[Senate Hearing 109-929]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 109-929
 
    PERSPECTIVES ON PATENTS: POST-GRANT REVIEW PROCEDURES AND OTHER 
                           LITIGATION REFORMS

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON INTELLECTUAL PROPERTY

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              May 23, 2006

                               __________

                          Serial No. J-109-78

                               __________

         Printed for the use of the Committee on the Judiciary



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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
           Michael O'Neill, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

                 Subcommittee on Intellectual Property

                     ORRIN G. HATCH, Utah, Chairman
JON KYL, Arizona                     PATRICK J. LEAHY, Vermont
MIKE DeWINE, Ohio                    EDWARD M. KENNEDY, Massachusetts
LINDSEY O. GRAHAM, South Carolina    JOSEPH R. BIDEN, Jr., Delaware
JOHN CORNYN, Texas                   DIANNE FEINSTEIN, California
SAM BROWNBACK, Kansas                HERBERT KOHL, Wisconsin
TOM COBURN, Oklahoma                 RICHARD J. DURBIN, Illinois
                  Bruce Artim, Majority Chief Counsel
                Bruce A. Cohen, Democratic Chief Counsel







                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     8
    prepared statement...........................................    67

                               WITNESSES

Cadel, Andrew, Managing Director, Associate General Counsel and 
  Chief Intellectual Property Counsel, JP Morgan Chase, New York, 
  New York, on behalf of the Financial Services Roundtable and 
  BITS...........................................................    12
Chandler, Mark, Senior Vice President and General Counsel, Cisco 
  Systems, San Jose, California..................................     4
Johnson, Philip S., Chief Patent Counsel, Johnson & Johnson, New 
  Brunswick, New Jersey..........................................     6
Myhrvold, Nathan P., Chief Executive Officer, Intellectual 
  Ventures, Bellevue, Washington.................................     9
Thomas, John R., Professor of Law, Georgetown University Law 
  Center, Washington, D.C........................................    10

                               QUESTIONS

Questions submitted to the witnesses by Senator Dewine. (Note: 
  Responses to Senator DeWine's questions were not received by 
  the Committee prior to the time of printing (July 2, 2007).)...    31

                       SUBMISSIONS FOR THE RECORD

Cadel, Andrew, Managing Director, Associate General Counsel and 
  Chief Intellectual Property Counsel, JP Morgan Chase, New York, 
  New York, on behalf of the Financial Services Roundtable and 
  BITS, statement................................................    32
Chandler, Mark, Senior Vice President and General Counsel, Cisco 
  Systems, San Jose, California, statement.......................    40
Haken, Jack, Vice President, Intellectual Property & Standards, 
  U.S. Phillips Corporation, Briarcliff Manor, New York, 
  statement......................................................    53
Johnson, Philip S., Chief Patent Counsel, Johnson & Johnson, New 
  Brunswick, New Jersey, statement and attachment................    57
Myhrvold, Nathan P., Chief Executive Officer, Intellectual 
  Ventures, Bellevue, Washington, statement......................    68
Thomas, John R., Professor of Law, Georgetown University Law 
  Center, Washington, D.C., statement............................    98


    PERSPECTIVES ON PATENTS: POST-GRANT REVIEW PROCEDURES AND OTHER 
                           LITIGATION REFORMS

                              ----------                              


                         TUESDAY, MAY 23, 2006

                                       U.S. Senate,
                     Subcommittee on Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:08 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Orrin Hatch, 
(Chairman of the Subcommittee) presiding.
    Present: Senators Hatch and Leahy.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    Chairman Hatch. We are happy to welcome you all here to 
this very important hearing on patent reform today. We have 
some really stellar witnesses, and I look forward to it myself.
    Today's hearing will focus principally on questions 
surrounding post-grant review proceedings. As many of you know, 
post-grant review refers generally to the procedures allowing 
the validity of a patent to be challenged in an administrative 
proceeding conducted by the Patent and Trademark Office, rather 
than in court litigation.
    Under current law, there are now reexamination procedures 
by which the PTO may reconsider a patent's validity at the 
request of an interested party. However, current reexamination 
proceedings are very limited and do not allow for a full 
consideration of a patent's validity. As a result, even when 
reexamination is available, potential litigants generally wait 
to challenge a patent's validity until an infringement suit has 
been brought against them despite the higher cost and prolonged 
uncertainty of doing so.
    Proponents of adopting a more robust post-grant review 
proceeding, myself included, believe that providing a more 
efficient means of challenging a patent's validity in an 
administrative proceeding is necessary to address systemic 
problems in our patent system, making post-grant review an 
essential component of any meaningful reform legislation.
    There appears to be substantial agreement regarding the 
need for a more meaningful post-issuance review. There are 
strong disagreements over specific attributes and scope. The 
most significant of these disagreements appears to flow from 
fundamentally different opinions regarding the appropriate 
policy goals of such a procedure. From my perspective, the 
proponents of post-grant review appear to rely on one or more 
of the following basic policy rationales for expanding 
administrative review.
    First, some argue that the PTO is institutionally better 
equipped than the Federal Courts to resolve highly technical 
disputes regarding patentability.
    Second, many feel that a relatively inexpensive opportunity 
to challenge patent validity at an earlier point in time would 
significantly improve patent quality by allowing challengers to 
invalidate or narrow problematic patents soon after they are 
issued.
    Third, some believe that various aspects of litigation, 
including the presumption of validity, and the clear and 
convincing standard of proof place unwarranted burdens on a 
party seeking to challenge a patent's validity. They argue that 
these burdens would not be necessary in a specialized system of 
adjudicating patent validity due to the judge's higher level of 
technical expertise, and that such a system would allow a 
fairer opportunity to challenge validity.
    While these are not necessarily inconsistent rationales, 
there are significant tensions between the second and third 
goals. Obviously, the most suitable type of post-grant review 
system depends on the relative importance accorded these goals 
as well as how one balances a patent owner's countervailing 
interest and sufficient certainty and finality with respect to 
the validity of an issued patent.
    At its most fundamental level some form of post-grant 
review is necessary to ensure that the validity of questionable 
patents as adjudicated, which corresponds to the goal of 
improving patent quality by allowing a less expensive way to 
adjudicate validity issues.
    At present it appears that the substantial cost, delay and 
uncertainty of challenging a patent frequently outweigh the 
benefit to any one potential litigant of doing so. Thus, even 
though the aggregate costs of a suspected patent may be 
substantial, in many cases no single party has sufficient 
incentive to litigate the patent's validity to conclusion. In 
part this is because the benefits of a successful challenge 
flow to everyone against whom the patent could have been 
asserted, while the litigation costs are borne by only one of 
them. If reducing the disincentives to validity challenges is 
the primary goal of post-grant review, it would likely be 
necessary to limit or exclude various factors that would 
greatly increase its cost, including the availability of 
discovery and extended proceedings with live testimony.
    Additionally, as Professor Thomas and others have 
suggested, simply decreasing the cost would not address the 
public goods aspect of patent challenges. Rather, doing so, 
would require some additional incentive or ``bounty.''
    On the other hand, to the extent that the main goal of 
post-grant review is to create a specialized system for fully 
adjudicating patent validity, it would be necessary to include 
many aspects of adversarial litigation that would drive up the 
cost and potential delays associated with these proceedings.
    For obvious reasons, if post-grant review largely 
replicates the costs and delays of court proceedings, it is 
unlikely to be an attractive alternative to litigation unless 
the challenger's likelihood of success is increased by 
stripping away the presumption of validity and lowering the 
standard of proof required to establish invalidity.
    However, if the solution is merely to allow patents to be 
invalidated using a lower standard, it is unclear why we go to 
the trouble of inventing or creating an entire post-grant 
review system instead of simply lowering the standard that is 
applicable in litigation.
    To date, widely disparate proposals and suggestions 
regrading post-grant review have been made by stakeholders, 
academics and lawmakers. At one of the spectrum are proposals 
that would create a low-cost streamlined proceeding by simply 
expanding the current inter partes reexamination.
    At the other end are suggestions for the creation of 
specialized patent courts that would partially supplant Federal 
Court litigation. Many proposals fall somewhere between these 
two extremes. For example, some propose making an expanded 
reexamination available throughout the life of a patent, while 
also providing a separate more robust opposition proceeding for 
a short window of time after a patent's issuance.
    There are also a variety of suggestions regarding how to 
increase the incentives to challenge patents preemptively, such 
as awarding attorneys' fees to a successful challenger, or 
according a presumption of validity only to patents that have 
survived the challenge to their validity.
    It is my hope that today's hearing will shed some light on 
how to address the fundamental tension between these various 
models of post-grant review and their relative benefits and 
limitations.
    I do look forward to the witnesses' testimony and to a 
lively discussion of these important issues, and we will take 
Senator Leahy's opening statement whenever he arrives, and we 
will interrupt whatever we are doing to take that statement. I 
understand he is on his way.
    We have a particularly wonderful panel here today, and I 
will just introduce them all.
    Mark Chandler, a Senior Vice President, General Counsel, 
Cisco Systems, Inc.; Philip S. Johnson, Chief Patent Counsel 
for J&J, Johnson & Johnson; Nathan P. Myhrvold, Chief Executive 
Officer of Intellectual Ventures; John R. Thomas, Professor of 
Law, Georgetown University Law Center; and Andrew Cadel--am I 
pronouncing that right or is it Cadel.
    Mr. Cadel. Cadel.
    Chairman Hatch. I knew there would be some fancy way of 
saying it.
    [Laughter.]
    Chairman Hatch. Managing Director, Associate General 
Counsel and Chief Intellectual Property Counsel, JP Morgan 
Chase.
    This is a really good panel, and we are really grateful to 
have you here, and we need some help in this area, so I am 
going to particularly pay attention to what you have to say, 
and let's hope that we can arrive at what is really the best of 
circumstances in the end.
    So, Mr. Chandler, we will begin with you.

