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House of Representatives,
Subcommittee on Courts and
Intellectual Property,
Committee on the Judiciary,
Washington, DC.
  The subcommittee met, pursuant to notice, at 9:03 a.m., in room 2237, Rayburn House Office Building, Hon. Howard Coble (chairman of the subcommittee) presiding.
  Present: Representatives Howard Coble, Charles T. Canady, Sonny Bono, Christopher B. Cannon, F. James Sensenbrenner, Jr., Bob Goodlatte, Edward A. Pease, Barney Frank, William D. Delahunt, Zoe Lofgren, and John Conyers, Jr.
  Also present: Mitch Glazier, chief counsel; Jon Dudas, counsel; Blaine Merritt, counsel; Veronica Eligan, staff assistant; and Robert Raben, minority counsel.

  Mr. COBLE. The Subcommittee on Courts and Intellectual Property will come to order.

  Good morning, ladies and gentlemen. This is our initial meeting of the 105th Congress, and I want to welcome each of you here.

  I am not violating protocol because Mr. Frank's counsel assures me that Barney does not take umbrage if we go ahead and start without him, and you all have been diligent to come here at the duly announced time. So I think we will get this show on the road.
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  I dislike unnecessarily extended opening statements, but this issue has invited a spirited response. It is intricate and complex. So my opening statement may well be more extended than is normal for me.

  Today this subcommittee is conducting a hearing on H.R. 400, the 21st Century Patent System Improvement Act; H.R. 673, the Patent and Trademark Office Surcharge Extension Act of 1997, and H.R. 811, the Patent Term Restoration Act of 1997, which I believe was just introduced yesterday.
  [The bills, H.R. 400, H.R. 673, and H.R. 811, follow:]


  Mr. COBLE. H.R. 400 is necessary legislation which will allow American businesses to compete effectively in markets today and into the 21st century. It will benefit American inventors, innovators and society at large by providing more efficient and effective operation of the Patent and Trademark Office, by furthering the constitutional incentive to disseminate information regarding new technologies more rapidly, by guaranteeing that patent applicants will not lose patent term due to delays that are not their fault, by improving the procedures for reviewing the work product of patent examiners, by protecting earlier domestic commercial users of patented technologies, and by deterring invention promoters from defrauding unsuspecting inventors.

  This bill was developed by the Judiciary Subcommittee on Courts and Intellectual Property in the last Congress and reported by unanimous vote by the Judiciary Committee late in the second session of the 104th Congress. The version of the bill that we have introduced is nearly identical to last year's bill, except that it includes the contents of a manager's amendment that was developed with the Senate, the administration, and the House Government Reform and Oversight Committee, which would have been offered if the bill had been scheduled for a vote in the full House.
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  This legislation was the subject of several days of hearings in the last Congress, many of you will recall. I would like to place in the record a letter written by the Secretary of Commerce on September 12, 1996, that expressed the strong support of the Clinton administration for last year's bill, including the proposed manager's amendment.

  [The letter follows:]


  Mr. COBLE. The provisions in this bill were also supported by the former Bush and Reagan administrations. This bill is supported as well by an exceptionally large and diverse coalition of small and large companies, independent inventors, and associations representing every type of U.S. industry and inventor that utilizes the patent system. The coalition includes companies that are responsible for large numbers of high-wage manufacturing jobs in America. It also has the support of the technology and innovation Chairs of the White House Conference on Small Business, which was charged last year with analyzing these issues. I can proudly say to you that after many hearings and negotiating sessions, it now has the full and unqualified support of the overwhelming number of American industries that utilize our patent system.

  I look forward to working with all interested parties as we prepare to move this important and necessary patent legislation through this Congress. The reforms contained in this bill are needed, in my opinion, in order to make the patent system best serve the country now and into the next century.

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  The second bill on which the hearing will focus this morning is H.R. 673, which responds to an aspect of the budget proposed by the administration on February 6 and to congressional practice over the past 6 fiscal years. The administration budget proposal would divert $92 million in fiscal year 1998 from the U.S. Patent and Trademark Office, which receives no taxpayer dollars, to other tax-funded areas of the Government. In 1999, the administration proposes that $119 million per year be diverted. In fiscal year 1997, the Congress diverted $54 million, a significant increase over previous diversions.

  This legislation would correct this serious and growing problem without doing harm to the budget, so that the PTO can continue to be the engine that fuels the creation of competitive American technology. The legislation we are considering today is revenue-neutral. It does not increase an expenditure of taxpayer revenues which would increase the deficit. It would merely permit the PTO to use all of the patent and trademark fees it receives to examine patent and trademark applications, to grant patents, and to register trademarks. It does this by placing the fees generated by the surcharge mandated by the Omnibus Budget Reconciliation Act of 1990 into the same category as the other user fees paid by patent and trademark applicants. Specifically, it would characterize these fees as offsetting collections rather than offsetting receipts, so that all the fees collected could be used for the purpose intended, for which they were paid.

  We must stop, it seems to me, an unwarranted tax on innovation. Our Patent and Trademark Office cannot operate effectively on 80 percent of its operating budget, all of which is paid for not by you and me, but by the applicants who use it.

  I look forward as well to working with all interested parties to reverse the potential decline in the services offered by the PTO. In this increasingly competitive atmosphere or climate, the economic survival of the United States will be dependent upon high-technology products and services. We cannot allow the pillar upon which our competitiveness in the global economy rests to be destroyed.
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  Another bill noticed for this morning's hearing, as I mentioned previously, is H.R. 811, which was introduced in the 104th Congress by Representative Dana Rohrabacher as H.R. 359; title of bill: ''To Restore the Term of Patents.'' The subcommittee heard testimony on the merits of H.R. 359 at hearings on January 8 and November 1, 1995. Mr. Rohrabacher testified at the latter hearing. On May 15, 1996, the subcommittee rejected H.R. 359 by a vote of 12 to 2. This hearing will address again the provisions of Mr. Rohrabacher's bill and its potential effects on the patent system.

  We have several very distinguished witnesses with us this morning, and I look forward to their testimony on these important bills.

  I see that the ranking member is not here. Does my friend from Massachusetts have an opening statement to make?

  Mr. DELAHUNT. No, I don't, Mr. Chairman.

  Mr. COBLE. All right, sir.

  Folks, as you all know, on this Hill many events occur simultaneously. So I'm sure that there are other meetings going on. We have a Crime Subcommittee that will convene at 10:30, I believe. So we will probably lose some people who would normally be with us then. So you all bear with us; we'll go along here.

  At this time I will call the first panel to the table. We're pleased to have received requests by several Members of Congress to give statements at today's hearings. Because we have 12 other witnesses who will testify today, and because the Subcommittee on the Constitution, in addition to the Crime Subcommittee, will conduct a hearing on campaign finance reform at 10:15, and many of this subcommittee's members are also members of that subcommittee as well, I would request my colleagues, if they would, to restrict their comments to 5 minutes. And I would say that to the rest of the witnesses. I'm not suggesting that anyone is going to be keel-hauled or hauled off to the gallows if you violate the 5-minute rule, but, folks, if we don't adhere to the 5-minute rule, we will be here until well after midnight. I don't think anybody wants to do that. So you all bear with me.
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  That red light has a way of transmitting many various signals. [Laughter.]

  The signal that will be transmitted by the red light today is that your 5 minutes have elapsed, and I will appreciate you all adhering to that.

  I ask for unanimous consent that a full written copy of any testimony any member would like to contribute to be placed in the hearing record.

  This initial panel will consist of the Honorable Sue W. Kelly, who represents the 19th District of New York; the Honorable Duncan Hunter, whom I do not yet see--I stand corrected; I didn't see you, Duncan--who represents the 52d District of California; the Honorable Dana Rohrabacher, who represents the 45th District of California--my gosh, is this a California caucus this morning? [Laughter]--the Honorable Tom Campbell, who represents the 15th District of California, and the Honorable Stephen Horn, who represents the 38th District of California.

  So if you all will come forward and take your seats--Sue, I hope you can withstand the California influence that surrounds you on all sides.

  Ms. KELLY. New York is up to it.

  Mr. COBLE. It's good to have you all with us, and, Sue, why don't we start with you and we'll move from my left to my right, keeping in mind the 5-minute rule.

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  Mrs. KELLY. Thank you, Mr. Chairman. Members of the subcommittee, I'm delighted to be here today to testify in support of H.R. 400, the 21st Century Patent System Improvement Act. I come before you not as an expert in patent law, but as one who has firsthand seen the effects that global competition can have on our constituents.

  This act, which in similar form was reported favorably by this subcommittee and the full Judiciary Committee of the 104th Congress, should be acted upon favorably and quickly by this subcommittee. I say this because, until we pass this bill, we're placing a choke-hold on the speeding of technological fruits of our most innovative inventors and companies into the marketplace, technology which is critical to keep America competitive in this global economy.

  In fact, I would go so far as to call this bill the Keep America Competitive Act. We cannot ignore the economic facts driving some of our fastest-growing industries. It's well-known in the information technology industry that product cycles are short, often on an order of 12 to 18 months or less for hardware products. For example, one of my New York constituent companies gets half of its hardware revenue from products that are less than 12 months old. In another area of the industry, the Worldwide Web, companies talk of doing things in ''Web-years;'' i.e., 90 days. Yet, that same industry as a whole is growing so fast that it will be the largest industry in the country by the year 2000, if we keep the latest technology flowing to it. If not, that growth and those jobs will flow offshore, and we cannot afford that.

  It's a domestic imperative that we have a modern, efficient Patent and Trademark Office to move applications quickly through the examination process. It's also an imperative that we have an 18-month publication of patent applications for all inventors under the conditions described in the bill. Publications at 18 months will bring new technologies to public attention, reduce overlapping research, and accelerate the speed at which these new technologies become licensed and marketed products.
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  If you agree with me that we need to do all we can to help get the latest technology into the marketplace, so it can be licensed and put to use by those who will deliver our products to the world, then how can we say that we will only make some of the technology available? How can we say that our businesses do not need to know about technology until actually a patent issues? We cannot in good conscious make such judgments because we neither know which technological inventions may be industry-critical, nor from whom or from what source such inventions will arise. Indeed, the source of such inventions could also be foreign, since this is the case of 45 percent of all U.S. patents today, and it's unfair to our industry to keep from it technology openly published abroad at 18 months.

  If you agree that our companies should be given the opportunity to be aware of, and to license, the technology they need to compete, we should focus as well on how we protect inventors in the process. There's two primary risks we need to protect: a failure to get a patent after the technology is disclosed and the inability of an inventor to raise the funds to market or license the invention. Both of these concerns are addressed by H.R. 400.

  Under the provisions of the bill, an inventor may delay publication of a patent application until 3 months after the Patent and Trademark Office gives the inventor an indication of whether or not the invention is patentable. This is the so-called first office action. Thus, the inventor will have the assurance that a patent will issue on the invention. If a patent is unlikely to issue, the inventor has the option of withdrawing the application and continuing to treat the technology as a trade secret.

  The second concern about the inventor's inability to raise the funds necessary to market the invention will be significantly improved by the 18-month publication process. I envision released information about patent applications being categorized by subject matter, and this information being broadly available. This open-air market will bring together inventors and venture capitalists, inventors and licensees, and will help maximize the value of all inventions.
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  At the same time, those inventors who wish to enter into relationships with financial backers even before publication are, of course, free to do so. The risk of the theft of technology is a risk an inventor always has, and what we can do is arm inventors with the means to market their inventions and to ensure their rights. H.R. 400 does this by the very act of publication, and by giving inventors the right to collect royalties on their inventions from the time the application is published. Today inventors can collect royalties only from the time a patent actually issues.

  Mr. Chairman, before I finish, I'd like to spend a minute on submarine patents. Those are the insidious applications that an inventor intentionally keeps pending in the patent system--I got the red light already? May I respectfully request the rest of my testimony be submitted for the record, sir?

  Mr. COBLE. You may, indeed, Sue, and I dislike having to interrupt you in the middle of sentence, but if we're going to stay--if this train is going to run on schedule, then we're going to have to adhere to that. Without objection, the complete statements will be entered into the record.

  [The prepared statement of Mrs. Kelly follows:]


  Mr. Chairman, Members of the Subcommittee, I am delighted to be here today to testify in support of H.R. 400, the ''Twenty-First Century Patent System Improvement Act.'' I come before you not as an expert in Patent Law, but as one who has seen firsthand the effects that global competition can have on our constituents. This Act, which in similar form was reported favorably by this Subcommittee and the full Judiciary Committee of the 104th Congress, should be acted upon favorably and quickly by this Subcommittee. I say this because until we pass this bill, we are placing a chokehold on speeding the technological fruits of our most innovative inventors and companies into the marketplace, technology which is critical to keep America competitive in this global economy. In fact, I would go so far as to call this bill the ''Keep America Competitive Act.''
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  We cannot ignore the economic facts driving some of our fastest growing industries. It is well known in the information technology industry that product cycles are short, often on the order of 12—18 months or less for hardware products. For example, one of my New York constituent companies gets half its hardware revenue from products that are less than 12 months old. In another area of the industry, the World Wide Web, companies talk of doing things in ''Web-years,'' i.e., 90 days.
  Yet that same industry as a whole is growing so fast it will be the largest industry in the country by the year 2000--if we keep the latest technology flowing to it. If not, that growth, and those jobs will flow offshore, and that we can not afford.
  It is a domestic imperative that we have a modern and efficient Patent and Trademark Office to move applications quickly through the examination process. It is also an imperative that we have 18-month publication of patent applications for all inventors, under the conditions described in the bill. Publication at 18 months will bring new technologies to public attention, reduce overlapping research, and accelerate the speed at which these new technologies become licensed and marketed products.
  If you agree with me that we need to do all that we can to help get the latest technology into the marketplace so that it can be licensed and put to use by those who will deliver our products to the world, then how can we say that we will only make some of that technology available. How can we say that our businesses do not need to know about technology until a patent actually issues? We cannot, in good conscience, make such judgments, because we neither know which technological inventions may be industry-critical, nor from whom or from what source such inventions will arise. Indeed, the source of such inventions could also be foreign, since this is the case with 45% of all U.S. patents today, and it is unfair to our industry to keep from it, technology openly published abroad at 18 months.
  If you agree that our companies should be given the opportunity to be aware of and to license the technology they need to compete, we should focus as well on how we protect inventors in the process. There are two primary risks against which we must protect: (1) the failure to get a patent after the technology is disclosed; and (2) the inability of an inventor to raise funds to market or license that invention. Both these concerns are addressed by H.R. 400.
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  Under the provisions of the bill, an inventor may delay publication of the patent application until 3 months after the Patent and Trademark Office gives the inventor an indication of whether or not the invention is patentable. This is the so-called ''first office action.''
  Thus, the inventor will have assurance that a patent will issue on the invention. If a patent is unlikely to issue, the inventor has the option of withdrawing the application, and continuing to treat the technology as a trade secret.

  The second concern about the inventor's inability to raise the funds necessary to market the invention will be significantly improved by the 18-month publication process. I envision released information about patent applications being categorized by subject matter and this information being broadly available. This ''open-air market'' will bring together inventors and venture capitalists, and inventors and licensees, and will help maximize the value of all inventions. At the same time, those inventors who wish to enter into relationships with financial backers even before publication, are, of course, free to do so.
  The risk of theft of technology is a risk an inventor always has, and what we can do is arm inventors with the means to market their inventions and to ensure their rights. H.R. 400 does this by the very act of publication and by giving inventors the right to collect royalties on their inventions, from the time the application is published. Today, inventors can collect royalties only from the time a patent actually issues.
  Mr. Chairman, before I finish, I'd like to spend a minute on ''submarine patents.'' These are those insidious applications that an inventor intentionally keeps pending in the patent system. Submarine patents keep technology off the market, by modifying the applications, and rolling out patents as others reinvent the wheel and apply what they thought was original technology. This hurts American companies three ways: (1) it keeps them in the dark about technological developments they may need to be competitive; (2) it causes overlapping development efforts; and (3) it requires them to continue to pay for old technology long after patents on the same technology have expired for their competitors overseas.
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  Congress shut the door to ''submarine patents'' in 1994, but an effort to create the alternative of a 17-year fixed patent term, measured from the date the patent is granted, would reopen it. We cannot tolerate such a situation. What we can do is protect patent terms with extensions for Patent and Trademark Office delays. This H.R. 400 does.
  Mr. Chairman, I wish you much success in moving ahead with your ''Keep America Competitive'' bill, the ''Twenty-First Century Patent System Improvement Act.'' Its passage is essential to ensure the fastest possible flow of technology to our businesses and their workers, while at the same time protecting and encouraging our inventors.
  Thank you.

  Mr. COBLE. Our next speaker is Mr. Hunter. For the benefit of the uninformed, Mr. Hunter's surname fits him well because he is probably the most adept hunter in the Congress of the United States. Mr. Hunter, it's good to have you here.


  Mr. HUNTER. I thank you, Mr. Chairman. It's nice to be with you and with the committee, and thanks for letting me testify this morning.

  I'll offer my written statement for the record, and I'll take a lesson from this disciplined train that you have running, and I'm going to be, hopefully, short and sweet here.

  I would like to focus on two things in my bill. I think you could call them insulation and expedition; that is, first, insulating the integrity of the Patent Office by providing protections to the people who run the Patent Office, the people who make the examinations, and second, lifting the employee cap that will allow us to have enough people to expedite the granting of patents.
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  Mr. Chairman, let me just say that I think that patents and patent rights are a great deal like property rights. They're a great deal like real property rights. When you have an economy that's based on the transfer of land and real property, it's absolutely important that you have integrity in that process. A patent examiner really is a little bit like a judge. They're a quasi-judges because they conduct an examination that ends up with them giving an inventor a title. The end product is not a title to 10 acres of land, but it's a title to an idea. There is a bit of a struggle between industry that wants to implement ideas, the people that turn the assembly lines, and the people that come up with these ideas.

  I would offer that the United States is idea-heavy; other countries around the world are production-heavy, and there is a little bit of a conflict between the two interests. I think that Japan, if they had their way, would have very abbreviated patent rights because the place where they make their money is the assembly line, and the faster they get these ideas into the assembly line, the better they like it.

  I think you have to insulate these judges, and that's exactly what a patent examiner is. He's like a judge. In a way, a patent action is like a little quiet title action with real property. When the inventor emerges from the PTO he or she either has or doesn't have the right to a valuable piece of property.

  My bill does a couple of things, Mr. Chairman. First, it requires that all search and examination duties be performed by U.S. citizens who are Federal employees. It also requires that the PTO Commissioner maintain the examines files. In the past, as a cost-cutting measure, the PTO has ceased including some of the foreign inventions in the search files. As a result, examiners have incomplete search files. I think the PTO needs to have enough resources so that they can conduct a thorough search, including foreign files.
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  My bill also requires that the PTO examiners dedicate 5 percent of their time to training. These judges are going to make very important and critical economic decisions with respect to property rights as a result, they need to have a lot of expertise.

  H.R. 812, grants the PTO some flexibility, while it maintains title V employee rights for patent examiners. Mr. Chairman, let me just say that the Patent Office is a place where, under corporation, enormous political pressure can be applied. That means delegations coming in and hammering the leadership and the executives to compromise patents, and to put pressure on these little judges that are making these decisions. As you know, in an area where property rights are important, the worst thing you can do is allow political pressure to be applied. Therefore, my bill provides and maintains insulation of these patent examiners who, in fact, are quasi-judges.

  I think it's in our country's interest to have a system where there's a great deal of insulation between the people that are making these decisions, and those who benefit from the decisions. If you want to expedite patents, fine, let's lift the FTE cap, and that's one thing that my bill does. H.R. 812 allows the PTO to hire more patent examiners, provide training for them, and protect them as Federal employees who are under a system in which they are insulated from political pressure. Otherwise, I think we're going to have a patent system where we've lost a great deal of integrity, and that's going to accrue to the detriment of this country, which is idea-heavy, not production-heavy.

  So that's the thrust of my remarks and I want to also say that I support Mr. Rohrabacher's legislation. I like the idea that it reinstates a patent term certain with the term of 17 years from the date of grant, or 20 years from the date of file, whichever is larger.
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  My understanding is, Mr. Chairman, we're all going to talk about what we think is good for the inventors because we know that those idea people are key to our economy. I think that the idea people, the inventors, like the idea that we're going to have integrity in this patent system.

  Thank you very much.

  [The prepared statement of Mr. Hunter follows:]

  I would like to take this chance to thank Chairman Howard Coble for giving me the opportunity to testify on this very important topic: the U.S. Patent System.

  As you all know, our Founding Fathers knew the importance of establishing a system that would protect ideas, inventions, and writings as the personal property of their originator, thereby ensuring that the flow of inventions and innovations continue to energize our great country. In fact, Article 1, Section 8 of the Constitution gave this task to the Congress when it stated: ''To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.'' From this original directive, we have developed the most successful patent system in the world, with over 100,000 patents issued each year.
  Patents, while complicated, are a vital force in our economy. New inventions and innovations in engineering, bio-technology and manufacturing create jobs in America, while at the same time, a secure our economic growth for the future. The 105th Congress will take up the debate on how to improve our Founding Fathers' original efforts. While some reforms may improve the system, we must act carefully in order to protect the integrity of the system and maintain the core of our patent system, which is the best in the world.
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  Mr. Chairman, I am concerned by recent reports indicating that the current Patent and Trademark Office (PTO) Commissioner, Bruce Lehman, is promoting efforts to create a ''world patent system.'' On June 6, 1994, Commissioner Lehman stated, ''I envision a world in which any inventor can go to any major patent office for examination and then [receive] world-wide protection. This will not be possible until we bring together [the] two greatest systems in the world, the U.S. and Japan.'' This unilateral decision by the Commissioner to harmonize our patent system with that of other countries who do not provide the same level of protections for inventors, and therefore do not encourage the same level of innovation, essentially results in a dumbing down of our patent system. Instead of encouraging other countries to reach our high standards, we are accepting the lowest common denominator, and this will have serious negative consequences to our economy.
  Last year, when I testified on this subject before the subcommittee, I mentioned my strong concerns that the Title 5 protections for federal workers, specifically the patent examiners, were being eliminated through the proposal to corporatize the office. I appreciate the Chairman for including the Title 5 protections for the employees of the office, I remain concerned. If H.R. 400 is enacted in its current form and the PTO becomes a government corporation, it will become exempt from adhering to 10 of the 11 prohibited personnel practices [Title 5; sec. 2302].
  As a result of this provision in Title 5, patent examiners, who act as judges in cases of intellectual property, could be subject to undue influence. Among these 10 prohibited personnel practices that would be exempted are: (1) To coerce the political activity of any person; (2) To provide protection for an employee who files any appeal, complaint, grievance or for cooperating with the Inspector General of an agency; and (3) To protect an employee from reprisal due to refusing to obey an order that would require the individual to violate a law. Given the importance and sensitivity of the task these examiners are required to accomplish, refusing them these key protections places our entire patent system at risk.
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  Like many of my colleagues, I am supportive of efforts to identify federal agencies that would operate more efficiently through corporatization; however, the Patent and Trademark Office is not such an agency. Would any of us seriously consider a proposal to corporatize the U.S. Court system, where money could be used to influence the outcome of a particular dispute? Of course not. We should use that same guiding principle when examining reform of the PTO office. Patent examiners grant personal property rights. They perform a function similar to that of a judge and, as a result, should receive the same protections. If this is not done, our patent system will be placed at great risk.
  Other provisions of H.R. 400 concern me as well. Specifically, the allowance of third party participation in re-examination challenges, publication of patent applications prior to their official grant and the impact this has on small inventors. I understand industry concerns about the threat of so-called ''submarine patents.'' I believe, however, that we can address this problem without dismantling a patent system which has served us so well for nearly two hundred years.
  Mr. Rohrabacher recently introduced legislation, H.R. 811, that addresses the problem of submarine patents. The legislation also reinstates the patent term to 17 years from date of patent grant, as it was before Congress passed the GATT enabling legislation in 1995. Under the actual GATT treaty, the agreement set 20 years from file as a minimum, not a maximum. Therefore, the Rohrabacher bill is GATT consistent. The Rohrabacher bill also acknowledges a difference between small inventors who want to protect their inventions until the patent is issued and companies that choose to foreign file. Mr. Chairman, as you know, if an inventor files in another country, their application will be published 18 months after the earliest filing date.
  H.R. 811 also calls for the publication of patent applications of filers that are not diligently moving forward on their patent and are thereby gaming the system. This language will effectively end the threat of submarine patents and their negative impacts on our economy. I am an original cosponsor of Mr. Rohrabacher's bill because I believe it will improve and strengthen our patent system, without dismantling the protections that our current system offers inventors.
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  As I have already mentioned, I believe that our patent examiners are a national asset and an imperative component of the patent system. I recently introduced legislation, the Patent Sovereignty Act of 1997 (H.R. 812), that recognizes the important contributions of patent examiners and incorporates administrative changes that will strengthen the office.. My bill requires that patent examiners spend at least five percent of their duty time in training. Issuing good and defendable patents requires that patent examiners remain aware of any technological advances worldwide. Administration efforts to cut back on training opportunities for examiners have placed the quality of issued patents at risk. With my bill, examiners will routinely receive technical and legal training to promote the efficiency of the office..
  In addition, incentives should be put in place to retain experienced and long serving examiners. Having experienced examiners on staff will provide the institutional knowledge necessary in an agency that is plagued with a high turnover rate, historically between 15 and 25 percent. Experienced staff members are uniquely able to improve the efficiency of the office through advice, direction, and continued work on formal examinations.
  The Patent Sovereignty Act will also require that all search and examination duties be performed by U.S. citizens who are federal employees. Current trends to out source the search duties of the examination, and thereby separating those two functions, threatens patent integrity. Given the sensitive material contained within a patent application, information should not be provided to any persons or groups that are not sworn to protect and uphold the Constitution, as are examiners. Most certainly, non-citizens, either located in the U.S. or abroad, should not be hired for this important and sensitive duty. Under H.R. 400, these important services could be contracted out, yet there do not appear to be any security measures in place to protect the secrecy of patent applications. I am particularly concerned about the national security implications of this practice.

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  My bill also lifts the full-time employee (FTE) requirement for the PTO. In the past, the PTO Commissioner cited a lack of hiring flexibility as the reason for corporatization. I do not believe it is necessary to completely change the PTO, when the flexibility to improve pendency can be attained through this regulatory change. Though the PTO is fully funded through fees, current regulations do not allow it to hire more examining professionals as needed if the number of patent applications increases dramatically. As a result, pendency is increased; this is the case even on the more routine patent applications. My bill will give the PTO the flexibility to meet its obligations without the need to corporatize.

  Over the last two years, a number of small inventors have visited me in my office and listed their four major concerns. Mr. Rohrabacher's bill addresses two of these: protection for the small inventor against early publication and the reinstatement of the 17 year guaranteed patent term. My bill addresses their two remaining concerns: qualified examiners, as I have already mentioned, and retaining patent fees in the office.
  Approximately 16 percent of the fees collected by the PTO are sent directly to the Treasury for deficit reduction, and this money is routinely appropriated back to the office for their use. Last year, however, $54 million of the approximately $106 million contribution by the PTO was used to fund other programs. Most inventors object to this practice because they believe that their fees should be used to run the office, and fees not used for this purpose are merely additional taxes they pay. Patent fees should remain within the office to improve its performance, or they should be lowered.
  I believe that if we lift the FTE requirement and retain the fees within the PTO, we can provide the office with the flexibility to meet its mission without corporatizing this important federal function.

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Mr. Chairman, patents are our economic drivers. Millions of jobs across the country are dependent on the inventions and innovations of our great minds and their patents. It is my sincere hope the committee will take the time to address this issue carefully. Any decisions made in the 105th Congress regarding patent reform will have long reaching effects on our economy and the future of our children. Thank you again for allowing me to testify before the subcommittee and I would be happy to answer any questions you may have.


  Mr. COBLE. I'll say to the gentleman from California, and I thank you for your testimony. We are going to be working with the patent examiners to further strengthen the examination system. Duncan, much of what you seek in your bill is offered in H.R. 400. I'm sure you know that.

  Mr. HUNTER. Yes.

  Mr. COBLE. There's a lot of duplication. But, anyway, I look forward to working with you as we go along.

  Mr. HUNTER. Thank you, Mr. Chairman.

  Mr. COBLE. We have been joined by the ranking member, the distinguished gentleman from Massachusetts. Barney, do you want to be heard now or do you want to wait until the panel finishes?

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  Mr. FRANK. I thank you for the offer, Mr. Chairman. I appreciate your getting this hearing started on time. I think that is important, and I apologize; I had something else that kept me awhile, but you did exactly the right thing in starting on time.

  This is a very complicated subject, so I'm probably going to need about a month or two before I make an opening statement. [Laughter.]

  Mr. COBLE. Well, to extend what the gentleman from Massachusetts said, I'm going to need a month or two also, but I did jump in the water and give an opening statement, Barney. If you want to do that, that will be fine.

  OK, the gentleman from California, Mr. Rohrabacher.


  Mr. ROHRABACHER. Thank you very much, Mr. Chairman and my fellow colleagues. I appreciate the opportunity to testify today on my bill, H.R. 811, the Patent Term Restoration Act, as well as H.R. 400.

  This committee is discussing potential changes in the patent law, and never has there been a more stark contrast in the directions that are being suggested by those who are proposing legislation in a given area. H.R. 400, which I call the Steal American Technologies Act.   No. 1, would reconfirm the end of the right of the American people to a patent term-certain; that is, to a guaranteed patent term, and replace it with an uncertain patent term. No matter how people are trying to give assurances about the patent term such as ''oh, don't worry, you're even going to gain some time,'' these are only personal assurances, which 3 years and 4 years or 5 years down the road mean absolutely nothing. Up until 2 years ago, from the time of our Constitution, Americans had a right to a guaranteed patent term. This is being taken away from them now.
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  No. 2, on H.R. 400 would end basically another right that's been enjoyed by Americans, and that is an inventor has always had the right, once he applied for a patent, to confidentiality. If his or her invention was something that was a product of their work, and their diligence and time, and their genius and their creativity, they had a right to submit it to the Federal Government for approval of the Patent Office and not have it published all over the world until they were granted the ownership rights of that particular idea.

  Basically, the right of confidentiality is totally obliterated by H.R. 400. It would publish whether or not a patent has been issued. After 18 months every one of our technological secrets would be made available to every copycat, every cheat, every competitor of America in the world. And for us to think that they wouldn't use it against is about as naive as anything I've ever seen in my life.

  Of course, the big guys can hire stables of lawyers; once their patent is issued, they can go back to try to get their patent rights, but that's only good for the big guys who can afford all of these lawyers. The little guys end up losing tremendously on H.R. 400. And who's given? The big guys and the foreign corporations.

  No. 3, H.R. 400 would change the Patent and Trademark Office into a corporatized quasi-private business, much like the Postal Service, and patent examiners will basically lose their current status, but will in some unspecified ways be protected. That makes no sense to me at all, and Duncan Hunter's remarks went directly to that issue.

  My bill, H.R. 811, would, No. 1, reinstate the 17-year guaranteed patent term while retaining the option of a term that is complying within national accords. In other words, this guaranteed patent term does not go against the grain of GATT. This is a GATT-consistent proposal because GATT never required us to end the guaranteed patent term.
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  No. 2, my bill would reaffirm the patent applicant's right of confidentiality. Again, anyone who believes that we can publish all of our secrets even before the patent is issued, this is really the height of naivete. And, yes, big corporations who don't want to pay off the little inventors are going to benefit by publishing every one of their secrets. International corporations and foreign corporations will benefit, but the American inventor will suffer and his rights, basic rights, are being taken away.

  Also, there's a companion bill, H.R. 812, which Duncan Hunter just introduced which basically talks about keeping the issuance of patents a government function and keeping patent examiners recognized as the quasi-judicial decisionmakers that they are, and I support that bill 100 percent.

  The changes proposed in H.R. 400 are aimed not at preventing submarine patenting, and this is one point we need to make and need to discuss. First of all, this idea came out of an agreement between Bruce Lehman, the head of our Patent Office, and his Japanese counterpart to harmonize our patent law, to basically make American patent law like the Japanese patent law. And I would submit that basically the submarine patent issue is being used as a cover for an attempt to harmonize and globalize patent law, which will greatly diminish the protection Americans have already had. I offered to put any protection into my bill against submarine patents, and, of course, no one took me up on it because the real purpose is to eliminate these rights Americans have had.

  Mr. COBLE. Well, Mr. Rohrabacher, I appreciate your being here, and you and I won't slug it out today--[Laughter]. I realize, folks, much of what is contained in these bills is subject to interpretation. You express alarm about the employee status changing. That ain't going to happen--pardon my imprecise grammar. You indicate that it will become a quasi-private entity. That's not true. But we'll talk about this at a later time.
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  Mr. FRANK. Mr. Chairman, if you'll permit, your grammar may not have been correct, but it was quite precise. [Laughter.]

  Mr. COBLE. I thank the gentleman.

  Mr. ROHRABACHER. Mr. Chairman, I would submit a lengthier statement for the record.

  Mr. COBLE. OK, without objection, Mr. Rohrabacher.

  [The prepared statement of Mr. Rohrabacher follows:]

  Mr Chairman and colleagues, thank you for this opportunity to testify about my bill, H.R. 811, the Patent Term Restoration Act of 1997, and others before this committee.
  This committee is discussing potential changes in the patent law. Never has there been a more stark contrast in the directions being suggested by those who have proposed legislative changes. The patent issue is of vital importance to the United States as a country and to its citizens as individuals. In fact, it will be the most important issue that this Congress deals with because of the long range impact on our citizens and our economy.
  The technical nature of these patent reform issues can easily obscure the impact of what the 105th Congress does or does not do. It is our duty to make sure that every citizen knows what we are about in these proceedings, and how substantially different these approaches are. We must let the sun shine on the actions and intent of all those who would change a system that has operated very well for over two centuries.
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  The founders of our nation recognized the importance of patents to America's future economy and to its citizens as individuals. Even before adding the Bill of Rights to our Constitution, with their unique assurances of freedom of religion, speech and other individual liberties, our forefathers dealt with individual rights to patents. In fact the founders of our nation imbedded this right in the very first article of the Constitution, following only those sections which determined the structure of the Congress itself. In order to ''establish Justice ... and promote the general Welfare,'' the drafters of this epoch document enumerated the several Congressional powers needed to preserve the union including their need:
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries
  With wondrous foresight, those who crafted this marvelous document recognized that the vitality and future of their foundling nation lay not just in its lands and resources, but in the unique individuality of its citizens which would give birth to inventions that would shape our economy ... but could do so only if the inventors were assured of the rights to develop their creations, for their benefit and that of their fellow citizens. These rights were not similarly protected elsewhere in the world then, or now.
  That very protection, coupled with the unique innovativeness of Americans from our pioneer ancestors to present day inventors, has assured the United States of the majority of the world's patents. It has been the backbone of our economy; it has stimulated the development of processes, materials and equipments that have created our nation's wealth, have given our citizens the highest standard of living in the world, have allowed us to protect the cause of freedom throughout two world wars, and are now allowing us to explore our universe and our very being from Earth to outer space.
  Other nations have tried to emulate our success and even our Constitution, but none have succeeded because some element of protection for the individual has been missing, either in their law or culture. We will continue our position of leadership in the free world as long as we protect all of the individual rights that stimulate innovativeness among Americans.
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  And so it was with considerable alarm that I saw the rights of American inventors given away in revisions to U.S. law that followed the international agreement (GATT) of 1994.
  Instead of encouraging other nations to raise the standards of patent protection to those of the United States, which have been indisputably successful for the past 200 years, we allowed ourselves to be lulled into lowering our standards to those of countries which could not compete against us.
  Instead of continuing the guaranteed protection of a patent for a term of 17 years from the time a U.S. patent is granted, we acceded to the self-serving motives of the ''one worlders'' by adopting the uncertain patent term used by our second-best competitors elsewhere in the world. In 1995, by adopting a new patent term of 20 years from filing the U.S. patent application, we have subjected our inventors to an uncertain and frequently shorter patent protection. This will virtually ensure economic harm, particularly to the individual or small-company inventor, and for what good end elsewhere? Certainly none in the United States.
  My bill, the Patent Term Restoration Act, H.R. 811, will remedy that catastrophe, as I'll explain in a minute. However, I'm at least as concerned about new threats to our eminently successful patent system. Not satisfied with partial retraction of Constitutionally-based patent rights, the one-worlders of the political system, guided by our economic opponents in the world market, have a plan to destroy all initiative for U.S. inventors.
  I did not make the decision easily to label H.R. 400 (and its predecessor in the last Congress, H.R. 3460) the ''Steal American Technology Act.'' Certainly the sponsors of this bill are honorable men, but perhaps so misled by 94 pages of complex technical jargon and cross-references, that they believe it will improve the patent system, and are intrigued by its 21st century glitter. But a time bomb is lurking in H.R. 400 as surely as the Year-2000 clock problem is waiting in our computers.
  There is no justification to reconfirming the end of the right of Americans to a guaranteed patent term, and its replacement with an uncertain patent term.
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  There is no way that U.S. inventors, or our nation, will be helped by the pre-patent-award publication provisions of H.R. 400. In contrast, this attack on traditional patent confidentiality provisions, offers an open invitation to every copycat in the world to steal the ideas of American inventors. It also is a particularly insidious form of ''Corporate Welfare,'' requiring the small inventor to pay additional maintenance fees so that his confidential data can be published to reduce some corporation's research expenditures.
  There is no reason to ''harmonize'' the U.S. patent system with that of the rest of the world when this means dragging down the rights of American inventors to the poor protection afforded their counterparts in Japan and Europe.
  There is no justification for the proposal of H.R. 400 to radically change the entire--structure of the Patent and Trademark Office (PTO), form a quasi-private business like the postal service, change the civil service status of the patent examiners, all in order to correct a few problems that can be corrected by the present PTO with modern and efficient management. The only motive, perhaps hidden from beguiled H.R. 400 supporters, is to make the PTO less susceptible to U.S. control and oversight and more subject to foreign influence.
  There is no public benefit to ''Corporatization'' as envisaged in H.R. 400. A government owned corporation does NOT, nor can it ever, confer the benefit of ''Privatization'' which Congress has endorsed for other functions. There are functions still being performed within the government which can be contracted out to industry with savings that are uniquely achievable in the competitive market place. However, the issuance of patents is an inherently governmental function and not suitable for privatization.
  Neither does this so-called ''corporatization'' provide insulation from legal liability in the usual way that a corporation protects certain individuals. The Government will still own PTO Corp. and be responsible for defending PTO in suits and liable for any damages.
  I can conceive of no advantage in allowing PTO to operate under only ''policy direction'' of the Secretary of Commerce. H.R. 400 affords PTO with the specific powers to amend or repeal patent rules, its own bylaws, and rules and regulations including the interpretation data storage and retrieval and associated confidentiality... all with little oversight.
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  What purpose is served by permitting PTO Corp to open offices all over the world, a totally unnecessary diversion of manpower and resources hardly needed in this electronic communication environment--unless you want to have the PTO more susceptible to foreign influence.
  Do you believe that a cost reduction will really occur when PTO is afforded unlimited authority to determine the need for any of its expenditures, to borrow, and to build new facilities without oversight by the Government and the defined audits and inspector general oversight of other agencies.

  Finally, why authorize PTO to accept gifts of money, services, or property, a provision that is not likely to inspire public confidence in this era of foreign influence in Government affairs via backdoor contributions--and these are only a few of the unacceptable provisions of H.R. 400.
  My bill, H.R. 811, The Patent Term Restoration Act, goes in exactly the opposite direction to H.R. 400. It is certainly more consistent with American traditions in the patent arena, and a lot easier to understand because it effects only a few changes, H.R. 811, would:
  #1--Restore American inventors' guaranteed patent term. It accomplishes this (in section two) by assuring the inventor of the longer of: (a) the historically afforded 17 year term from the time the patent is granted (the patent grant affording inherent protection against infringement); or (b) 20 years from the time of earliest filing (an interval that could be longer than 17 years from grant but only for an inventor whose application is processed in an unusually short time.)
  This last (b) option is consistent with practices in other countries, and with the minimum requirements of the international accords. There is no requirement in such accords for denying an American inventor 17 years to commercialize his or her conception. This guaranteed term has been the motivating factor, and the appropriate reward, for innovations that have made the U.S. the major source of inventions in the world, benefiting both our economy and quality of life.
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  #2--Shore up the confidentiality provisions of the present patent law, while specifically defining those few ''special circumstances'' in which public interest may require publication of patent application data while the patent is pending. Under present law, all data relating to patent applications are held in confidence from the time of filing until the patent is granted. This patent-pending period is one of high vulnerability for the inventor, particularly the individual inventor or one who works for a small company. Normally the applicant is using all of his/her financial and intellectual resources to prosecute the patent, while simultaneously looking for a way to finance and otherwise provide for commercialization needed to will deliver benefit to the public while sustaining the inventor.
  In the U.S. we value the contributions of individual inventors because they are the strength of our economy and democracy. That is one reason why we have been so innovative as a nation. Other countries do not favor individual inventiveness; they favor patent development and control in large companies in close cooperation with collectivist governments. Such an environment has led these nations to the practice of publishing all patent application data soon after the foreign patent application is made.
  Despite the fact that the early publication is contrary to American interests, H.R. 400 and its predecessors would mandate publication of all U.S. patent application data shortly after filing, and well before the protective patent is granted. Moreover, the current patent law gives the Commissioner discretion to publish patent application data in undefined ''Special Circumstances,'' interpreted in PTO regulations as instances in which it is--''necessary to the proper conduct of business before the [Patent] office''--and where the Commissioner believes such publication--''involves an interpretation of patent laws or regulation that would be of important precedent value.''
  In such an environment, it is imperative to preempt universal early publication of patent-pending data. We must also define and restrict the ''Special Circumstances'' allowing publication to those that favor the American public and the conscientious American inventor, rather than foreign companies and those multi-national corporations who look at publication of U.S. patent-pending data as a way of subsidizing their research efforts.
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  Section 3 of my bill, H.R. 811, provides for only three exceptions to the general confidentiality rule (and also closes the door to any new pre-issuance objections)
  Exception one would permit, but not require, the Commissioner to publish U.S. patent application data, but only to the extent (as a maximum), and after the time, that such data is already in the public domain in other countries..
  This exception is not burdensome to the inventor. If a person who files for a U.S. patent, also files for a foreign patent, some or all of his foreign application data will be published overseas, immediately or shortly thereafter. The inventor's technology is therefore made mailable to our foreign competitors, possibly in their language rather than English. They can immediately build on that technology. U.S. companies cannot do so until they obtain the patent application data in English. This ''special circumstances'' publication exception does not disclose any patent application data that the inventor has not consented to by foreign filing. The Commissioner can determine if U.S. interests are truly enhanced by publication of the foreign-filed patent data, can publish as much data as already made public in other countries, and can outsource the actual publication allowing the end users to pay for the costs. There is no ''Corporate Welfare'' in this.
  Exceptions two and three are closely related. Both are provisions to publish data from those U.S. patent applications which fit the definition for the so-called submarine patents. However, publication will occur only after the Commissioner has notified the applicant and has afforded the applicant an opportunity to petition and demonstrate reasons against publication.
  Under exception two, patents that have been pending in the system for more than five years receive automatic scrutiny to determine whether the public interest will be served by publication. However, there are seven categoric exceptions covering delays caused by circumstances beyond the control of the applicant.
  Exception three also provides for publication of submarine patents, but catches them earlier in the process when a dilatory inventor requests delaying continuances for no bona fide reason.
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  Examination of the patent issuance data indicates that these ''submarine patent'' exceptions may be rarely needed, but they will serve the public's interest. They recognize that the primary thrust of the Constitution is to ''promote the progress of science and the useful arts'' for the benefit of the country, and as a necessary corollary it does so by ''securing exclusive rights to inventors.'' If an inventor chooses to game the system by deliberately denying timely use of technology to the public, the inventor may benefit in ways not consistent with the Constitutional intent, and in the process may hurt U.S. interests. An inventor wishing to gamble on the advantage of deliberate delaying techniques can do so by keeping data a trade secret, rather than hiding within the protection of the patent system.
  I believe that there have been only a handful of ''submarine patents'' among the hundreds of thousands of patents processed in recent years, and the trend is for these to diminish. This bill will torpedo any remaining submarines lurking in the system.
  The confidentiality and publication changes proposed by H.R. 400 are aimed, not at preventing ''submarine'' patents, which is used as an excuse, but at the harmonizing U.S. patent law with Japan. I submit for the record an agreement signed by Patent Commissioner Bruce Lehman and his counterpart in the Japanese patent office.
  I would remind my colleagues that over these last two years, I have offered over and over again, to include in my legislation any legislative remedies for a so-called abuse referred to as a ''submarine patent.'' My only prerequisite was that it not destroy the guaranteed patent term in the process.
  Tom Campbell was the only one who took me up on this offer, offered language which assures the elimination of submarine patents, and stands beside me today to oppose H.R. 400 and explain his support of H.R. 811.
  I also am joined today by Duncan Hunter, whose bill, H.R. 812 will deal with those few improvements needed in the infrastructure of the PTO to ensure its continued excellence. A key provision is the retention of the quasi-judicial status that these examiners presently have. I am proud to co-sponsor this bill developed to meet the needs of the professionals in that Patent Office who are the people most knowledgeable about what is needed, and to accept the morale support of these professionals for the bill which best serves their clients, namely America's inventors.
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  Our patent protections and rights have served our country and its people well.
  Don't expect to harmonize our law with Japan's, and to drastically change the fundamentals of how technology is protected without terrible, unanticipated consequences. America did not become the world's greatest innovator for no reason.
  Don't expect our country to stay on top when the fundamental laws and protections are changed.
  H.R. 400 will become a catastrophe in slow motion. H.R. 811 will put us back on the fast track to leadership in innovation and technology development.

  Mr. COBLE. The Chair is now honored and pleased to recognize the gentleman from California, Mr. Campbell.

  Mr. CAMPBELL. Mr. Chairman, thank you. You and I haven't had a chance to talk about this yet, and I'd like to do that because I think a compromise is appropriate and very possible.

  Here's where I see the possibility: as I see it, presently the large technological companies and small technological companies have been rallying behind your bill. That's my perception. And I've been in touch with the research universities. I think no deal is good unless it's got both--and the small inventors also. But, at least as I understand it, at the present, Mr. Chairman, I don't think the research universities have come down on either side of this. What I'm hoping for is a bill that will have the support of the high-tech companies--that's critical--but also the research universities because they generate so much of the intellectual property.

  Submarine patents, let me just try to hit that one head-on. That, I think, is the best argument on the side of the high-tech companies, and I understand it and I accord it credit. I believe it. There are some submarine patent artists out there.
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  But here's how you get at that. I drafted a way to deal with it. It may not be the best way, but I think it's a compromise, which is what I'm trying to do. I don't want to see the ''slugging out'' to which the chairman referred, if there's a possibility of getting business and inventors together.

  What I drafted is in section 3 of the Rohrabacher bill, section 3, clause 3. What it says responds to the heart of the submarine patent: somebody who files an application for a patent and a little bit later files a continuation of that application; a little bit later files another continuation--all the time keeping it just beneath surface, stalling, stalling, and stalling, until somebody like Intel or Microsoft comes up with an idea in a commercial form that happens to incorporate that which has been just below the surface. Then the submarine surfaces and fires the torpedoes, to continue this analogy.

  So the key here is to single out the person who's gaming the system. So what I drafted was, ''if you file an application continuation request, then you have to disclose,'' continuing the process being the key. What I'm concerned about is, if you have everybody disclose, you will inadvertently dampen a little the incentive to invent for the honest folks and for the research universities who are not gaming the system. And so why don't we go after those who we can identify by the conduct that they're engaged in if they're gaming the system?

  Why, does disclosure have a depressing effect on creation of invention? The reason is that you ought to be able to shop a patent pending. You ought to be able to shop a trade secret. Now your bill, Mr. Chairman, says you take your choice; 18 months comes; the Patent Office says we're not ready yet or the Patent Office has already given you a patent; if they haven't given you an answer yet, you can withdraw and try a trade secret. That's right. But suppose in the 19th month, Mr. Chairman, suppose in the 19th month you would have gotten your patent. Then you're stopped. You have to take your choice in the 18th month.
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  The inventor needs to have that option of shopping a trade secret or shopping a patent or patent pending. So I think you, Mr. Chairman, and this committee, for which I have the highest regard--as you know, I used to serve on it--has a chance to make a compromise to go after those who are gaming the system without the unfortunate effect of depressing invention.

  I conclude by saying my colleagues have spoken eloquently, particularly Congresswoman Kelly and the chairman, about the need to disseminate information about high technology. That's right. I totally agree. But today I'm also emphasizing the need to incentivize invention, and the patent system was created to achieve both.

  Now I want the chairman carefully to observe that I'm stopping 1 minute before the end of my time, so that he might be gracious unto me in future appearances. [Laughter.]

  Mr. COBLE. Tom, I appreciate that, and I commend each of you for adhering to the 5-minute rule. I thank you for doing that.

  As an aside, you alluded to the research community. Now many research universities, including the University of California system, CalTech, did weigh-in and express support for this bill last Congress.

  Mr. CAMPBELL. Last year.

  Mr. COBLE. Yes.

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  Mr. CAMPBELL. I've been in touch with them this Congress, Mr. Chairman, and I'm trying to work a compromise; I really am. I know where they were last year, but I think it's accurate that they're not onboard either side yet this year.
  Mr. COBLE. OK, that's somewhat surprising because there's really not that much difference between the two bills.

  In any event, it's good to have you all here. I have no questions. I will recognize the ranking member, the gentleman from Massachusetts.

  Mr. FRANK. I'm delighted to hear Mr. Campbell's testimony because I think having his understanding at work on this issue is very important, because it obviously oughtn't to be a source of disagreement. It's not an ideological issue. It really is an issue where the goal is universally agreed to when we're talking about ways of approaching it. And I'm also pursuing with some universities in my own area what their particular views, because I noted their lack of a firm position at this point.

  In addition to the publishing of the patents, are there other issues that you think are a problem from the universities' standpoint?

  Mr. CAMPBELL. I do, Congressman Frank, and that's the certainty of the term. It's really literally ''Can I take an idea to the bank?'' You can take an idea to the bank if you know you will have numbers of years of intellectual property protection for your idea. Now that matters to the small inventor who might have to go to the bank to get to the money. It matters to the research university, to the extent that that is a source of funding. So the certainty of the term----
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  Mr. FRANK. Is another issue for them, OK.
  Mr. CAMPBELL [continuing]. Is the second.

  Mr. FRANK. I guess I wouldn't subscribe fully to the notion that you can take an idea to the bank. I know in our other committee where you and I serve we are talking about letting them get into securities and insurance. I hadn't thought of them as getting into ideas in a big way yet, but maybe that will be the next amendment to the banking powers. [Laughter.]

  But I want to stay in touch with you on both those issues. It's obviously a very important constituency to----

  Mr. CAMPBELL. I think disclosure is the No. 1, 2, and 3.

  Mr. FRANK. I guess I would just say, in general, I believe there is a genuine consensus here as to goals. So I would say to all my colleagues I think characterizing people's motives is probably not a useful way to go here, or even to talk about major differences in perceived outcomes. I think we really are talking here about people who agree on ends overwhelmingly and have some difference as to means, which is inevitable in a complicated subject like this.

  Thank you, Mr. Chairman.

  Mr. COBLE. Thank you, Mr. Frank.

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  Anyone on the majority side have questions for the panel? Anybody?

  [No response.]

  Mr. COBLE. Gentlemen, thank you all for being here.

  Our next witness represents the administration: Bruce Lehman, not unknown to any of us in this room. Bruce, I didn't see you come in. Good to have you here.

  Mr. Lehman served as counsel to this subcommittee for 9 years and its chief counsel for a number of those years. He has been a strong advocate for intellectual property rights for U.S. property owners and a key player on intellectual property issues both in the United States and abroad. He has headed numerous delegations to consider international intellectual property issues at the World Intellectual Property Organization, and recently, I might say, very successfully completed negotiations which led to the adoption of two copyright treaties which will greatly enhance protection for U.S. copyright holders around the world. He is here today representing the administration.

  Commissioner Lehman, it's good to have you back on the Hill.


  Mr. LEHMAN Thank you very much, Mr. Chairman. May I proceed?
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  I believe you have a written statement for the record.

  Mr. COBLE. We do have a written statement, and I ask unanimous consent to make that a part of the record. Commissioner, you may proceed.

  Mr. LEHMAN And would you like me to confine my remarks to 5 minutes or----

  Mr. COBLE. If that could be done.

  Mr. LEHMAN I will attempt to do so, Mr. Chairman.

  Mr. COBLE. We will illuminate the green light, so that red light won't distract you right now. [Laughter.]


  Mr. COBLE. And, Commissioner, if you can't do it in 5 minutes, as I say, nobody's going to be keel-hauled today, but if you all can keep it within 5 minutes please do, because the subcommittee will have the benefit of the entire text of your testimony.

  Mr. LEHMAN. Thank you very much, Mr. Chairman. I think that the prepared text that we have presented to you really does go into all of the details. So perhaps the best thing that I can do is to try to stand back for a minute from some of the details of the discussion and talk a little bit more about what we're really trying to achieve here, what the policy is. If we do that, we really see that we have very little disagreement on anyone's part.
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  The objective is that we want to have a strong and fair patent system in the United States that serves the interests of primarily U.S. inventors, though we have an obligation to foreign patent-filers as well, but primarily U.S. inventors who want to get patent protection, so that then they can go into the financial marketplace in a very timely manner and use that patent to get the financing to put new products on the marketplace not only in the United States, but globally; to create new jobs for the American people, and to make our country more competitive.

  The one thing that I must emphasize, however is that the United States is now functioning in a globalized economy. I know a lot of people don't like to hear this; they don't like to hear this in many, many contexts. Increasingly, the jobs of Americans depend on our capacity to export our products. Those products are not very cheap manufactured goods of the kind that we see produced in underdeveloped countries. Those products are high-tech products in which the essential ingredient is the intellect, the intellectual creations that went into those products that oftentimes are protected by patents.

  So that when we look at the activities of the U.S. Patent Office, we must remember that all I can do when I sign my name to a patent in the United States is to give someone protection in this country for a period of time. It doesn't protect them at all in France or in Thailand or in Argentina or in any other place.

  So that if we want to have a system that works, it is going to have to be a system in which we provide timely and effective protection for inventors here in the United States, but that we also extend this system to the rest of the world, so that we have protection everywhere on this planet. And if we don't do that, then what we will find is that our most valuable assets in this country--and our valuable assets aren't the gold in the hills in the West anymore or even the cotton that grows in the fields of the South; our most valuable assets are the creations of the human mind of the people of this country, and we need to see that they are protected globally. That is an important theme that runs through this entire discussion and deals with Mr. Rohrabacher's issues and lots of others.
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  I'd like to just step back for a second from that global picture and just talk a moment about the principal legislation that is pending before you. I want to thank you, Mr. Chairman, and thank the ranking minority member, Congressman Frank, for your timely introduction of H.R. 400. That is not, of course, the administration bill. We have slightly different views on some of these matters, and they are reflected in our testimony. But it is extremely gratifying that you have all taken the legislative leadership to move this debate forward in this bill and to pick up where we left off last year after lots of discussion among very many, many, many parties.

  There's one element in this debate that I really want to take a moment to emphasize, and it probably goes in some ways to perhaps what's the heart of the difference between H.R. 400 and the administration approach to these matters, but it also touches a little bit on some of the other issues, the issues that I heard raised by Congressman Hunter.

  And, by the way, let me assure you that I am not aware, certainly, in recent times under any administration--and I can absolutely guarantee you that under this administration there is no politicization of the patent application process. I do not issue patents on the basis of somebody's political party or political preference. There do from time to time arise, however, some very significant policy issues, and I think that we do want to retain some control on the part of elected political officials over those policy issues, and we want to obviously retain Congress' right to have something to say about those policy issues. Because of that, the very essence of the administration's approach to reformulating the Patent and Trademark Office into a truly lean and effective operation, something that we call PBO, a performance-based organization, is to separate the policymaking and regulatory functions really from what are the program operations, the factory functions of the Office. We are a very big factory. We have 5,000 employees. We have two ZIP Codes, and every day mail trucks back up to our loading docks with over 15,000 pieces of mail which are patent applications and various documents that deal with the administration of patents and trademarks as well. The inventor is not served if we spend 10 years getting him through the Patent Office and then simply tack on another 17 years to his patent term. The inventors are served by our getting them in and out of the Patent Office and to the bank as quickly as possible. In order to do that, we have to have regard to this programmatic, administrative side of the operation, we have to have the capacity to be light on our feet, to adjust to changes in technology, to be able to direct our resources at the places that they are needed as problems arise.
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  For example, we have had an enormous increase in biotechnology applications and computer software applications. We need to direct our resources to those areas of critical technology. We need to hire very qualified examiners. We can't be stuck with 1945 rules for governing the patent system, and that's what your bill tries to address, and the administration is totally in agreement with that general objective.

  One principal difference--and there are some other differences--is that we would propose as a part of our performance-based organization concept, to put a really professional manager in charge of the day-to-day patent operations, and then to have an Under Secretary of Commerce for Intellectual Property who would deal with these critical policy matters. You alluded to some of them, like the copyright matters that we recently dealt with in Geneva, but issues like this come up every day, and sometimes, Mr. Chairman, they're very sensitive issues.

  Do you want a civil servant without any policy control over him or her to be dealing with very sensitive questions about patentability of life forms, use of human fetal tissue research in patented products, and so on and so forth? We may have differences of agreement among the parties; we may have differences of agreement among us. President Clinton may disagree with the majority in the House of Representatives at the moment on some of those issues, but those are issues that should be dealt with at a policy level, and it should be the Congress and the administration, the President, accountable to an electorate that resolves those questions. That's why we need to have a strong policy arm.

  You know, I see that the red light has gone on, Mr. Chairman. I just want to indicate that we are more than willing to work with you on these matters. We've been trying for the last 3 1/2 years now to address the various concerns that have been raised. In a country of 250 million people, as I don't need to tell you as Members of Congress, it's impossible to please every single human being. You try to please as many as you possibly can.
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  I think it's fair to say, Mr. Chairman, that the approach that you have come up with in H.R. 400 and the general thrust of the administration's position is overwhelmingly supported by the vast majority of users of the American intellectual property system, and I think that will become apparent to you in the hearing today and in the conversations that you and other members of the committee have with users of this system over the coming weeks and months.

