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23–434 PDF








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


F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
BOB INGLIS, South Carolina
MARK GREEN, Wisconsin
DARRELL ISSA, California
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JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California

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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
BOB INGLIS, South Carolina
DARRELL ISSA, California

HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
ZOE LOFGREN, California
MARTIN T. MEEHAN, Massachusetts
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ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California

SHANNA WINTERS, Minority Counsel


SEPTEMBER 15, 2005

    The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property

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


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


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.



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.


    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:]


    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.


    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:]








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    Mr. SMITH. Thank you, Mr. Johnson.

    Mr. Chess.


    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:]




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    Mr. SMITH. Thank you, Mr. Chess.

    Mr. Thomas.

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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:]







    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.]


Material Submitted for the Hearing Record


    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.


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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 our Constitution lays the framework for our nation's patent laws. It grants Congress the power to award inventors, for limited amounts of time, exclusive rights to their inventions. The Framers had the incredible foresight to realize that this type of incentive was crucial to ensure that America would become the world's leader in innovation and creativity.

    These incentives are just as important today as they were at the founding of our country. As we continue our journey into the digital age, we must make sure that the incentives our Framers put into our Constitution remain meaningful and effective. The U.S. Patent system must work efficiently if America is to remain the world leader in innovation.

    It is only right that as more and more inventions with increasing complexity emerge, we should examine our nation's patent laws to ensure that they still work efficiently and that they still encourage, and not discourage, innovation.

    One industry sector which is beginning to showcase the potential problems inherent in our nation's patent system is the high tech industry. In today's economy, many high tech products involve hundreds, and even thousands, of patented ideas. Technological innovators must work to ensure that they obtain the lawful rights to use the patents of others, through licenses and other lawful mechanisms. However, it appears that a cottage industry is emerging that seeks to take advantage of the complexity of these products and loopholes in our patent laws to extort money from high tech companies, both large and small. To be sure, these problems are not limited to the high-tech industry—inventors in all industries are increasingly facing these types of problems.
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    The solution to these problems involves both ensuring that quality patents are issued in the first place, and ensuring that we take a good hard look at patent litigation and enforcement laws to make sure that they do not create incentives for opportunists with invalid claims to exploit.

    The substitute would create a new post-grant opposition system in which any member of the public could request the USPTO to review the scope and validity of a patent within nine months from the date of its issuance. In addition, the substitute allows submission of prior art within six months after the date of publication of the patent application. These provisions will help ensure that interested parties have the incentive to challenge questionable patents at the beginning of the process and thus help ensure that only quality patents are issued.

    The substitute also contains many important litigation reform measures to help ensure that patent litigation benefits those with valid claims, but not those opportunists who seek to abuse the litigation process. Specifically, the bill creates a clear standard for ''willful infringement,'' helps ensure that damage awards are fair, and contains new venue provisions to discourage opportunistic forum shopping. I look forward to working with Subcommittee to ensure that the damages language is structured to reward legitimate damages claims while discouraging frivolous and inflated damage claims.

    All inventors will reap the rewards of a streamlined patent system that ensures that good quality patents are issued, and that opportunists cannot take advantage of loopholes in our enforcement laws.

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    Thank you again, Mr. Chairman for holding this hearing. I look forward to hearing today from our witnesses.



    I am happy to see that the private negotiations on patent reform have led to progress. While I also am pleased that some of the troubling provisions in the introduced bill have been discarded, I am concerned that new issues have been raised that would harm small patent owners and set a dangerous precedent for plaintiffs' rights.

    Let me say that I was an original cosponsor of the underlying legislation because I believe we need to make major changes to the patent system. It is important for our economy to harmonize our patent system with those of other countries. To this end, we should establish a system that awards the patent to the first-inventor-to-file. We also should make it easier for third parties to challenge patents after they have issued as long as the process has some finality to it.

    At the same time, however, I did have concerns with several of the provisions in the bill. One specific provision made it more difficult for legitimate patent owners to enforce their rights. I believe that proposal would have undermined the purpose of our intellectual property laws, which is to encourage investment into innovation.

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    While this new draft does not include that proposal, it does contain new language that limits where patent owners may bring lawsuits against those who steal their inventions. Specifically, the bill says owners may bring lawsuits only in the defendant's principal or regular place of business. This is a significant departure from existing law, which permits suits anywhere the infringing product is sold.

    This idea would harm the rights of small businesses and independent patent owners, who may not have the resources to track down the defendant's place of business and to initiate litigation far from home.

    It also sets a dangerous precedent. I am concerned that other industries may come forward to limit where lawsuits against them could be brought. This would be a blow to plaintiffs' rights in the areas of gender discrimination, labor rights, and civil rights, just to name a few.





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    Please accept my testimony regarding H.R. 2795, the Patent Elimination Act of 2005.

    In 1972 I filed the first patent on MR scanning that originated the technology that is today called MRI. I think it is true that the original scientific discovery that I made while I was a university professor, and the patent it gave rise to, has proven its value as a betterment for mankind, a result for which I am truly grateful. For whatever appreciation the public may have for the invention I believe most of that appreciation is owed the U.S. Patent System. Unique in the world, the U.S. Patent System crafted by the Founding Fathers, achieved for the first time in all history that unique collaboration of the law and technology that enabled the individual of ordinary circumstance to dream great dreams, and be provided the means to protect his product and get it to the marketplace.

    I think in this vein it is important to appreciate that the MRI machine was not the product of either a Multi-National Corporation or a Japanese conglomerate with great amassed reserves of disposable capital. Instead it was the product, after the initial discovery, of an individual scientist and his graduate students, toiling underfunded in a university laboratory with only the hope of the U.S. Patent to rescue them if the insurmountable mountain of technological obstacles that stood in the way of such a scanner could ever be overcome. Indeed if H.R. 2795 existed in its present form when we were developing the MRI, MRI would never have come to pass.

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    Our story is not unique. It is but one more of the many spectacular triumphs of that most extraordinary entity of human history and human law which we call the U.S. Patent System. We cherish it for what it has enabled us to accomplish. We cherish it for the protection it gave us, the ''little guy'', when mammoth multi-nationals sought to take our invention from us when it was finally complete after ten years. Thus when the U.S. Patent System that protected us and our MRI invention comes under attack by legislation like H.R. 2795 I quite naturally rise to protect the Patent System that protected us. In so doing we believe fervently we are protecting America. Hopefully you will forgive us when our passion for the U.S. Patent causes us to construe lawmakers who seek its destruction by legislation like H.R. 2795 as adversaries that have mounted an attack on America's very heart and soul. Perhaps our view comes from having fully engaged the U.S. Patent System, from having personally exercised all aspects of this majestic doctrine, and from having personally experienced its numerous ingenious attributes.

    Thus, when our first prototype MRI scanner was completed in 1977 and performed the first scan of the live human body, and when we left the university to form the first MRI company, we needed to find investors who would invest in our fledgling enterprise to create the first commercial MRI product and bring it to market. Needless to say, the first question from investors was what will secure our investment in your start-up MRI enterprise called Fonar? The only answer we had to give was that we held the original patent. It was the only answer but it was sufficient. We received the investor capital we needed, Fonar was born, and three years later we introduced the first commercial MRI scanner to the medical world.

