SPEAKERS CONTENTS INSERTS
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23–434 PDF
2005
AMENDMENT IN THE NATURE OF A SUBSTITUTE TO H.R. 2795, THE ''PATENT ACT OF 2005''
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
ON
H.R. 2795
SEPTEMBER 15, 2005
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Serial No. 109–53
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
DANIEL E. LUNGREN, California
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL ISSA, California
JEFF FLAKE, Arizona
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MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
CHRIS VAN HOLLEN, Maryland
DEBBIE WASSERMAN SCHULTZ, Florida
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PHILIP G. KIKO, General Counsel-Chief of Staff
PERRY H. APELBAUM, Minority Chief Counsel
Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
RIC KELLER, Florida
DARRELL ISSA, California
CHRIS CANNON, Utah
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
ROBERT WEXLER, Florida
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ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
BLAINE MERRITT, Chief Counsel
DAVID WHITNEY, Counsel
JOE KEELEY, Counsel
RYAN VISCO, Counsel
SHANNA WINTERS, Minority Counsel
C O N T E N T S
SEPTEMBER 15, 2005
OPENING STATEMENT
The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Howard L. Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
WITNESSES
Mr. Emery Simon, Counsel, the Business Software Alliance (BSA)
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Oral Testimony
Prepared Statement
Mr. Philip S. Johnson, Chief Patent Counsel, Johnson & Johnson, on behalf of the Pharmaceutical Research and Manufacturers of America (PhRMA)
Oral Testimony
Prepared Statement
Mr. Robert B. Chess, Chairman, Nektar Therapeutics, on behalf of the Biotechnology Industry Organization (BIO)
Oral Testimony
Prepared Statement
Mr. John R. Thomas, Professor, Georgetown University Law Center
Oral Testimony
Prepared Statement
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard L. Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
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Prepared Statement of the Honorable Bob Goodlatte, a Representative in Congress from the State of Virginia, and Member, Subcommittee on Courts, the Internet, and Intellectual Property
Prepared Statement of the Honorable John Conyers, Jr., a Representative in Congress from the State of Michigan, and Member, Subcommittee on Courts, the Internet, and Intellectual Property
Response to post-hearing questions submitted by the Honorable Chris Cannon, a Representative in Congress from the State of Utah, to Phil Johnson, Chief Patent Counsel, Johnson & Johnson
Response to post-hearing questions submitted by the Honorable Darrell Issa, a Representative in Congress from the State of California, to Phil Johnson, Chief Patent Counsel, Johnson & Johnson
Letter to the Honorable Zoe Lofgren, a Representative in Congress from the State of California, from Phil Johnson, Chief Patent Counsel, Johnson & Johnson
Letter to the Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property, and the Honorable Howard L. Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property, and Prepared Statement from Bob DeMatteis, Plastic Packaging Systems
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Prepared Statement of Raymond V. Damadian, President and Chairman, Fonar Corporation, Manufacturer of Scanners
Prepared Statement of Joy L. Bryant, Executive Director, National Association of Patent Practitioners
Prepared Statement of Stephen Wren, Independent Inventor and Actuary
Prepared Statement of Ronald J. Riley, President, Professional Inventors Alliance USA
Letter to the Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property, from Christine J. Siwik, Rakoczy Molino Mazzochi Siwik LLP, on behalf of Barr Laboratories, Inc.
AMENDMENT IN THE NATURE OF A SUBSTITUTE TO H.R. 2795, THE ''PATENT ACT OF 2005''
THURSDAY, SEPTEMBER 15, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
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The Subcommittee met, pursuant to notice, at 10:30 a.m., in Room 2141, Rayburn House Office Building, the Honorable Lamar Smith (Chairman of the Subcommittee) presiding.
Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order.
First, it's nice to look out and see a packed house today. That is indicative of the importance of the subject matter and of course the testimony of our witnesses, which will be forthcoming in just a few minutes. But I appreciate the interest.
While I am mentioning those who are in attendance, I probably should apologize in advance to a lot of you all. Not everyone—that for good or for bad, what you are going to be hearing about today is a fairly arcane subject. It is not only complex, but it is legalistic, technical, and I just appreciate everybody's patience in trying to delve into this particular subject. We are going to be talking about such things as July substitutes and September redlines and apportionment and venue, and so on and so forth. So a lot of subjects we will discuss today, and, again, I appreciate the interest.
Let me explain also why we have been slightly delayed and apologize to those of you all who did not get the word. There was a last-minute Republican conference meeting called to ratify the choice of the new Homeland Security Chairman, who is Peter King of New York. Because of that conference at 10:00, going from 10 roughly to 10:30, we had to postpone this particular hearing. But we will get started immediately. I am going to recognize myself for an opening statement, then the Ranking Member, then we will go to our witnesses.
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Today marks our fourth hearing on patent reform in the 109th Congress. The first two focused on the contents of a Committee print and the third on H.R. 2795. Today we will explore the merits of an amendment in the nature of a substitute to H.R. 2795, the ''Patent Act of 2005,'' that was developed in late July pursuant to negotiations among Subcommittee Members, industry representatives, and professional associations. A second document, a September redline to the substitute reflecting further changes, also will be discussed.
To arrive at this point is no small accomplishment, given the scope of the bill and the eventual application to so many lives and jobs. Notwithstanding our progress to date, the legislation is in fact at a crossroads.
High-tech and financial service companies believe present law encourages individuals to acquire poor quality patents. These patent holders, sometimes called trolls, can extort settlements from manufacturers by threatening to shut down assembly lines in the course of infringement suits.
It shouldn't become just another lawyer's game to divert money from purposeful endeavors like manufacturing computers and software, but some of the changes that we have considered may inadvertently hurt other important industries.
Biotech and brand drug companies, for example, operate under very different business models that rely on a legal system that vigorously affects patent rights. Their concerns about profit margins, lawsuits and productivity are no less sincere than those of the high-tech community.
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In this regard, I hope that Members and witnesses will remain especially creative and open-minded as we attempt to thread the needle on two key issues, changes to patent litigation venue and apportionment of damages.
In the seeking of compromise on the venue issue, we are taking a different approach. Instead of focusing on the frequency with which injunctions are issued, why not revise another statute that allows frivolous suits to be brought in patent friendly districts? We are now exploring the possibilities of allowing these suits to go forward but under more stringent terms; for example, only in districts in which the defendant has committed acts of infringement and has a regularly established place of business.
Consistent with this approach, the redline document would require district court to transfer an infringement action to a judicial district or to a division that is a more appropriate forum; that is, to a district or division where one of the parties has substantial evidence or witnesses.
Concerning apportionment, both the substitute and the redline document address the matter of determining the true value of an invention in an infringement action. In other words, how much value may be attributable to the inventor's own efforts versus the contributions from other sources, including the infringers.
I am especially interested in learning what the witnesses think of the redline draft, which replaces the venue language of the bill with the transfer of venue provision. More than 20 companies representing a broad cross-section of industrial interest support this provision. The redline text applies apportionment analysis to all inventions, not just combinations, distinguishes contributions arising from the patent invention to those attributable to the efforts of the infringer and clarifies that an infringed patent may not be credited with certain improvements that an infringer has incorporated into any infringing product.
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While all issues set forth in both documents are fair game for discussion today, I am particularly interested in these two issues, the venue and the apportionment of damages. I am convinced that either version, the July substitute or the September redline, with some tweaking will help individuals and companies obtain funds for research, commercialize their inventions, grow their businesses, create new jobs, and offer the American public products and services that make our country the envy of the world. In fact, that is what the patent system is supposed to do.
That concludes my remarks. I will now recognize the gentleman from California, Mr. Berman, for his.
Mr. BERMAN. Thanks very much, Mr. Chairman. Once again, thank you for scheduling this hearing on possible substitute amendments to the Patent Reform Act.
I know, in addition to the amendment in the nature of a substitute, that was circulated in July, a number of individual companies have met together over the summer to try to produce a consensus bill, a draft of which has been circulating as well. In all honesty, at this point in the process I would prefer that the Subcommittee be actually marking up a bill, but I understand the situation.
The witnesses all agree that patents are the foundation of American innovation, and they serve as the underpinning of the American economy. Strong intellectual property protection helps protect technology businesses, attract investors, provides incentives for drug companies to develop new drugs and allows independent inventors to make significant contributions to society.
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However, while robust property protection presents these benefits, when protection is given to questionable quality patents, the foundation begins to show its cracks. This leads to an increase in litigation, a decrease in investment, and casts doubt about the effectiveness of our patent system.
At last week's hearing regarding oversight of the PTO, we heard consensus from all of the witnesses, including the director of the agency responsible for administering the patent process, that there is a problem with the quality of patents issuing from the Patent Office.
It would be quite an accomplishment if we could reach consensus with this panel about the solution to the quality issue. Some of the proposed provisions of the original bill, as well as the substitutes, begin to address the quality in the initial stages of the examination process, such as the ability for third parties to submit prior art to the examiner.
Over the number of years Congressman Boucher and I introduced precursors to this bill, we always agreed that the key to improving quality was providing examiners with the necessary prior art resources. Access to better information will yield better decisions by the examiners.
Other provisions will enhance the quality of patents immediately after their issuance, such as the new post-grant opposition procedure. With the opportunity to establish a more comprehensive check on a patent's validity without resorting to an expensive and lengthy court proceeding, the bill will improve both the quality of specific patents and the patent system as a whole.
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Unfortunately, the goal of providing a true alternative to costly litigation, the second window provision, has been omitted from drafts of a substitute. Clearly a limited second window would shed more light on the quality and validity of questionable patents. With substitute options that do not contain the injunction provision or the second window options, I am left to ponder the fate of questionable quality patents that have already been granted. These patents will surely be litigated, but afforded a high presumption of validity, and therefore in all likelihood affirmed.
