[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





      PATENT QUALITY ENHANCEMENT IN THE INFORMATION-BASED ECONOMY

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 5, 2006

                               __________

                           Serial No. 109-99

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov

                                 _____

                     U.S. GOVERNMENT PRINTING OFFICE
                             WASHINGTON: 2006        

26-914 PDF

For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001





                       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
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

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

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois              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
BOB INGLIS, South Carolina           MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
DARRELL ISSA, California             ANTHONY D. WEINER, New York
CHRIS CANNON, Utah                   ADAM B. SCHIFF, California
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
J. RANDY FORBES, Virginia

                     Blaine Merritt, Chief Counsel

                         David Whitney, Counsel

                          Joe Keeley, Counsel

                          Ryan Visco, Counsel

                    Shanna Winters, Minority Counsel




                            C O N T E N T S

                              ----------                              

                             APRIL 5, 2006

                           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
The Honorable Zoe Lofgren, a Representative in Congress from the 
  State of California, and Member, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     3

                               WITNESSES

The Honorable Jon W. Dudas, Under Secretary of Commerce for 
  Intellectual Property and Director of the U.S. Patent and 
  Trademark Office
  Oral Testimony.................................................     4
  Prepared Statement.............................................     7
Mr. James Balsillie, Chairman and Co-Chief Executive Officer, 
  Research in Motion
  Oral Testimony.................................................    14
  Prepared Statement.............................................    16
Mr. Robert A. Stewart, Director and Chief Patent Counsel of 
  Americas, UBS AG
  Oral Testimony.................................................    22
  Prepared Statement.............................................    25
Mr. Mark A. Lemley, William H. Neukom Professor of Law, Stanford 
  Law School
  Oral Testimony.................................................    35
  Prepared Statement.............................................    36

               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard L. Berman, a 
  Representative in Congress from the State of California, and 
  Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................    67
Prepared Statement of The Institute of Electrical and Electronics 
  Engineers-United States of America (IEEE-USA)..................    67

 
      PATENT QUALITY ENHANCEMENT IN THE INFORMATION-BASED ECONOMY

                              ----------                              


                        WEDNESDAY, APRIL 5, 2006

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 4:55 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith (Chairman of the Subcommittee) presiding.
    Mr. Smith. Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order. Thank you all for 
your patience and for waiting. We obviously had a series of 
votes that we were not exactly expecting at 4 o'clock this 
afternoon. Plus there was a privileged resolution we weren't 
necessarily expecting to take up another half hour. I was told 
this was an angry crowdawaiting us, and I am glad you calmed 
down a little bit and we will proceed as quickly as we can, but 
having started late, I also need to say as well that we are 
expecting another series of votes in 1 hour, so we will 
probably enforce the 5-minute rule fairly strictly, and try to 
move along with the testimony with the questions as quickly as 
we can.
    I will recognize myself for an opening statement. Today, 
the Subcommittee returns to the gift that keeps on giving, 
patent reform and the 109th Congress. We have devoted much time 
and energy to this project. And I expect progress to continue.
    In light of our ambitiousness and the competing interest 
involved, perhaps it is not surprising that we haven't 
eliminated all differences by now. I have announced a new round 
of hearings for this spring with the intent of further 
illuminating a need for reform and to nudge the process along. 
That said, today's hearing addresses patent quality 
enhancement.
    While the Subcommittee has documented a steady increase in 
application pendency and backlogs at the PTO in recent years, 
the view among agency officials in the inventor community is 
that efforts to address these problems should not take 
precedent over improvement of patent quality. Patents of 
questionable scope or validity waste valuable resources by 
inviting third-party challenges and ultimately discourage 
private sector investment.
    At the front end of the system, we can do much to enhance 
the quality of patents issued by ensuring that PTO is allowed 
to keep all of the revenue it raises. While money isn't the 
answer to all of life's problems, American inventors and the 
public are best served by a fully-funded agency that can devote 
sufficient sources to hiring outstanding examiners, retaining 
experienced workers and modernizing PTO operations.
    In addition, every patent reform draft reviewed by the 
Committee this term has included a provision to allow third 
party submission of prior art.
    This will help examiners to determine whether the 
inventions under review truly are new and nonobvious.
    But no matter how diligent and thorough PTO examiners are, 
there will also be some patents issued that prompt questions 
about scope and validity. This is why the Subcommittee is also 
committed to improving patent quality at the back end of the 
system. This includes enacting improvements to the 
underutilized PTO re-examination proceeding.
    Significantly, the Subcommittee also is committed to the 
creation of a post grant opposition system that will enable 
parties to resolve patent disputes in an administrative 
setting. In other words, concerns about patent quality can be 
addressed more quickly and less expensively in such forum 
compared to litigation in Federal Court.
    The final comment on how we should examine quality, it is 
self-evident that all persons and entities affected by the 
operations of the U.S. System endorsed patent quality 
enhancement in the abstract, however, actual patent practice 
frequently involves the competing and conflicting interests of 
different businesses and individuals.
    For example, a software developer might endorse a specific 
change to the current statutory treatment of injunctive relief 
where damages computations set forth in title 35. The same 
revisions would be opposed by a number of patent interests, 
especially those in the biotechnology and the pharmaceutical 
industries.
    Different entities use the patent system in different ways, 
depending on their respective business models. It is important 
to acknowledge that dynamic when reviewing changes intended to 
enhance patent quality. That concludes my remarks, and the 
gentleman from California, Mr. Berman, is recognized for his.
    Mr. Berman. Thank you, Mr. Chairman, I apologize for being 
late.
    I believe this may be the 6th hearing on patent reform in 
this Congress. I want to start out by sincerely thanking the 
Chairman for his hard work in highlighting the need for patent 
reform in this Congress.
    He brought together a large coalition of bipartisan Members 
to support a patent reform bill and managed to almost achieve 
consensus among the different party interests.
    However, I must state that I wonder about the benefits of 
pursuing further hearings on the identical issues we discussed 
last year, if there are few new ideas being proposed and no 
further clarity about which legislative approaches this 
Subcommittee should follow regarding patent reform.
    I am concerned that merely discussing the issue without any 
movement on a legislative proposal will further entrench the 
parties in their respective positions. The recent cases which 
have been settled, NTP, BlackBerry, or have been granted cert 
by the Supreme Court, eBay versus Merck exchange, demonstrate 
that the time to address these issues is sooner rather than 
later.
    Past attempts at achieving more comprehensive patent reform 
have been met with resistance. However, the call for 
legislative action is loud.
    The New York Times has noted ``something has gone very 
wrong with the United States patent system.'' the Financial 
Times has stated, ``it is time to restore the balance of power 
in U.S. Patent law.'' therefore, today Congressman Boucher and 
I have introduced a narrowly tailored patent quality bill to 
address some of the more urgent concerns.
    Once again, I firmly believe that robust patent protection 
promotes innovation. However, I also believe that the patent 
system is strongest and that incentives for innovation are 
greatest when patents protect only those patents that are truly 
inventive. When functioning properly, the patent system should 
encourage and enable inventors to push the boundaries of 
knowledge and possibility. If the patent system allows 
questionable patents to issue and doesn't provide adequate 
safeguards against patent abuses, the system may stifle 
innovation and interfere with competitive market forces.
    High patent quality is essential to continued innovation. 
Litigation abuses, especially those which thrive on low quality 
patents, impede the promotion of the progress of science and 
the useful arts. Thus we must act quickly--I hope the 109th 
Congress--to maintain the integrity of the patent system.
    Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Berman. I am hoping other Members 
will allow their opening statements will be made a part of the 
record, but if not, the gentlewoman from California, Ms. 
Lofgren is recognized.
    Ms. Lofgren. I will be very brief. First, I want to thank 
each of the witnesses for their really very excellent 
testimony, which I have had a chance to read. You know, only a 
few of us who follow these patent issues as closely as the 
Members here do. I, however, participate in the debate on the 
floor that is going on at the same time. So I have to apologize 
in advance for leaving and I wanted to especially let the 
witnesses know that I have read their testimony. I hope to be 
back for questions and I thank the gentleman for having this 
hearing.
    Mr. Smith. Thank you, Ms. Lofgren. Before I introduce our 
witnesses, would you please stand and be sworn in. Please raise 
your right hand.
    [Witnesses sworn.]
    Mr. Smith. Thank you and please be seated. And we are 
operating with a makeshift mike up here, which seems to have 
some back noise here.
    Let me introduce our witnesses and we will proceed. Our 
first witness is Jon Dudas, Under Secretary of Commerce for 
Intellectual Property and Director of the U.S. Patent and 
Trademark Office. In his previous life, Director Dudas worked 
for this Subcommittee. So we welcome him back.
    He earned a bachelor's degree in finance summa cum laude 
from Illinois and a law degree with honors from University of 
Chicago.
    Our next witness is Jim Balsillie, chairman and CEO of 
Research In Motion, or RIM, the manufacturer of the BlackBerry, 
which I have in my pocket. He is a graduate of the University 
of Toronto, and the Harvard School of Business. A chartered 
accountant, he also holds a doctorate from Wilfrid Laurier 
University in Waterloo, Ontario.
    Our next witness is Robert Stewart, director and chief 
patent counsel of UBS AG in the Americas. Headquartered in 
Switzerland, UBS AG is the world's largest wealth management 
firm for private clients. Mr. Stewart's responsibilities 
include intellectual property litigation, prosecution, 
licensing mergers and acquisition and contractual matters for 
UBS AG. He studied electrical engineering at Polytechnic 
University located in Brooklyn, and earned his law degree from 
Georgetown University.
    Our final witness is Mark Lemley, the William H. Neukom 
Professor of Law and director of the Program in Law, Science 
and Technology at Stanford law School. In addition to his 
teaching and writing, Professor Lemley is of counsel to the San 
Francisco law firm of Keker and Van Nest. He earned his 
undergraduate degree with distinction from Stanford University 
and his law degree from University of California Berkeley.
    Mr. Smith. Welcome to you all. We have your statements and 
without objection, they will be made a part of the record. As I 
mentioned we would like to try to stay in the 5-minute rule so 
we can try to finish with our questions before the next series 
of votes commences, and with that, Mr. Dudas, we will begin 
with you.

  TESTIMONY OF THE HONORABLE JON W. DUDAS, UNDER SECRETARY OF 
  COMMERCE FOR INTELLECTUAL PROPERTY AND DIRECTOR OF THE U.S. 
                  PATENT AND TRADEMARK OFFICE

    Mr. Dudas. Thank you. Mr. Chairman, Ranking Member Berman 
and Members of the Subcommittee, thanks for holding this 
important hearing on patent quality.
    Every private property system requires certainty of 
property rights and a fair method to adjudicate disputes. The 
quality of patents is a fundamental element of establishing 
certainty. The intellectual property system in the United 
States is the envy of the world, and it is a shared 
responsibility of the courts, the Congress, and the 
Administration to ensure that the best system in the world gets 
even better. With the activities in the Supreme Court and in 
this Committee, it is clear this is a responsibility taken 
quite seriously.
    It is also a responsibility that the Administration takes 
quite seriously, and we at the USPTO are proud of the progress 
we have made. I have testified in the past that we would be 
improving the way we hire, the way we train, the way we 
promote, the way we reconfirm skill levels, the way we 
emphasize quality throughout the examination process, and the 
way we conduct our quality reviews.
    We have, and I am happy to report that we have shown 
measurable improvement in every quality goal I just mentioned. 
That information is more specifically laid out in my written 
testimony. But even with improved patent quality, what can you 
do if you believe the USPTO has made a mistake? Congress, in 
anticipating such concern, gave broad rights to all applicants 
and literally everyone who is concerned about another's patent. 
And these systems for challenging patents have improved as 
well.
    On any patent the USPTO issues, any person has a right to 
request a reexamination of a patent that the USPTO has issued. 
It can be requested at any time. And it can be requested on any 
patent.
    We have greatly improved this process by establishing a 
central reexamination unit. And in doing so, we have 
dramatically increased the thoroughness, consistency, the 
quality and the timeliness of reexaminations. Where once it 
could take more than 4 years to even see an action is brought 
down to nearly 2 years in almost all cases. We believe we will 
have all cases, most all cases done within 2 years, completed 
within 2 years at the Patent and Trademark Office fairly soon.
    So patent applicants, and those who wish to challenge 
patents issued to others, have important and many options and 
many responsibilities, and indeed rights. And as I have learned 
working on important issues in this Committee for 5 years, with 
every right is a responsibility. So, while most are quick to 
remind policy makers of their rights, some are a bit more 
hesitant to raise the issue of their responsibilities. But a 
private property right system depends on the responsible 
behavior of all, not just Congress, the courts and the 
Administration, but every applicant and every entity interested 
in other patents has responsibilities as well.
    Every applicant has a duty to disclose all relevant 
information and only relevant information. Some applicants give 
us no relevant information and some give us reams and reams of 
irrelevant or useless information, virtually burying that which 
is important--in some cases, not in most. We also sometimes 
receive multiple continuations, essentially do-overs after a 
patent application has been rejected in an effort to wear down 
an examiner who rejected it the first time, or in the hope that 
another examiner will get the case and grant the patent.
    There are many legitimate uses for continuation as well, 
but we want to address this behavior.
    Applications with inordinate numbers of claims are also a 
problem. All these are choices that some applicants make, 
choices that degrade the quality of the patent process and the 
patents issued. The USPTO has proposed rules to address some of 
these issues and we are considering other proposed rules to 
address the rest.
    There are many things we need to do at the Patent and 
Trademark Office, and there are many things we need to do 
throughout our system. But I'd like to take off on the theme 
that the Chairman and Ranking Member pointed out. I think 
everyone involved has a responsibility to promote sound 
proposals that will improve patent quality, even if it means 
they will not get everything they want immediately.
    There are two proposals pending before this Subcommittee 
that are widely supported throughout the intellectual property 
community that I think will directly and dramatically improve 
patent quality. I think we should all support public 
participation of prior art submissions and post grant 
opposition. There is plenty of opportunity to work in good 
faith to resolve the many remaining issues that are more 
controversial.
    But we may be able to make a real difference now. And we 
may need to get those provisions enacted now. Both provisions 
allow everyone to better exercise both their rights and their 
responsibilities.
    Public prior art submissions allow anyone to give the USPTO 
information believed to help with the quality examination. Post 
grant opposition allows anyone to challenge an issued patent in 
the most effective and most efficient manner. We have to 
approach it with the right balance but philosophically these 
are largely supported by nearly everyone in the intellectual 
property community.
    I look forward to working with the Subcommittee on these 
provisions. I look forward to working with the Subcommittee to 
swiftly resolve the many other important issues we face. I am 
honored to be here and I look forward to answering all your 
questions.
    Mr. Smith. Thank you, Mr. Dudas.
    [The prepared statement of Mr. Dudas follows:]
            Prepared Statement of the Honorable Jon W. Dudas














    Mr. Smith. Mr. Balsillie.