    Within a few years we were joined in the marketplace by a host of Japanese companies and Multi-National Corporations with scanners of their own, who ignored our patent, even while they themselves had made no technical contribution during the ten years of labor it took us to get from the first test tube experiments to the first commercial magnet. We resorted to the U.S. Patent. It rescued us!
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    Our American judiciary gave no quarter to the size of the mammoth Multi-National Companies that had appropriated little Fonar's technology. They adjudicated with the same even hand for which American jurisprudence is famous and meted out fairly the dictates of our patent laws to the infringers of Fonar's patents. When the day was done all infringers admitted that Fonar had not been treated fairly and while none could say they were pleased to have to pay little Fonar, none argued that Fonar's contribution had not been major and none contended that Fonar in its 35 years of labor to bring MRI to reality and improve it, was not eminently deserving of the justice it was now receiving.

    Fonar had earned its place in the world. U.S. Patent Law saw to it that the holder of one of America's patents was protected from usurpers of its technology irrespective of their size. Fonar was helpless without that protection. U.S. Patent Law rescued America's MRI. Little Fonar, as a result, can continue to create the many life-saving benefits that lie ahead in the field of MRI.

    From this 35 year right of passage involving intimate experience with our patent laws, in action, we feel that we can come before your committee, usefully Mr. Merritt, with our experience, and comment firsthand regarding our impressions of H.R. 2795.

    In general it must be obvious to even the most casual reader, that H.R. 2795 is the unqualified enemy of small business and the small business inventor. It seeks to void most of the protections upon which small start-up technology businesses like Fonar have relied on for two centuries. It is not fair for the proponents of this bill to argue, as they have, that this bill is good for the inventor. If H.R. 2795 is so good for the small business inventor as its supporters have repeatedly represented, why then am I filing my testimony opposing it? Surely the distinguished gentlemen who are sponsoring it do not mean to suggest that I as a scientist am unable to determine for myself what is good for me and what is not. Regarding the Patent Elimination Act of 2005, H.R. 2795.
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    I think it critical to remind reviewers of this bill that the US Patent is the heart and soul of the American Economy. Absent the patent; the telephone, the electric light, the computer, the internal combustion engine, the airplane, the radio and the vast array of other technologies the US Patent brought to life, American Industry and the American Economy that rests on it would not exist. Consequently America's inventors and the patents they depend on are America's lifeblood. To dismember the system that birthed them as the Management Amendment of H.R. 2795 intends, is to initiate a frontal assault on the U.S. economy itself. While it will be tempting to some to characterize this generalization as an overstatement it is not. Dismembering the U.S. Patent, as H.R. 2795 does, constitutes dismembering the very soul of U.S. economy. Its consequences cannot be overstated. Arguments that H.R. 2795 does not darken the soul of the U.S. economy will inevitably originate from corporate employees whose sole intent is to broaden the powers of infringement on behalf of their corporate employers, which corporate employees have never themselves crafted an invention and tried to start a company from scratch with the U.S. Patent as their only asset, as Thomas Edison, Alexander Bell, the Wright Brothers, Morse and the other legends of American Economic history did.

    While many of the provisions of the Manager's Amendment to H.R. 2795, especially after they have been mischaracterized as ''reforms'' when they are eliminations, may be abstract to Congressmen and staff who are distant from the processing of defending one's patent in a courtroom, they are, in fact, virile in their intent and intentionally so.

    Speaking generally, as an inventor who has been through the entire courtroom process of getting a patent upheld against a conglomeration of multi-national enterprises intent on infringement the inventor needs not only EVERY provision the ''aspiring infringers'' are seeking to remove, he needs more.
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    Indeed, except by firsthand experience of direct courtroom infringer assault, it is difficult to discern, given the legalistic lexicon in which the provisions H.R. 2795 are encoded, to comprehend the full measure of their malignancy. Thus granting the requested Limitations of Injunctive Relief when decoded into plain English is the literal enactment of a ''license to steal''. It is a blunt elimination of the patentee's right to say ''No'' (injunction) to the thief, ''You can't copy my invention and sell it as your own.'' It is self-evident that a patent without the right to say ''No, you can't make my invention and sell it'' is no patent at all. The First to File provision, another noxious initiative, plainly stated is another ''license to steal'' for an amply financed corporate giant, like a Japanese conglomerate. It fully enables, for example, the well practiced craft by Japanese corporate employees of visiting university laboratories and other research facilities with their cameras and interrogating naive researchers on their discoveries and leaving the premises to immediately file patents on the inventor's new discoveries before the inventor himself. First to File eliminates the inventor's proof by laboratory notes and records that he is the true inventor and thus voids his right to his inventions. The Third Party Pre-grant review is a further provision for potential infringers or their designees to inspect a patentee's invention, prior to its allowance as a patent, which provision possesses the obvious deficiency that the invention can now be copied by the inspecting party before it issues as a patent, thereby avoiding literal infringement. Pre-grant Review further enables the inspecting party to intrude in the patent approval process itself and seek impedance of the application or even total blockage of it. Third Party Reexamination of Post-Grant Review means that an infringer, if this provision is granted by H.R. 2795, will be able to postpone his request for a reexamination of the inventor's patent by the Patent Office until after trial. By so doing he grants himself the power to challenge validity of the inventor's patent twice, once in the courtroom and once again, after court if the inventor is upheld and he loses.
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    More importantly it enables the infringer to duck courtroom scrutiny of his invalidity argument and avoid full adversarial argument by opposing attorneys on the merits of his invalidity case in front of the Court and trial judge. Thus the infringer, by his Post-Grant Reexamination procedure, can avoid the risk of subjecting his invalidity argument to the full scrutiny of a detailed courtroom proceeding and save it for a second bite of the apple beyond the scrutiny of the court and trial judge once the patentee has won his case. Furthermore, since the Post-Grant opposition provision removes key protections for the inventor, his patent under the new provision can be challenged in Post-Grant oppositions by a limitless number of potential infringers up to the very date of its expiration 17 years after it's issuance. The patentee then, under this new provision will never unequivocally own a patent. He will thus be unable to secure finances from investors to initiate a commercial enterprise. The Best Mode requirement which H.R. 2795 seeks to scrap, is fundamental to the very rationale for a patent authorized by government. As Jefferson and Washington envisioned it, the patent was a limited exclusivity that could be awarded and enforced by government in exchange for full disclosure. Full disclosure would give the public access to the invention so others could improve on it and advance the state of the art of the technology. The Best Mode Disclosure requirement ensures and requires full disclosure of the patentee's invention in exchange for exclusivity. Compromising Best Mode Disclosure, by deleting the requirement that the best specific embodiment of the invention be disclosed, cheats the public of its right to that full disclosure in exchange for the public exclusivity to the inventor. Without full disclosure it becomes unduplicatable by ''one skilled in the art'' and the public is cheated of the use of that art. It further fails to force the inventor to specify his invention and therefore specify what will become the prior art for future inventions. The absence of a fully disclosed and fully specified prior art enables inventors to claim innovations at a later date in later patents, thereby falsely extending their patent's lifetime with innovations that were genuinely part of the original invention but left undisclosed (and unspecified) by the elimination of the Best Mode requirement. The remaining provisions, Prior Rights, Assignee Filing, Eradication, Limiting Damages, Removing the Inequitable Conduct Decision from Courtroom Adjudication, Limiting Damages and Limiting the User Scope of Applications, all possess onerous terms for the prospects of the inventor getting his patents upheld and his new business protected.
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    These provisions and H.R. 2795 must not be enacted. Despite their characterization to the contrary there is not a single provision for the benefit of the inventor. All are designed to benefit the infringer.










