirmed the adverse impact of 
patent interferences.
    Over the last 20 years, independent inventors have lost 
more of the interferences than they have won. As a group 
independent inventors, despite having invested multi millions 
of dollars in the patent interference system at a cost of about 
$300,000 per interference have fared worse than they would have 
achieved under a first inventor to file system.
    We believe that moving U.S. patent law to a first inventor 
to file system should be the centerpiece of any patent reform 
effort. Indeed, as we outline in our statement, it will 
facilitate and make more effective other important reforms.
    On issues other than first to file, the section offers the 
following proposals that appear in the committee print.
    First, limit the enforceability defense based on 
inequitable conduct to a but for standard and do not allow this 
defense to affect otherwise valid patent claims. In this 
respect, we differ from the others on the panel.
    Establish a more prompt and cost effective means for 
correcting defects and issued patents through a meaningful 
post-grant opposition proceeding that addresses most issues of 
patent validity implicated by such defects.
    And third publish all applications at 18 months. The 
publication of all applications would enhance certainty for the 
inventors and the public as to the identity of prior art.
    Four, limited allegations of willful infringement. Pleading 
willfulness in virtually patent litigation complicates 
discovery and raises issues of scope of waiver of attorney-
client privilege that could be avoided if appropriate reforms 
are enacted.
    The section would like the opportunity to work with you to 
develop these reforms, and our specific proposal with regard to 
willful infringement is to try the willfulness and discover the 
willfulness separately from the trial on the liability 
otherwise.
    Fifth, we think that the elimination of best mode is 
appropriate, particularly in an international context of patent 
harmonization. Our position is that elimination of best mode 
requirement represents a best practice in the patent 
harmonization context, a view that the section shares with 
virtually every major other NGO organization that has addressed 
the issue.
    I'm again grateful for the opportunity to present the views 
of the ABA IPL Section on these important issues related to 
patent law reforms. We look forward to a constructive dialogue 
that will expand the areas on consensus for pursuing such 
reforms and we hope that our comments today will serve as a 
constructive part of the dialogue that an effort of this 
magnitude requires. Thank you.
    [The prepared statement of Mr. LaFuze follows:]

