[Senate Hearing 110-149]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-149
 
            PATENT REFORM: THE FUTURE OF AMERICAN INNOVATION 
======================================================================
                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 6, 2007

                               __________

                          Serial No. J-110-41

                               __________

         Printed for the use of the Committee on the Judiciary

                     U.S. GOVERNMENT PRINTING OFFICE

37-760 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

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     4
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     1
    prepared statement...........................................   276
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     3
    prepared statement...........................................   283

                               WITNESSES

Bernstein, Bruce G., Chief Intellectual Property and Licensing 
  Officer, InterDigital Communications Corporation, King of 
  Prussia, Pennsylvania..........................................    15
Biberstein, Kathryn L., Senior Vice President, General Counsel 
  and Secretary, Chief Compliance Officer, Alkermes, Inc., 
  Cambridge, Massachusetts.......................................    20
Doyle, Mary E., Senior Vice President and General Counsel, Palm, 
  Inc., Sunnyvale, California....................................    16
Dudas, Jon W., Under Secretary of Commerce for Intellectual 
  Property, and Director, Patent and Trademark Office, Department 
  of Commerce, Alexandria, Virginia..............................     5
Squires, John A., Chief Intellectual Property Counsel, Goldman, 
  Sachs & Co., New York, New York................................    18

                         QUESTIONS AND ANSWERS

Responses of Bruce G. Bernstein to questions submitted by 
  Senators Grassley, Coburn, Specter and Kyl.....................    33
Responses of Kathryn L. Bilberstein to questions submitted by 
  Senators Specter, Coburn, Kyl and Grassley.....................    66
Responses of Mary E. Doyle to questions submitted by Senators 
  Grassley, Coburn, Specter and Kyl..............................   100
Responses of Jon W. Dudas to questions submitted by Senators 
  Coburn and Specter.............................................   126
Responses of John A. Squires to questions submitted by Senators 
  Kyl, Coburn, Grassley and Specter..............................   145
Responses of David Westergard to questions submitted by Senator 
  Kyl............................................................   181

                       SUBMISSIONS FOR THE RECORD

Agricultural members of the Biotechnology Industry Organization, 
  Washington, D.C., joint letter.................................   195
Bernstein, Bruce G., Chief Intellectual Property and Licensing 
  Officer, InterDigital Communications Corporation, King of 
  Prussia, Pennsylvania, statement...............................   198
Biberstein, Kathryn L., Senior Vice President, General Counsel 
  and Secretary, Chief Compliance Officer, Alkermes, Inc., 
  Cambridge, Massachusetts, statement............................   217
Companies, associations, venture capital firms and academic 
  institutions, joint letter.....................................   230
Department of Commerce, John J. Sullivan, General Counsel, 
  Washington, D.C., letter.......................................   235
Doyle, Mary E., Senior Vice President and General Counsel, Palm, 
  Inc., Sunnyvale, California, statement.........................   246
Dudas, Jon W., Under Secretary of Commerce for Intellectual 
  Property, and Director, Patent and Trademark Office, Department 
  of Commerce, Alexandria, Virginia, statement...................   264
Michel, Paul R., Chief Judge, U.S. Court of Appeals for the 
  Federal Circuit, Washington, D.C.:
    letter, May 3, 2007..........................................   277
    letter, May 21, 2007.........................................   279
    letter, June 7, 2007.........................................   280
National Association of Manufacturers, Dorothy Coleman, Vice 
  President, Tax and Domestic Economic Policy, Washington, D.C., 
  letter.........................................................   282
Squires, John A., Chief Intellectual Property Counsel, Goldman, 
  Sachs & Co., New York, New York, statement.....................   285


            PATENT REFORM: THE FUTURE OF AMERICAN INNOVATION

                              ----------                              


                        WEDNESDAY, JUNE 6, 2007

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Committee met, Pursuant to notice, at 10:07 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Patrick J. 
Leahy, Chairman of the Committee, presiding.
    Present: Senators Leahy, Cardin, Whitehouse, Specter, 
Hatch, and Coburn.

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

    Chairman Leahy. Good morning. We have had a little bit of a 
delay. We have been trying to get a room, an extra room for the 
overflow. Senator Specter and Senator Hatch and I always 
thought that this was a dry subject, but apparently there are 
some who are interested in it, all the pro bono lawyers in here 
and others.
    On April 18th, we took a momentous step toward ensuring 
America's continued leadership in innovation and production: on 
a bipartisan, actually a bicameral basis, we introduced the 
Patent Reform Act of 2007. We left partisanship and actually 
any sense of one body over the other at the door. I want to 
personally thank Senator Hatch, with whom I have worked on 
patent issues for many years. It has been more than a decade 
that we have worked together on these issues. Our last major 
patent bill was the American Inventors Act, which we began in 
1997 and passed in 1999. The other cosponsors of the bill 
include Senators Cornyn, Schumer, and Whitehouse, who are also 
members of this Committee.
    The issues we are discussing here rated a front-page story 
in the Wall Street Journal, which noted that the Supreme Court 
has ``underscored the patent system's disrepair in a series of 
rulings rejecting the way lower courts have been interpreting 
existing law. The Justices have declared, in effect, that the 
patent system, as it has developed through the courts, has 
deviated from the balance Congress set a half-century ago 
between promoting innovation and spreading the fruits of 
progress.'' This is one of those cases where the Court is 
exactly right.
    Over the years, our patent laws have served our inventors 
and our economy well, but they were crafted for a different 
time when smokestacks, rather than microchips, were the emblems 
of industry. It is far past time to update our laws for the 
21st century and the future of American innovation. We have 
spent several years working on just such legislation. Last 
year, Senator Hatch and I introduced S. 3818, which I said at 
the time was the first step down a road to real, constructive 
patent reform. Since that bill was introduced, we have spoken 
with all manner of interested parties across this country, and 
we have incorporated many of their suggestions into this year's 
bill, S. 1145, the Patent Reform Act of 2007.
    We are working to refine and to finish this bill. We 
continue our collective effort to select just the right words 
to convey our agreed-upon meanings. Today, we focus on our 
overall effort but also on specific aspects of the bill on 
which we have asked a distinguished group of witnesses to share 
with us their views on the structure of post-grant review, 
venue, and interlocutory appeal of so-called Markman hearings.
    We have come a long way in each of these areas, and we have 
made important modifications from last year's bill to address 
concerns that have been raised. We have worked on it straight 
through, even after the elections last year, straight through 
the winter and into this year. I am hoping that we will make 
further progress so that we are well prepared for our final 
drafting efforts, and then I have been told it will be put on 
the agenda in the Judiciary Committee for markup. As we move 
ever closer toward the finish line to enact legislation that 
will create the landscape necessary that American innovators 
need to flourish, we are focusing our debate on the specifics. 
These matters may seem dry, but they are important to getting 
our work done and done right in order to have meaningful 
reform.
    So I look forward to the testimony of our witnesses today, 
and I appreciate the expertise they bring to bear on these 
important issues.
    I should note that with respect to the administration 
witness, we did not receive the testimony from the Department 
until 4 o'clock yesterday, and I am not sure whether the fault 
lies with the Commerce Department or the White House clearance 
process. But, of course, that is not in compliance with our 
Committee rules, as both Senator Specter and I have noted. We 
have also been informed that Director Dudas would not give oral 
testimony on the topics for which he was invited, which is 
interesting, but would speak on a topic of his own choosing, 
namely, the PTO's new Patent Quality Program. We certainly 
agree patent quality is of singular importance, but Senator 
Specter and I specifically requested assistance from the 
witness on three other issues: post-grant review, venue, and 
interlocutory appeals.
    Under our rules and practice, whether the administration 
witness is accorded the privilege of a statement is up to the 
Chairman in these circumstances, especially when our rules have 
not been followed. Since we have not had a fair opportunity to 
consider the administration's written testimony, I will simply 
make it part of the record for the hearing, and I will accord, 
of course, the Director an opportunity to make an opening 
statement if he wishes to focus his comments on the topics of 
this hearing, not topics he might want for the hearing, which 
is post-grant review, venue, and interlocutory appeals. And 
then we will have questions.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Senator Specter?

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

    Senator Specter. Well, thank you, Mr. Chairman, and I 
commend you and Senator Hatch, former Chairman of this 
Committee, for the outstanding work you have done on this very 
important subject for many, many years. This is a matter of 
vital concern to this country and really to the world. The 
protection for property rights goes back to the Constitution 
itself, which grants exclusive rights to inventors for the 
fruits of their inventions, albeit it for a limited period of 
time, 20 years as specified in the Constitution. And the 
productivity and the wealth of the United States is attributed 
in large measure to the protection of intellectual property to 
encourage inventors to come forward with novel ideas and to 
have the fruits.
    There are a great many complex issues which have arisen in 
this field warranting a very careful reexamination by the 
Congress. There are substantial differences of opinion with 
those who rely upon patents, very substantial differences 
between high-tech and the pharmacology industry, differences of 
opinion between universities and venture capitalists on one 
side and software and high-tech companies on the other side. 
And it is in a sense a lawyer's paradise to work through these 
issues, perhaps more of a paradise for those on an hourly rate 
than those of us who are on the Judiciary Committee. But I have 
an extraordinary team of lawyers behind me, and we have spent a 
lot of time delving into the interstices of these issues.
    In a Congress confronted by many, many issues, I think no 
subject matter has brought more inquiries and more requests for 
meetings than has patent reform. And we heard about the issue 
of re-review by the Patent and Trademark Office, the so-called 
second window. We are worried about venue. We have all that 
business going to East Texas, and we worry about apportionment 
of damages, and so many, many other issues and about what the 
Supreme Court has done. And since it is a matter not involving 
a constitutional interpretation, Congress has full authority to 
get into the matter, and we are doing so in depth and in 
intensity.
    We have an extraordinarily crowded calendar in the Senate, 
but it is my hope that--I know that Senator Leahy, the 
Chairman, and Senator Hatch and I and others will be giving 
full attention to this matter to try to get it to the floor and 
then to press for floor action.
    I am going to have to excuse myself in a few minutes 
because I am managing with Senator Kennedy the immigration 
bill, and we have had a gauntlet laid down by the Majority 
Leader that if cloture is not invoked tomorrow at a 6 o'clock 
vote, he is going to take down the bill. And I think that would 
be disastrous. So we are up against a very tight time schedule. 
We were working late into the evening last night. We started 
again this morning at 8:30. We are trying to conclude many, 
many complex issues. And at the same time, we are meeting with 
many people who are in this room today on the H-1Bs and on the 
point system and trying to reassure people in high-tech that, 
where they have a particular individual in mind, we will retain 
the allowance for that person to be granted status to get a 
green card and stay here with visas to help on productivity.
    Thomas Friedman has suggested that we ought to modify the 
immigration laws to have a staple to a green card for every 
Ph.D. graduate. Certainly it would be economic 
administratively, just the cost of staples. And we are 
concerned about meeting those issues, and I see on my schedule, 
as Senator Leahy and Senator Hatch, a meeting with people in 
the industry at 11:30. I am not sure how we are going to juggle 
all those balls, but we will try to very carefully consider all 
of the many issues. High-tech practically has a Senate of its 
own on a day like today, with immigration and patent reform on 
the agenda.
    So thank you very much again, Mr. Chairman, and I will do 
my best to return to the hearing if I can.
    Chairman Leahy. Thank you very much, and because of the 
extraordinary work he has done on this, I want to ask if 
Senator Hatch wishes to say something.

