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2005
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
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Available via the World Wide Web: http://www.house.gov/judiciary
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
DANIEL E. LUNGREN, California
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL ISSA, California
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
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TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
ADAM SMITH, Washington
CHRIS VAN HOLLEN, Maryland
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
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Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
RIC KELLER, Florida
DARRELL ISSA, California
CHRIS CANNON, Utah
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
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BLAINE MERRITT, Chief Counsel
DAVID WHITNEY, Counsel
JOE KEELEY, Counsel
ALEC FRENCH, Minority Counsel
C O N T E N T S
HEARING DATES
Wednesday, April 20, 2005
PART I
Thursday, April 28, 2005
PART II
OPENING STATEMENT
April 20, 2005
The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
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
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The Honorable Bob Goodlatte, a Representative in Congress from the State of Virginia
April 28, 2005
The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
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
WITNESSES
April 20, 2005
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
Prepared Statement
Mr. Richard J. Lutton, Jr., Chief Patent Counsel, Apple, on behalf of the Business Software Alliance (BSA)
Oral Testimony
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Prepared Statement
Jeffrey P. Kushan, Esq., Sidley, Austin Brown and Wood, LLP, on behalf of Genentech
Oral Testimony
Prepared Statement
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
Prepared Statement
April 28, 2005
The Honorable Jon W. Dudas, Under Secretary of Commerce for Intellectual Property, and Director of the U.S. Patent and Trademark Office
Oral Testimony
Prepared Statement
Mr. Richard C. Levin, President, Yale University, on behalf of the National Research Council
Oral Testimony
Prepared Statement
Mr. Nathan P. Myhrvold, Chief Executive Officer, Intellectual Ventures
Oral Testimony
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Prepared Statement
Mr. Darin E. Bartholomew, Senior Attorney, Patent Department, John Deere & Company, on behalf of the Financial Services Roundtable
Oral Testimony
Prepared Statement
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
April 20, 2005
Prepared Statement of the Honorable Bob Goodlatte, a Representative in Congress from the State of Virginia
APPENDIX
Material Submitted for the Record
April 20, 2005
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
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
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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
April 28, 2005
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
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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 from Jack Haken, Vice President, Intellectual Property & Standards, U.S. Philips Corporation
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
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.(see footnote 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.
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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.(see footnote 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.
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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.
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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.(see footnote 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.
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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.(see footnote 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.
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.
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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.(see footnote 5)
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.(see footnote 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.
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.
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INJUNCTIONS
Section 7 of the Committee Print makes it more difficult for patent owners to obtain injunctions to stop infringement of patents.(see footnote 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.(see footnote 8)
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:
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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.(see footnote 9)
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.
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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.
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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.''(see footnote 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.
Filing of Patent Applications by Assignees
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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.(see footnote 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.
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.(see footnote 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.(see footnote 13) IPO supports the change.
Duty of Candor
Section 5 of the Committee Print codifies a duty of candor owed to the PTO by patent applicants and other parties.(see footnote 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.
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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.(see footnote 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.
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.(see footnote 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.
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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.(see footnote 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.
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.''(see footnote 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.
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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.(see footnote 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.
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.
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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. §112, 1) and derivation (35 U.S.C. §102(f)), may be raised in the request, but no issues of priority of invention (35 U.S.C. §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;
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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;
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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
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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.
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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.
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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.
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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.
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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.
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The members of the Business Software Alliance(see footnote 20) 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.
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
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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.
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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
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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.(see footnote 21) This concentration of patents within a technologic field presents specific challenges not only for the software industry, but also for biotechnology and other sectors.
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.
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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
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(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.
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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.(see footnote 22) 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.
Availability and Consideration of Prior Art
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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
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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;''
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(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.
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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.(see footnote 23) 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.
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.(see footnote 24) 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.
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.
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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.(see footnote 25) 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.
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.
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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. §112, or compliance with the duty of disclosure under 37 CFR §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.
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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. §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.
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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. §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. §112, first paragraph, and the utility requirement of §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. §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 (§4607 of the Intellectual Property and Communications Omnibus Reform Act of 1999, as enacted by §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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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?
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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.
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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.
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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.
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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——
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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.
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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.
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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?
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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.
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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——
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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.
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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.
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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.
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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.
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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.
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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.
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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?
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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.
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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.
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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——
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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.]
Next Hearing Segment(2)
(Footnote 1 return)
See generally materials from March 14, 2005 IPO conference ''Patent Trolls and Patent Property Rights'' (materials available from IPO).
(Footnote 2 return)
Committee Print, pp. 36–49.
(Footnote 3 return)
Committee Print, p. 35.
(Footnote 4 return)
Committee Print, pp.29–31.
(Footnote 5 return)
Committee Print, p. 7, amending 35 U.S.C. 135.
(Footnote 6 return)
Washington Legal Foundation Civil Legal Issues No. 129, April 15, 2005.
(Footnote 7 return)
Committee Print, pp.31–32.
(Footnote 8 return)
The U.S. Government has also been consistently critical of compulsory licensing and working requirements in international negotiations.
(Footnote 9 return)
Robinson, The Law of Patents (1890), §1170 and 1220.
(Footnote 10 return)
Committee Print, pp. 3–6, amending 35 U.S.C. 102.
(Footnote 11 return)
Committee Print, p.9.
(Footnote 12 return)
Committee Print, p.10.
(Footnote 13 return)
''A Patent System for the 21st Century,'' National Research Council of the National Academies (2004) at 99.
(Footnote 14 return)
Committee Print, pp.10–29.
(Footnote 15 return)
Committee Print, p.31.
(Footnote 16 return)
Committee Print, p.32.
(Footnote 17 return)
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.
(Footnote 18 return)
Committee Print, p.34
(Footnote 19 return)
Committee Print, p.49
(Footnote 20 return)
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.
(Footnote 21 return)
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.
(Footnote 22 return)
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
(Footnote 23 return)
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).
(Footnote 24 return)
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
(Footnote 25 return)
MercExchange v. eBay, Inc. et al, 401 F.3d 1323, 2005 U.S. App. LEXIS 4308, *41 (Fed. Cir. March 16, 2005).