What will be the effect on the economy that a questionable quality patent; for instance, a software program, can now be the reason for barring others from using their own truly inventive products? Shouldn't we consider how to rectify this problem as we discuss one of the most extensive patent reform bills since the 1952 act?
Though there are main issues which still need further discussions such as duty of candor provision and obviously some of the disputed provisions in the latest coalition draft, I will look forward to hearing from some of the industry witnesses today and see how, if at all, their positions have shifted since we began this process.
I hope to continue working with the group of cosponsors that you have put together, Mr. Chairman, to try to create a more perfect patent reform.
Mr. SMITH. Thank you, Mr. Berman. Without objection other Members' openings statements will be made a part the record. Before we begin our testimony, I would like to invite our witnesses to stand and be sworn in.
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[Witnesses sworn.]
Mr. SMITH. Thank you, please be seated.
Our first witness is Emery Simon, Counsel to the Business Software Alliance, where he advises BSA on a broad range of issues, including copyright law, electronic commerce, trade and encryption.
Mr. Simon received an undergraduate degree from Queens College, a Master's Degree from Johns Hopkins University and a law degree from the Georgetown Law Center.
Our next witness is Philip S. Johnson, Chief Patent Counsel for Johnson & Johnson, who will be testifying on behalf of the Pharmaceutical Research and Manufacturers of America, or PhRMA. He serves as the co-chair of PhRMA's Intellectual Property/Patents Focus Group and holds other leadership post in various IP trade associations. Mr. Johnson received his undergraduate degree from Bucknell University and his law degree from Harvard University.
Our next witness is Robert Chess, Chairman of Nektar Therapeutics, who will be testifying on behalf of the Biotechnology Industry Organization, or BIO. Mr. Chess co-chairs BIO's Intellectual Property Committee. He also teaches entrepreneurship and management of health care innovation at Stanford Graduate School of Business. Mr. Chess studied engineering as a graduate student at California Institute of Technology and earned a Master's Degree from the Harvard Business School.
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Our final witness is John R. Thomas, Professor of Law, Georgetown University Law Center. Professor Thomas also serves as the Visiting Scholar in Economic Growth and Entrepreneurship at the Congressional Research Service. He earned his Bachelor's Degree from Carnegie Mellon University, a law degree from the University of Michigan, and a Master of Law from George Washington University.
Welcome to you all. We have your entire testimony, which will also, without objection, be made a part of the record. We look forward to your testimony today.
Mr. Simon, we will begin with you.
TESTIMONY OF EMERY SIMON, COUNSEL, THE BUSINESS SOFTWARE ALLIANCE (BSA)
Mr. SIMON. Thank you, Mr. Chairman, Mr. Smith, and Members of the Subcommittee.
My name is Emery Simon, and I appear before you today on behalf of the Business Software Alliance. H.R. 2795 and the amendment in the nature of a substitute would make fundamental important changes to the patent law.
The BSA has had an opportunity previously to make its views known on the full exchange of these issues. Today I will limit my comments to a few of the most important changes in the substitute as certain proposals advanced by an ad hoc coalition on September 1, which you referred to, Mr. Chairman, as the redline document.
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Through its recent hearings this Subcommittee has heard that changes are needed in three areas, assuring patent quality, curbing excessive litigation and promoting international harmonization. BSA member companies believe in general the substitute addresses each of these key areas in ways that will improve and modernize our patent system.
We urge the Subcommittee to modify the substitute in certain limited respects, and I will identify these in the course of my testimony.
As Mr. Berman just said, the substitute would make a number of useful reforms aimed at ensuring patent quality. These include establishing a post-grant process to intercept bad patents and providing a workable mechanism aimed at enabling the PTO to receive prior art from persons other than the applicant. We believe these changes will improve patent quality and mitigate the need for parties to file expensive, disruptive lawsuits.
With respect to curbing excessive patent litigation, we support the approach in the substitute with regard to monetary damages and to discouraging plaintiffs from engaging in inappropriate forum shopping.
Specifically, the changes with respect to willful infringement will lead to better, more thorough searches by applicants and less litigation. This provision should reduce the need for expensive notice and opinion letters by establishing three clearly limited grounds for willfulness to be found.
We also support the approach of the substitute in addressing the problem of forum shopping by plaintiffs and the changes proposed in the redline on September 1. The substitute would create a viable means for the defendant to have the case moved through a more appropriate venue. The practice of filing suits in jurisdictions with a demonstrated pro-plaintiff bent warps settlement demands and undermines confidence in the fairness of adjudicated outcomes. We think that the changes proposed in the redline improve upon that.
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On the issue of calculations of damages for infringement, we support the changes proposed in the substitute and oppose the changes proposed in the redline on September 1.
The ad hoc coalition, the redline coalition proposal would perpetuate excessive unmerited and unfair damages awards in cases involving computers and software. Under current law, patent damage models are not required to focus on the economic value of the inventor's contribution. Instead damages can be based on the semantics of a cleverly drafted claim. This practice results in jury confusion because damage models can include significant value attributable not only to the new invention, but instead to already existing technology to prior art.
The court should have the statutory authority to make a determination about what the technological contribution with the patentee is before a party is allowed to present royalty damages models. The statutory language should focus this determination away from clever claims and onto the patent. We support the substitute because it would provide courts with a statutory basis for requiring patentees to present damage calculations based on the proportional value of a patent invention alone, not on the cumulative value of all features included within a large product, which for a computer can be thousands and thousands of features.
There may well be ways, Mr. Chairman, to improve the language in the substitute and we would like to work with you and others before full Committee consideration of this bill.
We oppose, as I said, the ad hoc redline because by changing the term ''inventive contribution'' to ''claimed invention'' unscrupulous parties could well claim damages based on the scope of the claims in the patent rather than the fact specific actual use of the invention.
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A provision not now part of the substitute, but which is part of the redline, is the repeal of section 271(f). We urge you to make this change. Under recent court holdings interpreting 271(f), a copy of a computer program made outside of the United States will be included in support of the United States damages if the software is made from a master disk developed in this country. If the software had been developed outside of the U.S., this rule would not apply. We believe this reading of 271(f) creates an unintended incentive to make valuable development activity outside the U.S. and should be removed from the law.
Finally, we note that in the course of your work the Subcommittee has considered a number of other issues, including second window for commencing a post-grant proceeding, limiting abuses of continuations of pending applications and additional reforms aimed at mitigating excessive litigation. We recognize the Subcommittee has reviewed each of these matters carefully and has decided not to address them at this time. These issues remain of deep concern to BSA members and to the technology industry as a whole. We are prepared at this point to support the Subcommittee reporting favorably the substitute with only the changes I have outlined.
Thank you again.
[The prepared statement of Mr. Simon follows:]
PREPARED STATEMENT OF EMERY SIMON
Chairman Smith, Mr. Berman and members of the Subcommittee, my name is Emery Simon, and I am counselor to the Business Software Alliance. I want to thank you for the opportunity to testify.
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Mr. Chairman, BSA commends you and the other members of this subcommittee for your demonstrated leadership in pursuit of improving our patent system. In our view, the amendment in the nature of a substitute represents an important step towards that goal.
BSA members believe that the patent system is fundamentally sound and works well for most innovators, whether they toil in their garage, experiment in a university laboratory, or work for a large corporation that provides goods and services to consumers. We believe that a periodic review and recalibration of the patent law is not only a good idea, but essential to ensuring that patents remain a vital incentive for innovation.
BSA members approach patent reform from a pragmatic, problem-solving perspective. Our attention is focused on those areas of law and practice that present specific challenges for our companies' day-to-day conduct of their businesses.
Through its recent hearings this Subcommittee has heard that changes are needed in three areas: assuring patent quality, curbing excessive litigation and promoting international harmonization. BSA member companies believe that, in general, the Substitute addresses each of these key areas in ways that will improve and modernize our patent system. We would urge the Subcommittee to modify the substitute in only limited respects, and I will identify those in the course of my testimony.
First, the Substitute would make a number of useful reforms aimed at assuring patent quality at a time of increasing demands on the patent office:
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It establishes an enhanced post-grant process to provide parties a second chance to intercept bad patents. We believe this change will mitigate the need for parties to file expensive and disruptive lawsuits.
It will also provide a more efficient means to challenge bad patents subject to the same evidentiary standard used in the granting of the patent, namely a preponderance of the evidence.
And it will provide a workable mechanism aimed at enabling the PTO to receive prior art information from persons other than applicant. This change will leverage private-sector resources to provide the examiner with more information upon which to base determinations on the fundamental issue of patentability and will help build a contemporaneous record that reflects the extent of the examination by the examiner.
BSA supports each of these reforms.
With respect to curbing excessive patent litigation, we support the approach in the Substitute with regard to monetary damages and to discouraging plaintiffs from engaging in inappropriate forum shopping.
As industry representatives have testified previously, the IT industry, like so many others, is encountering the enormous costs of dealing with patents of questionable quality. Today, hundreds of patent infringement cases are pending against computer software and hardware companies, costing the industry hundreds of millions of dollars each year. The fact that the patent system works well for other industries does not obviate the need to address this very real problem for the technology industry. Our industry is particularly vulnerable to such claims because our complex products often have hundreds of patented or patentable features contained within them.
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Left unchecked, these practices stand to disrupt the activities of true innovators and impede their ability to deliver products and services to consumers. We believe the changes contained in the Substitute would constitute an improvement over the current situation.
Specifically, the changes with respect to willful infringement will lead to better and more through searches by applicants and less litigation. This provision should reduce the need for expensive notice and opinion letters by establishing three clearly limited grounds for willfulness to be found. In addition, we believe that disruptions and uncertainty will be reduced by requiring courts to first make a determination of whether a patent is valid and infringed before it considers willfulness issues, including pleadings, discovery and findings.