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

    Senator Hatch. Well, thank you, Mr. Chairman. I appreciate 
you and your leadership in this area. I also appreciate--
    Senator Specter. Senator Hatch, would you yield for just a 
minute for a unanimous consent request for things that Senator 
Grassley has asked be included in the record?
    Chairman Leahy. Without objection, they will be included. 
Thank you.
    Senator Hatch. I also appreciate Senator Specter and his 
leadership on the Committee as well. We are led by good people, 
good lawyers who know what they are doing.
    Let me just say that this is a very important piece of 
legislation. It is not everything I would like to have or that 
I think any of us would like to have, but it does have some 
very valuable changes in patent law that I think will over the 
long run benefit most people.
    You know, the patent system is the bedrock of innovation, 
especially in today's global economy, and especially in this 
country. The sheer volume of patent applications reflects the 
brilliant innovative spirit, the vibrant spirit that has made 
America a worldwide leader in science, engineering, and 
technology. America's ingenuity continues to fund our economy, 
and we must protect new ideas and investments in innovation and 
creativity.
    Patents encourage technological development and 
advancements by providing incentives to invest in and disclose 
new technology. More than ever it is important to ensure 
efficiency and increase quality in the issuance of patents.
    Senator Leahy and I in particular--and I believe the 
distinguished Ranking Member deserves a lot of credit, too--we 
have worked for years trying to come up with some way of 
reforming and changing our patent system to get rid of some of 
the things that we think are abhorrent. But I realize that 
there are a number of industries that are very concerned about 
this bill, and I am concerned about it as well because I would 
like it to be right when we get through. But industries like 
the medical technology industry, biotech, universities, pharma, 
other technology companies, a number of them are concerned 
about post-grant review. They are concerned about apportionment 
and expanding PTO rules, rulemaking authority. And there are a 
number of other issues that cut across and are very difficult 
to handle.
    What we are trying to do here is move the process forward 
and come up with the very best patent bill we can. Everybody 
here should realize that it is difficult to do because even if 
we could get a bill through the Senate, it still has to go 
through the House. And there are a number of organizations who 
could stop this bill even though across the board it probably 
benefits most organizations.
    So we will do what we can to keep the issue open, and I 
hope that you will all weigh in and let us see what we can do 
to get this bill even more perfect than it is and to try to 
keep the United States the No. 1 innovating Nation in the 
world. And I think it will, and I just want to personally again 
express my regard for Senator Leahy. He is always taking these 
issues seriously. He is one of the more learned people in this 
area. It is a pleasure to work with him, and I am looking 
forward, hopefully between now and markup, to bringing together 
some of the ideas that really deserve to be in this bill and 
work with Senator Leahy to see what we can do to get more 
across-the-board support for the bill.
    There is a lot of support for it, and the changes that we 
are making in this bill are extremely important, as far as I am 
concerned. But we will certainly be available and open for good 
ideas and other approaches. But this is where we are starting 
and, frankly, we have come a long way to get here, I would say, 
wouldn't you, Senator Leahy? So I want to thank you again, and 
I look forward to hearing the testimony today.
    Chairman Leahy. Thank you.
    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. Dudas. I do.
    Chairman Leahy. Thank you. Go ahead.

  STATEMENT OF JON W. DUDAS, UNDER SECRETARY OF COMMERCE FOR 
INTELLECTUAL PROPERTY, AND DIRECTOR, U.S. PATENT AND TRADEMARK 
      OFFICE, DEPARTMENT OF COMMERCE, ALEXANDRIA, VIRGINIA