 TESTIMONY OF JAMES BALSILLIE, CHAIRMAN AND CO-CHIEF EXECUTIVE 
                  OFFICER, RESEARCH IN MOTION

    Mr. Balsillie. Thank you very much. Chairman Smith, Ranking 
Member Berman, and Members of the Subcommittee. My name is Jim 
Balsillie, and I am chairman and co-chief CEO of Research In 
Motion. I am pleased to appear here before you to speak on the 
issue of patent quality in the context of RIM's experience in 
the U.S. Patent system.
    RIM is the leading developer for innovative wireless 
solutions for the worldwide mobile communications market. RIM's 
BlackBerry products and services are used by tens of thousands 
of corporate and Government organizations around the world. Our 
largest market is United States, which accounts for more than 
half of RIM's revenues. And our biggest customer is the U.S. 
Federal Government.
    RIM is proud to serve the Department of Defense, the 
Department of Homeland Security, and the U.S. Congress, just to 
name a few of our valued Federal customers.
    As the Members of the Subcommittee are aware, last month, 
RIM paid over $612 million to settle a patent lawsuit brought 
about by a patent holding company NTP. Despite the fact that 
the Patent Office had rejected all of NTP's patents, and it was 
very likely to declare these patents invalid, RIM was forced to 
pay one of the largest settlements in U.S. History in order to 
end the uncertainty caused by the lawsuit.
    By appearing before you today, it is my hope that we are 
helping to advance patent law reform. The NTP case raises many 
questions, but there are a few that are particularly relevant 
to the scope of this hearing.
    First, and perhaps most puzzling for those who follow the 
NTP case, it is the role of the Patent Office versus the 
courts, particularly in the context of the reexamination 
process. In our case, our all of the five asserted NTP patents 
were completely rejected by the PTO in multiple office actions 
upon reexamination. At the time of the hearing on the 
injunction on February 24th, two of the three patents remaining 
had final office actions issued that rejected all of the claims 
on at least 3 grounds each.
    The remaining patent had all of its claims rejected as 
unpatentable on at least four grounds, including a 
determination that RIM had invented what NTP was trying to 
claim for itself.
    Even with these patent office rulings, the District Court 
judge appeared unmoved, and his comments during the proceedings 
suggested that he viewed the Patent Office rulings as 
irrelevant to his decision.
    A recent article in Newsweek Magazine that compared the NTP 
case to a judge in a murder case pondering execution while 
ignoring new DNA evidence that exonerates the accused. Congress 
should, at a minimum, provide industry with certainty as to the 
relevance of reexamination proceedings.
    Second, it is generally agreed that the Patent Office does 
not have the resources it needs to effectively review more than 
300,000 applications it receives each year. Consequently, 
concerns have been raised about the length of time it takes to 
process a patent application and the quality of patents that 
ultimately issue. The Patent Office has introduced two proposed 
changes to address these concerns. The first attempts to limit 
the number of claims in a patent. The average number of claims 
in a patent is 22.
    In the NTP case, NTP's eight patents had an average of 240 
claims each, with one having 655 claims. The NTP patent with 
655 claims was initially issued by the Patent Office without a 
single documented office action.
    The second proposed change attempts to place some 
restrictions on continuation practice. Eight of the nine claims 
ultimately issued to NTP were continuations filed more than 8--
more than 7 years after the initial NTP patent was filed. The 
Patent Office concluded that six of the nine claims were based 
on RIM's own technology.
    NTP was able to aggressively use the continuation process 
to copy RIM's ideas and seek an injunction that would prevent 
RIM from practicing what it invented. We think the facts in our 
case support the need for reform in these areas.
    Third, there is the matter of when an injunction is the 
proper remedy for patent infringement. We understand and 
appreciate the concerns that the pharmaceutical biotechnology 
and some independent vendors have expressed about changes to 
this standard. However, we firmly believe that the concerns 
raised by the technology sector can and should be addressed 
without harming others.
    We want to help Congress work with all others interested in 
improving the patent process so no other company in any 
industry experiences what RIM endured.
    Making technology products available to the public requires 
an aggregation of hundreds of different ideas in the 
development of products.
    In our case, the District Court was prepared to provide an 
injunction against us, our partners and customers, even though 
NTP had publicly acknowledged that they desired a monetary 
solution and that the threat of an injunction increased their 
leverage for a higher payout.
    Congress has directed courts on how to apply injunctive 
relief in section 283. At a minimum, it should not allow judges 
to undermine standards established in the law by this body. 
This would dramatically reduce the daily Russian Roulette that 
patent assertion companies are playing on the whole U.S. Tech 
and telecom system, which is currently condoned.
    Further enabling a patentee to obtain compensation for a 
patent that far exceeds the value of the patent invention 
cannot help but impact the economic and social benefits that 
the patent system was introduced to achieve and may well deter 
rather than promote innovation.
    We hope that Congress will keep these serious risks and 
costs in mind as it goes forward with Patent law reform. Mr. 
Chairman, thank you again for the opportunity to appear before 
you today. I will be pleased to take any questions you may 
have.
    Mr. Smith. Thank you, Mr. Balsillie.
    [The prepared statement of Mr. Balsillie follows:]
                 Prepared Statement of James Balsillie
                              introduction
    Chairman Smith, Ranking Member Berman and Members of the 
Subcommittee, my name is Jim Balsillie and I am Chairman and Co-Chief 
Executive Officer of Research In Motion. I am pleased to appear before 
you today to speak on the issue of ``Patent Quality,'' and am grateful 
for the opportunity to share with you RIM's experience with the United 
States patent system.
    Research In Motion (RIM) was founded in 1984 and is a leading 
developer of innovative wireless solutions for the worldwide mobile 
communications market. Through the development of integrated hardware, 
software and services that support multiple wireless network standards, 
RIM provides platforms and solutions for seamless access to time-
sensitive information including email, phone, Internet and intranet-
based applications. RIM's award-winning BlackBerry products and 
services are used by tens of thousands of corporate and government 
organizations around the world.
    RIM technology also enables a broad array of third party developers 
and manufacturers to enhance their products and services with wireless 
connectivity to data. RIM operates offices in North America, Europe and 
Asia Pacific and has approximately 5 million subscribers in over sixty 
countries. Our largest market is the United States, which accounts for 
more than half of RIM's revenues. Our biggest customer in the United 
States is the federal government. RIM is proud to serve the Department 
of Defense, the Department of Homeland Security and the U.S. Congress, 
just to name a few of our valued federal customers.
    As the Members of the Subcommittee are certainly aware, last month 
RIM paid $612.5 million to settle a patent lawsuit brought by patent 
holding company, NTP. Despite clear evidence that the Patent Office had 
rejected the NTP patents and was very likely to declare these patents 
invalid, RIM was effectively forced to pay one of the largest 
settlements in U.S. history in order to end NTP's highly publicized 
threats and the associated uncertainty felt by RIM's U.S. partners and 
customers.
    Underlying virtually every debate about patent laws are two 
distinct views of the nature of patents. Simply put, are patents an 
absolute property right, or a property right that must be construed in 
the context of its Constitutional objectives?
    The latter point of view is not new. The Supreme Court in Graham v 
John Deere Co. reiterated Thomas Jefferson's conclusion that the 
primary objective of intellectual property is to promote the Country's 
social and economic benefits and not to protect inventors' so-called 
``natural rights.'' In other words, patent rights are granted as a 
means to an end, and not the end itself. If the patent right is 
asserted in a manner that does not promote social and economic benefit, 
then it has become unmoored from its Constitutional foundation.
    Many, however, are of the view that, because the Patent Act grants 
the `right to exclude,' in order to give effect to this right, 
patentees must have virtually automatic injunctive relief for a breach 
of their rights. Those that hold this view also generally believe that 
patentees ought to be free to seek whatever compensation they are able 
to extract for their invention--even if that compensation bears no 
correlation to the value afforded by the invention in their patent.
    In the end, Congress must choose which characterization of patent 
rights better reflects its objectives for patent law and the 
Constitutional mandate that granted patent rights must promote the 
useful arts. If nothing else, RIM's experience in the NTP case 
demonstrates that there are significant undesirable social and economic 
costs contrary to promoting the useful Arts when patents are treated as 
an absolute property right. We hope that Congress will consider these 
costs carefully in deciding which is the appropriate characterization 
of patent rights.
    We understand and appreciate the concerns that Pharmaceutical, 
biotechnology and some independent inventors have expressed regarding 
changes to patent laws. We continue to firmly believe, however, that 
the concerns raised by the technology sector can be addressed without 
harming these other sectors. By appearing before you today, it is my 
sincere hope that we are helping to advance meaningful patent law 
reform, thus helping to assure that no other company experiences what 
RIM endured over the past five years. I believe that RIM's experience 
will prove instructive for all who care about innovation, 
competitiveness and free enterprise.
              role of the u.s. patent and trademark office
    The NTP case raises many questions, but there are a couple that are 
particularly relevant to the scope of this hearing. We should first 
ask: ``What is the role of the U.S. Patent and Trademark Office (PTO) 
in the patent system and how can the quality of patents be improved?''
                       reexamination proceedings
    Perhaps the most puzzling thing for those who followed the NTP case 
is the role of the patent reexamination process in pending litigation. 
If the patent system is to function properly, policymakers must clearly 
define what role the reexamination of patents should play in the patent 
system and what impact they should have on any court proceeding.
    The Patent Office has realistically acknowledged that, with 300,000 
applications per year, mistakes are inevitable and the easiest way to 
deal with this problem in the short term is to focus their limited 
resources on improving the processes to reexamine patents after they 
have issued. While historically the Patent Office reexamination process 
has been criticized, in 2005, the Patent Office established an elite 
group of examiners to complete reexaminations with the `special 
dispatch' required by Statute and its own procedures. According to 
these procedures, priority is to be given to patents that are in 
litigation.
    RIM commends the Patent Office for implementing these much needed 
changes in the reexamination process. However, in our case, this 
initiative came too late. If these new procedures and commitment to 
special dispatch had been implemented earlier, the first office actions 
for the reexaminations, which began in December 2002, would have issued 
by April 2003, several months before the district court ruled on NTP's 
first injunction request. Instead, the first office actions did not 
start to issue until March of 2005.
    All of the five asserted NTP patents were completely rejected by 
the PTO in multiple Office Actions upon reexamination. At the time of 
the hearing on the injunction on February 24 of this year, two of the 
three patents remaining in suit had final office actions issued that 
rejected all of the claims on at least three grounds each. The 
remaining patent is in inter partes reexamination in which an action 
closing prosecution (substantially the same as a final office action in 
the ex parte reexams) had issued rejecting all claims in the '592 
patent on at least four grounds each, including anticipation of each 
claim by RIM's own technology--i.e., a determination that RIM invented 
what NTP was trying to claim for itself.
    Even with the Patent Office issuing these rulings, the District 
Court hearing the case was unmoved. Although the Court did not formally 
enter a ruling at that time, the Judge's comments during the 
proceedings emphatically suggested that he viewed the final office 
actions as irrelevant to his decision--in spite of the fact that (1) 
the liability ruling on which injunctive relief would be granted was 
based on deference given during trial to the Patent Office's expertise 
in initially granting the patents, (2) the PTO specifically indicated 
in its office actions during reexam that it was seeking to address the 
concerns raised by the Court about reexamination timing, and (3) 
several patent practitioners have noted the exceptional quality of 
these office actions (as compared to the original examination to which 
deference was given at trial even though no substantive examination was 
apparent). Countless media articles commented on the Court's 
indifference to the PTO's rejections, including a recent article in 
Newsweek magazine that compared the NTP case to a judge in a murder 
case pondering execution while ignoring new DNA evidence.
    As this Subcommittee contemplates patent reform, RIM respectfully 
suggests that this circumstance should be addressed and that clarity be 
given as to the relevance of reexamination proceedings, possibly by 
providing formal guidance to the courts on what deference to give the 
Patent Office's reexamination proceedings during its different stages 
as the Court weighs the procedural options in litigation (e.g., stay 
the litigation or limit injunctive relief pending the outcome of the 
reexamination).
                            grant of patents
    It is generally agreed that the Patent Office does not have the 
resources it needs to effectively review the more than 300,000 
applications it receives each year. Concerns have been raised both 
about the length of time it takes to process a patent application, and 
the quality of patents that ultimately issue, (e.g. broad and vague 
specifications, broad and inconsistent claim language, `obviousness' of 
claimed inventions, patents seeking to claim technology that already 
exists in the public domain, etc.).
    Few would contest that the Patent Office is overburdened. Last 
year, Patent Commissioner John Doll was reported saying, ``When you've 
got 1.3 million cases in backlog, and it's taking [four to six] years 
to take a first office action, you've got to ask the question: Is the 
patent system still actually working, or are we just stamping numbers 
on the applications as they come through?''
    Commissioner Doll is not alone. In a survey by the Intellectual 
Property Owners Association of the nation's top patent lawyers, over 
half rated the quality of patents issued in the U.S. today as less than 
satisfactory or poor. Unless the Patent Office gets more resources, 
including additional qualified examiners, and is able to reduce the 
demands on its existing resources, the future may not be much better. 
According to the survey, over two-thirds of respondents said they 
thought the patent process would get longer, not shorter, over the next 
three years. And nearly three-quarters said they thought they would be 
spending more time, not less, on patent litigation over the coming 
years.
                     limitation on number of claims
    One of the ways to reduce the demands on the Patent Office's 
existing resources is to deter patentees from filing excessive numbers 
of claims in a patent. Why is the number of claims important? The 
Patent Office's recent figures suggest that the average number of 
claims in a patent is twenty-two. However, a small number of patentees 
file patents with many times this number of claims. For example, in the 
NTP case, NTP's eight patents had an average of 240 claims each, with 
one having 665 claims!
    Patents with an excessive number of claims put a huge burden on the 
process and can compromise the quality of the patents issued. The 
analysis required to ensure that the language in a patent claim is 
unambiguous, properly disclosed in the patent, and not claiming known 
technology that is already in the public domain, is by its nature a 
time-consuming one. Our understanding is that with the huge volume of 
patent applications, examiners' performance is assessed based on 
``counts'' allotted to them when specified activities are completed. 
They receive the same number of ``counts'' for allowing a patent, 
regardless of the number of claims in that patent. Therefore, a patent 
with an excessively large number of claims may receive less scrutiny 
per claim and thus be more likely to issue without the substantive 
examination required to ensure high quality patents.
    In our case, an NTP patent with 665 claims issued without a single 
documented office action. The prosecution history consists solely of 
references to undocumented meetings with the applicants. Indeed, 
Qualcomm noted in its request for a director-initiated reexamination of 
the NTP patents, ``[w]e understand that the U.S. Examiner allowed over 
1690 claims in five U.S. Patents...without ever issuing an action on 
the merits, with the exception of one double-patenting-only rejection 
on the '172 patent.''
    Excessive claims also result in considerable expense for parties 
defending actions by patent holders. Patent assertion companies may 
send letters to a large number of industry participants ``suggesting'' 
the desirability of a license, as NTP did to 47 companies, including 
RIM. The cost of a legal opinion as to the infringement/validity of 
claims increases with the number of claims. Further, the litigation 
cost and burden on the defendant of preparing a defense in court 
increases with the number of claims. For example, NTP sued RIM under 
all of its claims--over 1,900 in eight patents. Even though NTP 
ultimately reduced this number to 16 claims in five patents shortly 
before trial, the strain posed by the initial large number of claims 
had NTP's desired effect of prejudicing RIM's ability to fully and 
fairly defend itself in the fast-paced litigation of the so-called 
``Rocket Docket.''
    The Patent Office recently has proposed rules changes to limit the 
initial review of a patent application to ten claims (which would 
generally include all independent claims) unless the applicant prepares 
an ``examination support document'' to reduce the workload of the 
examiner with respect to additional claims. RIM understands the Patent 
Office is encountering resistance to its proposed changes from the 
patent prosecution bar, but nonetheless encourages Congress to support 
the Patent Office's endeavors to address this problem.
                          limit continuations
    Another issue of patent quality relates to the ability of patent 
holders to file multiple continuation applications during the life of 
the patent. In the aftermath of the NTP litigation, we have to ask if 
the ability to file continuations in this manner is consistent with the 
objectives of progressing innovation.
    Why are continuations an issue? While there are bona fide reasons 