 STATEMENT OF MARK CHANDLER, SENIOR VICE PRESIDENT AND GENERAL 
       COUNSEL, CISCO SYSTEMS, INC., SAN JOSE, CALIFORNIA

    Mr. Chandler. Thank you, Mr. Chairman. My name is Mark 
Chandler. I am Senior Vice President and General Counsel of 
Cisco Systems.
    Just three points following on your opening statement. 
First, why we think the current patent litigation system does 
not work; second, how a post-grant administrative review 
process can help remedy one defect of the system; and third, 
why some other changes are also required.
    Cisco has over 47,000 employees and invests over $3 billion 
each year in research and development. Our innovation helped 
create the global Internet. We hold over 2,500 issued U.S. 
patents, and have applied for over 4,000 more. Cisco believes 
deeply in strong protection for intellectual property.
    So why would a company like Cisco favor legal changes that 
some say would decrease the value of patents, and why would the 
manufacturer of the Blackberry pay over $600 million to license 
patents that the PTO said were invalid?
    The answer is that the patent litigation system is broken. 
When a patent holder is willing to license patented technology, 
the system should encourage negotiation of a license fee 
reflecting the fair value of the intellectual property. Our 
current litigation system completely fails that test. The 
current rules incentivize winner-take-all jackpot-like 
strategies. The patent litigation rules themselves are now a 
means of enhancing patent value instead of a neutral system for 
resolving disputes.
    Increasingly, those who manufacture products or offer 
services like Cisco are defendants in a new type of patent 
litigation. These efforts use in terrorem leverage that comes 
from recent changes in the patent system and abuse of that 
system to receive disproportionate and unearned fees, often 
through just the threat of litigation.
    Justice Kennedy recognized this in his opinion in the 
Supreme Court's eBay decision. Let me quote him: ``[i]n cases 
now arising...the nature of the patent being enforced and the 
economic function of the patent holder present considerations 
unlike earlier cases. An industry has developed in which firms 
use patents not as a basis for producing and selling goods but, 
instead, primarily for obtaining licensing fees''.
    In my written statement, I have provided documentation 
regarding abuse of patent litigation and studies of that 
problem. That said, we reject the use of pejorative terms such 
as ``patent trolls.'' The rise of this new type of litigation 
is not the issue, it is merely a symptom of an underlying 
problem. That is why Cisco and hundreds of other technology 
manufacturing media and financial services companies have 
joined together to seek reform.
    One important reform is a sensible post-grant review system 
linked to but separate from the litigation process. As the 
absurd outcome in the Blackberry case illustrates, there is 
currently no effective way to review the validity of a patent. 
The inter partes process is not a practical option due to the 
broad estoppel standard, and the presumption of validity that 
applies in litigation precludes effective challenges in court 
and drives extorsive negotiations.
    The solution is post-grant proceedings heard by 
administrative law judges trained to fairly assess merits. A 
first window immediately after a patent is granted will not 
solve the problem because a company like mine simply cannot 
anticipate when a patent is issued how the patent might be 
stretched to apply. A second window after receipt of notice of 
infringement would place the decisionmaking where it belongs, 
with the export agency guided by appropriate evidence.
    Patent holders must not face dilatory and duplicative 
proceedings, however. Justice delayed is justice denied in the 
patent system as well. To avoid unnecessary burdens the second 
window has to be constrained.
    First, if the prospective defendant choose to initiate 
post-grant review, he must estopped from relitigating any 
issues actually raised and decided in the proceeding.
    Second, if the defendant chooses not to initiate an 
administrative proceeding, then any later court challenge to 
patentability must overcome the presumption of validity.
    Third, a patent holder should have the right to block 
initiation of this post-grant proceeding, but in that case the 
presumption of the patent's validity would not apply in any 
subsequent court action.
    And finally, strict time limits and penalties should be 
included to ensure an administrative proceeding is not used for 
delay.
    This way we would avoid duplicative litigation, and also 
avoid the problem of the broad estoppel in the current inter 
partes system.
    There are several other necessary changes, however. First, 
venue at principle should be enacted to prevent forum shopping. 
Second, damage rules should require that fact finders determine 
actual inventive contribution of the patented technology, 
rather than basing royalties on a product's entire market 
value. Justice Kennedy recognized the harmful effect of the 
current rule in his observations about the leverage that is 
applied when ``the patented invention is but a small component 
of the product the [defendant] companies seek to produce.''
    Mr. Chairman, I see my time has expired. May I make some 
final, concluding remarks?
    Chairman Hatch. Go ahead.
    Mr. Chandler. Thanks. Two other principles that should be 
included are to make sure that U.S. patents apply only in the 
United States so there is not double jeopardy for products 
manufactured outside the U.S., and willfulness standards should 
better reflect traditional principles regarding treble damages.
    To conclude, it is simply not true that these modest reform 
proposals will eliminate longstanding rights of patent holders. 
As the Supreme Court unanimously found with respect to 
injunctions, the present rules and types of litigation they 
have engendered, are the result of recent decisions and 
exploitation of loopholes in the system.
    Congress should act to restore fairness and balance to 
patent litigation, and we look forward to working with you.
    [The prepared statement of Mr. Chandler appears as a 
submission for the record.]
    Chairman Hatch. Thank you very much.
    Mr. Johnson, we will take your statement.

STATEMENT OF PHILIP S. JOHNSON, CHIEF PATENT COUNSEL, JOHNSON & 
               JOHNSON, NEW BRUNSWICK, NEW JERSEY

    Mr. Johnson. Thank you. Chairman Hatch, it is indeed a 
pleasure to appear today. I want to thank you for the 
opportunity to testify on patent reform. Although I am active 
in a number of professional organizations, I am appearing here 
today only in my capacity as Chief Patent Counsel at Johnson & 
Johnson.
    Johnson & Johnson is a family of more than 200 companies, 
and is the largest broad-based manufacturer of health and 
personal care products in the world. Collectively, Johnson & 
Johnson companies represent this country's largest medical 
device business, its third largest biotechnology business, its 
fourth largest pharmaceutical business, and a very substantial 
consumer and nutritional and personal care business. Johnson & 
Johnson companies employ over 55,000 people in the United 
States, and these businesses are research-based businesses that 
rely heavily on the U.S. patent system and its counterpart 
systems around the world.
    In 2005, Johnson & Johnson's businesses invested $6.3 
billion in research and development, and indeed from time to 
time, Johnson & Johnson's companies have become involved in 
patent litigation, about equally as plaintiffs as they are 
defendants. While we are occasionally sued by non-manufacturing 
patentees, most of our litigation is with actual or would-be 
competitors.
    I am here today because I want to see us preserve and 
enhance the patent system's incentives to invest heavily in 
research and development. By doing so, we will not only improve 
the quality of life through new products and processes, but we 
will preserve our global competitiveness in an increasingly 
competitive world.
    While other issues are perhaps better at capturing the 
public's attention, I believe there is no more important issue 
that faces us today than that of patent reform.
    The Coalition Text attached to my written testimony is a 
balanced and politically achievable approach to patent reform. 
It includes an immediate post-grant 9-month opposition window 
designed as an immediate quality control check on newly issued 
patents. To stimulate public involvement in the process, it 
features lowered collateral estoppel and burden of proof 
standards. It also features an expanded list of validity issues 
that may be raised as compared to ex parte reexamination.
    The institution of such a post-grant opposition procedure 
will, nonetheless, come at a very substantial cost, especially 
to patentees who may have trouble affording the extended 
uncertainty of the proceedings that such an opposition approach 
might engender. To Johnson & Johnson and the 38 other companies 
and organizations that support the Coalition Text, these costs 
are a tradeoff worth making in favor of improved patent quality 
and reliable enforceability. The Coalition Text does not 
include any provision for subsequent post-grant oppositions, 
although ex parte and inter partes reexaminations will continue 
to be available to would-be patent challengers throughout the 
life of the patent.
    To provide a so-called second window opposition, especially 
one with lowered collateral estoppel and burden of proof 
standards, as suggested, for example, by Mr. Chandler, would be 
grossly unfair to patentees. Such proceedings would be 
counterproductive to participation in first window oppositions, 
would provide an unfair second bite at the apple to accused 
infringers, would likely add to the ultimate expense of patent 
enforcement, would provide an opportunity to infringers to 
disrupt patent rights near or at the end of the patent's term, 
would create the potential for concurrent and/or conflicting 
opposition and court proceedings and appeals, and/or would 
unfairly delay rightful enforcement of valid patents.
    Understandably, second window opposition proposals have 
been widely opposed within the intellectual property community, 
not only from those who oppose first window oppositions, but 
from a far broader spectrum of stakeholders, including AIPLA, 
IPO, ABA-IPL, PhRMA, BIO and many others from a broad base of 
industries, including Johnson & Johnson.
    Another important aspect for patent reform is inequitable 
conduct. This defense, which has become the defense of last 
resort in patent cases, has a negative impact both on patent 
litigation and on the practice before the Patent Office.
    Although the National Academies recommended that this 
defense be eliminated, the Coalition Text proposes to preserve 
it, but to apply two threshold limitations: a pleading 
limitation requiring that at least one asserted claim first be 
held invalid, and an evidentiary threshold requiring that the 
challenger show that but for the inequitable conduct the patent 
would not have been allowed.
    On the damage issue, Johnson & Johnson, frankly, sees no 
need for reform. Throughout the debate in the House and here 
again today, proponents of damages reform failed to support 
their position by citation to court cases showing that the 
courts are getting it wrong. In our experience, they simply are 
not. Where lost profits are involved, and where nexus is shown 
between the patented invention, its features, attributes and 
characteristics, and those included in the accused infringing 
product, we see no problem in having the royalty base include 
the entire value of the infringing product or process.
    There are areas of common ground, however, including 
agreement or apparent agreement on venue, on adequate funding 
for the United States Patent and Trademark Office, and on 
approaches that would punish people who attempt to game or 
otherwise abuse enforcement proceedings.
    I look forward to working with the Committee on these 
issues and any others that may come to the fore. Thank you.
    [The prepared statement of Mr. Johnson appears as a 
submission for the record.]
    Chairman Hatch. Thank you, Mr. Johnson.
    Senator Leahy is here, and he takes a tremendous interest 
in these intellectual property issues. We will take his 
statement at this time. Mr. Myhrvold, we will turn to you as 
soon as he is through.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. As you know, we are 
handling immigration on the floor, so we are kind of juggling 
back and forth. Unfortunately, it seems that everything that 
goes on goes through this Committee as of recent time.
    But the very complex issues in patent litigation, something 
that Senator Hatch and I have been grappling with for years, we 
were kind of asked by a lot of the others, both parties, to do 
that. A number of you I have met with both here and out of this 
room, so it is helpful what we are hearing from our witnesses. 
As I look around the room, I see an awful lot of people I have 
worked with over the years, and appreciate their help too.
    We have to figure out what the proper scope and form of 
review procedures are after the Patent and Trademark Office has 
granted a patent. It raises matters of patent law, 
administrative adjudication, and litigation strategies, all of 
these things. I think we have to keep in mind what our 
Constitution said, enshrined patent rights for the reason ``to 
promote the progress of science and useful arts.'' There is no 
mandate from the Founders that we embrace any particular 
approach to the patent litigation system, no requirement that 
we favor one side or another in a patent dispute, no directive 
to ensure that any other policies, however laudable they might 
be, be advanced. We are charged with creating and maintaining a 
system that gives inventors exclusive rights in their 
inventions for limited times in order, as I said, to promote 
the progress of science and useful arts.
    I believe an effective post-grant review procedure can and 
should do just that. It allows us to weed out efficiently 
invalid patents. The PTO can correct its own errors, and they 
do make errors. Infringement claims can be evaluated more 
effectively. And patent holders can be more confident in the 
rights secured to them.
    I have read over the written testimony. We could have a 
little bit of a lively debate among the people who are here. In 
fairness, I have said before I favor a strong post-grant 
process, including a limited--understand the word--limited 
second window in the event that a patent holder sues for 
infringement. But there are a multitude of subsidiary issues to 
be addressed within that framework.
    I do want to note, in closing, the strong praise I have of 
Senator Hatch for doing this. He and I have tackled these 
things over the years, I think sometimes, Mr. Chairman, when 
nobody else wanted to. We have always been able to reach a 
bipartisan conclusion. I think we are better for that, and that 
is what we are trying to do here.
    So I will put my whole statement and any other statements 
from this side in the record.
    Chairman Hatch. Without objection, so be it.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Chairman Hatch. We are so happy to have Senator Leahy here. 
When we get together, we can get things done, and so we are 
working hard on this to try and come up with something that 
will hopefully bring the parties together. That is pretty tough 
to do.
    Mr. Myhrvold, we are honored to have you here, and look 
forward to your testimony.