  Perhaps the best way to proceed at this point, Mr. Chairman, would be for me to get to the questions that the members may have rather than to continue on. You have my statement. I've tried to put in a bit of global perspective. Perhaps now we can get to the specific issues that are of concern to all of you.

  [The prepared statement of Mr. Lehman follows:]


  Mr. Chairman and Members of the Subcommittee, thank you for providing me with this opportunity to present the views of the Administration on H.R. 400, the ''21st Century Patent System Improvement Act;'' on H.R. 673, the ''Patent and Trademark Office Surcharge Extension Act of 1997;'' and on H.R. 811, the ''Patent Term Restoration Act.''

H.R. 400
  The Clinton Administration worked closely with this subcommittee and with the Congress during its last session on H.R. 3460, which addressed the improvements to the USPTO and the patent system in general. Many of the compromises we reached during those end-of-session discussions are reflected in H.R. 400.
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  The fact that H.R. 400 was introduced by you, Mr. Chairman, so soon after the Congress convened this year reveals the importance you place on the revision of our patent system to meet the needs of the 21st Century. We share that view. I look forward to working with you to accomplish that objective.
  Today, I will discuss what we believe the most significant provisions of H.R. 400 would accomplish. I will also suggest improvements that the Administration believes would achieve our common objectives while increasing productivity, cost effectiveness and quality service.
  Title 1 of H.R. 400 would convert the U.S. Patent and Trademark Office (USPTO) into a wholly owned government corporation in accordance with the Government Corporation Control Act. Let me emphasize the Administration's strong support for converting the USPTO into a customer oriented, performance-based organization within the Department of Commerce. This approach is preferred to that proposed by H.R. 400.
  In September of 1995, Vice President Gore announced plans to change the USPTO into a performance-based organization. The USPTO's operations make it an ideal candidate for conversion since they are completely funded by fees paid by the users of the agency's services and products--patent applicants and owners and trademark applicants and owners. As you know, the USPTO receives no taxpayer money. In addition, the service functions of the USPTO are measurable. Standards of quality and quantity can be set and the organization's performance evaluated using those standards as yardsticks.
  That said, however, I must note that there is a significant difference between the Administration's vision of the structure of the organization and the structure which would be created by the bill. The Administration has developed a legislative template for performance based organization candidates to use. The template includes provisions expanding personnel and procurement flexibilities and providing for a Chief Operating Officer who would be held accountable for achieving annual performance goals. The Administration would like to see the USPTO transformed into a performance based organization consistent with the legislative template. In the Administration's vision, the USPTO's policy making functions, granting of patent rights and registration of trademarks, would remain part of the Department of Commerce, under the direction of an Under Secretary for Intellectual Property, who would be appointed by the President with the advice and consent of the Senate. Such an arrangement ensures that the inherently governmental functions currently exercised by the USPTO remain clearly under the supervision of the appropriate Cabinet Department. It also ensures that intellectual property issues are considered as an integral part of each Administration's programs, since the Under Secretary would, through the Secretary, advise the President on both domestic and international intellectual property matters and ensure that these important issues are part of Cabinet deliberations. Finally, the arrangement would ensure that each Administration's objectives and priorities are reflected in the preparation of any intellectual property legislation and in international negotiations involving intellectual property.
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  The service functions of the USPTO--those of examining patent and trademark applications, and services supporting those functions--would be the responsibility of the performance-based organization. The Chief Operating Officer (COO) of that organization, who would be appointed by the Secretary of Commerce, would be held accountable for the organization's performance. Each year, the COO would enter into a performance agreement with the Secretary of Commerce establishing measurable goals in key operational areas. Those goals then would be used to judge the organization's performance. The Secretary would be authorized to award a bonus of up to 50 percent of the COO's annual rate of basic pay, with certain limitations, based upon the Secretary's evaluation of the organization's performance. We believe that setting clear goals and holding the person in charge responsible for achieving those goals are the best way to assure patent and trademark applicants of the timely, cost-effective treatment of their applications, which they pay for and deserve.
  In order to provide the necessary flexibility to meet the standards and goals established in the annual performance agreement, the COO would be granted authority to deviate from current statutory and regulatory procedures for managing personnel and procuring goods and services. For example, as in H.R. 400, ceilings on full-time employee equivalents would be eliminated, allowing the COO to hire the number of employees deemed necessary to meet the standards of performance for timeliness, perhaps, or quality when the number of applications filed increases. In the Administration's vision, other flexibilities authorized in connection with classification and pay or staffing would have to be exercised in a manner consistent with the merit system principles under title 5 of the United States Code, and also its provisions relating to preference eligibles, aggregate limitations on pay and labor-management relations, except to the degree expressly stated in the legislation.
  The personnel management flexibilities envisioned would allow the COO to establish a system of individual accountability, establishing goals and objectives for individuals, groups, or the organization as a whole, as appropriate, which would be used to evaluate performance for purposes of performance awards, pay adjustments, and other personnel actions. Broad-banded systems, different from those established in title 5, covering all or any portion of the workforce could be established to reflect more effectively the nature of the work performed, rather than the one-size-fits-all approach.
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  Appropriate flexibilities would also be provided in connection with procurement so that goods and services could be procured in an even more efficient and effective manner. A two-phase selection process, for example, could be used to more efficiently identify those sources who are the most competitive. All interested sources would still be able to participate in the initial phase of competition. Unlike the traditional procurement process, however, which begins with the solicitation of formal proposals--that are often detailed and expensive both for the vendor to prepare and the government to evaluate--the two phase process would permit the government to limit initial submissions to basic information (such as how their capabilities meet with what the government is generally looking for). Sources selected at the end of the first phase could be invited to participate in an open communication process in which they would be asked to examine the problem to be solved in depth and exercise the due diligence necessary to avoid pitfalls in developing solutions. These solutions would be evaluated in a more formalized process. We believe that such a procedure would ensure that procurements are open and competitive, while, at the same time, timely and cost effective.

  Those are the most significant differences between the Administration's vision of the performance-based organization and the structure that would be established by Title I of H.R. 400. We will also be discussing with you other areas in which we believe there are important differences. I look forward to working with you during the coming days to craft language that will produce an efficient, cost-effective organization to carry us into the 21st Century.

  Title II of H.R. 400 contains important substantive changes to our patent law. It would do the following: provide for publication of patent applications 18 months after filing; grant provisional rights to parties granted patents if others use the invention during the period between publication and grant; and authorize extension of a patent's term up to a total of 10 years if the grant of a patent is delayed by certain procedures or for an unlimited term if the grant of a patent is delayed by other procedures or as a result of unusual administrative delay.
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  As early as 1966, President Johnson's Commission on the Patent System recommended, among other things, publication of patent applications after 18 months. More recently, President Bush's Secretary of Commerce established a Commission on Patent Law Reform which recommended, among other things, early publication of patent applications. Public hearings I held in October of 1993 brought overwhelming testimony in favor of early publication. In spite of these recommendations over the past 30 years, the law still requires that patent applications be kept secret until a patent issues. If no patent issues, the technology claimed in the application is never made public unless the applicant chooses to do so.
  In your introductory statement on H.R. 400, on January 9, Mr. Chairman, you identified what I believe is the primary reason for the support that has been given the concept of early publication of patent applications. You noted that, under current law, foreign companies have the advantage of reviewing, in their own language, technology claimed in patent applications 18 months after those applications are filed in their countries. American companies do not enjoy this benefit. While they do have available the publication of the many patents granted within 18 months of their filing, they are not able to review those applications that do not mature into patents or to review immediately those applications that take longer than 18 months to grant.

  Title II of your bill would change that, enabling the U.S. public to review, in—English, all patent applications pending after 18 months, including the 46% which are filed by foreigners. Foreign applicants generally claim their priority filing date--the date they filed in their own country. That means foreign applications would generally be published 6 months after they are received by the USPTO, in other words, about the same time they are published abroad.

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  The second reason I believe so many inventors support the concept of early publication is that such publication would allow them to avoid duplicating the efforts of others. They will be able to determine if the technology on which they are working has been claimed by another. In addition, early publication fulfills the Constitutional purpose of promoting the useful arts by disseminating information about technology earlier than would otherwise be the case, allowing others to learn from it and build upon it. Finally, early publication can accelerate the licensing of technology by informing those interested in such technology of the fact that a patent has been applied for and of the name of the applicant, or any assignee.
  Title II also would provide certain exceptions from the requirement that patent applications be published after 18 months. If an application is withdrawn or is subject to a secrecy order, it would be excepted from the general requirement that it be published. These exceptions are necessary and are supported by the Administration.

  Another exception provided in the bill, however, the Administration cannot support. That provision would except applications from publication if the applicant requested at the time of filing that the application not be published until 3 months after the USPTO has ruled preliminarily on whether the claims in the application are patentable, and certified that the invention was not and would not be the subject of an application filed abroad. Such an exception likely would limit the benefits of early publication considerably.

  In H.R. 3460, the exception was limited to independent inventors. The Administration reluctantly supported the exception in that form because it could have been implemented without delaying publication at 18 months, because a limited number of applications would be involved. Expanding the exception as has been done in H.R. 400 would increase substantially the number of eligible applications, making implementation burdensome and 18 month publication much less beneficial.
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  The exception also would encourage U.S. applicants not to file abroad. We should encourage foreign filing, not discourage it. If patent rights for an important invention exist only in this country, foreign business are free to use that invention and sell the resulting products everywhere but here. U.S. businesses, on the other hand, would not be able to use the invention unless the patent owner were willing to grant a license. If, in such circumstances, the technology were valuable enough, U.S. businesses would certainly be tempted to invest abroad in order to use the technology freely and compete in the international marketplace. For these reasons, the Administration cannot support the exception.

  Title II of H.R. 400 contains safeguards to ensure against use of published information by unauthorized parties. Title II would provide provisional rights following publication of an application. Anyone who used an invention prior to the time the patent was granted would be liable for reasonable royalties for the period from publication until the patent's grant and, of course, would be subject to normal penalties for patent infringement for any period following grant. The availability of provisional rights is, however, conditioned upon a claim in the published application being substantially identical to a claim in the patent. This is a fairly strict standard to satisfy. As a result, the provisional protection accorded would be somewhat weak.
  The Administration, therefore, would be receptive to a strengthening of provisional rights in this section.

  Section 205 of the bill would also add to the bars to patentability, contained in section 102 of title 35, United States Code, provisions dealing with published applications. Section 205 would also expand the prior art effect of granted patents under section 102. This expansion of effect has not been widely discussed in the United States. We are hopeful that a full discussion of the matter will take place before any decision is made regarding it.
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  Section 208 of the bill would amend section 154(b) of the patent law, having to do with extension of the patent term. The Administration cannot support unlimited extensions resulting from delays in grant as a result of interference proceedings and secrecy orders. We should instead strive to streamline both processes to eliminate delays, rather than provide for unlimited extensions of the term to compensate for them.

  The Administration can support the concept of so-called ''prior user rights'' as exemplified in Title III of H.R. 400. Title III provides a defense against charges of patent infringement for a party who had, in good faith, used commercially, or made effective and serious preparations to use the subject matter of the patent at least one year before the effective filing date of the application. Effective filing date means the filing date of the earliest filed application relied upon in the application which resulted in the patent. This defense would be available so long as the party asserting it did not derive the subject matter he was exploiting commercially from the patentee or anyone in privity with the patentee. The defense would apply only to the subject matter in dispute and would not give the party a general license to use all of the technology claimed in the patent. The defense, if upheld, also would not in itself cause a patent to be deemed invalid either under the bars to patentability of section 102 of the patent law or as non-obvious under section 103.

  Title IV of the bill is aimed at ensuring that inventors have a cause of action against unscrupulous invention development enterprises that collect a good deal of money up front from their inventor clients but deliver little in the way of service. The bill would require such companies to provide clear written contracts stating plainly what services are to be provided and for what charges.
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  Customers would be given a period of 5 business days during which they could cancel the contract by letter. Invention development companies would have to inform customers of the right of cancellation in a cover letter to the contract in clearly legible, bold type. The cover letter also would have to provide facts about the number of inventions evaluated by the company, the number of positive and negative evaluations given, the number of contracting customers in the previous 5 years and the number of those who had earned more than the fees paid as a result of the work performed by the company. Finally, invention development companies would be required to report to their clients regularly regarding work done to promote the client's invention and the results of that work. Failure to fulfill these conditions could form the basis of a suit, if the customer later learned that he's been paying for service that wasn't being provided.

  These provisions should help reduce the number of instances in which inventors are cheated out of capital that would be better spent in other ways. Agents in other fields, literary agents for example, generally collect their money after they have performed services for their clients. Their fees often comprise a certain percentage of the earnings their activities generate for the client, and they report regularly to the clients on activities taken in their behalf. The bill would hold invention development companies to a similar standard.

  The Administration supports the concept of providing inventors with a cause of action against those who commit fraud. We have some suggestions regarding the proposal. Over the coming weeks, I know that we will work together to craft a provision that will enable inventors to protect themselves from unscrupulous opportunists who are interested only in their money, not in developing their ideas and inventions.

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  Title V of the bill would expand the role of a third-party requester in reexamination proceedings and would allow review of patent validity questions based upon factors other than prior art. The changes proposed would make reexamination a more effective and, therefore, more attractive option for resolving questions of patent validity, many of which are now handled by the courts.

  Title V would provide limited, yet meaningful, participation by third-party requestors through a reexamination proceeding resulting from their request. The third party would be served with copies of any papers submitted by the patentee during reexamination proceedings and would have an opportunity to submit written comments within a reasonable time. The bill also would expand the grounds on which reexamination could be requested to include compliance with all aspects of section 112 of title 35, United States Code, except the best mode requirement. Third party requestors also would be given a right of appeal from a final decision of the USPTO in favor of the patent owner.

  Title V also contains safeguards to prevent third parties from using reexamination proceedings to harass patent owners. The safeguards include limits on whether and when a request for reexamination may be filed and creates a statutory estoppel against further litigation of patent validity questions by a third party, after the party seeks and obtains judicial review of the USPTO's determination in their case. The Administration would be pleased to work with the Subcommittee staff to ensure that Title V, in addition to the changes proposed, addresses several recent court decisions that have adversely affected the efficiency of reexamination proceedings.


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  Title VI contains miscellaneous changes to our patent system only one of which I want to mention today, and that is the change proposed in section 605. The section would change the manner in which the USPTO treats examination of applications that claim two or more independent and distinct inventions. Currently, in such a situation, the applicant must restrict the application to a single invention and file separate applications for any other independent and distinct invention for which he wants to obtain rights.

  The proposed amendment would require that the USPTO allow the applicant simply to file additional fees equal to what would have been required if separate applications had been filed for each independent and distinct invention. While it appears to be a simple change, it would require a drastic modification of many aspects of our procedures--from the way patent applications are assigned and examined to the way fees are collected and accounted for. The cost of converting our procedures to accommodate the proposed changes would be extreme. The Administration opposes this proposal for that reason and recommends that it be deleted from the bill.

H.R. 673

  H.R. 673 would extend indefinitely the Patent Surcharge Fund, created in 1990 by the Omnibus Budget Reconciliation Act to ensure that all of the patent operations of the USPTO are covered by patent fees. By placing the fees generated by the surcharge into the same category as other user fees paid by patent and trademark applicants, the bill would permit the USPTO to use all of those fees to examine patent and trademark applications and to grant patents and register trademarks.

  While I appreciate your efforts to improve the operations of the USPTO, as reflected in H.R. 673, the bill is not consistent with the Administration's approach with respect to surcharge fees in fiscal year 1999 and beyond.
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H.R. 811
  As this bill has not yet been made available to me, I am basing my comments on Mr. Rohrabacher's proposal, H.R. 359, in the last Congress. H.R. 811 presumably would amend the patent law to provide a term of protection for patents of twenty years from filing (the current term) or seventeen years from the date the patent is granted, whichever is longer. The Administration opposes this legislation.
  In 1994, as part of the legislation implementing U.S. obligations negotiated during the Uruguay Round of multilateral trade negotiations under the General Agreement on Tariffs and Trade, the U.S. patent term was changed from 17 years measured from the date the patent is granted to 20 years measured from the date the patent application is filed. The Agreement on the Trade-Related Aspects of Intellectual Property requires that World Trade Organization Members provide a patent term of at least twenty-years from filing. In addition, we had entered into an agreement with Japan to resolve what a study of the General Accounting Office had identified as the single most troublesome barrier to obtaining adequate and timely patent rights in that country--the necessity to file in the Japanese language. Under our agreement, the Japanese Patent Office would accept patent applications in English, with a translation to follow within two months, would allow corrections of the application translation based upon the English original up until the first office action, and would allow corrections of the provisions of the patent based upon the English original so long as the correction did not expand the scope of the patent. In exchange, the United States agreed that the twenty-year term in the United States would be measured from the earliest filed patent application relied upon by an applicant.

  Now I don't know about you, but I have regarded it as a positive thing if you are able to obtain a additional benefit in exchange for something you are supposed to do anyway and which has wide support. I mentioned earlier President Johnson's 1966 Commission on the Patent System, the Secretary of Commerce's 1992 Commission on Patent Law Reform, and the 1993 hearings on patent reform that I held in 1993. In addition to the recommendations and support given 18-month publication in those fora, there were recommendations that the United States adopt a term of twenty-years measured from the date of filing.
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  A twenty-year term encourages expeditious prosecution of patent applications before the office by both applicants and their attorneys. Because the term clock is ticking from the date of filing, there are no incentives for applicants to delay the prosecution of their applications. Inventors who pursue their patents conscientiously clearly benefit. Our current average pendency is approximately 20 months. That means that, with expeditious prosecution, the vast majority of applicants will receive a term of protection of more than 18 years. I am committed to ensuring that we have an efficient, rapid examination of patent applications in all fields of technology. In the last year, for example, we have issued new examination guidelines that will speed and simplify the examination process in two of the most challenging technical areas--computer-implemented inventions and biotechnology.

  The only inventors who are likely to have a shorter term than seventeen years under our current law are those who, by filing continuing applications, deliberately delay the issue of their patents. Why would a patent applicant do that? Under the current law, they would be foolish to do so since there would be nothing to gain. Under the change proposed in H.R. 811, however, delay could garner large sums of money for the applicant if, after the claimed technology is independently developed and becomes widely used, he allows his patent to issue, giving him 17 years of exclusive rights. These so-called submarine patents have the power to shut down, or require royalties from, those businesses that have independently developed and been using the newly-patented technology. Submarine patents can be particularly devastating for small businesses that can ill afford to become involved in expensive patent infringement suits.

  The Congress is authorized by the Constitution to enact legislation granting exclusive rights for limited periods in order to promote the useful arts. It hardly promotes the useful arts to allow an individual to ''game'' the patent system in a way that does not disclose the technology he has developed until it has become common knowledge in the relevant industry, but allows him to reap financial rewards on the basis of what has become common knowledge.
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  The change proposed in H.R. 811 also would have another negative effect on U.S. business. For the ''game'' to work, the applicant in the United States cannot file abroad since, if he did so, the application would be published after 18 months and the fact that a U.S. application was pending would become known. That means that when the patent issues in the United States, there are no comparable patent rights in foreign countries. Businesses abroad are free to continue the use of the technology and the sales of the products involved everywhere but in the United States. U.S. businesses, however, must pay royalties if they want to continue to use the technology and sell the products here or abroad, raising their costs above those of their foreign competitors. As I noted before, circumstances like these encourage U.S. businesses to invest abroad where they can avoid these complications.

  Maintaining the twenty-year term, measured from the filing date of the earliest application relied upon by the applicant, ensures that applicants prosecute their applications expeditiously. The technology claimed in a U.S. patent now falls into the public domain at approximately the same time it enters the public domain abroad, allowing U.S. businesses to compete with their foreign counterparts on an equal basis without having to locate outside our borders, taking their investment capital and jobs with them. For these reasons, the Administration believes that the twenty-year patent term established by the Uruguay Round Agreements Act should not be changed.

  These then are the views of the Administration on the three bills on which you invited me to testify. We believe that converting the USPTO into a performance based organization, and reforming our patent laws, are necessary to ensure that our patent system truly promotes the progress of useful arts now and in the next century. I look forward to working with the members of this Subcommittee on the legislative language to accomplish these goals in the best fashion.
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  Mr. COBLE. Commissioner, since I did not rigidly enforce the 5-minute rule against you as the Commissioner, I'm afraid the subsequent witnesses are going to accuse me of imposing a double-standard when I do impose it upon them, but I felt like we needed to hear your full report.

  You have friends on both sides of the aisle on this Hill, as you know. You're highly respected. I think that's going to make this exercise an easier encounter.

  I find it difficult to reconcile that, on the one side, some people up here emphase the importance of or the commitment to technological growth, and then on the other side whack your budget. Now H.R. 400 attracted most of the people in this room here today, but I think H.R. 673 is equally important because that directs attention to the money which makes your wheel turn down at the PTO.

  Now I realize, Commissioner, you're a loyal soldier of the administration, and I commend you for that, but I feel your pain. [Laughter.]

  Knowing the gentleman from Massachusetts, he's going to have the last word before this is over.

  But I'm not being cute about that, Bruce. I mean, $92 million is a heck of a hunk, 20 percent, in fact. When you yank that, inevitably all sorts of bad things can result, it seems to me.

  Now to conserve time, Commissioner, if you are in agreement with this, I'd like to submit questions, and I invite the members of the subcommittee to join me, regarding this budget issue. Maybe, Commissioner, you might help in responding for the Department of Commerce budget experts. We invited them to appear here as witnesses, and they were not able to respond. But for now, I would like to ask you to briefly outline for us what the proposed $92 million diversion would mean to our inventors, more specifically, mean to you all and to the inventors.
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  Mr. LEHMAN Well, I will attempt to do that, Mr. Chairman.

  I'm glad you feel my pain, but I think that what we're dealing here with is much pain that a lot of people are feeling, in that we have probably for the first time in many, many years a broad, bipartisan agreement on a national objective, which transcends almost any other objective that we have in our country today. That is to reduce the Federal budget and eliminate--indeed, eliminate--the Federal budget deficit. So that means that we're going to have to make choices as to how we use and where we direct all the revenue that is available to the Federal Government.

  At least for this 1998 budget, the administration has chosen to direct $92 million of our funding to other purposes in an attempt to spread everything that we have around to try to achieve our overall objectives. That makes it particularly imperative that we have the kinds of reforms that are proposed in H.R. 400 and related legislation.

  Every organization in America today--and America is right now very competitive in the world economy, and one reason we are is because they are light on their feet; they are able to adjust to changing circumstances. The marketplace is a very cruel place, if you're out there in the private sector. You know, a competitor comes along and figures out how to produce the same product 10 percent cheaper than you are, and then you've got to scramble to do something about it, and you have to have the tools as an organization to be able to do that.

  In the private sector you have a great deal of discretion. You're judged only by the bottom line: you know, do you make a profit? We're a different kind of an organization, but we need to be judged, ultimately, by our performance, and the goal has to be to get the people who need to be in and out of the Patent Office quickly, to get them in and out of the Patent Office quickly. Now not everyone needs that; that may come as a shock to some of you. We've generally operated as a one-size-fits-all system up until now.
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  I had an interesting experience when I was talking with my counterpart who heads the European Patent Office, and I was discussing this 18-month publication issue with him, and he thought it was so strange in the United States that this should even be an issue, because, for example, in Europe and the European Patent Office they have a system of deferred examination. Indeed, many, many applicants--and particularly many large companies--prefer to simply file their application, have it published at 18 months, and put people on notice that these are their claims. In fact, they'd just almost as soon not have the claims whittled down by a patent examiner. It's a sort of ''don't-tread-on-me'' kind of system where you put out what you have there. You've all heard the phrase, and you've seen it on products, ''patent pending.'' That's what that's about. Some people are happy with that. They're happy with having the world know that their patent is pending. Other people, particularly those who require capital in industries such as the biotechnology industry and small, startup computer software companies, and so on and so forth, require the actual piece of paper from the Patent Commissioner in hand right away in order to get that venture capital or bank financing or initial public offering off the ground, so that they can get the money to work the system.

  So what we are going to do, Mr. Chairman, and are in the process of doing, in an attempt to deal with this issue of $92 million, is to take a very, very close look at exactly what the needs of our customers are and attempt to direct the resources that we have available to us to meeting those needs. That will mean that pendency overall, unless we have additional funds restored to us, will rise, but we will attempt in every way that we possibly can to see that the resources are directed at the people who need them.

  Now it gets quite complicated because we receive revenue from the process of filing and issuing and maintaining patents, and our system is backloaded. When you file a patent application at the Patent Office, if you're a big company, you pay about $800. If you're a small entity, you pay about $400. Then you pay an additional fee when you get your patent issued. For a big company, I think that's about another $1,300, and for a small entity, the whole thing is less than $650. So that's a pretty cheap system. By then, for $1,000, if you're a small entity, you've gotten into the system.
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  We have to keep that in mind because some of these high-tech people who need a lot of work on their applications and a lot of resources don't have the time just to--we're going to need to devote our resources to them as well, but at the same time keeping in mind where we get our money from, people that we can get in and out of the Office very quickly and into the stream of commerce, so that they're paying all their fees and then paying maintenance fees on their patents, will provide us with greater revenue.

  So we're taking a very close look at all of these issues, and we will do our best to try to provide a system that satisfies all of the national objectives that we have, including budget deficit reduction. But it is absolutely imperative--and I say this unequivocally--that that job will be made virtually impossible for us unless we have the kind of structural reform that is contained in H.R. 400 and related pieces of legislation.

  Mr. COBLE. I have a couple more questions, but I want to recognize the ranking member now, Mr. Frank from Massachusetts.

  Mr. FRANK. Thank you, Mr. Chairman, and I appreciate the Assistant Secretary's great wealth of expertise and diligence here. It's obviously going to be very helpful to us.

  One question about the Patent Office employees: What do we do to make sure they're well-protected, and particularly to make sure that we continue to have a high quality of people? What do we need legislatively, and to what extent do we need to spell it out to protect employees?

  Mr. LEHMAN. Well, we have been discussing this issue now for a couple of years, and I believe actually at the end of last year we had pretty much come to an agreement with the various organized labor organizations. You know how these things go; they ebb and flow. Sometimes they fall apart. But I think we're quite close to having a good agreement, certainly at least with our major union at the PTO, the National Treasury Employees Union, which we've worked with very, very closely.
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  Let me say that the principal reason, from my point of view, for this entire process of restructuring the Patent Office is so that we can do better by our patent examiners. They're the essence of our organization. We have about 2,000 of them. They're highly qualified people. Increasingly, they have Ph.D.s, high-level degrees.

  One of the most difficult problems that I have, for example, in administering the Patent Office, and in doing a good job, is--let me just give you a very specific example. You know, we hire a patent examiner. At the very beginning, even a Ph.D. isn't a very good patent examiner; they don't know anything. They may have done some bench work in a laboratory, but they don't know anything about patent examining. Well, you know, for the first 6 months they're virtually worthless. You have to train them. At just about the third year, they really become good, and in the process of examining patents, since what you're talking about is comparing an application with the preexisting technology, once you've been doing this for 3 years, you know virtually everything in your field; you know all the preexisting technology; your brain can work very quickly, faster than any computer, to make these determinations, to get applicants out of the Patent Office quickly. Well, what happens after we've trained people at three years right now, you know, we may be paying them $35,000, $40,000 a year. One of our friends downtown in a law firm offers them $60,000; they leave.

  Mr. FRANK. All right, I thank you.

  Mr. LEHMAN. We would be better off to be able to raise their salary----

  Mr. FRANK. Bruce, we're under the 5-minute rule.
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  Mr. LEHMAN. Yes.

  Mr. FRANK. I appreciate that point, and I think that it is, unfortunately, a general problem with public employees that we undercompensate and the public on the whole loses out, and I think that's been a particular problem lately because we have decided for political reasons that we can't allow our own salaries to go up with the cost of living, and we are holding hostage all of the other appointees. When they're held hostage, that puts a clamp on everyone else. It's one of the dumbest things we do from the standpoint of serving the public. I hope we will finally stop doing that.

  But I appreciate what you're essentially saying is that, as far as you're concerned, the agreements that were reached last year would still hold, and that would be the direction you'd want to go?

  Mr. LEHMAN. That's correct.

  Mr. FRANK. What's--the other sort of major issue I have is, What accounts for the research universities' hesitation this year? Have you been talking to them? What do you think their problems are and what can we do to try and deal with the issues that they'd be raising?

  Mr. LEHMAN. Well, the nicest thing about, I guess, congressional hearings is that, they are a way of continually venting issues and reventing them. I was not personally aware that there was a great deal of anxiety at this point among research universities, but perhaps there is more anxiety than I am aware of.
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  But I can tell you what their principal concern always has been, and I would think they would be completely supportive, by and large, of H.R. 400 and the administrative changes. Their principal concern would be--I don't believe it would be with the publication of patents at 18 months at all. In fact, universities----

  Mr. FRANK. Tell me what you think it is, not what it isn't.

  Mr. LEHMAN. It would be with the term issue, and the reason for that is that a university, obviously, is in a totally different position from an individual entrepreneur. The entrepreneur has come up with the idea, wants to go out and get the venture capital, and then get into the marketplace. The university is at an earlier stage. The university develops the raw technology and then must transfer that technology to some kind of entrepreneurial entity, some kind of--usually, oftentimes a large business or whatever. So there's a time lag there, and they're not getting any money flowing in to pay for these patent application costs. I think they're concerned that, if there is a long time lag, the technology that they have to transfer, won't be as valuable, if we've used up 5 years or 6 years of the patent time. So the answer to that is to see that we don't use up 5 or 6 years of the patent time.

  Mr. FRANK. This is my final question. I would think it would be--and I want to talk to the universities and hear this, but it does seem to me one of the advantages of the proposal you're making, as opposed to the 17 years being added on to whatever the process is, the 20 years with the process being included within that does increase everybody's incentive to do this quickly, but it only works if we can guarantee the people, obviously, that the Federal Government's incentive is as strong as everybody else's. I mean, if that were the case, if everybody were incentivized, I would think the universities, obviously, would want to move more quickly now. I guess that's one of the things we want to talk about: How do we sort of structure the right incentive for the Federal Government as well? Because we'd have a situation where it would be in everybody's interest to move quickly, and people sometimes get this peculiar idea that we in the public sector don't move as fast as other people. I guess that would be one of the things that I think might help alleviate this, if we could build into our own structure that kind of incentive.
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  Thank you, Mr. Chairman. I appreciate it.

  Mr. COBLE. I appreciate it, Mr. Frank.

  The gentleman from Virginia, Mr. Goodlatte.

  And, Commissioner, we're glad to hear from you, but if you could, maybe you could respond to answers a little more terse and a little more simplified, if you don't mind. [Laughter.]

  Mr. LEHMAN. OK, sure.

  Mr. COBLE. The gentleman from Virginia.

  Mr. GOODLATTE. Thank you, Mr. Chairman, and I'd like to thank you also for your introduction of this legislation, which, as you know, I have been pleased to cosponsor and strongly support. I think it is overdue, and I hope we're able to move it forward this Congress.

  Mr. Lehman, we welcome you, and I very much appreciate your suggestions and your general support of what we are attempting to accomplish here.

  I wonder if you might like to respond to some of the individuals who testified before you who have criticized some of the things we're trying to do. The first one I'd like to throw out is that we're giving away all of our patent ideas to the Japanese by going ahead with an 18-month publication.
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  Mr. LEHMAN. Well, that is just simply not the case. First of all, at the present time we have an average pendency in the Patent Office of about 20 months. Under a 20-year system, what it really means is that most people's patents are issued at about 20 months right now, and they have more patent term under our new, now a couple-year-old, law than they did under the old law. So nobody's giving anything away free.

  Mr. GOODLATTE. What about the publication though at----

  Mr. LEHMAN. Second, this is where we have to recognize that we are in a global system. Do we want a system where people only file for patents in the United States or do we want a system where they get a patent application filed in every country in this world? I think we want the latter, and we want them to be protected everywhere, and in every other one of those countries they publish at 18 months. So, then, if we continue our anomalous situation, we will be in the situation that everybody else around the world in their own language will be able to have access to U.S. technology at 18 months and earlier and be able to use it and figure it out, but Americans won't. In addition, it has really become increasingly apparent to me that there are many, many, many people in this country in industry who want the world to know that they have a claim on something at 18 months. There are a lot of people who want to be able to go to the Patent Office and find out what is very serious and is pending there, so that they do not waste their money on something that's already been invented.

  If you want an efficient system, you want a system where you encourage people to direct their resources at really new areas of technology. This is not about permitting the people to steal ideas. It's quite the opposite. It's about directing people's resources where there's really going to be money to be made, where nobody else has dibs on something.
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  Mr. GOODLATTE. You mentioned in your comments earlier that there are those who do not want to expedite the patent process and the publication of patent information. You addressed one that I think may have a legitimate concern, that being those who may be capital-poor, who have some ideas, and they need some additional time to get their ideas to the marketplace. We do need to address that issue. But there are also those, are there not, who game the patent system as we have it in this country today, and who have, by deliberately delaying, by changing their application, by modifying their exact application, and so on, gamed the system to deliberately keep their ideas hidden until such time as they believe it's opportune to bring that patent to the surface, to attempt to leverage some benefits from other people who in most instances, in my opinion, develop their ideas completely independent of the person who has kept this patent idea? Of course, I'm referring to submarine patents. Could you address that and the nature of that problem and how we go about solving that?

  Mr. LEHMAN. Well, Mr. Goodlatte, the patent system, at least the way I see it, comes into play when somebody comes up with an idea that meets the test of patentability, meaning novelty and nonobviousness; the invention never existed anywhere in the history of the world before; it wouldn't be obvious to one ordinarily qualified, ordinarily skilled, in that particular technology. We give that person a patent. That should have no anticompetitive effect in most cases because you're coming up with something--you're not giving anybody any exclusive rights to something that everybody else already has.

  The difficulty, however, with the so-called submarine patent, or when people game the system, is that they aren't coming to the Patent Office to get in and out quickly and then get into the venture capital marketplace and be able to finance their invention.
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  Mr. GOODLATTE. They don't want it then; they want somebody else to do the investing and then profit----

  Mr. LEHMAN. Exactly. Then what they do is that they just go out and hire a bunch of lawyers and enrich our profession. I think we're both lawyers. We have nothing against lawyers, but they want to enrich the legal profession and make lots of money off something that is completely counterproductive to what the patent system is all about. Even though the numbers of the submarine patents aren't that great, they can be enormously costly in terms of litigation expenses and a real drag on American innovation and technology.

  If you get a submarine patent on something like barcoding, and that was one of the big ones, half of American technology depends on that. You can send lawyers around to every company in America and start knocking on their door and say, ''Do you have a license from me?''

  Mr. GOODLATTE. H.R. 400 addresses that problem----

  Mr. LEHMAN. That's correct.

  Mr. GOODLATTE [continuing]. Does it not? And it also addresses the problem of, if you're going to protect an idea in today's world, you've got to protect it in other countries or somebody's going to grab it and be moving with it elsewhere. So you need to file in other countries. So if it's a significant idea, it's going to be filed in a number of places around the world, and it is then going to be published in foreign languages for that matter and utilized by those inventors in other countries, whereas the 45 percent of the patents that are filed in this country from foreign inventors will not be published here. We won't have the benefit of, as you say, seeing who else has already invented the mousetrap, so we can go on to something else, because there's nothing to be gained by trying to work in an area where someone else is already ahead of you. Is that a fair statement?
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  Mr. LEHMAN. Yes, that is an accurate statement.

  Mr. GOODLATTE. Thank you, Mr. Chairman.

  Mr. COBLE. I thank the gentleman.

  The gentleman from Massachusetts, Mr. Delahunt.

  Mr. DELAHUNT. Yes, thank you, Mr. Chairman.

  Mr. COBLE. Mr. Delahunt, pardon me just a minute.

  I will appreciate if the members will also try to adhere to the 5-minute rule, too. The gentleman from Massachusetts.

  Mr. DELAHUNT. I'm always very brief and concise, Mr. Chairman. You'll learn that during the course of the 105th.

  Mr. COBLE. All right, sir.

  Mr. DELAHUNT. I'm new to this committee, Mr. Commissioner, and just listening to your responses to the questions that have been asked, let me see if I get it here. I've listened to the concerns expressed by the Members that testified earlier and the questions that were raised relative to the uncertainty of the research community. Is this all really about turnaround time?
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  Mr. LEHMAN. Basically, yes. That is the only really legitimate issue, in my view. For the submarine patent practitioner it's not----

  Mr. DELAHUNT. In other words, whether it's a small inventor, whether it's the research community, people need to get answers as quickly as possible?

  Mr. LEHMAN. Yes, they need to get in and out of the Patent Office as quickly as possible. They need to have their----

  Mr. DELAHUNT. And given your current resources, the level of your resources, that's difficult to do in terms of everybody that comes seeking a patent; is that a fair statement?

  Mr. LEHMAN. It is difficult to do, yes.

  Mr. DELAHUNT. And I guess I'm picking up on the chairman's issue about feeling your pain. This diversion of $92 million certainly doesn't help in terms of meeting that point, that critical point in terms of turnaround for response; is that correct?

  Mr. LEHMAN. Well, I think what it does----

  Mr. DELAHUNT. In other words, I'm saying you need more money to do the job.

  Mr. LEHMAN. Well, if we're going to maintain a system where everyone gets in and out of the Patent Office quickly, we will need more money. We will start having to make choices, and what I said to you is that--and that is not completely unreasonable--that we will attempt to tailor a system so that the people who need to get in and out of the Office can get in and out of the Office, consistent also with the somewhat complicated way that we get our revenue----
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  Mr. DELAHUNT. Obviously, folks who file these applications feel that need. Somebody else is making the choice in terms of--it's PTO itself that's making that choice in terms of priority of needs; is that correct?

  Mr. LEHMAN. Well, right now we treat everybody the same--right now there isn't any special category of technology. Everybody comes to the Patent Office and we try to give them the resources that we can to process their application. We are going to have to change that, if we have fewer resources. We are going to have to start making choices.

  Mr. DELAHUNT. So it's the Office itself that will make those kinds of choices?

  Mr. LEHMAN. At the present time, unless you pass legislation to take that away from us, that is the case, yes.

  Mr. DELAHUNT. The chairman's point about the funding issue, if you had that $92 million in terms of the resources that are available, would that make a significant difference in terms of the turnaround time, to satisfy the concerns of----

  Mr. LEHMAN. Yes, if we all of the $92 million that our fee revenue provides, we would be able to actually reduce very substantially, without even a whole lot of reengineering, the patent processing time to substantially less than it is today----

  Mr. DELAHUNT. OK. And when you talk about

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  Mr. LEHMAN. For everyone.

  Mr. DELAHUNT. And when you talk about the critical role that the Patent Office plays in terms of this global economy, it has significant economic implications for this Nation.

  Mr. LEHMAN. Well, Mr. Delahunt, we're going to try to do everything we can to make certain that there is not a problem--you know, we have multiple goals. Budget deficit reduction is very, very critical, an important one. It will probably produce more business for the Patent Office because it, presumably, is going to free up more private sector capital to invest in new technology----

  Mr. DELAHUNT. Right.

  Mr. LEHMAN [continuing]. And so we'll have more business. But we're going to try to use our resources so that we can give people what they need.

  Mr. DELAHUNT. But that's exactly my point, Commissioner, is that that investment of resources in terms of funding the Office has a very positive effect in terms of our competitiveness in a global economy. Is that a fair statement?

  Mr. LEHMAN. Yes, I am a strong believer that the way we do our business has an enormous impact on the competitiveness of this country. We are in the technology business.

  Mr. COBLE. The gentleman from Massachusetts has pretty well put his finger on the pulse because that's what H.R. 673 does, Bruce; it gives you all full access to the $92 million.
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  Mr. LEHMAN. Well, Mr. Chairman, I'm sure that you can--we can continue to have a dialog on these points with the profession and my colleagues at the Office of Management and Budget.

  Mr. COBLE. Commissioner, let's move along.

  Mr. FRANK. Let me say, Mr. Chairman, I think that if we were reduce proposed tax cuts by $92 million, we could fully fund the Patent Office and the economy would be a lot better off.

  Mr. COBLE. The gentleman from Indiana, Mr. Pease.

  Mr. PEASE. Thank you, Mr. Chairman. I have no questions.

  Mr. COBLE. The gentlelady from California.

  Ms. LOFGREN. Thank you, Mr. Chairman. I am pleased to be here and pleased to be a member of this subcommittee in the 105th Congress.

  Listening to the discussion on fees, I would just note that I was pleased to become a cosponsor of the chairman's bill because he's absolutely right: to tax creativity in this manner is in the end counterproductive to the country. I realize, as an official in the administration, you are probably constrained in commenting on that, but this has been the product of bipartisan error, I think, over the years. Last Congress there was an effort made on the Republican side; this year by the Democratic administration. I think on a bipartisan basis we ought to put a stop to it this year, and we'll be better off if we do.
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  On the issue of H.R. 400, I am also a cosponsor of that and believe that it's a good bill, and one that is enormously important to not only the country, but the area that I represent in California, Silicon Valley.

  One of the issues that I did want to explore with you, however, Mr. Commissioner, is the issue of policymaking and trade negotiations. I note from Mr. Kantor's letter to the former chairman, Mr. Moorhead, late last year, he made it clear, and I believe it's still clear in this year's bill, that the policymaking efforts will continue to reside with the Commerce Department. However, sometimes that policymaking is not as smooth, in my judgment, as it might be when it comes to the issue of international agreements. I'm wondering if you concur with Mr. Kantor's letter of September of last year, and how you might address the issue of keeping the Congress involved, or at least consulted, on policy issues that are set, perhaps at variance with what the Congress might want to do or even the administration might want to do after consulting with Congress in the international trade area.

  Mr. LEHMAN. Well, first, let me say that I do concur with Secretary Kantor's letter. I not only concur with it, but feel personally quite strongly about it.

  In a lot of ways this debate is a very artificial debate because there are few areas of policymaking in the executive branch of government where there is, I think, less fighting and more harmony than in the area of international intellectual property policy, and some of these major policy decisions. We have always had an extremely good working relationship with the U.S. Trade Representative's Office, and with the International Trade Administration in the Department of Commerce. We really work hand-in-glove with them, but it's very important that we direct very high-level policy attention to this. That is why the involvement of the Secretary of Commerce--and I am right now an Assistant Secretary of Commerce--is very, very important. The administration actually proposes to enhance this by basically raising that status of Assistant Secretary of Commerce to an Under Secretary position.
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  Ms. LOFGREN. Perhaps, I could ask you to give some thought, although it's not a patent issue, to the discussions about copyright internationally which raised a lot of concern, and there were a variety of issues, in Silicon Valley. As you know, the bill last year was not acted upon by the Judiciary Committee because there were outstanding issues that were unresolved. I think there was a clear sense, certainly on my part, and I think on the part of other Members of Congress, and certainly on the part of people with very big stakes in the copyright and high-tech arena, that they didn't have the kind of access and involvement that they might have had in the public arena of, for example, a hearing before this subcommittee. So rather than belabor that point here, perhaps I could ask you to give some thought to how that process could be improved in the future, should H.R. 400 become law, and how we might work in a collaborative fashion to ease those sorts of issues.

  Mr. LEHMAN. Well, there were some. Last fall, as we were heading into these negotiations in Geneva, there were a number of differences of opinion among private sector interest groups in the United States. There were differences of opinion over, and continue to be, over some of the recommendations that the administration made in the area of copyright law. It's very hard to satisfy everybody, but I think, frankly, those differences have been vastly narrowed. In most cases, they've been eliminated. I really think this is a problem that's going away very quickly, and that should be, I would hope, the subject of another hearing that the chairman may have on that set of issues, which is very complicated.

  Ms. LOFGREN. Perhaps we could pursue that. I think it is a significant issue.

  And if I could just indulge the chairman----
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  Mr. COBLE. Sure, sure.

  Ms. LOFGREN [continuing]. For one final question, I think earlier someone asked about the academic community. So far, I have not heard a lot from universities, but, as I understand it, the sole remaining item for CalTech and the University of California at the end of the last Congress were provisions relating to the prior domestic commercial use and whether or not this might unfairly penalize universities by leaving them vulnerable to certain prior use defenses. I'm not sure that that couldn't be resolved satisfactorily, and I'm wondering if you have a proposal that would address that issue that's been raised by CalTech and the University of California that would not be inconsistent with what we're trying to do in this legislation.

  Mr. LEHMAN. We spent a lot of time working on that issue in the past, and I think have resolved lots of the problems, as you have pointed out, Ms. Lofgren. I think I'm sure that we can work with the committee to resolve the remaining problems, hopefully, to as many people's satisfaction as we can. You know, we won't be able to satisfy everybody, but I think at the end of the day we will be able to say that we've satisfied an awful lot of people. I think that will be apparent.

  Ms. LOFGREN. Thank you, Mr. Chairman, for letting me go a bit over.

  Mr. COBLE. Sure. Ms. Lofgren, you mentioned the fact that you were happy to be a member of the subcommittee. I had planned to welcome each of you as members, but when we started only Mr. Delahunt and I were here. So perhaps now, albeit belatedly, I want to welcome each of you on the subcommittee. It's going to be a lively session, and I'm sure we will see each other frequently.
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  The gentleman from Utah, Mr. Cannon.

  Mr. CANNON. Thank you, Mr. Chairman. I have no questions.

  Mr. COBLE. Commissioner, it is good to have you here. I have a couple more questions, but because the time is moving along, I'll converse with you at a subsequent time, and we'll iron that out later. It's good to have you with us this morning, Bruce.

  Mr. LEHMAN. Thank you very much, Mr. Chairman and members.

  Mr. COBLE. The first expert panel will come forward, if you will. I will introduce you all as you come forward. The first witness on the first expert panel this morning will be Mr. John R. Kirk. Mr. Kirk serves as the chair of the American Bar Association Section of Intellectual Property Law and is testifying today in his capacity as chair, ABA Intellectual Property Law Section. He is a graduate of the University of Texas and the University of Houston School of Law, and is admitted to practice before the Patent and Trademark Office. He is also a partner at the law firm of Jenkins & Gilchrist, where he practices intellectual property law with a specialization in patents and licensing.

  Our second witness will be Mr. Michael K. Kirk, who is executive director of the American Intellectual Property Law Association. Mr. Kirk was with the Patent and Trademark Office from 1962 to 1995, where he climbed the ranks from patent examiner to Deputy Commissioner. He is a graduate of Georgetown University Law Center and practiced as a registered patent attorney with NASAU. He was awarded the Jefferson Medal for contributions to American intellectual property law in 1992, received the Commerce Department's Gold Medal Award in 1984 and again in 1994, and was awarded the Presidential Rank of Meritorious Executive by both President Reagan and President Clinton.
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  Our third witness on the first panel is Mr. Chuck Ludlam, who has served as vice president for government relations to the Biotechnology Industry Organization since BIO's founding in 1993. Mr. Ludlam is responsible for all legislative and many regulatory initiatives. He holds a bachelor's degree from Stanford University and a law degree from the University of Michigan School of Law.

  Our fourth witness is Bud Berrier, who is president of the Intellectual Property Owners, Inc., and is testifying today in his capacity as president of IPO. He also serves as general patent counsel to the General Electric Co. Mr. Berrier holds a BS/ME degree from Purdue University, a law degree from Indiana University, and has been admitted to practice law and has been registered as a patent attorney with the U.S. PTO since 1996--strike that--since 1966.

  Our fifth witness is Ms. Mary Ann Alford. Ms. Alford is the president of the International Trademark Association and is testifying today in her capacity as president of INTA. She serves as well as the assistant general counsel for intellectual property to Remock International, Ltd. She is responsible for all intellectual property and related legal and investigative matters of the corporation and its subsidiaries worldwide, and has helped to develop an innovative international trademark enforcement program. She holds a bachelor's degree from Wellsley College and a law degree from Columbia University.

  Our last witness on this panel is Alan F. Holmer, the president of the Pharmaceutical Research and Manufacturers of America. Before assuming his duties as president, Mr. Holmer was a partner in the law firm of Sidley & Austin, where he headed the firm's international trade practice. He has also served in the positions of Deputy U.S. Trade Representative, General Counsel to the USTR, Deputy Assistant Secretary of Commerce for Import Administration, and Deputy Assistant to the President for Intergovernmental Affairs.
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  Now, folks, I apologize to you all for the elongated introduction, but I think it's important that members of the audience know about the credentials that these witnesses bring to the table.

  Pardon me 1 minute.

  Mr. Pease, I think you wanted to be recognized?

  Mr. PEASE. Thank you, Mr. Chairman, and I apologize that I did not say this earlier. Because I arrived late, I did not make an opening statement that may have saved some time, particularly in light of Ms. Lofgren's questioning.

  As you know, in a former life I served as general counsel for a university and dealt with intellectual property issues, among other things. I have maintained a number of those contacts since that time, and have been in discussion with representatives of the higher education community about this bill. I share Ms. Lofgren's belief that we can resolve the concerns that were raised by the University of California and CalTech, among others, in the context of H.R. 400. I'm working on that and hope to be helpful to the committee as we move forward.

  Mr. COBLE. I thank you for that, Mr. Pease.

  Folks, no one likes surprises, so we inevitably are going to go beyond the lunch hour, it appears. So I suspect somewhere around noontime or 12:15 we will probably have a 30- to 45-minute recess for the benefit of you all who want to plan ahead.
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  Having said that, it's good to have our first expert panel with us. So, Mr. John Kirk, we will commence with you, and then we'll work our way to my right. And if you will, folks, I know you're getting tired of hearing me reiterate this, but keep in mind the red light. We have written statements from our six witnesses, which I ask unanimous consent to be made a part of the record. I ask, again, if you will, to comply with the 5-minute rule.

  Mr. John Kirk.


  Mr. JOHN KIRK. Thank you, Mr. Chairman. I want to thank the entire subcommittee for the opportunity to appear here. I'm appearing on behalf of the Intellectual Property Law Section of the American Bar Association. I must state that the positions I take today are solely those of the section and not of the American Bar Association, since this has not been approved by the house of delegates or by the board of governors. So this is the section speaking, not the ABA.

  As you know, our section has been involved with this committee, at least for the last 3 years, in helping to craft provisions that have ended up in the Chair's bill, H.R. 400, and my written statement shall serve to present the section's position on H.R. 400.

  I would like to address more H.R. 673. I think while the Commissioner's under constraints concerning his funding, I'm not under such constraints. Even though the ABA does put somewhat of a bit in our mouth when we speak, we happen to get broad enough authority to talk about the diversion of funds to other governmental purposes from not only the U.S. Patent Office, but we intend to take the same position before some of the patent offices of the world.
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  I was thinking while Mr. Lehman was talking about being lean and mean, remembered back on a poem by Rudyard Kipling where a lean, mean calvary group rode into a valley and was thoroughly annihilated, and that's what I worry about making our Patent and Trademark Office too lean and mean, but not enough muscle on it.

  I was reading Mr. Lehman's boss' budget, and I'm sure all of you have, too. I don't see how the provisions of H.R. 400 can be effectively utilized to even determine whether they are adequate to improve our patent system if the Patent and Trademark Office doesn't have its money to do it. I mean, taking the $92 million away and then to tax the inventors of America another $119 million every year is just an egregious fault.

  I've got to apologize for straying somewhat from what I had prepared to say, but this is actually, I think, the most important thing that this committee can consider, is whether or not it passes and reports out H.R. 673.

  There are provisions in H.R. 400; for instance, the provision stuck on the next to the last page concerning the electronic filing of patent applications. Without the money, the Patent and Trademark Office, to make some of the choices that Commissioner Lehman says they will be required to make, will not even be able to test-bed that thing to see if it works. I mean, how can we modernize the administration of the greatest patent system in the world if they don't have the money to do it?

  The Commissioner has a lot of plans of things that he would like to try, not all of which our section agrees with, but I certainly think that he ought to be able to put the money into it to see if we can try to update this system and issue not only patents quickly, but patents of the best quality; so that when an infringer is approached with a U.S. patent, the presumption of validity means something and not is a hunting license for an accused infringer.
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  Now the provision for early publication, for instance contains a provision that allows anyone who does not want early publication to so state when they file. Pendency is going to go up so long that you can just hold that thing in there for several years anyway. If we add 20 months to present pondancy and we reduce the examining corps between fiscal year 1997 and 1998 from 2016 to 1,843, what are you going to do when you take a lot of money away from the Patent Office?

  I just want to respectfully suggest to the committee that the important thing to consider, along with the substantive issues of H.R. 400, is certainly the issue of funding this Patent and Trademark Office, so that it and its people can do what they're supposed to do.

  Thank you very much for the opportunity.

  [The prepared statement of Mr. John Kirk follows:]


  Mr. Chairman, Members of the Committee. On behalf of the Section of Intellectual Property Law of the American Bar Association, thank you for the opportunity to express our views on H.R. 400, the ''21st Century Patent System Improvement Act,'' and H.R. 673, the ''Patent and Trademark Office Surcharge Extension Act of 1997.'' Although these views represent the views of the Section of Intellectual Property Law, they have not been considered or approved by the House of Delegates or Board of Governors of the American Bar Association, and accordingly, should not be construed as representing the position of the Association.
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H.R. 400
  H.R. 400 and H.R. 3460, its predecessor in the 104th Congress, represent the most comprehensive and far reaching package of proposals to revise and reform the patent laws of the United States since the codification and enactment of title 35 more than 40 years ago. H.R. 400 includes a number of reforms which the Section of Intellectual Property Law believes to be not only positive changes in our patent laws, but changes which are essential for the United States to maintain its competitive position in what is rapidly becoming a single world-wide market for the development and exploitation of inventive talent.

Title I--Patent and Trademark Office Modernization

  As early as 1980, the American Bar Association adopted a policy favoring legislation to give the Patent and Trademark Office separate agency status outside the Department of Commerce. At that time, a bill (H.R. 6933, 96th Congress) to accomplish that result was reported by the House Judiciary Committee. The House did not act on the bill, and it never became law.

   Since 1980, the case for greater operating independence on the part of the PTO has grown even stronger. In the 1980's, we saw a movement toward first partial, and later full, funding of the PTO through user fees. We in the ABA did not favor the elimination of all public funding for the PTO. However, it has become a reality, one that is unlikely to be reversed in the foreseeable future.

  The fact that the PTO is now funded entirely by user fees is a development that argues most strongly in favor of government corporation status for the PTO.
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  Fifty years ago, with the enactment of the Government Corporation Control Act of 1945, Congress recognized that traditional governmental control systems, including budget, personnel, financial management, and procurement systems, are not suitable for revenue producing and self-sustaining operations, such as the PTO.

  In its August, 1995 report entitled ''Incorporating the Patent and Trademark Office,'' the National Academy of Public Administration (NAPA) identified established criteria for the use of government corporate structures. The Academy is a Congressionally chartered, nonprofit, nonpartisan organization formed to assist governments at all levels to improve their efficiency and performance.

  According to NAPA's analysis, corporate structure is appropriate for government programs which are predominately of a business nature, are revenue producing and self-sustaining or potentially self-sustaining, and involve a large number of transactions. These criteria are found in the Government Corporation Control Act of 1945, were articulated in President Truman's 1948 Budget Message, and were reaffirmed by the First Hoover Commission in 1949 and by NAPA's own 1981 Report on Government Corporations.
  We agree with NAPA's conclusion that the PTO meets the basic tests of these criteria. In fact, the Academy's most recent report represents the third NAPA report recommending corporate status for the PTO. The earlier reports were issued in 1985 and 1989, before the PTO had become fully funded by user fees.
   There are a number of concrete examples of the benefits of corporate structure for the PTO to be found in recent history of the Office.

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   Early in the President's first term, the present Administration mandated that virtually all executive branch agencies reduce their number of employees by a certain more or less arbitrary percentage. The PTO is included in this mandate to reduce FTE's, or ''full time equivalent'' employment levels.

   This is a prime example of circumstances in which rules which may make sense for typical government agencies make little or no sense for self-sustaining operations.
   From the point of view of providing necessary funding, the present structure of the PTO works pretty well. As the workload increases through increased applications for patents and for registration of trademarks--and it has risen steadily and predictably in recent years--more employees are needed to handle the workload. However, since rising applications mean rising revenues, the process is self-correcting, and produces the needed additional revenue to sustain operations. The same would of course be true if service needs were to decrease: less revenue, but fewer staff needed.

   However, compliance with mandates for arbitrary across the board staff reductions presents the PTO with the following dilemma: reduce services, even if demand and revenue to support the demand are rising, or provide the necessary services by devices such as contracting out services, almost inevitably at a higher unit cost for the services involved.

   From the point of view of government efficiency and economy, this obviously makes no sense. It also makes no sense from the point of view of fairness to the users who finance and sustain the patent and trademark operations. They likely will find themselves paying the same for reduced and inferior services, or will shortly be called upon to pay even more in order to sustain the same level of services through less efficient, more costly mechanisms.
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   Another glaring example of unfairness to the user community which needs to be corrected in the course of movement to a corporate structure is the practice of not making available, for expenditure by the PTO, all user fees collected by the PTO. Mr. Chairman, you do not attempt to make this correction in H.R. 400. In this regard, title I of H.R. 400 differs from H.R. 1659, the government corporation bill introduced by your predecessor, Carlos Moorhead, in the 104th Congress. That bill provided for repeal of the patent fee surcharge and return to the PTO of all funds raised by the surcharge. We note, however, that Mr. Moorhead did not include these provision in his later omnibus bill, H.R. 3460, apparently out of recognition of the political difficulty facing their enactment. While H.R. 400 is also silent on this issue, H.R. 673, the second bill which is the subject of today's hearing, does address the issue. The Section of Intellectual Property Law is very pleased that you have done so, and we will have more to say about this in the portion of our testimony on H.R. 673. I mention it here to note that we consider the two issues to be very much tied together. Financial and operational independence are prime objectives in moving from agency to corporate structure, and those objectives are seriously undermined if the corporation is not allowed access to the money it raises from user fees. If the level of diversion of user fees to the general fund proposed in the President's budget is adopted, passage of the substantive provisions of H.R. 400 won't make any difference.
   One of the many benefits of corporate status for the PTO is the greater flexibility it can provide in financial management, including borrowing authority such as that contained in section 121(c) of H.R. 400. Such borrowing authority would allow the Corporation to spread high cost capital expenditures, such as space acquisition and major systems improvements, over the life of the asset, a step which would more equitably distribute the financial burden on the users who will have to finance the improvements.

