Segment 2 Of 2     Previous Hearing Segment(1)

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Part II


House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.

    The Subcommittee met, pursuant to notice, at 12:12 p.m., in Room 2141, Rayburn House Office Building, the Honorable Lamar Smith (Chair of the Committee) presiding.

    Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order.

    First of all, let me express my appreciation to the great interest we have in this hearing today. We probably have the best attendance we have had all year on any hearing. We, of course, had a hearing on the same subject last week, so maybe the interest has been building as well. We expect to have interest by Members and appreciate the three other Members who are here today. This is not the best time necessarily to be conducting a hearing—at noon—but we hope there will be other Members who will stop by before we have a final vote and leave town today.
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    I am going to recognize myself for an opening statement, and then yield to the gentleman from California, the minority Ranking Member, for his opening statement as well.

    Today the Subcommittee on Courts, the Internet, and Intellectual Property will conduct its second hearing on a Committee Print to improve patent quality. The print is based on the leading recommendations developed by the PTO and a broad cross-section of industry and trade associations that are involved in the formulation of patent policy.

    There is no shortage of volunteers nationwide who want to testify before this Subcommittee. I assure these individuals and groups that their concerns will be heard and given due process.

    Following this hearing, I will work with the Subcommittee Members, the Patent and Trademark Office, and others to develop a bill based on the print, that I expect to move this spring. So I urge all interested parties to work toward areas of compromise and concordance, knowing that no entity or individual will be entirely satisfied with the finished product.

    Still, there are areas of agreement and the trajectory is encouraging. Creation of a post-grant opposition system, tweaks to inter partes reexamination, more expansive use of 18-month publication, a doctrine of a first-to-file construct, elimination of the best-mode requirement, reformation of the inequitable conduct defense, and an overhaul of the willful damages prevention have generated much support. Hopefully, reasoned discussions and good-faith negotiations will generation support for other issues as well. I also want to emphasize that subject matter not contained in the print could still be included in the bill.
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    Last week's panel featured representatives of larger mainstream industry groups. Today we welcome witnesses from Government, small business, the Academy, and the financial world. It is healthy and necessary to consider as many different perspectives as possible. Such diversity will only lead to a better work product.

    I look forward to hearing from the witnesses shortly, and now recognize the gentleman from California, Mr. Berman.

    Mr. BERMAN. Well, thanks, Mr. Chairman.

    Last hearing, we heard differing opinions about which sections of patent law should be reformed, how those reforms should be accomplished. Some of the witnesses stressed changes in litigation rules for patent cases; others focused on the need to harmonize U.S. patent laws with the foreign patent law. But all the witnesses seemed to agree that bolstering the level of patent quality is integral to a workable patent system.

    The whole foundation of the patent system is the idea that the Patent and Trademark Office grants high-quality patents. However, in recent years, and particularly since the State Street decision, a large number of questionable patents have been issued, leading to increased litigation and uncertainty in markets that are heavily dependent on patent rights. There are many possible reasons for the questionable quality—lack of funding resulting from fee diversion; lack of appropriate resources or training materials; an increase in the backlog of patent applications, which I gather—we will probably hear from Mr. Dudas—has become stunning; or even exposure to a new patentable subject matter, such as business method patents.
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    While the PTO has made great strides in addressing this problem, more needs to be done to restore confidence in the patent system. The Committee Print has provided a useful set of guidelines that identify some of the key areas in need of reform. Some of the provisions are almost identical to the ones Mr. Boucher and I proposed last year. However, an issue we addressed with our third-party prior art submission provision, and which deserves greater attention in the Committee Print or any future legislation, is how to address quality on the front end of the examination process.

    I anticipate a spirited discussion today on the merits of some of the proposals in the Committee Print. And I guess I submit a challenge to those critical of certain provisions. If you have a problem with the proposal, help us craft a better solution, because we are planning to introduce a patent bill, as the Chairman mentioned, in the near future. I hope that the many interested groups—and here I guess I want to echo the Chairman—can work together to help us formulate some answers to the problems facing the patent system today.

    I look forward to working with you, Mr. Chairman, in drafting this legislation, and yield back.

    Mr. SMITH. Thank you, Mr. Berman. And without objection, the opening statements of other Members will be made a part of the record.

    Before I introduce the witnesses, I would like to invite you to stand and be sworn in, if you will.

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    [Witnesses sworn.]

    Mr. SMITH. Thank you. Please be seated.

    Our first witness is John Dudas, Under Secretary of Commerce for Intellectual Property and Director of the U.S. Patent and Trademark Office. In a previous life, Director Dudas worked for this Subcommittee, so we welcome him back. He earned a bachelor's degree in finance, summa cum laude, from the University of Illinois and a law degree with honors from the University of Chicago.

    Our next witness is Richard Levin, a special friend and president of my alma mater, Yale University. He co-chaired the National Research Council that published a major study of the patent system last year. President Levin studied history at Stanford University and politics at Merton College, Oxford University. He also holds a doctorate in economics from Yale University.

    The next witness is Nathan Myhrvold, founder and CEO of Intellectual Ventures, an invention company in Belleview, Washington. He owns 14 patents and has several others pending. Dr. Myhrvold received an undergraduate degree in mathematics and a master's in geophysics and space physics from UCLA. He later earned another master's in mathematical economics and a doctorate in theoretical mathematics and physics from Princeton University.

    Our final witness is Darin Bartholomew, senior patent attorney for John Deere & Company. Mr. Bartholomew has practiced intellectual property law for more than 10 years. He earned an electrical engineering degree from Northwestern University, a J.D. from John Marshall Law School, and a Master of Laws from Georgetown University.
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    Welcome to you all. We have your complete written statements, and without objection they will be made a part of the record. We do ask that you keep your oral testimony, though, to 5 minutes.

    And Director Dudas, we will begin with you.


    Mr. DUDAS. Thank you very much, Chairman Smith, Ranking Member Berman, and Members of the Subcommittee. I appreciate your inviting me to testify today and I commend you for holding these hearings on your multi-title Committee Print, which proposes comprehensive changes to our patent system.

    The benefits of our patent system have always been obvious to Americans. You're all familiar with article I, section 8, clause 8 of the U.S. Constitution granting Congress the power to promote the progress of science and the useful arts by securing for the limited times to authors and inventors the exclusive right to their respective writings and discoveries. That clause was adopted into the Constitution without a dissenting vote and without even a recorded debate. History has repeatedly affirmed the wisdom of our Nation's founders in establishing these principles.

    The tremendous ingenuity of American inventors, coupled with an intellectual property system that encourages and rewards innovation, has propelled the growth of our Nation from a small agrarian society to the world's preeminent technological and economic superpower. And all of our patented technology finds its way into the public domain within 20 years, freely available to any and all. The success of our system has also been the basis for economic development in nations around the world.
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    Unfortunately, a growing chorus of critics now questions whether the fundamental patent system will enhance or hinder development in other nations. However, many of the nations questioning the efficacy of that system have become hotbeds for the manufacture and export of counterfeit goods, with more than 90 percent of goods, in some cases in some industries, being counterfeited or pirated. Therefore we must actively educate the world that respect for intellectual property benefits everyone.

    Having and promoting the fundamentally right system, however, is not enough. Even the best system in the world can and should improve, and, as you know, at the USPTO our 21st Century Strategic Plan began as directives from the President and Congress that we improve. Recently we've announced three internal reforms to improve our Agency's quality and efficiency. We're increasing transparency, we're internally improving our ex parte reexamination, and we're saving applicants tens of millions of dollars by revamping our process of applicants submitting appeal briefs. We're implementing a multitude of improvements and we plan to do more.

    We're also hearing legislative proposals in three general categories, as you mentioned—operational, litigation reform, and the convergence of international laws and best practices. In my view, each of these must center on how the patent system encourages innovation and, more importantly, serves the public at large. We must look at these issues from every angle. We must look at them from the perspective of the independent inventor who may be the next Thomas Edison to the perspective of a large company that believes its innovations are being frivolously tied up in unnecessary legal knots.

    As you reflect upon all of the proposals you hear, I urge that you not focus exclusively on litigation nor exclusively on the administrative process. Patent quality begins with the application and it begins with the applicant. And I can tell you that the number one challenge I hear from examiners today is one of application quality. So I'm comforted by Ranking Member Berman, your statement about the beginning of the process both at the USPTO, but we'll take it one step even further back, which is the quality of the application and the quality of the process as it comes into the Office, as well as what happens within the Office. I think all of these issues need to be considered, but one component shouldn't be considered to the expense of others.
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    We're committed at the USPTO to make sure that our practices and policies promote innovation and the dissemination of new technologies. While we implement operational reform, we realize that measures within your domain will make valuable contributions to the system. The USPTO and the Administration are enthusiastic to continue working with you closely and be a part of this hearing as you develop reform legislation to ensure that the U.S. patent system remains the world's leader.

    Thank you.

    [The prepared statement of Mr. Dudas follows:]







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    Mr. SMITH. Thank you, Director Dudas.

    President Levin.


    Mr. LEVIN. Chairman Smith, Congressman Berman, Members of the Subcommittee, thank you for offering me the opportunity to discuss the National Research Council's recommendations for improving the patent system in the United States. Patents play a crucial role in promoting technological innovation, which is the most important underpinning of economic growth. I'm delighted that the Subcommittee on Intellectual Property is developing legislation to ensure that the patent system continues to serve the Nation well.

    The project undertaken by the National Research Council, which I co-chaired with Mark Myers, a retired vice president of the Xerox Corporation, was the most comprehensive review of the patent system in decades. Our committee was perhaps the first to bring together practicing patent lawyers, academic lawyers and economists, business leaders, technologists, and inventors. We started with highly divergent views, but over the course of our deliberations our views converged and we reached consensus on several important recommendations that are reflected in the Committee Print.
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    We concluded that, on the whole, the patent system is working well and does not need fundamental revision. Yet we did note some causes for concern. The sheer volume of patent applications, especially those involving new areas of technology—the Ranking Member referred to business methods as an example—overwhelm—these new areas overwhelm the patent examination corps in ways that affect the quality and timeliness of decisions. In addition, it's become more expensive to acquire patents, to obtain licenses to patented technologies, and especially to enforce and challenge patents through litigation.

    Our recommendations are set forth in greater detail in an accompanying written statement, but here I'd like to emphasize three main themes.

    First, Congress and the PTO should take steps to ensure the quality of patents issued. The single most important step would be the establishment of a simple administrative procedure for opposing a patent after it has been granted. The process should be timely and efficient so that uncertainty can be resolved quickly without either inhibiting socially productive investment by competitors in situations where the patent proves to be invalid or by encouraging wasteful investment when the patent proves to be valid.

    A new opposition process is needed because the existing inter partes reexamination procedure only permits challenges to be lodged on narrow grounds. It's rarely used and has not proven to be effective. The only way to challenge a patent through the courts is to infringe it and draw either an infringement suit or a demand to take a license. This is an unnecessarily expensive way to resolve doubts about a patent's validity, and disputes take many years to resolve while technology, as we know, changes rapidly.
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    Patent quality can be improved also by the assiduous application of the nonobviousness standard by the Patent and Trademark Office. The PTO should develop new approaches to gathering information about the state of the art in emerging areas of technology, relying on outside experts when patent examiners lack expertise. The committee commended the PTO for the development of guidelines in emerging technology areas, such as genomics and business methods. It's important to offer such guidance promptly as new technologies emerge. The committee also recommended that Congress provide more resources for the PTO to hire needed examiners, to improve its information systems, and to fund a post-grant opposition procedure. Fortunately, the PTO will receive additional funding through the fee increase that was approved by Congress last year.

    A second theme, beyond validity, is the harmonization of the United States patent system with the European and Japanese patent systems. Differences among the world's major patent regimes entail wasteful duplication of effort by both inventors and by governments. The committee believes that gains in efficiency from harmonizations would be considerable. The United States is the only country that gives priority to the first person to reduce an invention to practice. Elsewhere, the first inventor to file is given priority. The latter test is objective; the former requires years of discovery, reams of depositions, and hours of trial testimony. Moreover, the U.S. is the only country in the world that requires a patent holder to hold that he has disclosed the best mode of practicing a patent. This, too, is costly and time-consuming to prove. Harmonization with global practice makes sense.

    Finally, the committee recommended that Congress mitigate other subjective elements of law that contribute to the extraordinary expense of patent litigation. For example, Congress would be well advised to eliminate or modify the standards governing inequitable conduct. The bill addresses that. There should be penalties for misconduct by patent applicants, but misconduct should not automatically invalidate the patent. Similarly, the doctrine of willful infringement should be modified, because willfulness is subjective and costly to prove, and the doctrine creates the perverse incentive for inventors to avoid the study of prior art lest they fail to cite a patent that turns out to be relevant.
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    I'm pleased that the legislation developed by the Subcommittee is consistent with the recommendations of our NRC committee. I would suggest, however, that the Subcommittee reconsider the provision allowing the settlement of invalidity claims during the post-grant review process. Settlement would undermine a major objective of instituting a post-grant review, and that is to clarify the grounds on which patents should be granted in emerging areas of technologies. The parties settled may resolve their disputes with one another, but it wont' clarify the law or the practice of the Patent Office for future innovations.

    Our committee also recommended that Federal judges faced with resolving validity disputes in infringement cases should have the option of referring the issues concerning validity to the PTO administrative judges, who have expertise in post-grant review.

    I would be pleased to answer your questions.

    [The prepared statement of Mr. Levin follows:]


    Good afternoon, Mr. Chairman, Congressman Berman, and members of the subcommittee. I am Richard Levin, President of Yale University and co-chair of the Committee on Intellectual Property Rights in the Knowledge-Based Economy of the National Research Council. The Research Council is the operating arm of the National Academy of Sciences, National Academy of Engineering, and the Institute of Medicine of the National Academies, chartered by Congress in 1863 to advise the government on matters of science and technology.
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    Although most Academy studies are conducted in response to an agency's or a congressional request, the study we will describe was initiated by the Council's Board on Science, Technology, and Economic Policy (STEP) because it recognized that the breakneck pace of technological change across many industries was creating stresses in the patent system that needed to be examined to ensure that it continues to be a stimulus to innovation and does not become an impediment to it.