    Mr. Chairman, Ranking Member Berman and other distinguished Members of the House Judiciary Subcommittee on Intellectual Property,
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    Thank you for holding this September 15, 2005 hearing on proposed changes to the U.S. patent system—the best and strongest in the world. I am submitting my testimony in writing with the hope that it will become part of the public record by way of this hearing because it is apparent that the voice of the independent inventor concerning this legislation has been heard little if at all to date.

    There are many witnesses who have testified before this committee this year that have claimed to speak on behalf of independent inventors, small businesses and others entities who clearly will be harmed by the Amendment in the Nature of a Substitute to H.R. 2795, the Patent Act of 2005. To my knowledge, there has been little testimony on this legislation before this committee from actual inventors who have substantial first-hand experience with the U.S. patent system and the inner workings of the U.S. Patent and Trademark Office.

    I am an inventor with such experience as relates to the issues before the subcommittee. Quite frankly, my patience with the system has run its course. Unless real and positive changes are made within the U.S. Patent and Trademark Office, my present invention will be my last. Getting a patent in today's patent system is just too hard, too time consuming, too frustrating, too expensive, and too risky.


    In my view the problems inventors currently face are within the USPTO and not in our underlying patent laws. This differs radically from nearly all of the testimony previously presented. How many of those previously testifying have had personal experience?
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    The USPTO is in a crisis. The problem for inventors and small companies is that application pendency—the time it takes to get a patent allowed and issued—is far too long. I, for example, have patent applications with a pendency of over 13 years. Mr. Chairman, inventors, universities, and small companies simply cannot and will not continue to innovate with such long pendencies. It places a terrible burden on us to fund research and development and greatly increases our patent related expenses. Such pendencies make the patent system a sport of kings and eliminates independent inventors and small firms from participating. Moreover, legal changes in the 1990s such as changing patent term to 20 years from ''date of filing,'' only further erode the value of a patent. By the time it issues with these lengthy pendencies there can be hardly any patent term left. There may be none. With these pendencies alone, by the time your patent issues your technology is most often outdated and worthless.


    Many supporters of this legislation speak of problems with patent quality. However, based on litigation results over the past few years decisions have been pretty well split 50/50 between patentee and infringer. That result suggests there is no great problem with patent quality in terms of the USPTO issuing invalid patents. Proponents who use this argument are simply not supported by the facts.

    Rather, the problem from my experience is that the USPTO is too hesitant to issue patents, not that they are issuing them too hastily. That theory would in part explain why pendencies have increased so substantially. If the committee would survey practitioners and applicants anonymously, I believe you will find they too feel long pendency is a significant problem. Many have told me so confidentially. It is difficult to believe, but the USPTO has to my knowledge and with all whom I have spoken, failed to survey applicants and their attorneys for feedback on many important matters. How can they faithfully serve their customers and the public if they do not know what customers want and need?
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    Therefore, contrary to what proponents claim regarding quality of patents issued being the problem, it is those patents that are not issued where the true problems lie. The changes therefore being proposed by the Intellectual Property Owners Association (IPO), AIPLA, the Business Software Alliance and others—mainly large corporations or alliances of them—are at best unnecessary and at worst dangerous as many provisions would only further erode the patent system and act as a disincentive to invent for independent inventors and small companies. This is a very important segment of our intellectual property society—the part most often responsible for breakthrough technologies which open new fields.

    My belief is this false issue of patent quality is being promoted before this subcommittee by large, multi-national companies to push for changes in U.S. patent law which will not strengthen it and therefore encourage innovation, but rather weaken it and thereby discourage innovation. As I review the Manager's Amendment I feel there are several portions that will have a substantial negative impact on the capabilities of small entities to benefit from the patent system. Further, I understand that with the Manager's Amendment revenues that have been diverted from the USPTO, fees that all entities—large and small—pay, will hereafter completely go to the agency instead of to other non-patent/trademark related issues. It will then be a true user fee instead of a hidden tax on inventors. With this funding change about to be instituted, why would Congress even consider changing the strongest and best patent system in the world before first seeing how the funding change will affect the system? The funding change alone may significantly reduce the need for if not eliminate any further legitimate need for changes in patent law.

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    Testimony from this year and from years past has caused me to try and help educate anyone connected to the U.S. patent system. As I indicated earlier, many organizations that have testified before this committee and before the Senate have stated they represent ''small business and individual inventor members.'' Specifically, the Intellectual Property Owners Association claim they represent small businesses and independent inventors. They do not.

    In viewing the composition of the IPO's committees, only large firms are represented (Microsoft, Xerox, Intel, . . .), as well as the large law firms (Kenyon & Kenyon, Howrey Simon, Drinker Biddle, . . .) who represent them. IPO, therefore, is merely a trade organization of large companies. It does not represent small companies and individual inventors to any meaningful degree. Consequently, organizations such as IPO that claim to speak on the ''little guy's'' behalf are misleading the committee at best.


    Some proponents speak of patents ''being used to suppress competition.'' They are correct. That's the point of patents in the first place. The idea was always to grant to an inventor for a limited time exclusive use of their invention—e.g. a monopoly—as a reward for the advantages society receives from the invention.

    Out of thousands of patents issued by the Patent Office each year, some will unavoidably be bad. However, if patents are of poor quality—bad—they likely will lose in court, or far more likely never make it to court and therefore be of no consequence. On the other hand, if patents are valid they will suppress infringers to the benefit of both the inventor and society, which was the purpose of the patent system. If a patent really is ''junk'' it is highly unlikely anyone will attempt to enforce it. Contingent attorneys, for example, will quickly see these facts and not waste their time on a lost cause. Contingent attorneys who cannot tell the difference between good and bad patents will not be in practice for long.
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    I am sincerely curious whether those who support these so-called reforms and make such broad statements have ever personally tried to enforce a patent? Do they speak from experience or do they just wail away at what they don't understand like bloggers? Ignorance is bliss. More disturbingly, other proponents have their own agenda, and it is not to encourage innovation. These shadowy figures lurking, not always in the background, if left unchecked will cripple America's technological edge and thereby its long-term economic outlook.

    Likewise, many supporters of the bill rally around the concept that people are concerned about suspect and overly broad patents. As above, if a patent is overly broad or issued in error it will seldom be enforced or hold up. Patent owners think long and hard before asserting a patent because of the cost. Keep in mind it costs the patent holder about the same in court as it costs the accused infringer. That's why few patent cases ever make it to court (roughly 97% of patent suits filed are settled out of court). No one wants a nuclear war. Therefore, all this hand wringing over bad patents is merely pretense to anesthetize and paralyze the patent system. It is but a red herring.

