[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                       FULL COMMITTEE HEARING ON
                        THE IMPORTANCE OF PATENT
                        REFORM ON SMALL BUSINESS

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 29, 2007

                               __________

                          Serial Number 110-12

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


JUANITA MILLENDER-McDONALD,          STEVE CHABOT, Ohio, Ranking Member
California                           ROSCOE BARTLETT, Maryland
WILLIAM JEFFERSON, Louisiana         SAM GRAVES, Missouri
HEATH SHULER, North Carolina         TODD AKIN, Missouri
CHARLIE GONZALEZ, Texas              BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington              MARILYN MUSGRAVE, Colorado
RAUL GRIJALVA, Arizona               STEVE KING, Iowa
MICHAEL MICHAUD, Maine               JEFF FORTENBERRY, Nebraska
MELISSA BEAN, Illinois               LYNN WESTMORELAND, Georgia
HENRY CUELLAR, Texas                 LOUIE GOHMERT, Texas
DAN LIPINSKI, Illinois               DEAN HELLER, Nevada
GWEN MOORE, Wisconsin                DAVID DAVIS, Tennessee
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
BRUCE BRALEY, Iowa                   VERN BUCHANAN, Florida
YVETTE CLARKE, New York              JIM JORDAN, Ohio
BRAD ELLSWORTH, Indiana
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


WILLIAM JEFFERSON, Louisiana         DAVID DAVIS, Tennessee, Ranking
HENRY CUELLAR, Texas                 ROSCOE BARTLETT, Maryland
GWEN MOORE, Wisconsin                SAM GRAVES, Missouri
YVETTE CLARKE, New York              TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


WILLIAM JEFFERSON, Louisiana         LYNN WESTMORELAND, Georgia, 
RICK LARSEN, Washington              Ranking
DAN LIPINSKI, Illinois               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               STEVE KING, Iowa
GWEN MOORE, Wisconsin                MARILYN MUSGRAVE, Colorado
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
JOE SESTAK, Pennsylvania             VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


JUANITA MILLENDER-McDONALD,          LOUIE GOHMERT, Texas, Ranking
California                           LYNN WESTMORELAND, Georgia
CHARLIE GONZALEZ, Texas
RAUL GRIJALVA, Arizona

                                 (iii)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES


PANEL I
Doll, Hon. John, Commissioner of Patents, U.S. Patent and 
  Trademark Office...............................................     3

PANEL II
Gross, Mitchell, Mobius Management Systems, Inc..................    19
Lord, Bryan P., AmberWave Systems Corporation....................    21
Ward, Emily, eBay, Inc...........................................    23
Neis, John, National Venture Capital Association.................    25
Thomas, John R., Georgetown University Law Center................    27
Kirsch, Kevin, Taft, Stettinius & Hollister LLP..................    29

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    41
Chabot, Hon. Steve...............................................    43
Altmire, Hon. Jason..............................................    45
Doll, Hon. John, U.S. Patent and Trademark Office................    46
Gross, Mitchell, The Information Technology Association of 
  America (ITAA).................................................    53
Lord, Bryan P., AmberWave Systems Corporation....................    60
Ward, Emily, eBay, Inc...........................................    93
Neis, John, National Venture Capital Association.................    96
Thomas, John R., Georgetown University Law Center................   106
Kirsch, Kevin, Taft, Stettinius & Hollister LLP..................   123

Statements for the Record:
Computing Technology Industry Association (COMPTIA)..............   136
Innovation Alliance..............................................   140

                                  (v)

  


                        FULL COMITTEE HEARING ON
                    THE IMPORTANCE OF PATENT REFORM
                           ON SMALL BUSINESS

                              ----------                              


                        THURSDAY, MARCH 29, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Jefferson, Shuler, 
Gonzalez, Larsen, Cuellar, Braley, Clarke, Ellsworth, Chabot, 
and Akin.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. I am very pleased to call this 
meeting to order, this hearing, this morning on the potential 
impact of patent reform on small business. For more than 200 
years, the U.S. patent system has served America's investors 
and helped to foster innovation and technological advancement.
    The words ``strong, enforceable patent''--based on an 
effective patent system--provides a critical incentive to 
innovation. Granting investors certain exclusive rights helps 
spur research inventors and development efforts, which in turn 
help drive American technological leadership. In this way, 
patents are an important linchpin with respect to continuing 
America's economic growth and global competitiveness.
    An effective patent and trademark office and sound 
intellectual property laws are particularly significant to 
small companies. As tireless innovators, small companies 
produce more than 13 times as many patents per employee than do 
their larger counterparts. This demonstrates the critical role 
that patents play for small firms, enabling them to attract 
investors, grow their companies, and compete with larger 
entities.
    Due to its importance to the U.S. economy and to small 
business, today's hearing will examine the effect of potential 
reforms on small firms. We will hear testimony on ways that we 
can improve the system to enable small companies to compete in 
a global economy. This includes harmonizing U.S. patent laws 
with those of other industrialized countries and strengthening 
patent quality.
    We will also hear about potential changes to the litigation 
system, which many suggest has become a deterrent to innovation 
and technological progress. Reforming the U.S. patent system 
could have a very significant impact on small companies' 
ability to protect as well as enforce their rights. The current 
system has a significant impact on the small companies that 
manufacture complex products, license patented technologies, 
and defend themselves in alleged infringement cases.
    We will hear testimony that will discuss these issues, 
which will illustrate the important stake that small companies 
have in this debate. Small innovative companies play a 
significant role in the most productive sectors of the United 
States economy. These companies are often more willing to take 
risks than larger competitors, positioning themselves to seize 
market opportunities.
    As remarkable inventors, small companies use and rely on 
the U.S. patent system. For many, this is central to their 
business and ongoing competitiveness. Today, we will ensure 
that these small firms have a voice in the patent reform 
legislation.
    I look forward to the testimony on this important, if 
complex, issue. And I will now recognize Mr. Chabot for his 
opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Thank you very much, Madam Chairwoman. I first 
want to apologize for being a little bit late and holding the 
meeting up. I am usually very careful about being here on time. 
Unfortunately, I had to speak at a meeting, and it went a 
little longer than we had anticipated. I hate keeping people 
waiting, so I do apologize for that.
    I also want to thank you, Madam Chairwoman, for holding 
this hearing this morning. I would also like to thank all of 
our witnesses for agreeing to share their views on this 
important issue. If I may, I would like to welcome Mr. Kevin 
Kirsch, who I will be introducing here shortly, who hails from 
the city of Cincinnati and also happens to be my Congressional 
District, the First District of Ohio in Cincinnati.
    Innovation is the heart and soul of this country, and we 
need not look any further than to our founding fathers and the 
United States Constitution to demonstrate the importance of 
patents and the development of our great nation. Through Title 
35, Congress has promoted ``the progress of science and useful 
arts by securing, for limited times, to authors and inventors 
the exclusive right to their respective writings and 
discoveries, the impact of which is immeasurable.''
    The impact of this protection and the protections that are 
contained in here is immeasurable. We now live in an age where 
what was once considered science fiction is now a part of 
everyday life. Advances in medicine and health technology allow 
us to lead longer lives. Wireless satellite, digital and 
electronic technology, have allowed us to live fuller lives, 
entertaining and communicating and traveling in ways that were 
never imagined in the past.
    The relationship between innovation, particularly advances 
in technology, and small businesses cannot be overstated. In 
2003, the Small Business Administration noted, ``Small firm 
innovators are extremely effective at producing technically 
important innovations, and technically important innovations 
are most likely to be commercially important.''
    In particular, the report found, among other things, small 
firms produce more highly-cited patents than large firms on 
average. Small firm patents are twice as likely as large firm 
patents to be among the most cited patents. Small patenting 
firms produce 13 to 14 times more patents per employee as large 
patenting firms. Small firm innovation on average is linked to 
scientific research twice as often as large firm innovation, 
and so it is substantially more high tech or leading edge.
    Thus, there is no doubt that small businesses have made 
significant contributions under the current patent system. But, 
like many other statutes such as the Sherman Act, our patent 
laws were enacted more than half a century ago. Advances in 
technology, together with uncertain patents and increased 
litigation, raise legitimate questions as to the sufficiency of 
Title 35 to protect and incentivize innovation in the 21st 
century.
    For small businesses, these concerns are compounded by the 
problems faced by small businesses utilizing the patent system. 
In its same report highlighting the successes experienced by 
small businesses, the Small Business Administration found that 
``Small firms find the patent system to be problematic. The 
costs of obtaining and maintaining patents can be prohibitive, 
and small firms are not able to undertake expensive litigation 
to defend their intellectual property.''
    I believe we have a unique opportunity today to explore in 
greater detail how different industry sectors utilize the 
patent system, determine what works for small businesses, and 
what areas can be improved to ensure that innovation continues 
to flourish into the future.
    I would also like to take a moment to recognize all of the 
time and effort that has been invested in this issue, 
particularly by my colleagues on the Judiciary Committee. I 
also happen to be on that Committee. As all of you know, patent 
law is a complex area, and I would like to thank Ranking Member 
Lamar Smith, and Courts and Intellectual Property Subcommittee 
Chairman Howard Berman, in particular for their leadership on 
this issue on that Committee.
    And, again, I want to thank all the witnesses for being 
here today and the testimony that we will be receiving here 
shortly, and I yield back, Madam Chair.
    Chairwoman Velazquez. Thank you.
    Our first panel, we have The Honorable John Doll, 
Commissioner of Patents. He is responsible for all aspects of 
the patent-granting process for the United States, more than 
5,000 employees, and an annual budget of more than $970 
million. Commissioner Doll joined the Patent & Trademark Office 
in 1974 as a Patent Examiner.
    Thank you for being here today. Welcome, and you will have 
five minutes to make your presentation.

STATEMENT OF THE HONORABLE JOHN DOLL, COMMISSIONER OF PATENTS, 
  UNITED STATES PATENT & TRADEMARK OFFICE, U.S. DEPARTMENT OF 
                            COMMERCE