to file a continuation, patentees can (and do) use continuations to 
gain a monopoly over later innovations that they never envisioned. In 
particular, a continuation enables a patentee to draft new claims based 
on what it has learned about the products of others, years after the 
patentee initially filed its patent. Giving a patentee the ability to 
draft claims that copy the independently developed technology of 
another company--claims the patentee otherwise would not have thought 
of--and then use those copied claims to shut down or hold-up that 
company is contrary to the most basic principles of fairness, and to 
the Constitutional mandate that patents must promote innovation.
    In the case of NTP's suit, four of the five patents asserted at 
trial were continuations. After RIM's success on appeal, there were 
nine claims in three patents left at issue in the suit, all but one 
were from continuations. Six of these claims were in the '592 patent, 
which was a continuation filed more than eight years after NTP's first 
patent application. NTP filed the '592 patent application six months 
after RIM launched the BlackBerry solution, and NTP sued RIM on that 
patent the day after it issued. NTP plainly crafted the '592 patent 
claims to specifically cover what RIM already had independently 
developed. Indeed, in the reexamination of the '592 patent, the Patent 
Office determined that RIM--not NTP--was the first to invent what NTP 
claimed in its '592 Patent. Thus while RIM never copied the inventions 
in the NTP patents, NTP was able to aggressively use the current 
continuation process to copy RIM's ideas and seek an injunction that 
would prevent RIM from practicing what RIM invented.
    Shortly after commencing its lawsuit, NTP refused RIM's request to 
explain precisely why it thought RIM infringed NTP's patents. NTP 
indicated that it did not matter whether or not RIM would be found to 
infringe in the initial trial, because NTP would simply draft another 
continuation based on what it learned at trial and sue RIM again. In 
fact, NTP even attempted to add over 32,000 claims in its reexamined 
patents, including claims intended to cover a design that RIM had 
confidentially disclosed to NTP.
    The Patent Office is proposing restrictions on continuation 
practice by requiring a patentee to explain why the claims sought in a 
second or subsequent continuation could not have been included in the 
original application or first continuation. RIM understands that these 
proposals are being resisted by the patent prosecution bar for a 
variety of reasons, some of which reflect valid concerns and a need for 
further clarification by the Patent Office, (for example the potential 
impact on existing patents drafted with a view to the continued 
availability of continuations, and the impact on divisional practice) 
and others that may simply reflect an interest in resisting any limit 
on the service they provide for their clients. RIM encourages Congress 
to support the Patent Office achieving reform in this area.
                         remedies for patentees
    A second key question raised by the NTP case is: ``Should there be 
limitations placed on the compensation available to patentees?'' In 
order to ensure that the costs associated with patents do not outweigh 
the social and economic benefits afforded by them, restrictions must be 
in place to ensure that the compensation for a patent bears some 
reasonable relation to the actual value of the invention in that 
patent. Bringing a single wireless technology product to market and 
into the public hands is very risky and involves a myriad of complex 
technologies--e.g., display screen technology, RF technology, 
application software, etc. Such products typically involve hundreds of 
inventions as well as the development, production and distribution of 
hardware and software components. If there are no limits on the 
compensation each patentee can seek for each of the hundreds of 
inventions in those products, there may not be sufficient remaining 
resources to bring the product to market--or even to compensate other 
patentees. In the NTP case, the Federal Circuit concluded that the 
patented invention in the NTP patents was the integration of an 
existing email system with a wireless system.
    The patents left it to RIM and others to design and build a two way 
handheld with desktop computer-like processing power, handheld email 
applications and operating system software, battery management systems, 
encryption software, special keyboards, communication protocols across 
the email and wireless system, redirector software and a relay 
infrastructure to route data between the email system and the wireless 
network--as well of course as the pre-existing email system and 
wireless network. In other words, the NTP patents did not come close to 
disclosing what is required to place in the hands of the public an 
actual, commercially viable and useful product. Inventor's rights are 
important. But if the ultimate objective is to put technology into the 
hands of the public at a reasonable price, no single patentee should be 
able to demand compensation that far exceeds the value of its actual 
and specific contribution to the ultimate product or system.
    Although some may ask ``why can't we let the marketplace take care 
of the problem'', the reality is that the current law on injunctions 
effectively gives patentees a gun, and the availability of a gun to one 
party in negotiations tends to skew the results that would otherwise 
naturally occur in the marketplace. Patentees are effectively able to 
use the Courts as a weapon to extort settlement amounts far greater 
than the reasonable market value of their patents.
                           injunctive relief
    As was widely reported during the course of the NTP litigation, and 
especially in the last six months, RIM faced the very real possibility 
of an injunction being imposed by the District Court by patents 
asserted by a patent assertion company.1 NTP further leveraged this 
threat against RIM by hiring a public relations firm to instill fear 
amongst RIM's customers and shareholders by way of a publicity 
campaign, effectively threatening millions of American customers in 
order to put additional pressure on a public company to capitulate to 
excessive demands. Even with a solid workaround design, the uncertainty 
inherent in a threat of an injunction created some disruption of our 
business. An injunction was not warranted in the NTP case, and the 
possibility that an injunction was available in such circumstances 
demonstrates the need for reform. These circumstances include not only 
those discussed in this section, but the Patent Office reexaminations 
described earlier, in which the Patent Office had fully and finally 
rejected all the remaining claims in suit as unpatentable at the time 
of the hearing in the District Court in February 2006.
    In the general case, injunctive relief for patent infringement 1) 
should not be virtually automatic, and 2) should not be made available 
where the patentee has clearly acknowledged it is seeking monetary 
compensation and is using the injunctive remedy as leverage solely to 
obtain money in excess of market value. Although there is a clear need 
to ensure that small inventors can receive reasonable compensation in a 
timely manner for their patents, these objectives can be accomplished 
without a virtually automatic injunction.
    Remedies, as opposed to rights, are typically tailored to the 
individual circumstances. Injunctions are viewed as extraordinary 
remedies in other areas of the law and are generally only available 
upon a demonstration of the inadequacy of money as a remedy--i.e. where 
the nature of the harm caused to the injured party is such that it 
cannot be compensated for with money. Even though in Section 283 of the 
Patent Act Congress appears to have applied the same traditional four 
part test for the availability of injunctive relief as applies in other 
areas of the law, the courts appear to ignore this Congressional 
mandate by creating an attenuated version of the test for patent cases. 
It is easy to see how in many instances damages would not be an 
adequate remedy in a patent case, but this should not make it an 
essentially irrebutable presumption. Where a patentee's business 
depends on excluding others from using its invention, money would 
probably not be an adequate remedy. However, an entity whose business 
is granting non-exclusive licenses has by its nature relied on a 
business model built on an inclusive, rather than exclusive, use of the 
technology by others. Such a patentee has no bona fide need to exclude 
and can be adequately compensated with money. And to be clear, we are 
not suggesting that such a patentee does not get any remedy. The issue 
is not whether they get a remedy, but what is the appropriate remedy. 
In such cases, the proper remedy is monetary relief rather than 
injunctive.
    Some argue that this impacts a patentee's ability to choose its 
licensees. The reality is that once a patentee has made the decision to 
grant a non-exclusive license, as opposed to an exclusive one, a 
patentee is not generally selective about its licensees. Unlike 
copyright or trade marks, patents tend to cover broad ideas (rather 
than narrow implementations), and the quality of the implementation of 
a broad patented idea would rarely reflect negatively on the patentee. 
Certainly, it would be unusual to find a patent assertion company that 
was selective about its licensees. The standard non-exclusive licensing 
business model in our industry is simple--maximize revenue by 
maximizing the number of licensees. A monetary award, rather than 
injunctive relief, should not impact on the patentee's ability to 
acquire other licensees. Indeed, because courts can award enhanced 
damages and must award at least a reasonable royalty, it is difficult 
to see how it could promote innovation by enabling a patentee that is 
not engaged in putting technology into the public's hands to shut down 
one that is, solely to enable the patentee to extort more than a 
reasonable royalty. The argument frequently heard that patentees need 
an injunction to avoid courts imposing their views of a reasonable 
royalty is specious. Courts award damages in every other area of law, 
and injunctions in those areas are not issued as a matter of course 
simply because the litigant might have a different view as to the 
appropriate amount of the award.
    One final point on injunctive relief: even if Congress concludes 
that damages are an inadequate remedy for patentees engaged in the 
business of granting non-exclusive licensees generally, injunctions 
should not be generally available to patent assertion companies. The 
activities of patent assertion companies are inherently at odds with 
the objectives of patent law. If every patentee decided to avoid the 
costs and risk inherent in going into business and instead waited for 
someone else to come up with the same idea and implement it and then 
charge the second company to stay in business--the costs of the patent 
system would soon outweigh its benefits. The patent assertion model is 
not the business model of independent inventors and universities 
seeking to introduce new technology to the market by licensing their 
technology to third parties for its commercialization. The patent 
assertion business model requires that the invention already be in the 
marketplace, else there is literally no one for them to assert the 
patents against. This business model effectively results in consumers 
paying twice for innovation--first for the real and substantial 
independent research and development costs incurred by the alleged 
infringer and second for the royalties paid to the patentee so that the 
alleged infringer can use that independently developed technology. 
There are additional economic costs because the royalties paid by the 
alleged infringer are not available for research and development or 
investment in capital infrastructure that might bring prices down. 
These costs can be significant and may even threaten the ongoing 
availability of a product or viability of a company, as there is no 
limit on the amount that the patentee can seek in compensation for the 
use of its patent--and no incentive for the patentee to limit its 
demands to an amount reflecting the value of its invention. Congress 
should take steps to ensure that Courts properly apply the traditional 
test for injunctive relief in patent cases it mandated in Section 283, 
and do so in light of the specific Constitutional objective that 
patents must promote the useful arts.
                              willfulness
    A finding of willful infringement entitles a patentee to an award 
of up to treble damages. The standards by which willful infringement is 
established must also be considered. Does it further the Constitutional 
objectives of the patent system to place the entire burden of 
determining whether there is an infringement of a patent on an alleged 
infringer, as is currently the case? Recent case law suggests that a 
patentee need only provide notice of a patent to a defendant to 
establish willful infringement. Under recent case law, patentees 
apparently are not required to make a clear claim of infringement, or 
to support their allegations of infringement in order to successfully 
allege willful infringement. This means that, with the cost of the 
stamp to deliver a vague letter mentioning its patents to a company, 
patentees can impose on that company costs easily exceeding tens of 
thousands of dollars to acquire legal opinions as to the validity and 
infringement of any patents provided. The patentee does not have to 
lift a finger to determine whether there is infringement, yet they can 
impose substantial costs on a targeted defendant to seek legal opinions 
that meet the rigorous requirements that case law requires for those 
opinions to be deemed competent.
    In the NTP case, NTP mass-mailed letters to 47 companies, including 
RIM in January 2000. RIM responded with a letter to NTP asking for 
additional information about its patents. NTP claims never to have 
received the letter, and made no further effort to contact RIM until 
NTP filed suit. Nonetheless, RIM was found liable for willful 
infringement based on what RIM did or did not do after receiving NTP's 
letter. The fact that the patent owner took no interest and forwarded 
no claim charts or otherwise showed there was an infringement simply 
did not matter. A recent case in the Court of Appeals for the Federal 
Circuit further suggests that, even if NTP had acknowledged receipt of 
RIM's letter, it would have no obligation to respond to inquiries or to 
provide support for its claims of infringement in order for it to 
obtain enhanced damages for willfulness. Thus, even though a patent 
owner does not deem the potential infringement worthy of investing time 
and money to do a proper infringement analysis and may never even bring 
a claim of infringement, the targeted defendant must do so or risk 
treble damages and the brand of ``willful infringer.''
    To illustrate the economic costs inherent in this bias towards 
patentees, one need only consider the NTP case. With 1920 claims in the 
NTP patents, each of the 47 companies would likely have to spend at 
least $200,000 for a legal opinion of invalidity and/or non-
infringement. Thus, for about $19 in postage, a single patentee like 
NTP can require 47 companies to divert over $9 million from other 
industry endeavors to obtain legal opinions regarding NTP's patents. 
Although it is currently rare for that many claims to be asserted, it 
is common for companies to receive dozens of such letters each year and 
to spend several hundreds of thousands or more each year on external 
legal opinions alone (not including the salaries and overhead for those 
that deal with these issues).
    It seems outrageous that companies must invest this sort of money 
in formal legal opinions as a result of vaguely crafted patent notice 
letters where the patentee has determined it is not worth its time or 
money to provide even a basic explanation as to why there may be 
infringement.
        relation of compensation to value of patented invention
    Without any restriction on the amount of compensation a patentee is 
entitled to for its patented invention, there are a number of 
circumstances in which, rather than promoting the useful Arts, patents 
can result in a reduction in the technology available to consumers or 
at least a significant increase in its price.
    One such instance is where the royalty rate for a particular patent 
fails to take into account that a single product requires patent 
licenses with multiple technology companies covering hundreds of 
patents. For example, the royalty rate determined by the jury at trial 
in the NTP case was 5.7% of the gross revenue on RIM's handsets, 
software and services. Considered in isolation 5.7% may not seem an 
onerous royalty. However, were each of our existing patent licensors to 
be entitled to this same 5.7%, neither RIM nor any other technology 
company could afford to bring the product to market.
    Similarly, significant economic and social costs can result from 
permitting a patentee to recover damages not only on the revenue of a 
party supplying products that directly or indirectly infringe a patent, 
but also on bona fide third party products or services used in 
combination with these products where those third party products or 
services would not themselves directly or contributorily infringe the 
patents. For example, there is a growing tendency for patentees with 
patents covering, for example, a small component of a handheld or a 
handheld software application, to seek royalties based not only on 
revenue generated by the handheld manufacturer's products, but on 
carrier network service revenue as well. These types of patents likely 
add no innovation to the wireless carrier network, which essentially 
acts as a pipe to deliver data from the handheld. The carrier's 
business model requires it to make services available to a wide range 
of products with no real depth of technical knowledge about these 
products. If in fact the handheld component or software application 
does infringe a patent, in these circumstances the carrier might well 
look to the supplier to indemnify it for any resulting damages. If 
those damages are calculated based upon not only the manufacturer's 
revenue, but the revenue from carriers' services as well, the 
manufacturer may be required to pay damages on money it has never 
received, and the total damages may exceed its total revenue for the 
infringing product. This is not only inconsistent with industry patent 
licensing practices; it simply is not economically feasible.
    A patent system that affords patentees ready access to compensation 
reflecting the value of their patents would seem better suited to 
achieve both protection for the patentee and the promotion of the 
useful Arts. RIM encourages Congress to provide guidance to the Courts 
and certainty to industry to achieve this end.
                               conclusion
    Mr. Chairman, thank you again for the opportunity to appear before 
you today. I hope that my testimony has been helpful to you and Members 
of the Subcommittee as you consider reforms to the patent U.S. patent 
system. If I can be of any further assistance to you with this very 
important work, I am at your service. I will be pleased to take any 
questions you may have.
    1 A patent assertion company is an entity whose primary business is 
enforcing its patent portfolio against technology companies that have 
independently researched, developed and commercialized similar 
technology. Such patent assertion companies typically do not practice 
the patented technology at all, but merely expend their energies in 
drafting claims in their pending continuation patent applications to 
claim for themselves successful products independently developed by 
others. Their business model is very different from that of independent 
inventors and universities that work to place in the hands of the 
public products that are not already in the marketplace by partnering 
with industry to commercialize their patented inventions, typically 
providing substantial know-how to implement their invention and related 
technology.