    Mr. Dudas. Thanks very much, Mr. Chairman, Senator Hatch, 
Senator Coburn. It is a pleasure to be here and have this 
opportunity to discuss the administration's thoughts and 
recommendations on patent enhancement issues. The bill that you 
have before the Committee is intended to improve our patent 
system by enhancing quality, reducing patent litigation costs, 
and further harmonizing patent laws where it is in the interest 
of American innovators. The administration supports these goals 
and commends you, Mr. Chairman, and your colleagues in the 
Senate and on the House side for introducing this bicameral and 
bipartisan bill.
    I also want to note that I apologize that the testimony 
came in at 4 o'clock. No matter what the situation was, that 
responsibility rests with me. I can tell you we respect the 
Committee and the Committee rules. I can also tell you that the 
testimony very closely tracks the administration's letter, the 
11-page letter that we sent on May 18th to the Committee. So, 
largely, the views that you will find in the written testimony 
will be views that have been placed before the Committee before 
that.
    Chairman Leahy. Thank you, and that will be part of the 
record, as I said. But Senator Specter and I both agreed on 
this when he was Chairman, and I follow the same thing as 
Chairman, that we have to get the testimony.
    Mr. Dudas. Absolutely.
    Chairman Leahy. I realize you have to go through a vetting 
in advance in the administration.
    Mr. Dudas. Right. No question.
    Chairman Leahy. But we do need it. Go ahead.
    Mr. Dudas. Right. And so the views that are in that letter 
are largely the written testimony, and certainly everything I 
wish to discuss today are views that are within the bill, 
within the purview of the bill. In that written testimony and 
in the letter that the administration sent on May 18th, you 
will find at the beginning of the letter a vast discussion of 
an issue that we think is fundamental to everything. It is not 
currently in the bill, but it deals with applicant quality 
submissions; it deals with having applicants give more. I will 
be happy to testify later today on that in response to 
questions.
    You focused in your letter on three specific issues, and I 
will talk about those three specific issues in the written 
testimony, answer any questions on any areas in the bill, and 
other areas where the administration wants to recommend.
    The area where the PTO has the most significant expertise 
is in the post-grant review. Post-grant review is something 
that was proposed at the USPTO in 2002, as far back as our 
Strategic Plan. Again, almost 5 years ago that was introduced. 
Essentially, the reason the USPTO proposed a post-grant review 
system, it is a system that has worked in other nations. We saw 
that litigation is growing in the United States, as well as the 
number of patents is growing, but the amount of litigation per 
patent is not growing. What you see is that litigation is 
growing because there are more patents out there. So we thought 
that it would make sense that you would have an alternative to 
a court system, that you would have the expertise of the Office 
in a post-grant system.
    What we proposed at the United States Patent and Trademark 
Office to the Congress, last Congress and again this Congress, 
is a system that has two options: a first window where a patent 
can be disputed on nearly any grounds and under any 
circumstances with a closed window--we proposed 12 months--and 
also a second window where it would be a more limited window. 
For the life of the patent, the patent could be challenged so 
long as two requirements are met. According to the 
administration, this is what we thought would be the most 
manageable and the fairest under such a system.
    The first requirement would be that there would be a threat 
of litigation, so the second window would be limited to a 6-
month period after the receipt of a notice from the patent 
holder alleging infringement; and, second, that there would be 
a threshold of significant economic harm.
    The idea was that this could serve as a meaningful 
alternative to litigation, probably less costly, certainly 
before experts at the Patent and Trademark Office. We also 
thought that it is very important if you are going to have a 
second window, if you are going to have a post-grant review, 
that you have very real estoppel, that you have a choice 
between litigation and post-grant review, that we should not 
have a situation where we set up forum shopping or giving 
several bites at the apple, that there should be true estoppel.
    The bill that has been introduced looks very similar to the 
administration's position, but there is one significant 
difference, and that is, rather than have the threat of 
litigation and economic harm, it goes from a disjunctive test 
to--I am sorry, from a conjunctive test to a disjunctive test 
saying it is ``or threat of economic harm.''
    The administration has concerns about this change for two 
reasons. One, administratively, that opens up a vast--a much 
larger number of possible cases that can come before the U.S. 
Patent and Trademark Office. And, quite frankly, without having 
the resources available now, we are not certain that we could 
handle the administration of that many cases. That, coupled 
with another provision in the bill that says the post-grant 
opposition would be opened up to all patents, both those 
patents that are in force today and those patents that are to 
come in the future. The administration would encourage the 
Committee to consider having a post-grant review system that 
looks prospectively only, or comes up with--we also have other 
opportunities and plans in place where we could limit the 
amount of post-grant review while the Office prepares and ramps 
up and prepares for post-grant opposition. So from an 
administrative perspective, we do have concerns that if it is 
opened up instantly to the more than 1.5 million patents that 
are in force today, that could overwhelm the Office. Obviously, 
both this Committee, the Congress, and the U.S. Patent and 
Trademark Office have an interest in making sure that any post-
grant review would be a success.
    We are very eager to discuss with you how we can change the 
post-grant provisions, speak with the Committee both here and 
in the House about how we think we can improve post-grant 
review, again, give you the thinking that we have had since 
2002.
    Two other areas that you raised in your letter: one was 
venue provisions and the other was interlocutory appeals. I can 
tell you, Mr. Chairman, that our interlocutory appeals, that is 
an area of expertise in which we are turning to the Department 
of Justice. I had a conversation with people from the 
Department of Justice the other day. There are some technical 
concerns that they have. I know they want to engage with the 
Committee on that, but quite honestly, we do not want to have 
an opinion solely from the United States Patent and Trademark 
Office because we think the Department of Justice has to be 
involved.
    I would direct your attention to something I am sure you 
are aware of, which is that Chief Judge Paul Michel, the Chief 
Judge of the Court of Appeals for the Federal Circuit, has 
weighed in on what he thinks procedurally could be problematic 
about interlocutory appeals, about what the workload would look 
like and what the problems might be there.
    On venue, we are also looking at the Department of Justice. 
I know they have also raised on venue technical concerns as 
well, and they want to raise with the Committee what thoughts 
they have on venue as well.
    [The prepared statement of Mr. Dudas appears as a 
submission for the record.]
    Chairman Leahy. Thank you. The Federal Circuit has held, 
analyst know, that the PTO--you mentioned them. They have held 
that the PTO does not have the substantive rulemaking authority 
that other Federal agencies do. In your testimony you state 
that PTO believes that rulemaking authority is good for the 
patent system, but you are concerned that the authority we 
grant PTO in this bill gives you too much discretion.
    I am not quite sure I understand that. How do you believe 
such authority would be misused by the PTO if they are not 
further constrained?
    Mr. Dudas. Mr. Chairman, we no longer have that concern. 
When we first saw that provision, we did have that concern in 
case it would allow for patent term extensions or other things 
that could be politicized before the Office. We do not think 
rulemaking authority would allow for such politicization and 
just think it is fundamentally a good provision.
    Chairman Leahy. I appreciate that very much. And we have 
heard numerous complaints about the quality of patents issued 
by the PTO, as you have, and I know you are trying to get on 
top of that, and in S. 1145 we tried to address this in several 
ways. One important improvement is the creation of a system for 
third parties to submit relevant information early in the 
application process, and I understand that that is something 
that normally does not happen today.
    Can you comment on the importance of outside third-party 
experts providing relevant information to PTO?
    Mr. Dudas. The administration is strongly supportive of 
that provision, and, in fact, we believe that patent quality is 
a shared responsibility. It begins with the patent application. 
It should give the patent applicant both an opportunity and a 
responsibility to give more information, but also the public at 
large.
    Right now, the rules under which the USPTO operates, after 
a patent application is published after 18 months, someone has 
an opportunity for 2 months to submit information, but they 
cannot comment on that. We think that bringing the public, 
giving the public the opportunity--not a requirement, but the 
opportunity--to give information that they think is relevant 
can only enhance patent quality.
    When patent examiners have the right information, they make 
the right decisions.
    Chairman Leahy. I want the press to know just how closely 
the administration and I see eye to eye.
    [Laughter.]
    Chairman Leahy. There are some who think that does not 
always happen, but I mention that only semi-facetiously. We 
really have worked, as I said earlier, in a bipartisan--to 
actually make it nonpartisan legislation. A key component, of 
course, is the structure of post-grant review, which has become 
a matter of a lot of discussion around the country. Certainly 
we heard it--I think Senator Hatch and I heard it from just 
about every stakeholder in this thing. You support such review.
    Tell me how a second window post-grant review would provide 
a more efficient alternative for determining patent validity 
than full-blown litigation.
    Mr. Dudas. Mr. Chairman, first off, the estimates that we 
see on what full-blown patent litigation--again, most cases 
settle, but full-blown patent litigation can cost upwards of $5 
million or more. The concerns that we have heard from people 
are often that they are before a jury who are not necessarily 
experts, who do not understand necessarily the validity of the 
patent. Much like ex parte reexamination and inter partes 
reexamination in the USPTO, a post-grant opposition would allow 
experts, judges who are already at the PTO making decisions on 
patentability and on appeals and interferences, give them the 
opportunity, experts in the field, to make these decisions.
    What post-grant opposition offers that current 
reexaminations do not offer is a process that looks more like 
litigation, that allows witnesses and allows more of that type 
of environment. In a way, I think post-grant opposition with 
the second window is the best of both worlds, because it is an 
alternative to litigation before experts that is cheaper and 
will be quicker.
    Chairman Leahy. I know as we have been preparing this, we 
have had a lot the staff working, Susan Davies especially from 
my office, and one of the things we do in this is we amend the 
prior user rights to apply to all patents being prepared 
commercially. I am told there has been a lot of comment on 
that. But if you have the certainty created by the first-to-
file system in the bill, is there any reason that an inventor 
using an invention should not be able to defend against a suit 
by a person who later files a patent application for a similar 
invention?
    Mr. Dudas. The concern that the administration raises and 
that some others have raised with prior user rights is that it 
might upset the balance between trade secrets and patents. In 
other words, the patent system is meant not so we make 
millionaires, not so we do--but so that we have disclosure of 
inventions. Ultimately, you disclose the invention. It is 
available to the public at large. In a certain amount of time, 
within 20 years, it is made freely available to everyone. Prior 
user rights right now exist under the law. If it is a year 
prior to filing, this might encourage people, prior user rights 
right up to the moment of filing, could encourage people to 
adopt trade secrets, which does not disclose technology. So in 
a way, what trade secrets--the patent system says if you 
disclose fully and make your information available to everyone 
so that everyone can use that and it will be freely available 
within 20 years, we want to encourage that.
    Prior user rights will encourage people to have trade 
secrets which basically says you can have this protection 
forever, but in exchange for that, you have to keep it secret.
    So I think the concern we have on prior user rights is 
twofold: first is that prior user rights might encourage trade 
secrecy more, which is a fine method, it is legal, but it does 
not encourage disclosure, which we want under the patent 
system. And the second area, which you have already alluded to, 
is right now we do not have a first-to-file system, but the 
bill does propose to have a first-to-file system.
    Chairman Leahy. Thank you.
    Senator Hatch?
    Senator Hatch. Thank you, Mr. Chairman.
    I am concerned about, among other things, the inequitable 
conduct provision from last year's bill because it was removed. 
Attorneys well know that the inequitable conduct defense has 
been overpleaded, and at least in my estimation, and I think 
the estimation of many others, it has become a drag on the 
litigation process. And as you, I believe that reforms to the 
inequitable conduct defense should focus on the nature of the 
misconduct and not permit the unenforceability of a perfectly 
valid patent on a meritorious invention. And sanctions should 
be commensurate with the misconduct. At least that is my view.
    I understand that the heart of the inequitable conduct 