    Mr. Doll. Thank you, Madam Chairwoman, Ranking Member 
Chabot, Members of the Committee. On behalf of my 8,500 
colleagues at the United States Patent & Trademark Office, 
thank you for this opportunity to discuss the PTO's programs 
and initiatives for small businesses.
    We are all aware of the vital role businesses play in 
promoting our economic growth. The inventions and innovations 
brought to us by independent inventors, minority and small 
businesses, have improved our lives and, in fact, saved lives. 
As inventors turn their ideas into viable, marketable products, 
it is important that they obtain the protection they need to 
safeguard their inventions.
    Many of the PTO's programs and initiatives serve to educate 
and assist small businesses and independent inventors in 
obtaining and maintaining that protection domestically and 
internationally. The PTO would not be able to effectively do 
what we do without the support of the administration and the 
Congress. I would like to take this opportunity to thank the 
administration and the Congress for supporting our current fee 
structure, which includes a 50 percent reduction for small 
entities, and ensuring that the PTO has access to all of our 
fees.
    Full access to our fees permits us to build on our 
successes in enhancing quality and production. Full access also 
allows us to offer a variety of services that are particularly 
useful to the minority and small businesses, as well as 
independent inventors.
    Our website, USPTO.gov, is an excellent starting point for 
inventors. It contains a wealth of information, including 
searchable databases of issued patents and of published patent 
applications. Our website also offers inventors a resource page 
that provides information on financing, marketing, and 
invention promotion scams.
    Inventors can also call our inventor's assistance center 
for one-on-one help in filling out forms as well as getting 
answers to questions on rules, procedures, fees, and patent 
examination policy. Our inventor's assistance center receives 
approximately 6,000 calls a month. Help is also available 
across the country through the PTO's Patent and Trademark 
Depository Library Program. This is a nationwide network of 
public, state, and academic libraries, which disseminate patent 
and trademark information.
    They also support inventors and entrepreneurs with seminars 
and training sessions. The library network consists of 85 
libraries located in 47 states, the District of Columbia, and 
Puerto Rico. We also sponsor two-day conferences for 
independent inventors and small businesses, which feature 
sessions on how to conduct a patent search, what is patentable, 
what is not patentable, how to protect your intellectual 
property, and even how to write a business plan.
    We are also working to streamline and demystify the patent 
application process. We continue to promote electronic filing, 
processing of patent applications, to enable all applicants to 
file and follow up on their patent applications 24 hours a day 
from any location in the world.
     The U.S. PTO is considering and has a variety of 
innovative patent processing initiatives, including a new 
offering called accelerated examination. Under this program, 
which began in August of 2006, the PTO offers a complete 
examination within 12 months as an option to inventors who wish 
a quick turnaround. The first patent issued under this new 
program was filed on September 29, 2006, and issued as a patent 
less than six months after on March 13, 2007.
    Independent inventors and small businesses are becoming 
involved in the global marketplace where counterfeiting and 
piracy are a serious threat. Small and minority businesses are 
particularly at risk here, since they often do not know the law 
and do not have the resources to effectively fight the fight.
    As part of the administration's STOP! initiative to combat 
piracy and counterfeiting of intellectual property, the PTO 
manages a telephone hotline. The phone number is 1-866-999-
HALT, where callers receive information from intellectual 
property attorneys at the Patent & Trademark Office on how to 
secure patents, trademarks, and copyrights.
    We have also established a link on our website to 
stopfakes.gov, which provides in-depth details of the STOP! 
initiative and has a section devoted solely to small business 
issue. An important part of the STOP! initiative is a 
nationwide public awareness campaign to help educate small 
businesses on protecting their intellectual property here and 
abroad. Our research shows that 81 percent of small businesses 
do not understand that their U.S. intellectual property rights 
stop at the United States borders.
    We look forward to working with this Committee to improve 
and expand our outreach to small businesses. Madam Chairwoman, 
thank you for this opportunity to discuss these issues with the 
Committee.
    [The prepared statement of Commissioner Doll may be found 
in the Appendix on page 46.]
    Chairwoman Velazquez. Thank you. Thank you, Mr. Doll, 
Commissioner Doll. In your testimony, you mentioned that patent 
applications received by your agency continue to increase. And 
I also understand that the number of highly technical 
applications covering fields such as biotechnology and computer 
science has also soared.
    Under these circumstances, I applaud your agency's effort 
to address concerns that have been raised regarding patent 
quality. Do you believe that effective planning, adequate 
budgetary resources, and rulemakings are sufficient for your 
agency to address the challenge of maintaining high patent 
quality?
    Mr. Doll. That is an excellent question, and you have 
covered quite a bit of information. Right now, the office is 
doing very well. We have a large number of new initiatives to 
address quality. Quality is our number one initiative. If an 
applicant receives a patent that isn't of good quality, it can 
be much more harm and be much more expensive than if we spend 
the time to do the good quality examination.
    Chairwoman Velazquez. Okay. Is that a yes?
    Mr. Doll. Okay. Yes.
    Chairwoman Velazquez. Yes. Thank you.
    Mr. Doll. Okay.
    [Laughter.]
    Chairwoman Velazquez.The next panel of witnesses will 
discuss a number of issues associated with the rules of patent 
litigation, including venue standards and the calculation of 
damages in infringement cases. Do you believe that legislation 
is necessary to address the concerns that some people have 
raised about the rules governing patent litigation?
    Mr. Doll. Is that a yes or no answer?
    Chairwoman Velazquez. Yes, sir.
    [Laughter.]
    I just want for the record to reflect whether you believe 
that is so.
    Mr. Doll. Yes.
    Chairwoman Velazquez. Okay. So does the administration have 
positions on various key elements of pattern reform now being 
considered by Congress? What are the PTO and administration 
positions on, first, post-grant review and the need for a 
second window; and, two, potential reforms in the ways that 
damages are calculated in patent infringement cases?
    Mr. Doll. With respect to the post-grant review and the 
second window, we haven't seen exactly what is in the bills 
that will be introduced in the House and the Senate, so it is 
difficult to comment on those. I think post-grant opposition is 
an excellent opportunity to complement a program that we 
already have, and that is ex parte and inter-party 
reexamination.
    This is an opportunity where we may be able to expand past 
the printed publication, which is the only requirement in ex 
parte and inter-party reexamination, to actually get to 
questions that are raised with respect to Title 35 of the 
United States Code 101 and 112 with respect to utility 
enablement and written description.
    Chairwoman Velazquez. So do you think legislation is 
required?
    Mr. Doll. Post-grant is an interesting option, and I am 
sure there will be lively debate with respect to that. The 
system, as it works right now, as you said in your opening 
statement, has been working very well for 200 years. I think 
the reexamination procedure provides that opportunity, and a 
venue post-grant may well open up the opportunity to discuss 
enablement utility and written description.
    Chairwoman Velazquez. Okay. Let us switch gears for a 
moment. Could you highlight some of the efforts that the U.S. 
PTO is making in order to help small businesses protect their 
intellectual property against piracy, counterfeiting, and 
infringement?
    Mr. Doll. Yes. The first thing that I would like to talk 
about were some of the things that we did in our testimony, or 
in my testimony, and that was education that we do through our 
independent inventor conferences--the conferences that we hold 
that are two-day conferences that teach people exactly what 
their patent is, how to get a patent, how to process a patent.
    And, as I said, 81 percent of the small businesses don't 
realize that if you have an invention that is internationally 
viable or marketable that you need to protect that invention in 
each one of the countries where that invention may be useful or 
may be marketed or sold.
    We have also the inventor's assistant, where you can call 
in and speak to supervisory primary examiners to see exactly 
what you need to protect your invention in the United States. 
We have an independent inventor's office that we have just 
opened in the past year where we just assigned one of our 
experienced supervisory primary examiners to help in the 
outreach effort to independent inventors and to small 
businesses.
    We work with the patent and trademark depository library 
programs, as I said, in 47 states and in Puerto Rico, which 
provide really invaluable information on exactly what 
information is out there, what patents have already issued, and 
to provide inventors and small businesses with the opportunity 
to learn what their rights are and how to protect.
    We have the STOP! initiative that I talked about where we 
have received thousands of telephone calls where people don't 
understand what they need to do to protect their inventions. We 
have 18 conferences planned that have been held--some have been 
held, some have been planned--across the countries where 
Undersecretary Dudas and Deputy Undersecretary Pinkos go across 
the country and talk about intellectual property and what their 
rights are.
    Education is the biggest thing that we can do. We have also 
just recently started posting U.S. patent office employees in 
foreign countries as intellectual property attaches. We have 
them, or currently will have them, in Brazil, two in China, 
Egypt, India, Thailand, Russia, and Geneva. What they have done 
is funnel a lot of the information back to the embassies and 
provided information that we can then funnel to the independent 
inventors and small businesses on what the challenges are in 
those countries.
    Chairwoman Velazquez. Commissioner, let me just say that I 
really appreciate your agency's efforts in all of these areas.
    Let me recognize Mr. Chabot, but I will come back and ask 
some other questions.
    Mr. Chabot. Thank you very much, Madam Chair. And I first 
would note the--if you are noticing, there is a lot of 
Democrats here, not too many Republicans here. We were actually 
invited down to the White House. Most of my Republican 
colleagues are down at the White House meeting with the 
President about a number of issues. I personally felt that 
patent reform was much more important than meeting with the 
President, so--
    [Laughter.]
    --that is why I am here today where I should be, so--
    [Laughter.]
    Chairwoman Velazquez. You are going to get in trouble.
    Mr. Chabot. I will probably get in trouble, you are right.
    [Laughter.]
    Just for the record, I like the President.
    [Laughter.]
    Chairwoman Velazquez. Let the record reflect that.
    Mr. Chabot. Of course, that could be controversial. That is 
probably a 30-second ad next time, too, so--
    [Laughter.]
    But in any event, I also want to thank Commissioner Doll 
for accommodating me recently in visiting the U.S. Patent & 
Trademark facility, not too far from here. But my staff and 
myself were very--it was very interesting seeing, you know, 
what goes on down there, so thank you very much for allowing us 
to do that.
    Just a few questions, and I think you really covered a lot 
in the chair's questions here. How does the U.S. Patent & 
Trademark Office deal with over-broad claims? And is there any 
way to determine whether large or small businesses submit 
applications with overly broad claims?
    Mr. Doll. Overly broad claims is a very important issue. It 
is something that we deal with from the first days that we 
start to train examiners. The most important thing that a 
patent examiner can do is assess the scope and the breadth of a 
claim. If they don't have a correct assessment of that breadth 
and scope, they may not do a proper search.
    And, in fact, what we have seen in the past couple of years 
is that is the number one error that we find when an examiner 
makes a determination is that the scope and the breadth of the 
claim had been improperly analyzed. We are spending a great 
deal of time in our new patent training academy where we have 
just instituted a program last year where we bring people in 
and we put them through an eight-month training program.
    And we spend several days of the training talking about the 
breadth of the claims, scope of claims. And we have hands-on 
examples, and then we allow them to look at actual applications 
where rejections have been written, have been upheld by the 
courts, and talk about exactly what are the pros and cons of 
interpreting this claim.
    It is an extremely important issue. As far as understanding 
whether large or small businesses, I don't have any statistics 
on that right now, but I would be happy to look into that. But 
a broad claim should never be allowed, so the claims that are 
allowed are the claims that have been determined by the 
examiner to have the correct scope and the correct breadth.
    Mr. Chabot. Thank you. What do you think will be the long-
term impact of web-based searching for patents and patent 
applications? And do you think it will reduce or increase 
conflict in the patent system?
    Mr. Doll. I think the web has opened up new doors to the 
American public, to the independent inventor, to the person 
working in their garage, to the small businesses that give them 
the opportunity to actually come into the United States Patent 
Office and look at what patents have been issued.
    If they have a particular invention, an idea, or an 
innovation that they would like to patent, they have the 
opportunity to look through our databases to search the same 
databases that the examiners searched for prior art with 
respect to patents that have issued with respect to 
applications that are pending to give them an idea as to 
whether or not their invention has been done or not.
    I think the web has really facilitated, again, the 
independent inventor and the small business to give them the 
opportunity to determine what is patentable and what isn't 
patentable.
    Mr. Chabot. Thank you. Could you comment on what problems 
arise because the United States doesn't use the first to file 
system for patents? And as you discuss this type of issue--and 
I assume you probably do with other countries and their 
representatives--what sort of feedback do you get as far as 
satisfaction or dissatisfaction with the way they do it as 
opposed to the way we do it?
    Mr. Doll. Right. I will go back to how Madam Chairwoman 
opened, with the United States patent system has been served 
well for over 200 years by the first to invent policy that we 
have. We are the only country in the world that has the first 
to invent as opposed to the rest of the world which has a first 
to file.
    The first to file takes care of a lot of complex legal 
questions, if there is a question of prior art as to who 
invented a particular invention. In the United States, we have 
a system where we determine who was the first inventor to 
invent. It may not have always been the first person to file.
    So there are pros and cons on both sides of that argument. 
And as I said, the United States Patent Office has been served 
for over 200 years very well by first to invent, and I think 
small businesses and inventors and independent inventors have 
been served very well by the first to invent.
    But I am sure there will be a vigorous conversation in the 
Congress this year, and possibly in years to come, and the 
patent office will fully support and implement whatever program 
Congress feels is appropriate.
    Mr. Chabot. Thank you. If you had the unilateral power to 
implement any changes to the patent system to help make small 
businesses--to make it work better for small businesses, what 
changes would you make?
    Mr. Doll. I think a lot of the changes that we are 
currently trying to implement work really well for the small 
business, for the little guy, the innovator that is just trying 
to get started.
    One of those is the peer to patent review. When somebody 
comes through the patent office, we do a great job. I think the 
examiners do a phenomenal job in the amount of time that they 
have to do an examination and to make a patentability 
determination. What we are trying to do with the peer to patent 
review pilot that we are getting ready to implement in early 
June is to give the public an opportunity also to comment on 
these applications.
    The worst thing that we can do for a small or an 
independent inventor is to give them a patent where someone 
else could legally or actually viably challenge that patent in 
court. So allowing other people to comment on this application 
while it is pending in the patent office, whether that be 
during a peer to pilot review during the examination, or 
whether that be during a post-grant opposition period, I think 
gives the small inventor and the independent inventor an 
opportunity to have a patent that they feel is extremely 
strong, that they feel confident will withstand a legal 
challenge in court.
    Mr. Chabot. Thank you. And one final question, would some 
type of formal or informal arbitration system be effective in 
your view in contesting the validity of patents? Would that be 
more effective than the current interference proceeding or 
post-grant review?
    Mr. Doll. Post-grant is an interesting option where we are 
looking for a low-cost option, to try to be fair, to try to 
balance the system, to make sure that the little guy, the small 
inventor, the small business, has the same opportunity in a 
reasonably cost-effective manner to challenge a patent and to 
look at that.
    We also have the reexamination proceeding that I think also 
does that. For $2,520, somebody can challenge a current patent 
and ask for reexamination, where they actually have a team of 
three examiners look at a patent one more time and make a 
determination whether or not there was prior art that raised a 
substantial new question of patentability.
    We have actually just created a new central reexam unit, 
and in that reexam unit these are people that are highly 
skilled, dedicated to the reexamination process, which look at 
these applications and, again, go through the complete 
examination process with respect to the new prior art that was 
submitted by either the patentee or a third party requester, 
and then any additional new art that they might uncover or 
discover during their searches to make a complete 
determination, again, as to the validity of those patents, and 
possibly amend the claims, cancel claims, or possibly cancel 
the entire patent.
    Mr. Chabot. Thank you.
    Madam Chairman, I yield back.
    Chairwoman Velazquez. Thank you.
    Mr. Larsen, you are recognized for five minutes.
    Mr. Larsen. Thank you, Madam Chairwoman. I just have one 
question, but it has got a little bit of a follow-up--or sort 
of a lead-in to it. Since '90, when the U.S. Patent & Trademark 
Office became self-reliant, until '05 when fee collections 
exceeded appropriations, and during those years there was about 
$750 million diverted right from PTO, U.S. PTO.
    The U.S. PTO received in excess of 440,000 patent 
applications in '06, is that right, a record number?
    Mr. Doll. Yes.
    Mr. Larsen. Yes. To help meet that demand, the agency hired 
over 1,200 patent examiners, exceeding your goal by 200 people. 
And they are going to continue to hire over 1,000 patent 
examiners over each year for the next five years.
    Recently, in testimony to the House Judiciary Committee, 
the head of U.S. PTO testified that PTO's '06 budget 
appropriation was sufficient to meet agency demands. But there 
is still this concern about a precedent of fee diversion, and 
what that might mean for available dollars. It is my 
understanding as well that the decision to grant PTO a robust 
budget appropriation has been a year-to-year determination as 
well.
    So given that as a lead-in, it is also my understanding 
that the recent reports by National Academy of Science and the 
FTC conclude the PTO does not have sufficient resources to 
ensure that it can meet its mission. So given the conclusion of 
those reports, and the testimony from the head of the PTO, 
which seemed to be at conflict, can you--do you agree with the 
conclusions of those reports? Or can you help enlighten us 
about why there might be a difference of opinion between the 
testimony given and the conclusions of these reports?
    Mr. Doll. Well, I fully support the President's budget. I 
fully support the appropriations that have been given by the 
Congress to the U.S. PTO. And as I said in my testimony, we 
really appreciate the full funding. Full access to our fees 
gives us the opportunity to institute programs, to carry out 
programs, and we have a list of new initiatives that I would 
love to talk about, but I am afraid I don't have time to talk 
about, that wouldn't be possible without full funding.
    The full funding has allowed us to actually recreate the 
independent inventor's office that I talked about, where we 
have just recently reinstituted it, reinvigorated it, and made 
it much more robust than it has been in the past, to reach out 
to small businesses.
    As far as the funding issue, what has happened in the 
past--and I certainly don't disagree with where the money was 
diverted to. They were very good projects and very worthwhile. 
But what happened to the U.S. PTO is that we were unable to 
hire at the levels that we felt we needed to hire to meet the 
growing demand of the applications filed. And we currently have 
a backlog of 735,000 unexamined applications.
    What we did last year was examine 320,000 new applications. 
So if you do the math very quickly, we added over 100,000 
brand-new unexamined applications to the backlog last year. 
This year, we will add over 100,000 additional new applications 
to the backlog and end the year with over 800,000 new 
applications in the backlog.
    We have initiatives to try to address that. We are trying 
to do a limitation on the number of continuations that an 
applicant can file. We are trying to focus the examination by 
limiting the number of claims that an application can contain, 
without providing additional support.
    We have no per se rules on strictly limiting the number of 
applications or the number of claims, but we have set limits 
where within those limits there is no additional help required 
from applicant. But if you feel that you need more claims, you 
