    [Senate Hearing 110-127]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 110-127

                                PROCESS PATENTS

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

                                    HEARING

                                   before the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 1, 2007

                                   __________

                              Serial No. J-110-31

                                   __________

             Printed for the use of the Committee on the Judiciary

                                  -------

                         U.S. GOVERNMENT PRINTING OFFICE

    37-168 PDF                 WASHINGTON DC:  2007
    ---------------------------------------------------------------------
    For sale by the Superintendent of Documents, U.S. Government Printing
    Office  Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
    DC area (202)512-1800  Fax: (202) 512-2250 Mail Stop SSOP,
    Washington, DC 20402-0001

                     COMMITTEE ON THE JUDICIARY

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

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Feinstein, Hon. Dianne, a U.S. Senator from the State from
      California, prepared statement.................................    59
    Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     1
        prepared statement...........................................    82
    Specter, Hon. Arlen, a U.S. Senator from the State of
      Pennsylvania...................................................     2

                                   WITNESSES

    Cotropia, Christopher A., Professor of Law, University of
      Richmond School of Law, Richmond, Virginia.....................     8
    Herrington, Wayne W., Assistant General Counsel, U.S.
      International Trade Commission, Washington, D.C................     3
    Kirk, Michael K., Executive Director, American Intellectual
      Property Law Association, Arlington, Virginia..................     6
    Thomas, John R., Professor of Law, Georgetown University Law
      Center, Washington, D.C........................................     5

                             QUESTIONS AND ANSWERS

    Responses of Christopher Cotropia to questions submitted by
      Senators Specter and Whitehouse................................    17
    Responses of Wayne Herrington to questions submitted by Senators
      Specter........................................................    24
    Responses of Michael Kirk to questions submitted by Senators
      Specter and Whitehouse.........................................    28
    Responses of John R. Thomas to questions submitted by Senators
      Specter and Whitehouse.........................................    34

                           SUBMISSIONS FOR THE RECORD

    American Federation of Labor and Congress of Industrial
      Organizations, William Samuel, Director, Department of
      Legislation, Washington, D.C., letter..........................    38
    Cotropia, Christopher A., Professor of Law, University of
      Richmond School of Law, Richmond, Virginia, statement..........    40
    Department of Commerce, John J. Sullivan, General Counsel,
      Washington, D.C., letter.......................................    48
    Herrington, Wayne W., Assistant General Counsel, U.S.
      International Trade Commission, Washington, D.C., statement....    65
    Kantor, Mickey and Theodore B. Olson, Hoffman-LaRoche Inc.,
      Washington, D.C., article......................................    69
    Kirk, Michael K., Executive Director, American Intellectual
      Property Law Association, Arlington, Virginia, statement.......    71
    Thomas, John R., Professor of Law, Georgetown University Law
      Center, Washington, D.C., statement............................    84
    United Steelworkers, Leo W. Gerard, International President,
      Pittsburgh, Pennsylvania, letter...............................    89

                                PROCESS PATENTS

                                  ----------

                              TUESDAY, MAY 1, 2007

                                           U.S. Senate,
                                    Committee on the Judiciary,
                                                       Washington, D.C.
        The Committee met, pursuant to notice, at 2:43 p.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
    Leahy, Chairman of the Committee, presiding.
        Present: Senators Leahy, Cardin, Whitehouse, Specter,
    Graham, and Coburn.

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

        Chairman Leahy. I would like to apologize to the four of
    you, and especially to Senator Specter and Senator Coburn, for
    being late. I have actually been in the Agriculture Committee,
    which was running somewhat behind, and everything has been
    running behind today with the funeral of our good friend, Jack
    Valenti. Senator Specter and I were both at that earlier today.
        I joined with Senator Hatch and other Senators, and with
    Chairman Berman and Representative Smith from the House
    Judiciary Committee, just a few weeks ago to introduce sweeping
    bipartisan, bicameral patent reform legislation. We are trying
    to update our patent laws to provide help to patent seekers and
    patent holders. The Supreme Court is also more engaged in
    patent law decisions than it has been in decades. It has
    decided three important cases already this term. In two
    decisions released just yesterday, the Supreme Court ventured,
    first, into the fundamental issue of the standard for
    ``obviousness'' that would prevent patentability and, second,
    spoke to the extraterritorial effect of U.S. patent laws.
        We have heard a great deal about another issue involving
    U.S. patents and overseas manufacturing--the issues surrounding
    products produced overseas using processes patented in the
    United States. One of those issues is the importation of these
    products. So we will turn today about what defenses should be
    available to a party accused of importing products manufactured
    abroad by infringing a U.S. process patent, the so-called
    271(g) question.
        Sometimes litigation brings important issues to our
    attention. It should always be the case that we do not intend
    to interfere with that litigation. We are well aware that
    private parties are interested, and we will proceed carefully
    today.
        Prior to Congress' amending the patent laws in 1988, a
    company holding a U.S. process patent could sue for
    infringement of that patent only if the infringement took place
    within the United States. If it took place overseas, they only
    had the International Trade Commission. In 1988, we amended
    that law.
        The ITC has held that our 271(g) defenses are not available
    in ITC exclusion proceedings because the plain language of the
    statute, confirmed by its history, applies them only to patent
    infringement claims being considered in Federal court pursuant
    to the 1988 amendment. So we will decide whether this
    distinction should remain.
        I have heard from those who argue that the defenses were
    never intended to be limited to infringement claims, and the
    law should be changed to harmonize ITC and district court
    litigation. Others argue that the purpose of an ITC exclusion
    proceeding and district court patent infringement litigation
    are simply different. But if we permit products to enter the
    United States that were made abroad by a process patented
    here--where the creation of the product would itself be an act
    of infringement if it occurred here--well, then, we are doing
    nothing less than offshoring infringement and outsourcing jobs.
        This may seem like is a very narrow legal issue, but the
    policy can have a very wide reach, and I think we should be
    fully informed. So I am looking forward to the witnesses today.
    But before we begin, of course, I yield to Senator Specter.
        [The prepared statement of Senator Leahy appears as a
    submission for the record.]

    STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
                            OF PENNSYLVANIA

        Senator Specter. Thank you, Mr. Chairman. This is a very
    important hearing focusing on a very narrow issue, as you have
    stated, whether the defenses ought to be available in the
    International Trade Commission contrasted with the Federal
    court. And this is part of a broader picture of patent reform
    where we are deeply involved at the present time, and there is
    a great deal of thought being given to the whole field, and
    especially to this specific issue.
        I regret that I cannot stay. We are in the midst of a whole
    series of meetings on immigration reform. We are trying to
    craft a bill to come before the Senate in the last 2 weeks of
    this month if we are to have any chance to deal with
    immigration this year, because once we pass Memorial Day, we
    get involved in the appropriations process. So there have been
    very heavy efforts on that, and there had previously been
    scheduled a meeting at 3 o'clock today, which I am hosting. But
    my staff is here, and my cerebrum will be here. My cerebellum
    is going to Hart 711. And the third part of my brain, medulla
    oblongata, is unoccupied at the moment.
        [Laughter.]
        Chairman Leahy. Can I borrow it?
        Senator Specter. So it is a rest period for part of me. But
    as I say, my staff will be here, and I will be watching the
    proceedings very closely.
        I have talked to the combatants. This is a Herculean
    struggle, and we will listen carefully and try to come to a
    sound legislative judgment. We will try to change our spots and
    do it rationally.
        Chairman Leahy. Thank you. If you are going to immigration,
    you are going to another Herculean battle, and I wish you well.
        Senator Specter. Well, the only regret I have about going
    to immigration is that I am not taking Coburn and Leahy with
    me.
        Thank you.
        Chairman Leahy. Gentlemen, would you please stand and raise
    your right hand? Do you solemnly swear that the testimony you
    will give in this matter will be the truth, the whole truth,
    and nothing but the truth, so help you God?
        Mr. Herrington. I do.
        Mr. Thomas. I do.
        Mr. Kirk. I do.
        Mr. Cotropia. I do.
        Chairman Leahy. Thank you. Our first witness will be Wayne
    Herrington, who is Assistant General Counsel at the United
    States International Trade Commission. After he got his law
    degree from Columbia University, he clerked for Judge Giles S.
    Rich of the U.S. Court of Appeals for the Federal Circuit. I
    knew Judge Rich. Mr. Herrington then held jobs both with the
    Government and in the private sector. He is co-author of the
    book ``Intellectual Property Rights and United States
    International Law.''
        We will begin with you, Mr. Herrington.

     STATEMENT OF WAYNE W. HERRINGTON, ASSISTANT GENERAL COUNSEL,
         U.S. INTERNATIONAL TRADE COMMISSION, WASHINGTON, D.C.

        Mr. Herrington. Thank you. Good afternoon, Chairman Leahy,
    Ranking Member Specter, and members of the Committee. The
    Commission appreciates the opportunity to appear before this
    Committee to discuss its administration of Section 337 of the
    Tariff Act of 1930 and process patents.
        The Commission is an independent, nonpartisan, quasi-
    judicial agency. It administers a wide variety of trade-related
    statutes, including Section 337 of the Tariff Act of 1930.
    Section 337 prohibits unfair practices in the import trade,
    including imports which infringe intellectual property rights.
    In fact, the overwhelming majority of our cases under Section
    337 involve allegations of patent or trademark infringement,
    with allegations of patent infringement predominating. We
    conduct our Section 337 proceedings under the adjudicative
    provisions of the Administrative Procedure Act, with an
    administrative law judge making an initial determination and
    the Commission making the final determination. If the
    Commission finds a violation of Section 337, it may issue an
    order excluding the infringing products from entry into the
    United States. It may also issue cease and desist orders to
    infringing firms and persons prohibiting them from selling
    infringing goods already located in the United States.
        The subject of this hearing is the law applicable to the
    unauthorized importation and sale of products made abroad by a
    process covered by the claims of a United States patent. The
    Commission has had statutory authority to address such
    unauthorized importation since 1940, when Congress enacted what
    used to be known as Section 337a. Section 337a was eventually
    incorporated in Section 337 itself as Section 337(a)(1)(B)(ii)
    as a result of the amendments to Section 337 in the Omnibus
    Trade and Competitiveness Act of 1988.
        The current version of that provision provides that the
    importation, sale for importation, or sale within the United
    States after importation of a product will be a violation of
    Section 337 if it is ``made, produced, processed, or mined
    under, or by means of, a process covered by the claims of a
    valid and enforceable United States patent.''
        The U.S. district courts did not obtain statutory authority
    under the patent law to address the unauthorized importation
    and sale of products made abroad by a patented process until
    1988, when 35 U.S.C. 271(g) was added to the patent law by the
    Process Patent Amendments Act. Besides providing for
    infringement, Section 271(g) provides that ``[a] product which
    is made by a patented process will, for purposes of this title,
    not be considered to be so made after--(1) it is materially
    changed by subsequent processes; or (2) it becomes a trivial
    and nonessential component of another product.''
        In 2002, in the Abrasives case, the Commission affirmed an
    order of one of its administrative law judges that the defenses
    to infringement contained in 35 U.S.C. 271(g)--that is,
    271(g)(1) and (g)(2)--were not available in a case based on the
    Commission's process patent provision. Specifically, the
    Commission found that Section 9006(c) of the Process Patent
    Amendments Act made it clear that the defenses of Section
    271(g)(1) and (2) would not apply to Section 337 cases. As an
    additional reason, the Commission found that Section 271(g)
    explicitly restricted its application to cases under Title 35.
    Section 337 is under Title 19.
        The accused infringer in the Abrasives case, Kinik, Co.,
    appealed the Commission's final determination to the Federal
    Circuit, arguing numerous points, including that the Commission
    erred in holding that Kinik could not rely on the defenses in
    271(g)(1) and (2). On appeal, the Federal Circuit agreed with
    the Commission's interpretation of the statutory provisions and
    the legislative history with respect to the inapplicability of
    those defenses. The case is Kinik Company v. International
    Trade Commission, a 2004 decision of the Federal Circuit.
    However, the court reversed the Commission's finding of
    infringement on an entirely unrelated basis because it
    disagreed with the Commission's claim construction.
        The foregoing is a summary of the Commission's practice and
    the development of the law. The Commission would be pleased to
    provide technical advice on legislative language the Committee
    may be considering.
        Thank you.
        [The prepared statement of Mr. Herrington appears as a
    submission for the record.]
        Chairman Leahy. Thank you very much.
        Our next witness is John R. Thomas, a professor of law at
    my alma mater, Georgetown, where he teaches classes on patent
    law and intellectual property and world trade. He recently
    received a grant from the MacArthur Foundation--
    congratulations--in order to continue working as a visiting
    scholar at the Congressional Research Service. Professor Thomas
    is an author of several books on intellectual property law and
    patent law and pharmaceutical patent law.
        And I will also take this moment to do some housekeeping
    and put a statement from Senator Feinstein and a letter from
    the AFL-CIO in the record at this place.
        Go ahead, Professor Thomas.

