[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                       PATENT QUALITY IMPROVEMENT

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 24, 2003

                               __________

                             Serial No. 38

                               __________

         Printed for the use of the Committee on the Judiciary






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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama              MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
ELTON GALLEGLY, California           JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia              RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
SPENCER BACHUS, Alabama              MAXINE WATERS, California
MARK GREEN, Wisconsin                MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  WILLIAM D. DELAHUNT, Massachusetts
MELISSA A. HART, Pennsylvania        ROBERT WEXLER, Florida
MIKE PENCE, Indiana                  TAMMY BALDWIN, Wisconsin
J. RANDY FORBES, Virginia            ANTHONY D. WEINER, New York
JOHN R. CARTER, Texas

                     Blaine Merritt, Chief Counsel
                          Debra Rose, Counsel
                         David Whitney, Counsel
              Melissa L. McDonald, Full Committee Counsel
                     Alec French, Minority Counsel














                            C O N T E N T S

                              ----------                              

                             JULY 24, 2003

                           OPENING STATEMENT

                                                                   Page
The Honorable Lamar Smith, a Representative in Congress From the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     1
The Honorable Howard L. Berman, a Representative in Congress From 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................     2

                               WITNESSES

Mr. Charles E. Van Horn, Partner, Finnegan, Henderson, Farabow, 
  Garrett & Dunner, on behalf of the American Intellectual 
  Property Law Association (AIPLA)
  Oral Testimony.................................................     5
  Prepared Statement.............................................     6
Mr. Mark Kesslen, Managing Director and Associate General 
  Counsel, J.P. Morgan Chase & Company, on behalf of the 
  Financial Services Roundtable and BITS
  Oral Testimony.................................................    15
  Prepared Statement.............................................    16
Mr. David M. Simon, Chief Patent Counsel, Intel Corporation
  Oral Testimony.................................................    19
  Prepared Statement.............................................    20
Mr. John R. Thomas, Professor of Law, Georgetown University
  Oral Testimony.................................................    24
  Prepared Statement.............................................    25












                       PATENT QUALITY IMPROVEMENT

                              ----------                              


                        THURSDAY, JULY 24, 2003

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at inter a.m., in 
Room 2141, Rayburn House Office Building, Hon. Lamar Smith 
(Chair of the Subcommittee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order. Good morning to you 
all. It is probably earlier to us than it is to you all. We 
were voting until 2 o'clock last night. So I mention that, so 
you will understand why our attendance is not at its usual 
number, and maybe we will have some Members who will be joining 
us a little bit later on.
    In any case, the Subcommittee today is holding a hearing on 
patent quality improvement, and I will recognize myself and Mr. 
Berman for opening statements. Then we will proceed and hear 
from our witnesses.
    As part of last year's authorization of the Patent and 
Trademark Office, Congress instructed the PTO to develop a 5-
year strategic business plan aimed at enhancing patent and 
trademark quality while reducing patent and trademark pendency.
    In response to this mandate, the PTO developed a strategic 
plan that was later revised based on constructive comments 
offered by this Subcommittee and the user community. In its 
revised plan, the agency has addressed these issues and 
identified goals and initiatives, largely supported by the 
major trade associations that represent patent and trademark 
filers.
    The Subcommittee reviewed the initial phase of the plan, a 
new fee schedule that would generate an additional $201 million 
in revenue for the PTO in fiscal year 2004 at an April hearing. 
Legislation incorporating the new fee schedule was the subject 
of Subcommittee and full Subcommittee markups earlier this 
year. However, an infusion of additional revenue is not an 
exclusive cure for what ails the PTO.
    Other administrative, operational and policy reforms, such 
as those set forth in the revised plan, must be implemented 
over the years if the agency is to become more productive and 
efficient. Beyond those changes that the Director may attempt 
to implement pursuant to his current statutory and 
administrative authority, there are other policy initiatives 
that he, the inventor community, or other Members may wish to 
explore that will necessitate a legislative response from 
Congress.
    The purpose of the hearing is to initiate dialogue on the 
merits of six issues of interest, both to me and the Ranking 
Member, Howard Berman. The suggested reforms touch upon the PTO 
reexamination system, patent litigation practice, and the 
responsibilities of an applicant in submitting information to 
assist in the search and examination activities.
    I want to emphasize that in regard to PTO reform all roads 
must lead to enhanced and patent and trademark quality. 
Reducing pendency and backlogs are important goals in their own 
right, but must never supersede the importance of improving the 
integrity of the patents issued.
    Patents of dubious quality only invite legal challenges 
that divert money and other resources from more productive 
purposes, purposes such as raising venture capital, 
commercializing inventions and creating jobs.
    Today's hearing will not end our discussion of how the 
Subcommittee can help PTO become more efficient and productive. 
I hope to visit other areas of the law that may contribute to 
patent quality improvement later in this term of Congress.
    The Ranking Member from California, Mr. Berman, is 
recognized for his opening statement.
    Mr. Berman. Thank you very much, Mr. Chairman, and I 
appreciate your holding this oversight hearing to explore ways 
to improve patent quality. The issue of patent quality is not a 
new one here for our Subcommittee, and while it is a familiar 
issue, it does remain elusive. There are many factors which 
potentially affect the quality of a patent as an application 
makes its way through the examination process.
    Having identified several points at which patent quality is 
most vulnerable today, we would hope to move forward and 
together develop appropriate solutions. As I understand it, 
today's oversight hearing will focus on six possible 
initiatives, four of which are relevant during the examination 
of the application and have a direct and potentially 
significant effect on patent quality, two of which are relevant 
at a time after a patent has issued and a controversy arises 
regarding infringement and validity of that patent.
    These last two initiatives deal more directly with 
balancing the equities of the parties when a controversy 
arises. The quality of a patent is synonymous with the value of 
that patent, and patent quality is dependent on the extent to 
which an invention has been certified to be useful, novel and 
nonobvious when compared to the existing state of the art.
    A poor quality patent, on the other hand, is typically 
invalid and may have far-reaching and negative ramifications 
for the individuals involved, as well as for the economy at 
large. Today's initiatives contemplate improving patent quality 
by increasing the responsibility of the applicant and engaging 
the participation of the public during the examination process 
in order to develop a more complete record of prior art.
    The first initiative contemplates allowing third parties to 
present to the examiner materials for consideration during the 
examination process. On the one hand, allowing third party 
submission will generate more prior art to be presented to the 
examiner, and therefore will strengthen the presumption of 
validity. Some argue, however, that any limited benefit is far 
outweighed by the burdens incurred by the applicant and by the 
PTO.
    Additional concerns such as whether one competitor might 
strategically submit materials to delay another's patent from 
issuing, and whether a third party should have the opportunity 
to attach his own commentary explaining the relevance of the 
submission, or should that be left to the examiner to deduce.
    The next initiative concerns the requirements of a patent 
application with regard to prior art submission. Currently an 
applicant is under no obligation to conduct a search of the 
pertinent literature to determine whether his invention is 
already within the public domain. However, if he conducts such 
a search, he is required to submit the results of that search 
to the office.
    It has been suggested that an applicant should be required 
to conduct a search before the application is presented in 
order to eliminate many of the obviously nonpatentable 
applications from being filed. But questions have been raised 
regarding how the scope of the search should be defined and 
whether this would generate a tremendous amount of litigation.
    Other concerns center around the applicant's increased 
financial burden, and the increased vulnerability to validity 
attacks for narrow searches and unintentional omissions.
    The third and fourth issues we are looking at today involve 
the inter partes reexamine, which is essentially a second 
analysis of the patentability of an invention in which a third 
party may participate.
    One proposal is to remove the provision preventing a party 
from raising on appeal any issue that could have been raised 
earlier. That provision seems to have the effect of keeping 
people from using the reexamination process and removing that 
provision would conversely encourage people to use that process 
as an alternative to litigation.
    There are other--there is another proposal to include 
section 112 issues among those which can be raised during this 
inter partes reexamination.
    The final initiatives concern the equities of the parties 
when judicial relief is requested for the patent infringement. 
Currently a patent holder may request injunctive relief if he 
alleges that his patent rights are being violated. A potential 
infringer may institute a declaratory action that the patent is 
invalid when there a reasonable apprehension of litigation.
    Further, an infringer will be responsible for three times 
the amount of plaintiff's actual damages beginning at the time 
notice is given of the infringement. Equity dictates that the 
precise moment each of those events attains legal significance 
should be the same. In other words, the moment at which an 
alleged infringer has a reasonable apprehension of suit should 
be the same moment an allegation of infringement is made, which 
should coincide with a party's receipt of notice such to incur 
liability for treble damages.
    Today we will explore the best and most appropriate ways to 
realign these interests. Taking action on those important 
initiatives is not the magic bullet that will cure the PTO of 
all that ails it. There are many additional areas, unity of 
invention, internal harmonization, and the unique concerns of 
industries, such as the biotech and financial services 
industries to name a few.
    And we shouldn't forget our commitment to follow through 
with the antidiversion measure, which we, through bipartisan 
support, voted out of full Committee favorably. I encourage all 
people interested in that to get active in anticipation of the 
bill reaching the House floor after the recess.
    Time and again we see that innovation is key to the future 
health of our economy. Patent quality is key to continued 
innovation, and I think our Subcommittee remains dedicated to 
achieving this goal.
    Mr. Chairman, thank you for your willingness to schedule 
this hearing, and I should point out that Mr. Boucher, who has 
been instrumental in investigating, developing these concepts 
from the beginning, also has a high interest in figuring out 
ways to improve patent quality.
    Mr. Smith. Thank you, Mr. Berman.
    Our first witness is Charles Van Horn, a partner at 
Finnegan, Henderson, Farabow, Garrett & Dunner. Mr. Van Horn 
joined the firm after a 31-year career in the U.S. Patent and 
Trademark Office. Mr. Van Horn received his B.S. From Lehigh 
University, his JD from the Washington College of Law, and his 
MBA from Lehigh University.
    Our next witness is Mark Kesslen, the Managing Director and 
Associate General Counsel at J.P. Morgan Chase and Company. He 
is a registered patent attorney who also serves as the cochair 
of the BITS Patent Issues Working Group, an organization that 
develops and evaluates patent policies for the financial 
services industry. Mr. Kesslen graduated from Tufts University 
with a Bachelor of Science Degree in electrical engineering. He 
received his law degree from the Case Western Reserve 
University School of Law.
    Our next witness is David Simon, who is Chief Patent 
Counsel at Intel Corporation. Mr. Simon manages all patent 
generation and analysis for Intel. He directly supervises 80 
employees and is responsible for filing numerous patent 
applications on behalf of the corporations.
    Mr. Simon received undergraduate degrees in electrical 
engineering and political science from MIT, and his JD from the 
Georgetown University Law Center.
    Our final witness is John Thomas, Professor of Law at the 
Georgetown Law Center, where he specializes in intellectual 
property licensing, international intellectual property law and 
patents. Professor Thomas has served as an instructor at the 
U.S. PTO Patent Academy since 1997 and is a visiting scholar 
with the Congressional Research Service since December 1999.
    Professor Thomas holds a BS in computer engineering from 
Carnegie Mellon and a JD from the Michigan School of Law and an 
LLM from George Washington University. Welcome to you all. We 
have your complete statements, and without objection they will 
be made a part of the record. And just a reminder, we hope you 
will keep your statements to 5 minutes.
    And we will proceed. Mr. Van Horn, we will begin with you. 
Thank you.

STATEMENT OF CHARLES E. VAN HORN, PARTNER, FINNEGAN, HENDERSON, 
     FARABOW, GARRETT & DUNNER, ON BEHALF OF THE AMERICAN 
         INTELLECTUAL PROPERTY LAW ASSOCIATION (AIPLA)

    Mr. Van Horn. Thank you, Mr. Chairman. I am pleased to have 
the opportunity to present the views of the American 
Intellectual Property Law Association on patent quality 
improvement. AIPLA welcomes the Subcommittee's efforts to 
explore ways to improve patent quality.
    Today's hearing focuses on six possible initiatives to 
enhance patent quality. Although we do not embrace all of the 
concepts presented in the draft bill, we do appreciate the 
Subcommittee's efforts to improve the patent system and the 
opportunity to engage in this dialogue.
    First, we are sympathetic to the motivation underlying the 
proposal to permit any party to submit prior art during the 
examination process for consideration by a patent examiner. 
However, the limited benefits of permitting these pre-grant 
submissions of prior art, we believe, are far outweighed by the 
problems it could create for applicants and the burdens it 
would place on the PTO. In addition to the additional workload 
and complications that it would create for an already 
overloaded examining staff, it is not difficult to imagine 
strategies that would unfairly delay the grant of the patent, 
and possibly even unjustly extend the patent term because of 
delays in the PTO.
    Second, we do not believe that a mandatory preliminary 
search requirement would guarantee information that is 
appreciably better or more complete than is presently available 
through examiner searches, coupled with the requirements of 
rule 56. In addition to failing to provide any guidance 
regarding the scope of such a search that will be made in each 
application, a very troubling aspect of this proposal is its 
significant potential to increase the costs of enforcing a 
patent.
    Third, the draft legislation would amend the current law 
regarding inter partes reexamination procedures to remove an 
estoppel provision, and would expand the grounds upon which an 
assertion of invalidity could be made to include any 
requirement under section 112 of title 35.
    We believe that the current estoppel provision provides an 
appropriate balance between the interests of the public and the 
interests of the patentees. The proposal to expand the grounds 
for reexamination to include any requirement under section 112 
we believe goes too far. We do not support including the best 
mode requirement of section 112, because of the analytical 
difficulties this issue presents and the relative inexperience 
of the PTO examining staff in addressing this issue.
    Finally, the remaining paragraphs of section 112 deal 
primarily with the form of the claim and claim construction 
principles that do not constitute, in our judgment, an 
appropriate basis for challenge in an inter partes 
reexamination proceeding.
    Fourth, another provision of the draft legislation would 
add five specific factors that a court should consider in 
determining whether to grant a preliminary injunction against 
the person marketing a product alleged to infringe a patent. 
AIPLA believes that given the well developed judicial doctrines 
regarding the equitable factors, a court should and does take 
into account in determining whether to grant a preliminary 
injunction, amending the current statute to include these five 
factors is unnecessary at best, and could be detrimental to the 
proper functioning of the patent system.
    Finally, AIPLA is concerned that the declaratory relief 
proposal could have an unsettling effect in the law in relation 
to patents. We see no justification to modify the current law 
regarding when declaratory action judgment actions can be 
brought, especially where the proposed modifications may make 
it more difficult to bring such actions. On the other hand, we 
do believe some useful changes can be made in the present state 
of the law regarding willful infringement.
    AIPLA is concerned about the disruptive effect that claims 
of willful infringement can have on the functioning of the 
patent system. They not only add unnecessarily to the costs of 
litigation, but provide a drag on innovation as companies are 
wary to improve upon or invent around patented inventions for 
fear of being subjected to claims of willful infringement and 
the possibility of treble damages.
    AIPLA is working with our sister organizations to address 
changes we believe are needed in this area, and hopes to be 
able to share our ideas with the Subcommittee in the very near 
future. This Subcommittee has made a very excellent start to 
enhance patent quality by proposing legislation that would 
fully fund the PTO, and we will do everything in our power to 
support this initiative and others that are likely to enhance 
patent quality.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Van Horn follows:]
               Prepared Statement of Charles E. Van Horn
    Mr. Chairman:
    I am pleased to have the opportunity to present the views of the 
American Intellectual Property Law Association (AIPLA) on ``Patent 
Quality Improvement.'' AIPLA welcomes the Subcommittee's efforts to 
explore ways to improve patent quality--goal number one.
    AIPLA is a national bar association of more than 14,000 members 
engaged 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.
                               background
    At the Oversight Hearing which the Subcommittee held on April 11, 
2002 on ``The U.S. Patent and Trademark Office: Operations and Fiscal 
Year 2003 Budget,'' AIPLA testified that achieving a strong and 
effective Patent and Trademark Office would require focusing on three 
critical objectives: quality, timeliness and improved electronic filing 
and processing capabilities. These objectives were stated in H.R. 2047, 
the ``Patent and Trademark Office Authorization Act of 2002.'' This 
legislation calls for the Director to develop a five-year strategic 
plan that would--