    Since 1980 a series of judicial, legislative, and administrative actions have extended patenting to new technologies (biotechnology) and to technologies previously without or subject to other forms of intellectual property protection (software and business methods), encouraged the emergence of new players (universities), strengthened the position of patent holders vis-à-vis infringers domestically and internationally, relaxed other restraints on the use of patents (antitrust enforcement), and extended their reach upstream from commercial products to scientific research tools and materials.

    As a result, patents are being more zealously sought, vigorously asserted, and aggressively enforced than ever before. There are many indications that firms in a variety of industries, as well as universities and public institutions, are attaching greater importance to patents and are willing to pay higher costs to acquire, exercise, and defend them. The workload of the U.S. Patent and Trademark Office has increased several-fold in the last few decades, to the point that it is issuing nearly 100 patents every working hour. Meanwhile, the costs of acquiring patents, promoting or securing licenses to patented technology, and prosecuting and defending against infringement allegations in the increasing number of patent suits are rising rapidly.

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    In spite of these changes and the obvious importance of patents to the economy, there had not been a broad-based study of the patent system's performance since the Depression. Accordingly, the National Research Council (NRC) assembled a committee that includes three corporate R&D managers, a university administrator, three patent holders, and experts in biotechnology, bioengineering, chemicals, telecommunications, microelectronics, and software, as well as economists, legal scholars, and practicing attorneys. This diversity of experience and expertise distinguishes our panel from nearly all previous commissions on the subject, as does our study process. We held conferences and public hearings and we commissioned our own empirical research. The committee's report, A Patent System for the 21st Century, released a year ago, provides a thoroughly researched, timely perspective on how well the system is working.

    High rates of technological innovation, especially in the 1990s but continuing to this day, suggest that the patent system is working well and does not require fundamental changes. Nevertheless, the committee was able to identify five issues that should and can be addressed now.

    First, maintaining consistent patent quality is difficult but increasingly important in fast-moving fields. Over the past decade, the quality of issued patents has come under frequent sharp attack, as it sometimes has in the past. One can always find patents that appear dubious and some that are even laughable—the patent for cutting and styling hair using scissors or combs in both hands. Some errors are unavoidable in a system that issues more than 187,000 patents annually, and many of those errors will have no economic consequence because the patents will not be enforced. Still, some critics have suggested that the standards of patentability have been lowered by court decisions. Other observers fault the USPTO's performance in examining patent applications, variously attributing the alleged deterioration to inadequate time for examiners to do their work, lack of access to prior art information, perverse incentives to grant rather than reject patents, and inadequate examiners' qualifications.
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    Because the claim that quality has deteriorated in a broad and systematic way has not been empirically tested, conclusions must remain tentative. But there are several reasons to suspect that more issued patents are substandard, particularly in technologies newly subject to patenting. One reason to believe that quality has suffered, even before taking examiner qualifications and experience into account, is that in recent years the number of patent examiners has not kept pace with the increase in workload represented by the escalating number and growing complexity of applications. Second, USPTO patent approval rates are higher than in some other major nations' patent offices. Third, changes in the treatment of genomic and business method applications, introduced as a result of criticisms of the quality of patents being issued, reduced or at least slowed down the number of patent grants in those fields. And fourth, there does appear to have been some dilution of the application of the nonobviousness standard in biotechnology and some limitations on its proper application to business methods patent applications. Although quality appears to be more problematic in rapidly moving areas of technology newly subject to patenting and perhaps is corrected over time, the cost of waiting for an evolutionary process to run its course may be too high when new technologies attract the level of investment exhibited by the Internet, biotechnology, and now nanotechnology.

    What are the costs of uncertainty surrounding patent validity in areas of emerging technology? First, uncertainty may induce a considerable volume of costly litigation. Second, in the absence of litigation, the holders of dubious patents may be unjustly enriched, and the entry of competitive products and services that would enhance consumer welfare may be deterred. Third, uncertainty about what is patentable in an emerging technology may discourage investment in innovation and product development until the courts clarify the law, or inventors may choose to incur the cost of product development only to abandon the market years later when their technology is deemed to infringe. In sum, greater certainty about patent validity would benefit innovators, technological followers, and consumers alike.
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    Second, differences among national patent systems continue to result in avoidable costs and delays. In spite of progress in harmonizing the U.S., European, and Japanese patent examination systems, important differences in standards and procedures remain, ensuring search and examination redundancy that imposes high costs on users and hampers market integration. It is estimated to cost as much $750,000 to $1 million to obtain comprehensive worldwide patent protection for an important invention, and that figure is increasing at a rate of 10 percent a year. Important differences include the following: Only the United States gives preference to the ''first to invent'' rather than the ''first to file.'' Only the United States requires that a patent application disclose the ''best mode'' of implementing an invention. U.S. law allows a grace period of one year, during which an applicant can disclose or commercialize an invention before filing for a patent, whereas Japan offers a more limited grace period and Europe provides none.

    Third, some U.S. practices seem to be slowing the dissemination of information. In the United States there are many channels of scientific interaction and technical communication, and the patent system contributes more to the flow of information than does the alternative of maintaining technical advances as trade secrets. There are nonetheless features peculiar to the U.S. patent system that inhibit information dissemination. One is the exclusion of a nontrivial number of U.S. patent applications from publication after 18 months, an international norm since 1994. A second U.S. idiosyncrasy is the legal doctrine of willful infringement, which can require an infringer to pay up to triple damages if it can be demonstrated that the infringer was aware of the violated patent before the violation. Some observers believe that this deters an inventor from looking at the patents of possible competitors, because knowledge of the patent could later subject the inventor to enhanced damages if there is an infringement case. This undermines one of the principal purposes of the patent system: to make others aware of innovations that could help stimulate further innovation.
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    Fourth, litigation costs are escalating rapidly and proceedings are protracted. Surveys conducted periodically by the American Intellectual Property Law Association indicate that litigation costs, millions of dollars for each party in a case where the stakes are substantial, are increasing at double digit rates. At the same time the number of lawsuits in District Courts is increasing

    Fifth, access to patented technologies is important in research and in the development of cumulative technologies, where one advance builds on one or several previous advances. Faced with anecdotes and conjectures about restrictions on research scientists, particularly in biotechnology, we conducted a modest survey of diverse participants in the field to determine whether patent thickets are emerging or access to foundational discoveries is restricted. We found very few cases although some evidence of increased research costs and delays and much evidence that research scientists are largely unaware of whether they are using patented technology. During our study, the Court of Appeals for the Federal Circuit ruled that university researchers are not shielded by the common law research exception against infringement liability. This combination of circumstances—ignorance of intellectual property on the one hand and full legal liability on the other—represents an exposure that universities are not equipped to eliminate by the kinds of due diligence performed by companies and investors.


    Our committee proposed seven steps to ensure the vitality and improve the functioning of the patent system:

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    1) Preserve an open-ended, unitary, flexible patent system. The system should remain open to new technologies, and the features that allow somewhat different treatment of different technologies should be preserved without formalizing different standards, for example, in statutes that would be exceedingly difficult to draft appropriately and equally difficult to change if found to be inappropriate. Among the tailoring mechanisms that should be exploited is the USPTO's development of examination guidelines for new or newly patented technologies. In developing such guidelines, the office should seek advice from a wide variety of sources and maintain a public record of the submissions. The results should then be part of the record of any appeal to a court, so that they can inform judicial decisions.

    This information could be of particular value to the Court of Appeals for the Federal Circuit, which is in most instances the final arbiter of patent law. To keep this court well informed about relevant legal and economic scholarship, it should encourage the submission of amicus briefs and arrange for temporary exchanges of members with other courts. Appointments to the Federal Circuit should include people familiar with innovation from a variety of perspectives, including management, finance, and economic history, as well as nonpatent areas of law that bear on innovation.

    2) Reinvigorate the nonobviousness standard. The requirement that to qualify for a patent an invention cannot be obvious to a person of ordinary skill in the art should be assiduously observed. In an area such as business methods, where the common general knowledge of practitioners is not fully described in published literature likely to be consulted by patent examiners, another method of determining the state of knowledge needs to be employed. Given that patent applications are examined ex parte between the applicant and the examiner, it would be difficult to bring in other expert opinion at that stage. Nevertheless, the open review procedure I will describe next provides a means of obtaining expert participation if a patent is challenged.
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    Gene sequence patents present a particular problem because of a Federal Circuit ruling making it difficult to apply the obviousness test in this field. This is unwise in its own right and is also inconsistent with patent practice in other countries.

    3) Institute an ''Open Review'' procedure. Congress should pass legislation creating a procedure for third parties to challenge patents after their issuance in a proceeding before administrative patent judges of the USPTO. The grounds for a challenge could be any of the statutory standards—novelty, utility, nonobviousness, disclosure, or enablement—or the case law proscription on patenting abstract ideas and natural phenomena. The time, cost, and other characteristics of this proceeding should make it an attractive alternative to litigation to resolve questions of patent validity. For example, federal district courts could more productively focus their attention on patent infringement issues if they were able to refer validity questions to an Open Review proceeding. The result should be much earlier, less expensive, and less protracted resolution of validity issues than we have with litigation and of a greater variety of validity issues than we have with re-examination even if it were used.

    4) Strengthen USPTO resources. To improve its performance, the USPTO needs additional resources to hire and train additional examiners and implement a robust electronic processing capability. Further, the USPTO should create a strong multidisciplinary analytical capability to assess management practices and proposed changes, provide an early warning of new technologies being proposed for patenting, and conduct reliable, consistent, reputable quality reviews that address office-wide as well as individual examiner performance. The current USPTO budget is not adequate to accomplish these objectives, let alone to finance an efficient Open Review system.
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    5) Modify or remove the subjective elements of litigation. Among the factors that increase the cost and reduce the predictability of patent infringement litigation are issues unique to U.S. patent jurisprudence that depend on the assessment of a party's state of mind at the time of the alleged infringement or the time of patent application. These include whether someone ''willfully'' infringed a patent, whether a patent application included the ''best mode'' for implementing an invention, and whether a patent attorney engaged in ''inequitable conduct'' by intentionally failing to disclose all prior art when applying for a patent. Investigating these questions requires time-consuming, expensive, and ultimately subjective pretrial discovery. The committee believes that significantly modifying or eliminating these rules would increase the predictability of patent dispute outcomes without substantially affecting the principles that these aspects of the enforcement system were meant to promote.

    6) Harmonize the U.S., European, and Japanese patent examination systems. The United States, Europe, and Japan should further harmonize patent examination procedures and standards to reduce redundancy in search and examination and eventually achieve mutual recognition of applications granted or denied. The committee recommends that the United States should conform to practice elsewhere by adopting the first inventor to file system, dropping the ''best mode'' requirement, and eliminating the current exception to the rule of publication of an application after 18 months. The committee also recommends that the United States seek to have other jurisdictions adopt the practice of a grace period for filing an application. These objectives should be pursued on a trilateral or even bilateral basis if multilateral negotiations do not progress.

    7) Consider enacting a narrowly drawn exception from infringement liability for some research activities. Here we do not propose specific legislative language, but we do suggest some principles for Congress to consider in drafting a narrow research exception that would preserve the intent of the patent system and avoid some disruptions to fundamental research.
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    In making these recommendations, our committee was mindful that although the patent law is designed to be uniform across all applications, its practical effects vary across technologies, industries, and classes of inventors. There is a tendency in discourse on the patent system to identify problems and solutions to them from the perspective of one field, sector, or class. Although the committee did not attempt to deal with the specifics of every affected field, the diversity of the membership enabled us to consider each of the proposed changes from the perspective of very different sectors. Similarly, we examined very closely the claims made to us that one class of inventors—usually individuals and very small businesses—would be disadvantaged by some change in the patent system. Some of the committee's recommendations—universal publication of applications, Open Review, and shifting to a first-inventor-to-file system—have in the past been opposed on those grounds. The committee reviewed very carefully, for example, how small entities currently fare in interference proceedings, examination, and re-examination. We also studied how European opposition proceedings affect small businesses. We concluded they enjoy little protection and in fact are often at a disadvantage in the procedures we propose to change. In short, we believe that our recommendations, on balance, would be as beneficial to small businesses and individual inventors as to the economy as a whole.

    I appreciate the opportunity afforded by the committee to testify on our conclusions and would be happy to answer any questions.

    Mr. SMITH. Thank you, President Levin.

    Dr. Myhrvold.
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    Mr. MYHRVOLD. Thank you, Mr. Chairman, Members of the Committee, both thank you for having me here and for turning your attention to a very important topic of patent reform.

    My perspectives today are going to be based a little bit on who I am. I started off as an academic physicist. I started my own company and became a start-up entrepreneur in California in 1983. Microsoft acquired my company and so I became a corporate executive, Microsoft's chief technology officer, for 14 years. Five years ago, I left Microsoft and started Intellectual Ventures, dedicated to the idea of invention and helping inventors. Finally, I'm an inventor myself, so I understand the Patent Office from that perspective.

    Now, invention is critical to America; I don't need to remind you of that. One point I think is very important, though, is that the small inventor is critical to America. Forty-five percent of America's patent holders are classified as small entities by the Patent Office. That means they're individuals, they're universities, or they're small businesses. This cuts across every field of technology no matter how exotic, no matter how cutting-edge. In fact, look at semiconductors, look at nanotech, look at computers. You'll find in those areas that individuals and universities together often have more patents than the biggest companies in the world. It's a diffuse group; it's also a vulnerable group, because they depend on patent law very critically, much more so than the big guys do. So as we approach patent reform, it's very important that we keep them in mind. An unintended consequence of shifting in one area can make the playing field not level for the little guy.
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    I've studied the Committee Print. There's a lot that I would commend the Committee on and I would agree with. Actually, Chairman Smith summed up a whole series of things. I won't repeat them all. I also want to echo my colleagues' remarks that when you add something like post-grant opposition—I think it's a good move—you've got to make sure that it's funded and resourced. We can't heap more new things on the Patent Office while they still have such a backlog of the work they're supposed to ordinarily be doing.

    I've also studied the Committee Print in other ways and, to be frank, there are some things I don't agree with that I think would be harmful. Most important of those, I think, are the rule changes regarding injunctions. Now, patents are designed to give ownership of inventions to inventors, and that ownership isn't conditional on whether they make it or not. That's what our system is. It's perfectly honorable to be an inventor in a university or a small entity that doesn't actually manufacture, in fact licenses to others.

    Now, the injunction change, I feel, would really disadvantage the small inventor. It would significantly erode some of their rights. Ironically, it's been proposed as a trial—or as reform to reduce litigation. I'm afraid it would have exactly the opposite effect, increasing the number of litigations and the size and complexity of each litigation. My written testimony explains why.