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   Earlier, our statement made reference to a long standing American Bar Association policy favoring independent status for the PTO outside the Department of Commerce. In keeping with the ABA position, we believe that this government corporation should be headed by a CEO with considerable experience in patent and trademark law, appointed for a term of years by the President, with the advice and consent of the Senate. The corporation should have a board of directors, including members from the private sector with experience in patent and trademark law, should have a CEO who is the chief spokesperson for the United States on patent and trademark matters, and have operating and financial flexibility similar to that of a private corporation.

   A central issue concerning conversion of the PTO to a governmental corporate structure is, of course, the degree of independence which its CEO or Director will exercise in leading the new entity. Discussion of various bills introduced on this subject in the 104th Congress focused on this issue more than any other. Difficulty in resolving it delayed final action on the legislation, and this delay was perhaps responsible for the fact that the legislation was not enacted. It is, in short, a critical issue.

   The Intellectual Property Law Section of the ABA supports a corporate structure under which both responsibility and accountability are focused on the CEO of the government corporation. We believe that the corporation should be outside the Department of Commerce, as called for in H.R. 1659 and H.R. 400. Our preference is for total separation from the Department of Commerce. We recognize, however, that government corporations, including the one we hope the PTO will become, are still part of government, and subject to policy direction from the President. We also understand that the Congress and/or the President may decide that a government corporation should be subject to general policy direction not only from the President, but from another officer of the government, such as a cabinet Secretary.
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   Title I of H.R. 400 provides for such a structure. Although outside the Department of Commerce (''separate from any department of the United States''), the corporation would be ''under the policy direction of the Secretary of Commerce.'' Significantly, the bill also provides that the Office ''shall be a corporate body not subject to direction or supervision by any department of the United States, except as otherwise provided in this title.'' We consider this provision to be one clearly establishing operational independence of the Office from Department of Commerce supervision, as well as an underscoring of Congressional intent that ''policy direction from the Secretary'' means just that, and only that. It does not constitute authority for intervention and supervision by subordinate units of the Department.

   We find this to be an acceptable and workable resolution of the governance issues, and we strongly support enactment of title I of H.R. 400.

Title II--Examining Procedure Improvements: Publication with Provisional Royalties; Term Extensions; Further Examination

Early Publication

   In the United States, patent applications are held in confidence by the Patent and Trademark Office, and their contents are not made public unless and until a patent is issued pursuant to a particular application. This contrasts to the practice in almost all the rest of the world, where patent applications are typically made public 18 months after the original filing date.

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   The Intellectual Property Law Section of the ABA favors changing U.S. law, as called for in S. 1961, to provide for such early publication of patent applications, while providing a procedure to maintain trade secrecy if the applicant desires after receiving a first office action.

   Early publication of patent applications is another way of saying that the contents of U.S. patents are to be disclosed to the public before the inventor receives a patent on his or her invention. Opponents of such disclosure argue that such forced disclosure is an open invitation for competitors of U.S. patent applicants to steal their inventions, which could be the result if the theft of surcharge user fees is not stopped.

   This argument has some surface appeal. After all, early publication means that patent applications, including details of how to make the invention in question, are thrown open to anyone who wants to see them. Furthermore, early publication, by definition, means that this frightening event occurs before the inventor receives a patent or can be sure that one is forthcoming.

   Almost half the patent applications filed in the United States are filed by foreign inventors. A substantial number of domestic applicants are U.S. multi-national corporations which routinely file abroad. Add the many applications filed by small businesses and others who also file abroad, and it is clear that a substantial majority of U.S. patent applications are filed abroad as well as in the United States.
   Early publication would provide inventors and investors with information to help them make decisions at critical stages of invention development. For example, an inventor whose own publication date is imminent can take comfort in the knowledge that no other applications have been opened which establish priority rights in another pending application. If such priority does appear to be established, the inventor may then be able to abandon his or her own application and take advantage of other strategies which may still be available, such as trade secret protection. In this regard we note that section 202 of H.R. 400 provides a procedure whereby applicants can prevent publication of their applications until 3 months after first office action in the PTO. We also note that H.R. 400 would make this procedure available on the same basis to all applicants, rather than limiting its availability to a single class of applicants, as called for in the predecessor bills in the 104th Congress. We commend you for this improvement. Problems may still be encountered in the requirements to qualify for the delay, in that an applicant must request delayed publication at time of application, and must, at the same time, certify that the application will not be filed in a foreign country.
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   We also support efforts to guarantee that all applications receive a first office action in fourteen months, so that the need for delayed publication does not occur. It is unlikely that an early first action is possible unless the diversion of user fee funds is stopped. The whole scenario concerning early publication leaves the question: How are you going to pay for it?
Provisional Royalties

   Under present U.S. law, the right to sue for infringement of a patent or to demand royalty payments for use of the patented invention does not attach until a patent is issued. The Intellectual Property Law Section of the ABA believes that publication of patent applications in advance of the issuance of patents must be accompanied by a grant of rights to the applicant to obtain compensation from anyone who makes, uses, sells, offers for sale, or imports the invention between the time the application is published and the patent is issued. For the Intellectual Property Law Section, establishing such provisional rights is both a necessary condition for supporting early publication and an additional reason for doing so, the latter because it provides protection for inventors where none exists today.

Patent Term Extension

   The Uruguay Round Agreements Act (URAA), enacted in December, 1994 took a first major step in the direction of reforms which are retained and expanded in H.R. 400. Section 532 of the URAA provides that patent terms are to be measured from date of application, rather than date of issuance of the patents. In constructing the patent reform package represented by H.R. 400, we applaud you, Mr. Chairman, for your efforts to retain this critical provision of the URAA, and to resist efforts to abandon this reform by the passage of bills such as H.R. 359 in the 104th Congress. Retention of patent term measured from filing, combined with the broader patent term extension provisions called for in title II of H.R. 400, is the proper approach.
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   Until the enactment of section 532 of the URAA, which became effective on June 8 of last year, the term of utility patents granted by the United States was 17 years, measured from the date of issuance by the U.S. Patent and Trademark Office. Section 532 changed this to provide a patent term of 20 years, which would still begin on date of issuance but would be measured from date of application for the patent by the inventor. As is readily apparent, the net effect of this change is to provide a longer term of patent protection for patents which are issued less than three years from application, and a shorter term for those which are pending for more than three years from application to issuance. The average pendency period is about 19 months, so most inventors will enjoy longer patent protection under the change. However, pendency and consequently patent term are adversely impacted by the failure of the Congress and the Administration to allow the PTO full use of fees paid by its customers.

   Title II contains patent term extension provisions which are designed to address any inequities which might occur due to delayed issuance of patents under a term measured from filing. It is true that when patent term is measured from filing date, delay in the issuance of a patent is very costly to the applicant. Every day of delay reduces the term of patent protection, something that does not happen when patent term is measured from issuance. The vast majority of inventors will still come out ahead, since their patents will be issued well before the expiration of three years from application.

   However, there is no doubt that there will be situations in which, through no fault of the applicant, processing is unreasonably delayed and drags out beyond the three year point where the application becomes a net loser under the change made in the URAA. An obvious example of this would be if the PTO negligently lost an application and failed to process it.
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   Title II is designed to address such delay through reasonable patent term extension provisions. The URAA already provides for some such extensions, such as when a government secrecy order delays the issuance of a patent, or when an applicant loses valuable patent protection while successfully appealing a Patent and Trademark Office decision against patentability. Title II would provide for longer terms of such extensions, as well as authorize patent term extension in circumstances in which there has been ''unusual administrative delay by the Office in issuing a patent.''

   We believe that case by case patent term extension for delays in the patent review process is a superior solution to that called for in H.R. 359 for those rare circumstances in which unfair results occur under a patent term measured from filing. Unlike those proposals, H.R. 400 provides relief without throwing out all the benefits of a term measured from filing. We support the patent term extension provisions in section 208, and we support the enactment of title II of H.R. 400.

Title III--Protection for Prior Domestic Users of Patented Technologies

   As you noted, Mr. Chairman, in your introductory statement accompanying H.R. 400, title III ''creates a defense against infringement charges for parties who have independently developed and used technology in the United States before a patent application was filed on that technology by another party.'' You also expressed the view that ''This will protect the investments of innovative American manufacturers who have built plants using technology later patented by another party.''

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   Legislation providing for rights to continue use of an invention based on prior domestic commercial activities has attracted support of other organizations. Partially in response to such support, the Section of Intellectual Property Law has continued to review the desirability of providing for prior use rights in a number of contexts.

   However, the Section of Intellectual Property Law does not favor the provision of such ''prior user rights'' based on prior commercial use by persons who elect not to disclosure their inventions in exchange for limited term patent protection, but rather seek to protection their inventions by non-disclosure and reliance upon protection under State trade secrets laws. In accordance with this policy, we oppose the enactment of Title IV of S. 1961.

Title IV--Enhanced Protection of Inventors' Rights

  Title IV of H.R. 400 is designed to rein in the deceptive and often fraudulent practices of so-called invention development companies, which prey upon inventors, and upon the larger universe of those who aspire to being inventors.

   Over the many years these practices have persisted, a number of consistent features have been present. First, they are focused on the exploitation of those who believe they are, or could be, inventors of patentable subject matter. They do not target their services toward the research and development departments of major corporate enterprises, but rather upon independent inventors, most often first time or one time inventors.

   Many inventors targeted by invention development companies bring to their creative efforts a degree of dedication and passion which is not matched by an ability to realistically evaluate their own efforts. At the same time, they also may lack even a rudimentary understanding of our patent system and be unsophisticated in what is necessary and possible to turn their efforts into commercial success.
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   In short, they are victims waiting for an unscrupulous invention development company to happen.

   When a potential customer contacts such a company--usually after seeing a television or print media advertisement--the contact sets in motion a chain of events which has common features over time and independent of the merits of the potential invention.

   First, the potential customer who contacts the toll free number of the invention development company is asked to provide a description of his or her invention.

   In the hands of the unscrupulous invention development company, the invention instantaneously develops tremendous potential for patenting, successful development, and marketing. Actual merit does not appear to play a factor in this evaluation. In one case, a journalist, interested in testing the outer limits of an invention development company's unbridled optimism, submitted a proposal for a unique automobile ''cruise control'' device. It consisted of a device for bolting the accelerator pedal, depressed to achieve the desired speed, to the floor of the car. A report came back that department stores all over the country were waiting to put this stroke of genius on the market, perhaps anticipating that motorists were dying to put it in use.

   Along with the favorable initial report, the customer receives the initial bite: a solicitation for fees to finance some sort of feasibility study, which may or may not include a patent search. The fee is typically several hundred dollars, often as much as $1000.

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   Not surprisingly, the report that results is invariably also favorable, albeit couched in generalities and lacking any meaningful specificity regarding the proposal at issue. The existence of voluminous prior art, and the absence of elements such as novelty, usefulness, and nonobviousness are, of course, not causes to render an unfavorable report.

   Sometimes the bogus invention development company actually assists the customer in applying for and receiving a patent. However, the patents are often narrow or not well written, or both, or are design patents, which provide little if any real patent protection to the customer whose need is for a utility patent. Furthermore, even these relatively useless claims are often vulnerable to legal challenge. For example, when someone working for the company adds the ornamentation necessary to support a claim for a design patent, the applicant (the customer) is not the inventor, and is not entitled to a patent.

   For customers that fail to see the writing on the wall and cut their losses, invention development service fees grow larger as the pitch moves to invention development and marketing. Here again, the actual services provided are minimal, such as providing a list of names and addresses of corporations for the customer to write to in order to solicit financial backing.

   Over a decade ago, our Section of the ABA identified a need for and recommended federal regulatory actions to curb these practices. A number of those recommended actions parallel provisions of title IV, and include: (1) a requirement that all contracts for invention development services be in writing; (2) a ''cooling off'' period between receipt of the contract by the customer and any required payment under the contract; (3) mandatory contract provisions spelling out services to be provided, a time schedule for the performance of such services, and a listing of the names and addresses of persons and firms who will be providing services under the contract; and (4) a requirement that the invention development service provider deliver a written quarterly report to the customer, spelling out services already performed and services to be performed, a full accounting of money paid by the customer under the invention development contract, and the name and address of every person or entity to whom the subject matter of the contract has been disclosed, the reason for such disclosure, and copies of all responses received as a result of such disclosures.
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   Two years ago, we added to these recommendations a recommendation for the enactment of legislation creating a civil cause of action against an investment development company that fails to disclose or misrepresents its success rate or its favorable evaluation rate. Success rate refers to the percentage of customers whose benefits from the company's services exceed money paid out to the company. Evaluation rate refers to the percentage of potential customers whose inventions received a favorable evaluation.

   Title IV specifically requires such disclosures, and creates a new cause of action which includes remedies for persons injured by a failure to make such disclosures.

   Thus, title IV contains a number of specific features endorsed by the Intellectual Property Law Section of the American Bar Association. We believe that the system of accountability through mandatory contract, disclosure, and reporting requirements contained in the bill is the right approach. We also believe that these requirements must be backed up with authority for private enforcement through civil remedies for customers injured by violations of the bill's requirements.

   In this regard, we believe that the provision for recovery of damages--actual or statutory--when the injury results from failure to disclose the company's favorable report rate or its customers' success rate, is a key feature of the bill.

   At the same time, we believe that you were wise to authorize a cause of action for other violations of the regulatory scheme. Experience in states which have similar disclosure requirements, or where the Federal Trade Commission has required such reporting, indicates that fraudulent invention development companies are able to neutralize negative success rates by false and fraudulent representation of the ''special'' merit of the invention in question, or of the extraordinary services to be rendered.
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  Title IV authorizes recovery for injury due to other violations of the statute and regulatory scheme, such as failure to give the customer progress reports on exactly what services have been provided and will be provided. We believe this is appropriate, as is the provision for recovery for injury caused by ''any false or fraudu-lent statement, representation, or omission of material fact by an invention develo-per ...'' (regardless of whether that false or fraudulent conduct violates a specific provision of the regulatory scheme).

   Proposed new section 56 (b) of title 35 authorizes the court to award reasonable attorneys' fees and to treble damage awards. The Section of Intellectual Property Law endorses trebling of such awards and the award of reasonable attorneys' fees.

   We believe that civil enforcement mechanisms, such as those called for in title IV, provide the best prospect for discouraging and sanctioning the practices which inspired the introduction of this title of H.R. 400. Criminal enforcement, while possible and desirable in cases where criminal fraud can be proven, is unlikely to provide a sufficient number of prosecutions to provide any meaningful deterrent. In this regard, we note two points made in the testimony of the Deputy Assistant Attorney General Robert S. Litt of the Criminal Division, U.S. Department of Justice, at the September 1994 hearing of the Subcommittee on Regulation and Government Information of the Senate Governmental Affairs Committee. One, the Department of Justice feels it already has sufficient authority to prosecute fraudulent activity by invention development firms. Two, the Department is not aware that it has any such prosecutions pending, or that it has ever prosecuted such a case.

   Deputy Assistant Attorney General Litt pointed to the exercise of prosecutorial discretion as a factor which probably contributes to this paucity of cases. Civil enforcement, particularly actions for damages brought by the victims of such practices, represents the most realistic route by which to pursue these practices.
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   We also support proposed new section 59 of title 35, as added by section 402 of the bill. This section provides that existing State laws relating to invention development companies will not be preempted, unless provision therefore is specifically made.

   Not all states have adopted such laws, and problems of interstate enforcement support the need for federal legislation. However, state laws in many states provide valuable compliance and enforcement mechanisms, and you are wise to specifically provide that these laws are not preempted.

   The provisions found in Title IV of H.R. 400 were first introduced as H.R. 2419 of the 104th Congress. That bill contained provisions, not found in title IV, which would establish an elaborate system of registration by the PTO of invention developers. We believe you were wise to not include these provisions in H.R. 400. Any potential benefits of the registration system are outweighed by undesirable features of such a system, which include a substantial administrative burden on the PTO and legitimate service providers. It also appears likely that many unscrupulous operators will use their enrollment with the PTO as a basis of making claims to potential customers that they are ''Approved by the U.S. Government.''

  The Section of Intellectual Property Law of the American Bar Association supports the enactment of title IV of H.R. 400.

Title V--Improved Reexamination Procedures

   Issues regarding patent reexamination and reissue, and the role that third party participants should play in such proceedings, have frequently had the attention of the patent community, the PTO, and the Congress during the past 20 years.
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   In 1977, the PTO instituted rules, known as the ''Dann amendments'', permitting ''no defects'' reissue patent applications to be filed by patent owners. Under these rules, third parties could intervene as protestors in the proceedings to consider the reissue application.

   Many practitioners felt that, under the Dann amendments, third party intervenors abused the reissue process. In this regard, our Section, then known as the Section of Patent, Trademark and Copyright Law, adopted a resolution favoring the abolition of the Dann amendments. The Dann amendments were abolished, and the present statutory reexamination provisions (35 U.S.C. 301—307) went into effect July 1, 1981.

   In approving these reexamination provisions, the House Committee on the Judiciary articulated the following purpose of the legislation:

   ''This new procedure will permit any party to petition the patent office to review the efficacy of a patent, subsequent to its issuance, on the basis of new information about pre-existing technology which may have escaped review at the time of the initial examination of the patent application. Reexamination will permit efficient resolution of questions about the validity of issued patents without recourse to expensive and lengthy infringement litigation. This, in turn, will promote industrial innovation by assuring the kind of certainty about patent validity which is a necessary ingredient of sound investment decisions.'' House Report No. 96—1307(I), to accompany H.R. 6933, (hereafter referred to as the ''House Report'') at pages 3—4).

   The Committee report elaborated further on the objective of reexamination as a means to reduce litigation and the resultant delay and expense:
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The cost incurred in defensive patent litigation sometimes reaches $250,000 for each party, an impossible burden for many smaller firms. The result is a chilling effect on those businesses and independent inventors who have repeatedly demonstrated their ability to successfully innovate and develop new products. A new patent reexamination procedure is needed to permit the owner of a patent to have the validity of his patent tested in the Patent office where the most expert opinions exist and at a much reduced cost. Patent office reexamination will greatly reduce, if not end, the threat of legal costs being used to 'blackmail' such holders into allowing patent infringements or being forced to license their patents for nominal fees. (House Report, page 4).

   The costs today are considerably higher than the $250,000 mentioned in the Report.
   Experience since the enactment of sections 301—307 seems to indicate that the Congress laudable objective that reexamination serve as a speedier, less costly substitute for litigation has not been achieved, at least not to the extent hoped for.

   At the time the 1981 legislation was enacted, approximately 2000 reexamination cases per year were expected by the PTO.
   In fact, in the 13 years following the July 1, 1981 effective date of section 301—307, a total of only 3482 requests for reexamination were received by the PTO. Fifty-five percent of these requests were made by third party requesters.

   We believe that the use of reexamination by third party requesters has been limited by the inability of third party requesters to participate significantly in the reexamination prosecution.
  Under the current procedure, a third party requester files, as part of its request for reexamination, reasons which it believes support reexamination. Section 303 provides that the Commissioner then has three months within which to determine if ''a substantial new question of patentability affecting any claim of the patent is raised by the request.''
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   If such a determination is made, the Commissioner must order reexamination and allow the patent owner at least two months to file a statement in response. If, and only if, the patent owner files such a statement, the third party requester has one, and only one, opportunity to be heard.

   As noted in the explanatory material accompanying a predecessor bill, H.R. 1732, when it was sent to the 104th Congress by the Commerce Department, many patents owners forego their right to comment on the order of reexamination thereby denying third party protestors even that one opportunity to reply.

   As early as 1985, our Section identified this very limited role for third party requesters as a deficiency in the present reexamination statutes and procedures. At that time, we called for legislation to provide a greater degree of participation by third-party requestors in reexamination proceedings. We specifically recommended that this greater participation include a privilege of responding one time to each response by the patent owner to an official action.

   In 1993, we adopted a policy favoring consolidation of the order for reexamination and first office action. In the same resolution, we favored allowing a third party requester to submit written comments, within strict time deadlines, on the patent owner's response to the first office action. We recommended limiting the scope of such comments to issues covered by the office action and the patent owner's response.

   Title V of H.R. 400 goes a long way toward achieving these objectives. Consolidation is permissive under the bill rather than mandatory, but the PTO has indicated that, in implementing the legislation if enacted, it expects ''that consolidation will occur in the vast majority of cases.''
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   The bill would allow third party requesters to comment upon any patent owner response filed to any PTO office action on the merits. This would be limited to one time only written comments ''within a reasonable period not less than 1 month after the date of service of the patent owner's response.'' Third party comments would be limited to issues covered by the Office action or the patent owner's response.

   The Section of Intellectual Property Law feels that these changes are important and beneficial. Under current law, once reexamination is ordered, the proceedings become essentially ex parte between the examiner and the patent owner. As I noted earlier, the only opportunity for third party participation other than filing an original request occurs if the patent owner elects to respond to the order of reexamination. There is no opportunity to comment on any other office actions during the course of reexamination.

   This inability to be heard throughout the reexamination process, coupled with a belief that courts and juries are more likely to uphold the validity of a reexamined patent, often leads potential third party requesters to argue patentability in front of a judge or jury, rather than in a reexamination proceeding.

   We have for many years favored modifying reexamination statutes and procedures to address these disincentives to utilization of reexamination as an alternative to litigation. We believe that title V addresses these concerns in a positive way, and holds out real hope that the expectations expressed in the Committee Report in 1980 might be realized.

   The bill amends section 304 to eliminate the patent owner's privilege of filing a statement in response to the reexamination order. Since no such statement is allowed, the bill removes the strategic advantage that the patent owner now has to submit a statement when it is to his or her advantage to do so, but forego a statement when the patent owner feels it is more advantageous to deny a privilege of response by the third party.
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   We also support the provisions of the bill which amend 35 U.S.C. 302 to expand the scope of reexamination to include the requirements of 35 U.S.C. 112, except for the best mode requirement. In 1993, our Section adopted a resolution supporting such an expansion, a position which was reaffirmed in 1994 and 1995.

  Section 503 (f) of H.R. 400 would add a new section 308 to title 35. Proposed section 308 (b) is designed to prevent a losing party in infringement litigation from ''relitigating'' its assertion of the invalidity of a patent claim by filing a third party request for reexamination with the PTO.
  The Intellectual Property Law Section supports this provision.

   Our Section also supports a requirement that, under controlled conditions, third party requesters be permitted to participate in any examiner interview initiated by the patent owner or by the examiner in reexamination proceedings.

   Title IV of H.R. 400 consists of provisions which were first introduced as H.R. 1732 in the 104th Congress. The ''Statement of Purpose and Need'' accompanying the Speaker letter which transmitted that proposed bill to the Congress addressed the question of such third party participation in examiner interviews. Page 6 of this Statement states that, while no statutory provisions exist or are proposed in this regard, the Office has the authority to provide for such participation by rule making.
  The Statement of Purpose and Need concludes the discussion of this topic with the following observations: ''Such interviews could be conducted under controlled conditions before the examiner and could include the participation of an additional, more senior, Office representative. Third-party requesters should not be permitted to initiate examiner interviews.''
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   We support these conditions of third party participation, which are virtually identical to conditions called for in our 1993 policy statement. We note, however, that not only is there no statutory provision for such participation proposed in the Administration bill, but that the Statement accompanying its submission states merely that such procedures could be initiated by rule making. It does not express an intention to do so.

   Accordingly, we recommend that such third party requester participation be specifically authorized by an amendment to the bill. We further recommend that the bill not permit third party requesters to initiate interviews, and that a senior PTO official should join the examiner in conducting the interview.

   As a further incentive to utilization of reexamination, title V of H.R. 400 would provide third party requesters with appeal rights parallel to those provided to patent owners, both to the Board and to the Federal Circuit. Review by way of a civil action under 35 U.S.C. 145 is not provided for. If these appeal rights are exercised, the third party is then estopped from later asserting, in any other forum, the invalidity of any claim determined to be patentable on appeal on any ground which the third party raised or could have raised in reexamination. This is to add finality to reexamination when the third party appeals or participates in an appeal.

   The Section of Intellectual Property Law of the ABA supports the provisions of title V which would extend appellate rights to third party requesters in reexamination proceedings. We also support enactment of collateral estoppel provisions, but only to the extent the estoppel extends to issues that were actually raised in the reexamination proceeding.
H.R. 673
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   The Intellectual Property Law Section of the ABA strongly opposes user funds paid to the PTO being diverted into the general revenue for other purposes.
   Mr. Chairman, H.R. 673 is designed to stop the diversion of user fees raised to fund the Patent and Trademark Office. I'm not much for euphemisms, so ''theft'' sounds more accurate to me than ''diversion.'' The law says these funds ''shall be credited to a separate account established in the Treasury and ascribed to the Patent and Trademark Office,'' and that they ''shall only be made available to the Patent and Trademark Office.'' That's what users are paying for. To me, using this money for something else is not a heck of a lot different than ordinary robbery. The guy who sticks a gun in your face is merely uttering the street equivalent of ''Make all the funds deposited in the special account ascribed to your wallet available to me or else!''

   We are facing a true crisis regarding the funding of the PTO. For the first time, a President's budget proposal to fund the federal government for the coming year calls for denying the PTO the use of fees paid by users of PTO services. The President's proposal for fiscal year 1998, if enacted, would deny the PTO $92 million of such user fee funds, with disastrous consequences on PTO operations and services. In subsequent years, the amounts confiscated would be even greater.

   For the past six years, the PTO has received no public funding, and has been fully funded by patent and trademark user fees. The final step toward 100% user fee funding was the addition of a surcharge on all patent fees under 35 U.S.C. 41(a) and (b). This surcharge was enacted as part of a 1990 law designed to rein in the national budget deficit.

   Congress decided in 1990 that some pretty drastic steps had to be taken to rein in our growing national deficit. For those who depend upon patent protection and the services of the Patent and Trademark Office, one drastic step was an immediate increase of 69% in the major fees which must be paid in order to obtain and maintain patent protection. This was the amount of increase which was deemed necessary to raise enough revenue to permit the PTO to operate entirely on user fee funding. This was a tremendous burden on America's innovators. Combined with other patent fee increases which Congress enacted a few month later, inventors saw their PTO fees more than double in just one year. It was tough, but America's inventor community collectively swallowed hard and paid up. Since then, not a dollar of public funds has been utilized to run the PTO.
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   The story should have ended there, with users paying the full costs, and their fee funds being used for that purpose. Unfortunately, events took an only in Washington twist. The bill which increased the fees specified, in even stronger terms than the original fee laws, that the money raised could be used only to pay the costs of running the Office and providing the services for which the fees were paid. This feature of the fee increase seemed consistent with fairness, logic, and common sense. However, because of the arcane way the fee increase was structured or captioned, the so-called surcharge portion of the fees we pay are treated entirely differently from normal fees. The surcharge portion is treated as if it were general tax revenue, and apparently can be, and is, assigned to any and all governmental purposes.

   Although the law establishing the surcharge specifies that the funds raised may be used only for PTO operations, this has never been the case. In every PTO Appropriations Act since 1991, a portion of these funds has been denied to the PTO and diverted for other purposes. For the current fiscal year, which ends on September 30, the amount is $54 million.

   Until the President's current proposal, all such diversions of user fees have originated in the Congress, either by the failure of the Appropriations Committees to make the full amount available in the bills they have reported, or by floor amendments in the House or Senate which take money from the PTO and reallocate it to other government programs. In the current budget proposal, the President not only joins in this raiding of PTO user fees, but takes it to record amounts. Furthermore, for all out years (years after fiscal year 98), the Administration's proposal is that the full amount of PTO user fees raised by the surcharge--$119 million per year--be confiscated and used for other purposes.

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Impact on PTO Services

   In addition to being fundamentally unfair to the users of PTO services, these diversions of funds are likely to have negative effects on PTO operations and efficiency which will be crippling in the short run and disastrous in the long run. The immediate effects are likely to include a freeze on all hiring and drastic cutbacks in training and travel activities. Pendency times for patent applications are almost certain to increase, and revenue will be further reduced by losses in application, maintenance, and other fees. The PTO projects a cumulative loss (fee funds denied plus revenue lost) of up to $1 billion over five years.
  Our entire patent system will suffer, as will all those who use or depend upon the system. The pain is likely to be felt most acutely by independent inventors and small businesses, for whom timely patent protection is often an issue of economic life or death. I know this from first hand experience, in that I have throughout my career and continuing to this day, primarily represented independent inventors.
   The negative impact of implementing the President's proposal will not stop at our borders. The patent community of the United States is greatly concerned about the extremely high cost of obtaining patent protection in other important world market counties, including Japan, the European Union, and the emerging Eastern Europe. These extremely high costs include patent office filing and processing charges which in some countries are several times the large fees charged by our own PTO. In many instances, these fees are being used as general revenue funding measures. When U.S. applicants complain of this practice, they are frequently told that they have no grounds for complaint, since the United States government is doing the same thing by its diversion of user fees in the patent surcharge account. This presents still an additional reason why we must end this deplorable practice. If the United States were to put a halt to this practice, we would improve our bargaining position in trying to convince other governments to refrain from such practices.
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   In this same regard, we note that the European Patent Office recently substantially lower its fees to provide greater incentives and opportunities for European inventor to enjoy the benefits of patent protection. If the United States takes a giant step in the other direction by making it much more difficult for our inventors to obtain and maintain patent protection, not only individual inventors and industries will suffer, but our nation's competitive position will also.

   There is an alternative. The alternative is to raise patent fees even more, to replace the funds collected to run the PTO but diverted to other programs. Here once again, the burden would fall most heavily upon independent inventors and small businesses, for whom the costs of obtaining and maintaining patent protection is already frequently prohibitively expensive.

  Mr. Chairman, the Section of Intellectual Property Law of the ABA commends you for your commitment, as demonstrated by your introduction of H.R. 673, to end this deplorable practice. We would prefer to see it ended by ending the surcharge itself. If the surcharge were to be repealed, we recognize that it would be naive and unrealistic to expect that overall fees would be reduced by this amount. We are not asking for a reduction in fees, and would be willing to see normal fees adjusted to pick up the surcharge portion of the total fees now imposed--if the payment remained in the PTO.

  We also realize, however, that the chances that the surcharge will not be extended is next to nil. Under these circumstances, we see H.R. 673 as the best approach that has been proposed. H.R. 673 would extend the surcharge indefinitely, but would restructure it in a manner designed to prevent theft of the funds raised for purposes other than the operations of the PTO. We favor the enactment of H.R. 673.
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  Mr. COBLE. Thank you, Mr. Kirk.

  Mr. Michael Kirk.


  Mr. MICHAEL KIRK. Thank you, Mr. Coble. Members of the subcommittee, I appreciate the opportunity to appear on behalf of the American Intellectual Property Law Association today to present our views on both H.R. 673 and H.R. 400.

  Both of these bills are critical to the Nation's patent system, but if steps aren't promptly taken to ensure the PTO can use all of our patent fees, as you, Mr. Coble, indicated, we are, pardon the cliche, simply rearranging the deck chairs on the Titanic.

  The administration's budget proposal proposes to take $568 million of user fees from the PTO from 1998 through the year 2002. Because of the inevitable slowdown in patent processing, there will be additional lost revenues resulting in nearly a $1 billion shortfall in PTO revenues over that 5-year period. The PTO has been forced to suspend the hiring of patent examiners; patent pendency will skyrocket from 20 to 42 months. They have curtailed certain quality programs in the Office, so that the quality of patents issuing at the end of this period are going to be questionable unless steps are taken to reverse this.

  Inventors were asked to absorb a 69-percent increase in patent fees in 1991 to help reduce the deficit. We see no valid justification for again taking these increased patent fees in the guise of yet reducing the deficit one more time and balancing the budget. Taking these fees really amounts to nothing more than a tax on innovation. It harms not only the inventors, it harms and undercuts the technological innovation that has made the United States a world leader.
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  We in AIPLA do not profess to be experts in the realm of scoring and pay-go concepts of the budget. Accordingly, we cannot unequivocally state that the provisions of H.R. 673 will stop the diversion of patent applicants' fees to other unrelated programs, but we must not allow ourselves to be sidetracked from our goal of ensuring that the PTO can use all of the fees that it receives for the purposes for which they were paid. The elimination of this secret innovation tax is the No. 1 priority for my association. Unless we stop this diversion, the PTO is going to become an irrelevant embarrassment to this Nation.

  Turning now to H.R. 400, this bill, we believe, responds perfectly to the needs of American industry and inventors as they face increasing competition from foreign rivals in markets both in the United States and abroad. Title I converts the PTO into a government corporation, giving it the administrative flexibility to operate at peak efficiency by freeing it from burdensome Federal regulations.

  Three different National Academy of Public Administration reports have recommended that the PTO be transformed into a Government corporation, to provide it with the flexibility to provide high quality services to its customers in the most economical and efficient manner and to reflect its transition from a traditional Government agency to a self-financing Government enterprise. It will easily save users $25 million annually.

  Title II retains the benefit of a patent system where the term lasts 20 year from filing, but it refines the possibilities for term extensions to ensure that no diligent patent applicant will receive a shorter term than under the previous law. It avoids the problem of patent terms measured from grant, which can expire a decade or more after the terms of their foreign counterparts. This delayed expiration under the previous U.S. law forced U.S. companies to transfer manufacturing facilities and jobs offshore if they wished to compete in the countries where the patents had already expired.
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  H.R. 400 also creates a personal defense to patent infringement for parties who have developed and used an invention commercially at least 1 year before the filing date of another person's patent application. The prior user right is the title about which some question has been raised by universities. We believe that the steps that have been taken last year have significantly lowered the concern of the university community, but, obviously, they must speak for themselves.

  There are a number of small and medium-sized U.S. companies that simply can't afford to protect every invention that they come up with. This means that they have to resort to trade secret law to protect those inventions. This allows a second inventor, possibly a foreign inventor--45 percent of all U.S. patents are issued to foreign applicants--to come in, obtain a U.S. patent on technology already being commercially used in this country by an American company and prevent that American company from continuing to use that invention.

  The reverse is not the case. All of our major foreign trading partners have prior user rights in their laws. The prior user right defense, which H.R. 400 would bring to our law, will allow American manufacturers to commit resources to the commercialization of inventions in the United States, secure in the knowledge that a later patent will not disrupt their operations, allowing them to continue to provide high-wage jobs for American workers.

  Strong patent protection is the key to U.S. global technological leadership. H.R. 400 will strengthen the Nation's patent laws, provide greater certainty for American businesses and inventors, and should be promptly enacted.

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  H.R. 811, introduced by Congressman Rohrabacher, moves the Nation backwards. It reintroduces a patent term measured from grant, which brings back the abuses which existed under that system. That bill should be rejected.

  Thank you, Mr. Chairman.

  [The prepared statement of Mr. Michael Kirk follows:]

  Mr. Chairman, I appreciate the opportunity to appear before the Subcommittee today on behalf of the American Intellectual Property Law Association (AIPLA) to present the position of the Association on H.R. 673, The Patent and Trademark Office Surcharge Extension Act, and H.R. 400, The Twenty-First Century Patent System Improvement Act. It is not an understatement to say that the concepts underlying these bills are extremely important to our patent and trademark systems--in fact, critical to the well being of our nation's patent system--and AIPLA strongly supports their enactment.
  In addition, as requested in the letter inviting AIPLA to testify, we have included some comments on H.R. 811, the ''Patent Term Restoration Act'' (Rohrabacher). If, as expected, it returns the United States to a patent term measured from grant, it will represent an unwise step backward and should be rejected by the Congress.
  The American Intellectual Property Law Association is a 10,000 member, national bar association constituted primarily of lawyers in private and corporate practice, in government service, and in the academic community. AIPLA represents a wide and diverse spectrum of individuals, companies and institutions involved directly or indirectly in the practice of patent, trademark, copyright and unfair competition law, as well as other fields of law affecting intellectual property. Our members represent both owners and users of intellectual property.
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H.R. 673
  Nothing in the recent past has been as vital to the United States patent system as the goals underlying the Patent and Trademark Office Surcharge Extension Act of 1997, H.R. 673. Since Congress imposed a surcharge on patent fees to replace taxpayer revenues in the Omnibus Budget Reconciliation Act of 1990, the Congress has increasingly refused to allow the Patent and Trademark Office (PTO) to utilize all of the revenues generated. Beginning with the diversion of $8 million to fund other unrelated government programs in 1992, Congress has diverted a total of $142 million over the past six fiscal years, reaching a record level of $54 million in the current fiscal year.
  As you noted in your introductory statement for H.R. 673, Mr. Chairman, this diversion has had a debilitating impact on the patent examination process. The PTO has been forced to gradually reduce a number of programs intended to promote the quality of the patents it grants. Curtailing patent search file reclassification and patent quality review programs are two examples. To accommodate the $54 million reduction in funding for the current fiscal year, the Patent and Trademark Office had to reduce the number of patent examiners it intended to hire by 50 percent, notwithstanding an increase in patent application filings of nearly 10%. The PTO was also forced to terminate its planned ''Reengineering Laboratory'' which held significant promise for bringing about such cost saving measures as electronic filing and search and examination work-sharing. The Office also eliminated completely its patent search file reclassification effort and significantly reduced the level of technical and legal training for patent examiners. These drastic, resource driven decisions will result in the PTO taking a longer time to examine and issue patents which will not receive the same level of attention that was possible when the Office was properly funded.
  Exacerbating this situation beyond all reason, however, is the proposal in the Administration's fiscal year 1998 budget sent to the Congress on February the 6th that would withhold from the PTO $92 million in patent user fees. Even worse, the planning assumptions in that budget reveal that the Administration intends to completely deny the Office the ability to use any of the $119 million which will be collected as surcharge fees each year from fiscal year 1999 through fiscal year 2002 (Appendix 1 shows ''0'' Budget Authority for the PTO in fiscal year 1999—2002). Thus, during the five year period beginning in fiscal year 1998, the Administration plans to deposit in the treasury and not allow the PTO to use nearly $570 million in patent applicants' fees.
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  The inevitable slowdown in the processing of patent applications has a compounding effect in future years. For each patent that the PTO is not able to issue during that five year period, the PTO will experience an additional loss of revenue from issue fees and maintenance fees which will not be paid. If the Administration's fiscal year 1998 budget document is permitted to become reality, the Office estimates it will lose an additional $424 million from the non-payment of fees over this five year period. In anticipation of this revenue loss, the Office has canceled totally all plans for hiring patent examiners for this fiscal year because it will simply not have sufficient funds to pay for them in fiscal year 1998 and beyond. The chart appended to my statement (Appendix 2), which is based on data obtained from the PTO, shows that the effect of this theft will be a patent pendency of 42 months by fiscal year 2003 if the Administration's plan is not stopped.
  The impact of the resulting delay also flies in the face of the obligations of the United States and other member nations of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Article 62 of TRIPs provides:

2. Where the acquisition of an intellectual property right is subject to the right being granted or registered, Members shall ensure that the procedures for grant or registration, subject to compliance with the substantive conditions for acquisition of the right, permit the granting or registration of the right within a reasonable period of time so as to avoid unwarranted curtailment of the period of protection.

  Can the United States legitimately argue that a 42-month patent application pendency is ''reasonable'' or that it is not an ''unwarranted curtailment of the period of protection?'' Worse, on what basis do we make the argument that similar or longer periods of patent application pendency in other members of TRIPs violate their obligations? The potential consequences for American industry and workers are dire.
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  Mr. Chairman, inventors were asked to absorb a 69% increase in patent fees in 1991 to help reduce the deficit by making the PTO completely dependent on user fees for its support. No valid justification can exist to take these increased patent fees away from inventors in the guise of yet again reducing the deficit and balancing the budget. The diversion of these funds from the purposes for which they were paid is nothing less than a secret tax on innovation. It not only harms inventors, it will undercut the incentives for technological innovation that have made the United States a world leader.
  We in AIPLA do not profess to be experts in the realm of deficit ''scoring'' or ''pay-go'' concepts. Accordingly, we cannot state unequivocally that the specific provisions of H.R. 673 will solve once and for all the diversion of patent applicants fees to other unrelated programs. From our discussions with a number of budgeting and appropriation experts, it certainly appears that H.R. 673 is on the right path by recategorizing the surcharge fees from offsetting receipts to offsetting collections. However, we must not be sidetracked by arcane budget technicalities from our goal of ensuring that the PTO can use all of the fees it receives from patent applicants for the purposes for which they were paid. The elimination of this secret innovation tax is the number one priority of the American Intellectual Property Law Association. Unless we stop this diversion of PTO funds and secure stable, adequate funding for it, the Patent and Trademark Office will become an irrelevant embarrassment. Moreover, it will undercut the efforts of both government and industry to reduce patenting costs throughout the world.
  H.R. 400, the 21st Century Patent System Improvement Act, contains five titles addressing significant reforms in the operation of the Patent and Trademark Office and in the substantive patent law. A sixth title groups a number of miscellaneous amendments which will also benefit users of the patent system. These changes were thoroughly considered in the 104th Congress and were unanimously reported to the House floor for action by the Judiciary Committee. Unfortunately, time did not permit action on the bill containing these improvements, H.R. 3460, prior to the end of the 104th Congress. AIPLA urges the Subcommittee to promptly report H.R. 400 to ensure that there will be adequate time for enactment this year. The time to adopt these important improvements is now.
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Title I--Patent and Trademark Office Modernization Act
  Title I of H.R. 400 addresses a number of the problems confronting the PTO by establishing the Office as a wholly-owned Government corporation under the policy direction of the Secretary of Commerce. The AIPLA strongly endorses transforming the PTO into a government corporation, with sufficient independence to insulate it from redundant and needlessly bureaucratic management by the sub-Cabinet officials in the Department of Commerce. We believe that there is no question but that the PTO could function more efficiently and effectively, and provide users with higher quality and more responsive products and services if it were properly transformed into a government corporation. H.R. 400 will save the PTO tens of millions of dollars annually which is absolutely critical at this time of severe resource reductions experienced by the Office over the past several years and proposed to continue into the future.
  In testifying in the last Congress on H.R. 1659, a predecessor of Title I of H.R. 400, we listed a number of attributes that properly crafted legislation transforming the PTO into Government corporation should have:
It would terminate the provision in OBRA which permits Congress to divert for unrelated purposes patent fees paid by inventors.
It would allow the PTO to hire adequate numbers of examiners to process growing patent and trademark application workloads.
It would authorize the PTO to directly acquire needed space on the most financially attractive terms.
It would ensure that the PTO could operate without micro-management by mid-level bureaucrats outside the PTO.
It would allow the PTO to quickly and efficiently acquire information technology by exempting it from the Brooks Act.
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It would give the PTO flexibility in its human resources management to support its needs in a timely and effective manner.
It would free the PTO from the obligation of using the Government Printing Office to satisfy its printing needs.
  We suggested that these characteristics be coupled with authority to provide adequate compensation to attract and retain a chief executive with the qualifications and skills to manage the 5,200 employees and $663 million budget of the PTO, with oversight by an advisory body comprised of patent or trademark knowledgeable individuals with significant management experience. In addition, the operations of the PTO should continue to receive close scrutiny through Congressional oversight hearings.
  This Subcommittee worked tirelessly in the last Congress to develop legislation transforming the PTO into a government corporation that was broadly acceptable to all concerned parties. Several days of hearings were held on H.R. 1659 during which the Subcommittee heard from the Administration, patent owners, inventors, employee unions, and many others. After H.R. 1659 was folded into H.R. 3460 and reported by the full Committee, former Chairman Moorhead and Ranking Member Schroeder continued to work with former Commerce Secretary Kantor to forge a government corporation bill acceptable to the Administration. The result of this effort is reflected in a letter from Secretary Kantor:
The Administration believes that the changes that we have crafted together in the en banc floor manager's amendment will create an organization consistent with the essential principles of the Vice President's vision for the Performance Based Organization, to further our mutual goal of creating a more efficient and effective patent and trademark office. In light of these changes, the Administration strongly supports House passage of H.R. 3460 with the en banc manager's amendment.
  H.R. 400 contains the en banc manager's amendment and builds on this outstanding bipartisan effort. It achieves a majority of the objectives AIPLA listed for this legislation and would, we believe, significantly strengthen the ability of the PTO to deliver the products and services needed by the patent and trademark communities. Together with H.R. 673, the provisions of H.R. 400 will give the American public the type of Patent and Trademark Office needed for the 21st Century.
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  We appreciate the hard work and untiring efforts of the Subcommittee to craft a bill acceptable to the Administration, the user groups, and employee representatives. While each might want to change the details in some respects, we believe that Title I of H.R. 400 is sound and should be promptly enacted.
Title II--Examining Procedure Improvements: Publication with Provisional Royalties; Term Extensions; Further Examination

  Title II of H.R. 400 would amend section 122 of title 35 to provide for the publication of each pending application promptly after the expiration of 18 months from its earliest effective filing date, with the exception of applications subject to secrecy orders. As we testified on H.R. 1733 in the last Congress, the AIPLA has long favored 18 month publication of all applications for patents. The publication of pending patent applications is a cost effective means of ensuring that United States inventors will have prompt access in the English language to a comprehensive technological database similar to that which foreign inventors in our major trading partners already receive in their language from their regional and national patent offices. Early publication will allow U.S. inventors to avoid duplicative research and optimize investment decisions in pursuing technological development.
  In addition, early publication will assist the PTO in its examination of patent applications by more effectively placing relevant prior art before examiners. Potential interferences can be identified and provoked by applicants at an early date, avoiding situations where later filed applications issue before earlier filed applications for the same invention. Inventors and companies employing inventors will be able to receive more complete and accurate patentability and infringement assessments since potentially adverse patent rights can be more readily identified and monitored.
  A major benefit of 18 month publication is that it, together with a patent term of 20 years from the earliest effective filing date, will eliminate the adverse consequences of an application that is allowed to languish in secrecy for years in the PTO before issuing as a patent to the surprise of an industry built on what had been thought to be public domain technology. Not only will U.S. companies know at a relatively early stage what technology may be the subject of a patent, but they will also know when the term of the patent covering that technology will end.
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  Concern has been expressed regarding the publication of trade secrets in applications for inventions that would ultimately be found to be unpatentable. Amended section 122 addresses this concern by authorizing any applicant to request that his or her patent application not be published until three months after the Director (formerly, Commissioner) of the PTO makes a notification under section 132 of title 35. Applications claiming the benefit of an earlier filing date would not be eligible to benefit from such a request. In addition, an applicant would be required to certify that the invention disclosed in the application was not or would not be the subject of an application filed in a foreign country. These limitations are imposed because applications filed in foreign countries would ultimately be published there in any event, and allowing them to participate in this program could only serve to deny Americans the right to see technology published here in the English language at the same time it would be published abroad.
  The AIPLA endorses the concept of allowing applicants to receive a first examination by the PTO prior to publication. We believe that this more than addresses a largely hypothetical concern. This provision would allow domestic inventors who do not intend to file abroad to make informed decisions about whether their applications contained patentable subject matter before committing to continue the patenting process where mandatory publication of their applications would occur. We would recommend, however, that the Director, in establishing regulations to implement this procedure, provide that any fee established be reduced by 50% for any independent inventor, non- profit organization, and small business concern as defined under section 3 of the Small Business Act.
  We also believe that the amendment to section 122(c) of title 35 contained in Section 202, that publication shall not create any new opportunities for pre-issuance opposition, is desirable to allay the concerns which have been expressed by some.
  To ensure that applications are promptly published 18 months from their earliest effective filing date, Section 203 of Title II would authorize the Director to consider the failure of an applicant to timely claim the benefit of the filing date of an earlier-filed application as a waiver of such benefit. AIPLA supports such a prohibition on late claims for the benefit of prior-filed applications. In fact, we would go even further. The provision should preclude any claim for priority that, if accepted, would result in publication of an application for patent later than 18 months from the earliest effective filing date of the application. Such a requirement would both encourage careful consideration of priority claims at the time of the filing of a patent application and would ensure that the public has the benefit of reliable and timely notice of potential patent rights. Again, from our perspective, one of the chief benefits of a system of publication of pending applications is the certainty that it brings to the patenting process. Inventors and the public at large should be able to make early, complete and accurate assessments of patentability and patent rights.
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  Under Section 204, a patentee would enjoy provisional rights in the form of a reasonable royalty from anyone who, with actual notice of the published patent application made, used, offered for sale, sold, or imported the patented invention into the United States, during the period from publication of the application until grant of a patent. We believe that this is an essential and valuable adjunct to a pre-grant publication system. This clearly enhances the rights of patent applicants. Today, a patent applicant has no recourse against a copier of his product from the time it is placed on the market until a patent is issued.
  Section 208 of Title II would amend section 154(b) of title 35 which authorizes the Director to extend the term of patents in certain circumstances. It would add to the three existing possibilities for an extension (to compensate for delays in the patent issuance process) a fourth category for unusual administrative delays by the Office in processing a patent. It would extend the period for two categories of extension from five to ten years (successful appellate review and unusual administrative delays) and would remove the cap altogether on the other two categories (interferences and secrecy orders). However, it would count only once any period of delay that overlapped with one or more other reasons for delay. Section 208 would also eliminate the limitation that no patent delayed by appellate review could benefit from an extension where it issued within three years from its earliest filing date. Conversely, it would make applicable to all four categories of extension the limitation that the period of any extension would be reduced by a period equal to the time during which the applicant failed to engage in reasonable efforts to conclude the processing for examination of the application. This limitation previously applied only to extensions for successful appellate review.
  In response to concerns by some that the PTO might be hesitant to admit that it was the cause of an unusual administrative delay, amended section 154(b)(1)(B) sets forth objective criteria for determining when an unusual administrative delay has occurred. These criteria--a ''time clock'' as some prefer to call it--provide that the PTO must take certain specified steps within set time limits and that failure to do so constitutes an unusual administrative delay which will result in an extension of the patent term for each day the Office was late in taking the step in question. Thus, a first action or notice of allowance must be mailed within 14 months of filing; a response to an applicant's reply must be given within 4 months of the date of receipt of that reply; action following a decision of the Board of Patent Appeals and Interferences or a Federal Court must be taken within 4 months of the date of decision; and a patent must be issued no later than 4 months after the date on which the issue fee was paid. Indeed, while amended section 154 (b)(1) B) would not shield inventors who need a patent promptly from the impact of the Administration's fiscal year 1998 budget proposal, it would at least ensure that they would not have their patent terms shortened.
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  While the AIPLA has not believed it essential to have such a time clock included within the patent statute, we believe that it serves as a useful addition because it puts to rest once and for all any question of whether a diligent patent applicant will be able to receive at least seventeen years of exclusive patent rights. With the amendments made by Title II, we are confident that all diligent patent applicants will receive more than seventeen years of exclusive patent rights.
  Together, the new basis for extension of patent term and the provisional rights provided under Title II provide a complete answer to the concerns which have been voiced regarding the potential loss of patent term under the Uruguay Round Agreements Act. Not only will patent applicants now receive added term to compensate for any conceivable delay they might experience which is beyond their control, they will also have the right to receive a reasonable royalty for the use of their inventions beginning 18 months from their earliest effective filing date and even earlier should earlier publication be requested. In the vast majority of cases, patentees will be guaranteed the opportunity of at least 18 1/2 years of rights and, should they file a provisional application and request early publication of their complete application, this period could exceed 19 1/2 years. While we trust that every effort will be made by the Office to ensure that all patents will be issued promptly so as to avoid such protracted periods of rights, we believe that this removes completely any question of an inventor not receiving an adequate period of patent rights.
  Section 209 facilitates the processing of patent applications in situations where an applicant has received a final rejection, but believes that the prospects for an examiner allowing his application would be enhanced through further examination. Rather than having to file a continuing application and start the process anew, section 209 allows the applicant to continue the examination simply by paying a fee. Moreover, small entity's fees would be reduced by 50 percent.
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  Section 210 of Title II would also make a technical correction to section 119(e) of title 35 to ensure that co-pendency between a provisional and complete application would not be lost in those situations where the final day for filing a complete application falls on a Saturday, Sunday or federal holiday within the District of Columbia. This would be accomplished by extending the pendency of the provisional application to the next succeeding secular or business day.
Title III--Protection for Prior Domestic Users of Patented Technologies
  AIPLA supports the enactment of Title III of H.R. 400. Title III would add a new section 273 to title 35 which provides a carefully crafted defense to a charge of patent infringement for a person who has made a good faith, commercial use of the subject matter of a patent, or effective and serious preparation for such use, prior to the earliest effective filing date of that patent. The Association supported similar legislation in the 103rd Congress, and Title III contains a number of improvements which were added in the 104th Congress that even more carefully delimit the prior use defense, thereby ensuring that it will be available only in the most compelling circumstances.
  For the great majority of inventions, effective protection can only be realized through the patent system. While protection under trade secret law is available for certain manufacturing processes and equipment, most inventions can be reverse engineered and copied once they are placed on the market or are otherwise publicly disclosed. Moreover, because trade secret laws generally provide limited protection in comparison to patent law, protection under trade secret laws is seldom chosen where effective patent protection is available.
  There are a number of reasons, however, why it is not feasible or even possible to patent every invention which could be patented. First and foremost are costs. The costs of seeking and obtaining patent protection in the United States are high, and the costs of enforcing patents in this country can be astronomical. These costs impact most severely smaller U.S. firms and especially independent inventors who are frequently limited to seeking patents for only their most important inventions. Moreover, given the high costs of patenting in Europe and elsewhere around the world, inventors who can not afford such costs will choose to forgo patenting in the United States as well because they could then prevent free rides by their foreign competitors by protecting some of their inventions as trade secrets.
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  Industrial process technology presents another difficult dilemma for its creators. Identifying a competitor's use of a patented process can be extremely difficult in the United States and impossible in foreign countries. Even if obtaining patents in the United States and abroad were economically feasible, the patent's disclosure of the process presents a significant risk to the patentee in the United States and foreign markets. Especially in the case of products made abroad and imported into the United States, it is very difficult to prove that the products were made by a particular process that infringes a patent in the United States or the country of origin.
  For these and other practical reasons, many U.S. companies and especially smaller U.S. companies are forced to forgo patenting of many inventions. In the case of industrial process technology and certain manufacturing equipment, these companies seek to protect their technology under trade secret law. This creates the possibility that a second, later U.S. or foreign inventor may obtain a U.S. patent on technology already being commercially used, but which has not been publicly disclosed. This later inventing U.S. or foreign holder of a U.S. patent could then obtain an injunction and prevent the U.S. manufacturer from further use of the invention, even though the U.S. manufacturer had made the benefits of the invention available to the American public though its commercial trade secret use of the invention.
  A personal defense against the possibility of an infringement suit by a second inventor would offer relief to U.S. manufacturers who, for the reasons mentioned, cannot afford to patent every marginally valuable invention. It would also protect those who do not wish to disclose an industrial process in a patent, the enforcement of which is problematic. A prior use defense would allow American manufacturers to commit resources to the commercialization of such inventions without patenting, but with security that a later inventor could not subsequently disrupt their operations.
  A prior use defense will also prove very useful in connection with computer program related inventions. The Proposed Examination Guidelines for Computer-Implemented Inventions published by the PTO opened the door to the granting of more patents in this area. However, many of the techniques which programmers have used in years past are not readily available to the PTO for it to consider as it examines computer program inventions. To the extent that patents might issue covering techniques which have long been in use by computer hardware and software developers, the prior use defense of Title III should prove invaluable, especially during this transition.
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  It is important to note that foreign inventors and manufacturers, though confronted with the same practical problems as their American counterparts, do not face the possibility that a later inventor can obtain a patent and disrupt their home-based manufacturing operations. This is because virtually all industrialized countries protect their domestic manufacturers with a prior user right (See Keith M. Kupferschmid, Prior User Rights: The Inventor's Lottery Ticket, 21 AIPLA Quarterly Journal No. 3, (1993). Thus, while a Japanese or German company with a U.S. patent may preclude the use of an industrial process by a U.S. company which had been utilizing that process as a trade secret for years before the patent application for the process was even filed, the reverse is not the case. American inventors holding patents in any of our major trading partners could not preclude use of the patented invention by a company which had begun its use of the invention before the American inventor filed a patent application. When 45% of all U.S. patents are being granted to foreign firms, this unbalanced playing field is, of itself, a strong economic argument in support of Title III. The laws of the United States should protect American jobs and businesses.
  The AIPLA support of Title III is predicated on the fact that it provides a carefully crafted, limited prior use defense. The limitations of Title III ensure that U.S. patentees will continue to enjoy their full, exclusive patent rights except in certain rare situations where an earlier-started, domestic, commercial enterprise will be allowed to continue under restricted circumstances. We have every confidence that the prior use defense will be rarely used based on experience in other countries having prior user right provisions which are more readily available than those which would be established under Title III (See Lise Osterborg, Towards a Harmonized Prior User Right Within a Common Market System, 12 Intl. Review Indus. Prop. and Copyright 447 (1981).
  We note, however, that the value of the prior user right defense should not be discounted simply because it will rarely be used. The availability of a prior user right defense will take the pressure off of U.S. companies to patent marginally valuable inventions and those which are difficult to enforce.
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  A number of important refinements were made in the predecessor to Title III in the last Congress. For example, proposed new section 273(c)(7) requires that the commercial use or a reduction to practice of the invention now must occur at least one year before the effective filing date. New section 273(a)(1) defines the term ''commercially used'' to mean that a person asserting the prior user defense must have used the invention in the United States in the design, testing or production of a product or service which is sold or otherwise transferred in commerce. The invention used need not be accessible or otherwise known publicly. Thus an industrial process or tool which is used as a trade secret to produce a product in commerce would be deemed to have been commercially used.
  Title III also tightens the requirements with respect to what constitutes ''effective and serious preparation.'' Under new section 273(c)(3), ''effective and serious preparation'' will only give rise to a prior use defense with respect to inventions which cannot be commercialized without a significant investment of time, money, and effort. This is further qualified by the requirements that a person asserting a prior use defense must have