                Prepared Statement of William L. LaFuze



                               ATTACHMENT




    Mr. Smith. Thank you all for your encouraging comments as 
well as your constructive suggestions.
    I'm pleased in looking at everybody's testimony that there 
seems to be so much agreement. Needless to say, that's not 
surprising that there's going to be some disagreement, and 
maybe we can talk about two or three of those issues a little 
bit more extensively.
    Let me go through the print and let me know if you disagree 
with some of my conclusions.
    This is section by section. Section 3, the first inventor 
to file, the first to file, it's my understanding that everyone 
supports that, although, Mr. LaFuze, I realize you feel that 
harmonization only goes so far, and I agree with some of the 
points that you have made there. But just in general I'm 
talking about here.
    On Section 4, the right to a patent, I think generally 
everyone supports that or doesn't have a position. Same with 
duty of candor.
    Section 6, the right of the inventor to obtain damages. 
Paragraph 6 I think most support, though there are some changes 
and some details to be worked out.
    Injunctions is an area--let me come back to that in a 
minute because I know there is some disagreement.
    The same thing on continuation applications. On section 9, 
post-grant proceedings, expansion of 18-month publication, 
everyone seemed to support.
    Let's see on--let's see. Let me jump over to the other part 
of post-grant opposition. General support with changes, and 
does anyone disagree with Mr. Lutton's suggestion for the two 
windows or are you familiar with that. Does anyone have any 
strong opposition to that? Just a little bit of a variation of 
a theme?
    I don't want to get bogged down on this, but, Mr. Hawley, 
yes.
    Mr. Hawley. Thank you, Mr. Chairman., IPO is actively 
considering a number of different alternatives. Currently, the 
Board of Directors' position is that the 9-month window is 
correct for the procedure as it's defined. If you go to a 
longer period or a procedure that's more like a revocation, 
then some of the other features may need to be changed, such as 
the standard of proof, and it becomes--begins to become quite 
interrelated.
    Quite concerned about long periods of indefinitiveness, 
particularly for those of our members who need to take 
advantage of the venture capital system and having their patent 
at risk for long periods of time for small companies, start-up 
companies is generally not a good thing for them.
    So we are actively considering other alternatives, but at 
the present time, we support just the 9-month window.
    Mr. Smith. Okay. Mr. Kushan.
    Mr. Kushan. Genentech is generally in favor of a fixed 
period after the grant of the patent as the window of 
opportunity for post-grant opposition proceedings. The main 
reason for that is on balance as the patent life continues on, 
we are in a situation where we're about to reach the market 
with our drug product, and it's extremely difficult to have the 
scenario of a patent challenge go back to the PTO once we're 
that close to the market.
    There are many concerns about how you balance that. We 
certainly can appreciate the need for an efficient 
administrative procedure being available when patent challenges 
arise, but we have to balance that.
    Mr. Smith. Okay. When it comes right down to it, we're just 
talking about a few months to differentiate you all, and I 
don't think in the end that's going to be one of the real areas 
of disagreement. We'll I suspect be able to work that out.
    But another subject that's a little bit more--it's equally 
if not more critical are injunctions and there is some 
disagreement there. Mr. Lutton, I think you feel that the 
current system is not working.
    Do you want to explain why? Whereas let's see Mr. Kushan 
opposes the reform as well. If you'll give your reasons for 
what' wrong with the status quo as well as whether you see any 
areas where we can talk more about middle ground?
    Mr. Lutton. Okay. Let me try to do that quickly. The--to 
summarize the statute currently says that injunctions are 
available based on principles of equity. What we believe is the 
courts are not really following that or at least they're not 
giving it any breadth beyond the cases of national health 
emergencies. An illustrative case is this Merck Exchange 
against eBay case that was just decided recently. It was an 
appeal from the district court in Virginia, where the court 
balanced equities and believed that an injunction was not 
appropriate and the Federal Circuit reversed--this was only a 
month ago--and essentially rejected a number of possible bases 
for the denial of the injunction and effectively limited it to 
only national health emergencies.
    Our core focus is we'd like to see a little more breadth in 
the word equity than national health emergencies, so we're 
looking for any principles of equity, any ability of the 
Congress to inject back into that standard or reinstruct the 
courts that this is not just about health. It's about doing 
equity for this injunctive relief.
    Mr. Smith. Okay. Thank you, Mr. Lutton. The Gentleman from 
California, Ms. Berman, is recognized for his questions.
    Mr. Berman. Thank you, Mr. Chairman, and I'd like to 
express the hope there might be a second round if we still got 
to stick around here anyway, just because there's so many 
issues raised by this excellent panel.
    Just--my--just taking the area the Chairman was asking 
about, all four of you agree with a post-grant opposition 
process; is that correct?
    That makes me--let the record show they nodded their heads 
yes.
    Mr. Smith. Well, with a few changes I think most do support 
it as a matter of fact.
    Mr. Berman. Yeah. Well, I think they all support a--we're 
getting into how long it should be available and other issues, 
but they all support it.
    If--my assumption is you support it because you think it's 
a more efficient and quicker way of resolving issues of 
questionable patents than litigation, very expensive 
litigation.
    If that's the case, why doesn't it make sense to open up 
when a notice of infringement, a letter of infringement has 
gone out, open up this process at that point for a short window 
so that this more efficient process can perhaps avoid the need 
for what now really looks like it might be a subject to 
litigation, and I guess I'm asking that to the people who are 
resisting that, which seems to be everyone except Mr. Lutton.
    Mr. Lutton. Unfortunately so.
    Mr. Hawley. Yes, I'll address that just very briefly 
because again our--my mandate from the board is limited to our 
past resolutions, but I can----
    Mr. Berman. No, let's just talk among ourselves----
    Mr. Hawley. Talk among ourselves and we'll be--give you 
some of the perspectives that, as a result of some of the 
discussions that we've had. And I think it was best put 
actually by a good friend in the ABA, who talked about 
designing a post-grant opposition system which, as you can see 
from the committee print, has a very large number of features 
to it. It's one thing to say that it would be wonderful to have 
a post-grant opposition system and then it's another thing 
altogether to agree on all of the details that might be 
incorporated in such a system.
    And the point that's typically made is that if you are 
designing a post-grant opposition system for the purpose of 
providing some kind of final review for patents that are just 
issuing from the Patent Office, you design your system in terms 
of the burdens of proof and the processes and everything else 
in one way, and if you are really saying that a post-grant 
opposition procedure is much more than that and akin to what we 
find in most foreign jurisdictions, which is a revocation 
proceeding, then you would design it in another way in terms of 
the rules of evidence that would be----
    Mr. Berman. But bring that down apart from--I didn't want 
to address the total post-grant opposition. I understand it's 
complicated. Just the issue of opening it up after the notice 
of infringement has gone out. That's what I was asking about.
    If one of you could sort of just try to address that aspect 
of it.
    Mr. LaFuze. If we're not requested to give views of our 
groups, I would be happy to respond----
    Mr. Berman. Yeah.
    Mr. LaFuze.--to that. The systems that we have discussed 
and the systems that are proposed are streamlined procedures. 
Primary evidence coming in by affidavit or declaration----
    Mr. Berman. Right. Right.
    Mr. LaFuze. And only a right of cross examination, which is 
a limited discovery. It's designed intentionally to hold down 
costs, yet try to get to the meat of the problem.
    For patents that are really of great value, there is some 
concern that if you move all the review process from the 
litigation from the courts to the Patent Office that there may 
not be a full opportunity to really explore all the issues that 
exist. And so I think the theory at least of some of us is that 
if we try this opposition proceeding to correct mistakes that 
are made in a relatively short time after a patent issues and 
let's see how that works first, we can adjust the time as may 
be needed.
    If all the litigation from the courts were moved to the 
U.S. PTO, I think the U.S. PTO would be so overwhelmed. They 
don't have the staff.
    Mr. Berman. Right.
    Mr. LaFuze. They don't have the money. They don't have 
the----
    Mr. Berman. Right. Just because of the--my time--it's still 
flashing. Does that mean I can get another question in.
    Mr. Smith. The Gentleman is recognized for another minute. 
Yes.
    Mr. Berman. All right. I mean you can't have patents of 
great value that are challenged in a short post-grant 
opposition so I'm not quite sure why the value of the patent is 
the key here.
    But let me just turn to the injunction for a second. I 
guess this is to Mr. Kushan. You don't want to change the 
provision on injunction. You want it to--I mean you talk a 
presumption, but it's pretty automatic--finding of infringement 
injunction issues. Is that an unfair conclusion?
    Mr. Kushan. No.
    Mr. Berman. Okay. Then would you be willing to go with an 
automatic stay of an injunction pending appeal?
    Mr. Kushan. That's an option. I think a lot courts do that 
now, where a district court has found infringement; that the 
patent is valid and is infringed, and an injunction is 
appropriate; and then there is a disruption that's possible to 
the market or to the other party.
    Mr. Berman. The judges weigh the equity.
    Mr. Kushan. They can weigh the equity as they do it now. 
There are many cases recently----
    Mr. Berman. Why is--if it's good for that, why isn't it 
good for the injunction?
    Mr. Kushan. Well, the proposal in the committee print is 
not bad. What you have in the committee print is a shift in the 
philosophy of entitlement to an injunction. It's going from an 
entitlement that the patent owner, with a--this is a valid 
patent that has been infringed. With that perspective, the 
property right that is the patent gets its value by being able 
to----
    Mr. Berman. What if you took it out of the burden argument, 
and you just gave the injunction as a tool for a judge to 
utilize where the judge concluded based on the evidence 
presented at remedy that this was an equitable way to handle 
it? You just sort of took it out the presumption that's issued 
versus presumption that's not issued--just left it as a tool 
for the judge?
    Mr. Kushan. Well, a lot of business decisions, particularly 
in the biotechnology sector, are premised on the patent being 
able to exclude use that's not authorized under the patent. 
That premise is very tangibly felt in the biotech sector 
because it's a fundamental part of the business equation of 
developing a biotech drug.
    Mr. Berman. But we know that money can assuage.
    Mr. Kushan. But in this setting, you know, it's not 
necessarily a bad thing to force biotech companies to develop 
different drugs. I mean there is a benefit overall to a system 
where exclusivity is respected. My--I can only provide a 
perspective of Genentech. Certainly, we have a reliance on the 
exclusivity of the patent, and in the absence of evidence that 
suggests that it should not be granted--an injunction should 
not be granted--that the equity should tilt in favor of the 
patent owner.
    And again, I'll reiterate. We're dealing with valid 
patents, not invalid patents. These are valid patents that are 
infringed. So it's not one of these issues of we don't know 
whether the patent is of questionable validity. This is a 
legitimately issued patent. When you have that setting, you 
should have the right to exclude, and let the burden fall on 
the shoulders of the other party to show why an injunction 
should not be issued.
    But again, I don't want to be entirely negative about this 
topic. The issue seems to be the use of that threat in an 
inappropriate way to affect litigation and to increase risks 
and induce settlements that are not appropriate. There are lot 
of misuses of that threat. I think the Committee can spend some 
time looking at reforms to the litigation equation that 
mitigate that risk.
    Mr. Berman. But there are a lot of misuses of this----
    Mr. Smith. And the Gentleman's time has expired. The 
Gentleman from Virginia, Mr. Goodlatte, is recognized for his 
questions.
    Mr. Goodlatte. Thank you, Mr. Chairman. Mr. Hawley, as I 
mentioned in my opening statement, software and other high tech 
companies face a serious problem. Many of their inventions and 
products involve hundreds of patents which must be lawfully 
cleared for use. In this environment, do you see how the threat 
of a permanent injunction by one nefarious party could impede 
the development of innovative products and encourage 
disproportionate settlements from high tech companies? And if 
so, what can be done to solve this problem without rolling back 
permanent injunction, since I understand that's one provision 
of this legislation you're not happy about?
    Mr. Hawley. I apologize that I don't fully understand your 
question, but let me say a few things in response.
    The software industry and the microelectronic industry is 
not unique in having products that are covered by large numbers 
of patents. We are in the electro photographic copying 
business, and I think you would be quite amazed at the stack of 
patents that covers any particular electro photographic 
machine. There could be thousands.
    Mr. Goodlatte. I understand. One of those many hundreds of 
patents is challenged and an injunction is issued. What do you 
do about it if you can't have a----
    Mr. Hawley. I think----
    Mr. Goodlatte.--different way of handling injunctions than 
is handled under current law?
    Mr. Hawley. When you are faced with a patent infringement 
suit on a portion of a large machine, maybe a small portion, 
you have a fairly long period of time in which you can evaluate 
the design around alternatives. Litigation lasts for a very 
long time. You're usually well aware of the patent before it 
issues.
    Mr. Goodlatte. But can't the treble damages penalties that 
are hanging over your head ensue from the date that it's been 
brought to your attention that the patent might be infringed 
upon and therefore if you loose that process all during the 
time that you're doing exactly what you're talking about, 
you're subject to quite a heavy threat of losses if you do not 
settle up with this party that may be trying to hold you up 
from every other aspect of moving forward with your product?
    Mr. Hawley. Okay. You're getting into the area of treble 
damages and with respect to treble damages in any serious 
disputes you will have ameliorated your risk by obtaining--but 
exercising your duty of due care and obtaining opinion of 
counsel, and if the opinion of counsel is that you don't have 
any other alternative, you design around the patent and go 
about your business. Otherwise, you're not being--you're not 
subjecting yourself to treble damages.
    So the treble damages hanging over your head is that the 
committee print addresses itself to is really--the provision in 
the committee print is really an anti-troll provision in the 
sense that we are now getting on a fairly regular basis non-
specific accusations of infringement that are essentially form 
letters that are sent to hundreds--I've heard as many as 
thousands--of companies.
    All of those place those hundreds or thousands of companies 
into a legal limbo.
    Mr. Goodlatte. I've got other questions to ask.
    Mr. Hawley. I'm sorry.
    Mr. Goodlatte. I'm going to have to cut you short. But let 
me turn to Mr. Lutton and ask him based upon Mr. Hawley's 
testimony that permanent injunction is the primary remedy by 
which patent owners can enforce their exclusive rights, do you 
believe the injunction provision in the committee print could 
inhibit legitimate patent owners from getting an injunction in 
cases in which there are only one or very few patent claims 
involved in litigation? And if so, do you have some suggestions 
on how to prevent that problem?
    Mr. Lutton. The answer is no. I don't think it could 
because the provision in the committee print is simply 
instructing a court to do equity. It's providing another factor 
that the court should consider or amplifying a factor that the 
court should consider in administering equity.
    That being said, I would echo again the comments I made 
earlier that I do believe that what--the core of what we're 
looking for is a reinjection of principles of equity into the 
injunctive issue, reempowering courts to decide whether in a 
particular case an injunction is needed or not. If it is 
needed, it should be granted. If it's not, it shouldn't.
    Mr. Goodlatte. Let me get in one more question if the 
Chairman will allow me and just ask all the witnesses if they 
can tell me why small businesses or independent inventors 
should support any of the provisions of this print? What's in 
it for them? Start with Mr. LaFuze.
    Mr. LaFuze. First of all, it's a less costly system. Second 
of all, it's a more predictable system. In a perfect 
environment, you ought to be able to go to the Patent Office, 
take a look at the file wrapper, take a look at what's publicly 
available and tell what the scope of the patent is and whether 
the patent is valid or not. The system that we have now is 
predicated on many different kinds of secrets that are not 
publicly available. You can't tell easily whether something has 
been offered for sale what constitutes the bar. You can't tell 
when somebody may have conceived, reduced practice, used 
diligence in terms of advancing an invention. There are so many 
unknowns with the system that we have today that you can't tell 
really what rights you have very easily. And it's very 
expensive to litigate them, as we all know. And we need a 
system that gives a simpler, fairer, more cost effective, more 
predictable outcome to the question of what valid rights do you 
have as a patent owner.
    Mr. Goodlatte. Mr. Kushan?
    Mr. Kushan. Thank you. Two reforms are going to enhance the 
ability of the independent inventor and small business to use 
our patent system.
    First, I think it's going to be a very good thing to dispel 
the myth that the first to invent system has benefits for the 
independent inventor. As a company that spends millions of 
dollars in interference proceedings, it's certainly not a cheap 
proceeding and if--considering as the statistics have shown, 
that 13 or so people who got--were worse off because of the 
system over the last decade, it's not benefiting them. A fairer 
system is one where a true inventor who files an application 
first gets the patent and there's no fight. There's no cost. 
It's just over. That's more predictable, more certain, and it 
will cost a lot less.
    The reforms that Mr. LaFuze has walked through also make it 
clear to understand what you're going to get.
    Post-grant opposition proceedings are also valuable to any 
patent owner, including the independent inventor. The big 
question that companies face when they see a patent or license 
offer is whether that patent is valid. If you have an 
opposition proceeding and your patent has gotten through that 
proceeding, that's going to be a very solid, definite and 
certain legal right. And that's going to induce very healthy 
negotiating processes between the patent owner and the company, 
and I think everybody who values their patent right is going to 
want to have that kind of an assurance of patent quality behind 
it.
    Mr. Goodlatte. Mr. Chairman, do I have your lead to allow 
the other two witnesses to answer that question or----
    Mr. Smith. The Gentleman is recognized for an additional 
minute for the other two witnesses to answer.
    Mr. Goodlatte. You each get 30 seconds.
    Mr. Lutton. I think this bill is tremendously beneficial to 
small business. They benefit from quality of patents. They 
benefit from predictability in the system, but most of all they 
benefit from control around damages and injunction abuses. The 
small business that goes out of business--if they have to spend 
5 or 10 million dollars defending themselves, and there's so 
much of that burden that they're bearing now that this bill 
will be tremendously beneficial for them.
    Mr. Goodlatte. Thank you. Mr. Hawley.
    Mr. Hawley. You asked about what the benefits are. All of 
the benefits that I could think of have already been stolen by 
my other panelists here, so I would point you to the--again--
the injunction provision and the specific reference to 
encouraging the court to consider in an injunction context 
whether or not the patentee is actually themselves using the 
invention. Many small business, small start ups, individual 
inventors have not yet found the resources to do that. And this 
would limit their ability to--and their opportunity to 
negotiate good agreements because of not being users 
themselves, they are at a disadvantage.
    Mr. Goodlatte. Thank you very much. Thank you, Mr. 
Chairman.
    Mr. Smith. Thank you, Mr. Goodlatte. The Gentlewoman from 
California, Ms. Lofgren is recognized.
    Ms. Lofgren. Thank you, Mr. Chairman, and thanks for this 
hearing.
    I have been talking with and listening to my constituents 
now for some time and advancing the suggestion that this ought 
to be the Congress that really spends a lot more time on issues 
of patent law, and I think it's--this testimony today makes 
clear why that's important. And certainly the draft before us 
is recognition of the importance of this subject matter.
    Having said that, it's not a surprise that we're going to 
have to work through some of these issues yet and the good news 
is that we have a great track record of people in the patent 
community working together to come up with solutions that we 
can all work with and feel good about.
    I note that some of the recommendations in the draft bill 
we had in H.R. 400 some years ago that was derailed for reasons 
that I never felt very compelling and hopefully we'll have a 
better chance this time in keeping valid measures intact in the 
bill.
    But I do want to go into the issue of the injunction. 
Listening to Mr. Kushan and Mr. Lutton, it occurs to me that 
your differing viewpoints really are a product of your 
differing industries, and the things that you're saying are 
valid. But the differences of opinion relate to the different 
ways that biotech works as compared to other technology 
companies. And it seems to me understanding--and I'm sure you 
would--the point of view of the other guy because of the nature 
of their business. There's got to be some way to come up with a 
resolution that works both for biotech and for the computer 
industry. I'm just convinced that there would be. So I'm hoping 
and after we leave the witness table, there will be some 
discussions and brainstorming on how we--and some suggestions 
that we might look at to kind of solve and reach that kind of 
accommodation that historically we always have done, and I know 
we have fine organizations that can facilitate those 
discussions if necessary.
    I wanted to ask a question on the treble damages section--I 
guess to you, Mr. Lutton--the change that it--if a defendant 
has received a detailed written notice from the patent owner 
charging infringement and identifying the specific claims in 
patent and alleging infringing product. That limitation is that 
a suitable one from your point of view or would you go with the 
rest of them?
    Mr. Lutton. I would like to--we would like to see that 
provision, that part of the bill, removed, and I'll tell you 
why. The current law is that mere knowledge of a patent can 
give rise to a charge of willfulness. I do believe the 
provision that you've got in here today will help take care of 
that issue. But we believe that all it gives rise to is a more 
artful form of letter writing. That allows a patentee to write 
a nicely worded letter, put a defendant on notice of a patent, 
expose them to triple damage, and we don't believe that's the 
kind of egregious conduct that should accord--exposure for 
punitive damages.
    We'd like to see instead that portion removed so that 
instead the law focuses on only cases like copying or violating 
a court order where there's truly some conduct warranting 
punishment by triple damages.
    The rest of the behavior that we want to incentivize is 
perfectly adequately incentivized by the threat of a lawsuit 
alleging infringement and awarding actual damages. So we don't 
think that this is an area where we need that tripling of 
damages.
    Ms. Lofgren. Do the other witnesses agree or disagree?
    Mr. Hawley. Congressman, if I may. The provision that is in 
the committee print is simply one that you were talking about 
here, and that is the notice requirement. It's simply one that 
establishes when the accused infringer has a duty of due care. 
And it doesn't automatically mean that if they eventually lose, 
they are going to have to pay treble damages because in most 
circumstances like that, they will ameliorate their liability 
by doing a duty of due care thorough investigation. And we 
think it's appropriate. Our members think it's appropriate. I'm 
sorry.
    Ms. Lofgren. I don't want to interrupt, but we only have a 
limited amount of time, and it seems to me--I mean there are 
some academics that are making the assertion that the creation 
of the appellate system actually had a result that eliminated 
the balancing of equities. I don't know if that's true or not, 
but I think we've all learned that what intend and what 
actually happens isn't always the same. And the concern I think 
that's been expressed is not what you've said because there's 
nothing wrong with what you said, but that it really wouldn't 
work out in the way that you've outlined. And I don't know the 
answer, but we are going to have a second round, are we not, 
Mr. Chairman? No? All right. Then I will--my time has expired, 
but I would like if I could--and it could be later--Mr. Kushan, 
you did mention a concern about the definition or prior art in 
the draft, and I would like to know more about your concerns in 
that area and we don't have time here. But if you could 
elucidate that at a later date, I'm very interested in it.
    Mr. Smith. Okay. Thank you, Ms. Lofgren. The Gentleman from 
California, Mr. Issa, is recognized for his questions.
    Mr. Issa. Thank you, Mr. Chairman. Boy, every question 
leads to another question.
    From a practical matter, if we look at the treble damages 
question--and I'll take almost anyone's answer on this--but 
isn't there essentially a problem today that to get treble 
damages and more importantly to get your legal fees, which is 
the first step. You know, often they do not use a multiplier, 
but they at least--you're able to recover legal expenses, which 
is also part of this willfulness.
    Isn't there really conceptually a problem that it's a high 
burden, and seldom accomplished, and you don't know if you're 
going to get it 'til the end of the trial. So--and this is for 
better or worse from my experience with 37 patents and way too 
much time both before the PTO and in legal proceedings. Don't 
we really have the question of notice, which obviously everyone 
runs to some attorney, who, for a price, delivers you an non-
infringement opinion, and that sort of--that takes care of you 
as a practical matter until some future point.
    At the present time, that future point is the end of the 
trial often or very late. As a practical notice if we 
instructed the courts to move their markman hearings up, to 
bifurcate and make those first instead of last, even it was a 
preliminary, if that became the point at which constructive 
notice is the point at which you could be eligible to pay legal 
fees, the markman ruling is the point at which you're on notice 
as to what the patent means. And as an inventor, I have to tell 
you: I've sent out those letters and I've received those 
letters over the years, and nobody ever tells you what you're 
really infringing, because nobody wants to limit their claim, 
so no one gets specific, and you're right, though. If we pass 
the law as it is here, you'll simply have more clever letter 
writing.
    So as we're trying to finalize this document, are those 
thresholds that you believe we should be working toward to try 
to get to an effective definition of when damages are more than 
ordinary and then before I let anyone answer on this, 'cause I 
know we're going to run out of time, as a matter of injunctive 
relief, my own experience, the judges don't grant it. What they 
do is they tell you they'll give you effectively the 
indubitable equivalent--and I can never pronounce that--I 
apologize, and then what they do is they don't have a bond.
    So isn't a major part of the injunctive problem the fact 
that bonds are seldom ordered as a pre-judgment and injunctions 
are seldom ordered because you really got to do well on that 
preliminary injunction. You really have to have five guys you 
already stopped and went through the whole trial process or you 
don't get it. And so as a practical matter for inventors, they 
don't get equity unless the guy has money at the end of the 
road, because they don't get the injunction, because that's a 
tough standard, and we're not likely to change it enough, but 
they also don't get a bond until they have basically until it's 
going up on appeal. Then 60 days after the judgement is made 
final, they finally get a bond or a bankruptcy.
    Is that an area that we should be working in, and I'd like 
your comments on it because those are two of the 20 things I've 
gotten written here that I think we haven't yet refined in our 
bill.
    I guess--since you've been the--Mr. Punitive and Treble 
Damages.
    Mr. Hawley. I don't know where to start.
    First of all, with respect--there was a comment that you 
made that I think is illustrative of the problem that we see 
with the injunctive provision is that you almost automatically 
thought of the preliminary injunction standards of--and that 
was what clicked on when you----
    Mr. Issa. Well, because if you don't win at preliminary 
injunction, you normally don't get an injunction from the judge 
until the end of the trial.
    Mr. Hawley. That's true. You don't get an injunction until 
the end of the trial, but you do get damages up to the point of 
an injunction.
    Mr. Issa. By the way, just for you edification, I am a 
little skewed. I worked for 20 years in consumer electronics. 
Only once did I ever have a lawsuit against somebody that at 
the end of the day really had to pay. You know, the fact is 
that in that industry most often you're infringers have a 
strong tendency to be people with very shallow pockets.
    Mr. Hawley. Agreed. But to get to your point on willful 
infringement. The real issue that the committee print addresses 
is, in my view, and the view of many of my colleagues, is 
really, as I said earlier an anti-troll provision. It really 
eliminates the growing practice of sending out form letters; 
and, thereby putting hundreds of people on ``willful 
infringement notice.'' Our members are not upset about having a 
duty of due care in appropriate circumstances. We think that 
that's--that willful--that infringers should not be willful, 
and if they're properly put on notice with the patent number 
and the product that's involved, we think that's fair.
    The problem we have with the form letter is that there is 
no product. You could take Kodak out of the letter, put 
Motorola in, and the letter wouldn't change at all. So we are 
then faced with the prospect of having to go figure out 
whether--what products they're talking about and that's not 
always a trivial exercise.
    So it's really an anti-troll provision because it's going 
to cut out a lot of the extraneous legal work that is a result 
of people protecting themselves from the prospect of treble 
damages when they get these form letters.
    The provision in the committee print also addresses the 
issue that we've heard in the National Academy of Sciences 
report and elsewhere where people are intentionally telling 
their employees not to read patents because they're afraid that 
the mere fact of reading them will result in a finding of 
wilful infringement. Under the committee print, you have to 
have actual notice. You have to copy or you have to have in 
order for willfulness to kick in. So people should no longer be 
concerned about reading patents.
    Mr. Issa. Anyone else? With the Chairman's indulgence?
    Mr. Smith. Mr. Lutton. Go ahead.
    Mr. Lutton. Okay. I think we agree with your suggestion 
that both in the area of triple damage and in the area of 
injunction, there's a difference between what the law says and 
what actually happens. And that's one of the reasons why we 
view both of these provisions as really going to managing risk. 
And for us, for every lawsuit we're involved in that goes to 
final judgement, which, leaving my company aside, but for every 
lawsuit that goes to final judgment, there is 25 more that 
don't go to final judgment; that get adjudicated or settled 
ahead of time, and for every one of those, there's 25 letters 
that were written that never made it to a lawsuit at all.
    And so we're really seeing a huge stacking of his risk and 
everyone of those carries with it the potential threat of an 
injunction; the potential threat of triple damages, which are 
not decided until the very end of the road. And so these 
provisions by bringing some certainty back into how those laws 
are supposed to be applied and the conditions in which they're 
going to apply will help eliminate the current conundrum that 
we're in of all the decisions are decided at the very end and 
they're all very draconian, and you can't really make any 
reasonable judgments about which cases should be settled and 
which ones should go forward because they're all threatening a 
terrible dramatic remedy. So that's our issue.
    Mr. Issa. Mr. Chairman, recognizing we're out of time and 
there's no second round, I would only ask that we be able to 
submit additional questions to the panel and receive back 
answers in writing.
    Mr. Smith. Okay. And without objection, all Members have 
that right.
    Mr. Issa, thank you for your questions, and it occurs to me 
you may be the only actual inventor who is a Member of his 
Subcommittee.
    Mr. Issa. Well, actually only Roscoe Bartlett and myself 
are inventors, patented inventors in the whole Congress.
    Mr. Smith. Is that right?
    Mr. Issa. And I can't figure out why in the world he's not 
on this Committee.
    Mr. Smith. And you're glad you are.
    Mr. Issa. It's a conspiracy. Yes, we do have inventors of 
conspiracy.
    Mr. Smith. The Gentleman from Virginia, Mr. Boucher, is 
recognized for his questions.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
want to apologize first for being tardy at this hearing today. 
We have the Energy Bill on the floor, and I've been tied up 
with that for the better part of the afternoon.
    But my absence here doesn't reflect a lack of interest in 
this subject. I happen to think that patent reform is perhaps 
the.single most important thing that we accomplish in the 
course of this entire Congress. And I want to commend the 
various externally interested parties that have come forward 
and strongly urged the Congress to move forward aggressively on 
patent reform.
    Mr. Berman and I have been discussing this matter for the 
better part of the last 4 years. We have now structured two 
separate bills recommending various aspect of steps that could 
be taken to improve patent quality, and we think generally 
beneficiate the patent system overall, to the advantage of all 
parties concerned.
    And I want to commend today Chairman Smith for the staff 
draft or his draft that--I don't want to say it's just the 
staff--it's Mr. Smith's draft that he has put together. It's a 
very thoughtful document, and I think it reflects well the 
debate and the general discussions we've had ongoing for the 
past some time.
    I'm going to take just a few minutes to ask you to comment 
on several matters.
    I have the general sense that the current system insulates 
the patent examiner; it makes it very difficult for him to 
acquire information about prior art. It discourages the 
submission of that information by third parties. It contains a 
post-grant opposition proceeding which is essentially 
meaningless. It's a proceeding on the record, decided on 
briefs. There's no opportunity for the summonsing of witnesses, 
the cross examination of those witnesses. No live argument 
before someone who can decide whether the patent was properly 
awarded or not.
    And then at the end of that relatively meaningless and non-
participatory process, estoppel applies. And so if you have 
elected to take part in it, you're sort of bound by that 
judgement. You're precluded from raising the issues in court 
that could have been raised in the course of that post-grant 
opposition that you've participated in.
    So little wonder that it's not used today. People who have 
real objections don't see this as a meaningful process.
    The injunction that issues when there's a preliminary 
finding of patent infringement that basically stops the 
business activity for whoever the defendant is in that case is 
also extraordinarily problematic and really interrupts 
legitimate business activity at the present time.
    And I'm wondering in addition to questioning you on the 
adequacy of the staff bill with regard to these two matters, 
whether there is anything in your opinion that the bill does 
not contain that should be a part of it in this overall effort 
to enhance patent quality.
    So my question for those who would care to answer: Do you 
find the post-grant opposition proceeding that is in the bill 
to be helpful? Are there aspects of it that you would like to 
see us improve beyond the provisions you see in the bill? It 
does, as I understand it, allow for witnesses, allow for 
argument, and it turns into a real adjudicatory proceeding 
within the Patent Office the post-grant that today is basically 
meaningless and the injunction provisions would require an 
actual showing of irreparable harm, so it would tend to mimic 
what we are familiar with in terms of injunctions apart from 
the patent process. That strikes me as helpful. And I would be 
interested in your reaction to those key provisions and your 
suggestion for anything else that ought to be in the bill. Who 
wants to go first?
    Mr. Hawley. I'm never shy. I'll go first.
    Mr. Boucher. Good. Thank you.
    Mr. Hawley. I think what you're referring to is the 
reexamination provisions that came in with the AIPA bill, and 
this committee print address two of the issues with that that I 
think will be helpful.
    The first is to eliminate the estoppel effect of the 
process in the Patent Office and the second is to open it up to 
more patents. There was a rather severe limitation on the issue 
date for patents that could be reexamined. There have only been 
75 reexaminations, and most people that I've talked to the 
estoppel provisions are the ones--is the reason that is most 
often given, and this bill I think takes care of that.
    Mr. Boucher. Let me just ask if you think the process that 
is outlined in the bill for that reexamination, what I'm 
referring to as post-grant opposition, is adequate or do we 
need to amplify that process, that post-grant process?
    Mr. Hawley. No. Our position is that the post-grant 
opposition that is proposed for the first time in this 
committee print, in conjunction with the improvements to the 
reexamination provisions, are a good collection of tools for 
the patentee to use.
    We believe that the post-grant opposition procedure that is 
in the bill, as I've said in my written submission, we agree 
with virtually every provision that is in there. We think it 
will be a good system. It will certainly not be a silver 
bullet. It will not solve all the problems of the world, but it 
will be a process that we believe people will use and that it 
will--it is well balanced. To amplify a little bit on Bill 
LaFuze's comments, it's a streamlined system. It's designed to 
be finished in a year. It's designed so that that can be 
accomplished. So it's not a revocation proceedings, which he 
addressed. So we do think it's a good provision and we support 
it.
    Mr. Boucher. And the injunction provision in the bill?
    Mr. Hawley. The injunction provision in the bill we have 
more difficulty with because it's not simply a minor--in our 
view, it's not simply a minor tweaking of the current process. 
It's a real change. It places the burden on the patentee to 
establish the need for an injunction, whereas under most 
circumstances now the injunction is almost a matter of right 
and the defendant needs to say why it cannot. So that's a major 
change.
    It also begins to import preliminary injunction concepts 
that--and where the preliminary injunction law is going to be 
borrowed I'm sure of it and the barrier is very high.
    It also encourages the court to determine whether or not 
the patentee is working the invention themselves, which we feel 
is akin to a working requirement and will not be seen with 
favor by small companies and small--and individual inventors.
    Mr. Boucher. I think I know what you think about the 
injunction. Mr. Lutton?
    Mr. Lutton. Very quickly. We do support the post-grant. We 
view it as a second chance to get it right on the patents that 
matter. We think that second window which I referred to earlier 
is a critical piece in order to allow us to focus on the 
patents that really matter.
    We're strong supporters of the injunctive provision that's 
in there, but also believe that there are other ways to get at 
that same issue, but we like that issue.
    I have two other suggestions for you in terms of things 
that are not in the bill that might be worth thinking about.
    One is the submission of prior art by a third party from 
the outside during the pendency of a patent application with 
comment so that the interested public can provide the PTO with 
the benefit of its thoughts on additional prior art.
    The second idea is some consideration of whether the burden 
of proof for invalidating a patent, which is clear and 
convincing evidence, ought to be lowered in those instances 
where the patent examiner has not had the opportunity to 
examine the prior art that is at issue in the challenge later. 
So clear and convincing may be a appropriate if the patent 
examiner looked at this art. The patent examiner didn't have 
that art. It's totally a new challenge. Maybe it's 
preponderance of evidence.
    Mr. Boucher. That's a very interesting proposal.
    So you're saying keep the clear and convincing evidence 
standard general but apply a preponderance of the evidence 
standard where the examiner has not had an opportunity to have 
benefit of evidence of prior art that whoever wants to 
challenge the award of the patent happens to have?
    Mr. Lutton. That's right. And I think the rationale would 
be that the presumption of validity and the clear and 
convincing evidence standard are premised on an examination of 
the Patent and Trademark Office. If there was no examination 
relative to that prior art, why the presumption?
    Mr. Boucher. Does the availability of a strong and 
accessible post-grant opposition proceeding where witnesses can 
be brought in, argument can be held--you get an adjudication 
before the patent actually leaves the Patent Office--ameliorate 
to some extent the burden that this clear and convincing 
evidence standard general imposes with regard to court 
proceedings?
    Mr. Lutton. To some extent, but not totally. You have to 
look at post-grant opposition as a second coarser look at the--
or more granular--let me say it that way--more granular filter 
through which a patent must pass. But it is not--it does not 
have all of the flexibility and other opportunities over 
litigation. There are cases that are going to be litigated even 
after post-grant opposition. But I think it provides another--
you can really look at the first examination, which is on 
average 17 hours, as the first filter. Post-grant for those 
cases where it's brought a second filter. And then for the 
cases that are not dealt with that way litigation.
    Mr. Boucher. Okay. Yes, Mr. Kushan.
    Mr. Kushan. I just want to briefly emphasize one point 
about, and it's a cross-cutting point, whether you're talking 
about post-grant opposition or other issues, focused on PTO 
activities, one thing that we are concerned about is making 
sure that we plan for the infrastructure to be sound and fully 
funded and designed in a way which will be better than the 
proceedings we have now. In the biotech sector, there are a lot 
of interference proceedings. If we have that set of rules and 
practices used to run opposition proceedings, it won't be a 
very good system and we think you need to consider some 
structural changes at the PTO to make sure that you have a very 
well designed group of people running the opposition 
proceedings. This might be done just by setting up a separate 
division at the Patent Office to run those proceedings.
    The funding issue is also critical, and I think given the 
constraints we have with assured funding, you need to envision 
a scenario where we have to prioritize the work of the PTO to 
make sure that opposition proceedings don't turn into multi-
year proceedings because of funding problems. So with that, 
I'll stop and encourage you to think about how these things 
will run at the Patent Office as well.
    Mr. Boucher. LaFuze?
    Mr. Smith. Thank you, Mr. Boucher. Your time has expired. 
Without objection, Mr. LaFuze, will you respond very briefly?
    Mr. LaFuze. I will. First of all, the intellectual property 
law section supports the post-grant opposition system that's in 
place in the bill. And secondly, with respect to injunctions, 
we don't have a position, so I will only offer my own personal 
comments on that. I think the injunction issue needs to be 
broken down into two parts. What happens after a trial is over 
and a judgment is entered and a judgment and an injunction is 
being considered pending appeal. And then I think the other 
one, which is an entirely different circumstance, is what do 
you do with an injunction when the court of appeals says the 
patent is valid, the patent is infringed, and the remedies 
under title V include the possibility of in injunction. I think 
we need to break those up. There are things we can do with the 
bond pending appeal. There are things that we can do with 
attorneys fees if somebody gets an injunction and it turns out 
they lose on appeal, and the defendant actually has been 
injured that can be measured somehow monetarily, and I think if 
we break those two issues apart, separate them, analyze them 
differently, it will be easier to handle.
    Mr. Smith. Mr. Boucher, thank you for your earlier comments 
as well as your questions. I might have guessed with all 
witnesses being lawyers we were going to have a little bit of a 
problem with time constraints. But we had a lot to discuss 
today as well.
    Let me just make the observation that I think it's evident 
to anyone who is here that not only is this an important piece 
of legislation, but we're going to go forward in a bipartisan 
way and I appreciate the supportive comments on both sides of 
the podium up here.
    We're also serious about going forward in an expeditious 
way. We have a tentative mark up scheduled for the end of May. 
That gives us I think a reasonable amount of time to continue 
our discussions. And we still do have work to do on injunctions 
and post-grant opposition and a couple of other continuation 
applications being another area that we need to explore, too.
    But we've made a lot of progress, and I appreciate all the 
agreement and the time that you all have committed to the task.
    This is the first, as you know, of a couple of hearings, 
and we do expect to get to the end with your good help.
    Mr. Berman. Would the Chairman yield?
    Mr. Smith. Thank you, again. The Gentleman from California 
is recognized.
    Mr. Boucher. I just want to make about 20 seconds of 
comment.
    Mr. Smith. Okay. The Gentleman is recognized.
    Mr. Boucher. To repeat in my opening statement the 
congratulation on what you're doing on all this and how you're 
going about it. And secondly, see if the witnesses other than 
one of you spoke to the prior--third-party prior art issue--if, 
in writing you could just give us your position on allowing the 
Patent Examiner to get third-party prior art between 
publication and grant. I think that's an issue the committee 
print doesn't address, which having all your positions would be 
helpful.
    Mr. Smith. Thank you. Thank you, Mr. Berman, and again 
thank you, all. We stand adjourned.
    [Whereupon, at 6:09 p.m, the Subcommittee adjourned.]