    The real issue with these proponents is that big companies don't like it when small companies, universities, or independent inventors assert patents against them. The only patents big companies tolerate are their own. Even then their interest is merely as a tool to defend, not to truly innovate. Also and oddly enough, they by far own the largest number of patents. But of course from their view, only theirs are valid. I find this hypocritical. It is also disconcerting given the likely outcome of their assault on our patent system and to our nation's future innovation and economy that is directly dependent upon the innovation the patent system encourages.
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    As I stated earlier, the patent system is becoming a sport of kings. This bill will only worsen the situation. It prices small concerns out of the market and in so doing only further ensconces big companies in their markets, further cementing their stranglehold. The pending bill will only further widen the gap between the haves and the have-nots and the public will pay the price in the end with higher prices and inferior goods due to reduced competition.

    Certain witnesses and companies have complained about so-called ''patent trolls.'' This label is most always used by large companies to describe small entities that have the audacity to assert patents against them. They have lost in court and so now they dissemble aiming to corrupt the patent system, even if it permanently damages the country. IPO itself has used this nonsensical term. It is interesting to think that though IPO claims to represent ''small business and individual inventor members,'' they speak like a big company. The IPO is not a sheep. It is a wolf. ''Patent troll'' is then a farce used by these large and unscrupulous parties in an attempt to defame inventors and small companies, and mislead Congress about what is really going on within our nation's intellectual property system. It is another red herring, attempting to obscure Congress from the truth.

    Proponents of this legislation use the argument that there is something implicitly wrong with a party who owns patents in only selling or licensing them and not actually building or using the patented technologies themselves. However, for over a century independent inventors have done just that. Edison himself was prolific in selling his ideas to other parties. Bell left the business end to others. Many inventors feel uncomfortable from past experience in commercializing their own inventions and prefer to leave that to those with more business acumen. Others simply prefer to invent and are happy to leave the business end to others. Clearly then, there is nothing wrong with an inventor leaving the business side of the invention to others such as through licensing of the technologies patented or an outright sale. Whoever coined the phrase ''patent troll'' was either ignorant of the invention field or a sly dissembler.
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    Still, it is the breakthroughs that lay the foundation for new fields. Before one can refine they must first establish. I am of the opinion that large companies will never seek to create markets for new technologies. They would rather wait until someone else does it then swoop in to use their large capital reserves to scoop up a large share of the developing market. Without a strong patent system independent inventors and small companies are at their mercy. Without a strong patent system there will be no independent inventors or small companies who risk all to create new markets for innovative technologies. That is why these large multi-national entities—with few exceptions—are begging Congress to make changes to U.S. patent law.


    My firm belief is that many of the provisions included in the Amendment in the Nature of a Substitute will irreparably harm small entities dependent on strong intellectual property laws here in the U.S. Without independent inventors and small companies to take the dare there will be a dearth of leadership into new promising technological fields—only a never-ending stream of minute cosmetic changes to a worn and musty product line. Without independent inventors and small businesses, our nation's economy will suffer. Many of these proposed changes will tip the scales of justice in favor of those with the deepest pockets and will thereby prove the undoing of small entities and independent inventors.

    In part, I have strong concerns about the following provisions: First-to-File, Prior User Rights, 18-month publication for domestic applications, and Third Party Re-examination. Each of these provisions benefit large, deep pocketed organizations and corrupt companies to the detriment of inventors and small business owners, many who will face unaffordable expenses and terrible consequences as a result of this proposed legislation.
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    With Prior User Rights, small entities could face the near impossible task of competing against a well-funded corporation. This possibility will only add to the difficulty for those who seek funding from third parties such as venture capitalists. The risk will be that they may invest in a startup who at some later date in spite of having invented the product or technology may have to compete with a far larger competitor. This prior user provision then places in doubt the exclusivity right of a patent which was a fundamental principle as espoused in the U.S. Constitution. Funding sources will understandably be tentative.

    The publication at 18 months from filing an application is another provision of this legislation that would place small entities and inventors at a disadvantage. What is now accomplished in complete secrecy will at 18 months be throw open for the world to see. Currently, anyone who doesn't file overseas has the option of NOT having their intellectual property known before protections are guaranteed. This will eliminate that option. Once published, the inventor will have to maintain his lead in an invention that may yet need refinement against an army of far better funded adversaries. Often times, such as in the case of the television, perfecting an invention to make it ready for the marketplace can take years. Such was the case with Bell and his telephone, Philo Farnsworth and the television, Morse on the telegraph, and the Wright Brothers on the airplane. It took Chester Carlson years to develop xerography to a practical state. Often, this is the case. This provision will place small entities therefore at a critical disadvantage. It would force them into a situation where they will have to compete with a far better funded firm before they are ready. As above, this further erosion of the patent system will discourage inventors and investors and thereby innovation. Such then is the problem with both First to File and 18 month publication.

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    How is an inventor protected after the 18-month publication should it be determined later that the ''invention'' was not patentable? Trade secrecy is the current option and that effectively will be taken away via publication. The danger of course is that inventors will begin more widely using trade secret protection where possible. But to encourage disclosure was another reason the patent system was established in the first place. The inventor discloses the invention and in return receives exclusive use of their invention for a limited time. It seems to me this provision will undermine an important reason the patent system was created.

    I have similar concerns about the First To File provision. Clearly, the advantage would be to well funded organizations who can much more readily prepare a patent application—specially having been tipped off by an inventor. That would present an impossible uphill climb for the inventor and encourage invention theft. I recall the confusion physicist Gordon Gould who invented the laser had when he delayed filing for about a year. In the interim another did. Fortunately, our First to Invent provision gave the patent to the true inventor. Similarly, Alexander Graham Bell came very close to being beaten to the Patent Office by Elisha Gray. Had he been 1 day later and had the proposed First to File provision been in effect, the Americana catch phrase would have become ''Ma Gray.''

    Another related concern is that the change to First to File will only further swamp the patent office. Large companies who are already inundating the PTO with applications will only increase the amount of applications they are now filing in an attempt to beat small entities to the punch rather than first perfecting an invention. The result will be a further overwhelmed examining body struggling to keep up with a weighty load. Clearly, large firms are far better able to use this shotgun approach with applications. This may be an important reason for the current backlog on unexamined applications causing these dangerous pendencies. This use of greater resources and funding will further place small entities at a disadvantage. The result is similar to the advantage large entities have over smaller adversaries now in the courts. Large companies will be able to use their size alone to gain a competitive advantage, just as they now do in the market place. Historically the patent system has had a leveling affect making smaller entities more competitive which in turn forced larger entities to stay current in technologies rather than just rely on their superior size to maintain market dominance. I am extremely concerned that nearly all of the proposed changes will have a considerable detrimental affect on competition.
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    Patent law affects different business sectors differently. So it is imperative to understand that simply because large companies in one sector of the economy consider there to be problems with the law, their proposed changes (such as in the Manager's Amendment) are apt to create undue harm and burdens to others in their field and, quite likely, some or all parties in other fields. That is why there is such a strong presence on Capitol Hill of lobbyists who represent the Business Software Alliance, Pharma and BIO—three ''players'' who were invited to personally appear before the committee to testify.