reduced the invention to practice in the United States before the effective filing date of the patent;
completed a significant portion of the total investment necessary to commercially use the invention and have made a commercial transaction in the United States in preparation to use the invention before the effective filing date of the patent, and
diligently completed the remainder of the activities and investments necessary to commercially use the invention and promptly began its commercial use after the effective filing date of the patent.
  Adoption of the prior use defense contained in Title III is pro-American jobs. It gives American companies and their workers the same protection enjoyed by their major foreign competitors. AIPLA strongly believes that this protection is long overdue.
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Title IV--Enhanced Protection of Inventors' Rights
  Unscrupulous invention development organizations have long been the bane of unsuspecting inventors in the United States. It has been estimated that such unscrupulous invention developers receive more than $100 million annually from first-time inventors seeking assistance in the marketing and protection of their inventions. Title IV seeks to combat the predatory practices of such firms through a combination of mandatory disclosure of the details of their operations and practices, including their rates of success, establishing a civil remedy to allow inventors injured through such predatory practices to recover actual or statutory damages, including reasonable costs and attorney fees, and requiring that such firms engaged in obtaining patent or trademark protection enroll annually with the Patent and Trademark Office. AIPLA strongly endorses the enactment of federal legislation to curtail the operations of such unscrupulous organizations. We note that Title IV contains a number of improvements over its predecessor bill in the 104th Congress, H.R. 2419. These refinements are welcome additions and move us closer to our objective of protecting inventors by ridding the nation of unscrupulous invention development firms while having a minimal impact on legitimate firms which offer beneficial services to America's inventors.
  Title IV would add a new Chapter 5 to title 35 of the United States Code. Proposed new section 35 USC 52 would require every contract for invention development services to be in writing. Proposed new section 53 would require that every contract for such services have a cover sheet listing the total number of inventions evaluated by the firm during the preceding five years, together with the number of inventions which received positive evaluations and the number which received negative evaluations. The cover sheet would also require the invention developer to list the total number of customers with which it has had contracts in the previous five years and the total number of customers known to have received, by virtue of the invention developer's performance, an amount of money in excess of the amount the customer paid to the invention developer. We believe that disclosure of the acceptance rate by invention developers of inventions presented for development as well as the number of times inventors have realized a positive balance of cash flow from such transactions would be useful to inform prospective clients. We note with approval the amendment to proposed new section 61 to make the willful misrepresentation of such information a misdemeanor subject to a fine of up to $10,000 for each offense.
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  Proposed section 52 would also require each invention developer to state, in a written document to be given to each customer, the usual contracting and business practices of the developer, including information regarding the usual terms of its contracts and the fees that it charges. Proposed section 55 specifies certain mandatory contract terms. Each contract for invention development services must include the terms and conditions of payment, a description of the services which the developer undertakes to perform, a statement of whether the developer will construct or distribute prototypes of the invention and, if any representation of projected earnings has been given, a statement of that projection along with a description of the data upon which it is based.
  We again note that improvements have been made in Title IV over H.R. 2419 regarding certain of the mandatory contract terms listed (e.g., the requirement in section 55(a)(5) to list the name and address of any ''person that may perform'' any of the services the invention developer undertakes to perform is changed to any ''person who it is known will perform''). However, the obligation in section 55(a)(7) (to keep all records and correspondence relating to the performance of invention development services for 2 years and, before such records are destroyed, to contact the customer to give them the opportunity to see such records) is continued. While such a requirement may be useful if one is focusing exclusively on disreputable invention developers, we continue to urge that care be taken to ensure that unnecessary burdens are not placed on ''legitimate'' invention developers. There are already too few helping hands for inventors and AIPLA would strongly prefer to not have that number even further diminished.
  Proposed section 56 (b) would establish a cause of action against an invention developer by any customer who is injured by a false or fraudulent statement or omission of material fact by the developer. The recovery may be the greater of $5,000 or the amount of actual damages sustained. Reasonable costs and attorney's fees may also be recovered from the developer. AIPLA strongly endorses the creation of this private right of action, especially the statutory damages and the availability of reasonable costs and attorney's fees. Federal, state, and local enforcement agencies too frequently do not have the resources to prosecute unscrupulous invention development firms. Not only would the creation of such a private course of action address this reality, but the availability of statutory damages along with costs and attorneys' fees increase the likelihood that injured inventors could actually recover sufficient damages to justify their bringing such actions.
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  We also note with approval the absence of any requirement for invention developers to enroll annually with the Patent and Trademark Office as contained in section 57 of H.R. 2419. We believe proposed section 57 (previously section 58) offers a better alternative, namely, the maintenance of a record of complaints regarding specific invention developers. Finally, we also note that the definitions in proposed section 51 have been clarified.
  AIPLA believes that federal legislation regulating the conduct of invention development organizations is long overdue. Each year literally thousands of unsuspecting, first-time inventors are defrauded by unscrupulous invention development firms throughout the United States. Unfortunately, insufficient efforts have been directed toward stopping the activities of these organizations due to the scarcity of resources in the various agencies with enforcement powers. We compliment you, Mr. Chairman, for the care you have taken in Title IV to eliminate a number of the inappropriate and unnecessary burdens that H.R. 2419 placed on those firms which are appropriately and legitimately making efforts to assist inventors in commercializing their inventions. Unduly burdensome reporting requirements could have discouraged legitimate entries into the invention commercialization field while doing little to discourage the unscrupulous firms that would simply engage in creative promotions to demonstrate the value of their activities.
Title V--Improved Reexamination Procedures
  During the debate on the establishment of the patent reexamination system in the United States in the late 1970's, attention was focused on achieving the right balance between, on the one hand, permitting third parties to come forward with evidence and participate in proceedings and, on the other hand, providing patent owners with a means to evaluate the validity of issued patents quickly and inexpensively without undue harassment. With the benefit of nearly 15 years experience with reexamination, the AIPLA believes that the procedure is not performing as effectively as was envisioned and that a better balance needs to be struck between third party participation in the reexamination and patentees receiving a prompt and inexpensive reexamination.
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  AIPLA believes that Title V strikes the needed balance between these competing goals better than existing law.
  AIPLA strongly supports the amendments which would be made by Title V to expand both the scope of the reexamination process and the ability of the public to participate in that process. In addition to allowing requests for reexamination to be based upon patents and printed publications, Section 503 of Title V would amend section 302 of title 35 to allow requests for reexamination to also raise issues of compliance with section 112 of title 35, except for the best mode requirement. It would also require the real party in interest to be identified. Where the Commissioner makes a determination to order reexamination of a patent, amended section 304 would allow the order to be accompanied by the initial Office action on the merits of the reexamination.
  Where a reexamination proceeding is initiated upon the request of a third party, amended section 305 would require that documents filed by either the patent owner or third party be served on the other party. Where the patent owner responds to any Office action on the merits, amended section 305 would give a third party requester one opportunity to file written comments on each response by the patent owner. Amended section 306 would allow either the patent owner or a third party requester to appeal the final decision of an examiner in a reexamination to the Board of Patent Appeals and Interferences, and allow each to be a party in an appeal taken by the other to the Board. Similarly, it would allow either the patent owner or third party requester to appeal a final decision of the Board of Patent Appeals and Interferences to the Court of Appeals for the Federal Circuit (CAFC) and, again, each could be a party in an appeal taken by the other. In appeals to the CAFC, however, a third party who participates as a party or who files an appeal would be estopped from later asserting, in any forum, the invalidity of any claim determined to be patentable by the CAFC on any ground which the third party requester raised or could have raised during the reexamination proceeding. This provision, together with the requirement to identify the real party in interest, prevents a person from having a second bite at the apple.
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  Finally, new section 308 of title 35 would prohibit reexamination proceedings in certain circumstances. First, once an order for reexamination has been issued, neither the patent owner nor a third party requester could file a subsequent request for reexamination until a reexamination certificate was published under section 307 of title 35, unless authorized by the Commissioner. In addition, once a final decision was entered in a civil action under section 1338 of title 28 holding that a third party requester had not sustained its burden of proving the invalidity of any patent claim in suit, the third party requester could not thereafter request reexamination on the basis of issues which were or could have been raised in such civil action.
  With the improvements made by Title V, patent reexamination proceedings will provide members of the public with a more effective administrative procedure to test the scope and validity of patents. These changes will be especially beneficial for small businesses which simply cannot afford to engage in protracted litigation against well-financed patent owners in Federal district courts to challenge patent validity. At the same time, safeguards are in place to ensure that the procedures cannot be abused. Thus, the procedures will protect small firm patent owners from efforts by large firms to use the improved reexamination procedures as a vehicle for harassment. The system will be fairer to both parties and its use should increase, reducing the burden on the courts. AIPLA urges the adoption of these changes.
Title VI--Miscellaneous Improvements
  Section 601 of Title VI amends section 111(b)(5) of title 35 to enhance the attractiveness of filing provisional applications. Section 111(b)(6) currently provides that, subject to the conditions in sections 111(b) and 119(e) of title 35, and as prescribed by the Commissioner, a non-provisional application for patent may be converted into a provisional application for patent. The enhancement provided by the amendment to section 111(b)(5) would allow applicants, upon timely request and as prescribed by the Commissioner, to convert in the opposite direction to convert a provisional application into a non-provisional application notwithstanding the absence of a claim.
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  This is a desirable change to the patent laws. It would, in essence, allow applicants to expeditiously file a non-provisional application through a simple conversion of a provisional application, without burdening the applicant by requiring the filing of what would essentially be a duplicate of the provisional application. This is a user friendly change which AIPLA heartily endorses.
  AIPLA also welcomes and supports the amendments which Section 603 would make in chapter 15 of title 35 concerning plant patents. Specifically, Section 603 would amend section 161 of title 35 to eliminate the exemption from plant patent coverage of tuber propagated plants. This limitation was originally included in the plant patent statute due to fears that subjecting potatoes to plant patent coverage might somehow deny the populace access to, or increase the price of, a basic food stock. Experience over the years has demonstrated that this exclusion has served simply to remove the incentives of the patent system for conducting research to improve potatoes and other tuber propagated plants. We endorse the removal of this limitation.
  Section 163 of title 35 would also be amended by Section 603. The amendments conform the rights conferred by a plant patent to those set forth for patents in Article 28 of the Agreement on Trade-Related Aspects of Intellectual Property Rights and, more importantly, extend the coverage of a plant patent to any of its parts. Currently, a plant patent does not cover plant parts, so that, for example, the importation into the United States of flowers cut from a patented flowering plant is not covered by a U.S. patent on the plant from which the flower was taken. This has resulted in a very significant industry outside the United States in which flowering plants patented in the United States are grown outside our borders, and the resulting flowers harvested and shipped into the United States. The plant breeder who developed and patented the plant receives nothing. This amendment would stop that practice and is long overdue.
  Finally, AIPLA supports section 605. It eliminates a potential problem where an application contains more than one invention and an applicant is required to file one or more divisional applications. By allowing the applicant to promptly submit an examination fee and request examination of each additional invention and by so doing to obtain the benefit of the original filing date for term extension purposes, section 605 ensures that all diligent applicants subject to a restriction requirement will benefit fully from the patent extension provisions of section 54(b)(1)(A).
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  H.R. 400 would provide a number of extremely useful and needed improvements in America's patent law and the functioning of the Patent and Trademark Office. It is important that this legislation be enacted promptly. The United States is in an economic war with its major trading partners and the battles will be won or lost on the basis of who best stimulates and protects the creativity and ingenuity of its citizens. The changes in H.R. 400 will go far toward giving our creative community the tools it needs to win.
H.R. 811
  In the letter of invitation to testify, witnesses were asked to also address H.R. 811, a bill that Representative Rohrabacher was expected to introduce. While two discussion drafts have been circulating, Representative Rohrabacher had not introduced a successor to the bill introduced in the 104th Congress, H.R. 359, by the time we were asked to submit our written statements.

Thus, it is not possible to comment on any bill which Representative Rohrabacher might introduce addressing the topics under discussion today. However, based on H.R. 359 which he introduced in the last Congress, we would like to express our strong opposition to the key purpose of that bill, namely, to roll back U.S. law to measure patent term from the date of grant rather than solely from the date of filing. Changing the term of U.S. patents from 17 years from grant to 20 years from filing was advantageous both for American workers and companies. By eliminating the benefits for those patent applicants who intentionally delayed the grant of their U.S. patents, the 20 year term from filing ensured that U.S. patents would expire at the same time as their foreign counterparts. Under the previous system, situations existed where an American manufacturer, faced with a U.S. patent, could only supply foreign markets where the counterpart foreign patents had expired by manufacturing the patented product offshore. In addition, the 20 year-from-filing-term also eliminated the benefits to those applicants who deliberately delayed the grant of their patents in order to take advantage of the commercialization of new technologies by others. H.R. 359 would return those undesirable features to our patent law. As previously noted, H.R. 400 retains the benefits of measuring the term of a patent from its filing date while ensuring that any diligent patent applicant could receive a term at least as long and usually longer than the old system of measuring term from grant.
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  Mr. COBLE. Thank you, Mr. Kirk.

  Mr. Ludlam.


  Mr. LUDLAM. Thank you, Mr. Chairman, members of the subcommittee. My name is Chuck Ludlam. I'm vice president for government relations of the Biotechnology Industry Organization (BIO). We represent 700 biotechnology companies throughout the country and throughout the world.

  I think it's safe to say that the biotech industry is the most research-intensive, innovative, entrepreneurial and competitive industry in the United States and perhaps in the world. Enactment of the chairman's bill is one of BIO's highest legislative priorities. Let me talk specifically about title I--the one title of the bill that's of most concern to us. That's the patent term amendments, and then I have one minor comment on the publication issue, which we also support.

  Let me explain why patent term is so important to biotech companies. We need to go to our capital markets again and again and again to get capital to fund research. Only 1 percent of the companies I represent have revenue and sales to fund research. They go back to investors of various types to get capital. Those investors want to know that, if that company manages to innovate, that they will have proprietary protection on that innovation and that competitors cannot steal the technology.
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  Unfortunately, there is no category of patents which are more adversely affected by the new GATT patent term than biotech inventions. Professor Lemley's study from the University of Texas found that on average biotech inventions would lose 1 year of patent protection under the new GATT patent term law. This is an average figure. There will be many cases where they'll lose more than 1 year, and in fact we can think of cases where a biotech invention would end up with a 5- or a 10-year patent, or perhaps no patent term at all, under the GATT patent term law as it's currently in effect. Other industries might gain, but our industry on average will lose, and in many cases we will lose a great deal.

  The reason for this loss is because we have the longest pendency at the Patent and Trademark Office of any technology at this point. So a patent term measured from application can be disadvantageous to the biotech industry as compared to the old system measured from grant.

  Our position is very clear on this bill: we can live with the new 20-year patent term system as long as diligent applicants are not harmed for delays that are beyond their control. We have never pressed for amendments which would protect dilatory applicants. We have only proposed amendments that will help diligent applicants.

  H.R. 400 accomplishes this balance, and that's why we support it. It ensures that a diligent applicant cannot lose patent term for reasons of delay at the PTO which are beyond their control. It does this by providing day-for-day compensation for excessive delays in the process, and this applies to any type of delay. If the PTO loses a file, if there's a protracted interference, if they lose time on appeals, or for any other reason where an applicant is losing time at the PTO for reasons beyond their control, they will receive compensation--in other words, extra patent term--to make up the difference. In my testimony, in appendix A, I've given eight examples of exactly how the compensation provisions of H.R. 400 would work, and we're very satisfied that they would be very effective.
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  Let me mention how this applies to the budget crisis that the PTO is now potentially facing. For $100 million or so of the user fees we pay to the PTO to be diverted to other purposes, and I have to refer to this as theft--we have paid these user fees to the Patent and Trademark Office for Patent and Trademark Office purposes--will lead to a rise in the pendency at the PTO from 20 to 42 months, which is the estimate. This means we will see shortened patent terms for everybody under the current law. The provisions for compensation in H.R. 400 absolutely protect applicants in this and all of the other cases where delays occur that are beyond the applicant's control.

  Let me mention universities. BIO happens to represent 65 university technology biotech centers. So we have an academic side to BIO and not just a private industry side, and we are vitally concerned that they receive the longest possible patents because we license their patents, and their patents are worth more to our companies if they have the longest possible patent. The provisions in H.R. 400 protect them the same as they do the private industry. Whoever the inventor is, they get the protections.

  Let me address the issue of submarine patents. Whether or not there were a lot of submarine patents in the past or not is completely irrelevant to the issues in this bill. The perception that there were abuses and the fact there were some egregious abuses did lead to a change in the law. We now have the GATT patent term law measured from application. That is the fact. That is the status quo. The only way to change that is to propose amendments which will not reopen the old possibilities for abuse. That is what H.R. 400 will do.

  Let me make one minor comment about publication. When a patent is published in Europe, and our companies have extensive experience because they all file in Europe and Japan, then our companies can see that a technology is blocked. That means they can bite the bullet and move on to some other research, because they know that if they finally come up with that same invention, that somebody else has the patent and they will be blocked. This means that they can redirect their research into areas where they will not be blocked. This literally conserves research funds. This literally means that when we are investigating cancer or AIDS or Alzheimer's or the other diseases, we will save research funds. You can make an argument that the patent publication provision, because it saves the waste in research, actually can save lives.
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  Thank you very much.

  [The prepared statement of Mr. Ludlam follows:]

  My name is Chuck Ludlam(see footnote 1) and I am Vice President for Government Relations at the Biotechnology Industry Organization (BIO).(see footnote 2) I appreciate the opportunity to appear here today to testify on behalf of BIO regarding the patent term and 18 month publication provisions of H.R. 400 and alternative approaches to these issues proposed by Congressman Dana Rohrabacher.

  As all entrepreneurs must do, let me start with the bottom line: with regard to the patent term issue, the biotechnology industry and BIO support, and urge others to support, the new 20 year patent term as amended with the safeguards in H.R. 400 which ensure that diligent patent applicants are not penalized for delays which are beyond their control.
  Two outlines of these protections and eight scenarios describing how the patent term provisions operate to protect diligent patent applicants are presented at pages iii, iv and 26—30 respectively.
  With the adoption of the patent term provisions of H.R. 400 we believe that all legitimate issues about the new 20 year term will have been resolved and that, while it is more complex to administer, it is an acceptable alternative to a minimum 17 year patent term from grant. H.R. 400 means that patent applicants who are willing to diligently prosecute their patent applications will, in all but very limited circumstances, be able to secure a patent term of at least 17 years. If they are dilatory in their prosecution, they will end up with a shorter patent term, but they will have no excuses and no basis for complaint.
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  To be clear, the guaranteed minimum 17 year patent term would resolve most of our concerns. The amendments H.R. 400 proposes to the 20 year term would achieve the same result. In addition, it does not open up opportunities for late-issue, submarine patents, a concern of some not comprehensively addressed in the Rohrabacher draft.
  There may be no industry which is more sensitive to the length of the term of a patent than the biotechnology industry. The rate of investment in research and development in this industry is higher than in any other industry. Any law which undermines the ability of biotechnology companies to secure patent protection for a full term undermines funding for research on deadly, disabling and costly diseases. Capital will not be invested in biotechnology companies if they are not able to secure intellectual property protection to ensure that they have a full term for a patent in which to recoup the substantial investments they must make in developing a product for market. This is why BIO has been so active in seeking a fair resolution of the patent term controversy.
  The concern arises from a 20 year patent term measured from the date of application for a patent. The patent system in effect prior to the enactment of the GATT implementing legislation provided for a 17 year patent term measured from the date a patent is granted. It is easy to see that if the patent application process takes more than three years, an inventor under a 20 year term could end up with a patent of term of less than 17 years from grant. The critical issue becomes how long it takes the PTO to process a patent application and whether the applicant's patent term will be less than 17 years when the processing time at the PTO exceeds three years. Without safeguards to protect the applicant from delays which are beyond his control, it is certainly possible for the applicant to end up with a patent term of less than 17 years. This is how a 20 year term can be less than a 17 year term.
  With regard to the publication of patent applications eighteen (18) months after application, BIO finds that most of its members do not regard publication to be harmful and some even regard it to be beneficial to the biotechnology industry. ''BIO, therefore, supports this provision of H.R. 400.'' This industry must decide whether to spend literally hundreds of million dollars on a plan for biomedical research. ''To make this decision requires the maximum amount of information to be known regarding what one's competitors are doing.''
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  Currently, biotechnology companies must go to Europe or Japan to determine what their U.S. competitors are doing here in the United States. In many cases, translation fees must be paid to determine if another company may be already pursuing a particular technology. ''U.S. publication at 18 months will eliminate this expense and allow U.S. biotechnology companies to collect pertinent information without incurring these costs.'' This will not provide international competitors any new information as all U.S. biotechnology companies file internationally on all significant inventions.

  To understand our industry's position on the patent term issue, one need only understand one simple fact about the biotechnology industry; most of our firms fund research on deadly and disabling diseases from equity capital, not revenue from product sales. Without investors taking the risk of buying the stock of our companies, much of our vital research would end. Almost without exception our industry cannot borrow capital. Our principal, and for most of us our only, source of capital is equity capital.
  Intellectual property protection is critical to the ability of the biotechnology industry to secure funding for research because it assures investors in the technology that they will have the first opportunity to profit from their investment. Without adequate protection for biotechnology inventions, investors will not provide capital to fund research. There is substantial risk and expense associated with biotechnology research and investors need to know that the inventions of our companies cannot be pirated by their competitors. Therefore, less patent protection means less biomedical research on deadly and costly diseases because there will be less time to recoup the investment and make a profit.
  A June 1994 report by Dr. David H. Austin of Resources for the Future(see footnote 3) specifically documents the vital economic importance of intellectual property protection and its relationship to research expenditures, including the value of patents, and their effect on competing companies and on the biotechnology industry in particular.
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  The results of Dr. Austin's study indicate that there is a significant reaction in the stock market when certain broad types of patents issue. When a patent is listed in the Wall Street Journal, it positively affects the value of the stock for the company receiving the patent, and negatively affects the stock price of competitors to that company. Dr. Austin defines a ''significant'' increase in valuation as $1.7 million on a company capitalized at an average of $400 million. The report found that there is a positive correlation between stock price, when a patent is filed and issued, and research and development expenditures. In addition, the report indicates that the granting of an important patent appears to raise the net value of the entire industry. These findings are consistent with the March 20 Washington Post article entitled ''A Biotech Company is Granted Broad Patent and Stock Jumps.''(see footnote 4)

  Intellectual property protection for biotechnology inventions is particularly important as the amount of capital biotechnology firms must raise is so large. The biotechnology industry is one of the most research intensive industries in the civilian manufacturing sector. The average biotechnology company spends $71,000 per employee on research, more than nine times the U.S. corporate average of $7,650. In a 1995 survey by Business Week, the top five firms in the U.S. in terms of research expenditures per employee were biotechnology companies: Biogen ($210,724), Genetics Institute ($114,943), Genentech ($112,030), Immunex ($102,719), and Amgen ($91,266). Ernst & Young(see footnote 5) reports that biotechnology companies spent $7.9 billion on research and development in 1996, up 1300% since 1986.
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  We must sustain investor interest over a very long holding period. Bringing a biotech drug product to the market today is both a lengthy and expensive process. From the initial testing of the drug to final approval from the Food and Drug Administration can take 7—12 years, and this process can cost anywhere from $150 to $359 million. Both the length and cost of this process are tremendous impediments for small biotechnology companies attempting to bring a product to the market.
  Today, because of strong intellectual property protection and investor confidence, the biotechnology industry consists of about 1,300 companies, of which about 290 are publicly traded. The overwhelming majority of companies in this industry have 500 or fewer employees and less than five percent are profitable. The industry currently employs over 118,000 people in high-skill, high-wage jobs, a nine percent increase over 1995. There are currently 42 biotechnology therapeutics and vaccines on the market. Ernst & Young reports that there are 657 products in human clinical development, but there are over 2,000 in early research stages. All of this research is dependent on strong intellectual property protection. One must remember that the biotechnology industry did not exist twenty years ago and without strong intellectual property protection it would not exist today.
  This is a particularly sensitive time for the industry. The biotechnology industry experienced a net loss of $4.5 billion in 1996, and has lost over $16 billion in the last four years. A September 1995 Ernst & Young report found that biotech companies, on average, have 16 months of capital left at their current burn rates (the rate at which capital is being expended), a 36 percent decrease from 1994.(see footnote 6) According to a March 1994 report by Dr. Robert Goldberg of the Gordon Public Policy Center at Brandeis University, 75 percent of biotechnology companies have 2 or fewer years of capital left.(see footnote 7) The capital markets for biotechnology companies have improved considerably since then, but the industry remains fragile and ever in need of capital to fund research.
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  This Congressional action on intellectual property protection for biotechnology inventions will have a critical impact on whether these companies survive to continue their life-saving and life-enhancing research or fold at a time when inadequate federal funds are available to continue this research.

  The United States currently has the dominant biotechnology industry when compared with any other country in the world. Precisely because the U.S. is preeminent in the field of biotechnology, it has become a target of other country's industrial policies. In 1991, the Office of Technology Assessment (OTA) found that Australia, Brazil, Denmark, France, South Korea and Taiwan (Republic of China) all had targeted biotechnology as an enabling technology. Furthermore, in 1984, the OTA identified Japan as the major potential competitor to the United States in biotechnology commercialization.(see footnote 8)

  The OTA also identified the manner in which Japan had targeted biotechnology. The report stated, ''In 1981, the Ministry of International Trade and Industry (MITI) designated biotechnology to be a strategic area of science research, marking the first official pronouncement encouraging the industrial development of biotechnology in Japan. Over the next few years, several ministries undertook programs to fund and support biotechnology.'' One of the Japanese ministries, the Ministry of Health and Welfare (MHW), instituted a policy whereby existing drugs would have their prices lowered, while allowing premium prices for innovative or important new drugs, thus forcing companies to be innovative and to seek larger markets.(see footnote 9)
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  The competitiveness of the U.S. biotechnology industry means that U.S. patients with rare deadly and disabling diseases have hope. It means that they can look to American biotech companies to develop the therapies and cures which will ease their suffering.
  One of the great strengths of the U.S. biotechnology industry is the intellectual property protection afforded to biotech inventions. The U.S. is widely acknowledged to have the strongest patent protection in the world. It is critical for the U.S. to continue to set the highest standards for intellectual property protection and to strengthen one of the pillars on which our biotechnology industry rests.

  Despite the importance of patents to the biotechnology industry and the acknowledged importance of this industry to U.S. competitiveness, applicants for patents on biotechnology inventions--from the National Institutes of Health, university and foundation grantees of NIH, independent research foundations, and the biotechnology and pharmaceutical industries--experience unusually long administrative delays in the processing of patent applications at the PTO.
  Although the PTO has taken steps to address some of the causes of these problems, pendency as measured by the PTO has yet to be reduced by these steps. The PTO actually reported an increase in pendency of applications within the biotechnology group last year compared to the previous year.(see footnote 10) Although BIO applauds the significant steps that the PTO's biotechnology group has taken to speed the issuance of patents, these steps have not yet eliminated the delays.

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  Under the new 20 year GATT patent term measured from the date of application--not the date of the grant of a patent--we expect that biotechnology inventors will see a decreased patent term. Professor Lemely from the University of Texas School of Law studied the effect of the GATT changes on the patent term. He studied recently issued patents issued to various industries and concluded that, although most industries gain patent term, he could not say this for the biotechnology industry. Although Professor Lemley did not make any conclusions regarding the patent term of biotechnology inventions, the data presented in his paper makes it quite clear that biotechnology industry would have patents that lose patent term(see footnote 11). Professor Lemley states:

Under the old law, the biotechnology patents had an average term of 6,077 days, the average time spent in prosecution was 1,599 days giving the average 5,706 days of protection under the new law.(see footnote 12)

The one year loss in patent term (6,077 days old law minus 5,706 days under the new law, a loss of 371 days) understates the facts. We anticipate that a large percent of patent applicants will lose an even larger portion of the patent term. This net loss of patent term will hit an industry which may be the most dependent on patent protection and where the loss of patent term will be especially devastating.
  Although the loss of a year of patent term would be significant to any industry, the averaging of patent term understates the problem of the erosion of patent term for some BIO member companies. As stated above most biotechnology companies are small. The small size is often reflected in that their entire research and drug development program is protected by just a couple patents. The small number of patents that protect a given companies research means that a decrease in one patent term is not offset by other longer patent terms in other patents and, therefore, a large decrease in even a small fraction of the patents will necessarily limit these companies ability to do important research towards cures of devastating and disabling diseases.
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  BIO has taken a consistent position on the patent term issue since the debate began. We have always pressed for protections to ensure that diligent patent applicants are not penalized for delays which are beyond their control. While we have said that a guaranteed 17 year term from grant would be desirable, we have always proposed ways for patent applicants to achieve a similar result without insisting that there be a guaranteed minimum 17 year patent term from grant. Our proposals, now incorporated in H.R. 400, do this without providing opportunities for late-issue, submarine patents.
  On June 27, 1994, BIO wrote to Ambassador Mickey Kantor and many in the Congress expressing our ''serious concerns relating to draft legislation to implement the agreement.'' We said that ''limiting the patent term to 20 years from filing, without adopting either a package of safeguards or other reforms, will seriously disadvantage our industry, which is particularly prone to lengthy delays between the filing of a patent application and subsequent issuance of the patent.'' We outlined two alternatives which would ameliorate our concerns. We said that the Congress could set a minimum 17 year patent term from grant or it could adopt a series of amendments to protect diligent applicants.
  At this point in the process the draft legislation provided for five years of compensation for time lost due to interferences, but it did not provide for any compensation for time lost due to appeals to the Board of Patent Appeals and Interferences or the Court of Appeals for the Federal Circuit (CAFC).
  On August 12 the House and Senate Judiciary Committees held a hearing on the proposed GATT—TRIPS implementing legislation. BIO wrote a letter to the Committee reiterating our concerns. Around this time the Administration offered to provide for some compensation for delays due to CAFC appeals, but it offered no compensation for delays due to appeals to the Board, appeals which tend to take much more time than CAFC appeals. But, the coverage of CAFC appeals was a major strengthening in the protections provided to diligent applicants.
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  On September 20 we wrote to the House of Representatives regarding a Dear Colleague letter circulated by Congressman Joseph Kennedy. We noted that, ''The Clinton Administration has offered to ameliorate the impact of the 20 year term by providing some compensation for delays due to interferences and appeals to the Court of Appeals and it may guarantee that pending cases are not hit retroactively by the new limits. But, it has been unwilling to provide relief for delays due to appeals within the Patent Office, appeals which account for much of the delay.''
  On September 24 we received a call from the PTO saying that it would finally agree to provide for compensation for delays due to appeals to the Board of Patent Appeals and Interferences. This was another major strengthening in the protections provided to diligent applicants. This improvement represented substantial progress and, as a direct result, when the GATT implementing legislation was then introduced early the next week, BIO wrote to the entire House and Senate on September 27 urging them to ''vote in favor of the legislation.''
  In this letter we praised the Administration for including provisions addressing each of our concerns, but we could not endorse the 20 year patent term or state that the safeguards met our standards. It was obvious that we could not do so due to the five year cap on compensation for time lost in interferences and appeals, a cap which we had consistently opposed.
  After the implementing legislation was adopted and signed into law, our concern over the 20 year patent term was ameliorated by the decisive action of PTO Commissioner Bruce Lehman in resolving the long-standing dispute over utility rejection of claims to biotechnology inventions. He organized a hearing in San Diego on this and other issues involving biotechnology patents and in early December the PTO proposed guidelines on utility rejections of biotechnology claims which would conform the requirements in the PTO to those articulated by the supervisory courts and make the utility requirements for biotechnology inventions the same as those required for all other inventions. This was intended to end the virtually automatic rejection of biotechnology patent claims until and unless the inventor had data from human clinical trials to support a claim. This biotechnology utility standard was substantially higher than the utility standard for non-biotech inventions and it was causing substantial delays in the processing of biotechnology patents. These guidelines have now become final and they will make a difference, particularly if other reforms proposed in the PTO are implemented.
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  Along with everyone else in Washington we had thought the patent term debate was over when, to our great surprise, in December the Administration reopened the debate. It stated in a letter to Senator Dole that it would not oppose an amendment to the GATT implementing legislation which would guarantee a minimum 17 year term from grant. The Administration had adamantly opposed a 17 year minimum throughout the debate to that point. We considered this Administration statement to be an invitation to continue the process of securing safeguards which we had begun earlier in the year. If it would not oppose a 17 year minimum term, we believed it could certainly support safeguards within the context of a 20 year patent term from application.
  Responding to the dramatic and surprising change in the Administration's position, in March of 1995 BIO proposed a series of additional amendments to the GATT implementing law to strengthen the safeguards which had been included at our request in the September bill and December law. It is these proposals which were eventually incorporated in H.R. 400 and its predecessor bills.
  On May 25, 1995, Congressman Carlos Moorhead, Chairman of the House Intellectual Property Subcommittee, introduced his patent reform bill and proposed to further amend the patent term. Congressman Moorhead's bill recognized that the current patent term law was unfair to the patent applicants that experienced delays at the PTO and were not compensated by an extension. The bill included extensions of patent term when the applicants experienced unusual administrative delays at the Patent and Trademark Office, but the provision was discretionary, not a guarantee. This discretionary provision was the third round of strengthening of the protections provided to diligent applicants, but BIO continued to press for an objective ''chess clock'' standard.
  The Moorhead bill also provided for up to ten years of extensions for delays due to appeals and interferences, a fourth round of protections for diligent applicants. BIO continued to call for unlimited compensation for delays due to interferences.
  On October 31, 1995, the day before the hearings of the House Intellectual Property Subcommittee regarding the patent term issue, the PTO wrote to Chairman Moorhead that it would issue regulations providing an objective definition of what constitutes ''unusual administrative delay,'' a term incorporated in the Moorhead bill.
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  Prior to the mark-up in the Intellectual Property Subcommittee in May, Chairman Moorhead proposed a series of amendments to his bill which incorporated the objective PTO definitions for patent extensions in the bill and provided for unlimited compensation for delays due to interferences, securing the fifth and sixth round of improvements to protect diligent applicants. At this point, BIO was finally able to endorse the bill and did so enthusiastically. The bill would amend the patent term in precisely the same ways as BIO had been recommending since the Spring and Summer of 1994. The new bill lifted the cap on appeals and unusual administrative delays from five to ten years, provided objective definitions of what constitutes ''unusual administrative delays'' as outlined in Commissioner Lehman's letter and lifted the cap on interferences and secrecy orders.
  At this time BIO was also able to secure an agreement to incorporate legislative report language to clarify the circumstances that would lead to compensation. This agreement constituted a critical issue and a seventh round of protections for diligent applicants. Appendix D outlines the report language which ensures that diligent applicants do not lose patent term in these appeals.
  Finally, over the winter of 1996-1997 BIO secured the endorsement of the patent coalition of a series of minor but important technical changes in the legislation and they were incorporated in H.R. 400 when it was introduced on January 9, 1997, Chairman Coble and Congressmen Conyers. These constitute the final, eighth round of protections for diligent applicants.

  Following is a summary of the eight (8) rounds of amendments to protect diligent applicants:
1. compensation for delays due to appeals to Court of Appeals for Federal Circuit;
2. compensation for delays due to appeals to Board of Patent Appeals and
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3. compensation for miscellaneous delay (subjective and discretionary);
4. 10 year cap on compensation;
5. compensation for miscellaneous delay (objective guarantee);
6. lift cap on compensation for delays due to interferences;
7. legislative report language regarding complete compensation for due to delays at the PTO; and
8. final technical changes incorporated in H.R. 400.
  This record of progress confirms the willingness of the Administration, PTO, House Subcommittee, and patent coalition to respond to reasonable proposals to protect diligent applicants against the loss of patent term. At every point in the process they have been willing to listen and in the end to make the necessary changes.
  This history also shows that BIO's position has been consistent throughout this multi-year debate, always proposing amendments in the 20 year context and always proposing amendments which would only benefit diligent applicants. Every proposal BIO has made to protect diligent applicants has been adopted--eight rounds of amendments.
  BIO has every reason to enthusiastically endorse H.R. 400's patent term provisions and believes that this bill will protect diligent patent applicants from any type of delay beyond their control. This bill answers every legitimate question about the patent term issue.
  Let me take a few minutes to outline exactly how these protections will work to protect diligent applicants.

  We recognize that the issue of ''submarine'' patents is central to this debate. There apparently are a few patent applicants who will intentionally delay the issuance of a patent, amend their claims very late in the prosecution process, and surprise the marketplace with exorbitant demands for royalties. We do not believe that this is a pervasive problem, but there are some notorious examples which can be cited.
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  The proposals in H.R. 400 do not provide refuge for those who would seek to secure late-issue, submarine patents. This concern should be an essential limitation on any amendments to the GATT implementing law. The Rohrabacher draft is flawed as it permits some patent applicants to delay the issuance of patents. While there are ways to deal with this problem within a system which grants a guaranteed minimum 17 year term, the Rohrabacher proponents have not advanced them.
  1. Loosen Cap on Compensation for Delay: H.R. 400 provides full compensation to patent applicants for delays due to secrecy orders, interferences, and raises the cap on term compensation for appeals to the Board or CAFC to ten years. These provisions amend the five year cap that was included in P.L. 103—465 (GATT implementing act), which allied to all of these types of delay.
  Raising the maximum compensation from five to ten years for appeals and miscellaneous delays and eliminating the cap for interferences and secrecy orders, as Congressman Coble has proposed, will solve the problem created by the current law for these types of delay. The principle here is that these types of delay are beyond the applicant's control and the applicant should be compensated for lost time, period. It is important to remember that the compensation is only provided in the case where the applicant prevails in the interference or on the appeal.
  The classic case where a patent applicant should be compensated is the case where the government acted illegally in denying the applicant a patent. If compensation is not provided, it would, in effect, permit the government to win even if it loses in court and, permit it to penalize an applicant for taking the appeal. In these cases the sole cause of the delay is the governments failure to grant a patent to an applicant who has made a valid claim.
  The current five year cap on compensation for delay due to appeals has the effect of discouraging patent applicants from asserting their legal rights against the government. The cap has the effect of undermining government accountability to the law. It is difficult for any citizen to take on the government, but it would be outrageous when the citizen does so and is penalized with the loss of patent term because he brought the case in the first place.
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  In the appendix to this statement--Appendix B and Appendix C--BIO has documented cases of lengthy biotechnology interferences and appeals. This is not a hypothetical issue. We have real cases where a five year cap on compensation for lost time would erode the final patent term. There is absolutely no reason based on principle which justifies these parties losing patent term when the PTO is in control of the patent application throughout this period. It would be patently unfair and confiscatory to reduce their patent term simply because they were involved in protracted interferences or appeals.
  Secrecy orders, like interferences, are the type of proceeding where the delay is beyond the control of the applicant and where there is a clear need to provide compensation to the applicant.
  Unfortunately the five year cap in current law actually provides an incentive for parties to prolong interferences when they know that they will lose. If they can prolong the interference beyond five years, they can cut into the patent term for their competitor. And, it is not difficult for parties to do this. In H.R. 400 there is no cap on the compensation for interferences, parties which suspect that they will lose have a much greater incentive to settle early. Under H.R. 400, there is no competitive advantage gained by prolonging an interference proceeding.
  Similarly, applicants have little control over the time it takes to successfully prosecute an appeal to the Board of Patent Appeals and Interferences (Board) or the Court of Appeals for the Federal Circuit (CAFC). Appeals to the Board are ex parte proceedings based upon a record that is in front of the Board.(see footnote 13) Therefore, applicant has little opportunity to influence the time in which the Board renders its decision. An applicant dissatisfied by a decision by the Board can appeal a decision to a federal court, but there the Federal Judge overseeing the appeal oversees the course of the litigation.

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  2. Compensation for Miscellaneous Delays: Current law does not compensate patent applicants for time lost at the PTO. H.R. 400 sets time limits for actions on the part of the PTO for several different actions and provides compensation up to ten years to patent applicants for delays that exceed these limits. This provides an objective standard to determine whether PTO actions constitute ''unusual administrative delay'' and assurances to patent applicants that they will get a full patent term if they are diligent with their patent prosecution.
  Some of the miscellaneous causes are applications abandoned by PTO error; backlog of unexamined applications delayed by loss of files or responses by PTO; suspensions of prosecution by the PTO; delays caused by PTO's failure to consider arguments/evidence; withdrawal from issue by the PTO; reopening of prosecution involving a new ground of rejection or new rationale after final rejection or appeal; and new restrictions among claims to the same type of subject matter as were pending prior to the first restriction requirement or first office action.
  There is an obvious need for the provision proposed by in H.R. 400. The PTO apparently understands this issue as it has proposed in a letter dated October 31, 1995 from Commissioner Lehman to Congressman Moorhead that the PTO issue regulations to define in objective, quantitative terms the concept of ''unusual administrative delay.'' With a discretionary, subjective standard there would always be substantial interpretation required to determine the equities in an individual case. Lots of paper would be exchanged between applicants for compensation and the PTO would need to justify its determinations in writing. And, many of the decisions under a discretionary, subjective standard would be litigated to death by patent applicants. This is a nightmare both for the PTO and for applicants. It is a waste of time, expensive, and uncertain.
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  Recently the PTO has held hearings on the administrative burden imposed on the PTO by recent applications filed for patents on genes and genomes. It has stated that just 60 of these applications would cost $24,000,000 to examine. Without taking any position on the merits of this statement, if it is true, such a burden could cause a ripple effect throughout the PTO in the examination of thousands of other biotech patent applications. The point is simple: there are reasons which could lead to the wholesale delay in processing biotech patent applicants which are completely beyond the control of a patent applicants and for which the applicant should not be penalized.
  It is only fair for the PTO to be under some pressure to complete action on an application. It should not be only the applicant who feels the pressure. We need an even-handed, balanced system of incentives and safeguards to ensure that both parties proceed expeditiously to process a patent. It is unfair if the only party which feels the pressure is the applicant.
  It is not also fair for the PTO to be the sole judge of when its actions have been ''usual'' or ''unusual.'' There might be some tendency for the PTO to resist admissions that it had been responsible for ''unusual administrative delay.'' Such admissions might be cited by the Congress or critics of the agency. It is better to use an objective standard which does not carry any mark of opprobrium for the agency.
  What H.R. 400 proposes is an objective standard which defines what is ''usual'' or ''reasonable.'' This is a standard which is easy to administer. There is no need to detailed regulations, subjective judgments, or blaming one party or another.
  The key point is that in addressing the submarine patent issue legislatively we must not unintentionally penalize diligent patent applicants. To harm a diligent applicant is an approach which aims at the guilty and damages the innocent.
  H.R. 400 proposes a ''no excuse'' provision which guarantees that patent applicants will not be penalized with shortened patent term for delays which are beyond their control. It is not a guarantee of a 17 year patent term, but it--with the compensation mechanisms for delays due to interferences and appeals--provides a guarantee that the patent application can secure such a patent term. Whether the patent applicant secures a 17 year or longer term is almost entirely within his or her control. If they do not secure one, it is because they delayed their own patent application at the PTO, not because of PTO delays or delays due to interferences and appeals.
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  Given the controversy over the patent term, it is essential that we provide statutory assurances that the diligent patent applicant will be compensated for unusual administrative delay, not assurances from the Commissioner or directives in the legislative history regarding regulations which would be issued to implement a vague, subjective, statutory standard. We believe that only objective, statutory language will break the current stalemate on the patent term issue. This is what we find in the terms of H.R. 400.
  3. Compensation for all times that the application is not in the control of the applicant: The terms of H.R. 400 clarifies that no applicant will lose patent term because of reasons outside of the control of the patent applicant. Clarification in report language would still be helpful to indicate that it is not required that each and every decision adverse to the applicant need to be overturned by the court for applicant to earn an extension as the presence of one improper rejection is sufficient to delay the issuance of a patent. Again, this would merely clarify the conditions for patent term extension already found in P.L. 103—465. See Scenario Six in Appendix A. We have offered report language to cover this issue in Appendix D.
  4. Rolling Over Patent Term Extensions: H.R. 400 provides for rolling over extensions into a subsequently filed applications where the same invention is prosecuted in both applications.
  These amendments are particularly important to protect patent applications which were filed prior to June 8, 1995, the effective date for PL 103—465. Millions of dollars have been invested in the inventions with respect to which these patent applications have been filed. It is not fair to change the rules of the game in mid-stream and potentially reduce the patent term which these applicants expected prior to the enactment of the GATT 20 year term. Applicants were given advance notice of the June 8 date and many of them filed continuing applications, but this is not sufficient to ensure that they will receive a 17 year term from grant. In lieu of providing a guaranteed 17 year minimum term H.R. 400 proposes that extensions can be rolled over into future filed applications without loss of patent term due to actions of the PTO.
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  H.R. 400 clarifies this by providing for the rolling over of an extension into a subsequent application if the applicant is diligently pursuing a patent and the delay in the previous application is tantamount to a delay in the subsequently filed application. Rolling an extension into a subsequently filed application is needed to provide applicant the ability to pursue the patenting of an invention through several applications which is the typical procedure in pursuing a patent.
  Providing an applicant the ability to roll an extension into a subsequently filed application does not benefit a would be submariner. In the twenty year term from filing regime, an applicant does not gain any benefit from refiling an application as the refiled application will have the same effective filing date from which the twenty year term is measured. In fact, the patent applicant faces the possibility of loosing fourteen months of patent term when the PTO processes the application and where no extension is available.
  They are summarized in the narrative and side-by-side outlines at the beginning of this testimony. We believe that this does not provide opportunities for applicants who seek to secure late-issue, submarine patents. A detailed explanation of these four amendments and the text of the amendments themselves are printed in the appendix to this statement.
  5. Simultaneous Examination of Restricted Groups of Claims: H.R. 400 provides a new mechanism by which a patent applicant can proceed with several patent applications at the same time so as not to lose patent term. See Scenario Two in Appendix A. This provision protects applicants from patent term erosion due to restriction requirements of the PTO and in some cases saves as much $60—100,000 in additional legal costs.

  It is critical that an applicant's appeal which results in a reversal of a determination adverse to the applicant at the PTO Board or CAFC qualify for compensation for lost patent term. H.R. 400 requires that the ''patent [be] issued pursuant to a decision in the review reversing an adverse determination of patentability....'' It is an important that this language is understood to have the same meaning.
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  The issue here is, in essence, the form in which an applicant must ''win'' in the appeal in order to receive compensation. Winning is, in practice, quite ambiguous. One could view winning in a mechanistic way--looking only at whether the Board or Court ''reverses'' the examiner's or PTO's decision to deny a patent. But the Board or Court can ''affirm'' in various ways (that is uphold the ultimate decision to deny patentability) where the applicant does, in fact, win on some relevant issue which will advance the applicant's interest in securing a patent.
  In the end, the only way an applicant will secure compensation is when a patent is, in fact, finally issued and that is the ultimate win and only then would the issue of compensation for lost patent term arise. It would be at odds with the basic philosophy of the bill--and patently unfair--for an applicant to ultimately secure the issuance of a patent and lose patent term because (1) the grant of the patent is delayed due to an appeal and (2) the time lost due to the appeal does not lead to compensation because the appeal decision is not in the form which leads to compensation. If the patent is not ultimately issued, then the time lost due to the appeal is irrelevant; we are only talking about patents which are finally issued and time was lost due to an appeal.
  The consequences of a narrow and rigid interpretation of the language in H.R. 400 on this point are harsh. If an applicant does not ''win'' on appeal--that is the patent must be (1) ''issued pursuant to a decision in the review'' and (2) the decision must be one ''reversing an adverse determination of patentability''--then there is no compensation for lost time due to the appeal.
  The proper interpretation of the language is regain patent term on any decision that reverses a determination adverse to the applicant, and allows applicant a single amendment to place the claims in accord with the holding of the Board or Court. This is a standard which goes to the substance, not the form, of the appeals decision. Remember, we are only talking about cases where a patent is ultimately issued. If the Appeals decision does not reverse any decision of the examiner or PTO, it is hard to see how the applicant will ultimately secure the issuance of a patent. But, there are lots of ways in which an appeal can lead to a win for the applicant eventhough the appeals body does not reverse a decision on the ultimate question of patentability. In short, the appeals decision may lead to more process and this additional process leads to the issuance of the patent. In this sense, the appeal may be indispensable to the issuance of the patent, but the patch subsequent to the appeal may involve some more steps--the patent may not be, in effect, issued by the Board or court.
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  Let us outline the various ways in which the PTO can be affirmed whereas the applicant has won:
1. Let us assume that multiple issues are taken to the PTO Board in an appeal. The Board can agree with part of the rejection and, therefore, affirm the rejection as proper, even though the Board reverses the examiner on important issue which advance the applicant's cause in ultimately securing the issuance of a patent.
2. The Board can affirm on issues not raised in the briefs nor argued by the examiner nor by the applicant. This is, unfortunately, common although it smacks of unfairness. But, in these cases, the applicant's cause might well be advanced by such a decision which lays open the path to the grant of a patent.
3. The Board's or Court's affirmance can be on very narrow ground that can be overcome by an obvious and straight forward amendment by the applicant. Again, here the applicant is technically the loser, but, in substance, he wins the day due to the narrowing of the grounds for the rejection.
4. The Board or Court can direct the PTO to consider some declaration or amendment that had not been previously considered by the PTO. Here a patent will not issue pursuant the decision of the court or the board.
  In short, a rigid requirement that an applicant ''win'' an appeal under the terms of H.R. 400 and that a patent issue ''pursuant'' to that decision will lead to some harsh and unintended results. Congress should clarify this in report language and make it more precise; it focuses on the substance of the decision--did applicant advance his cause--not simply on a mechanistic determination of whether the applicant won in the form of the decision and that the patent issues forthwith as a result of the court appeal and not any subsequent process after the appeal.
  The language in H.R. 400 has the potential to impose a major penalty on an applicant who takes an appeal, when it is ultimately determined that the PTO has improperly denied patentability. In effect, it penalizes an applicant for exercising the applicant's legal rights to take an appeal.
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  This interpretation of the language will encourage an applicant to take a spurious appeal on some claims for the sole purpose of securing compensation for the delay and then lengthening the applicant's patent term. Even if the amount of time which might be added is small--certainly not a ''submarine'' patent--this is a possible way to game this system. (We question if this gaming is possible, as the PTO would have to cooperate by improperly denying patentability.) If this is considered to be an issue with respect to which a safeguard might be included, the PTO might be given the option to grant allowable claims even though other claims are being taken on appeal.(see footnote 14)

  In conclusion, the rigid ''win'' requirement in H.R. 400 needs to be clarified so as not to be adverse to diligent, good faith applicants. This interpretation is entirely consistent with the intent of the legislation. Legislative language which accomplishes these objectives is presented in Appendix D of this testimony.

  BIO also supports the publication of patent applications eighteen (18) months after application. BIO finds that publication is also beneficial to the biotechnology industry and supports the publication provisions of H.R. 400.
  The companies BIO represents all file for patents in Europe and Japan, where the 18 month publication rule applies. So, our industry has vast experience with the 18 month publication rule. We see none of the parade-of-horribles which the opponents of 18 month publication claim will occur if the U.S. adopts the 18 month publication rule here.
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  It is certainly true that applicants or owners of patents can expect that competitors will seek to find a way around their patent.
  This is why patent counsel are so highly paid--so they can draft claims which will block competitors.
  If an applicant or patent owner is unsophisticated, and it is easy for a competitor to ''draft around the patent,'' then his or her patent will be of limited value.
  So, it is the substance of a patent which is the key issue, not the issue of whether or not the patent is published at 18 months. A weak patent published at grant is just as vulnerable as a weak patent published 18 months after application.
  If an applicant is the first to file or the first to invent, they have priority over all other applicants and inventors. This is true irrespective of when the patent is published.
  The fact that a substance of a patent is published before it is granted does absolutely nothing to undermine the priority of the inventor who is first to invent.
  If you are standing in a river when the flood hits, you are going to be washed away. It doesn't make any difference whether you see it coming or not. What the person standing in the river knows and when they know it is irrelevant if they don't head for shore.
  Inventors who are first to invent and which secure a strong patent definitely block their competitors--period--whether or not the competitors see them coming.
  The advantage of 18 month publication is that it tells these competitors to get out of the river--to find some other place to stand. It tells them, ''don't waste your time standing in the river when there's a flood coming.'' It says that someone else is going to get that patent because they're first. In the biotech field, this can save hundreds of millions--even billions--of dollars in wasted research. These savings can be redirected into other research.
  So, the patent publication provision will literally husband scare research funds and save lives.
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  When biotechnology companies now go to Europe or Japan to determine what there U.S. competitors are doing here in the United States translation fees frequently must be paid to decipher the published patent applications. This is essential to determine if another company may be already pursuing a particular technology. U.S. publication at 18 months will eliminate this expense and allow U.S. biotechnology companies to collect corporate intelligence without incurring these costs. This will not provide international competition any new information as all U.S. biotechnology companies file internationally on all significant inventions.

  It is essential that we resolve the controversy over the 20 year patent term and patent publication issues. Without a resolution we fear that the Congress will be unable to return to a business-like consideration of the other patent issues which need to be addressed. Patent term is a critical issue, but there are other important issues.   The following patent issues need to be addressed:
1. Hatch Waxman reform: There is a consensus among companies that do pharmaceutical and biotechnology research that the current Hatch-Waxman law undercompensates researchers. This undercompensation discourages the long term investment in research and drug discovery. Appendix E outlines amendments to the Hatch-Waxman Act supported by BIO.
2. PTO User Fee Diversion: BIO has been very active in seeking to end the diversion of PTO user fees and interested in the proposals to restructure of the PTO. BIO is currently seeking a position on H.R. 673, which is entirely consistent with positions that this organization has taken in the past.
3. Scope of Patents in Japan: The Subcommittee has been helpful as the U.S. seeks to secure adequate patent protection for biotechnology inventions in Japan.
4. GATT Negotiations: BIO is already working on the next round of negotiations on international treaties on patents, Article 27. The current article does not provide sufficient protection for many biotechnology inventions.
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  The log jam on patent legislation arising from the controversy over the 20 year patent term and patent publication is imposing a very real cost for all of us who care about patent policy. It is time to resolve the controversy by ensuring that patent term is not eroded due to government action beyond the control of the applicant.

  Congressman Coble has demonstrated his understanding of the importance of patents for biotechnology inventions. They have led the way in strengthening patent protection for our innovative industry. They can now lead the way to protect diligent patent applicants from the impact of the 20 year patent term.
  With the adoption of these amendments we have an acceptable alternative to a 17 year minimum patent term from grant. Such a minimum term might be the simple solution, but safeguards for diligent patent applicants achieve the same result and are functionally equivalent.
  To be clear, the guaranteed minimum 17 year patent term would resolve all of our concerns. H.R. 400 would, except in rare cases, achieve the same result while not opening up opportunities for late-issue, submarine patents, a concern of some not completely addressed in the Rohrabacher draft legislation.
  Patent publication at 18 months is another needed reform which BIO supports. Based on our experience the parade-of-horribles suggested by opponents of publication will never appear.
  Thank you very much for your support for the biotechnology industry and the opportunity to present this testimony.
  I am happy to attempt to answer your questions.

APPENDIX A: EIGHT SCENARIOS DESCRIBING PROVISIONS OF H.R. 400 Which Protect Diligent Patent Applicants From Loss of Patent Term
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  The following eight (8) scenarios explain how the terms of H.R. 400 will guarantee patent term protection for diligent applicants. An outline of the patent term provisions appears immediately following the Executive Summary of this testimony.

  Scenario One: Patent applicant files patent application for mouse-cat antibody to be used to detect numerous metabolites of illegal narcotics 1/1/97. Patent Office misdirects application to mouse trap art unit on 7/1/97. Application is transferred to art unit that handles pharmaceuticals that correspond to the metabolites by mouse trap examiner on 12/1/97. Application is lost for three weeks then goes to examiner on 1/1/98. Examiner looks at application for the first time on 4/1/98. Examiner resigns on 6/1/98. Application is reassigned to new examiner on 8/1/98. New examiner recognizes that the application is mis-assigned on 10/1/98 and transfers it to antibody art unit on 11/15/98. Application arrives in new art unit on 1/1/99 and is assigned to Examiner on 2/1/99. Examiner examine application on 4/20/98 and application receives examination report on 5/1/98 (called first action on merits). The application is thereafter processed efficiently and issues on 1/1/01.
  Under the current law applicant would receive 15 years and 11 months of patent protection.
  Under Rohrabacher bill applicant would receive 17 years of patent protection.
  Under H.R. 400 applicant would receive 15 years 11 plus time in excess of 14 months that first action took to receive 15 months or 17 years, 2 months.
  Scenario Two: Applicant claims a new human factor that encourages the growth of neurons after stroke, DNA encoding the molecule, RNA molecules to that molecule, antibodies to that molecule, recombinant methods of producing that molecule, a method of using that molecule to treat stroke victims, and a pharmaceutical composition that contains that factor on 1/1/97. Applicant is directed to select only one invention to prosecute (a restriction requirement) on 3/1/98.
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  Under current law applicant would be forced to select a single invention, and require attorneys to write and file and prosecute six additional applications directed to the non elected inventions at a cost as high as $60,000—$100,000. The PTO would render a patentability opinion on the six newly filed applications on 3/1/00, while the patent term was running against the patent applicant. Resulting in patent term of 17 years for the elected invention and 15 years for the other allowed inventions.
  Under the Rohrabacher bill the applicant would have 17 years of protection for all inventions, but may incur additional legal costs.
  Under H.R. 400 applicant would have the option of paying additional fees and prosecuting all the inventions simultaneously in one application saving as much as $60,000—$100,000 in legal fees and having 17 years of patent protection for all of the inventions.