        ``
         (1)  enhance patent and trademark quality;

         (2)  reduce patent and trademark pendency; and

         (3)  develop and implement an effective electronic system for 
        use by the Patent and Trademark Office and the public for all 
        aspects of the patent and trademark processes. . . .''

    It is not by accident that AIPLA and other user organizations list 
quality as the first objective. Quality of the patents granted by the 
USPTO must be at the forefront of efforts to strengthen and improve the 
operation of the USPTO. Granting patents that cannot withstand the 
rigors of a court challenge does not serve the interests of the USPTO 
user community. It is costly and wasteful of valuable resources that 
could be put to better use in other endeavors. Moreover, the existence 
of patents that confer unwarranted rights of exclusivity may deter 
lawful technical and marketing activity by others. On the other hand, 
the ability to protect investments in research through the grant of 
strong patent rights is equally critical. AIPLA believes that efforts 
to strengthen and improve USPTO operations should therefore be governed 
in every instance by a concern, first and foremost, for improving 
quality of the rights granted under patents and trademark 
registrations.
    In the original 21st Century Strategic Plan released by the USPTO 
in June 2002, and in the revised 21st Century Strategic Plan released 
in February of this year, there were several proposals that were aimed 
directly or indirectly at improving patent quality. AIPLA joined with 
other user groups to support these proposals in a letter to OMB:

        1)  Expanding the ``second set of eyes'' review concept, 
        successfully used with business method patent applications, to 
        other technology areas;

        2)  Enhancing the reviewable record by increasing the amount of 
        information included in patent application files regarding 
        applicant/examiner interviews;

        3)  Creating a competitive compensation package for Supervisory 
        Primary Examiners to attract and retain the best employees for 
        these jobs;

        4)  Developing tests to determine the suitability of candidates 
        for the position of examiner;

        5)  Establishing ``training art units'' for new examiners in 
        high volume hiring areas;

        6)  Developing a testing process to certify examiners for 
        promotions;

        7)  Making greater use of Search Reports prepared under the 
        Patent Cooperation Treaty and by other qualified patent 
        offices; and,

        8)  Expanding patent application work product reviews, 
        including work product reviews of primary examiners.

    AIPLA believes there is more that can be done to improve patent 
quality. First and foremost, enactment of H.R. 1561, with the amendment 
added during the Subcommittee's markup that would allow the USPTO to 
retain and use all of its fee revenue, would constitute a major step in 
that direction. The ability to retain and use all of its fee revenues 
would obviate the need for the USPTO to outsource patent searches to 
private search contractors to reduce patent pendency. Even if such 
outsourcing does reduce pendency, its long term impact on patent 
quality is unknown. If the USPTO is permitted to retain and use all of 
its fee revenues, it could, over time, hire and train the number of 
patent examiners needed to conduct the quality searches and 
examinations necessary to grant the quality patents sought by users.
    This is not a criticism of the Office. It has been forced to seek 
ways to improve its operations precisely because it has not been 
allowed to retain and use all of its fee revenues. If H.R. 1561, as 
amended by the Subcommittee becomes law, the USPTO will have the 
resources it has said it needs to do the job properly.
                        patent quality proposals
    Today's hearing focuses on six possible initiatives to enhance 
patent quality. AIPLA addresses these six initiatives on the basis of a 
draft bill shared with us by the Subcommittee staff which outlines the 
six initiatives in five sections of the draft bill. Some of these 
initiatives are similar to proposals we have reviewed in the past, 
while others are new. Although we do not embrace all of the concepts 
presented in the draft bill, we do appreciate the Subcommittee's 
efforts to improve the patent system and the opportunity to engage in 
this dialogue.
Third-Party Submission of Art During Examination
    Section 2 of the draft legislation would permit any party to submit 
prior art, including ``evidence of knowledge or use, or public use or 
sale,'' during the examination process for use by examiners in making 
patentability determinations under sections 102 and 103. The Office 
would have to consider such submissions if they are in writing, 
accompanied by a prescribed fee, set forth the ``teaching and 
applicability'' of such references and the basis on which they are 
offered, and include a sworn declaration as to relevance and accuracy.
    We are sympathetic to the motivation underlining this proposal. 
Getting the most relevant information regarding the patentability of 
each invention before examiners is essential for issuing valid patents. 
However, the limited benefits of allowing pre-grant submissions of 
prior art are far outweighed by the problems it could create for 
applicants and the burdens it would place on the USPTO. Few members of 
the public would monitor published applications for the purpose of 
ensuring that the best prior art was considered by the examiner. Even 
the opportunity to do so will diminish over time as the USPTO begins to 
reach its goal of 18-month average pendency. The proposal would, 
however, allow any member of the public, wishing to prevent a 
competitor from receiving a patent in a timely manner, to delay the 
issuance of a patent by submitting such prior art in a piece-meal 
fashion. As long as the conditions set forth are satisfied, the Office 
would be required to continue the examination and consider the 
submission. Small businesses and independent inventors could be 
particularly harmed by their inability to promptly receive a patent 
needed to raise venture capital or to enjoin a competitor's activity.
    Conversely, one could even conceive of circumstances under which a 
patent applicant might submit relevant prior art directly or through an 
intermediary for the purpose of delaying the issuance of the 
applicant's patent, especially considering that publication at 18-
months is optional and patent term is restored for pendency exceeding 
three years.
    Moreover, such submissions would increase the workload on an 
already overloaded examining staff. Examiners would be required to 
consider new categories of prior art. The legislation expands the prior 
art to be evaluated by examiners to include evidence of ``knowledge,'' 
``use,'' ``public use,'' (is the former ``use'' non-public?) and 
``sale.'' The legislation does not provide standards for the evidence 
other than requiring that it be in written form; nor does it address 
how an applicant might overcome such submissions. In addition to the 
extra burden on examiners, there would also be a considerable training 
challenge imposed on the USPTO to prepare its 3500 patent examiners to 
be able to evaluate and handle such submissions.
    It should be noted that Japan had a pre-grant opposition procedure 
for a number of years. The General Accounting Office reported to 
Congress in July of 1993 that 45 percent of the U.S. companies 
responding to their survey said that at least one of their Japanese 
patent applications had been opposed in Japan within the previous five 
years. Of those, 71 percent had 1 to 5 opponents, 15 percent had 6 to 
10 opponents, 9 percent had 11 to 50 opponents, and 2 percent had more 
than 50 opponents. Delays in receiving patents, especially for 
important inventions, were rampant. There were examples, under this 
pre-grant procedure where applicants actually had their patents issued 
after their term of protection had expired. Following years of urging 
by the United States Government and industry groups, the Japanese 
finally agreed to end the practice in 1996. For the United States to 
now embrace such a procedure would set a most unfortunate precedent.
Mandatory Prior Art Search by Applicants
    Section 3 of the draft legislation would require all applicants to 
conduct a preliminary search for prior art and include the 
documentation of such a search in their patent applications. The 
documentation must include an explanation of the method of conducting 
the search, the databases searched, the results of the search, a 
statement of the ``teaching and applicability'' of each reference, and 
any other documentation requested by the Office that is reasonably 
necessary to examine an application. The applicant would also be 
required to submit a sworn declaration attesting to the relevance and 
applicability of each reference and the accuracy of the documentation. 
Any person who intentionally fails to submit the required documentation 
will be considered to have fraudulently withheld information.
    Again, the goal of this provision is laudatory: to develop a more 
complete record of prior art so that examiners can conduct more 
thorough examinations to strengthen the resulting patents. While an 
admirable goal, we do not believe that the provision would guarantee 
information that is appreciably better or more complete than is 
presently available through examiners' searches coupled with the 
requirements of Sec. 1.56 of the Rules of Practice in Patent Cases 
(Rule 56). The proposed search would, however, impose a significant 
burden on applicants, add to the mountains of paper presently flooding 
the Office, and add to the workload of examiners who would have to 
review such submissions.
    By requiring each applicant to conduct a preliminary search, all 
applicants, even those whose knowledge of the prior art in his or her 
field is as good as, or better than, any data base, would nonetheless 
be required to conduct such a search and include the required 
documentation in his or her application. Intentional failure to comply 
would result in the applicant being considered to have committed fraud 
on the Office. Moreover, the documentation would have to include a 
statement of the teachings of each reference, not just those relevant 
and material to the patentability of the invention. These requirements 
would substantially increase the costs to applicants of preparing 
patent applications and to the Office for reviewing applications with 
questionable benefit for patent quality.
    The provision offers no guidance regarding the scope of the search, 
merely requiring that ``a preliminary search'' be conducted. Examiners 
would be well advised to be chary about relying too heavily on searches 
whose quality is unknown. And while the applicant must attest to the 
accuracy of the documentation, that merely addresses the accuracy of 
the reported search results, not its comprehensiveness.
    To the extent that examiners would be required to sort through and 
review the documentation submitted, the preliminary search would impose 
a burden of dubious benefit on the PTO, an office already plagued by 
enormous backlogs. The likely result would be increased pendency of 
applications with no appreciable improvement in the quality of patents 
granted.
    These comments should not be understood as suggesting that the 
proposal should be further refined to impose even greater burdens on 
patent applicants. As previously noted, applicants are already required 
to submit relevant materials to the USPTO. Rule 56 currently imposes on 
an applicant a duty to disclose to the Office any information known to 
that applicant to be material to patentability. Information that is 
material to patentability includes any information that establishes, by 
itself or in combination with other information, a prima facie case 
that a claim is unpatentable. Importantly, information that is not 
material to patentability need not be submitted to the USPTO. In 
addition, where bad faith or intentional failure to disclose such 
material information to the USPTO becomes known to the USPTO before 
issue, no patent will be granted.
    Another troubling aspect of this proposal is its potential to 
increase the costs of litigation. One can imagine endless discovery of 
the added documentation portions of patents by litigants in efforts to 
elevate marginal information into material information or to contest 
the sworn statement that such information is relevant. Of course, some 
discovery and ``fishing expeditions'' of this nature occur today, but 
the increased obligations that this proposal would place on applicants 
would surely increase such activity as well as the costs of patent 
litigation.
Inter Partes Reexamination
    Section 4 of the draft legislation would make two changes to 
Chapter 31, Optional Inter Partes Reexamination Procedures. First, it 
amends Section 315(c) of title 35 to remove the estoppel effect of an 
order for reexamination in any later assertion of invalidity arising 
under 28 U.S.C. 1338 on any grounds a third-party requester ``could 
have raised'' in the inter partes reexamination proceeding.
    The goal of the estoppel provision in section 315(c) is to prevent 
third-parties from having the proverbial ``two bites of the apple;'' 
being able to challenge validity during an inter partes reexamination 
and again during subsequent litigation on the same grounds. It seeks to 
strike an appropriate balance between the interests of the public and 
the interests of patentees. The public has an interest in being allowed 
to challenge overly-broad or invalid patents. Patentees have an 
interest in not being subjected to harassment from serial challenges to 
their patents on the basis of information which was available to a 
third-party challenger at the time that an inter partes reexamination 
request was filed. To protect the public's interest, section 315(c) 
would not estop an assertion of invalidity based on newly-discovered 
information unavailable to a third-party requestor at the time of the 
inter partes reexamination proceedings.
    AIPLA believes that the balance struck in the existing section 
315(c) is appropriate and opposes the proposed amendment. We see no 
justification for a third party, who is aware of information, or who 
reasonably could have become aware of such information, not to base a 
reexamination request on all such information. This balance was struck 
to ensure that patentees of limited means would not be subject to 
harassment from serial challenges of a third party requestor based on 
information that the requestor could have submitted initially, and we 
believe it is a correct balance.
    The estoppel provision may not be the principal reason for the 
limited number of inter partes reexamination requests which have been 
filed to date. Only those patents issuing on applications filed after 
the effective date of the American Inventors Protection Act, November 
29, 1999, are subject to it. Given the long and growing pendency of 
patent applications filed after that date, it is no surprise that to 
date few requests have been filed. In addition, until 35 U.S.C. 141 was 
amended just this past November 2nd, a third-party requestor could not 
appeal an adverse determination of patentability by the Board of Patent 
Appeals and Interferences to the Court of Appeals for the Federal 
Circuit. The fact that only the patentee was permitted to appeal an 
adverse decision to the Court was a powerful deterrent to using the 
inter partes reexamination procedure. Further, unlike ex parte 
reexamination, the real party in interest must be identified. This was 
again a safeguard inserted into the inter partes reexamination 
procedure to protect patentees from serial challenges from a single, 
unknown, third-party. The downside of this safeguard is that third 
parties are reluctant to file inter partes reexamination requests out 
of concern that, if they are not successful, they have identified 
themselves as possible infringers. Again, this was the result of a 
careful balancing of interests by Congress when it established inter 
partes reexamination. Finally, there is a reluctance to request an 
inter partes reexamination where the grounds for asserting invalidity 
are limited to patents and printed publications. If the reexamination 
request is unsuccessful, the utility of those references could be 
compromised in subsequent litigation where other grounds can be raised.
    Given these disincentives for using inter partes reexamination 
proceedings, it is not surprising that few requests have been filed. 
The fact that 14 requests have been filed in the first 6 months of this 
year (as compared to two in 2001 and six in 2002) suggests that more 
time is needed before the impact of the estoppel and other provisions 
can be fully evaluated.
    Section 4 of the draft legislation also expands the grounds upon 
which an assertion of invalidity can be made during an inter partes 
reexamination proceeding by amending section 311 of title 35 to include 
any requirement under section 112. As previously noted, requestors are 
currently limited to challenging the validity of claims on the basis of 
patents or printed publications.
    AIPLA has previously testified in support of allowing third parties 
to challenge patents in post-grant opposition proceedings on the basis 
of section 112, paragraphs 1 (except ``best mode'') and 2. With the 
exception of best mode (for the reason that examiners have no way of 
investigating this anachronistic requirement), examiners currently 
scrutinize applications for the requirements of paragraphs 1 and 2 of 
section 112 during the initial examination as a matter of routine. 
Allowing challenges on the basis of paragraphs 1 (excluding best mode) 
and 2 of section 112 would be a constructive amendment to section 311.
    AIPLA does not believe that patents should be challenged in the 
USPTO in inter partes reexaminations on the basis that a patentee did 
not disclose the best mode contemplated by the inventor for carrying 
out his or her invention. This is not the best mode ultimately 
developed by an inventor for practicing the invention. This is the best 
mode contemplated by an inventor for carrying out the invention at the 
time the application was filed. This issue includes consideration of 
the applicant's intent, which is the subject of a great deal of 
discovery by defendants in patent litigation, usually accomplishing 
little more than increasing the costs of litigation. To allow this 
ground to be raised in inter partes reexamination would immeasurably 
complicate the procedure and frustrate the goal of reexamination of 
providing a relatively quick and inexpensive alternative to litigation.
    We do not believe the remaining paragraphs of section 112 dealing 
with claim form (independent, dependent, and multiple dependent) and 
means-plus-function claims are appropriate grounds to be raised in an 
inter partes reexamination proceeding. Paragraphs 3, 4, and 5, which 
address claim form and how dependent and multiple dependent claims may 
be written and construed, are more procedural than substantive and are 
not appropriate grounds for challenging validity.
    Section 112, paragraph 6, allows an applicant to express an element 
in a claim for a combination as a means or step for performing a 
specified function without the recital of structure in the claim. To 
determine what the claim covers, one is directed to look to the 
disclosure in the specification to determine the corresponding 
structure, material, or acts which limit the claimed invention. 
Paragraph 6 thus presents an alternative form of claiming and 
instructions for ascertaining what such a claim includes and excludes. 
It is more directed to allowing applicants flexibility in claiming 
their inventions and to enabling the public to determine whether a 
given product or process infringes the claim than to providing a ground 
for challenging validity. Accordingly, we do not believe paragraph 6 is 
an appropriate basis for challenge in an inter partes reexamination 
proceeding.
Injunctions
    Section 5 of the bill would amend section 283 of title 35 to add 
five specific factors that a court should consider in determining 
whether to grant a preliminary injunction against a person marketing a 
product alleged to infringe a patent. The court is to consider:

        1)  whether the party seeking the injunction is marketing a 
        product covered by the patent,

        2)  whether the party is engaging in activities to begin 
        marketing such a product,

        3)  whether there are alternatives to the product,

        4)  the adverse effects of removing the product from the 
        market, and

        5)  the extent to which the party seeking the injunction will 
        suffer harm that cannot be remedied by the payment of damages.

    Section 283 of title 35 currently reads as follows:

                ``Sec. 283. Injunction

        ``The several courts having jurisdiction of cases under this 
        title may grant injunctions in accordance with the principles 
        of equity to prevent the violation of any right secured by 
        patent, on such terms as the court deems reasonable.''

    To obtain a preliminary injunction, a party must establish (1) a 
reasonable likelihood of success on the merits; (2) irreparable harm; 
(3) the balance of hardships tipping in its favor; and (4) the impact 
of the injunction on the public interest. H.H. Robertson, Co. v. United 
Steel Deck, Inc., 820 F.2d 384, 2 USPQ2d 1926 (Fed. Cir. 1987); 
Hybritech Inc. v. Abbott Lab., 849 F.2d 1446, 7 USPQ2d 1191 (Fed Cir. 
1988); Reebok International, Ltd. v. J. Baker, Inc., 32 F. 3d 1552 (Fed 
Cir. 1994). The trial court must engage in an evaluation and balancing 
of these factors and the circumstances surrounding each. Illinois Tool 
Works, Inc. v. Grip-Pak, Inc., 906 F. 2d 679 (Fed. Cir. 1990); Polymer 
Technologies, Inc. v. Bridwell, 103 F. 3d 970 (Fed. Cir. 1996).
    A ``clear showing'' of patent validity and infringement will create 
a presumption of irreparable harm. Where validity and infringement have 
been clearly established, immediate irreparable harm is presumed. Smith 
International, Inc. v. Hughes Tool Company, 718 F. 2d 1573 (Fed. Cir. 
1983). Some courts have even found that, where there is a strong 
showing of patent validity, an invasion of the inventor's right to 
exclude under the patent should be sufficient irreparable harm for an 
injunction without a showing that the infringer is financially 
irresponsible. Smith International, Inc. v. Hughes Tool Company, 718 F. 
2d 1573 (Fed. Cir. 1983); Zenith Laboratories, Inc. v. Eli Lilly and 
Co., 460 F. Supp. 812 (D.N.J. 1978).
    However, like any presumption, a presumption of irreparable harm 
may be overcome by facts in the record. Rosemount, Inc. v. United 
States Int'l Trade Comm'n, 910 F. 2d 819 (Fed Cir. 1990); Progressive 
Games v. Shuffle Master, 69 F. Supp 2d 1276; 1999 U.S. District Lexis 
20783. Even when irreparable injury is presumed and not rebutted, it is 
still necessary for a court to consider the balance of hardships on the 
parties. H.H. Robertson, Co. v. United Steel Deck, Inc., 820 F.2d 384 
(Fed. Cir. 1987); Datascope Corp. v. Kontron Inc., 786 F. 2d 398 (Fed. 
Cir. 1986).
    As the question of whether to grant an injunction is founded on 
principles of equity, a court has the discretion to weigh the relevant 
hardships on the parties. The court's consideration could include any 
number of factors, including the effect on the patentee's market share, 
business reputation and goodwill, as well as the parties' relevant 
size. Bell & Howell Document Management Prods. Co. v. Altek Systems, 
132 F.3d 701 (Fed. Cir 1997); Illinois Tool Works, Inc. v. Grip-Pak, 
Inc., 906 F. 2d 679 (Fed. Cir. 1990); Progressive Games v. Shuffle 
Master, 69 F. Supp 2d 1276; 1999 U.S. District Lexis 20783. In 
determining whether the likelihood of irreparable harm is sufficient to 
warrant a grant of a preliminary injunction, courts have considered 
whether a party makes, or plans to make, the patented product. Roper 
Corp. v. Litton Systems, Inc., 757 F. 2d 1266 (Fed. Cir. 1985).
    Given these well developed judicial doctrines regarding the 
equitable factors a court should take into account when determining 
whether to grant a preliminary injunction, AIPLA believes amending the 
current statute to include these five specific factors in section 283 
is unnecessary at best, and could be detrimental to the proper 
functioning of the patent system. Trial courts already have the power 
to evaluate these and many other equitable considerations in 
determining whether a preliminary injunction should be granted. Courts 
do not routinely issue a preliminary injunction to stop an alleged 
patent infringement. An accused infringer may present evidence that the 
various factors do not call for the grant of a preliminary injunction.
    The proposed amendment is heavily weighted to make the court's 
determination of whether to grant a preliminary injunction turn on 
whether the patent is being ``worked,'' that is, whether the protected 
invention is being commercialized. As noted above, the question of 
whether a patentee makes or plans to make a patented invention is 
already a factor courts may consider in weighing whether to grant a 
preliminary injunction, but it is one of many factors and not the 
predominant factor. To focus on whether a patent is being worked would 
have a number of negative consequences for America's innovative 
community.
    The United States patent system is founded on Article 1, Section 8, 
Clause 8 of the Constitution that grants Congress the power ``To 
promote the progress of . . . useful acts, by securing for limited 
times to inventors the (exclusive right to their . . . discoveries'' 
(emphasis added). This Constitutional power does not limit the 
exclusive right only to discoveries and inventions which are worked.
    There is good reason for this. Many of the greatest inventions in 
our Nation's history have been made--and continue to be made today--by 
the lone individual. Such independent inventors often do not have the 
financial resources to develop and bring to market their inventions. It 
took Chester Carlson, the inventor of electrostatic copying (which we 
now know as xerography) over twenty years from the date of his first 
patent application to produce a successful commercial product. Such 
struggling entrepreneurs must approach venture capitalists and 
established manufacturing firms for assistance. To adopt a provision 
which could limit the rewards for such pioneers to reasonable royalties 
until they are in a position to market their patented inventions would 
seriously erode the incentives of the patent system for them. Not only 
would their opportunities to seek licenses and manufacturing partners 
be jeopardized, but it could lead to a greater reliance on trade 
secrets, undercutting the Constitutional purpose of promoting the 
progress of the useful arts through the publication of patented 
inventions.
    Placing too heavy an emphasis on determining whether to grant a 
preliminary injunction on whether a patent was being marketed would 
also set an unfortunate precedent globally. For years U.S. Government 
representatives worked tirelessly to urge other countries to eliminate 
provisions in their laws that authorized the grant of compulsory 
licenses on the ground that a patent was not being worked in their 
territory. To suggest that the failure to work a patent in a country is 
an acceptable reason for withholding the grant of a preliminary 
injunction undermines years of effort and could have serious adverse 
consequences for U.S. interests abroad.
    Finally, such an explicit requirement that a patentee must be 
marketing or engaged in activities to market an invention as a 
condition for obtaining a preliminary injunction could raise questions 
of compliance with obligations under Articles 28 and 50 of the 
Agreement on Trade-Related Aspects of Intellectual Property Rights 
(TRIPs). Under Article 28 of TRIPs, member nations must have patent 
laws that grant exclusive rights to make, use and sell inventions 
protected by patents:

                Article 28

        ``1.
            A patent shall confer on its owner the following exclusive 
        rights:

            ``(a) where the subject matter of a patent is a product, to 
        prevent third parties not having the owner's consent from the 
        acts of: making, using, offering for sale, selling, or 
        importing for these purposes that product;

            ``(b) where the subject matter of a patent is a process, to 
        prevent third parties not having the owner's consent from the 
        act of using the process, and from the acts of: using, offering 
        for sale, selling, or importing for these purposes at least the 
        product obtained directly by that process.''
           . . .

Article 28 does not condition the grant of such exclusive rights on 
whether the patentee is marketing his or her invention.
    Similarly, Article 50 obligates member states to ensure that courts 
shall have the authority to order prompt and effective provisional 
measures [preliminary injunctions]:

                Article 50

        ``1.
            The judicial authorities shall have the authority to order 
        prompt and effective provisional measures:

            ``(a) to prevent an infringement of any intellectual 
        property right from occurring, and in particular to prevent the 
        entry into the channels of commerce in their jurisdiction of 
        goods, including imported goods immediately after customs 
        clearance;

            ``(b) to preserve relevant evidence in regard to the 
        alleged infringement.

        ``2.
            The judicial authorities shall have the authority to adopt 
        provisional measures inaudita altera parte where appropriate, 
        in particular where any delay is likely to cause irreparable 
        harm to the right holder, or where there is a demonstrable risk 
        of evidence being destroyed.''
           . . .

Nowhere is this obligation conditioned on a patent holder marketing his 
or her invention.
    For all of the foregoing reasons, AIPLA strongly opposes adding to 
section 283 of title 35 the factors contained in Section 5 of the draft 
legislation.
Declaratory relief
    Section 6 of the draft legislation states that any communication by 
a patent holder that is sufficient to subject the recipient to 
liability for willful infringement shall be sufficient to confer 
standing on the recipient to maintain an action for declaratory relief. 
The section further provides that, for a notice of infringement to be 
sufficient to subject its recipient to liability for willful 
infringement, it must identify the specific patent, identify the 
allegedly infringed claims in the patent, and set forth the alleged 
infringing product, process, or service.
    Section 2201 of title 28 guides the filing of declaratory judgment 
actions in federal courts:

                ``Sec. 2201. Creation of Remedy

        ``(a) In a case of actual controversy within its jurisdiction . 
        . . any court of the United States, upon filing of an 
        appropriate pleading, may declare the rights and other legal 
        relations of any interested party seeking such declaration, 
        whether or not further relief is or could be sought. Any such 
        declaration shall have the force and effect of a final judgment 
        or decree and shall be reviewable as such.''
        . . .