    So we have to be very careful that while we try to reform litigation we don't accidentally create the Trial Lawyers Full Employment Act. If you look around the world, you compare our system to others, you find America has the strongest rights for inventors of any place in the world. There's a bunch of other countries that are very, right up on a par with us. I agree about international harmonization; that's an important thing. So the first rank of countries are very high. If you look at this injunction provision, you can also find countries that have that kind of law, and those typically aren't first-world nations. Those are countries like the Philippines, Peru, or Rwanda. Having strong rights for inventors is a very important thing. We've got to make sure that, going into the 21st century, we have the best possible incentive for all of America's inventors.
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    One other brief—I've got too many things, actually, to list here. My written testimony covers them. There is, to me, a very surprising loophole for software- or Internet-related things, nontangible items in the Committee Print which would dramatically reduce any royalties due legitimate patent holders for any of these nontangible items. I think the 21st century isn't a time when we should take an act like that. Clearly the Internet and software and other very intangible things are important to us.

    Going forward, the committee has a challenging and interesting task to balance all of these different factors. I will make myself available both during the questions now and at any point in the future to help out in that important process.

    Thank you.

    [The prepared statement of Mr. Myhrvold follows:]


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


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    As long as I can remember I have been fascinated with science and technology. I pursued science in school, earning a bachelor's degree in mathematics, and master's degree in geophysics and space physics, both from UCLA. I continued exploring other disciplines, getting another master's degree in mathematical economics and a PhD in mathematical physics from Princeton University. I would have finished school much earlier if I had focused on one topic, but to be honest I never met a kind of science I didn't like. This obsession with schooling might have consumed half my life, but for the fact that I started early, entering college at 14, and completing my PhD by age 23.

    After Princeton I was hired by Cambridge University in England, working directly for Professor Stephen Hawking. My research area was quantum field theory in curved space time, perhaps one of the most obscure and esoteric scientific disciplines. At that point in my life I would have told you that I'd be an academic researcher. But life has a way of throwing us curve balls. I took a three month leave of absence from working with Hawking to go to the San Francisco Bay Area to help some friends from graduate school on a software project. Before I knew it I was caught up in entrepreneurial fever.

    The year was 1984, and the software industry was still tiny. I became the CEO of Dynamical Systems, a software start up with less than a dozen full time employees. After two years of struggling to keep our heads above water, we were acquired by Microsoft. I spent the next 14 years as a Microsoft employee, reporting directly to Bill Gates as Microsoft's first Chief Technology Officer. I could scarcely believe that I went from esoteric theories in physics to what would become the largest software company in the world.

    At Microsoft I championed the development of new technology. Microsoft had zero patents and just two patent applications at the time I joined the company. I advocated increases in R&D spending, and patent filing, greatly increasing each of these. In 1991 I convinced the Microsoft board of directors to start Microsoft Research, the first major industrial research lab to be started in more than a generation. Laboratories like Bell Laboratories, GE Research Labs, Xerox PARC, and IBM Research, have made a tremendous contribution to America's preeminence in science and technology. Unfortunately, these institutions were founded 30 to 100 years ago, and there aren't many recent examples. Very few of the new giants of technology have bothered to invest in research and create similar research organizations. Microsoft Research now employs over 700 researchers in seven laboratories, and is ranked as one of the leading research institutions in the world.
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    I retired from Microsoft in 2000, and founded Intellectual Ventures, a company dedicated to investing in innovation and creativity in the form of invention. The venture capital community exists to help entrepreneurs start and finance new companies—at Intellectual Ventures we help and finance inventors to invent. This includes both full time employees, as well as working with inventors who are university professors, academic researchers, small businesses that cannot afford to patent without help, as well as independent inventors. I meet frequently with inventors from all ranks, and have attached a recent speech on invention given at Princeton University. Our company provides both business expertise and financing to these inventors, and provides inventors with a healthy share of the profits in their inventions.

    My business career as a corporate executive has focused on managing innovation and using patents as a business asset. However, I am also an inventor with 17 issued US patents. I'm working on increasing that number; for the last couple years I have filed over a dozen patent applications a year which are still pending in the Patent Office. So, in addition to using patents in business, I am also a customer of the Patent Office and have seen the details of the patent process up close.

    Given my varied career, I have seen the patent system from the perspectives of pure academic research, a giant technology company, and finally that of a small business. Each perspective offers different views on the patent system. The Subcommittee will hear from people in many of these directly through the process of these hearings. What I can offer is the views of someone who has experienced all of them.

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    The patent system is a fundamental foundation of America's innovation based economy. Like any other part of the free enterprise system, the patent system offers economic incentive by allowing private ownership. In a way, this is no different than real estate, or other private assets. Private ownership of valuable assets is the basis for the American economy.

    The process of invention requires large amounts of the inventor's time, energy and money. In order to create incentive for that expenditure, the inventor gets ownership in the invention for a limited time, after which it passes into the public domain. This system has been a primary driver behind the tide of innovation that has kept America number one in the world for at least the last century. The system that encouraged and sustained great inventors like Thomas Edison, Alexander Graham Bell and the Wright brothers is a critical component of America's 21st Century goals to lead the world in computing, biotechnology, nanotechnology and dozens of other exciting fields.


    The leading component of America's invention output is driven by individual inventors, academic institutions, and small and medium businesses. The Subcommittee has heard testimony from large technology companies, and their trade associations. These firms are important inventors, and they frequently lead the list in terms of sheer number of patents. However what is much less well known is the substantial role that the little guy plays.

    According to US Patent Office records, 45% of American patent holders are classified as ''small entities'' which includes small businesses, universities and individuals.
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    This pattern is repeated if you look in particular technology areas. I have done empirical research to understand the nature of the invention process, and found some remarkable results. It is not surprising that the entities that hold the most patents on computer processors include corporations like Intel and IBM. However, if you add them up, universities, individuals and small businesses in aggregate have substantially more processor patents than Intel or IBM—indeed more than the two combined. The same pattern is found in every technology field where I have looked. Small inventors have more operating system patents than Microsoft, more networking patents than Cisco and more wireless patents than Qualcomm.

    The typical pattern in a technology field is that the top company (or even the sum of the top five or ten companies) has only a small fraction of the patents in that field—often no more than 10% of the patents. Most invention is not done by the largest companies in the field. Invention occurs across the whole spectrum of the economy—from technology giants all the way down to the lone inventor in the garage. Those lone inventors aren't just working on low-tech areas—no matter how technical a field, a huge number of patents are held by private individuals. Critics of the patent system sometimes talk derisively about the ''myth of the small inventor'', ignoring their contribution. Well, I am here to tell you that small inventors are not only alive and well, but they actually contribute more inventions than the biggest corporations do.

    I think that it is very important for the Subcommittee to appreciate the role that small inventors play when considering reforms to the patent system. This is because small inventors depend on the patent system far more than big companies do. The patent system is the only means for the small inventor to get a fair shake, and any semblance of a level playing field.
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    A large company has financial resources that a small inventor can only dream of. They also have the ability to extract value from their patents a variety of ways. Indeed many large companies use their patents only on a defensive basis—that is a polite way to say that they use their patents to maintain their dominant market positions, rather than actively use them as revenue generators in their own right.


    A small inventor, on the other hand, depends almost totally on the patent system to secure his ownership rights in the invention. A small change to patent law can, as an unintended consequence, have catastrophic effects on a small inventor who depends totally on his or her patent rights to survive. A small inventor does not have huge market share and other business assets to fall back on. Worse yet, the small inventor almost invariably winds up competing with large, well funded companies that have every possible advantage. Only the patent system stands tall as the protector of the basic rights of small inventors.

    Changes to patent law must be scrutinized carefully to make sure that they do not tilt the playing field in a way that further disadvantages small inventors. They do the bulk of America's inventing and they deserve our support.


    I applaud the Subcommittee for its interest in patent reform and I have studied the Committee Print. There are a number of needed reforms that I agree with. In the interests of being concise I will focus here on the most important areas where I think your efforts can be improved, at least from my perspective.
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    First, I have to be frank and say I am disappointed that there isn't more focus on what I think is the most important aspect of patent quality—namely improving the quality of the patent examination process. Most of the committee print covers rules about patent disputes, and does not address the issues with getting patents examined in the first place. Patent quality starts in the Patent Office itself.

    Anybody who is a big customer of the Patent Office, as I am, can tell you that they need some help. The backlog of patents has grown larger, and the waiting time to get a patent has grown with the backlog. Longer waiting is not a recipe for success in a world where the pace of technology is going faster, not slower. Looking ahead, the Patent Office must continue to hire and train new examiners, and keep up with the pace at which invention occurs. This job isn't getting any easier. Many of the proposals in the committee print are likely to increase the burden on the Patent Office. For example, the post-issuance oppositions with discovery will add process and personnel demands.

    Simply put, the Patent Office needs adequate resources to do its job. Until the Patent Office is funded adequately to meet the demand for patents, America's inventors are going to be poorly served. I know that funding is a major occupation of Congress, which cuts across many issues including this one. However, without adequate resources, the Patent Office will be stuck in a situation where patent fees continue to rise, as they did last year, without the service improving. This amounts to a hidden tax on innovation. Is that really what serves America best as we enter the 21st Century?

    In fairness, I can't complain about the resources without adding that I think the Patent Office does a good job within the constraints it has. Some critics of the patent system like to point to silly sounding patents, like a recent case mentioned in the press of a patent on a peanut butter and jelly sandwich. Or, critics will claim that the patent system is ''out of control'' and argue that there are many bad patents. These claims are misleading.
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    Though some bad patents are inevitable, the vast majority of all patents are sound and valid. No serious observer of the patent system has reached any other conclusion. As one example, when patents are re-examined by the Patent Office, the majority of the patents survive all or in part. This is also true in litigation results—there is no data on patents being found invalid en masse in the courts.

    It is true that there are also some pretty frivolous sounding patents—indeed there are web sites that feature them, like Looking at such a site it becomes obvious that the creativity of American inventors covers the full range from the sublime to the ridiculous, but that can leave the wrong impression. Most patents are both serious and valid.

    Another area where misconceptions are bandied about is the topic of patent litigation. In a perfect world, property rights would always be respected, but here on Earth disputes are an inevitable reality. Many critics of the patent system wax hyperbolically about an ''explosion'' or ''epidemic'' in patent litigation. While it is true patent litigation has risen in recent years, these critics aren't telling the whole story. For example, the number of patent lawsuits each year is actually lower than the number of trademark lawsuits. Historically, copyright lawsuits used to outnumber patent suits, but in the late 1990s patent suits pulled ahead. However, in the last five years, copyright lawsuits have grown over twice as fast as patent suits and are set to overtake patent lawsuits, probably this year. Patent lawsuits are neither more common, nor are they growing faster, than any other form of intellectual property litigation.

    A more telling point is that the number of patents has also grown. It makes sense that with more patents, and more patent holders, there is more opportunity for them to get into disputes. If you divide the growth in patent lawsuits by the growth in patents you find that on a per patent basis there were fewer lawsuits in 2004 than there were in 1985. This is hardly the makings of an epidemic. Instead the growth of patent lawsuits reflects the growth of the use of patents, and the growth of technologically innovative companies that rely on patents.
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    Let me be clear that I agree it is a worthy goal to reduce patent litigation. Litigation saps resources that small inventors could put toward more productive pursuits, like new inventions. Reducing the likelihood of litigation, with the attendant cost, complexity and uncertainty is a worthy goal.


    As a result, I cannot agree with one of the most extreme features of the Committee Print, regarding changes in permanent injunctions. This feature will greatly increase the volume, cost and complexity of patent litigation. It will also harm the small inventor.

    The Committee Print changes the way permanent injunctions are granted, reversing principles, practices and legal precedents that date back to the very origin of the Patent Office. Patents are designed to give ownership of inventions to the inventor for a limited period of time. They are property rights. When a court finds that those rights are infringed, and another party is determined to trespass upon those rights, the court may decide to issue an injunction.

    The Committee Print weakens and threatens to eliminate the injunctive relief due to the patent holder. It introduces an untested and potentially volatile new condition of ''irreparable harm'' into the injunction process. To put this in perspective, the Committee Print says, in effect, that it is okay to take the property of the patent holder as long as it won't irreparably harm them. This is tantamount to saying it is okay for a squatter to camp on your lawn as long as the harm to you isn't ''irreparable''. This flies in the face of the most concepts of property. Furthermore, the test of harm includes the extent to which the patentee makes use of the invention.
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    The latter point is quite telling. This feature of the Committee Print amounts to tilting the playing field toward large product companies and away from the small business, university and independent inventor.

    It is important to note that this proposal to curtail overall injunctive relief for patent owners is not confined to preliminary injunctions, which are an altogether different body of law. It makes sense to consider issues like irreparable harm when considering whether to take the extraordinary step of issuing an injunction before trial. This is already common practice in many aspects of the law, including patent law. No change needs to be made here.

    The permanent injunctions remedies for patent owners that the Committee Print threatens to minimize—and, in large part, eliminate—are an entirely different animal than a preliminary injunction. Permanent injunctions occur only after a court has fully tried the case. In practice, this usually includes multiple rounds of appeal which occur over many years, so it is not an emergency rush to judgment. Before a permanent injunction is granted, the court will have carefully and definitively answered the question of infringement. In addition, current law and surrounding case law already give the court leeway to decide whether an injunction is appropriate.

    Given the protracted legal maneuvering that precedes them, it's not like these injunctions sneak up on you. A defendant typically has many years notice. That time can be used to design around the patent in question. This is commonly done in the technology industry. A design-around renders an injunction moot, because the products no longer infringe. Innovative product companies frequently have the option to avoid injunctions through engineering rather than legal proceedings.
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    Injunctions come down to an issue of property. The infringer will, by definition, be found to have trespassed on the patent's holder's property, and the injunction is the eviction notice. No other part of property law holds that a lawful property owner must show that he or she is ''irreparably harmed'' before they can evict a squatter or trespasser.

    What motivates this unprecedented taking of private property rights? Proponents of this approach make several arguments, none of which hold water on closer examination.

    The first argument is based on a misconception that the patent system exists to cut a special break for companies that manufacture products. The fact is that the patent system exists to protect and encourage inventions, not products.