are more than welcome to file them, but we are going to ask you 
to file an examiner's support document to aid the examiner, to 
help the examiner do a more focused examination.
    Mr. Larsen. So, if I may, it sounds like you appreciate the 
full appropriation.
    Mr. Doll. Yes, sir.
    Mr. Larsen. But with regards to the National Academy of 
Science report and FTC report, you haven't directly answered 
that question whether or not you agree with the conclusion of 
those reports. It sounds from your answer is that they--NAS and 
FTC have made a very good case that there is a lot of work to 
be done that isn't getting done.
    Mr. Doll. You are absolutely correct, and I certainly don't 
mean to avoid the question. But I do want to make sure that I 
support the budgets that we have been given and appreciate the 
full funding.
    However, there is always more that we can do. We have a lot 
of initiatives that we would like to put in place. We have new 
programs that we would like to institute. It would be great if 
we could reach out to small businesses more, actually spend 
more time in the field working with them, provide better search 
systems, provide more up-to-date search systems.
    More money would always be appreciated, so if you are able 
to do that the patent office would find very good ways to 
utilize that money to help small and independent inventors.
    [Laughter.]
    Mr. Larsen. That is an unusual request.
    [Laughter.]
    Thank you.
    Thank you, Madam Chairman.
    Chairwoman Velazquez. Mr. Jefferson.
    Mr. Jefferson. Thank you, Madam Chair.
    Mr. Chabot asked the question one way, which was, if you 
had the power to enact to some provisions, which would they be? 
I want to ask it a different way. Which of the proposals that 
you are aware of that are under the so-called label of reform 
of the patent system would be most advantageous to small 
businesses if they were adopted?
    Mr. Doll. I don't have a good answer, because the proposals 
that I have seen have been proposals that are a long way from 
final rules or law. And I would hope that the office would have 
the opportunity to work with Congress and to work with the 
Committee to make sure that there is always a fair and balanced 
equity between the large entity, the people with the deep 
pockets that can run to the office often, and that small 
independent inventor that is trying to get his invention off of 
the ground or trying to get a corporation started.
    And so I am not sure which ones would be most 
disadvantageous, because I see pros and cons on both sides, but 
overall from the programs that I have seen and the bills that I 
have seen from the last Congress it looked like we could make 
all of them work fairly and equitably for.
    Mr. Jefferson. The issue of access to the federal courts, 
in your opinion, would that--just ask on this one, would that 
be more or less disadvantageous to small or larger concerns?
    Mr. Doll. I am not sure I understand the question.
    Mr. Jefferson. Well, the cases now in court, there is some 
talk about arbitration, some talk about other ways to get after 
disputes. Do you think if we--right now the court actions that 
are brought to deal with patent infringement questions--and so 
my question, I am trying to get specific on one issue, I 
couldn't get the broad ones, just ask about this. Do you think 
that would disadvantage small business folks or not?
    Mr. Doll. I think the court system has fair access for both 
large and small entities. There is always a question of cost as 
to whether or not the small entities have the resources to 
fully fight the fight. We do have programs in the office, such 
as the reexamination unit, where for what I think is a very 
reasonable cost they have the opportunity to challenge the 
validity of a patent.
    Mr. Jefferson. Let me ask you another question and get out 
of this area, then. On harmonization, there are differences 
pointed out in the information I have gotten here about how 
different regimes deal with patent issues. I would guess you 
would say that the U.S. parent regime, if I can call it that, 
is superior to the rest of the world's patent protection 
regime, would you not?
    Mr. Doll. Oh, absolutely.
    Mr. Jefferson. So, consequently, we don't want to harmonize 
too much, do we, with the rest of the world, if ours is better 
than theirs, do we?
    Mr. Doll. I was hoping harmonization would lean towards the 
U.S. system.
    Mr. Jefferson. Oh, I would hope so, too. But all of the 
material I am reading about the reform seems to suggest that we 
ought to join league with others in the world, because our 
system is different. I suppose it is different because in your 
opinion mine is better.
    Mr. Doll. I think our system is better. I think our quality 
is better. It is certainly less expensive. It is less expensive 
to obtain a patent and maintain a patent in the United States 
than it is anywhere else in the world, especially with respect 
to Japan or the EPO. When it comes to our quality, I believe 
our quality is better than the quality in either the European 
patent office or in the Japanese patent office.
    Mr. Jefferson. So you would warn against harmonization that 
takes us to the other patent regimes as opposed to our own.
    Mr. Doll. I agree with you, Congressman. The United States 
system is the best system, and harmonization should lead 
towards the United States, as compared to leaning towards 
either the Japanese or the European system.
    Mr. Jefferson. Thank you, Madam Chair.
    Chairwoman Velazquez. Mr. Gonzalez?
    Mr. Gonzalez. Thank you very much, Madam Chairwoman. And 
welcome, Commissioner.
    Mr. Doll. Thank you.
    Mr. Gonzalez. These are huge issues, and we try to remain 
focused on the implications and consequences of small 
businesses. Obviously, things are going on in other committees, 
things are going on in the Senate, but our charge really is 
about small business, and sometimes they just kind of get lost 
in the one size fits all, because many times the size is just 
too big and it doesn't fit small businesses, and that is going 
to be my fear.
    And how do we define or characterize some of the smaller 
players? Now, I am going to be reading from a recent article. 
``Computer companies say they are often the targets of suits 
filed by technological buffs.''--now, I would imagine 
technological buffs are probably small business--``who obtain 
patents they do not intend to use to provide a product or 
service.''
    And I am going to read on, ``Microsoft, the world's largest 
software company, is a defendant in more than 35 patent 
infringement cases. The vast majority of those cases were filed 
by individuals and small companies whose main business is 
licensing patents,'' said David Capers, Microsoft's General 
Manager of Intellectual Properly Licensing.
    ``There is such uncertainly about patent quality and about 
patent litigation that it really rewards those willing to play 
the patent lottery. Microsoft says the current system gives 
patent owners of any size--small, for instance--excessive 
powers to demand royalties.'' And it goes on to discuss that.
    And I understand the perspective from Microsoft, and I 
understand Pfizer, and I understand Amgen, I understand what is 
going on out there. The difference, though, is that I think 
they can articulate and promote their view of the world much 
better than small businesses, and that is my biggest concern.
    And I am not saying every small business litigant is right, 
and the big issue then, is, are we going to wait for the courts 
for the litigate this, or are we going to legislate something? 
Where courts used to defer to the legislature pursuant to the 
Constitution of the United States and are now maybe deviating 
from that. So we do have a charge, and we are going to be 
acting.
    What I am going to ask you to do, and I am going to 
basically follow pretty much what my colleague, Congressman 
Jefferson, was pointing out, but I am going to ask you to 
present your testimony in this light. Worst case scenario for 
the small business, when we talk about harmonization, what 
would be the things that we need to guard against as we promote 
the best interests of small businesses in the United States?
    For instance, if we do have some harmonization, are we only 
extending the problems from, let us say, a domestic model to an 
international model for small businesses?
    Secondly, patent quality--I am reading in our memo. 
``Leading technology companies have raised concerns that 
modifications to U.S. patent law should be made to help ensure 
that patents issued by the PTO continue to be quality 
patents,'' whatever that really does mean. Again, worst case 
scenario for small businesses, if we attempted to do something, 
where should we not be going?
    And, last, patent litigation, basically, you know, loser 
pays, and so on. And we can have that debate over and over 
again, but I will tell you now it is a tremendously chilling 
effect when someone asserts a legal right and doesn't have the 
resources and takes a great risk, and then they lose because 
sometimes I am just telling you they are truly outdone. And I 
have witnessed this firsthand, and they will lose.
    And then, of course, then they are going to be saddled with 
the cost of the litigation that was brought in good faith, but 
for whatever reason that jury or that judge just didn't see it 
that day. And many times it is just the legal talent, in 
quantity and quality in that courtroom. So I just want to know, 
what would be the worst case scenario for businesses as we 
attempt to reform patents?
    Mr. Doll. I am at a loss as to what the worst case scenario 
would be. What I would like to address, if you allow me, is to 
talk about the quality, because I think that is the thing that 
the U.S. PTO can do, has control over, and it gives the small 
businessman or the independent inventor the most leverage, 
whether it be in court or whether it be in litigation, or 
before the patent office.
    Our quality numbers are the best they have been in over 25 
years. What we are doing in the office is we have a large 
number of quality initiatives. We have a targeted review. We 
are using a second pair of eyes. We have a quality review 
program that looks at a statistically significant sample of 
allowed applications--applications where the examiner has 
finished their work. And we also have an in-process review, 
where we look at the work as the examiners are doing it.
    We have experts in each one of the technology centers to 
address whether or not these inventions, whether or not these 
applications are ripe for appeal. Before an application goes to 
the Board of Appeals to make a determination as to whether or 
not the examiner has made a correct determination, we have a 
pre-appeal brief conference where the examiner sits down with a 
supervisory primary examiner and an appeal specialist and goes 
over the arguments made by applicant and made by the examiner, 
to make sure that the inventor, to make sure the applicant 
isn't spending money to write an appeal brief to go to the 
Board of Appeals to get a decision whether or not the examiner 
was right.
    After the pre-appeal brief conference, we then have another 
appeal brief conference, that once the applicant has spent the 
money to write the appeal brief, and to file that formal 
appeal, that the case is still ripe, that it should go to the 
Board of Appeals. Our affirmance rate at the Board of Appeals 
has been rising over the last couple of years, meaning that the 
examiners are doing a better job of picking cases that really 
are ripe for appeal, where the examiner has made the correct 
determination during the prosecution.
    Quality I think is the key. Regardless of how we harmonize, 
I think if the applicant, whether it be a small or a large 
entity, if they walk out of the patent office with a quality 
patent, a patent that they are sure they can walk into court 
and defend, that they have confidence in that they are going to 
win, no matter how much it costs them to finance that 
litigation, I think that is the best thing that we can do for 
all of our applications.
    We have another program that we are working on this summer. 
We are actually working with our PPAC, our Patent Public 
Advisory Committee, which is a Congressionally-mandated 
advisory committee to the patent office. We are working with 
them to do townhall meetings this summer across America. And 
what we are doing is we are looking to--
    Chairwoman Velazquez. Time expired, so if you want to 
finish your sentence right there.
    Mr. Doll. What we would like to do is get opinions from 
stakeholders as to what we can do to the office to make it work 
better for every one of our stakeholders, whether it be a large 
or a small entity.
    Mr. Gonzalez. Madam Chair, will you indulge me for 10 
seconds?
    Chairwoman Velazquez. Sure.
    Mr. Gonzalez. Thank you.
    Commissioner, what I was trying to elicit from you was 
basically where not to go, and that is the lesson that we all 
learned when we have had Alan Greenspan before us. He would 
never tell you where to go, but he definitely told us where not 
to go. And that is what I really wanted. And I know it is a 
difficult one for any administrator or chairman or commissioner 
to tell us, but sometimes a little bit of guidance does help 
Congress, and I thank you for your service.
    I yield back.
    Chairwoman Velazquez. Okay. Mr. Shuler?
    Mr. Shuler. Madam Chair, thank you.
    Mr. Doll, thank you for your testimony here today. I want 
to talk about third party requesters. You know, how effective 
is a third party requester? Is that where you are seeing some 
of the fraud and abuse on patents? How does help small 
businesses?
    And I looked through some of the statements, and it looks 
like you have, you know, 5,000 employees who are actually 
working with the patent office in order to conduct the files 
and the processes. And it looks like they have to obtain about 
one and a half patents under review per week.
    Mr. Shuler. Well, is it more effective for your office to 
be able to have a third party such as an attorney or some of 
the court--you can read the line item ads in the classified 
sections, or even sometimes you can actually see it on the TV, 
``If you have a patent, please inquire at our office.'' How 
effective, and what is the abuse side of that?
    Mr. Doll. That is a great question, and I think that is an 
opportunity for the patent system to take a quantum step 
forward and to increase quality immeasurably. What we are doing 
is the statistic that you reported is absolutely correct. The 
average examiner has 20.4 hours to do an application. That is 
the average examiner. That is the average application last 
year.
    In that time, the examiner does a search, reads the claims, 
analyzes those things, and then makes a patentability 
determination and informs the applicant as to what is 
patentable and what isn't patentable. What we are doing with 
the peer to patent review that you spoke about, or third party 
submissions, is to allow other people to opine on the 
patentability of this application.
    Now, we have heard from some small entities that they see 
this possibly as the big guy ganging up on the little guy. I 
don't see it that way at all, because, again, what I would like 
to do is talk about quality, because the more opinion that you 
get, the more prior art that is before the examiner, the better 
opportunity that examiner has to make that right determination 
and to grant a patent properly.
    When you look at the litigation history, and you look at 
the court statistics, when the examiner has the best prior art 
in front of them, they make the right decision the vast 
majority of times. So the peer to patent review actually gives 
the examiner a better opportunity to actually make that 
determination.
    We are starting a pilot in probably early June this year, 
maybe July, where we are actually going to work in one of our 
technology centers, one of our high-tech technology centers, 
where we do software and all of our hardware computer 
applications. And we are going to run the pilot for a year 
where we are working with Beth Novak from New York University, 
and we are actually going to have an external body review 
applications that are voluntarily submitted to this program and 
then published, and then allow this body, this third party 
submission, of prior art with explanation to the patent office 
as to why these claims are patentable or why they are not 
patentable over the prior art that they turned up.
    I think that gives applicant a much stronger feeling about 
the patent that they get, and would give them the confidence to 
say, ``My patent has gone through not only review by the patent 
office, it has gone through a peer review by an objective third 
party who would really like to opine and be experts in this 
area.''
    Mr. Gonzalez. Would it increase the costs from the 
applicant?
    Mr. Doll. No. No, it would not increase the cost at all, 
because the third party review is purely voluntary on their 
part. They would make a submission to the office, and then the 
examine would review that submission and then make the same 
determination. So there would be no cost at all, but I think a 
much higher quality.
    Mr. Shuler. And from your budget standpoint, will we see a 
reduction in the budget, or would it be an increase in the 
budget because of that third party?
    Mr. Doll. The budget would stay the same. The examiner 
would view this as actually additional prior art, and would 
view that as a help in making the determination.
    Mr. Shuler. Expediting the process much faster?
    Mr. Doll. I don't think it would expedite it, because we 
would not relieve the examiner from doing their search or 
making their own determination. This would just be one more 
submission that they would consider.
    Mr. Shuler. All right. Great. Thank you, Mr. Doll.
    I yield back.
    Chairwoman Velazquez. Thank you.
    Ms. Clarke?
    Ms. Clarke. Thank you very much, Madam Chair.
    Good morning, Commissioner. I wanted to ask about the 
inventor's assistance center. Is it physically located in one 
place? Can you tell us a little bit more about it?
    Mr. Doll. Right. The inventor's assistance center really 
is--it is one of our flagships for independent inventors. It is 
staffed by retired supervisory primary examiners. They have one 
administrative patent judge who retired and came back and is 
working as an inventor assistance center person.
    We have a great deal of expertise there on everything from 
how to fill out the forms to actual examination questions and 
how to deal with an examiner. It is one on one. It is 
physically located in the Patent & Trademark Office. But 
because we have an 800 phone number, anybody can call in from 
anywhere where they would like and get that assistance.
    Ms. Clarke. Commissioner, have you considered perhaps 
partnering with SBA or one of the other entities that serves 
small businesses, so that we can sort of decentralize that 
operation and get perhaps an individual who does the outreach 
into other communities and then channel them into the 1-800 
number?
    I raise that simply because when you re talking about, you 
know, isolated communities, perhaps immigrant communities, 
perhaps African-American communities of color, navigating the 
system tends to be the challenge. Even though we have stuff 
online, we may mention 1-800 numbers, when they are able to 
actually physically see someone, especially because they are 
holding on to their inventions so tightly. They want to see 
someone face to face, because they don't want someone to steal 
their information. Have you considered that?
    Mr. Doll. That is a great suggestion, and it is an idea 
that I will take back to the office. We have partnered with 
various organizations, inventor organizations, small business 
agencies. When we go to particular cities for our independent 
inventor conferences, and we have had them come in and actually 
talk to the independent inventors and the small businesses, it 
is--as far as decentralizing, that is a wonderful idea, because 
you are absolutely right.
    When you see the inventors walk in to our independent 
inventor conferences, they are holding their notebooks, and 
they are holding--
    Ms. Clarke. With sunglasses on, right?
    [Laughter.]
    Mr. Doll. And they are holding them very closely, because 
they don't know who to trust, and they don't know who to 
disclose their inventions to. As I said, we have an inventor's 
scam listing on our website--
    Ms. Clarke. Exactly.
    Mr. Doll. --to show maybe who you shouldn't be dealing with 
or who you actually do have a good relationship with. We do 
outreach with other agencies, as you said. But incorporating 
them into our inventor's assistance centers is a very good 
idea, and thank you for that.
    Ms. Clarke. No problem, Commissioner. And then, just 
finally, can you tell this Committee, what is the culture of 
diversity within the Patent & Trademark Office? The American 
business environment consists of a multiplicity of diverse 
ethnic groups. Therefore, diversity in staff and attorneys is 
important and should be a reflection of the environment that 
you serve.
    Has your office organization done any training or studies 
to identify how the Department can be more sensitive to this 
changing environment? And what is the dynamics as it relates to 
women in senior-level positions?
    Mr. Doll. Again, that is a great question. And I would be 
pleased to have you visit the United States Patent & Trademark 
Office, because when you walk around our campus it is almost 
like the United Nations. We are 54 percent diverse. Almost 50 
percent of all our patent examiners are women. It is a truly 
diverse organization.
    Ms. Clarke. Well, thank you very much, Commissioner.
    Mr. Doll. Thank you.
    Ms. Clarke. Thank you, Madam Chair. I yield back the rest 
of the time.
    Chairwoman Velazquez. Thank you.
    Commissioner, a large number of engineers and Ph.D.s are 
employed by small companies, and they undertake extensive 
research and development efforts. My question to you is: does 
PTO gather any specific information about small business patent 
applicants?
    Mr. Doll. Well, we do have some data on the number. When it 
comes to small businesses, small entities comprise about 30 
percent of the applications that are filed. They comprise over 
25 percent of all the patents that we issue.
    Chairwoman Velazquez. Okay. Thank you. Let me thank you 
again.
    We are going to take a recess. We have a vote on the House 
floor.
    Commissioner, I will ask you, do you have any staff with 
you?
    Mr. Doll. Yes, I do.
    Chairwoman Velazquez. And they will stay here to listen to 
the second panel?
    Mr. Doll. Oh, yes, absolutely.
    Chairwoman Velazquez. It is going to be a very interesting 
panel, and I think it is worth having your staff here.
    Mr. Doll. Absolutely.
    Chairwoman Velazquez. We will recess.
    [Recess.]
    Chairwoman Velazquez. I want to welcome all of the 
witnesses and thank them for agreeing to be here today to shed 
some light into this important issue.
    Our first witness is Mr. Mitchell Gross. He is a Chairman 
and CEO of Mobius Management Systems, a company that he helped 
found in 1984. Mobius is the leading provider of comprehensive 
software solutions for enterprise archives and records 
management. Mobius has over 400 employees and is headquartered 
in Rye, New York. Mr. Gross is testifying on behalf of the 
Information Technology Association of America. Welcome.