    Consider what history has shown: independent inventors and small companies are most often responsible for technological breakthroughs. Witness Edison's light bulb, Bell's telephone, the Wright brother's airplane, Gould's laser, Fulton's steamboat, etc. The list goes on. Large firms rarely, if ever, have excelled at breakthrough innovations. Corporations have the wrong culture for it. Theirs is a culture of refinement of existing technologies, not on trail blazing new fields. There is too much risk for them in getting too far afield from their existing product line. As a case in point, when Alexander Graham Bell offered the telephone to Western Union, William Orton the then President of the giant telegraph firm rejected his offer and replied ''what would I do with such a toy?''


    Patent law in the U.S. is critical to our economy. Patents are the lifeblood to all but the largest players in industry. Large corporations can readily compete and even dominate without patents. I suspect if you could hear what they say behind closed doors you would find their preference would be no patent system at all. That would provide far less risk to their market dominance. Without genuine intellectual property, there is little chance for all the rest. It is our intellectual property laws that have enabled competition in our country and placed us where we are currently in the world—Number One. We need to think carefully and study thoroughly before we make changes to them.
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    Before considering any further changes to the current U.S. patent code, let reforms at the USPTO take place first. Do not put the proverbial cart of changes to our underlying patent protections before the horse of adequate funding to the USPTO. Also, please remember that changes take time, so don't act in haste because large multi-national corporations are making these requests. I for one do not believe that they are acting with the best interest of our country at heart, but rather their short-term bottom lines.

    There is much more at stake here than saving a handful of large multi-national companies litigation costs. My hope is that Congress will take the time and put in the needed effort to understand the consequences before proceeding with this legislation.



    Mr. Chairman, Ranking Member Berman, and other distinguished Members of the Intellectual Property Subcommittee.

    My name is Ronald J. Riley, and I am an inventor. I founded the Professional Inventors Alliance USA to bring a voice to Washington, D.C. since, generally speaking, anytime Congress approaches reforms to the U.S. Patent and Trademark Office and to the underlying patent laws of the United States, inventors are for the most part left out of the debate. In general, Congress hears from patent counsels who represent large corporations, such as the multinational organizations that support H.R. 2795, or any of its variations that have come to pass since its introduction in June. A most interesting thing to point out is that there is a so-called red-line version of the bill now referred to as the ''consensus'' draft. It turns out that 33 companies got together and decided that this is what they want from Congress.
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    Thirty-three companies may make a consensus in the eyes of a few, but to those of use who use and depend on the current and strong patent system, we question the wisdom of accepting such a draft without full and comprehensive hearings that everyone can understand. This issue, while arcane, is one of the most important issues that will ever come before the U.S. Congress. It goes right to the heart of why our country is a world leader on so many fronts.

    Promoting the General Welfare of the Constitution does not, in my opinion, mean writing laws that seemingly benefit one sector of the nation to the detriment of the general public. Quite frankly, the public interest will not be served by the passage of H.R. 2795, or any of the variations that I have read to date. Moreover, the Constitution discusses specifically the exclusive rights conferred to authors and inventors to their respective writings and innovations. The legislation challenges the constitutional framework of exclusive rights for intellectual property owners in many ways.

    Additionally, proponents of this legislation suggest that these proposed changes will lead to more quality patents, less litigation, harmonization, and, somehow, more innovation. Those of us in the Professional Inventors Alliance could not disagree more with that assessment and we believe that the very large entities promoting this legislation are not being entirely accurate with their descriptions of the legislation to Members of this subcommittee, nor are they presenting the big picture of how this legislation could negatively impact our economy.

    I also would like to address something that I find very interesting. Proponents of patent reform tend to use questionable and sometime insulting terms in order to paint opponents of patent reform in a certain way. In the 1990s, the so-called submarine patent was the base issue that was showcased to obtain changes to the patent system. This year, it seems to be the term ''patent trolls.'' This term refers insultingly to those companies and/or individuals who trade in patents which they have obtained one way or another—legally—from inventors. In the United States, which was founded on the concepts of free enterprise and ownership of property, trying to stop such legal activities is questionable at best. If an inventor can do better by placing his invention in the hands of a professional patent marketer, this should not be thwarted. This is no different, in reality, than using a real estate agent for selling a house or commercial space.
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    Q. Todd Dickenson, the former director of the U.S. Patent and Trademark Office and now a counsel to General Electric, testified on July 26 of this year before the Senate Judiciary Subcommittee on Intellectual Property that General Electric was a patent troll. In fact, he stated that almost every large company with patents is in some fashion a patent troll. So I hope this discussion of the so-called patent troll can be deleted from the debate.

    Intellectual property rights are as important as real property rights. As you all well know, the United States Supreme Court recently held in the Kelo decision that local governments may force property owners to sell out and make way for private economic development when officials decide it would benefit the public, even if the property is not blighted and the new project's success is not guaranteed. It is apparent that Congress understands how controversial the Kelo decision is. Real property and the laws regarding takings are easier to comprehend as Congress has stepped right up to address the Kelo decision in several ways.

    With all due respect to the Members of this Subcommittee, the Professional Inventors Alliance views all versions of H.R. 2795—including the Manager's Amendment and the so-called Redline version—the way real estate property owners view the Kelo decision. Many provisions of the legislation that the supporters claim will improve the system will, in fact, take intellectual property right out of the hands of the actual inventor without just compensation, or any at all for that matter.

    Private property is a foundation principal that has set our country apart from the rest. Fundamentally, many provisions found in the many versions of H.R. 2795 are to intellectual private property rights as the Kelo decision is the real private property rights. Therefore, it is with great hope and encouragement that the distinguished Members of this subcommittee and the rest of Congress, should the legislation progress forward, take a very, very close look at why the Professional Inventors Alliance believes strongly that provisions found in the many versions of this legislation will have disastrous effects on independent inventors, small- and medium-sized businesses throughout the country, and the economy as a whole.
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First to File

    Every version of this legislation of which I am aware includes a provision known as First to File. Supporters of this system say that this change from the current and stronger ''first to invent'' system will stop the time-consuming ''interference'' legal arrangement necessary in determining who actually is the first to invent where such a question arises; therefore, there will be less litigation. This is false in that the numbers of patents that go through interference are minute. According to the U.S. Census Bureau and U.S. Patent and Trademark Office, in 2003 there were only ninety (90) inter partes interferences declared out of 367,000 patent application filings; there were 2721 ex parte interferences. This comes to .0076 of a percentage point. The bottom line is that there are not a lot of these cases brought through the system.

    The reality of a first-to-file system is that patents will be of less quality; prior art will not be researched thoroughly, if at all. In the race to file a patent, companies likely will file as many patents as quickly as possible thus jamming up the patent examination process with unnecessary proceedings. Such a system will encourage incomplete and poorly drafted concepts. These facts will make the system more—not less—litigious than the first to invent system. In fact, it could open the patent attorneys up to malpractice suits IF they didn't beat someone to the patent office to file the application.

    A significant side effect of first to file is that the large number of published patent applications which do not proceed to become issued patents become pseudo prior art which then is used to interfere with subsequent inventors getting the patents they are due. In other words, the ''new'' prior art is actually very poor and will lead to less quality in future patents. This runs contrary to what those who are promoting this legislation say with respect to this legislation.
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    As we all know, harmonization is one of the ''reasons'' Congress is working to alter our patent system. Well, Japan has the first-to-file system and firms tend to file applications as soon as possible to prevent their rivals from using the invention before them. The point of this statement is that it shows that companies will game the system. Proponents of changing the U.S. system to one that is not as strong point to several scenarios as examples for why changes in the system are needed. Congress should be aware that there are calls for changes to the Japanese system, itself, because their system facilitates wholesale theft of their inventions.