We support the approach of the Substitute in addressing the problem of forum shopping by plaintiffs. The Substitute would create a viable means for the defendant to have the case moved to a more appropriate venue. The practice of filing suit in jurisdictions with a demonstrated pro-plaintiff bent warps settlement demands and undermines confidence in the fairness of adjudicated outcomes. It has proven very burdensome for technology companies sued in jurisdictions far removed from their principal places of business where the bulk of the evidence or witnesses are to be found.
While we support the approach of the Substitute, we believe that the goals of promoting litigation efficiency and fairness can be accomplished in a clearer manner with certain changes in the wording. In preparing for this hearing your staff has directed us to look at proposals that have been developed by an ad hoc coalition of companies. We support the language they have developed to improve the Substitute on this issue of forum shopping.
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We also support the changes proposed by the Substitute as circulated by your staff with regard to the calculation of damages for infringement. Today, when a small component of a multi-faceted system or product is alleged to infringe a patent, the damage claim often seeks some portion of the value of the product as a whole, or the full scope of the claimed invention, such as a computer, rather than being limited to only the value of the infringing feature or functionality. In practice this means that damages can be calculated as 3 to 5 percent of the value of a $2,000 computer rather than the value of the item that may be just $1 or $2. This often leads to unduly inflated verdicts or settlement demands, and is unworkable when thousands of patents can apply to a product.
We believe the language of the Substitute as circulated by your staff is generally correct and appropriate. The Substitute would provide courts with a statutory basis for requiring that patentees (and their expert witnesses) present damages calculations based on the proportional value of a patented invention alone, rather than on the cumulative value of all features included with a larger product. There may well be ways to improve this language, and we would like to work with you, Mr. Chairman, and other Members on this language before full Committee consideration of the bill.
We understand that certain changes to this language have been proposed by an ad hoc coalition of interests, and we must state our opposition to their proposal. That group has erroneously characterized that language as having the support of technology companies. That is not the case. The ad hoc coalition draft ignores a serious issue by which abusers of the patent system can claim damages beyond the value of the contribution of the invention. By proposing to change the term ''inventive contribution'' to ''claimed invention'', unscrupulous patentees could well claim damages based on the scope of the claims in the patent rather than the fact-specific actual use of the invention in the instant case.
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For example, in a case involving a built-in modem in a computer, the claim for damages was based on the value of the computer. Under the Substitute's formulation damages would appropriately be measured on the value of the modem. However, if damages were based on the claimed invention as some have proposed—the combination of a microprocessor, hard drive, motherboard etc., the royalty would be based on the value of the entire computer.
BSA member companies often face plaintiffs who demand royalties based on the cost of the entire computer or the entire software package when their inventive contribution is limited to some minor improvement on some piece of the product involved. For this reason, we pledge our willingness to continue to work on this issue, but we must oppose the change proposed by the ad hoc coalition of companies.
A provision not now part of the Substitute is the repeal of Section 271(f). We urge you to make this change. In 1984, Congress added Section 271(f) to prevent companies from manufacturing components of an infringing product in the United States, and exporting those parts for assembly abroad to avoid the claim of infringement. Today, the provision has been interpreted by the courts in ways that deter domestic development of software. Under recent court holdings, a copy of a computer program made outside the United States may in some cases nonetheless be included as part of United States damages if the software is made from a ''master disk'' developed in the United States. If the software had been developed outside the U.S., this rule would not apply. The same issue may exist with respect to development of other information-based products that are made wholly outside the United States based on information developed in the United States. We believe this application of the law creates an unintended incentive to move valuable development activity outside the U.S., and should be removed from the law.
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BSA also supports provisions of the Substitute aimed at harmonizing U.S. law with that of other major jurisdictions by establishing a first to file system and requiring publication of all applications 18 months after filing.
While our members' businesses and those of a growing number of American companies are global, there is no global patent system. The costs and uncertainty posed by a multiplicity of national patent regimes—all sharing the same basic goal, but each imposing disparate administrative burdens on inventors—is a matter that merits action. In this environment, it is essential that the U.S. recognize where its system is out of step with the rest of the world. The U.S. ''first-to-invent'' system is an often-cited example. We believe a change to 'first inventor to file' is timely.
We also endorse the proposal that all pending applications be published at 18 months after their initial filing. Adopting full 18-month publication will make the patent system more transparent and will complement the goals of the proposed third party submission of relevant prior art and post-grant opposition procedures.
Finally, we note that, in the course of your work, the Subcommittee has considered a number of other issues including a ''second window'' for commencing a post grant proceeding, limiting abuses of continuations of pending applications and additional reforms aimed at mitigating excessive litigation. We recognize the Subcommittee has reviewed each of these matters carefully and has decided not to address them at this time. Although these issues remain of concern to BSA members, we are prepared to support the Subcommittee reporting favorably the Substitute with only those changes I have outlined.
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Again, thank you for this opportunity to testify.
Mr. SMITH. Thank you, Mr. Simon.
Mr. Johnson.
TESTIMONY OF PHILIP S. JOHNSON, CHIEF PATENT COUNSEL, JOHNSON & JOHNSON, ON BEHALF OF THE PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA (PhRMA)
Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Chairman, and other distinguished Members of the Subcommittee, I am Phil Johnson. I am Chief Patent Counsel of Johnson & Johnson. I am here to testify today both on behalf of PhRMA and Johnson & Johnson.
We appreciate the opportunity to provide this testimony on this important issue of patent law reform. Johnson & Johnson is a family of more than 200 companies and is the world's largest manufacturer of healthcare products.
Taken collectively, Johnson and Johnson's companies represent the largest maker of medical devices in this country. We represent the second largest biotechnology business and the fourth largest pharmaceutical business.
Johnson & Johnson companies employ 55,000 people in the United States, 7,000 of them in California alone. In reliance on the promises of rewards from the patent system, Johnson & Johnson companies this year expect to invest nearly $5.7 billion in research and development.
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Mr. Chairman and the Subcommittee, with your introduction of the substitute H.R. 2795, we all took a great step forward toward meaningful patent reform. By eliminating provisions relating to injunctions, continuations and so-called second window post-grant opposition, while retaining many of the other provisions of the National Academy suggestions, you have moved our patent reform discussions much closer to consensus.
During the Congressional recess, as has been noted, work continued to close the remaining gaps, especially those relating to the CREATE Act and the substitute's venue and damages provisions.
As you know, a coalition text is the result, a coalition text which is now supported by some 33 companies, and I am now pleased to report that as of Tuesday also by the IPO, the broad-based Association of Intellectual Property Owners.
While there seems to be general agreement among many of the witnesses today on the coalition text approach to venue, the same is obviously not true of the damages apportionment provision. At the outset, it should be noted that the National Academy of Sciences made no recommendation to revise the matter in which damages are assessed in patent cases. To many, including Johnson & Johnson, such a provision is simply unnecessary to patent reform. The current case law which applies Georgia-Pacific factor 13, among other factors, is seen to be working just fine.
To others, Georgia-Pacific factor 13 is not being uniformly applied by the courts and should be codified. This latter approach appears to have been the intent behind the damages apportionment language in the substitute as it is in the coalition text.
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The problem with the language in the substitute is its use of the term ''inventive contribution.'' this is a term which is susceptible to many different interpretations where the language of the coalition text is not. Georgia-Pacific factor 13 establishes an analytical approach for determining the realizable profit or value that should be credited to a patent invention in the context of a reasonable royalty determination.
In determining that value under Georgia-Pacific, the profit or value stemming from the claimed invention is distinguished from the realizable profit or value added to the accused product or process by the infringer. The coalition text is true to this approach.
Johnson & Johnson and many other companies oppose the suggestion that in determining patent damages only partial credit should be given to the realizable profit or value added by the patented invention taken as a whole. Such an approach would be unworkable and unprecedented in patent damages law. Patent damages would be trivialized in most cases and unfairly awarded in almost all.
A patented invention should not be dissected into its subparts or subelements and then evaluated piecemeal in an effort to isolate whether inventive contributions might be present in some of these subparts and, if so, where they are. The reason is because to do so the true value of the invention will likely be lost.
At some level all patented inventions are combinations of old elements. They are patentable precisely because as a whole they are more valuable than the sum of their parts. Under the inventive contribution analysis suggested by some, such synergies would never be recognized. Moreover, to ignore the value of the invention taken as a whole would undermine the principal purpose of the patent system, which is to reward inventors for the entirety of what their inventions have given to society.
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In conclusion, because of the Subcommittee's open and inclusive process, meaningful patent reform, as embodied by the coalition text, may now be within reach. Johnson & Johnson hopes that it is.
I want to thank you for this opportunity to testify and stand ready to answer any questions you might have.
[The prepared statement of Mr. Johnson follows:]
PREPARED STATEMENT OF PHILIP S. JOHNSON
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Mr. SMITH. Thank you, Mr. Johnson.
Mr. Chess.
TESTIMONY OF ROBERT B. CHESS, CHAIRMAN, NEKTAR THERAPEUTICS, ON BEHALF OF THE BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO)
Mr. CHESS. Chairman Smith and Members of the Subcommittee, I am pleased to testify before you today regarding the pending patent reform legislation, the amendment in the nature of a substitute to H.R. 2795. I would like to thank the Subcommittee for its continued leadership issues related to strengthening the foundation of American innovation, intellectual property.
I am Rob Chess, Executive Chairman of Nektar Therapeutics, and I am here representing the Biotechnology Industry Organization. BIO is involved in the research and development of healthcare, agricultural, industrial and environmental biotech products. The industry is one of the most innovative industries in the U.S. economy, filing more than 40,000 biotechnology patent applications in 2003 alone.
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I base my comments today based on 14 years of experience as executive of a top biotech company that is successful because of the strength and predictability of the patents. I am not a patent lawyer. Rather, I am an executive who will explain how important patents are to biotech and what may occur if the wrong reforms are enacted.
Perhaps no other industry is as dependent as the biotech industry. A majority of biotech companies have no products on the market, but they do have patented innovative discoveries which may be translated into life-saving products over the course of years.