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

        Mr. Thomas. Thank you, Mr. Chairman.
        Chairman Leahy, Ranking Member Specter, and other members
    of the Committee, I appreciate the opportunity to appear before
    you today. I testify here on my own behalf, and my views are
    not necessarily those of any institution with which I am
    associated.
        The issue of process patent enforcement is complex. Yet in
    the view of many observers, the question of process patent
    enforcement reduces to an elemental proposition of a just
    system of laws: that like cases should be decided alike,
    regardless of the forum in which the case is heard.
        Competing views certainly exist, and I will rely upon Mr.
    Kirk to articulate them effectively, but let me focus my
    testimony instead on the concerns that have arisen with respect
    to the Kinik case and its consequences.
        The Kinik opinion has attracted criticism for several
    reasons. First, its holding is purely dicta. It is hastily
    considered and not necessarily the result of the dispute before
    the court.
        Second, the Federal Circuit arguably misinterpreted
    language from the statute and legislative history that it read
    to say that the limitations in 271(g) do not apply to the ITC.
    But a sensible and alternative reading of that language is
    merely that 271(g) does not affect wholly domestic situations
    involving process patents, and that the ITC is not usurped by
    the availability of a similar remedy in the trial courts.
        Finally, the Federal Circuit did not account for the strong
    presumption against extraterritorial application of U.S. laws.
    Mr. Leahy, you referenced the Microsoft v. AT&T case that came
    out yesterday. There the Supreme Court emphasized that the
    presumption that U.S. law governs domestically but does not
    rule the world applies with particular force to patent law. The
    court further explained that this presumption is not defeated
    even with respect to provisions like 271(g) that have some
    extraterritorial effect. In those cases, the presumption
    remains instructive as to the extent of the statutory
    exemption. Application of this presumption suggests that the
    271(g) defenses should apply not just to the district courts,
    but also to the ITC.
        Now, regardless of whether the Federal Circuit got it right
    in Kinik, there are a number of concerns that its outcome has
    raised.
        First, Congress intended the two exemptions of the Process
    Patent Amendments Act to balance the traditional competing
    objectives of patent law, and one of them is to encourage the
    labors that lead to innovation, but the other is to disseminate
    the fruits of those labors to members of the public. The
    ``materially changed'' and ``nonessential component''
    limitations both balance the interests of patent proprietors,
    on one hand, with follow-on innovators, and they also recognize
    the territorial limitations of the patent instrument. These
    congressional intentions, this balance, simply cannot be
    achieved if, at whim, the patent holders can simply go to
    another forum and bypass them.
        Second, our current fragmented enforcement policy may limit
    the access of U.S. consumers to innovative products that bear a
    tangential relationship to the patented process. The two
    exemptions in 271(g) evidence a Congressional intent not to
    provide patent holders in the United States with an
    extraterritorial proprietary interest on products too distant
    from the marketplace value of the patented process. Again, that
    goal cannot be achieved if a plaintiff on its whim can simply
    bypass the forum in which they apply.
        Finally, the remedial disparity between the district courts
    and the ITC potentially favors domestic industry over foreign
    firms. Because the availability of exclusion orders is premised
    upon the existence of a domestic industry, U.S.-based firms are
    favored over importers. Although the analysis of whether this
    regime is effectively a violation of our WTO agreements which
    bind us is a complex issue, but the perceived favoritism of
    U.S. industry over foreign firms may send a conflicting
    message.
        Also issued yesterday was the U.S. Trade Representative's
    report about intellectual property rights in foreign firms, the
    special 301 report, and the USTR faulted no fewer than 43 of
    our trading partners for violations or lapses, perceived lapses
    in intellectual property policy. The U.S. may be subject to
    similar criticism so long as it maintains a regime of
    substantive patent law that favors domestic industry over
    foreign firms.
        Thank you very much for the opportunity to present this
    testimony, Mr. Chairman. I look forward to any questions that
    you or your colleagues may have.
        [The prepared statement of Mr. Thomas appears as a
    submission for the record.]
        Chairman Leahy. Thank you, Professor, and thank you for
    keeping within our time limitations.
        Mr. Kirk has been the Executive Director of the American
    Intellectual Property Law Association since 1995--is that
    correct? He previously held a number of positions at the Patent
    and Trademark Office, including most recently Deputy
    Commissioner. He has had extensive experience in patent law in
    the international context. During his tenure at the Patent and
    Trademark Office, Mr. Kirk represented the United States in
    several international treaty obligations, including GATT and
    WIPO and OECD. And to try to keep some continuity here, he is
    also a graduate of the Georgetown University Law Center.
        What year did you graduate?
        Mr. Kirk. I graduated in 1965.
        Chairman Leahy. Mr. Kirk knows why I am grinning. I
    graduated in 1964.
        [Laughter.]
        Chairman Leahy. Go ahead, Mr. Kirk.