    Finally, under a first to file system, far too many questions exist to determine how it will impact our tried and true system. For many patents—especially extraordinarily innovative ones—it takes years before a patent issues. There is a long pending timeframe now that is getting longer. The question then becomes: When does a first-to-file patent become a ''real'' patent? Also, when do subsequent filings that also may be ''real'' patents—get their chance at being issued and not stopped by failed first-to-file filings? In other words, is the first to file filing really the invention? This is a clear case of unintended consequences that will clog up the examination system and further clog up the courts with litigation that currently is non-existent under the first-to-invent system.

18-Month Publication of all domestically filed applications

    It is with great interest that I hear all of these corporations discuss harmonization with other countries' patent systems. We always hear specifically about Japan's patent system, and apparently the promoters of this legislation think highly of that system.
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    Just this past July, an article from a Japanese media outlet written by Yomiuri Shimbun was published. I have included the article at the end of this written testimony and ask that it be made part of the official record.

    The central theme to the article was that Japan's intellectual property competitiveness is in decline. Interesting points were made about what Japan is giving away in terms of economic resources. The director of Japan's External Trade Organization's Intellectual Property Rights Beijing Office last year visited the head office of the Haier Group, China's largest consumer electronics maker. A Haier Group official ''proudly'' told the Japanese IP official that they use dozens of computers to search for patent applications submitted to the patent office in Japan, the United States and European countries to obtain useful information to develop ''their'' products. The Chinese company's official noted that it was for that reason alone that their company spends only small amounts of money on research.

    Rightfully stunned by the information, the Japanese IP director of External Trade discussed his experience with the head of a private patent office in Tokyo, who then turned around and asked his colleagues to figure out how often patent applications were being reviewed on the Japanese patent office's website from people in China and South Korea. Each day, from these countries respectively, Japan's patent office website was hit 17,000 and 55,000 times.

    This is astounding information that I hope the subcommittee understands. This Congress is on record as being very concerned about piracy by unscrupulous overseas firms. Foreign competitors, many whom we know already are stealing such information, can move forward untouched while harming the true creators and innovators of new discoveries and ideas. Japan's system is leaking and Congress is embarking on changing our laws to be in line with their poor ones. Legislation attempting to harmonize with Japan and the E.U. must be reconsidered closely and thoroughly. Perhaps Japan and the E.U. need to adopt some of our intellectual property protections.
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    The article discusses that the IP competitiveness is a foundation of Japan's national strength. PIA argues that our current patent system, which has served this country well for over 215 years, is the foundation for our country's economic and innovative strength. There is a reason why the U.S. is a leader in the world although we are one of the youngest countries on the globe. The U.S. respects personal property, both intellectual and real property. In other countries, this is just not the case. That is why the Professional Inventors Alliance finds it alarming that Congress is actually looking to weaken our system of intellectual property rights protections that currently exists and are the strongest in the world.

    The pre-patent world publication after 18 months devalues the application process and actually makes it an adversarial opportunity for unscrupulous entities seeking to steal ideas from those legitimately going through the system. Therefore, the newly knowledgeable firms—both international and domestic—with an ability to review such published applications can begin to advance a not yet patented innovation. With the U.S. Patent Office's internet site, people around the world can see the details and begin to pirate and market ideas that are currently held in secret. This devalues the both the application and patent to the point where going through the system will prove more harmful to an inventor/small business trying to secure exclusive rights guaranteed by the Constitution. This cannot seriously be the intent of this Subcommittee, but it is the reality.

    Pre-grant publication is ill-conceived. Cutting-edge technologies take many years to go through the patent system. Right now, if an inventor files overseas they know that the application will be published after 18 months. This proposed legislation takes away even this modest protection—the current domestic filing with no publication—from the actual inventor. Moreover, for domestically filed applications, publication at 18 months worldwide of the application details that which historically in the U.S. has been held in confidence (secret) will harm the actual inventor.
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    Secrecy ALWAYS has been a key ingredient of the U.S. Patent System. In fact, the Patent Office always has kept the details secret until a final decision was made regarding patentability. Under the current system, if the domestic-only filed application is not granted a patent, all of the information surrounding the application are returned to the inventor sealed thereby allowing the actual inventor to rework the application OR go the way of trade secrets. This provision, which is in all of the proposals, will take away this opportunity for inventors and small businesses to take their ideas and move forward and prosper even without patent protection but through what is known as trade secrets.

Third-Party pre-grant review

    Publication and third-party pre-grant review go hand-in-hand. This also is an attempt to harmonize the U.S. Patent System with that of the Japanese. This pre-patent/pre-publication review allows rival companies—both foreign and domestic—to learn the details of the innovation and challenge the examiner during what is now done in total secrecy. To reiterate, secrecy is very important so that the true inventor is protected and he/she can be assured the exclusive right to it and receives royalties.

    Aside from allowing others to learn all of the details of the applications before they are protected, adding this procedure for third party review will add delays to a patent. It also provides competitors time to research and learn more about the innovation in order to make their best objections against claims allowed by the patent examiner.

    This provision will add extra hurdles to the patent process to the detriment of the applicant (i.e., actual inventor). This will lengthen the time toward granting a patent, not lessen the time as proponents of the legislation claim. Moreover, this adds yet another place for unscrupulous competitors to learn about the innovation, put it into use and therefore claim prior use. This provision adds an additional measure to lessen the quality of the patent.
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    The third-party participation in pre-grant reviews provision devalues the patent by allowing entities to learn and challenge what is currently being done in secrecy, which is very important so that the true inventor is protected and can be assured the exclusive rights to receive royalties. This participation also will delay the patent and further burdens to the examiners, which—according to Under Secretary Jon Dudas—are already over encumbered with work.

Third-Party Reexamination

    It is with great hope that every member of this subcommittee understands exactly it is that is being proposed in this legislation. The current Inter partes examination proceedings differ from the proposed post-grant opposition proceedings in that inter partes reexaminations already are available under the current process at any time during the life of the patent and are limited to patentability issues based on earlier patents or publications describing the invention at issue. This legislation expands inter partes reexaminations by removing the limitation that any requester is estopped from asserting at a later time patent invalidity on any ground that the requester ''could have raised'' during the reexamination proceeding. This allows continual post-grant oppositions by an infinite number of entities that obviously will harm those with limited funding (i.e., small businesses and independent inventors).

    Of course, the original limitation was intended to balance the equities involved in inter partes reexamination, and comported with fundamental notions of fairness. This is no different than what occurs if an infringer is sued in court and, having argued invalidity and losing, that same infringer cannot later bring a second lawsuit seeking to invalidate the same patent.
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    PIA's position is that this is but another provision that will harm the small business and independent inventor by devaluing the exclusive right to a patent. It also will severely add to the costs of obtaining a patent and weaken the current system.

Prior User Rights

    Patent law favors the patent holder who applies the Founders' desire for placing patents in the public domain. H.R. 2795, the July Manager's Amendment, and the new September 1st red-line version of the bill bring ''prior user rights'' into U.S. law to harmonize with Japan and European patent law—expanding on the first-to-file patent right. Well, I've already discussed how the first-to-file proposal will harm independent inventors and small businesses. So, let's go over in detail how this provision will harm the U.S. patent system to the detriment of not only small business people and inventors but the interest of the general public.

