    [Senate Hearing 111-202]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-202

       PATENT REFORM IN THE 111TH CONGRESS: LEGISLATION AND RECENT COURT
                                   DECISIONS

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

                                    HEARING

                                   before the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   ----------

                            TUESDAY, MARCH 10, 2009

                                   ----------

                               Serial No. J-111-9

                                   ----------

             Printed for the use of the Committee on the Judiciary

                                                            S. Hrg. 111-202

       PATENT REFORM IN THE 111TH CONGRESS: LEGISLATION AND RECENT COURT
                                   DECISIONS

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

                                    HEARING

                                   before the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                            TUESDAY, MARCH 10, 2009

                                   __________

                               Serial No. J-111-9

                                   __________

             Printed for the use of the Committee on the Judiciary

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                           COMMITTEE ON THE JUDICIARY

                      PATRICK J. LEAHY, Vermont, Chairman
    HERB KOHL, Wisconsin                 ARLEN SPECTER, Pennsylvania
    DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
    RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
    CHARLES E. SCHUMER, New York         JON KYL, Arizona
    RICHARD J. DURBIN, Illinois          JEFF SESSIONS, Alabama
    BENJAMIN L. CARDIN, Maryland         LINDSEY O. GRAHAM, South Carolina
    SHELDON WHITEHOUSE, Rhode Island     JOHN CORNYN, Texas
    RON WYDEN, Oregon                    TOM COBURN, Oklahoma
    AMY KLOBUCHAR, Minnesota
    EDWARD E. KAUFMAN, Delaware
                Bruce A. Cohen, Chief Counsel and Staff Director
                  Nicholas A. Rossi, Republican Chief Counsel

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Coburn, Hon. Tom, a U.S. Senator from the State of Oklahoma,
      prepared statement.............................................   145
    Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     3
    Leahy, Hon. Patrick, a U.S. Senator from the State of Vermont....     1
        prepared statement...........................................   208
    Specter, Hon. Arlen, a U.S. Senator from the State of
      Pennsylvania...................................................     2

                                   WITNESSES

    Appleton, Steven R., Chairman and CEO, Micron Technology, Inc.,
      Boise Idaho....................................................     4
    Johnson, Philip S., Chief Intellectual Property Counsel, Johnson
      & Johnson, New Brunswick, New Jersey...........................     5
    Kappos, David J., vice President and Assistant General Counsel,
      Intellectual Property Law and Strategy, International Business
      Machines Corporation, Armonk, New York.........................     7
    Lemley, Mark A., William H. Neukom Professor of Law, Stanford Law
      School, Stanford, California...................................    13
    Maghame, Taraneh, vice President, Tessera, Inc., San Jose,
      California.....................................................     9
    Wamsley, Herbert C., Executive Director, Intellectual Property
      Owners Association, Washington, D.C............................    11

                             QUESTIONS AND ANSWERS

    Responses of Stenen R. Appleton to questions submitted by
      Senators Feinstein, Hatch and Coburn...........................    34
    Responses of Philip S. Johnson to questions submitted by Senators
      Feinstein, Hatch and Coburn....................................    41
    Responses of David J. Kappos to questions submitted by Senators
      Feinstein, Coburn and Hatch....................................    53
    Responses of Mark A. Lemley to questions submitted by Senators
      Feinstein, Hatch and Coburn....................................    60
    Responses of Taraneh Maghame to questions submitted by Senators
      Feinstein, Hatch and Coburn....................................    65
    Responses of Herbert C. Wamsley to questions submitted by
      Senators Feinstein, Hatch and Coburn...........................    79