defense lies with the quality of the patent application, 
including information disclosures. Now, in your testimony you 
describe that over half of all submitted applications either 
had no information disclosure statements or contained 
inordinately large information disclosure statements that, in 
effect, bury relevant information.
    Now, could you please describe for us the impact this has 
on patent quality, pendency, efficiency, and even the outcome 
in litigation?
    Mr. Dudas. Absolutely, Mr. Senator. I appreciate the 
question, and I was hoping at the time of the opening statement 
to raise this. I have a box of materials here that I will just 
show you. It is a good example of what we get in the Patent and 
Trademark Office at times.
    This is one box of materials that a patent applicant might 
have submitted that someone thinks would be relevant, and the 
problem is--what I am raising right now is 2,600 pages of 
material that was submitted in one box in one patent 
application, and there were 27 other boxes that had this amount 
of material inside the patent application.
    The problem with that is that an average examiner in this 
case would have an average of 24.5 hours. Certainly an examiner 
might take more time in that case. The problem with inequitable 
conduct is, as it has been interpreted now, we absolutely 
believe at the Patent and Trademark Office that there needs to 
be significant penalties for someone who tries to purport fraud 
on the Office. But we want to make certain that the remedies 
are commensurate with what the issue is, that inadvertent 
mistakes, innocent mistakes, are not punished more than they 
should be.
    So as you mentioned, 25 percent of the cases we get 
absolutely nothing. The applicant has said we have nothing that 
we can provide that we think is significant. In 25 percent of 
the other cases we get an inordinate number of disclosures, 
including 28 boxes that are this large.
    Simply put, in our office we have had an application that 
has 3,000 claims and over 2,000 references. The Cray 
supercomputer was 12 claims. The microcomputer was eight 
claims. The MRI was 16 claims. Our point is that the reason why 
we find that we should resolve inequitable conduct is to 
encourage applicants to give more and better information. Do 
not give us 28 boxes of material like this. Give us what is 
truly relevant so that you can have a higher-quality patent. 
And we think in order to do that, we have to make inequitable 
conduct something that absolutely punishes fraud but absolutely 
promotes disclosure, and also we want to make certain that we 
take care of small inventors who might not have the resources 
to give us that background.
    Senator Hatch. Mr. Dudas, the USPTO consists of very 
skilled and dedicated examiners. I think they are committed to 
the granting of quality patents. Now, I understand, as you have 
just explained, the rigorous time constraints that examiners 
must follow in order to accommodate the hundreds of thousands 
of patent applications that they receive each year. Now, it is 
hard for me to envision how an examiner can meaningfully 
consider boxes and boxes of references in the short amount of 
time they are allotted.
    How do we get patent applicants to not shirk their 
disclosure responsibilities and not overwhelm the system? Would 
that be an extension of what you just said?
    Mr. Dudas. It would. I think the Patent and Trademark 
Office has the authority to require more and better searches to 
be submitted, to have reports submitted to the office. But in 
order to do that, we want people to feel encouraged. Right now, 
applicants feel that they cannot, or at least they believe they 
cannot, disclose information because they say they fear that 
they will be found for an innocent mistake, and there are some 
cases that have shown that.
    Again, we think if we can give people the right incentives, 
then we should require them to give us more and better 
information. Our error rate is at a historic low right now. Our 
approval rate is at a historic low. There have been more 
quality initiatives put in place, but there is more that we can 
do. But it cannot just be the Patent and Trademark Office. As 
the Chairman noted, the public has a role to play, and 
certainly the applicant, who gains all the benefits from a 
patent application, has much to do.
    Senator Hatch. Well, this proposed legislation would 
institute a robust post-grant review process so that third 
parties can challenge suspect patents in an administrative 
process overseen by the USPTO rather than through costly 
litigation. Now, some argue that the USPTO does not have the 
expertise to handle a post-grant review process. I would just 
like to have your thoughts on that.
    Mr. Dudas. I think there is probably no place better than 
the USPTO that has the expertise. We have administrative patent 
judges who handle appeals and interferences right now.
    The one issue that I would note is the post-grant, as it is 
right now, we believe we might not have the resources to ramp 
up the number of people we need to have as judges if we put all 
million and a half patents that are available now subject to 
post-grant review. But as far as expertise, I do not think 
there is a better expertise truly anywhere in the world than 
among our administrative patent judges.
    Senator Hatch. I think you make a good point on that.
    Thank you, Mr. Chairman. I appreciate it.
    Chairman Leahy. Thank you.
    Senator Coburn?
    Senator Coburn. Thank you. The problem of fee diversion is 
not addressed in the bill, is it, the administration's position 
that they would like to see fee diversion ended?
    Mr. Dudas. The administration actually for the last 4 years 
has ended diversion in the President's budget and has 
essentially -the difference that is made under the Government 
Performance and Results Act, the Office had averaged meeting 
about 25 percent of its key goals. After that had ended in the 
President's budgets and Congress supported that, and having an 
aggressive Strategic Plan, we have moved up 50, 70, 90 percent 
of our goals, up to 94 now.
    Senator Coburn. The post-grant opposition process, is it 
not true that the Japanese presently are thinking about doing 
away with theirs because of the negativity that they have seen 
in terms of innovation in Japan?
    Mr. Dudas. I am not aware that they have done away with 
their post--
    Senator Coburn. No. They have not done away. Are they not 
considering it?
    Mr. Dudas. I am not aware that they are considering--I am 
not aware that they are, but I could understand. They have a 
very big concern in Japan about what they consider filing of 
junk patents, and they have a big concern about what is coming.
    I will tell you Japan did change at one point. They had a 
system where they had a first window and a second window type 
of--and they have changed it to a second window the entire 
time. And I think that is where the source of their concern is, 
that you have an unlimited ability to challenge the patent 
throughout the life.
    Senator Coburn. If you applied the European rate, what you 
see in the EU, 5.3 percent of all patents go through a 
challenge in the second opportunity, and you apply that to a 
U.S. patent, if you assume the same, that is 8,600 cases that 
you are going to add per year in a post-grant review. Are you 
capable of handling that?
    Mr. Dudas. I do not believe right now we are capable of 
handling 8,600 cases, and we have reason to--
    Senator Coburn. But that is 8,600 cases based on what you 
approve, correct?
    Mr. Dudas. That is 8,600--yes, if it is 5.3 percent of--we 
approve about 180,000 a year.
    Senator Coburn. Yes, so you are talking about 8,600 on what 
you approve, and then if we open it up to all in the past--
    Mr. Dudas. Right, right. That is the source of our concern. 
We actually think the European system--because of the way the 
European system works where you have to challenge validity 
country by country, we probably should not get 5 percent. But 
there is no question that we have a great concern that if we 
saw those kinds of numbers, we would not be in a position today 
and we probably will not be in a position in the next few years 
to be able to handle that kind of influx on post-grant 
opposition. It would be because of the lack of resources or 
ability to ramp up.
    Senator Coburn. So let me understand. You would dispute 
that we would have 5.3 percent?
    Mr. Dudas. We think that we would not have 5.3 percent. 
That is correct.
    Senator Coburn. And why would you assume that?
    Mr. Dudas. We think in the United States--because a lot of 
the times in the European Union we believe much of what is 
driven in their post-grant opposition system is the fact that 
if you can take down the patent in post-grant opposition, it 
will be gone for good. Also, in the European Union you would 
have to challenge validity on a country-by-country basis. In 
the United States, of course, if you go to the courts and you 
win in the courts, that is good throughout the United States. 
So we think more people would still opt for litigation.
    Senator Coburn. The average length of procedure in a post-
grant opposition in Europe is about 31 months. So if the 
pendency time in the U.S. is about 31 months and if post-grant 
opposition is about 31 months, you are talking about taking 5 
years of life out of a patent. Is that good for innovation in 
this country?
    Mr. Dudas. Certainly lengthy pendency in terms is not good 
for innovation in--
    Senator Coburn. Well, lengthy pendency and lengthy post-
grant opposition.
    Mr. Dudas. And lengthy post-grant opposition is not as 
well, absolutely. We believe that we could get the job done 
likely within 12 months under an appropriate post-grant 
opposition procedure that ramps up at the right rate.
    Senator Coburn. I would have trouble believing that, and I 
think most people would who have been through the litigation 
and dealing with Government agencies in this country. Twelve 
months I think is a pretty forward-looking number.
    Let me ask you one other question. Would people not really 
have about three bites at the apple under a post-grant--a 
second window opportunity, take one segment of their claim and 
maybe lose it in the post-grant and then still be able to go 
into the courts on another claim, even though they might have 
lost the initial claim? So what you could actually do is take 
31 months of pendency, 31 months of post-grant review, and then 
3 to 5 years in the court, so essentially you could get a 
patent of half of its life?
    Mr. Dudas. There is no question there are several options 
that people have under existing law and that they could have 
under the post-grant opposition system.
    I will say that the third element, the third bit there, if 
the administration's position is adopted, would not exist 
because the estoppel needs to be quite strong that says on the 
second window any issue that you raised or could have raised--
    Senator Coburn. Or could have raised.
    Mr. Dudas.--you can bring up no place else. That second 
window, from the administration's position, is intended to 
allow nothing--a complete alternative to litigation.
    Senator Coburn. All right. And I would like your comment on 
venue shopping. The bill as it is currently written, the 
infringer actually has venue-shopping capability, but the 
patent holder does not. Do you see a problem with that?
    Mr. Dudas. I do think that you have to consider everyone 
involved in terms of venue. Again, the Department of Justice 
will weigh in on this, but I will say that the venue provision 
is important to balance both the alleged infringer, or the 
defendant, and also the plaintiff, or the patent holder, 
particularly since a patent holder might be a small innovator, 
might be an independent inventor or a small business. So that 
is something that should be considered, and I think on balance 
needs to be considered.
    Senator Coburn. Do not patent holders want a venue so that 
they can limit their costs of litigation so they can get it 
seen and heard and handled quickly rather than favorably? 
Because--
    Mr. Dudas. I am sorry. Could you repeat that question? I 
apologize.
    Senator Coburn. For example, there are certain places where 
you can go and get some--for example, in Virginia, you see a 
great response, a quick time. What that relates to is less 
cost. We have small innovative companies in this country who 
have limited resources, and if you limit their ability to go to 
a place where they have expertise, where they are very 
knowledgeable, they do this a lot, their dockets are not 
crowded with criminal cases, do you not see the cost of 
litigation as a factor in limiting patentability and 
maintaining the viability of a patent?
    Mr. Dudas. Certainly, people are often looking at making 
certain they go to a jurisdiction where they think they can get 
a decision quickly, where they think they can get the 
expertise. When the Eastern District of Virginia adopted the 
rocket docket, it became the place where patent cases went and 
people became concerned about--
    Senator Coburn. But if you are an infringer, maybe you 
would want to go someplace where it takes 5 to 7 years.
    Mr. Dudas. Certainly. I think that would be--
    Senator Coburn. Thank you. I do not have any additional 
questions. Thank you.
    Chairman Leahy. Thank you very much.
    Mr. Dudas, thank you very much, and when you review the 
transcript, and if you are also reviewing anything that is said 
by any of the witnesses, if there is anything you wish to add, 
please feel free, and I will leave the record open, with no 
objection, for a few days so that others can ask questions.
    Mr. Dudas. Thanks, Mr. Chairman.
    Chairman Leahy. Thank you very much. We will take a 3-
minute recess while we set up for the next panel.
    I have also been advised we are going to have votes around 
11:30, 11:35, and the reason I mention that is to suggest that 
everybody try to keep within their time limits. I do not mean 
to be a pain in the neck on this, but you are going to have to 
so that we can get to the votes. The whole testimony of all 
four of the panelists will be placed in the record as though 
read. I would hope that you would be able to summarize so we 
can go to questions.
    The first witness will be Bruce Bernstein, InterDigital's 
Chief Intellectual Property and Licensing Officer. He manages 
the company's intellectual property assets and the patent 
licensing business. I will also put his full and impressive 
background--and I mean that seriously -in the record.
    I will break from my normal procedures to swear all 
witnesses. Because of the nature of this, I will not.
    Go ahead, Mr. Bernstein.