                       COMMITTEE PRINT REGARDING 
                       PATENT QUALITY IMPROVEMENT



                                Part II

                              ----------                              


                        THURSDAY, APRIL 28, 2005

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 12:12 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith (Chair of the Committee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order.
    First of all, let me express my appreciation to the great 
interest we have in this hearing today. We probably have the 
best attendance we have had all year on any hearing. We, of 
course, had a hearing on the same subject last week, so maybe 
the interest has been building as well. We expect to have 
interest by Members and appreciate the three other Members who 
are here today. This is not the best time necessarily to be 
conducting a hearing--at noon--but we hope there will be other 
Members who will stop by before we have a final vote and leave 
town today.
    I am going to recognize myself for an opening statement, 
and then yield to the gentleman from California, the minority 
Ranking Member, for his opening statement as well.
    Today the Subcommittee on Courts, the Internet, and 
Intellectual Property will conduct its second hearing on a 
Committee Print to improve patent quality. The print is based 
on the leading recommendations developed by the PTO and a broad 
cross-section of industry and trade associations that are 
involved in the formulation of patent policy.
    There is no shortage of volunteers nationwide who want to 
testify before this Subcommittee. I assure these individuals 
and groups that their concerns will be heard and given due 
process.
    Following this hearing, I will work with the Subcommittee 
Members, the Patent and Trademark Office, and others to develop 
a bill based on the print, that I expect to move this spring. 
So I urge all interested parties to work toward areas of 
compromise and concordance, knowing that no entity or 
individual will be entirely satisfied with the finished 
product.
    Still, there are areas of agreement and the trajectory is 
encouraging. Creation of a post-grant opposition system, tweaks 
to inter partes reexamination, more expansive use of 18-month 
publication, a doctrine of a first-to-file construct, 
elimination of the best-mode requirement, reformation of the 
inequitable conduct defense, and an overhaul of the willful 
damages prevention have generated much support. Hopefully, 
reasoned discussions and good-faith negotiations will 
generation support for other issues as well. I also want to 
emphasize that subject matter not contained in the print could 
still be included in the bill.
    Last week's panel featured representatives of larger 
mainstream industry groups. Today we welcome witnesses from 
Government, small business, the Academy, and the financial 
world. It is healthy and necessary to consider as many 
different perspectives as possible. Such diversity will only 
lead to a better work product.
    I look forward to hearing from the witnesses shortly, and 
now recognize the gentleman from California, Mr. Berman.
    Mr. Berman. Well, thanks, Mr. Chairman.
    Last hearing, we heard differing opinions about which 
sections of patent law should be reformed, how those reforms 
should be accomplished. Some of the witnesses stressed changes 
in litigation rules for patent cases; others focused on the 
need to harmonize U.S. patent laws with the foreign patent law. 
But all the witnesses seemed to agree that bolstering the level 
of patent quality is integral to a workable patent system.
    The whole foundation of the patent system is the idea that 
the Patent and Trademark Office grants high-quality patents. 
However, in recent years, and particularly since the State 
Street decision, a large number of questionable patents have 
been issued, leading to increased litigation and uncertainty in 
markets that are heavily dependent on patent rights. There are 
many possible reasons for the questionable quality--lack of 
funding resulting from fee diversion; lack of appropriate 
resources or training materials; an increase in the backlog of 
patent applications, which I gather--we will probably hear from 
Mr. Dudas--has become stunning; or even exposure to a new 
patentable subject matter, such as business method patents.
    While the PTO has made great strides in addressing this 
problem, more needs to be done to restore confidence in the 
patent system. The Committee Print has provided a useful set of 
guidelines that identify some of the key areas in need of 
reform. Some of the provisions are almost identical to the ones 
Mr. Boucher and I proposed last year. However, an issue we 
addressed with our third-party prior art submission provision, 
and which deserves greater attention in the Committee Print or 
any future legislation, is how to address quality on the front 
end of the examination process.
    I anticipate a spirited discussion today on the merits of 
some of the proposals in the Committee Print. And I guess I 
submit a challenge to those critical of certain provisions. If 
you have a problem with the proposal, help us craft a better 
solution, because we are planning to introduce a patent bill, 
as the Chairman mentioned, in the near future. I hope that the 
many interested groups--and here I guess I want to echo the 
Chairman--can work together to help us formulate some answers 
to the problems facing the patent system today.
    I look forward to working with you, Mr. Chairman, in 
drafting this legislation, and yield back.
    Mr. Smith. Thank you, Mr. Berman. And without objection, 
the opening statements of other Members will be made a part of 
the record.
    Before I introduce the witnesses, I would like to invite 
you to stand and be sworn in, if you will.
    [Witnesses sworn.]
    Mr. Smith. Thank you. Please be seated.
    Our first witness is John Dudas, Under Secretary of 
Commerce for Intellectual Property and Director of the U.S. 
Patent and Trademark Office. In a previous life, Director Dudas 
worked for this Subcommittee, so we welcome him back. He earned 
a bachelor's degree in finance, summa cum laude, from the 
University of Illinois and a law degree with honors from the 
University of Chicago.
    Our next witness is Richard Levin, a special friend and 
president of my alma mater, Yale University. He co-chaired the 
National Research Council that published a major study of the 
patent system last year. President Levin studied history at 
Stanford University and politics at Merton College, Oxford 
University. He also holds a doctorate in economics from Yale 
University.
    The next witness is Nathan Myhrvold, founder and CEO of 
Intellectual Ventures, an invention company in Belleview, 
Washington. He owns 14 patents and has several others pending. 
Dr. Myhrvold received an undergraduate degree in mathematics 
and a master's in geophysics and space physics from UCLA. He 
later earned another master's in mathematical economics and a 
doctorate in theoretical mathematics and physics from Princeton 
University.
    Our final witness is Darin Bartholomew, senior patent 
attorney for John Deere & Company. Mr. Bartholomew has 
practiced intellectual property law for more than 10 years. He 
earned an electrical engineering degree from Northwestern 
University, a J.D. from John Marshall Law School, and a Master 
of Laws from Georgetown University.
    Welcome to you all. We have your complete written 
statements, and without objection they will be made a part of 
the record. We do ask that you keep your oral testimony, 
though, to 5 minutes.
    And Director Dudas, we will begin with you.

  TESTIMONY OF THE HONORABLE JON W. DUDAS, UNDER SECRETARY OF 
 COMMERCE FOR INTELLECTUAL PROPERTY, AND DIRECTOR OF THE U.S. 
                  PATENT AND TRADEMARK OFFICE

    Mr. Dudas. Thank you very much, Chairman Smith, Ranking 
Member Berman, and Members of the Subcommittee. I appreciate 
your inviting me to testify today and I commend you for holding 
these hearings on your multi-title Committee Print, which 
proposes comprehensive changes to our patent system.
    The benefits of our patent system have always been obvious 
to Americans. You're all familiar with article I, section 8, 
clause 8 of the U.S. Constitution granting Congress the power 
to promote the progress of science and the useful arts by 
securing for the limited times to authors and inventors the 
exclusive right to their respective writings and discoveries. 
That clause was adopted into the Constitution without a 
dissenting vote and without even a recorded debate. History has 
repeatedly affirmed the wisdom of our Nation's founders in 
establishing these principles.
    The tremendous ingenuity of American inventors, coupled 
with an intellectual property system that encourages and 
rewards innovation, has propelled the growth of our Nation from 
a small agrarian society to the world's preeminent 
technological and economic superpower. And all of our patented 
technology finds its way into the public domain within 20 
years, freely available to any and all. The success of our 
system has also been the basis for economic development in 
nations around the world.
    Unfortunately, a growing chorus of critics now questions 
whether the fundamental patent system will enhance or hinder 
development in other nations. However, many of the nations 
questioning the efficacy of that system have become hotbeds for 
the manufacture and export of counterfeit goods, with more than 
90 percent of goods, in some cases in some industries, being 
counterfeited or pirated. Therefore we must actively educate 
the world that respect for intellectual property benefits 
everyone.
    Having and promoting the fundamentally right system, 
however, is not enough. Even the best system in the world can 
and should improve, and, as you know, at the USPTO our 21st 
Century Strategic Plan began as directives from the President 
and Congress that we improve. Recently we've announced three 
internal reforms to improve our Agency's quality and 
efficiency. We're increasing transparency, we're internally 
improving our ex parte reexamination, and we're saving 
applicants tens of millions of dollars by revamping our process 
of applicants submitting appeal briefs. We're implementing a 
multitude of improvements and we plan to do more.
    We're also hearing legislative proposals in three general 
categories, as you mentioned--operational, litigation reform, 
and the convergence of international laws and best practices. 
In my view, each of these must center on how the patent system 
encourages innovation and, more importantly, serves the public 
at large. We must look at these issues from every angle. We 
must look at them from the perspective of the independent 
inventor who may be the next Thomas Edison to the perspective 
of a large company that believes its innovations are being 
frivolously tied up in unnecessary legal knots.
    As you reflect upon all of the proposals you hear, I urge 
that you not focus exclusively on litigation nor exclusively on 
the administrative process. Patent quality begins with the 
application and it begins with the applicant. And I can tell 
you that the number one challenge I hear from examiners today 
is one of application quality. So I'm comforted by Ranking 
Member Berman, your statement about the beginning of the 
process both at the USPTO, but we'll take it one step even 
further back, which is the quality of the application and the 
quality of the process as it comes into the Office, as well as 
what happens within the Office. I think all of these issues 
need to be considered, but one component shouldn't be 
considered to the expense of others.
    We're committed at the USPTO to make sure that our 
practices and policies promote innovation and the dissemination 
of new technologies. While we implement operational reform, we 
realize that measures within your domain will make valuable 
contributions to the system. The USPTO and the Administration 
are enthusiastic to continue working with you closely and be a 
part of this hearing as you develop reform legislation to 
ensure that the U.S. patent system remains the world's leader.
    Thank you.
    [The prepared statement of Mr. Dudas follows:]

            Prepared Statement of the Honorable Jon W. Dudas




    Mr. Smith. Thank you, Director Dudas.
    President Levin.

 TESTIMONY OF RICHARD C. LEVIN, PRESIDENT, YALE UNIVERSITY, ON 
            BEHALF OF THE NATIONAL RESEARCH COUNCIL

    Mr. Levin. Chairman Smith, Congressman Berman, Members of 
the Subcommittee, thank you for offering me the opportunity to 
discuss the National Research Council's recommendations for 
improving the patent system in the United States. Patents play 
a crucial role in promoting technological innovation, which is 
the most important underpinning of economic growth. I'm 
delighted that the Subcommittee on Intellectual Property is 
developing legislation to ensure that the patent system 
continues to serve the Nation well.
    The project undertaken by the National Research Council, 
which I co-chaired with Mark Myers, a retired vice president of 
the Xerox Corporation, was the most comprehensive review of the 
patent system in decades. Our committee was perhaps the first 
to bring together practicing patent lawyers, academic lawyers 
and economists, business leaders, technologists, and inventors. 
We started with highly divergent views, but over the course of 
our deliberations our views converged and we reached consensus 
on several important recommendations that are reflected in the 
Committee Print.
    We concluded that, on the whole, the patent system is 
working well and does not need fundamental revision. Yet we did 
note some causes for concern. The sheer volume of patent 
applications, especially those involving new areas of 
technology--the Ranking Member referred to business methods as 
an example--overwhelm--these new areas overwhelm the patent 
examination corps in ways that affect the quality and 
timeliness of decisions. In addition, it's become more 
expensive to acquire patents, to obtain licenses to patented 
technologies, and especially to enforce and challenge patents 
through litigation.
    Our recommendations are set forth in greater detail in an 
accompanying written statement, but here I'd like to emphasize 
three main themes.
    First, Congress and the PTO should take steps to ensure the 
quality of patents issued. The single most important step would 
be the establishment of a simple administrative procedure for 
opposing a patent after it has been granted. The process should 
be timely and efficient so that uncertainty can be resolved 
quickly without either inhibiting socially productive 
investment by competitors in situations where the patent proves 
to be invalid or by encouraging wasteful investment when the 
patent proves to be valid.
    A new opposition process is needed because the existing 
inter partes reexamination procedure only permits challenges to 
be lodged on narrow grounds. It's rarely used and has not 
proven to be effective. The only way to challenge a patent 
through the courts is to infringe it and draw either an 
infringement suit or a demand to take a license. This is an 
unnecessarily expensive way to resolve doubts about a patent's 
validity, and disputes take many years to resolve while 
technology, as we know, changes rapidly.
    Patent quality can be improved also by the assiduous 
application of the nonobviousness standard by the Patent and 
Trademark Office. The PTO should develop new approaches to 
gathering information about the state of the art in emerging 
areas of technology, relying on outside experts when patent 
examiners lack expertise. The committee commended the PTO for 
the development of guidelines in emerging technology areas, 
such as genomics and business methods. It's important to offer 
such guidance promptly as new technologies emerge. The 
committee also recommended that Congress provide more resources 
for the PTO to hire needed examiners, to improve its 
information systems, and to fund a post-grant opposition 
procedure. Fortunately, the PTO will receive additional funding 
through the fee increase that was approved by Congress last 
year.
    A second theme, beyond validity, is the harmonization of 
the United States patent system with the European and Japanese 
patent systems. Differences among the world's major patent 
regimes entail wasteful duplication of effort by both inventors 
and by governments. The committee believes that gains in 
efficiency from harmonizations would be considerable. The 
United States is the only country that gives priority to the 
first person to reduce an invention to practice. Elsewhere, the 
first inventor to file is given priority. The latter test is 
objective; the former requires years of discovery, reams of 
depositions, and hours of trial testimony. Moreover, the U.S. 
is the only country in the world that requires a patent holder 
to hold that he has disclosed the best mode of practicing a 
patent. This, too, is costly and time-consuming to prove. 
Harmonization with global practice makes sense.
    Finally, the committee recommended that Congress mitigate 
other subjective elements of law that contribute to the 
extraordinary expense of patent litigation. For example, 
Congress would be well advised to eliminate or modify the 
standards governing inequitable conduct. The bill addresses 
that. There should be penalties for misconduct by patent 
applicants, but misconduct should not automatically invalidate 
the patent. Similarly, the doctrine of willful infringement 
should be modified, because willfulness is subjective and 
costly to prove, and the doctrine creates the perverse 
incentive for inventors to avoid the study of prior art lest 
they fail to cite a patent that turns out to be relevant.
    I'm pleased that the legislation developed by the 
Subcommittee is consistent with the recommendations of our NRC 
committee. I would suggest, however, that the Subcommittee 
reconsider the provision allowing the settlement of invalidity 
claims during the post-grant review process. Settlement would 
undermine a major objective of instituting a post-grant review, 
and that is to clarify the grounds on which patents should be 
granted in emerging areas of technologies. The parties settled 
may resolve their disputes with one another, but it wont' 
clarify the law or the practice of the Patent Office for future 
innovations.
    Our committee also recommended that Federal judges faced 
with resolving validity disputes in infringement cases should 
have the option of referring the issues concerning validity to 
the PTO administrative judges, who have expertise in post-grant 
review.
    I would be pleased to answer your questions.
    [The prepared statement of Mr. Levin follows:]

             Prepared Statement of Richard C. Levin, Ph.D.

    Good afternoon, Mr. Chairman, Congressman Berman, and members of 
the subcommittee. I am Richard Levin, President of Yale University and 
co-chair of the Committee on Intellectual Property Rights in the 
Knowledge-Based Economy of the National Research Council. The Research 
Council is the operating arm of the National Academy of Sciences, 
National Academy of Engineering, and the Institute of Medicine of the 
National Academies, chartered by Congress in 1863 to advise the 
government on matters of science and technology.
    Although most Academy studies are conducted in response to an 
agency's or a congressional request, the study we will describe was 
initiated by the Council's Board on Science, Technology, and Economic 
Policy (STEP) because it recognized that the breakneck pace of 
technological change across many industries was creating stresses in 
the patent system that needed to be examined to ensure that it 
continues to be a stimulus to innovation and does not become an 
impediment to it.
    Since 1980 a series of judicial, legislative, and administrative 
actions have extended patenting to new technologies (biotechnology) and 
to technologies previously without or subject to other forms of 
intellectual property protection (software and business methods), 
encouraged the emergence of new players (universities), strengthened 
the position of patent holders vis-a-vis infringers domestically and 
internationally, relaxed other restraints on the use of patents 
(antitrust enforcement), and extended their reach upstream from 
commercial products to scientific research tools and materials.
    As a result, patents are being more zealously sought, vigorously 
asserted, and aggressively enforced than ever before. There are many 
indications that firms in a variety of industries, as well as 
universities and public institutions, are attaching greater importance 
to patents and are willing to pay higher costs to acquire, exercise, 
and defend them. The workload of the U.S. Patent and Trademark Office 
has increased several-fold in the last few decades, to the point that 
it is issuing nearly 100 patents every working hour. Meanwhile, the 
costs of acquiring patents, promoting or securing licenses to patented 
technology, and prosecuting and defending against infringement 
allegations in the increasing number of patent suits are rising 
rapidly.
    In spite of these changes and the obvious importance of patents to 
the economy, there had not been a broad-based study of the patent 
system's performance since the Depression. Accordingly, the National 
Research Council (NRC) assembled a committee that includes three 
corporate R&D managers, a university administrator, three patent 
holders, and experts in biotechnology, bioengineering, chemicals, 
telecommunications, microelectronics, and software, as well as 
economists, legal scholars, and practicing attorneys. This diversity of 
experience and expertise distinguishes our panel from nearly all 
previous commissions on the subject, as does our study process. We held 
conferences and public hearings and we commissioned our own empirical 
research. The committee's report, A Patent System for the 21st Century, 
released a year ago, provides a thoroughly researched, timely 
perspective on how well the system is working.
    High rates of technological innovation, especially in the 1990s but 
continuing to this day, suggest that the patent system is working well 
and does not require fundamental changes. Nevertheless, the committee 
was able to identify five issues that should and can be addressed now.
    First, maintaining consistent patent quality is difficult but 
increasingly important in fast-moving fields. Over the past decade, the 
quality of issued patents has come under frequent sharp attack, as it 
sometimes has in the past. One can always find patents that appear 
dubious and some that are even laughable--the patent for cutting and 
styling hair using scissors or combs in both hands. Some errors are 
unavoidable in a system that issues more than 187,000 patents annually, 
and many of those errors will have no economic consequence because the 
patents will not be enforced. Still, some critics have suggested that 
the standards of patentability have been lowered by court decisions. 
Other observers fault the USPTO's performance in examining patent 
applications, variously attributing the alleged deterioration to 
inadequate time for examiners to do their work, lack of access to prior 
art information, perverse incentives to grant rather than reject 
patents, and inadequate examiners' qualifications.
    Because the claim that quality has deteriorated in a broad and 
systematic way has not been empirically tested, conclusions must remain 
tentative. But there are several reasons to suspect that more issued 
patents are substandard, particularly in technologies newly subject to 
patenting. One reason to believe that quality has suffered, even before 
taking examiner qualifications and experience into account, is that in 
recent years the number of patent examiners has not kept pace with the 
increase in workload represented by the escalating number and growing 
complexity of applications. Second, USPTO patent approval rates are 
higher than in some other major nations' patent offices. Third, changes 
in the treatment of genomic and business method applications, 
introduced as a result of criticisms of the quality of patents being 
issued, reduced or at least slowed down the number of patent grants in 
those fields. And fourth, there does appear to have been some dilution 
of the application of the nonobviousness standard in biotechnology and 
some limitations on its proper application to business methods patent 
applications. Although quality appears to be more problematic in 
rapidly moving areas of technology newly subject to patenting and 
perhaps is corrected over time, the cost of waiting for an evolutionary 
process to run its course may be too high when new technologies attract 
the level of investment exhibited by the Internet, biotechnology, and 
now nanotechnology.
    What are the costs of uncertainty surrounding patent validity in 
areas of emerging technology? First, uncertainty may induce a 
considerable volume of costly litigation. Second, in the absence of 
litigation, the holders of dubious patents may be unjustly enriched, 
and the entry of competitive products and services that would enhance 
consumer welfare may be deterred. Third, uncertainty about what is 
patentable in an emerging technology may discourage investment in 
innovation and product development until the courts clarify the law, or 
inventors may choose to incur the cost of product development only to 
abandon the market years later when their technology is deemed to 
infringe. In sum, greater certainty about patent validity would benefit 
innovators, technological followers, and consumers alike.
    Second, differences among national patent systems continue to 
result in avoidable costs and delays. In spite of progress in 
harmonizing the U.S., European, and Japanese patent examination 
systems, important differences in standards and procedures remain, 
ensuring search and examination redundancy that imposes high costs on 
users and hampers market integration. It is estimated to cost as much 
$750,000 to $1 million to obtain comprehensive worldwide patent 
protection for an important invention, and that figure is increasing at 
a rate of 10 percent a year. Important differences include the 
following: Only the United States gives preference to the ``first to 
invent'' rather than the ``first to file.'' Only the United States 
requires that a patent application disclose the ``best mode'' of 
implementing an invention. U.S. law allows a grace period of one year, 
during which an applicant can disclose or commercialize an invention 
before filing for a patent, whereas Japan offers a more limited grace 
period and Europe provides none.
    Third, some U.S. practices seem to be slowing the dissemination of 
information. In the United States there are many channels of scientific 
interaction and technical communication, and the patent system 
contributes more to the flow of information than does the alternative 
of maintaining technical advances as trade secrets. There are 
nonetheless features peculiar to the U.S. patent system that inhibit 
information dissemination. One is the exclusion of a nontrivial number 
of U.S. patent applications from publication after 18 months, an 
international norm since 1994. A second U.S. idiosyncrasy is the legal 
doctrine of willful infringement, which can require an infringer to pay 
up to triple damages if it can be demonstrated that the infringer was 
aware of the violated patent before the violation. Some observers 
believe that this deters an inventor from looking at the patents of 
possible competitors, because knowledge of the patent could later 
subject the inventor to enhanced damages if there is an infringement 
case. This undermines one of the principal purposes of the patent 
system: to make others aware of innovations that could help stimulate 
further innovation.
    Fourth, litigation costs are escalating rapidly and proceedings are 
protracted. Surveys conducted periodically by the American Intellectual 
Property Law Association indicate that litigation costs, millions of 
dollars for each party in a case where the stakes are substantial, are 
increasing at double digit rates. At the same time the number of 
lawsuits in District Courts is increasing
    Fifth, access to patented technologies is important in research and 
in the development of cumulative technologies, where one advance builds 
on one or several previous advances. Faced with anecdotes and 
conjectures about restrictions on research scientists, particularly in 
biotechnology, we conducted a modest survey of diverse participants in 
the field to determine whether patent thickets are emerging or access 
to foundational discoveries is restricted. We found very few cases 
although some evidence of increased research costs and delays and much 
evidence that research scientists are largely unaware of whether they 
are using patented technology. During our study, the Court of Appeals 
for the Federal Circuit ruled that university researchers are not 
shielded by the common law research exception against infringement 
liability. This combination of circumstances--ignorance of intellectual 
property on the one hand and full legal liability on the other--
represents an exposure that universities are not equipped to eliminate 
by the kinds of due diligence performed by companies and investors.