   STATEMENT OF NATHAN P. MYHRVOLD, CHIEF EXECUTIVE OFFICER, 
          INTELLECTUAL VENTURES, BELLEVUE, WASHINGTON

    Mr. Myhrvold. Well, I am honored to be here, Mr. Chairman, 
Member of the Committee. I am here to talk from the perspective 
of an independent inventor, which is my current job title. I 
filed more than 100 patent applications myself, but prior to 
this, I was Chief Technology Officer of Microsoft for 14 years, 
so I also something of the issues that happen in a big company.
    The first point I would like to make is that this really is 
an issue about property rights, and the patent system bestows 
property rights on an idea in order to give that idea the same 
status as any other kind of property in our capitalist system. 
It is very important that we keep that property right and that 
we keep it for small inventors. So regardless of whether it is 
Cisco or Microsoft, many of the most exciting huge companies 
today were tiny companies in recent memory, started by one or 
two people that had a great idea. And it is very important that 
this Committee keep that in mind. The small seeds are what grow 
this great forest of ideas. Going forward, to be competitive, 
we need to keep that.
    I think my second point is that this is not about tort 
reform. Although litigation is part of the patent system, I do 
not think this is really a tort situation. It is not about an 
abuse--there are, of course, abuses to litigation. There are 
abuses of every system that people have. I would suggest to you 
that the patent system is not quite in the state of crisis some 
others may think it is. Patent litigation is the least common 
form of intellectual property lawsuit, so it is lower than both 
trademark and copyright. It has been growing because the number 
of patents have been growing, but on the basis of the 
litigations per patent, that has been declining. In fact, it is 
at the lowest now that it has been since 1995.
    The court records show that the number of cases that reach 
trial has been flat in recent years. 104 cases reached trial in 
1998, 107 did in 2005. That is not a giant crisis.
    The awards for patents have gone up, but so has the stakes 
in technology. We took a look at added up the awards of the top 
set of tech companies that have paid big awards, and we 
discovered that over a 13-year period, this set of companies 
had paid $3.7 billion. It is a lot of money, until you consider 
that their revenue for the same period was an incredible $1.4 
trillion. I think maybe the Senate is the only place you can go 
and say trillion and not have it be a big number, just amazing.
    So if you take those patent cases--
    Chairman Hatch. That was a terribly cheap shot, but it 
was--
    [Laughter.]
    Mr. Myhrvold. But I know you are not disputing it.
    [Laughter.]
    Chairman Hatch. No, no, I think you have a very good point.
    Mr. Myhrvold. All together, these losses to patent things 
amount to about one-quarter of 1 percent of the revenues of 
these companies over this period. So while it is great to 
reform it and I am for many kinds of patent reform, we should 
keep in perspective this is not a litigation disaster. When you 
look at the companies that receive those payments, they are 
mostly very honorable companies.
    Post-grant review is a very important topic. I want to 
first though mention that the existing forms, ex parte and 
inter partes are far more successful than they are made out to 
be. Ex parte in 2005 handled 524 cases. That is more than five 
times the caseload that the Federal courts handled. Inter 
partes only really got going in 2003, so it is 3-years-old. It 
doubled between 2004 and 2005. It is already over half the 
rate, the caseload.
    So why are we looking for a new one? Why do we need a new 
post-grant mechanism? I suggest it is because this is a 
slippery slope. If you want a streamlined procedure, you have 
to take something out, or it has the full cost of trial. But if 
it is streamlined, there is a lot of advantages to going to 
trial. So as a result, we continually creep along, adding more 
and more features to these post-grant reviews, trying to 
recapitulate and recreate what a trial is.
    And so my solution to that is to suggest that in fact a 
dedicated patent court might be a better approach. Rather than 
say let's create a semi-trial over in the Patent Office and a 
full trial in the judiciary, let's restructure the trials in 
the judiciary to eliminate forum shopping, eliminate a bunch of 
the things that make it difficult and complex.
    With respect to first and second window, I would go back to 
what I said at the beginning, the small inventor is incredibly 
important here. We need to be able to give them certainty and 
give them speed. An extended period of review after the patent 
is issued means, in practical sense, they do not have the 
patent yet. Their financial backers probably will not give them 
the extra thing. They will say, ``Now, wait a minute. You have 
to go that extra period.'' It is like increasing pendency, the 
amount of time it takes to get a patent.
    Second window, I would agree with Mr. Johnson, is an 
incredible burden to place on the patent holder, and it is not 
going to serve a purpose of actually taking anything away from 
trial.
    To echo remarks that you made, Mr. Chairman, there is a 
huge public value to bad patents being taken out of the system. 
A strict time limit on a first window--if we need one; I am not 
convinced we do--but a strict time limit creates the incentive 
for people to speak now or forever hear your piece.
    And I see that I have actually run over my time, so thank 
you very much.
    [The prepared statement of Mr. Myhrvold appears as a 
submission for the record.]
    Chairman Hatch. Thank you. We appreciate hearing from you.
    Professor Thomas, we will turn to you.

   STATEMENT OF JOHN R. THOMAS, PROFESSOR OF LAW, GEORGETOWN 
            UNIVERSITY LAW CENTER, WASHINGTON, D.C.

    Mr. Thomas. Thank you, Mr. Chairman, for the opportunity to 
testify on the subject of post-grant review procedures.
    I appear today on my own behalf as a concerned observer of 
the patent system.
    One of the issues the two previous witnesses had discussed 
relates to time limits. Is there to be an initial 9-month 
period for oppositions, and then followed by a 6-month second 
window. As you have just heard, imposing time limits is 
justified on the basis of uncertainty and burden. I think that 
further explanation of this issue is appropriate. The 9-month 
period appears to be adopted from the European Patent 
Convention, which I think is a similar limit. However, the 
European Patent Convention does not put an end to patent 
challenges after the 9 months. Signatory states of the European 
Patent Convention are free to challenge patents in different 
national member states at the national level, and nullity 
proceedings or other sorts of proceedings once the 9 months 
expires.
    In the U.S., the Patent Act places no limit on filing a 
reexamination, and indeed, patent proprietors obtain the 
ability to tune up their patents by returning to the U.S. PTO 
and filing a reissue procedure throughout the entire term of 
the patent.
    Similarly, continuation practice, the doctrine of 
equivalence, create a relatively fluid environment for patent 
claims. Within that environment I think it is relatively 
difficult to make the case that lenient opposition time limits 
will contribute to uncertainly.
    Strict time limits may also detract from the ability of an 
opposition to serve as a prompt, inexpensive mechanism for 
assessing a patent's validity. Patents often issue long before 
the inventions they claim become commercially viable. Areas of 
which you know very well, pharmaceuticals and medical devices, 
patents often issue years before FDA marketing approval occurs.
    Other patents are sold to owners of more aggressive 
litigation postures. Other patents describe inventions that are 
simply ahead of their time. So debate over time limits for 
oppositions may not be properly centered on whether we ought to 
have a 6-month window, but really whether we ought to have any 
time limits at all, for filing the opposition.
    You will note there is a time limit sense that we ought to 
avoid harassment of patentees. Experience under the German 
patent system suggests the opposite. There used to a 5-year 
limit on contesting validity for German patents, and the 
experience was that virtually all of the oppositions were filed 
on the eve of the 5-year deadline. When they got rid of the 
deadline, suddenly the number of oppositions dropped.
    On the other hand, there may be concerns that the 
availability of the second window discourages potential 
opponents from taking advantage of the first window. One way of 
solving that problem, again, based on German practice, is to 
adjust the presumption of validity. Under the law of many 
European states, a presumption of validity does not attach 
during the initial opposition period, but it would attach in a 
subsequent nullity proceeding. We could borrow from that 
approach here, allow a presumption of validity to attach in the 
second window, but not in the initial term for an opposition.
    Now, following the lead of Professor Mark Janis, I would 
also encourage Congress to consider, when looking at some of 
the particulars of patent opposition proceedings, to look at 
trademark opposition proceedings. The U.S. PTO has run a 
trademark opposition for many years without really any sort of 
significant complaint, got lots of rules like discovery and 
motion practice. While I do not want to naively suggest that 
those ought to be transferred to the patent context where the 
stakes can be higher and the issues more numerous and complex, 
it seems like a good starting point. Also, certainly opposition 
procedures ought to reflect the substantive patent law 
provisions they complement. So if the substantive provisions 
tend to lead to less complex issues like a first inventor to 
file a priority system or elimination of thus mode, that would 
certainly weigh against discovery provisions in an opposition. 
It would seem that if we streamline those provisions there is 
certainly less need for discovery.
    Senator, you have already mentioned the public goods 
problem that accompanies patent litigation. The legislation 
that bears your name, the Hatch-Waxman Act, incorporates 180-
day generic exclusivity to account for those kind of public 
goods problems. Within the oppositions, as you have mentioned, 
one mechanism for recognizing the public interest involved in 
patent challenges would be an attorney fee shifting rule with 
respect to oppositions. It could be two way, it could be one 
way, in favor of a successful patent challenger. Of course, 
another thing to think about is who is going to bring the 
oppositions, but also how they are going to terminate. Of 
course, many patent adversarial proceedings terminate by 
settlement, and, of course, that potentially leaves an invalid 
patent on the books.
    So one notion to think about is should we have a notice-
based proceeding like the Medicare Modernization Act or Hatch-
Waxman pharmaceutical litigation, or should, in fact, like the 
reexamination statute, we compel that these oppositions run to 
their full term.
    Thank you very much.
    [The prepared statement of Mr. Thomas appears as a 
submission for the record.]
    Chairman Hatch. Well, thank you, Professor, we appreciate 
it.
    Mr. Cadel.