      STATEMENT OF MICHAEL K. KIRK, EXECUTIVE DIRECTOR, AMERICAN
       INTELLECTUAL PROPERTY LAW ASSOCIATION, ARLINGTON, VIRGINIA

        Mr. Kirk. Thank you, Chairman Leahy, members of the
    Committee. I am pleased to be here today to offer the views of
    the American Intellectual Property Law Association on whether
    the defenses to infringement in Section 271(g) should be made
    applicable to Section 337 of the Tariff Act of 1930. I will not
    go through the details that have already been covered by you,
    Mr. Chairman, and by Mr. Herrington and Professor Thomas, but
    let me say that there are significant differences between a
    Section 337 proceeding in the ITC and an action for patent
    infringement in a Federal court that make Section 271(g)
    exceptions inappropriate for Section 337.
        The ITC must find that a patentee is actively engaged in
    exploiting the patent in the United States. The product must
    have been made by a process covered by a valid and enforceable
    patent. The remedy is limited to a prospective exclusion order,
    no monetary damages. The ITC must also consider the public
    interest, health and welfare, and competitive conditions in the
    United States before issuing an exclusion order, and the
    Section 337 determination is subject to Presidential review
    before becoming final.
        In contrast, the district court in a patent infringement
    action only considers whether the patent is valid, enforceable,
    and infringed, and both damages and injunctive relief are
    available.
        By adding 271(g) to the patent law, Congress intended to
    provide additional remedies in Federal court for process patent
    owners. Congress explicitly stated that it did not intend to
    undermine any existing remedies available to patent owners in
    Section 337 proceedings. The Senate report reinforces this
    point. As we heard from Mr. Herrington, this intent was
    confirmed by the ITC and the Federal Circuit in Kinik v.
    International Trade Commission. We think the Federal Circuit
    got it right. Congress closed the process patent loophole with
    passage of 271(g) and was careful not to create a second one.
    We believe this decision was correct.
        The proposed amendment to Section 271(g) would be
    detrimental to U.S. manufacturers. It would put domestic firms
    at a competitive disadvantage relative to their foreign
    competitors. A domestic manufacturer has no defense to a charge
    of infringing a process patent under Section 271(a) on the
    ground that the product will later be materially changed or
    become a trivial and nonessential component of another product.
        Its foreign competitors do not face this problem. The
    practice outside the United States of a process protected by a
    United States patent is not an infringement of the U.S. patent.
    There is no Section 271(a) action that can be brought against a
    foreign company for such activity outside the United States.
        If the proposed amendment were adopted, a company in China
    could transform an intermediate compound--produced according to
    a patented process--into a chemically different final product
    and import it with impunity into the United States. Or a
    company in South Korea might employ a patented method for
    forming conductive lines on semiconductor wafers as an initial
    step in manufacturing integrated circuits for use in cell
    phones that could be imported into the United States, perhaps
    under either of the two defenses. Protecting American
    intellectual property against foreign usurpation is already
    difficult; the amendment would make it more so.
        Moreover, the amendment would create a perverse incentive
    to offshore domestic manufacturing and jobs, as you alluded to,
    Mr. Chairman. It could provide an incentive for domestic
    manufacturers to practice patented manufacturing processes
    offshore in order to take advantage of the defenses in 271(g),
    in the same manner as their foreign competitors could, were
    this amendment to be adopted. Existing pressures already exist
    to offshore American jobs to take advantage of low labor costs
    in other countries. Aiding their exodus by weakening protection
    for U.S. process patents would seem unwise.
        For these reasons, AIPLA opposes any amendment to Section
    271(g) to create new defenses that would only benefit foreign
    manufacturers conducting unfair trade practices. Section 337
    should not be amended in a manner that would benefit foreign
    manufacturers at the expense of patent owners, manufacturers,
    and workers in this country.
        Thank you, Mr. Chairman. I would be pleased to answer any
    questions you might have.
        [The prepared statement of Mr. Kirk appears as a submission
    for the record.]
        Chairman Leahy. Well, thank you very much, Mr. Kirk.
        Christopher Cotropia is an associate professor of law at
    the University of Richmond School of Law, and a member of the
    school's Intellectual Property Institute. He attended law
    school at the University of Texas Law School. He clerked for
    Judge Alvin Schall of the U.S. Court of Appeals for the Federal
    Circuit. We have two people who clerked for the Court of
    Appeals for the Federal Circuit. He teaches intellectual
    property law, patent law, copyright law, cyberlaw, and
    property.
        Please go ahead.