STATEMENT OF MITCHELL GROSS, PRESIDENT & CEO, MOBIUS MANAGEMENT 
SYSTEMS, INC., ON BEHALF OF INFORMATION TECHNOLOGY ASSOCIATION 
                           OF AMERICA

    Mr. Gross. Thank you, Chairman Velazquez and Ranking Member 
Chabot, members of the Committee. I very much appreciate the 
opportunity to appear before you today and discuss the 
importance of patent reform to small business.
    The United States patent system is something I work with 
almost every day in my business, and I believe very strongly 
that there are some problems with the system that demand our 
attention as a nation and an economy.
    First let me tell you a little bit about my company, Mobius 
Management Systems. Mobius, as you stated, is a leading 
provider of comprehensive software solutions, archiving, and 
records management.
    Twenty-five years Mobius has defined and led the market, 
software that stores, index, distributes diverse documents, 
reports, images, in any format from any source. Our solutions 
have achieved industry-wide recognition for the ability to 
support high-volume, high-performance simultaneous access 
requirements in distributed environments that range from the 
desktop to the mainframe.
    Commentators have said that more than 85 percent, if not 
more, of all the information we create today in the United 
States, in both government and private sector, is created in 
electronic form, documents to banking transactions, product 
logistics, e-mail, data analysis, graphs, charts, and all the 
rest. Much of that only exists in electronic form and is never 
put on paper.
    We at Mobius play a key part in designing and implementing 
software systems to match. We create our own software, license 
software products from other companies to implement the 
solutions. Mobius has over 400 employees, headquartered in Rye, 
New York. We still do the overwhelming majority of our 
development in the United States.
    I am also testifying on behalf of the Information 
Technology Association of America, which counts many small 
businesses among its 325 members. ITAA represents companies of 
all size. About half of the ITAA members are small businesses. 
I am privileged to serve on the Board of Directors of the ITAA 
Information Technology Service.
    Chairwoman Velazquez, as the head of a small business in 
the information technology sector, I am aware and I am here to 
stress the fact that the United States patent system is broken 
and needs to be fixed. Let me make it clear from the outset, 
however, that I am a strong supporter of patent protection and 
the role it plays in fostering innovation. And I, too, am the 
holder of a patent.
    Constitutional power of Congress to promote the progress of 
science and useful arts by granting exclusive patent right for 
limited periods of time has been and continues to be one of the 
cornerstones of successful American economy. The United States 
patent system does have a profound effect on innovation, new 
business development, job creation, and everything else, 
creating wealth of that nature.
    Today, however, the U.S. patent system has developed a 
number of flaws that need to be addressed by legislation. The 
problem is important because the systems impact is so 
important. The system as skewed as it is now has a profound 
effect, retarding business development and wealth production.
    Where I sit as a small business man, the issues with the 
patent system stretch from the process of patent application 
and grant at the PTO on through the process of enforcement, 
licensing, and litigation. The issuing process is too 
expensive, takes too long, and poses too much risk that an 
over-broad patent of questionable validity will issue at the 
end.
    The enforcement side, the system is so tilted to the 
plaintiff patentee's advantage; that is, the cost of losing 
litigation can be so high with multiple worldwide damages based 
on excessive estimates of the value of the infringement, that 
defendants are forced to settle, regardless of merits of their 
defense or the weakness of the patent underlying the 
plaintiff's claim.
    Legislation was introduced in the last Congress. And I 
understand it will be soon introduced again. I applaud the 
effort to move from generalities about the need for reform, 
epic proposals that change the structure of how the PTO has 
business and how patent infringement litigation is conducted.
    If I had to try to characterize the problem in just a few 
words, I might say too much risk of losing a fight when a bad 
patent stands up against information. What is a bad patent? It 
is one that is overly broad in its coverage, often one that 
covers a process, usually one that does not seem very novel to 
somebody like me who has been in the business for over 25 years 
that I have been involved with at Mobius. I think the problem 
may be particularly acute in the software and IT services 
industry.
     The United States needs to do a lot more to improve patent 
quality at the outset. Everyone knows that not every patent is 
issued by the U.S. Patent Office. A lot can be done to improve 
the PTO's access to and knowledge of prior art, the key to 
determining whether an application really presents a novel and 
non-obvious innovation.
    It remains important to have a viable low-cost 
administrative process for reviewing patents that already have 
been issued if the claims of the validity hold up unchallenged. 
Of course, it is not the fact of over-broad patents that 
matters. It is the consequence of infringement that weighs most 
heavily in the equation. And right now the risk of very high 
damages are exorbitant settlement requests in my mind very 
real.
    Basically, Chairman Velazquez, the current system in my 
view leaves small business in a position where we are afraid to 
innovate. I don't have confidence that undisclosed patent 
applications are truly novel. My company does not have the 
resources to do extensive patent searches every time we should 
in the modern environment, featuring many more patents than has 
been the case in the past.
    If we make a mistake and step into a field of technology 
covered by undisclosed applications, we run very high risks of 
serious consequences in the face of a system that favors all 
patentees.
    While the discussion of what to do about the problem--
    Chairwoman Velazquez. Mr. Gross, time has expired. Would 
you like ten seconds to summarize whatever important point you 
want to make?
    Mr. Gross. Okay. Without reform, a system that is intended 
to serve innovation is having the opposite effect. Whenever my 
company engages in development of products and services, we 
have to ask ourselves what is it.
    Chairwoman Velazquez, that concludes my prepared remarks. I 
would be happy to answer questions.
    [The prepared statement of Mr. Gross may be found in the 
Appendix on page 53.]
    Chairwoman Velazquez. Thank you very much.
    Let me remind the witnesses that you will have five minutes 
to make your presentation.
    Our next witness is Mr. Bryan Lord. He is the Vice 
President for Finance and Licensing and General Counsel of 
AmberWave Systems Corporation. Founded in 1999, AmberWave is a 
small technology firm focused on research and development of 
advance materials. And the company is a pioneer in the field of 
strained silicon technology. AmberWave has been a symbol, a 
portfolio of 180 patents, employs 23, and is based in Salem, 
New Hampshire.
    Welcome, sir.