                     TOWARD A BETTER PATENT SYSTEM

    Our committee proposed seven steps to ensure the vitality and 
improve the functioning of the patent system:
    1) Preserve an open-ended, unitary, flexible patent system. The 
system should remain open to new technologies, and the features that 
allow somewhat different treatment of different technologies should be 
preserved without formalizing different standards, for example, in 
statutes that would be exceedingly difficult to draft appropriately and 
equally difficult to change if found to be inappropriate. Among the 
tailoring mechanisms that should be exploited is the USPTO's 
development of examination guidelines for new or newly patented 
technologies. In developing such guidelines, the office should seek 
advice from a wide variety of sources and maintain a public record of 
the submissions. The results should then be part of the record of any 
appeal to a court, so that they can inform judicial decisions.
    This information could be of particular value to the Court of 
Appeals for the Federal Circuit, which is in most instances the final 
arbiter of patent law. To keep this court well informed about relevant 
legal and economic scholarship, it should encourage the submission of 
amicus briefs and arrange for temporary exchanges of members with other 
courts. Appointments to the Federal Circuit should include people 
familiar with innovation from a variety of perspectives, including 
management, finance, and economic history, as well as nonpatent areas 
of law that bear on innovation.
    2) Reinvigorate the nonobviousness standard. The requirement that 
to qualify for a patent an invention cannot be obvious to a person of 
ordinary skill in the art should be assiduously observed. In an area 
such as business methods, where the common general knowledge of 
practitioners is not fully described in published literature likely to 
be consulted by patent examiners, another method of determining the 
state of knowledge needs to be employed. Given that patent applications 
are examined ex parte between the applicant and the examiner, it would 
be difficult to bring in other expert opinion at that stage. 
Nevertheless, the open review procedure I will describe next provides a 
means of obtaining expert participation if a patent is challenged.
    Gene sequence patents present a particular problem because of a 
Federal Circuit ruling making it difficult to apply the obviousness 
test in this field. This is unwise in its own right and is also 
inconsistent with patent practice in other countries.
    3) Institute an ``Open Review'' procedure. Congress should pass 
legislation creating a procedure for third parties to challenge patents 
after their issuance in a proceeding before administrative patent 
judges of the USPTO. The grounds for a challenge could be any of the 
statutory standards--novelty, utility, nonobviousness, disclosure, or 
enablement--or the case law proscription on patenting abstract ideas 
and natural phenomena. The time, cost, and other characteristics of 
this proceeding should make it an attractive alternative to litigation 
to resolve questions of patent validity. For example, federal district 
courts could more productively focus their attention on patent 
infringement issues if they were able to refer validity questions to an 
Open Review proceeding. The result should be much earlier, less 
expensive, and less protracted resolution of validity issues than we 
have with litigation and of a greater variety of validity issues than 
we have with re-examination even if it were used.
    4) Strengthen USPTO resources. To improve its performance, the 
USPTO needs additional resources to hire and train additional examiners 
and implement a robust electronic processing capability. Further, the 
USPTO should create a strong multidisciplinary analytical capability to 
assess management practices and proposed changes, provide an early 
warning of new technologies being proposed for patenting, and conduct 
reliable, consistent, reputable quality reviews that address office-
wide as well as individual examiner performance. The current USPTO 
budget is not adequate to accomplish these objectives, let alone to 
finance an efficient Open Review system.
    5) Modify or remove the subjective elements of litigation. Among 
the factors that increase the cost and reduce the predictability of 
patent infringement litigation are issues unique to U.S. patent 
jurisprudence that depend on the assessment of a party's state of mind 
at the time of the alleged infringement or the time of patent 
application. These include whether someone ``willfully'' infringed a 
patent, whether a patent application included the ``best mode'' for 
implementing an invention, and whether a patent attorney engaged in 
``inequitable conduct'' by intentionally failing to disclose all prior 
art when applying for a patent. Investigating these questions requires 
time-consuming, expensive, and ultimately subjective pretrial 
discovery. The committee believes that significantly modifying or 
eliminating these rules would increase the predictability of patent 
dispute outcomes without substantially affecting the principles that 
these aspects of the enforcement system were meant to promote.
    6) Harmonize the U.S., European, and Japanese patent examination 
systems. The United States, Europe, and Japan should further harmonize 
patent examination procedures and standards to reduce redundancy in 
search and examination and eventually achieve mutual recognition of 
applications granted or denied. The committee recommends that the 
United States should conform to practice elsewhere by adopting the 
first inventor to file system, dropping the ``best mode'' requirement, 
and eliminating the current exception to the rule of publication of an 
application after 18 months. The committee also recommends that the 
United States seek to have other jurisdictions adopt the practice of a 
grace period for filing an application. These objectives should be 
pursued on a trilateral or even bilateral basis if multilateral 
negotiations do not progress.
    7) Consider enacting a narrowly drawn exception from infringement 
liability for some research activities. Here we do not propose specific 
legislative language, but we do suggest some principles for Congress to 
consider in drafting a narrow research exception that would preserve 
the intent of the patent system and avoid some disruptions to 
fundamental research.
    In making these recommendations, our committee was mindful that 
although the patent law is designed to be uniform across all 
applications, its practical effects vary across technologies, 
industries, and classes of inventors. There is a tendency in discourse 
on the patent system to identify problems and solutions to them from 
the perspective of one field, sector, or class. Although the committee 
did not attempt to deal with the specifics of every affected field, the 
diversity of the membership enabled us to consider each of the proposed 
changes from the perspective of very different sectors. Similarly, we 
examined very closely the claims made to us that one class of 
inventors--usually individuals and very small businesses--would be 
disadvantaged by some change in the patent system. Some of the 
committee's recommendations--universal publication of applications, 
Open Review, and shifting to a first-inventor-to-file system--have in 
the past been opposed on those grounds. The committee reviewed very 
carefully, for example, how small entities currently fare in 
interference proceedings, examination, and re-examination. We also 
studied how European opposition proceedings affect small businesses. We 
concluded they enjoy little protection and in fact are often at a 
disadvantage in the procedures we propose to change. In short, we 
believe that our recommendations, on balance, would be as beneficial to 
small businesses and individual inventors as to the economy as a whole.
    I appreciate the opportunity afforded by the committee to testify 
on our conclusions and would be happy to answer any questions.

    Mr. Smith. Thank you, President Levin.
    Dr. Myhrvold.

   TESTIMONY OF NATHAN P. MYHRVOLD, CHIEF EXECUTIVE OFFICER, 
                     INTELLECTUAL VENTURES

    Mr. Myhrvold. Thank you, Mr. Chairman, Members of the 
Committee, both thank you for having me here and for turning 
your attention to a very important topic of patent reform.
    My perspectives today are going to be based a little bit on 
who I am. I started off as an academic physicist. I started my 
own company and became a start-up entrepreneur in California in 
1983. Microsoft acquired my company and so I became a corporate 
executive, Microsoft's chief technology officer, for 14 years. 
Five years ago, I left Microsoft and started Intellectual 
Ventures, dedicated to the idea of invention and helping 
inventors. Finally, I'm an inventor myself, so I understand the 
Patent Office from that perspective.
    Now, invention is critical to America; I don't need to 
remind you of that. One point I think is very important, 
though, is that the small inventor is critical to America. 
Forty-five percent of America's patent holders are classified 
as small entities by the Patent Office. That means they're 
individuals, they're universities, or they're small businesses. 
This cuts across every field of technology no matter how 
exotic, no matter how cutting-edge. In fact, look at 
semiconductors, look at nanotech, look at computers. You'll 
find in those areas that individuals and universities together 
often have more patents than the biggest companies in the 
world. It's a diffuse group; it's also a vulnerable group, 
because they depend on patent law very critically, much more so 
than the big guys do. So as we approach patent reform, it's 
very important that we keep them in mind. An unintended 
consequence of shifting in one area can make the playing field 
not level for the little guy.
    I've studied the Committee Print. There's a lot that I 
would commend the Committee on and I would agree with. 
Actually, Chairman Smith summed up a whole series of things. I 
won't repeat them all. I also want to echo my colleagues' 
remarks that when you add something like post-grant 
opposition--I think it's a good move--you've got to make sure 
that it's funded and resourced. We can't heap more new things 
on the Patent Office while they still have such a backlog of 
the work they're supposed to ordinarily be doing.
    I've also studied the Committee Print in other ways and, to 
be frank, there are some things I don't agree with that I think 
would be harmful. Most important of those, I think, are the 
rule changes regarding injunctions. Now, patents are designed 
to give ownership of inventions to inventors, and that 
ownership isn't conditional on whether they make it or not. 
That's what our system is. It's perfectly honorable to be an 
inventor in a university or a small entity that doesn't 
actually manufacture, in fact licenses to others.
    Now, the injunction change, I feel, would really 
disadvantage the small inventor. It would significantly erode 
some of their rights. Ironically, it's been proposed as a 
trial--or as reform to reduce litigation. I'm afraid it would 
have exactly the opposite effect, increasing the number of 
litigations and the size and complexity of each litigation. My 
written testimony explains why.
    So we have to be very careful that while we try to reform 
litigation we don't accidentally create the Trial Lawyers Full 
Employment Act. If you look around the world, you compare our 
system to others, you find America has the strongest rights for 
inventors of any place in the world. There's a bunch of other 
countries that are very, right up on a par with us. I agree 
about international harmonization; that's an important thing. 
So the first rank of countries are very high. If you look at 
this injunction provision, you can also find countries that 
have that kind of law, and those typically aren't first-world 
nations. Those are countries like the Philippines, Peru, or 
Rwanda. Having strong rights for inventors is a very important 
thing. We've got to make sure that, going into the 21st 
century, we have the best possible incentive for all of 
America's inventors.
    One other brief--I've got too many things, actually, to 
list here. My written testimony covers them. There is, to me, a 
very surprising loophole for software- or Internet-related 
things, nontangible items in the Committee Print which would 
dramatically reduce any royalties due legitimate patent holders 
for any of these nontangible items. I think the 21st century 
isn't a time when we should take an act like that. Clearly the 
Internet and software and other very intangible things are 
important to us.
    Going forward, the committee has a challenging and 
interesting task to balance all of these different factors. I 
will make myself available both during the questions now and at 
any point in the future to help out in that important process.
    Thank you.
    [The prepared statement of Mr. Myhrvold follows:]

                Prepared Statement of Nathan P. Myhrvold

    Mr. Chairman and members of the Subcommittee, my name is Nathan 
Myhrvold. I am very pleased to have been asked to share my views as a 
scientist and inventor on the patent system with the Subcommittee. My 
personal history is very relevant to my remarks today, so permit me to 
introduce myself.

                               BACKGROUND

    As long as I can remember I have been fascinated with science and 
technology. I pursued science in school, earning a bachelor's degree in 
mathematics, and master's degree in geophysics and space physics, both 
from UCLA. I continued exploring other disciplines, getting another 
master's degree in mathematical economics and a PhD in mathematical 
physics from Princeton University. I would have finished school much 
earlier if I had focused on one topic, but to be honest I never met a 
kind of science I didn't like. This obsession with schooling might have 
consumed half my life, but for the fact that I started early, entering 
college at 14, and completing my PhD by age 23.
    After Princeton I was hired by Cambridge University in England, 
working directly for Professor Stephen Hawking. My research area was 
quantum field theory in curved space time, perhaps one of the most 
obscure and esoteric scientific disciplines. At that point in my life I 
would have told you that I'd be an academic researcher. But life has a 
way of throwing us curve balls. I took a three month leave of absence 
from working with Hawking to go to the San Francisco Bay Area to help 
some friends from graduate school on a software project. Before I knew 
it I was caught up in entrepreneurial fever.
    The year was 1984, and the software industry was still tiny. I 
became the CEO of Dynamical Systems, a software start up with less than 
a dozen full time employees. After two years of struggling to keep our 
heads above water, we were acquired by Microsoft. I spent the next 14 
years as a Microsoft employee, reporting directly to Bill Gates as 
Microsoft's first Chief Technology Officer. I could scarcely believe 
that I went from esoteric theories in physics to what would become the 
largest software company in the world.
    At Microsoft I championed the development of new technology. 
Microsoft had zero patents and just two patent applications at the time 
I joined the company. I advocated increases in R&D spending, and patent 
filing, greatly increasing each of these. In 1991 I convinced the 
Microsoft board of directors to start Microsoft Research, the first 
major industrial research lab to be started in more than a generation. 
Laboratories like Bell Laboratories, GE Research Labs, Xerox PARC, and 
IBM Research, have made a tremendous contribution to America's 
preeminence in science and technology. Unfortunately, these 
institutions were founded 30 to 100 years ago, and there aren't many 
recent examples. Very few of the new giants of technology have bothered 
to invest in research and create similar research organizations. 
Microsoft Research now employs over 700 researchers in seven 
laboratories, and is ranked as one of the leading research institutions 
in the world.
    I retired from Microsoft in 2000, and founded Intellectual 
Ventures, a company dedicated to investing in innovation and creativity 
in the form of invention. The venture capital community exists to help 
entrepreneurs start and finance new companies--at Intellectual Ventures 
we help and finance inventors to invent. This includes both full time 
employees, as well as working with inventors who are university 
professors, academic researchers, small businesses that cannot afford 
to patent without help, as well as independent inventors. I meet 
frequently with inventors from all ranks, and have attached a recent 
speech on invention given at Princeton University. Our company provides 
both business expertise and financing to these inventors, and provides 
inventors with a healthy share of the profits in their inventions.
    My business career as a corporate executive has focused on managing 
innovation and using patents as a business asset. However, I am also an 
inventor with 17 issued US patents. I'm working on increasing that 
number; for the last couple years I have filed over a dozen patent 
applications a year which are still pending in the Patent Office. So, 
in addition to using patents in business, I am also a customer of the 
Patent Office and have seen the details of the patent process up close.
    Given my varied career, I have seen the patent system from the 
perspectives of pure academic research, a giant technology company, and 
finally that of a small business. Each perspective offers different 
views on the patent system. The Subcommittee will hear from people in 
many of these directly through the process of these hearings. What I 
can offer is the views of someone who has experienced all of them.

                     PATENTS: PROTECTING INVENTIONS

    The patent system is a fundamental foundation of America's 
innovation based economy. Like any other part of the free enterprise 
system, the patent system offers economic incentive by allowing private 
ownership. In a way, this is no different than real estate, or other 
private assets. Private ownership of valuable assets is the basis for 
the American economy.
    The process of invention requires large amounts of the inventor's 
time, energy and money. In order to create incentive for that 
expenditure, the inventor gets ownership in the invention for a limited 
time, after which it passes into the public domain. This system has 
been a primary driver behind the tide of innovation that has kept 
America number one in the world for at least the last century. The 
system that encouraged and sustained great inventors like Thomas 
Edison, Alexander Graham Bell and the Wright brothers is a critical 
component of America's 21st Century goals to lead the world in 
computing, biotechnology, nanotechnology and dozens of other exciting 
fields.

               SMALL INVENTORS: AMERICA'S ECONOMIC ENGINE

    The leading component of America's invention output is driven by 
individual inventors, academic institutions, and small and medium 
businesses. The Subcommittee has heard testimony from large technology 
companies, and their trade associations. These firms are important 
inventors, and they frequently lead the list in terms of sheer number 
of patents. However what is much less well known is the substantial 
role that the little guy plays.
    According to US Patent Office records, 45% of American patent 
holders are classified as ``small entities'' which includes small 
businesses, universities and individuals.
    This pattern is repeated if you look in particular technology 
areas. I have done empirical research to understand the nature of the 
invention process, and found some remarkable results. It is not 
surprising that the entities that hold the most patents on computer 
processors include corporations like Intel and IBM. However, if you add 
them up, universities, individuals and small businesses in aggregate 
have substantially more processor patents than Intel or IBM--indeed 
more than the two combined. The same pattern is found in every 
technology field where I have looked. Small inventors have more 
operating system patents than Microsoft, more networking patents than 
Cisco and more wireless patents than Qualcomm.
    The typical pattern in a technology field is that the top company 
(or even the sum of the top five or ten companies) has only a small 
fraction of the patents in that field--often no more than 10% of the 
patents. Most invention is not done by the largest companies in the 
field. Invention occurs across the whole spectrum of the economy--from 
technology giants all the way down to the lone inventor in the garage. 
Those lone inventors aren't just working on low-tech areas--no matter 
how technical a field, a huge number of patents are held by private 
individuals. Critics of the patent system sometimes talk derisively 
about the ``myth of the small inventor'', ignoring their contribution. 
Well, I am here to tell you that small inventors are not only alive and 
well, but they actually contribute more inventions than the biggest 
corporations do.
    I think that it is very important for the Subcommittee to 
appreciate the role that small inventors play when considering reforms 
to the patent system. This is because small inventors depend on the 
patent system far more than big companies do. The patent system is the 
only means for the small inventor to get a fair shake, and any 
semblance of a level playing field.
    A large company has financial resources that a small inventor can 
only dream of. They also have the ability to extract value from their 
patents a variety of ways. Indeed many large companies use their 
patents only on a defensive basis--that is a polite way to say that 
they use their patents to maintain their dominant market positions, 
rather than actively use them as revenue generators in their own right.

                 PROTECTING THE SMALL INVENTOR'S RIGHTS

    A small inventor, on the other hand, depends almost totally on the 
patent system to secure his ownership rights in the invention. A small 
change to patent law can, as an unintended consequence, have 
catastrophic effects on a small inventor who depends totally on his or 
her patent rights to survive. A small inventor does not have huge 
market share and other business assets to fall back on. Worse yet, the 
small inventor almost invariably winds up competing with large, well 
funded companies that have every possible advantage. Only the patent 
system stands tall as the protector of the basic rights of small 
inventors.
    Changes to patent law must be scrutinized carefully to make sure 
that they do not tilt the playing field in a way that further 
disadvantages small inventors. They do the bulk of America's inventing 
and they deserve our support.