    Products are protected by ordinary commercial law, and the economic incentive to create and sell products is immediate and obvious—the profits that flow from product sales. In sharp contrast, there is no economic incentive for an inventor if others can take and use his invention without justice. The patent system exists to address this by acknowledging the constitutionally guaranteed exclusive rights that inventors have in their inventions. This ''exclusive right'' is meaningless if in most circumstances inventors cannot have ownership in their inventions, including the right to exclude others.

    The public good served by the Patent Office is to stimulate inventors to come up with new technology that can change our world, and see it enter the public domain after a period of time. This point is so important it bears repeating—the patent system exists to protect and stimulate inventions, not products.
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    Discriminating against patent holders on the basis of whether or not they produce a product disenfranchises some of America's most creative and prolific inventors. This broad group includes: university professors and research scientists, who often make great breakthroughs without having the facilities or resources to manufacture the products commercially; individual inventors who are in the same situation; and, finally small businesses who may commercialize some of their inventions but frequently invent more than they are able to productize simultaneously.

    There is nothing dishonorable in an inventor licensing his or her inventions to companies that are in a better position to commercialize the technology. This time honored practice has been around as long as the patent system has. Thomas Edison, Nicola Tesla and other great 19th Century inventors all licensed their inventions out to companies to build them.

    The tradition continues to this day. If you use a digital cellular phone, the chances are high that Qualcomm licensed its CDMA technology to the cell phone's manufacturer. DVD players rely on video compression patent technology licensed from a consortium of inventors ranging from Sony to Columbia University, while licenses to patents on inventions from Ray Dolby and his company increase our enjoyment of music. Within the technology industry companies like IBM, Lucent, Texas Instruments, Sony, Philips, Thomson and many others derive significant revenues from patent licensing activities.


    A primary justification advanced for the injunction proposal is that successful and innovative companies need this legislation to beat back a rising tide of nuisance lawsuits originating from greedy trial lawyers and unscrupulous patent holders. I can sympathize with this because when I was Microsoft, I frequently had to deal with patent lawsuits in my role as Chief Technology Officer. Microsoft has the dubious distinction of having been named as a defendant in patent lawsuits 52 times in the last five years, making it the second most ''popular'' defendant in the country.
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    So, while I can understand the frustration that my colleagues in large technology companies have, the reality is that the impact of these lawsuits is exaggerated. Some horror stories exist, but they are rare. The magnitude of the supposed problem is not borne out by the statistics.

    I was curious, so I did a study counting the total number of lawsuits filed against technology companies by entities that do not produce products. The total of all these lawsuits over the last five years was just over 2% of all patent lawsuits. Furthermore, fully half of those lawsuits are from one very litigious company. Those horror stories aren't about an epidemic, or a situation that is out of control—it is actually a very minor phenomenon. I also counted the number of patent lawsuits in which a large technology company was the plaintiff—the result is 1.6%. Large technology companies generate nearly as many lawsuits as the entities that have no products.

    These numbers put some perspective on the problem. On one hand, we have the potential to harm tens of thousands of small inventors. On the other hand we have the supposed benefit—to reduce the total number of lawsuits by perhaps one percent. It seems clear that the cure is far worse than the disease.

    This is particularly true because the proposal in the Committee Print won't decrease litigation at all. In fact, it will dramatically increase the number of patent lawsuits, as well as their complexity and cost. Ironically, this proposal, which is often described as being yet another much needed and important reform against the excesses of trial lawyers, is in fact the trial lawyers' full employment act.
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    First there is the volume of the lawsuits. Today, about 97% of the patent lawsuits that are filed settle prior to a trial. The entire viability of the court system depends on this high settlement rate. Even a small change would overwhelm the courts with vastly more trials. Yet under the proposal, large companies will have no reason to settle. Their principal motive in settling a patent suit before trial is to avoid the possibility of an injunction should the company be found to be infringing, and to avoid enhanced damages should their unauthorized use of property be found to be willful. Without these threats, companies being sued will adopt the best strategy for their shareholders: refuse to settle and use the advantage of their deep pockets to drag lawsuits out to the bitter end, secure in the knowledge that no injunction can get in their way.

    The complexity of the litigation also increases substantially, because now several new issues have been added to the already complex decision making process of the courts. In addition to determining infringement, the courts must also try an entirely different set of facts. The Committee Print directs that the court ''shall consider and weigh evidence that establishes or negates any equitable factor relevant to a determination of the existence of irreparable harm, including the extent to which the patentee makes use of the invention''.

    In simple terms, this is a second lawsuit tacked onto the original lawsuit, complicating the already difficult patent litigation with an entirely new set of issues. Provisions like ''consider and weigh evidence'' mean a whole new area for motions, discovery and argument in court. As it stands, patent lawsuits can take five to seven years, and in some cases even longer. This new process will add substantially to this timetable.

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    This isn't the only new complexity thrown at the courts. By reducing or eliminating the right to an injunction, the courts are for the first time put in the position of determining the terms and conditions under which technology is licensed on a broad scale. Instead of the marketplace, courts will now be the primary determinant of licensing terms.

    This also greatly adds to the complexity of the litigation. Under current patent law, the court may determine damages for past usage, but the court explicitly does not interfere in the market for future use of the patents. Instead, the court determines whether the property of the patent holder is being used—if it is, then the court issues an injunction and the two parties must work out for themselves what to do. In many cases there is no future use, because the infringer will use the many years that it took for the case to wind its way through the courts to redesign their product. In other cases the infringer and patent holder decide to settle based on their unfettered negotiations, which take into account the full panoply of market factors and competitive alternatives available in the modern economy.

    Instead, under the proposal in the Committee Print, the court would have to set future licensing terms. Economists have a name for this scheme—it is called compulsory licensing. Numerous studies have shown that it is a poor way to run a patent system. It is also out of keeping with the key principles of the American economy and Constitution of the United States.

    The decision-making process inherent in this huge new responsibility will weigh heavily on the courts. Current courts already expend a lot of time and energy determining past damages. Adding the future, which might stretch for a decade or more depending on the life of the patents, greatly raises the stakes. Higher stakes generally means more arguing on yet another issue—what should the future damages be? One thing seems certain: this proposal would be a boon for expert witnesses and the trial lawyers who deploy them.
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    Some critics of the patent system ask ''why aren't monetary damages enough? Why are injunctions needed?'' There are several answers. Corporations fear injunctions, and that's what brings them to the settlement table, yielding a 97% settlement rate. Determining commercial use and setting license fees will greatly complicate the litigation process. But perhaps the most important reason is that this compulsory licensing proposal will inject court mandated control over future licensing rather than allowing the parties to work out a market-oriented solution.


    The injunction proposal is the topic in the Committee Print that I feel most strongly about. However, there are several other areas that deserve some comment. The Committee Print has an innocuous-seeming amendment to Section 271(f) of title 35 in the patent code. Unfortunately, this amendment would dramatically strip the rights of patent holders and would deal a serious blow to small inventors working in what is otherwise one of the most exciting and dynamic areas of the American economy.

    Section 271(f) is in plain terms a law designed to prevent patent holders from being cheated by unscrupulous exporters. Patent law holds that export of a patented invention outside the United States is a use of the invention, just as much as sale inside the country would be. Both export and domestic sale are on the same basis. Section 271(f) was intended to close a loophole and prevent a company from exporting components rather than an entire invention. It has worked well in that purpose and substantial case law has developed around it.

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    Incredibly, the amendment proposed in the Committee Print creates a gaping loophole for software, or any invention that includes software. It requires that any ''component'' under 271(f) be a tangible item—thus exempting software altogether. It additionally requires that the tangible item ''is itself combined physically with other components to create the combination that is alleged to infringe''.

    Translating this to plain English, it means that a software company could exploit the loophole created by this provision to export software without it counting as an export. Software would not qualify as a ''tangible item'', particularly if it was exported by transmission over the Internet or another computer network which these days is the dominant way software is shipped and sold. Software composed of multiple software components—as virtually all software is these days—would also not count. Most software companies have the majority of their revenue come from outside the US, so this provision would at a single stroke cut the licensing revenues due a valid software patent holder by a factor of two or more.

    Software is not the only beneficiary of the loophole created by this provision. Any invention that combines software and hardware could also be able to use the loophole by simply exporting the hardware physically, then downloading software to it. Literally millions of inventions, ranging from aircraft navigation systems to videogames and toys would suddenly have their exports made immune from justice.

    What justification can there be to strip America's inventors of the revenue from these exports? It is hard for me to imagine how, at the onset of the 21st Century, anyone could pretend that only ''tangible items'' have value when the Internet has become a ubiquitous channel for commerce, and software is a multi-hundred billion dollar market.
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    The topic of willful infringement is clearly an area of patent law where reform is needed. The current willfulness standard should be clearly reviewed. However, I cannot support the Committee Print which goes too far in reducing the conditions under which a company can be found liable for willfulness.

    Note that willfulness goes hand in hand with the injunction issue. If large corporations know that they don't have to worry either about an injunction or about an increased financial penalty due to a finding of willfulness, then they can infringe at will. At worst, a court will make them pay a license fee, but even that is not certain because the court might not make such a finding. Even if a court eventually rules against them, the infringer can delay for many years. The best strategy for a large company is simply to infringe widely, and refuse any negotiation with the patent holder.

    This creates an incentive for exactly the kind of behavior the patent system is supposed to oppose. This is another example of a reform that, as an unintended consequence, would increase the volume of patent litigation by motivating companies to infringe. Small inventors would be adversely affected because their only means to bring such deliberate infringers to heel is to resort to expensive litigation they can ill afford.


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


    The filing of continuations to a patent application is a longstanding and valuable mechanism which has great merit in the patent system. Small inventors (and many large inventors) often use continuations because they cannot afford to put all of their ideas into their first patent on an invention. So, they describe the invention via the patent specification, and make their initial set of claims. Later, they can file a continuation which draws new claims, but only within the boundaries of the original specification. This is a well-established practice that has developed a clear body of case law around it, and has the important feature that small inventors can devote their scarce resources to protecting specific inventions first (e.g., the core invention of a start-up company) while pursuing protection for the broader concepts in a continuation application. It therefore rewards both early innovation and ongoing creative invention

    The Committee Print seeks to place new conditions on the filing of continuations. However, the terminology used in the Committee Print removes an important inventor's right by requiring that patent claims in continuations cannot be ''broader in scope than the broadest claim'' in the original case the continuation stems from.
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    Limiting continuation applications in this manner would unfairly bias the patent system against the small inventor, and would result in many legitimate inventions going unprotected by the patent laws, resulting in decreased innovation due to removal of this protection.

    Moreover, this odd provision seems intended to solve a problem that no longer exists, namely the former situation where a U.S. patent expired 17 years after its issue date, which encouraged certain irresponsible patentees to drag the patent procedure out for decades, obtaining a new 17-year term for each issuing patent. This scheme has been eliminated by the adoption in the U.S. of a patent term of 20 years from the filing date, which is the international standard.

    In addition, the practice of reissue applications already incorporates a requirement that no broadening claims can be pursued more than two years after a patent issues. The Committee Print would create a conflict in the law by preventing a patent applicant from pursuing broader claims in a continuation application, even though he or she would be allowed to pursue a broader claim in a reissue of the parent patent, even at a later date.

    This provision is thus both unnecessary and in conflict with other portions of the patent law, and would cause many properly patentable inventions to go unprotected, stifling innovation by encouraging companies to copy rather than invent.


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    Lest it seem that I am unduly negative on the Committee Print, I hasten to add that there are many features that I think are positive moves which will strengthen the patent system. This includes reform to the concept of ''best mode'' implementation. I appreciate the Committee Print proposal to limit rampant assertions of inequitable conduct, the growth of which has been referred to recently as a ''virtual plague.'' Of course, I would encourage the Subcommittee to consider carefully the actual implementation to insure that it cannot be manipulated for delay or leverage.

    Another benefit is increased transparency through the publication of all patent applications is another important reform. These are important contributions which will strengthen the patent system for all participants.

    An area of particular importance is the harmonization of U.S. patent law with international patent law. This is critical for promoting American exports, and aids small inventors who lack the resources to cope with inconsistent international requirements on their own.


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

    The barriers to entry around the world are collapsing. Tom Friedman, a columnist for the New York Times, and a close observer of globalization likes to say that the world is becoming flat. If America wants to remain competitive, we must play to our strengths and remain the world's leading innovators and inventors. The patent system is the bedrock on which this is founded. I want to thank the Subcommittee for their work to keep the patent system, and by extension America, competitive in this vital area.

    Mr. SMITH. Thank you, Dr. Myhrvold.

    Mr. Bartholomew.

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    Mr. BARTHOLOMEW. Thank you, Chairman Smith, Ranking Member Berman, and Members of the Subcommittee. My name is Darin Bartholomew. I am senior counsel for Deere & Company, where I focus on intellectual property and technology matters. I am pleased to testify today on behalf of John Deere Credit, the Financial Services Roundtable, and BITS.

    The Financial Services Roundtable and BITS are financial services trade associations that represent some of the largest financial institutions in the country, including banks, broker-dealers, and other financial institutions. John Deere Credit is one of the largest equipment finance companies in the United States and is proud to be a member of the Financial Services Roundtable. We agree with many of the concepts which you include in the Committee Print and we appreciate the opportunity to provide you and other Members of the Committee with comments.

    Today, over 800,000 applications are pending in the PTO and examiners are unable to spend enough time to provide a meaningful examination on complex applications. This is particularly true in the area of business method and financial services patents. After the landmark decision in State Street Bank & Trust Company in 1998, the number of pending patent applications that involve financial services and business methods have surged greatly. Because it typically takes more than 3 years to get allowance of these applications, we are faced with an avalanche of increased litigation risks for the financial services industry.

    There are steps that Congress can take to provide protection against frivolous claims without impairing the important protections afforded by intellectual property rights. The main areas are creating an opposition proceeding, modifying the standard for injunctive relief, improving the prior-user rights defense, clarifying the damage rules, and promoting collaborative research.
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    The Committee Print on opposition proceedings does not include a window for initiation of an opposition proceeding upon the threat of patent infringement. However, we believe that this is essential to improve the quality of patents issued in the U.S. Organizations will not likely expend the resources necessary to monitor patents in a 9-month post-grant window. There is no tangible economic return for challenging patents unless there is a threatened infringement or requirement to license the application.