    AIPLA is concerned that Section 6 of the draft legislation could 
have an unsettling effect on the law of declaratory relief in relation 
to patents. Currently, an individual has standing to seek declaratory 
relief if there is an ``actual controversy,'' that is, if there is (1) 
an explicit or actual threat of a suit which creates a reasonable 
apprehension of suit, and (2) present activity which could constitute 
infringement or concrete steps taken with the intent to conduct such 
activity. Fina Research, S.A. v. Baroid Ltd., 141 F.3d 1479 (Fed Cir. 
1998); Cargill, Inc. v. Sears Petroleum & Transport Corp., 2002 U.S. 
Dist. LEXIS 20714 (Fed Cir. 2002). Even if there is actual controversy, 
the court retains discretion to decline jurisdiction. EMC Corp. v. 
Norand Corp., 98 F.3d 807, 39 USPQ2d 1451 (Fed. Cir. 1996). By 
providing that any communication sufficient to impose liability for 
willful infringement is sufficient to confer standing to bring a 
declaratory judgment action, the proposed language could be interpreted 
to eliminate any communication not satisfying such stringent 
requirements for a willful infringement notice from conferring standing 
to bring a declaratory judgment action. This could eviscerate the 
existing standards, thereby severely limiting the availability of 
declaratory relief.
    Currently, a party may bring a declaratory judgment action to 
clarify his or her rights where that party has a reasonable 
apprehension of suit for patent infringement. The party can obtain a 
determination of whether a technology of interest or planned activity 
is covered by a patent or is in the public domain. Under the 
legislation, a party could have no standing to bring a declaratory 
judgment action unless the individual received a notice sufficient to 
create liability for willful infringement. A patentee could cast a 
cloud over an area of technology, and those subject to that cloud could 
do nothing to resolve the issue short of engaging in potentially 
infringing acts as long as the patentee did not send a qualifying 
communication.
    We see no justification to modify the law regarding when 
declaratory judgment actions can be brought, especially where the 
modifications might make it more difficult to bring such actions. On 
the other hand, we do believe some useful changes can be made in the 
present state of the law regarding willful infringement.
A Proposal to Improve the Law Regarding Willful Infringement
    AIPLA is concerned about the current state of the law regarding 
willful infringement, and especially the disruptive effect that claims 
of willful infringement have on the functioning of the patent system. 
It not only adds unnecessarily to the cost of litigation, but it 
produces a drag on innovation as companies are wary to improve upon or 
invent around patented inventions for fear of being subjected to claims 
of willful infringement and the possibility of treble damages. More 
importantly, the current state of the law regarding willful 
infringement may be affecting the Constitutional scheme of exclusivity 
in exchange for public disclosure.
    During the 2002 Federal Trade Commission/Department of Justice 
Hearings on the patent system, the role of patents as an effective 
means for disseminating information efficiently was repeatedly called 
into question. It was clear from the statements of various witnesses, 
and from the give-and-take in the discussions at the hearings, that the 
frequency with which willful infringement has been alleged has led some 
companies to forbid their employees from reading patents.
    Numerous problems have arisen with the enhanced damages provision 
of the patent statute, particularly as that provision has been 
interpreted by the Federal Circuit. Under Federal Circuit precedent, a 
party who has knowledge of a patent is under a duty of care to 
reasonably avoid infringement of the patent. The Federal Circuit has 
said that this usually entails the obtaining of a competent legal 
opinion. Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F. 2d 
1380 (Fed Cir. 1983). Subsequent cases have held that the non-
disclosure of the opinion during the course of the trial can lead to a 
negative inference that the opinion obtained was adverse to the 
infringer. Kloster Speedsteel AB v. Crucible, Inc., 793 F. 2d 1565 
(Fed. Cir.1986). These cases have driven alleged infringers to obtain 
an opinion of counsel in virtually every instance of alleged 
infringement, and to produce such opinions during the course of 
litigation. M. Powers and S. Carlson, The Evolution and Impact of the 
Doctrine of Willful Patent Infringement, 51 Syracuse L. Rev. 53, (2001) 
(hereinafter ``M. Powers and S. Carlson'').
    The widely-shared perception that an alleged infringer must obtain 
a competent legal opinion in patent cases also leads to problems with 
attorney disqualification. Some states, such as the state of Virginia, 
do not even allow the attorney trying the patent infringement case to 
be in the same law firm as the attorney who drafted the opinion for 
purposes of willfulness. As a result, a company's chosen counsel cannot 
act as both its counselor and its trial attorney. Long-term 
relationships between attorneys and clients can be lost because the law 
firm is not able to assume this dual role, and the costs of defending 
oneself against a charge of willful infringement is escalated.
    The requirement of the need for a legal opinion in every patent 
infringement case can also lead to problems in larger companies. Larger 
companies have numerous employees, many facilities, and many 
operational units. Knowledge of a patent by only a single individual in 
that company may be imputed to the company at large for purposes of 
willfulness. Yet, the actual decision maker, who should decide whether 
to obtain a legal opinion, may never be aware of the patent. A company 
can ``know'' of a patent for purposes of willfulness and yet not 
realize that it should obtain a legal opinion to absolve itself of 
willfulness allegations.
    Any exposure to or knowledge of the infringed patent may be held to 
be sufficient to meet the notice requirement for willfulness. In Great 
Northern Corp. v. Davis Core and PadCo, 782 F. 2d 159, 167 (Fed. Cir. 
1986), a patentee was found to have notice of a patent sufficient to 
trigger its affirmative duty to obtain an opinion of counsel when the 
infringer's president learned of the patent at a social gathering from 
a third party who, at the same time he mentioned the patent, also 
stated it was invalid. The Federal Circuit found that the infringer's 
``failure to fulfill that duty is clearly an adequate basis for the 
district court, in its discretion, to assess treble damages . . .'' Id 
at p. 167.
    The cost to alleged infringers is immense. Because of the low 
knowledge threshold that can give rise to a duty of due care to avoid 
willful infringement and because of the negative inference that 
attaches to the nondisclosure of an opinion of counsel, infringers must 
inevitably err on the side of caution and obtain opinions of counsel 
when there is even the smallest possibility that they may be sued for 
infringement of the patent. For companies that may receive hundreds of 
allegations of patent infringement annually, the total costs for such 
opinions can be especially costly given the rigid and comprehensive 
requirements for such opinions enunciated by the Federal Circuit.
    Apart from the costs of all of these preventative steps forced on 
accused infringers, claims of willful infringement are made in almost 
every patent infringement lawsuit. A great deal of discovery is taken 
on the willfulness issue. Many motions are typically filed including a 
motion to compel the opinion, motions to compel withheld documents 
under the attorney-client privilege, motions to bifurcate the trial and 
reconsiderations of these motions, etc. All of these motions add 
additional unnecessary costs to patent infringement litigation.
    AIPLA has undertaken the task of developing a proposal to reform 
the practices in this area that would both promote the Constitutional 
role of the patent system to efficiently disseminate knowledge, while 
retaining the ability to obtain enhanced damages from an abject 
copyist. We elicited input from our membership and from an FTC 
representative at a Forum at our Spring Meeting this year and learned 
much that informed the further debate. We are working with our sister 
organizations to launch a multi-year program to implement the changes 
needed and hope to be able to share our ideas with the Subcommittee in 
the very near future.
                               conclusion
    AIPLA appreciates the efforts of the Subcommittee to examine ways 
in which patent quality might be enhanced. We encourage you to continue 
your efforts. You have made an excellent start by proposing legislation 
that would fully fund the USPTO and we will do everything in our power 
to support this initiative. We look forward to receiving the proposal 
of the USPTO to establish a post-grant opposition system and commit to 
work with you on this proposal.

    Mr. Smith. Thank you, Mr. Van Horn.
    Mr. Kesslen.

  STATEMENT OF MARK KESSLEN, MANAGING DIRECTOR AND ASSOCIATE 
GENERAL COUNSEL, J.P. MORGAN CHASE & COMPANY, ON BEHALF OF THE 
             FINANCIAL SERVICES ROUNDTABLE AND BITS

    Mr. Kesslen. Thank you, Mr. Chairman. I was pleased to 
accept your invitation to testify today on behalf of the 
Financial Services Roundtable and BITS. We are grateful for the 
opportunity to comment on the steps that should be taken to 
modernize the patent laws.
    Mr. Chairman, patent attorneys and financial institutions 
are a well kept secret. We work quietly behind the scenes to 
protect our companies'intellectual capital from assault. In 
recent years we have been busy fighting frivolous patent 
claims, often at a significant expense to our companies. And we 
are concerned that this is a problem that is not going away 
unless Congress does something about it.
    Pending claims of infringement against financial service 
companies are serious problems, but they are only the tip of 
the iceberg. Patent applications involving financial services 
have been filed in large numbers since 1997. Because it takes 
at least 4 years to get these applications processed through 
the Patent Office, the number of these patents now issued are 
growing, which will lead to an increase in the number of 
claims.
    We believe that there are steps that Congress can and 
should take to provide the safeguards without impairing the 
important protections afforded to intellectual property. We 
recommend four initial measures.
    Under the first measure, we propose modifying the prior 
user rights defense. We believe that this defense is an 
important protection, especially due to the recent growth in 
patent litigation and our historical reliance on copyrights and 
trade secrets.
    But in its current form this defense does not go far 
enough. It is too easy for a patent owner to circumvent it. The 
defense should be modified to apply equally to any product or 
process covered by a patent. We believe that the level of proof 
required to assert this defense should be reduced.
    Under the second measure we propose modifying the standard 
for injunctive relief. In many countries injunctive relief is 
not available for paper patents that have not been worked. That 
is, if the owner of a patent does not use it within a specified 
period of time, the owner loses the ability to obtain 
injunctive relief. This is appropriate because the patent law 
is intended to encourage and reward innovators by ensuring they 
receive the fruits of their efforts.
    We believe a better and more equitable approach is to allow 
courts to grant an injunction on a patent only if the patentee 
is likely to suffer immediate and irreparable harm that cannot 
be remedied by the payment of money damages alone.
    If an inventor can demonstrate a likelihood of irreparable 
harm, injunctive relief ought to be available, but if that is 
not the case, then for the good of society, they should not be 
allowed to stand in the way of the utilization of their 
invention. Of course, the inventor should be entitled to 
monetary awards and thus be rewarded for their efforts.
    Under the third measure, we seek to clarify some of the 
current damages laws. More specifically, we believe that the 
patent law relating to damages is subject to abuse by patent 
holders who go fishing for infringers. By simply sending a 
letter at the cost of nothing more than a 37-cent stamp, a 
patent holder can set in motion a very costly process for the 
alleged infringer.
    The recipient of that letter has to undertake an 
investigation, incurring substantial cost, personnel and legal 
time. Failure to conduct the necessary due diligence could 
later subject the alleged infringer to treble damages. The 
accusing patent holder incurs no risk or cost other than the 
cost of that stamp.
    We believe that the patent law should be modified to 
provide that enhanced damages may not be awarded unless the 
alleged infringer has received an objectively reasonable 
apprehension of suit by the patentee, which includes an 
identification of the patent, the patent claims at issue, and 
the particular product at suit.
    We have also proposed similar standards for limiting actual 
damages in our written testimony.
    Under the fourth measure, we recommend developing an 
opposition proceeding. The Patent Office has proposed a post 
grant review of patent claims in their 21st century plan. We 
strongly support this concept.
    However, to be fair, we believe these proceedings should 
include a readily available, reasonably prompt and cost 
effective way to determine patentability without imposing 
unreasonable burdens on the patentees. The procedure would 
enable companies to manage the risk claims against them based 
upon bad patents without incurring the high cost of litigation 
or facing the need to settle to avoid that cost.
    In conclusion, the Roundtable and BITS are strong believers 
in the U.S. Patent process as fundamental to a healthy U.S. 
Economy and robust free enterprise system. Given the importance 
of the patent process, the Patent Office should be fully funded 
and given adequate resources to perform its duties. Current 
efforts to craft legislation are to be commended. However, with 
increases in both the requests received by the Patent Office 
and the claims of infringement, there is a need for 
Congressional debate and frank discussion regarding expanded 
defenses and other tools for litigation risk management with 
members of the financial services industry and the patent 
community at large.
    Again, thank you for the opportunity to speak today.
    [The prepared statement of Mr. Kesslen follows:]
                   Prepared Statement of Mark Kesslen
    Chairman Smith, Ranking Member Berman and members of the 
Subcommittee, my name is Mark Kesslen and I am the lead intellectual 
property and technology attorney at J.P. Morgan Chase in New York. I am 
pleased to testify today on behalf of The Financial Services Roundtable 
and BITS, which are affiliated financial services trade associations.
    The Financial Services Roundtable (www.fsround.org) represents 100 
of the largest diversified financial services companies providing 
banking, insurance, and investment products and services to American 
businesses and consumers. Member companies participate through their 
chief executive officer and other senior executives nominated by the 
CEO. Roundtable member companies account directly million jobs.
    BITS (www.bitsinfo.org) was created in 1996 to foster the growth 
and development of electronic financial services and e-commerce for the 
benefit of financial institutions and their customers. BITS provides 
intellectual capital and addresses emerging issues where financial 
services, technology and commerce intersect. BITS's Board of Directors 
is made up of the Chairmen and CEOs of twenty of the largest U.S. 
financial services companies, as well as representatives of the 
American Bankers Association and the Independent Community Bankers of 
America.
    I was pleased to accept your invitation to testify as the current 
chairman of the Roundtable Patent and Intellectual Property Working 
Group and the BITS Patent Issues Working Group (the Working Group).
    Mr. Chairman, patent attorneys in financial institutions are a 
well-kept secret. We work quietly behind the scenes to protect our 
companies' individual intellectual capital from assault. In recent 
years, we have been kept busy fighting frivolous patent claims--often 
at significant expense to our companies--and we are concerned that this 
is a problem that is not going to go away unless Congress does 
something about it.
    For this reason, our Working Group is grateful for this hearing and 
the opportunity to comment on steps that should be taken to modernize 
the patent laws.
    Banks, broker-dealers and insurance companies, like other 
businesses in the United States, are threatened by a large and growing 
number of frivolous claims of patent infringement. Pending claims of 
infringement are a serious problem, but they are only the tip of the 
iceberg. Patent applications that involve financial services in some 
way have been filed in large numbers since 1997. Because it takes at 
least four years to get applications for patents of this type processed 
through the USPTO, the number of these patents now being issued is 
growing. We believe that this will lead to an increasing number of 
frivolous claims filed against financial firms in coming years.
    There are steps that Congress can and should take to provide 
financial firms and other businesses additional safeguards against 
these frivolous claims, without impairing the important protections 
afforded to intellectual property under the patent law. We recommend 
four initial measures, which are discussed below:

          Improve the prior user rights defense;

          Modify the standard for injunctive relief;

          Clarify the damages rules; and

          Create an opposition proceeding.