                         PROPOSED PATENT REFORM

    I applaud the Subcommittee for its interest in patent reform and I 
have studied the Committee Print. There are a number of needed reforms 
that I agree with. In the interests of being concise I will focus here 
on the most important areas where I think your efforts can be improved, 
at least from my perspective.
    First, I have to be frank and say I am disappointed that there 
isn't more focus on what I think is the most important aspect of patent 
quality--namely improving the quality of the patent examination 
process. Most of the committee print covers rules about patent 
disputes, and does not address the issues with getting patents examined 
in the first place. Patent quality starts in the Patent Office itself.
    Anybody who is a big customer of the Patent Office, as I am, can 
tell you that they need some help. The backlog of patents has grown 
larger, and the waiting time to get a patent has grown with the 
backlog. Longer waiting is not a recipe for success in a world where 
the pace of technology is going faster, not slower. Looking ahead, the 
Patent Office must continue to hire and train new examiners, and keep 
up with the pace at which invention occurs. This job isn't getting any 
easier. Many of the proposals in the committee print are likely to 
increase the burden on the Patent Office. For example, the post-
issuance oppositions with discovery will add process and personnel 
demands.
    Simply put, the Patent Office needs adequate resources to do its 
job. Until the Patent Office is funded adequately to meet the demand 
for patents, America's inventors are going to be poorly served. I know 
that funding is a major occupation of Congress, which cuts across many 
issues including this one. However, without adequate resources, the 
Patent Office will be stuck in a situation where patent fees continue 
to rise, as they did last year, without the service improving. This 
amounts to a hidden tax on innovation. Is that really what serves 
America best as we enter the 21st Century?
    In fairness, I can't complain about the resources without adding 
that I think the Patent Office does a good job within the constraints 
it has. Some critics of the patent system like to point to silly 
sounding patents, like a recent case mentioned in the press of a patent 
on a peanut butter and jelly sandwich. Or, critics will claim that the 
patent system is ``out of control'' and argue that there are many bad 
patents. These claims are misleading.
    Though some bad patents are inevitable, the vast majority of all 
patents are sound and valid. No serious observer of the patent system 
has reached any other conclusion. As one example, when patents are re-
examined by the Patent Office, the majority of the patents survive all 
or in part. This is also true in litigation results--there is no data 
on patents being found invalid en masse in the courts.
    It is true that there are also some pretty frivolous sounding 
patents--indeed there are web sites that feature them, like 
www.patentlysilly.com. Looking at such a site it becomes obvious that 
the creativity of American inventors covers the full range from the 
sublime to the ridiculous, but that can leave the wrong impression. 
Most patents are both serious and valid.
    Another area where misconceptions are bandied about is the topic of 
patent litigation. In a perfect world, property rights would always be 
respected, but here on Earth disputes are an inevitable reality. Many 
critics of the patent system wax hyperbolically about an ``explosion'' 
or ``epidemic'' in patent litigation. While it is true patent 
litigation has risen in recent years, these critics aren't telling the 
whole story. For example, the number of patent lawsuits each year is 
actually lower than the number of trademark lawsuits. Historically, 
copyright lawsuits used to outnumber patent suits, but in the late 
1990s patent suits pulled ahead. However, in the last five years, 
copyright lawsuits have grown over twice as fast as patent suits and 
are set to overtake patent lawsuits, probably this year. Patent 
lawsuits are neither more common, nor are they growing faster, than any 
other form of intellectual property litigation.
    A more telling point is that the number of patents has also grown. 
It makes sense that with more patents, and more patent holders, there 
is more opportunity for them to get into disputes. If you divide the 
growth in patent lawsuits by the growth in patents you find that on a 
per patent basis there were fewer lawsuits in 2004 than there were in 
1985. This is hardly the makings of an epidemic. Instead the growth of 
patent lawsuits reflects the growth of the use of patents, and the 
growth of technologically innovative companies that rely on patents.
    Let me be clear that I agree it is a worthy goal to reduce patent 
litigation. Litigation saps resources that small inventors could put 
toward more productive pursuits, like new inventions. Reducing the 
likelihood of litigation, with the attendant cost, complexity and 
uncertainty is a worthy goal.
    injunctive relief for patent infringement should not be reduced
    As a result, I cannot agree with one of the most extreme features 
of the Committee Print, regarding changes in permanent injunctions. 
This feature will greatly increase the volume, cost and complexity of 
patent litigation. It will also harm the small inventor.
    The Committee Print changes the way permanent injunctions are 
granted, reversing principles, practices and legal precedents that date 
back to the very origin of the Patent Office. Patents are designed to 
give ownership of inventions to the inventor for a limited period of 
time. They are property rights. When a court finds that those rights 
are infringed, and another party is determined to trespass upon those 
rights, the court may decide to issue an injunction.
    The Committee Print weakens and threatens to eliminate the 
injunctive relief due to the patent holder. It introduces an untested 
and potentially volatile new condition of ``irreparable harm'' into the 
injunction process. To put this in perspective, the Committee Print 
says, in effect, that it is okay to take the property of the patent 
holder as long as it won't irreparably harm them. This is tantamount to 
saying it is okay for a squatter to camp on your lawn as long as the 
harm to you isn't ``irreparable''. This flies in the face of the most 
concepts of property. Furthermore, the test of harm includes the extent 
to which the patentee makes use of the invention.
    The latter point is quite telling. This feature of the Committee 
Print amounts to tilting the playing field toward large product 
companies and away from the small business, university and independent 
inventor.
    It is important to note that this proposal to curtail overall 
injunctive relief for patent owners is not confined to preliminary 
injunctions, which are an altogether different body of law. It makes 
sense to consider issues like irreparable harm when considering whether 
to take the extraordinary step of issuing an injunction before trial. 
This is already common practice in many aspects of the law, including 
patent law. No change needs to be made here.
    The permanent injunctions remedies for patent owners that the 
Committee Print threatens to minimize--and, in large part, eliminate--
are an entirely different animal than a preliminary injunction. 
Permanent injunctions occur only after a court has fully tried the 
case. In practice, this usually includes multiple rounds of appeal 
which occur over many years, so it is not an emergency rush to 
judgment. Before a permanent injunction is granted, the court will have 
carefully and definitively answered the question of infringement. In 
addition, current law and surrounding case law already give the court 
leeway to decide whether an injunction is appropriate.
    Given the protracted legal maneuvering that precedes them, it's not 
like these injunctions sneak up on you. A defendant typically has many 
years notice. That time can be used to design around the patent in 
question. This is commonly done in the technology industry. A design-
around renders an injunction moot, because the products no longer 
infringe. Innovative product companies frequently have the option to 
avoid injunctions through engineering rather than legal proceedings.
    Injunctions come down to an issue of property. The infringer will, 
by definition, be found to have trespassed on the patent's holder's 
property, and the injunction is the eviction notice. No other part of 
property law holds that a lawful property owner must show that he or 
she is ``irreparably harmed'' before they can evict a squatter or 
trespasser.
    What motivates this unprecedented taking of private property 
rights? Proponents of this approach make several arguments, none of 
which hold water on closer examination.
    The first argument is based on a misconception that the patent 
system exists to cut a special break for companies that manufacture 
products. The fact is that the patent system exists to protect and 
encourage inventions, not products.
    Products are protected by ordinary commercial law, and the economic 
incentive to create and sell products is immediate and obvious--the 
profits that flow from product sales. In sharp contrast, there is no 
economic incentive for an inventor if others can take and use his 
invention without justice. The patent system exists to address this by 
acknowledging the constitutionally guaranteed exclusive rights that 
inventors have in their inventions. This ``exclusive right'' is 
meaningless if in most circumstances inventors cannot have ownership in 
their inventions, including the right to exclude others.
    The public good served by the Patent Office is to stimulate 
inventors to come up with new technology that can change our world, and 
see it enter the public domain after a period of time. This point is so 
important it bears repeating--the patent system exists to protect and 
stimulate inventions, not products.
    Discriminating against patent holders on the basis of whether or 
not they produce a product disenfranchises some of America's most 
creative and prolific inventors. This broad group includes: university 
professors and research scientists, who often make great breakthroughs 
without having the facilities or resources to manufacture the products 
commercially; individual inventors who are in the same situation; and, 
finally small businesses who may commercialize some of their inventions 
but frequently invent more than they are able to productize 
simultaneously.
    There is nothing dishonorable in an inventor licensing his or her 
inventions to companies that are in a better position to commercialize 
the technology. This time honored practice has been around as long as 
the patent system has. Thomas Edison, Nicola Tesla and other great 19th 
Century inventors all licensed their inventions out to companies to 
build them.
    The tradition continues to this day. If you use a digital cellular 
phone, the chances are high that Qualcomm licensed its CDMA technology 
to the cell phone's manufacturer. DVD players rely on video compression 
patent technology licensed from a consortium of inventors ranging from 
Sony to Columbia University, while licenses to patents on inventions 
from Ray Dolby and his company increase our enjoyment of music. Within 
the technology industry companies like IBM, Lucent, Texas Instruments, 
Sony, Philips, Thomson and many others derive significant revenues from 
patent licensing activities.

       THE COMMITTEE PRINT INCREASES THE NUMBER, COMPLEXITY AND 
                          EXPENSE OF LAWSUITS

    A primary justification advanced for the injunction proposal is 
that successful and innovative companies need this legislation to beat 
back a rising tide of nuisance lawsuits originating from greedy trial 
lawyers and unscrupulous patent holders. I can sympathize with this 
because when I was Microsoft, I frequently had to deal with patent 
lawsuits in my role as Chief Technology Officer. Microsoft has the 
dubious distinction of having been named as a defendant in patent 
lawsuits 52 times in the last five years, making it the second most 
``popular'' defendant in the country.
    So, while I can understand the frustration that my colleagues in 
large technology companies have, the reality is that the impact of 
these lawsuits is exaggerated. Some horror stories exist, but they are 
rare. The magnitude of the supposed problem is not borne out by the 
statistics.
    I was curious, so I did a study counting the total number of 
lawsuits filed against technology companies by entities that do not 
produce products. The total of all these lawsuits over the last five 
years was just over 2% of all patent lawsuits. Furthermore, fully half 
of those lawsuits are from one very litigious company. Those horror 
stories aren't about an epidemic, or a situation that is out of 
control--it is actually a very minor phenomenon. I also counted the 
number of patent lawsuits in which a large technology company was the 
plaintiff--the result is 1.6%. Large technology companies generate 
nearly as many lawsuits as the entities that have no products.
    These numbers put some perspective on the problem. On one hand, we 
have the potential to harm tens of thousands of small inventors. On the 
other hand we have the supposed benefit--to reduce the total number of 
lawsuits by perhaps one percent. It seems clear that the cure is far 
worse than the disease.
    This is particularly true because the proposal in the Committee 
Print won't decrease litigation at all. In fact, it will dramatically 
increase the number of patent lawsuits, as well as their complexity and 
cost. Ironically, this proposal, which is often described as being yet 
another much needed and important reform against the excesses of trial 
lawyers, is in fact the trial lawyers' full employment act.
    First there is the volume of the lawsuits. Today, about 97% of the 
patent lawsuits that are filed settle prior to a trial. The entire 
viability of the court system depends on this high settlement rate. 
Even a small change would overwhelm the courts with vastly more trials. 
Yet under the proposal, large companies will have no reason to settle. 
Their principal motive in settling a patent suit before trial is to 
avoid the possibility of an injunction should the company be found to 
be infringing, and to avoid enhanced damages should their unauthorized 
use of property be found to be willful. Without these threats, 
companies being sued will adopt the best strategy for their 
shareholders: refuse to settle and use the advantage of their deep 
pockets to drag lawsuits out to the bitter end, secure in the knowledge 
that no injunction can get in their way.
    The complexity of the litigation also increases substantially, 
because now several new issues have been added to the already complex 
decision making process of the courts. In addition to determining 
infringement, the courts must also try an entirely different set of 
facts. The Committee Print directs that the court ``shall consider and 
weigh evidence that establishes or negates any equitable factor 
relevant to a determination of the existence of irreparable harm, 
including the extent to which the patentee makes use of the 
invention''.
    In simple terms, this is a second lawsuit tacked onto the original 
lawsuit, complicating the already difficult patent litigation with an 
entirely new set of issues. Provisions like ``consider and weigh 
evidence'' mean a whole new area for motions, discovery and argument in 
court. As it stands, patent lawsuits can take five to seven years, and 
in some cases even longer. This new process will add substantially to 
this timetable.
    This isn't the only new complexity thrown at the courts. By 
reducing or eliminating the right to an injunction, the courts are for 
the first time put in the position of determining the terms and 
conditions under which technology is licensed on a broad scale. Instead 
of the marketplace, courts will now be the primary determinant of 
licensing terms.
    This also greatly adds to the complexity of the litigation. Under 
current patent law, the court may determine damages for past usage, but 
the court explicitly does not interfere in the market for future use of 
the patents. Instead, the court determines whether the property of the 
patent holder is being used--if it is, then the court issues an 
injunction and the two parties must work out for themselves what to do. 
In many cases there is no future use, because the infringer will use 
the many years that it took for the case to wind its way through the 
courts to redesign their product. In other cases the infringer and 
patent holder decide to settle based on their unfettered negotiations, 
which take into account the full panoply of market factors and 
competitive alternatives available in the modern economy.
    Instead, under the proposal in the Committee Print, the court would 
have to set future licensing terms. Economists have a name for this 
scheme--it is called compulsory licensing. Numerous studies have shown 
that it is a poor way to run a patent system. It is also out of keeping 
with the key principles of the American economy and Constitution of the 
United States.
    The decision-making process inherent in this huge new 
responsibility will weigh heavily on the courts. Current courts already 
expend a lot of time and energy determining past damages. Adding the 
future, which might stretch for a decade or more depending on the life 
of the patents, greatly raises the stakes. Higher stakes generally 
means more arguing on yet another issue--what should the future damages 
be? One thing seems certain: this proposal would be a boon for expert 
witnesses and the trial lawyers who deploy them.
    Some critics of the patent system ask ``why aren't monetary damages 
enough? Why are injunctions needed?'' There are several answers. 
Corporations fear injunctions, and that's what brings them to the 
settlement table, yielding a 97% settlement rate. Determining 
commercial use and setting license fees will greatly complicate the 
litigation process. But perhaps the most important reason is that this 
compulsory licensing proposal will inject court mandated control over 
future licensing rather than allowing the parties to work out a market-
oriented solution.

             THE PROPOSED CHANGES WOULD GUT PROTECTION FOR 
                      COMPUTER-RELATED INVENTIONS

    The injunction proposal is the topic in the Committee Print that I 
feel most strongly about. However, there are several other areas that 
deserve some comment. The Committee Print has an innocuous-seeming 
amendment to Section 271(f) of title 35 in the patent code. 
Unfortunately, this amendment would dramatically strip the rights of 
patent holders and would deal a serious blow to small inventors working 
in what is otherwise one of the most exciting and dynamic areas of the 
American economy.
    Section 271(f) is in plain terms a law designed to prevent patent 
holders from being cheated by unscrupulous exporters. Patent law holds 
that export of a patented invention outside the United States is a use 
of the invention, just as much as sale inside the country would be. 
Both export and domestic sale are on the same basis. Section 271(f) was 
intended to close a loophole and prevent a company from exporting 
components rather than an entire invention. It has worked well in that 
purpose and substantial case law has developed around it.
    Incredibly, the amendment proposed in the Committee Print creates a 
gaping loophole for software, or any invention that includes software. 
It requires that any ``component'' under 271(f) be a tangible item--
thus exempting software altogether. It additionally requires that the 
tangible item ``is itself combined physically with other components to 
create the combination that is alleged to infringe''.
    Translating this to plain English, it means that a software company 
could exploit the loophole created by this provision to export software 
without it counting as an export. Software would not qualify as a 
``tangible item'', particularly if it was exported by transmission over 
the Internet or another computer network which these days is the 
dominant way software is shipped and sold. Software composed of 
multiple software components--as virtually all software is these days--
would also not count. Most software companies have the majority of 
their revenue come from outside the US, so this provision would at a 
single stroke cut the licensing revenues due a valid software patent 
holder by a factor of two or more.
    Software is not the only beneficiary of the loophole created by 
this provision. Any invention that combines software and hardware could 
also be able to use the loophole by simply exporting the hardware 
physically, then downloading software to it. Literally millions of 
inventions, ranging from aircraft navigation systems to videogames and 
toys would suddenly have their exports made immune from justice.
    What justification can there be to strip America's inventors of the 
revenue from these exports? It is hard for me to imagine how, at the 
onset of the 21st Century, anyone could pretend that only ``tangible 
items'' have value when the Internet has become a ubiquitous channel 
for commerce, and software is a multi-hundred billion dollar market.

      THE PROPOSED CHANGES WOULD REWARD WILLFUL PATENT INFRINGERS

    The topic of willful infringement is clearly an area of patent law 
where reform is needed. The current willfulness standard should be 
clearly reviewed. However, I cannot support the Committee Print which 
goes too far in reducing the conditions under which a company can be 
found liable for willfulness.
    Note that willfulness goes hand in hand with the injunction issue. 
If large corporations know that they don't have to worry either about 
an injunction or about an increased financial penalty due to a finding 
of willfulness, then they can infringe at will. At worst, a court will 
make them pay a license fee, but even that is not certain because the 
court might not make such a finding. Even if a court eventually rules 
against them, the infringer can delay for many years. The best strategy 
for a large company is simply to infringe widely, and refuse any 
negotiation with the patent holder.
    This creates an incentive for exactly the kind of behavior the 
patent system is supposed to oppose. This is another example of a 
reform that, as an unintended consequence, would increase the volume of 
patent litigation by motivating companies to infringe. Small inventors 
would be adversely affected because their only means to bring such 
deliberate infringers to heel is to resort to expensive litigation they 
can ill afford.

         POST-GRANT OPPOSITION PROCEDURE WILL REQUIRE GREATER 
                        PATENT OFFICE RESOURCES

    Post-grant opposition to a patent is a concept that has been 
proposed in various forms for many years. The value of post-grant 
opposition is that it gives the marketplace the opportunity to be heard 
and to help the Patent Office. However, this is appropriate only if 
done for a limited time after issuance, with a strict time limit on the 
opposition proceedings, and with conditions that would prevent it from 
being used to manipulate the system. Otherwise this would become yet 
another protracted and expensive dispute mechanism which would 
disadvantage small inventors. It could also be yet another full 
employment act for lawyers. The Committee Print proposes a nine month 
limit from time of patent issuance. This is a reasonable compromise.
    However, I would caution the Subcommittee that any post-grant 
opposition of this sort will greatly increase the workload for the 
Patent Office, and will therefore require additional resources. It does 
not seem reasonable to ask the Patent Office to take on additional 
duties knowing that they lack the necessary financial resources to do 
so. Frankly, the Patent Office backlog is too long as it is, and if 
post-grant opposition takes resources away to make the backlog worse, 
this would be a net negative for the patent system. Indeed, improving 
the patent examination process by giving the Patent Office adequate 
resources would do more for patent quality than post-grant oppositions 
would, and would reduce the need for them.

        THE PROPOSED RESTRICTIONS ON CONTINUATION APPLICATIONS 
                         SHOULD BE RECONSIDERED

    The filing of continuations to a patent application is a 
longstanding and valuable mechanism which has great merit in the patent 
system. Small inventors (and many large inventors) often use 
continuations because they cannot afford to put all of their ideas into 
their first patent on an invention. So, they describe the invention via 
the patent specification, and make their initial set of claims. Later, 
they can file a continuation which draws new claims, but only within 
the boundaries of the original specification. This is a well-
established practice that has developed a clear body of case law around 
it, and has the important feature that small inventors can devote their 
scarce resources to protecting specific inventions first (e.g., the 
core invention of a start-up company) while pursuing protection for the 
broader concepts in a continuation application. It therefore rewards 
both early innovation and ongoing creative invention
    The Committee Print seeks to place new conditions on the filing of 
continuations. However, the terminology used in the Committee Print 
removes an important inventor's right by requiring that patent claims 
in continuations cannot be ``broader in scope than the broadest claim'' 
in the original case the continuation stems from.
    Limiting continuation applications in this manner would unfairly 
bias the patent system against the small inventor, and would result in 
many legitimate inventions going unprotected by the patent laws, 
resulting in decreased innovation due to removal of this protection.
    Moreover, this odd provision seems intended to solve a problem that 
no longer exists, namely the former situation where a U.S. patent 
expired 17 years after its issue date, which encouraged certain 
irresponsible patentees to drag the patent procedure out for decades, 
obtaining a new 17-year term for each issuing patent. This scheme has 
been eliminated by the adoption in the U.S. of a patent term of 20 
years from the filing date, which is the international standard.
    In addition, the practice of reissue applications already 
incorporates a requirement that no broadening claims can be pursued 
more than two years after a patent issues. The Committee Print would 
create a conflict in the law by preventing a patent applicant from 
pursuing broader claims in a continuation application, even though he 
or she would be allowed to pursue a broader claim in a reissue of the 
parent patent, even at a later date.
    This provision is thus both unnecessary and in conflict with other 
portions of the patent law, and would cause many properly patentable 
inventions to go unprotected, stifling innovation by encouraging 
companies to copy rather than invent.

              PATENT QUALITY: IN EVERYONE'S BEST INTEREST

    Lest it seem that I am unduly negative on the Committee Print, I 
hasten to add that there are many features that I think are positive 
moves which will strengthen the patent system. This includes reform to 
the concept of ``best mode'' implementation. I appreciate the Committee 
Print proposal to limit rampant assertions of inequitable conduct, the 
growth of which has been referred to recently as a ``virtual plague.'' 
Of course, I would encourage the Subcommittee to consider carefully the 
actual implementation to insure that it cannot be manipulated for delay 
or leverage.
    Another benefit is increased transparency through the publication 
of all patent applications is another important reform. These are 
important contributions which will strengthen the patent system for all 
participants.
    An area of particular importance is the harmonization of U.S. 
patent law with international patent law. This is critical for 
promoting American exports, and aids small inventors who lack the 
resources to cope with inconsistent international requirements on their 
own.

                               CONCLUSION

    Since the 19th Century America has been the guiding beacon of 
invention for the world. Thomas Edison's light bulb was a tangible 
symbol of that beacon, and since his day, millions of other American 
inventions have followed in his path. Patents are the legal construct 
that breathe economic life into those inventions by giving their 
inventors a property interest in them. The resulting economic incentive 
helps inventors spend their time, energy and money in the difficult 
task of wresting secrets from nature and harnessing them into new 
technology. America, with its patent system, has been unchallenged as 
the invention capital of the world, and we have benefited enormously 
from this legacy.
    As we enter the 21st Century, our traditional economy is beset by 
many challenges. International competitors such as China have already 
learned how to manufacture goods at low cost, and are becoming more 
technologically sophisticated with each passing day. As it stands, it 
is becoming ever rarer for an American company that ``makes'' products 
to actually do the manufacturing. Instead they design products that are 
built by others, often outsourced overseas. What is the difference 
between that, and an inventor who licenses his patents? It seems to me 
to be very poor timing to disadvantage small inventors in favor of 
large product companies, right at the stage when the real product 
building is moving overseas. The future of America is more strongly 
tied to invention than at any time in our past. We must support our 
inventors, including those that are in universities and small 
businesses, and plucky individuals working on their own.
    The barriers to entry around the world are collapsing. Tom 
Friedman, a columnist for the New York Times, and a close observer of 
globalization likes to say that the world is becoming flat. If America 
wants to remain competitive, we must play to our strengths and remain 
the world's leading innovators and inventors. The patent system is the 
bedrock on which this is founded. I want to thank the Subcommittee for 
their work to keep the patent system, and by extension America, 
competitive in this vital area.



    Mr. Smith. Thank you, Dr. Myhrvold.
    Mr. Bartholomew.