  Scenario Three: Applicant writes prophetic application regarding computer diagnosis and recommended treatment for bacterial infection on 1/1/97. Applicant keeps it secret allocating no resources to develop this technology but waiting for others to develop such technologies. Applicant waits until 1/1/37 when technology is the basis of a forty billion dollar worldwide business, modifies the application to specify the exact exported technology and then the PTO issues the patent. Applicant demands $500,000,000 from each of the four firms that dominate the world wide market.
  Under current law applicant would have no patent term left and the court would grant a motion for summary judgment against applicant.
  Under Rohrabacher bill, the companies would be faced with the dilemma of paying millions in legal fees to defeat the patent and face a possible end to their business, or pay the $500,000,000 license fee.
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  Under H.R. 400, applicant would have no patent term left and the court would grant a motion for summary judgment against applicant.
  Scenario Four: Four biotech companies, a university and a pharmaceutical company each find a gene for Alzheimer's disease and file patent applications between 1/1/97 and 5/1/97. PTO declares an interference to determine who is the first to invent on 5/1/99. Interference involves seven parties and, therefore, there are twenty-one sets of discovery and interference last until 5/1/11. Three losing parties appeal to the CAFC where a judgment is rendered on 1/1/15 directing the PTO to alter its decision. Applicant is awarded a patent on 1/1/16. Because of the number of parties involved no cross licensing agreement can be worked out and none of the parties have invested in the technology for the last 19 years.
  Under the current law, applicant would have 6 years of patent term. 1 year plus a five year extension. Probably an inadequate time to justify investment of resources for drug discovery.
  Under the Rohrabacher bill, applicant would have 17 years of patent term.
  Under H.R. 400 applicant would have 17 years of patent term.

  Scenario Five: Applicant files application to method of producing anticancer agent expressed in goat milk on 1/1/97. Congress announces a five year moratorium on patenting transgenic animals on 1/1/99. Congress does not renew the moratorium and the patent issues on 1/1/04.
  Under the current law, applicant would have 13 years of patent term.
  Under the Rohrabacher bill, applicant would have 17 years of patent term.
  Under H.R. 400, applicant would have greater than 17 years of patent term as applicant would receive a 5 year extension for unusual administrative delay.

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  Scenario Six: Applicant files application to method of producing anticancer agent expressed in goat milk on 1/1/97. Examiner rejects application as he believes this is impossible that the expression would not destroy the activity of the agent. Applicant offers documentary evidence of the efficacy of the expressed protein. Examiner refuses to consider declaration as it was not filed in a timely manner. Applicant appeals to the Board on 1/1/98. The Board upholds the examiners decision, then to the CAFC which overrules the PTO and directs the PTO to consider the declaration on 1/1/05. The examiner considers the declaration. Patent issues on 1/1/06.
  Under the current law, applicant may have 11 years of patent term to 16 years of patent term. It is not clear that the patent applicant would get patent term extension as the patent did not issue pursuant to an appellate decision. If applicant did receive an extension that extension would be capped at 5 years despite an appellate process that took 6 years.
  Under the Rohrabacher bill, applicant would have 17 years of patent term.
  Under H.R. 400, applicant would have greater than 17 years of patent term as applicant would receive a full six years for the time applicant appealed the decision of the PTO.

  Scenario Seven: Applicant files patent application to compound that increases tolerance to radiation poisoning by 1000 times on 1/1/97. The Defense Department declares that the application be kept secret as development would disrupt world peace on 2/1/98. DOD lifts secrecy order on 2/1/17. Patent issues on 1/1/20.
  Under the current law, applicant would have 5 years of patent term.
  Under the Rohrabacher bill, applicant would have 17 years of patent term.
  Under H.R. 400, applicant would have greater than 17 years of patent term as applicant would receive a full extension for delays due to secrecy orders.

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  Scenario Eight: Applicant files application to a mammal's that expresses anticancer agent expressed in milk on 1/1/97. Examiner rejects application as he believes that this would be violative of the constitutions prohibition against slavery (as humans are mammals) and impossible regarding sea animals because of the typically high sodium content of their blood and inherent difficulty in milking whales on 10/1/98. Applicant offers to amend the claims to exclude humans and sea mammals as this was not part of his invention on 4/1/99. Examiner rejects the amendment as applicant does not have any basis in the original application for the proposed amendment on 1/1/00. Applicant refiles application mentioning mammals other than humans and sea mammals on 5/1/00. Application is issued on 1/1/01.
  Under the current law, applicant would receive 16 years of patent term.
  Under the Rohrabacher bill, applicant would have 17 years of patent term.
  Under H.R. 400, applicant would have greater than 17 years 1 month of patent term as applicant would receive an eight month extension for the delay in receiving the first action, and a five month extension for the delay in receiving the second action. The extensions from the earlier application would roll into the new application.


  Following are some examples of long delays in cases appealing PTO actions to the Court of Appeals for the Federal Circuit (CAFC). A five year cap on the compensation due to patent applicants for delays at the CAFC would be inadequate to compensate the companies in these and other cases.

  4 1/2 years In re Vaeck 20 USPQ 2d 1438 (CAFC).
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  8 years In re Goodman 29 USPQ 2d 2010 (CAFC).
  10 years In re Wright 27 USPQ 2d 1510 (CAFC).
  13 years Fiers v. Sugano 25 USPQ 2d 1601 (CAFC)
  14 years In re Bell 26 USPQ 2d 1529 (CAFC).
  Below examples of long delays in cases involving interferences. A five or ten year cap on the compensation due to patent applicants for delays for interferences would be inadequate to compensate the companies in these and other cases.

  (a) Case One: Interference originally declared between multiple parties. The Administrative Patent Judge indicated when rendering an interlocutory decision that without settlement the interference could last at least 11 years. At that time the application was some eight years old. The junior and thus likely losing party was already on the market and had every incentive to delay the interference and not to settle. Under the new law this invention would be lucky to enjoy one year of effective life with a possible 5 year extension. Although interferences are relatively rare those involving important inventions usually last a long time. The situation will become even worse if GATT is implemented like NAFTA by making 35 USC 104 international or possibly repealing it altogether. The prospect of ''tactical'' interferences is alarming.
  (b) Case Two: Another biotechnology based company has 20 declared interferences with the furthest progressed of those contested (i.e. not settled) which comprise more than half of the total pending now for 10 years and not expected to be decided within the PTO for another two years. This decision is then subject to the loser's right of appeal to the district court (2-3 years for final decision) and then the CAFC! As with the first example effective life could be reduced to little or none.
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  (c) Case Three: Chief Counsel of yet another of our member companies has had more interferences declared in the first few years with that company than in twenty years with a major pharmaceutical company.
  Following is report language which BIO recommends be adopted to clarify the terms of the appeals compensation provision and the application to continuations:

  Compensation for delays due to appeals: The Committee has reviewed the GATT law provision providing compensation to patent applicants who take appeals to the Board of Patent Appeals and Interferences or Court of Appeals for the Federal Circuit (CAFC). The current language, and the language incorporated in H.R. 1733, provides that the ''patent [be] issued pursuant to a decision in the review reversing an adverse determination of patentability....'' We have determined that it is not necessary to amend this language to provide compensation when an applicant's appeal ''result ... in a reversal of a determination adverse to the applicant'' at the PTO Board or CAFC as both have the same meaning.
  The Committee does not view the current appeal language in a mechanistic way. The Board or Court can ''affirm'' a rejection where the applicant does win on some relevant issue. The applicant is entitled to compensation in these cases. Where an applicant does not prevail on any determination, no compensation should be provided for lost patent term.
  This understanding will not lead to abuse of the compensation system. The only occasions when an applicant will secure compensation is when a patent is, in fact, finally issued and a decision is made by the PTO that is overturned in appellate review.
  Some of the many ways in which an applicant can secure compensation, (even additional amendments or affidavits are submitted to place the application in condition for allowance) under this provision are the following:
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1. In a situation like applicant in In re Alton, (37 U.S.P.Q. 2d. 1577 (BNA)) where the CAFC reversed the PTO's decision to not consider a affidavit to overcome a rejection, but then remanded the case to the PTO to consider the merits of the declaration.
2. In a case where the board reverses an examiner's rejection as improperly based, but issues a new rejection on more proper grounds.
3. In a case multiple issues are taken on appeal and the Board or Court affirms the denial of patentability by upholding one of the rejections made by the examiner, but reverses the examiner on one of the other issues.
4. The Board's or Court could affirm the denial of patentability on very narrow ground that can easily be overcome by a minor or straight forward amendment which would not have obviated the original rejection.
5. Finally, after the appeal has been pending, in some cases for a long time, the PTO itself may withdraw the appeal by contacting the applicant and suggesting minor or strait forward amendment which the PTO now considers would obviate the original rejection.
  The Committee directs the PTO to issue regulations interpreting the appeals compensation provision consistent with this understanding.

  Continuation Applications: The Committee has adopted an objective time clock to protect applicant from delays that are out of applicants control. The extensions that are available to a parent application, that are necessary part of the delay for a subsequently filed continuation application (including a divisional application), that have the same priority date are entitled to the same patent term compensation. Similarly, for divisional applications the restriction in the parent application is considered the first action in the subsequently filed divisional. A divisional application would be not eligible for any patent term restoration in a parent application that accrues after the restriction is made final.
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  1. Patent Term Extension Limits: The current limitation on patent extensions of two years or five years for regulatory delays should be repealed.
  2. Total Limit on Extensions: The current provision on patent extensions limiting the extended patent term to 14 years from the date of regulatory approval should be repealed.
  3. Delays Included in Extensions: The restoration period should include the entire period of regulatory delay, with no deduction for the regulatory delay occurring before the formal application for regulatory approval to market.
  4. Starting Regulatory Clock: The regulatory review period should include any regulatory review time during the pendency of the application for the patent extended, not just the time after the patent was issued.
  5. Other Regulated Industries: Patent restoration should be broadly available for all regulated industries that are subject to substantial marketing delays attributable to regulatory review.
  6. Separate Extensions: A single patent should be capable of being separately extended for each distinct entity claimed in the patent that requires a separate regulatory review.
  7. Interim Extensions: Interim extension opportunities should be expanded and the process simplified where a patent could expire before approval of the regulated product.
  8. Late Issuing Patents: A late-issuing patents should be extendable.
  9. Due Diligence Requirement: The ''due diligence'' requirement should be repealed.
  10. Data Exclusivity: The U.S. data exclusivity law should be harmonized with the rest of the worlds standard.
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  Patent term for biotechnology companies can be eroded by government action even when the patent term granted by the PTO is seventeen years. Biotechnology patents for drugs to cure deadly and costly diseases do not permit the company immediately begin to market the product with respect to which the patent was granted. The Food and Drug Administration must grant approval and when this approval comes many years after the patent has been granted, the company effectively loses patent term. When one agency, the PTO, grants a patent, the patent term begins to run even if the other agency, the FDA, will not permit the product to be marketed.
  The Hatch-Waxman Act addresses this second cause of patent term erosion by granting partial compensation--an extension of patent term--for delays experienced by the company in the approval of a product by the FDA. But, as with the safeguards written into the current GATT patent term law, the Hatch-Waxman Act safeguards are in need of reform. They provide only partial compensation for delays and this is just as unfair to the inventor company as the delays at the PTO in granting a patent in the first place. Both are essential issues. The Hatch-Waxman Act simply restores patent term lost due to FDA delays; it does not extend the term of the patent beyond that which is set by the PTO. So, we remain concerned about the initial patent term, not just the Hatch-Waxman Act provisions. In short, amendments to the Hatch-Waxman Act are not a substitute for amendments to the GATT implementing law. At the same time, we must amend the Hatch-Waxman Act to ensure that what is protected by safeguards at the PTO is not then lost due to inadequate safeguards at the FDA.
  The existing Hatch-Waxman Law has failed over the past ten years to consistently afford meaningful post-marketing patent terms. One effect of the inequities and uncertainties in the current patent term restoration law has been the consideration in the Congress over the past decade of a number of private extension bills.
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  In order to provide commercially meaningful and equitable patent terms in regulated industries and address the issues raised by P.L. 103-465 amendments, BIO proposes that the following amendments to the Hatch-Waxman Act be enacted:
  1. The current limitation on patent extensions of two years or five years for regulatory delays should be repealed. First, the period of time between discovery of a new regulated entity and the initiation of the patenting process is typically quite short. However, the period of time required thereafter to obtain regulatory approval for marketing can typically be very long, often 10 years or more. The two-year or five-year limitation on extensions is wholly inadequate to restore lost patent term and establish parity in the typical post-approval patent term enjoyed in non-regulated industries.
  2. The current provision on patent extensions limiting the extended patent term to 14 years from the date of regulatory approval should be repealed. Second, like the five-year limitation discussed above, the 14-year post-approval limitation has resulted in truncated patent extensions (for less than the otherwise applicable five-year limitation). The truncation of the patent extension has the effect of providing inventors in regulated industries with less effective post-marketing patent term than patentees in non-regulated industries. Normally, a patentee is free to begin marketing a patented product immediately upon completion of the development of the invention. This can be at or near the time of patent filing. Under the contemplated provisions for publication of pending patent applications not later than 18 months from the priority date of the patent application, patentees in non-regulated industries will enjoy 19 1/2 years of enforceable patent rights. Similarly, domestic applicants using (conversion-to-provisional) patent application procedures can expect issuance of a patent within approximately 18 months of the provisional application filing date, resulting in an actual post-issuance, post-marketing patent term of 19 1/2 years. Thus, parity for inventors in regulated industries requires that the post-approval (or post-marketing) limitation on patent extensions afford a similar opportunity for a 19 1/2 years of enforceable rights. The existing provisions on patent restoration in Europe and Japan (enacted after the U.S. law covering patent term restoration), in fact, provide for post-approval limitations in excess of the current 14-year limitation.
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  3. The restoration period should include the entire period of regulatory delay, with no deduction for the regulatory delay occurring before the formal application for regulatory approval to market. Third, current law denies restoration for fully one-half of all the regulatory delay attributable to the period from the beginning of the regulatory review period (e.g., the initial application for approval for testing) to the actual filing of the application for approval to market. The deduction in this regard is purely arbitrary. It discriminates in the pharmaceutical field with a particular vengeance against inventors who require substantial periods of time in which to determine a precise provable indication, develop a particularly unusual or innovative therapy where few models exist for conducting appropriate clinical trials, and focus on a chronic (as opposed to acute) indication for use. The better public policy would afford such innovators a longer, not a shorter, period of restoration for the exceptional nature of the risks and difficulties encountered in the development process.
  4. The regulatory review period should include any regulatory review time during the pendency of the application for the patent extended, not just the time after the patent was issued. Fourth, under the 17-year patent term measured from grant, a patent is eligible for restoration as soon as the patent is granted. Under a 20-year patent term from filing, a patent should likewise be eligible for restoration as soon as the patent is filed. The filing of the patent application fixes the expiration date of the patent and, thus, limits the post approval patent term. In order to provide meaningful restoration, the entire regulatory review after the patent term has begun to run should be included in the restoration period. The failure to start the restoration clock at filing under the patent term based on filing was apparently an administrative oversight in the drafting of the GATT legislation that must be corrected. For example, if an unsuccessful appeal delayed the issuance of a patent for 12 years for a product that required 13 years to develop to approval, the patent restoration period would be limited to one year. The patent term after approval could be as short as nine years. Had the appeal not been taken and the patent issued in two years, a full five-year patent restoration would have been possible under current law.
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  5. Patent restoration should be broadly available for all regulated industries that are subject to substantial marketing delays attributable to regulatory review. Fifth, the current patent term restoration act is limited to specific types of products regulated under specific laws. For example, regulated agricultural products (e.g., pesticides, herbicides, and fungicides) are not covered, even though safety and other tests result in substantial delays in commercialization on account of regulatory review. While more study is needed to identify industries and/or regulatory schemes that should be included under a reformed patent term restoration law, regulated agricultural products may present an immediate and compelling case for inclusion.
  6. A single patent should be capable of being separately extended for each distinct entity claimed in the patent that requires a separate regulatory review. Sixth, if a patent claims multiple and distinct products that are separately developed, then each product will be associated with its own regulatory review period during which the testing and other pre-marketing approval requirements unique to that product will be undertaken. In such a situation, multiple extensions for the same patent should be afforded with each such extension limited to the distinct entity, with the term of extension limited in each case to the particular regulatory review period in question, and with the extension based on the expiration of the patent determined exclusive of any other extension granted based on another regulatory review.
  Such a reform would remove a superfluous technical limitation on the effectiveness of the patent term restoration law that could result in complete denial of any patent restoration opportunity for a new drug (or other entity) in the situation where the inventor elected to obtain a single patent on the distinct products, instead of seeking multiple patents, each limited to a single approved drug. While this provision may have been an oversight in the drafting of the patent term restoration law in 1984, at least one example has emerged of a patent in which three different NDA-approved drugs were specifically claimed. In this case, only one of the three products would have qualified for an extension.
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  7. Interim extension opportunities should be expanded and the process simplified where a patent could expire before approval of the regulated product. Seventh, a rare, but egregious limitation of the existing restoration law is the very limited opportunity for interim extension in the situation where a patent to be extended would normally expire before the regulatory approval to market. The opportunity to extend the patent on an interim basis for up to five years should be possible, following which the full patent restoration opportunities should be afforded at the time of regulatory approval. Thus, after one or more interim extensions, an innovator could have much of the patent term restored.
  8. A late-issuing patents should be extendable. Eight, with U.S. patent interference practice and other complex features of U.S. patent prosecution, the issuance of a patent can be delayed until substantially after the date of regulatory approval. In order to afford meaningful extension opportunities, an innovator should be accorded a more prolonged period than 60 days from the date of regulatory approval, e.g., up to two years before the date of expiration of the patent.
  9. The ''due diligence'' requirement should be repealed. Ninth, since 1984 the Patent and Trademark Office reports that essentially no substantive challenges have been made by members of the public under the due diligence provisions. No patent term extension has been reduced even one day for lack of due diligence. Despite this the Patent Office must obtain from the applicants for extension sufficiently detailed information on regulatory approval efforts to determine if the required diligence is present. The net effect of the ''due diligence'' requirement is the creation of a more complex procedure that is more expensive for the applicant and the government.
  10. Data Exclusivity. Tenth and finally, the United States standard for data exclusivity is different than the laws of our European trading partners. Under Hatch-Waxman, a new chemical entity (''NCE'') approved by the FDA is entitled to five years of non-patent exclusivity. See 21 U.S.C. 355(c)(3)(D)(ii), 355 (j)(4)(D)(ii). No applicant seeking approval of an abbreviated new drug application (''ANDA'') can submit an ANDA before the expiration of five years from the date on which an NCE is approved, except that an ANDA may be filed no earlier than four years after approval if the applicant certifies that a relevant patent is invalid or will not be infringed.
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  In Europe, NCEs generally are entitled to six or ten years of non-patent exclusivity. Although the period can be determined at the option of the member state, ten years of data exclusivity must be granted for ''high-technology products.'' This protection is generally referred to as ''data exclusivity.'' It is designed, among other things, to provide an incentive for research and the development of new products.
  As a signatory of GATT/TRIPS, the U.S. has agreed to harmonize its laws with those of its international trading partners. In order to achieve this result, the U.S. should increase data exclusivity from five to ten years.
  BIO believes that these ten amendments would make modest improvements in the Hatch-Waxman Act and that they should be adopted. It is particularly appropriate that they be adopted at the same time as amendments to the GATT patent term are adopted. Both sets of amendments address the same issue--erosion of patent term due to government action which is beyond the control of the patent applicant.

  Mr. COBLE. Thank you, Mr. Ludlam.

  Mr. Berrier.

  Mr. BERRIER. Thank you. I am president of Intellectual Property Owners, Inc., or IPO, and I appreciate very much this opportunity to represent IPO and express IPO's strong support for both H.R. 400 and H.R. 673.

  IPO is a nonprofit association that represents industry, universities, and individuals who own patents and other intellectual property, and has been an advocate for strong and well-structured patent systems around the world for the last 25 years.
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  I will focus my remarks this morning on several of the important aspects of these bills.

  The 1995 GATT legislation modified the term of a patent from 17 years from issuance to 20 years from filing. This conformed U.S. law to the GATT requirement, and at the same time closed a loophole in our patent system that had allowed applicants to abuse the system and move the effective period of their patents far into the future by delaying issuance of the patent. The loophole was closed by measuring the patent term from the filing date of the application instead of the date of the patent grant.

  H.R. 400, importantly, retains the patent term of 20 years from filing of the application and keeps the loophole closed, while providing reasonable patent term extensions in legitimate circumstances.
  H.R. 400 also creates an important prior user right, or a defense against infringement of patents based on manufacturing activity that began more than 1 year before the patent application was filed.

  Industry that invests in U.S.-based chemical or manufacturing plants should not be required to file patent applications or publish on all aspects of its processes in order to protect itself against patents issuing on applications that are filed long after its activity began. Every major manufacturing country affords this type of protection to its manufacturing base. It's time that we do the same.

  Another important feature of H.R. 400 is that it requires publication of patent applications 18 months after filing. Many U.S. patents now issue, and are therefore published, in 18 months. But for those patents that do not, U.S. industry will be given an early warning similar to the early warning currently given in Japan and Europe, an early warning to enable U.S. industry to design noninfringing alternatives, so their businesses are not suddenly disrupted when a patent issues after being submerged in secrecy for many years.
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  Turning now to H.R. 673, costs for obtaining and maintaining patents around the world for the full 20-year term have become prohibitive. By one estimate, the cradle-to-grave patent cost to protect a single invention in 52 countries is about $470,000. In Europe alone, the cost is about $130,000. There is an alarming trend for countries who have recently adopted patent systems to also adopt very high fee schedules. Patent costs in the Ukraine, Thailand, and Russia, countries that have only recently established patent systems, are among the highest in the world.

  While the TRIPS agreement promises an improved and strengthened worldwide patent regime, there is increasing concern that U.S. inventors will be denied the benefits that were expected to flow from this agreement because of the high patent costs. There is concern that what is required by treaty may be denied by pricing. U.S. inventors may simply not be able to afford the system. These high patent costs are clearly being driven by countries using their patent systems to generate tax revenues in excess of what is required to operate their patent offices. This is a practice that should not be permitted and the United States must take a leadership role on this issue, if we are to preserve the benefits to U.S. inventors that we expected to flow from the TRIPS Agreement.

  And we must lead by example. We simply must stop using Patent Office fees for purposes other than operating the office. H.R. 673 is designed to produce this result and is strongly supported by IPO.

  Thank you.

  [The prepared statement of Mr. Berrier follows:]
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  Mr. Chairman and Members of the Subcommittee, my name is Erwin F. Berrier, Jr. I appreciate this opportunity to express the strong support of Intellectual Property Owners (IPO) for H.R. 400 and H.R. 673.

  I am the current president of IPO, which is a nonprofit association that represents companies, universities, and individuals who own patents, trademarks, copyrights, and trade secrets. IPO members receive about 30 percent of the U.S.-origin patents that are granted by the U.S. Patent and Trademark Office.

  I am the General Patent Counsel of General Electric Company in Fairfield, Connecticut but my testimony today is on behalf of IPO, in my capacity as president of IPO.

  H.R. 400 is an important patent bill that provides government corporation status for the U.S. Patent and Trademark Office (PTO) to help the PTO provide first class service to the public at reduced cost and provides important substantive and procedural improvements in U.S. patent law.

  In summary, the bill:

Creates a government corporation structure for administering patent and trademark laws that should improve the quality and reduce the cost of services provided by the PTO.

Requires publication of patent applications 18 months after the first filing for which priority is claimed, which will help protect U.S. manufacturers from submarine patents and boost U.S. research and development by giving our researchers earlier access to information about the latest foreign and U.S. technology while protecting the rights of patent application owners with a new royalty right in published applications.
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Extends the term of a patent beyond the term of 20 years from first filing in proper circumstances without permitting applicants to abuse the system and unfairly extend their patent term far into the future.
Protects U.S. manufacturers who invest in manufacturing processes to bring products to market from later infringement claims based on patent applications filed more than one year after the manufacturer's use began.
Protects inventors from improper practices by invention development firms.
Reforms PTO reexamination proceedings to provide a more effective alternative to court litigation for resolving disputes over the validity of patents.

  We believe the overall effect of H.R. 400 will be to encourage technology-based manufacturing and create more high-paying jobs in America. IPO strongly supports H.R. 400 and we urge passage of H.R. 400 this year.

  IPO also strongly endorses H.R. 673, the ''Patent and Trademark Office Surcharge Extension Act of 1997.'' H.R. 673 is designed to eliminate the practice of diverting patent surcharge funds collected by the Patent and Trademark Office to unrelated government programs starting in fiscal year 1999. IPO believes early passage of H.R. 673 is critical and that the current and planned diversion of patent fee surcharges in fiscal years 1997 and 1998 should be stopped.

In General
  Title I of H.R. 400 establishes the Patent and Trademark Office as a government corporation under Title 31 of the United States Code. The head of the corporation would be the Director of the U.S. Patent and Trademark Office, who would have two top subordinates--a Commissioner
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for Patents and a Commissioner for Trademarks.
  Eight years ago, IPO commissioned a report that was issued by the National Academy of Public Administration (NAPA) entitled ''Considerations in Establishing the Patent and Trademark Office as a Government Corporation.'' That report concluded that the PTO is well-suited for government corporation status. NAPA said the PTO has more in common with private business than most government agencies because (1) the PTO is supported by user fee revenue and (2) it must respond to demands for services that it does not control.

  At a hearing before this Subcommittee in 1992, IPO testified that Congress should ''reinvent the PTO by establishing it as a government corporation.'' IPO recommended then--and recommends today--that the government corporation should include the following features:

Operating Flexibility--broad operating flexibility similar to that enjoyed by private businesses with regard to personnel systems, employee compensation, number of employees, management of contracts and office space, streamlined decision making, and ability to inject entrepreneurial spirit into its operations;
Borrowing Authority--authority for the corporation to borrow money, subject to appropriate limits; and

Voice for Users--a statutory advisory committee of private sector experts to advise the head of the corporation and members of Congress on the administration of the corporation.
  A government corporation with these features would enjoy many of the advantages that a private business has over a conventional Federal government agency in responding to customers. Title I of H.R. 400 contains most of these features, and we endorse Title I.
Operating Flexibility
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  We support the provisions in Title I that give the corporation flexibility in numbers of employees hired and management of contracting, office space and printing, and the language in the bill that gives the corporation autonomy on internal management matters.

  By exempting the corporation from government ceilings on the number of employees (the full-time equivalent or ''FTE'' ceiling), the bill will allow the Director to hire as many employees as the demand for services requires. By exempting the corporation from several statutes, the bill gives the corporation flexibility to manage its own contracts, office space and printing when it chooses.
Advice From Users; Borrowing Authority
  The government corporation should be subject to Congressional oversight and should have a mechanism to give private sector fee payers a voice in how the corporation is managed. We support establishing a management advisory board by statute as proposed in section 114 of the bill. Such a board will guarantee a voice for the corporation's customers in how the corporation should be managed. The board will provide valuable information through an annual report transmitted to the Committees on the Judiciary of the House and the Senate and to the President. Advisory board members can work in partnership with the Director and the Congress. Users represented through the board will have a strong interest in helping oversee the corporation, and can be depended upon to insist on efficiency and effectiveness of operations.

  We believe some of those who have opposed government corporation status for the PTO may not understand the proposal. A government corporation is not a private company, and Title I of H.R. 400 does not ''privatize'' the PTO. The employees of the corporation would continue to be government employees. The corporation and its Director would be under the policy direction or oversight of the President, the Secretary of Commerce, the Congress, and the Comptroller General of the United States. The corporation would have its own Inspector General. Users of the corporation would advise the government through the advisory board.
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  Finally, another significant feature of Title I is borrowing authority for the corporation. The bill gives the corporation authority to issue bonds or other debt instruments to assist in financing the corporation's activities.

  For example, borrowing authority will enable the corporation to build its own buildings, if that option is determined to be more economical than leasing. Borrowing authority, coupled with the exemption from statutes such as the Federal Property and Administrative Services Act of 1949, will allow the Director to make decisions on office space without the involvement of the General Services Administration.
  Borrowing authority also is needed in order to finance other large, one-time capital improvements such as automating the search files. In the past decade the PTO has spent several hundred million dollars of current user fee income on search file automation that has been of benefit primarily to future users of the Office. It is unfair to tax current users of the PTO to pay the costs of long-term capital improvements. Borrowed money is a better source of funding for such improvements.
  In addition to the government corporation in Title I, we also strongly support the substantive and procedural improvements in patent law that are made by Titles II to VI.
Early Publication and Royalties for Applications
  We support publication of patent applications 18 months after the earliest filing date claimed for priority or three months after a patentability report as proposed in Title II, whichever is later. The current U.S. patent system, which requires that applications be kept confidential until the patent is granted, causes uncertainty about the status of rights in new technology and unreasonably delays dissemination of technological information. U.S. manufacturers who invest in technology development and new product design are entitled to an early warning that their design or approach may be blocked by a patent.
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  The United States needs to strike a balance between, on the one hand, the interest of U.S. patent applicants in keeping applications confidential and, on the other hand, the interest of the general public in being able to obtain early access to information in patent disclosures. Once a technology owner elects to seek patent protection, the public needs to know of the possibility of patent rights within a reasonable time. Every major industrialized county in the world has supported its manufacturing base by striking this balance and publishing patent applications 18 months after filing. It is time for us to do likewise.

  A small minority of interested parties have opposed publication of patent applications, calling the bill the ''Steal American Technologies'' act. Anyone who believes that we can stop foreign competitors from using American inventions by avoiding publication of patent applications is misinformed. The only way American inventors can stop competitors from manufacturing abroad for foreign markets is to obtain patents abroad. U.S. patent law reaches only U.S. activity, under existing law or under H.R. 400. Inventions are being made public today when a U.S. patent is granted or a U.S. inventor files abroad and the application is published, and anyone can use the invention in a country where no patent exists.

  Under the publication system proposed in H.R. 400, U.S. researchers will benefit particularly from early English language access to applications filed in the U.S. Patent Office that are of foreign origin, which are now 45 percent of all applications. The proposed legislation measures the 18-month publication period from the earliest claimed patent application priority date. Since foreign-origin applications typically are filed abroad about 12 months before they are filed here and they claim that early priority date, those applications will be published about 6 months after they are filed here, a year earlier than domestic-origin applications. This will level the playing field with foreign countries that already are publishing our applications in their languages within 6 months after our applications are filed abroad.
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  Ideally, the Patent and Trademark Office should issue an initial report on patentability of applications no later than 15 months after filing, and publish every application no later than 18 months after filing. This would give the applicant 3 months to decide whether to withdraw the application to preserve secrecy of inventions that do not qualify for patent protection. Since PTO workloads will not always allow patentability reports to be issued within 15 months, however, we support the exception to 18 month publication in Title II that allows deferral of U.S. publication of applications that are not being filed abroad until three months after the patentability report.

  A key part of Title II is section 204, which creates provisional rights to royalties in published applications. Existing law does not give any right to a royalty for use of an invention covered by a patent application. H.R. 400 establishes a provisional right to a royalty beginning with the date of publication of the application. The right to a royalty for the period between publication and the date of patent grant complements full patent rights (rights to damages and injunctions) that run from date of patent grant until 20 years after filing.
Patent Term Extensions
  IPO also supports section 208 of Title II, which expands the authority of the PTO to extend patent terms that otherwise would expire 20 years after filing of the first application. In a statement for the record of a joint Senate—House hearing that was held on August 12, 1994, IPO vigorously supported the 20-year patent term. At that hearing, United States Representative Dana Rohrabacher testified in favor of retaining the old 17-year term measured from the date of patent grant, but the Judiciary Committees did not accept his view, and Congress decided to change to a term whose expiration is measured from the date of filing.

  We continue to believe that the term that expires 20 years after filing is a fundamental reform in the U.S. patent system. It closed a loophole in our patent system that allowed applicants to abuse the system by intentionally delaying the issuance of patents and unfairly extending the effective period of patents far into the future. In these situations, U.S. industry is unfairly burdened as it competes for export sales in global markets with non-U.S. manufacturers whose laws do not permit such manipulations. These ''submarine patents'' have been a growing menace. After decades in the Office, patents have been granted in mature industries where manufacturers already have invested in product commercialization. The long delays have caused uncertainty for manufacturers who do not know the status of patent rights in new technologies for many years after the patent normally should be granted. The American public has paid millions of dollars to owners of long-delayed patents who have done nothing to commercialize technology. Long-delayed patents deprive the country of new products and manufacturing jobs.
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  The patent term that expires 20 years after the filing of the first application, which came into effect in June 1995, removed the incentive for delay by applicants and created an incentive for patent owners to commercialize inventions promptly. The 1995 law provides for extension of the term for up to 5 years when the grant of the patent is delayed due to an interference proceeding, a secrecy order, or an appellate review, but does not provide for an extension of the term in other situations where substantial delay may occur that is beyond the control of the applicant.

  Section 208 of H.R. 400 provide additional term extensions in appropriate case--extensions of up to 10 years in the case of appellate review or unusual administrative delay, and unlimited extensions for delays caused by secrecy orders and interference proceedings. The bill extends the term day-for-day and automatically whenever the Patent and Trademark Office takes more than 14 months to reach an application initially, or more than four months to reply to correspondence from the patent applicant or take other action on the application.
Prior Domestic Commercial Use
  We support Title III of the bill, which gives early domestic commercial users of a patented invention in the United States a defense against a patent owner whose patent filing date is more than one year later.

  Title III strikes a balance between the rights of patent owners and the rights of prior domestic commercial users of patented inventions. This is particularly important for processes used in U.S. industry where a manufacturer does not file a patent application. Without a prior user right such a manufacturer might find itself blocked from using manufacturing equipment and processes upon which its business had been based for many years. Manufacturers should not be required to file patent applications on all aspects of their manufacturing processes to assure future quiet enjoyment of their investment.
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  Foreign countries already are providing manufacturers in their countries the advantage of a prior domestic use right. It is time that we do the same.

  Title III is a carefully thought-out, balanced proposal that strongly supported by IPO.
Protection of Inventors
  We support Title IV of H.R. 400 on enhanced protection of inventors' rights. This title prohibits improper practices by invention development firms. It makes knowingly providing any false or misleading statement or omission of material fact by an invention development service a misdemeanor that can result in a fine of up to $10,000 per offense. Title IV also requires disclosure of a firm's track record and allows an inventor to withdraw from a contract with a firm within a reasonable time.

Improved Reexamination Procedures
  We favor Title V of H.R. 400, which refines and improves the patent reexamination law that was passed by Congress in 1980 and implements most of the recommendations made to the Secretary of Commerce in 1992 by the Advisory Commission on Patent Law Reform.

  The 1980 patent reexamination law was intended as a quick and inexpensive alternative to court litigation on issues of patentability involving earlier patents or printed publications. Time has shown, however, that the present reexamination process has not delivered on this expectation primarily because it is an ex parte proceeding.

  We believe Title V strengthens the reexamination process by giving third parties greater participation in patent reexamination proceedings. The bill gives third party requesters, for example, a right to comment in writing on each response filed by the patent owner. This added opportunity for participation in the proceedings will encourage use by third parties.
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  One of the most important changes in patent reexamination proceedings made by Title V is to give third party requesters a right of appeal for the first time. Third party requesters will be able to appeal to the Board of Patent Appeals and Interferences and to the Court of Appeals for the Federal Circuit. We agree with the approach taken by the bill of giving both the patent owner and the third party a right to appeal to the Court of Appeals for the Federal Circuit and giving neither of them a right to de novo review of a reexamination proceeding in the U.S. District Court for the District of Columbia.

  We also support the other improvements in the reexamination process made by Title V, including (1) expanding the issues that can be reexamined to include section 112 of the patent code (except for the ''best mode'') and (2) first office action.

  Title V seeks to avoid duplication of effort in court litigation and Patent and Trademark Office reexamination. The bill estops third party requesters that participate in a reexamination appeal to the Court of Appeals for the Federal Circuit from later asserting patent invalidity in another forum on a ground that the party raised or could have raised in the reexamination. Similarly, the bill requires that once a final decision has been entered in court against a party who is asserting patent invalidity, then that party may not request reexamination on issues that the party raised or could have raised in court.

  We believe the minority that has objected to Title V may have misunderstood the legislation. Title V retains the existing reexamination framework of the 1980 law, which contains carefully crafted safeguards to prevent abuse by those who wish to have patents reexamined. Title V does not give challengers a new avenue to initiate actions against patent owners, but merely improves an avenue that already exists. The PTO will continue to order a reexamination of a challenged patent only if it determines that the challenger has raised a ''substantial new question of patentability.''
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  If this condition is not met, then no reexamination is declared, and the patent owner does not need to get involved or spend money. The Office's decision that there is no substantial new question of patentability is not appealable.

  Title V also continues the requirement of current law that the Office must decide whether to institute reexamination within three months after the filing of the request for reexamination. Continued as well is the requirement that all reexamination proceedings be conducted with ''special dispatch.''
Miscellaneous Patent Provisions
  Title VI makes miscellaneous patent law changes that we support. Section 601 simplifies patent procedures by permitting the conversion of a provisional patent application to a regular application. Section 603 refines the plant patent laws by expanding coverage to tuber propagated plants and to ''parts'' of a plant such as cut flowers. Section 604 of the bill is a useful clarification of the Patent and Trademark Office's authority to provide for filing of patent applications and other documents by an electronic medium. In a few years, patent and trademark documents will be filed and retrieved in electronic form, a change that undoubtedly will improve the efficiency and effectiveness of the Office's operations.
  We compliment Chairman Coble on his proposal to amend the provision in the Omnibus Budget Reconciliation Act of 1990 that has allowed the government to withhold some $140 million in patent fee surcharges since 1992. The 1997 appropriations bill for the Commerce, Justice and State Departments withheld a record $54 million. This withholding already has caused the PTO's patent examining operations to curtail staffing and already has contributed to a rise in the pendency time of patent applications in the PTO that is expected to increase if the withholding continues.
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  On February 6, the Clinton Administration sent to Congress its 1998 budget that proposes even more drastic withholding of fee surcharges. The budget proposes to withhold $92 million in 1998, which is nearly 20 percent of the PTO's patent examining budget. The Administration also is recommending withholding the full amount of the patent fee surcharge fund--$119 million--in each of fiscal years 1999—2002. We understand that this level of withholding will cause the average pendency time of patent applications in the PTO to increase from the current level of about 21 months to about 42 months by 2003.

  If the withholding of fee surcharges is not stopped, either patent fees will become prohibitively high or pendency time for patent applications will increase.

  If the pendency time of patent applications is allowed to increase to an average of 42 months, the effect on those inventors and industries that require early patent protection will be severe. Moreover, the slowdown in disseminating information about new technology to the public through granted patents will slow progress in American technology, particularly in the absence of any requirement for 18-month publication of patent applications. Experience has shown that once a large backlog of unexamined patent applications is allowed to accumulate, it takes many years to bring the pendency time back to an acceptable period. When the number of experienced patent examiners is reduced, a long time is needed to recruit and train a larger patent examining corps and give them enough experience so that they can achieve the high productivity needed to make inroads into the backlog of unexamined applications.

  If the withholding of fee surcharges continues, the only alternative to allowing pendency time of applications to increase to 42 months or more will be to enact into law a large increase in the fees that are paid to the PTO to file, issue, and maintain U.S. patents. An across-the-board increase in patent fees in the order of 20 percent, in addition to the annual cost of living adjustment, may be required this October to offset the loss of income to the Patent and Trademark Office from the planned withholding and diversion patent fee surcharges.
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  U.S. inventors and industry are still adjusting to the long-term effects of several large increases in patent fees that were put into place in the 1980s and early 1990s. Only recently have owners of U.S. patents felt the full impact of the maintenance fees that came into effect gradually on portfolios of existing patents. IPO believes that a 20 percent increase in patent fees at this time will place an unacceptable burden on large and small American inventors, and will subject the U.S. government to acute embarrassment.

  In the past two years, U.S. industry and the U.S. government have undertaken a campaign to persuade the major trading partners of the U.S. to reduce the cost of obtaining and maintaining patents in their countries. In 1996 the U.S. Trade Representative identified the high cost of patenting in Europe as a potential trade barrier. A number of interested parties are meeting in London next month to discuss reducing patent costs.

  Costs for obtaining and maintaining patents around the world for the full twenty year term have become prohibitive. By one estimate the cradle to grave patent costs to protect a single invention in 52 countries is about $472,000. In Europe alone the cost is about $134,000. There is an alarming trend for countries who have recently adopted patent systems to also adopt very high official fee schedules. Patent costs in the Ukraine, Thailand, and Russia, countries that have only recently established patent systems, are among the highest in the world. While the TRIPS agreement promises an improved and strengthened worldwide patent regime, there is increasing concern that U.S. inventors will be denied the benefits that were expected to flow from this agreement because of the high patent costs. There is a concern that what is required by treaty may be denied by pricing--U.S. inventors may simply not be able to afford the system. These high patent costs are clearly being driven by countries using their patent systems to generate tax revenue in excess of what is required to operate their patent offices. This is a practice that should not be permitted and the U.S. must take a leadership role on this issue if we are to preserve the benefits to U.S. inventors that we expected to follow from the TRIPS agreement--and we must lead by example.
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  The only acceptable solution is for Congress to stop the withholding and diversion of patent fee surcharges at once. H.R. 673 as we understand it is designed to eliminate the withholding and diversion beginning in 1999 by reclassifying patent fee surcharges as ''offsetting collections,'' a category of government funds that is unlikely to be diverted in the same way as existing fee surcharges, which are ''offsetting receipts.'' We urge this Subcommittee to approve H.R. 673 as soon as possible and advise the Appropriations Committee of the harm that will be caused by requiring the Patent and Trademark Office to collect more fees than are required to operate the Office.
  We urge enactment of all titles of H.R. 400, enactment of H.R. 673, and immediate elimination of the practice of diverting patent fee surcharges to unrelated government programs.

  Thank you for inviting me to testify. I will be glad to answer any questions.

  Mr. COBLE. Thank you, Mr. Berrier.

  Ms. Alford.


  Ms. ALFORD. Thank you, Mr. Chairman. The International Trademark Association (INTA) of which I am president, welcomes the opportunity to appear before the subcommittee today to present its views on title I of H.R. 400 and on H.R. 673.

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  Last March, INTA testified before this panel in connection with the bill introduced by former Representatives Moorhead and Schroeder that, like H.R. 400, would have established the Patent and Trademark Office as a Government corporation. We testified then that such a proposal would, if enacted, represent a step forward in the administration of the trademark operations of the Patent and Trademark Office. We also expressed our opinion that the many operational problems that plagued the patent operations can best be addressed by separating the agency's patent and trademark operations into two distinct entities, and by creating an independent U.S. Trademark Office. That remains our view. In fact, we believe that the single most important step Congress could take to improve the administration of the U.S. trademark system would be to create a separate, independent Trademark Office.

  Frankly, Mr. Chairman, after much study and consideration, we are convinced that unless the Trademark Office is made a separate agency, myriad operational and policy issues adversely affecting trademarks will continue to be ignored.
  The current situation at the PTO is not a pretty one, Mr. Chairman. The time it takes for the PTO to issue an initial opinion on the registerability of a mark is currently around 6 months or twice the congressionally-mandated goal. The time it takes to obtain a trademark registration also exceeds the goal establishes by Congress. Unless something is done about this situation, it is only going to get worse.

  For the past 2 years, trademark applications increased at a rate in excess of 10 percent a year, and the President's budget submission for fiscal year 1998 projects that the time it will take the PTO to issue an initial registerability opinion will grow to 7.3 months and the time to issue a registration will grow to 17.5 months. Obviously, this is a deteriorating situation which will continue to have severe adverse consequences on the legal protection of valuable brand names and on the global competitiveness of U.S. businesses.
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  In the absence of an independent Trademark Office, important trademark policy issues are, unfortunately, being given short shrift. As a good example, you, yourself, Mr. Chairman, have mentioned today the time the Commissioner has spent this year on copyright issues, and we believe he has spent more time on copyright policy issues than on trademark issues.

  For example, in terms of the issues of interest to the trademark community which have not been addressed, we have been waiting for over 2 years for the introduction of legislation that would implement provisions of the Trademark Law Treaty, a noncontroversial, yet critical, treaty that harmonizes administrative and procedural aspects of trademark law around the world. Although title I of H.R. 400 would appear to provide the Trademark Office with the flexibility to respond to an ever-growing workload, the bill does not address the fundamental problem that trademark policy and operations, because they represent a small fraction of the overall PTO budget and personnel, are not being given proper attention.

  That is why, Mr. Chairman, we are in favor of legislation that would create a separate Trademark Office as a Government corporation. In fact, we have proposed such legislation and have gone so far as to prepare specific bill language that we would encourage this panel to consider as an alternative approach to dealing with these problems.

  Under our proposal, management of the U.S. Trademark Office would be vested in a presidentially-appointed Commissioner of Trademarks operating under the policy direction of the Secretary of Commerce. As a Government corporation, the agency would have the requisite flexibility and authority to operate in the most cost-effective and efficient way possible.

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  Like H.R. 400, our proposal would permit the Trademark Office to procure equipment, space, and services in a more timely fashion than currently is the case in an operation driven by the needs of the Patent Office. Moreover, under our approach, the Trademark Office no longer would be subject to artificial hiring and spending constraints, which would make absolutely no sense for an agency that is funded entirely by user fees.

  Let me emphasize, Mr. Chairman, that the creation of a U.S. Trademark Office would not cost the taxpayers of this country one cent. The Office would be 100 percent user-fee-funded. In response to those who question whether the trademark operation is large enough to support itself, I note that trademarks, with a budget of around $80 million and with more than 600 full-time employees, is already larger than many existing Federal agencies.

  We strongly believe that our approach represents the best way to significantly improve the U.S. Government's trademark operations, and that is why we prefer it to H.R. 400, which does not provide for the creation of a separate Trademark Office.

  If I might summarize the remainder of our remarks, we do believe that the administration initiative to divert $92 million is ill-advised, and, therefore, wholeheartedly support enactment of your bill, H.R. 673.

  And with regard to the proposed major reorganization of the Patent and Trademark Office, we believe that it will not address the problems that currently exist. Indeed, reorganizations have been tried for a number of administrations over a number of years, but the situation is bad and requires radical, not cosmetic, surgery.

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  Thank you very much.

  [The prepared statement of Ms. Alford follows:]

  Mr. Chairman and Members of the Subcommittee, my name is Mary Ann Alford, and I currently serve as president and Chairperson of the Board of the International Trademark Association (INTA). I am employed by INTA member Reebok International Ltd. as vice president and assistant general counsel for intellectual property. Like all the officers, board members, committee chairpersons, and members of the association, I serve on a voluntary basis.

  INTA is a 119-year-old not-for-profit membership organization. Our more than 3,200 members represent the vast majority of users of the U.S. trademark registration system. As you know, Mr. Chairman, INTA has been at the forefront of changes to U.S. trademark law since as early as the Trademark Act of 1881, and, with your help and participation, recently celebrated the fiftieth (50th) anniversary of the current U.S. Trademark Act, the Lanham Act.

  INTA welcomes the opportunity to appear before the Subcommittee today to present its views on H.R. 400, the ''21st Century Patent System Improvement Act,'' and H.R. 673, the ''Patent and Trademark Office Surcharge Extension Act of 1997.'' Our comments with respect to H.R. 400 are limited to Title I of the bill, which would establish the Patent and Trademark Office as a government corporation. INTA expresses no opinion with regard to those provisions of the bill relating to substantive patent law issues. We also express no view with respect to the other bill before the Subcommittee today, the ''Patent Term Restoration Act'' introduced by Representative Rohrabacher.
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  Before outlining our views on these proposals, Mr. Chairman, on behalf of INTA, I wish to congratulate you on your appointment as chairman of the House Subcommittee on Courts and Intellectual Property. We have long-valued our relationship with you and look forward to working with you and your staff in the future. We also want to congratulate Representative Frank on his appointment as ranking member of the panel.
  Almost one year ago, INTA testified before this panel in connection with a bill (H.R. 1659) introduced by former representatives Moorhead and Schroeder that, like H.R. 400, would have established the Patent and Trademark Office as a government corporation. We testified then that such a proposal ''would, if enacted, represent a step forward in the administration of the Trademark Operations'' of the PTO. We also expressed our opinion that the many operational problems that plague the Trademark Operations can best be addressed by separating the agency's Patent and Trademark Operations into two distinct entities and by creating an independent U.S. Trademark Office. Not only is that still our view, but recent events have reinforced our strong belief that the single most important step Congress could take to improve the administration of the U.S. trademark system would be to create a separate, independent U.S. Trademark Office. Such an office, with responsibility for its own administrative, financial, personnel, and other matters, would be able to adopt and implement policies that serve the best interests of both the Trademark Operations and the user community.
  Frankly, Mr. Chairman, after much study and consideration, we are convinced that unless the Trademark Office is made a separate agency, myriad operational and policy issues adversely affecting Trademarks will continue to be ignored. This is because, as noted in our testimony last year, the focus of the PTO's activities always has been on the much larger patent operations and on patent law and policy. Indeed, under the Clinton Administration, even copyright-related issues have assumed greater importance within the PTO than trademark issues. Thus, Trademarks has been downgraded from ''second-class'' to ''third-class'' intellectual property citizenship within the PTO. There is no sound reason, whether legally-, policy-, or economically-based, why this should be so. In today's increasingly competitive, global economy, the U.S. can ill-afford to weaken any of its intellectual property regimes. Nonetheless, that is exactly what is happening.
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  For example, when Trademarks became a 100% user fee-funded agency in 1982, requiring a 500% increase in the basic trademark application fee, Congress insisted that the PTO reduce the time it takes to issue an initial opinion with respect to the registrability of a mark to, on average, three months. It also directed the PTO to reduce the time it takes to issue a registration to, on average, 13 months. These goals were met in the late 1980's and continued to be met for a number of years. Today, however, the time it takes for the PTO even to issue an initial registrability opinion is approximately six months, or twice the congressionally-mandated goal. The time it takes actually to obtain a registration is, as of the end of January 1997, 16.6 months. Indeed, a review of the President's budget submission for Fiscal Year 1998 indicates that the situation will get worse. First-action pendency is projected to increase to 7.3 months in Fiscal Year 1998 and the pending time to registration is projected to increase to 17.5 months. At the same time, trademark applications are increasing at a rate that exceeds ten percent a year. It does not take much to realize that this is a deteriorating situation that will continue to have severe adverse consequences on the legal protection of valuable brand names and on global competitiveness of U.S. businesses.
  In the absence of an independent Trademark Office, important trademark policy issues are, unfortunately, being given short shrift. For example, we have been waiting for over two years for the introduction of legislation that would implement provisions of the Trademark Law Treaty, a noncontroversial, yet critical, treaty that harmonizes administrative and procedural aspects of trademark law around the world. Similarly, it has taken the PTO nearly four years to take the necessary steps to reinstitute the public advisory committee on trademark affairs. By any measure, delays of two or four years to implement such basic policy steps are unacceptable: yet they are being accepted as ''business as usual'' within the PTO today.

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  Although Title I of H.R. 400 would appear to provide the Trademark Operations with the flexibility to respond to an ever-growing workload, the bill does not address the fundamental problem that trademark policy and operations, because they represent a smaller fraction of the overall PTO budget and personnel, are not being given proper attention. That is why, Mr. Chairman, we are in favor of legislation that would create a separate U.S. Trademark Office as a government corporation. In fact, we have proposed such legislation, and even have drafted a bill that we would encourage this panel to consider as an alternative approach to dealing with these problems.
  Our proposal is not etched in stone, and we would be delighted to work with the Subcommittee and its staff on any aspects of our proposed bill language. Nonetheless, we think that the following provisions are essential for successful and efficient trademark operations. Our proposal, for example, would vest management of the U.S. Trademark Office in a presidentially-appointed Commissioner of Trademarks, operating under the policy direction of the Secretary of Commerce. As a government corporation, the agency would have the requisite flexibility and authority to operate in the most cost-effective and efficient way possible. Like H.R. 400, our proposal would permit the Trademark Office to procure equipment, space, and services in a more timely fashion than currently is the case. Moreover, under our approach, the Trademark Office no longer would be subject to artificial hiring and spending constraints, which make absolutely no sense for an agency that is funded entirely by user fees. In order to assure user input with respect to major policy issues, our proposal also creates a nine-person Management Advisory Board.
  Let me emphasize, Mr. Chairman, that the creation of a U.S. Trademark Office would not cost the taxpayers of this country one cent. The office would remain 100% user-fee funded. In response to those who question whether the Trademark Operations is large enough to support itself, I note that Trademarks, with a budget of around $80 million and with more than 600 full-time employees, is already larger than many existing federal agencies. Finally, based upon our own financial analyses and workload projections, it is clear that the Trademark Operations would remain on sound financial footing. As noted earlier, the number of filings is increasing at an unprecedented rate. The income derived from such filings should protect the economic viability of a separate Trademark Office. Further, should any fee increase be required, let me assure you that, given the current dismal state of affairs, trademark owners would view such increase as a small price to pay for the creation of an independent Trademark Office.
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  We strongly believe that our approach represents the best way to significantly improve the U.S. government's trademark operations. That is why we prefer it to H.R. 400, which does not provide for the creation of a separate Trademark Office. If, however, our approach does not prove successful, we would urge you and your colleagues, at a minimum, to consider amending H.R. 400 to make it more consistent with the provisions of the government corporation proposal introduced last year by Senator Hatch. As you will recall, under Senator Hatch's proposal, the PTO's Trademark Operations would be an ''autonomous'' subdivision of the agency, responsible for administering its own operations and for controlling its own budget, management structure and procedures. Although H.R. 400 provides that the head of the PTO's Trademark Operations ''shall be the principal policy and management advisor[] to the Director [of the United States Patent and Trademark Office] on all aspects of the activities of the Office that affect the administration of ... trademark operations,'' in our view, this provision does not assure the operational autonomy of the PTO's Trademark Operations. Nor does the provision that would prevent trademark user fees from being spent to support non-trademark activities.
  It is unfortunate, indeed, Mr. Chairman, that, rather than working to improve trademark operations, the Administration has embarked on two policy initiatives that, we believe, are ill-advised because they will exacerbate a deteriorating situation. The first is the proposed reorganization of the PTO. The second is the President's Fiscal Year 1998 budget submission, which contains plans to divert $92 million in PTO user fees to non-PTO activities.
  In our opinion, the proposed reorganization will not result in improved management of the Trademark Operations. Indeed, just the opposite is likely to occur. With respect to trademark policy issues, for example, we note that the Commissioner ''determines'' the policies of the agency, the Assistant Commissioner for Trademarks ''assists'' the Commissioner in this task, the Legislative and International Policy Group is the ''principal advisor to the [Commissioner] on public policy matters related to intellectual property protection,'' and the Administrator for Trademark Operations provides ''policy direction'' to the Trademark Examining Groups. By diffusing and diluting responsibility for policy matters it will be even more difficult for the PTO to focus on important trademark issues and to adopt consistent policies. Absent a single source of oversight and responsibility, we are quite concerned about overall accountability.
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  With regard to operational matters, the proposed reorganization would create a new position of Chief Executive Officer (CEO), who would be responsible for both patent and trademark operations. As we understand it, the CEO would be appointed for a fixed term by the Secretary of Commerce. The Assistant Commissioner for Trademarks, who is a presidential appointee under 35 USC 3, would have no operational responsibilities.
  We believe the proposed creation of the position of CEO and the division of responsibility for trademark policy and operational matters represent a fundamental change in the management of the PTO and warrants close congressional scrutiny prior to implementation. It would appear, for example, that the new CEO will have more authority and responsibility than the presidentially appointed assistant commissioners but will not be accountable to those who pay his or her salary. In addition, we see nothing in the proposed reorganization that assures that trademark operational issues will be given the attention they deserve. Thus, from the standpoint of the Trademark Operations, the creation of the position of CEO, although guaranteed to result in increased administrative overhead, is unlikely to result in improved oversight and management of the Trademark Operations.
  We understand that the Administration believes that responsibility for policy may be separated from responsibility for operations. In our experience, however, trademark policy and operations are inextricably linked. Within the PTO, policy drives operations and the operational capabilities of the office affect the development and implementation of policy. Thus, we question the very rationale for the reorganization proposal.
  Focusing on the second of the recent developments referred to above--the Administration's proposal to divert $92 million from the patent fee surcharge account to other tax-funded areas of the government in fiscal year 1998--we believe this proposal is unconscionable. Therefore, Mr. Chairman, we wholeheartedly support enactment of your bill, H.R. 673, which will, in the future, put an end to this practice. As you noted in your remarks accompanying introduction of the bill, the Administration's proposal constitutes an ''unwarranted tax'' on the users of the PTO. Stated simply, the fees paid by users of the PTO should be used solely and exclusively for the benefit of the PTO.
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  Although we recognize that the Administration's budget proposal is directed solely at the patent fee surcharge account, if adopted, it clearly will also have a negative impact on the PTO's Trademark Operations because many shared services, such as automation, either will be reduced or, worse, eliminated entirely. This clearly, would affect adversely the operational problems we described earlier. Once again, we note that this result would be avoided if a separate Trademark Office existed.

Thank you, Mr. Chairman, for providing INTA the opportunity to testify on these important issues. We hope our proposal to create a separate U.S. Trademark Office will be given serious consideration. We sincerely believe our proposal is in the public interest.


  Mr. COBLE. Thank you, Ms. Alford.

  I'm sure you know that the subcommittee feels rather strongly about trademark protection. The Madrid Protocol Implementation Act has already been introduced, and the trademark law treaty implementation legislation will be introduced imminently, probably within the next 3 to 5 weeks.

  Ms. ALFORD. We certainly hope so.

  Mr. COBLE. Thank you, Ms. Alford.

  Mr. Holmer.
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  Mr. HOLMER. Thank you, Mr. Chairman. If it's OK with you, I'd like to use just 4 minutes of my time.

  Mr. COBLE. That will be fine.

  Mr. HOLMER. I represent the research-based pharmaceutical industry, about 100 of our country's leading pharmaceutical and biotechnology companies. The companies I represent are the source of over 90 percent of new medicines in the United States.

  You have my written testimony, Mr. Chairman. I'll describe it in about 30 seconds.

  We support the enactment of H.R. 400. We support the restoration of patent time lost as a result of administrative delays at the PTO. We support strengthening the PTO by making it a Government corporation. We support publication of patents within 18 months of their filing, and we support H.R. 673, which will stop the diversion of PTO user fees paid by our members.