To illustrate, I point to my own company, Nektar. Nektar has been in existence since 1991. We have had 17 rounds of financing and have several products on the market. Yet we are still not profitable. It is our intellectual property that has allowed us to gain the capital necessary to survive over those many years.
One of Nektar's exciting products is Exubera, an inhaled insulin powder developed in collaboration with Pfizer. It is the first noninjectable form of insulin and could be a major advance in therapy for the 18 million Americans who suffer from diabetes. Their product, this product was recommended by an FDA advisory committee for approval last week but a key patent covering the product was granted in 2000.
Upon word of the issuance of the patent covering inhaled insulin in dry powder form, Nektar's stock valuation increased by 20 percent. I have actually brought the product here today. Don't leave home without one. But this is it right here.
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Basically, what it does, I hope you don't mind if I give you a demo.
Mr. SMITH. Show and tell is fine.
Mr. CHESS. What the basic problem is there are about 5 million diabetes in the U.S. who take insulin, another 3 million who should. The key to controlling your diabetes is taking insulin 3 to 6 times a day. The average diabetic only takes it right now twice a day because of fear of injections. What we have done is basically done a way so they won't have to take meal-time injections anymore. What you do is you basically take this blister here that has the powdered insulin in it. Open it up just like this. Then stick it in right here just like you would your ATM card, pump it once, fire. See that powder there. You actually see that. That's actually—insulin is smoke. You just breathe that in by just opening the chamber like this, rather than taking a shot.
I think it's actually going to make a huge difference in the lives of people and frankly solve—the biggest problem in diabetes therapy right now is getting people to comply with their insulin therapies.
Nektar's story is similar to the story of hundreds of U.S. biotech companies in the United States. Investors will only invest in ideas if they are adequately protected by strong patents.
Turning to the amendment, we are pleased that it is a substantial improvement over the introduced bill. We note that provisions that would have severely weakened the ability of innovators to obtain and enforce patent protection have been eliminated.
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Specifically the current provision does not contain harmful and permanent injunction reforms, a dangerous second window and post-grant and damaging limitless continuation of practice reforms. BIO members have legitimate needs for filing continuations. I can certainly tell you that from our country we just filed continuations in almost every patent that we do.
Continuation practice allowed biotech inventors to obtain adequate protection for the full scope of their inventions. The practice is common in our industry because it can take 12 to 15 years to bring a product to market. During the patent examination process, the inventor is likely to obtain a patent only on one aspect of his discovery. The issued patent will allow the inventor to seek capital investment to further the product development while he files continuations, applications, commensurate with the scope of the full discovery.
The amendment, however, contains a venue provision which is cause for significant concern for BIO members because it shifts the advantage in patent litigation in favor of the defendant. It would only allow a lawsuit to commence in the district where the defendant resides or is located. BIO opposes this because resource limited biotech companies may be forced to file lawsuits far outside of their normal jurisdiction where small biotech companies may find it difficult to assert their patent rights.
We urge you to eliminate this provision. That said, BIO supports many provisions in the substitute bill, including a first inventor to file system, allowing its signees to file for a patent, eliminating the best mode requirement, eliminating the inequitable contact defense, providing pre-grant submissions of prior art, simplify the definition of prior art and requiring publication within 18 months of filing, and reforming willfulness standards.
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I can see I am over time a little bit, probably because I did the demo. Should I continue here or——
Mr. SMITH. Without objection, please take an extra minute because of that demo. I never had anybody use that as an excuse before, but we will allow that today.
Mr. CHESS. I just can't resist.
Mr. SMITH. Maybe we ought to charge you for that little free advertising, I don't know.
Mr. CHESS. Actually, well, I hope not but some of you may end up using our product one day.
While our members agree on many provisions of the substitute bill, there are areas where our members are decided. One disagreement concerns a standard of proof required to invalidate a patent in the proposed post-grant opposition procedure. As you know, the current substitute requires that a patent challenger show by a preponderance that the patent is still valid. We are basically divided on this between preponderance of evidence and clear and convincing standards.
Let me just say a few words on the Coalition for Patent Reform proposal. We recently became aware of the proposal and have been apprised of their concepts. The proposal differs from your amendment in that it includes a new transfer of venue provision, repeals section 271(f), revises the previous provision of apportionment of damages and clarifies the conditions for patentability taking into account the CREATE Act. Like the substitute, we view the proposal as a substantial improvement over H.R. 2795.
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On the apportionment damages, what I can tell you is that we have not achieved a consensus yet, and we are still studying the proposal.
On the transfer of venue provision in the coalition draft, we note that the draft removed the onerous venue provisions from the substitute amendment and replaces it with a transfer of venue provision. However, the primary objection to the coalition approach within our membership is the belief that transfer of venue motions will delay and divert patent infringement actions.
In conclusion, BIO supports and applauds the continuing efforts of this Subcommittee to improve the patent system, yet urges caution that the delicate balance of the system may be maintained.
Thank you, and I appreciate you allowing a little extra time.
[The prepared statement of Mr. Chess follows:]
PREPARED STATEMENT OF ROBERT B. CHESS
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Mr. SMITH. Thank you, Mr. Chess.
Mr. Thomas.
TESTIMONY OF JOHN R. THOMAS, PROFESSOR, GEORGETOWN UNIVERSITY LAW CENTER
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Mr. THOMAS. Mr. Chairman and Members of the Subcommittee, my name is Jay Thomas. I am delighted to have the opportunity to testify at this hearing in my individual capacity as a concerned observer of the patent system. By no means should my remarks be construed as representing the views of Georgetown University or the Congressional Research Service.
The Subcommittee deserves congratulations for its perseverance in its efforts to reform the legal regime that is widely regarded as America's engine of innovation. Your leadership in advancing these reforms has been remarkable, and we remain confident that you will achieve the interest of patent owners, innovative industry, and the public.
As the legislation continues to mature, the Subcommittee may wish to consider what has been described as its foundations, recent studies by the National Academies, Federal Trade Commission and most recently the National Academy of Public Administration.
In addition, as originally presented, H.R. 2975 appeared to build on a number of themes, including reducing trolling, curbing practices that lead to cost and delays in patent litigation, adopting best practices from peer patent systems, and of course addressing perceived shortfalls in patent quality.
The Subcommittee may wish also to consider the extent to which subsequent versions of the bill fulfill these basic goals. I am going to offer a few examples. New to the more recent provisions of H.R. 2795 are provisions directed toward venue and patent litigation. For policy reasons that remain obscure, Congress has enacted a specialized venue statute for patent cases and subsequent developments in the Federal Circuit have construed them in a liberal fashion, essentially making venue conterminous for personal jurisdiction. The result is a great deal of flexibility for patent plaintiffs.
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One of the versions of the bill would in fact define more stringent venue standards. Another would require or allow transfers of venue. A few observations could be made about the competing approaches, both of which have their merits.
First, we have a Federal Circuit. We have one, the Patent Appeals Court, that hears most, if not all, patent appeals in this country. So forum shopping doesn't really involve the search for more favorable alternative interpretations of the law, but rather different judicial levels of expertise as well as distinct docket management systems that imply a different pace of litigation.
Finally, one of the major themes of the bill is to reduce the cost and complexities of patent cases. The Subcommittee may wish to consider whether the September 1 proposal, which provides standards for transfer of venue, is in keeping with the remainder of the bill, which generally limits resource-intensive satellite determinations in patent cases.
Let me also turn now to continuation applications. Predecessor versions of the bill delegated authority to the PTO to regulate. That language has now been deleted. In the meantime the recently issued National Academy of Public Administration report recommended that limitations be imposed on the number of continuations that could be filed and developments in the courts proceeded apace.
On September 9, the Federal Circuit decided Symbol Technologies v. Lemelson Medical, Education & Research Foundation, affirming a judgment that a patent was invalid for prosecution laches. Continuation practice is a long-standing feature of U.S. patent law and to some extent may even be required by the Paris Convention, which is a treaty the United States signed in the 19th century. Nonetheless, considerable concern both in the NAPA report and commentary by academics and scholarly practitioners have voiced concerns over potential abuses in connection with a limitless refiling of applications. As a result, the Subcommittee may wish to persist in its efforts to determine whether restrictions ought to be imposed upon continuations or not.
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With respect to oppositions, predecessor versions of the bill allowed oppositions to be brought 9 months after the patent issued or 6 months after the patentee brought a charge of infringement. More recent versions of the bill eliminate that latter alternative.
Setting time limits for the instigation of a proposed grant proceeding requires a careful balancing of interests. The current proposal is in line with the established foreign practice which ordinarily requires an opposition to be brought, I think, either 6 to 9 months of patent issuance. These time limits prevent harassment or at least reduce potential for harassment of the patentee and provide stability for the proprietary right.
On the other hand, the current U.S. equivalent to opposition, the reexamination proceeding, allows a request to be brought at any time during the life of a patent. Further, unlike foreign counterpart legislation, H.R. 2795 places strict limits on the length of opposition proceedings, might also reduce the opportunity to harass a patent owner.
More liberal time restrictions may better highlight the U.S. PTO's role as a U.S. public service organization and best ensure the quality of patents that were not immediately believed to be of interest to affect this industry. As a result, the Subcommittee may wish to pay careful attention to time restrictions by use of oppositions for members of a public.
I see that my time has just about drawn to a close. I very much thank the Committee for allowing me to testify. To your credit you have consistently solicited a wide range of use. I know that I speak for a wide number of legal academics and say we will remain available to you for technical assistance as you continue to plumb what you have properly described as an arcane field of law.
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Thank you very much.
[The prepared statement of Mr. Thomas follows:]
PREPARED STATEMENT OF JOHN R. THOMAS
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Mr. SMITH. Thank you very much, Professor Thomas.
Let me direct my questions first to Mr. Simon. As I mentioned in my opening statement, I am going to focus on venue and apportionment. Actually what we did was a breakdown and a chart on both issues. It looks like to me that there is not any strong opposition to the redline venue. Most folks seem to find it acceptable. In the case of PhRMA some members are on the one side, some members are on the other. But it looks like the September 1 draft is not necessarily objectionable. So let me focus on apportionment initially.