 STATEMENT OF BRUCE G. BERNSTEIN, CHIEF INTELLECTUAL PROPERTY 
AND LICENSING OFFICER, INTERDIGITAL COMMUNICATIONS CORPORATION, 
                 KING OF PRUSSIA, PENNSYLVANIA

    Mr. Bernstein. Thank you. Chairman Leahy, Senators Hatch 
and Coburn, my name, again, is Bruce Bernstein, and I am Chief 
Intellectual Property and Licensing Officer of InterDigital 
Communications. InterDigital is headquartered in Pennsylvania, 
and we have a fairly large facility in New York. I great 
appreciate this opportunity to discuss the importance of strong 
patent rights to InterDigital, a founding member of the 
Innovation Alliance.
    InterDigital is a small company, yet we have enormous 
inventive capacity. For over 30 years, we have been at the 
forefront of research and development in advanced wireless 
technologies, and today virtually every digital cellular 
telephone has our technology inside of it.
    As the owner and licensor of hundreds of U.S. patents, 
InterDigital believes deeply in the promise and constitutional 
precepts of our patent laws, namely, that a strong and balanced 
patent system is absolutely vital to America's economic and 
innovative leadership. Incremental and narrowly targeted 
reforms we believe are important to the continued health of our 
patent system, but we are concerned that sweeping changes may 
be unwarranted and harmful and will have unintended adverse 
consequences.
    Let me start off by saying that InterDigital actually 
supports several portions of the bill, including expanded 
third-party submissions of prior art and universal publication 
of applications, and we fully support the objectives.
    However, we are very concerned that certain of the proposed 
measures would undermine enforceability, predictability, and 
the value of all patent rights and would actually encourage 
litigation and abuse of the system. In particular, mandatory 
apportionment of damages and post-grant opposition we believe 
would fundamentally weaken the patent system by making it far 
less expensive to infringe patent rights, yet at the same time 
more expensive to actually enforce and defend them. And for 
licensing-based companies such as InterDigital, the collective 
effect of these measures would be severe; and, simply put, 
infringers would have little incentive to take a license 
without first being sued and every incentive to game the system 
and risk litigation.
    In the wake of eBay and other recent Supreme Court 
decisions that we have heard about today, the balance of power 
between patent owners and infringers has already radically 
shifted, particularly to the detriment of smaller firms that 
are in the business of licensing their innovations. We believe 
that the proposed mandatory apportionment and post-grant 
opposition provisions would, for many such innovators, drive 
the final nail in the coffin.
    InterDigital's patented technologies are respected and 
highly valued, and our licensing history is extensive and well 
established. Even still, we have every reason to believe that 
large users of our technologies--and these include some of our 
existing licensees--would exploit the proposed post-grant 
opposition and expanded reexamination procedures to essentially 
tie up our patents through endless administrative and judicial 
challenges. In fact, I have been told as much by several of 
these companies over the past year.
    While most of these companies say they respect intellectual 
property rights, in reality their sole objective is either to 
avoid, significantly reduce, or at a minimum severely delay 
making any licensing payments whatsoever, regardless of the 
validity or strength of the patent.
    America's leadership in this knowledge-based economy is 
highly dependent upon our most valuable natural resources and 
exports, namely, our ideas and our innovations. If the U.S. 
weakens our patent rights and remedies at home, our ability to 
press foreign countries to respect American intellectual 
property and, frankly, to adequately enforce their own 
intellectual property laws will be greatly diminished. A patent 
is intended to be an incentive and reward for innovation, and 
companies that develop innovative technologies but choose to 
license those technologies rather than manufacture--and I want 
to stress the point that sometimes that is not by choice--are a 
critical and fast-growing element of America's economy. We 
believe that Congress should avoid enacting legislation that 
prefers any given business model or swings the pendulum toward 
any specific stakeholder, no matter how well organized or vocal 
they may be.
    [The prepared statement of Mr. Bernstein appears as a 
submission for the record.]
    Chairman Leahy. Thank you.
    Ms. Doyle? And I should also note that Ms. Doyle is the 
Senior Vice President and General Counsel of Palm, Inc. She 
manages delivery of legal services to the company's worldwide 
operations. Her legal career spans more than two decades 
beginning with her first job in business litigation at Manett 
Phelps. She joined Teledyne in 1984 where she worked for 12 
years in increasingly higher roles. She returned to Silicon 
Valley in 1996 to join General Magic, Inc., as its general 
counsel and secretary, joined Palm in April 2003. I would note 
that she received her law degree from the Boalt Hall School of 
Law at the University of California, where she was president of 
the law school student body of her graduating class. I never 
got to do that.
    I will put the rest in the record. Go ahead, Ms. Doyle. 
Please try to summarize, especially for the points that you 
most want us to remember.