  That, Mr. Chairman, is our position, but I'd like to take just a moment to explain to you why I'm really here today. I'm here today because of a young man named Paul Watrous. Paul is a high school senior in Irving, TX. He's there in Dick Armey's district. I'm here because of him and millions of other Americans like him. Mr. Chairman, a picture speaks a thousand words, and that's Paul Watrous' picture over there on that easel.
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  Paul has asthma, and he's one of the real success stories of the pharmaceutical industry. When he was in the fifth grade, Paul was hospitalized with asthma attacks 15 separate times for up to a week at a time. Four years ago, he started on a clinical trial for a new drug called Accolate made by one of our companies, Zeneca. Since then, he has not been hospitalized once for an overnight stay.

  Now, you may be asking, what does Paul Watrous have to do with H.R. 400 and H.R. 673? It's relevant, and in my view it's important because we need to have a national strategy in this country to promote biomedical innovation. The enactment of H.R. 400 and the enactment of H.R. 673 are important to that overall national strategy.

  We've made extraordinary strides as a nation to combat and to cure disease. In 1996, the companies I represent introduced 53 new medicines covering 40 separate diseases--a new drug for Alzheimer's, 3 new medicines for MS, a new drug to treat asthma, three medicines for AIDS, 7 new orphan drugs, 5 for cancer, the first insulin drug in the last 14 years. We don't plan to stop there, Mr. Chairman.

  In 1997, the companies that I represent will invest $19 billion--that's with a ''B''--will invest $19 billion on research and development for new cures and new treatments. A record 22 percent of sales are going to go into R&D. We've got, for example, 22 new medicines in development for Alzheimer's, 107 for heart disease and stroke, 110 for AIDS, 215 for cancer.

  But we can only continue that record of achievement and our future research if we have a national strategy for biomedical innovation. Strong patent protection is crucial to that strategy. If we don't have strong patent protection, we don't get new drugs discovered, and, therefore, no industry has a greater stake in a strong patent system than does the pharmaceutical industry.
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  So that's why, Mr. Chairman, we are so very grateful for the leadership that you have shown in introducing H.R. 400 and in introducing H.R. 673. We support both of those bills, and we urge their early adoption.

  Thank you.

  [The prepared statement of Mr. Holmer follows:]


   Good morning, Mr. Chairman and Members of the Subcommittee. I am Alan F. Holmer, President of the Pharmaceutical Research and Manufacturers of America, or PhRMA. PhRMA represents more than 100 of the country's leading, research-based pharmaceutical and biotechnology companies, which discover and develop more than 90 percent of all new medicines. There is no industry in America that is more committed than ours to strong protection of intellectual property rights in the U.S. and around the world. I appreciate this opportunity to explain the reasons why PhRMA supports H.R. 400, the 21st Century Patent System Improvement Act.

  While the details of H.R. 400 are important, I urge that we first recall the reasons why we established and continue to care about our patent system. It is because all Americans--young and old, rich and poor, women and men, rural/urban/suburban, of all races, colors and creeds--benefit from innovation in our daily lives. Our nation's founders recognized in the Constitution that innovation saves time and labor, expands horizons, empowers the human race, and provides more and better choices. Indeed, biomedical innovation literally saves lives through the discovery and development of new medicines that prevent, cure and treat diseases.
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  Through innovation and hard work, we have transformed our fledgling 13 state-republic into today's Superpower, put Americans on the moon, and revolutionized the way we teach, learn, raise our families, travel, and conduct our lives and our businesses.
  Through biomedical innovation specifically, we have made great progress in the never-ending war against disease. Pharmaceutical companies are leading the way in the search for cures. Last year alone we brought 53 new medicines to the market for patients suffering from 40 diseases. For example:
With new protease inhibitors, many HIV/AIDS patients are again planning their lives rather than their funerals.
With new drugs for asthma, asthmatic children and their parents are missing fewer school and work days and having more fun.
With new antidepressants and medicines for schizophrenia, parents who might otherwise be hospitalized or dysfunctional can remain in their jobs and in their homes, taking their kids to church, soccer and basketball games, Scouts and music lessons. They can review their kids' homework, pack their lunches before school each morning, and continue generally to be functional families.
  Our medicines help and heal not just individuals, but whole families.
  Pharmaceutical discovery and development is costly, lengthy and risky. On average, it takes $500 million and 12—15 years to move a compound synthesized in the lab to the market. Only 1 in 5,000 compounds is a commercial success; the failure rate is extraordinary. The political risks are sobering as well. Internationally, federally and in the states, cost containment pressures yield proposals and measures that restrict:
the risk-taking innovators' freedom to price their medicines based on market factors rather than government mandates, and
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the ability of physicians to prescribe the newest or most appropriate medicines for their patients.
  Despite these many disincentives, PhRMA firms are doing their part to promote biomedical innovation. This year they're investing a record $19 billion in R&D--more than the total budget of the National Institutes of Health, and indeed more than half of the state budgets. But to optimize-biomedical innovation and its overwhelming benefits to society, the United-States Government needs a strategy and needs to play its part. We support enactment of H.R. 400 as part of the government's strategy to promote biomedical innovation.

  Patent protection is essential to promote innovation. Patents provide not a monopoly, but simply a reasonable period of market exclusivity to encourage R&D. Without patent protection, free riders would make it unprofitable for private companies to invest substantially in costly R&D.
  H.R. 400 is comprehensive legislation to improve our patent law. While each of the titles in the bill merits enactment, I will focus on three provisions of particular interest to our industry.
  First, H.R. 400 will strengthen the Patent and Trademark Office by converting it to a government corporation with resulting operational and fiscal flexibility. Without a modern, efficient, competent PTO, American innovation--and thus American competitiveness, knowledge-based industries and high-wage jobs--will suffer irreparably. In addition, incorporation will underscore that user fees paid by patent and trademark applicants should be used solely to fund PTO operations.

  Second, H.R. 400 also will restore effective patent life lost as a result of unusual administrative delays at PTO under the new 20-year-from-filing patent system. Prompt examination of applications is a matter of concern with respect to pharmaceutical and particularly biotechnology inventions which, on average, are pending before the PTO for significantly longer than 18 months. Under the former 17-year-from-grant system, an innovator did not lose patent life as a result of delays at the PTO. The 17-year-clock did not start ticking until the patent was issued. Under the new system, however, lengthy delays reduce patent life since the clock starts ticking immediately upon filing. H.R. 400 will ensure that innovators are not victimized by any unusual administrative delays that are not their fault--which, regrettably, could become unusual if $92 million in PTO user fees are diverted for other purposes.
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  Third, H.R. 400 will provide generally for publication of patent applications 18 months after filing. This is the rule in other developed countries. Publication, with provision for a royalty beginning with publication, will result in the availability in English of applications filed in this country by foreign applicants, just as U.S. origin applications are available in foreign lands. PhRMA supports upward harmonization of-patent laws, with adequate and effective protection of pharmaceuticals, throughout the world.
   Mr. Chairman and Members of the Subcommittee, I conclude with two general points. First, PhRMA opposes the diversion of PTO user fees for unrelated purposes. Our members pay fees to the PTO for a specific service, patent examination. These fees are not general tax revenues for whatever use the Congress and President may agree upon. Yet both the President and the Congress, Democrats and Republicans, have proposed or diverted these user fees to compensate for budget cuts adversely affecting other programs wholly unrelated to the PTO and innovation.
  It is unwise to underfund the PTO, which serves as a gatekeeper to obtaining adequate patent protection (and thus promoting innovation). It is wrong to take innovators' user fees and treat them as general taxpayer revenue. To stop such user fee diversion, PhRMA supports H.R. 673, the Patent and Trademark Office Surcharge Extension bill introduced by the Chairman on February 11 to ensure that user fees are available only to the PTO for PTO-authorized activities and operations.
  Second, any patent restoration accomplished through H.R. 400 of course must be available to innovators on a nondiscriminatory basis. I note in this regard that H.R. 400 will not, in combination with martial-patent term restoration under the Hatch-Waxman Act of 1984, provide a longer patent term for pharmaceutical patent holders than other innovators. H.R. 400 will simply restore any patent term lost at the PTO because of unusual administrative delay which, in any event, concludes with patent issuance. The Hatch-Waxman partial restoration of patent term lost due to lengthy FDA processes begins with patent issuance. Obviously, these restoration periods (only partial in the case of Hatch-Waxman) do not overlap. The net effect of both restoration measures would only reduce (not eliminate) pharmaceutical patent term lost by regulatory delays. Pharmaceutical innovators will still be treated less favorably than other innovators with respect to effective patent term, because the Hatch-Waxman Act provides only partial restoration. Both types of delay, at the PTO and the FDA, warrant restoration to at least-reduce the loss of pharmaceutical patent term.
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  In conclusion, PhRMA strongly supports H.R. 400 and H.R. 673, urges their speedy enactment, and welcomes the opportunity to answer any questions about them.

  Mr. COBLE. Thank you, Mr. Holmer.

  You know, we've heard a lot about sheep cloning this week. I'd like to clone this panel because you all have heaped praise upon 400 and 673, and you stayed within your 5-minute timeframe.

  Mr. FRANK. Could we leave our clones to listen to them?

  Mr. COBLE. Pardon?

  Mr. FRANK. Can we leave our own clones behind to listen to them? [Laughter.]

  Mr. COBLE. I won't touch that one.

  Mr. LUDLHAM Mr. Chairman, that company is a member of BIO, we're happy to say.

  Mr. COBLE. Pardon?

  Mr. LUDLHAM The company that performed that experiment is a member of BIO, we're happy to say.

  Mr. COBLE. Oh, very interesting.
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  Well, I do appreciate you all being here. Thank you for staying within the time constraints. I'll try to impose the same time upon my questioning.

  Mr. Mike Kirk, I was going to ask Mr. Rohrabacher this question; but for the 5-minute rule, I would have asked him. How about giving your response to his description of H.R. 400 as ''The Steal American Technology Act?'' How do you respond to that?
  Mr. MICHAEL KIRK. Mr. Chairman, that's a little like comparing Mother Teresa to Al Capone. [Laughter.]

  I think your bill is the Protect American Jobs Act. As I indicated in my statement, it will protect jobs in this country by ensuring that patent terms don't expire decades too late, forcing manufacturers to go offshore to compete in world markets. It will protect American manufacturers and jobs in this country from later patents issued to foreign companies when the reverse is not true. It will protect American jobs, Mr. Chairman.

  Mr. COBLE. Well, I must confess that was a rhetorical question. I thought that would be your answer. [Laughter.]

  I'm glad to hear it.

  Mr. John Kirk, how damaging are submarine patents to the present system and to the economy? And No. 2, does H.R. 400 adequately address the issues of guaranteeing at least 17 years of patent term for inventors without allowing the practice of submarining?

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  Mr. JOHN KIRK. The problem with the guaranteeing of the term under the present act--the 20-year patent term which you've already passed I think takes care of the submarine patent issue. Our section--actually, the ABA took a position on the 20-year patent term in 1967 or 1968, when President Johnson had that Patent Commission.

  But the problem comes along, if the Patent Office is underfunded, is not able to issue office actions prior to the publication date, then the applicant, be it individual, large company, or whoever, would not have the choice then of whether or not to determine whether they're going to get a patent or not get meaningful coverage, and elect to keep the invention as a secret. That election is valuable to the individual inventor, the small business, and colleges and universities, so that early publication at least gives the applicant to the patent an option to determine whether or not they're going to keep it as a trade secret.

  I have a little bit of a problem about the time that the H.R. 400 requires the election of that because you run into the problem that if you elect when filing the application and you're out trying to find a licensee, if you find an angel that wants to get foreign coverage while you're still within the period that you can apply for it that early election becomes a problem unless you can repudiate it later on. But I think you have to have an election in the thing to determine whether or not you want to keep something as a trade secret.

  Mr. COBLE. Thank you, sir.

  Ms. Alford, under your proposal that a separate Government corporation be created for trademarks, let me ask you this: would both the Patent and Trademark corporations have their own administrative support staff to handle what may well be duplicative functions, such as accounting, human resources, data processing, et cetera? And if the answer to that is in the affirmative, to what extent would that add to the cost of operations compared to the current shared administrative support?
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  Ms. ALFORD. Obviously, there would be the need for some duplicated services, as there is between any two agencies within the Government. We've run the numbers, however, and believe that it would not significantly increase the cost, if at all. We'd be glad to sit down and talk at any time about those numbers and run through them with you again.

  More importantly, however, the trademark community is so distressed with the current situation in the Trademark Office that we would be willing to tolerate some increase in the fees required if we could obtain quality services and get trademark registrations out of the Office within a reasonable period of time.

  Mr. COBLE. I thank you, Ms. Alford. I see the red light now shines in my eyes. [Laughter.]

  So I will recognize the distinguished gentleman from Massachusetts.

  Mr. FRANK. To begin with, Ms. Alford, are there substantive issues that are not being handled well or is it just delay? What's your problem with the current Trademark Office?

  Ms. ALFORD. It's delay. It's disorganization. I mean, the situation with regard to the space is so bad, for example, and the problem that it's created with regard to storage of files has, I understand, created the situation where OSHA has issued a citation for unsafe working conditions.

  Mr. FRANK. So it's not policy disagreements; it's inadequate resources being dedicated to the important function?
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  Ms. ALFORD. That's right, but it's also a----

  Mr. FRANK. Thank you.

  Ms. ALFORD [continuing]. Question of attention to trademark issues over patent. Patents always get more attention. If you look at the initial draft of the 10 most important policy issues of the Trademark Office for 1997, there was not a single trademark issue on it.

  Mr. FRANK. We could call it the Mommy Likes Them Better Act when we go forward. [Laughter.]

  The point, though, about resources is obviously important because all of you are here saying that we should not take $92 million away from the Patent Office so we can help balance the budget, and you want a new agency. I agree with much of this, but I think we ought to be very explicit about something. Part of your problem is that you're trying to exist in a world in which everybody says Government in general is a terrible thing, and you want to be the exception, and that's not going to work very well.

  I understand downsizing is a good thing, and less is better. You were complaining--was it one of the--Mr. Kirk was complaining about a reduction in the number of patent examiners. Well, I agree we shouldn't be reducing patent examiners, but if we live in a world in which the reduction in the number of Government employees is always a good thing, don't be surprised when people don't have a footnote that says, ''except for patent examiners.''

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  I mean, I think part of the problem we're facing here is we are in a political and intellectual climate in which people demonize the performance of public responsibilities in general, and there are no public responsibilities performed in general; they are all very specific. They all come down to specific things.

  Why is the $92 million being taken away from you, which becomes $500-and-something million over a 5-year period? Because people say we've got to balance the budget by the year 2002 and we've got to cut taxes substantially and we have to significantly increase military spending because Mars might attack. I'm out of other reasons, what that's all about. [Laughter.]

  It doesn't work. I mean, something's got to give. I will say this: given the climate we're in, when you or any other group come to us--and we're easy; we're the turf helps, and so we'll probably be all for your $92 million, but, on the other hand, I would just remind you that I voted for the diversion, I think, and, Mr. Kirk, it has to do with your--with another one of your sections. A proposal came to take money from the Patent Office and give it to the Legal Services Corporation.

  Mr. JOHN KIRK. I'm well aware of that, Mr. Frank.

  Mr. FRANK. Yes. Well, I mean, what's the Bar Association's position on that amendment?

  Mr. JOHN KIRK. Do you mean our section?

  Mr. FRANK. No, the Bar Association.

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  Mr. JOHN KIRK. The American Bar Association supported that diversion.

  Mr. FRANK. That diversion. Well, that's my point. The point is that if you put people into that kind of a box, bad decisions will get made. And I'm telling you, therefore, that I would hope you want a new Government agency; you want more Government employees. All of you want to not have this money go to help offset.

  I mean, I agree with you on the specifics, but please take a minute to add your objection to the whole notion of downsizing and the demonizing of Government, because, as I said, everybody wants to be an individual exception to that, and it doesn't work. People who come and tell us that they want more public funding, as I do in many of these areas, had better join us in resisting the assaults on the Federal system because otherwise these things are going to happen.

  Mr. Kirk.

  Mr. JOHN KIRK. May I respectfully comment to that? There's one great distinction in terms of downsizing Government when you are talking about an employee of the Patent and Trademark Office, and that is the users of the Patent and Trademark Office are paying for that employee.

  Mr. FRANK. I agree, and the users--Mr. Kirk, everybody's an exception. I just want to tell you that you can make that exception if you want. You couldn't even sell the Bar Association on it; right? I mean, the Bar Association didn't even agree with you, and you're an active member.

  I just want to tell you, a world in which you are an exception to a general principle of reducing, et cetera, is not going to work well; plus, remember, part of this ideology doesn't have to do with who pays for it. People talk about public employees as if they were some blight on the Nation; you know, ''these bureaucrats, they're interfering with things.'' Well, you're talking about some public employees who perform very important functions, but they're not the exception. Most public employees perform important functions that are performed because it's not appropriate to have them performed in some ways privately. And I think the trouble is now everybody's going to make those fine distinctions.
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  And, by the way, there are other user fees. You know, then the highway people say, wait a minute, don't use any of our money for this. I mean, there are a lot of user fees, and by the time you totally segregate all the user fees, you're going to have some serious problems.

  Thank you, Mr. Chairman.

  Mr. COBLE. Thank you. I think much of what Mr. Frank said has merit, but I was going to indicate the distinction that the patent examiners are, indeed, paid with user fees, which are not public moneys or tax moneys.

  Mr. FRANK. Well, do we then--excuse me, Mr. Chairman. Do we then take all the highway money off-budget and all the other things that are paid for by user fees off-budget? Because when we do, we aren't going to have much of a budget left.

  Mr. COBLE. But I think, Barney, in that case, there would be more public moneys involved with the highway equation. As I said, much of what you said has merit, but, interestingly, I was going to make the same point.

  Mr. FRANK. I don't mean to be ungracious; I'll settle for that, Howard. [Laughter.]

  Mr. COBLE. Now let me go to the right and recognize the gentleman from Virginia, Mr. Goodlatte.

  Mr. GOODLATTE. Thank you, Mr. Chairman.
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  I'd like to pursue this whole issue with you regarding what this accomplishes for patent reform. What I'd like to address is this whole issue of publication of patents after 18 months, and the claim of those who oppose this that we're somehow giving our secrets away. To me, that isn't at all how our patent system has worked. We protect people's ideas through the patent process by publishing it and telling the whole world that this person has this idea, and that idea is protected. If they're concerned about somebody else learning about their idea, then they need to follow a trade secret process rather than a patent process.

  But it seems to me that one of the problems we have with our current laws is that the meaning of the phrase that we see on lots of goods that are out there available in the marketplace, the phrase ''patent pending,'' doesn't have a whole lot of teeth behind it because, as I understand it--and you correct me if I'm wrong--under current law, if you are subsequently granted a patent, but somebody has stolen your idea in the meantime and has been copying it and producing it and selling it during whatever course of time, under current law all you can do is require them to stop as of the date the patent is issued. You don't have any ability to go back and collect royalties for that previous time.

  But under this change in the law, where we're now going to require publication after 18 months, during that time now you'll be able to go back and obtain royalties. Is that not correct? Mr. Kirk.

  Mr. MICHAEL KIRK. Mr. Goodlatte, that is absolutely correct, and there's another comment that was made this morning by Mr. Rohrabacher that needs to be put into context. He made the statement that, when we publish these applications during their pendency before patent grant, we're giving this technology away to the entire world. The fact of the matter is that when we publish this technology upon patent grant that same ''giveaway'' occurs unless you get patents in every other country where you want protection. So it is a misleading statement to make that comment, and you are absolutely correct that the publication with provisional rights gives inventors under this bill something they do not today have.
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  Mr. GOODLATTE. So many of the products that are patented are not simply an idea that may not be available to somebody who is a competitor. So many of them, because of the rapidly-changing technology of today, have to be rushed to the marketplace immediately and have that patent pending label on. So all of the ideas that are going into them are available to anybody who wants to get a hold of that product, look at it, put it into all the sophisticated scientific equipment to analyze what its components are, what it's made of. And if they want to copy it and get it on the marketplace and make some profit before the patent is finally issued, the current system allows them to game that and take advantage of the small entrepreneur who had a very good idea. And our system corrects that and prevents them from being able to abuse it in that fashion.

  I am, like you, getting tired of those who are attacking legitimate efforts to strengthen American business. To me, the greatest proof that what we are doing is not something that benefits the Japanese is the long, long, long list of American businesses and associations that want these patent reforms because they know that they are vitally important for our industries to be competitive worldwide.

  Anybody else want to comment on that softball? [Laughter.]

  Mr. HOLMER. If I could, Mr. Goodlatte, I think the fundamental point is that society does not benefit from secret inventions.

  Mr. GOODLATTE. Right.

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  Mr. HOLMER. The tradeoff contemplated under our Constitution and our laws over the years has been full disclosure of an invention in exchange for a limited period of market exclusivity. All H.R. 400 does is to try to enshrine that into U.S. law, and that's why I think you're to be commended for supporting it.

  Mr. GOODLATTE. Thank you, Mr. Chairman.

  Mr. COBLE. Thank you, Mr. Goodlatte.

  Mr. Delahunt.

  Mr. DELAHUNT. Yes, I was interested, Ms. Alford, in your comment about the Trademark Association being willing to consider increased fees to meet the situation, which is, as you described, one that's extremely distressful.

  Ms. ALFORD. That's right.

  Mr. DELAHUNT. You know, it appears, again, just listening to this dialog for the first time, that not only is it a problem of restructuring, but more so a question of resources, inadequate resources.

  Ms. ALFORD. That's right, it is, Congressman Delahunt, a question of resources. But, as I said, it's also a question of emphasis in terms of the fact that the revenues of the Patent Office and the budget of the Patent Office are 85 percent-plus oriented toward the patent system. The trademark system is quite small by comparison. As a result----
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  Mr. DELAHUNT. I guess, then, I'd like to direct----

  Ms. ALFORD [continuing]. It gets little attention, essentially.

  Mr. DELAHUNT. Excuse me, but I guess the next question would be--it would seem, again, from what I'm hearing today, that in terms of those that are concerned about patent, there's also an acknowledgment that it's resources that's really at the heart of this particular problem, and that the bill to restructure the system to comply with international agreements and to improve the efficiency of the system is good, but more than that, it is resources.

  Would the patent community also consider enhanced or increased user fees?

  Mr. MICHAEL KIRK. Mr. Delahunt, let me respond to that. First of all, we need to understand that fees for the trademark examining operation have what are referred to as a ''fence'' around them. They are not subject to this taking. The trademark operation is going to get the entire amount of the trademark user fees that are paid to it in the future years. I think the concern that Ms. Alford is expressing is that she is expressing dissatisfaction with the current operation, and would be willing to increase those fees somewhat to get the service that she wants.

  I think on the patent side of the house it's a rather different animal.

  Mr. DELAHUNT. You need the fence?

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  Mr. MICHAEL KIRK. We would love to have a fence because we think we have adequate resources; we just can't get our hands on them.

  Ms. ALFORD. If I might follow that up, the fact that the patent fees are being reduced does have an impact on trademark operations. While, yes, there is a fence around our fees, as Congressman Coble mentioned, there are a number of joint services which are provided to both the patent and trademark operations, and to cut the patent fees significantly diminishes the services available to the Trademark Office under those joint areas.

  Mr. DELAHUNT. So it's a permeable fence, in other words?

  Ms. ALFORD. I guess you could say that.

  Mr. BERRIER. No, no----

  Ms. ALFORD. It's hard to say.

  Mr. DELAHUNT. OK, thank you. That's all the questions I have.

  Mr. FRANK. So the only vote for raising patent fees comes from the trademark people? [Laughter.]

  Mr. DELAHUNT. Well, no--let's--you know, I'd yield my time to the ranking member, but maybe we should pursue that and get some sort of response from the patent community in terms of my question, in response to my question.
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  Mr. MICHAEL KIRK. Let me attempt to, if I might, Mr. Delahunt. It is correct that there are certain common operations--for example, in automation, in personnel, in procurement--that are funded both jointly by patent fees and by trademark fees. Where the trademark operation benefits from this joint funding is on those occasions where there is a demand, let us say, for a new automated system in trademarks which might exceed the yearly contribution of the trademark operation. Then those automation resources are available and can be made available in greater proportion than the contribution of the trademark operation to provide the services.

  But it doesn't work the other way, sir. The patent operation, when it needs automation resources, the contribution of the trademark operation to that total package is relatively small. So, basically, it is sort of a one-way fence. However, it is not something that the patent community is concerned about. The patent community is concerned about the fact that it is going to lose a billion dollars if this budget proposal goes forward without change over the next 5 years. That's the major concern.

  Mr. DELAHUNT. Thank you. I have no further questions, Mr. Chairman.

  Mr. COBLE. I thank the gentleman.

  The gentleman from Indiana, please.

  Mr. PEASE. No questions, Mr. Chairman.

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  Mr. COBLE. The gentlewoman from California.

  Ms. LOFGREN. Thank you, Mr. Chairman.

  This has been very interesting to listen to all of you. I think you were all here when the testimony from Congressman Rohrabacher and Campbell occurred, and I was wondering, Mr. Kirk, Mr. Michael Kirk, if you could comment on the compromise measure recommended by Congressman Campbell, which is, as I understand it, a right not to have publication unless an extension is filed, and even at that point there would be discretionary authority for the Commissioner to decline to publish, and if you can come up with a rationale on how that would be an improvement over protection from publication that is in H.R. 400.

  Mr. MICHAEL KIRK. Yes, Ms. Lofgren. Let me first of all comment that we should never lose sight of the fact that H.R. 811, like H.R. 359, is fatally flawed in that it continues to measure patent term from grant. It has not changed in that regard.

  In H.R. 811, there are two provisions that deal with publication. One of those, the one that I think was Mr. Rohrabacher's proposal, would allow an applicant to keep an application pending for decades without publication because of the burdens that would be placed on the Commissioner to cause publication to occur.

  With respect to Mr. Campbell's proposal, he would put a burden on the applicant to demonstrate that he was not being dilatory in processing his application slowly by filing a ''continuing application,'' as it is put in that legislation. The problem with this is that any applicant who has a bent for delay can simply augment his basic application with additional subject matter, as it's called. In other words, he's enlarged his or her invention, and he files a ''continuation-in-part'' application. I daresay the Commissioner is going to be extremely hard-pressed, particularly with there being no guidelines, to demonstrate what constitutes dilatory tactics and what does not. He's going to be extremely hard-pressed to make a finding that a dilatory tactic has been employed because the inventor simply responds, ''But, sir, I have enlarged my invention that I want to bring forward for the benefit of the public. Certainly I'm not being dilatory in doing that.''
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  So I think there are problems with both of the publication schemes. But the fundamental problem is that the term measured from grant. This is a critical flaw because in some of the most outrageous cases of so-called submarine patents, the claims that were at dispute in the lawsuit did not enter the pending application until over 30 years after it was initially filed. So even if you did publish it, you still don't know where it's going to wind up.

  Thank you.

  Ms. LOFGREN. Thank you.

  The other Mr. Kirk, the other thing that struck me, and I can't recall which of the two witnesses mentioned it, but I think the phrase was that the little guys would have a hard time retaining counsel and pursuing remedies under H.R. 400, the bipartisan bill. But ultimately, your patent is only as good as your actions taken to enforce it. So I'm wondering if you have a comment on the issue of whether small inventors are adequately protected under either bill, when once the patent is issued, one needs to preserve it through legal action.

  Mr. JOHN KIRK. Well, let me preface my remarks on that to state that, throughout my 30 years of practice, I've predominantly represented small businesses and individual inventors. When I was invited to testify here, I looked back through my records, and actually right now I have only three clients for whom I do not pay the small entity fee when we prepare and file a patent application. So I've always been concerned about these issues as they appear in this legislation.

  And, Ms. Lofgren, if you remember on the prior bills, members of our section have talked with the committee concerning the publication issue and the right for the individual inventor or small business to at least get a look at whether or not they're going to receive meaningful patent coverage when the application is filed. Recognizing there is an 18-month publication period, how can the individual inventor be protected with this?
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  To a large measure, some of that is in H.R. 400 in allowing him to elect. Now, as I mentioned before, I have a little problem of seeing how a resourceful individual inventor is going to make use of that election if it is irrevocable at the time of filing. If that is changed so that the individual inventor merely declares, or even publication does not occur until 3 months after the first Office action, so then an application could be withdrawn application. I mean, that could be a ministerial Act just as much as paying the issue fee and having a patent issue.

  Then the provision, H.R. 400, also allows for early publication if some member of the industry wants to get that flag out there to the rest of the world as to what they're doing. So I think in terms of the publication issue that H.R. 400 is adequate to handle it. I think the 20-year term takes care of the hiding materials, and our section in ABA entirely has favored it for years.

  Ms. LOFGREN. Thank you.

  Mr. Chairman, my time is up, but I was just wondering if perhaps on the trademark issue--I think what I'm hearing is that it's not just a financial issue, but a matter of attention perhaps related to the reorganization as well--whether the subcommittee might separately take a look at that reorganization?

  Mr. COBLE. I think that can be done subsequently.

  I have a couple of additional questions, and I will yield a second round to members if they also have additional questions.
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  Mr. Berrier, there have been proposals to allow the PTO to set its own fees subject to certain guidelines rather than have these fees be set by the Congress, as is provided by H.R. 400. What's your read on this?

  Mr. BERRIER. Well, certainly we want to make sure that the Patent Office has all the funds that it needs to operate effectively and efficiently, but we are also very concerned about cost. We think that oversight and check and balances are needed in that regard, and so we favor and support Congress setting the fees to provide that oversight.

  Mr. COBLE. Well, I concur with that.

  Mr. Holmer, I had a couple of questions for you, but you addressed them both in your testimony, but I want to thank you for sharing your story with Paul. And did you say he has not been hospitalized in 4 years?

  Mr. HOLMER. That's right. When he was in the fifth grade, he was hospitalized 15 separate times for up to a week at a time. Since he's been on the new drug, for the last 4 years he hasn't been hospitalized once overnight. It's just an extraordinary story.

  Mr. COBLE. That is a very good story as well.

  Mr. Ludlam, Messrs. Rohrabacher and Campbell indicated or suggested requiring publication only for patent applications filed abroad as a solution to the perceived publication problem for American inventors. What say ye to that?
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  Mr. LUDLAM. Creating a two-class system on publication I think is an open invitation for abuse. Unfortunately, it's the case that some of the most notorious abusers of the patent system have been inventors who probably are not filing abroad. I think you could call this exemption from publication the ''Lemuelson loophole.''

  Second, there is really nothing to fear from publication. Our companies file in Europe and Japan all the time. We have no parade-of-horribles to show for it. In fact, the trade publications in the United States report the applications that are filed abroad, and those are published in the United States. It's a major service of our trade publications.

  The point is that, once you are first to invent or first to file, or both, you have priority at the Patent Office. Your priority is not undermined by the fact of publication. You have priority. The fact that other people might know that you're pending tells them that you're first and tells them that they're second, and they ought to move on to something else.

  If publication at 18 months is so horrible and so disadvantageous to the independent inventor, then why don't these people oppose publication at grant? The publication at either 18 months or at grant gives the competitors exactly the same option. They have no more options because it's published early than they have when it's published late. It's exactly the same set of options for the competitor.

  Now there was a provision in the discussion draft of the Rohrabacher bill--I haven't actually seen the final terms of H.R. 811--which said that in cases where the applicant was dilatory and abusing the system, that they might get published at 5 years. Again, as Mike Kirk has suggested, there's no penalty on the term. This is only a penalty in the form of publication.
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  Unfortunately, the way the provision was worded in the discussion draft, the stars would have to align on seven or eight different points before you would get publication even at 5 years. The way it was drafted initially was that you would have one look at 5 years, and if it didn't qualify for publication, that trigger would be gone. It is not a rolling trigger providing that at such time as the alignment occurred, then you would finally get publication. I mean, this is being like whipped by a wet noodle basically. It's not effective. It has nothing to do with patent term. It is simply a publication penalty. It might occur at 5 years, and probably wouldn't even occur then.

  Mr. COBLE. Mr. Rohrabacher contends that his bill would resolve the submarine problem, but I have doubts about that. And I realize, folks, that we have to be at five places simultaneously up here, but I regret that the first panel consisting of our members couldn't stay with us because I think this has been an illuminating hearing.

  Mr. Frank, second round.

  Mr. FRANK. Yes. On the resources question, assuming there was no diversion, at the current level of patent fees would there then be no delays that were caused by lack of resources? Would we then be at some optimum? Yes, Mr. Kirk?

  Mr. MICHAEL KIRK. Mr. Frank, there would be no delays with one possible caveat, and that goes back to a comment that you made earlier about shrinking the Federal work force. As you recall, the Workforce Restructuring Act of, I think, 1994 was passed in order to save taxpayer dollars by requiring 292,000-person reduction in the Federal payroll. That act was passed to save taxpayer money. Notwithstanding that, it was applied to the PTO, which gets no taxpayer money. Now that's not particularly----
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  Mr. FRANK. Excuse me. It wasn't applied to it. See, this is part of the problem. It wasn't a bill that was first passed and then applied to those people; they were in it in the first place. It wasn't subsequently applied. And the fact is that when we talk about these downsizings, people don't differentiate, because there are a variety of--and people, when they give the overall totals, don't have those footnotes.

  But if I still want to know, if you got to keep all the money that was there, presumably, it would go to salaries. I mean, what would they--I mean, I was assuming if you kept all the money, that it would go to hiring people. What would it go to, then, if it didn't go to hiring people?

  Mr. MICHAEL KIRK. My comment was going to the point that----

  Mr. FRANK. I understand, but I want you to set aside your comment and answer my question.

  Mr. MICHAEL KIRK. All right.

  Mr. FRANK. The question is this: if, in fact, there was no diversion and the Patent Office could keep all of the money from the fees--and I'm new to this, so I've got to ask--does that mean there would be no additional Federal revenues; it would be entirely self-financed by these fees?

  Mr. MICHAEL KIRK. Yes, they'd be entirely self-financed by those fees.
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  Mr. FRANK. All right, and, presumably, those fees would then go to hiring back some of the people who had been laid off. What else would you do with the fees?

  Mr. MICHAEL KIRK. You might be forced, because of the Workforce Restructuring Act and its application to the PTO, you might be forced to contract out additional work for which you have to pay higher salaries. You might have to pay examiners expensive overtime because you can't bring the bodies onboard. But I think----

  Mr. FRANK. OK. So if you were able to deal with that, and they were not unduly restricted by that law, the amount of money would be sufficient to hire all the--if you could otherwise do it, the amount of money would be enough to hire all the examiners you need?

  Mr. MICHAEL KIRK. Yes, it would.

  Mr. FRANK. Mr. Kirk.

  Mr. JOHN KIRK. I think it was more than a personnel issue with the Patent and Trademark Office because Commissioner Lehman has undertaken a reengineering of the whole structure, which he mentioned in his comments concerning the whole way the Patent and Trademark Office does business. The technology filed in the Patent and Trademark Office is now classified under a really bulky classification system, and the Commissioner was going to develop testbeds to see if they could streamline the way which applications are handled at the Office, the quality of the examiner, which actually I think in his goal was to reduce the number of people at----

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  Mr. FRANK. Well, OK, then I guess--would you have enough with just the fees, if there was no diversion, both to have--because you, obviously, are going to need these people for a while, until you get your new system--would you have enough both to go forward with the technological innovations and with the personnel?

  Mr. JOHN KIRK. Yes, sir. Yes, sir, he had planned on doing that.

  Mr. FRANK. So that would mean, then, that there would be no delays, except in cases of some screwup, that were due to inadequate resources? And that's at the--do you anticipate that that would stay the same? I mean, if we increase business, and they would all pay for themselves, that ratio would stay the same?

  Mr. MICHAEL KIRK. The application fee income depends upon the amount of work that comes in the door. Also it's adjusted each year according to increases in the CPI. So the more work that comes in the door, the more money that's received. That money can be used to hire the additional hands to take care of the work. So it would be adequate for the foreseeable future, sir.

  Mr. FRANK. Yes, although if some people have their way, the amount of CPI increase will, of course, be reduced. I mean, I don't want to see that, but----

  Mr. MICHAEL KIRK. We would still accept it, Mr. Frank. [Laughter.]

  Mr. FRANK. Yes. So you are talking about being entirely self-financed, no tax money going in, no tax money going out, and that would keep you at exactly the level you need?
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  Mr. JOHN KIRK. Yes, sir.

  Mr. FRANK. Anybody else disagree on that?

  Ms. ALFORD. Obviously, that would not address the issues to which I was referring.

  Mr. FRANK. Right. Do the others agree with that? Mr. Ludlam, Mr. Berrier, and Mr. Holmer.

  Mr. LUDLAM. Let me emphasize again that the compensation provisions dealing with patent term, I mean should we have a budget crash at the PTO, the compensation provisions will protect applicants. They may get a later patent because of the crash, but they won't lose patent term. So that's a critical provision----

  Mr. FRANK. Well, I understand, but that's obviously second best. My question is, from the resources standpoint, since we are talking about that, whether the current level of fees entirely used for running the Office is adequate to run the Office without having to extend people's patent term because of failure to deal with it in a timely way. OK, thanks.

  Mr. COBLE. Thank you, Mr. Frank.

  Mr. Goodlatte, second round.

  Mr. GOODLATTE. Thank you, Mr. Chairman. I think we've thrashed the opposition pretty well with this panel. [Laughter.]
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  But I'm not one to miss an opportunity to lay it on. So I wonder if any of you have anything that you'd like to add that was raised as a red herring by the opponents to this legislation that you think we haven't adequately addressed here. I guess not?

  Mr. LUDLAM. Just one comment, Mr. Goodlatte.

  Mr. GOODLATTE. Yes, Mr. Berrier.

  Mr. LUDLAM. I mean, there are 80,000 to 100,000 genes; there are 5,000 genetic diseases; there is gene therapy; there are proteins; there are drugs. There is plenty of invention to be done. If a particular invention is blocked by a patent, and you see that through publication or you see that at grant, you move on. There is so much science out there waiting to be invented, waiting to be turned into useful technology. It's not like if you get a patent and it's published early that you're at a dead end; you can move on.

  Mr. GOODLATTE. Publication aids that. It doesn't destroy it; right?

  Mr. LUDLAM. Absolutely.

  Mr. GOODLATTE. Absolutely.

  Let me ask you this: Commissioner Lehman mentioned one concern, and I think it's a legitimate concern, and that is the high-tech entrepreneur who's got an idea and can't raise the capital until he's got the patent in hand. Can you take us through how that particular situation could work under these reforms? For example, is the right to withdraw your application immediately prior to the publication a good protection for that individual, and then they bring it back when they think they can push it through more quickly, or is there some other solution that works for them?
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  Mr. MICHAEL KIRK. Mr. Goodlatte, if I were representing a high-tech entrepreneur who needed a patent promptly, I would file in the Office a request to accelerate prosecution. You can get the entire patent process completed on an accelerated basis. If that is your concern it can be done.

  Mr. GOODLATTE. Does that work in a timely fashion to avoid any significant length of time between the point of publication and the issuance of the patent?

  Mr. MICHAEL KIRK. In many cases, you would have the patent before 18 months, if you moved on an accelerated basis to process your patent application. Most applicants don't ask for it.

  Mr. GOODLATTE. Thank you. Mr. Chairman, I don't have any other questions.

  Mr. COBLE. Thank you, Mr. Goodlatte.

  Mr. Delahunt.

  Mr. DELAHUNT. Yes, I'll address this question to the entire panel, but maybe--and I don't know whether there is an answer to it, but in terms of the issue that you raised, Ms. Alford, are there any figures that you're aware of that would discriminate the time or the resources of the Patent and Trademark Office between patents and trademarks work? I don't know if that's measurable, but----

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  Ms. ALFORD. No. Well, my understanding in terms of whether you're looking at funding----

  Mr. DELAHUNT. On a percentage basis.

  Ms. ALFORD [continuing]. At expenses, time, whatever, the split between the two is roughly between about 12 to 15 percent being trademarks and the remaining being----

  Mr. DELAHUNT. And the balance is patent?

  Ms. ALFORD [continuing]. The remaining being patent, yes. It depends on the figure you look at.

  Mr. DELAHUNT. Thank you. I have no other questions.

  Mr. COBLE. The gentleman from Indiana did not have a first round. I presume you have no second round, Mr. Pease?

  Mr. PEASE. No, Mr. Chairman. Thank you.

  Mr. COBLE. The gentlelady from California.

  Ms. LOFGREN. Thank you, Mr. Chairman.

  Getting back to the trademark issue, you mention in your written testimony the problems with the reorganization, which I hope that we get more fully advised of later.
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  Ms. ALFORD. Yes.

  Ms. LOFGREN. And, actually, if you had specific written comments about that reorganization, I would love to review them at a later date; I'm sure other members of the committee would as well.

  Ms. ALFORD. We'd be glad to provide those to you.

  [The information follows:]


  Ms. LOFGREN. You mentioned also Senator Hatch's bill last year as potentially a way to resolve these issues, absent creating still another Office. Now, under Senator Hatch's bill, if I understand it--and this is question, not a statement--the trademark functions would remain within the Office. However, there would be authority for the chief of that division, or whatever we might want to call it, to have decisionmaking authority on staffing and equipment and the like. So, for example, the description you had earlier about delays, for example, of a piece of equipment, would it be true that under Senator Hatch's bill the Chief of the Trademark Division could decide, ''well, I'm not going to use the Patent Office equipment; I'm going to go out to a different vendor and buy my own using our fees''? And if we were to pursue something of that nature, do you think that that would go a long way toward resolving the problems that you see?

  Ms. ALFORD. Thank you for raising that issue. That was one thing I had to omit, given the 5-minute limit. But it is to us the most acceptable compromise. Senator Hatch's proposal did create an autonomous trademark operation subdivision of the intellectual property agency that would be responsible for administering its own operations, controlling its own budget, management structure, and procedures. Consequently, we would support that, if we were not able to have consideration of our proposal for an independent trademark agency, yes.
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  Ms. LOFGREN. Do any of the other panelists see a downside for the patent side of the operation in the Senator Hatch proposal that is not readily apparent?

  [No response.]

  Ms. LOFGREN. So the panelists think that would resolve it without doing damage to the Patent Office. That might be something we might want to pursue, Mr. Chairman, and I don't have any further questions.

  Mr. COBLE. The gentleman from Utah, Mr. Cannon.

  Mr. CANNON. Thank you, Mr. Chairman.

  Just a quick question for any of the panelists who may know it: What is the incremental cost to have a patent accelerated? We were talking about the small entrepreneur and moving quickly so he can get his funding. Is there an additional cost in the Patent Office for that?

  Mr. MICHAEL KIRK. There are requirements for the attorney to provide additional information, so there is an additional cost for the applicant to come forward with all of the relevant information and to facilitate the search and processing. So there is a slight cost in that connection, but in terms of the cost to the Office, no, sir, there would not be.

  Mr. CANNON. Thank you.
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  Mr. COBLE. Thank you, Mr. Cannon.

  Lady and gentlemen, we appreciate you all being here. I think you have added measurably to this discussion. Ms. Alford, perhaps we can have an informal meeting initially and just think aloud together.

  Now pardon my immodesty, Ms. Alford, but I think H.R. 400 warmly embraces the trademark community. We've by no means slammed the door on you, but we can still talk additionally.

  Ms. ALFORD. My intent was not to derogate H.R. 400, but simply to propose what we believe is the preferred alternative.

  Mr. COBLE. Oh, no, I understand that.

  Mr. FRANK. As I understand it, Mr. Chairman, they want to be disembraced. I think the embrace is where the problem is. [Laughter.]

  Mr. COBLE. Thank you. Thank you again, folks.

  Why don't we call the next panel up. I am told that there may be an imminent vote. By that, I mean within the next 15 or 20 minutes. So why don't we go ahead and seat the next panel and at least get your testimony in. Then we may have to break to vote, maybe for a brief recess.

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  The first witness on the second panel this morning will be Dr. David L. Hill, who is chairman of the advisory committee of the Alliance for American Innovation, Inc. Dr. Hill is a nuclear physicist, and the current president of the Patent Enforcement Fund, which assists inventors in bringing infringement suits in the courts. Dr. Hill was an associate professor at Vanderbilt University from 1949 to 1954 and was a group leader in theoretical nuclear physics at the Los Alamos Scientific Laboratory in Los Alamos, NM, from 1955 to 1958. In addition to having lectured extensively in the areas of atomic energy, science, and public affairs, he has also been president of several companies engaged in various scientific endeavors.

  Our second witness will be Mr. Harold C. Wegner. Mr. Wegner is professor of law at the George Washington University National Law Center and is testifying today in his capacity as a professor of intellectual property law. He is also a partner with the law firm of Foley & Lardner, where he practices patent law. Professor Wegner is the author and coauthor of more than 10 books on patent law and is in the process of writing a case book on patent law.

  Our final witness on the second panel is Mr. Stephen H. Barram, who is the chief executive officer of Integrated Services, Inc., a small business software company in Oregon. Mr. Barram also serves as a delegate to the Technology and Innovation Committee of the White House Conference on Small Business.

  We have written statements from the three witnesses which I ask unanimous consent to be made a part of the record, and I ask that you all again, if you will, adhere to the 5-minute rule.

  Now I just heard the beeper go off, Barney, and I think we have three votes. I think it might be 15 and 2 fives. After we've already bothered to seat you all, we have a 15 and 2 fives. Why don't we, if this is amenable, recess for 45 minutes. If we're not back, you'll know we're still over there voting, but I think we can probably be back in 45 minutes. Well, why don't we say 1 o'clock? We'll stand in recess until 1 o'clock.
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  [Whereupon, at 11:53 a.m., the subcommittee recessed to reconvene at 1 p.m., the same day.]

  Mr. COBLE. I apologize to the panel which has been introduced and seated, and I apologize to you all in the audience, for the recess, but that's the nature of this beast. When the bell, when the gong sounds, we have to respond to it, and we had four votes back to back. So that's why it took some time. So I hope you all have been fed, good food and drink, and are ready for the afternoon session.
  So, Dr. Hill, if you will start us off.

  Mr. HILL. Thank you, Mr. Chairman. I understand that my prepared testimony is part of the record.

  Mr. COBLE. That is correct.

  Mr. HILL. Thank you. Then I will try to use my 5 minutes to emphasize the broad futures that I think may sometimes be overlooked in concern with detail.

  H.R. 400 is about success--or, rather, I should say, about response to success. The success is that of the U.S. patent system, which is unique among great nations in its ability to provide enforceable intellectual property rights to individuals. It's far ahead of the systems in Europe and still further ahead of the system in Japan.
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  It is no accident that the United States has now become the world's superpower because it alone has a patent system which engenders innovation most effectively. The statistics of the Department of Commerce show that the significant inventions that start new industries almost always come from individual inventors working alone. The genius of the U.S. patent system is that it provides incentive to those individuals by strong, enforceable patent rights.

  The presence of those patent rights is due to the nature of the immigration that started this country. This country began with a ragged group of immigrants who were escaping generations of oppression from financial centers. Those financial centers have control of the patent systems in Europe and, even worse, they have control in Japan, but in the United States the importance of the individual was emphasized, and that is the genius of our system.
  Almost always our great corporations are the result of invention from individual inventors. Now we have some misguided elements in those corporations attempting to avoid the expense of paying for the continuing innovation from our independent inventors. From the Japanese, who understand very well the significance of patents, we have a system in which the Japanese industrial complex is closely tied with our Government, so they can't change their patent system; therefore, they propose to change ours. That was the objective of the Lehman-Asou agreement and the Brown Kuriyama agreement of 1994. The agreements are displayed in appendix A of my prepared testimony.

  The actions of H.R. 400 are in fulfillment of those agreements. H.R. 400 has the purpose of destroying the rights of individual inventors, and it does it thoroughly. It takes the most essential elements of intellectual property and systematically destroys them. It begins with the provision for publication of an application, irrespective of whether a patent right has issued. Under the present system, the application is kept secret until the inventor has a patent to enforce his rights to his invention.
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  And then we move on to reexamination, an expanded reexamination, so that the ex parte nature that the U.S. patent system has created in the application and in the reexamination is now destroyed by providing rights to reply, and even rights of appeal, for those who initiate the reexamination, resulting in an overwhelming amount of litigation which will swamp the independent inventor.

  We in Patent Enforcement Fund are working with independent inventors all the time, and we know the difficulty they have enforcing their rights under the present system. Under these changes, they would be even more disadvantaged and would be completely destroyed in their capability.

  H.R. 400 goes on to provide prior user rights, so that any company, the principal infringers of the inventor, if they can claim that they began to develop and use and produce the invention, and had a sale more than 1 year before the date of the application, they can force the inventor to an unlimited amount of litigation with them.

  And, finally, the corporatization of the Patent Office will permit political interference with the quasi-judicial function which the examiners have been performing and have been performing rather well, as demonstrated by the record of achievement of innovation in the United States.

  So I've been very direct, Mr. Chairman. I hope that you will have a conversion experience on the way to Damascus and will join with us in rejecting H.R. 400 before it trashes the U.S. patent system.
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  [The prepared statement of Mr. Hill follows:]


  Mr. Chairman, Members of the Committee, my name is David L. Hill, Chief Executive Officer of Patent Enforcement Fund, Inc. and also Chairman of the Advisory Committee to the Alliance for American Innovation. I am pleased to testify before you today regarding H.R. 400.

  I shall testify in detail regarding this bill, but let me first step back from those details and give you a summary, as I see it, of the current debate on changing the U.S. Patent System.
  We begin with the recognition that the U.S. Patent System is the best in the world and that it, along with our natural resources, has enabled the great economic miracle which has now brought the United States to be the leading world power.
  Despite the excellence of the U.S. Patent System, there is now a strong effort to degrade it severely, even down to the level of the Japanese Patent System which is one of the worst in the world.
  Three constituencies are involved in this debate:
A. The American constituency, made up of the vast majority of American citizens who have benefited from the economic strength growing out of our Patent System. That is the constituency, I believe, which has elected to office each of the members of this Congress. I speak for that constituency as well when it refers to the ancient maxim: ''If it ain't broke, don't fix it.''
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B. A second constituency may be referred to as the ''corporate lobby,'' representing some misguided elements of corporate America which believe their corporate interests will be best served by skewing the Patent System against the independent inventor. Yet most of those great corporations have been founded on the work of independent inventors. They face the prospect of competition from future new corporations in our expanding economy if the independent inventors of this country continue to be motivated by a strong Patent System to seed new industries through further breakthrough inventions.
The third constituency is the ''Japanese lobby'' which expresses the objectives of the Government of Japan and the industrial complex associated with that Government which is strongly disadvantaged in the present economic competition. Innovation proceeds at a far higher rate in the U.S. than in Japan because the Japanese Patent System has been dominated by corporate interests from its inception and does not provide real enforceable intellectual property rights to independent inventors in Japan as the U.S. System does.
  There are immense economic values involved here, Mr. Chairman, measured in hundreds of billions of dollars in royalty fees alone payable annually plus other far greater values due to the role of the Patent System in engendering and enabling economic growth.

Consequences of Proposed Changes
  If these two hostile lobbies succeed in their current objective of modifying and largely trashing the U.S. Patent System, then two principal results will follow.
A. Long-Term Worsening of the Present Unfavorable Trade Balance
  The present unfavorable trade balance will worsen steadily and relentlessly over the long term. In the present age we are more and more dependent on exports based on information and innovation rather than on the products of smokestack industries. The proposed changes in the U.S. Patent System will dampen the wellsprings of innovation from individual genius which have supported and enriched us up to the present time.
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B. Mounting Security Risk to the United States
  The resultant enfeebling of the U.S. economy from the proposed evisceration of our Patent System will create a mounting security risk to the United States as a nation.
  For example, our ability to turn back the attack from Japan at Pearl Harbor ultimately depended on the vitality and resilience of our economic system which was the outgrowth of continual dynamic seeding from the Patent System over many decades.
  A difficulty for the Congress in dealing with this vital and complex issue concerning proposed changes in the Patent System is that we do not presently, in my judgment, have a dependable and trustworthy Commissioner of Patents and Trademarks. Commissioner Lehman has consistently mislead the Congress in his testimony and has demonstrated by his actions and his statements that he is not working for the American people but rather in the interests of the two lobbies which would undermine and largely destroy the U.S. Patent System. I return later to the behavior of Commissioner Lehman.
Why the U.S. Patent System is the Best in the World
  The items for consideration before this Committee today have to do with changes in Intellectual Property rights granted under the U.S. Patent System. We begin with the recognition that the U.S. Patent System is the best in the world. It is the envy of inventors everywhere outside of the United States. The systems in Europe are substantially inferior and the system in Japan is still worse. The criterion by which I make that judgment is the capability of the Patent System to stimulate innovation--to do what Abraham Lincoln referred to as adding the fuel of economic incentive to the fire of genius. It arises in the Constitutional empowerment to the Congress in Article I Section 8 that inventors shall have exclusive rights to their discoveries for a limited period of time. The U.S. System is superior to those of Europe and Japan because it provides clear and enforceable rights of intellectual property ownership to the individual inventor. Our system is characteristically American in growing out of the insight of Thomas Jefferson, James Madison and others of our Founding Fathers who were sensitive from their recent experience to the ways in which the rights of individuals could be trampled and denied by centers of major financial and political power. Because our Constitution and the patent laws growing out of its empowerment have tended to give unique standing to the inventions of our best and our brightest, the resulting intellectual property has become a leaven that has worked throughout the U.S. economy to yield great growth and power.
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  Those inventions which lead to entirely new products and create new industries almost always come from the work of independent inventors working alone or in very small companies rather than from those employed by major corporations. The protection and fostering of individual genius is indeed the genius of the U.S. Patent System.