    Mr. Smith. Mr. Stewart.

   TESTIMONY OF ROBERT A. STEWART, DIRECTOR AND CHIEF PATENT 
                  COUNSEL OF AMERICAS, UBS AG

    Mr. Stewart. Thank you. Chairman Smith and Ranking Member 
Berman. My name is Robert Stewart, and I am the chief patent 
counsel for UBS AG in the Americas. 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 represents over 100 of the 
largest diversified financial institutions who account directly 
for millions of jobs. The Financial Services Roundtable would 
like to commend Chairman Smith and the rest of the Subcommittee 
for their time and effort in an attempt to strengthen the 
quality of the U.S. Patent system, and encourage innovation 
without discouraging economic activity.
    In particular, I would like to commend Congressman Berman 
for the introduction of his thoughtful bill today.
    As you know, the financial services community is intensely 
interested in patent quality and litigation issues, and is 
grateful for you for considering these matters.
    It is perhaps too easy and convenient to place the entire 
burden for patent quality on the staff of the U.S. Patent and 
Trademark Office, who I will refer to as the PTO.
    We believe that Director Dudas and his staff continue to 
overcome the challenges facing the PTO, including reducing the 
backlog of pending applications. However, the fact remains that 
over 800,000 applications are pending in PTO and examiners 
aren't able to spend enough time to provide meaningful 
examination. As a result, patent quality has suffered and 
patents of dubious quality threaten to destruct lawful economic 
activity. Patent quality can be improved by improving the 
disclosure of relevant prior art, improving the quality of 
district court decisions, and the inclusion of an effective 
post grant opposition proceeding, and we mustn't forget 
litigation reform measures.
    We can improve the disclosure by ensuring that relevant art 
is disclosed in a meaningful way to examiners that are pressed 
for time. Any examination by the PTO is only as reliable as the 
information that the examiner is readily able to apply to the 
claims under review.
    And in furtherance of this goal, we are quite pleased that 
H.R. 2795 has a third party submission procedure which will 
allow for more effective disclosure of relevant prior art to 
the examiners at the PTO.
    Also, Congress should adopt an interlocutory appeal of 
claim interpretation. The Federal circuit frequently overturns 
claim interpretations, and as you may be familiar with Kimberly 
Moore's work, 35 percent of District Court claim 
interpretations were overturned between 1996 and 2003. The 
inconsistent claim interpretations between the District Court 
and the Federal Court are representative of the U.S. Patent 
system's wasteful use of limited judicial resources.
    So to further improve the efficiency of the judicial 
resources, an interlocutory appeal to the Federal circuit 
should be permitted after a Markman hearing, where the claims 
are interpreted by the District Court. This new procedure will 
help mitigate the judicial inefficiency that occurs when a full 
trial is conducted based on an incorrect interpretation of the 
patent.
    In addition, Congress should support specialized patent 
courts. Many District Court judges have no special or technical 
patent expertise, and have never been admitted to practice 
before the U.S. Patent and Trademark Office, whereas patent 
attorneys hold technical degrees and pass a special patent bar. 
Therefore, we encourage preferential venue in the 10 District 
Courts that currently handle the most patent matters and 
professor Moore has also been very instructive on this 
particular matter as well.
    We also strongly support the establishment of a post-grant 
opposition proceeding with a second window that will allow 
anyone who is threatened with a patent infringement action to 
follow a request for an opposition proceeding within 6 months 
after receiving notice. Without the 6-month window, many 
organizations may not expend the resources necessary to 
invalidate a patent in an opposition proceeding.
    The second window could be subject to a clear and 
convincing standard of proof.
    As for litigation reform, the patent quality problem cited 
above make the need for litigation reform all the more 
compelling. Congress can and should provide financed firms and 
other businesses with the additional safeguards against 
frivolous claims without impairing the important protections 
afforded to intellectual property. As owners of intellectual 
property, we have as much interest as anyone in protecting true 
innovation that benefits society has a whole.
    Specifically, Congress should clarify the damages role with 
respect to willfulness and apportionment, limit venues to the 
place of incorporation, expand the scope of prior user rights 
beyond business methods, and modify the standard for injunctive 
relief.
    In conclusion, the Financial Services Roundtable is a 
strong believer in the U.S. Patent process as fundamental to a 
healthy U.S. Economy.
    Given the importance of the patent process, the PTO should 
be fully funded without fee diversion and given adequate 
resources to perform its duties. At the same time, it is not 
enough for the PTO to turn out patents in greater quantity if 
those patents are not of the highest quality.
    I know that Director Dudas shares this view, and we 
appreciate his dedication to patent quality issues. Moreover, 
because of increases in frivolous claims of patent 
infringement, we encourage you to continue your focus on 
appropriate defenses and other tools for litigation risk 
management. We look forward to participating further as you 
develop and move legislation to improve the patent laws. Thank 
you.
    Mr. Smith. Thank you, Mr. Stewart.
    [The prepared statement of Mr. Stewart follows:]
                Prepared Statement of Robert A. Stewart




















    Mr. Smith. Professor Lemley.