STATEMENT OF ANDREW CADEL, MANAGING DIRECTOR, ASSOCIATE GENERAL 
  COUNSEL AND CHIEF INTELLECTUAL PROPERTY COUNSEL, JP MORGAN 
CHASE, NEW YORK, NEW YORK; ON BEHALF OF THE FINANCIAL SERVICES 
                      ROUNDTABLE AND BITS

    Mr. Cadel. Thank you. Chairman Hatch and Ranking Member 
Leahy, my name is Andy Cadel, and I am a Managing Director, 
Associate General Counsel and Chief Intellectual Property 
Counsel at JP Morgan Chase, and I am pleased to be testifying 
today on behalf of the Financial Services Roundtable and BITS, 
which are affiliated financial services trade associations.
    As you know, the financial services community--
    Chairman Hatch. Is your microphone on?
    Mr. Cadel. I believe it is. Maybe I am not talking close 
enough.
    Chairman Hatch. You might need to pull it a little closer.
    Mr. Cadel. Better?
    Chairman Hatch. I can hear, but I am not sure people in the 
back can.
    Mr. Cadel. If you cannot hear me, let me know.
    As you know, the financial services community is intensely 
interested in patent quality and litigation issues, and is 
grateful that you are considering these matters. We believe 
that various provisions can be adopted which will make our 
patent system and effective and efficient mechanism that 
fosters economic growth, and have submitted written testimony 
to this effect.
    In my oral testimony I would like to focus on two of these 
provisions: one, creating a meaningful opposition proceedings 
with two windows; and two, establishment of an interlocutory 
appeal for Markman rulings.
    In the opposition proceeding, the PTO proposed a post-grant 
review of patent claims in its 21st Century Strategic Plan that 
was released in 2002, and we strongly support establishment of 
an opposition proceeding, again, with two windows.
    With respect to the first window, we recommend that the 
opposition procedure allow the public to petition the PTO to 
cancel one or more claims of a patent within 12 months of 
issuance. The counterpart U.K. opposition law provides a period 
of 24 months, European Patent Convention is only 9 months. So 
we respectfully suggest that this reasonably moderate time of 
12 months is a good midpoint.
    With respect to a second window, we recommend allowing 
anyone who is threatened with a patent infringement action to 
follow the request for an opposition proceeding within 6 months 
after receiving notice of the patent infringement action. 
Without the second window, the opposition proceeding would not 
achieve its goal of significantly improving patent quality by 
having suspect patents reviewed.
    In the United States the financial industry has no 
infrastructure in place to monitor patents in time for parties 
to take full advantage of the first window. As many products 
and services today integrate multiple technologies, it will be 
difficult, if not impossible, to monitor all the categories 
necessary in the time allotted for the first window. Further, 
the public often does not truly know what the patentee intends 
for the scope of the claims until the patent is enforced.
    We respectfully submit that it is just not reasonable to 
expect businesses to review all patents issued within a year of 
their issue date, determine every possible interpretation an 
inventor may ascribe to the claims, identify those of suspect 
validity, and then undergo the expense of attacking all those 
that may be applicable and suspect during a first window. I 
suggest that is difficult for large institution such as 
financial firms, even harder for small businesses.
    For both windows, launching an opposition would foster a 
more detailed scrutiny of patents than ordinarily occurs during 
the typical 25 hours or less of examination at the PTO. A first 
window could be subject to a preponderance of evidence standard 
for showing of validity, and the second window could be 
generally subject to a clear, convincing standard for proof of 
validity, consistent with current treatment in trial court to 
foster efficient use of dispute resolution resources.
    The second topic I would like to address is interlocutory 
appeals and Markman hearings. One of the most, if not the most, 
important determinations in a patent litigation is the 
determination of the meaning of the claims. This determination 
takes place early in the suit during a Markman hearing, and 
will eventually define the scope of the patent. This 
determination is crucial to the question of both validity and 
infringement. It is difficult to overstate the importance to 
the parties of obtaining a claim construction they can rely on.
    District Court patent claim interpretations are frequently 
overturned by the Federal Circuit. For instance, in the period 
from 1996 to 2003, 35 percent of District Court claim 
interpretations were overturned by the Federal Circuit. The 
inconsistent claim interpretations between the District Court 
and the Federal Circuit create uncertainty and imbalance 
between the parties.
    An interlocutory appeal to the Federal Circuit should be 
permitted after a Markman hearing. This procedure would help to 
mitigate the judicial inefficiency that occurs when a full 
trial is conducted based on an incorrect interpretation of a 
patent at the District Court proceeding, and then the Federal 
Circuit modifies or reverses that interpretation and orders a 
new trial based on that modified interpretation or reversal.
    In addition to the attorneys' fees and other incurred 
costs, litigants also pay heavy business costs due to this 
uncertainty. For example, litigants may experience escalated 
business costs because of delayed product launches and 
decreased productivity, which arise from distracted key 
employees, who must focus on litigation instead of their 
business.
    Interlocutory appeal will bring more certainty to claim 
construction to help each party more accurately evaluate its 
settlement position, which in turn will lead to earlier 
settlements and fewer suits in the legal system. Moreover, 
interlocutory appeal removes the undue advantage that a party 
who benefits from an erroneous claim construction has not only 
on the opposing party, but to others in the industry who fear 
they will be subject to the same faulty interpretation.
    The Financial Services Roundtable and BITS membership 
believes the U.S. patent process is fundamental to a healthy 
U.S. economy and a robust free enterprise system, and we thank 
this Committee for taking up this important matter.
    [The prepared statement of Mr. Cadel appears as a 
submission for the record.]
    ChairmanHatch. Thank you so much.
    Senator Leahy.
    Senator Leahy. Mr. Chairman, I am going back to the floor, 
so I will submit my questions. I wonder, with your permission, 
if I just might ask one?
    Chairman Hatch. Sure.
    Senator Leahy. Mr. Myhrvold says that--did I pronounce your 
name correctly?
    Mr. Myhrvold I have been called worse. Yes, Myhrvold is 
fine.
    Senator Leahy. OK. You said patent lawsuits are declining. 
Of course, Mr. Chandler said they are on the rise. Now, I would 
like to know who is correct, also what these suits are about. 
If they are legitimate disputes, then the numbers do not bother 
me as much. That is what I was taught at Georgetown, that is 
what the courts are there for. Of course, if their business 
strategies masquerade in this case in controversy, that is 
another thing. Are they going up or are they going down? Who 
wants to--Mr. Chandler?
    Mr. Chandler. The numbers that we have--and I am not sure 
they are inconsistent, I think they are consistent with what 
was in your testimony as well--there were 1,212 suits filed in 
1990, patent suits; in 2004, 3,055; in 2005, 2,700, so I think 
the consistency--as Mr. Myhrvold pointed out, they declined 
from 2004 to 2005. That is certainly true. The trend since 1990 
has generally been up, would be our view of how the numbers 
play out.
    Mr. Myhrvold. The number of suits has gone up, I do not 
dispute that it has gone up. However, it has gone down in many 
important measures. It literally went down between 2004 and 
2005, as noted, but since 1995, the number of lawsuits per 
patent has declined. So that means the likelihood a given 
patent is in a lawsuit is declining.
    We should expect, if 50 years from now we have 100 times as 
many patents, there is likely going to be 100 times as much 
economic activity around it, there will be some additional 
suits. But since it is on a per patent basis, it is low.
    The other thing is the number of suits that are filed is 
quite different than the number that actually go to trial, 
whereas 2,700 suits were filed in 2005, 107 of them actually 
cases were heard in court.
    Senator Leahy. Of course, settling cases is good if you 
really settle to the parties' satisfaction. If you are settling 
to pay off nuisance factor, that is an entirely different 
thing. If you have a true case in controversy, and the parties 
come together to settle, that is not a bad thing. If it 
reflects hold-ups, it is a bad thing. I will put my questions 
in the record. I was fascinated by something that Professor 
Thomas said about the German system--I think I am paraphrasing 
this correctly--that they used to have a deadline, and so a 
whole lot of suits got filed by the deadline. They got rid of 
the deadline, the number of suits went down because you did not 
have to worry about your rights being cutoff. Did I state that 
basically correct?
    Mr. Thomas. You did, sir.
    Senator Leahy. Thank you. When I was at Georgetown Law 
School I was not used to asking the professors questions. They 
usually asked me, and the answer could have been way up in the 
air. Here I got a direct answer. Thank you.
    Mr. Chairman, thank you for your courtesy.
    Chairman Hatch. Thank you, Senator Leahy. We appreciate 
your attention to these type of very serious issues.
    Let me start with you, Mr. Chandler. One of the most 
controversial questions about post-grant review is whether 
parties should be forced to initiate an opposition proceeding 
during a short window of time after a patent is issued. Some 
stakeholders, primarily in the technology and financial 
services sector, suggest that it would be very difficult, if 
not impossible, to identify problematic patents within the 
first 9 or 12 months after issuance. Could you explain more 
fully why this is so difficult, this would be so difficult, and 
also any specific examples or illustrations of actual patents 
would be helpful as well.
    And, of course, after Mr. Chandler gets his answer, I would 
be happy to hear from any other witnesses who would agree or 
disagree with what he has to say.
    Mr. Chandler. Sir, the principal reason why a short first 
window would not suffice is that the ability to determine when 
a patent is issued, the way those claims will be applied by the 
patent holder in bringing an action is very, very constrained. 
I think Mr. Cadel referred to this in his testimony as well.
    In the case of our products, there are potentially tens of 
thousands of patents which someone could try to say somehow 
applies. We have numerous pieces of litigation that we have had 
where there is no way, if you look at the patent, you would 
imagine that someone would try to apply it to the product that 
we have because of the way the patent was granted before in a 
way that referred to things totally different than what we are 
doing.
    I will give you one example. We have one suit currently 
pending where a gentleman who had been involved in religious 
studies and in a seafood importing business, had not technical 
background, was receiving literature through his fax machine, 
and thought of a way that he thought it would improve the way 
fast mass fax distribution would occur. He worked with a patent 
lawyer, filed a patent. There's nothing in there that would 
make you think it would apply to anything we do or that it 