        STATEMENT OF CHRISTOPHER A. COTROPIA, PROFESSOR OF LAW,
        UNIVERSITY OF RICHMOND SCHOOL OF LAW, RICHMOND, VIRGINIA

        Mr. Cotropia. Thank you, Mr. Chairman, and I thank the
    Committee and the Chairman for the opportunity to testify
    before the Committee today on the extraterritorial enforcement
    of a United States process patent. I appear today on my own
    behalf, as a concerned observer of the patent system.
        As has been mentioned before, the issue before the
    Committee today is very narrow and incredibly complex. I hope
    to cut through some of this complexity with my testimony today
    and provide a fair and balanced presentation of the issues that
    271(g) exceptions and their inapplicability to the ITC present.
        To put it succinctly, there are three issues that are
    presented by the inapplicability of these exceptions to the
    ITC: the first is inconsistency of judgments; the second are
    these international trade issues; and, third, the possible
    hindrance of the policies behind the exceptions.
        One of the other things I would like the Committee to
    consider is exactly how this issue sits within the context of
    the broader patent reform that is facing us currently today.
        As has been previously mentioned, the Kinik decision
    presents the possibility, although yet not applied, that the
    exceptions to 271(g) would only apply in district court cases
    as opposed to cases before the ITC. I would like to proceed
    with my testimony just talking about these three issues that I
    think it presents.
        First, inconsistency of judgments. Professor Thomas
    presents this as one of the potential concerns, the idea being
    that for the same patent and the same claims someone would not
    win in the district court proceedings because the exceptions
    would be applicable. But then at the ITC, with the same patent
    and the same claims, I could prevail because the exceptions do
    not apply. This is a potential concern.
        There are, however, reasons to not label these judgments as
    ``inconsistent.'' In some ways, we could be looking at apples
    and oranges here. If Congress purposely created separate and
    different types of enforcement mechanisms, then in some ways
    there is no reason to compare these as equals. This same
    argument can actually be made at even a higher level. There are
    different purposes that these two tribunals try to effectuate.
    United States district courts are tasked with enforcing the
    patent laws of Title 35, while the ITC is actually tasked with
    enforcing our trade-related laws and protecting domestic
    industries.
        The second potential concern is the international concerns,
    and this is more specifically the concern that not allowing
    these exceptions to apply in the ITC realm would cause us to be
    in incompliance with TRIPs, particularly Article III of TRIPS,
    which requires us to not provide someone of foreign origin with
    less favorable protections than a domestic counterpart. You
    could see how this could play out. A foreign importer would be
    subject to in some ways the heightened standards at the ITC,
    would not be able to avail themselves of those defenses, and,
    thus, might be found liable at the ITC, while a domestic
    counterpart in district court would be able to avail themselves
    of these exceptions. And, thus, we would have a less favorable
    application to a foreign company.
        The problem here with this type of analysis is that we have
    to look at the totality of the circumstances to determine
    whether it is less favorable. And as has already been mentioned
    by Mr. Kirk, there are certain differences between the two
    jurisdictions, and in some ways district court proceedings can
    be more onerous because of the monetary relief that is there,
    and there are some advantages to foreign companies in the ITC.
    One in particular that was adopted with these amendments is 35
    U.S.C. 295, which only applies in district court settings and
    creates a presumption of infringement in that context, but does
    not create a presumption of infringement in the ITC context.
        The third area of concern is to see whether this might
    actually hinder the policy concerns behind Section 271(g). In
    some ways, I think that this is the most important issue, and
    we really need to consider how much we want to limit the
    enforcement of process patents outside the United States. To
    put it another way, how strong do we want process patents to
    be?
        Professor Thomas presents a good argument why this might
    actually upset the balances in this type of situation, but on
    the flip side, there could be good arguments to be made that we
    are just extending the natural protection that you get in the
    United States to extraterritorial regions. We do not care
    traditionally under process patents what product was made by
    the patent or the value the process presented to that patent.
    And, thus, we could be simply extending this in the ITC realm
    to those things that are done abroad.
        My final point--and in some ways this is not directly
    relevant to the 271(g) issue--is that I really think the
    Committee and Congress should consider this issue in the
    context of broader patent reform. To get 271(g), the first go-
    around, it took many years. It also took a bitter battle
    between industries and much congressional testimony. In some
    ways, I would like the Committee to take a look at this, an
    issue that has not actually been applied, and think about it in
    the broader context, and also think about it being a moving
    part in the patent reform that has in some ways a higher impact
    and greater range, that is currently before the Committee and
    Congress, both the House and the Senate.
        Thank you very much, and I look forward to your questions.
        [The prepared statement of Mr. Cotropia appears as a
    submission for the record.]
        Chairman Leahy. Thank you, Professor.
        Mr. Herrington, let me refer to Mr. Cotropia's testimony.
        Senator Graham. Mr. Chairman, pardon me. I am going to have
    to leave. Could I submit for the record an article by Mr.
    Kantor and Mr. Olson reflecting my views? And I apologize to--
        Chairman Leahy. No, it is quite all right. In fact, we will
    keep the record open for any Senator, we will keep it open for
    at least 24 hours if any Senator wants to--
        Senator Graham. I will take you up on that. This is a very
    important issue for me in South Carolina, and I appreciate your
    having this hearing.
        Chairman Leahy. I understand.
        Senator Graham. Thank you very much.
        Chairman Leahy. Thank you, and I appreciate your coming
    here. I know you spent a lot of time on this.
        Mr. Herrington, in Professor Cotropia's testimony, he
    explores whether you apply the 271(g) defenses--if you apply