     STATEMENT OF BRYAN P. LORD, VICE PRESIDENT, FINANCE & 
   LICENSING, GENERAL COUNSEL, AmberWAVE SYSTEMS CORPORATION

    Mr. Lord. Thank you. Madam Chairwoman, thank you very much 
for that kind introduction. You have saved me a couple of 
minutes of my testimony. Representative Chabot, members of the 
Committee, thank you as well for the opportunity to be here 
with you today.
    I want to echo Representative Chabot's comments about the 
special effort that the Judiciary Committee has been making on 
this issue. We appreciate that and equally appreciate the Small 
Business Committee taking an effort to take a special look at 
this from the small firm's perspective. I would also note that 
uniquely this has been what appears to be a bipartisan effort 
as well. And we appreciate the two of you sitting side by side 
and taking a look at this from our perspective.
    As you mentioned, Madam Chairwoman, AmberWave Systems is a 
small company, 23 employees. We like to think of ourselves as a 
bit of a special company as well. And that is because we are 
one of 5,000 spinouts of university technologies that have 
occurred over the course of the last 25 years.
    This is largely due to the successful buy-dual litigation 
that was passed years ago and has really been the catalyst for 
a special network of firms that combine entrepreneurship, 
invention, and investment into what some business school 
professors have called a value network.
    These value networks are really the secret behind why 
economies like Silicon Valley; New England's Boston Route 128; 
Research Triangle Park; the Austin, Texas region all have a 
very special and robust economy associated with them.
    I will try to be brief. I want to make just three points. 
One is America does have the world's most innovative economy. 
And that is, in large part, because of a very properly and 
well-functioning patent system.
    I will, respectfully, disagree with Mr. Gross and say that 
our patent system is not broken. We think that our patent 
system, in fact, is the gold standard in the world. And 
changing the patent system in a manner that would call for 
wholesale change would be inconsistent with I think its proper 
role in creating our world's most innovative economy.
    Second, I think that patent reform still is necessary and 
an appropriate topic for us to be talking about. AmberWave is 
one of the founding members of a group called the Innovation 
Alliance, a coalition of firms, small, medium, and large, that 
all believe that the most appropriate place for us to be 
focusing our attention is on improving patient quality in very 
much the same way that Commissioner Doll talked about from the 
PTO's perspective, and that, really, as the PTO is working hard 
on their efforts, as the Supreme Court has also taken cases 
under consideration, really, through patent quality, we can 
really address most of the ills and help those that are working 
within the system and still discourage those that are abusing 
the system.
    Let me point out that if the changes that were proposed in 
the 109th Congress were reintroduced, just hypothetically but, 
as some have said and speculated that would be the case, these 
changes would have a severe negative impact on small firms like 
AmberWave and this innovation ecosystem that I talk about Let 
me highlight just three ways quickly.
    One is the so-called first to file method and revision. As 
Commissioner Doll talked about, inventors clutch their 
notebooks to their chest. And it's really through the first to 
invent process and standard that's unique in the world that 
inventors get credit for their invention that is properly 
documented in their notebook.
    To suggest that we should harmonize with the rest of the 
world and go to a first to file standard suggests that what we 
really do is have a race to the courthouse and reward a patent 
lawyer who first pays a fee, as opposed to an inventor who 
properly documents their invention in their notebook.
    Second, so-called post-grant review. We have talked about 
that. I think the most troubling problem with post-grant is the 
incessant uncertainty and unreliability that would be added 
into the system for a patent in a post-grant regime.
    We think the pre-grant focus, as the commissioner talked 
about, is the appropriate place to talk about it, but to throw 
into the system an uncertainty and unreliability into patents 
would make it very difficult to found new businesses.
    Finally, the so-called apportionment provision is very 
difficult and problematic for small firms. What it suggests is 
that a quantitative standard would be directed towards juries 
to assess and award damages after an infringement was found. 
That would prohibit the jury from taking into account a 
disproportionate and significant impact that a small firm may 
bring to an overall product. And that would be harmful on small 
businesses.
    So far this debate has been largely between big tech and 
big pharma, as we saw in the last Congress. And we appreciate 
the opportunity here in the 110th for you to be expanding the 
interests and hearing from voices like small firms, like 
AmberWave, and the innovation economy that we participate in.
    Thank you.
    [The prepared statement of Mr. Lord may be found in the 
Appendix on page 60.]
    Chairwoman Velazquez. Thank you, Mr. Lord.
    Our next witness is Ms. Emily Ward. She is the Associate 
General Counsel for patents at eBay Inc. eBay is a global 
online marketplace enabling trade on a local, national, and 
international basis. With a diverse and passionate community of 
individuals and small businesses, eBay offers an online 
platform where millions of items are traded each day. eBay was 
founded in 1995 and is based in San Jose, California.
    Welcome, Ms. Ward. You will have five minutes.

 STATEMENT OF EMILY WARD, ASSOCIATE GENERAL COUNSEL, PATENTS, 
                           eBAY INC.

    Ms. Ward. Thank you, Chairwoman Velazquez, for that 
gracious introduction. Chairwoman Velazquez, Ranking Member 
Chabot, and members of this Committee, we would like to thank 
you for giving us this opportunity to testify about the 
importance of patent reform to small businesses.
    Patent litigation reform is not just about patent holders 
or the technology industries that are developing cutting-edge 
technologies, products, and services that improve our everyday 
lives.
    The patent litigation reform debate should not just be a 
legalistic discussion of arcane patent law technicalities. No. 
Patent litigation reform is about making it easier for 
hardworking small business people and entrepreneurs across 
America to use technology tools to succeed in their chosen 
field of business.
    I believe that the most important message here today is 
that while Twenty-First Century digital technology is important 
for big global businesses to operate successfully, it is even 
more important for American small businesses.
    Technology tools help level the playing field. They enable 
small businesses to succeed in our highly competitive global 
economy. The unfortunate reality today is that patent 
litigation abuses are imposing significant legal costs on major 
technology companies across the board. These costs are passed 
along to technology users in the form of higher prices.
    Higher prices hit small businesses with their narrow 
margins particularly hard. Take a look at the technologies that 
have been targets of abusive patient litigation: computer 
hardware, software, cell phones, BlackBerries, printers, and 
online services and Web sites.
    As consumers, many of us would like to have the largest 
cell phone, the newest laptop, or cutting-edge digital 
entertainment systems. These are fun gadgets, but we don't 
really need them. This is not the same for small business 
people. It is hard to find a small business person who is not 
using a host of digital technology equipment and tools every 
single day to do business.
    In short, small business must have and needs affordable 
effective technology. They are not fun gadgets. They are the 
tools that enable small business people to operate 
independently and with unprecedented efficiency.
    Just take the Internet and eBay marketplace as an example. 
Millions of small business people across the globe use Internet 
technology to compete against the retail giants and sell their 
products to consumers. Hundreds of thousands of American small 
businesses that use the eBay marketplace to connect with 
customers across the nation and increasingly to export to 
consumers in other parts of the world, this is a massive 
success story of how technology tools, hardware, software, 
communications, and the Internet are helping small businesses 
to survive and thrive.
    These same technologies have been targeted by patent 
licensing businesses that do not make any commercial products. 
They pursue a new business model. And this business model is to 
write patent applications or purchase patents, with the aim 
being to exhort exorbitant licensing fees and patent lawsuits. 
The weight of these licensing costs and risks of more huge 
judgments and settlements, like the one in the BlackBerry case 
last year, which I am sure people are familiar with, which 
settled for $612 million, drive up the costs of these 
technologies in ways that hurt small businesses' bottom lines.
    Furthermore, small businesses often produce goods and 
services as partners with larger businesses. When these larger 
businesses pay hundreds of millions of dollars due to frivolous 
licensing demands or patent lawsuits, that cost is borne, 
either directly or indirectly, by the small business partners 
or customers.
    Finally, small business entities have suffered by being 
directly targeted by patent licensing companies as well. For 
example, a patent licensing entity called Pan IP sued about 50 
small businesses, including a New York ski shop, 2 electronics 
stores, a pie company that was literally called The Little Pie 
Company, an Oregon fabric store, a New Jersey plumbing store, 
an Indiana chocolate shop, among many other defendants for 
alleged patent infringement.
    The patent licensing fees that the plaintiff was seeking 
were large enough, about 25 to 50 thousand dollars apiece, to 
be financially crippling to a small company. But, however, the 
average cost for a small business to defend patent lawsuits and 
to hire attorneys is even more staggering and can easily run 
into the hundreds of thousands to millions of dollars.
    As I said in my opening, I believe that the patent 
litigation debate should get beyond the legal technicalities 
and focus on the real world impact of abusive litigation. That 
said, eBay believes that modest reforms in the current system 
to address inequities are very important and would benefit the 
overwhelming majority of small businesses. They include 
addressing the unpredictability and potential unfairness of 
damages calculations and informed shopping and addressing 
willfulness claims. These moderate reforms would prove of major 
benefit to the millions of small businesses who rely on 
technology to compete.
    Thank you.
    [The prepared statement of Ms. Ward may be found in the 
Appendix on page 93.]
    Chairwoman Velazquez. Thank you, Ms. Ward.
    Our next witness is Mr. Neis, Mr. John Neis. He is the 
Managing Director of Venture Investors, an early-stage venture 
capital firm with offices in Madison, Wisconsin and Ann Arbor, 
Michigan. Mr. Neis is testifying on behalf of the National 
Venture Capital Association, which represents approximately 480 
venture capital and private equity firms.
    Welcome, Mr. Neis.