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Mr. Simon, my question for you is going to really be why do you support the July versus the September version. But I think you answered that in your testimony.
Let me ask you this, without your volunteering to negotiate in open court over any details, do you think that a compromise is possible on apportionment?
Mr. SIMON. I think it's fair to say, Mr. Chairman, that technology companies and BSA have been nothing but ready to compromise in this process.
Mr. SMITH. Okay.
Mr. SIMON. I think it's also fair to say that there are certain places where we cannot go, where the support of our industry for this legislation should not be taken for granted. This is an extraordinarily important issue for us. Are there different ways to formulate it? Yes. But there is a core issue here that is really separating the parties.
For our industry to look at products as a whole implicates an enormous exposure to damages, and that is simply not a place where we can go.
Mr. SMITH. Thank you. Mr. Johnson, in regard to apportionment, it is my understanding that initially PhRMA agreed to the July version and then I think must have changed. You must have changed your mind because you now support the September redline instead of the July substitute. Is that true that you initially did approve the July substitute?
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Mr. JOHNSON. Mr. Chairman, I am wearing two hats today. I will say that I don't think that PhRMA agreed either to the July version or to the coalition text as it is now for this matter. However, I do think that they did not express opposition to the coalition—rather, to the July 26th draft on apportionment as much as on venue. I know that they reached the second—however, in my written testimony I do point out that even some of the people in the coalition drafters, negotiators if you will, have the damages language that—the inventory contribution language in some of their earlier drafts, when they were, I believe, under the impression that the purpose of that text was to codify Georgia-Pacific factor 13.
It only became apparent, really in the summer, in August, to many of those involved, that the provision that was being sought, at least the interpretation that was being sought for the inventive contribution language was this subpart or sub-element approach to dissect the invention down to its subparts and to then inquire which of those subparts had, if any, inventive contribution.
That really has become—this is not just a semantic difference in language, this is really a fundamental difference in that I think the coalition supporters and many others really feel that would go to the very heart of patent damages.
Mr. SMITH. Okay. We may follow up with you on that particular subject. I appreciate that point of view.
Mr. Chess, in your testimony, you may not have so intended, but your testimony quite frankly reminded me of just how much has been taken out of the original bill and how much has been compromised and how much has been jettisoned and how many concessions have been made. Like I say, that might not have been the intent of your testimony, but it just reminded me of how far we have come, if you want to look at it that particular way.
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The other thing, is it a correct reading of BIO's stand that mainly, mainly because of having 1,000 member companies, that you really haven't taken a hard position on either venue or apportionment? I notice that you said some member companies support the September 1 draft in regard to that very issue. Others support the September draft in regard to apportionment. But because of the multitude of interest, that you represent, you haven't taken a hard position on either venue or apportionment. Is that a fair description?
Mr. CHESS. First of all, let me respond to the first thing you said. Actually, we have beenappreciative of the work, working with you and the others of the Committee, and how much progress has been made here. So we actually believe that the work that has been done——
Mr. SMITH. One person's progress is another person's concession.
Mr. CHESS. Yes, because you know, in our industry, as I think you gathered from my testimony and discussions that you have had, intellectual property is probably as important or more important to our industry than any other, because it's the very heart of what we are doing because the long development times and the certainty of being able to protect what you have developed 10, 15, 20 years out.
Mr. SMITH. Okay.
Mr. CHESS. In regards to the two specific questions you asked on apportionment and on venue, of those two issues the venue issue is a far more important one to us than the apportionment issue. On the apportionment we have different views within the industry. Some view that codifying one out of, I guess, 13 different ways of doing apportionment, you know, would be somewhat unusual and maybe cause the other ones to be less important. Others view it as just codifying something that frankly is done by judicial review anyway. So that is not a critical issue.
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On the venue, the venue is a very important issue to our industry. The key concern there is twofold. One of them is using provisions such as being proposed in the coalition as a delay tactic, so delaying the time that you are able to get injunctive relief, and also a great deal of concern, particularly from smaller companies like my own, of the difficulty of basically having venue chosen in some ways by the defendants in places that are far away and difficult for you to both work in.
That said, we are still studying the September 1 draft and have not come to a——
Mr. SMITH. I have you down as open to considering the language, is that right?
Mr. CHESS. I think we are open to considering, open to discussion on it.
Mr. SMITH. Thank you, Mr. Chess.
Professor Thomas, my time is up on questions, but I will take the liberty of making a quick observation on your testimony. It was unusual, it was subtle, it was understated. I thought it was effective, mostly persuasive or persuasive in many cases. But I appreciated your suggestions and comments.
Now, you may not like this comparison, or maybe you will, but it reminded me a lot of what I have seen of Judge Roberts' writings. So depending on which side you are on, you may or may not consider that to be a compliment, but it is intended to be as such.
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The other thing regarding your testimony that I can't let pass, and that is that anyone, as you did on page 5, who refers to the plural of forum, which most of us would say forums, as fora, f-o-r-a, the Latin plural, can't be all bad.
So anyway, we appreciate your testimony.
The gentleman from California, Mr. Berman, is recognized.
Mr. BERMAN. Well, thank you, Mr. Chairman, some can see it as similar to Judge Roberts, others can see it as patting your back on the one hand and picking your pocket with the other.
Mr. SMITH. Oh, that is too harsh, Mr. Berman.
Mr. BERMAN. The reason I say that is we have a redline version with some—we have a bill which, to my way of thinking, has stripped out very significant reforms in the process. There are many still in it, but it has stripped out some very important reforms.
It has gone the way that I gather a number of your member companies like in the way of apportionment. It has diluted the venue provision. That happens to be a dilution that I like. But I think it's better than the original venue provision that I saw in the July draft. And at least based on your answer to the Chairman, neither PhRMA nor BIO support the bill, even though all these changes have been made at the behest of BIO and PhRMA. What is going on?
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Mr. JOHNSON. I suppose I will volunteer to try to answer that. As for PhRMA, PhRMA has only more recently become involved in this and was not one of the original movers behind the legislation. They didn't submit text. It wasn't one of the organizations that was doing that.
As for the redline, there simply hasn't been enough time since September 1 for, to my knowledge, any of the organizations that are larger professional associations and trade organizations to sit down and go through the procedures that are necessary for them to accept or reject as a whole. It was coincidental that IPO had its annual meeting on this over this past weekend and was able to do that.
However, I would note that a number of PhRMA member companies are supporters of the coalition text. And I am not a politician, so I don't perhaps want to prognosticate what that would mean, but I would certainly—it shows that a number of pharmaceutical companies are supportive, as are companies from many other industries.
Mr. CHESS. As, you know, you can tell with the work that has been going on with the Committee, this is an area that is, as I mentioned earlier, absolutely critical to our industry, and we have put a lot of work as an industry into developing positions here. I don't think we would have put that much work in it if we don't ultimately like to see a bill move forward and see a deal struck that is acceptable to all parties.
That said, I mean, developing a position within BIO with our thousand members is very difficult on something where it is so critical to so many different companies, and there's often divergent business viewpoints on that. We have worked very hard within BIO to come to a consensus view. We actually at our executive committee meeting in August, patent reform in the various proposals, were focused on it. We had a call in September that our board members joined on, and we are still working to sort of come up with a unified position.
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Some of the latest redline areas that Chairman Smith discussed, we are still studying and trying to come up with viewpoints, but we are working very hard to come up with a unified position among many different areas so we can work with the Committee in developing a bill.
Mr. BERMAN. Well, all I know is Chairman Smith has convened a number of meetings with the representatives of PhRMA and BIO since last May. It seems like—and I know there have been countless meetings separate from us or with our staffs. It just seems to me that organizations as sophisticated and agile as the ones that comprise your organization members, if there isn't some process that allows decisions to be made over that period of time in the context of what constitutes necessary changes to get the organization support and what doesn't, there is something missing.
Let me ask one last question on this time. I guess perhaps it's to Mr. Chess.
We have taken out, I guess in the July draft, the second window. I think it's no surprise, I think that weakened the effectiveness of the reforms we sought. The argument was not to allow that second bite at the apple.
At the same time, Mr. Chess, the reason I guess I am asking this question is, you sort of very strongly and emphatically came out for the continuations process unchanged, the right—which apple is the second bite not appropriate at? You want to have it—unfettered ability to file continuation, file successive patents, but heavens forbid that someone who is totally unaware of the existence of the patent until they were sued or be sent a letter of infringement now wanted to utilize the post-grant opposition that they had their chance. Whether they knew it or not, it doesn't matter. They had their chance, if it passes, that's it.
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Do you see what I mean? There seems like there is an inconsistency, depending on which ox is getting gored.
Mr. CHESS. Well, let me explain. You know, at least in the context of our industry, which is, first of all, on the post-grant, and I will sort of tie the two together in the second window, we need—and I can speak to our company—for bringing this product to market we have needed to raise $1.2 billion. The key to be able to do that for us is the certainty of the intellectual property. There is no way we would have been able to raise that kind of money if people thought our intellectual property wouldn't hold up.
Having a second window where 8 years, 10 years, 15 years out, somebody can come back by a lower standard than what would have held up in a court and have a chance to basically invalidate our intellectual property would be a huge issue for investors, and I think that would make a major difference in the amount of flowback coming in.
Mr. BERMAN. Let's just state that accurately. Someone who comes in at a point where they have been told that they are—it is alleged that they are infringing on a patent that they may have had no knowledge of and only has to show by a preponderance of the evidence that the patent never should have been granted in the first place, that's not what I would call a low standard.
Mr. CHESS. It certainly—as you know, sir, it's a lower standard than would be, you know, in a court. And certainly in our industry, you know, the patents are all published, people can read them and they have plenty of opportunity to look at the literature, you know, before embarking on an area.