    them in the district court but not at the ITC, would that
    really result in inconsistent decisions? He speaks of the
    different institutional goals of patent infringement litigation
    in ITC proceedings. I think I am correctly stating it.
        Mr. Cotropia. That is correct, Chairman.
        Chairman Leahy. Now, can you elaborate, Mr. Herrington, on
    how the purposes of ITC exclusion proceedings and the remedies
    available there are distinct from district court patent
    infringement litigation?
        Mr. Herrington. Yes, Mr. Chairman. I can tell you that with
    respect to the distinctions and similarities, as I mentioned
    earlier, we adjudicate under the adjudicative provisions of the
    Administrative Procedure Act. There is an administrative law
    judge and then potential review by the Commission.
        The proceedings before the administrative law judge are
    very much like a bench trial in a United States district court.
    There is discovery very similar to the type of discovery that
    you could get in a district court proceeding. The response
    times tend to be shorter. The rules of evidence that we apply
    are the ABA Rules of Evidence, reliable, probative, substantial
    evidence. We do not directly apply the Federal Rules of
    Evidence, but we can look to them for some guidance. There is
    not a jury, of course. It is just the administrative law judge
    and ultimately the Commission. We do not award damages.
        There are three parties to a Commission 337 proceeding: one
    is the complainant; one is the respondent, the accused
    infringer; and the other is the Commission investigative
    attorney. We have an office at the Commission called the Office
    of Unfair Import Investigations, and they provide an attorney
    who acts as a party in every one of our Section 337
    investigations at the Commission level, and the purpose of that
    attorney is to make sure the record is complete and to address
    public interest concerns.
        Of course, our jurisdiction is limited to imports. We do
    have a domestic industry requirement. Our appeals, appeals from
    our determinations, are to the Federal Circuit, which is the
    same court, of course, that hears all appeals from patent cases
    in district courts.
        Chairman Leahy. Well--oh, go ahead.
        Mr. Herrington. I hope I--
        Chairman Leahy. It is such a complex hearing. I may do a
    followup question on this, but I wanted to go to Professor
    Thomas for a moment because he had stated several reasons why
    Congress should change the law so that 271(g) defenses apply in
    ITC proceedings as well as in patent infringement cases in
    district court. And the defenses assumed the process used to
    manufacture the product abroad was a process that, if it was
    used in the U.S., it would violate a U.S. process patent and,
    thus, be patent infringement.
        The 271(g) defenses simply excuse that action for patent
    infringement cases where the manufacturing occurred abroad, if
    the foreign product is sufficiently different than the original
    product. If you are going to apply the defenses to ITC
    proceedings, would we not be encouraging companies to produce
    these products abroad instead of doing them here in the U.S.?
        Mr. Thomas. Well, Mr. Chairman, being just a lawyer and,
    gee, not only that, just a law professor, these sorts of
    economic calculations can be difficult to make. But what I
    would observe--
        Chairman Leahy. I am just a small-town lawyer who lives on
    a dirt road in Middlesex, Vermont, so I mean, what the heck.
        Mr. Thomas. Well, we will give you credit for your choice
    of law school, at a minimum, sir.
        [Laughter.]
        Mr. Thomas. What I would observe is that simply this
    situation is complex. For example, when I go to places like
    South Carolina, I see large Japanese automakers with large
    plants by the side of Route 95. Many foreign firms have
    substantial manufacturing in the United States, and many of
    them, I am sure, want to import component parts for their
    products that they make in the United States from abroad. Would
    they cease these activities if they cannot actually import
    products from abroad because they can be accused of patent
    infringement in the ITC, but not the district courts?
        So it seems to me this account of offshoring in a world
    with multinationals and distributed manufacturing facilities is
    a complex one. I am not sure the story is as straightforward
    that they will simply be saying this is going to promote
    offshoring.
        Chairman Leahy. Mr. Kirk and Professor Cotropia, do you
    want to add anything to that?
        Mr. Kirk. Chairman Leahy, I come from the perspective that
    I am not terribly concerned about the difficulties faced by a
    foreign company, that practices a process that was created and
    patented in the United States by an American company, which
    would like to avail itself of the defenses in 271(g) to import
    that product into the United States. It deprives the patent
    holder of the revenue it rightly deserves, and it makes a
    mockery, I believe, of the situation.
        The article that Senator Graham asked be put into the
    record states in part ``There is no real harm done to the
    holder of a process patent if someone produces and imports a
    significantly different product into the United States. On the
    other hand, real damage to the economy and to innovation could
    ensue if these limitations were not built in the law.''
        I am sorry, sir, but I do not believe a foreign copyist is
    an innovator. I think they are a copyist, and I do not believe
    they should be entitled to these defenses.
        Chairman Leahy. I gather that is the way you felt.
        Professor Cotropia?
        Mr. Cotropia. The only point I would add to this discussion
    is that maybe the focus needs to be on the actual incentives of
    the creation of the process in the first place. In some senses,
    that is where patent law is trying to target, not a kind of
    post hoc after the fact taking up of value. So the question
    becomes whether someone innovating a process needs to have this
    added protection for its extraterritorial use or not, and
    clearly Congress thought that it would not be that much harm on
    the incentive to take that away from them at the district court
    level.
        The question then becomes if we take away that at the ITC
    level, does that erode too much of the incentive that is there,
    and I think that is the balancing question that Congress is
    faced with here.
        Chairman Leahy. Thank you.
        Senator Coburn?
        Senator Coburn. Just a couple of questions.
        It is your opinion, Professor Thomas, that 271(g) right now
    favors domestic industry.
        Mr. Thomas. It is my opinion that the inapplicability of
    271(g) defenses to ITC actions favors domestic industry.
        Senator Coburn. And the purpose for favoring the domestic