Why Most Important Inventions Come From Independent Inventors Working Alone
  Invention comes from individual inventors thinking in original and creative ways. Most of our great corporations have grown out of the work of an individual inventor, as cited in Appendix B. A few examples which quickly come to mind are Herman Hollerith, with the invention of his tabulating machine giving rise to the enterprise that became the International Business Machines Corporation; Alexander Graham Bell with his invention of the telephone giving rise to the American Telephone and Telegraph Company and the regional Bell Companies; Thomas Alva Edison with his light-bulb and many other products leading to the General Electric Company. Inventions are necessary to the successful growth of a major corporation, for the associated patent rights enable the company to protect its profit margin, to build up capital for further research and development in the area of technology that it owns and to have the capital for expansion and growth.
  As the corporation grows, a transformation occurs in which most employees are directed to the established program based on the earlier inventive work. The original founders die or move on and the new employees tend to be those who are more susceptible to direction to an established program and less inclined to be innovative thinkers.
  The consequence is that the vast majority of important inventions which create new products and lead to entirely new industries come from independent inventors working alone or in very small companies. This conclusion is thoroughly documented by Department of Commerce statistics as shown in Appendix D. It is true that most of the R&D expenditures are by the major companies and it is also true that many inventions are made by them and are reflected in many patents issued to them. However, the study of those patents and inventions shows that they are almost entirely improvements on existing products. Very rarely indeed does the breakthrough invention occur in work sponsored by a major corporation. It is those pioneering inventions which arise almost always with individual inventors and which are primarily responsible for the seeding and growth of our economy through the creation of new industries. Those are the inventions which we most value as a product of our Patent System. The capability of our Patent System to foster such inventions is a primary good which is threatened by the proposed changes in the patent law and which must be preserved at all costs.
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The Animus of Some Misguided Corporate Interests to Skew the Patent System
  As the corporation grows, it may develop hostility to invention in its chosen area of technology which originates outside the corporate walls. That hostility arises from two sources:
1. The myth develops within the corporation that it has the creative brain power to deal with everything important in its chosen area of technology. That myth is needed to support the corporate ego which is vulnerable to nagging doubts as the creative people in the corporation leave with its growth and many of the best people outside prefer an independent rather than a corporately directed program of activity. The ''NIH factor'' (not invented here) is well-known in corporate psychology and leads to the refusal to recognize valuable work done outside the corporation in the market area of the corporation.
2. The corporate middle-level managers tend to believe that they are serving the corporate ownership well by denying the recognition of outside proprietary rights to intellectual property which could cause the corporation to pay a reasonable royalty for the use of that property. Accordingly, they will attempt to use the financial strength of the corporation in overwhelming the individual inventor who tries to license and assert his rights against the corporation for products which are being used by the corporation without license, that is, by infringement of the individual inventor's rights. Those managers may reason that they may save the corporation money, on average, by fighting the rights of independent inventors rather than by proceeding promptly to a reasonable license arrangement.
  By an extension of the same attitude, such corporate will favor any changes in the Patent System which diminish the effective intellectual property rights of the individual inventor as compared to the intellectual property rights of the corporation.
  While those misguided corporate interests are entitled to express their views through as many well-paid lobbyists and patent lawyers as they may choose to employ, those of us who are concerned with the fixture welfare of the U.S. economy must assure that they do not succeed in diminishing the effectiveness of the U.S. Patent System as it applies to the individual inventor. We need to protect the rights of the individual inventor because we need the fixture seeding of the U.S. economy which grows out of the work of such inventors. We need the new corporations which will arise from their work and grow great to compete with those established corporations which may sometimes now try to diminish the role of the individual inventor. We need the continuing turbulence of competition from the growth of new corporations. In this way, we retain the vitality and continuing expansion of the U.S. economy.
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Why the Japanese Seek to Enfeeble the U.S. Patent System
  The Japanese Patent System favors corporate interests and suppresses the rights of the independent inventor. Accordingly, the Japanese are at a substantial competitive disadvantage with the United Stases in long-term economic growth. They understand that well and also understand that for reasons of their culture, linking their major corporations with their Government, they are not able readily to change their system. Therefore, they propose to change ours. For that reason, they entered into two agreements with the United States in 1994 which, if enacted into legislation, will accomplish their objective of severely weakening the U.S. Patent System as it applies to the independent inventor. Objectives set forth in those agreements are included in she matters to which this Committee addresses its attention today.
  The Japanese have been quite forthright in stating their objectives for changing the U.S. Patent System. Analysis of the two 1994 agreements, entered into by Commissioner Bruce Lehman and Commerce Secretary Brown with the Japanese, indicates that the Japanese offer inconsequential and almost trivial concessions in return. It is astonishing that they have found two U.S. officers who would enter into those agreements and who have been enthusiastically promoting their fulfillment to the great potential damage of the U.S. Patent System arid consequent damage to the U.S. economy. A clear statement of the Japanese objective is given by Saburo Okita, the major architect of Japan's economic policies from the end of the war on to recent times. He was also the Japanese Foreign Minister not long before he died in 1993. He was lionized by the Japanese and there is even an entire library in Nara devoted to his works. In one of his books entitled, ''Japan's Challenging Years,'' he states, ''I will actually be happy if rearmament is completely prohibited. An army in uniform is not the only sort of army. Scientific technology and fighting spirit under a business suit will be our underground army. This Japanese-American war can be taken as the khaki losing to the business suits.''
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  The requirement of H.R. 400 for a laid-open patent should be rejected. The requirement for publication after 18 months is a basic change in the U.S. patent procedures which currently assure that the applicant will be able to keep his filing secret until the patent is issued. If the filing is abandoned or the patent is otherwise not issued, then the filing remains secret. This proposed change would have a disastrous impact on the rights now enjoyed by those who file in the USPTO. It would be particularly damaging to those who make the most significant innovations, for experience shows that such patents often require many years to issue, ranging from six to ten or more. Such inventions are breaking new ground and, under the empowerment of the U.S. Constitution, represent intellectual property which belongs exclusively to the inventor for a limited period of time. That period under recent law is 17 years from the date of issue of the patent. Under this proposed revision, the secrets of the inventor would be exposed to the public 18 months after filing of an application, even though he might not receive a patent for many years thereafter. Nevertheless, the significance of his discoveries would be open for all to see within 18 months. It has been said that a new idea can propagate with the speed of light, so that rapidly thereafter others could begin to develop applications suggested by the discovery disclosed by the laid-open application. For the independent inventor, the results are calamitous. Not only any major corporation in the United States, but also any other competitive inventor or corporation throughout the world, could begin poaching on territory which presently remains known only to the inventor and to the Patent Office until a patent is issued.
  I believe this provision flies so much against the intent of Article I Section 8 of the Constitution that it is at risk of being Unconstitutional. In any case, it would be erroneous policy to take away from the independent U.S. inventor what is presently one of his most important rights under the U.S. Patent System, namely, the right to keep his invention secret until rights to license and enforce it become available to him. Under the proposed change, any corporation that wished could begin preparing and filing applications in adjacent areas of the newly disclosed technology. If those applications involve limited and sharply defined claims, then when the original pioneering inventor finally receives his patent with appropriately broad claims, he would find that a picket fence by a multitude of minor patents had been erected around his territory so that what could have been and should have been a valuable intellectual property has effectively been taken away from him.
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  Another consequence of the laid-open application is that competitors who oppose the grant of the patent can then employ their lawyers to unearth examples of asserted prior art to be submitted to the examiner in opposition to the application. Operating still more insidiously, the competitor could send the asserted prior art to the inventor himself with a statement of its importance to his application. Then, if the inventor concluded that the submitted prior art was insignificant and did not submit it to the Patent Office, the competitor could bring action against him for inequitable conduct after the patent issued, inasmuch as the inventor has an obligation to submit everything to the Patent Office which he thinks may be relevant to the application. By such procedures, a competitor could add heavily to the administrative costs of the inventor-applicant, using its corporate resources to overwhelm the financial means of the inventor during the processing of the patent application before the applicant may enjoy the benefit of a presumption of validity which he will achieve with an issued patent.
  A further possible consequence of this early disclosure of an invention before the patent issues would be that those who would like to destroy the patent right through the reexamination process as soon as the patent is issued would have years of preparation for such reexamination challenges while the original inventor was waiting and struggling to have his initial application successfully find its way through the process of issuance as a granted patent.
  If we wish to destroy for the independent inventor the value of the U.S. Patent System and all that it may contribute to our economic growth in the future, then this one change will largely accomplish that task. The provision of H.R. 400 mandating publication of the patent application at any time before the patent issues is destructive of the basic intent of the Patent System and must be rejected.
  In an astonishing display of bias, Commissioner Lehman has been championing those changes advocated by the Japanese lobby and by the corporate lobby. He has endorsed the changes to which he and Secretary Brown committed the U.S. Administration by the Japanese-American agreements of 20 January 1994 and 16 August 1994.
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  He has gone so far in pushing for the passage of the changes agreed to with Japan that his enthusiasm appears to have overwhelmed his integrity.
Unwarranted Assertions of Support
  On the 25th of October 1995, he testified before the House Subcommittee on International Economic Policy and Trade that there was broad support for his recommendations, citing the fact that all of the witnesses which had testified in PTO hearings were in favor of the changes. Such witnesses were evidently very carefully selected. For all of the organizations known to me and representing independent inventors have registered their adamant opposition to H.R. 1733 and their strong support for H.R. 359 in the 104th Congress and their strong opposition to H.R. 400 in the present Congress.
The Myth of the Submarine Patent
  It may be noteworthy that Commissioner Lehman formerly worked in a law firm which spent much of its time lobbying for corporate interests. In an effort to justify the drastic change associated with the patent term running from the date of application rather than from the date of issue, he has testified to the Congress that industry is at risk from ''submarine patents'' which remain submerged for a long time in the patent issuance process and then ultimately emerge to ''torpedo'' members of industry. The submarine patent is a myth and Commissioner Lehman's testimony itself has proven it to be so. When challenged by members of Congress to support his assertions, he has submitted data extracted from the Patent Office files to show that one out of 7,700 (one thirteen thousandth of one percent) patent applications had been on file for more than 20 years before the patents issued. When the 627 patents which he cited were then examined, it was found that about half of them were subject to secrecy orders and a substantial part of the others were owned by Government and that substantially no patents fit into the description which he had offered as the basis for this drastic amendment to our patent laws.
  It is sometimes argued by those in favor of having the patent term run from date of application that when a patent is slow to be issued, it may be due to the inventor engaging in delaying tactics that slow down the issuance. Every instance that I know of and have investigated in which a patent has had an extended period of issuance, has been one in which the ultimate issuance of the patent only occurred because of extraordinary diligence and persistence by the inventor in fighting for its issuance. I know of no instance in which an inventor has deliberately delayed the issuance of his patent nor do I know of any procedure under the patent regulations by which an inventor even has that capability. The obligation remains upon the Patent Office to move the application process forward as rapidly as possible unless it has been countermanded by an explicit secrecy order.
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  When we recall that the primary purpose of the U.S. Patent System is to provide enforceable property rights to those who make significant inventions, there is a situation which sometimes arises which Commissioner Lehman should have understood and should have explained to the Congress, instead of building an alarming myth about a ''submarine patent.'' It may sometimes occur that an inventor of exceptional genius may achieve a cluster of significant inventions which are filed in one original disclosure with the Patent Office. If those inventions represent breakthroughs in a new field, it may take the inventor many years to get through the Patent Office procedure to a patent. The applicant must find an examiner who can understand a field of technology that has not previously been before him. For a pioneer patent, the inventor must file broad claims in order to stake out what he has achieved. Such broad claims are frequently contested at length before allowance is given. Appeals to the Board of Patent Appeals and Interferences and then to the Court of Appeals for the Federal Circuit may be required before the matter is resolved. In this fashion, 10, 15, 20 years or more may elapse before the patent is issued. Yet those patents which ultimately issue, as a tribute to the persistence and insight of the inventor, are indeed the pearls of the Patent System. They are precisely the patents that open up new industries and do most to seed our economy. They are the patents which we must promote and protect. Yet, the provision of having the patent term run from the application date of the patent would sharply reduce its value or eliminate it altogether. Similarly, the provision of having the application published 18 months after date of application would destroy most of the value of the patent, as described above.
  Another aspect of patent procedure which could have been and should have been explained by Commissioner Lehman to the Congress, but was not, is the following. When a number of different inventions are comprised in a single disclosure, then regulations in the Patent Office require that each invention be separated and provided for in a separate application. Thus, when a cluster of inventions are described by an exceptionally talented inventor in a single disclosure to the Patent Office, he may subsequently be required to file a series of so-called divisional applications to process each separate invention on its own merits. Thus, in the situation described above, when an inventor has broken ground in a new technology and filed a cluster of inventions in a single disclosure, he may struggle for 10, 15, 20 years or more to have his first patent issued from that disclosure. After he has notice of allowance on his first invention, he may then be required to file a divisional application for another invention and may have a period of some years of struggle with the Patent Office to have that second invention allowed in a patent. The same process may then apply for a second and a third divisional application, each of which may take some time to find its way through the Patent Office. Thus, for the exceptionally brilliant inventor just the inventor who should be most protected by the Patent Office the final issuance of all of the patents for the inventions disclosed in the initial cluster disclosure may take many years. That is a consequence of Patent Office regulations. While an inventor is struggling to feed his family and get his first patent issued from an important cluster disclosure, he has neither the energy, the time or the financial resources to process a second or a third divisional application. He may not even know that a divisional application is required until he is so notified by the Patent Office as he approaches allowance on one of his inventions in the cluster disclosure.
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  Because income from an issued patent frequently takes years to materialize, the inventor is frequently struggling to survive economically while he is going through the extended process of having a breakthrough invention patented. When there are several divisional applications then subsequently required in series, the inventor must continue his struggle with the Patent Office to obtain a sequence of patents to protect his intellectual property.
  This problem with divisional patents and many inventions arising from a ''cluster disclosure'' is peculiar to the independent inventor and seldom, if ever, arises for a large corporation for two reasons:

1. The economic problems of supporting oneself while processing a contested application does not arise for the corporation with its ample financial resources.

2. The large corporation seldom, if ever, retains in its employ a person of sufficient genius to file a major ''cluster disclosure'', for the reasons discussed above.
  When we realize that the primary purpose of the Patent System should be to protect and to encourage those inventors who make the most significant inventions that seed the economy with new industries, we then recognize how profoundly misleading Commissioner Lehman's testimony has been in failing to explain to the Congress the needs of the exceptionally talented inventor and the importance of having the Patent System operate to protect him. Instead, Commissioner Lehman has tried to turn this situation around and use it to build the myth of the submarine patent as the excuse for attempting to destroy the System, difficult though it may be, under which the exceptionally talented inventor has been protected in having the right to process his application to a successful conclusion in patenting major breakthrough inventions, even to the extent of having several major inventions resulting from a single ''cluster disclosure.'' For that reason, I refer to those patents from such inventive disclosure as the pearls of the Patent System which we should protect in every possible way. They are the patents which are most significant in seeding our economy and give the best promise that through innovation, the United States may ultimately become a dominant trading partner and cure the present trade deficit under which it labors. Those are also the class of patents which, through vitalizing our economy, help maintain the position of the United States as the dominant economic power of the world. Commissioner Lehman and his proposed policies to trash the U.S. Patent System serve the short-sighted interests of the corporate lobby and the Japanese lobby but betray his obligation to serve the interests of the American people in his role as an officer of the U.S. Government.
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  The second step in the Brown/Kuriyama Agreement of 16 August 1994 for the USPTO requires that new reexamination procedures be established to permit unspecified and unlimited third parties to participate in any examiner interviews and to submit written comments on the patent owners response to any action in the patent under reexamination. That represents a drastic departure from current reexamination proceedings in which a third party may initiate a reexamination but the dialogue then continues only between the Patent Office and the patent owner in the same fashion as in an initial patent application. The proposed change would permit an unlimited and crushing burden of administrative proceedings against any owner of an important new patent. It could make the ownership of that patent a burden which the independent inventor would be unable to sustain.
  While the patent system is intended to encourage the inventor to obtain intellectual property rights, the proposed revised reexamination procedures in association with the provision for 18 months publication of the application would tend to eliminate the value and the sustainability of those rights for the independent inventor. When we recognize that that independent inventor is the primary source of the new industry and the vibrant economic strength of the U.S. economy, we recognize how ingeniously these proposed changes represent a stiletto thrust from the Keiretsus to the heart of the U.S. independent inventor.

  The Act grants a royalty-free license to any company that claims that it has engaged in the design, testing or production of a product resulting in a commercial sale prior to the filing date of the patent in issue. The company may have kept its development secret and no disclosure may be made by the commercial sale itself, yet the inventor who has diligently pursued the patenting of his invention is thereby deprived of the right of exclusion which is fundamental to the intent of the Constitutional empowerment to the Congress on intellectual property. This provision of the Act may lead to endless litigation which the Independent Inventor is financially ill-prepared to assume. It, therefore, may tend to destroy also the protection which the Patent System is intended to provide and does presently provide to the Independent Inventor.
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  A welcome feature of H.R. 400 is the regulation of patent and invention-development companies. Some of these companies have preyed upon the unsuspecting and gullible inventor, collecting fees from him for services which prove to be negligible. However, the risk to the Independent Inventor from such unscrupulous patent-development companies is minor indeed compared with the loss that the Independent Inventor would suffer from the passage of H.R. 400 which would destroy most of the patent protection upon which the Independent Inventor now relies.
  Under Section 112, the amendment of paragraph 2(b)(14) provides that the PTO ''may accept monetary gifts or donations of services or of real, personal or mixed property in order to carry out the functions of the Office.'' Note that this empowerment is unrestricted as to source of the gifts or quantity of the gifts and that the purpose is to be interpreted under the broad discretionary powers given to the Director under the Act.
  The Bill makes no provision for an inspector general for the PTO and thus eliminates the requirement for an independent audit of the Office.
  Under this legislation, if we, for example, have a Director appointed and confirmed who has much of his previous experience in the patent field gathered from being employed as a lobbyist for major multinational corporations and for the Japanese Industrial Complex, he would be able to use gifts to the Patent Office to influence critical decisions by key personnel within the Patent Office and even to attempt to influence crucial decisions by patent examiners who, under the discretion of the Director, would be entitled to special bonuses if they exercise their discretion in a manner to suit the Director's wishes. Under H.R. 400, such corrupting action by the Director would be consistent with the law governing the practice of the Patent Office. There would be no independent audit to help the Congress know that examiners were being corrupted and that foreign subversion might be affecting the Patent Office.
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  It is reported that the Japanese may be very generous in their gifts to universities, to research institutions and to others who may help influence policy in a manner desired by the Japanese Industrial Complex. Some of the same generosity, to a somewhat lesser degree, has sometimes been reported to be shown by major interests in Corporate America. The language of H.R. 400 shows awareness of these propensities and wishes to make such gifts and their consequent influence legally available to the Director as a tool in molding the actions of the Patent Office.
  The appropriate legislative action, in my judgment, is to reject H.R. 400 as being destructive of both the near-term and the long-term interests of the United States.
  A constructive response in the international debate on patent rights would be to urge Japan and other overseas countries to cease the process of using laid-open applications at all, in view of their profoundly disruptive effect on the intellectual property rights of the inventor.

Understanding the superiority of the U.S. Patent System over those of Japan and Europe may provide opportunities for improving those systems such that the right of their inventors may be further enhanced. As the world grows smaller, every nation is enriched when the inventiveness and productivity of other nations is advanced through incentives arising from strong intellectual property rights.


  Mr. COBLE. Well, Doctor, I thank you for your directness. As I said earlier this morning, much of what is said in this city, and on this Hill specifically, is subject to interpretation. Now you regard H.R. 400 as an anathema. Many people in this room earlier today regard it as a savior. So perhaps we can all get our differences consolidated.
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  Mr. HILL. Well, I hope so, Mr. Chairman. If I may say so, there are three constituencies. There's the American constituency which is not complaining about the patent system. It has benefited from the innovation that has brought us to the position of prominence that we have. There's a second constituency which represents certain misguided elements of corporate America, and those were eloquently represented and presented this morning. And then there is the constituency representing the Japanese industrial complex, and it has been very ably represented by Commissioner Lehman and the late Secretary Brown.

  Mr. COBLE. Well, I thank you for being here, Doctor.

  Mr. Wegner, we'll hear from you.

  Mr. FRANK. Mr. Coble, would you yield to me?

  Mr. COBLE. I will, indeed.

  Mr. FRANK. I just want to take exception to your last remark, Mr. Hill. I regard Mr. Lehman as a man of great integrity. If you disagree with him, you ought to disagree with him without the kind impugning of his patriotism and motives that I think, unfortunately, was part of your last remark.

  Mr. HILL. Congressman Frank, I would like to refer you to my testimony in which I give you many instances of misleading testimony by Senator Lehman to the Congress.

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  Mr. FRANK. Well, if you'll forgive me, I----

  Mr. HILL. In my view, we would be well served if he withdrew from office.

  Mr. FRANK. Which I realize your résumé shows that you did begin your career around that time that Senator Herbert Lehman began his Senate race, but it's not ''Senator Lehman;'' it's Assistant Secretary Lehman.

  But I would also would reiterate what I said. Disagreement is to be expected, but I thought your characterization impugning of his motives as being one who is serving the Japanese interests is simply not only inaccurate, but not helpful to the advocacy.

  Mr. COBLE. Well, let me insert my oars into the water, too. I have to agree with the gentleman from Massachusetts. But, as I said earlier--and I'll reiterate--I think Commissioner Lehman enjoys wide respect in the Congress on both sides of the aisle, liberal, conservative, Democrat, Republican, mugwump, you name it--most people are high on Bruce Lehman. I've been called an agent for the Japanese industrialists. I was called this morning by my colleague as stealing intellectual property. I'm paraphrasing now, but we're getting far afield, Mr. Wegner. I know you're ready to testify. [Laughter.]

  Mr. WEGNER. That's fine.

  Mr. COBLE. But let's hear from Mr. Wegner.

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  Mr. WEGNER. I just wanted to say amen to what you have said.

  First of all, it's an honor to testify here. My remarks are in the record. I'd like to take 90 seconds of my time to address the issue of Mr. Lehman. I happen to know him very well, and we've been adversaries as well as friends on issues, and if he errs on any side, he pushes very hard for the American side in international trade. I've seen him in operation. I consider him a man of the highest and personal integrity. He's brought a spark to the patent system that I have not seen in my professional life, which goes back 32 years. And if we could clone a Lehman--I don't want to clone sheep, and maybe ethically we can't clone Lehmans, but the more Lehmans we have----

  Mr. COBLE. Don't get Mr. Frank on the cloning subject. He'll clone us. [Laughter.]

  Mr. WEGNER. With respect to Mr. Hill's testimony, we come from a different planet. We had the best patent system in the world, without question, in 1836, and it stood up pretty well. It was a good model, but we need to make some reforms.

  The Japanese aren't trying to change us to their system. They've emulated a whole lot of our system, and the 20-year term and the 18-month publication they took out of international models. They also copied from the Dutch. Who's going to pick on the Dutch? What have the Dutch done to us lately?

  We've got to take the personal rhetoric out of this, look at publication. I want to focus on publication, why it's important. And on a new issue, the most important development today to see changed was the statement by the Assistant Secretary to slay the patent dragon of one-size-fits-all. This has been in existence for 33 years: one-size-fits-all; ''let's push every application through the widget-grinder of the Patent Office as soon as we can. And what's so bad about this?
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  People want only some of their patents done right away. In biotech they're important. The patents are very important, but maybe only 1 out of 10--maybe you've made ten different DNA strands, and one of them you want to commercialize. The last thing you want to do is to push the other nine applications. Let it sit on the shelf. With 18-month publication and 20-year term, you can do that.

  The idea of voluntary deferred examination will save us literally billions of dollars. I have appended to my testimony a statement I made 3 years ago urging this course of action. The bottom line is, we have 1 out of every 10 cases in biotech which is very important. Let's go to the front of the line with that case. Other industries are entirely defensive. The Ford Co. in the forties bragged that it had never enforced a patent--never enforced a patent. If you have an industry where there's an entirely defensive scope, where all you want to do is block other people, then, fine, you publish and let it sit forever.

  So I commend Assistant Secretary Lehman for his proposal for voluntary deferred examination. Publication is an absolutely a key integer. Without publication, you can't let people defer the examination. You have to have the term capped at 20 years. That way it's on your own dime if you decide to defer. And you're not submarining or suppressing or anything like that because of publication at 18 months. I think it's in the best constitutional purpose for the American patent system to publish at 18 months.

  The quid pro quo is to give the inventor his rights, but give the public the information. Witness after witness talked in biotech, how very important it is. There are thousands of biotech widgets that we want to make, and if a company finds out that somebody else is making widget 922 at 18 months, they can stop spending millions of dollars of research and find different alternative cures for AIDS, cancer, and other diseases.
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  It's been a long day, and I'll submit to any questions that you may have. Thank you for your time.

  [The prepared statement of Mr. Wegner follows:]

  Thank you for permitting me to testify. I am a Professor of Law and the Director of the Intellectual Property Program at George Washington University. I also am the Director of the Dean Dinwoodey Center for Intellectual Property Studies, a graduate research institute charged with a study of policy issues including patent reform. I am also a member of the national law firm, Foley & Lardner. I testify pro bono; the views I express are entirely my own.
  There are many pieces to the patent reform puzzle. I testify today principally to speak to two specific items in the current legislation--automatic publication of patent applications and maintenance of the patent term capped from the filing date. These points are covered in the first section of this paper; counterproposals from a discussion draft from Congressman Rohrabacher are considered at II, page 6. I have focused my testimony to key new issues; for a background on additional points dealing with publication and term, an abridged version of my 1994 Congressional testimony is appended at page 13.
  I also wish to call to the attention of this Congress the need to amend H.R. 400 to take into account judicial erosion of the patentee's scope of protection in the Warner-Jenkinson case, a point possibly more important than the issues we are otherwise addressing today, and something that could easily be rectified by an amendment to H.R. 400--a ''discussion draft'' and history of this amendment are found beginning at page 11.
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  The policy reasons favoring a twenty year term capped from filing coupled with 18 month publication have been addressed repeatedly and are very well understood:
(1) Submarine Patents

  There is first of all the question of ''submarine patents''--a phenomenon dating back more than a full century to the notorious patent attorney George Selden. Mr. Selden patented the gas-driven automobile, obtaining his patent only after sixteen years and only after the real pioneers of industry had put the cars on the road. Selden's invention was little more than a paper creation, a patent tax on the real innovators who did more than write down their idea on a scrap of paper, putting their creative geniuses into actual production. I refer to my testimony three years ago that explains the Selden phenomenon in greater detail; see page .

(2) An Uneven Information Playing Field

  American policy should dictate favoring the domestic innovative community with the latest scientific information, and clearly not follow a patent publication policy that gives e.g. Japanese researchers earlier information about Japanese and American technology earlier than our own domestic researchers. This is a prime evil addressed by the publication aspect of H.R. 400: We want American researchers to gain access in English, locally, to the latest technology from the United States, Japan and elsewhere not later than when the technology is published in Japanese in Tokyo. It is unthinkable that we would have a policy where American technology would otherwise be published in Japanese, permitting overseas competition to see what's what in the United States even before the American industrial community.

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  It is thus untenable that most foreign patent offices publish applications automatically eighteen months from first filing, while Americans are deprived of these valuable invention disclosures until grant. In the simple context of either an American, Japanese or any inventor filing in both Japan and the United States, a Japanese language text of the invention is published in Tokyo eighteen months from first filing. A Japanese seeking to stay up to date on the state of the art can obtain a Japanese language text on both American and Japanese innovation. Yet, an American individual or small business is kept in the dark, unable to obtain a prompt English translation of the Japanese text. Even the larger American concerns are behind the eight ball, as they must rely upon an expensive watch service that culls the Japanese language texts: The delay and cost in obtaining English translations are untenable.
(3) Uncertain Risks for American Development

  All other factors being equal, a multinational is encouraged to develop its invention and create production facilities in Europe and Asia than risk a submarine patent or other long-secret application arising years later as a patent, threatening to shut down a domestic factory.

  Thus, all patent applications are kept in the open in Europe and most other countries after 18 months. But, since the American patent application files remain secret ''forever,'' industry is left hanging for many years, uncertain that a patent may eventually be granted.

(4) Vogel Trailers, A Much Larger Problem

  For more than twenty-five years since the notorious Vogel case, it has been possible to file a ''Vogel trailer,'' to obtain broader protection in a secret continuation after the grant of a first, narrow patent.
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  In the actual Vogel case, In re Vogel, 422 F.2d 438 (CCPA 1970), a first patent was granted to a method of treating ''pork.'' The public thus came to know that the patent protection gained was only for ''pork''--treating lamb, beef or other meat was outside the patent protection. Before grant of the ''pork'' patent, a continuation was filed for the treatment of ''meat.'' Before this case, it had been assumed that if one patented a method of treating ''pork,'' this would bar a second patent to the same invention. I.e., ''pork'' is the same invention as ''meat.'' But, no! A predecessor to the Federal Circuit held that ''pork'' is not ''meat;'' there are two inventions: Two patents may be granted after all.

  In case after case, narrow patents--''pork''--are granted, but third parties are worried that a second, broader patent--''meat''--is yet to come.

  Roughly twenty percent of all applications filed in recent years have been of the continuation or related type.

  Third parties have no access to the true continuation, so they have no way of knowing the scope of protection sought in such a continuation. (Just last year, for the first time, the PTO will allow access to information about the existence of a trailer, but not access to the file, unless the continuation is filed under a ''file wrapper'' procedure.) Publication is vital to stop this practice that is quite widespread, dwarfing true ''submarine'' patents by a ratio of at least 100:1.

(4) ''Patent Worksharing''

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  ''Patent worksharing'' is gradually being introduced around the world: Instead of having several patent offices conduct independent examinations of parallel patent applications to the same invention, with patent worksharing, the work of the first examining office is ''piggybacked'' by other offices: Instead of making a fresh, complete examination in second and subsequent countries, the benefits of the first examination results are used in the other countries. The patent applicant who has received a thorough examination in one country will then tailor his claims in the other offices, generally citing the examination results (including prior art) to the other offices. This makes it far, far easier for the examiners in the second and subsequent countries to do their tasks.
  As Americans seek patent protection in China, Brazil and other developing countries under the current World Trade Organization (WTO) regime, they are trying to spread the benefits of their inventions on a broader territorial base, while reaping the rewards of increased sales and profits for American inventors and industry. Yet, it is increasingly more difficult to obtain rapid grants of patents in these countries, thanks to the success of increased filings and the expense of running a local patent office. All of the developing countries are taking advantage of ''piggybacking.''

  America is the victim of piggybacking, because America examines first, so that virtually all other parallel examinations are piggybacked off the U.S. examination.

(a) Publication and Capped Term as the Key
  The reason that the U.S. has examined first--and thus reaps no benefits of piggybacking--is that the United States must examine promptly, without delay of any kind, because historically the term of the patent would be unreasonably extended and inventions would be suppressed for a prolonged period. The antidote is a combination of capping the term at twenty years from filing date (so that the length of prosecution does not prolong the patent term) and publication at 18 months (so that ''submarining'' is not possible).
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(b) Billions in Cost Savings
  To the extent that the United States has both a term capped from the filing date and publication, then the United States could have a system of mutual piggybacking, where some of the cases would go first in Europe or elsewhere, and the United States examiner could then take advantage of the European examination.
  In a more advanced piggybacking system, a formal worksharing agreement would be created with Europe and Japan so that one Examiner would do the work of three. This is explained in my 1994 testimony, appended at page 13. This would result in literally billions in savings over the coming years to both government and taxpayer alike.

(c) Billions in Savings for Patent Applicants
  One of the legitimate concerns of small businesses and individual inventors and universities is the high cost of foreign patent protection. Many feel priced out of the market. With patent worksharing, costs could be dramatically lowered to open the door to foreign patenting to a new class of inventors. This would have the very pro—American impact of letting Americans gain patent protection in Europe and Japan. Defensive patenting to block offshore manufacture would be one result. Joint ventures in foreign markets would create valuable capital to spur domestic growth.
  While the savings would open doors for a new class of inventors, the overall impact would be felt by established enterprises as well. Imagine filing only one patent application for global protection, the dream at the end of the patent worksharing rainbow. Individual companies would be able to save millions of dollars in foreign attorney fees, translation expenses and personnel costs.
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  It has recently been proposed that no U.S. application should be published until after a foreign patent office has published a counterpart.
  In some ways, this parallels proposals that I had made over ten years ago. In my proposal, I had suggested that an applicant would have a right to continued secrecy if it were alleged by the applicant that there is no foreign counterpart and the invention remains a trade secret. In the end, I have come to the conclusion that it is better if we guarantee the patent applicant the opportunity for early examination.

  The current proposal to delay U.S. publication until after foreign publication is entirely unsatisfactory as it provides no benefit and a considerable disadvantage to the American research community. Consider the situation where there are parallel filings in Japan and the United States, and as a result of the recent proposal, the Japanese application is published six months earlier than the U.S. application. This would give the Japanese industrial community a six month lead time on the latest innovations, providing Japanese language texts in Tokyo six months before the U.S. Patent and Trademark Office would publish the U.S. counterpart disclosure.
A Better Solution to Help Small Entities
  To reach the same objectives of this counterproposal without the detriments, the following is proposed, some of which is contained already in H.R. 400. Automatic publication would take place, but there would be four complementary reforms:
(a) as foreign patent offices publish applications at eighteen months from first filing, any patent applicant here should be permitted to withdraw an application from publication within fifteen months from filing by stating that the invention remains a trade secret (including absence of any parallel foreign filings), assuming diligence in prosecution;
(b) several patent attorney-ombudsman should be stationed throughout the examining corps with their task being to help the small entity inventor, and with line authority to the Solicitor, and not the ''bean counter'' supervisory line to the Assistant Commissioner;
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(c) every effort would be made to give the ''small entity'' inventor an examination on the merits before the publication of the application, with publication postponed until after a reasonable time for consideration of the examination results; and

(d) major league attorneys should be encouraged to have actual or quasi-pro bono representation of individual inventors by crafting a PTO-arbitrated malpractice system for individual inventors and other small entities, superseding state laws.

  The current legislation does not address a principal problem of the current state of the patent case law, namely, how strictly will an inventor be held to the literal wording of his patent claim vis a vis the rights of third parties?
  A ''doctrine of equivalents'' dating back to the early nineteenth century has created a penumbra of protection around the legal scope, which heretofore forgave many errors in patent drafting a particular problem for the individual inventor. All of this is on the verge of major change in the coming weeks or months. I predict that this matter will achieve major attention by the pronouncement of the Supreme Court in the Warner-Jenkinson appeal from the en banc Federal Circuit opinion in Hilton Davis Chem. Co. v. Warner-Jenkinson Co., 62 F.3d 1512 (Fed. Cir. 1995) (en banc).
  Who will win? It won't matter much in terms of a need for legislation, as a lose-lose scenario for patent holders will be created. An affirmance would codify a far stricter and unforgiving standard of patent draftsmanship that has superseded much of the case as law created by the original Federal Circuit more than a decade ago. Yet, a reversal would go even further and make the life of the individual inventor even more difficult.
  Subject to giving the Supreme Court its day to explain patent claiming policy in Warner Jenkinson, I propose that Congress reconsider the statutory alternative of a ''reissue'', something that would mitigate the need for the doctrine of equivalents. The legislative answer is two-fold:
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First, let's let the patentee correct the scope of claims through statutory ''reexamination'' under 35 U.S.C. 302, to broaden claims in this modern procedure instead of under the more anachronistic reissue procedure.
Second, let's eliminate third party intervening rights where the third party commercializes after the reissue or reexamination is filed (as opposed to today's rule keying such rights to the grant of the reissue or issuance of the reexamination certificate).
  The proposal to shift the intervening rights trigger to the filing date has been discussed in academic circles for more than five years. It's a no brainer that should be welcomed by patentees better able to fix their scope of protection and industry that is better served by a literal broadening of patents than today's amorphous scope of protection under the doctrine of equivalents. For the convenience of this Subcommittee, I have provided with this testimony a draft of the necessary legislation, the Post-Grant Patent Procedures Act of 1997, that follows immediately below.
  Individual inventors need redress from Warner-Jenkinson far more than the major corporations who are better able to prospectively craft claims than an emerging organization.

I thank the Chairman and his distinguished colleagues for the opportunity to appear before you today.


  Mr. COBLE. Thank you, Mr. Wegner. You accelerated to the point where you beat the red light. [Laughter.]

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  Mr. Barram.


  Mr. BARRAM. Mr. Chairman, thank you for the opportunity to present some comments from the small business perspective.

  As indicated, I am CEO of a small software manufacturing and development firm in Oregon. We're 9 years old and we have about 80 people. While our business growth and our development of software and manufacturing capabilities drive me to have a keen interest in the intellectual property area, I also come here representing the 1995 White House Conference on Small Business, of which I was a delegate, and I was directly involved in the technology and innovation section.

  I believe that the conference delegates, for the first time in the history in the White House Conference on Small Business, moved away from an isolationism point of view in the attitude of coming up with two technology recommendations that were not only included in the top 60, but placed in the top 15 that were forwarded to the President.

  During our discussions, there was a tremendous amount of debate over whether or not Congressman Rohrabacher's previous bill, 359, was a step in the right direction or a step backward. In a very conscious way, the technology section in voting out its recommendations was very intentional about not tying itself to the provisions of 359 because there was a very implicit and explicit discussion as to whether or not that was forward-thinking or did not recognize emerging globalization and competition issues that we as small business owners felt were very necessary to be considered.
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  Attached to my testimony you will find a letter that was written by the technology regional chairs of the Small Business Conference and sent last year to Congressman Moorhead and Rohrabacher setting out the considerations that were important to the technology delegates. I believe that H.R. 400 does a good job of meeting most of those.

  I will not go through my testimony because, having sat here all morning, most all of it was already covered ably in terms of the specifics. What I would like to do is, in an overview way, provide a perspective that maybe hasn't yet been presented.

  I do believe we stand at a crossroads. We can either choose to live and act as we always have or recognize that we are a part of a new-found global economy and a marketplace of which we either must choose to seize the opportunities that are being presented to us or ignore. For us as small technology businesses, those of us who use the intellectual property and patent system, to ignore global competitors is to invite failure, but to ignore global marketplaces is absolutely foolishness on our part.

  As we consider, or as you consider, any patent bill, I believe that it's imperative that we take into account the effect on international trade and our global competitiveness. The last thing we want to do now is to have an American patent law that puts American companies at a global disadvantage.

  And I would echo the comments just made: we have had a wonderful patent system that was entirely to our advantage, but as the economy has moved and we are now part of something that's more global in nature, for us to remain with our head in the sand, thinking that our previous patent law continues to service us as well as it did, is not forward-thinking, and I would urge that we move forward with H.R. 400.
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  In the area of publication, nothing I think is more heartbreaking than to watch a small inventor pour his life savings into something only to later find out that it was already someone else's patent that had been filed, and yet no publication had been made. And I think that publication under H.R. 400 addresses that very effectively, and we would argue to go in that direction.

  There's also the theft issue. I'm simplistic in some fashions. It strikes me that the only way to protect American technology in another country is for us to patent it in another country. When we file an application for patent in another country, it will be published 18 months later. We're not talking about something that's going to remain secret, and for us to think that most of us are only going to be dealing with U.S. patents, if we're going to take the effort to file a patent, is also something that's very shortsighted in this economy.

  As a lawyer, I also have an additional concern. If we return to what was the so-called 17-year patent term, I believe that lawyers will arguably, and very properly, work to delay issuance to ''protect their clients' best interests.'' That, to me, does not foster competitiveness, and I think that's part of what this bill does. It allows us to move forward on competitiveness.

  I thank you for the time and I'm willing to answer questions.

  [The prepared statement of Mr. Barram follows:]

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  Mr. Chairman and members of the committee, I appreciate the opportunity to be able to comment and present a small business perspective on the effect of proposed patent law changes.
  My name is Steve Barram. I am the CEO and founder of a small business in Portland, Oregon. We are a software manufacturer which started in 1988 and has grown steadily ever since. In 1993 our first year of eligibility, we placed 25th on the Inc. 500 list of fastest growing privately held companies. We have been privileged to move to a leadership position in a vertical niche market and claim Texaco, Pennzoil, Jiffy Lube, Valvoline, Castrol, and other oil companies as well as major franchise groups as our major customers. 7E

  While our business growth and software manufacturing capabilities drive me to have a keen interest in the intellectual property area and the protection afforded us, I also come here representing the 1995 White House Conference on Small Business. Having been directly involved in the technology and innovation issues that were discussed at the White House Conference and Small Business, I believe that the conference delegates came away with both a clear understanding and consensus on the fact that we are now a part of the global economy and its impacts on, as well as opportunities for, small business. Indeed, the White House Conference on Small Business in 1995 reversed its earlier isolationism and voted overwhelmingly on the importance of international trade to the future of American small business and was the first one in history to report out two technology issues in the top 60 recommendations. Both of the technology issues placed in the top 15 recommendations forwarded to the President and Congress.

  There was significant discussion at the White House Conference on Small Business about protection intellectual property rights of the U.S. businesses. In the technology and innovation section, there was initial discussion by some who argued we should adopt a stance similar to the bill introduced by Congressman Rohrabacher last term, H.R. 359. That bill tried to reintroduce the so-called ''17-year'' patent system. The Technology Section voted that H.R. 359 was a step backward, away from international standards, and was contradictory to the role the Conference delegates wanted. The technology and innovation section specifically omitted any reference that would tie us to a position similar to H.R. 359. Attached to this testimony is a letter from the White House Conference on Small Business leaders written last term and addressed to Congressmen Moorhead and Rohrabacher setting out the considerations that were important to the technology delegates. H.R. 400 does a good job of meeting most of these needs.
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  In addition to the letter, I would like to elaborate on the position of the delegates.

  Given the increasing importance of patents, it is not surprising that there is so much passion in the current debate over patent law modernization. On the side opposing modernization are powerful interests and many independent inventors. They are bitterly opposed to any modernization of our patent law and are working to restore the ''17-year'' term. On the side favoring modernization is most of American industry and the business community. These people are working toward standardizing international patent law. Somewhere in the middle of all this are the interests of small business.
  I believe the United States stands at a crossroads. We can either choose to live and act as we always have, or recognize the newfound global economy and marketplace of which we are a part and seize the opportunities it is presenting to us. For small technology businesses, those of us who use the intellectual property and patent systems, to ignore global competitors is to invite failure; to ignore global markets is to miss great opportunities. Just as our founding fathers realized the importance of a uniform law governing trade between the states, we now need that same uniformity of law for trade between nations. The American patent law that served us so well for 200 years now must ensure that not only are we incensing invention, but also that it does not harm our global competitiveness. Therefore, as we consider any patent bill, it is imperative that we take into account their effect on international trade and our global competitiveness. The last thing we want to do is have American patent law put American companies at a global disadvantage.
  Both of the topics that follow have serious implications for the global competitiveness of American small business.

  At first glance, it might seem crazy to publish applications before they issue as patents. Publication might allow anybody to read and copy the invention before there is any patent protection. Publication might also enable competitors to bombard the Patent Office with prior art and thus ''stall'' an application interminably. Publication might also destroy the opportunity to keep the invention a secret should it prove to be not patentable.
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But there are also very good arguments for publication

  First, publication protects inventors from wasting effort, time and money on technology being claimed by others. Nothing is more heartbreaking than to see a small inventor sink a lifetime of savings into building a business around his or her invention only to discover later that somebody else filed an earlier patent. Yet unless the ''new'' idea is old enough that patents have already issued to other people, how can one know if it is safe to proceed? Unless an American inventor goes to the expense of searching foreign patent offices, there is presently no way of knowing what new technologies are in the process of acquiring U.S. patent protection. Indeed, if we restore the ''17-year term'' as some are advocating, applications may be kept secret in the Patent Office for a very long time. An inventor could be far down the road toward building a successful business before he discovers that another's long-pending patent will take away everything he has built.

  Second, there is a popular belief that American patent applications are presently secret until the patent issues. That is not true. Most American patent applications are secret only at home. The vast majority of all American applications--and especially the important ones--are now being published overseas 18 months after their filing date. This is because 45% of U.S. applications are filed by foreign companies as a counterpart to the application they file in their home country. Another 30% are filed by multinational companies who rarely file important patents only in the U.S. Many additional U.S. patent applications, filed by small businesses like mine, are also filed abroad. All of these U.S. applications filed abroad are ''laid open'' or published in those foreign countries 18 months after the filing date. As a result, America's foreign competitors presently have a powerful advantage in information about pending American patents. The important patents pending in America are known overseas but hidden to small American businesses. Clearly, small business would benefit if it could, without compromising its own patents, learn what technology has already been staked out by pending patents.
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Will Publishing Applications Enable Theft?

  Sadly, many inventors and small businesses have been scared by headlines claiming that publication of applications will create a new way for foreigners to steal our inventions. The truth is that the technology in an American patent can be copied legally anywhere in the world except in America. Publishing the application will not change that fact. The only way to protect American technology in another country is to patent it in that county. And when an application is made in that other country, it will be published there. Publishing the application here at the same time as it is published in other countries provides no new information to foreign competitors. Publishing applications does not create a new opportunity to steal American technology!

  On the other hand--what about those 45% of American applications made by foreigners? They are now secret in the U.S. H.R. 400 will publish them here and make their contents known to American inventors. Then small business can have the best of all possible worlds. We will be able to determine what areas of technology are open for exploitation. We will be able to see what only our foreign competitors can now see. We will be able to read in English what is often now only available in other languages. Publishing applications in the U.S. is a good idea.


  To some people, the old system of setting a patent to expire 17 years after the date of grant seemed like a good idea that should not have been changed. But things are not what they seem. Every administration since Eisenhower recommended abandoning the ''17-year'' system. Indeed, there was almost universal agreement that the United States should adopt the emerging international standard for patent expiration--20 years from the filing date. Yet we waited. Before we adopted the 20-year standard, we wanted concessions from our key trading partners. The concessions came in 1994. Then, just when it looked like America would finally adopt the 20-year system, a storm broke. In July 1994, the Lemuelson Foundation ran full page newspaper ads predicting an economic disaster for America unless the U.S. retained the ''17-year'' patent system.
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  Why the fuss? The advocates of keeping the ''17-year'' system claim that if the 20-year ''clock'' starts running when the application is filed and then the Patent Office takes too long to examine the application, the applicant will be denied valuable patent time. That seems like a legitimate concern. But another concern may have more to do with the tremendous passion and money spent on the issue. That is the ability under the old ''17-year'' system to maintain a patent monopoly much longer than 17 or 20 years. Indeed, under the ''17-year'' system it is possible to maintain a patent monopoly for 50 years or more.
How it is done?
  Under the so-called ''17-year'' system, patents did not expire until 17 years after the date of issue. In other words, the 17-year clock didn't start running until the patent was issued. For simple inventions covered by one patent, the system worked well. But most inventors didn't realize that by filing applications for multiple patents, the monopoly period could be extended far beyond 17 years. To gain patent protection for more than 17 years, the applicant could have his application broken up into a series of multiple, related patents, some of which would issue quickly, while others could have their issue dates delayed for decades. It was thus possible to use a series of patents to monopolize Biotechnology for a half century or more--many times longer than the framers of the old law intended.

  Case in point--In Lemelson v. Ford Motor Company, the patentee is claiming that Ford is infringing a series of related patents on an invention the patentee claims was made before 1954. The patentee claims his series of patents (issued under the old ''17-year'' system) entitle him to monopolize the 1954 technology until at least the year 2011--almost 60 years.

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  The 20-year system which has been in effect since 1995 prevents such maneuvers because now all patents expire 20 years after they are filed, regardless of how they are strung together. Understandably, some patent owners are very reluctant to lose the opportunities inherent in the old ''17-year'' system. There is a huge amount of money at stake.

  But patents cut both ways. They must expire in a timely manner in order to allow competition and further progress. Imagine where the U.S. would be today if Edison and Bell had used extension techniques to keep their monopolies going for 60 years or more. In other countries where their patents would have expired after 20 years, electric power and telecommunications would have begun advancing. In the U.S. all progress would have been frozen and we'd still be cranking up a ''Hello Central.''
  As a lawyer, I have an additional concern if the U.S. returns to the so called 17 year term system. Because the debate has become so public, lawyers who are properly representing clients in the patent process will now urge them to work to delay issuance for as long as possible in order to protect their clients best interest. While this is legally proper, and I would say ethically mandated for lawyers, I do not believe this fosters competitiveness in a global environment. Rather it encourages just the opposite monopolistic tendencies.

  We should not forget that a patent application is an application for a monopoly. The new 20 year system limits the monopoly to about 20 years. Clearly America would be gravely harmed by returning to a, system that permits, even encourages, longer monopolies.

  On the other hand, concerns that the PTO might delay or even lose an application are legitimate. The solution, however, is not to restore the old ''17-year'' system. The solution is to offer applicants day-for-day extension of the expiration date for every day over 3 years that the PTO delays examination. Among other things, that will be a terrific incentive for the PTO to examine expeditiously. H.R. 400 contains such a provision and it should eliminate most legitimate concerns over the fairness of the new 20-year system.
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What the New American Industry Thinks
  The 1960s, 1970s, and 1980s saw a steady decline in American industry's global competitiveness. In market after market, American products were replaced by products from Germany, Japan and Korea. In the 1990s, the trend reversed. American ingenuity reasserted itself in the form of a new breed of enterprise. Companies that were small businesses just a decade or two ago arose and recaptured the lead for America in global technology. They have names like AMD, Applied Materials, Compaq, Intel, and Micron. For this new breed of company, intellectual property protection is vital. It is significant that these bright new companies have studied the issue and universally concluded that America should publish applications and not reinstate the 17-year system.
The Special Concerns of Small Business
  Small business, on the other hand, does not have the resources or time to become expert on patent and intellectual property law. Unfortunately, the viewpoints of many small businesses have been distorted by a veritable flood of mix-information directed toward small businesses and inventors. Our own company has been the recipient of phone calls by organizations claiming to represent the interests of small business and asking us to insist that Congress oppose publication and reinstate the 17-year term. The problem with these calls has been that the facts that they used to make their case were terribly, terribly wrong. For example, they claim that the average patent takes 8 years to issue when in truth it is closer to two years. They claim that independent entrepreneurs and small businesses account for the vast majority of U.S. patents when the truth is that the largest single group holding U.S. patents is foreign entities--American independents and small entities combined hold barely one fifth of U.S. patents. They claim that U.S. applications are presently secret when the truth is that most are not. They claim that big business is out to destroy the patent system when the truth is that a strong patent system is critical to our most successful businesses. This mix-information has understandably created a passionate reaction. It has also made the debate over these issues far less rational and more rancorous than it should have been. Parties have dug in behind ''my way or no way'' positions and refused to consider that others also have valid concerns that need to be addressed.
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Patent law must benefit all Americans. There is so much at stake. Let's not make this year a repeat of the acrimony that hobbled us last year. It is time for all of us to come to the table and agree on modernization of America's patent and intellectual property laws to benefit the entire nation.


  Mr. COBLE. Thank you, Mr. Barram.

  As you pointed out, the disadvantage of being members of subsequent panels is that you have to listen to testimony that you had probably planned to present yourself, but the advantage is the ability to provide oversight, and I thank you for the oversight.

  Thank you, gentlemen, for being with us.

  Dr. Hill, the Alliance for American Innovation claims to represent thousands of independent inventors. Does this alliance impose membership fees or charges for membership?

  Mr. HILL. I believe it has contributions; it accepts contributions, Mr. Chairman. I'm not aware of membership fees.

  Mr. COBLE. So voluntary contributions?

  Mr. HILL. Right.
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  Mr. COBLE. And what constitutes being a member?

  Mr. HILL. I think if you're on the mailing list, if you indicate interest in the objectives of the organization and are on the mailing list, that represents the organization.

  Mr. COBLE. OK, and then the funding, as best you know, is just through voluntary contributions?

  Mr. HILL. I believe that's right.

  Mr. COBLE. OK. The Constitution, as you know, contains an equitable balance of disclosure of ideas in exchange for protection of a property right. Why are provisional rights and the ability to withdraw an application prior to publication inadequate to protect inventors while allowing disclosure which eliminates duplicative research and development?

  Mr. HILL. The purpose of the patent system, Mr. Chairman, is to move forward from the old system of trade secrets. It represents a bargain between the inventor and the Government by which, up to the present time, the inventor has provided his application, which gave a statement, a secret statement, of his invention, and it remained secret until the inventor had rights to enforce the property rights with that invention.

  The withdrawal of the application represents a return to the trade secret system, and the trade secret system was disadvantageous to the public at large because it did not have the advantage of the patent system. The very word ''patent'' means disclosed, open, revealed. And the contract between the inventor and the government was that his invention would remain secret until he had rights to protect it. So that--and then, after a limited period, such as 17 years, it would pass into the public domain. So this got away from the situation in which a person might have an important development; he would keep it as a trade secret, and it would die with him. It would be lost. Now, under the patent system, it becomes part of the public domain. So there's a great virtue to the public in the patent system both in terms of providing significant incentive to the inventor through property rights and also through providing full disclosure in a manner to teach anyone else how to do it under the contract, the patent. So filing and then withdrawing defeats that purpose, and likewise, publication after 18 months defeats it because the inventor may not have a patent then, and for significant inventions he almost certainly will not have a patent then. Experience shows that the inventor may have to struggle for years to educate the Patent Office when he makes a significant breakthrough.
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  Now Commissioner Lehman likes to quote statistics. He talks about the numbers of patents. He's talking about all of them. The trivial patents--anybody can get a patent--anybody, but to get patents that represent a significant breakthrough, and therefore represents significant intellectual property, and may ultimately represent hundreds of millions of dollars, even billions of dollars, of product, hundreds of thousands of jobs, a patent on that kind of invention represents new ground and it takes a while to get that.

  Mr. COBLE. Mr. Barram, you've touched on my question in your written testimony. Do you want to be heard on that question, the question I just put to Dr. Hill?

  Mr. BARRAM. In terms of submitting and withdrawing?

  Mr. COBLE. Yes, why is it inadequate?

  Mr. BARRAM. I'm not sure that I--I got lost, I'm sorry, in the answer.

  Mr. COBLE. Well, I asked, Why are provisional rights and the ability to withdraw an application before publication inadequate to protect inventors while allowing disclosure which eliminates duplicate research and development? I think you touched on it in your written testimony.

  Mr. BARRAM. From the standpoint of the inventor, I guess I come back to it's not a secrecy issue. If I'm going to file, I am typically not going to file just in our jurisdiction; I am going to file elsewhere. Once I do that, I am availing myself of what has become a global standard in terms of publication rights. Even turning it around--I'm not sure I'm answering your question, quite honestly, but even turning it around, if a Japanese----
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  Mr. COBLE. And I may not have framed the question as clearly as I could have, either.

  Mr. BARRAM. Oh, if a Japanese company decides to file an application in Japan, it will be published 18 months later in Japanese. If they file for an application over here under current law, the publication in English is not going to take place until a patent is issued. To me, that's disadvantageous because, as a small business person, I am typically not going to avail myself of the resources to go through the Japanese language filing system. If we turn it around and harmonize, which has been used in a derogatory sense earlier, I believe that we actually provide a benefit to the small inventor who doesn't have the resources to go do that, and take advantage of things that will now be published in our own language.

  And it strikes that we are getting hung up on secrecy as opposed to where is society today, and what is the world we have to operate in? What used to work doesn't have as much effect today. Now I'm not sure I answered your question, but----

  Mr. COBLE. That's good.

  Professor, I'll get to you subsequently. Let's hear from the gentleman from Massachusetts now.

  Mr. FRANK. Thank you, Mr. Chairman.

  I look at two of what seem to be the most salient issues here. One is the 20-year versus 17-year, the 17-year guarantee, the 20-year with compensation, and at least theoretically it is possible, if that system is administered properly, to protect people by extending 20 years. I think that one is more easily compromised, but if you do it right, it's certainly easy to conceptualize that if it's our fault, we, the Government, then we can extend it.
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  The one that's harder to compromise on is the publication. So I would like to ask--and this is a new subject to me in a lot of ways--so let me ask, and I'll start with Mr. Hill, but ask about the others. As I understand it, the objection to publication 18 months after you filed, which could be several years before you get the patent, is that it leaves you open to people who, studying what you did, will try to steal pieces of it or contest it, et cetera. But the point that was interesting to me was that, obviously, it's going to be published at some point anyway.

  So you say, for instance, in your testimony, Mr. Hill--and I apologize for having been overly delayed, but I have tried to read the parts that seem to me most relevant--that what publication means is that by the time--you're under attack before you have the right to protect yourself because you haven't gotten the patent. But do I misunderstand the law? If you file first, doesn't that give you the protection? I mean, why are you not protected at that point, once you have filed, and 18 months later it's published? If someone is doing something that infringes on you, why are you any less able to protect yourself then than you would be when the patent issues?

  Mr. HILL. Well, Congressman Frank, when an inventor files for a patent, he's not assured of its issuance. He goes through a number of very anxious months and years of dialog with the Patent Office, with the examiner, and he never knows that it will be issued until he gets notice of allowance, which is maybe after many years.

  Now just turning the question around, any inventor now can give notice to others of his invention after he has filed an application, because he's protected by the filing. He can do that right now. That doesn't require any change in the law. He can do it in 10 minutes or in 10 months or 18 months, but he doesn't do it normally. He doesn't do it because--you've heard some conversation earlier today, giving somebody notice will stop them from going forward with a duplicative development. I assure you that is a very unsophisticated viewpoint in my experience, because in the Patent Enforcement Fund we're working with inventors who have issued patents, valid and strong patents, and they give notice to large companies which are infringing. Does that affect the large companies? They know the patent's there; they just breeze right along, and the inventor has to come in with all the power of the Federal courts to try to enforce his rights.
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  Mr. FRANK. Well, Mr. Hill, that would seem to me to undercut, frankly, your own argument; namely, it concedes that publication is going to have to happen at some point. And what you're saying is the fact that the patent is issued is not any greater protection than it would have been if you published it after 18 months. I mean, if the fact that the patent's being--you say in here in your testimony that the problem now is you've got to publish before your rights have been perfected, but you're saying that that doesn't make any difference; you still--you're under the same kind of assault. And you do have the same right to protect yourself from filing as from the issuance of the patent against infringement.

  Mr. HILL. Congressman, the power of the Federal courts in patent enforcement is significant, and, therefore, the power of enforcing a valid patent is what the inventor attempts to obtain through the patent system, but he doesn't disclose his----

  Mr. FRANK. I understand, but----

  Mr. HILL [continuing]. Invention normally until he has that right of patent enforcement.

  Mr. FRANK. If we're talking here about someone who is really trying to steal your work based on your having published it, if you have applied first, you are as protected then, ultimately, legally as if the patent issued. So why--I don't understand why you are less protected then. If someone steals your work and maybe tries to beat you to the patent thing, you have every right to sue, having filed first, that you did later, don't you?

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  Mr. HILL. You have the right, Congressman, but it takes hundreds of thousands, and often millions of, dollars to place a suit and to carry it through. Now the inventor, after he has a patent, may have some capability of bringing that money together, but most independent inventors who have produced the great corporations in this country are not rich people. They may ultimately become wealthy, but----

  Mr. FRANK. I understand, but my----

  Mr. HILL [continuing]. They're not so in the beginning.

  Mr. FRANK [continuing]. Problem is certainly the day your patent is issued you're not going to have all that money, are you? I mean, doesn't it take a while, once the patent is issued----

  Mr. HILL. He doesn't have the money, but at least he has property then; he has intellectual property, which under the U.S. system is significant and can be the basis for substantial funding.

  Mr. FRANK. Could be, but I would--I guess I'm persuaded even more, because there are competing goods here; I understand that. There is the advantage of notice and the advantage of people being put on notice not to waste their efforts. I mean, it seems to me if you assume--let me try to get centralized in this way--if you assume that most of the people seeking patents were honest, good, decent people, then publication wouldn't be a problem; correct? The problem with publication----

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  Mr. HILL. Say that again?

  Mr. FRANK. Well, if you assume that the people in the inventing business were decent people----

  Mr. HILL. In the investment----

  Mr. FRANK [continuing]. Then publication would be a good----

  Mr. HILL. In the investment business?

  Mr. FRANK. Invention.

  Mr. HILL. Inventing, OK.

  Mr. FRANK. Yes, inventing things.

  Mr. HILL. Yes.

  Mr. FRANK. I know that's not in one of the Labor Department's occupational groups [laughter], but, I mean, if you talked about innovation--publication is helpful to the extent that people are honest and not trying to steal each other's work, because then if you were in the business of inventing things, you would welcome publication as a way to say to you: don't waste your effort here; somebody's already been there; go over there.

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  The question is, however, the offset is not everybody in this world is good and decent. There are crooked people who want to steal other people's work, and so those are the competing problems we have here.

  And then the question is: What kind of safeguards can you come up with, so that you get the advantages of publication for the great majority of people who would use the information well--i.e., stay away from somebody else's patent, et cetera--versus how do you stop the people who are going to misuse it. And the point that seems to me to be clear is that there are some problems when bad people try to poach your patent, but they do not seem to me to be qualitatively worse once you've got the patent than at the publication date. I mean, you still would be at the moment the patent issues maybe a poor, independent inventor without a lot of legal resources, and I don't see any great difference.

  Mr. HILL. Well, Congressman Frank, I know from direct experience with many inventors that the life of the inventor is very rocky and very difficult. He needs all the help he can get. One of the inventors that we have worked with for a long time had a significant invention that resulted ultimately in more than $10 billion in sales. He went to the great corporations and offered to license them. They studied it; they studied it carefully, and after they had learned everything about it, they said to him, ''We're impressed with what you've done. We've decided it's not in our interest to take a license, but we wish you the best of luck.'' And a few years later, they came onto the market with their own systems on which his patent read. So, subsequently, he joined with us and proceeded to enforce his rights, and we ultimately got some significant results from that. But that's just an illustration----

  Mr. FRANK. Well, I'd say that--I don't know whether you were talking about intermittent windshield wipers, but that would seem to me to be describing that event.
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  But the other question I have is this: Are you aware of any cases where inventors worked very hard, scraped up their money, did their best, and then found when they went to file that somebody else had beaten them to the punch, but because there was no prefiling system, they didn't know about that? I mean, are there any--because there would seem to me, at least theoretically, to be countervailing cases of people who were disappointed to find that their efforts were frustrated, and if they had had notice, they might have been able to channel their efforts into a different direction.

  Mr. HILL. Well, when you proceed to apply for a patent, the first thing you do is make a search to see what is already in the patent literature.

  Mr. FRANK. Right, but if it hasn't been published, it isn't going to be there. That's precisely what we're talking about. That seems to me to be the rationale for the publication date, which is significantly to increase the patent literature, so that patent work is updated, and in fact it would seem to me in the nature of the case, the older the patent, the less likely you are to think you're some brilliant person by independently inventing it. So the most recent work is, in fact, likeliest to be unpublished unless you have a publication requirement 18 months or so after.