    We believe that the 4-month window for launching an opposition after a threat of patent infringement would foster a more detailed scrutiny of patents than ordinarily occurs during a typical examination in which an examiner expends about 25 hours or less. This would create an efficient two-level examination regime within the U.S. for patents that are asserted. Patents that are asserted represent less than 2 percent of issued patents, approximately 2,500 patents a year. That would be a low administrative burden on the PTO to conduct an opposition proceeding for patents prior to their assertion. In the Committee Print, secrecy of the opposer was one of the topics that is necessary to prevent retaliatory oppositions or opposition wars between competitors. We felt that the preponderance of the evidence standard proposed would provide an incentive to use opposition proceedings instead of filing a lawsuit initially.

    Turning to the area of injunctive relief, in the U.K. injunctive relief is permitted anytime after expiration of 3 years from the date of the grant of the patent. This would provide a strong incentive for actually using inventive ideas instead of letting them sit on the shelf, and inventors would be allowed to license to others to achieve and satisfy the working requirements, which would meet the requirements of small entities.

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    With respect to business method patents, business method patents have proved difficult to define in practice and are not defined anywhere in the Patent Act. That's why we favor the Committee Print that would expand the prior-right user defense to all methods and to apparatus and systems. In addition, we feel that the defense should be extended to cover other matters so that we can achieve a standard in which the preponderance of evidence is used to invalidate business method patents.

    In clarifying the damage rules, we agree with the Committee Print, but we have some modifications to refine language. These modifications involve clarifying the level of knowledge that it takes to prevent increased damage awards. We are in agreement with the codification of this decision, in that the absence of an opinion of counsel does not create an inference of willful infringement, in concurrence with the recent Knorr-Bremse decision.

    With respect to the promotion of collaborative research, the current novelty provision in the law includes a public use provision as a novelty-barring event, and the U.K. and Europe both include language that prior art must be publicly available in their statutory provisions. Accordingly, we think that it is appropriate to include a reference to ''public'' or ''publicly available'' in the current statute. The presence of the word ''public'' supports the use of confidentiality agreements to conduct collaborative research between organizations, and the absence of ''publicly available'' would potentially lead to the creation of a class of secret prior art that is disfavored by the Federal Circuit and Congress.

    We look forward to providing additional detail and working with the Subcommittee to refine these concepts.

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    Thank you.

    [The prepared statement of Mr. Bartholomew follows:]











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    Mr. SMITH. Thank you, Mr. Bartholomew.

    Director Dudas, in Dr. Myhrvold's written testimony, he said his number one concern was patent quality, specifically the PTO. And President Levin in his written testimony mentioned a couple of things, that the number of patent examiners was not keeping pace with the workload, that the U.S. seemed to be approving patents at a higher percentage than other countries, and he was concerned about the increasing dilution of the nonobvious standard—all of which might be taken to point to weaknesses in the Patent and Trademark Office.

    In your statement a few minutes ago, you mentioned all the reforms that you were undertaking or planned to undertake. Do you really think you have the resources you need to accomplish the goals, and if not, how do you propose getting those resources?

    Mr. DUDAS. Thank you for that question. We also believe that patent quality is by far the number one most important goal. We also recognize that our office has broken records in the number of applications we've received at the USPTO for each of the last 20 years. We've recognized that the number of examiners we've hired has not kept pace with that number of applications.
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    One of the most important things we can do is, under the strategic plan we put together 37 initiatives, and we basically looked at our processes in a brand-new way. We looked at quality from top-to-bottom. We used to measure quality in terms of the very end of the process: should this patent have issued or shouldn't this patent have issued. We now look at the process in a broken-down manner. We have better ability to train, we have better ability to find out specifically, down to the art unit, down to the examiner, down to the director level what issues we have with quality.

    The issue—the question you have about resources, we have a short-term solution in that the fees that passed will help us hire a good number of examiners over the next number of years. We'll always need—I can say that in the near future we will always, always need examiners to examine patent applications. But we need to find something more than just hiring additional people because we have found that through the 1990's there are times when you simply cannot keep up with the demand. You can't find the number of people. I don't think we're at that place right now, but I do think we have to find other ways.

    One of the things that we had proposed is looking at potential ways of competitively sourcing tasks. Other ways go directly to the heart of what I mentioned earlier about application quality. Our system prides itself on giving vast flexibilities. We should continue to give flexibilities, but at a time when we need to consider resources, we might have to consider which flexibilities are necessary and which are simply beneficial or desirable.

    Mr. SMITH. Okay. Let us know how we can help.

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    Mr. DUDAS. Absolutely.

    Mr. SMITH. President Levin, I was going to go back to the nonobvious standard. How can we ensure that courts, if they are, don't continue to dilute the nonobvious standard; and is one solution perhaps changing the language in section 103 of the Patent Act, or is there a way to achieve the goal without changing the language? Or what would you recommend?

    Mr. LEVIN. Our committee debated this question of changing 103 quite extensively, and the majority concluded that we need not do that. And we did not recommend it. There was a minority of the committee, however, who felt that some toughening of the statutory language would be useful, something like introducing explicit language about an inventive step, such as they have in Europe.

    However, we really did converge on the idea that a post-grant review process would in many respects do the work of a stronger standard. Many of the weak patents that are out there are ultimately overturned by the courts applying the nonobviousness standard. But so many of them get through, particularly in these new areas of technology—genomics when it first came in, and business methods when they first started to get patented. And you have a period of years where the presumption is to grant the patent and there's not enough check. It takes years for the courts to check on the validity, but if you had a post-grant review process it would get checked much more quickly and the standards governing the PTO examiners would be clarified. That would be the most important way to improve patent quality.

    Mr. SMITH. That would have the impact that you desire.
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    Mr. LEVIN. I think the desired impact. And I think Mr.—agrees with that.

    Mr. SMITH. Okay, thanks. One more question, President Levin. I've read that the willful violation is charged in more than 90 percent of all patent suits. What changes do you think need to be made to reduce the number or make it harder to prove willful infringement?

    Mr. LEVIN. It's just the standard practice, you know. The plaintiff charges willful infringement and the defendant counterclaims, you know, inequitable conduct. It happens in most cases. That's why we think both these documents need to be modified or abolished. The Committee's codification of making it unnecessary to rely on exculpatory opinions is helpful, but frankly, I think a majority of our committee believed that simply eliminating treble damages for willful infringement would be the right answer, which effectively eliminates the doctrine.

    It's a subjective determination, ultimately, what is willfulness. And your—the draft bill actually introduces another area of subjectivity, I think inadvertently, by talking about this, you know, way out of a charge of willful infringement by saying that a defendant might have an informed good-faith belief that a court would hold a patent invalid. Well, how are you going to determine that? That's just ripe for asking for lots of discovery and lots of opinion and trying to determine what somebody thought at some prior time. This is just the sort of thing we're trying to avoid in eliminating best mode, in eliminating first to invent, in eliminating inequitable conduct.
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    Mr. SMITH. Okay, thank you. And without objection, I'm going to yield myself an additional minute, realizing I'm setting a precedent for other Members here as well.

    Dr. Myhrvold, you do not want us to change the way injunctions are granted. In that case, what do we do about the shakedown lawsuits that seem to terrorize some people?

    Mr. MYHRVOLD. Well, it's a very difficult issue. And of course it's always easier to criticize a concrete thing than to come up with something new, and that's why the committee has a hard task here. When I was at Microsoft, the nuisance patent lawsuits would come to the chief technology officer. So I handled plenty of those. I think we're one of the most popular, if that's the right term, defendants for that reason. So I have great sympathy with reducing nuisance lawsuits. I don't have a single magic formula, however, that says this is exactly how to do it, and I wish I did.

    Mr. SMITH. Okay. Does anyone else have a solution for this type lawsuits that we're talking about?

    [No response.]

    Mr. SMITH. Good. Maybe it's up to us to decide. I don't know. Okay.

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    Yes, Mr. Bartholomew, do you have a——

    Mr. BARTHOLOMEW. Yes. I think one of the things that we could do to accommodate the small entities in this case is to define the working, if you will, that occurs under that injunctive relief standard to allow small entities to license to others who make, sell, or use the inventions, and that it might also be possible to agree on some other type of exemption for small entities in the case of this requirement. The problem with giving an exemption to small entities is that some LLC and other small companies are set up expressly for the purpose of asserting patents against larger companies, and that would prove to be a difficult exception to get buy-off on.

    Mr. SMITH. Okay, thank you, Mr. Bartholomew.

    Mr. DUDAS. I'm sorry, I——

    Mr. SMITH. Director Dudas, if you will briefly give us a comment.

    Mr. DUDAS. Very briefly. I'm probably testifying more as a former staffer of this Subcommittee and Committee. But I would commend your attention to, if litigation is the problem, to look at litigation systems management reforms, et cetera—loser-pays rules types of things.

    Mr. SMITH. Okay, that might be helpful. Thank you.

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    The gentleman from California, Mr. Berman, is recognized for his questions.

    Mr. BERMAN. And litigation reform in an area that is Federal law would be very unique for the Judiciary Committee in the House. We like to just do litigation reform on the things that are in State courts. [Laughter.]

    The injunction issue is very interesting. Dr. Myhrvold, I had a chance to sit through a withering attack by one of your employees on this portion of the bill. And perhaps—I have actually now read these two, the existing law and our provision, as opposed to just sort of dealing with this very conceptually, and it seems to me there is a middle ground here somewhere. There are two classic sort of positions. One is, a guy has the patent, no one else should be able to do anything with it unless it is with his permission. The other side of the coin is you hear stories of some little portion of a very expensive product for which there was a huge amount invested and a tremendous amount of expense, and it is a very small part of the final product. And apparently the way the law is interpreted, and I can see why given the way the existing law reads, it is only about preventing violations of a right secured by a patent. Yes, the courts have discretion now, but the only factor they really look at is whether the injunction should issue to prevent the violation of any right secured by a patent—the exclusivity issue. It tilts on that side.

    I look at the language of the Committee Print and it seems to tilt against really getting injunctions. You have to show irreparable injury and—isn't there some way to deal with this problem of essentially giving the holder of a patent a level of leverage that really isn't equitable or sensible or in the public interest and at the same time maintain some concept of exclusivity for the patent holder in normal situations? I mean, isn't there some way to bridge existing law and the Committee Print on this that can create a dynamic where this doesn't become an issue that bogs this bill down?
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    Mr. MYHRVOLD. You know, the tricky thing here is you're balancing two sets of rights, you know, the rights of the patent holder and the rights of everybody else, someone who's claimed to be an infringer. One of the ways our court system works is by balancing those rights. Today one form of this is that 97 percent of all patent lawsuits settle before trial. And they settle before trial because——

    Mr. BERMAN. Because of a fear of an injunction.

    Mr. MYHRVOLD. And so, in fact, the tricky thing is if you reduce the likelihood of injunctions, what you wind up doing potentially is doubling or tripling the number of patent lawsuits.

    Mr. BERMAN. That is one way to look at it. Another way to look at it is you enhance the value that the settlement has some relationship to the damage, as opposed to the—I will be careful not to get too literal here—but to the extraordinary power that the guy who is likely to get the injunction has in negotiating a settlement.

    Mr. MYHRVOLD. One comment I'd make, then, is that a lot of these issues are about war stories. You know, you've got the little-inventor war story—little guy is disadvantaged by the big company—and you have the big-company war story about the nuisance lawsuits. It would be very interesting to have a real statistical study and say, well, how often do these things come up? How often is it that a tiny part of a big product, as you said, does actually go all the way to trial and doesn't settle?

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    Mr. BERMAN. And it could be—but—well, but in the end, the language I see in section 283 on injunctions certainly doesn't take that situation into account. Which is why I think there is an interesting—including the summary—a vision of this in the Committee Print.

    Anyway, I don't know, President Levin, if you have——

    Mr. LEVIN. Well, our committee didn't look at this, but I think you're conceptually right. There would be a middle ground that referenced a balancing of the rights of both sides. This only talks about balance—it talks about balance, but it talks about—or principles of equity to prevent the violation of a right secured by a patent. If you want to go in between, you could talk about balancing the rights of the patent holder and the accused infringer.

    Mr. BERMAN. Right. Let me try and get my additional minute.

    Mr. SMITH. Without objection, the gentleman is recognized for an additional 2 minutes.

    Mr. BERMAN. Oh. Great. Yes. Does this expand geometrically or mathematically? [Laughter.]

    Mr. SMITH. It is not going to escalate more.

    Mr. BERMAN. Let me turn to another issue. The publication—I am thinking now in terms of our Committee Print. I like the idea of publication after 18 months. I particularly like it because I would like to see, I think, some ability for third parties to provide prior art going in and obviously publication is essential to providing prior art. But that causes some problems. We have had that drill before.
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    The other issue, though, is first-to-file versus first-to-invent. I understand changing it to first-to-file in terms of harmonization, and there is a certain conceptual attractiveness in saying, hey, if you are going to invent and you want to be protected, go file it. But aren't you, when we do that, creating a huge advantage for the big guy who can quickly hire the lawyer and has him on staff and get the thing, and the small inventor is trying to raise the money with his new invention to put together the patent application and get it in? We are going to get opposition on both of these from certain folks. I am just wondering, isn't 18 months the more important principle to establish here? And both of them are harmonization issues, I guess, but—and aren't there some meritorious arguments against going to first-to-file?

    Mr. LEVIN. Let me take the 18 months first. I think we know that the sky won't fall if we impose an 18-month requirement because we've already imposed it on anyone who wants to take a patent in another national jurisdiction. So all this bill would do and what our committee recommends is extend that to people who, by current law, can exempt themselves from that requirement by promising only to file in the United States. There's no logic behind that. And we know that it's workable to have publication at 18 months and for the very reasons you say—it gets the information out into the public domain and allows challenges for prior art and also informs the people working in related areas of technology as to what patent claims are ahead of it in the queue. So it's a good thing to change the 18-month requirement. It's not a full substitute for switching to a first-to-file regime.

    Mr. BERMAN. No.