    industry was what?
        Mr. Thomas. I believe the purpose speaks for itself. In
    1930, the statute was passed to favor domestic industry over
    foreign competitors.
        Senator Coburn. OK. Well, let me go a little further. You
    all have called in the question of economics and trade and
    everything else. Tell me, when we look at ITC, where is the
    legitimacy for a drug manufacturer in this country who may have
    patent rights in Europe, but then is told what price they will
    be paid for their drug? If you have intellectual property but
    yet you have a price control on that otherwise--I guess the
    thing I am challenging a little bit is how worried we are about
    our trading partners when, in fact, we are the ones getting the
    short end of the deal in intellectual property throughout the
    world. That is my view. It may be slanted. It certainly is
    going on in the Far East and in the Near East, where we lack
    any capability to enforce our intellectual property.
        I hear you and the other professor come and say we should
    be worried about it. I think there is a cogent argument to be
    made to say we should not disadvantage somebody under ITC, that
    we are using two standards. But maybe that is a good standard
    given the world where it is today rather than taking the
    presumption that we are worried about trade in the future.
        You know, I find that very strange that that figures in to
    what you all are trying to testify today. We ought to be
    talking about what are the effects of 271 and what are the
    effects of the ITC process under it, and let trade fall where
    it will. If we have true intellectual property, we ought to
    protect it, and we ought to protect it equally. And trade
    agreements or not, either that patent means something in this
    country or it does not.
        I know I am not a lawyer, so I am setting this down kind of
    as a doctor: Where are the symptoms here and where is the
    disease? The disease is if somebody has a patent on a process
    and it is their patent, they ought to have adequate protection
    for that, whether they are trying to do that overseas or they
    are trying to do it here, especially if they have conquered the
    patent law overseas.
        So help me out. Where does the trade come into this versus
    the inapplicability of the two sets of performance standards,
    one under the ITC and one under 271(g)?
        Mr. Thomas. Certainly, sir. First, my sense is that medical
    pricing bears a tangential relationship to this issue, but I
    think it is important to remember that the United States is a
    member of a community of states. We were one of the founding
    members of the World Trade Organization. As part of that
    agreement, other member States of the WTO have pledged to
    dramatically upgrade their intellectual property regimes. When
    you start speaking about European States, patents on
    pharmaceuticals are well available there, and there are
    established enforcement systems, and pharmaceutical companies
    that are based in the United States quite frequently obtain
    patents covering processes in those jurisdictions. Those
    patents remain ready for enforcement at any time by a U.S.
    firm. In addition--
        Senator Coburn. OK. Let me interrupt you just for a second,
    if I can. Those patents are enforced as long as the
    pharmaceutical company will agree to sell at the price at which
    the European country says they are going to pay for it under
    the threat of ``We will allow production of this drug if you do
    not do that.''
        Now, tell me in law how that patent is protected when it
    is, in fact, hung out to dry under the threat of having no
    patent protection? I mean, that is what we see. Am I incorrect
    in that? Is that not why we have prices of pharmaceuticals one-
    half the price they are in this country all across Europe
    because a fixed price is demanded?
        Mr. Thomas. Well, Mr. Coburn, while I do not claim to have
    an extraordinary amount of expertise in pharmaceutical pricing
    under the various laws of Europe, I am not familiar with any
    regime that denies patent protection to drug companies that do
    not sell at a particular price. Perhaps they exist. I am
    certainly not aware of any European patent law that, in fact,
    stipulates pricing for particular products as a condition to
    obtain patent protection.
        Senator Coburn. It is not a stated threat. It is an implied
    threat.
        Mr. Thomas. OK. Well, I am not aware of the express or
    implied limitations, so your knowledge may exceed my own. I am
    certainly not aware of it. Certainly many jurisdictions do use
    an average pricing regime, just as the United States Government
    uses an average wholesale price for its own Federal employee
    pricing system.
        So I think we cannot point fingers too quickly at prices of
    medicines that we regulate certainly for Federal employees, and
    we certainly regulate prices of other products.
        I think ultimately, just going back again, we have entered
    into an international agreement that stipulates, among other
    things, that our firms can obtain intellectual property rights
    and enforce them on a nondiscriminatory basis in those
    countries, and as part of that deal, we have also agreed to
    apply national treatment and most-favored-nation to our trading
    partners. And I think as part of that deal, regardless of
    whether you feel others are scalawags or others are not living
    up to their bargain, it is important for the United States to
    set an example and follow the terms of the agreement, in my
    opinion.
        Thank you.
        Senator Coburn. Thank you.
        Chairman Leahy. Thank you.
        Senator Cardin?
        Senator Cardin. Thank you, Mr. Chairman.
        I have two questions. The first is how we can make the
    remedy under the ITC more effective. I appreciate, Mr.
    Herrington, the work that is done at the Commission, but I know
    it can take a long time. It can be very expensive, and
    enforcement through denying entry into the United States is not
    always effective. So I would be interested in how we could
    improve the system so that those that violate our intellectual
    property laws, that the domestic producers have a more
    effective remedy through the ITC.
        Second, Professor Thomas, I think you have sort of provoked
    my interest. I must confess I do not know the entire history
    behind the defenses in 271(g), and I am certain they were hard
    fought and very controversial. But maybe you are convincing me
    that we should repeal those two exemptions with the district
    court matters, knowing full well that the dollar amounts that
    are awarded there would take into consideration what would be
    included in those defenses anyway.
        So why not just, if you are so concerned about our
    international requirements, consider changing the defenses that