 STATEMENT OF MARY E. DOYLE, SENIOR VICE PRESIDENT AND GENERAL 
           COUNSEL, PALM, INC., SUNNYVALE, CALIFORNIA

    Ms. Doyle. Thank you very much, Chairman Leahy,
    Chairman Leahy, Senator Hatch, Senator Coburn, and members 
of the Committee, my name is Mary Doyle, and as you said, 
Chairman Leahy, I am Senior Vice President and General Counsel 
of Palm, Inc. I thank the Committee for the opportunity to 
testify on behalf of Palm and as a member of the Coalition for 
Patent Fairness in support of the Patent Reform Act of 2007. We 
believe this legislation will greatly enhance the ability of 
Palm and other companies like ours to innovate and to compete 
globally.
    Palm and many others believe it is time to take stock of 
the U.S. patent system once again and to ensure that it is 
working in a fair and balanced way for American innovators 
across all industries. In our view, the provisions of this 
bill, S. 1145, accomplish that goal. We commend Chairman Leahy, 
Senator Hatch, and the other sponsoring members of this 
Committee for developing legislation over the past two 
Congresses that seeks to reconcile the interests of all 
stakeholders in the U.S. patent system to reach a fair and 
balanced result.
    In my limited time now, I will focus on the issues you 
requested me to focus on, but during the question-and-answer 
period, I would like to discuss our support for your proposed 
changes regarding the apportionment of damages and the 
establishment of a more rigorous standard for imposition of 
triple damages upon finding of willful infringement.
    We support reform of the patent system to permit 
interlocutory appeals to the Federal Circuit for Markman 
rulings and to discourage forum shopping. We also believe the 
proposed post-grant review procedures are a fair and reasoned 
response to unresolved patent quality issues and historical 
underinvestment in the work of the PTO. Before delving into 
these issues in greater detail, I thought I would provide an 
example of Palm's everyday experience with the patent system.
    The company recently prevailed in a case in which the 
patent holder sought a claim interpretation that would include 
a Palm device, such as this Treo smartphone, within the meaning 
of the word ``card.'' The district court construed the claim 
favorably to Palm and then granted Palm's subsequent motion for 
summary judgment. On the patent holder's appeal to the Federal 
Circuit, the district court's claim construction was reversed. 
On remand, the trial court conducted a second Markman hearing, 
once again construing the word ``card,'' this time in 
conformity with the decision of the Federal Circuit, but again 
to Palm's advantage, not surprisingly. Summary judgment was 
granted to Palm a second time and was sustained on the second 
appeal to the Federal Circuit. There is now no question that 
devices such as these are not ``cards.'' The cost of this 
litigation, however, and two trips to the Federal Circuit was 
$3.5 million, and this for a case that never reached trial.
    Palm also routinely receives patent assertions delivered in 
the guise of invitations to license. Vaguely worded and 
generally unsubstantiated by claim charts or otherwise, these 
letters by themselves may expose and often do expose the 
recipient to triple damages for willful patent infringement. 
Invitations to license may in some cases be coupled with what I 
call the ``thwack factor,'' named for the sound a large stack 
of patents makes when it hits the negotiations table. The 
thwack factor is credited with discouraging the recipient of a 
letter from undertaking the not insubstantial cost of doing an 
initial infringement and invalidity analysis to determine 
whether any of the patents in the pile are valid and infringed. 
And I must say that most often many, and sometimes all, are 
invalid and not infringed. The goal of the asserter is 
obviously to move the focus of the discussion from whether a 
royalty is due to how much it will be.
    The risk of triple damages, the thwack factor, and 
uncertainty as to the measure of damages that a court will 
apply often convinces many a recipient to achieve the best 
settlement it can under the circumstances and avoid the cost 
and aggravation of litigation. While we and many others 
successfully navigate these waters daily, there is no question 
that the license fees paid to patent owners, big and small, 
powerful and emerging, with products or without, is 
unjustifiably inflated to reward not the inventor but the 
litigator who takes maximum advantage of the current inequities 
in our patent system.
    [The prepared statement of Ms. Doyle appears as a 
submission for the record.]
    Chairman Leahy. Thank you very much, and I would note that 
you what you spoke about, the cost of litigation going twice to 
the Federal Circuit, as I am sure you know, that is not an 
unusual experience. And although I have never quite heard, in 
our words of art, the thwack idea, I know it will probably 
become a word of art in this Committee.
    Ms. Doyle. Thank you, Mr. Chairman.
    Chairman Leahy. John Squires is the Chief Intellectual 
Property Counsel for Goldman Sachs and has global 
responsibility for all legal matters pertaining to intellectual 
property, including patents, trademarks, and copyrights. He has 
built the firm's intellectual property practice with focus on 
the capture, deployment, and monetization of firm-generated 
intellectual property.
    I will put the full background in the record. I think, 
though, Mr. Squires, in my 32 years here, you are the first 
lawyer who has testified who also played as a linebacker for a 
Division I-AA team. That could be interesting in close 
negotiations.
    [Laughter.]
    Chairman Leahy. I will leave it at that. Mr. Squires, go 
ahead, please.

   STATEMENT OF JOHN A. SQUIRES, CHIEF INTELLECTUAL PROPERTY 
COUNSEL, GOLDMAN, SACHS & CO., NEW YORK, NEW YORK, ON BEHALF OF 
 AMERICAN BANKERS ASSOCIATION, FINANCIAL SERVICES ROUNDTABLE, 
   AND SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

    Mr. Squires. Thank you, Mr. Chairman. That is a different 
thwack factor. Chairman Leahy, Senator Hatch, Senator Coburn, I 
am John Squires of Goldman Sachs, and I appreciate the 
opportunity to testify today.
    I appear before you today as chairman of the Intellectual 
Property Subcommittee of the Securities Industry and Financial 
Markets Association and also represent the American Bankers 
Association and The Financial Services Roundtable.
    Our respective industry organizations support S. 1145 
because we believe these are precisely the issues that must be 
addressed to bring a system out of balance back into balance. 
We are grateful for the substantial and thoughtful nonpartisan, 
bicameral work that is already underway.
    Patents are still generally new to our industry. While 
financial service patents are generally attributed to the State 
Street Bank decision stemming from 1998, the truth of the 
matter is that modern banking and technology needs and the 
advent of the Internet flattened our world almost overnight. 
Since then, we have had to rethink and reengineer almost every 
aspect of our businesses to stay competitive in a global 
marketplace. Be it technology push or innovation pull, we would 
be here either way.
    While patents in our industry do provide substantial 
benefits and incentives, particularly where open innovation or 
transparency are desired, the more common experience 
unfortunately has been that of a system in need of substantial 
reform.
    Patent examination quality issues, predatory patent 
assertions, and litigation abuse have precluded continued 
progress and efficiencies in bettering the U.S. financial 
system. A recent Harvard Business School study concluded that 
financial patents are 27 times more likely to be asserted in a 
lawsuit than non-financial patents. And because patent suits 
carry the risk of injunction, the delivery of financial 
services in the U.S. economy is all too easily put at risk. We 
fear this is only the tip of the iceberg.
    To be clear, our industry organizations do not see 
themselves as opponents of other views on the bill. Clearly, 
our member organizations finance drug companies and biotech 
companies of all shapes and sizes and seed venture capital 
firms and startups to help bring their visions to light. We 
believe and invest in their business models.
    To convey to you our experience, I analogize to an 
investment portfolio. We view the current patent system as 
underperforming because it is overweight with an World War II 
era view of the world and underweight in terms of the robust 
and complex value drivers of the knowledge economy. To finish 
my analogy, it is time for Congress to enable patent law to 
generate the substantial returns for the U.S. economy and 
American competitiveness that it should.
    With respect to the issues I have been asked to address, 
first, venue, we support the bill's venue provisions as an 
effective means to forestall blatant forum shopping and 
litigation abuse. Just because a server which processes a check 
or clears a security can be located anywhere should not mean 
that defendants can be found everywhere.
    Second, interlocutory appeal. The availability of appeal 
will allow the original principals of Markman uniformity, 
clarity, and expeditious case resolution to be effectuated.
    Finally, post-grant review. For industries with complex 
value chains such as ours, especially in the services area, a 
second window may be the only opportunity to challenge validity 
and get prior art in front of the agency expert at deciding it.
    We thank again the Committee for the opportunity to testify 
and for the work that has already been done. We look forward to 
answering questions.
    [The prepared statement of Mr. Squires appears as a 
submission for the record.]
    Chairman Leahy. Thank you very much, Mr. Squires.
    Kathryn Biberstein--am I pronouncing that correctly?
    Ms. Biberstein. It is ``Biberstine.''
    Chairman Leahy. I am sorry. She serves as Alkermes--how 
badly did I do that one?
    Ms. Biberstein. Alkermes.
    Chairman Leahy. Alkermes. I am not going to read the rest 
of this. I am afraid--
    [Laughter.]
    Senator Hatch. You are 0 for 2, Mr. Chairman.
    Chairman Leahy. Yes, I know. She has also held positions at 
Crowell & Moring and the World Economic Forum. Senator Hatch 
and I have been at Davos often on that. B.S. from General 
Motors Institute, J.D. from the University of Michigan Law 
School.
    Your full statement is part of the record. Please go ahead.