    Prior user rights neutralize and devalue the exclusive rights to a patent. The concept is to allow anyone using technology that is covered by claims made in a patent to pay no royalties to the patent owner if it can be proven that the prior user actually utilized the innovation before the patent was issued. Prior user rights provide an open invitation to commit fraud in an attempt to avoid paying for the rights to use the patent. Moreover, these proposed rights create a never-ending cause for more, rather than less, litigation.

    First, the inventor or small business must discover the use by the prior user party then file suit in order to get them to stop using the innovation (current process). Enactment of this legislation provides a prior user right that would give anyone—deep pocketed corporations, both foreign and domestic, for example—a new defense to use the patented innovation at will. This essentially diminishes to zero the value of the patent if the inventor is a small business / independent inventor and the ''prior user'' is a large corporation with a lot of money. The new prior user rights defense coupled with third-party pre-grant review and 18-month publication fly in the face of the constitutional provisions rewarding those who disclose and patent their innovations.
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    The question raised with allowing prior user rights is: What is the motivation for an independent inventor or small business to go through the costly patent process when that patent can be taken by another claiming prior use? Moreover, IF the idea of the legislation is to limit law suits, imagine if the owner of the patent has as much funding as the ''prior user''—this could then result in more—not less—timely and costly litigation. Again, this runs contrary to the authors' intent on limiting litigation.

Assignee Filing

    This provision has to be viewed from the eye of the beholder. This legislation allows employers, a.k.a. assignees, to have the absolute power to file an application without the signature of the actual inventor, or even the knowledge of the inventor! This proposal renders powerless the inventor against their employer with respect to patent ownership and control. It is always beneficial for there to be a record of the actual inventor.

    With a Congress that is so determined to show how strong they are with respect to property rights after the Kelo decision, this provision should be of major concern to a great many people.

Best Mode

    Eliminating ''Best Mode'' essentially would alter the definition of ''prior art;'' simply put, this is any existing knowledge of a similar innovation via ways accessible by the Public. Current law requires inventors to disclose to the public the best use of the invention at the time the patent application is filed. Without this requirement, the inventor and not the public would know the full use of the patent. It also would allow for an unscrupulous inventor to increase the term of the patent protection by filing 'improvements,' about which they were already aware, later. While the bill's authors claim that they want to improve the quality of patents, it seemingly would do the opposite.
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    The ''best mode'' requirement makes it necessary to disclose a specific embodiment. Patent applications and patents without specific embodiments are respectively filed and issued in Japan and that is why a Japanese patent is often not a good piece of prior art. For a detail in a specific embodiment may be the very thing that can be put into a claim to make it allowable over the prior art.

    The purpose for which our Founding Fathers created the U.S. Patent System is to promulgate knowledge and technology. The ''deal'' with the federal government is that if an inventor provides enough details of the innovation so that someone skilled in the art could duplicate it, the government would provide the inventor an exclusive right (property right) for a limited time and keep others from using the invention. Therefore, there is no reason to hide the innovation and by virtue of knowing the ''best mode,'' others will learn how to utilize and improve upon it; thereby building knowledge for the public, as a whole. So anything but ''best mode'' is in effect gaming the system and cheating the intent of the patent system itself.

    Please understand about this term ''specific embodiment;'' It is necessary when making claims (i.e., value points) for the patent. Eliminating the 'best mode' requirement may make it difficult for people to fully know and understand how the patent is supposed to work. The specific embodiment is the best mode of operation of the patented innovation. Not requiring best mode is yet another open invitation to game the proposed system by later filing the 'true' best mode which had been withheld to gain longer effective patent terms.

Duty of Candor and Limitation of Inequitable Conduct

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    While the legislation would codify a duty of candor (specific embodiment) owed by the patent applicants, it seeks to limit substantially the defense of inequitable conduct—intentional acts and omissions of a patent applicant or representative of a patent applicant during the course of obtaining a patent from the USPTO—by allowing it only to be pled where the court has first invalidated a claim and the accused infringer has a reasonable basis for alleging that (''but for'' conduct of the inventor) a reasonable patent examiner would not have allowed the invalidated claim to issue as part of the patent.

    Under the current system, the party alleging inequitable conduct must prove the threshold elements of materiality of the misstatement or omission and intent to deceive the patent office by clear and convincing evidence. The determination of inequitable conduct is committed to the district court's discretion. Inequitable conduct is highly factual, often turning on credibility of witnesses. Courts have long been viewed as best able to resolve highly factual questions such as intent to deceive. Moreover, the defense is not available, under the current language, until after there is a finding of invalidity. In essence, the defense is not available to a defendant until it has already won the case. Under the legislative proposals, however, the matter would then be referred to the USPTO and leave sole determination in the office with no right to appeal.

    The American Intellectual Property Law Association interestingly states that ''the current reliance on the courts for 'enforcement' of the duty (of candor) is problematic because it can lead to the punishment of benign deeds and the failure to punish bad deeds. The ultimate ineffectiveness of the inequitable conduct defense today is probably best illustrated by the fact that it is raised and litigated in almost every important patent case, but is rarely successful.'' [emphasis added]. If it is rarely successful, it appears that the courts indeed are doing their jobs appropriately.
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Determination of Damages

    This provision seeks to limit the damages to the portion of the total value of the method or apparatus in question by the value of the overall invention (entire market value rule). It seems that the courts are the best place for this to continue to transpire because a broad-based law might have an adverse effect. For example, while attempting to hinder willful patent infringers, this provision would reward them. It also can be viewed as sort of compulsory licensing.

    If infringers are not worried about getting hit with the full market value of the overall invention, then they can simply view the infringement as a ''cost of doing business.'' Large corporations could hammer small businesses and inventors because the curtailing effect of damages due to the inventor would be lowered substantially.

    Let's take a look at an example to determine damages by the ''portion'' of the ''total value''—Think in electronic terms of a wheelbarrow. If the invention in question were the wheel, and the entire wheelbarrow sells for $100, what is the contribution of the wheel? Though the wheel may be considered only 10 percent of the cost, its contribution to the whole is infinite. It is the causal component and without it, the wheelbarrow is worthless.

    Let's now consider that there is a wheel on the original product, but the new invention provides the equivalent of a ball or roller or other bearings which make the wheel work much better. What then is the value of the new invention? Would it be simply the cost of the bearings?
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    With invention, one must consider what makes the invention enabled. Without the wheel or the bearing, it is not a wheelbarrow. Though other inventions may be more subtle, the value of the whole invention may rest upon the inventive content. This is because an improvement to the product may be the reason the newly combined devices can be sold at a premium (or even sold at all). That can be referred to as a ''competitive edge,'' and without the new invention, it is just another of the same.

    This is the purpose of invention, since all but the seminal inventions are improvements on other previous inventions. The first or seminal invention might be a reduction or means of implementing a discovery that has not before been implemented. From that time, inventions based on that invention are improvements that may make the previous improvement(s) un-saleable or primitive. In short, the value of the invention is often not the ''part'' or ''portion'' of the overall value but it is the gestalt of the system because without it there would be no reason to use or by the ''invention'' over the same or similar product that does not include it.