    are available for those who have violated the patent laws of
    this country but have the defenses because of the change in
    status or the minor impact on the product?
        Mr. Herrington. Senator Cardin, with respect to the first
    question you addressed, I had not given that a lot of thought
    before coming to this hearing. You may know that our caseload
    has been increasing. It has been increasing very substantially.
    We are still able to cope with that caseload, and we are taking
    steps to ensure that we have the appropriate personnel and
    facilities to make sure that that continues to happen.
        I am not sure that I can comment any further on the
    question.
        Senator Cardin. Well, it may be that some of the procedures
    or some of the requirements--we found that in some of the ITC
    areas that I have been involved with on steel and
    countervailing duties, et cetera, that some of the laws that
    you operate under make it difficult to comply and some of the
    court rulings have made it difficult to enforce our laws.
        I happen to agree with Senator Coburn. I want to make our
    intellectual property rights enforceable and I want to make our
    rules enforceable. So I do not have a lot of sympathy for those
    who violate them.
        Mr. Herrington. Well, we will certainly give that some
    thought and, mention anything that we think is appropriate.
        Senator Cardin. Thank you.
        Professor Thomas, I am looking forward to your reply.
        Mr. Thomas. Mr. Cardin, I hope you have the same sympathy
    for witnesses before this Committee. Certainly I agree with you
    to the extent that symmetry of laws between the ITC and
    district courts--
        Senator Cardin. So you support repealing those?
        Mr. Thomas. Well, I think let me offer a few observations
    on that point. I am not that familiar with European medical
    pricing. I am more familiar with European patent laws, and many
    of them had a provision that essentially inspired 271(g). They
    called for products that were directly -and I am
    transliterating, but directly the result of the process.
        Senator Cardin. You are suggesting that we pattern our
    trade laws after Europe?
        Mr. Thomas. We already have, Mr. Cardin. We--
        Senator Cardin. Certainly that is not true in agriculture.
        Mr. Thomas. Well, the Process Patent Amendments Act
    certainly was--
        Senator Cardin. Certainly it is not true in the Doha Round
    where we are getting into all types of problems with Europe.
        Mr. Thomas. All I am suggesting is--in fact, will tell you
    directly is that the legislative history of the Process Patent
    Amendments Act accounted for European laws that used words like
    ``directly the product of the process,'' and I think this was
    an attempt to articulate a bit further--
        Senator Cardin. So when the European laws favor our foreign
    competitors, we should use those laws, but not the other ones?
    I am not--
        Mr. Thomas. Well, if you will allow me to continue, Mr.
    Cardin, if I may.
        Senator Cardin. Sure.
        Mr. Thomas. One thing to remember is that when the product
    of the process is subject to a number of modifications or is
    only tangential to the product, there tends to be some
    disconnect or at least some separation between the process and
    the product. And so the notion is perhaps these individuals are
    not the copyists of which you speak. Perhaps they have done
    some follow-on innovation themselves to move further.
        I would also state that--
        Senator Cardin. Then that wouldn't violate the law. They
    wouldn't violate the--they would have a defense there.
        Mr. Thomas. Well, they might violate the process patent in
    the jurisdiction from which that product is exported.
        Senator Cardin. Then they have violated our law.
        Mr. Thomas. Not necessarily under 271(g) in the district
    courts.
        Let me also observe that these situations arise because
    there is no product patent in the United States. If there is a
    product patent in the United States, that patent proprietor
    could enforce the product patent directly. And the reason these
    cases come up is because there is only a process patent in the
    United States. And why is there only a process and not a
    product patent? Usually because patent policy says that there
    ought not to be, because it is a naturally occurring substance
    or because the product is already known, and so the only
    innovation that is done is a new way of making it or using it.
        So those policy reasons are well established in the patent
    law, and they are not by accident. They balance between
    innovation and access. And so when we say, well, we ought to
    have expanded protection for sort of a form of patent
    protection that is regarded as weak, that is sort of at times
    left to someone who cannot get a full-fledged product patent,
    we should at least pause, respectfully, I think, before we
    expand it.
        Thank you, Mr. Cardin.
        Senator Cardin. Thank you.
        Thank you, Mr. Chairman.
        Chairman Leahy. Senator Cardin, if you have more, feel
    free.
        Senator Cardin. No, Mr. Chairman. I think I got the answer
    I expected. I would just come back to the point, if there are
    additional suggestions that any of the panelists might have, we
    would certainly appreciate it, because I do think we want our
    laws enforced.
        Thank you.
        Chairman Leahy. In fact, I will keep the record open. There
    are a couple of points that I would like to explore further.
    For one thing, take a look at your testimony when you look at
    it. If you want to add to it, and we will note it as an
    addition, but we are keeping it open for that. We are not
    trying to play ``gotcha'' here. This is too important an issue.
    It is a highly complex issue, as you know. You have each spent
    more time on this than most of us have. But it is a very, very
    worrisome issue.
        After I get a chance to read more thoroughly the two cases
    from yesterday in the Supreme Court, I may followup with some
    questions based on that. Some of the cases in the Supreme
    Court--I mean, it is very easy to read a case about chasing a
    fleeing suspect. The press and everybody else can usually pick
    up on that, and as a former prosecutor, I read it with
    interest. But on these, they get a little bit--they do not make
    for exciting bedtime reading. Perhaps for the four of you they
    do. They do not for me. But, fortunately, they do for Susan
    Davies and other brilliant people on the staff. But I may
    followup based on that, if you do not have any objection.
        So we will stand in recess.
        [Whereupon, at 3:34 p.m., the Committee was adjourned.]
        [Questions and answers and submissions for the record
    follow.]
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]