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On the continuation in parts, in the biotech industry it takes many years to perfect an invention, particularly for smaller companies where you don't have the full resources to develop all the aspects of that. That's why in our company and many others you see many continuation of parts. They are not separate patents. They are basically taking the invention and basically fleshing it out over time so you are able to get the full value out of it.
Mr. SMITH. Thank you, Mr. Berman. The gentleman from Florida, Mr. Keller, is recognized for Committee questions.
Mr. KELLER. Thank you, Mr. Chairman.
Mr. Chess, you are the chairman of a company that's been in business for 14 years and is still not profitable.
Mr. Simon, you are the counsel for a group that you call the BS Alliance. With that background, why aren't you guys running for Congress?
My first question. I am going to be directing most of my questions to the issue of litigation reform. But before I do, just looking at other parts of the bill, I can't help but notice, Mr. Chairman, that section 5 of this bill is called the duty of candor. So Congress is now telling private citizens that they have a duty to be candid. Isn't that a bit like Colonel Sanders telling people they have a duty to be nice to chickens.
I think it may be subjective and a bit tough to bring some enforcement in that section, but I remain open minded in that section and every other one.
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With respect to litigation reform, let me begin with
Mr. Simon. Do you think there should be additional reforms in this bill aimed at reducing excessive or frivolous litigation and, if so, what do you think they should be?
Mr. SIMON. It's a tough committee, Mr. Keller, because we have throughout this process identified a number of areas where we would like to see reform. For a variety of reasons this Subcommittee has decided at this time not to take up all of those areas. But the problem of excessive litigation continues to spiral out of control in our industry.
If I may, let me just read to you the first sentence of an article in yesterday's ''Wall Street Journal'' by Bill Buckley. He writes: In one of Douglas Fuey's early business ventures he provided phony new vehicle titles for stolen cars. His partner Larry Day is a one-time Blackjack dealer in Las Vegas. Together, the two men have found a more active line of work suing cell phone companies for patent infringement. Earlier this year their company got $128 million in damages from Boston Communications.
That's an example of what I think we are confronting that is going to become more and more of a problem. I think this bill will make a difference. I think that some of these issues have to be reconsidered by you over time.
Mr. KELLER. Okay. Mr. Johnson, do you think there are additional reforms aimed at reducing excessive or frivolous litigation that we might consider ?
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Mr. JOHNSON. I think there are. I couldn't estimate whether or not they would be politically acceptable. They are something that could be accomplished. We have considered a great many of them during our conversations. One that we have considered and rejected as probably not possible would be to adopt the English system of awarding attorneys fees to the prevailing party and as a way for deterring frivolous litigation.
Mr. KELLER. You considered that but didn't think ultimately that would fly?
Mr. JOHNSON. Well, actually, I personally did, but I was advised. This is part of a larger process, and others advised me that was probably not something that could be accomplished.
Mr. KELLER. What about the idea of bigger sanctions for frivolous litigation? Did you all ever consider that?
Mr. JOHNSON. Well, that would fall in that same category.
Mr. KELLER. Not really, because the loser pays. You can lose and still not have a frivolous suit, you know. You just have to pay the other side. There are some people that have legitimate suits, you know, just bad, bad ideas.
Mr. JOHNSON. Yes. Well, we already have now in the patent laws the abilities for the courts to award trebled damages in attorneys fees but especially attorneys fees in exceptional cases, and that apparently is not sufficient to deter as many frivolous suits as we would like.
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Mr. KELLER. Okay. Mr. Chess, of course, both of you gentlemen know I was joking about your respective backgrounds there. But do you have any ideas of any additional reforms that we might consider that would reduce frivolous litigation?
Mr. CHESS. Yes. Actually just on the note, the average biotech company, you might be interested, it takes about 15 years to gain profitability. That includes sort of the successful one like Genentech and Amgen. It is a long road.
Mr. KELLER. I know, I am just kidding.
Mr. CHESS. I know.
Mr. KELLER. Okay.
Mr. CHESS. The one thing I can tell you—unlike the other people here I am not a patent attorney, so I can't give you probably kind of specific concepts here. The one I probably can reinforce is the importance of being able to enforce the patent, you know, in our industry, given the amount of, you know, investment we make. But I will sort of leave it to the others and perhaps if we can get back to you in writing on specific ideas on this area.
[11:32 a.m.]
Mr. KELLER. Mr. Chairman, the final—if Mr. Thomas could also—or Professor Thomas, give us your thoughts. More sanctions for attorney fees, prevailing party get their fees paid, any other ideas that you think would help with reducing frivolous litigation.
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Mr. THOMAS. I'm not in a specific position to advocate reforms before the Subcommittee. However, I can report scholarly discussion on three points. One is, of course, adoption of the English rule for fee shifting, which may reduce asymmetries in litigation risk profiles between troll plaintiffs and for innovative firms.
Another possibility is that the patent system currently uses a specialized court at the appellate level. There may be an option for having magistrates, special masters who are more specialized at the trial court level.
Finally, I think it's fair to say it's pretty widely believed that arbitration in the patent field has been a quiet failure, and the Federal circuit is currently embarking upon an arbitration proposal. Perhaps the Subcommittee could use its good offices to encourage arbitration as a means of reducing transaction costs associated with dispute resolution in the patent field.
Mr. KELLER. Thank all of you, Mr. Chairman. Yield back.
Mr. SMITH. Thank you, Mr. Keller.
The gentlewoman from California Ms. Lofgren.
Ms. LOFGREN. Thank you, Mr. Chairman. As always, this has been a useful and enormously interesting hearing, and I appreciate that the witnesses would take so much time and explain their viewpoint on it. I'm struck again by the disagreements that are really rooted in some cases by the different business models that are present before us. And I think it is important and that we've had this spirit throughout that with whatever reform we have, we make sure that we nurture every element of our economy. It's important for all of us that biotechnology and IT, that everything flourish for the whole good of the American economy.
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Having said that, however, I remain frustrated that we have not yet reached an agreement where I think in some areas we could. And I was listening, Mr. Simon, to your testimony and your problem with the coalition print language on calculation of damages. And I'm wondering if you could provide examples of real situations you have encountered where a court awarded excessive damages to a patentee unfairly based on the whole product subject to the patent rather than simply the inventive contribution so we can understand your point of view a little bit better.
Mr. SIMON. Thank you, Ms. Lofgren.
There have been a whole series of cases. We had a case some years ago where General Electric was sued over its magnetic resonance device, where a very small element of it was infringing, and the damages were calculated based on the entire MRI machine, which is millions of dollars, as I understand it. We had a case just a couple of years ago where Bose was being sued by JBL Speaker Manufacturers. What was at issue was an input into the speaker, how the analog information comes in. Again, the damages were based on the entire speaker rather than the patented port. Last year we had a case in Procom v. Symbol, which is a wireless technology which we now all use, the 80211 standard. At issue was a power-saving feature in the chip. Again, the damages were calculated not just on the basis of the power-saving feature, but on the transmitter, the receiver, the entire technology.
So if you'd like, I'd be happy to submit for the record specifics on these cases and many others.
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So we have a pattern where courts—where juries are awarding damages based upon entire products. And as you well know, for example, a computer may have as many as 2,000 or 3,000 or 4,000 patents that read on to it. Well, if you award 1 percent damages per patent, you end up with damages potentially swamping the entire value of the product. That's the threat that we confront.
Ms. LOFGREN. I think it would be helpful to the Committee if you could submit details for us to study.
Mr. SIMON. We'd be happy to.
Ms. LOFGREN. I would appreciate that.
Mr. Thomas, I understand from your testimony that you believe that existing law under Georgia Pacific allows courts to—already—to apply an apportionment principle in patent cases. What do you think of how the court apportions damages based on facts in the cases just disclosed or mentioned by Mr. Simon? Do you have—what's going wrong here?
Mr. THOMAS. My experience at the Congressional Research Service has taught me to see both sides of many issues. It's fair to say that this is already a part of our law, at least with respect to reasonable royalties. There may be a lack of appreciation of that point. There may be disagreements as to the factual dispute. The notion is, well, why is someone buying this product? Are they buying it because of a particular advantage? They're probably not buying a car because of a patented windshield wiper, but they may be buying a speaker because of a patented woofer. So there's simply going to be independent factual determinations that have to be made on a case-by-case basis, and there will also often be disagreements about particular facts in particular cases. I can describe the problem as really no more than that.
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Ms. LOFGREN. It was a number of months ago now, I submitted a memorandum that were suggestions not that I had made, but that had been made to me by academics, and I would never support the English rule when it comes to ordinary tort law, number one, because that's up to the States, not up to the Federal Government.
And, number two, you can have injured parties that lack the means to actually hire counsel and seek justice in courts. Those rationales don't apply in this case because it is Federal jurisdiction, and you have people of means for the most part who can have the ability to protect or assert their rights.
I'm wondering, Mr. Johnson, you talked briefly, in answer to my colleague's question, about the—adopting the copyright standard for attorneys' fees. How much do you think would that change the dynamic in terms of frivolous lawsuits? Actually, I'm over, but perhaps we could get a comment from others.
And then the other suggestion made to me was to mandate attorneys' fees for defendants who respond to demand letters that subsequently invalidates the patent in court. I'm wondering if anyone has a perspective of how much that might heal the problems that face us.
Mr. JOHNSON. May I respond?
Mr. SMITH. Yes. Mr. Johnson.
Mr. JOHNSON. I think that adoption of the English rule would substantially deter the bringing of frivolous actions, and it would allow the bringing of some actions which now are not brought because the enormous cost of patent litigation may in some situations overshadow the recovery that's likely. I think if you envision what the BSA folks might refer to as trolls bringing an action against a large software company, for example, knowing that if they go to final judgment and lose, that they may have to pay the attorneys' fees incurred in such an action, that there probably would be a very different dynamic.