    Mr. LEVIN. The advantages of a first-to-file regime, in addition to just the principle of harmonization, are the fact that you avoid all the costly determination when there are disputes about who was first. In one case, it's purely objective who got to the Office first; in the other, first-to-invent, what was in the mind of the inventor at what time—it takes a lot of discovery and a lot of sorting through the evidence. And here's the crux of it. There have been careful statistical studies of this phenomenon. And what we find is small inventors are not disadvantaged by the first-to-file. That is to say, in the case of disputes that are—where there are priority disputes, the first to file, according to Gerry Mossinghoff's work, wins something like 93 or 97 percent of the time. The exact number is in my testimony. And in fact, if anything, the conclusions of Former Commissioner Mossinghoff and of Mark Lemley, a lawyer at the University of California, Berkeley, are that the evidence suggests that the current situation actually slightly disadvantages small inventors who don't have the capacity or resources to fight out the arguments about, you know, who was first in the expensive way that it has to be fought out today.
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    So first-to-file, in our view, would not favor the big guys. It would just be a simpler, more efficient way to resolve disputes about priority.

    Mr. BERMAN. I agree.

    Mr. SMITH. Thank you, Mr. Berman. The gentleman from Virginia, Mr. Goodlatte, is recognized for his questions.

    Mr. GOODLATTE. Well, thank you, Mr. Chairman, and thank you for these continuing hearings on this legislation, which I think everybody here on the Committee that is here today is very, very interested in and we applaud you for your leadership on it. And I want to welcome all these panel members, particularly Secretary Dudas.

    Mr. Secretary, I wonder if you could comment on whether or not a post-grant opposition proceeding would help ensure the quality of patents.

    Mr. DUDAS. I think a post-grant opposition proceeding would go a great length to ensure quality of patent applications. What you hear today is people find that reexamination is too limited. It is too limited. Litigation is considered too costly, too lengthy, too uncertain. Post-grant opposition allows you to go before the Office. You have the expertise there. It's something that's been in our Strategic Plan for almost 3 years now and has been widely accepted in the studies that have been done and the private-sector industry groups as well. I think post-grant opposition is probably the most important element for increasing quality for the system as a whole.
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    Mr. GOODLATTE. Mr. Myhrvold mentions in his testimony the problems that patent backlogs cost for inventors. I am wondering if, again, you would comment on this. How would this post-grant opposition proposal impact patent pendency? How could Congress help minimize the effect that proceeding might have on patent pendency, if you are going to tell me that it could slow it down?

    Mr. DUDAS. It wouldn't naturally slow it down. It could possibly slow down production because of the resources we put into that. The most important thing at that point, as we've said in our Strategic Plan all along, is for any new initiatives that we have in place, we will need to be able to have appropriate funding to go along with that. But there's not a natural policy reason why it would slow down pendency within the Office.

    Mr. GOODLATTE. So you wouldn't predict that simply implementing that policy would have a resultant drag on the productivity of your Agency?

    Mr. DUDAS. Not if it came with resources to fund it, that's correct.

    Mr. LEVIN. May I add an observation?

    Mr. GOODLATTE. Sure.

    Mr. LEVIN. It might actually speed up pendency, because by clarifying standards in emerging areas of technology might make the examination process more efficient for patents behind in the queue.
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    Mr. GOODLATTE. Very good.

    Dr. Myhrvold, you mentioned some criticisms of the bill in your testimony. How would the Committee Print help small businesses?

    Mr. MYHRVOLD. Well, it—you know, there's a variety of things in the Committee Print that I think are helpful to any patent holder. I'm hard-pressed to think of any that help small business particularly, but that's okay.

    Mr. GOODLATTE. No, if they are helped along with everybody else, that is fine, but how—which ideas in this Committee Print would you identify as helpful to small business?

    Mr. MYHRVOLD. It's a little easier for me to identify the ones that would be hurtful, sir.

    Mr. GOODLATTE. I know. That is why I want you to tell us what would be helpful.

    Mr. MYHRVOLD. Well, you know, I've seen the studies that my colleague here referred to about first to file and so forth. It generates lots of heat and passion in people, but I think is actually probably better for folks to have it the way the Committee Print does. I think this inequitable conduct thing definitely needs to be reformed, and that's helpful to everyone. Best mode is another thing, where—all of these subjective areas, as this NRC committee found, only make it harmful for everybody. So I think all of those are potentially very, very good for every patent holder. I don't know of anything in the bill that specifically something that advantages small patent holders over anyone else. But patent quality does help everyone.
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    Mr. GOODLATTE. Anybody else want to address that?

    [No response.]

    Mr. GOODLATTE. Okay, I have another one for you, Dr. Myhrvold. How would the proposals in the Committee Print, or would the proposals in the Committee Print increase or decrease abuses in patent litigation?

    Mr. MYHRVOLD. Well, I think the overall volume of litigation would go up if this injunction feature were implemented. And I'll explain briefly why. The first, as I previously said, 97 percent of the cases settle. They settle because the parties have a motive to settle. If in fact there's no injunction at the end, then at least for that fraction of cases where it seems unlikely, a large corporate litigant has every interest in the world to keep the litigation going. So if 97 percent goes to 94 percent, that doubles the number of suits. So it doesn't have to happen very often to have a big impact.

    In addition, there's two big additional responsibilities heaped on the court here. The first is the determination of is it irreparable harm, is it not; who's commercializing, who isn't commercializing? The bill says, you know, ''shall duly consider all evidence.'' Well, that means motions and discovery and testimony, and it's a lawsuit tacked onto a lawsuit.

    The third area is actually the most concern to me because, if there is no injunction, that means the court must determine the license terms and business model for all future use. Today the court doesn't do that. That's another that's going to have an enormous amount of testimony, litigation, and expert witnesses associated with it.
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    Mr. GOODLATTE. Anybody else want to address that point? Mr. Bartholomew?

    Mr. SMITH. The gentleman is recognized for an additional minute.

    Mr. GOODLATTE. I thank the Chairman.

    Mr. BARTHOLOMEW. The injunctive requirement as it was proposed in the Committee Print does not abolish the right to injunctive relief. And as we interpret it, it primarily applies to a permanent injunction rather than a preliminary injunction. First of all, the injunctive relief is definitely available where working occurs, that is, where the patentee makes use of his invention. And we would favor extending that to allowing the patentee, such as a small entity, to be able to—or any entity, for that matter, to be able to work the invention through licensing to others that may have manufacturing capacity or other expertise that the small entity does not have.

    Further, in looking at the language of the Committee Print, it looks like that a totality of the circumstances test may apply to considering the working requirement. That is, the working requirement might be one factor in the overall determination on whether to grant or deny injunctive relief, but that other factors that relate to determining whether there is harm would also apply.

    Thank you.
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    Mr. GOODLATTE. Thank you, Mr. Chairman.

    Mr. SMITH. Thank you, Mr. Goodlatte.

    The gentlewoman from California, Ms. Lofgren, is recognized for her questions.

    Ms. LOFGREN. Thank you, Mr. Chairman. And thanks to all the panelists for your thoughtful testimony and also the more expansive written testimony.

    This is, for me, a great process because we are hearing a series of knowledgeable people. And I think the Chairman has made clear, we have a working draft. It doesn't have anyone's name on it yet because we want to invite suggestions and end up with the best product that really supports innovation and is fair. So that is the spirit that I am going into this inquiry, and your comments help a great deal.

    Dr. Levin, your comment regarding the reasonable belief issue, all of a sudden I realized I think you are right on that. That is just going to invite a lot more litigation. I personally think that is a very helpful observation.

    Dr. Myhrvold, your comments and testimony, because it is somewhat at odds with the rest of the panelists, does draw attention. In your written testimony, on page 11, you talk and draw our attention to what you describe as a gaping loophole for software on 271(f). Can you expound on what your concern is there?
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    Mr. MYHRVOLD. Okay. Section 271(f) of the law covers what—basically; I'm going to simplify it because both I'm not a lawyer and we want to treat this at a high level. It covers infringement on exports. If you have a patent, you're owed a royalty, it's considered an infringement, you're owed a royalty on both sales in the U.S. and exports. 271(f) covers what happens—a definition of this export thing, broadly. And the Committee Print introduces a very short amendment. It says a component, under this term, shall be a tangible item, and it shall be combined with other components. Now, what that means is that any intangible thing is now not considered an infringement for export under 271(f). Practically speaking, what this means is all export of all software products would not be covered.

    So that means if you're a valid patent holder, you have a royalty agreement with a software company, you wouldn't get paid for all their exports, which for most software companies in the United States is more than half their income. Not just software. Actually, because it says ''tangible item,'' anything involving Internet protocols or any other sort of tangible purely electronic commerce, or an invention that has as a piece of it—you know, an airplane navigation system, including the airplane, but if the software was downloaded across the Internet, then it wouldn't apply.

    And so my issue here is we can't define the only valuable items as tangible.

    Ms. LOFGREN. President Levin or other panelists, do you concur or do you disagree with that?

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    Mr. LEVIN. I really hadn't focused on this provision and it wasn't something we covered in our report, so I would leave it to others to determine.

    Mr. DUDAS. This is something that we were looking at. I can't give you a firm position. I can tell you it's also something that's being reviewed in the courts and that's one of the things we're looking at.

    Ms. LOFGREN. I wonder if it would be fair to ask each of you to take a look at it and share whatever thoughts you might have subsequent to this hearing. I don't know what I think about it. I just was interested by the testimony and wanted to pursue it.

    On the whole issue of the permanent injunctions, Dr. Myhrvold, obviously you are talking about the small inventor, but a lot of the disputes aren't between the small guy and the big guy, they are between the big guy and the big guy. And some of what, in terms of—there is no way to really do a survey of what is happening in the 97 percent of litigation that has been settled, because it has been settled and oftentimes it is a confidential settlement. So it is very difficult. Ultimately, we are relying on anecdotes, which is not a good practice, but it is the only thing we can do because it is all we have.

    So just as a matter of law and principle, how do you—if you were designing this, how would you allow a court to establish the equities where you have, for example, a product that has perhaps a multiplicity of patented materials owned by or licensed by a variety of individuals and corporations, challenged by someone who has a small component, who has the ability, really, to extort a huge amount of money for what is really a small part, versus all the other owners of intellectual property there. I mean, I am not saying there shouldn't be a remedy, but if—how would you—what tools would you give a court to draw—if you were God? [Laughter.]
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    Mr. SMITH. Without objection, the gentlewoman is recognized for an additional minute. Perhaps more.

    Mr. MYHRVOLD. So I can be God, but only for an additional minute.

    Ms. LOFGREN. Only for 60 seconds. So don't waste it.

    Mr. MYHRVOLD. You know, it's a great question. I'm going to have to get back to you in detail. I think, you know, to—I think actually statistical studies could be done, particularly because really what's important here aren't the cases that settle, it's the cases that actually go and injunctions are filed—how often does this actually occur. I think that data could be forthcoming. I don't personally have it.

    It's a difficult issue. Today courts do have discretion and courts will often exercise it. And so the whole question here is do we know that the judiciary is abusing or not properly on those things or not.

    Ms. LOFGREN. Well, it is not a matter of abuse but it is how you set the standard both in statute but also in the law as applied and interpreted by the judicial branch.

    Mr. MYHRVOLD. You know, for example, I'd be really interested to find out how often does this case occur. You're absolutely right. A lot of patent disputes are one big company suing another big company and all their suppliers. So maybe this is a much smaller case, or much larger case, than we're talking about.
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    Ms. LOFGREN. Thank you, Mr. Chairman.

    Mr. SMITH. Thank you, Ms. Lofgren.

    The gentleman from Virginia, Mr. Boucher, is recognized for his questions.

    Mr. BOUCHER. Well, thank you very much, Mr. Chairman, and I want to commend you at the outset for calling the Committee's attention to a very clear need, and that is to improve patent quality through the passage of legislation. And I want to commend you for putting before the Committee a very constructive draft of a new law, which contains many features that I find to be attractive. And I am glad to hear our panelists today point to some of those very constructive features.

    Mr. Berman and I have been for the last 4 years having discussions about approaches that we could take in order to improve patent quality. Four years ago, we drafted a bill, introduced it. It contains a number of the concepts that are now reflected in the bill introduced by Chairman Smith, or the bill circulated by Chairman Smith. There are a number of things that we looked at at that time that, however, are not reflected in this draft. Let me just point to one of those in particular and get your opinion about whether we are right about this, whether Mr. Berman and I were right in proposing this.

    The overall goal here is to improve patent quality. That inevitably means we need to bring more pertinent information to the attention of the patent examiner and to the post-grant proceeding, to the Patent Office generally, so that mistakes can be corrected before the patent leaves the Office. One of the things that I think would really help to improve the quality of the initial patent exam would be a clear opportunity, with well-defined parameters, for third parties to make submissions of prior art that they happen to have within their possession. And Mr. Berman and I had recommended that.
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    Now, that clear procedure is not contained within the draft we are currently considering. So the first question I have is what is your opinion of having a clearly defined procedure that would encourage submissions of prior art by third parties? And if you have suggestions for the parameters of such a process, please share that with us also. Mr. Dudas?

    Mr. DUDAS. Thank you. We do allow now at the Patent and Trademark Office up to 2 months after publication the submission of prior art, but with no relevancy statement. The distinction made is you can submit prior art, that's accepted. If you comment on the prior art, that's sent back or destroyed. There is a statutory prohibition currently in place that says we cannot have a pre-grant opposition procedure, so the question is, in order to avoid harassment or delay of the patent application, how do we get relevant art from the outside along those lines?

    We are open to the suggestion of how we can improve that. We certainly believe that there should be a uniformity of any type of submission that there is there. We are currently looking at 2 months after 18 months—I'm sorry, it's published at 18 months, then there's 2 months to submit prior art—moving that time frame to bring in prior art. And then the question of what's the right balance of whether or not there can be any comment on that at all. That becomes more problematic, and we've traditionally opposed pre-grant both in the U.S. and elsewhere, where it looks like it can be—harass the applicant.

    But a way of getting more prior art is something that we have now that we'd like to expand, and we also do it in more general ways through partnerships with the private sector.
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    Mr. BOUCHER. Well, I very much welcome your willingness to have a conversation about ways we might amplify that process to some extent.

    Other comments on the submission of prior art? President Levin.

    Mr. LEVIN. It seems to me a bit of a confession of failure if you don't allow the submission of prior art until publication and don't require publication until 18 months, and then are thinking about what would happen after that 2-month window. It's like saying there's no hope for ever getting pendency below 2 years. That's not the way the system should be working. That shouldn't be our aspiration. Wouldn't it be a lot better to speed up pendency, to actually beat the publication deadline and actually have the publication of the patent come when the patent issues, after 9 months or 6 months, and then let people intervene with their prior art in an opposition procedure?