 STATEMENT OF JOHN NEIS, ON BEHALF OF NATIONAL VENTURE CAPITAL 
                          ASSOCIATION

    Mr. Neis. Thank you, Chairwoman Velazquez, Ranking Member 
Chabot, and members of the Committee. My name is John Neis. And 
I am Managing Director at Venture Investors, an early-stage 
venture capital firm based in Madison, Wisconsin. It is my 
privilege to have the opportunity to share the views of the 
venture capital community on proposals for patent reform.
    Venture capitalists invest in small emerging growth 
companies that strive to commercialize innovation. Companies 
that received their start with venture capital dollars include 
Genentech, Amgen, Intel, Cisco, Google, Medtronic, Microsoft, 
and eBay. At one time, all of these market leaders were small 
companies with big ideas.
    The complexity of balancing the legitimate interests of 
numerous parties as Congress examines patent reform does not 
elude us. While we all agree there are abuses of the patent 
system and improvements could and should be made, we believe 
it's absolutely critical that any reform proposals are 
thoroughly vetted by legislators who are fully apprised of the 
consequences associated with each change to the system.
    At the center of our concerns is the reality that the cost 
of defending against infringement is disproportionately 
burdensome for the small venture-backed company while the 
benefit of infringing relative cost is disproportionately 
attractive to the large company.
    Our young, emerging companies are disadvantaged relative to 
the larger Goliaths in so many ways that often the only 
competitive advantage they possess is the sustainability of 
their intellectual property. Yet, some proposals, while well-
intentioned, erode the ability of small companies to defend 
their patents at a cost that doesn't threaten their viability. 
Allow me to provide some examples.
    The goal of post-grant opposition invalidating flawed 
patents is one we share. However, an open-ended second process 
weakens the presumption of validity. A company that has a 
legitimate patent may not be able to get venture funding if 
that patent is going to be challenged again and again.
    The post-grant review clearly favors large companies with 
deep pockets, who could use these proceedings to delay patent 
issuances to a venture-backed company. If a post-grant 
opposition procedure is to be adopted, it should allow only a 
single window with a short predictable duration of 
approximately six months. Petitioners for cancellation should 
be required to identify themselves and should be required to 
file all issues regarding patentability.
    If a party elects to challenge a patent issuance through 
this process, they should not be permitted to again raise these 
issues in any subsequent proceeding, which would protect the 
patentee from having to repeatedly defend the patent based upon 
the same arguments.
     One area that we do not feel needs reforming is the 
calculation of damages. The current system in which the full 
impact of a patented feature on a product is considered is an 
appropriate one. Patentees have never been systematically 
overcompensated, nor are they currently.
    The apportionment of damages proposal, which limits damages 
to only the patented feature, does not recognize that the sale 
of the whole product is often dependent on the presence of a 
patented improvement. Arbitrarily denying the courts the 
ability to base computations on the entire market value of a 
product will lead to equally arbitrary results as judges go for 
the hypothetical price of an unsold feature. This is an area of 
reform that is best left alone.
    In my written testimony, I have described similar 
unintended consequences with many of the other proposed reforms 
regarding willful infringement, injunctive relief, prior use 
rights, and venue shopping, each of which alone could add cost, 
delay, and uncertainty that favors a deep-pocketed Goliaths in 
a battle against a small company that is solely reliant on 
successfully commercializing a single innovation.
    Many of the companies supported by my firm have fewer than 
20 employees. Lawyers charge as much as $600 an hour for their 
expertise. A freshly minted Ph.D., the one who is actually 
turning the innovation into a commercial reality, makes the 
equivalent of $60 an hour or less. While I have nothing against 
lawyers, only the investment in the latter is going to help 
advance innovation.
    We share the objective of reducing unnecessary litigation. 
Money spent by Google or Roche in frivolous patent litigation 
is not only a drag on the U.S. economy. It's money that could 
be better spent acquiring young companies that are moving 
technology in new directions. However, reforms that add new 
processes, delays, and uncertainty force my young companies to 
spend their scarce dollars on J.D.'s, rather than Ph.D.'s. And 
that stifles innovation.
    The best reforms will be those that focus on the front end, 
ensuring that patents are issued, the ones that are issued, are 
of high quality. Part of the problem in getting quality patents 
out of the system has been the lack of information available to 
patent examiners.
    Reported plans to use the power of the Internet to access 
technical experts is a radical idea that can improve access for 
patent examiners. While this is only a pilot project, we feel 
that it is the type of innovation that offers tremendous 
promise.
    In conclusion, the U.S. must continue to be the leader in 
promoting and insisting on sound, strong, and consistent 
intellectual property protections for those who need it most. 
Improving the quality of the patent system is critical to our 
nation's innovation leadership. However, so is protecting the 
smallest of companies that have contributed so substantially to 
that leadership in our nation.
    Thank you.
    [The prepared statement of Mr. Neis may be found in the 
Appendix on page 96.]
    Chairwoman Velazquez. Thank you, Mr. Neis.
    Our next witness is Mr. John Thomas. He is professor of law 
at Georgetown University in Washington, D.C. Professor Thomas 
teaches courses in patent law and food and drug law. And his 
publications include both a textbook and a case book on patent 
law. Professor Thomas was recently awarded a grant from the 
MacArthur Foundation in order to continue his work as a 
visiting scholar at the Congressional Research Service.
    Welcome.

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

    Mr. Thomas. Thank you, Madam Chairwoman, Ranking Member 
Chabot, and members of the Committee. Thank you again for the 
opportunity to testify here today before you. I very much 
respect the work of the Committee to take on a field of law 
that sometimes deserves its reputation as being rather daunting 
and impenetrable. But small businesses and their owners are 
increasingly feeling the impact of the patent system upon 
competition, upon sustainable development, and upon social 
justice. So the issues that are before you impact your 
constituents very much.
    Legislation before the 109th Congress would have dealt with 
two controversial features that I want to discuss: oppositions 
and market-based damages, the latter sometimes sailing under 
the heading of apportionment. Let me talk about oppositions 
first.
    The legislation would have created a post-grant 
administrative revocation proceeding before the Patent Office 
with the intended goal of, first, having a low-cost litigation 
substitute to allow members of the public to test patent 
validity and also taking advantage of the expertise of the 
Patent Office, two features that would seem to favor the 
interest of small firms.
    Now, concerns have been expressed that these opposition 
proceedings would inject uncertainty into the proprietary 
rights granted by patients. And those are important concerns. 
But when weighing them, I hope the Congress would consider 
that, in fact, there are a number of existing post-grant 
proceedings that have already been discussed before you.
    One of them is a reissue, a proceeding that is just about 
as old as the patent system in this country. And that procedure 
allows any patent owner to return to the Patent Office with her 
patent and effectively tune it up, change claims, amend claims, 
omit claims. And that can be done, again, at any time during 
the life of the patent.
    Similarly, we have two flavors of reexamination proceedings 
that allow, again, the patent owner, third parties, the 
Commissioner of Patents to challenge an issued patent, again at 
any time during the life of the patent.
    In view of these established post-grant proceedings, savvy 
patent decision-makers have long accounted for the role of the 
Patent Office once a patent issues. And, again, that 
intervention can be at any time.
    So I think Congress may wish to consider carefully whether 
opposition procedures really are going to amount to a sea 
change, established patent practice, and also whether time 
limits on bringing an opposition are appropriate, both in view 
of our long tradition of respecting public views and public 
inputs into the patent system, and also the sense that many 
products are not valuable or their value is not realized early 
in their life span. In fact, they only impact--for some 
pharmaceuticals, they can't be marketed early in their life 
span. So the worth of that patent does not accrue until later 
on.
    Let me also talk about the damages proposal, the 
apportionment proposal. The fundamental premise of the patent 
system is that the market values inventions best. That is why 
the patent system has been such a success over its 
alternatives, such as a prize system, where an entity like this 
would dole out money to different firms based on what they 
thought of the merits of the invention.
    Now, filling that premise is the concept that patent 
damages should be based on the value of that invention. As 
evidenced, for example, by the recent $1.52 billion verdict 
reached against Microsoft, there is some mounting evidence that 
judicial determinations of patent damages have become overly 
generous.
    In the general sense, that is due to the increasing 
complexity of technology or even everyday consumer products we 
buy are not just one invention but dozens or hundreds or even 
thousands of them and also the sense that there are just a lot 
more patents out. The number of issued patents today is an 
order of magnitude more than a generation before.
    So the combination means that there are a lot of patents 
and there are fairly heavy damages. So within this milieu, high 
tech firms increasingly have to obtain not just one patent 
license or two patent licenses. They have to pay dozens of 
them.
    How are the cases stacking up on that? Recent empirical 
evidence suggests that the average royalty award awarded by 
courts is 13 percent. Now, if someone entering into the world 
of academia did some patent license negotiations, that's a 
pretty high number, particularly if a product is covered by 
hundreds or dozens of patents.
    I have also listed a number of judicial opinions in my 
statement. It also suggests that there are some problems afoot. 
Damages awards that are super competitive, that are above the 
marketplace rate lead to emphasis on litigation. They promote 
patent speculation. They cause the patent scope to effectively 
cover other products and technologies that are not within that 
patent. And ultimately they may impede the process of 
technological innovation dissemination that the patent system 
is meant to foster.
    So I believe that the apportionment concerns are very 
significant ones. And I encourage the Committee to consider 
them further. Thank you very much.
    [The prepared statement of Mr. Thomas may be found in the 
Appendix on page 106.]
    Chairwoman Velazquez. Thank you, Mr. Thomas.
    And now I will recognize Ranking Chabot for the 
introduction of his witness.
    Mr. Chabot. Thank you, Madam Chair.
    And I am proud to introduce our final witness here today, 
not only because of the expertise that he brings to these 
hearings but because he is, as I mentioned before, a 
constituent of mine from the first district of Ohio, 
Cincinnati.
    Mr. Kirsch has an impressive background in commercial and 
intellectual property litigation matters. He is currently a 
partner with the Cincinnati law firm of Taft, Stettinius and 
Hollister in their Litigation Department. Prior to joining 
Taft, Mr. Kirsch was intimately involved with intellectual 
property issues, including leading the Legal Services 
Department for Luxottica retail, the world's leading designer, 
manufacturer, and distributor of prescription frames and 
sunglasses.
    He was also formerly a partner with Oppenheimer, Wolff and 
Donnelly, focusing on complex commercial patent, trademark, 
copyright, misappropriation of trade secrets, and domain name 
disputes.
    Mr. Kirsch was of counsel with Stradling, Yocca, Carlson 
and Rauth, a leading high technology law firm in Newport Beach, 
California. He is admitted to practice before the state courts 
of California, U.S. District Courts of California, U.S. Courts 
of Appeals for the Ninth Circuit and the Federal Circuit. And 
so he has a considerable amount of wealth. I think he will have 
something to add to this panel.
    We welcome your testimony, Mr. Kirsch.