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Ms. LOFGREN. Mr. Chairman, I know my time is up, and I appreciate Mr. Johnson's response. Could we just ask Mr. Simon to briefly comment, and then I'll yield back.
Mr. SMITH. Why don't we have one more response, and then you can also follow up with written questions, which I'm sure they'll be happy to answer as well.
One more response, Mr. Thomas.
Ms. LOFGREN. Actually, I was wondering if Mr. Simon and BSA——
Mr. SMITH. Sorry; Mr. Simon.
Mr. SIMON. Mr. Chairman, with respect to the English rule that has been suggested, we think it would make a difference. The problem with frivolous litigation and attorneys' fees being paid by a frivolous plaintiff is you have got to have a real entity there. What we have in a lot of situations right now is the entities are suing are operations much like the one that Bill Buckley described in this article yesterday. So for entities like that, having to—at the end of the day having to pay potential legal fees, is not going to make that much of a big difference. If the suit is between two established entities, Johnson & Johnson and GE, there's a real disincentive there.
So I'm not negating the fact it would have an impact, I'm just not sure——
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Ms. LOFGREN. It just doesn't deal with the issue of stopping products shipping because of the exposure.
Mr. SIMON. That's one of the elements of it, too. I just didn't want to go down the injunction path with you.
Ms. LOFGREN. I understand.
Thank you, Mr. Chairman.
Mr. SMITH. Thank you, Ms. Lofgren.
The gentleman from Utah Mr. Cannon is recognized for questions.
Mr. CANNON. Thank you, Mr. Chairman. If I could just follow up on this discussion about the English rule, which I always have disliked. I note that the Chairman has introduced a bill called the Litigation Abuse Reduction Act, LARA, which is in my Subcommittee, so we're working complementarily here. The idea behind that bill is we actually put teeth in rule 11 sanctions, which seems to me might actually go a long ways.
Mr. Thomas in particular, or any other panelist who would like to talk about it, does rule 11 sanctions actually—do they work in this case, and would that improve the situation?
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Mr. THOMAS. Again, there are a couple sides to every issue, but generally speaking, I think rule 11 has not historically proven to be a tremendous success in curbing abusive litigation practices.
Mr. CANNON. Definitely not historically, but is it possible? Are you familiar with the bill we call LARA?
Mr. THOMAS. Yes, I've reviewed it. Generally speaking, patent litigation is very unpredictable; very difficult for individuals to determine in a jury trial system exactly what is going to happen. And so I think there often is a plausible argument of infringement and validity. I suspect I'm a little suspicious of the approach. Thank you.
Mr. CANNON. By that you mean you don't think the approach would be effective, or you think given the vagaries of a jury trial, that it might not produce the justice from a judge making a decision about the frivolous nature of the case as compared with a jury?
Mr. THOMAS. For all those reasons you have described.
Mr. CANNON. Mr. Johnson, do you want to comment on that one?
Mr. JOHNSON. Yes. I think that there's quite a difference between expecting that a rule 11 sanction would be applied or might be applied when you finally get to trial and the dynamics that are involved in bringing suits and negotiating settlements in advance. The English rule, as we've discussed, would establish the certainty that the prevailing party would get its attorneys' fees, and that will change the dynamics in the settlement negotiations that take place.
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And we have to remember that the vast majority of these kinds of disputes are never tried. One case in thirteen or even less than that actually gets to trial. The possibility that rule 11 sanctions would be applied in the cases that get to trial would be sufficiently remote, so I'm afraid it wouldn't change the dynamics.
Mr. CANNON. I think the nice thing about LARA is it can be applied at any stage. So if it becomes clear to a judge that a case is frivolous—what do we need to do to LARA to make it actually bite the guy who brings that frivolous case and then it's paid out of court?
Mr. JOHNSON. If I may, the cases are sufficiently complex that in the pretrial stage it's unlikely the judges would develop the degree of familiarity and confidence to want to go and sanction one party or the other prior to trial. I think that's something courts would be reluctant to do.
Mr. CANNON. They certainly have been reluctant to do that in the past. I think we need a change of view among our jurists today to get in, look at a case, see if it's got substance, and then sanction people. And that's what I hope LARA will do at some point in time. I think that is a duty that we need to start imbuing into the judiciary. I think LARA is a good step in that direction. I'm relatively passionate about that. That's why I'm asking these questions, because I want the judges to be thinking about what their responsibility is.
Mr. Simon, let me go to you for a moment. In your testimony you support the repeal of section 271(f). There are companies in the U.S. that contend it is intended to protect intellectual property from overseas infringement. If intellectual property protection is the goal of our bill, does the repeal of 271(f) affect that goal?
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Mr. SIMON. No, I don't believe so, Mr. Cannon. The provision was added to the U.S. Law in the 1980's, 1984, I believe, where we had a situation where folks were gaming the system. They were assembling parts that if they had been put together in complete product would have been infringing in the U.S., but the parts individually were not. What they were doing is shipping those products outside the U.S. to avoid the patent infringement in the U.S. and 271's added the law to make sure those folks could not get away with that.
What we have now is an aberration, which is what we have now is if you do your full development of a computer program in the U.S., and you ship that master disk outside, and you actually install it in a new PC or phone or whatever outside the U.S., it reads 271(f) onto that situation. Nobody in the U.S. is trying to avoid patent infringement in the U.S. if that software is infringing in the U.S., it's infringing in the U.S. So what we have is an unfortunate incentive to do development outside the U.S. because 271 does not reach that situation as opposed to doing it here.
So I don't think it has any impact on domestic—in fact, it would have a positive impact on innovation.
Mr. CANNON. Positive affect on domestic, but isn't there a significant possibility that people in the U.S., companies in the U.S., will take software and have it developed outside, just like you would put a package of components together and make a device; isn't there a temptation to send software development outside the United States so that pieces can be brought together and not be subject to the same kind of infringement that there would be if it was developed in the U.S.? Isn't it two sides of a coin here?
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Mr. SIMON. There are two sides to a coin, of course. I think what we have is a situation where the current law as it has been read by two separate court opinions acts as a disincentive to domestic development. The fact that companies do development both domestically and abroad has a lot more to do with business reasons right now, and we'd like to keep it at a business reason level rather than an aberration of the law.
Mr. CANNON. Mr. Chairman, I cannot believe how quickly that light goes red. As I yield back, I just want to say one thing. That is, people in Bangladesh can buy air time to make a telephone call anywhere on Earth for a penny a minute. What we're doing here is not just about the health of American companies, which is very, very important, but it's about an environment in which technology can flourish and affect the poorest people on Earth. Never in the history of mankind has the ability of a poor nation to leapfrog into the next generation been so great as it is today. I think this is a time of great moral importance to America and to the world, and I want to thank our panel for the input on the topics today. Thank you.
Mr. SMITH. Thank you, Mr. Cannon. Mr. Cannon, thank you for also mentioning such a great piece of legislation.
The gentleman from California Mr. Issa is recognized.
Mr. ISSA. Thank you, Mr. Chairman. First, I'd like to thank you, Mr. Chairman. I'd like to thank Mr. Boucher, certainly Ranking Member Berman, and Mr. Goodlatte for being an intellectual trust that has done so much of this for—don't be smiling, Bob. The truth is that I'm humbled to come to a Committee and work with people who have spent so many years, worked so hard to understand issues which are complex. And I know this is a hearing today, but the truth is that every once in a while I have to recognize that a few people in Congress have put inordinate time in to understand the issues better than others.
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I particularly want to follow up on what Mr. Berman said. And I know the red light will come on for me just as quickly.
In my practical experience, and I have not studied law, so I had to pay for it one legal bill at a time, but I paid greatly, more than your Harvard degree actually. If we were to have a single reexamination by a single party, and that leads to an estoppel, one time, no second window, just to follow up on Mr. Berman, then from a practical standpoint, if you wanted to be Machiavellian, not that a lawyer would ever choose to recommend that a client do that, why not choose a weak opponent, let them file a weak re-exam, but throw in—and I use the word reexam because I'm older, I guess—but throw in all kinds of information, but do it poorly, compile it poorly, not particularly in the process? Then wouldn't you have what we already have in a reexamination process that already is available, and under the old law you would have all of the information there, a presumption that it was considered and evaluated fully, even though it's just sitting in the incoming record, and it follows the water for somebody who later is accused of infringement, is a significant potential infringer, believes that the art properly presented would be shown to be, you know, prior art that would 102 or 103 the patent, why in the world shouldn't there be an opportunity for a different defendant to have a different opportunity to present similar or, in some cases, the same information, but in a more—what they believe to be a more appropriate and cohesive fashion?
Mr. Johnson, you have the biggest smile. You get it first.
Mr. JOHNSON. Well, I think that both texts at the moment envision that there will be multiple opposers who will be able to file at the same time, and that if there are multiple oppositions, that they'll be consolidated.
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I also believe that the estoppel provisions only pertain to those who choose to participate and not to those who don't choose to participate, so that if someone wanted to file an opposition, and do a bad job at it at their own peril, I suppose that's possible. But none of the proposals foreclose the possibility of a later challenge in court, so that even regardless of what has been said in the opposition or what the conclusion of the opposition is, with the exception of those who have chosen to participate, and then only limited to the issue that is actually decided and the facts necessary for that decision, but with what exception, that narrow exception, those issues may be, in fact, relitigated later in litigation.
Mr. ISSA. I don't think that was Mr. Berman's question. His question really had to do with a repeat administrative action.
Mr. JOHNSON. If I may respond to that. The reason that there is such opposition, broad opposition, to a repeat procedure is simply because the opposition procedure as it's now proposed was intended to be a fairly quick quality check on—inexpensive quality check on the quality of patents issuing from the Patent Office. It was not designed to be a replacement for patent litigation. It doesn't mean that at the end of the opposition period, though, that the public is without the ability to challenge the validity of a patent. Reexamination—the reexamination procedure which we have now will continue to be in place, and, of course, later on should there become a real dispute and there be litigation——
Mr. BERMAN. Would the gentleman yield?