Limitation of the Doctrine of Willful Infringement

    This section proposes limitations on treble damages to specific case where the defendant (willful infringer) has received a detailed written notice from the patent owner specifying all of the charges. Contrary to limiting lawsuits as the authors claim as one of their objectives in this legislation, this one would create more problems and litigation. For instance, patent infringers wouldn't be motivated to abide by the patent protections of the inventor in that they would pay less in damages related only to specific cases in combination with the market value changes. This would dampen efforts to thwart the stealing of intellectual property.
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    Without the ability to sue for and collect damages because of ''willful infringement,'' there is little if any reason for larger and well-heeled companies to stop infringing. A perfect example of such a company was RCA under the leadership of David Sarnoff. He spent years and millions of dollars fighting valid patents of Philo Farnsworth of Utah, the actual and seminal inventor of the systems of electronic television we use today. As a side note, his statue, not Sarnoff's, is in the U.S. Capitol to presumably celebrate his innovations in television.

    Here is one of the best examples of the hard road for the individual inventor—even one who invented one of the greatest breakthrough products in the world. Farnsworth, like many inventors, had to crawl along to market, fighting the entrenched large companies (RCA) and new technology. In this case, Farnsworth was a 14-year-old Mormon farm boy who realized, while plowing his potato field, that one could draw a picture on a phosphorescent tube, one line at a time. This is a brilliant insight that took him years to perfect. And when he did the large companies—RCA, front and center—did their best to destroy him. This is but another example how the Professional Inventors Alliance believes the various versions of H.R. 2795 will tip the scales in favor of the deep pocketed infringers to the detriment of the actual inventor.

    Because of the initial bill, references to proponents of the H.R. 2795 bill as introduced, and comments made by members of Congress concerning the following provisions, we want to go on record to discuss both injunctive relief and limiting the scope of continuations.

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Limiting Injunctive Relief

    While eliminating injunctive relief was part of the base bill, it is highly likely that proponents of the original version will continue to push for this provision. So I want to pay attention to it briefly because we understand that there will be efforts to ''put it back in the bill once it passes out of committee,'' as was stated by a distinguished member who sits on this panel, while he was addressing supporters of the legislation.

    In short, this is compulsory licensing under another name, which can also be classified as a regulatory taking. This provision unconstitutionally undercuts the ''exclusive rights of authors and inventors'' granted under valid patents by allowing the courts to determine ''equity'' in considering ''fairness of the remedy in light of all the facts and the relevant interest of the parties associated with the invention.'' Simply put, infringement is infringement and patent holders, under this section, cannot be guaranteed exclusivity of their invention. Moreover, this essentially is compulsory licensing under another name. In effect it is a regulatory taking of private property. This would be an enormous blow to universities, the independent inventor and small business owner, especially those who are attempting to obtain venture capital for the commercialization of their invention(s).

    In the case above (Philo Farnsworth vis-à-vis RCA) it took countless trials that in each one RCA lost. But they had power and money to try and return and retry ad nauseam until the Courts finally put their collective foot down. Few innovators and/or inventors could have survived this.

Limiting the Scope of Applications
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    Proponents of limiting the scope of continuing applications would keep the inventor from broadening the scope of his/her claim after the initial filing of the patent application. Adding this provision could have very damaging side effects. The proponents of the legislation claim they want to do away with subjectivity in the examination process. In our opinion, this may have the very opposite effect.

    During the hearings on patent reform, Under Secretary Jon Dudas claimed that the increased mass of continuation applications has burdened the workforce. Also, that there are a ''few'' people who have used the continuation applications procedures to ''track'' the commercial development of a specific technology only to ''spring it upon'' an industry. So why not provide more money for more examiners to the USPTO instead of changing the entire patent system that will benefit only a select few?

    Thwarting the creativity of inventors by limiting claims to those in the initial application will severely hurt the patent system and unnecessarily deny applicants the right and opportunity to obtain protections for their entire inventions. Quite often applications for newly discovered ideas take a long time to go through the system. During that period, further ideas arise after the initial application is processed that had only the initial claims. By not allowing the inventor to make claims for his or her invention would lead to legitimate inventions going unprotected by the proposals before the subcommittee. At the same time it brings into question the constitutionality of the provision because the inventor is not provided such guarantees to exclusive rights.

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    The Manager's Amendment, as well as the other variations of the legislation, if passed as currently written, would be an enormous blow to universities, the independent inventor and small business owner, especially those who are attempting to obtain venture capital for the commercialization of their invention(s). As I indicated I my opening statement, the Supreme Court's recent decision on Kelo is to private real property as many provisions of this proposed legislation is to private intellectual property.

    Taken in total, this would be the most comprehensive change to the patent system in history. At the same time, it would weaken the best patent system in the world to that of Europe and Japan. It would open our innovations to worldwide piracy through the many provisions in the bill—first to file, worldwide publication, third party input both pre- and post-grant, limitations on damages for infringement and prior user rights. Taken as a whole, patents as we know them today will be hugely devalued.

    There is nothing in any treaty to which the U.S. is a part that requires us to re-write our laws. While there are minimum requirements, the U.S. can maintain its strong patent system and still be compliant with all treaties. On the other hand, other countries are free to strengthen their patent systems to allow innovation and advancement to occur in their countries. Even with current protections set forth in our Trade Related Intellectual Property System that supposedly were written to protect U.S. intellectual property holders, dozens of nations that signed onto the agreement have not honored their commitments. Likewise, the U.S. has not enforced them since 2000.

    It needs to be pointed out that the USPTO takes in more than adequate financial resources through fees (inventor taxes or innovation taxes), which since the early 1990s have been diverted from use by the Patent Office by Congress and used for general obligations elsewhere in the federal budget. Recent temporary medications in our laws have changed this process thereby providing the USPTO with vastly more resources. Perhaps it would be better to allow the USPTO to hire more examiners to address the ''burdened'' workforce before altering (and severely weakening) the U.S. Patent System.
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    It is clear that intellectual property experts from the international community also are calling for new patent procedures that will lessen unnecessary patent application filings. Even Japan's ''experts'' are concerned with how unscrupulous companies in South Korea and China are utilizing the ''open applications system'' Congress is currently considering implementing in the U.S. To do so is frightening, not only from an independent inventor's point of view, but also for national security considerations. Members of the Professional Inventors Alliance are clearly concerned with the proposals pushed by multinational corporations that, if enacted into law, will have a devastating impact on our country's economy and innovative sprit and output! Please do your due diligence and listen not only to those promoting these provisions that will line their large and deep pockets. More importantly, please consider what the impact of changing the best system in the world and unilaterally dragging it down to mediocrity and how it will affect our country as a whole.

    On behalf of the Professional Inventors Alliance we respectfully request that Congress tread very, very carefully in this policy arena and not move forward with any of these controversial proposals that will benefit only a portion of those who benefit from the current patent system. After all, it has served this country well for over 200 years.

    Thank you for the opportunity to present the views of the Professional Inventors Alliance. We have many ideas about how to improve the system and when called upon to provide those, we will be happy to do so. Please feel free to contact me if anyone has any questions concerning this testimony.

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