    STATEMENT OF KEVIN KIRSCH, PARTNER, TAFT, STETTINIUS & 
                         HOLLISTER, LLP

    Mr. Kirsch. Thank you very much, Ranking Member Chabot, 
Madam Chairwoman Velazquez, and the rest of the members of the 
Committee. I appreciate very much the opportunity to speak here 
today on issues concerning patent reform.
    Before I begin with my prepared comments, I would like to 
just quickly address a comment made by Committee Member 
Gonzalez and also by Committee Member Jefferson. Based on my 
experience in litigation, patents are swords. They are not 
shields. They are only as good as the desire and the ability to 
enforce brought by the person who holds the patent.
    In litigation, leverage is key. And so two initiatives that 
have been sort of promulgated by various factors of removing 
the ability to get injunctive relief and removing the ability 
to get willfulness damages or curbing those abilities would 
severely impact small business' ability to retain contingency 
fee lawyers to work on their cases because typically small 
businesses can't afford the $2 million it costs on average for 
a small patent case and the $4 it costs on average for a $25 
million-plus patent case. So to remove those two components I 
think would potentially cause great harm to small businesses 
and their ability to effectively enforce their portfolios.
    So let me dive into my prepared statement. From a patent 
litigator's perspective, the largest issue confronting the 
current system is the pervasive uncertainty created by a 
systemic flow in the system of patent procurement that allows 
patents to issue with undefined and ambiguous terms and a 
system of jurisprudence ill-equipped to adequately treat patent 
cases.
    Although the patent statute requires patent applicants to 
claim their inventions with specificity, patent applicants are 
not required during the application process to define the terms 
in the patent claims in such a manner so as to educate the 
public as to the intended meaning of such claim terms.
    For example, when a claim term recites the signal A as 
multiplexed together with signal B, did the applicant intend 
that signals A and B are multiplexed together with each other 
on the same signal line or signals A and B are multiplexed 
together at the same time? As such, many patents are inherently 
ambiguous at their point of issuance.
    When litigated, these patents are then put forward for 
interpretation to a District Court judge with typically no 
relevant technical background and no training in patent law. 
The judge is charged with the daunting responsibility of 
construing the meaning of each of the asserted claims, which 
could far more easily have been defined by the patentee during 
the procurement process.
    The construed claims are then presented to a jury at trial 
charged with the responsibility of rendering a verdict, whether 
a particular product or process, method of doing business, 
software program, etcetera, infringes one or more of the 
construed claims of the asserted patent and charged with 
rendering a verdict on a host of possible defenses asserted by 
the alleged infringer.
    Is there any greater evidence of the need for definition of 
each of the claim terms by the patentee during the procurement 
process than the hundreds of millions of dollars and countless 
jurist hours spent related to claim construction hearings each 
year?
    Short of trial, the claim construction hearing is the most 
significant event in patent litigation. During a claim 
construction hearing, attorneys spend hours, if not days, 
presenting arguments and evidence to a District Court judge 
regarding the meaning of typically 5 to 10 claim terms. The 
judge then spends hours, if not days, writing lengthy opinions 
regarding what 5 to 10 claim terms mean.
    Despite brilliant jurists, quality attorneys, and excellent 
law clerks assisting the judges in crafting the opinions, the 
reversal rate at the Federal Circuit on claim construction 
approaches 40 percent. Further, the Federal Circuit basically 
repeats the entire claim construction process as it treats 
appellate review of claim construction de novo.
    In addition to the extraordinary and economic opportunity 
costs lost by the claim construction process, the inherent 
uncertainty caused by the ambiguity in the meaning of terms 
subverts one of the primary purposes of the patent system. With 
an almost 40 percent reversal rate, how can alleged infringers 
receive actual notice of what is disclosed and claimed in a 
patent until after the Federal Circuit rules on the meaning of 
the claims?
    What if we could cure the single most problematic aspect of 
patent cases, removing the confusion associated with claim 
terms, and set District Court judges free from the daunting 
task of interpreting the languages of patents?
    One possible solution to the confusing and ambiguous nature 
of some claim language would be to require applicants for 
patents to define terms in the claims of the patents at the 
time of the filing of the application or at a very early stage 
of the patent application process, require the examiner to 
review and reject the proposed definitions until such time as 
they are written in plain English and allowed, and hold the 
patent to the allowed definitions during litigation. The 
process may also involve the patent examiner identifying claim 
terms for definition by the application in an early stage of 
the examination process.
    While not having a retroactive effect and while not 
completely eliminating disputes as to the meaning of patent 
claims, as the parties may then revert to arguing as to what 
the definitions mean, this process may lead to fewer patent 
disputes since the public will have a much better understanding 
of exactly what is covered by the patent claims and may also 
lead to more streamlined and efficient patent litigations.
    One other issue that I would like to address briefly that 
is ripe for reform concerns the way patents are litigated. With 
rare exception, District Court judges do not wish to preside 
over patent cases. District Court judges are uncomfortable 
dealing with the technology; do not fully understand patent 
law; and, understandably, do not appreciate the high rate of 
reversal associated with patent cases.
    A system of District Court judges, preferably patent 
attorneys, positioned throughout the country dedicated 
primarily to patent cases with the support of special clerks 
with technology backgrounds, preferably patent attorneys, would 
appear to present a far better alternative to the current 
system.
    In addition, patent cases should be tried on the bench, 
rather than a jury. Is it really fair to ask a juror to decide 
whether patent A on a subtle nuance of semiconductor MOSFET 
capacitor technology when viewed in light of patent B on 
another subtle nuance of semiconductor MOSFET capacitor 
technology renders obvious patent C, which is being asserted 
against a semiconductor chip manufacturer?
    The jurors just don't understand this. I have been in mock 
jury panels. I have watched them work. They don't get the 
technology. They don't get the patent law. They don't 
understand the issues. And they come out on such a--they 
basically decide this issue on the most bizarre reasons that 
have nothing to do with the merits of the case.
    Finally, one other benefit to actually having special 
District Court judges with the technical background would 
potentially allow us to open the door to give deference to the 
claim construction rulings of those courts.
    The Federal Circuit does not give any deference whatsoever 
to what the District Court judges are doing currently. If you 
put in special judges who actually understood the issues and 
were trained in patent law, it is more probable that we would 
receive that type of deference for them.
    So thank you very much.
    [The prepared statement of Mr. Kirsch may be found in the 
Appendix on page 123.]
    Chairwoman Velazquez. Thank you.
    This has been an incredible, incredible panel. What it 
shows is the complexity of this issue and the ramifications of 
what patent reform could have on both ends of those who are 
opposing it and those who are in favor of it.
    Let me just say that, as we heard from the different 
witnesses, this could have significant impact on small 
businesses. Given the fact that our Committee has been given 
expanded jurisdiction, we have a responsibility to try to 
understand this issue and to see how it is going to impact on 
small businesses.
    So with that, let me thank all of the witnesses. And I 
would like to address my first question to the two patenting 
experts, Mr. Thomas and Mr. Kirsch.
    From my perspective, there are legitimate small business 
concerns, both in favor of and opposed to patent reform 
legislation. There are small companies being sued under 
spurious claims and others that must compete with companies 
employing questionable patents. These companies support patent 
reform. There are also small businesses that develop and 
license technologies, and they are concerned about changes in 
patent law that might make their patent rights less certain. 
These companies do not support patent reform.
    Would you agree with this assessment?
    Mr. Thomas. Yes.
    [Laughter.]
    Chairwoman Velazquez. Mr. Kirsch?
    Mr. Kirsch. Yes.
    Chairwoman Velazquez. Okay. Thank you.
    My next question is addressed to Ms. Ward. One of the more 
difficult facets of the debate about patent reform is how best 
to qualify or quantify the impact the spurious patent 
litigation has on innovation.
    When Mr. Lord testifies that potential patent reform 
legislation could mean that his company will have a difficult 
time attracting future venture capital investments, I 
understand his concern. For many companies, no investors mean 
no research and development.
    Less clear to me is how patent litigation impacts ongoing 
innovation. Ms. Ward, can you tell me how the patent 
infringement cases, like the ones your company has faced, 
impact innovation, particularly for small companies?
    Ms. Ward. Yes. I would be happy to. That is an excellent 
question. Reformation of patent litigation abuses will actually 
help and improve innovation. I think a number of the witnesses 
testified that, frankly, there is so much money being spent on 
lawyers, there is so much money being spent on settlements and 
judgments right now in patent litigation.
    That is because abuses are so common under the current 
system. Tamping down and making, if you will, minor adjustments 
or minor corrections in the current litigation system to really 
tamp down abuses will actually help free up more money and take 
it away from defending or paying spurious licensing fees and 
more money into innovation, more money into R&D, more money 
into engineers.
    One quick note is that when we were facing the Merc 
Exchange/eBay case about a year ago, where there were a lot of 
opponents to sort of the automatic injunction rule that had 
been in place before the Supreme Court decided Merc Exchange, 
those opponents would say, ``Look, if you grant eBay's request 
in the Merc Exchange case, gosh, the patent system will end. 
The whole thing will fold. This will be a complete disaster.''
    If you sort of see, what has happened is the Supreme Court 
unanimously agreed and put in place the four-factor test that 
is sort of traditional in looking at injunctions, applied it as 
well to patents, and what you will see is that since that time, 
actually, the system has worked much better.
    Chairwoman Velazquez. Anyone else who would like to comment 
on that?
    Mr. Lord. Yes. Madam Chairwoman,--
    Chairwoman Velazquez. Yes, Mr. Lord?
    Mr. Lord. --I would like to jump in. Thank you--
    Chairwoman Velazquez. Sure.
    Mr. Lord. --for the comments.
    You know, I think that what we really have here is an 
appeal from large technology companies to change and reduce the 
burden on large companies' legal budgets.
    And, quite frankly, I don't buy the argument that a 
reduction in a large company's overall litigation budget will 
result in increased investment in research and development.
     Large companies should already have an incentive to invest 
in research and development because of their very place in the 
marketplace. That ought to be encouraged. But I don't think 
that it's fair to say that there is a one-to-one correlation 
that a dollar reduced from a large company's litigation 
department will shift into a dollar in early-stage research and 
development.
    Chairwoman Velazquez. Thank you, Mr. Lord.
    Mr. Gross and Ms. Ward, why is apportionment of damages so 
important to the proponents of patent reform?
    Mr. Gross. I mean, I was somewhat surprised and actually 
wasn't aware about the average size of the settlements of 
patent disputes. Just for frame of reference, my peer group of 
public companies, where there is available information, the 
maximum license royalty fee that we pay for embedded products 
is ten percent.
    My particular company is two percent. And if we were faced 
with a 13 percent average royalty rate, we would shut our doors 
very quickly. We couldn't afford to do that. We couldn't afford 
to pass that cost along to our customers.
    The risk of a patent settlement that makes your 
commercialization efforts not worth it are what keeps a lot of 
small businesses from proceeding along the process of creating 
innovation and commercializing it.
    Ms. Ward. If I could just answer your question regarding 
damages apportionment? The proposal that has been enunciated in 
previous bills, the House and the Senate, is just that damages 
should be in a sense related to the inventive contribution or 
the inventive value of the patented invention and should not 
necessarily include the value that others in a sense 
contribute.
    If I could give you sort of a real world, you know, just an 
example? If somebody is an engineer in a company and they are 
working in a group of 200 engineers and every engineer is 
making a contribution to the final product, that engineer 
should be accorded in a sense his salary. He or she should not 
necessarily be accorded a percentage of every other person's 
salary because every other person has made a contribution to 
that final product. And those contributions in a sense should 
be recognized separately.
    All we're talking about is sort of common sense adjustment, 
that the damages that a patentee should get should actually be 
related back to the value of his invention that he contributes.
    Chairwoman Velazquez. Mr. Kirsch?
    Mr. Kirsch. If I may, this apportionment of damages issues 
is actually addressed by the Georgia Pacific standard, which is 
that there is about--I can't remember the number of terms but 
about 15 different factors that you weigh when you're looking 
at Georgia Pacific specifically related to royalty that factors 
deal with damages.
    But you are supposed to look at the actual contribution of 
the invention to the overall product that you are analyzing for 
your damages analysis? So it should actually be done by the 
standard that is being followed by most of the courts anyway. I 
think the apportionment issue is more of a statutory sort of 
codification of existing case law.
    Mr. Neis. If you would, may I jump in, please, Madam?
    Mr. Lord. Go ahead. I have already spoken.
    Mr. Neis. Yes. I would like to add there. You know, I have 
got a portfolio company that has developed revolutionary new 
treatments for cancer. These devices sell for about $3 million. 
It's an enormous piece of equipment. It's having a huge impact 
on cancer treatment. Some of their patents are covering 
relatively minor aspects of the total system, but those minor 
aspects are what impact their ability to get market share.
    And if you went to an apportionment of damages approach 
where you were just looking at the value of that component that 
might be--you know, a court could arrive at a $50,000 value. 
That is not going to compensate them for loss of half of their 
marketplace that people started trying to infringe the patents. 
So this is an area that really makes it ripe for abuse by large 
companies.
    Chairwoman Velazquez. Thank you. Now I will recognize Mr. 
Chabot.
    Mr. Chabot. Thank you very much, Madam Chair.
    I will start with you, Mr. Kirsch, if I can. In your 
testimony, it makes you wonder whether the judicial system is 
really equipped to handle patent disputes. And you mentioned 
about how kind of incomprehensible this stuff might be to 
juries or really to anybody probably up here on this panel if 
we were sitting on one of those juries as well. What do you 
think? I mean, what should be done about that? What is, say, a 
bench trial versus jury trial? What do you think we ought to 
do?
    Mr. Kirsch. As I suggested, I think that we ought to 
develop a system of judges throughout the country who are 
specialists in this area who get patent attorneys to actually 
become District Court judges, especially in the areas where you 
have just a heavy amount of patent litigation. In the 
alternative, Darrell Issa's idea of opting in, so you have a 
judge, such as in the Northern District of Ohio, Judge 
O'Malley, has indicated that she actually enjoys doing patent 
cases. And that is very rare because you go to the Southern 
District of Ohio and start asking all of those judges. And 
uniformly they hate doing patent cases.