would have been picked up in any kind of search when the patent 
was issued. He eventually claimed that he had created the 
Internet. I think there were former Federal officials who may 
have a higher claim than he does to that.
    Chairman Hatch. We know some around here.
    [Laughter.]
    Mr. Chandler. And yet, at this stage of the game, we are 
faced with having a high burden with a presumption of 
invalidity to try to go back and show that there was not much 
inventive content in what he did. And that is the problem is 
that if--you referred to the issue of the presumption earlier, 
the presumption of validity. When we look at a second window, 
we are talking about working immediately after a claim of 
infringement comes, so the defendant would have to move very, 
very quickly, and then having that decided by the experts with 
all the appropriate evidence I front of them, and without being 
burdened with a presumption of validity that will preclude 
effective review.
    Chairman Hatch. Mr. Myhrvold?
    Mr. Myhrvold. You know, I think that largely this is a 
cultural issue between different industries. Most tech 
companies that I'm familiar with--and as I say, I used to be 
chief technology officer of one--tell their employees not to 
look at patents. They have no procedure for checking patents. 
The reason 6 months wouldn't be enough is, if you don't read 
them at all you're not ever going to find out.
    Now, the reason they don't do that is twofold. One is that 
they figure it will slow people down to worry about those 
things. Better to get out in the market and we'll sort out the 
issues later. It's a cultural thing in that there's never been 
a tradition of doing that.
    Now, in the wireless industry, that's quite different. 
Qualcomm is an example of a company that is very prominent, but 
everyone, actually, in the wireless industry, also very high-
tech, just as complicated a set of products as a Cisco or a 
Microsoft or an Intel would create, and there they're really on 
top of it. I see this when my own patent applications are 
published. You know, 18 months after you file, the application 
is published. And in some areas, if the application is 
published, no one seems to look. And in other areas, where it's 
in an industry that people are really engaged with the patent 
system, you get pieces of e-mail or people call you up within 
days, weeks of a patent being published on the PTO Web site. So 
they're absolutely are industries that watch very, very 
closely.
    Chairman Hatch. Anybody else?
    Mr. Johnson. Senator?
    Chairman Hatch. Yes, sir.
    Mr. Johnson. We think there's plenty of time. We do read 
patents in our industries. But now that patent applications are 
by and large publicly available within 18 months of filing, you 
frequently have a year, 2 years or more before the patent 
issues. There's really no reason, having watched the patent 
application go through prosecution, that a 9-month period of 
time isn't plenty of time within which to put together an 
opposition and file it.
    Mr. Cadel. In our experience, we do watch patents in areas 
where we can predict where they're going to come from. So we 
look at our competitors, for instance. That's an area where 
it's predictable and we know what to look for. But I have to 
agree with Mr. Chandler that, at least in our industry, in my 
experience, it is extremely difficult to anticipate how some of 
these patents are going to be interpreted, and it is rather 
routine for us to be contacted by an inventor, presented with a 
patent and the claim that we're infringing it, and we look at 
it and in all candor have no idea where this thing might apply 
in our business.
    And, you know, maybe that's because we run everything 
from--on just the technology side, everything from the ATM 
machine that you're getting cash from all the way through our 
settlement systems, all the way through systems that have to 
price complex derivatives in multiple currencies. But there's 
just a tremendous amount we're doing and there's a tremendous 
amount of vagueness, frankly, in a lot of the patents that are 
being issued. And for us to make that connection within a year 
is just difficult.
    The other question, just to address what Mr. Johnson said, 
is that we find that a lot of patents are filed with requests 
for confidential treatment. So a lot of the patents that we've 
seen issued we haven't had notice of within the 18-month 
publication period, but in fact we don't hear about until 
they're issued.
    Mr. Thomas. Senator, if I may. Let me simply note I'm 
somewhat skeptical that this is a matter of tradition and 
culture and some industries are very vigilant and others are 
just lazy and they deserve the results that they get. The fact 
is, in certain industries--and chemical and biotech are among 
them--there's a standard nomenclature. We use a standard Geneva 
nomenclature to describe small molecule chemicals. So when you 
read the claim on the patent, there it is. Now, it's not always 
like that, but there's much more of a standard in nomenclature. 
Finance and business software, there's much less of a standard 
nomenclature.
    And again, let me remind you, as some of the witnesses have 
already said, this is a private regulatory environment of 
enormous complexity, with 3,000 to 4,000 patents issuing every 
Tuesday and that number growing month by month. So to impose a 
burden of observation, it's an incredible burden even for those 
patents that are published prior to grant.
    Thank you.
    Mr. Johnson. Senator?
    Chairman Hatch. Mr. Johnson.
    Mr. Johnson. Speaking as someone who is in the 
biotechnology industry, I'd like to point out that there's 
anything but a standard nomenclature relating to biotechnology 
inventions. And in fact, early on in the biotechnology 
development, there were issues of description that had to be 
sorted out and regulations and approaches developed. But they 
were indeed developed.
    The patent laws require, under 35 U.S.C. Sec. 112, that the 
applicant for a patent provide a written description of his 
invention and, further, that he particularly point out and 
distinctly claim that which he regards to be his invention. And 
that requirement is one which should be enforced in the Patent 
Office, and is, and in the courts as well. Indefiniteness is a 
reason to invalidate a patent claim. If the argument is that 
the courts aren't doing their job on invalidating patents 
because they're indefinite or there is no written description, 
or the claiming isn't sufficiently definite, the cure is not to 
institute additional proceedings or engender hostility toward 
the system overall, it's to reinvigorate the Section 112 
standards that should apply.
    It was always understood as part of the patent grant that 
the reward would only come to those inventors who would 
disclose their invention. The reward is not just for inventing. 
The reward is also for disclosing the invention so that others 
may garner information that will help them in their own 
endeavors, albeit perhaps not commercial ones until the patent 
expires.
    Mr. Cadel. Chairman Hatch, maybe just one more thing. If it 
would be helpful to you, we'd be happy to submit some patents 
that we've been presented with, so that you can see the exact 
challenge that we're up against in trying to--
    Chairman Hatch. It would be helpful if you would do that.
    Now, Mr. Johnson, in your testimony you seem to make the 
point that having a second window undermines the public 
interest, as I see it, in two ways, the way you seem to say. 
First, you argue that it would reduce incentives to bring a 
challenge in the first window. That's delaying the invalidation 
of defective patents. And second, you say it would create 
uncertainty for the patentee, which decreases the patentee's 
incentive to invest in commercializing an invention.
    Could you just expand a little bit on these points? And 
specifically, why do you believe that having a limited first 
window is the most appropriate way to create incentives for 
earlier preemptive challenges. And also, since the court could 
make an invalidity determination at any time during the life of 
the patent, why would having a second window substantially 
increase the uncertainty for patentees?
    And of course after Mr. Johnson gives his answer, I would 
be happy to get some others.
    Mr. Johnson. Well, I think on the first point, Professor 
Thomas has given me a tail wind by pointing out that the German 
experience was that people who had oppositions, if there's one 
window, will file them before the time limit expires. Indeed, 
if you are aware as a competitor of a piece of important prior 
art, a patent or a publication that might invalidate a patent, 
and you know that you can sit on your hands for as long as it 
takes until someone happens to charge you with infringement, 
why in the world would you begin an opposition procedure? In 
your mind, you have in essence a personal defense to the 
patent.
    And so you'll let the patent stay out there, where it may 
chill the competitive activities of others. That's the best of 
both worlds for the person who knows of such prior art. But 
it's not the best result as a matter of public policy.
    For areas where people do read patents and do adjust their 
behavior accordingly, if there is an invalid patent that's 
issued by the Patent Office, we want it to be removed. That 
way, other people, who are designing their research and 
development activities and deciding what new products can come 
out, can do so with a fair understanding of what the patent 
landscape will be.
    We will never know, in a situation with a second window 
opposition proceeding, how many drugs weren't developed, how 
many other important products weren't developed because 
someone, in essence, suppressed a piece of prior art waiting 
for a second window in the event they should ever have to use 
it. So I feel very strongly that the public interest should be 
to encourage immediate presentation of all prior art.
    Now, as a practical matter, patents do more than simply 
reward the invention by the grant of a patent. In today's 
world, an increasingly complex technological world, it takes 
millions to hundreds of millions to a billion dollars or more 
to develop some inventions for market. That's certainly 
commonplace in the pharmaceutical and biotechnology areas. 
Calculations are made when people decide whether or not to fund 
these development programs as to what the technical risk is, 
what the patent risk is, what the market might be, and the 
expected period of exclusivity. And part of the patent risk 
that goes into these calculations is the likelihood that 
someone will choose to challenge the patent as invalid.
    If we can move that risk forward so that people who have 
challenges will bring them, say, within the first 9 months 
after issuance, drugs which are not now developed may indeed be 
developed, because we will be reducing the patent risk and 
leaving the companies who are deciding to make the investment 
only with the technical risk. And standing alone, the technical 
risk may be tolerable. And indeed, we may find, and I expect we 
will find, that if patents become more reliably enforceable--
and I'm talking about high-quality, valid patents becoming more 
reliably enforceable--that will stimulate more investment in 
research and development, which is much needed in many areas, 
not just in the health care area, but in many areas that are 
important to this country.
    Chairman Hatch. Anybody else?
    Mr. Cadel. I mean, just on the question of why would you 
bring an opposition in the first window, I think there are a 
few things I'd like to raise. One is we suggested we think 
there should be an escalating burden of proof in a second 
window. I think everyone--it sounds like everyone can agree 