    TESTIMONY OF DARIN BARTHOLOMEW, SENIOR ATTORNEY, PATENT 
 DEPARTMENT, JOHN DEERE & COMPANY, ON BEHALF OF THE FINANCIAL 
                      SERVICES ROUNDTABLE

    Mr. Bartholomew. Thank you, Chairman Smith, Ranking Member 
Berman, and Members of the Subcommittee. My name is Darin 
Bartholomew. I am senior counsel for Deere & Company, where I 
focus on intellectual property and technology matters. I am 
pleased to testify today on behalf of John Deere Credit, the 
Financial Services Roundtable, and BITS.
    The Financial Services Roundtable and BITS are financial 
services trade associations that represent some of the largest 
financial institutions in the country, including banks, broker-
dealers, and other financial institutions. John Deere Credit is 
one of the largest equipment finance companies in the United 
States and is proud to be a member of the Financial Services 
Roundtable. We agree with many of the concepts which you 
include in the Committee Print and we appreciate the 
opportunity to provide you and other Members of the Committee 
with comments.
    Today, over 800,000 applications are pending in the PTO and 
examiners are unable to spend enough time to provide a 
meaningful examination on complex applications. This is 
particularly true in the area of business method and financial 
services patents. After the landmark decision in State Street 
Bank & Trust Company in 1998, the number of pending patent 
applications that involve financial services and business 
methods have surged greatly. Because it typically takes more 
than 3 years to get allowance of these applications, we are 
faced with an avalanche of increased litigation risks for the 
financial services industry.
    There are steps that Congress can take to provide 
protection against frivolous claims without impairing the 
important protections afforded by intellectual property rights. 
The main areas are creating an opposition proceeding, modifying 
the standard for injunctive relief, improving the prior-user 
rights defense, clarifying the damage rules, and promoting 
collaborative research.
    The Committee Print on opposition proceedings does not 
include a window for initiation of an opposition proceeding 
upon the threat of patent infringement. However, we believe 
that this is essential to improve the quality of patents issued 
in the U.S. Organizations will not likely expend the resources 
necessary to monitor patents in a 9-month post-grant window. 
There is no tangible economic return for challenging patents 
unless there is a threatened infringement or requirement to 
license the application.
    We believe that the 4-month window for launching an 
opposition after a threat of patent infringement would foster a 
more detailed scrutiny of patents than ordinarily occurs during 
a typical examination in which an examiner expends about 25 
hours or less. This would create an efficient two-level 
examination regime within the U.S. for patents that are 
asserted. Patents that are asserted represent less than 2 
percent of issued patents, approximately 2,500 patents a year. 
That would be a low administrative burden on the PTO to conduct 
an opposition proceeding for patents prior to their assertion. 
In the Committee Print, secrecy of the opposer was one of the 
topics that is necessary to prevent retaliatory oppositions or 
opposition wars between competitors. We felt that the 
preponderance of the evidence standard proposed would provide 
an incentive to use opposition proceedings instead of filing a 
lawsuit initially.
    Turning to the area of injunctive relief, in the U.K. 
injunctive relief is permitted anytime after expiration of 3 
years from the date of the grant of the patent. This would 
provide a strong incentive for actually using inventive ideas 
instead of letting them sit on the shelf, and inventors would 
be allowed to license to others to achieve and satisfy the 
working requirements, which would meet the requirements of 
small entities.
    With respect to business method patents, business method 
patents have proved difficult to define in practice and are not 
defined anywhere in the Patent Act. That's why we favor the 
Committee Print that would expand the prior-right user defense 
to all methods and to apparatus and systems. In addition, we 
feel that the defense should be extended to cover other matters 
so that we can achieve a standard in which the preponderance of 
evidence is used to invalidate business method patents.
    In clarifying the damage rules, we agree with the Committee 
Print, but we have some modifications to refine language. These 
modifications involve clarifying the level of knowledge that it 
takes to prevent increased damage awards. We are in agreement 
with the codification of this decision, in that the absence of 
an opinion of counsel does not create an inference of willful 
infringement, in concurrence with the recent Knorr-Bremse 
decision.
    With respect to the promotion of collaborative research, 
the current novelty provision in the law includes a public use 
provision as a novelty-barring event, and the U.K. and Europe 
both include language that prior art must be publicly available 
in their statutory provisions. Accordingly, we think that it is 
appropriate to include a reference to ``public'' or ``publicly 
available'' in the current statute. The presence of the word 
``public'' supports the use of confidentiality agreements to 
conduct collaborative research between organizations, and the 
absence of ``publicly available'' would potentially lead to the 
creation of a class of secret prior art that is disfavored by 
the Federal Circuit and Congress.
    We look forward to providing additional detail and working 
with the Subcommittee to refine these concepts.
    Thank you.
    [The prepared statement of Mr. Bartholomew follows:]