    I would like to provide you some additional detail regarding each 
of these measures.
                 improve the prior user rights defense
    We believe that the prior user rights defense under 35 U.S.C. 273 
is an important protection for financial institutions especially due to 
the recent growth in patent litigation. But in its current form, the 
prior user rights defense does not go far enough. It is too easy for a 
patent owner to circumvent the defense by claiming their invention is 
different from a pre-existing business method because it is, instead, a 
system or apparatus. The prior user rights defense should be modified 
to apply equally to any products or services covered by a patent. We 
also believe the level of proof required to successfully assert the 
prior user rights defense should be reduced from the ``clear and 
convincing'' standard to a ``preponderance of the evidence'' standard.
               modify the standard for injunctive relief
    In many countries, including Canada and most European countries, 
injunctive relief is not available for paper patents that have not been 
worked. That is, if the owner of a patent does not use the patent 
within a specified period of time, the owner loses the ability to 
obtain injunctive relief. This is appropriate because the patent law is 
intended to encourage and reward inventors and innovators by ensuring 
they receive the fruits of their efforts. It is not intended to enable 
them to prevent the use of new ideas by anyone at all.
    We believe a better and more equitable approach is to allow courts 
to grant an injunction on a patent only if the patentee is likely to 
suffer immediate and irreparable harm that cannot be remedied by the 
payment of money damages alone. If an inventor can demonstrate a 
likelihood of irreparable harm, injunctive relief ought to be 
available. But if that isn't the case, then for the good of society, 
they should not be allowed to stand in the way of utilization of their 
invention. Of course, the inventor should be entitled to license fees 
and thus be rewarded for their efforts. The result will be the payment 
of reasonable royalties, rather than disproportionately costly 
settlements in the face of threatened injunctive relief.
                       clarify the damages rules
    We believe that the patent law is subject to abuse by patent 
holders who go fishing for infringers. This is sometimes referred to as 
the ``37-cent notice'' issue. By simply sending a letter, at the cost 
of nothing more than a 37-cent stamp, a patent holder can set in motion 
a very costly process for the alleged infringer. The recipient of the 
letter has to undertake an investigation, incurring the cost of 
personnel time and legal counsel, both of which can be substantial. 
Failure to conduct the necessary due diligence could later subject the 
alleged infringer to treble damages. The accusing patent holder incurs 
no risk or cost, other than the cost of a stamp.
    We believe that the patent law should be modified to provide that 
enhanced patent infringement damages may not be awarded: (1) on the 
basis of the mere knowledge of a patent or its contents by the 
defendant prior to suit, or (2) for any infringement occurring prior to 
the defendant's receipt of written notice from the plaintiff of a 
charge of infringement, which identifies the specific patent, claims, 
and alleged infringing products or services at issue and which is 
sufficient to give the defendant an objectively reasonable apprehension 
of suit on the patent. Notwithstanding those limits, we believe that a 
patent infringer should be subject to payment of enhanced damages if: 
(a) the infringer deliberately copied the patented subject matter; or 
(b) the patent was asserted against the infringer in a previous U.S. 
judicial proceeding, and the subsequent infringement is not more than 
colorably different from the conduct asserted to be infringing in the 
previous proceeding.
    We also believe that the current marking statute inappropriately 
measures damages that can be awarded to holders of paper patents under 
which no articles are manufactured or patents possessing only method 
claims. The holders of these patents whether or not the infringer knew 
of the existence of the patent may sue an alleged infringer and collect 
the full base amount of monetary damages. By contrast, the holder of a 
product patent may be denied monetary damages for infringement 
occurring prior to the lawsuit, if the product had not been marked. It 
would be fair and appropriate to treat holders of patents covering 
intangibles in a similar manner by starting the clock for actual 
damages for paper and process patents based upon the same standard as 
enhanced damages set forth above.
                    create an opposition proceeding
    The USPTO has proposed a post-grant review of patent claims in 
their 21st Century Strategic Plan that was released in 2002. We 
strongly support this concept. The procedure, as proposed, would allow 
the public to petition the USPTO to cancel one or more claims in a 
patent within one year of issuance, and would allow anyone who is 
threatened with a patent infringement action to petition the USPTO for 
review within four months. Under this proposed procedure, the 
patentability of issued claims would be reviewed by Administrative 
Patent Judges of the Board of Appeals of the USPTO. To be fair, we 
believe these proceedings should include a readily available, 
reasonably prompt and cost effective way to determine patentability 
without imposing unreasonable burdens on patentees. This procedure 
would enable companies to manage the risk of claims against them based 
on bad patents, without incurring the high cost of litigation or facing 
the need to settle to avoid that cost.
                               conclusion
    BITS and The Financial Services Roundtable are strong believers in 
the US patent process as fundamental to a healthy US economy and robust 
free enterprise system. With increases in both patent requests and 
claims of infringement, there is a need for Congressional debate and 
frank discussion with members of the financial services industry and 
the patent community at large. Given the importance of the patent 
process, the USPTO should be fully funded and given adequate resources 
to perform its duties. Current efforts to craft legislation are to be 
commended, especially where the focus is on improvements to the patent 
process. Concepts such as opposition proceedings and reexamination 
improvements are constructive. Because of increases in frivolous claims 
of patent infringement, consideration should also be given to 
appropriate defenses and other tools for litigation risk management. 
Among those we recommend for consideration and implementation are: 
modifying the prior user rights defense; modifying the standard for 
injunctive relief; and addressing the notice issue. Numerous other 
improvements of the patent process can be imagined and the financial 
services industry will continue to make suggestions along with other 
businesses that are more traditional participants in the patent 
process.

    Mr. Smith. Thank you, Mr. Kesslen.
    Mr. Simon.

   STATEMENT OF DAVID M. SIMON, CHIEF PATENT COUNSEL, INTEL 
                          CORPORATION

    Mr. Simon. Thank you, Mr. Chairman. I would like to extend 
my thanks for being asked to testify here. We would 
particularly like to recognize the efforts of this Committee on 
behalf of improving patent quality and also initiate the Patent 
Office under Judge Rogan's leadership to improve patent quality 
through procedural implementations and providing better 
resources and support for patent examiners, who we feel are 
badly overworked.
    There are a number of issues that arise that lead to patent 
quality, and patent quality is very important to the 
semiconductor and IT industry. We are both some of the largest 
customers of the Patent Office in terms of filings, and also it 
is important for us that not only we have strong patent 
protection, but we not be harassed by poorly examined and 
invalid patents.
    There are a number of documented issues and various studies 
in my written testimony that I refer to, explaining some of the 
procedural issues and lack of resources and how that impacts 
the Patent Office.
    But the issue that I would most like to focus on here today 
is on the injunction issue and the permanent injunction issue 
in terms of patent litigation. If you look at the comparative 
allowance rates between the United States Patent Office and 
European and Japanese patent offices, who are generally 
considered among the leading patent offices, studies show that 
on average the United States Patent Office approves over 90 
percent of all applications eventually for allowance.
    Compare that with the European and Japanese patent offices 
that do it at about 65 percent. If one assumes, not necessarily 
this is right, but if one assumes that this 25 percent 
differential means that 25 percent of the patents filed and 
issued by the United States Patent Office should not have been 
issued, that would end up leading us, based on last year's 
issuances from the U.S. Patent Office about 40,000 patents that 
should not have been granted. And even if this is high by an 
order of magnitude, that still leaves 4,000 patents that should 
not have been granted.
    This is a severe problem, and it is being doubled by the 
recession, because what we have found is there is a growing 
market for the punching of patents from distressed or bankrupt 
companies.
    We at Intel are aware of a number of bankruptcy sales where 
we have observed law firms actually marching in on their own to 
buy patents and offering millions of dollars to buy patents. 
Their sole purpose, obviously, is to sue on their own real 
behalf on those patents and make money.
    Similarly, there are some financial investors who have also 
gotten into this business, and we are finding that is 
constantly deluging us with claims and lawsuits. We believe 
this is a very serious problem that needs to be addressed.
    For example, a few years ago we found ourselves faced with 
a company who had bought a patent for $50,000, sued us on that 
patent asking for $8 billion, that is B with a billion, of 
damages plus the permanent injunction. The permanent injunction 
would have done them absolutely no good. They weren't in the 
semiconductor business. They had nobody in their company who 
was a semiconductor engineer or computer designer. They were in 
this purely for the money, and they were using the threat of 
that injunction as a way to harass us.
    Their business model, suing people on patents that they 
bought from distressed companies, is enhanced from a number of 
aspects. First of all, there is a huge amount of uncertainty in 
patent litigation. Recent studies, as provided for in my 
written testimony, show that over 50 percent of all patent 
decisions in the courts that are appealed are reversed, at 
least in part. Claim interpretation remains a huge area of 
doubt, notwithstanding the Markman hearing process that has 
been implemented. And then, if you lose the case, you are faced 
with the issue of permanent injunction being against you. And 
even if you want to go up on appeal, if it is a big product, 
you can't. You can't afford to have your plants sit there idly, 
particularly in our industry where our plants frequently cost 2 
to $3 billion for each new plant, to sit there idly while you 
are waiting for the court of appeals and you are enjoined.
    So it is simply a matter of this issue really needs to be 
fundamentally addressed. In addition, I would like to point out 
that rather than repeat what my colleague, Mr. Kesslen, has 
said, we strongly agree with the comments that he made.
    And one other issue on broadening reexamination, I disagree 
with Mr. Van Horn and the AIPLA. We think that reexamination 
should be strengthened, and we do agree that the res judicata 
effect that got imported into section 315(c) should be removed.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Simon follows:]
                  Prepared Statement of David M. Simon
    Mr. Chairman, Congressman Berman and the Members of the 
Subcommittee:
    Thank you for the opportunity to appear before you today. My name 
is David Simon and I am Chief Patent Counsel for Intel Corporation. I 
am pleased to testify today on behalf of Intel.
    Let me thank the Subcommittee for holding these hearings. Patents 
are important to high technology for protecting intellectual property--
the key to the United States' growth over the last twenty years. For 
the IT and semiconductor industries, strong protection of patents is 
essential in fostering continued innovation and investment; U.S. 
companies are investing billions in research and development to develop 
cutting-edge products--these products help the U.S. remain the most 
competitive country in the world.
    Intel commends Chairman Smith and Ranking Minority Member Berman 
along with the rest of the committee members for their support of a 
vital patent system. Intel also applauds the on-going initiatives from 
the United States Patent & Trademark Office under Judge Rogan's 
leadership to improve patent quality.
    In addition to the on-going work to improve the Patent Office, 
Intel believes that important legislative work remains to be done with 
regards to patent quality. Improvidently granted patents result from 
well documented deficiencies in the U.S. Patent & Trademark Office 
including low pay for patent examiners, inadequate resources for the 
examiners and the test required by the Federal Circuit to determine if 
an application is patentable.\1\ One commentator concluded that roughly 
half of all issued, litigated patents are invalid.\2\ While that 
estimate may appear high initially, statistical analysis shows that 
over 90% of all U.S. patent applications are ultimately approved and 
result in a patent. Contrast the U.S.'s shockingly high approval rate 
with the European and Japanese patent offices' approval rates of about 
65%.\3\ Surely, applicants for American patents are not that much more 
discriminating than their counterparts for foreign patents in selecting 
ideas that merit a patent application. This differential in the 
approval rates between the U.S. and foreign Patent Offices leads one to 
the conclusion that perhaps 40,000 improvidently granted patents issue 
each year.
---------------------------------------------------------------------------
    \1\ See, e.g., Robert B. Merges, As Many as Six Impossible Patents 
Before Breakfast, 14 Berkeley Technology Law Journal 577 (1999).
    \2\ John R. Allison & Mark A. Lemley, Empirical Evidence on the 
Validity of Litigated Patents, 26 AIPLA Q.J. 185 (1998).
    \3\ Cecil D. Quillen, Jr. & Ogden H. Webster, Continuing Patent 
Applications and the Performance of the U.S. Patent Office 11Federal 
Bar Journal (No. 1) 1, 3 (2000).
---------------------------------------------------------------------------
    Our key concern is that these improvidently granted patents become 
powerful tools for abuse. This abuse seriously undermines the continued 
vitality of the high tech industry as legitimate companies are 
threatened with a permanent injunction on improvidently granted 
patents.
    Lawyers and their financial backers have been buying these 
improvidently granted patents from distressed companies for the sole 
purpose of suing legitimate businesses. Patents can be sold like any 
other form of property and an active market has formed in recent years 
where patents can be bought or sold--frequently for less than the 
prosecution costs of the original patent. Intel often finds law firms 
and financial backers of litigation bidding against each other to buy 
these patents so that they can then form businesses solely for the 
purpose of suing legitimate companies. These lawsuits, in which the 
plaintiff invariably seeks a permanent injunction, stymie competition 
and clog the courts with useless cases brought solely to enrich these 
lawyers and their financial backers. These patent system bottom feeders 
have now become so common that Intel has coined a term to describe 
them: ``patent trolls.''
    Several problems contribute to making this ``patent troll'' 
business model a simple and effective source of illegitimate profit 
irrespective of the quality of the patent. For example, if the troll 
can claim that the patent covers $5 billion in annual revenue, that 
troll will ask for a royalty fee of a few percentage points of revenue; 
e.g., $150 million per year. While that may seem to be an absurd amount 
to pay to someone who bought a patent out of bankruptcy for less than 
one hundred thousand dollars, the troll will threaten the legitimate 
business with a permanent injunction at the end of the patent case, 
threatening the halt of the sale of a critical product or closing down 
a production facility. Even if the chance of the troll winning is low, 
the troll's costs are modest, normally a few million dollars at most. 
In contrast, the legitimate business the troll targeted faces potential 
financial ruin if it can no longer sell a key product. Intel recently 
faced such a troll who wanted $8 billion and a permanent injunction 
after purchasing the patent for $50,000.\4\
---------------------------------------------------------------------------
    \4\ Top Ten Defense Cases of 2000: In the shadow of the Valley, San 
Francisco Daily Journal April 18, 2001 http://www.weil.com/WGM/
quotables.nsf/e49ad7e458c039f78525691a0071b053/
6098de882426067085256a33005879eb?OpenDocument
---------------------------------------------------------------------------
    The uncertainties in patent litigation also facilitate the patent 
troll's inappropriate business model. These patent trolls have the 
presumption of validity on their side. It is difficult to convince a 
jury of patent invalidity in light of the heightened evidentiary 
standard for invalidity of clear and convincing evidence. Adding to the 
troll's weapons are the uncertainties regarding how the patent claims 
will be interpreted by the court. One recent study showed that over one 
half of all appealed patent decisions by the district courts are 
reversed at least in part.\5\ Other studies show that district court 
interpretations of the claims are found to be in error about one-half 
of the time.\6\
---------------------------------------------------------------------------
    \5\ Cecil D. Quillen, The U.S. Patent System: Is it Broke? And Who 
Can Fix It? http://www.ftc.gov/os/comments/intelpropertycomments/
quillenattachments/isitbrokewhocanfixit.pdf at pg. 6.
    \6\ Ray K. Harris & Sandra Etherton, Software Protection: Patents 
http://www.lawhost.com/lawjournal/99winter/patents5.html
---------------------------------------------------------------------------
    This unpredictable legal environment has encouraged legitimate 
companies threatened by patent trolls to pay large settlements as trial 
nears rather than risking that their entire businesses will be shut 
down by a permanent injunction. Legitimate businesses cannot wait for 
the appeal process to rectify the wrong decision because it may be two 
years before the appeals court reverses the district court's decision. 
Waiting two years without product being sold and factories lying idle 
pending the outcome of the appeal is simply not acceptable to any 
business.
    A recent case involving the Blackberry PDA highlights our concerns. 
The lawyer for the patent troll NTP had the temerity to be quoted as 
saying:

        NTP is in the business of licensing patents. We would pursue an 
        injunction that would prevent the [defendant] from continuing 
        to sell Blackberrys. That's RIM's [the defendant's] 
        nightmare.\7\
---------------------------------------------------------------------------
    \7\ http://www.forbes.com/2002/11/21/cz-vm--1121rim--print.html

    Now, if NTP is in the business of licensing, it wants money. An 
injunction really does NTP no good because NTP is not going to make 
money by RIM not selling Blackberry PDA's and not running its network. 
Rather, NTP was using the threat of the injunction to maximize the 
settlement. Is this the result that caused the founding fathers to 
provide for patents in the Constitution? Intel believes this result 
would have baffled the founding fathers.
    Unfortunately, there is little hope of change with the current 
situation without legislative intervention. Until now, courts have 
almost always sided with the patent trolls in granting permanent 
injunctions. The Federal Circuit has stated that the denials of 
permanent injunctions are ``rare.'' \8\ Virtually all of the recent 
reported cases where a district court failed to issue an immediate 
permanent injunction at the conclusion of a patent case involved 
medical products. Even in these circumstances, the courts often imposed 
the injunction six to twelve months after the end of the trial.\9\ 
Intel believes it is a gross distortion of the patent system to permit 
trolls to use the threat of injunctions to try to maximize their 
monetary claim, particularly as many of these claims are based upon 
improvidently granted patents bought in bankruptcy.
---------------------------------------------------------------------------
    \8\ Rite Hite Corp. v. Kelley Co., 56 F.3d 1538, 1547 (Fed. Cir. 
1995) (finding that patentees failure to market the patented invention 
is not sufficient to support the denial of a permanent injunction).
    \9\ See, e.g., Schneider (Europe) AG v. Scimed Life Sys., 852 F. 
Supp. 813 (D. Minn. 1994); Pall v. Micron Separations, Inc., 792 F. 
Supp. 1298 (D. Mass 1992); Moxness Prods. v. Xomed, Inc., 7 U.S.P.Q.2d 
1877 (M.D. Fla. 1986); Shiley Inc. v. Bentley Labs, Inc., 601 F. Supp. 
964 (C.D. Cal. 1985).
---------------------------------------------------------------------------
    Therefore, Intel strongly urges this Subcommittee to give 
legitimate companies the tools to fight back against patent trolls by 
modifying section 283 of Title 35 on Patents to require that courts 
will fully consider the equities when deciding whether to grant a 
permanent injunction at the conclusion of the patent case. The 
Semiconductor Industry Association's proposal, which Intel 
wholeheartedly supports, is to add the following language to section 
283:

        A court shall not grant an injunction under this section unless 
        it finds that the patentee is likely to suffer irreparable harm 
        that cannot be remedied by payment of money damages. In making 
        or rejecting such a finding, the court shall not presume the 
        existence of irreparable harm, but rather the court shall 
        consider and weigh evidence, if any, tending to establish or 
        negate any equitable factor relevant to a determination of the 
        existence of irreparable harm.

    In addition to making this amendment to reduce the odds that 
litigation concerning improvidently granted patents clog the courts, 
Intel understands that the Subcommittee is exploring third party and 
applicant submission of prior art, estoppel and inter partes 
reexamination, the application of section 112 during reexamination and 
declaratory relief and offers to license.
    Intel believes that the proposal to permit third parties to submit 
prior art in opposition to published patent applications is laudable. 
Getting better prior art before the Patent Office would improve patent 
quality and it is in the effected parties' best interest to ensure that 
the Patent Office does a good job. Third party prior art submissions 
that were only submitted for the purpose of delay should prove apparent 
to examiners and a reasonable fee to submit the art would remove most 
frivolous submissions. We believe with minor rewriting of the rules 
regarding patent protests that this can be affected.
    Intel understands that requiring a prior art search by patent 
applicants has also been proposed; however, Intel believes this is a 
superfluous and a needless expense that will prove counterproductive. I 
estimate that this would add at least $500 to the applicants' costs for 
filing, and in Intel's case, this would add over $1 million to our 
costs each year. Further, applicants would merely submit all of the 
results of their search to avoid any question of inequitable conduct. 
As a result, the Patent and Trademark Office would be burdened with 
irrelevant prior art and it would be harder for the examiners to 
separate the wheat from the chaff. In addition, the Patent Office could 
not rely on the applicant's search anyway and would redo it. Intel 
firmly believes that giving the examiners the resources to do their job 
and compensating them adequately as proposed in Judge Rogan's Strategic 
Plan is a far better way to improve the quality of the prior art cited 
against patent applications.
    Intel also believes that strengthening inter partes reexamination 
is highly appropriate. First, Intel believes that expanding the 
authority of the Patent and Trademark Office to address the enabling 
disclosure, written description and other requirements in 35 U.S.C. 
Sec. 112 would be appropriate. Such technical issues are often best 
resolved before patent examiners who have technical expertise rather 
than before district court judges and juries.
    Nonetheless, inter partes patent reexamination before the Patent 
Office has a major drawback: the res judicata effect of the 
reexamination for ``issues that could have been raised before the 
Patent Office'' as provided currently in section 315(c) of Title 35 is 
too broad. This language, which largely tracks the language in the 
Restatement Second of Judgments, has enormous breadth. It leaves anyone 
submitting an inter partes request at the mercy of a subsequent 
decision that newly uncovered prior art could have been found earlier 
and therefore should have been submitted in the reexamination. Intel 
does not believe that the breadth of res judicata in case law should be 
imported into reexamination. The impact and burdens of litigation that 
led to the doctrine of res judicata are far greater than those arising 
from patent reexamination procedure. Therefore Intel requests that this 
language be deleted from section 315(c). Otherwise, few companies will 
be willing to use inter partes reexamination.
    Intel also believes that addressing willful infringement would be 
helpful and reverse a fundamental flaw in current U.S. law. The 
original, constitutional premise and social contract behind patents is 
inventors will disclose their inventions to the public in return for 
the public getting the benefit of their patent's teaching.\10\ In 
exchange, the inventor gets her patent.\11\ The idea is that scientists 
would be able to study patents to create future inventions.
---------------------------------------------------------------------------
    \10\ See, e.g., Kewanee Oil. Co. v. Bicron Corp., 416 U.S. 470, 481 
(1974).
    \11\ See Kurt M. Saunders, Patent Non-use and the Role of the 
Public Interest as a Deterrent to Technology Suppression, 15 Harvard 
Journal of Law & Technology 1, 62 (1998).
---------------------------------------------------------------------------
    However, the case law on willful infringement prevents such 
studying. An award of enhanced damages following a finding of willful 
infringement can result from a single engineer in a company simply 
reviewing another company's patents. This studying of patents that even 
the Supreme Court has lauded \12\ should not trigger the enhanced 
damages that can be awarded for willful infringement. Indeed, many 
companies forbid their engineers from studying third party patents to 
avoid the charge of willful infringement. If a patentee wants to 
recover enhanced damages as permitted by a finding of willful 
infringement, the patentee should be required to provide the potential 
defendant with a detailed notice of the patent infringement. That 
notice should be at least sufficiently detailed to enable the defendant 
to bring a declaratory relief action. This is the position of the 
Intellectual Property Owners Association.
---------------------------------------------------------------------------
    \12\ Id.
---------------------------------------------------------------------------
    However, Intel believes that Congress should take a further step 
and also require the patent owner to set forth which claims it believes 
are infringed by which product and why. Many corporate patent counsel 
receive at least weekly letters from third parties regarding patents. 
That letter may be enough notice to trigger a willful infringement 
charge. Paying $40,000 per patent for an opinion of counsel to be used 
to rebut the charge of willful infringement is not cost effective given 
the volume of such notices. Nor is filing declaratory infringement 
actions an appropriate remedy since these ``notices letters'' are far 
too commonplace. Imposing on the patentee the minor burden of adding a 
few paragraphs to a letter explaining why the patentee believes 
infringement exists puts the burden in the appropriate place if the 
patentee wants it damages multiplied by two or three due to a finding 
of willful infringement. These paragraphs should specify which claims 
are infringed by which products and why. This would avoid the added 
burden of enhanced damages being awarded for improvidently granted 
patents.
    In conclusion, Intel believes that the initiatives that I have 
outlined along with implementing Judge Rogan's Strategic Plan would 
greatly enhance patent quality. I would like to thank the Subcommittee 
for this opportunity to testify.

    Mr. Smith. Thank you, Mr. Simon.
    Professor Thomas.