    But if we could basically have a way of either funneling 
patent cases to judges that are interested in this subject 
matter and that become trained in it or actually setting up a 
system where we have specially trained judges with backgrounds 
with stats, with technical backgrounds that can handle these 
types of cases, we would be far better off.
    I mean, I do think on the bench trial issue--and my 
statement was a little broad in that there are certain issues 
you could put to a jury. For example, you could ask a jury who 
was the first to invent. And that's kind of a more specific 
fact issue. But to ask a juror to try to analyze whether two 
prior references actually read on a patent's being asserted 
against another product in the semiconductor arena or in 
pharmaceutical arena, they're just not going to understand it. 
And we would be better served having a judge with special 
training with special staffs actually dealing with these 
issues.
    So I think that some type of program that would allow for 
that greater specialty would be very beneficial to the system.
    Mr. Chabot. Thank you.
    Mr. Thomas, what would you say is the most important change 
or modification or reform that could be made essentially in the 
patents? If you had to pick one, what do you think would be the 
most significant that would be doable?
    Mr. Thomas. Thank you.
    In general I would favor those reforms that lower 
transaction costs and increase certainty. That would enable 
small business to navigate the sometimes treacherous patent 
terrain the best and I think the reforms that serve those 
purposes are best suited for small entities. That is why I like 
oppositions, which tend to allow patent validity be tested in a 
relatively low-cost forum by an expert tribunal before patents 
can be enforced and more costly litigation.
    Mr. Chabot. Thank you.
    Mr. Neis, as an investor, what problems do you perceive 
with the quality of patents issued by the U.S. Patent and 
Trademark Office? And how does this affect your investment 
decisions?
    Mr. Neis. Well, clearly we are making--I mean, we are 
typically backing a couple of guys with the great idea at the 
formative stages of a company in that intellectual property is 
what is really driving the attraction of venture capital 
dollars into the company in the first place.
    So quality up front is important. We think the greatest 
room for improvement is an improvement of quality, giving the 
PTO the resources and better access to information so that not 
overly broad patents are issued.
    But we would rather see the improvements up front early in 
the process, where it's much lower cost, rather than wholesale 
changes after issuance that really add a whole layer of delay 
and burden and uncertainty for these small companies because at 
the end of the day, you know, our companies can only win in 
these litigation fights one way. They can win in the courts. 
The big company can win two ways. They will win either in the 
courts or simply by attrition. They will just spend the little 
company into bankruptcy.
    Mr. Chabot. Madam Chair, I had a couple of more questions. 
But I think in the interest of time, I would be happy to yield 
back to you if you had something you wanted to ask.
    Chairwoman Velazquez. No. Go ahead.
    Mr. Chabot. Okay. Thank you.
    Ms. Ward, what recommendations do you have with regard to 
making damage calculations more predictable under the current 
patent system?
    Ms. Ward. I think that the provision that was proposed in 
the Senator Hatch and Leahy bill is excellent. It actually goes 
back and says, ``What is the value of the inventive 
contribution?'' and that is the measure for the damages base. 
And you should actually consider sort of the comparison between 
the inventive contribution and then also the comparison of 
other improvements that may have been added by the company or 
others and sort of kind of take those against each other in 
terms of looking at the damages.
    Mr. Chabot. Thank you.
    Mr. Lord. Representative Chabot?
    Mr. Chabot. Yes?
    Mr. Lord. May I jump in there, please?
    Mr. Chabot. Yes, absolutely
    Mr. Lord. I think something has been misstated that I would 
like to correct on the apportionment issue. And that is that 
the proposal that has been put forth is actually codification 
of one of the 15 factors in the Georgia Pacific test. 
Codification of Georgia Pacific that says that all of the 15 
factors, which Ms. Ward should be referring to would be I think 
a good solution for our patent system. The problem is that the 
proponents of apportionment want to take one of the prongs out 
of the Georgia Pacific test and make that single prong the law 
of the land.
    Her hypothetical actually identifies exactly the problem. 
Not all engineers are created equal. And Mr. Neis talked about 
this. Some technologies, like some engineers, are Nobel 
Laureate technologies. And those are the types of technologies 
that ought to be rewarded in the marketplace.
    So simply doing a head count doesn't work. And that is why 
Georgia Pacific has 15 factors. And that is what we ought to be 
codifying.
    Mr. Chabot. Thank you.
    Mr. Gross, I will conclude with you. You had said very 
clearly the patent system in your view is broken, it has 
considerable flaws, it is too expensive, defendants are forced 
to settle, and folks are afraid to innovate. What one or two 
doable things would you do if you had the power to do so to 
change it?
    Mr. Gross. One thing I might recommend is a program similar 
to what is available for trademarks. And that is kind of a use 
it or lose it process where you develop and get a patent if you 
don't commercialize it within some period of time, you lose the 
rights or there is some way that there is a just way to provide 
for a royalty treatment of it.
    The other thing that is particularly a problem to small 
business is that the patent litigation process tends to be one 
where small patent holders or even large patent holders will go 
sue the deep pockets that are using the technology. The end 
result has been it is quite surprising that the deep pockets 
turn to the little pockets that have the technology.
    And we in almost 5,000 license agreements are forced to 
indemnify our users of our technology, which makes us extremely 
cautious and extremely careful and extremely fearful of coming 
up with new products that may step on a patent that we can't 
adequately research, so somehow finding a way that the risk of 
the patent can be properly associated and somehow finding a way 
that patents and technology can, in fact, become commercialized 
and provide some benefit both to the commercializer and the 
general population.
    Mr. Chabot. Thank you.
    Madam Chair, let me commend the panel for really very 
excellent testimony here this morning. I want to commend you 
for putting the panel together and for holding this hearing and 
exercising our Committee's jurisdiction in this area. There are 
other committees clearly that are relevant as well, but I think 
it is important that we look at the impact that the whole 
patent system has on small businesses. And so I want to commend 
you on your leadership on that. Thank you.
    Chairwoman Velazquez. Thank you, Mr. Chabot.
    I have two or three more questions. My first question I 
would like to address to Professor Thomas. We heard this 
morning concerns being raised about the so-called second 
window. It sounds to me that companies, small companies in 
particular, fear that a second window for filing an opposition 
to an issued patent will make less valuable their patent 
rights.
    I understand you have studied the post-grant opposition 
issue. Thus, will the availability of a second window 
fundamentally weakens patent rights?
    Mr. Thomas. Well, in my opinion, no. If I may expand for 
this answer?
    Chairwoman Velazquez. Yes.
    Mr. Thomas. Again, the patent system represents a bargain 
between the public and the inventor. The inventor obtains 
exclusive rights, but it's over the public interest. And, as a 
result, it seems suitable that the public may be able to 
comment upon that grant, if not for the entire term of the 
patent, at least to such time as the value of that invention is 
realized.
    Please recall that certainly for pharmaceuticals, many of 
these products are simply not going to be approved by the FDA 
for many years after the patent is obtained. So if we have a 
very short initial period and no further chance for an 
opposition, you are essentially exempting the pharmaceutical 
industry and all the public health concerns that the patent 
system embraces from the opposition system. That sounds to me 
to be an unwise design choice.
    Thank you.
    Chairwoman Velazquez. Thank you.
    Anyone else who would like to comment on this?
    Mr. Kirsch. You know, actually, I would like to make one 
comment with respect to it. I think we need to be careful with 
any procedure that we put into place for the post-opposition 
process.
    In reviewing H.R. 2795, there were a few things within that 
proposal that raised concern that had a lower standard of proof 
where there was a preponderance of the evidence versus clear 
and convincing and District Court levels. It allowed for 
discovery. So any affiant during the course who submitted a 
declaration would be susceptible to a deposition.
    These types of procures, that could be a large cost to a 
small company. So if a small company got a patent and then put 
it through this post-opposition procedure with no actual 
opportunity to go collect damages at the end of the day because 
all they're doing is defending against the actual validity of 
the patent and paying for all this discovery over a period of 
time that's supposed to go up to a year, I mean, it could be a 
pretty onerous burden for small businesses.
    Chairwoman Velazquez. Thank you.
    Professor Thomas, can you explain how passage of 
legislation that includes provisions on willful infringement 
and apportionment of damages will have had an impact on the 
$1.52 billion judgment that a jury rendered in the recent 
Microsoft v. Alcatel?
    Mr. Thomas. Thank you.
    Well, Microsoft is well-capable of representing itself, and 
I haven't studied the case carefully because of the lack of 
published opinion. But it's my understanding that the jury 
awarded .5 percent of the entire price, not just of the 
operating system but the entire computer, the hardware, based 
on two patents relating to MP3 files. And while I enjoy 
listening to music from my computer very much, I rather doubt 
it's worth that much percentage given all the other technology 
that has gone into a computer.
    So certainly the apportionment standard would allow or 
perhaps place a renewed emphasis on something we already have 
in our law, which is a fairly nuanced law that looks for some 
cases where the technology, that kind of technology, drives the 
sale and, therefore, it is appropriate to base damages on the 
entire product--that's the entire market value rule--and other 
cases where apportionment is more appropriate. You can see how 
courts went fairly quickly to fault apportionment because it's 
easier to do, quite frankly. And it's easier for jurors to do. 
I think legislation might nudge our law in the right direction.
    A willful infringement reform would also make sure that 
there is, in fact, a finding of infringement before we go 
through the nettlesome issues of what did the inventor, what 
did the accused infringer know, when did she know it, and do we 
think she is a bad person, and ten elements that really don't 
have much to do with the issue at trial.
    Thank you.
    Mr. Lord. Madam Chairwoman?
    Chairwoman Velazquez. Yes, Mr. Lord?
    Mr. Lord. The one-half percent, I might point out, is much 
more in line with the types of royalty rates that we see over 
on the tech side of things. I want to also make a note that the 
13 percent that has been talked about I'm quite confident that 
13 percent includes as part of its calculus biotechnology 
licensing rates, which, as you probably know, are far more 
excessive because of the business models that are present much 
more sharing, much more of a joint development effort in the 
biotech space, which obviously then has the net effect of 
driving up that average 13 percent. The half percent, 
regardless of how we might deal with apportionment, is much 
more in line with the type of royalty rates that we see in the 
big tech, in the high tech side of things.
    Chairwoman Velazquez. Thank you.
    Mr. Gross, am I correct that concerns about the patent 
system in its current state have caused your company to change 
its behavior or its direction? And if so, could I ask you to 
highlight a couple of companies how your company has changed 
its behavior?
    Mr. Gross. Yes. Thank you.
    Many years ago we came up with an innovation that we 
actually spent close to $10 million developing. And in our 
initial search as a company, we found no direct patents that we 
would infringe upon. And after we went to commercialization, we 
found that there are other people that propose to go after our 
technology. And faced with the cost of that, we abandoned that 
technology. And for a small company of our size, that is a lot 
of money to spend.
    Chairwoman Velazquez. But let me ask you, how would reform 
of the patent law have eased your concerns; and, second, the 
actions your company will be able to take after the patent 
system is reformed?
    Mr. Gross. A couple of things. One, the ability of us to 
more openly, clearly, and less expensively challenge patents 
that just touched on pieces of what we were doing and, 
therefore, posed a problem to us would have made it a lot 
easier.
    The other thing that I think was important is what we found 
with a lot of the things that we ran up against. They were 
warehoused patents. In other words, several of them were owned 
by very, very large companies with floors full of lawyers that 
just take out patents with no intent to use those patents but 
intent to exercise those patents if somebody else did 
commercialize the technology or to use it, frankly, as a 
blocking technology, so some review process that could prevent 
that.
    The other thing is the indemnification issue that I 
mentioned earlier. The requirement of our customers to 
indemnify us is a big factor in our decision of where to go 
with technology. And something that deals with that 
indemnification process would help us greatly.
    Chairwoman Velazquez. If anyone else would like to add? 
Yes, Ms. Ward?
    Ms. Ward. May I add something? Going to Mr. Gross' example, 
which I definitely sympathize because I have heard it quite a 
lot, there are two aspects of the reform that would actually 
specifically help Mr. Gross. The first is in post-grant 
opposition having that second window so that the companies like 
Mr. Gross, the ones that are actually faced with the threat, 
can then go back and look and see, ``Is there prior art? Are 
there issues about the patent that make the patent flawed and 
faulty?'' and bring those before the Patent and Trademark 
Office, which is a less expensive venue than bringing it before 
court. That reform would actually help companies like Mr. 
Gross.
    The other reform that would actually help companies like 
Mr. Gross is reform on the willfulness issues, which I am sure 
you know Mr. Gross has probably suffered as well as other small 
companies in that, even though he did actually very good faith 
and very detailed searches, that alone may not be a sufficient 
defense to willfulness.
    Usually, the defense is, after you do those good faith 
searches, you have to go out and hire an outside counsel 
opinion, which are 20 to 50 to 100 thousand dollars to get, and 
have an outside counsel issue a written report saying, ``Well, 
your technology doesn't infringe'' or ``The patent is 
invalid.'' And it's a big expense, and it's a huge burden on 
small companies.
    So those two changes would actually help companies like Mr. 
Gross'.
    Chairwoman Velazquez. Yes, Mr. Neis?
    Mr. Neis. I would just like to add. I mean, you know, the 
issue with post-grant opposition, as Mr. Kirsch pointed out, is 
that it does add a layer of costs for these small companies.
    I mean, these companies are often starting out with only a 
couple of million dollars of funding that they are using to 
advance their technology. And if they have to consume that, use 
that money for attorneys, it is preventing them from spending 
that money on technology development.
    It is not just the cost in terms of the dollars. It is the 
enormous distraction for the management team in the formative 
stages that really is going to stifle innovation. So if there 
is to be any kind of post-grant opposition, it really needs to 
be short and allow these companies to get to certainty very, 
very quickly.
    Chairwoman Velazquez. With that, I want to commend all of 
the witnesses for participating in this hearing today. It has 
been quite an important hearing to help us understand the 
importance of this issue.
    And let me just say that we will continue this Committee to 
monitor what will happen regarding patent reform. And I believe 
that a case has been made this morning regarding the impact 
that it could have on small businesses.
    So, with that, the Committee adjourns.
    [Whereupon, at 12:30 p.m., the foregoing matter was 
concluded.]

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