  TESTIMONY OF MARK A. LEMLEY, WILLIAM H. NEUKOM PROFESSOR OF 
                    LAW, STANFORD LAW SCHOOL

    Mr. Lemley. Thank you, Mr. Chairman. I think everybody can 
agree there are bad patents out there. The Patent Office, I 
think, is doing more and more to try to solve the problem and 
try to weed out the bad patents. But the reality of the 
situation is we are never going to find them all. And it's 
probably not even cost effective to find them all in the Patent 
Office, because somewhere between 90, 95 percent of patents, 
once they are issued from the Patent Office, are never heard 
from again.
    Instead, it seems to me if our focus is patent quality 
enhancement, what we need to do is try to find the patents that 
matter, weed out the bad patents that actually matter that are 
going to affect people later in life.
    One way to do that is post grant opposition. And endorse 
both the H.R. 2795 and the Berman-Boucher bill that proposed 
post grant opposition system. Though, in fact, it seems to me 
the disputed issue in the post grant opposition area, which is 
whether we can have a second window, have an opportunity to 
identify those patents, when they become relevant in 
litigation, is the critical issue. Without an opportunity for 
people to file a post grant opposition at the time that they 
are aware of a patent, the post grant opposition becomes 
somewhat illusory.
    We can go further. In my paper I submitted along with my 
testimony, I suggest a sort of what you might call a gold-
plated patent mechanism, where people could opt in for their 
most important patents to higher scrutiny, submit a search, ask 
for more time from the Patent Office, pay a higher fee, and in 
exchange, get something of value, in exchange get a patent that 
was treated by the courts with greater respect, with more 
deference.
    Both of these systems would allow us to focus the patents 
that matter because they would harness the information that 
private parties have and that the PTO currently doesn't have 
about which of the patents is important to focus on and which 
ones are not.
    I also think, though, that you can't discuss patent quality 
without talking about the problem of Patent lawsuit abuse. 
There is a very real problem out there confined, I think, to 
some industries, but to a very wide and important sector of the 
economy, of patent lawsuit abuse. To some extent, those are bad 
patents being asserted. They are patents that shouldn't have 
been issued, that are invalid, that people are asserting.
    But there is also a problem even with patents that are 
legitimately issued, when people wait in the wings and surprise 
a mature industry or a standard setting organization with a 
patent that he they didn't know about after it has been to--for 
people who have already made irreversible investments, when 
people overclaim the breadth of their patents, when they 
actually invent something, but pop up 10 years later and claim 
they invented something much broader covering an entire 
industry that they hadn't thought of at the time, or when they 
use the threat of injunctive relief or of damages in excess of 
actual compensatory value to coerce a settlement, that so often 
happens in patent litigation where the defendant might have a 
good claim that the patent is invalid, might have a good claim 
that they don't infringe, but isn't willing to put their 
product on the line.
    The testimony we just heard about Research in Motion is, in 
one sense, exceptional. They actually took the case all the way 
to litigation. Most people aren't willing to take that risk and 
so they settle.
    You can solve those problems, it seems to me, in a couple 
of ways. You can get at the problem of hiding in the wings with 
publication and with limitations on continuation practice, and 
you can get at the problem of holdup or threats of holdup by 
restricting the ability to claim super compensatory damages to 
cases in which they are really warranted, where the conduct 
really is copying, or by giving the district courts, confirming 
that the district courts have in the existing statute, the 
discretion to consider equitable factors in deciding whether or 
not to grant injunctive relief.
    Now, the one thing it seems to me that the patent reform 
process has taught us is that different industries have very 
different experiences with the patent system. The way the 
patent system affects you if you are in the IT industry is very 
different than if you are in the biotech or the pharma 
industry. I think for that reason it is unlikely you are ever 
going to get broad industry consensus on meaningful patent 
reform.
    You can either throw up your hands and do nothing, or I 
think you can try to tailor the patent reform efforts in such a 
way that they actually target the problems that exist in 
certain industries without doing real harm to other industries. 
So you can tailor damages rules to the problem of component 
industries. You can tailor injunctive relief by giving the 
District Court the discretion to decide only in a few cases, is 
injunctive relief inappropriate; and in cases where it is a 
vital part of the patent right, we should keep it.
    You can even tailor things like post grant second window 
perhaps by having a lack of notice rule. Anyone who is on 
notice of a patent doesn't get a second window. They have to 
file in the first window. But if you didn't know about the 
patent, then you ought to have a opportunity to challenge it.
    All of these things, it seems to me, have one thing in 
common, which is they solve real problems in the patent system 
that are industry specific, not by writing industry specific 
laws, but by writing general laws that will effect different 
industries differently, and that is what I urge you to do.
    Mr. Smith. Thank you, Professor Lemley.
    [The prepared statement of Mr. Lemley follows:]
                  Prepared Statement of Mark A. Lemley
                   introduction and executive summary
    Reforming the patent system is important. Patents are critical to 
innovation, and the patent system generally works well in encouraging 
invention. But the system also has problems, and is in need of an 
overhaul. In particular, improvements can be made in two main areas: 
(1) finding tailored ways to improve patent quality without wasting 
money examining unimportant patents; and (2) preventing abuses of the 
system by people who use patents not for their intended purpose of 
supporting innovation, but to hold up legitimate innovators.
    Let me be clear at the outset that these are both important 
problems, and patent reform that addresses those problems will be an 
important step in encouraging innovation in the United States. It is 
particularly important that Congress act to prevent abuses of the 
patent system by those who use the patent system not to develop and 
make products but to squeeze money out of those who do. While there are 
as yet no reliable statistics on the extent of the holdup problem, 
there is no question that it is a widespread and extremely serious 
problem in the semiconductor, computer, Internet and telecommunications 
industries. Large, innovative companies such as Intel and Cisco never 
have a week go by without threats of suit from a non-manufacturing 
patent owner claiming rights in technology that the defendants did not 
copy from the patent owner--usually they've never even heard of the 
patent owner--but instead developed independently. While there is a 
legitimate role for small and individual inventors who patent their 
technologies and license their ideas to others, increasingly the patent 
owners are not contributing ideas at all, but popping up years or even 
decades later and trying to fit an old patent to a different purpose. 
Unscrupulous patent owners do this because the law permits it, and 
because it gives them a chance to make a lot of money--under current 
law, far more money than their technology is worth.
    Patent reform needs to deal with these abuses of the system without 
interfering with the normal, legitimate use of the system to protect 
and encourage innovation. Doing so requires careful balancing of the 
interests of patent owners, technology companies, and the public.
    One fact that complicates patent reform efforts.is that the patent 
system works very differently in different industries. See Dan L. Burk 
& Mark A. Lemley, Policy Levers in Patent Law, Va. L. Rev. (2003). 
While innovators in the semiconductor, computer, Internet and 
telecommunication industries identify abusive patent litigation as the 
major problem they face, there is no similar problem in the medical 
device, biotechnology and pharmaceutical industries. Those industries 
have very different characteristics--pharmaceutical patents are more 
likely to cover a whole drug, rather than one of 5,000 different 
components of a semiconductor chip. So patent owners in the 
pharmaceutical industries don't have to worry about and endless stream 
of patent owners asserting rights in their drugs. Further, innovators 
in the biotechnology and pharmaceutical industries consider patent 
protection far more important to their R&D efforts than do the 
information technology industries. The challenge is to craft a unitary 
patent law that can accommodate the very different needs of each of 
these important industries.
    Because patents are so important to a large group of stakeholders, 
and those stakeholders have such diverse interests, it may not be 
possible to get universal agreement on all aspects of a comprehensive 
reform bill. A workable bill will necessarily involve compromises, and 
won't leave everyone happy. That is not a reason to abandon the effort. 
It is important that something be done to improve patent quality and 
reduce patent lawsuit abuse. Rather, it suggests the need to take 
measured steps towards reforming the system.
    In the sections that follow, I discuss a number of proposed 
reforms. I have also attached copies of two short papers with ideas for 
dealing with both problems, one entitled ``What To Do About Bad 
Patents'' and co-authored with Doug Lichtman at the University of 
Chicago and Bhaven Sampat at Columbia, and the other a speech I 
recently gave entitled ``Ten Things To Do About Patent Holdup of 
Standards (And One Not To).'' Some of the ideas in those papers are 
reflected in pending or proposed legislation; other ideas may be worth 
thinking about as the patent reform effort continues.
                 publication and post-grant opposition
Summary: Requiring publication of all patent applications and creating 
        a post-grant opposition system are important changes that will 
        improve the patent system.
    The first goal of patent reform should be to ensure that the 
procedures in the Patent and Trademark Office are adequate to identify 
and weed out bad patents when it is cost-effective to do so. Two 
proposed changes will help.
    First, it is extremely important that the patent system require 
prompt publication of all U.S. patent applications. Section 122(b) 
currently permits some patent applications to avoid publication, with 
the result that some applicants can conceal their invention from the 
public for years. Those applicants can then take a mature industry by 
surprise when the patent issues. Requiring publication of all 
applications 18 months after they are filed will put the public on 
notice of who claims to own particular inventions, allowing companies 
to make informed research, development and investment decisions.
    Second, post-grant oppositions are a valuable addition to the 
patent system that will help identify and weed out bad patents without 
the cost and uncertainty of litigation. The post-grant opposition bill 
is well-written and will significantly improve the patent system.
    The best approach is one that permits a post-grant opposition to be 
filed either within 9 months after a patent issues or within 6 months 
after the opposer is notified of infringement, whichever comes later. 
The addition of the second, 6-month window has been controversial in 
some circumstances, but it is critical to the success of the post-grant 
opposition procedure. Because of the long timelines associated with 
many patents, and the fact that those engaged in patent holdup often 
wait for years after patents issue before asserting them, limiting 
opposers to a 9-month window after the patent issued would render post-
grant opposition ineffective for the majority of patents. An example is 
pharmaceutical patents. Because of the long FDA approval process, 
potential generic manufacturers will likely have no idea at the time a 
patent issues whether the drug it covers will survive clinical trials 
and be approved for sale. By the time they know which patents are 
actually important, it would be too late to oppose them. This problem 
extends to other industries as well. Submarine patentees and other 
trolls often sit on patent rights for many years before asserting them 
against manufacturers. In order to take advantage of the nine-month 
window, those manufacturers would have to guess which of the millions 
of patents in force might become important a decade from now. Since 
only 1% of patents are ever litigated, forcing them to make such a 
guess would make the system worthless to most of the people who would 
use it.
    Including a second window for defendants who were not on notice of 
the patent when it issued seems an appropriate way to solve this 
problem. This gives a short period in which to oppose patents once they 
are brought to a company's attention, without permitting undue delay.
              damages: reasonable royalty and willfulness
Summary: Changes to the entire market value rule in reasonable royalty 
        damages and limitation of willfulness claims are both important 
        steps that will help deal with serious problems in the patent 
        system. The reasonable royalty portion of H.R. 2795 does not 
        need any modification. The willfulness provision of that bill 
        improves the current law in certain respects, but could be made 
        better still.
    Reasonable Royalties. The reasonable royalty provisions in the 
existing law create significant problems in those industries in which 
patented inventions relate not to an entire product, but to a small 
component of a larger product. Because courts have interpreted the 
reasonable royalty provision to require the award of royalties based on 
the ``entire market value,'' juries tend to award royalty rates that 
don't take into account all of the other, unpatented components of the 
defendant's product. This in turn encourages patent owners in those 
component industries to seek and obtain damages or settlements that far 
exceed the actual contribution of the patent. There are numerous cases 
of just this problem occurring. Most notably, there are hundreds of 
``essential'' patents covering proposed new standards for third-
generation wireless telephones. Carl Shapiro and I have an empirical 
study of this ``royalty stacking problem'' in progress right now. As 
originally drafted, H.R. 2795 solves this problem by encouraging the 
courts to consider the contribution of other elements of the invention.
    There seems to be consensus that reasonable royalty damages should 
be limited to the share of a product's value that comes from the 
invention, and that patentees should not be able to capture value they 
did not in fact contribute. The only question is how to get there. H.R. 
2795 does so in a straightforward way, by requiring courts to determine 
the value of the ``inventive component'' of the product. A proposed 
``Coalition Draft'' of HR 2795 circulated in the fall of 2005 would 
make a seemingly small change, from ``inventive component'' to 
``component of the claimed invention.'' Unfortunately, this change 
could have the unfortunate consequence of allowing patentees to 