that you want as much brought in the first window as possible, 
so there should be things to encourage that.
    I have to disagree with the contention that sitting on 
prior art is the best strategy. We, too, spend a lot of money 
in research and development and putting out new products. We 
spend a lot of money in marketing. It's really not in our best 
interest to play legal chicken and have this piece of prior art 
sitting in my desk and, you know, hoping that if there's a 
challenge brought to a patent that I'll be OK under that. My 
preference would clearly be, if there was a good opposition 
proceeding, to take that prior art, challenge it, get the 
patent off the table so I can go ahead and market and just win 
in the marketplace as opposed to have to have that worry 
hanging over me.
    The second point that was raised is on the question of the 
importance of getting more certainty behind your patents. It's 
been raised an the context of raising money. Obviously, as an 
investment bank we spend a lot of time, and I personally spend 
a lot of time, looking at companies that we're either going to 
invest in or we're potentially going to buy and looking at 
their patent portfolio. And as you mentioned earlier in your 
statement, there is no guarantee ever of clean title or quiet 
title in a patent. It's always subject to an invalidity 
challenge as a defense in litigation.
    So the idea that having a first window then gets rid of 
that, I think, is false. What we find in the investment 
community is there's a very big difference between the 
presumption of validity that you have in the courts and a 
presumption of validity in the marketplace. There is no 
presumption of validity in the marketplace. If a company comes 
to us and they have a patent portfolio, we don't look at that 
and say that's great, this is definitely 100 percent, we have 
this market locked up. We look at things like was this patent 
ever challenged. Was it challenged in court--that's great. Was 
it brought up through the appeals process in the Patent Office.
    All these things strengthen the patent, and I believe that 
throughout the life of any patent you're going to have 
challenges. It's important to be able to have those challenges 
and to make sure that the patents you have outstanding are 
still valid, but there shouldn't ever be a point in time where 
we say this patent is valid and there's no further challenge to 
it. And I don't think the markets require that.
    Mr. Myhrvold. You know, if you look at the set of legal 
articles that lawyers have written about patent litigation 
strategy, you'll discover an overwhelming number of them 
explicitly recommend, if you've got great prior art, you 
probably don't want to put it into one of the existing 
procedures. It literally is the advice. I've been given that 
advice by attorneys when we were at Microsoft--you know, no, 
don't start the reexamination because--It's streamlined, but if 
you really care about whether you win or lose, the difference 
in cost isn't worth the difference in potential outcome. So 
most trial attorneys, not surprisingly, will recommend you wait 
for a trial. That's what they're good at.
    So I think that this issue of people sitting on the best 
prior art absolutely exists. And I know personally of many 
cases where people do that. If you look online at people's 
strategy papers, they explicitly say it.
    Mr. Chandler. Mr. Chairman?
    Chairman Hatch. Yes.
    Mr. Chandler. I think it's important to go back to the 
first principle, which is what we are seeking is to have a fair 
and level playing field to assess the quality of a patent and 
to assess its patentability. The court system does not provide 
that because of the presumption.
    I think what Mr. Myhrvold has just referred to advice to 
avoid the existing procedures is exactly the case that's being 
made for a new procedure. Mr. Johnson in his written statement 
referred directly to the various types of challenges to 
patentability that are not currently permitted in the ex parte 
process. It doesn't cover indefiniteness of claims. It doesn't 
cover best mode. It doesn't cover enablement. It doesn't cover 
prior sale. So I would agree completely that the existing 
processes are not a desirable place to go.
    Unfortunately, it's a rock and a hard place for those of us 
who would not have the ability, as Mr. Cadel pointed out, to 
readily determine on a consistent basis what patents might be 
asserted against our products at the time the patents are 
issued. And that's why we seek a short, speedy, and not 
expensive process when we're on notice of infringement to go 
have experts at the Patent Office, with appropriate evidence, 
take a fair look at any patentability issues that might arise.
    Mr. Thomas. Senator, if I may, I think the issue before you 
is whether we ought to encourage prompt patent challenges 
through the Draconian sanction of disallowing individuals from 
bringing them at all. Fifteen months seems like a fairly short 
period of time in the 20-year patent term. Again, when the 
United States stands apart from patent-granting jurisdictions 
which usually invite comparison, I think we ought to ask why 
are we somehow limiting the right of members of the public to 
challenge these important rights.
    Again, patentees traditionally have enjoyed, since the 19th 
century, the ability freely to amend their claims at the Patent 
Office throughout the entire term of the patent. The issue is 
whether third parties should face the same restrictions. It 
seems to me 15 months is already a considerable restriction.
    Mr. Myhrvold. Mr. Chairman, do you wish to hear one last 
word?
    Chairman Hatch. I will hear one last word, then I have 
another question.
    Mr. Myhrvold. First of all, we're not proposing that 
members of the public can't freely challenge patents using 
other procedures, such as inter partes or ex parte 
reexaminations. But the more expanded provisions in an 
opposition proceeding, we are suggesting, should be done right 
away. This is especially true because they relate to issues 
which should be apparent on the face of the patent. If you 
can't tell, for example, what the patent is claiming, as Mr. 
Chandler has suggested, you can tell that by looking at the 
patent and you can bring your opposition immediately and get it 
taken care of.
    But why are we doing this? Why are we worrying about this? 
It's because of what Mr. Myhrvold, Dr. Myhrvold, suggests, 
which is it is important for our society to provide a reliable 
patent right if we want science and technology to move forward. 
And that is, after all, the primary purpose of the patent 
system.
    Chairman Hatch. Well, thank you. Let me just say, in his 
written testimony, Mr. Myhrvold notes the perceptions vary 
about what constitutes a so-called patent troll and comments 
that it is all but impossible to pin people down on exactly 
what a patent troll is. I myself refer to them as good patent 
trolls and bad patent trolls. And I have to admit this may not 
work. I have to admit that I have had the same experience as we 
have looked at these matters.
    So in hopes of clarifying the issue, let me just address 
this question to each one of the witnesses. We will start with 
you, Mr. Chandler. Exactly what is a patent troll. Just give us 
the best shot you have, OK?
    Mr. Chandler. OK, I don't--I didn't coin the term. That 
derivation is elsewhere. I really don't find it a useful 
category for addressing the issues. I think what we have is a 
setting where, for a number of reasons largely due to recent 
court decisions, the patent system now creates a huge amount of 
leverage through litigation and the threat of litigation. And 
when parties choose to try to receive fees for their patents 
based on the fact that a validity challenge will be very hard 
to do, based on the fact that it can be made to apply to the 
entire value of a product when in fact the inventive 
contribution seems to be very, very small, until the decision 
last week an almost automatic injunction would issue, when it's 
routine to try to seek treble damages.
    When those are the bases for which a claim is made for very 
large fees, I think that's what's given rise to the use of that 
terminology. But the issue isn't the nature of the parties 
themselves that come in. It's that we have a system that 
encourages that kind of conduct, and I think that's what the 
Committee can do, is take a large step toward making sure that 
when patent licensing negotiations occur, they're based on the 
economic value of the patent rather than on the ability to 
utilize the litigation system to change the equation.
    Chairman Hatch. OK, Mr. Chandler. Mr. Johnson?
    Mr. Johnson. I don't use the term, but as I understand any 
proper use of it, it would pertain to people who have frivolous 
lawsuits who use the threat of patent enforcement proceedings 
and the specter of the costs that are included in those 
proceedings in order to coerce settlements, which settlements 
are typically defined based on being a proportion of what it 
will cost to defend and to go ahead and win the case. To me, 
that is an abuse of litigation and one which we should remedy 
if we can.
    But what I do not find as a patent troll is someone who has 
a meritorious claim and who has found that someone is 
infringing their patent, and who wins in court and, as part of 
winning in court, expects to receive either a fair measure of 
damages or an injunction, or both. Those people are legitimate 
inventors who deserve not to be labeled as trolls.
    Chairman Hatch. Thank you. Mr. Myhrvold?
    Mr. Myhrvold. You know, the term ``patent troll'' was 
originated, actually, by an Intel employee who now works for 
me, to define exactly the case that Mr. Johnson had said, 
people that were taking patents and coming and offering a 
settlement so cheap that it was never going to be adjudicated. 
And so they had a bogus claim, but it was so expensive to call 
them on the claim being bogus that it never is adjudicated.
    In addition, I would add to that people that manipulate the 
system in ways that are really beyond what it was originally 
intended. There's a famous case of an inventor who had patents 
that stayed 40 years in the Patent Office, and through that 
incredible set of loopholes that he was able to do that, was 
able to get a patent that had a 20-year life starting in 1994 
even though he'd filed it in 1954. There are a few cases like 
that. There's very few cases like that.
    Instead, the term has been corrupted to be used as someone 
you don't like. And it's been associated particularly with 
people that haven't been successful in the market. A very 
common case is a young company gets venture financing, they 
think they have the world by the tail, they work very hard. 
Turns out they are a little bit optimistic about timing or they 
try something a little too hard. Later on, the company says, 
well, we innovated, we were the first there, we genuinely 
invented, isn't it appropriate for us to get compensated by 
people who later came along and squatted on our property.
    I don't think there's anything wrong with that either in 
terms of the outcome--I don't think it's proper to be able to 
take other people's property without paying for it. I don't 
think that's outside the intent of the Constitution, as Senator 
Leahy read. It's to promote people in fact benefiting from 
their inventions. It takes a huge amount of risk up front to 
pay people without knowing what on earth they're going to 
invent.
    I started Microsoft Research at Microsoft, which is the 
only really large computer science research laboratory of its 
type started in the last 25 years. Very difficult to convince 
the Microsoft board that it was sensible to pay up to--I think 
they've got up to 700 researchers now--to pay all the salaries 
and all the costs without having a concrete idea of what you're 