  Mr. HILL. We have a system now called interference, so that if two patent applications are made simultaneously or within a similar range of period, then that can be sorted out. That's within the present system, and the present system must be changed only very, very carefully. All of these changes in H.R. 400 that I have been speaking about are very destructive of the ultimate position of the inventor and greatly favor the corporate interest, because they don't have the problem of supporting the cost of litigation. They have virtually unlimited funds for that purpose. So it's the independent inventor who has represented the principal source of innovation in this country that we need to protect and to which we speak.
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  Mr. FRANK. I thank you. You mentioned interference, and I'm taking too much time in the huddle. So I will defer back, Mr. Chairman. Thank you for the extra time.

  Mr. COBLE. I thank the gentleman.

  The gentleman from Indiana.

  Mr. PEASE. Thank you, Mr. Chairman. I apologize for my tardiness, and I did not hear the presentations. I'll direct this to whoever would like to answer it.

  How do you respond to those who say that the small inventor, small American inventor, who would file and, under the provisions of this act, have his idea disclosed publicly, but doesn't have the means to file independently in other countries deals with the fact that that information is then publicly available for use or abuse in those other countries?

  Mr. WEGNER. I think the answer has to be that we make it a simple international system. It is not a farfetched idea. Right now if you can't file abroad, the real intellectual property you're getting is just the United States, and you're giving an invitation, a carte blanche invitation, to people in Asia and Europe to not only take the technology for free, but then improve it and get their own patents and then dominate us with reciprocal filings to the United States.

  The answer is a harmonization treaty. I've testified in 1992 to something we've called patent work-sharing. This should be the goal: have one examiner around the world examining globally and sharing our resources. So a Japanese examiner picks up one case; an American examiner, another case, and so forth. Isn't it absolutely idiotic that we have the same invention examined by 5 or 10 different examiners in different languages around the world? You can see it from a governmental efficiency standpoint, but think about the poor company and the individual inventor that has to file, prosecute 10 case in 10 languages, and have a whole army of lawyers.
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  All we need to do is to have patent work-sharing. It works like this: you file first in the United States, and then 1 year later--we have a Paris Convention for filing 1 year later--you'd file patent work-sharing, and one application would be filed. You'd file in your home country or pick the one that gives you the best results.

  Now there's a kicker. You don't want to have a foreign government granting U.S. rights uncontested. So you have to have an opposition system at the end of the rainbow, a local opposition system. This is not rocket science; this is nothing new. We've been working on this for literally 15 years.

  And then we get into other aspects of the harmonization debate. The 18-month and 20-year term are critical integers. There are a few other reform issues that have to be done, and all we have to do is make a few changes in our law, because the rest of the world has already taken this international model. We've had a 5-year exercise in Geneva. We had a committee of experts in the World Intellectual Property Organization; no treaty is coming out of that, but what did come out of that was an ever-better, ever-more-refined draft treaty. It's a model patent code. So it's been looked at. It's got the best features from what Europe has done, what Japan has done, what we've done. That's what Congress has to do if it wants to save money, if it wants to help our individual inventors.

  Once you have patent work-sharing, then you can get a patent granted quickly and efficiently and economically, and universities and individual entities can do that. That's what has to be done.

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  Mr. PEASE. Thank you. Nothing further, Mr. Chairman.

  Mr. COBLE. Let's try a second round. Do you have something?

  Mr. FRANK. No, Mr. Chairman, I have a--I want to apologize to the people from the public employee groups who will be testifying and promise to continue to meet with them, but I have a meeting at 2 o'clock in my office that I've called. So I am going to have to be there.

  Mr. COBLE. Massachusetts will be represented because your colleague just came in.

  Mr. FRANK. No, I invited him to the meeting.
  Mr. DELAHUNT. I have been instructed to come to that meeting. [Laughter.]

  Mr. FRANK. It's about fishing, which is very important----

  Mr. COBLE. I think Barney invited him and he told him he would attend. I think that was the way the invitation was. [Laughter.]

  But thank you, Mr. Frank, for being with us. I appreciate it, Barney.

  I say to the third and final panel folks: don't get uneasy; we're going to get to you, but I do want to revisit just a minute.

  Professor, Mr. Rohrabacher has told us that submarine patents are rare and that we're trying--and I'm quoting--''to cut off a leg to get rid of a hangnail.'' You mentioned in your testimony that the possibility of submarine patents can do great damage because it prevents work-sharing and could be costing patent applicants billions. Expand on that somewhat, Professor, if you will, and describe for me in your opinion, what the complete impact of Mr. Rohrabacher's bill would have in his current form on the American patent system.
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  Mr. WEGNER. Well, I've only seen the discussion draft, but let's focus, first, on submarine patents. The ultimate submarine patent, we all know the infamous name Lemuelson; it's sort of a buzzword for this century, the way George Selden was in the last century. When George Selden patented the automobile, it was a submarine patent, and held up Ford and others.

  But it's not just Lemuelson; that's the extreme case. Roughly 20 percent of all patent applications are of the continuation or continuing application type, and, indeed, it was said earlier today, if I'm a lawyer with an uncapped system, I have to serve my client, and I can be very, very slow in prosecuting a patent, particularly in the regulated industries. Look, in the drug industry, if it's going to take 10 years to get regulatory approval, I don't need a patent for the first 10 years because the criminal system will put you in jail if you copy a drug that hasn't been approved.

  So I want that patent to start when the regulatory approval hits. So it is--we are the slowest people in the world if we're doing the pharmaceutical field, which is my field. And you've got to have a cap on the term.

  And just to say Mr. Campbell hit one point very well, saying you have a continuation gate perhaps, but there are many ways to slow things down. Just imagine in your own context, if you had a rule saying debate would be limited and you take care of all laws expeditiously, just imagine how you'd have a law passed every week instead of having a third of your laws passed in the last few weeks of Congress. There's always a game to be played and there's always a color of legitimacy around anything that's being done, and you're not representing your client properly unless you spread things out.
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  So submarining is, in the extreme it's a Lemuelson, but 20 percent--some are legitimate; maybe they're all legitimate, but for some reason it takes us a very long time to prosecute applications. And if you look in the biotech area, it's particularly long and will always be very long with an uncapped term. I did some statistics about 3 years ago, and whereas in the muffler, literally mufflers, patents were granted in about 15 months, when you counted the chaining of continuation upon division, upon continuation, in the biotech area dealing with DNA it was more like 60 months. A lot of that was very voluntary. The big companies certainly would like to have their terms start when regulatory approval is granted. That's just natural. That's in the self-interest. You've got to keep the cap on the term. It's absolutely essential, absolutely vital.

  Mr. COBLE. Thank you, Professor.

  Speaking of Lemuelson, that brings me, Mr. Barram, to you.

  Mr. HILL. Mr. Chairman, could I comment on submarine patents?

  Mr. COBLE. Sure.

  Mr. HILL. First of all, when a patent is being prosecuted, there are restrictions on the period of response for the applicant, and if the applicant doesn't respond in a timely way, normally 60 days or 90 days, his application is at risk of abandonment, and sometimes it's necessary to petition to the Commissioner to try to get a patent back into force.

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  Divisional applications are usually required by the Patent Office itself because of different subject matter within disclosure itself. And so divisional applications are, indeed, there, but that is the way the law works, and it's--in all of my experience, I've never known an inventor who was deliberately delaying his application. There are some cases--and Lemuelson is one of them, and there are others that are well-known--in which the patent didn't issue for a long time, but the reason it didn't issue was because of various delays in the patenting process, and the only reason it ultimately issued is because the inventor day by day and month by month throughout that entire period was fighting to get it out.

  So the submarine patent idea is a myth. It was originally demonstrated to be a myth in the initial testimony of Commissioner Lehman, which completely misled the Congress in the way it quoted statistics, and the whole thing is a tempest in a teapot, and the committee accepts it because the word sounds pretty good. It's a clever word, and----

  Mr. COBLE. Well, we're back to----

  Mr. HILL [continuing]. You speak of torpedoing; it's a clever word, too.

  Mr. COBLE. We're back to what I said about subject to interpretation, and we've heard a lot of that today, and I'm not pointing accusatory fingers at anybody.

  Mr. Barram, speaking of Lemuelson, you mentioned in your written testimony that opposition to adopting the 20-year term was funded by the Lemuelson Foundation, and some have speculated that opposition to H.R. 400 is being funded by the same foundation. Now I'm not faulting them, if this is true, because every foundation or individual has a right to oppose or confirm any project. Do you have any idea why they would be opposed to 400, if they are?
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  Mr. BARRAM. The only assumption that I would continue to make is, based on advertisements that I have seen in the past where Lemuelson had his name along the bottom of them, it was, in my mind, it was inflammatory. It went after attacking the patent system and it never addressed a changing world economy. And so, from my standpoint, I believe that what we have is maybe a higher degree of rancorous debate, which we certainly had when 359 and 1733 were being discussed. In many respects, the debate was focused on highly emotionally-charged issues that I am not certain are factually based.

  To give you an example, whether what I received was Lemuelson supported or not, I don't know, but we received a phone call, and other small businesses in our technology field received some as well, and this caller was asking for support of 359 during the last term. When I started asking questions, because I happened to have a little bit of interest in the area, the facts, as they were relayed to me and as I alluded to in my testimony, were that the average patent takes 8 years to issue and independent entrepreneurs and small businesses account for the vast majority of U.S. patents. When if you want to go by statistics, it's less than 2 years for the average patent to issue. Yes, we have exceptions, and it's less than 20 to 23 percent of small, independent inventors that hold the patents. We aren't in that society anymore. Whether we wish we were or not, we aren't.

  And there was also the claim that U.S. patent applications are presently secret, when the truth is most are not, because they're filed either by a foreign corporation as an ancillary patent to something that's been filed abroad first or they're filed by a U.S. corporation that's also making a foreign application. And in a small business setting, funding notwithstanding, I am going to make a decision about whether or not I have a product that's worth patenting in more than the U.S. marketplace.
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  I will, as a small business person, have to figure out how to fund it, because we don't have a harmonization today. That's a fact of life that I have to deal with. But I would argue that that's a better fact of life for competition in general, and it's more recognizing of where we are in society in a global economy, and I would choose to deal with those issues because I happen to believe that American ingenuity still is going to give me a leg up. Is it going to be easy? No. Am I going to face difficulties that may not be as onerous to a large corporation? You bet.

  Mr. COBLE. Thank you, sir.

  Mr. Delahunt.

  Mr. DELAHUNT. I'll waive any questions.

  Mr. COBLE. Mr. Pease.

  Mr. PEASE. No questions, Mr. Chairman.

  Mr. COBLE. Before I excuse you, gentlemen, Mr. Hill, I want to just revisit very briefly the Alliance for American Innovation. The membership intrigues me. You say you become a member when you get on a mailing list? Does that constitute membership?

  Mr. HILL. Well, my understanding----

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  Mr. COBLE. And there's nothing wrong with that. I'm told that it represents thousands of inventors, and I'm just confused about how one becomes a member.

  Mr. HILL. My understanding of the organization, Mr. Chairman, is that the Alliance for American Innovation is a rather spontaneous coalescence of individuals who are individually and collectively outraged by the attempt to destroy the position of the independent inventor in the U.S. patent system, and they have joined together and are attempting to clarify the position for the benefit of the Congress in order to maintain the strong advantage that we now have in the U.S. patent system, and to avoid these various misleading attacks that are being made on the system.

  There is an affiliation form which is signed apparently.

  Mr. COBLE. Yes, I was waiting for you to read that, if you wanted to comment on that.

  Mr. HILL. Yes, that's right. There's an affiliation form that I think we have signed.

  Mr. COBLE. Pardon?

  Mr. HILL. My company is Patent Enforcement Fund, and that's a company that works with inventors.

  Mr. COBLE. Yes.

  Mr. HILL. We never take any money from the inventor. We try to help the inventor by funding the licensing and enforcement activity.
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  Mr. COBLE. OK.

  Mr. HILL. I'm also very enthusiastic and I'm very glad to function in the role of speaking for the Alliance for American Innovation.

  Mr. COBLE. Yes, gentleman, thank you all for being here. Thanks for your patience during a long day.

  If the third and final panel will come forward, I will introduce you as you all make your way forward. The first witness on our final panel will be Ms. Maureen Gilman, who is the director of legislation of the National Treasury Employees Union. She is responsible for setting and implementing the legislative agenda for labor unions, representing 150,000 Federal employees, including the trademark examiners and many other employees of the Patent and Trademark Office. Ms. Gilman holds a law degree from the University of Connecticut, which is New London Ms. Gilman, is that New London?

  Ms. GILMAN. No, that's in Storrs actually.

  Mr. COBLE. Storrs.

  Ms. GILMAN. My undergraduate school is in New London.

  Mr. COBLE. A college up there across from the Coast Guard Academy.

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  Ms. GILMAN. Connecticut College, right, that's where I went to undergrad.

  Mr. COBLE. So you were at the university--and a B.A. from Connecticut College. Connecticut College would be New London?

  Ms. GILMAN. Yes, correct.

  Mr. COBLE. She is also a member of the Connecticut and Washington, DC, Bars.

  Our other witness on this panel is Mr. Ronald J. Stern, who is president of the Patent Office Professional Association, a union of approximately 900 members which represents the patent examiners of the Patent and Trademark Office. Mr. Stern holds a bachelor's degree from the City College of New York and a law degree from George Washington University.

  We have written statements from our two witnesses, and I will ask at this time unanimous consent that these statements be made a part of the record. And I ask that you all, if you will, stay as close--we're about at the end of the day now. So we may give you 6 or 7 minutes, if you need it. But it's good to have both of you here.

  Mr. Stern, why don't we start with you?


  Mr. STERN. Well, thank you very much, Mr. Chairman. Thank you for giving us the opportunity to present the views of our association.
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  You mentioned that we have 900 members. By the way, we represent approximately 2,400 professionals at the Patent and Trademark Office. We represent the largest group of employees at the Patent and Trademark Office that is organized, and that includes all the other organized groups at the Office combined.

  And, for the same reasons that you have heard, and lots of other people have spoken to, we also support the extension of the fee surcharge in H.R. 673. We do need the money. We support the removal of the FTE ceilings from the PTO, as provided in both H.R. 400 and H.R. 812. That is Duncan Hunter's bill.

  In addition to that, we support Mr. Rohrabacher and Mr. Campbell's bill, H.R. 811, to restore the 17-year patent term for some patentees and to allow early publication of patent applications under special circumstances.

  In the area of personnel administration, H.R. 400 retains employees in our established civil service system. This will protect the integrity of the U.S. system, and it will maintain the time-tested balance between managerial flexibility and equitable treatment of employees.

  PTO employees have earned and deserve their civil service rights. The PTO has been an example of hard work, productivity, and efficiency--in stark contrast to the stereotype of unproductive and inefficient Government workers.

  All examiners are subject to a performance evaluation system in which they are fully responsible for quality, quantity, and timeliness. Production quotas are specified in 6-minute increments, and many employees put in lots of voluntary overtime.
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  Unfortunately, H.R. 400 doesn't address most of the problems actually facing the Patent Office today. Frankly, the most significant problem we have is that confidence in the quality of our work product seems to be at an all-time low. In the past 15 years, there has been a relentless drive to increase the productivity of examiners; that is, to decrease the amount of time spent on each case. Each professional puts in about as much quality into the product as the time granted to him by management allows. At this point, the average amount of time spent per application is approximately 17 hours. How much less time can an examiner spend on a case and still put out a quality decision? Currently, the European Patent Office spends about twice as much time on a case.

  In addition, critical search tools have been crippled. As you noted in the remarks accompanying H.R. 673, there have been problems with funding and with placing foreign patents in our search files. Our customers give us a mere 50 percent satisfaction rating. Their No. 1 concern is the quality of our work product, especially as regards the adequacy of the search of the prior art.

  In a survey conducted by an outside consultant, our employees have also identified the No. 1 problem as concern over the quality of the work product. To overcome this, our examiners need more time per case, better search tools, and training. The issue is not merely the total level of resources that are available right now, but it's really one of priorities with respect to our existing resources. In simple language, it's a question of who gets the money that we really do have. Right now, the PTO collects just under $8,000 in fees for each issued patent over the life of the patent, but less than $800 on average is allocated to examiners for examining a patent application. The rest is processing costs and overhead. Have we become the U.S. Overhead Office?
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  The PTO demonstrated its priorities by the way in which it allocated the administration's cut of $92 million in surcharge money within the agency. We have been told that 302 full-time equivalent examiner positions will be cut in fiscal year 1998 relative to fiscal year 1997, even though only 27 full-time equivalent positions will be cut from the overall patent business staff, and that staff includes examiners.

  What does it mean, if you're decreasing one group and maintaining the overall average. It means the positions are going somewhere else. We don't know where they're going to, but they're going somewhere else.

  We believe this imbalance in the priorities of the agency can only be changed by adopting the provisions of H.R. 812.

  With your permission, may I take another minute?

  Mr. COBLE. Go ahead.

  Mr. STERN. The most important reform in H.R. 812 is section 6(d). Just as Congress put a fence around trademark fees by requiring that all trademark fees be used only for trademark registrations and related activities, so should Congress declare that certain patent application fees be dedicated to fund the pay and training of patent examiners. We strongly support such a fence. Inventors pay application fees principally for the time examiners use to search and evaluate the patentability of an invention. Inventors should be guaranteed the services they paid for, and budget shortfalls accommodated by adjustment of processing and overhead costs. It's time to get our priorities straight.
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  And one other item: you noticed that the Commissioner in his speech spoke of attempting to pay examiners more money. He thinks that after 3 years examiners are more productive than they are prior to that, and that they deserve more money. The current civil service system provides many opportunities for the Commissioner to actually pay people more money. He has been, through these hearings, made aware of it. I don't know if his lieutenants have actually told him personally, but through these hearings he's been made aware of those flexibilities.

  No one in the Office in the past year has offered to initiate anything that will pay people more money, and, in fact, they have gone just the other way. They have discouraged employees by taking money away from the award system, and they have also discouraged employees by cutting back benefits.

  In one area we have a comp. time program that provides some flexibility in when you come in that is particularly applicable to hardship cases. We have one lady that has to go for cancer treatments, and she would like to work. She would prefer to work on the weekends, so that she can go during the week to her cancer treatments, but the agency has said, no, we're not going to permit that; this doesn't fall within our established comp. time guidelines. And, as a consequence, they would rather have her take leave than to have a dedicated, highly-productive, highly-skilled examiner volunteer to work.

  Thank you very much for giving me the extra time.

  [The prepared statement of Mr. Stern follows:]

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  Mr. Chairman and Members of the Subcommittee, thank you for the opportunity to provide the views of the Patent Office Professional Association. Our organization is the exclusive bargaining agent for the approximately 2400 patent professionals at the U.S. Patent and Trademark Office. The vast majority of the employees we represent are engineers, scientists, and lawyers who work as patent examiners. Patent examiners are the quasi-judicial officials who make the legal determinations as to whether an inventor is entitled to a patent.
  There is virtually universal agreement within our membership that providing the PTO with the authority to retain all of its fee income is a significant benefit. We all recognize that charging someone a fee for a promised service and then diverting the fee to other purposes undercuts our ability actually to do what was promised. It also constitutes a tax on innovation which undercuts incentives to invent.
  We, therefore, support H.R. 673. However, the bill could be made even better if the fixed $119 million surcharge to be collected in all future years were to be indexed to both workload, i.e. stated on a per application basis, and inflation.
  There is also virtually universal agreement within our membership that the ever-rising number of applications filed requires a commensurate increase in the staff needed to process those applications. When applicants pay a fee, they are entitled to receive the full service they have paid for. The PTO receives no taxpayer subsidies. It is unfair to take the users' money and then to withhold a portion of the promised service arbitrarily because of an FTE ceiling based upon a general desire to eliminate other government functions. Therefore, freedom from FTE ceilings, as adopted in H.R. 400, is the logical solution.
  Mr. Rohrabacher and Mr. Campbell have introduced a bill to restore the 17 year patent term for some patentees and to allow for early publication of patent applications under special circumstances. The Patent Office Professional Association supports this bill because it protects a vital resource for our economic well being, the American inventor.
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  On the issue of personnel administration, H.R. 400 is a vast improvement over the approach taken by the numerous reorganization bills proposed in the 104th Congress. H.R. 400 retains employees in our established civil service system, with its finely developed balance between the desire for managerial flexibility and the need for fair, equitable treatment of employees. Maintenance of the civil service's culture of honorable treatment is extremely critical to my membership. However, there is one anomaly in Title 5 that seems to have been overlooked in H.R. 400. Of the eleven categories of prohibited personnel practices specified in Section 2302, only one, dealing with whistle blower protections, is applicable to the employees of a government corporation. A typical prohibited practice not applied to corporate employees is the prohibition against retaliation for testifying on behalf of a fellow employee in a hearing before a government agency or in a grievance proceeding. To maintain the integrity of the system, all of the prohibited personnel practices defined in Section 2302 should continue to be applicable to any reorganized Patent and Trademark Office.
  PTO employees have earned and deserve their civil service rights. The PTO has been an example of hard work, productivity and efficiency, in stark contrast to the stereotype of unproductive and inefficient government workers. All examiners are subject to a performance evaluation system in which they are fully responsible for quality, quantity and timeliness. Production quotas are specified in six minute increments and many employees already put in lots of voluntary overtime. Surely, it would be contrary to the family values we all share to demand even more output, thereby requiring employees to spend more evenings and weekends to meet ever-increasing goals.
  Unfortunately, H.R. 400 does not address the most serious problems facing the PTO today. Frankly, examination practice in our country is rapidly approaching a stage of major crisis. It is a crisis of confidence in the quality our work product. For examiners, quality basically means a complete search of the prior art, a thorough and clear exposition of all the legal issues, and making correct decisions. In the past fifteen years, there has been a relentless drive to increase the productivity of examiners, that is, to decrease the amount of time spent on each case. Each professional puts as much quality into the product as time granted to him by management allows. As the complexity of the technology has expanded, as the size of the search file has expanded, as the complexity of the legal issues has expanded, and as patent procedures have become more complex, there is only one thing that has remained constant the quota assigned to each examiner.
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  At this point, the average amount of time spent per application is approximately seventeen hours. How much less time can an examiner spend on a case and still put out a quality decision? Currently, the European Patent Office spends about as much time searching a patent application as our examiners spend on the entire prosecution of a case.
  Critical search tools have been crippled. Since March of 1995, the PTO has ceased to classify new foreign patents according to the U.S. Patent Classification system and has ceased to distribute them to our search files. Reclassification efforts with respect to U.S. patents have been curtailed and in some cases, where a reclassification project has been conducted, the project did not include the reclassification of foreign patents and non-patent literature. These classification failures are seriously undermining the validity of U.S. patents.
  Our customers have been surveyed numerous times, and have been extensively interviewed in focus groups. Their number one concern is the quality of our work product, especially as regards the adequacy of the search of the prior art. In a recent survey conducted by the Haelan Group, an outside consulting firm that was hired by management as part of the re-engineering efforts at the PTO, our customers gave us a mere 50% overall satisfaction rating. Our rating is so low that even the Postal Service and the Internal Revenue Service have higher overall satisfaction scores. Whereas our searches once were the envy of the entire world, we now regularly hear of cases in which a European Patent Office examiner has found a relevant reference that was not found by our initial search.
  Our employees have also been surveyed by the Haelan Group. In that survey, the number one problem identified by employees was concern over the quality of our work product. Our examiners are strongly motivated to provide a quality work product by their professionalism and by their pride. Every patent lists the names of the examiners who worked on the case, and no one wants to be embarrassed. But our examiners cannot perform miracles. They need time, better search tools, and training.
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  Our customers have spoken. Our employees have spoken. But, nothing has changed. Production and cycle times still take precedence over quality. And administrative and automation functions still take priority over examination functions.
  The issue is not merely the total level of resources available, but one of priorities with respect to our existing resources. In simple language, it is a question of who gets the money we have first. Right now the PTO collects just under $8000 in fees for each issued patent over the life of the patent. But less than $800, on average, is allocated to examiners for examining a patent application. The rest is processing costs and overhead. Have we become the U.S. Overhead Office?
  Another example of the PTO's priorities can be seen from the way in which the Administration's cut of $92 million in surcharge money has been allocated within the agency. We have been told that 302(see footnote 15) full time equivalent examiner positions will be cut in FY 98 relative to FY 97 even though only 27(see footnote 16) full time equivalent positions will be cut from the overall patent business staff (which includes examiners). This obviously means that the agency will increase staffing in the processing and overhead areas to offset the decrease in the examining area.

  We believe this imbalance in the priorities of the agency can only be changed by an explicit direction from Congress. Just as Congress put a fence around trademark fees, by requiring that all trademark fees be used only for trademark registrations and related activities in 35 U.S.C. 42(c), so could Congress declare that certain patent application fees be dedicated to fund the pay and training of patent examiners. We strongly support such a fence. We believe that all patent application fees and extension fees should be dedicated to examiners salaries and training of examiners. Inventors pay application fees principally for the time examiners use to search and evaluate the patentability of an invention. We believe the inventors should be guaranteed the services they paid for, and budget shortfalls accommodated by adjustment of processing and overhead costs.
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   In H.R. 400, at Section 112, in the amendment to 35 U.S.C. 2(b)(10), the new PTO is given the power to contract out the entire operation of the organization, including the searching and examination of patent applications, to foreign governments and international organizations. We believe the critical functions of searching and examination must be retained in this country. We urge the Congress not to give the PTO such unfettered power.
  Do not think such an extreme possibility is entirely hypothetical. A 1994 O.G. notice proposed contracting with the European Patent Office for searches in PCT cases in which the United States was specifically designated by the applicant as the search authority. See 1167 OG 74 of October 18, 1994.
  While we support cooperative efforts with foreign patent offices and with international organizations, the basic functions of searching and examination involve policy matters that determine our competitiveness with both the Europeans and the Japanese. We do not think it is wise to even create the potential for such a loss of control of fundamental, Constitutionally mandated economic policy. We recommend that Congress direct that examination be performed within the territory of the United States by government employees who are citizens.
  The degradation of our search files has crippled the examiners ability to retrieve the art relevant to a patent application. The failure to reclassify means that subclasses get so large that they no longer can be searched expediently. The PTO has taken the approach that it can substitute text searching for a comprehensive classification system. However, our U.S. Patent Classification System is a concept-based retrieval system essential even in environments where text searching is available. When concepts are described by common words, a text-based retrieval system will produce an abundance of irrelevant documents. In some areas of technology, the relevant concepts are only embodied in drawings rather than in text. Both our examiners and the European Patent Office examiners find that when using text-based retrieval systems, useful results can only be produced if the text-based result is narrowed by a concept-based classification system. We recommend that Congress direct the PTO to maintain the U.S. Patent Classification System.
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  Our search files can not produce a comprehensive result if whole classes of documents have been omitted. Foreign patents and technical literature are important to doing a quality job. Pursuant to the Patent Cooperation Treaty, this nation is committed to maintaining foreign patents from the major industrialized nations arranged properly for search purposes. In simple terms, the United States cannot ignore foreign patents. We recommend that Congress, by statute, direct the PTO to classify the foreign patents and include them in the search files.
  Our paper search files are dirt cheap. While computerizing our search systems may produce marginal advantages in some areas of technology, it costs ten times more than the paper files. Congress must decide whether it is worthwhile to severely curtail examination functions in order to substitute computerized search systems for our relatively cheap and proven paper files.
  Patent examiner training has been identified as a critical need by our customers. P. Mathis & Associates, another outside consultant hired by the PTO as part of its reengineering effort, conducted two automation studies which concluded that additional training was a critical PTO need. But, even more importantly, every profession has provided for continuing education for its members to improve and maintain skills. The profession of patent examining should be no different. In a patent reengineering workgroup, it was concluded that a specific set aside for training was the best way to ensure that employees actually would be trained. Best practices in U.S. industry provide that 4—6% of an employees time be spent in training, while 10—12% is the best practice in Europe. We are in favor of patent examiners spending at least 5% of their duty time in training.
  To provide an economical source of competent and dedicated trainers, we recommend that Congress, by statute, direct the PTO to develop an incentive program to retain retirement eligible primary examiners. Civil service law currently allows retention bonuses of up to 25% of salary. The concept of creating an incentive envisions, but does not require, monetary incentives.
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  We support H.R. 673 because it removes a tax on innovation and provides for adequate funding of the PTO.
  We support the removal of FTE ceilings from the PTO in order to provide the necessary flexibility to render services that have been paid for in advance.
  The current approach of maintaining the civil service status of employees will protect the integrity of the U.S. patent system. It will also provide a time-tested balance between managerial flexibility and equity for employees. However, H.R. 400 should be amended so that all of the prohibited personnel practices defined in Section 2302 will continue to be applicable to any reorganized PTO.
  Since examination and searching involve policy that determine our competitiveness throughout the world, these functions should be performed in our country by civil servants who are citizens.
  Patent applicants, outside practitioners and our employees believe that the quality of our work product needs enhancement. Patent examination can be readily enhanced by providing more time for examination, by improving the search files, by maintaining the U.S. Patent Classification System, and by training examiners. We recommend this be accomplished not by greater budgets but rather by reallocation of the available resources.

  Mr. COBLE. Thank you, Mr. Stern.

  Ms. Gilman.


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  Ms. GILMAN. Thank you, Mr. Chairman. I appreciate the opportunity to present the views of the National Treasury Employees Union here today. And, as you say, the hour is late, and we have given a written statement to the committee. So I'll be very brief. I would just like to make three points.

  First of all, obviously, our interest in the proposals that this committee is looking at is their impact on the employees that we represent at the Patent and Trademark Office. H.R. 400 we believe basically maintains the status quo in regard to how employees will be affected. They will continue to be covered by title V, which maintains civil service protections pretty much thoroughly throughout the bill. There are a couple of minor issues that we could work with the committee on to improve there.

  But we also feel that if the committee were willing to move in the direction of the Moorhead-Schroeder bill that was reported out of the committee last year, that it would provide for opportunities for us to work with management at PTO to bring some innovative new ways of doing work and maybe more productive ways of working to PTO. The idea that making PTO more like the private sector we believe should be accompanied by allowing the employee representatives to act more like employee representatives do in the private sector. The Moorhead-Schroeder bill allowed for employees to bargain over more basic conditions of employment, and we think that that would have allowed some new innovations that maybe could have provided increased productivity.

  The second issue that I wanted to mention is privatizing and contracting out at PTO. We believe that there are a number of functions that are performed at PTO that are inherently governmental and shouldn't be contracted out at all, but should be handled by Federal employees. But we feel that if you're going to contract out there, that there should be some sorts of standards and guidelines that need to be met to ensure that contracting out does either increase productivity or decrease cost, that it just shouldn't be done in the name that the private sector always does it better, because we don't think that's the case.
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  The third issue that I wanted to mention is your bill, H.R. 673. The National Treasury Employees Union strongly supports that bill. We believe that fees that are paid for the purpose of ensuring that we have well-functioning patent approval systems should be used for that purpose. The fact is that the funds have been diverted in the past, in the recent past, and that PTO has suffered budget cuts, that have caused a hiring freeze, overtime restrictions, cancellation of automation projects, and cancellation of the planned hiring of 500 new patent examiners. We think your bill would help alleviate those problems, and we strongly support it.

  That concludes my oral statement. I'd be happy to answer any questions.

  [The prepared statement of Mr. Tobias follows:]

  Chairman Coble, Ranking Member Frank and Members of the Subcommittee, my name is Robert M. Tobias, and I am the National President of the National Treasury Employees Union (NTEU). On behalf of the more than 150,000 federal workers represented by NTEU, I would like to thank you for the opportunity to present NTEU's views today as the Subcommittee begins consideration of H.R. 400, the 21st Century Patent System Improvement Act; H.R. 673, the Patent and Trademark Office Surcharge Extension Act of 1997; and Representative Rhorabacher's legislation to restore the patent term.
  In addition to the various legislative proposals currently pending before this Subcommittee, it is my understanding that the Administration is presently considering an administrative reorganization of the PTO that they intend to achieve through an agency reprogramming--notice of which is expected to be submitted to the Appropriations Committee soon. A more comprehensive PTO-Performance Based Organization legislative proposal is also being developed by the Administration for introduction this spring.
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  NTEU represents approximately 2,500 bargaining unit employees at two local chapters at the U.S. Patent and Trademarks Office (PTO). The employees of NTEU Chapter 243 are involved in all phases of the patent application process--from handling mail, to other tasks directly related to the adjudication of patent and trademark applications. The Trademark Society, NTEU Chapter 245, represents the professionals who process Trademark applications.
  As you are well aware, the U.S. Patent and Trademark Office plays a crucial role in the development of new industries in our economy. The Office's employees perform the quasi-judicial function of adjudicating patent and trademark applications--an inherently governmental function that appropriately belongs in the public domain. The American public and business community place great importance on the registration of patents and trademarks in the United States as a key to the protection of valuable intellectual property rights. The PTO's employees are vital to the successful operation of the Office and to the successful implementation of an reorganization plan.
  NTEU's interest and involvement in the debate on the reorganization of the PTO stems from our concern about the impact any reform proposals will have on the employees we represent at the PTO. As the debate on intellectual property reform goes forward, NTEU feels strongly that whatever policy is created must be able to be efficiently and effectively implemented. It is vital that any legislation to change the PTO from a government agency to a performance based organization or a government corporation embody accountability, oversight, and checks and balances on those managing such an entity.
  Personnel ceilings, space allocation and procurement requirements, and the inability to use the surcharge on patent user fees have placed significant burdens on the Office. NTEU firmly believes that any reorganization proposal, however, should also embrace personnel systems that allow for increased employee participation in the terms and conditions of their employment in the interest of increased productivity and cost effectiveness. If the PTO will be granted certain operating flexibilities to allow the Office to function more like a business, NTEU feels strongly that employee representatives must have an opportunity to guard against arbitrary management action in these areas by being able to negotiate on the employees behalf. The ability of the employees to successfully exercise their judgment, produce a quality product, and satisfy the needs of their customers must not be compromised. The workforce must feel empowered to do its jobs without fear of unfair treatment and reprisal. The employees make the Office successful, and their cooperation and satisfaction are necessary components of any successful change in the operation of the PTO.
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  NTEU believes that is indeed possible to create a more efficient and cost effective patent and trademark operation without compromising critical employee protections that help ensure a fair work environment. To increase efficiency and productivity in the federal government, particularly with static or decreasing agency budgets, NTEU believes that the creation of successful labor management partnerships is critical. Pre-decisional involvement by employees and their elected representatives will lead to better initial decisions together with faster implementation of needed changes. Formally involving employee representatives in the decision making process increased the effectiveness and productivity of such operations and policies. NTEU remains interested in the labor relations provisions of any reform proposals before the 105th Congress, and the impact any of the proposed reforms would have on the daily work lives of PTO's employees. With these issues in mind, my testimony today will focus not on the core intellectual property policy reforms but on the employee impact of the various proposals currently under consideration.

  H.R. 400 appears to be very similar to the bipartisan legislation supported by NTEU last year (H.R. 3460, the ''Moorhead-Schroeder Patent Reform Act''), except that much of the labor-relations language that was originally included in the ''Organization and Management'' section of the bill has been substituted by language restoring Title V, U.S. Code in its entirety. NTEU believes that making the Officers and employees of the Office subject to the provisions of Title V relating to Federal employees does indeed maintain the status quo, but ignores an important opportunity to grant PTO flexibilities that would allow it to operate more like a business. While I understand the Committee's jurisdictional concerns, this approach abandons an opportunity to implement innovative personnel practices that could foster increased efficiency and productivity.
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  NTEU supported the version of H.R. 3460 that was reported out of this Committee on June 11, 1996, as legislation that achieved an appropriate balance between management flexibility and employee protection. This particular proposal struck a responsible balance between specific Title V exemptions by expanding negotiating rights over issues such as pay, benefits, and other critical terms and conditions of employment.
  As debate on this issue goes forward, I would strongly encourage this Subcommittee to give serious consideration to the labor-relations provisions included in last year's Committee-reported version of H.R. 3460. NTEU views the labor-relations provisions included in last year's bill as a better alternative to achieving the increased productivity being sought, than the current version of H.R. 400.
  NTEU is also concerned about the contracting-out authority granted the new Office by the language in Section 112, the ''Powers and Duties'' section of H.R. 400. The language in this section of the bill is identical to that included in last year's proposal, and NTEU's concern remains the same. NTEU strongly believes that contracting-out should only be done when it is proven that the particular function can be performed faster, better, and cheaper than if it were performed in-house. The language in Section 112 of the bill, however, would permit the Corporation to ''... use, with the consent of the agency, government, or organization concerned, the services, records facilities or personnel of any State or local government agency or instrumentality of foreign government or international organization to perform functions on its behalf.'' The bill goes even further to include language that would allow the Corporation to ''... enter into and perform such contracts, leases, cooperative agreements, or other transactions with international, foreign and domestic public agencies and private organizations and persons as needed in the conduct of its business and on such terms as it deems appropriate.''
  In reorganizing the PTO, this Subcommittee should require that contracting-out activities are executed in the most efficient and cost effective manner. For that work which is susceptible to privatization, a fair and open process should be created to ensure that Federal employees are replaced only if a substantial saving can be guaranteed. With this in mind, I propose that the Committee consider including language similar to that approved and signed into law as part of the Resolution Trust Corporation Completion Act of 1993 (P.L. 103—204). This language states that the use of non-Corporation employees to perform the work of the Corporation should be done only where the use of such services is the most practicable, efficient, and cost effective. Such language would ensure that critical factors such as these are appropriately considered as an important part of the decision to contract out.
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  NTEU supports the language in Section 112 of H.R. 400 that provides for the PTO to retain and use all of its revenues and receipts. Further remarks regarding this important provision are included as part of my comments on H.R. 673. NTEU is also pleased that H.R. 400 requires that the Commissioner for Patents and the Commissioner for Trademarks shall be persons with demonstrated experience in patent law and trademark law respectively. I am also pleased that critical language ensuring the adoption of existing labor agreements has been included in H.R. 400.
  Mr. Chairman, NTEU supports and commends your introduction of H.R. 673, legislation to end the continuing diversion of millions of dollars of the PTO's fee-funded revenues from their intended purpose to the general Treasury.
  As you are well aware, PTO bore a $54 million dollar reduction in funding for operating expenses for Fiscal Year 1997, despite the fact that some $119 million or 20 percent of the Office's revenue derived from application and user fees should have been available from the surcharge account. This drastic reduction in funding for the operating expenses of the PTO has resulted in a virtual freeze in hiring throughout PTO despite ever increasing application filing and increasing pendency. According to PTO, overtime has been restricted by at least 50 percent and focused on high technology examination areas; critical training programs have been cut; book and periodicals have been cut; automation projects have been canceled; there have been five percent across-the-board reductions to administrative and support areas where funding and hiring have been frozen for the past three to five years; and the planned hiring of 500 patent examiners has been suspended.
  The President's fiscal year 1998 budget calls for $92 million to be diverted from the PTO's fee funded revenues to the general treasury, and will even further devastate the Office's ability to fulfill it's constitutionally mandated functions. The administration's proposal calls for $119 million to be diverted in 1999. PTO's increasing lack of access to approximately 20 percent of its rightful and needed revenues continues to be reflected in increasing pendency of patent and trademark applications, and seriously jeopardizes the overall fiscal and operational stability of the Office.
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  Both patent and trademark applications continue to increase yearly, and have increased by more than 10 percent in the past year. Yet, PTO continues to face fiscal constraints that unnecessarily restrict its ability to effectively meet its growing challenges. NTEU supports H.R. 673, which will give the Office greater autonomy over the use of its fee-funded revenues and thereby allow the use of these funds for their intended purpose.
  At the time we required to submit testimony, no legislation had yet been introduced in the 105th Congress by Representative Rohrabacher dealing with the patent term or other issues that would potentially impact the employees at the PTO. I understand that the legislation that is expected to be introduced will be similar to H.R. 359, legislation introduced by him in the 104th Congress. H.R. 359 in the 104th Congress dealt primarily with the patent term and publication issues, and proposed no changes that would have directly impacted the personnel or structure of the PTO. We, therefore, would offer similar comments to those on H.R. 400. That is, that while employees will not be subjected to arbitrary management actions due to the coverage of Title V, an opportunity to pursue innovative personnel systems that could increase productivity will be missed.
  Federal employees and federal employee Unions, particularly NTEU, recognize the world is changing and evolving at an even faster rate, and we are very conscious of the budget deficit and its impact on pay, benefits, training, office supplies and federal employee work life. Today's economic and political realities have created a climate ripe for meaningful change in the federal service delivery system. Given the fact that the PTO is fee funded and does not rely on general tax revenues to support its operations, this Office is indeed an ideal candidate for innovative change and reorganization. It remains critical, however, that efforts to reinvent government in general, and the PTO in particular, not diminish the rights and protections afforded federal employees.
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  Federal employees on the front lines of the PTO effort are critical to the successful implementation of any reform initiatives. They are interested in pursuing new ways to increase productivity, which is limited at best under Title V. But, in moving out from under Title V, they must have the means to protect themselves through collective bargaining. As this Subcommittee and the 105th Congress continue to explore options to reinvent the Patent and Trademark Office to meet the demands of the 21st Century, NTEU remains willing to work with you to ensure that the labor-relations provisions included in any enacted proposal will indeed result in success.

Again, thank you for the opportunity to present NTEU's views. I would be pleased to answer any questions you may have.

  Mr. COBLE. While I've expressed my thanks to each of you, you have been very dutiful and very patient today, and you all are winding it down.

  Mr. Stern, you and your colleague, Ms. Gilman, differ on whether title V ought to apply in its entirety to the employees of the U.S. PTO, as Ms. Gilman just mentioned. You indicate that you support the provisions of H.R. 400 which maintain the status quo generally, while Ms. Gilman supports last year's version, which you just indicated, which called for and provided for full and fair bargaining over almost all aspects affecting PTO's employees.

  Now I'm being devil's advocate Mr. Stern. Let's assume I'm a hardnosed advocate for the labor union and I say to you, ''Why don't you support granting more power for your bargaining organization?'' I'm glad that you're where you are, but----

  Mr. STERN. No, no, no. There's really a simple answer, and, that is, we're not looking to grab more power for our organization, and to bargain more. The truth is we are very unequal partners with management in the labor-management relations area. They're the big bully and we're the weakling on the block. They will win in negotiations.
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  As a matter of fact, I'd put my confidence in the political leadership of this country, including in Congress. I think Congress has been vastly more generous and more concerned with Federal employees than the managers at the Patent and Trademark Office. Managers have demonstrated time and time again that they are opposed to the kinds of reforms that help employees, help the system, and that have been widely accepted within Congress.

  And one of the areas, for example, is comp. time. There currently are two bills--there's S. 4 and H.R. 1--that provide for benefits that people say Federal employees have, but the folks at the Patent and Trademark Office are trying to take away from us right now. They're threatening to end all the comp. time programs.

  Mr. COBLE. And, Ms. Gilman, I want you to reduce his answer to memory and say that over and over again, and we'll convince you perhaps. [Laughter.]

  Ms. GILMAN. I'll work on it. [Laughter.]

  Mr. COBLE. Mr. Stern, you indicate that you support Mr. Rohrabacher's bill. How would the day-to-day work of the employees you represented affected by the Rohrabacher bill?

  Mr. STERN. Yes, I think that's a very good point, and we are coming at it from a parochial point of view. Our view is not as global as the views that you've heard from the other panels. With respect to the 17-year term, for example, the pressure is on the Patent Office to do the work quickly. We really feel it's unfair, because of underfunding of the Patent Office, to curtail the term of an inventor's protection just because we can't get to the inventor's application. Our membership is going to bear the antagonism and the pressure that is put on the Patent and Trademark Office by the inventing community, and that will--that's not a desirable goal. We really can't control how many resources the agency throws at quickly responding to inventors, and when the inventor is angry, we're going to be at the front lines of that anger. So that's half of it.
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  The other half relates to publication side. Publication is an administrative nightmare. One of the things that has not been dealt with yet is the cost of publication. The cost of publication can be enormous.
  The principal purpose of publication is disclosure. The assumption that publication actually will provide disclosure I think is an incorrect assumption, because in fact people can hide their disclosure by--it's easy to game the system with the publication system just by having multiple inventions disclosed in a particular application. If, for example, your invention deals with a carburetor, you can wind up throwing it into a much larger system; you can wind up combining it with other things. And if we don't have the professionals available to classify all aspects of an application you can easily hide significant information by combining it with other things.

  Mr. COBLE. Mr. Stern, you and I can chew on this at a subsequent time, but it is my belief--again, subject to interpretation--it is my belief that the Rohrabacher bill probably does not have any direct effect at all on your employees' day-to-day work activity. I think by having lifted the FTE ceiling, which we've done, by providing more money, which we've done, I don't know that you need a dog in that fight. But that's your call, not mine. [Laughter.]

  Mr. STERN. I hope I've given an explanation of what our concerns are, and to the extent that additional resources will overcome those concerns, those additional resources meaning money----

  Mr. COBLE. Yes.

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  Mr. STERN [continuing]. And people, are appreciated and probably--well, the----

  Mr. COBLE. I'll consider your answer; you consider my question more.

  Mr. STERN. Yes, sir.

  Mr. COBLE. Ms. Gilman, let me visit with you a minute or two.

  Ms. GILMAN. Yes.

  Mr. COBLE. You propose that the subcommittee consider limiting contracting to instances when that contracting work can be performed more efficiently outside than it can be done in-house.

  Ms. GILMAN. Yes.

  Mr. COBLE. You suggest, furthermore--I think you mentioned the RTA statute as a model----

  Ms. GILMAN. RTC; right.

  Mr. COBLE. That statute states that the government corporation may contract out when it determines that utilization of outside services is ''practicable and efficient.'' Would the addition of that phrase satisfy your concern with section 112?

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  Ms. GILMAN. I think that would go a long way to helping in that section. I can't say that my union endorses the use of contracting out in general. We, for the most part, think Federal employees do a good job, but we do think that it is very unfair to just allow contracting-out to go forward without some sort of a standard that shows that it's going to be more productive, which has happened in many cases. We've seen many GAO reports that show that claims that were made by private contractors that they were going to come in and do the work cheaper with the same quality have not come out that way, and so we would, therefore, support the addition of language that would, as you say, require that they show that it's practicable and efficient.

  Mr. COBLE. Would the insertion of that phrase make you feel--make your coffee taste better in the morning, Mr. Stern?

  Mr. STERN. Could you repeat the phrase again? I wasn't----

  Mr. COBLE. Well, the phrase was that it may contract out when it determines that the utilization of outside services is practicable and efficient.

  Mr. STERN. I think that's a wise addition.

  Mr. COBLE. OK.

  Mr. STERN. We agree with NTEU with respect to contracting-out. In terms of the overall situation with respect to contracting-out, unfortunately, it has been used at the Patent Office to evade FTE ceilings. Most of the contracting-out has been done for that purpose. Within my own bargaining unit, it has just started to be done, and we also have the same experience--that the folks who are the contractors are doing the same services and providing the same functions as our members did at a much, much higher cost. I mean vastly higher cost.
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  Mr. COBLE. Well, permit me to conclude with one final question which I will put to each of you involving contracting-out. Each of you has expressed concern about the contracting-out provisions in section 112 of 400. It is my impression that the PTO is now forced to contract out because of the FTE limitations it must comply with or abide by. In other words, it doesn't have enough employees to do the job because even though it might have the money, it can't hire more employees than the FTE limit. H.R. 400, however, removes the FTE ceiling. Now I don't want to simplify this, but won't that alone solve the contracting-out problem?

  Ms. GILMAN. Mr. Chairman, I'm not sure if it will, but it would certainly help, and we always support the removal of FTE ceilings. We think that's a very bad way to manage, that it creates incentives for people to use contractors that aren't going to do as good of a job. We strongly would support getting rid of FTE ceilings.

  Mr. STERN. Yes, we would agree with that. We would add one other caveat, and that is that all contracts, all solicitations be put on the public record, and that all contracts be opened to public inspection, so that one can actually see what is being contracted out, what the costs are, and precisely what functions are going to be performed. That is a major concern of ours. I think that in H.R. 812 there is a provision regarding that, and it would make a fine addition to H.R. 400. By the way, there are lots of provisions in H.R. 812 that I think are fully compatible with H.R. 400--as a matter of fact, any particular bill that comes forward to reorganize the Patent Office--because the bill deals with problems other than the problems that have been talked about in the past.

  Mr. COBLE. And I have ignored my red light because I forgot that Zoe had joined us. Zoe, do you want to weigh-in on this?
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  Ms. LOFGREN. Just very briefly. First, my apologies. I had need to go downstairs to the Crime Subcommittee. The Attorney General is appearing on juvenile justice, and I had----

  Mr. COBLE. That's where I need to be as well.

  Ms. LOFGREN [continuing]. To go down briefly.

  I think you're asking all the right questions, Mr. Chairman. I would just note that, coming from California, we don't get schooled in phrases like ''Do you need a dog in this fight?'' [Laughter.]

  I enjoy that way of thinking about it, and I very much agree with that question. [Laughter.]

  Mr. COBLE. And I will next teach the gentlewoman how to talk southern one of these days. [Laughter.]

  How about you, Ed?

  Mr. PEASE. Mr. Chairman, just quickly, I wanted to follow along the same line of questions that you had. In Mr. Tobias' statement on the question of contracting-out, he addressed some of the issues that the chairman has already raised with you. So I won't go into them again. But he also implied--at least I read it as implying--that there are insufficient protections for civil service employees who might lose a position because of contracting-out. Can you elaborate on that further?
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  Ms. GILMAN. That's correct. There's an OMB guidance called the A—76 circular that is supposed to provide a system. If you are going to move from using Federal employees to using contract employees, you are supposed to follow steps. You are supposed to be able to show that you will get a cost savings. That guidance is regularly ignored, and we have worked in the past to try to insist on getting some sort of standards in place for what you're going to get if you move to an outside contractor.

  Mr. PEASE. Well, Ms. Gilman, do I understand you to say that the circular might be sufficient protection, but it's being ignored, or the circular is not sufficient protection, even if it's followed?

  Ms. GILMAN. I would say that we have problems with some of the particulars in the circular, but the biggest issue is that it's not followed at all in many instances.

  Mr. PEASE. OK. And would your recommendation then be that the statute needs to include what those protections would be in this case?

  Ms. GILMAN. I think that would be a great help, and we added some language, as was mentioned before, in the RTC reorganization bill on contracting-out right in the statute.

  Mr. PEASE. OK, thank you. That's all I have, Mr. Chairman.

  Mr. COBLE. Thank you.

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  Anything else from you?

  I thank you, Ms. Gilman and Mr. Stern. I thank all the witnesses, and I thank those in the audience, for that matter. This has been a very productive day for our subcommittee, as far as I'm concerned. I hope you all share my optimism about today's hearing.

  I thank all the witnesses. The subcommittee very much appreciates their contribution and your attendance here.

  This concludes our hearings on these bills. The record will remain open for 1 week. Thanks again to each of you, and we stand adjourned.

  [Whereupon, at 2:20 p.m., the subcommittee adjourned.]





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H.R. 400


H.R. 673



H.R. 811

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FEBRUARY 26, 1997

Serial No. 3

Printed for the use of the Committee on the Judiciary

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

HENRY J. HYDE, Illinois, Chairman
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
BOB INGLIS, South Carolina
SONNY BONO, California
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ED BRYANT, Tennessee
BOB BARR, Georgia

JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts

THOMAS E. MOONEY, Chief of Staff-General Counsel
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JULIAN EPSTEIN, Minority Staff Director

Subcommittee on Courts and Intellectual Property
HOWARD COBLE, North Carolina, Chairman
SONNY BONO, California

BARNEY FRANK, Massachusetts
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts

MITCH GLAZIER, Chief Counsel
ROBERT RABEN, Minority Counsel
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  February 26, 1997
  H.R. 400
  H.R. 673
  H.R. 811

  Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property

  Alford, Mary Ann, president and chairperson of the board, International Trademark Association
  Barram, Stephen H., chairman and CEO, Integrated Services, Inc.
  Berrier, Erwin F., Jr., president, Intellectual Property Owners
  Campbell, Hon. Tom, a Representative in Congress from the State of California
  Gilman, Maureen, director, legislation, National Treasury Employees Union
  Hill, David L., Ph.D., chairman, Advisory Committee, Alliance for American Innovation
  Holmer, Alan F., president, Pharmaceutical Research and Manufacturers of America
  Hunter, Hon. Duncan, a Representative in Congress from the State of California
  Kelly, Hon. Sue W., a Representative in Congress from the State of New York
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  Kirk, John R., chair, Section of Intellectual Property Law, American Bar Association
  Kirk, Michael K., executive director, American Intellectual Property Law Association
  Lehman, Bruce A., Assistant Secretary of Commerce and Commissioner of Patents and Trademarks, Patent and Trademark Office, U.S. Department of Commerce
  Ludlam, Chuck, vice president, government relations, Biotechnology Industry Organization
  Rohrabacher, Hon. Dana, a Representative in Congress from the State of California
  Stern, Ronald J., president, Patent Office Professional Association
  Wegner, Harold C., professor of law and director, Intellectual Property Program, George Washington University

Alford, Mary Ann, president and chairperson of the board, International Trademark Association:
Letter dated March 17, 1997, to Chairman Coble
Prepared statement
  Barram, Stephen H., chairman and CEO, Integrated Services, Inc.: Prepared statement
  Berrier, Erwin F., Jr., president, Intellectual Property Owners: Prepared statement
  Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Intellectual Property: Letter dated September 12, 1996, to Hon. Carlos J. Moorhead, from Secretary of Commerce Michael Kantor
  Hill, David L., Ph.D., chairman, Advisory Committee, Alliance for American Innovation: Prepared statement
  Holmer, Alan F., president, Pharmaceutical Research and Manufacturers of America: Prepared statement
  Hunter, Hon. Duncan, a Representative in Congress from the State of California: Prepared statement
 Page 331       PREV PAGE       TOP OF DOC
  Kelly, Hon. Sue W., a Representative in Congress from the State of New York: Prepared statement
  Kirk, John R., chair, Section of Intellectual Property Law, American Bar Association: Prepared statement
  Kirk, Michael K., executive director, American Intellectual Property Law Association: Prepared statement
  Lehman, Bruce A., Assistant Secretary of Commerce and Commissioner of Patents and Trademarks, Patent and Trademark Office, U.S. Department of Commerce: Prepared statement
  Ludlam, Chuck, vice president, Government Relations, Biotechnology Industry Organization: Prepared statement
  Rohrabacher, Hon. Dana, a Representative in Congress from the State of California: Prepared statement
  Stern, Ronald J., president, Patent Office Professional Association: Prepared statement
  Tobias, Robert M., national president, National Treasury Employees Union: Prepared statement
  Wegner, Harold C., professor of law and director, Intellectual Property Program, George Washington University: Prepared statement

(Footnote 1 return)
In compliance with the terms of House Rule XL, clause 2(g)(4), Mr. Ludlam's curriculum vitae and disclosure is presented in Appendix F, which is in the subcommittee files.

(Footnote 2 return)
BIO is the international trade organization to serve and represent the emerging biotechnology industry in the United States and around the globe. As the leading voice for the biotechnology industry, BIO represents over 700 companies, academic institution, state biotechnology centers and related organizations in 47 states and more than 20 nations engaged in the development of products and services in the areas of agriculture, biomedicine, diagnostics, food, energy and environmental applications.

(Footnote 3 return)
''Estimating Patent Value and Rivalry Effects: An Event Study of Biotechnology Patents,'' Dr. David H. Austin, Fellow at Resources for the Future (RFF)(Washington, D.C.), Discussion Paper 94-36 (June 1994).

(Footnote 4 return)
The patent was granted to Genetic Therapy Inc. of Gaithersburg, Maryland for ex vivo gene therapy. GTI's stock jumped 17% the day after the patent was granted.

(Footnote 5 return)
A fiscal year for Ernst & Young is from July 1 through June 30. Therefore, 1995 indicates July 1, 1994 through June 30, 1995.

(Footnote 6 return)
''Biotech 96: Pursuing Sustainability,'' 10th Anniversary Edition, Ernst and Young (September 1995) and ''Biotech 97 Alignment,'' 11th Anniversary Edition, Ernst and Young (1996).

(Footnote 7 return)
''Price Controls and the Future of Biotechnology: The Results of a Survey,'' Dr. Robert Goldberg, Senior Research Fellow, Gordon Public Policy Center, Brandeis University (March 1994). The 1996 edition of Facts & Figures by the Biotechnology Industry Organization reports the average falling to 16 months from 25 months from 1994 to 1995.

(Footnote 8 return)
U.S. Congress, Office of Technology Assessment, Biotechnology in a Global Economy 243 (October 1991).

(Footnote 9 return)
U.S. Congress, Office of Technology Assessment, Biotechnology in a Global Economy 244-245 (October 1991).

(Footnote 10 return)
The 1996 Facts & Figures by the Biotechnology Industry Organization, and personal interview with John Doll, Group Director, Biotechnology Group, Patent and Trademark Office, February 13, 1997.

(Footnote 11 return)
Volume 22, American Intellectual Property Law Association Quarterly Journal (Nov. 1995).

(Footnote 12 return)
See page 32. Professor Lemley suggests that because of the new law the prosecution times will be reduced by 20%, under the new law, Professor Lemley's data still indicates that the average biotechnology patent will still loose patent term.

(Footnote 13 return)
35 U.S.C. 7(c) (1995).

(Footnote 14 return)
Allowing the PTO to issue claims would further require language that insures obvious-type double patenting is not held (or that a terminal disclaimer is not required) for the latter issued patent.

(Footnote 15 return)
The decrease of 302 FTEs was specified in handout provided at a briefing given by the Chief Financial Officer of the PTO on February 6, 1997. FY 1997 FTEs are planned to be 1967. FY 1998 FTEs are planned to be 1665.

(Footnote 16 return)
FY 1998 Corporate Plan For The U.S. PTO, pages 47—48. FY 1997 FTEs are 4499. FY 1998 FTEs are 4472.