   STATEMENT OF JOHN R. THOMAS, PROFESSOR OF LAW, GEORGETOWN 
                           UNIVERSITY

    Mr. Thomas. Thank you, Mr. Chairman. I am pleased to have 
the opportunity to testify today. I appear here in my personal 
capacity as a concerned observer of the patent system.
    The Subcommittee has wisely identified the most pressing 
issue in contemporary patent administration. Persistent 
accounts suggest that patent quality stands at levels that are 
not socially optimal.
    The PTO has proposed a number of reforms to patent 
acquisition procedures to address the issue. But given the 
PTO's limited rulemaking authority, legislative reforms may be 
the best option.
    As we approach the issue of patent quality, it is important 
to remember that patents are more important by any conceivable 
measure today than they were a generation ago.
    Also, the PTO finds itself in an extremely difficult 
working environment. In this milieu, the imposition of modest 
increases in the responsibilities of patent applicants strikes 
many observers as a sound policy choice. Many of the proposals 
the Subcommittee considers today would do just that, and I 
believe they are worthy of extended consideration.
    One of the proposals would ask applicants to perform a 
prior art search, and also to explain in some level of detail 
the references that they submit. I think this is a good idea, 
because it is a desirable reform in an era of diminishing PTO 
resources, and it comports with existing patent policies.
    When I teach patent law, one of the messages to the 
students is libraries, not laboratories. We want technologists 
to look to existing proprietary technologies and the prior art, 
rather than engage in duplicative R&D that is more expensive. 
Having applicants perform a mandatory prior art search comports 
with this goal, because they should know what is out there.
    Patent applicants already have to include such a statement 
when they submit foreign language references for which no 
translation is available. So this measure is really more of an 
extension of existing duties than a full fledged radical 
reform. Individuals have to perform due diligence when they 
file lawsuits, when they file SEC statements, when they ask the 
Government for other privileges. Why should the duty for patent 
applicants be any different?
    Statements of relevance might also discourage the current 
counterproductive strategy of some patent applicants, in which 
they submit hundreds of references to the examiner, and leave 
the Patent Office to figure them out. I also believe that the 
increased receptivity of third party submissions will allow the 
U.S. PTO to take advantage of the increased knowledge of the 
public.
    Also, there is wide agreement that inter partes 
reexamination has not successfully shifted patent challenges 
from the courts to the U.S. PTO. As originally enacted, its 
appeal provisions were too limited, its substantive scope too 
narrow, and its estoppel provisions excessive. Previous 
legislation has solved the problem of the appeal provision. 
Many commentators believe it is time to enhance the substantive 
scope of reexam, and also to limit the estoppel effects.
    This proposal would do those things. I would encourage the 
Subcommittee to expand the substantive basis for ex parte 
reexamination to mirror that of inter parte reexamination. I am 
aware of such concerns about strategic behavior that some 
commentators believe would apply if this provision was enacted, 
but I would observe that many foreign patent offices have had 
similar provisions in place for years and these concerns have 
not been realized.
    Now, the current proposal also states that any 
communication by a patent owner sufficient to create liability 
for a willful infringement would also create declaratory 
judgment jurisdiction. The apparent policy goal of this 
proposal was quite sound. Patent proprietors should not be able 
to cause concern over enhanced damages, without allowing the 
patent to be immediately challenged in court. However, 
declaratory judgment jurisdiction rests upon a constitutional 
basis, the requirement of a case or controversy. That is 
something this Subcommittee can legislate around very easily.
    So if you want to pursue the policy goal, I would encourage 
taking the opposite tack, stating that unless the patentee 
makes a charge of infringement sufficient to invoke declaratory 
judgment jurisdiction, that then there can be no liability for 
willful infringement. I somewhat believe this is a second best 
solution, with the optimal solution being getting rid of any 
enhanced damages in the patent law.
    I encourage the Subcommittee to continue thinking 
creatively about solutions to the patent quality problem. I 
believe that the extent of current patent quality problems as 
well as the increasingly difficult circumstances that the U.S. 
PTO finds itself today merit the establishment of an Office of 
Patent Quality Review. This office could develop measures of 
patent quality, both in terms of the process, the examination 
process, and the product, issue patents. I believe that such an 
office should not exist within the U.S. PTO, or even within the 
Department of Commerce but rather the Federal Trade Commission, 
an agency with experience and expertise in competition law and 
consumer affairs.
    Thank you.
    [The prepared statement of Mr. Thomas follows:]
                  Prepared Statement of John R. Thomas
    I am honored to have this opportunity to appear before the 
Subcommittee. I testify today on my own behalf as a concerned observer 
of the patent system.
    The Subcommittee has appropriately identified patent quality as a 
crucial issue of contemporary patent administration. Government, 
industry, academia and the patent bar alike have long insisted that the 
USPTO approve only those patent applications that describe and claim a 
patentable advance. Quality patents are, in short, valid patents. Such 
patents may be reliably enforced in court, consistently expected to 
surmount validity challenges, and dependably employed as a technology 
transfer tool. Quality patents fortify private rights by making their 
proprietary uses, and therefore their value, more predictable. They 
also clarify the extent to which others may approach the protected 
invention without infringing. These traits in turn strengthen the 
incentives of private actors to engage in value-maximizing activities 
such as innovation or commercial transactions.
    In contrast, poor patent quality is said to hold deleterious 
consequences. Large numbers of improvidently granted patents may create 
in terrorem effects on entrepreneurship, ranging from holdup licensing 
to patent thickets. They also create duplicative, deal-killing 
transaction costs, as potential contracting parties must revisit the 
work of the USPTO in order to assess the validity of issued patents. 
Poor patent quality may also encourage activity that is not socially 
productive. Attracted by large damages awards and a porous USPTO, rent-
seeking entrepreneurs may be attracted to form speculative patent 
acquisition and enforcement ventures. Industry participants may also be 
forced to expend considerable sums on patent acquisition and 
enforcement. The net results appear to be reduced rates of innovation, 
decreased patent-based transactions, and higher prices for goods and 
services.
    Unfortunately, despite extraordinary efforts by the USPTO to 
improve patent quality, the problem remains. Persistent accounts 
suggest that patent quality remains at less than optimal levels. Many 
of the causes of this state of affairs are beyond the control of the 
USPTO. Strict Federal Circuit standards for rejecting applications, 
soaring application rates, lean fiscal policies and an increasingly 
ambitious range of patentable subject matter are among the difficulties 
faced by the USPTO in achieving a rigorous level of review. Legislative 
reforms may to a long way towards increasing the stringency of USPTO 
review, to the ultimate benefit of industry and consumer alike.
    In my view, the two most profitable mechanisms for improving patent 
quality involve: (1) a modest expansion of the responsibilities of 
patent applicants; and (2) increased engagement of members of the 
public. First, as the grant of a patent provides innovators with a 
powerful commercial tool, many of us believe that applicants should 
bear commensurate responsibilities. Second, the USPTO should be better 
able to employ ``private patent examiners'' to assist in examination 
tasks. Because the reforms considered today work towards these goals, I 
favor their serious consideration.
    Promotion of Third Party Submissions and Inter Partes 
Reexamination. I believe that increased receptivity to third party 
submissions will allow the USPTO to take advantage of the knowledge of 
interested members of the public, and therefore support this proposal 
wholeheartedly. As well, there is widespread agreement that inter 
partes reexamination has not successfully shifted patent challenges 
from the courts to the USPTO. As originally enacted, its appeal 
provisions were too limited, its substantive scope too narrow, and its 
estoppel provisions excessive. Previous legislation has solved the 
problem of its appeal provisions; I agree that it is time both to 
include Sec. 112 as a basis for provoking an inter partes 
reexamination, as well as to limit the potential estoppel effects of 
invoking this proceeding. I would also encourage the Subcommittee to 
consider expanding the substantive basis for ex parte reexamination to 
mirror that of inter partes reexamination.
    Mandatory Prior Art Searches. A compelled applicant prior art 
search is not only a desirable reform in an era of diminishing USPTO 
resources, but one that comports with existing patent policies. The 
patent system aspires to send technologists to ``libraries, not 
laboratories:'' firms are encouraged to consult the prior art and 
patent literature before completing expensive R&D in order to see 
whether a desired technology already exists. A mandatory prior art 
search fully comports with this goal. Patent applicants already include 
such statements when submitting foreign language references for which a 
complete translation is unavailable,\1\ so this proposal is not so much 
a sweeping reform but an expansion of existing duties. Statements of 
relevance must also discourage the current, counterproductive strategy 
of some patent applicants, in which they submit hundreds of references 
and leave the USPTO examiner to sort them out.
---------------------------------------------------------------------------
    \1\ 37 C.F.R. Sec. 1.98(a)(3)(iii).
---------------------------------------------------------------------------
    Preliminary Injunctions. I encourage clarification of this 
proposal. The four traditional preliminary injunction standards are:

        (1)  whether the plaintiff will probably succeed on the merits;

        (2)  whether irreparable harm to the plaintiff would result if 
        the injunction is not granted;

        (3)  the balance of harms between the plaintiff and defendant 
        if the injunction is allowed; and

        (4)  whether the injunction will have an impact on the public 
        interest.

The current proposal would compel consideration of five additional 
factors, which currently are probably subsumed within the second, 
``irreparable harm'' factor, and the fourth, ``public interest'' 
factors. It is not entirely clear whether this legislation would create 
a nine-factor test or simply flesh out the second and fourth factors. 
Although lists of factors in the law tend not to specify the exact 
relationship between the different factors--they are more a list of 
ingredients than a recipe--the fact that these factors are stated 
separately suggests that they are of equal dignity and worthy of equal 
consideration.
    Declaratory Relief and Offers to License. The current proposal 
states that any communication by a patent owner sufficient to create 
liability for willful infringement would also create declaratory 
judgment jurisdiction. The apparent policy goal of this proposal is 
quite sound: patent proprietors should not be able to cause concern 
over enhanced damages without allowing the patent to be immediately 
challenged in court. However, declaratory judgment jurisdiction rests 
upon the constitutional requirement of an actual case or controversy, a 
standard that Congress cannot readily legislate around. I would 
encourage the Subcommittee to achieve the same policy goal by pursuing 
the opposite tack: unless the patentee makes a charge of infringement 
sufficient to invoke declaratory judgment jurisdiction, then there can 
be no liability for willful infringement.
    Additional Reforms. I encourage the Subcommittee to continue 
thinking creatively about solutions to our patent quality problem. I 
believe that the extent of current patent quality problems, as well as 
the increasingly difficult circumstances the USPTO appears likely to 
find itself in the future, merit the establishment of an Office of 
Patent Quality Review. This office could develop measures of patent 
quality, both in terms of the examination process and issued patents. I 
believe that such an office should not exist within the USPTO or the 
Department of Commerce, but rather the Federal Trade Commission, an 
agency with experience and expertise in competition law and consumer 
affairs.
    Thank you for the opportunity to testify today.