going to get back. Anything that closes the loop and bring 
merit back into the thing so that people who are successful get 
paid makes it easier to make that investment.
    Mr. Johnson talked about that in terms of the business 
calculations in a pharmaceutical companies--the technical risk, 
the patent risk. That's one aspect of it, but the same decision 
is made by independent inventors. Should I risk my time, 
energy, and money to create something really new. And if you 
do, I don't think there's any issue in the system with you 
benefiting from it.
    Mr. Thomas. In my opinion, a patent troll is an 
entrepreneurial speculator who, animated by the high 
transaction cost of resolving patent disputes, attempts to 
exercise hold-up rights against established industries based 
upon patents of dubious merit. I agree with my predecessor 
speakers, though opposition systems may be animated or you may 
be inspired by trolling practices or putative trolling 
practices, I think the challenge before you is to develop a 
robust opposition system that's useful against all manner of 
patentee by all sorts of industry to lower those transaction 
costs of patent disputes.
    Mr. Cadel. This is definitely a question where going last 
doesn't leave me a whole lot to say. Most days it just feels 
like ``anyone who's suing JP Morgan Chase.''
    [Laughter.]
    Mr. Cadel. But generally, I think I agree with everything 
that people said. There are some cases where there are very 
clearly people who are gaming the system, but I think those are 
the exceptions. I think most of the time there are legitimate 
reasons and I think what we're all trying to do here and what 
we really appreciate you trying to do is close up those 
loopholes so that those who are trying to game the system 
can't.
    Chairman Hatch That was a pretty honest answer, really. All 
of you gave good answers as far as I was concerned.
    And Professor Thomas, in your written testimony, you refer 
to the lack of incentives to adjudicate patent validity as a 
public goods problem and suggest that--at least, I interpret it 
this way--that some sort of a bounty is needed to create 
sufficient incentives to bring challenges. Two things that have 
been discussed in terms of providing such a bounty are attorney 
fee shifting, and allowing the presumption of validity to 
attach only once a patent has survived a validity challenge.
    In your opinion, would either of these options work? If 
not, what type of bounty do you have in mind?
    Mr. Thomas. Well, I favor both of those proposals, although 
I suppose I'm more inclined toward attorney fee shifting. We do 
that in the Copyright Act, we do it in a number of other areas 
of law, and I think that might be the most appropriate way. 
Also, out of sympathy to individual inventors and smaller 
firms, this would allow a more equal playing field between 
larger and smaller companies, because a smaller firm that has a 
meritorious claim can effectively be financed to pursue that 
claim and act as a private attorney general.
    I'm less inclined to the presumption of validity until it's 
already been tested, although I'm eager to hear more about that 
proposal. That was essentially a situation that existed prior 
to the existence of the Federal Circuit. And although many of 
us have concerns about viewing infringement as a public 
service, regardless of how many of us believe the eBay case was 
correctly decided, nonetheless I think there was a presumption 
of administrative regularity that ought to be weighed, whether 
we detract from it.
    I propose that simply the patentee pay a cash bounty to any 
successful challenger that defeats one of its claims. I believe 
that that cash payment system would refine the ability both of 
patentees to file claims and also incent individuals to 
challenge those claims.
    Thank you.
    Chairman Hatch. All right. Mr. Myhrvold, let me ask you 
this question. In your written testimony, you seem to make the 
point that the reexamination procedures may be a more 
appropriate model for post-grant review than the adversarial 
proceedings that are favored by others. You also argue that a 
more robust system of post-grant review might be subject to 
abuse and could encourage strategic behavior by defendants in 
litigation.
    I would like you to expand on these points and, in 
particular, how do you think some parties might use a second 
window either to delay final judgment in court or to exert 
leverage on existing--well, in licensing negotiations. And 
also, is there some way to prevent these types of abuses? I 
would like to know that.
    Mr. Myhrvold. Well, I think the first thing is that the ex 
parte and inter partes reexamination procedures actually are 
enormously successful. Some people have an attitude that 
they're a niche or that they're barely used. As I discussed in 
my testimony, ex parte is used about five times more than the 
court system is.
    Also, following up with something that Professor Thomas 
said, reexamination procedures don't stop if people settle. If 
you start one of these ex parte reexamination procedures, it 
will follow through even if the parties have settled. So it 
does get the bad patents off the table.
    Inter partes is a much more recent thing. It didn't really 
become feasible until changes to the law in 2002, so it has 
only been a couple of years. It only applies to patents that 
were filed after November 1999, so many of those patents 
haven't even issued yet, or some of them haven't. So it's a 
very small population of patents on which these things, the 
inter partes, could actually apply.
    Nevertheless, I think they're both very successful. They're 
successful because they're doing something different than 
trial. They're not a one-to-one substitution for a trial. Ex 
parte is simple and it's inexpensive; that's also the drawback. 
Because it's simple, there are lots of things you can't raise. 
In particular, the party bringing it can't continue to 
participate and make further arguments. But it's very, very 
successful in terms of having a way for people that don't have 
those kinds of resources or interests to fire off a salvo that 
could invalidate the patent.
    So as we look at how we create a new mechanism, why would 
we create a new one? What would the reasons be? Well, the 
normal logic is to say we'd like to decrease the number of 
litigations. Well, in order to decrease litigation, you have to 
motivate a party who's afraid of a patent to say I have a 
better chance of doing it in this new method versus trial. And 
at trial I have the full range of opportunities of discovery 
and arguments and oration and the entire legal tradition. 
That's why it's expensive and difficult and time-consuming. But 
you have that full option. So most attorneys would say, look, 
if you really care about winning or losing, and it's a very 
serious issue, you probably want that full scope of things at 
trial.
    So as a result, there has been a progression both in this 
country and overseas of creating opposition or interference or 
post-grant review--in a general sense--proceedings that keep 
adding one more piece of what a atrial is. And the argument is 
always, OK, let's have that one more piece, and if we get that 
one more piece, OK, that will be enough. But I don't see any 
compelling argument as to why it will be enough and why you 
won't just create, if we keep this notion going, why we won't 
have four or five of these procedures at some point in the 
future, each one trying to bite off a little bit more of what's 
in a trial.
    Now turning to your issue of the abuse question. These 
proceedings have a fundamental difference from a trial. The 
difference is that the patent holder has everything to lose and 
the other side, the challenger, has nothing to lose. In a trial 
for infringement, you're going to consider multiple questions--
validity, enforceability, and the actual facts of infringement. 
So if the trial goes one way, one party wins; if it goes the 
other way, the other party wins. This is a way of creating a 
forum in which only party can lose, and do it as a delaying 
tactic which is likely to take a couple of years.
    It's very hard to believe, unless we did some quite 
miraculous thing, that a complicated second window scheme--by 
``complicated'' I mean with more features than today's inter 
partes scheme--that such a scheme could be done in less than a 
couple of years. Which means you've got the opportunity--And 
then there's also appeal. The inter partes has the right to 
appeal to the Federal Circuit. So you could potentially take a 
multi-year proceedings against the patent holder which, even if 
they all fail, delay them enormously before they could start a 
trial where both sides have skin in the game.
    And, you know, this isn't a theoretical worry here on my 
part. Again, if you look at the advice that lawyers give their 
clients or the articles that they write to their clients, many 
of these issues are discussed. As I mention in my written 
testimony, besides sitting on prior art it's not uncommon for 
someone that has a special piece of prior art to just say, 
well, give me a cheap license and I'll stay quiet.
    So I think you have to view all of these systems as being a 
very complicated set of checks and balances. There are 
motivated adversaries on both sides. It's very, very difficult 
to come in with a mechanism that keeps those things even-keel. 
You know, today we have the three methods--trial, inter partes, 
and ex parte. And before we go and add some additional one, 
let's be clear on what it's going to be.
    Finally, to return to what I started with, it's unrealistic 
to think that one of these mechanisms is going to obviate trial 
in a large fraction of cases. It may take some of the cases 
away, granted. Most likely, what a new post-grant opposition 
procedure does is it provides a voice for someone who couldn't 
get a trial. Now, that may be a very valuable thing. But let's 
not confuse ourselves that if we get the right mechanism, the 
number of trials will go down. Because trial lawyers, acting in 
the best interests of their clients, are often going to tell 
them, look, I want the full set of procedures available in 
trial, that's how I can best defend you.
    Chairman Hatch. Mr. Cadel, let me just ask you this. In 
your written testimony, you suggested an interlocutory appeal 
of a district court's Markman decision should be allowed. It 
seems to me that somewhat the same interest of creating 
additional certainty could also be achieved by increasing the 
deference, you know, given to the trial court. For example, 
some have suggested making claim construction a mixed question 
of law and fact.
    Could you expand a little on why you believe the 
interlocutory appeal would be beneficial? And when you have 
answered, I would be happy to hear from anybody else on the 
panel who cares to comment.
    Mr. Cadel. Sure. I think this goes along with another 
suggestion I made in my written testimony, where we think that 
specialized district courts for patent cases would also be 
helpful. And fundamentally, the creation of the Federal Circuit 
reflects the general feeling that the patent law is a very 
complex, technical area and specialization is helpful. I think 
why I would prefer to see the final decision on Markman made at 
the Federal Circuit level, as opposed to giving more deference 
to the district court, is I have a higher degree of confidence 
that the Federal Circuit is going to get it right.
    The reason I believe that interlocutory appeal is very 
important is for the reasons I stated in my testimony, it's 
such an important decision and it happens so early on in the 
case that what you effectively have is a litigant--and this 
could be for plaintiff or defendant. I don't think it skews one 
way or the other. But where you effectively stand is the 