manipulate their damages by changing the way they claim their 
invention. For example, the inventor of the intermittent windshield 
wiper could claim the wiper alone, or alternatively could choose to 
claim a car including an intermittent windshield wiper. The invention 
is the same, and the patentee shouldn't be able to capture more money 
by phrasing the claim in the second way than the first. But the 
coalition draft may produce just such an effect, since the ``claimed 
invention'' is literally the whole car and not just the windshield 
wiper.
    Willfulness. The doctrine of willfulness is a mess. Over 90% of all 
patent plaintiffs assert willful infringement, even though most of the 
defendants in those cases developed their products independently and 
had never heard of the plaintiff or its patent. Patent law currently 
punishes not just those who copy from the patent owner but also these 
independent developers. But independent developers are not ``willful'' 
in any ordinary meaning of the term. Rather, the way the courts have 
interpreted patent law has created a bizarre game. By sending a 
carefully crafted letter, patent owners can cause companies to have to 
obtain written opinion letters and waive the attorney-client privilege, 
and if they don't can declare them willful infringers for continuing to 
sell products they designed in good faith and without knowledge of the 
patent. It is important to clean up the willfulness doctrine. [While 
some have proposed eliminating it altogether, I think that goes too 
far. Enhanced damages for willfulness serve as an important deterrent 
in those cases where the defendant really does steal the technology 
from the patent owner.]
    H.R. 2795 makes two important changes that reduce the abuse of 
willfulness. First, it requires a letter that puts the defendant on 
notice of a patent to be sufficiently specific that a defendant can 
file a declaratory judgment action asserting its innocence. This should 
reduce the casual, off-hand sending of such letters. Second, by 
requiring the pleading and litigation of willfulness only after a 
defendant has been found to infringe, H.R. 2795 eliminates many of the 
harms associated with the court's reliance on advice of counsel, 
because the defendant will not have to decide whether to waive the 
privilege until after the primary trial has ended. Further, by 
requiring bifurcation of willfulness, the bill simplifies the patent 
litigation process by separating out discovery as to willfulness and 
eliminating the need for that discovery in the cases where the patent 
is ultimately held invalid or not infringed. [Once this bifurcation 
occurs, the same jury that determined validity obviously cannot make 
the delayed willfulness determination. The sensible way to solve this 
problem is to make willfulness a question for the district judge, just 
as the damage enhancement for willfulness already is.].
    However, H.R. 2795 as currently written leaves intact the opinion 
letter ``game'' for many patent lawsuits. Because a defendant's only 
defense to willfulness under the statute is the existence of ``an 
informed good faith belief'' in invalidity or noninfringement, 
defendants are as a practical matter extremely likely to decide they 
have to obtain an opinion, rely on the advice of counsel, and therefore 
waive the attorney-client privilege. This waiver distorts legal advice 
in difficult ways, making settlement more difficult. See Mark A. Lemley 
& Ragesh K. Tangri, Ending Patent Law's Willfulness Game, Berkeley 
Tech. L.J. (2003).
    This problem could largely be solved if defendants could rely on 
strong (though ultimately unsuccessful) arguments to avoid a finding of 
willfulness. To do this, section 284(b)(3) of H.R. 2795 should be 
modified by adding after ``under paragraph (2)'' the following: ``if 
the infringer offered an objectively reasonable defense in court or''. 
This would make either an objectively reasonable argument or a 
subjectively good faith belief grounds for avoiding willfulness. It 
makes little sense to conclude that defendants are acting willfully if 
the case was a close one. Adding an objective reasonableness defense 
would permit defendants who think they have a strong argument to rely 
on that argument, rather than having to waive privilege.
                           injunctive relief
Summary: Injunctive relief is an important part of the patent right, 
        but it is subject to abuse in certain situations. It is 
        important to preserve the right of injunctive relief in the 
        case of legitimate patent claims, while preventing those who 
        abuse the system from using the threat of injunctive relief to 
        extort money from legitimate innovators. H.R. 2795 takes a step 
        in the right direction by giving courts the power to stay 
        injunctive relief pending appeal where doing so wouldn't harm 
        the patentee. It takes another step in the right direction by 
        explicitly introducing fairness concerns, but it is important 
        that those concerns be determinative only in limited contexts 
        and that injunctive relief be available in the normal case of 
        patent infringement.
    The goal of any revision to the injunctive relief sections of the 
patent law should be to ensure that people who actually need injunctive 
relief to protect their markets or ensure a return on their investment 
can get it, but that people can't use the threat of an injunction 
against a complex product based on one infringing piece to hold up the 
defendant and extract a greater share of the value of that product than 
their patent warrants.
    Section 283 of the Patent Act by its terms provides the tools 
needed to achieve this goal: district courts are granted the discretion 
to decide whether and under what circumstances to issue patent 
injunctions. The statute provides that courts ``may'' grant injunctions 
once infringement is found, but only ``in accordance with principles of 
equity'' and ``on such terms as they deem reasonable.'' 35 U.S.C. 
Sec. 283. Those principles of equity are well-established in a long 
line of cases, both from this Court and from the regional circuits. 
See, e.g., Weinberger v. Romero-Barcelo, 456 U.S. 305, 312 (1982) 
(setting out the four equitable factors to be considered in granting 
injunctive relief: (i) whether the plaintiff would face irreparable 
injury if the injunction did not issue; (ii) whether the plaintiff has 
an adequate remedy at law; (iii) whether granting the injunction is in 
the public interest; and (iv) whether the balance of hardships tips in 
the plaintiff's favor); see also Mueller v. Wolfinger, 68 F. Supp. 485, 
488 (D. Ohio 1946) (applying the factors under predecessor to Section 
283). Before the creation of the Federal Circuit, regional circuits 
applied these principles, and occasionally denied permanent injunctive 
relief to patent owners based on their application of traditional 
equitable principles. See, e.g., Foster v. Am. Mach. & Foundry Co., 492 
F.2d 1317, 1324 (2d Cir. 1974); Vitamin Technologists, Inc. v. Wisc. 
Alumni Res. Found., 146 F.2d 941, 956 (9th Cir. 1945); City of 
Milwaukee v. Activated Sludge, Inc., 69 F.2d 577, 593 (7th Cir. 1934).
    Unfortunately, the Court of Appeals for the Federal Circuit has 
effectively read the terms ``may'' and ``in accordance with principles 
of equity'' out of the statute. In no case in the last twenty years has 
the Federal Circuit permitted a district court to apply its equitable 
powers to refuse a permanent injunction after a finding of 
infringement.1 Indeed, the court's grant of permanent injunctive relief 
is so automatic that it rarely even recites the equitable factors any 
longer, relying instead on an all-but-conclusive presumption that 
injunctive relief is appropriate. In this case, for example, the 
Federal Circuit made it clear that a district court had the power to 
deny injunctive relief only in exceptional circumstances. MercExchange, 
LLC v. eBay, Inc., 401 F.3d 1323, 1339 (Fed. Cir. 2005). Further, the 
only exceptional circumstance the court identified was one involving 
imminent danger to public health, in which case the court suggested it 
might be appropriate to consider the public interest in access to the 
invention. While the Supreme Court is considering that case at this 
writing, there is no guarantee they will interpret the statute as it 
was actually written rather than as the Federal Circuit has done.
    Holdups occur on a regular basis under the Federal Circuit's 
mandatory-injunction standard. Patentees can obtain revenue in excess 
of the value of their technology by threatening to enjoin products that 
are predominantly noninfringing and in which the defendant has already 
made significant irreversible investments. In numerous cases, the 
parties settle for an amount of money that significantly exceeds what 
the plaintiff could have made in damages and ongoing royalties had they 
won. In these cases it is not the value of the patent but the costs to 
the defendant of switching technologies midstream that are driving the 
price. For example, one patent owner charges a 0.75% royalty for 
patents that don't cover industry standards, and 3.5% for patents that 
do cover industry standards. Mark R. Patterson, Inventions, Industry 
Standards, and Intellectual Property, 17 Berkeley Tech. L.J. 1043, 1059 
n. 61 (2002). The patent owner can demand nearly five times as much 
money once the industry has made irreversible investments in a 
particular technology. Many other patent owners report settling their 
cases for dollar amounts significantly in excess of what they could 
have won in royalties. The windfalls to the patentee in these cases 
stem from the ability to threaten to shut down the defendant's 
technology altogether.
    Holdup is of particular concern when the patent itself covers only 
a small piece of the product. A microprocessor may include 5,000 
different inventions, some made by the manufacturer and some licensed 
from outside. If a microprocessor maker unknowingly infringes a patent 
on one of those inventions, the patent owner can threaten to stop the 
sale of the entire microprocessor until the defendant can redesign its 
product and retool its plant to avoid infringement. Small wonder, then, 
that patentees regularly settle with companies in the information 
technology industries for far more money than their inventions are 
actually worth. Defendants are paying holdup money to avoid the threat 
of injunctive relief. That's not a legitimate part of the value of a 
patent; it is a windfall to the patent owner that comes at the expense 
not of unscrupulous copyists but of legitimate companies doing their 
own research and development.
    Explicit consideration of principles of equity would give the 
courts the tools they need to deal with this problem. Patent owners who 
do not manufacture the patented or any other competing good, and who 
seek only to license their invention at a reasonable royalty, should be 
entitled to injunctive relief only if they would be irreparably injured 
by the infringement. If the patentee has an adequate remedy at law, 
that fact properly weighs against granting injunctive relief. Those 
equitable principles would also permit courts to consider the balance 
of the hardships, so that the ordinary grant of injunctive relief can 
be avoided where it would have significant negative consequences and 
little affirmative purpose, as in the case of the 5,000-component 
invention. At a minimum, courts should delay the entry of injunctions 
pending appeal in order to give the defendant a chance to implement a 
design-around if in fact they can do so without infringing the patent.
    I should be clear that the application of equitable principles 
would not mean that injunctions are generally problematic. Injunctive 
relief is an important part of the patent law, and in most cases there 
will be no question as to the patentee's entitlement to such relief. To 
begin, equity warrants an injunction absent extraordinary circumstances 
if the patentee practices the patent in competition with the accused 
infringer. Even if the patentee doesn't sell the patented product, if 
it sells a different product in the same market, equity should entitle 
it to an injunction to prevent an infringer from competing with the 
product it does sell. Similarly, if patentees assign or exclusively 
license the patent to someone who competes in the marketplace, they 
should also be entitled to injunctive relief under normal 
circumstances. And even if the patentee hasn't done these things in the 
past, if it is actively engaged in research and development and 
preparing to do so in the future equity might well support injunctive 
relief. Patentees also ought to be entitled to an injunction in cases 
where the defendant copies the idea from the patentee, even if the 
patentee is not participating in the market and has no plans to do so. 
Infringers shouldn't be able to copy an invention from the patentee, 
knowing that if they are caught they will still only have to pay a 
royalty. Even if none of these things are true, some injunctions won't 
lead to a risk of holdup, and so even patentees who don't meet any of 
the criteria listed above will often be entitled to an injunction. This 
is the virtue of equitable discretion--courts can grant injunctions 
when they are warranted, without being bound to grant them when they 
create more problems than they solve. The grant of discretion in the 
statute should be coupled with legislative history making it clear that 
injunctive relief is the normal remedy and will be available in the 
circumstances just described. Doing so will help to avoid the risk that 
other countries will seize upon our equitable doctrines to try to 
inappropriately limit patent rights.
    Permitting stays will further help solve the problem of holdup by 
threat of injunctive relief. Confirming the equitable power of courts 
to stay injunctions is a good idea. It will give companies time to 
retool their factories to avoid infringement. At the same time, the 
irreparable harm limitation ensures that patent owners that actually 
need injunctive relief, like pharmaceutical companies litigating 
against generics, will be entitled to get it.
                                 venue
Summary: Some limitation on venue in patent cases is desirable.
    Patent cases, unlike general federal civil cases, can today be 
brought anywhere a patented product is sold or used. In practice, this 
means that they can be brought in any district in the country. Patent 
plaintiffs (and declaratory judgment plaintiffs too) engage in forum-
shopping, seeking a location perceived as most favorable to their side.
    There is no reason the law should permit such forum shopping. A 
rule that allowed the plaintiff to sue in either its home forum or the 
defendant's home forum would give ample consideration to the 
plaintiff's interest in convenient adjudication while reducing the 
worst abuses. Such a rule wouldn't solve the forum-shopping problem 
entirely--one can imagine patent litigation companies setting up shop 
in a favored jurisdiction in order to take advantage of that forum--but 
it will help.
    1 The Federal Circuit occasionally affirms a refusal to grant 
preliminary injunctions, see Hybritech Inc. v. Abbott Laboratories, 849 
F.2d 1446, 1458 (Fed. Cir. 1988), or to enter injunctions when the 
patentee has failed in some other aspect of proof, see Odetics, Inc. v. 
Storage Tech. Corp., 185 F.3d 1259, 1273 (Fed. Cir. 1999) (patentee 
committed laches, and could not enjoin products produced during the 
period of its laches). But not since the 1984 decision in Roche 
Products Inc. v. Bolar Pharmaceuticals Co., 733 F.2d 858, 866 (Fed. 
Cir. 1984), has it refused to enter a permanent injunction because of 
considerations of equity.