                Prepared Statement of Darin Bartholomew



    Mr. Smith. Thank you, Mr. Bartholomew.
    Director Dudas, in Dr. Myhrvold's written testimony, he 
said his number one concern was patent quality, specifically 
the PTO. And President Levin in his written testimony mentioned 
a couple of things, that the number of patent examiners was not 
keeping pace with the workload, that the U.S. seemed to be 
approving patents at a higher percentage than other countries, 
and he was concerned about the increasing dilution of the 
nonobvious standard--all of which might be taken to point to 
weaknesses in the Patent and Trademark Office.
    In your statement a few minutes ago, you mentioned all the 
reforms that you were undertaking or planned to undertake. Do 
you really think you have the resources you need to accomplish 
the goals, and if not, how do you propose getting those 
resources?
    Mr. Dudas. Thank you for that question. We also believe 
that patent quality is by far the number one most important 
goal. We also recognize that our office has broken records in 
the number of applications we've received at the USPTO for each 
of the last 20 years. We've recognized that the number of 
examiners we've hired has not kept pace with that number of 
applications.
    One of the most important things we can do is, under the 
strategic plan we put together 37 initiatives, and we basically 
looked at our processes in a brand-new way. We looked at 
quality from top-to-bottom. We used to measure quality in terms 
of the very end of the process: should this patent have issued 
or shouldn't this patent have issued. We now look at the 
process in a broken-down manner. We have better ability to 
train, we have better ability to find out specifically, down to 
the art unit, down to the examiner, down to the director level 
what issues we have with quality.
    The issue--the question you have about resources, we have a 
short-term solution in that the fees that passed will help us 
hire a good number of examiners over the next number of years. 
We'll always need--I can say that in the near future we will 
always, always need examiners to examine patent applications. 
But we need to find something more than just hiring additional 
people because we have found that through the 1990's there are 
times when you simply cannot keep up with the demand. You can't 
find the number of people. I don't think we're at that place 
right now, but I do think we have to find other ways.
    One of the things that we had proposed is looking at 
potential ways of competitively sourcing tasks. Other ways go 
directly to the heart of what I mentioned earlier about 
application quality. Our system prides itself on giving vast 
flexibilities. We should continue to give flexibilities, but at 
a time when we need to consider resources, we might have to 
consider which flexibilities are necessary and which are simply 
beneficial or desirable.
    Mr. Smith. Okay. Let us know how we can help.
    Mr. Dudas. Absolutely.
    Mr. Smith. President Levin, I was going to go back to the 
nonobvious standard. How can we ensure that courts, if they 
are, don't continue to dilute the nonobvious standard; and is 
one solution perhaps changing the language in section 103 of 
the Patent Act, or is there a way to achieve the goal without 
changing the language? Or what would you recommend?
    Mr. Levin. Our committee debated this question of changing 
103 quite extensively, and the majority concluded that we need 
not do that. And we did not recommend it. There was a minority 
of the committee, however, who felt that some toughening of the 
statutory language would be useful, something like introducing 
explicit language about an inventive step, such as they have in 
Europe.
    However, we really did converge on the idea that a post-
grant review process would in many respects do the work of a 
stronger standard. Many of the weak patents that are out there 
are ultimately overturned by the courts applying the 
nonobviousness standard. But so many of them get through, 
particularly in these new areas of technology--genomics when it 
first came in, and business methods when they first started to 
get patented. And you have a period of years where the 
presumption is to grant the patent and there's not enough 
check. It takes years for the courts to check on the validity, 
but if you had a post-grant review process it would get checked 
much more quickly and the standards governing the PTO examiners 
would be clarified. That would be the most important way to 
improve patent quality.
    Mr. Smith. That would have the impact that you desire.
    Mr. Levin. I think the desired impact. And I think Mr.--
agrees with that.
    Mr. Smith. Okay, thanks. One more question, President 
Levin. I've read that the willful violation is charged in more 
than 90 percent of all patent suits. What changes do you think 
need to be made to reduce the number or make it harder to prove 
willful infringement?
    Mr. Levin. It's just the standard practice, you know. The 
plaintiff charges willful infringement and the defendant 
counterclaims, you know, inequitable conduct. It happens in 
most cases. That's why we think both these documents need to be 
modified or abolished. The Committee's codification of making 
it unnecessary to rely on exculpatory opinions is helpful, but 
frankly, I think a majority of our committee believed that 
simply eliminating treble damages for willful infringement 
would be the right answer, which effectively eliminates the 
doctrine.
    It's a subjective determination, ultimately, what is 
willfulness. And your--the draft bill actually introduces 
another area of subjectivity, I think inadvertently, by talking 
about this, you know, way out of a charge of willful 
infringement by saying that a defendant might have an informed 
good-faith belief that a court would hold a patent invalid. 
Well, how are you going to determine that? That's just ripe for 
asking for lots of discovery and lots of opinion and trying to 
determine what somebody thought at some prior time. This is 
just the sort of thing we're trying to avoid in eliminating 
best mode, in eliminating first to invent, in eliminating 
inequitable conduct.
    Mr. Smith. Okay, thank you. And without objection, I'm 
going to yield myself an additional minute, realizing I'm 
setting a precedent for other Members here as well.
    Dr. Myhrvold, you do not want us to change the way 
injunctions are granted. In that case, what do we do about the 
shakedown lawsuits that seem to terrorize some people?
    Mr. Myhrvold. Well, it's a very difficult issue. And of 
course it's always easier to criticize a concrete thing than to 
come up with something new, and that's why the committee has a 
hard task here. When I was at Microsoft, the nuisance patent 
lawsuits would come to the chief technology officer. So I 
handled plenty of those. I think we're one of the most popular, 
if that's the right term, defendants for that reason. So I have 
great sympathy with reducing nuisance lawsuits. I don't have a 
single magic formula, however, that says this is exactly how to 
do it, and I wish I did.
    Mr. Smith. Okay. Does anyone else have a solution for this 
type lawsuits that we're talking about?
    [No response.]
    Mr. Smith. Good. Maybe it's up to us to decide. I don't 
know. Okay.
    Yes, Mr. Bartholomew, do you have a----
    Mr. Bartholomew. Yes. I think one of the things that we 
could do to accommodate the small entities in this case is to 
define the working, if you will, that occurs under that 
injunctive relief standard to allow small entities to license 
to others who make, sell, or use the inventions, and that it 
might also be possible to agree on some other type of exemption 
for small entities in the case of this requirement. The problem 
with giving an exemption to small entities is that some LLC and 
other small companies are set up expressly for the purpose of 
asserting patents against larger companies, and that would 
prove to be a difficult exception to get buy-off on.
    Mr. Smith. Okay, thank you, Mr. Bartholomew.
    Mr. Dudas. I'm sorry, I----
    Mr. Smith. Director Dudas, if you will briefly give us a 
comment.
    Mr. Dudas. Very briefly. I'm probably testifying more as a 
former staffer of this Subcommittee and Committee. But I would 
commend your attention to, if litigation is the problem, to 
look at litigation systems management reforms, et cetera--
loser-pays rules types of things.
    Mr. Smith. Okay, that might be helpful. Thank you.
    The gentleman from California, Mr. Berman, is recognized 
for his questions.
    Mr. Berman. And litigation reform in an area that is 
Federal law would be very unique for the Judiciary Committee in 
the House. We like to just do litigation reform on the things 
that are in State courts. [Laughter.]
    The injunction issue is very interesting. Dr. Myhrvold, I 
had a chance to sit through a withering attack by one of your 
employees on this portion of the bill. And perhaps--I have 
actually now read these two, the existing law and our 
provision, as opposed to just sort of dealing with this very 
conceptually, and it seems to me there is a middle ground here 
somewhere. There are two classic sort of positions. One is, a 
guy has the patent, no one else should be able to do anything 
with it unless it is with his permission. The other side of the 
coin is you hear stories of some little portion of a very 
expensive product for which there was a huge amount invested 
and a tremendous amount of expense, and it is a very small part 
of the final product. And apparently the way the law is 
interpreted, and I can see why given the way the existing law 
reads, it is only about preventing violations of a right 
secured by a patent. Yes, the courts have discretion now, but 
the only factor they really look at is whether the injunction 
should issue to prevent the violation of any right secured by a 
patent--the exclusivity issue. It tilts on that side.
    I look at the language of the Committee Print and it seems 
to tilt against really getting injunctions. You have to show 
irreparable injury and--isn't there some way to deal with this 
problem of essentially giving the holder of a patent a level of 
leverage that really isn't equitable or sensible or in the 
public interest and at the same time maintain some concept of 
exclusivity for the patent holder in normal situations? I mean, 
isn't there some way to bridge existing law and the Committee 
Print on this that can create a dynamic where this doesn't 
become an issue that bogs this bill down?
    Mr. Myhrvold. You know, the tricky thing here is you're 
balancing two sets of rights, you know, the rights of the 
patent holder and the rights of everybody else, someone who's 
claimed to be an infringer. One of the ways our court system 
works is by balancing those rights. Today one form of this is 
that 97 percent of all patent lawsuits settle before trial. And 
they settle before trial because----
    Mr. Berman. Because of a fear of an injunction.
    Mr. Myhrvold. And so, in fact, the tricky thing is if you 
reduce the likelihood of injunctions, what you wind up doing 
potentially is doubling or tripling the number of patent 
lawsuits.
    Mr. Berman. That is one way to look at it. Another way to 
look at it is you enhance the value that the settlement has 
some relationship to the damage, as opposed to the--I will be 
careful not to get too literal here--but to the extraordinary 
power that the guy who is likely to get the injunction has in 
negotiating a settlement.
    Mr. Myhrvold. One comment I'd make, then, is that a lot of 
these issues are about war stories. You know, you've got the 
little-inventor war story--little guy is disadvantaged by the 
big company--and you have the big-company war story about the 
nuisance lawsuits. It would be very interesting to have a real 
statistical study and say, well, how often do these things come 
up? How often is it that a tiny part of a big product, as you 
said, does actually go all the way to trial and doesn't settle?
    Mr. Berman. And it could be--but--well, but in the end, the 
language I see in section 283 on injunctions certainly doesn't 
take that situation into account. Which is why I think there is 
an interesting--including the summary--a vision of this in the 
Committee Print.
    Anyway, I don't know, President Levin, if you have----
    Mr. Levin. Well, our committee didn't look at this, but I 
think you're conceptually right. There would be a middle ground 
that referenced a balancing of the rights of both sides. This 
only talks about balance--it talks about balance, but it talks 
about--or principles of equity to prevent the violation of a 
right secured by a patent. If you want to go in between, you 
could talk about balancing the rights of the patent holder and 
the accused infringer.
    Mr. Berman. Right. Let me try and get my additional minute.
    Mr. Smith. Without objection, the gentleman is recognized 
for an additional 2 minutes.
    Mr. Berman. Oh. Great. Yes. Does this expand geometrically 
or mathematically? [Laughter.]
    Mr. Smith. It is not going to escalate more.
    Mr. Berman. Let me turn to another issue. The publication--
I am thinking now in terms of our Committee Print. I like the 
idea of publication after 18 months. I particularly like it 
because I would like to see, I think, some ability for third 
parties to provide prior art going in and obviously publication 
is essential to providing prior art. But that causes some 
problems. We have had that drill before.
    The other issue, though, is first-to-file versus first-to-
invent. I understand changing it to first-to-file in terms of 
harmonization, and there is a certain conceptual attractiveness 
in saying, hey, if you are going to invent and you want to be 
protected, go file it. But aren't you, when we do that, 
creating a huge advantage for the big guy who can quickly hire 
the lawyer and has him on staff and get the thing, and the 
small inventor is trying to raise the money with his new 
invention to put together the patent application and get it in? 
We are going to get opposition on both of these from certain 
folks. I am just wondering, isn't 18 months the more important 
principle to establish here? And both of them are harmonization 
issues, I guess, but--and aren't there some meritorious 
arguments against going to first-to-file?
    Mr. Levin. Let me take the 18 months first. I think we know 
that the sky won't fall if we impose an 18-month requirement 
because we've already imposed it on anyone who wants to take a 
patent in another national jurisdiction. So all this bill would 
do and what our committee recommends is extend that to people 
who, by current law, can exempt themselves from that 
requirement by promising only to file in the United States. 
There's no logic behind that. And we know that it's workable to 
have publication at 18 months and for the very reasons you 
say--it gets the information out into the public domain and 
allows challenges for prior art and also informs the people 
working in related areas of technology as to what patent claims 
are ahead of it in the queue. So it's a good thing to change 
the 18-month requirement. It's not a full substitute for 
switching to a first-to-file regime.
    Mr. Berman. No.
    Mr. Levin. The advantages of a first-to-file regime, in 
addition to just the principle of harmonization, are the fact 
that you avoid all the costly determination when there are 
disputes about who was first. In one case, it's purely 
objective who got to the Office first; in the other, first-to-
invent, what was in the mind of the inventor at what time--it 
takes a lot of discovery and a lot of sorting through the 
evidence. And here's the crux of it. There have been careful 
statistical studies of this phenomenon. And what we find is 
small inventors are not disadvantaged by the first-to-file. 
That is to say, in the case of disputes that are--where there 
are priority disputes, the first to file, according to Gerry 
Mossinghoff's work, wins something like 93 or 97 percent of the 
time. The exact number is in my testimony. And in fact, if 
anything, the conclusions of Former Commissioner Mossinghoff 
and of Mark Lemley, a lawyer at the University of California, 
Berkeley, are that the evidence suggests that the current 
situation actually slightly disadvantages small inventors who 
don't have the capacity or resources to fight out the arguments 
about, you know, who was first in the expensive way that it has 
to be fought out today.
    So first-to-file, in our view, would not favor the big 
guys. It would just be a simpler, more efficient way to resolve 
disputes about priority.
    Mr. Berman. I agree.
    Mr. Smith. Thank you, Mr. Berman. The gentleman from 
Virginia, Mr. Goodlatte, is recognized for his questions.
    Mr. Goodlatte. Well, thank you, Mr. Chairman, and thank you 
for these continuing hearings on this legislation, which I 
think everybody here on the Committee that is here today is 
very, very interested in and we applaud you for your leadership 
on it. And I want to welcome all these panel members, 
particularly Secretary Dudas.
    Mr. Secretary, I wonder if you could comment on whether or 
not a post-grant opposition proceeding would help ensure the 
quality of patents.
    Mr. Dudas. I think a post-grant opposition proceeding would 
go a great length to ensure quality of patent applications. 
What you hear today is people find that reexamination is too 
limited. It is too limited. Litigation is considered too 
costly, too lengthy, too uncertain. Post-grant opposition 
allows you to go before the Office. You have the expertise 
there. It's something that's been in our Strategic Plan for 
almost 3 years now and has been widely accepted in the studies 
that have been done and the private-sector industry groups as 
well. I think post-grant opposition is probably the most 
important element for increasing quality for the system as a 
whole.
    Mr. Goodlatte. Mr. Myhrvold mentions in his testimony the 
problems that patent backlogs cost for inventors. I am 
wondering if, again, you would comment on this. How would this 
post-grant opposition proposal impact patent pendency? How 
could Congress help minimize the effect that proceeding might 
have on patent pendency, if you are going to tell me that it 
could slow it down?
    Mr. Dudas. It wouldn't naturally slow it down. It could 
possibly slow down production because of the resources we put 
into that. The most important thing at that point, as we've 
said in our Strategic Plan all along, is for any new 
initiatives that we have in place, we will need to be able to 
have appropriate funding to go along with that. But there's not 
a natural policy reason why it would slow down pendency within 
the Office.
    Mr. Goodlatte. So you wouldn't predict that simply 
implementing that policy would have a resultant drag on the 
productivity of your Agency?
    Mr. Dudas. Not if it came with resources to fund it, that's 
correct.
    Mr. Levin. May I add an observation?
    Mr. Goodlatte. Sure.
    Mr. Levin. It might actually speed up pendency, because by 
clarifying standards in emerging areas of technology might make 
the examination process more efficient for patents behind in 
the queue.
    Mr. Goodlatte. Very good.
    Dr. Myhrvold, you mentioned some criticisms of the bill in 
your testimony. How would the Committee Print help small 
businesses?
    Mr. Myhrvold. Well, it--you know, there's a variety of 
things in the Committee Print that I think are helpful to any 
patent holder. I'm hard-pressed to think of any that help small 
business particularly, but that's okay.
    Mr. Goodlatte. No, if they are helped along with everybody 
else, that is fine, but how--which ideas in this Committee 
Print would you identify as helpful to small business?
    Mr. Myhrvold. It's a little easier for me to identify the 
ones that would be hurtful, sir.
    Mr. Goodlatte. I know. That is why I want you to tell us 
what would be helpful.
    Mr. Myhrvold. Well, you know, I've seen the studies that my 
colleague here referred to about first to file and so forth. It 
generates lots of heat and passion in people, but I think is 
actually probably better for folks to have it the way the 
Committee Print does. I think this inequitable conduct thing 
definitely needs to be reformed, and that's helpful to 
everyone. Best mode is another thing, where--all of these 
subjective areas, as this NRC committee found, only make it 
harmful for everybody. So I think all of those are potentially 
very, very good for every patent holder. I don't know of 
anything in the bill that specifically something that 
advantages small patent holders over anyone else. But patent 
quality does help everyone.
    Mr. Goodlatte. Anybody else want to address that?
    [No response.]
    Mr. Goodlatte. Okay, I have another one for you, Dr. 
Myhrvold. How would the proposals in the Committee Print, or 
would the proposals in the Committee Print increase or decrease 
abuses in patent litigation?
    Mr. Myhrvold. Well, I think the overall volume of 
litigation would go up if this injunction feature were 
implemented. And I'll explain briefly why. The first, as I 
previously said, 97 percent of the cases settle. They settle 
because the parties have a motive to settle. If in fact there's 
no injunction at the end, then at least for that fraction of 
cases where it seems unlikely, a large corporate litigant has 
every interest in the world to keep the litigation going. So if 
97 percent goes to 94 percent, that doubles the number of 
suits. So it doesn't have to happen very often to have a big 
impact.
    In addition, there's two big additional responsibilities 
heaped on the court here. The first is the determination of is 
it irreparable harm, is it not; who's commercializing, who 
isn't commercializing? The bill says, you know, ``shall duly 
consider all evidence.'' Well, that means motions and discovery 
and testimony, and it's a lawsuit tacked onto a lawsuit.
    The third area is actually the most concern to me because, 
if there is no injunction, that means the court must determine 
the license terms and business model for all future use. Today 
the court doesn't do that. That's another that's going to have 
an enormous amount of testimony, litigation, and expert 
witnesses associated with it.
    Mr. Goodlatte. Anybody else want to address that point? Mr. 
Bartholomew?
    Mr. Smith. The gentleman is recognized for an additional 
minute.
    Mr. Goodlatte. I thank the Chairman.
    Mr. Bartholomew. The injunctive requirement as it was 
proposed in the Committee Print does not abolish the right to 
injunctive relief. And as we interpret it, it primarily applies 
to a permanent injunction rather than a preliminary injunction. 
First of all, the injunctive relief is definitely available 
where working occurs, that is, where the patentee makes use of 
his invention. And we would favor extending that to allowing 
the patentee, such as a small entity, to be able to--or any 
entity, for that matter, to be able to work the invention 
through licensing to others that may have manufacturing 
capacity or other expertise that the small entity does not 
have.
    Further, in looking at the language of the Committee Print, 
it looks like that a totality of the circumstances test may 
apply to considering the working requirement. That is, the 
working requirement might be one factor in the overall 
determination on whether to grant or deny injunctive relief, 
but that other factors that relate to determining whether there 
is harm would also apply.
    Thank you.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Goodlatte.
    The gentlewoman from California, Ms. Lofgren, is recognized 
for her questions.
    Ms. Lofgren. Thank you, Mr. Chairman. And thanks to all the 
panelists for your thoughtful testimony and also the more 
expansive written testimony.
    This is, for me, a great process because we are hearing a 
series of knowledgeable people. And I think the Chairman has 
made clear, we have a working draft. It doesn't have anyone's 
name on it yet because we want to invite suggestions and end up 
with the best product that really supports innovation and is 
fair. So that is the spirit that I am going into this inquiry, 
and your comments help a great deal.
    Dr. Levin, your comment regarding the reasonable belief 
issue, all of a sudden I realized I think you are right on 
that. That is just going to invite a lot more litigation. I 
personally think that is a very helpful observation.
    Dr. Myhrvold, your comments and testimony, because it is 
somewhat at odds with the rest of the panelists, does draw 
attention. In your written testimony, on page 11, you talk and 
draw our attention to what you describe as a gaping loophole 
for software on 271(f). Can you expound on what your concern is 
there?
    Mr. Myhrvold. Okay. Section 271(f) of the law covers what--
basically; I'm going to simplify it because both I'm not a 
lawyer and we want to treat this at a high level. It covers 
infringement on exports. If you have a patent, you're owed a 
royalty, it's considered an infringement, you're owed a royalty 
on both sales in the U.S. and exports. 271(f) covers what 
happens--a definition of this export thing, broadly. And the 
Committee Print introduces a very short amendment. It says a 
component, under this term, shall be a tangible item, and it 
shall be combined with other components. Now, what that means 
is that any intangible thing is now not considered an 
infringement for export under 271(f). Practically speaking, 
what this means is all export of all software products would 
not be covered.
    So that means if you're a valid patent holder, you have a 
royalty agreement with a software company, you wouldn't get 
paid for all their exports, which for most software companies 
in the United States is more than half their income. Not just 
software. Actually, because it says ``tangible item,'' anything 
involving Internet protocols or any other sort of tangible 
purely electronic commerce, or an invention that has as a piece 
of it--you know, an airplane navigation system, including the 
airplane, but if the software was downloaded across the 
Internet, then it wouldn't apply.
    And so my issue here is we can't define the only valuable 
items as tangible.
    Ms. Lofgren. President Levin or other panelists, do you 
concur or do you disagree with that?
    Mr. Levin. I really hadn't focused on this provision and it 
wasn't something we covered in our report, so I would leave it 
to others to determine.
    Mr. Dudas. This is something that we were looking at. I 
can't give you a firm position. I can tell you it's also 
something that's being reviewed in the courts and that's one of 
the things we're looking at.
    Ms. Lofgren. I wonder if it would be fair to ask each of 
you to take a look at it and share whatever thoughts you might 
have subsequent to this hearing. I don't know what I think 
about it. I just was interested by the testimony and wanted to 
pursue it.
    On the whole issue of the permanent injunctions, Dr. 
Myhrvold, obviously you are talking about the small inventor, 
but a lot of the disputes aren't between the small guy and the 
big guy, they are between the big guy and the big guy. And some 
of what, in terms of--there is no way to really do a survey of 
what is happening in the 97 percent of litigation that has been 
settled, because it has been settled and oftentimes it is a 
confidential settlement. So it is very difficult. Ultimately, 
we are relying on anecdotes, which is not a good practice, but 
it is the only thing we can do because it is all we have.
    So just as a matter of law and principle, how do you--if 
you were designing this, how would you allow a court to 
establish the equities where you have, for example, a product 
that has perhaps a multiplicity of patented materials owned by 
or licensed by a variety of individuals and corporations, 
challenged by someone who has a small component, who has the 
ability, really, to extort a huge amount of money for what is 
really a small part, versus all the other owners of 
intellectual property there. I mean, I am not saying there 
shouldn't be a remedy, but if--how would you--what tools would 
you give a court to draw--if you were God? [Laughter.]
    Mr. Smith. Without objection, the gentlewoman is recognized 
for an additional minute. Perhaps more.
    Mr. Myhrvold. So I can be God, but only for an additional 
minute.
    Ms. Lofgren. Only for 60 seconds. So don't waste it.
    Mr. Myhrvold. You know, it's a great question. I'm going to 
have to get back to you in detail. I think, you know, to--I 
think actually statistical studies could be done, particularly 
because really what's important here aren't the cases that 
settle, it's the cases that actually go and injunctions are 
filed--how often does this actually occur. I think that data 
could be forthcoming. I don't personally have it.
    It's a difficult issue. Today courts do have discretion and 
courts will often exercise it. And so the whole question here 
is do we know that the judiciary is abusing or not properly on 
those things or not.
    Ms. Lofgren. Well, it is not a matter of abuse but it is 
how you set the standard both in statute but also in the law as 
applied and interpreted by the judicial branch.
    Mr. Myhrvold. You know, for example, I'd be really 
interested to find out how often does this case occur. You're 
absolutely right. A lot of patent disputes are one big company 
suing another big company and all their suppliers. So maybe 
this is a much smaller case, or much larger case, than we're 
talking about.
    Ms. Lofgren. Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Ms. Lofgren.
    The gentleman from Virginia, Mr. Boucher, is recognized for 
his questions.
    Mr. Boucher. Well, thank you very much, Mr. Chairman, and I 
want to commend you at the outset for calling the Committee's 
attention to a very clear need, and that is to improve patent 
quality through the passage of legislation. And I want to 
commend you for putting before the Committee a very 
constructive draft of a new law, which contains many features 
that I find to be attractive. And I am glad to hear our 
panelists today point to some of those very constructive 
features.
    Mr. Berman and I have been for the last 4 years having 
discussions about approaches that we could take in order to 
improve patent quality. Four years ago, we drafted a bill, 
introduced it. It contains a number of the concepts that are 
now reflected in the bill introduced by Chairman Smith, or the 
bill circulated by Chairman Smith. There are a number of things 
that we looked at at that time that, however, are not reflected 
in this draft. Let me just point to one of those in particular 
and get your opinion about whether we are right about this, 
whether Mr. Berman and I were right in proposing this.
    The overall goal here is to improve patent quality. That 
inevitably means we need to bring more pertinent information to 
the attention of the patent examiner and to the post-grant 
proceeding, to the Patent Office generally, so that mistakes 
can be corrected before the patent leaves the Office. One of 
the things that I think would really help to improve the 
quality of the initial patent exam would be a clear 
opportunity, with well-defined parameters, for third parties to 
make submissions of prior art that they happen to have within 
their possession. And Mr. Berman and I had recommended that.
    Now, that clear procedure is not contained within the draft 
we are currently considering. So the first question I have is 
what is your opinion of having a clearly defined procedure that 
would encourage submissions of prior art by third parties? And 
if you have suggestions for the parameters of such a process, 
please share that with us also. Mr. Dudas?
    Mr. Dudas. Thank you. We do allow now at the Patent and 
Trademark Office up to 2 months after publication the 
submission of prior art, but with no relevancy statement. The 
distinction made is you can submit prior art, that's accepted. 
If you comment on the prior art, that's sent back or destroyed. 
There is a statutory prohibition currently in place that says 
we cannot have a pre-grant opposition procedure, so the 
question is, in order to avoid harassment or delay of the 
patent application, how do we get relevant art from the outside 
along those lines?
    We are open to the suggestion of how we can improve that. 
We certainly believe that there should be a uniformity of any 
type of submission that there is there. We are currently 
looking at 2 months after 18 months--I'm sorry, it's published 
at 18 months, then there's 2 months to submit prior art--moving 
that time frame to bring in prior art. And then the question of 
what's the right balance of whether or not there can be any 
comment on that at all. That becomes more problematic, and 
we've traditionally opposed pre-grant both in the U.S. and 
elsewhere, where it looks like it can be--harass the applicant.
    But a way of getting more prior art is something that we 
have now that we'd like to expand, and we also do it in more 
general ways through partnerships with the private sector.
    Mr. Boucher. Well, I very much welcome your willingness to 
have a conversation about ways we might amplify that process to 
some extent.
    Other comments on the submission of prior art? President 
Levin.
    Mr. Levin. It seems to me a bit of a confession of failure 
if you don't allow the submission of prior art until 
publication and don't require publication until 18 months, and 
then are thinking about what would happen after that 2-month 
window. It's like saying there's no hope for ever getting 
pendency below 2 years. That's not the way the system should be 
working. That shouldn't be our aspiration. Wouldn't it be a lot 
better to speed up pendency, to actually beat the publication 
deadline and actually have the publication of the patent come 
when the patent issues, after 9 months or 6 months, and then 
let people intervene with their prior art in an opposition 
procedure?
    So why think in a mindset that assumes there's a 3-year 
pendency? That's not the best system.
    Mr. Boucher. But you do favor a clear provision that allows 
for the submission of prior art, perhaps amplifying the 
administrative process currently in practice at the Patent 
Office?
    Mr. Levin. Well, I think it's more important to speed up 
pendency and introduce a post-grant review system, where of 
course----
    Mr. Boucher. Well, we can do both, though. I mean, it is 
not a mutually exclusive arrangement.
    Dr. Myhrvold, do you want to comment?
    Mr. Myhrvold. Well, I very much support both what 
Commissioner Dudas and Dr. Levin said. I would love to have 
six- or 9-month pendencies. That would be fantastic for 
inventors. Maybe a little bit too much to hope for in the near 
term. I think that the current administrative----
    Mr. Smith. Without objection, the gentleman is recognized 
for an additional 2 minutes.
    Mr. Boucher. Thank you.
    Mr. Myhrvold. You know, I think that the existing 
procedures that the Patent Office has are good. By the way, I 
support publication of all applications. I think transparency 
in the process is very good, and this plays to that. And then, 
as Director Dudas said, it's a matter of balancing, you know, 
what the relevant time frames are. Obviously, if you have a 2-
year time to submit prior art, that pushes pendency back out 
again.
    Mr. Boucher. Okay. I understand your point. Thank you.
    Let me tell you what my practical concern is about the 
automatic injunctions that follow today the finding of patent 
infringement, and that is that it simply enhances dramatically 
the leverage of the patent holder in order to negotiate what 
may be an extraordinarily favorable settlement from his 
perspective. Let me give you an example. Research In Motion, 
the maker of BlackBerries, which we all carry now, originally 
was confronted with a patent claim for $50 million. Once a 
finding of infringement was entered, settlements commenced, and 
the settlement turned out to be $450 million. And the incentive 
that Research In Motion had to pay that king's ransom, that 
shakedown, as Chairman Smith so well described the general 
circumstance, is that automatic injunction would have 
terminated the company's business. They would have had to stop 
selling BlackBerries in the United States.
    And I just think that leverage is unjustified. I think it 
is too much. Now, the patent holder is going to get his damages 
no matter what. There is going to be a trial or a settlement on 
the question of damages. But why give the patent holder that 
extraordinary amount of leverage and a shakedown opportunity?
    Comments? President Levin.
    Mr. Levin. I think that there's a certain logic in that and 
perhaps--it's not something I've given a lot of thought to 
previously, but some more balanced phrasing, rather than going 
from presumptively there'll be an injunction to presumptively 
there won't be, finding some kind of balancing test as a way of 
changing the law would be a solution.
    Mr. Boucher. But you agree the current structure is a 
little bit unbalanced in having that automatic----
    Mr. Levin. I agree with the factual assertion you made, 
that it does give a lot of leverage to the patent holder.
    Mr. Boucher. You are a careful witness, President Levin.
    Mr. Dudas, do you want to comment?
    Mr. Dudas. I'd be happy to comment. I think it goes back a 
bit to what Congressman Berman had said earlier on the question 
of how are you viewing this. One of the challenges as 
intellectual property policymakers is convincing others that 
intellectual property is property. And the question is, ``Is 
this property?'' If you take a real property example, which we 
often do when we're in other countries, the person who has the 
beachfront property, who holds out when the shopping center 
wants to come in. Do we say the shopping center's got a great 
shopping center plan, we really think that they're going to go 
ahead and build and they'll pay you money damages? I think it's 
a question of, if that patent is intellectual property, is this 
really reducing property rights; and a question of whether 
we're shifting market decisions to judges, is I think what some 
have said.
    Mr. Boucher. I hear what you are saying. It is a kind of 
theoretical response to a practical problem, and I find it less 
than compelling. But I appreciate what you said anyway.
    Mr. Dudas, with the Chairman's indulgence, I want to ask 
you one question on a subject that has not been raised today. 
Mr. Berman and I several years ago were quite concerned about 
the award of business method patents and the fact that we saw 
that as something of a runaway train. And there were some 
notable examples that I think most people, most observers 
really thought were inappropriate for patent awards. I mean, 
what comes to mind is DoubleClick's patent on the reverse 
auction. That wasn't exactly new. Reverse auctions have been 
known since about 5,000 years ago. I mean, it was not exactly 
novel. What was novel was that DoubleClick carried this out on 
the Internet for the first time.
    So we inserted a provision which, frankly, I still find 
appealing, that says that if you are carrying out through a 
computer implementation something that is well-known in the 
physical world and is a commonly known practice, it is not 
novel, it is obvious, it is not patentable.
    What do you think about that? Is that something we should 
do? It is not something that is in the draft we are now 
considering, but we think it is still an important principle.
    Mr. Dudas. I think it is something that we are considering 
and should consider. I think the biggest problem that we have 
with business methods patents or with new technologies is that 
it's new and that it's something that the Office will deal 
with. I'm one that hesitates to compare rejection rates with a 
signal of quality, but when you have new technology, you often 
have that come in. Business methods patents allowance rate is 
now 16 percent. I think in that area in particular, finding the 
new technology, finding the new art has largely addressed it. I 
think this is something that we should be considering.
    Mr. Boucher. Well, this comes right to the point, though. 
Simply----
    Mr. Smith. Mr. Boucher, would you like another minute or 
would you like to submit written questions to Director Dudas?
    Mr. Boucher. Well, Mr. Chairman, may I ask unanimous 
consent for one additional minute?
    Mr. Smith. Without objection, the gentleman is recognized 
for another minute.
    Mr. Boucher. Thank you, Mr. Chairman.
    Simply improving the quality of the information that comes 
to the patent examiner doesn't solve a problem when the 
standard, no matter what the quality of the information, 
permits the award of the patent. So very simply, do you have a 
standard now at the Patent Office that says that something 
carried out for the first time by computer implementation--in 
common parlance, carried out on the Internet--is not patentable 
if this is a known practice in the physical world?
    Mr. Dudas. I don't believe we have a standard that goes 
along those lines. I think----
    Mr. Boucher. And so my question is shouldn't we have one. 
Just that simple.
    Mr. Dudas. And I--the answer--it's a simple question, I 
think the answer is probably more complex. If you carry 
something out in the private world and you manage to do it 
through software, software patents are----
    Mr. Smith. I see I still have about 30 seconds for Mr. 
Myhrvold. [Laughter.]
    Mr. Myhrvold. The devil's in the details here. If you had a 
car that could drive itself, that's something that we can do in 
the real physical world, no software can do today. The day they 
do that, that's a breakthrough.
    Mr. Smith. Thank you, Mr. Boucher.
    The gentleman from California, Mr. Schiff, is recognized 
for his questions.
    Mr. Schiff. Thank you, Mr. Chairman.
    President Levin, I wanted to follow up on one of the 
questions that my colleague Howard Berman asked you earlier, 
and preface it by saying that, you know, I am very proud as a 
Californian that the UC has led in patents for several years 
now. And Cal Tech, located in my district, is a proud Number 
Two. There has been some concern raised, I think, at the UC 
about the change, or proposed change, in going to the first-to-
file from a first-to-invent and what impact that would have on 
universities that maybe don't have such a well-developed effort 
to race to the Patent Office, and have a different practice, by 
and large.
    What impact do you think such a change would have on the 
universities? Is that a concern to you, given your background? 
How do you think it would change the behavior of universities? 
Should there be some kind of a carve-out for universities and 
their publications? What do you think the impact would be?
    Mr. Levin. I would firmly oppose a carve-out for 
universities on these grounds. I think the impact would be of 
changing to first-to-file, is that we'd get a little more 
efficient in our own internal processing of patents. I mean, 
it's hardly an excuse that universities operate more slowly 
than the private sector. We shouldn't rely on that. And I know 
there are some colleagues within the university community who 
are advancing the view that you suggest, but I think for the 
most part they are the people who run our technology transfer 
offices. And we had a recent meeting of the presidents of the 
Association of American Universities, on the Committee on 
Intellectual Property, that was unanimous in supporting the NRC 
recommendations, including first-to-file. I think it's--you 
know, if we're inefficient at processing patents, we shouldn't 
be rewarded by the law. We ought to get better.
    Mr. Schiff. Well, isn't that inefficiency due somewhat to 
the different nature of a university from a private firm that 
is in the business of----
    Mr. Levin. We already have what is a very, I think, 
appropriate but also generous provision of the law which allows 
universities to file patents for inventions that were financed 
by Federal grants. That's worked extremely well. The reason 
that the University of California has done so well is because 
of the passage of the Bayh-Dole Act, and it's had, I think, 
massive salutary effects on our economy to get technology out 
into the public domain. There's no reason--I mean, 
organizations like the University of California or Yale or MIT 
are well enough organized today that we ought to be able to 
turn patents around just as fast as private sector. I don't see 
any reason for a special exception.
    Mr. Schiff. Anybody on that narrow issue have any different 
view?
    Mr. Chairman, thank you. I yield back the balance of my 
time.
    Mr. Smith. Thank you, Mr. Schiff. Why don't you yield the 
balance of your time to Mr. Berman, who has another question?
    Mr. Schiff. Yes, I would be happy to yield my time.
    Mr. Berman. I am just wondering if the president of Yale, 
who has spoken against carve-outs, what they think of the 
University of California's desire to carve out immunity from 
liability in copyright and patent cases. One test of your 
cautiousness that Mr. Boucher observed. [Laughter.]
    Mr. Levin. I'm not an expert on the doctrine of sovereign 
immunity, but I think that it's an unfortunate consequence of 
that doctrine that some universities are claiming exemption 
from infringement, whereas private universities are liable for 
infringement.
    Mr. Berman. And those same universities want to enforce 
their patent rights----
    Mr. Levin. That's right. Yeah.
    Mr. Berman. --against others.
    Mr. Levin. Yeah. I----
    Mr. Berman. That makes it particularly strange, doesn't it?
    Mr. Levin. We're prepared to play by the fair rules of the 
game. We can enforce our patents and copyrights, other people 
can enforce them against us. I think that's best for the 
American economy. If there's a way to make that true for all 
universities that doesn't violate important constitutional 
principles, I would be in favor of it.
    Mr. Berman. Now we'll need a hearing on that subject.
    Mr. Smith. Thank you, Mr. Berman.
    The other gentleman from California, Mr. Issa, is 
recognized for his questions.
    Mr. Issa. It is interesting that my years of watching Star 
Trek have come in handy. As you were explaining the problem, I 
immediate thought of the problem of firing while cloaked. 
Didn't everyone want to have that ability to fire without being 
fired back. And obviously, in that fiction it wasn't possible, 
but in this reality it is possible.
    As I ask my questions, I want you to understand that I am 
not an attorney, I am not a patent attorney; I am a bit of a 
bonehead engineer. But I always talk like I have experience, 
because I do have 37 patents and plenty of time paying a lot of 
lawyers, an awful lot of lawyers, and even a few judges, it 
seems---- [Laughter.]
    I knew that would get that reaction.
    Mr. Smith. You may want to rephrase that. Refer to the 
Ethics Committee.
    Mr. Issa. I cannot tell you how much I have spent over the 
years with judges that were doing their first Markman ruling. 
And I actually gave the money to the lawyer, but I knew that I 
was paying for a judge to learn. If that clarifies it--yes, 
that is what I meant, Mr. Chairman.
    As somebody who has a lot of patents, and my company has 
even more, I am concerned about a lot of things related to this 
bill. First of all, I am an advocate of eliminating the ability 
of people to swear behind, infinitely, their invention and 
reduction to practice, because I have seen that abused. There 
is no question, though, that a strict first-to-file is an 
extreme move in the other way. And I would hope that as this 
goes on--and I would like your comments on it--that there is 
middle ground, that there is the ability to recognize that if 
you run to the Patent Office with a half-baked, half-cocked 
idea--which, by the way, those who can write those up the 
quickest win--versus those who want to not only reduce to 
practice, but they also want to reduce to a form, a patent 
application, need to have some reasonable middle-ground time.
    That would be my first question, is what about that middle 
ground?
    Mr. Levin. I think it's unnecessary. And the reason I would 
cite that it's unnecessary is we've got thousands of American 
corporations today that file for patents in Europe, in specific 
jurisdictions in Europe as well as the EPO, and in Japan and 
elsewhere around the globe who are filing on a first-to-file 
basis and nobody's complaining about it. I don't see a problem.
    Mr. Berman. Would the gentleman yield just on this point?
    Mr. Issa. Certainly.
    Mr. Berman. It isn't first to file----
    Mr. Levin. It's first inventor to file.
    Mr. Berman. First inventor to file. But your argument in 
favor of the change was you won't have to have litigation about 
who invented, but going to first inventor to file still leaves 
that issue open to litigation.
    Mr. Levin. It does. But it doesn't--it removes a big piece 
of it because a big piece of it is who was first to invent. Now 
all you have to do is establish that you are an inventor.
    Mr. Issa. Reclaiming my time, I think the one thing that we 
have to recognize is yes, those American corporations do it. I 
was one of those American corporations. I have a number of 
patents abroad. But of course I always worried about my home 
market, and my home market gave me the ability to reduce it, to 
have it ready, and then I always filed in the U.S. first--what 
a surprise. And then, oh, by the way, you file during your 
quiet period or during your secret period, if you will, and 
within that 1 year. So I am not sure that under the current 
law, with two standards, that you can use no objections 
overseas as the panacea.
    As to the question of elimination--and this particularly 
goes to Mr. Dudas--the current law allows you do file and, even 
if you are filing against a competitor and both of you are 
selling in the market, get all the way to the end and not know 
what dollars you are going to receive, whether you are going to 
be Panduit or what standard of is the infringement going to be 
analyzed as market share, is the infringement going to be 
analyzed as if you were exclusive and there were no non-
infringing. All those issues are post-getting a decision, and 
then you go into that whole other phase. As a result, if you 
eliminate the ability to get treble damages, what you have done 
is taken--and you put two levels of uncertainty into the 
argument. You have put the level of uncertainty of even whether 
you are going to get legal fees, and you have put the 
uncertainty as to where you can get to the end of the day and 
end up getting that famous 2 cents because they look and say, 
well, there were so many other noncompeting uses that we are 
not going to give you any of these tests that give you a 
reasonable loss of profits.
    If you do away with one, aren't you in fact going to have 
to fix--and that is my question--fix the other so that there 
would at least be better certainty as to your award if you 
prevail, if you are going to take away the high end of treble? 
And I just as for leave for them to answer.
    Mr. Smith. Oh, okay. And without objection, the gentleman 
has another 2 minutes as well.
    Mr. Dudas. Can you premise your question again? I'm sorry, 
I lost you at the very beginning.
    Mr. Issa. Right now you start off and you file a lawsuit 
against a competitor--you are in the market, he is in the 
market, you believe that there is no non-infringing use, you 
know of none--but you go through the entire multi-year process. 
And even if he develops one during the period, he can diminish 
your claim to where you start off saying I am entitled to lost 
profits, he is doing $100 million worth of these, and that is 
$100 million times my profit, that is 33 EBITDA, I am entitled 
to this.
    So you start off with this, hey, look, he is infringing $33 
million a year of damages. You get to the end, and somebody 
might give you a reasonable royalty, based on some judge or 
jury--well, judge, basically, most of the time. He is going to 
give you a reasonable royalty of 2 cents, based on your 
invention and not lost profits, because during the time 
somebody developed a non-infringing, or they believe there is a 
non-infringing use. So you have a skew. You have from 2 cents a 
unit that ends up being one-tenth of your legal fees, to $33 
million a year. That is very often, at least in my experience, 
the window you are dealing with.
    When you say treble damages, at least the judge looks and 
says hell, this isn't enough of an award no matter how--and he 
says but it was willful, and he has the ability to triple it 
and provide you reimbursement for your legal fees.
    It sounds like this legislation anticipates, and some of 
you are saying, let's take that away. And my question is, 
assume for a moment we are taking it away. Don't you have to 
give back something, or what you end up with is all of the 
downside, none of the upside. And patent infringement is about 
protecting real property. And so I would like your comments on 
that.
    Mr. Dudas. I'm sorry. I agree that--and actually I'll take 
it back one step. I think that there is a reason for willful 
damages. I think there's a reason for treble damages. I think 
the issue that has come up is the question of how it's being 
applied and what it's doing. Our patent system is about 
disclosure. If it's being applied in such a way that it's 
causing people not to get more information, not to become more 
informed, that that becomes a problem. So I would argue that 
although we should look at how it's being applied, that there 
is a basis for treble damages and willful infringement, and if 
that is gone, there should be something to be looked at along 
those lines. But I think that it shouldn't be gone.
    Mr. Issa. Mr. Levin, you wanted to answer?
    Mr. Levin. Well, this is more--you know, right now the area 
of damages is left pretty much at the discretion of the courts. 
And there are a variety of standards for awarding damages. And, 
you know, it's perfectly possible to make, you know, strong and 
credible cases that lost profits ought to be the basis for--and 
in many cases they are the basis for an award. Are you really 
objecting to the uncertainty, as opposed to the amounts?
    Mr. Issa. I'll be very brief. If you don't know whether you 
are going to get lost profits, and reasonable royalties can be 
very small, you have--without treble damages you lose the 
ability for a judge to say, look, this was willful infringement 
and unless I can give him his legal fees and triple this 2 
cents reasonable royalty, I can't bring any justice to this 
arrangement because we have gone on for 2 years and $2 million 
apiece, the guy has built his market on cheating on this guy, 
and I am going to provide an injunctive relief today, but 
unfortunately I am stuck with a standard of the industry 
royalty which I don't intend on giving you, but--and 
essentially you are getting a royalty charge as though I wanted 
to give you one, in many cases, at the end of a court trial.
    Mr. Levin. Yeah, but I've seen many cases in which the 
argument for reasonable royalties is rejected in favor of lost 
profits.
    Mr. Issa. No, no, we are saying that if you don't bring the 
certainty in, then the fact is, by eliminating the 3-times, the 
judge has no ability to even balance what would seem to him to 
be an unreasonable reward, but one in which he cannot use lost 
profits. Remember, the lost profits are only good if there is a 
non-infringing alternative--if there isn't a non-infringing 
alternative. Once there is a non-infringing alternative, you 
are dropping down this list and the dollars drop way off. And 
like every other thing we have talked about here, there is 
always a claim and there is always an expert who says there is 
a non-infringing alternative. And no matter how crummy it is, 
they have to consider it as though the expert is telling the 
truth.
    Mr. Levin. I see your point.
    Mr. Smith. Thank you, Mr. Issa.
    Let me thank the witnesses for their testimony today. It 
has been most helpful, most informative. As you all know, we 
hope toward the end of May to have a piece of legislation that 
will be more final in its nature, and your testimony today has 
helped us move the ball along and get closer to that goal.
    I would also like to thank everyone in the audience for 
their interest in the subject at hand. Really, this is the 
first effort, I think, at comprehensive patent reform in a 
number of years, as you heard several Members mention today. 
And we appreciate your participation and interest and listening 
as well.
    With that, we stand adjourned.
    [Whereupon, at 1:43 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard L. Berman, a Representative 
     in Congress from the State of California, and Ranking Member, 
    Subcommittee on Courts, the Internet, and Intellectual Property
    Mr. Chairman,
    Thank you for scheduling this hearing on patent reform. In the past 
4 years, my colleague from Virginia and I have introduced legislation 
on patent quality reforms multiple times. Most recently, in October, we 
introduced HR 5299, The Patent Quality Assistance Act, which attempted 
to address many of the problems that continue to exist in our patent 
system. The bill helped foster discussions among diverse industry 
groups, all of which now recognize the need for changes to the patent 
law. While there are many different views about how to amend the law, 
we all share a common goal--improving the quality of the patent system.
    Our patent system was designed to promote continual innovation by 
providing strong protection for intellectual property. However, if we 
protect invalid patents, the system will have the opposite effect, that 
of hindering creative output. Furthermore, the introduction of poor 
quality patents into the marketplace actually increases the amount of 
litigation and has a negative effect on the economy.
    The problem of low quality patents cuts across the entire spectrum 
of art units that the Patent Office examines, but the chief culprits 
are patents in the business methods and software area. The famed one 
click patent and the patent for a method allowing automobile purchasers 
to select options for cars over the internet, represent only a drop in 
a very large bucket of questionable quality patents.
    The Patent Office has initiated what it calls a ``second set of 
eyes review'' in an effort to address the problem, but that is merely a 
stop gap measure. Without an assurance of sufficient funding every 
year, the PTO cannot maintain the staff it needs to administer the 
reviews or implement new quality initiatives. Therefore, funding for 
the PTO and an end to diversion of collected fees need to remain top 
priorities in any reform effort.
    Furthermore, any legislative solution to the problem of patent 
quality must address deficiencies both at the front end of the process, 
the examination stage which takes place in the PTO, and at the back 
end, which takes place in the courtroom. Inventors should have 
confidence about the quality of the patents they receive before 
investing further in research and development, and equally secure in 
the knowledge that they can properly enforce that patent.
    In this vein, I have a couple of concerns relating to the committee 
print. The print primarily describes reforms to litigation and remedy 
provisions. While many of the suggestions are worthwhile, I am 
concerned that we are merely treating the symptoms without enough 
emphasis on curing the underlying disease. Patent quality needs to 
remain a focus with an objective of minimizing litigation on numerous 
invalidity claims. For example, including a provision on allowing 
submissions of additional prior art to an examiner may be helpful in 
addressing this poor quality problem.
    Furthermore, much of the print speaks to harmonization of U.S. 
patent law with patent law in the rest of the world, for example, 
shifting from a first to invent paradigm to one of first inventor to 
file. While this is a very important and necessary discussion, I am 
concerned that opposition to these provisions at this point will affect 
the ability to achieve other essential patent reform.
    I am looking forward to hearing from today's witnesses to identify 
potential solutions to the problems created by questionable patent 
quality. Some of the suggestions for change, such as the injunction 
provision, may not be palatable to some of the witnesses. However, I 
throw out a challenge to those witnesses, help us craft a resolution to 
the problem the injunction provision was designed to address, that of 
the patent troll. While the structure of the discussion may be centered 
around the committee print, I hope that the witnesses here and at 
future hearings will identify additional possibilities for resolving 
patent quality problems. I look forward to working with the Chairman in 
drafting effective patent legislation.
Letter to the Honorable Lamar Smith, a Representative in Congress from 
the State of Texas, and Chairman, Subcommittee on Courts, the Internet, 
 and Intellectual Property, from William L. LaFuze, Partner, Vinson & 
Elkins, LLP, and Chair, Section of Intellectual Property Law, American 
Bar Association, on behalf of the American Bar Association and the ABA 