Markman hearing is made and the decision of what the patent 
means is now decided. And you have to go to trial based on that 
even if, as a litigant, you believe that that's wrong. So 
you're now faced with a kind of Draconian choice of do I go 
ahead and kind of roll the dice and say I think this Markman's 
wrong and I can overrule it on appeal, or do I settle early and 
basically do I at that point settle and pay money to someone 
who's patent I believe is either--I believe I'm not infringing.
    So that's really not the kind of situation you want to put 
litigants in. It's not something that helps settlement and it's 
not something that helps the system. Where an interlocutory 
appeal is very helpful is you get that decision before the 
Federal Circuit, who I believe is in the best position to make 
the correct decision. That decision that comes down, I believe, 
should be law of the case. We don't think that it's something 
that, you know, you should then get to go and reappeal. But 
armed with that decision, both sets of litigants know where 
they stand, and I think it does help to create a better 
settlement situation, where you're--you know, the more 
information you have, the more certainty you have, the more 
confident you are--a settlement is just like any other 
investment, and the more confident you are in making that 
investment.
    Chairman Hatch. Anybody else?
    Mr. Thomas. Senator--
    Chairman Hatch. Let me ask one last question, then. Oh, I 
am sorry. Professor--
    Mr. Thomas. Oh, I apologize, Senator.
    Chairman Hatch. Oh, that is fine. I am happy to hear from 
you.
    Mr. Thomas. One concern I would have about a specialized 
trial court for patent matters is that you would have the vast 
majority of patent cases would not interact with the general 
judicial system at all. We've just heard from the eBay case 
that--
    Chairman Hatch. You think that is bad?
    Mr. Thomas. I think that's bad, as it's just been reminded 
with the eBay case that the patent system is part of a larger 
jurisprudence. It's part of an jurisprudence of competition, of 
evidence, of procedural law. And isolating it may not always 
lead to the best results. Having interaction with a general 
purpose trial court and a specialized appeal court at least 
allows more mainstream notions of coming from jurisprudence to 
interact with the patent law. I think one way to split the 
difference would be to consider magistrates or special masters 
in patent cases and provide a program that would pursue along 
those lines. I'm also sympathetic to the notion of 
interlocutory appeal, but I would note that of course a lot of 
jurists don't hold a Markman hearing early in the trial; they 
hold it rather later. So I'm not sure those benefits would 
necessarily accrue in every sort of case.
    Thank you, Senator.
    Mr. Myhrvold. You know, just to differ with Professor 
Thomas on the specialized court issue, I think we have to 
understand that any really interesting and complicated post-
grant review thing is another kind of a trial. OK? That is what 
you're creating and it is separate from ordinary jurisprudence. 
So up can do that inside the Patent Office and say that's a 
special branch of the executive that is going to do this thing 
that's like a trial and maybe it's got discovery but maybe it 
doesn't have everything, and then go later. Or you can decide 
up front that you're going to go and put it over there, as has 
been done in both tax and bankruptcy matters. And I'm sure 
there are other examples as well.
    So the issue that he brings up is an interesting issue, 
which is how does it interplay with the rest of the 
jurisprudence. Of course, the Court of Appeals for the Federal 
Circuit does hear more than just patents and the Supreme Court 
is still the ultimate arbiter, as it was in the eBay case. And 
I think all of those things should be preserved. But anything 
that winds up creating a very in-depth review process is by its 
nature a kind of a specialized court. The question is do you 
run it in parallel with existing Federal district courts, so 
that you have two parallel systems you have to manage in sync, 
or do you try to have one?
    Mr. Chandler. Senator?
    Chairman Hatch. Yes, sir?
    Mr. Chandler. I think that the importance of coordination 
of the litigation system was well illustrated by the RIM case, 
where, while the Patent Office was in the process of 
invalidating the patents involved, RIM was facing the 
possibility of injunction in that case and ended up paying $600 
million.
    Interestingly, in a meeting in this building, I was asked 
once whether RIM really hadn't made a big mistake by just 
paying $24 million when they had the chance to do that and make 
the case go away. I would say as a general counsel of a 
technology company, it's very, very hard for me to ever say I 
want to pay anything to someone who has patents that I believe 
are invalid. That's why we seek this kind of mechanism. Mr. 
Myhrvold referred to the importance and saying it's very hard 
to find a mechanism that keeps an even keel, in describing the 
success in some areas of the existing processes and also their 
failures. And that's really what we seek, is to try to keep 
that kind of even keel so that you aren't faced with being told 
that because of litigation leverage and lack of coordination 
between the different processes, you should pay money for 
something that is in fact valueless.
    Chairman Hatch. OK. Let me ask one last question, and that 
is in the eBay case, the Supreme Court recently handed down a 
decision involving the standard for obtaining injunctions in 
the district court--which I think has been one of the most 
controversial issues debated in the context of patent reform. I 
would just personally like to hear from each of you your views 
about what practical effect the eBay decision will have. And 
perhaps more importantly, I would like to know whether, from 
your individual perspectives, the Supreme Court's ruling 
affects patent reform legislation.
    Mr. Cadel, we will turn around and start with you and work 
through the rest of the panel.
    Mr. Cadel. Thank you very much.
    No, we think the eBay case and the Supreme Court got it 
exactly right. We're very pleased with that. We expect that, 
and I think you see this in some of the concurrences, 
particularly in Justice Kennedy's concurrence, I believe it 
was, that the real issue is going to be how you look at 
companies that are only seeking monetary damages. I do believe 
that there is a distinction between a company that is enforcing 
its patent in a circumstance where it's trying to protect a 
marketplace, trying to protect its market position, and a 
circumstance where they are seeking only monetary damages. And 
in the case where they're seeking only monetary damages, it's a 
little harder to justify the old rule that they're entitled to 
an automatic injunction. So I think that this is going to help 
in that balance and where only monetary damages is sought. 
Hopefully, practicing companies will be under less of a threat 
that they're going to be shut down and can pay, you know, an 
appropriate value for that invention but not have the veritable 
gun to their head.
    Chairman Hatch. Professor Thomas?
    Mr. Thomas. I also agree. I believe that the Supreme Court 
got it right. I enjoyed reading the opinion. I was pleased that 
the Supreme Court articulated the appropriate factors. I 
believe it's largely business as usual for the patent system, 
but there will be a handful of cases involving system claims 
and the entrepreneurial speculators I spoke of previously where 
results might differ. I think that will have a positive effect 
both in the courtroom and the board room.
    Thank you.
    Mr. Myhrvold. It's sort of interesting that I both agree 
and disagree with these guys, and that's sort of the mark of an 
interesting Supreme Court case, is everyone can see in it 
something that's interesting.
    My company and a set of 20 of some of the most well-known 
inventors in America filed an amicus brief in this case about 
the issue of should you have lower rights if you are practicing 
your invention versus you're not. We feel strongly that any 
inventor should have the same set of rights, so I disagree 
quite strongly with what Mr. Cadel said, that a company that 
practices products ought to be put in a different level.
    That said, I don't think that this case actually harmed 
that principle, so we actually were pleased with the outcome of 
the case. It suggested that there is a four-factor test--or not 
suggested, it mandated the four-factor test, which many people 
from our perspective thought was a fine result.
    At the same time, it did not, absolutely did not say that 
there was a rule, as eBay had asked, that in fact people that 
don't practice the product be disenfranchised. And the original 
district court ruling, which had not given an injunction to 
Mercexchange, on several bases, wasn't upheld. It has been 
remanded back with a different standard.
    I think the thing that's slightly disappointing about this 
decision for everyone is that there's very little guidance that 
the Supreme Court gave on some of the really key issues in the 
case. So yes, the court was remanded to use a four-factor test. 
Exactly how you're supposed to do that, or how it was in this 
case, the decision was silent on.
    Mr. Johnson. We had also urged the four-factor test be used 
in our amicus brief. And there's certainly something for 
everyone in the opinion. I think the more interesting question 
is whether it removes from your plate the question of whether 
to include any type of injunction language in patent reform 
legislation and, from the written statements, it would appear 
that there seems to be some consensus that we should let the 
courts go about their business now and see how it turns out. I 
would agree with that.
    Mr. Chandler. We believe the Court decision did remove one 
of the in terrorem elements of style of patent license 
negotiation that is applied by a lot of entities these days. On 
the other hand, it will put pressure on some of the other 
elements. There's a good question as to whether it will lead to 
an increase in forum shopping due to the discretion that's 
accorded to the trial court. And I think it points to the fact 
that it's important for you and the Congress to followup to 
make sure we address each of those elements and establish a 
level playing field and really return to the traditions that we 
had of fairness in patent adjudication before recent decisions 
unleveled the playing field.
    Chairman Hatch. Well, thanks to you all. I don't know if we 
could have had a better panel than this panel. You haven't 
resolved all our problems for us, though, and if anything, 
you've made them more complex for us. We have been trying to 
find some simple way of solving all these problems and pleasing 
everybody and, as you know, there is no way we can do that. So 
what we have to do is sift through all this and see what we can 
do to try and be fair but yet honest and decent, and hopefully 
we can come up with something that will be acceptable to most 
people. But we appreciate your help, every one of you. You are 
brilliant people and this has meant a lot to me, this hearing.
    So I just want to thank you once again for appearing and 
for taking your valuable time and helping to try and help us to 
be able to get it right. So we will see what we can do, and we 
hope we can get some legislation that will help to resolve some 
of the difficulties that you have mentioned here today. We will 
do our best to do that.
    So thanks so much. With that, we will recess until further 
notice.
    [Whereupon, at 3:43 p.m., the Subcommittee was adjourned.]
    [Questions and submissions for the record follow.]
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