                              ATTACHMENT 1






















                              ATTACHMENT 2










    Mr. Smith. Mr. Dudas, let me direct my first question to 
you. Everyone in this room has probably read a number of 
articles about the RIM case, the BlackBerry case. And I would 
like for you to respond to a couple of points that Mr. 
Balsillie made and that I would make, and that is the 
impression that we have had from reading these articles and 
looking at the case is that the Patent and Trademark Office 
issued patents that were questionable, and then when it came to 
the reexamination of some patents did not act with dispatch.
    Would you respond to those points?
    Mr. Dudas. Certainly. I think one of the points about 
reexamination is it shows largely that the process does work in 
that----
    Mr. Smith. Because it cost BlackBerry over a half a billion 
dollars to learn that lesson.
    Mr. Dudas. If you look at reexaminations, it gives you an 
opportunity to challenge a patent that the Patent and Trademark 
Office has issued. So I think philosophically, it is something 
we think post grant is better. On special dispatch, I think it 
is unacceptable to be taking the amount of time that the office 
had taken just 3, 4 years ago, where it took 4 years before we 
even touched an action.
    I testified before this Subcommittee that that was going to 
change, that we were going to make certain we had an action on 
every case before 2 years. We were able to do that I think 
special dispatch has real meaning now.
    The special reexamination unit not only increases quality, 
it increases consistency. In some cases we are taking 30 times 
the amount looking at reexamination. Professor Lemley had a 
good point, there is a difference between 408,000 applications 
that come in that you have to deal with every single one of 
those in an appropriate manner, or looking at 540, where 
someone says we have a substantial question. But I will also 
point out there is an excellent point on anyone's part, we 
should have these done. We believe we will be able to get them 
done eventually within 20 months very soon.
    But the other thing to look at as well is the 
responsibility of the patent applicant who is involved in a 
reexamination and the responsibility of the requesters. There 
are many cases where the request for reexamination did not come 
upon a notice letter, it did not come upon being sued, it did 
not come upon losing a motion to dismiss. But the reexamination 
question is not coming in until after that case is lost in 
court, there is a finding of damages and it goes forward.
    If the request comes in sooner, we certainly would be able 
to get it done sooner. Judges are less likely--the evidence 
shows both in terms of policy, and in fact--judges are less 
likely to stay cases once a full decision has gone through a 
full discovery and a full decision has been made. That is an 
issue, I think, where there is responsibility across the board. 
I think we can give folks a stronger sense that the Patent and 
Trademark Office is doing a better job which makes us a more 
viable alternative.
    Mr. Smith. Mr. Balsillie are you at least partially 
reassured by those remarks?
    Mr. Balsillie. Yes, I am. I think the improvements in the 
Patent Office are appropriate. And we support them. And I think 
they are making some positive directions. And it is too easy to 
make the Patent Office a scapegoat. Some of the things that I 
have experienced is that we think when there is reexaminations, 
there needs to be clarity also to the courts, just what is the 
strength of the patents and what is the strength of the 
reexamination rulings?
    In our case, all of the final office actions, rejecting all 
of the claims and yet that had no weight in injunctive relief, 
so there is a special dispatch element, but there is also an 
element of waiting and quality that the court should be guided 
in this case as well.
    Mr. Smith. Thanks. Mr. Dudas, one more question I have 
actually been waiting weeks to ask you this. Let's assume that 
we agree that you could be doing a better job when enforcing 
the nonobvious standard.
    And I think you would agree that we would hope that courts, 
district courts would be a little more strict in how they 
interpret the nonobvious standard. This is not a issue that was 
called to my attention, but this is a paper napkin ring that is 
the kind typically wrapped around napkins of plastic wear, you 
know rectangular piece of paper with a little glue on one end.
    This was patented many years after it allegedly was being 
used informally. This to me may be an example of a patent that 
was obvious rather than nonobvious. And I don't know the origin 
of this, but to me, this has always seemed a little bit like 
the peanut butter and jelly sandwich that is being patented, 
and an example, perhaps, of how we can do a better job along 
the process.
    Do you have any comments on that?
    Mr. Dudas. Absolutely. I will comment more generally, and 
then I will get specifically to that.
    Mr. Smith. Be very quick.
    Mr. Dudas. I will get specific. There is a concern--it is 
certainly frustrating to some examiners when they feel that 
they have a finding of obviousness, and they need to show 
something more specifically. We don't want to have willy nilly 
discussions of obviousness, et cetera. But there is no question 
we share the same goals as the Federal circuits and the courts 
that have given us guidance, which is to not do too much 
second-guessing. At the same time, we do think it is a worthy 
area to be looking into.
    Mr. Smith. Thank you, Mr. Dudas. I will have additional 
questions after the other Members have asked their questions. 
The gentleman from California, Mr. Berman.
    Mr. Berman. Thank you. I would like to pick up on the 
issues raised by the Chairman's initial question, and your 
response, and I would like to ask, Director Dudas, would you 
prefer to be Secretary Dudas, which is better? I don't know. 
But I would like to ask you, and then I would like to ask Mr. 
Balsallie to comment, and Professor Lemley, if he would, an 
issue that has come up that you now just discussed, at least I 
wasn't aware of until last fall, is this issue on inter partes 
reexamine, where we spoke about the effect of instituting an 
inter partes after a decision of the District Court.
    So what I would like to know at this point is what do you 
believe the effectiveness of a PTO review, which finds a patent 
invalid, should be on a district court decision during various 
trial phases? If the PTO is in the middle of the review and the 
court is in the middle of the liability phase, should the court 
stay the proceeding? What if the court is in the damages phase, 
what if the PTO has made a decision that the patent is invalid? 
What should be the effect on the liability or damages phase? 
And should those same conclusions apply in where it is an ex 
parte reexamination proceeding? Also, what should the deference 
be to the enter party's decision in the district court? And to 
what extent in all this are you--if what the Chairman 
originally proposed last year in his legislation--we didn't 
address this issue then, but in the bipartisan bill that he 
proposed, that changed, that provided a better kind of balance 
on the injunction issue and a second window, and a post exam 
process and a second window and made a number of these changes, 
should your answers to these questions, would they be different 
if that were now the law?
    Can you answer these 14 questions?
    That is a continuation process.
    Mr. Dudas. That is not one question. There are a lot of 
claims as well. But at any rate, the world we live in now, 
quickly, I will answer as director. If any ex partes 
reexamination upon being filed, we will follow through its 
conclusion regardless of when it's filed. We have no authority 
to stay that. An inter partes reexamination, we must stay it 
after a final decision, which means a CAFC decision, or a 
district court decision that hasn't come forward.
    I agree that----
    Mr. Berman. But if the district court decision has come 
down finding a patent was valid and infringed, but the other 
side still has time to file a notice of appeal, or is pursuing 
an appeal----
    Mr. Dudas. We are not estopped. However in that case, we 
have the authority, we believe, under good cause, to stay the 
proceeding within our office, and so as not to waste 
administrative resources while the CAFC makes that 
determination. We have done that in a case that is outstanding 
right now, and there is an action against us in the Eastern 
District of Virginia suggesting we don't have that authority. 
We believe we do have that authority.
    The law is fairly clear that we are estopped in an inter 
partes, case after a final decision. It's also clear under the 
law, we believe, that we must go on in any ex partes 
reexamination regardless. I think the policy should be that 
there needs to be certainty. There shouldn't be a policy of who 
goes first.
    I talked to a number of Federal judges about this and off 
the record the discussion has been along the lines of, if the 
Patent and Trademark Office can get a reexamination done within 
a certain amount of time, then they would more likely stay 
their actions.
    But you are in an exact point. The question becomes, I 
believe, at what point is the reexamination requested? I think 
there is a difference in judges' minds. There is a difference 
certainly in our minds, from a policy perspective not from 
under the law, but from a policy perspective, if a 
reexamination is filed before you go to court or before the 
discovery phase versus after a decision has been made, findings 
have been found, et cetera. That looks more like a second bite 
at the apple. And it seems to me, as Under Secretary, at this 
point we need to have clearer rules along those lines.
    I think the same is true for post grant. I think the post 
grant opposition proceeding that we would suggest would have a 
second window. It would allow for the PTO to stay an action in 
the cases--it would only let you in a second window if you had 
a threat of a lawsuit. And I think there are answers to that 
where judges have the opportunity to stay and the PTO does. 
There is a lot more to this answer. I know my time is up, but 
the key is when is that requested. But I do think certainty 
will help.
    Mr. Balsallie. In the case of Research in Motion, it's 
really a real-life case. It is not a hypothetical case. And 
when you look at the wireless system that we employ, in our 
preliminary searches of the Patent Office, there is 
approximately 1.1 million patents that apply to our wireless 
system. Now, if you applied 2 to 3 dozen average claims, that 
means we have 30 million approximate claims that could apply 
against BlackBerry. And it takes one claim to shut down the 
whole system. That is what I call Russian Roulette.
    And then you come at us and then what happens is with that 
Russian Roulette, somebody is holding a gun to your business, 
and has the ability----
    Mr. Berman. Worse than Russian Roulette.
    Mr. Balsallie. I am trying to be polite, but there is no 
limit on what they can ask. For they can ask for $612 million 
and my kidney. So there is no limit. And that is Russian 
Roulette and worse.
    And then you have--and so definitely, when somebody is not 
practicing, they are not furthering the arts. And this doesn't 
prejudice innovators, and it doesn't prejudice those that sell 
products. And there is a contradiction between somebody wanting 
to be protected with irreparable harm, but really, all this 
want is money.
    And there is no harm done in just prescribing a royalty and 
keep it in, keep it paid and just keep it in escrow. There is 
no irreparable harm.
    And in terms of the reexamination process, I have yet to 
understand why the patent--injunction is a blunt instrument. 
And the only place where it is used almost absolutely is in the 
patent process.
    Yet, it's this broad system with tens of millions of 
claims.
    It doesn't bear any relation to what would protect the 
society and furthers innovation. It's an anomaly. And in our 
case, we actually, they actually did find office actions. They 
actually did their job. It was done. It was in three cases. And 
what is ironic is we were stayed as the primary inventor, so we 
are being shut down for something the Patent Office said 
shouldn't have been issued, and we are the inventor and the 
courts gave no weight to it. And in fact, there was some joking 
by the courts that if we stop wireless e-mail, it won't be 
``the end of the free world.'' yet I thought it wasn't about 
the end of the free world, it was about a balance of equities.
    Mr. Smith. Thank you, Mr. Balsillie. Let me go back to a 
couple of questions that I had, and give you all a chance to 
respond as well.
    I have an intervenor here. I didn't see you until right 
now. Welcome back, and the gentlewoman from California is 
recognized for her questions.
    Ms. Lofgren. Thank you, Mr. Chairman. There are so many 
questions, but I think I just like each of the witnesses to 
comment on a back end, if you will, question, with respect to 
injunctions. We have been, the three of us and several other 
Members have been working through these issues in public 
hearings, in discussions, in various forms and formats 
throughout this Congress, and one of the things that I have 
been told, and I would like you to comment on, is that in the 
area of patent litigation, once there has been an ajudication 
of infringement, an injunction is awarded against the 
infringing party in virtually every instance, which is very 
different from other types of litigation where it is more 
difficult to get injunctive relief. And I think that is exactly 
the issue that is before the court today on the Merck exchange 
eBay case, and I don't think it would be appropriately 
necessary to talk about that one case.
    But I am interested in, one of the prongs of the injunction 
standard is ordinarily the prospect of irreparable harm, harm 
that can't be made whole by a monetary award. And it seems to 
me in a situation where a patentee does not compete in the same 
line of business as the infringing party, what could the 
irreparable harm be that couldn't be made whole by a monetary 
award? And what is the theory of irreparable harm in that case?
    And I think probably this had a lot to do with the RIM case 
and perhaps, Mr. Balsallie, I hope I am not mispronouncing your 
name, but I am particularly interested in NTP's theory of 
irreparable harm for injunction as well as, certainly, 
Professor Lemley. I appreciate you have come all the way from 
Stanford to be here today. I make that trip every week, so I 
know it is not easy to do.
    Mr. Balsallie. Very briefly, because Professor Lemley 
certainly has great background in this, and I would say that we 
were puzzled because they put forward that all they wanted was 
money, but they wanted an irreparable harm remedy. And it was 
really to extract more leverage than due the value of the 
patent. It was never clarified. They never answered why. It was 
just an automatic. They didn't practice anything, any 
innovation, they didn't further the arts. One of their patents 
was issued, they filed a suit, it was issued well after 
BlackBerry had been in the market through continuation. So, I 
mean, I am at a complete loss to give you any understanding as 
to why that instrument was used.
    Mr. Lemley. The existing statute says, courts may grant 
injunctions in accordance with principles of equity, which 
seems to suggest that courts and patent cases ought to do 
exactly what they do in copyright cases, in real property 
cases, in personal property cases, which is considered 
irreparable harm, balance of the hardships and so forth. But 
the Federal circuit, over the last 20 years, has kind of 
drifted into a rule that really is, I think, unique to patent 
cases, which is an absolute entitlement to injunctive relief 
once the patent has been found invalid and infringed.
    I think that is a mistake. Now let me be clear. I think 
injunctions are normally the right remedy. They are the right 
remedy where you have somebody competing with the patent owner, 
whether or not the patent owner is practicing the same 
invention. I also think they are the right remedy where the 
defendant engaged in copying from the patent owner. You 
shouldn't be able to copy and then continue using the 
technology.
    But, I think it is important for this Committee to 
emphasize that the traditional principles of equity and the 
ability for district courts to sort of think through the 
question of whether injunctive relief is appropriate, in any 
given case, really is and ought to be an important part of the 
patent system.
    Mr. Lemley. At the eBay hearing last week, counsel for 
MercExchange said, well, you shouldn't change this rule of 
absolute entitlement to injunctive relief because Congress has 
already thought about changing injunctive relief, and they 
haven't acted.
    Ms. Lofgren. We actually thought about readopting the 
statute we have.
    Mr. Lemley. I heard a proposal on the Senate side you ought 
to italicize the word ``may'' in section 283. I don't know 
whether it's possible to italicize something in the United 
States Code, but that is not a bad start.
    Ms. Lofgren. If I could, I just have a little bit more 
time. I'm interested, Professor, you had--we have heard 
opponents of the coalition draft talk about the ability of 
courts to reduce damage awards in patent litigation to take 
account of the portion of an infringing product's value 
contributed by nonpatent components, and I have heard from 
proponents that the current law does not actually accomplish 
this, in part because of the deficiencies we all agree need to 
be addressed at the front end.
    Can you talk just briefly about your view of inventive 
contribution rather than whole claims under current law?
    Mr. Lemley. Yes. The current law, like in the injunction 
context, at least nominally gives you the ability to deal with 
this problem because it allows courts to take into 
consideration all of the other nonpatented components of the 
invention. The problem is courts don't generally do so, or at 
least they don't do so to a significant extent.
    I'm producing an empirical study on this issue right now. 
What we find is they reduce damages a little bit as royalty 
percentage in component industries, but not by very much; in 
fact, so little that on average a component product would have 
only 1.3 or 1.4 components in it. That's, of course, not true.
    You could solve this problem theoretically in the courts if 
you could get the courts to really take all of this into 
account, but it's hard to do so, and so I think actually 
encouraging them specifically to consider this in the statute 
by focusing on the inventive contribution that is the subject 
of the patent and how it relates to the broader product will 
get us damages numbers that are in line with the patentee's 
actual contribution, which is what I think we want at the end 
of the day.
    Ms. Lofgren. Thank you very much. Thank you, Mr. Chairman.
    Mr. Smith. Thank you.
    Let me return to a subject that is a part of our patent 
reform effort and, Mr. Stewart and Mr. Lemley, ask you about 
it. This is the second window review under the postgrant 
system. I think all of our witnesses support that, as do I, but 
there are others who oppose the postgrant system because they 
say that will potentially unsettle any patent title, so to 
speak, and the owner of that patent will always be concerned 
that they may be challenged. What is a good response to the 
concerns of those who oppose the postgrant system. Mr. Stewart 
and Mr. Lemley.
    Mr. Stewart. I agree with the Subcommittee that the 
postgrant opposition is a very effective tool, and the second 
window is more so effective. The postgrant opposition, as I 
think it's currently situated, gives 9 months after the grant 
in which you could challenge a patent, and EPO has a similar 
statute on the books.
    This situation with the second window is that typically 
most firms do not monitor competitors' patents to a large 
extent, especially in the financial services industry. In 
addition, when you monitor firms, that opens up a whole another 
can of worms in terms of liability and willfulness and things 
of that nature. So if you're not monitoring the competitors' 
patents that are coming out, you don't have an opportunity to 
take advantage of that first 9-month window, and it's only when 
you receive that letter, if you will, or that lawsuit or 
whatever the case may be at a later point do you have an 
opportunity to really look at the patent and actually challenge 
it in the USPTO and take advantage of the opposition precedent. 
We've had numerous problems with monitoring of competitor 
patents because of some of the willfulness issues you guys have 
tried to address.
    Mr. Smith. Mr. Lemley.
    Mr. Lemley. I think the answer to--what's a good answer to 
that objection is we already have a system in which you can go 
back to the Patent Office and ask for a reexamination at any 
time, regardless of how long you wait, and the reason we have 
that normal reexamination system is we think it's actually 
better and cheaper to try to get the patent validity sorted out 
in the Patent Office without having to go through litigation 
that costs $5 million a side.
    I think of postgrant opposition as a sort of improvement in 
the reexamination process. It's not and shouldn't be full-
fledged litigation, but it ought to be something more and have 
more involvement than a regular reexamination system. And then 
it seems to me to be reasonable to say not, as we do with 
regular reexam, you can bring it at any time, but you can bring 
it within a few months after you find out about the patent.
    That can happen either because the patent issued, I think, 
in the pharmaceutical industry--everybody is going to know 
about these patents on basically the day they come out, so 
second window maybe isn't so necessary. But in the IT industry 
and the financial services industry, as Mr. Stewart indicates, 
people don't find out about these patents until years later, or 
they may read them and not have any idea that they are going to 
be asserted against a different technology three generations 
down the line. Giving a limited period of time in which to go 
to the Patent Office and short-circuit, if we can, patent 
litigation is the right thing to do.
    Mr. Smith. Thank you, Professor Lemley.
    Mr. Dudas, I'd like to propose a question actually from a 
constituent of mine, but it bears on some of the subjects at 
hand. RIM is upset that the reexamination of the NTP patents 
were not conducted with special dispatch as the Patent Act 
requires. I have also heard this is the constituent patentee 
who has been stuck in a reexam proceeding for nearly 6 years. 
As an act of fairness he suggested we require the office to add 
day-for-day term extension to any patent that is the subject of 
reexamination when that proceeding has not concluded after 2 
years. In other words, if the office has not made a final 
determination after 2 years, the patent will receive additional 
term protection for each day thereafter. What's wrong with that 
idea, if anything?
    Mr. Dudas. The first thing that is wrong is that the 
reexamination has taken 6 years. I'm not aware; I can follow up 
to find out a little bit about that. We have gotten an action 
on every reexamination pending over 2 years. I don't know if 
this involves appeals or whatnot, but we have to make certain 
that's not a case where people are involved in reexaminations 
for 6 years unless it's caused by their own actions.
    The question about patent term extension, I think that is 
probably not the right answer, because even pending before 
reexamination, your patent is valid, determined valid, still 
has a presumption of validity, et cetera. The patent term 
extension we have now says if the office takes too long, and 
you don't yet have your patent rights, you're losing under a 
20-year filing term, so we'll give that back to you. But under 
the patent reexamination, the patent is still valid and can 
still be held.
    I think this is an excellent opportunity, and I will invite 
the oversight of the Subcommittee to make certain that I make 
good on the pledges I have made that we are going to get these 
things done more quickly. I think patent term extension might 
skew the incentives.
    Mr. Smith. Thank you, Mr. Dudas.
    Any other questions?
    The gentleman from California.
    Mr. Berman. Thank you, Mr. Chairman.
    I want to give Professor Lemley a chance to answer my 
initial questions, if I could. I also have another question, 
but I just have to follow up on something.
    Are you saying that in your case your opponents ended up 
through the continuation process filing or refining or changing 
a patent claim after your product was already out in the 
market, and that patent, that refined patent, became the basis 
for the finding of infringement?
    Mr. Balsillie. That was all but one of the claims in our 
case, yes. And the patent was issued long after our product was 
in the market, and then they sued us the day it was issued.
    Mr. Berman. Was the refinement made after your product 
was----
    Mr. Balsillie. Yes, it was.
    Mr. Berman. They knew what you were doing.
    Mr. Balsillie. In fact, I'll even tell you we disclosed the 
work route to them, and they filed continuations on that work 
route. Absolutely. You bet.
    Mr. Berman. Mr. Lemley.
    Mr. Lemley. Just to emphasize, that is actually one of the 
most problematic abuses of the continuation process is the use 
to identify something that your competitors come up with and 
change your patents to do it.
    Just briefly on the question of staying litigation pending 
reexam, I agree with Director Dudas on this, there are reexams 
filed because people actually want to get the patent's validity 
determined early on, and there are reexams filed for strategic 
reasons late in litigation because there is no real cost to 
doing so.
    It seems to me the courts, I think, are, generally 
speaking, getting it right, staying the litigation if you file 
your reexam early, not staying the litigation if you're filing 
your reexam late just as a strategic matter. That seems to me 
the right result.
    Mr. Berman. What about after--what if the, quote, infringer 
has lost a judgment and then asserts reexam?
    Mr. Lemley. That seems to me sort of very late. If you wait 
until you have already got your day in court, and then you're 
going to the Patent Office and saying, I want to use a process 
that's designed to be less expensive and avoid having to go 
have my day in court, that's maybe not the way we want the 
system used.
    Mr. Berman. Director Dudas, we talked at one point about 
the issue of quotas for examiners and this whole issue of--is 
there a disservice in having quotas which keep a patent 
examiner from spending more time on a particularly complicated 
case, and has there been any discussion about the wisdom of 
that in the office?
    Mr. Dudas. Absolutely, vast discussion. The bottom line is 
more time on a patent application, more time will lead to 
higher quality. I don't think it's necessarily a one-to-one 
relationship. All this, though, relies on a balance of 408,000 
applications, we have to be able to examine. Right now we 
examine all claims in every application, and hiring 1,000 
examiners a year at an 8 percent rate, we never actually get to 
the point where we're turning the tide on pendency. Very 
important, not saying we get it to an ideal point, but turning 
the tide. A reexamination is very much like that. There are not 
time limits. If it takes 30 times the amount of time, we take 
30 times the amount of time.
    One of the things that we are considering, big ideas, is 
should we be examining every single claim and every single 
application. And one of our rules actually suggests let's at 
least look at a couple first, and then we can possibly look at 
all the rest later unless you abandon some of them. Even 
further down the line, talk about having a more robust 
examination for some applications.
    Mr. Smith. Thank you, Mr. Berman, Mr. Dudas.
    We are going to vote, and as a result we'll need to adjourn 
the Subcommittee. But thank you all for your testimony today. 
It has been very, very helpful. So we will stand adjourned.
    [Whereupon, at 6:01 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard L. Berman, a Representative 
     in Congress from the State of California, and Ranking Member, 
    Subcommittee on Courts, the Internet, and Intellectual Property
    Mr. Chairman,
    I believe this may be the sixth hearing on patent reform this 
Congress. I must thank the Chairman for his hard work in highlighting 
the need for patent reform this Congress. He brought together a large 
coalition of bi-partisan members to support a patent reform bill and 
managed to almost achieve consensus among the different party 
interests. However, I wonder about the benefits of pursuing further 
hearings on the identical issues we discussed last year if there are 
few new ideas being proposed and no further clarity about which 
legislative approaches this subcommittee should follow regarding patent 
reform. I am concerned that merely discussing the issue without any 
movement on a legislative proposal will further entrench the parties in 
their respective positions. The recent cases which have been settled 
(NTP/BLACKBERRY) or have been granted cert by the Supreme Court (EBAY/
MERCEXCHANGE) demonstrate that the time to address these issues is 
sooner rather then later.
    Past attempts at achieving more comprehensive patent reform have 
been met with resistance. However, the call for legislative action is 
loud. The New York Times has noted, ``[s]omething has gone very wrong 
with the United States patent system.'' The Financial Times has stated, 
``[i]t is time to restore the balance of power in US patent law.'' 
Therefore, today, Congressman Boucher and I have introduced a narrowly 
tailored patent quality bill to address some of the more urgent 
concerns.
    Once again, I firmly believe that robust patent protection promotes 
innovation. However, I also believe that the patent system is 
strongest, and that incentives for innovation are greatest, when 
patents protect only those patents that are truly inventive. When 
functioning properly, the patent system should encourage and enable 
inventors to push the boundaries of knowledge and possibility. If the 
patent system allows questionable patents to issue and does not provide 
adequate safeguards against patent abuses, the system may stifle 
innovation and interfere with competitive market forces.
    High patent quality is essential to continued innovation. 
Litigation abuses, especially those which thrive on low quality 
patents, impede the promotion of the progress of science and the useful 
arts. Thus, we must act quickly during the 109th Congress to maintain 
the integrity of the patent system.