    So why think in a mindset that assumes there's a 3-year pendency? That's not the best system.

    Mr. BOUCHER. But you do favor a clear provision that allows for the submission of prior art, perhaps amplifying the administrative process currently in practice at the Patent Office?

    Mr. LEVIN. Well, I think it's more important to speed up pendency and introduce a post-grant review system, where of course——

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    Mr. BOUCHER. Well, we can do both, though. I mean, it is not a mutually exclusive arrangement.

    Dr. Myhrvold, do you want to comment?

    Mr. MYHRVOLD. Well, I very much support both what Commissioner Dudas and Dr. Levin said. I would love to have six- or 9-month pendencies. That would be fantastic for inventors. Maybe a little bit too much to hope for in the near term. I think that the current administrative——

    Mr. SMITH. Without objection, the gentleman is recognized for an additional 2 minutes.

    Mr. BOUCHER. Thank you.

    Mr. MYHRVOLD. You know, I think that the existing procedures that the Patent Office has are good. By the way, I support publication of all applications. I think transparency in the process is very good, and this plays to that. And then, as Director Dudas said, it's a matter of balancing, you know, what the relevant time frames are. Obviously, if you have a 2-year time to submit prior art, that pushes pendency back out again.

    Mr. BOUCHER. Okay. I understand your point. Thank you.

    Let me tell you what my practical concern is about the automatic injunctions that follow today the finding of patent infringement, and that is that it simply enhances dramatically the leverage of the patent holder in order to negotiate what may be an extraordinarily favorable settlement from his perspective. Let me give you an example. Research In Motion, the maker of BlackBerries, which we all carry now, originally was confronted with a patent claim for $50 million. Once a finding of infringement was entered, settlements commenced, and the settlement turned out to be $450 million. And the incentive that Research In Motion had to pay that king's ransom, that shakedown, as Chairman Smith so well described the general circumstance, is that automatic injunction would have terminated the company's business. They would have had to stop selling BlackBerries in the United States.
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    And I just think that leverage is unjustified. I think it is too much. Now, the patent holder is going to get his damages no matter what. There is going to be a trial or a settlement on the question of damages. But why give the patent holder that extraordinary amount of leverage and a shakedown opportunity?

    Comments? President Levin.

    Mr. LEVIN. I think that there's a certain logic in that and perhaps—it's not something I've given a lot of thought to previously, but some more balanced phrasing, rather than going from presumptively there'll be an injunction to presumptively there won't be, finding some kind of balancing test as a way of changing the law would be a solution.

    Mr. BOUCHER. But you agree the current structure is a little bit unbalanced in having that automatic——

    Mr. LEVIN. I agree with the factual assertion you made, that it does give a lot of leverage to the patent holder.

    Mr. BOUCHER. You are a careful witness, President Levin.

    Mr. Dudas, do you want to comment?

    Mr. DUDAS. I'd be happy to comment. I think it goes back a bit to what Congressman Berman had said earlier on the question of how are you viewing this. One of the challenges as intellectual property policymakers is convincing others that intellectual property is property. And the question is, ''Is this property?'' If you take a real property example, which we often do when we're in other countries, the person who has the beachfront property, who holds out when the shopping center wants to come in. Do we say the shopping center's got a great shopping center plan, we really think that they're going to go ahead and build and they'll pay you money damages? I think it's a question of, if that patent is intellectual property, is this really reducing property rights; and a question of whether we're shifting market decisions to judges, is I think what some have said.
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    Mr. BOUCHER. I hear what you are saying. It is a kind of theoretical response to a practical problem, and I find it less than compelling. But I appreciate what you said anyway.

    Mr. Dudas, with the Chairman's indulgence, I want to ask you one question on a subject that has not been raised today. Mr. Berman and I several years ago were quite concerned about the award of business method patents and the fact that we saw that as something of a runaway train. And there were some notable examples that I think most people, most observers really thought were inappropriate for patent awards. I mean, what comes to mind is DoubleClick's patent on the reverse auction. That wasn't exactly new. Reverse auctions have been known since about 5,000 years ago. I mean, it was not exactly novel. What was novel was that DoubleClick carried this out on the Internet for the first time.

    So we inserted a provision which, frankly, I still find appealing, that says that if you are carrying out through a computer implementation something that is well-known in the physical world and is a commonly known practice, it is not novel, it is obvious, it is not patentable.

    What do you think about that? Is that something we should do? It is not something that is in the draft we are now considering, but we think it is still an important principle.

    Mr. DUDAS. I think it is something that we are considering and should consider. I think the biggest problem that we have with business methods patents or with new technologies is that it's new and that it's something that the Office will deal with. I'm one that hesitates to compare rejection rates with a signal of quality, but when you have new technology, you often have that come in. Business methods patents allowance rate is now 16 percent. I think in that area in particular, finding the new technology, finding the new art has largely addressed it. I think this is something that we should be considering.
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    Mr. BOUCHER. Well, this comes right to the point, though. Simply——

    Mr. SMITH. Mr. Boucher, would you like another minute or would you like to submit written questions to Director Dudas?

    Mr. BOUCHER. Well, Mr. Chairman, may I ask unanimous consent for one additional minute?

    Mr. SMITH. Without objection, the gentleman is recognized for another minute.

    Mr. BOUCHER. Thank you, Mr. Chairman.

    Simply improving the quality of the information that comes to the patent examiner doesn't solve a problem when the standard, no matter what the quality of the information, permits the award of the patent. So very simply, do you have a standard now at the Patent Office that says that something carried out for the first time by computer implementation—in common parlance, carried out on the Internet—is not patentable if this is a known practice in the physical world?

    Mr. DUDAS. I don't believe we have a standard that goes along those lines. I think——

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    Mr. BOUCHER. And so my question is shouldn't we have one. Just that simple.

    Mr. DUDAS. And I—the answer—it's a simple question, I think the answer is probably more complex. If you carry something out in the private world and you manage to do it through software, software patents are——

    Mr. SMITH. I see I still have about 30 seconds for Mr. Myhrvold. [Laughter.]

    Mr. MYHRVOLD. The devil's in the details here. If you had a car that could drive itself, that's something that we can do in the real physical world, no software can do today. The day they do that, that's a breakthrough.

    Mr. SMITH. Thank you, Mr. Boucher.

    The gentleman from California, Mr. Schiff, is recognized for his questions.

    Mr. SCHIFF. Thank you, Mr. Chairman.

    President Levin, I wanted to follow up on one of the questions that my colleague Howard Berman asked you earlier, and preface it by saying that, you know, I am very proud as a Californian that the UC has led in patents for several years now. And Cal Tech, located in my district, is a proud Number Two. There has been some concern raised, I think, at the UC about the change, or proposed change, in going to the first-to-file from a first-to-invent and what impact that would have on universities that maybe don't have such a well-developed effort to race to the Patent Office, and have a different practice, by and large.
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    What impact do you think such a change would have on the universities? Is that a concern to you, given your background? How do you think it would change the behavior of universities? Should there be some kind of a carve-out for universities and their publications? What do you think the impact would be?

    Mr. LEVIN. I would firmly oppose a carve-out for universities on these grounds. I think the impact would be of changing to first-to-file, is that we'd get a little more efficient in our own internal processing of patents. I mean, it's hardly an excuse that universities operate more slowly than the private sector. We shouldn't rely on that. And I know there are some colleagues within the university community who are advancing the view that you suggest, but I think for the most part they are the people who run our technology transfer offices. And we had a recent meeting of the presidents of the Association of American Universities, on the Committee on Intellectual Property, that was unanimous in supporting the NRC recommendations, including first-to-file. I think it's—you know, if we're inefficient at processing patents, we shouldn't be rewarded by the law. We ought to get better.

    Mr. SCHIFF. Well, isn't that inefficiency due somewhat to the different nature of a university from a private firm that is in the business of——

    Mr. LEVIN. We already have what is a very, I think, appropriate but also generous provision of the law which allows universities to file patents for inventions that were financed by Federal grants. That's worked extremely well. The reason that the University of California has done so well is because of the passage of the Bayh-Dole Act, and it's had, I think, massive salutary effects on our economy to get technology out into the public domain. There's no reason—I mean, organizations like the University of California or Yale or MIT are well enough organized today that we ought to be able to turn patents around just as fast as private sector. I don't see any reason for a special exception.
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    Mr. SCHIFF. Anybody on that narrow issue have any different view?

    Mr. Chairman, thank you. I yield back the balance of my time.

    Mr. SMITH. Thank you, Mr. Schiff. Why don't you yield the balance of your time to Mr. Berman, who has another question?

    Mr. SCHIFF. Yes, I would be happy to yield my time.

    Mr. BERMAN. I am just wondering if the president of Yale, who has spoken against carve-outs, what they think of the University of California's desire to carve out immunity from liability in copyright and patent cases. One test of your cautiousness that Mr. Boucher observed. [Laughter.]

    Mr. LEVIN. I'm not an expert on the doctrine of sovereign immunity, but I think that it's an unfortunate consequence of that doctrine that some universities are claiming exemption from infringement, whereas private universities are liable for infringement.

    Mr. BERMAN. And those same universities want to enforce their patent rights——

    Mr. LEVIN. That's right. Yeah.
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    Mr. BERMAN. —against others.

    Mr. LEVIN. Yeah. I——

    Mr. BERMAN. That makes it particularly strange, doesn't it?

    Mr. LEVIN. We're prepared to play by the fair rules of the game. We can enforce our patents and copyrights, other people can enforce them against us. I think that's best for the American economy. If there's a way to make that true for all universities that doesn't violate important constitutional principles, I would be in favor of it.

    Mr. BERMAN. Now we'll need a hearing on that subject.

    Mr. SMITH. Thank you, Mr. Berman.

    The other gentleman from California, Mr. Issa, is recognized for his questions.

    Mr. ISSA. It is interesting that my years of watching Star Trek have come in handy. As you were explaining the problem, I immediate thought of the problem of firing while cloaked. Didn't everyone want to have that ability to fire without being fired back. And obviously, in that fiction it wasn't possible, but in this reality it is possible.

    As I ask my questions, I want you to understand that I am not an attorney, I am not a patent attorney; I am a bit of a bonehead engineer. But I always talk like I have experience, because I do have 37 patents and plenty of time paying a lot of lawyers, an awful lot of lawyers, and even a few judges, it seems—— [Laughter.]
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    I knew that would get that reaction.

    Mr. SMITH. You may want to rephrase that. Refer to the Ethics Committee.

    Mr. ISSA. I cannot tell you how much I have spent over the years with judges that were doing their first Markman ruling. And I actually gave the money to the lawyer, but I knew that I was paying for a judge to learn. If that clarifies it—yes, that is what I meant, Mr. Chairman.

    As somebody who has a lot of patents, and my company has even more, I am concerned about a lot of things related to this bill. First of all, I am an advocate of eliminating the ability of people to swear behind, infinitely, their invention and reduction to practice, because I have seen that abused. There is no question, though, that a strict first-to-file is an extreme move in the other way. And I would hope that as this goes on—and I would like your comments on it—that there is middle ground, that there is the ability to recognize that if you run to the Patent Office with a half-baked, half-cocked idea—which, by the way, those who can write those up the quickest win—versus those who want to not only reduce to practice, but they also want to reduce to a form, a patent application, need to have some reasonable middle-ground time.

    That would be my first question, is what about that middle ground?

    Mr. LEVIN. I think it's unnecessary. And the reason I would cite that it's unnecessary is we've got thousands of American corporations today that file for patents in Europe, in specific jurisdictions in Europe as well as the EPO, and in Japan and elsewhere around the globe who are filing on a first-to-file basis and nobody's complaining about it. I don't see a problem.
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    Mr. BERMAN. Would the gentleman yield just on this point?

    Mr. ISSA. Certainly.

    Mr. BERMAN. It isn't first to file——

    Mr. LEVIN. It's first inventor to file.

    Mr. BERMAN. First inventor to file. But your argument in favor of the change was you won't have to have litigation about who invented, but going to first inventor to file still leaves that issue open to litigation.

    Mr. LEVIN. It does. But it doesn't—it removes a big piece of it because a big piece of it is who was first to invent. Now all you have to do is establish that you are an inventor.

    Mr. ISSA. Reclaiming my time, I think the one thing that we have to recognize is yes, those American corporations do it. I was one of those American corporations. I have a number of patents abroad. But of course I always worried about my home market, and my home market gave me the ability to reduce it, to have it ready, and then I always filed in the U.S. first—what a surprise. And then, oh, by the way, you file during your quiet period or during your secret period, if you will, and within that 1 year. So I am not sure that under the current law, with two standards, that you can use no objections overseas as the panacea.

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    As to the question of elimination—and this particularly goes to Mr. Dudas—the current law allows you do file and, even if you are filing against a competitor and both of you are selling in the market, get all the way to the end and not know what dollars you are going to receive, whether you are going to be Panduit or what standard of is the infringement going to be analyzed as market share, is the infringement going to be analyzed as if you were exclusive and there were no non-infringing. All those issues are post-getting a decision, and then you go into that whole other phase. As a result, if you eliminate the ability to get treble damages, what you have done is taken—and you put two levels of uncertainty into the argument. You have put the level of uncertainty of even whether you are going to get legal fees, and you have put the uncertainty as to where you can get to the end of the day and end up getting that famous 2 cents because they look and say, well, there were so many other noncompeting uses that we are not going to give you any of these tests that give you a reasonable loss of profits.

    If you do away with one, aren't you in fact going to have to fix—and that is my question—fix the other so that there would at least be better certainty as to your award if you prevail, if you are going to take away the high end of treble? And I just as for leave for them to answer.

    Mr. SMITH. Oh, okay. And without objection, the gentleman has another 2 minutes as well.

    Mr. DUDAS. Can you premise your question again? I'm sorry, I lost you at the very beginning.

    Mr. ISSA. Right now you start off and you file a lawsuit against a competitor—you are in the market, he is in the market, you believe that there is no non-infringing use, you know of none—but you go through the entire multi-year process. And even if he develops one during the period, he can diminish your claim to where you start off saying I am entitled to lost profits, he is doing $100 million worth of these, and that is $100 million times my profit, that is 33 EBITDA, I am entitled to this.
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    So you start off with this, hey, look, he is infringing $33 million a year of damages. You get to the end, and somebody might give you a reasonable royalty, based on some judge or jury—well, judge, basically, most of the time. He is going to give you a reasonable royalty of 2 cents, based on your invention and not lost profits, because during the time somebody developed a non-infringing, or they believe there is a non-infringing use. So you have a skew. You have from 2 cents a unit that ends up being one-tenth of your legal fees, to $33 million a year. That is very often, at least in my experience, the window you are dealing with.