    Mr. Smith. Thank you, Professor Thomas. Thank you all for 
your comments today, as well as for your compliment of the 
Committee's work.
    Let me address my first question to you all and ask you to 
really set priorities for us, because we are trying to decide 
which of these items to translate into legislation and we need 
some help with setting those kinds of priorities.
    So what is the single most important action that the 
Subcommittee could take to improve patent quality, or maybe it 
is avoiding some action. But I am hoping it is affirmative and 
you all have recommendations as to which of these ideas that we 
have discussed today would be the most important to you.
    And Mr. Van Horn, I would like to start with you.
    Mr. Van Horn. Thank you, Mr. Chairman. Well, I think the 
Subcommittee has taken the first and essential step toward 
solving this problem; that is, by enacting or hopefully 
enacting legislation that would prohibit fee diversion. This 
has many important ramifications for the PTO, primarily in 
their ability to hire, train, and effectively supervise patent 
examiners in their examination task.
    To the extent they have to take shortcuts because of a lack 
of budget in these critical areas is ultimately going to lead 
to a decrease in the patent quality and the effectiveness of 
the job done by the patent examiner.
    I think, secondly, that particular lack of resources also 
has an impact on the tools available for patent examination, 
and I refer primarily to the ability to automate the system and 
provide some relief to the significant administrative burdens 
that the office now has and applicants now have of chasing 
around missing papers and missing files. This is a significant 
detraction from the essential tasks of patent examination.
    Mr. Smith. Thank you. By the way, we all on the Committee 
feel strongly about the issue of fee diversion. We have yet to 
convince some of our friends on the Appropriations Committee 
that that is the right way to go, but we are working on it.
    Mr. Kesslen.
    Mr. Kesslen. As I said before, I am here today on behalf of 
the Financial Services Roundtable, and I think if you polled 
the CEOs of the various financial service companies, they would 
like the fifth and sixth approach in your proposed bill, 
dealing with injunctive relief and frivolous claims.
    The threat, the gun that is put to our head to settle or 
else, the threat that the wheels of commerce can come to a 
halt. There is a current litigation within our firm today that 
if we ultimately lose could really hurt the economy, and this 
is a company that doesn't make or sell anything competitive. It 
merely has a paper patent. So to be able to look at the 
irreparable harm, not only at the preliminary injunction state, 
but really at the permanent injunction state, which is really 
where we are focused at, and looking at some of the claims that 
came in--just yesterday and last Thursday, two more of those 
37-cent type letters came into our organization, which starts 
the churning of our money for a claim that may or may not have 
any merit. So that is our focus.
    Mr. Smith. Mr. Kesslen, you anticipated my second question, 
which I will get to in a minute. But thank you. Mr. Simon.
    Mr. Simon. Thank you, Mr. Chairman. Obviously for us the 
most important issue is reforming the law and injunction. And 
after that, I would say the willful infringement issue followed 
by strengthening reexamination. We believe those are the three 
areas that there should be focus.
    We strongly by the way, disagree that requiring applicants 
to do a search will yield anything. People are just going to 
submit the results of their search. There will be stacks of 
paper this high coming into the Patent Office, because nobody 
under rule 56 is going to take the chance of having withheld 
the wrong document.
    Mr. Smith. Thank you. Professor Thomas.
    Mr. Thomas. I believe that ultimately the best hope is 
going to be to recruit members of the public to act as private 
patent examiners, assisting the office in the examination 
duties. Competitors often have the knowledge that they can 
bring to bear to either invalidate a patent or narrow its 
claims, and they often have the incentives. One concern this 
Committee may have is those incentives. The trouble with 
challenging a patent is that it has a lot of spillover effects. 
If one of us in this room owns a patent and we are all acting 
in the same industry, which one of us is going to be incented 
to challenge that patent? If I challenge the patent to defeat 
your patent, everyone else gets the benefit.
    So incenting, or providing some sort of a reward for patent 
challenges behind the benefit to the entire industry may be a 
productive approach.
    Mr. Smith. Thank you, Professor Thomas. We have asked you 
all to address six ideas. The fifth and sixth ideas both 
directly or indirectly involve the shakedown sites, Mr. 
Kesslen, that you referred to, and what we have done is we have 
actually broken down how all stand individually on all six 
ideas. On the fifth idea, preliminary injunctions and patent 
challenges, Mr. Van Horn, you oppose that. Professor Thomas 
wanted clarification.
    On the sixth, declaratory relief and offers to license, 
that was opposed by Mr. Van Horn and Professor Thomas as well, 
I think. What I really wanted to ask you all who oppose these 
two ideas is, if you oppose them, what other actions would you 
recommend to discourage the use or the threat of the shakedown 
suits?
    And, Mr. Van--my time is up. If you can give me a brief 
answer. Mr. Van Horn.
    Mr. Van Horn. Well, at least in my experience, which is 
very small in terms of patent litigation, it is--one person's 
frivolous suit is another person's constitutional right to 
protection of his or her property.
    We have not yet developed an alternative solution if this 
is a problem. But we do think that the proposals relative to a 
preliminary injunction could have a very damaging effect on 
small businesses, and independent inventors. It would set an 
unfortunate precedent for the global protection of intellectual 
property, and we believe at least raises an issue about 
compliance with our obligations under international agreements 
such as GATT-TRIPS.
    Mr. Smith. Thank you. Professor Thomas, what would you 
recommend to reduce shakedown suits or frivolous lawsuits?
    Mr. Thomas. The requirement for a preliminary injunction, 
prior to the creation of the Federal Circuit, was generally 
that the patent had to be previously enforced and held not 
invalid by a prior tribunal. So returning to that state of 
affairs is at least some possibility. Another is to require 
some sort of Patent Office review to make sure that the patent 
is valid before it is enforced.
    I believe that those are possible mechanisms to achieve 
that goal.
    Mr. Smith. Thank you, Professor Thomas. The gentleman from 
California, Mr. Berman, is recognized for his questions.
    Mr. Berman. Thank you, Mr. Chairman, and we thank all of 
the panelists for sharing their thoughts about this.
    Professor Thomas I have had the benefit of meeting with, 
and my staff meeting with to hear a number of his very 
interesting views on how to make this system better.
    In this particular round, rather--I would like to just ask 
a broader question. Many of the patent quality issues came up 
in the context of this recent trend toward patenting business 
methods. And while these, of different alternatives here, don't 
distinguish between business methods and other patents, I am 
curious about how all of you react to this trend. There was a 
New Yorker magazine piece recently that talks about the sort of 
the birth of modern newspapers, a publisher named Benjamin Day.
    He decided instead of trying to get the subscribers and the 
purchasers of the newspapers to pay the costs, they would sell 
advertising and reduce the price of the paper from 5 cents to 1 
cent in 1833. He didn't patent that idea. He also decided to 
change the method of distribution, and he sold them to newsboys 
in lots of hundreds to hawk on the street.
    Pretty soon, this newspaper, the New York Sun, was just 
sweeping the field with the--none of these new methods of 
publishing and selling newspapers were patented. Other papers 
mimicked them. Pretty soon there was competition. This paper 
got the advantages of being the originator of the idea and did 
very well for a very long time, then other papers imitated and 
they had more competition, and that was sort of how American 
business worked in new methods. No one patented the moving 
assembly line or the mail order catalog or the decentralized 
corporation or the frequent flier mile.
    But a recent court decision, and all of a sudden everything 
is changed. Now people are running around and getting patents 
on all kinds of business methods and ways of doing business. 
And the last paragraph of the article: Americans have 
traditionally been cheery about intellectual property rights, 
and quotes Thomas Jefferson on the balance here. We have 
managed to strike a balance between the need to encourage 
innovation and the need to foster competition, as Benjamin Day, 
that publisher I mentioned, and Henry Ford, Sam Walton might 
attest, American corporations have thrived on innovative ideas 
and new business methods without owning them for two centuries.
    Now this balance has been upset. The scope of patents have 
been extended. Copyrights have been extended. Trademarks have 
been subjected to bizarre interpretations. Celebrities are even 
claiming exclusive ownership of their first names, Spike Lee 
and Viacom's cable channel.
    I am curious about the panelists' reactions to all of this, 
and are we going too far in allowing people to claim ownership 
of new ways of doing business, as opposed to the kinds of 
inventions that historically have been subject to patents?
    I am curious if any of you have any reactions to that.
    Mr. Kesslen. Yes, I do, concerning the State Street case 
which came out of the financial services industry. Obviously we 
have been very focused on this issue.
    I think as an organization we thought long and hard about 
business method patents, and our fundamental challenge with it, 
as much as we would like to get rid of them, because it would 
get rid of a class of patents that would impact us as an 
industry, I am not sure from a practical perspective it is 
really possible.
    I think the problems that business method patents are 
facing are no different than the Patent Office faced when some 
of the genetic engineering happened, and then you went to 
software. I think they are getting up to speed in getting the 
kind of prior art they need. They are not there yet. They don't 
have to staff to deal with it, which I think is their biggest 
challenge. But I think when you will look at the types of 
claims that are hitting our organization, a smart patent 
attorney can couch any one of these methods of doing business 
as software. There is always a piece of hardware or a piece of 
software connected. So from a definitional perspective, I think 
it is going to be quite a challenge, and that is why I would 
prefer to focus more on the quality issues and some of the 
other things we have talked about today.
    And I think on top of that, I believe that--I forget which 
situation of TRIPPS, but I think you would violate the TRIPPS 
with regard to treating different technologies or different 
patents differently. So I think that is another problem.
    Mr. Berman. Any other thoughts here?
    Mr. Simon. Yes, Congressman Berman. If you look at how the 
courts struggled with the definition of what in computers and 
software should or should not be patentable and eventually 
basically said it should be treated like anything else, you run 
into a real definitional problem. It is real hard to define 
things in a manner that an attorney won't be able to get around 
and make it patentable anyway.
    I think the real focus has to be on what can we do to 
improve the quality of those patents as opposed to trying to 
somehow legislatively by some definition change it. The courts 
struggled with this issue for about 15 or 20 years, were never 
able to solve it. I have written numerous academic articles 
where people are trying to come up with proposals on solving 
it, and every single one of them I think we can get around.
    Mr. Berman. So both of you essentially are saying don't try 
to make that distinction in the law, instead deal with some of 
these discrete issues involving quality and process and make 
the system better?
    Mr. Kesslen. That is correct.
    Mr. Smith. Thank you, Mr. Berman. The gentleman from 
Florida, Mr. Keller, is recognized for his questions.
    Mr. Keller. Thank you, Mr. Chairman. Let me begin with Mr. 
Simon and Mr. Kesslen. The gist of what I have learned from 
listening to you guys is you are concerned about frivolous 
patent infringement claims against your employer, and I have 
tried a lot of cases over the years before I came here, but not 
complex intellectual property law cases, so I am hoping you can 
walk me through this. Give me an example, Mr. Simon, if you 
were explaining this say to a sixth grade class. What would be 
a classic example of a frivolous claim that would force you to 
incur a lot of defenses in defending it?
    Mr. Simon. I will give you a real one--Techsearch case. In 
that case, somebody had gone into court, bought a patent in 
bankruptcy for $50,000, turned around and sued us. It had a few 
words that were somewhat similar to the words that we used to 
describe our processors. They therefore claimed, as you will 
find in any industry, people tend to use the same words. But 
they then claimed therefore that all of our processors 
infringed.
    I had looked at this. We had an opportunity to actually 
take a license to this patent earlier on. We took it, looked at 
it, said, well, if you hold the patent upside down, read it 
backwards maybe you can make an argument, that is about it. But 
we will win on summary judgment.
    Mr. Keller. Right.
    Mr. Simon. It turned out I was right. We did win on summary 
judgment. It cost me $3 million to win on summary judgment. I 
could have gotten the license for several hundred thousand.
    Mr. Keller. Three million. That is not even the trial or 
anything, just summary judgment, just the discovery?
    Mr. Simon. Yes. To give you an idea, our typical patent 
case, we are spending between 10- and $15 million in the years 
before trial. Trial, it goes up from there.
    Mr. Keller. The guys who try these cases for you and do the 
discovery, are those people that specialize in patent law who 
pass that special bar, or these are just regular litigators you 
are paying?
    Mr. Simon. These are regular litigators who have a proven 
track record in high technology cases. It is very unique.
    Mr. Keller. Kind of a subspecialty. What would a typical 
partner in a law firm specializing in this go for? Is that a 
$400 kind of a lawyer?
    Mr. Simon. I wish. $400 is getting to be associate rates. 
In large firms we are talking 6-, 7-, $800, sometimes even a 
thousand dollars an hour.
    Mr. Keller. In what city?
    Mr. Simon. Santa Clara, California.
    Mr. Keller. Those are California rates.
    Mr. Simon. No. We use lawyers all around the country. 
Texas, New York, Chicago, West Coast, wherever we can find 
somebody who is going to be good at litigating a technology 
case.
    Mr. Keller. Let's say you have a case like the one you just 
mentioned, and you pay all of this money, you thought it was 
frivolous, and sure enough the judge ultimately ruled there are 
no factual issues here, it is crystal clear here you guys are 
going to win. Do you ever have any success with rule 11, or do 
you find that the judges are reluctant to grant those type of 
sanctions?
    Mr. Simon. You have to have a particularly egregious case 
under rule 11 where it was--where it would be apparent to the 
judge just looking at the patent. Since very few of our judges 
have technical qualifications, that is very rare.
    Mr. Keller. I found that too. I haven't done those kind of 
cases, but I have seen cases in the employment area where 
someone, you know, sued for racial discrimination and yet we 
hired someone of the same race, or they sued for age 
discrimination, and we hired someone who was older, and even 
then you don't get rule 11 sanctions.
    So, Mr. Kesslen, what is your analysis of these same 
issues? Is rule 11 tough? Do you see a lot of frivolous suits?
    Mr. Kesslen. Well, the answer is yes and yes. I think--rule 
11, no. I think one of the issues with patent litigation is it 
is notice pleading. It is basically we have a patent, you have 
a product, therefore you infringe, the case starts. And so you 
really don't have that many opportunities.
    With frivolous claims, yes, we see them, and I think the 
fundamental reason is pre-State Street financial firms 
historically relied on trade secrets and copyrights to protect 
their innovations. So what happened was, when people starting 
filing patents during the Internet boom, let's say on-line 
banking, okay, they don't know what banks had been doing for 
decades. So they filed a patent application in the Patent 
Office. The Patent Office wasn't aware what the industry had 
been doing for a number of years. The patent comes out of the 
Patent Office issued, on line banking product. I am using 
hypotheticals here, comes back and sues us. What we now have to 
do is establish that we need to go back 10 years in time to 
demonstrate to the court that what this patent covers we have 
been doing for generations. And so it is--that is why these 
types of cases are so expensive.
    Mr. Keller. Let me stop you there. If we were focused on 
this sole issue of preventing frivolous suits in this arena, do 
you have any further suggestions of some additional step we 
should take beyond this draft legislation?
    Mr. Simon.
    Mr. Simon. Yes. I think one thing would be to consider 
taking the rules from the Northern District of California on 
patent litigation which require that the claims be interpreted 
first, and maybe even considering have a special judicial panel 
to do that, given the high reversal rate of the district 
courts. Most patent infringement cases really hinge on getting 
the claim interpretation right, and that should be done early 
rather than late, as many judges tend to do, in my review. And 
it should be done by people who really understand how to do it. 
Lots of judges get it wrong, unfortunately.
    Mr. Keller. Mr. Chairman, can I just have a second and have 
Mr. Kesslen answer that same question?
    Mr. Smith. Without objection, the gentleman is recognized 
for an additional minute.
    Mr. Keller. Mr. Kesslen, would you answer that? Do you have 
any suggestions of something we could do further to prevent 
frivolous claims?
    Mr. Kesslen. In my written testimony, in addition to 
dealing with the permanent junction issue, the treble damages 
issue, I think the declaratory issue, I think what we need is 
the attorneys very often who are representing these plaintiffs 
are contingency fee attorneys, and they are very aggressive and 
they play games. So the more that we can do to make them 
realize that we can bring an action against them because the 
mere letter doesn't do it, that we could bring a DJ action that 
the industry could go after them is helpful. I think limiting 
treble damages, cutting off actual damages under--for certain 
paper patents would be helpful. To make sure that the inventor 
can be rewarded, but the pot of gold isn't quite as big as they 
think it is going in, will be helpful.
    Mr. Keller. Thank you.
    Mr. Chairman, I yield back.
    Mr. Smith. Thank you, Mr. Keller.
    And the gentleman from California, Mr. Berman.
    Mr. Berman. Yes. Mr. Van Horn, by and large, the 
association you speak for here, like the inter partes 
reexamination process, do you think it's useful?
    Mr. Van Horn. Well, as you know, this is a fairly recent 
player in this particular field. It was introduced only for 
patents that were issued on applications filed after November 
1999. So we are in the very early stages of the implementation 
of this practice. It clearly gives a third party some 
advantages that they do not have in ex parte reexamination. And 
I don't think we have given the system a fair opportunity, 
particularly since the law was amended in November 2002, to 
provide an opportunity for third parties, for example, to 
appeal a favorable decision to the Federal circuit. So I don't 
think the law has had an adequate opportunity to actually be 
implemented at this point in time.
    Mr. Berman. So are you saying you are not ready yet to make 
any suggested alternatives to the one that is proposed here for 
encouraging the use of this procedure?
    Mr. Van Horn. I think we do support the addition of the 
section 112, first paragraph, except for best mode and second 
paragraph issues to reexamination.
    Mr. Berman. Expanding the scope of what can be looked at in 
the reexamination?
    Mr. Van Horn. Correct. We do not support the removal of 
this estoppel provision, primarily because there is a balance 
that must be weighed between the rights of the patent owner and 
the rights of third parties and the public. And the concern in 
putting in that particular provision was that particularly 
well-to-do third parties would use this as a basis to harass 
patent owners by invoking reexamination and sometimes tying up 
this procedure in the Patent and Trademark Office for many, 
many years.
    I was personally involved on behalf of a patent owner who 
had filed suit in a district court, I believe in Texas, in 1995 
on 4 patents. In 2003 the reexamination certificates in 13 
separate reexaminations on these 4 patents were finally 
concluded. And so it certainly can be used to delay a final 
decision by the PTO in these matters.
    Mr. Berman. The flip side of that, however, of course is, 
with the estoppel provisions, you are going to have lots of 
challengers not using reexamination and going to the far more 
costly litigation route. And does that bother you?
    Mr. Van Horn. I think if they have that option, certainly 
small businesses, simply complex litigation or even a simple 
litigation is simply out of the question financially. So they 
need some type of system where they have the opportunity to 
present this issue to someone to make a decision on this 
reexamination. So it is a balancing between the rights of these 
two interests, no question.
    Mr. Berman. On the prior art search, concerns have been 
raised about the extent to which, if you put that obligation on 
the applicant, will that become the basis of litigation later 
on? They didn't do it adequately. So I guess, the notion of 
throw in everything to try and minimize that. Do you think 
there are some ways we could define the parameters and scope of 
the search so that an applicant could feel confident that he 
could engage at a reasonable expense in a search that would be 
thorough enough to not make him vulnerable to litigation for 
his efforts?
    Mr. Van Horn. Personally, I think it would be very 
difficult to define that particular scope. And I believe, 
personally, that it would create many more problems than the 
possible benefits from such a requirement.
    Mr. Berman. Do you have any thoughts on this, Professor 
Thomas?
    Mr. Thomas. Well, with respect to my colleague at the bar, 
I believe some of these concerns are overstated.
    Mr. Berman. Because--and I guess you cited the foreign 
model.
    Mr. Thomas. Yes, that is correct. Well, that had to do with 
oppositions. But in general, I think it is fair to require 
patent applicants to perform due diligence. You recall that 
when an applicant files an application with the PTO, she is 
presumptively entitled to receive the grant. The PTO has to 
affirmatively reject the application for her not to. Once the 
patent is granted, that patent is presumed valid not by 
preponderance of the evidence, which is the PTO standard, but 
by the higher civil standard of clear and convincing. The 
system somewhat favors the patent applicant and eventually the 
patentee.
    I think again it is fair, given the powerful commercial 
tool that a patentee is awarded, that she should have to do due 
diligence to be entitled to that grant. It may prevent some 
applications from being filed because art will be discovered 
that would cause the claim to be narrowed or discourage that 
filing at all. And I believe it would help the examiner.
    Mr. Berman. Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Berman.
    If there are no further questions, let me thank the 
witnesses for their contributions today. It has all been very 
helpful. And we probably will take some of these ideas to 
legislation, and look forward to your support and input in the 
future as well. Thank you all. And the Subcommittee stands 
adjourned.
    [Whereupon, at 11:02 a.m., the Subcommittee was adjourned.]

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