Mr. ISSA. I certainly would, Mr. Berman.
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Mr. BERMAN. How would you feel if no second window and all that, but the district court judge had the ability to say, we refer this matter back to the Patent Office for a determination on whether its obviousness or novelty or any other elements of having a valid patent—the district court would have the discretion to make that referral.
Mr. JOHNSON. In the reexamination context, district court judges don't have the authority at the moment to refer, but, in fact, it happens quite frequently. That is——
Mr. BERMAN. You're talking to a postgrant kind of procedure where there's discovery and more of a process.
Mr. JOHNSON. Yes. If you look today without the law at what happens in litigation, quite frequently after there is some considerable discovery in litigation, one party or the other may elect to go back into reexamination, and it happens actually fairly frequently. And at that time motions are brought frequently by the party going back into reexamination to stay the case pending the outcome of the reexamination. The judges weigh that and, generally speaking, grant those motions for stay unless they're brought on the eve of trial or—or there are other circumstances and then wait for the outcome of the reexamination in order to restart the case.
Mr. SMITH. Mr. Johnson, I'd like to move on if we can. The gentleman's time has expired. I'd like to give Mr. Goodlatte from Virginia the opportunity to ask a couple of questions.
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Mr. GOODLATTE. Mr. Chairman, thank you for holding this hearing, and thank you for your fortitude in pursuing this issue. We've been down a long and arduous road, but making progress on this issue, and I thank you for that.
I thank the gentleman from California for his kind words as well. I don't know that they're merited or not, but they are certainly well taken.
I'd like to ask Mr. Chess and Mr. Johnson and Mr. Simon, as this legislative process moves forward, are you open to hearing and working on additional ways to tackle the injunction language and other litigation reform proposals, some of which we've talked about a little bit here, in a way that helps the technology community while not harming other traditional patent holders?
Start with you, Mr. Chess.
Mr. CHESS. Obviously it's hard to answer a general question like that without understanding the specifics of what you have in mind. And clearly from the point of view of our industry, the current system from the biotechnical industry actually on injunctions actually works quite well. And so——
Mr. GOODLATTE. You understand, though, it doesn't work well for other people.
Mr. CHESS. I understand the technology situation, and actually I used to be in the technology industry. I started my career at Intel a long time ago. So I understand and am sensitive to some of the issues. So obviously we'd have to understand specifically what we have in mind, providing we can protect what we have that's important to Biotech.
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Mr. GOODLATTE. Let Mr. Johnson answer that.
Mr. JOHNSON. We're always willing to talk to anyone about anything that might lead to better results. But the fact of the matter is that we have spent a huge amount of time, and injunctions are fundamental to the patent right. When we're talking about injunctions, we're not talking about frivolous plaintiffs, we're talking about people who have won the lawsuits. We're talking in the permanent injunction context normally about someone who's not only won at the district court level, but also won on appeal.
I think the idea that someone who has established their right under the patent so that it's been tested through the court system and found to be valid and infringed is entitled to an injunction. That's a fundamental basis of the property right we offer to patentees.
Mr. GOODLATTE. Mr. Simon. I'm going to follow up with their comments in just a second. I know your answer, so be brief so I can follow up.
Mr. SIMON. Sure. We're always willing to talk about it. I'll just put one other thing before you. There is a petition now before the Supreme Court to hear the MercExchange-eBay case, and this is exactly the issue that the Supreme Court has been asked to decide. So whether this Subcommittee, this Committee, or this Congress ultimately get to this important issue, there's a possibility that we can get a Supreme Court ruling on it.
We'll talk more.
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Mr. GOODLATTE. Let me ask the three of you this question that does get to a little more precision. Doesn't the plain meaning of the current injunction statute require that a judge weigh the equities when deciding whether to grant an injunction? And if you agree with that comment, how can anyone object to language in a bill that would ensure that the courts are carrying out the plain meaning of the current law?
Start with you, Mr. Chess.
Mr. CHESS. As you're—I'm the nonpatent attorney in this group. You're probably getting into kind of technical specifics.
Mr. GOODLATTE. You asked me to get into the specifics.
Mr. CHESS. So I'd like the opportunity to confer with the bio folks and have the chance to respond back.
Mr. GOODLATTE. We'll try Mr. Johnson.
Mr. JOHNSON. I believe courts do consider principles of equity in deciding whether to grant permanent injunctions.
Mr. GOODLATTE. Should we require them to lay them out step by step so it's clear to the parties in the case that the judge has indeed done that, as opposed to just hoping that they've done that when they issue an injunction?
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Mr. JOHNSON. Normally what happens is that when an injunction is sought, briefing is received by the court, and the court will hold a hearing. I know especially in the areas that we work, we don't, even if we win, always receive permanent injunctions, or they may be limited in scope in one way or another. And I know that the same is true on the other side. We have had situations where we've had cases where we have been allowed to continue to sell our products when it was deemed to be in the public interest to do so. So I believe it does work and that the courts do consider the public interest.
Mr. GOODLATTE. Mr. Simon.
Mr. SIMON. I found surprising in Biotech Industries' testimony a line on this specific issue, Mr. Goodlatte. On page 6 at the very bottom, the written testimony says: If you allowed courts to weigh equities and balance hardships, our patent system would be weakened, and research and development would suffer.
I didn't make that up, that's in their testimony. I think courts do weigh them. I don't think they give enough weight to them right now.
Mr. GOODLATTE. Thank you.
Mr. Chairman, I know our time has expired here. I do have a statement that I would ask be made part of the record.
Mr. SMITH. Without objection, the opening statements will be made a part of the record.
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The gentleman from California Mr. Issa would like to direct a question that he would like responded to in writing. Mr. Issa.
Mr. ISSA. Thank you, Mr. Chairman. I'll be very brief. It will take some time and some thought to get the answers, but based on what I've heard here today, I'd really appreciate it.
When we discussed 271(f), I believe I heard very clearly that it was an outcome that would occur, and it had occurred, that we tried to correct with the 271(f) in the '80's. We're now looking at stripping it away because we don't like the outcome, we want a different outcome.
As fair and long-reaching as each of you can be in your positions, can you tell me, should we adopt in Congress a policy of calculating what the outcome would be, how it would affect business, and then put our law in effect in order to achieve that? Not just in 271, but obviously if we do it here, do we begin saying, let's change this? For example, should we arbitrarily reduce the length of a patent or type of patent because it would encourage business, or extend it because it would help one industry? Should I look at Biotech as getting a different length patent than other industries? Should I start doing that based on what amount of business occurs in the United States?
And if you would give me that further discussion that will take a few paragraphs, I would appreciate it, because that's my question on 271 is do I do it because of the business outcome.
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Mr. SMITH. Good question. Thank you, Mr. Issa.
We have only 5 minutes left to vote, so we're going to need to adjourn. And on the way there, thank you all again for your testimony. It's been very helpful. And we will continue our discussions about the legislation. Thank you.
[Whereupon, at 12 noon, the Subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA, AND RANKING MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY
Mr. Chairman,
Thank you for scheduling this hearing on possible substitute amendments to the Patent Reform Act. In addition to the amendment in the nature of a substitute from July, I know a number of individual companies have met together over the summer to try and produce a consensus bill—a draft of which has been circulating as well. However, in all honesty, by this point in the process I would have preferred that this subcommittee actually be marking up the bill.
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The witnesses all agree that patents are the foundation of American innovation and therefore serve as the underpinning of the American economy. Strong intellectual property protection helps technology businesses attract investors, provides incentives for drug companies to develop new drugs, and allows independent inventors to make significant contributions to society. However, while robust intellectual property protection presents these benefits, when protection is given to questionable quality patents, the foundation begins to show its cracks. This leads to an increase in litigation, a decrease in investment, and casts doubt about the effectiveness of our patent system.
At last week's hearing regarding Oversight of the PTO, we heard consensus from all of the witnesses, including the Director of the agency responsible for administering the patent process, that there is a problem with the quality of patents issuing from the Patent Office. It would be quite an accomplishment if we could reach consensus with this panel about the solution to the quality issue.
Some of the proposed provisions of the original bill, as well as the substitutes, begin to address quality in the initial stages of the examination process, such as the ability for third-parties to submit prior art to the examiner. Over the past number of years, as Congressman Boucher and I introduced the precursors to this bill, we always agreed that the key to improving quality was providing examiners with the necessary prior art resources. Access to better information will yield better decisions by the examiners.
Other provisions will enhance the quality of patents immediately after their issuance, such as the new post-grant opposition procedure. With the opportunity to establish a more comprehensive check on a patent's validity, without resorting to an expensive and lengthy court proceeding, the bill will improve both the quality of specific patents and the patent system as a whole.
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Unfortunately, the goal of providing a true alternative to costly litigation—''the second window provision'' has been omitted from drafts of a substitute. Clearly, a limited second window would shed more light on the quality and validity of questionable patents. With substitute options that do not contain the injunction provision or the second window options, I am left to ponder the fate of questionable quality patents that have already been granted. These patents will surely be litigated, but afforded a high presumption of validity and therefore, in all likelihood, affirmed. What will be the effect on the economy that a questionable quality patent (a software program) can now be the reason for barring others from using their own truly inventive products?
Shouldn't we consider how to rectify this problem as we discuss one of the most extensive patent reform bills since the '52 Act?
There remain issues which still need further discussion such as the duty of candor provision and obviously some of the disputed provisions in the latest coalition draft.
I look forward to hearing from some of the industry witnesses today and see how, if at all, their positions have shifted since we began this process. I hope to continue working with the group of co-sponsors for this bill to try and create a more perfect patent reform.
PREPARED STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA, AND MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY
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Thank you, Mr. Chairman, for holding this important hearing to examine the amendment in the nature of a substitute to H.R. 2795.
Article I Section 8 of