    When you say treble damages, at least the judge looks and says hell, this isn't enough of an award no matter how—and he says but it was willful, and he has the ability to triple it and provide you reimbursement for your legal fees.

    It sounds like this legislation anticipates, and some of you are saying, let's take that away. And my question is, assume for a moment we are taking it away. Don't you have to give back something, or what you end up with is all of the downside, none of the upside. And patent infringement is about protecting real property. And so I would like your comments on that.

    Mr. DUDAS. I'm sorry. I agree that—and actually I'll take it back one step. I think that there is a reason for willful damages. I think there's a reason for treble damages. I think the issue that has come up is the question of how it's being applied and what it's doing. Our patent system is about disclosure. If it's being applied in such a way that it's causing people not to get more information, not to become more informed, that that becomes a problem. So I would argue that although we should look at how it's being applied, that there is a basis for treble damages and willful infringement, and if that is gone, there should be something to be looked at along those lines. But I think that it shouldn't be gone.
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    Mr. ISSA. Mr. Levin, you wanted to answer?

    Mr. LEVIN. Well, this is more—you know, right now the area of damages is left pretty much at the discretion of the courts. And there are a variety of standards for awarding damages. And, you know, it's perfectly possible to make, you know, strong and credible cases that lost profits ought to be the basis for—and in many cases they are the basis for an award. Are you really objecting to the uncertainty, as opposed to the amounts?

    Mr. ISSA. I'll be very brief. If you don't know whether you are going to get lost profits, and reasonable royalties can be very small, you have—without treble damages you lose the ability for a judge to say, look, this was willful infringement and unless I can give him his legal fees and triple this 2 cents reasonable royalty, I can't bring any justice to this arrangement because we have gone on for 2 years and $2 million apiece, the guy has built his market on cheating on this guy, and I am going to provide an injunctive relief today, but unfortunately I am stuck with a standard of the industry royalty which I don't intend on giving you, but—and essentially you are getting a royalty charge as though I wanted to give you one, in many cases, at the end of a court trial.

    Mr. LEVIN. Yeah, but I've seen many cases in which the argument for reasonable royalties is rejected in favor of lost profits.

    Mr. ISSA. No, no, we are saying that if you don't bring the certainty in, then the fact is, by eliminating the 3-times, the judge has no ability to even balance what would seem to him to be an unreasonable reward, but one in which he cannot use lost profits. Remember, the lost profits are only good if there is a non-infringing alternative—if there isn't a non-infringing alternative. Once there is a non-infringing alternative, you are dropping down this list and the dollars drop way off. And like every other thing we have talked about here, there is always a claim and there is always an expert who says there is a non-infringing alternative. And no matter how crummy it is, they have to consider it as though the expert is telling the truth.
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    Mr. LEVIN. I see your point.

    Mr. SMITH. Thank you, Mr. Issa.

    Let me thank the witnesses for their testimony today. It has been most helpful, most informative. As you all know, we hope toward the end of May to have a piece of legislation that will be more final in its nature, and your testimony today has helped us move the ball along and get closer to that goal.

    I would also like to thank everyone in the audience for their interest in the subject at hand. Really, this is the first effort, I think, at comprehensive patent reform in a number of years, as you heard several Members mention today. And we appreciate your participation and interest and listening as well.

    With that, we stand adjourned.

    [Whereupon, at 1:43 p.m., the Subcommittee was adjourned.]


Material Submitted for the Hearing Record

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    Mr. Chairman,

    Thank you for scheduling this hearing on patent reform. In the past 4 years, my colleague from Virginia and I have introduced legislation on patent quality reforms multiple times. Most recently, in October, we introduced HR 5299, The Patent Quality Assistance Act, which attempted to address many of the problems that continue to exist in our patent system. The bill helped foster discussions among diverse industry groups, all of which now recognize the need for changes to the patent law. While there are many different views about how to amend the law, we all share a common goal—improving the quality of the patent system.

    Our patent system was designed to promote continual innovation by providing strong protection for intellectual property. However, if we protect invalid patents, the system will have the opposite effect, that of hindering creative output. Furthermore, the introduction of poor quality patents into the marketplace actually increases the amount of litigation and has a negative effect on the economy.

    The problem of low quality patents cuts across the entire spectrum of art units that the Patent Office examines, but the chief culprits are patents in the business methods and software area. The famed one click patent and the patent for a method allowing automobile purchasers to select options for cars over the internet, represent only a drop in a very large bucket of questionable quality patents.

    The Patent Office has initiated what it calls a ''second set of eyes review'' in an effort to address the problem, but that is merely a stop gap measure. Without an assurance of sufficient funding every year, the PTO cannot maintain the staff it needs to administer the reviews or implement new quality initiatives. Therefore, funding for the PTO and an end to diversion of collected fees need to remain top priorities in any reform effort.
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    Furthermore, any legislative solution to the problem of patent quality must address deficiencies both at the front end of the process, the examination stage which takes place in the PTO, and at the back end, which takes place in the courtroom. Inventors should have confidence about the quality of the patents they receive before investing further in research and development, and equally secure in the knowledge that they can properly enforce that patent.

    In this vein, I have a couple of concerns relating to the committee print. The print primarily describes reforms to litigation and remedy provisions. While many of the suggestions are worthwhile, I am concerned that we are merely treating the symptoms without enough emphasis on curing the underlying disease. Patent quality needs to remain a focus with an objective of minimizing litigation on numerous invalidity claims. For example, including a provision on allowing submissions of additional prior art to an examiner may be helpful in addressing this poor quality problem.

    Furthermore, much of the print speaks to harmonization of U.S. patent law with patent law in the rest of the world, for example, shifting from a first to invent paradigm to one of first inventor to file. While this is a very important and necessary discussion, I am concerned that opposition to these provisions at this point will affect the ability to achieve other essential patent reform.

    I am looking forward to hearing from today's witnesses to identify potential solutions to the problems created by questionable patent quality. Some of the suggestions for change, such as the injunction provision, may not be palatable to some of the witnesses. However, I throw out a challenge to those witnesses, help us craft a resolution to the problem the injunction provision was designed to address, that of the patent troll. While the structure of the discussion may be centered around the committee print, I hope that the witnesses here and at future hearings will identify additional possibilities for resolving patent quality problems. I look forward to working with the Chairman in drafting effective patent legislation.
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    Thank you for scheduling this hearing to continue our discussion on patent reform. Last week we heard differing opinions about which sections of the patent law should be reformed, and how those reforms should be accomplished. Some of the witnesses stressed changes in litigation rules for patent cases, while others focused on the need to harmonize. U.S. patent laws with foreign patent law. However, all of the witnesses seemed to agree that bolstering the level of patent quality is integral to a workable patent system.

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    The foundation of the patent system is the idea that the Patent and Trademark Office grants high quality patents. However, over the past few years, a larger number of questionable patents have been issued, leading to increased litigation and uncertainty in markets that are heavily dependent on patent rights. There are many possible reasons for the questionable quality—lack of funding resulting from fee diversion, lack of appropriate resources or training materials, an increase in the backlog of patent applications, or even exposure to new patentable subject matter, such as business method patents. While the PTO has made great strides in addressing this problem, more needs to be done to restore confidence in the patent system. Congress has an important role to play in helping bring about that change.

    The Committee print has provided a useful set of guidelines that identify some of the key areas in need of reform. In fact, many of the provisions are almost identical to the ones Mr. Boucher and I proposed last year. However, an issue we addressed with our third party prior art submission provision, and which deserves greater attention in the committee print or any future legislation, is how to address quality on the front end of the examination process.

    I anticipate a spirited discussion today on the merits of some of the proposals in the Committee Print. As I did last week, I submit a challenge to those critical of certain provisions—if you have a problem with a proposal, help us craft a better solution. Because we are planning to introduce a patent bill in the near future, I hope the many interested groups can work together to help us formulate some answers to the problems facing the patent system today. I continue to look forward to working with the Chairman to draft effective patent legislation.

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    Mr. Chairman and members of the subcommittee, I'm Jack Haken, Vice President for Intellectual Property and Standards of U.S. Philips Corporation. I appreciate this opportunity to express our views on a topic of vital interest to Philips, namely preserving the current patent protection against infringing exports that is provided by Section 271(f) in Title 35 of the United States Code.(see footnote 26) As I will explain in my testimony, we are opposed to the amendment proposed in Section 10 of the Committee Print.

    Philips is a manufacturer of electronic and electrical products and is one of the largest users of the patent systems in the United States and other industrialized countries. Last year we filed U.S. patent applications for about three thousand new inventions. Scientists and engineers at our U.S. laboratories have made pioneering advances that revolutionized and revitalized the electronics industry with innovations that led to high definition television, optical CD and DVD recording, digital cellular telephones, medical imaging and digital rights management. In 2004 Philips reported income from licensing our patented inventions that was well in excess of five hundred million dollars.

    Section 271(f) is particularly important to our industry because it allows us to protect our intellectual property rights when American based companies export specialized components and parts kits for assembly in countries that do not have useful patent enforcement systems: in particular China, Taiwan, Korea and India.
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    As background, I would like to speak briefly about two major changes that have affected the electronics hardware industry during the past decade and which make Section 271(f) so important to us.

    The first change is a well-recognized shift of high volume electronics manufacturing from the United Sates to overseas contract facilities. America is no longer a competitive site for manufacturing this equipment, but we remain a primary source of new ideas, technology and essential components that we export to the manufacturers. Royalties on exports of patented technology are a significant reason that our domestic research establishment remains vital.

    The second change is, perhaps, not as visible as the first; in 1990 almost all consumer electronic devices were implemented in separate specialized sets as combinations of hardware circuit elements. For example, televisions, VCR's and telephone answering machines were produced and marketed in separate boxes and often via different selling channels. Today those same product functions are usually implemented in software and we are moving toward a small number of common multiuse hardware platforms. Software programs on personal computers and PDA's now provide audio and video recorder functionality. Cameras and music players are furnished as software features in cellular telephones and television players will soon follow. In this context, the boundary between hardware and software becomes fuzzy. Software and firmware code effectively reconfigures the hardware circuits to perform particular player or display functions that were formerly achieved in fixed circuitry.

    The interchangeability of electronic hardware and software has also softened the boundaries between our traditional marketing and sales channels. Today we find that the traditional electronics manufacturers, major software houses and PC integrators are direct competitors for the same consumer electronics product space.
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    Section 271(f) was enacted by Congress to plug a 1972 judicially-created loophole that had allowed American companies to avoid liability for patent infringement by unassembled kits of parts or essential components of patented combinations which they exported for assembly overseas.

    In March 2005 the United States Court of Appeals for the Federal Circuit confirmed that software code that Microsoft had exported to overseas manufacturers for incorporation onto the disk memories of computer systems was a ''component'' within the meaning of section 271(f). Judge Rader found that Microsoft's software ''morphed'' into hardware in the computer systems and that there was no indication of Congressional intent that the statute would distinguish between hardware and software or tangible and intangible components. Judge Rader also found that any attempt to single-out the software industry as exempt from Section 271(f) would run afoul of the United States' treaty obligations under the TRIPS Agreement.

    Let me cite some examples of Philips' patent licensing programs that would have been negatively affected if proposed section 271(f)(3) had been law when we obtained our relevant patents:

1) Optical Recording—Philips invented the technology that enabled development of the CD and DVD industries. We have patents in our portfolio that cover apparatus and methods that format and index data on these discs. When we started licensing these patents, the patented technology was implemented as hardware circuits in disc drives and recorder sets. Today the same technology is being implemented as PC software that is internationally marketed and distributed over the Internet and as firmware that is stored in semiconductor memory chips. We have great concern that any requirement that limited export patent protection to ''tangible'' items that are ''combined physically'' would impact our ability to bring infringement actions against exporters who utilize the Internet to distribute original and upgrade software to manufacturers and users in developing countries where local intellectual property law enforcement is of little worth.
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2) Speech and Image Coding—Philips invented important methods and apparatus for speech and image coding which we license to manufacturers of cellular telephone, digital cameras and set-top boxes. Large scale production of these products has quickly moved from the United States to other countries that have immature intellectual property enforcement systems like Taiwan, Mainland China and Korea, but American companies are, and are likely to remain, the developers and providers of the application and operating system software that controls the hardware and implements the coding methods. The software is often exported to manufacturers either as source code, master object code copies or as firmware on semiconductor memory chips. Upgrade software is regularly distributed over the Internet and over cable television networks. Again we have great concern that any requirement that limited export patent protection to ''tangible'' items that are ''combined physically'' would impact our ability to bring infringement actions against exporters who distribute this original and upgrade software.

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

4) Digital Personal Video Recorders (PVR's)—Philips manufactured the first Tivo brand personal video recorders and the technology has already changed the television viewing habits of the American public. Philips' patented video compression technology enables these machines to pack recorded video signals onto hard disk drives. Today the same functionality and methods are implemented in PC software that is bundled with operating systems and distributed over the Internet.
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5) Digital Rights Management—Philips holds a significant minority interest in InterTrust Technologies Corp. InterTrust owns and licenses a large portfolio of patents for digital rights management technology that enables the owners of copyrighted music, video works, books and other proprietary data to regulate and collect royalties when their properties are distributed on electronic media and/or over the Internet. In 2004 Philips reported a gain of over one hundred million dollars from the patent licensing activities of InterTrust. Components of many of these patented DRM systems are necessarily distributed at the same time and over the same media or channel with the creative materials that they manage and protect. However we have great concerns that future inventions in this area will not meet the ''tangible'' and ''combined physically'' limitations of proposed section 271(f)(3) and would thus not receive adequate export patent protection.

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

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

    Thank you.






(Footnote 26 return)
The proposed text for Section 271(f)(3) is confusing inasmuch as it is unclear whether the phrase ''under this section'' is intended to only apply to subsection 271(f) or to all of section 271 (e.g. Whether the carve-out for intangible components will also change the scope of domestic contributory infringement under section 271(c)). For purposes of this testimony, we assume that the changes are intended to affect only to subsection 271(f). If the proposal is carried-over into later drafts, we suggest that the ambiguity be clarified.