                  Section of Intellectual Property Law



   Response to questions submitted by the Honorable Darrell Issa, a 
Representative in Congress from the State of California, to J. Jeffrey 
Hawley, Legal Division Vice President and Director, Patent Legal Staff, 
   Eastman Kodak Company, on behalf of Intellectual Property Owners 
                           Association (IPO)



   Response to questions submitted by the Honorable Darrell Issa, a 
Representative in Congress from the State of California, to Richard J. 
  Lutton, Jr., Chief Patent Counsel, Apple, on behalf of the Business 
                        Software Alliance (BSA)



   Response to questions submitted by the Honorable Darrell Issa, a 
Representative in Congress from the State of California, to Jeffrey P. 
 Kushan, Esq., Sidley Austin Brown and Wood, LLP, on behalf of Genetech



   Response to questions submitted by the Honorable Darrell Issa, a 
Representative in Congress from the State of California, to William L. 
     LaFuze, Partner, Vinson & Elkins, LLP, and Chair, Section of 
 Intellectual Property Law, American Bar Association, on behalf of the 
 American Bar Association and the ABA Section of Intellectual Property 
                                  Law



Prepared Statement of the Honorable Howard L. Berman, a Representative 
     in Congress from the State of California, and Ranking Member, 
    Subcommittee on Courts, the Internet, and Intellectual Property
    Thank you for scheduling this hearing to continue our discussion on 
patent reform. Last week we heard differing opinions about which 
sections of the patent law should be reformed, and how those reforms 
should be accomplished. Some of the witnesses stressed changes in 
litigation rules for patent cases, while others focused on the need to 
harmonize. U.S. patent laws with foreign patent law. However, all of 
the witnesses seemed to agree that bolstering the level of patent 
quality is integral to a workable patent system.
    The foundation of the patent system is the idea that the Patent and 
Trademark Office grants high quality patents. However, over the past 
few years, a larger number of questionable patents have been issued, 
leading to increased litigation and uncertainty in markets that are 
heavily dependent on patent rights. There are many possible reasons for 
the questionable quality--lack of funding resulting from fee diversion, 
lack of appropriate resources or training materials, an increase in the 
backlog of patent applications, or even exposure to new patentable 
subject matter, such as business method patents. While the PTO has made 
great strides in addressing this problem, more needs to be done to 
restore confidence in the patent system. Congress has an important role 
to play in helping bring about that change.
    The Committee print has provided a useful set of guidelines that 
identify some of the key areas in need of reform. In fact, many of the 
provisions are almost identical to the ones Mr. Boucher and I proposed 
last year. However, an issue we addressed with our third party prior 
art submission provision, and which deserves greater attention in the 
committee print or any future legislation, is how to address quality on 
the front end of the examination process.
    I anticipate a spirited discussion today on the merits of some of 
the proposals in the Committee Print. As I did last week, I submit a 
challenge to those critical of certain provisions--if you have a 
problem with a proposal, help us craft a better solution. Because we 
are planning to introduce a patent bill in the near future, I hope the 
many interested groups can work together to help us formulate some 
answers to the problems facing the patent system today. I continue to 
look forward to working with the Chairman to draft effective patent 
legislation.
 Memorandum to the Honorable Lamar Smith, a Representative in Congress 
  from the State of Texas, and Chairman, Subcommittee on Courts, the 
Internet, and Intellectual Property and the Honorable Howard Berman, a 
 Representative in Congress from the State of California, and Ranking 
Member, Subcommittee on Courts, the Internet, and Intellectual Property 
  from Darin E. Bartholomew, Senior Attorney, Patent Department, John 
                            Deere & Company



Prepared Statement of Jack Haken, Vice President, Intellectual Property 
                 & Standards, U.S. Philips Corporation

    Mr. Chairman and members of the subcommittee, I'm Jack Haken, Vice 
President for Intellectual Property and Standards of U.S. Philips 
Corporation. I appreciate this opportunity to express our views on a 
topic of vital interest to Philips, namely preserving the current 
patent protection against infringing exports that is provided by 
Section 271(f) in Title 35 of the United States Code.\1\ As I will 
explain in my testimony, we are opposed to the amendment proposed in 
Section 10 of the Committee Print.
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    \1\ The proposed text for Section 271(f)(3) is confusing inasmuch 
as it is unclear whether the phrase ``under this section'' is intended 
to only apply to subsection 271(f) or to all of section 271 (e.g. 
Whether the carve-out for intangible components will also change the 
scope of domestic contributory infringement under section 271(c)). For 
purposes of this testimony, we assume that the changes are intended to 
affect only to subsection 271(f). If the proposal is carried-over into 
later drafts, we suggest that the ambiguity be clarified.
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    Philips is a manufacturer of electronic and electrical products and 
is one of the largest users of the patent systems in the United States 
and other industrialized countries. Last year we filed U.S. patent 
applications for about three thousand new inventions. Scientists and 
engineers at our U.S. laboratories have made pioneering advances that 
revolutionized and revitalized the electronics industry with 
innovations that led to high definition television, optical CD and DVD 
recording, digital cellular telephones, medical imaging and digital 
rights management. In 2004 Philips reported income from licensing our 
patented inventions that was well in excess of five hundred million 
dollars.
    Section 271(f) is particularly important to our industry because it 
allows us to protect our intellectual property rights when American 
based companies export specialized components and parts kits for 
assembly in countries that do not have useful patent enforcement 
systems: in particular China, Taiwan, Korea and India.
    As background, I would like to speak briefly about two major 
changes that have affected the electronics hardware industry during the 
past decade and which make Section 271(f) so important to us.
    The first change is a well-recognized shift of high volume 
electronics manufacturing from the United Sates to overseas contract 
facilities. America is no longer a competitive site for manufacturing 
this equipment, but we remain a primary source of new ideas, technology 
and essential components that we export to the manufacturers. Royalties 
on exports of patented technology are a significant reason that our 
domestic research establishment remains vital.
    The second change is, perhaps, not as visible as the first; in 1990 
almost all consumer electronic devices were implemented in separate 
specialized sets as combinations of hardware circuit elements. For 
example, televisions, VCR's and telephone answering machines were 
produced and marketed in separate boxes and often via different selling 
channels. Today those same product functions are usually implemented in 
software and we are moving toward a small number of common multiuse 
hardware platforms. Software programs on personal computers and PDA's 
now provide audio and video recorder functionality. Cameras and music 
players are furnished as software features in cellular telephones and 
television players will soon follow. In this context, the boundary 
between hardware and software becomes fuzzy. Software and firmware code 
effectively reconfigures the hardware circuits to perform particular 
player or display functions that were formerly achieved in fixed 
circuitry.
    The interchangeability of electronic hardware and software has also 
softened the boundaries between our traditional marketing and sales 
channels. Today we find that the traditional electronics manufacturers, 
major software houses and PC integrators are direct competitors for the 
same consumer electronics product space.
    Section 271(f) was enacted by Congress to plug a 1972 judicially-
created loophole that had allowed American companies to avoid liability 
for patent infringement by unassembled kits of parts or essential 
components of patented combinations which they exported for assembly 
overseas.
    In March 2005 the United States Court of Appeals for the Federal 
Circuit confirmed that software code that Microsoft had exported to 
overseas manufacturers for incorporation onto the disk memories of 
computer systems was a ``component'' within the meaning of section 
271(f). Judge Rader found that Microsoft's software ``morphed'' into 
hardware in the computer systems and that there was no indication of 
Congressional intent that the statute would distinguish between 
hardware and software or tangible and intangible components. Judge 
Rader also found that any attempt to single-out the software industry 
as exempt from Section 271(f) would run afoul of the United States' 
treaty obligations under the TRIPS Agreement.
    Let me cite some examples of Philips' patent licensing programs 
that would have been negatively affected if proposed section 271(f)(3) 
had been law when we obtained our relevant patents:

        1)  Optical Recording--Philips invented the technology that 
        enabled development of the CD and DVD industries. We have 
        patents in our portfolio that cover apparatus and methods that 
        format and index data on these discs. When we started licensing 
        these patents, the patented technology was implemented as 
        hardware circuits in disc drives and recorder sets. Today the 
        same technology is being implemented as PC software that is 
        internationally marketed and distributed over the Internet and 
        as firmware that is stored in semiconductor memory chips. We 
        have great concern that any requirement that limited export 
        patent protection to ``tangible'' items that are ``combined 
        physically'' would impact our ability to bring infringement 
        actions against exporters who utilize the Internet to 
        distribute original and upgrade software to manufacturers and 
        users in developing countries where local intellectual property 
        law enforcement is of little worth.

        2)  Speech and Image Coding--Philips invented important methods 
        and apparatus for speech and image coding which we license to 
        manufacturers of cellular telephone, digital cameras and set-
        top boxes. Large scale production of these products has quickly 
        moved from the United States to other countries that have 
        immature intellectual property enforcement systems like Taiwan, 
        Mainland China and Korea, but American companies are, and are 
        likely to remain, the developers and providers of the 
        application and operating system software that controls the 
        hardware and implements the coding methods. The software is 
        often exported to manufacturers either as source code, master 
        object code copies or as firmware on semiconductor memory 
        chips. Upgrade software is regularly distributed over the 
        Internet and over cable television networks. Again we have 
        great concern that any requirement that limited export patent 
        protection to ``tangible'' items that are ``combined 
        physically'' would impact our ability to bring infringement 
        actions against exporters who distribute this original and 
        upgrade software.

        3)  Medical Imaging--Philips is one of the world's largest 
        manufacturers of medical imaging equipment. Almost ten thousand 
        of our United States employees work on medical products. Much 
        of this equipment is computer-based; the processes that enable 
        our CT, MRI and ultrasound scanners and our patient monitoring 
        systems are executed and controlled by software. New 
        examination techniques and upgrades are distributed and 
        installed using data formats which arguably intangible and 
        would arguably be excluded from export patent protection if 
        Section 271(f) were amended as proposed in Section 10 of the 
        Committee Print.

        4)  Digital Personal Video Recorders (PVR's)--Philips 
        manufactured the first Tivo brand personal video recorders and 
        the technology has already changed the television viewing 
        habits of the American public. Philips' patented video 
        compression technology enables these machines to pack recorded 
        video signals onto hard disk drives. Today the same 
        functionality and methods are implemented in PC software that 
        is bundled with operating systems and distributed over the 
        Internet.

        5)  Digital Rights Management--Philips holds a significant 
        minority interest in InterTrust Technologies Corp. InterTrust 
        owns and licenses a large portfolio of patents for digital 
        rights management technology that enables the owners of 
        copyrighted music, video works, books and other proprietary 
        data to regulate and collect royalties when their properties 
        are distributed on electronic media and/or over the Internet. 
        In 2004 Philips reported a gain of over one hundred million 
        dollars from the patent licensing activities of InterTrust. 
        Components of many of these patented DRM systems are 
        necessarily distributed at the same time and over the same 
        media or channel with the creative materials that they manage 
        and protect. However we have great concerns that future 
        inventions in this area will not meet the ``tangible'' and 
        ``combined physically'' limitations of proposed section 
        271(f)(3) and would thus not receive adequate export patent 
        protection.

        6)  Travel Route Planning--Scientists at our Briarcliff Manor, 
        New York laboratories invented and developed patented systems 
        that are used to plan travel routes in car navigation systems 
        and on Internet mapping web sites. The same methods have 
        application to robotic movement and to managing escapes from 
        disaster areas. Here again, we see infringing products and 
        upgrades being distributed and exported on electronic media and 
        over the Internet and again fear the loss of our enforcement 
        rights if section 271(f) protection is reduced.

    Some of the other witnesses at this hearing may tell you that the 
carve-out in proposed Section 271(f)(3) is directed at business method 
patents and is necessary to prevent their abuse, but the language in 
Section 10 of the Committee Print is much broader than necessary for 
that purpose and will create a loophole that will allow software and 
firmware houses to avoid liability for patent infringement of U.S. 
patents by exporting their wares as ``intangible'' e-mail signals and 
files on master disks with full knowledge that they will be converted 
to tangible, physical form when received by their overseas customers. 
At best, the language of Section 271(f)(3) constitutes discrimination 
which favors the software industry over traditional hardware 
manufacturers, at worst it will tend to drive the remainder of U.S. 
electronic hardware manufacturing overseas to countries that do not 
offer strong IP protection.
    The software industry could achieve cost savings by moving its 
development and production facilities overseas, but it has chosen to 
remain in the United States and has flourished here, in no small part 
because the copyright, trade secret and judicial processes in the 
United States provides strong and effective protection for the 
intellectual property content of software products. There is no 
justification for letting them enjoy the benefit of our strong IP 
system for their own products while, at the same time, they are allowed 
to avoid exposure to other companies' patents when those same products 
are exported.
    Thank you.

 Letter from Ryan M. Fountain, Attorney at Law, Mishawaka, Indiana to 
 Blaine Merritt, Chief Counsel, Subcommittee on Courts, the Internet, 
         and Intellectual Property, Committee on the Judiciary