  STATEMENT OF KATHRYN L. BIBERSTEIN, SENIOR VICE PRESIDENT, 
   GENERAL COUNSEL AND SECRETARY, CHIEF COMPLIANCE OFFICER, 
    ALKERMES, INC., CAMBRIDGE, MASSACHUSETTS, ON BEHALF OF 
           BIOTECHNOLOGY INDUSTRY ORGANIZATION (BIO)

    Ms. Biberstein. Thank you. Chairman Leahy, Senator Hatch, 
Senator Coburn, thank you for letting me testify today 
regarding patent reform. This issue is of critical importance 
to the more than 1,100 members of the Biotech Industry 
Organization, or BIO, whom I represent today.
    As you consider changes to the patent laws, I ask you to 
focus on one key point: The patent system today is working to 
foster the innovation and investment necessary to bring new 
drugs to treat critical diseases to market in the United 
States. As we work together to strengthen the patent laws, I 
would ask that you safeguard this very important societal 
benefit.
    My name is Kathy Biberstein, and I am the Senior Vice 
President and General Counsel of Alkermes. Alkermes is exactly 
the sort of success story that the U.S. patent system has 
fostered in this country. Founded 20 years ago on the basis of 
a proprietary patent estate, last year Alkermes became one of 
only a handful of profitable biotechnology companies. We 
reached this milestone by developing innovative medicines--
Risperdal Consta, a long-acting atypical anti-psychotic for 
schizophrenia; and Vivitrol, a once-monthly injectable 
treatment for alcohol dependence--based on a patent estate we 
invested in over decades.
    Like us, the hundreds of other BIO members companies, 
mostly small, emerging companies with little revenue and no 
products on the market, leveraged their patent estates to 
attain the public and private capital and partnerships with 
pharma partners to develop nascent technologies into the drug 
products you see on the market today. And you all know these 
products. They are the ones you search for on the Internet when 
a loved one develops a cancer or a neurological disorder or 
HIV/AIDS. These are our industry's success stories.
    Biotechnology product development is high risk. It can take 
a decade and hundreds of millions of dollars, and most products 
never reach the market. Investors invest in such products only 
if they believe there can be a return on their investment. 
Patents provide this assurance.
    While we believe the patent system is working, there is 
always room for improvement. BIO welcomes many of the positive 
reforms contained in the Patent Reform Act of 2007. However, 
the bill includes three provisions that lack any degree of 
consensus: a broad second window for administrative post-grant 
challenges, a dramatic expansion of the law on apportionment of 
damages, and a sweeping delegation of substantive rulemaking 
authority to the PTO.
    Both a patent challenge, easily brought at any time during 
a patent's term under a low standard of proof, and a 
calculation of damages in which courts must subtract all 
elements that existed in the prior art, with the effect of 
making patent infringement cheaper, will diminish patent value 
and, therefore, discourage investment. There is broad consensus 
against these controversial changes.
    Senator Hatch spoke about the problems with the inequitable 
conduct doctrine, and I think you said it perfectly. The best 
mode requirement in patent law has similar problems, and BIO 
encourages its repeal.
    You have also asked BIO's views on venue reform and 
interlocutory appeals of Markman rulings, and I have included 
that in my testimony.
    So I urge the Committee to focus on the areas in which 
there is a broad consensus on the need for reform and to ensure 
that any new legislation strengthens the system that serves as 
the engine of this country's innovation.
    Thank you.
    [The prepared statement of Ms. Biberstein appears as a 
submission for the record.]
    Chairman Leahy. Thank you very much.
    Starting on my left, your right, Mr. Bernstein, on the 
question--I mean, most of the people testifying have been large 
industries, but you have the small inventors, and I think that 
we have to be concerned about them. Senator Coburn and others 
raised that issue. They do not have the money to challenge 
patents before it becomes painfully obvious it may affect them. 
Are we suggesting they are on their own?
    Mr. Bernstein. If you are asking about smaller companies 
that are on the infringer side of things--was that your 
question?
    Chairman Leahy. No. Well, small companies that may want to 
challenge patents.
    Mr. Bernstein. Right. What do they do, yes. Our view is 
that there is an existing procedure in place, and we are all 
aware of it. It is called--
    Chairman Leahy. I am thinking of, you know, the post-grant 
process where you can harass competitors. We have tried to 
build safeguards into that, but are small inventors protected 
enough?
    Mr. Bernstein. In terms of the post-grant, the current 
proposed language, you know, our view is we are all for cheaper 
mechanisms to either weed out bad patents, invalidate, you 
know, bad patents, or to more appropriately tailor the scope of 
issued patents in view of new prior art that has come to 
people's attention. Our concern is that there is no balance to 
that procedure as currently in place and that it can be subject 
to widespread abuse.
    Chairman Leahy. As I read your testimony, you oppose 
granting substantive rulemaking authority to the PTO. Is that 
correct?
    Mr. Bernstein. We oppose that. Our view is that that is 
better left for Congress so that it can be subject--
    Chairman Leahy. But virtually every other agency of the 
U.S. Government has that, and I have found the people over at 
PTO to be honest, hard-working civil servants. Why should they 
be different than other Federal agencies?
    Mr. Bernstein. Unfortunately, I cannot comment on the other 
agencies and the rulemaking authority. I am not that familiar 
with it. But in terms of the PTO, our view is that it is such a 
critical issue for the U.S. economy that it is something that 
should be subject to debate within the Congress and a hearing 
such as this.
    Chairman Leahy. I have gotten a lot of letters about 
Georgia Pacific, the rules and damages, treating it almost like 
gospel. But 18 months ago, to go back to my mail, I got the 
same recitation on automatic injunction, saying that if we 
change the rule, then Heaven and Earth are going to collapse. 
But the Supreme Court rejected that unanimously in eBay, of 
course. I did not believe that disaster was going to follow, 
anyway. Dire consequences have not followed. Why do we have to 
worry if you have assertions of impending disaster on the 
apportionment issue? I mean, they seem like almost the same 
arguments we heard on automatic injunctions.
    Mr. Bernstein. Yes. Two things. One, in terms of the eBay 
decision, I frankly think it is too early for anyone to say 
what the effects are. I mean, there has been a handful of 
cases, district court cases, were injunctive relief has been 
denied. You know, I have looked at those cases, and my guess is 
the judges in those cases--and Judge Michel from the Federal 
Circuit raised this issue. What is the practical way of 
implementing, you know, the post-eBay judgments? So when there 
is no injunctive relief, basically you have the court setting 
royalty rates for the life of the patent.
    So I think the jury is still out on the effects of eBay, 
and, you know, I think this is something we are encouraging 
Congress to wait and see what happens. And I think it will take 
some time to see the true effects of the eBay case.
    In terms of apportionment of damages, you know, I have been 
told this by companies. I do a lot of licensing. Day in and day 
out, I am traveling. I am on the road dealing with companies 
trying to secure license agreements. And the combination of 
lack of injunctive relief for patent holders and the 
possibility of significantly under-market damages have had--I 
have had people come back to me and say, You know what? Just 
sue us, because at the end of the day, you know, maybe 5, 6 
years out, we may lose the case, but you are not going to get 
an injunction, so we are going to continue to infringe. And we 
will owe you something less, if not--you know, equal to or less 
than what you are asking for now.
    Chairman Leahy. Ms. Biberstein, you say also oppose, am I 
correct, granting substantive rulemaking authority to the PTO?
    Ms. Biberstein. Correct.
    Chairman Leahy. And you object to the post-grant provisions 
of the bill because it contains a significant economic harm 
trigger for second window, but you endorse the PTO letter to 
us, which takes issue only with the same language. Do I 
understand you correctly that if we refine the harm test, your 
concerns would be addressed?
    Ms. Biberstein. The second window you are talking about?
    Chairman Leahy. Yes.
    Ms. Biberstein. Yes, the second window is our concern. You 
know, it is not--this is not a normal experience for me to be 
up here with all you people. Normally I sit in my office in 
Central Square, and we worry about just keeping the company 
going from 1 day to the other, and--
    Chairman Leahy. But that is not where you are today.
    Ms. Biberstein. That is not where I am today.
    Chairman Leahy. So I wonder if you could back to the 
question.
    Ms. Biberstein. These issues, the second window, 
apportionment of damages likewise, are issues that, frankly, 
make us feel threatened for our existence. The second window, 
we are not opposed to a post-grant opposition proceeding, one 
that, you know, encourages prior art to come out early on so 
that we have good patents granted on which people can invest 
hundreds of millions of dollars in terms of clinical trial and 
regulatory approvals. The problem for us is we start investing 
that money, and we invest a lot of it, and if you have an open-
ended second grant period, there is a risk that investment 
money will not come in and will not be made available because 
you have got a lower standard of review.
    Chairman Leahy. Your industry is unique in this regard?
    Ms. Biberstein. I do not know if my industry is unique in 
this regard. I believe that there are a lot of people who have 
to invest in ideas for a long time, and I believe that we all 
want high-quality patents as soon as we can get them. So 
waiting, encouraging people to wait until later on to bring 
information that may improve the quality of a patent is, 
frankly, I think, not what we are trying to do here.
    Chairman Leahy. Thank you.
    Senator Hatch?
    Senator Hatch. Well, thank you, Mr. Chairman.
    Ms. Doyle, your comments about the post-grant review 
procedures were interesting. Would you explain, if you will, 
how the post-grant review process can lead to reduced 
litigation costs? And do you think the proposed ``second 
window,'' as currently written, you know, is adequate to 
accomplish this?
    Ms. Doyle. Senator Hatch, Palm is a small company. About 
180,000 patents are issued every year. It would be very 
difficult for us to review every one of those that may 
implicate our industry or to anticipate that one that says the 
word ``card'' in it might ultimately be attached to us. So, in 
our view, a second window is very important because we would 
not be able to catch every patent that ultimately is stretched 
to apply to us during the initial post-grant proceeding.
    I believe it will reduce litigation costs because at least 
historically, if we refer to the European system, it is much 
cheaper to proceed through a very short--what turns out to be a 
very short process there. And it in most cases avoids 
litigation altogether.
    The advantages of kind of getting to the point of a matter, 
to understanding whether a patent is valid or not, has much to 
do with whether or not someone in the position of Palm believes 
it is important to take a license. And as many of us do, we 
respect others' intellectual property as we hope others will 
respect ours.
    Senator Hatch. Let me ask you this: Do you believe that 
providing attorneys' fees and costs to a prevailing party would 
further reduce the costs of litigation and alleviate the 
burdens on the present court system?
    Ms. Doyle. In my view, it would simply increase the cost of 
settling a matter because, as you know, the settlement 
calculus, when you are trying to avoid, for example, a 
frivolous claim, involves the amount of--you know, the 
litigation avoidance. And if I have to add Palm's legal fees 
together with the opposing party's legal fees, I think in most 
cases I will be faced with a situation where the cost of 
settlement will go up.
    Senator Hatch. OK. Ms. Biberstein, I share your concern 
about reform of the inequitable conduct doctrine. You mentioned 
in your testimony the regulation of applicant conduct should be 
committed to the expert agency, and that is USPTO. Now, could 
you please elaborate on what sort of agency actions, you know, 
you envision would remedy the current problem of ineffective or 
incomplete communications between patent applicants and patent 
examiners?
    Ms. Biberstein. Inequitable conduct, although it is alleged 
a lot today, is rarely found. The Patent Office has means today 
to require, you know, swearing-in or inventors to swear under 
oath regarding inventorship, to make these statements. They all 
exist today. And there are also penalties that exist today for 
people who lie, you know, when they swear an oath before the 
Patent Office.
    So I think that the Patent Office has those tools already, 
and they may have additional ones that I cannot speak to that 
could help encourage, you know, full disclosure. But I do not 
believe that inequitable conduct is an issue in patent 
prosecution today because it is rarely found to exist. It is 
just a huge cost in terms of litigation because it is always 
alleged.
    Senator Hatch. OK. Mr. Squires, I understand the need for 
an interlocutory appeal of Markman rulings,
    especially considering how technical and scientifically 
complex most claim construction analysis can be. Yet, as you 
mention, some argue that this process could result in providing 
litigants, I think if I recall it correctly, ``two bites at the 
apple.''
    Now, I am interested in hearing your ideas on how to 
prevent this from happening.
    Mr. Squires. Thank you, Senator Hatch. The interlocutory 
appeal for a Markman hearing is so important because the 
original principle is laid down in Markman, and that is for 
national uniformity in interpreting patent claims. So you have 
district courts currently that are reversed at a rate of 35 
percent from their Markman decisions in the Federal Circuit, 
and that leads to two trials, typically, because as Ms. Doyle 
testified to, another hearing goes on, the claim construction 
was considered to be wrong when given below and has to be done 
again.
    So the Markman opinion itself stresses the importance not 
only of uniformity but the Federal Circuit's role as having 
exclusive jurisdiction to provide that uniformity. The issue is 
often case dispositive and, therefore, the quicker you can get 
to a true meaning of the claims, which is in dispute, which 
drives the infringement analysis, the better chance you have 
overall in the long run of reducing the volume of cases and 
having them resolve either on summary judgment motion or 
settlement of the parties.
    Senator Hatch. Well, thank you.
    Mr. Chairman, I know my time is up and I have to leave, but 
could I ask one more question?
    Senator Cardin. [Presiding.] The Senator may proceed.
    Senator Hatch. Mr. Bernstein, I want to thank you for your 
testimony. Your comments on the post-grant review process 
provided me some additional insights on the concerns about the 
second window. Now, you stated that the second window could be 
triggered by virtually any challenger at any time. It seems to 
me the parties seeking to have a cancellation petition granted 
have certain hurdles to overcome, such as establishing 
significant economic harm. In other words, it is not a slam-
dunk that every petition filed will be granted.
    Now, why do you believe that the proposed criteria are 
inadequate, especially one cannot simply initiate a second 
window review as a matter of right?
    Mr. Bernstein. I believe the other was the threat of being 
sued.
    Senator Hatch. Right.
    Mr. Bernstein. You know, my view is that is not even a 
hurdle in terms of the threat of being sued, I mean, simply 
putting someone on notice. Ms. Doyle suggested that there are 
situations where patent holders will simply say, ``Here is an 
invitation to license,'' without even specifying why they are 
infringing. I think that kind of threshold would promote 
companies to continue to do that because once you have laid out 
your infringement case, you would have this threat.
    So from my perspective, those hurdles are de minimis, would 
be easily met in almost all situations, and I am talking from a 
purely practical standpoint because, again, I live the 
licensing business day in and day out. And at some point in 
time, you do put someone on full notice and you show claim 
charts on why they infringe. So I could see that, at least that 
hurdle being met each time.
    Our view is on post-grant opposition, you know, we are not 
opposed to a cheaper way of getting bad patents out of the 
system or a cheaper way of having patents reexamined. What we 
want to make sure is that, in fact, is a less expensive way and 
it does not end up costing as much as litigation. I mean, 
people have talked about the opposition process in Europe being 
cheaper. It is not. We have spent half a million dollars on 
opposition proceedings, and they have taken 5, 6-plus years. 
And that does not do people any good, patent holders any good.
    So we are looking for a quick method and a method that is 
fair to both parties.
    Senator Hatch. Well, thank you very much.
    Thanks, Mr. Chairman.
    Senator Cardin. Senator Coburn?
    Senator Coburn. Thank you.
    In last year's bill, we had a ``loses pay'' provision. What 
are each of your comments on whether or not that would slow 
down some of the overly aggressive both claims for licensing 
and also the ability to defend your patents? Any comments?
    Ms. Doyle. Senator Coburn, I shared my comments with 
Senator Hatch, which I believe is to the effect that ``loser 
pays'' will end up just increasing the average value of 
settlements.
    Senator Coburn. Why is that?
    Ms. Doyle. Because when you decide whether or not to settle 
a case, the standard settlement calculus is you add how much 
your defense costs will be and how much you believe you would 
likely pay if the worst happened, and then you discount it by 
the likelihood of a negative result--or positive result in that 
case--to decide how much you are going to pay. And if you add 
another certainty or another element of damages effectively, 
you just increase the calculus by the amount of the other 
side's fees.
    Senator Coburn. So you think there is no inhibitory effect 
for people making claims that are not valid if they have to--
and you can prove the fact that you have a valid patent and 
they are going to pay your costs for litigation, you think 
there is no inhibition in that at all?