                              ----------                              

   Prepared Statement of The Institute of Electrical and Electronics 
             Engineers-United States of America (IEEE-USA)
    IEEE's U.S. members are among the most frequent users of the USPTO, 
and therefore we have a compelling interest in ensuring that legal 
principles governing patent policy are consistent. By virtue of the 
practical experience of its members, the IEEE-USA respectfully believes 
that its views can assist this committee in evaluating the effect of 
patent reform proposals on technical innovation, especially that of 
independent inventors and small businesses. We support patent reforms 
that enhance our members' abilities to secure the patent protection 
they need, the lack of which would adversely affect our country's 
competitiveness, economy, and technological advancements.
    IEEE-USA believes that our nation's global competitiveness and our 
economy are directly tied to the innovations made by inventors of all 
types, including independent inventors, inventors employed by small 
businesses, inventors employed by research laboratories and 
universities, and inventors employed by Fortune 500 companies. The 
historical growth of more than one Fortune 500 company can be traced to 
the success of a startup with a handful of inventors that obtained 
funding due in great part to being able to protect their intellectual 
property. As such, the voice and concerns of the independent inventor 
and of small business entities must be considered along with the voice 
and concerns of larger entities at all stages of developing and when 
implementing changes to the patent process.
    We commend the Judiciary Committee's efforts to explore the 
complicated issue of patent reform. However, IEEE-USA believes that an 
investigation of patent reform requires Congress to assess all 
concerns, including those relating to the actions of patent infringers 
and patent trolls. If Congress reacts to concerns about patent trolls 
without assessing the consequences for patent holders who are subjected 
to patent infringers, then Congress might risk implementing bad 
legislation.
    Patent reform requires the consideration of all viewpoints. Within 
IEEE's U.S. membership, there is a diversity of views about patent 
reform. In contrast, witnesses at the Wednesday, April 5, 2006, 
Judiciary Subcommittee on Courts and Intellectual Property oversight 
hearing on ``Patent Quality in the Information-Based Economy'' 
presented a surprisingly unified position. Their testimony focused on 
restricting either the scope of patent coverage or the strength of 
patent enforcement provisions, without any real consideration of 
individual patent holders who may have valid concerns about losing 
their rights. In fact, the hearing presented the views of a Canadian 
company (Research in Motion), a Swiss Company (UBS), a legal scholar 
and the Under Secretary of Commerce for Intellectual Property. Many 
countervailing views, including the views of inventors and small 
business owners, were not presented.
    The IEEE-USA looks forward to assisting the USPTO and Congress in 
your efforts to improve the efficiency and quality of the patenting 
process. We believe that the subcommittee should hear a representation 
of all views before deciding on patent reform. More specifically, IEEE-
USA believes that the subcommittee should hear from U.S. companies and 
at least one practicing patent attorney (that is not directly employed 
by a single company).
    About IEEE-USA
    IEEE's U.S. members include inventors, innovators, designers, 
independent entrepreneurs, small business owners, and employees of 
firms that acquire, license and exploit intellectual property. Their 
collective efforts promote our nation's prosperity, security, and 
competitiveness by fostering technological innovation. IEEE supports 
the engineering process of creating, developing, integrating, sharing 
and applying knowledge about electronics, information technologies and 
physical sciences for the benefit of the profession and humanity.
    This statement was developed by the Intellectual Property Committee 
of the IEEE-United States of America (IEEE-USA) and represents the 
considered judgment of a group of U.S. IEEE members with expertise in 
the subject field. IEEE-USA is an organizational unit of the Institute 
of Electrical and Electronics Engineers, Inc., created in 1973 to 
advance the public good and promote the careers and public policy 
interests of the more than 220,000 electrical, electronics, computer 
and software engineers who are U.S. members of the IEEE. The positions 
taken by IEEE-USA do not necessarily reflect the views of IEEE or its 
other organizational units.

                                 