    Ms. Doyle. I would not say, Senator, that I think there is 
no inhibition at all. I know there are differing views on the 
subject. But in my view, from my daily life, as a defendant 
typically, it will simply increase the cost of--
    Senator Coburn. So when you pick up that Palm, that Treo 
there, that has supposedly a card, which you have defended 
twice, and then that gets known that all those--the $3.5 
million costs go against the individual, you do not think that 
will have an inhibitory effect in the future on people coming 
to challenge your patent?
    Ms. Doyle. In this case, I think it may have because the 
person involved was a relatively small holder. But most of the 
holders who are asserting are very capable and they just--
    Senator Coburn. Law firms.
    Ms. Doyle. Well, they are either taking it on contingency, 
in which case there isn't anybody's cost, at least as far as 
the plaintiff is concerned, No. 1. And, No. 2, licensing 
practices are often very big. The best known licensing groups 
are companies that hold tens of thousands of patents and will 
simply include the cost of, you know, their attorney fees in 
their general business model.
    Senator Coburn. Mr. Bernstein, what are your comments on 
that?
    Mr. Bernstein. I strongly disagree, respectfully disagree 
with Ms. Doyle. But, you know, the companies, for example, the 
small patent holder you are talking about, I mean, somebody 
pays to sue Palm. It is not free, and it may not be the 
inventor. It may be the law firm doing it on full contingency. 
But it is coming out of, you know, some partners' pockets. It 
may be an investor group, a VC, an investment banker, or some 
wealthy individual that is funding it.
    So it is coming out of somebody's pocket. As far as I know, 
most of the people I deal with do not like to throw money out 
the window. And if there is a serious concern about your case, 
I cannot believe that prudent investors--and I think most of 
these people, including contingency firms, are prudent 
investors--are not going to want to throw their money away on a 
bad case. And it is not insignificant in terms of attorneys' 
fees. If you are telling me--
    Senator Coburn. So it would eliminate some of this bad 
acting.
    Mr. Bernstein. I think so. It sets a higher threshold for--
rather than the Rule 11 legal threshold, it sets a financial 
threshold, which, frankly, hits people I think a lot harder 
than the legal--
    Senator Coburn. Ms. Biberstein, any thoughts on that?
    Ms. Biberstein. I would agree with Mr. Bernstein. To the 
extent that these are people making economic decisions or 
economic investments in patents versus R&D investments, then 
they have to be making decisions on an economic basis, versus 
someone who is making on R&D investment in a patent might view 
it differently, so yes.
    Senator Coburn. OK. Mr. Squires?
    Mr. Squires. I would agree with that. I think it would tend 
to reduce the speculative litigation, since there would be a 
new calculus into the equation, and I think it would have an 
effect somewhat like the eBay decision where you allow courts 
to do equity and took the automatic injunction away so that 
when money--monetary damage can compensate for the harm, that 
can be the reason not to get an injunction. The effect that had 
was really sort of reduce the thwack factor, the dollars 
attached to the thwack factor, similarly for a good calculus.
    Senator Coburn. Thank you. And then for both Ms. Biberstein 
and Mr. Bernstein, if we had the apportionment rules contained 
in 1145 in effect when your companies started, just what is 
your opinion you think that would have had on the progress and 
success of your individual companies?
    Mr. Bernstein. To some extent, you know, Goldman Sachs is 
actually one of our larger institutional investors. I could ask 
Mr. Squires that question. But, you know, that is actually a 
very good question. From our perspective, it would potentially 
change the entire economics of our business. You know, we rely 
almost entirely on our licensing revenues in terms of income. 
We do not have products, actual widgets that we sell to fall 
back upon. And, frankly, you know, we have got over 300 or 
close to 300 engineers innovating day in and day out. We need 
to see--or the market and our investors, like Goldman Sachs, 
needs to see an appropriate investment. And with the current 
language, that investment would artificially drop, we believe, 
below market rates.
    Senator Coburn. Therefore, there would not have been this 
extension and this growth and then the multiplicity of 
continued innovation?
    Mr. Bernstein. I think it would put a serious question to 
that, and, frankly, I am personally more concerned about, you 
know, the InterDigitals that have not even been started yet for 
the health of, you know, the American economy.
    Ms. Biberstein. I am actually still concerned about the 
health of my company, because this is the device we are working 
on developing right now, this is an inhaled insulin device. And 
part of the path leading me here today was when I read this 
draft legislation, and I said, Oh, this is not a codification 
of a provision of Georgia Pacific. This is a brand-new 
provision. It is prior art subtraction.
    I went to my CEO and I said, Well, look, insulin exists and 
a hand-held inhaler exists, but, you know, what does that mean 
for us in getting the investment necessary to bring the ability 
to inhale insulin, replacing multiple daily injections to the 
market? I do not think there is anyone here who does not think 
that is a good thing for society.
    I mean, I have on of these, too, but if I had to pick I 
personally I pick this. And so, you know, I continue to worry 
today about what this apportionment language will do to my 
company.
    Senator Coburn. OK. Let me just followup with kind of a 
statement and then get a reaction from you, and I will finish, 
Mr. Chairman.
    This is a big fight about winners and losers. You know, we 
are not children here. We know there are high stakes here. The 
question is: How do we strike the balance that protects 
intellectual property in the right amount and does not dumb 
down our ability to create innovation because we have protected 
it in a balanced way? How do we strike that balance? I have 
some trouble with this bill. You can obviously tell by the 
questions I am asking because I do not think we have struck 
that balance. I would like your comments, very honest and open 
comments. We have got to find that balance for the best of our 
country and to appease, try to appease everybody so that 
everybody has a square shot. Where is that? How do we do that? 
Any comments?
    Ms. Doyle. Senator Coburn, I would love to address that and 
in doing so try and address some of the concerns and fears that 
have been--
    Senator Cardin. Can I interrupt you just for one moment? I 
know that Mr. Bernstein needed to leave. If you want to make a 
comment first, we will give you that opportunity.
    Mr. Bernstein. Yes, sure. Thank you.
    First of all, you know, we sympathize, Ms. Doyle and Mr. 
Squires, we sympathize with your position. You know, we 
acknowledge at InterDigital that there are abusers of the 
current legal system. I mean, there are abusers of every 
system, you know, in this country and outside this country. But 
the current provisions of this bill are severely going to 
impact legitimate research, development, and innovative 
businesses in the United States. And, you know, we have had 
some fairly robust decisions coming out of the Supreme Court. I 
do not, frankly, think it has been long enough to really tell 
the outcome and how it is going to affect various industries. 
And I would just caution Congress and others about having 
sweeping reforms at this point in time, and not just--maybe 
doing it piecemeal and stepping back at some point in time.
    Senator Coburn. Ms. Doyle?
    Ms. Doyle. Thank you, Senator. I would like to also 
indicate that we sympathize and empathize with others in 
business in this country and have no intention of undercutting 
the efficacy of drugs or the likelihood that they will come to 
market or anything of the sort. However, every day we receive 
what are called patent assertions over the threshold, and the 
first thing that the people that we talk to, the asserters we 
talk to, ask for is a percentage of this entire device, which 
is priced at between $400 and $500 to our end-user customer, 
the carrier customer.
    The most expensive piece of componentry in this device 
other than the licensing is $30, and I believe the market, the 
free market, determines the value of that component and what it 
delivers to this device. And it is my belief that if a patent 
reads on that component, then the reasonable royalty should be 
charged against that component, say $30, and that all of the 
factors in Georgia Pacific could be used to sort out exactly 
what percentage of that $30 is due to the inventor that did 
something innovative about, say, the screen. But it is the 
screen that one has to look to, not the entire device. That 
would avoid situations like, in our case, someone with a chip 
patent coming to us indicating that they will not speak to our 
supplier on the subject, even though we have an indemnity 
relationship with our supplier. They will speak only to us, and 
there is only one reason: because they are looking for a 
percentage against this, the entire device.
    So I have to say that there are abuses. They are severe. 
They happen all the time.
    Senator Coburn. There is a balance, though, we have to--
    Ms. Doyle. And there is a balance that needs to be struck.
    Senator Coburn. Mr. Squires?
    Mr. Squires. Thank you, Senator. I would submit that mature 
industries with patents have procedural tools that exist that 
are just not available for industries that are new to patents, 
such as technology, software, financial services, and some of 
the new drivers of the economy. Therefore, I think Congress can 
strike that balance by some of the procedures in the bill. 
Particularly right now there is an ``open forever'' window, if 
you will. It is called ``reexamination.'' But to thread the eye 
of the needle on reexamination, you have to have a printed 
publication or an issued patent. That kind of prior art does 
not exist in the other industries to any great extent. 
Therefore, an opposition window and having a second window 
which is triggered on notice would be a meaningful way to get 
prior art into the system and also engage the expert agency who 
can decide that matter.
    As far as apportionment of damages goes, the Patent Office 
makes determinations as to where the scope of rights should be 
granted based upon the prior art, and what is obvious, in its 
determinations. There is no reason that the same cannot be done 
in terms of the economic commercial value of that. And the 
courts should engage, and they can start to hear and fulfill 
their Daubert principles, economic theories to help get at 
that. In fact, I just saw in the Wall Street Journal the other 
day that there is an exchange-traded fund that aggregates 
patents and lets an investor have exposure to that based upon 
valuations.
    And, finally, because issues of claim construction are the 
most important and most confusing often in the lower court and 
there is de novo review, interlocutory appeal might be the 
right calibration to get those issues decided early and 
resolved.
    Senator Coburn. Thank you.
    Ms. Biberstein?
    Ms. Biberstein. I do not personally believe this is--
sometimes this is described as a battle between, you know, the 
drug companies and the IT companies. I do not believe that is 
true at all. I think we all have a common goal, and that is to 
improve the quality of patents, to discourage bad patents from 
being asserted, to put processes in place to make this system 
hum, to make it work really well for everybody. I think a lot 
of the things we have talked about and agree about will do 
that. I think that, you know, repealing inequitable conduct to 
encourage prior art coming in early, post-grant opposition 
process early on, it may not get everyone everything they want, 
but we are combining these factors, we are building here. And 
so by building, we are creating, you know, a better system, and 
we cannot always, you know, get everything that will address 
our immediate concern. But if we put things like, you know, pay 
if you lose in place, then, again, all these factors are going 
to be additive and help us without discouraging innovation, 
across the industries. I mean, Palm benefits from the smaller 
companies innovating as well as the rest of us do. So I think 
we are there, I do, While safe-guarding these key issues on 
which there is not consensus.
    Senator Coburn. You know, there is a theory in medicine: 
First, do no harm.
    Thank you all.
    Senator Cardin. Let me thank the witnesses. Last year, I 
was looking at the patent issues from a little bit different 
perspective. I was on the Ways and Means Committee in the House 
and the ranking Democrat on Trade, and I remember trying to 
talk to some of our trading partners and some of our countries 
in which we were disappointed with their enforcement of patent 
laws and heard rather consistently about the differences that 
the U.S. patent laws internationally with other countries.
    So I would just like to get your perspective, if you have 
one, as to how important it is for us to look at what is 
happening internationally in the patent laws. Our patent laws 
are not consistent with a lot of other countries, and whether 
that is an important factor that this Committee should be 
considering in trying to bring some degree of uniformity as to 
patent laws, particularly with our major trading partners.
    Ms. Doyle. Senator Cardin, I am not an expert in this area, 
but in the first paragraph of my remarks this morning, I did 
indicate that I believe that we are currently at a competitive 
disadvantage to our competitors elsewhere in the world because 
our system imposes effectively a larger tax on doing business 
than others do. So, for example, in China, while it is now 
possible to get patents, it is not possible to enforce them. So 
if a Chinese company, for example, has U.S. patents, which they 
can enforce here, they have an advantage over a U.S. company 
that may have Chinese patents but cannot enforce them abroad. 
That is probably the one example that I am most familiar with 
that causes us quite a bit of concern.
    Senator Cardin. Of course, that does not really deal with 
the uniformity of the laws, more so than the enforcement, 
effective enforcement in China, which is certainly -I have 
heard lots of complaints about that. It joins the list of 
concerns we have about China as far as enforcing trading 
provisions.
    Ms. Doyle. Right. I think uniformity of laws in general is 
probably a good goal. But without knowing more than I do about 
international patent regulation, I do not think I am in a 
position to--
    Senator Cardin. I have heard Goldman Sachs does do a little 
bit of international business here, so maybe I can get a view 
from--
    Mr. Squires. On occasion, Senator, yes. There is much, much 
good in existing patent laws that promote innovation and 
economic expansion in every area of the U.S. economy, and the 
provisions in the bill we think can make it better. One area 
that is clearly different than European systems and U.S. 
systems is U.S.-style litigation. A lot of that is as a result 
that is speculative. People have procedures that they come in 
armed with, including presumption of validity, which is 
warranted, but in cases where there are developing industries 
or lack of prior art that gets applied in the Patent Office, 
questionable as to whether they are overarmed coming into 
litigation.
    But at the end of the day, U.S.-style litigation drains 
resources from really where they should be going, and that is 
back into R&D work that is being done that then could be 
patented. So it is a way that if there is appropriate 
calibrations put on it--and I think the bill contains those--
litigation costs can be more manageable, risks can be 
identified, and those dollars can go back into innovation where 
they belong and patents on innovation that help American 
competitiveness.
    One other difference I would point out is that the 
European--where I think our system is clearly better and should 
continue on that track is Europe requires a technical effect of 
some nondescript manner in order to confer jurisdiction on 
patentability. It has turned into a ``they know it when they 
see it'' type of regime. Here the doors to the Patent Office 
are much more wide open, taking innovations in all stripes and 
awarding patents on any process--new and useful--any method, 
system of manufacture, machine, or composition of matter, and 
that I think has fueled U.S. economic growth. And I have seen 
articles where people worry about Europe's competitiveness 
versus the U.S. because of these type of strictures.
    Senator Cardin. Is there a particular country that has a 
model on enforcement and law that we should be looking at?
    Mr. Squires. I think our model is fine. I think there is 
just some fine-tuning that needs to happen. For example, engage 
the patent agency, who is expert at making claim determinations 
based upon prior art, in a process where it can be available to 
more people, such as opposition. Right now it is all or nothing 
in court. A patent is granted. You have a presumption of 
validity. It either falls or is enforced.
    In an opposition practice, and including reexamination 
practice, there is a third way, and that is that the claims can 
survive, they can be gerrymandered around prior art, and the 
patents still issue but in a scope that is more reasonable to 
what has been out there in the prior art.
    So that type of calibration I think can go a long way and 
provide better patents at the end of the day, which the public 
gets a right to after the expiration, and they have a clear 
definition of what that is.
    Senator Cardin. Thank you.
    Ms. Biberstein. I might just add that I started my career 
in patents in Europe, so I learned inventive step before I 
learned non-obvious. And this was in the early 1990's, and what 
I can remark on perhaps is what I think has been remarkable 
progress of cooperation between the United States and other 
countries in Europe and around the world in the patent area 
that really did not exist a decade and a half ago.
    So I think that we have seen remarkable progress and will 
probably continue to see more. I think changing to a first-to-
file standard in the United States will also be helpful in that 
respect.
    Senator Cardin. Thank you. Well, once again, let me thank 
all of you for your appearance here today. This is a subject 
that, of course, this Committee has had under consideration for 
many years. It is one in which I am sure we are going to be 
receiving a lot more attention during this Congress, and 
today's hearing certainly enhanced our ability to deal with 
this very important subject for this country.
    The hearing will stand adjourned.
    [Whereupon, at 11:55 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                                 