                           SUBMISSIONS FOR THE RECORD

    AARP, Consumer Federation of America, Consumers Union, Public
      Interest Research Group, Washington, D.C., letter..............    85
    Aetna Inc., Apotex Corporation, Generic Pharmaceutical
      Association Hospira Inc., Hospira Inc., Myland Pharmaceuticals,
      National Association of Chain Drug Stores, Teva
      Pharmaceuticals, Watson Pharmaceuticals, joint letter..........    86
    America's Specialty Medicines Companies, W. Stephen Cannon,
      Attorney at Law, Constantine Cannon, Washington, D.C., letter..    87
    Appleton, Steven R., Chairman and CEO, Micron Technology, Inc.,
      Boise Idaho, statement.........................................    89
    Biotechnology Industry Organization, Washington, D.C., statement.    98
    Blaxill, Mark and Ralph Eckardt, The Innovation Imperative,
      report.........................................................   113
    Computing Technology Industry Association (CompTIA), Oakbrook
      Terrace, Illinois, statement...................................   147
    Jaeger, Kathleen D., President & Chief Executive Officer, Generic
      Pharmaceutical Association, Arlington, Virginia, statement.....   151
    Johnson, Philip S., Chief Intellectual Property Counsel, Johnson
      & Johnson, New Brunswick, New Jersey, statement and letter.....   154
    Kappos, David J., vice President and Assistant General Counsel,
      Intellectual Property Law and Strategy, International Business
      Machines Corporation, Armonk, New York, statement..............   156
    Kaufman, Hon. Ted, A U.S. Senator from the State of Delaware,
      statement......................................................   204
    Lemley, Mark A., William H. Neukom Professor of Law, Stanford Law
      School, Stanford, California, statement........................   210
    Maghame, Taraneh, vice President, Tessera, Inc., San Jose,
      California, statement's........................................   240
    National Association of Realtors, Washington, D.C., statement....   263
    Nelsen, Robert T., Co-founder and Managing Director, ARCH Venture
      Partners, Chicago, Illinois, statement.........................   264
    Swierenga, Karl, Vice President, FotoTime, Inc., Dallas, Texas,
      statement......................................................   267
    Patent and Trademark Office, Public Advisory Committee,
      Department of Commerce, report.................................   269
    Wamsley, Herbert C., Executive Director, Intellectual Property
      Owners Association, Washington, D.C., statement................   322
    Wisconsin Alumni Research Foundation (WARF), Carl Gulbrandsen,
      Managing Director, Madison, Wisconsin, letter and attachments..   339

       PATENT REFORM IN THE 111TH CONGRESS: LEGISLATION AND RECENT COURT
                                   DECISIONS

                                  ----------

                            TUESDAY, MARCH 10, 2009

                                           U.S. Senate,
                                    Committee on the Judiciary,
                                                       Washington, D.C.
        The Committee met, pursuant to notice, at 10:05 a.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
    Leahy, Chairman of the Committee, presiding.
        Present: Senators Leahy, Feinstein, Cardin, Whitehouse,
    Klobuchar, Kaufman, Specter, Hatch, Kyl, and Coburn.

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

        Chairman Leahy. Good morning. I am glad we are having this
    hearing because, as we all know, intellectual property is
    critical to our Nation's economy. It drives our contemporary
    economy. It is certainly going to fuel the future. Industries
    that rely on intellectual property protection accounted for
    roughly half of all U.S. exports and represented an estimated
    40 percent of U.S. economic growth in 2006. That was the last
    year in which our economy grew in all four quarters. Many of
    the jobs and expansion that can help us begin to recover from
    this economic recession are going to have their origin in the
    patent- and copyright-based industries. These range from
    computers and software programs, to new agriculture products,
    to our movies and our music.
        My own State is a significant exporter, and the majority of
    that is in intellectual property areas. Even without that, I
    would still be an ardent supporter of strong protection and
    enforcement of intellectual property rights. Last year, I led
    the bipartisan effort to pass the Prioritizing Resources and
    Organization for Intellectual Property Act to enforce laws
    against stealing America's intellectual property. The Chamber
    of Commerce estimates that IP theft costs American companies
    $250 billion a year; it also costs our economy 750,000 jobs.
        Several of us on this Committee are former prosecutors, and
    like my fellow former prosecutors, I know firsthand how
    important it is to have a full arsenal of legal tools to ensure
    that justice is done. In Vermont, Hubbardton Forge makes
    beautiful, trademarked lamps, sold all over the world. The
    Vermont Teddy Bear Company, like IBM, also relies heavily on
    intellectual property. SB Electronics needs patents for its
    film capacitor products. Burton's snowboards and logo are
    protected by trademarks and patents. Every State in the Nation
    has such companies, and every community in the United States is
    home to creative, inventive, and productive people. All
    Americans suffer when their intellectual property is stolen;
    they suffer when counterfeit goods displace sales of their
    legitimate products, and they suffer when counterfeit products
    actually harm them, as sometimes happens with fake
    pharmaceuticals or faulty electrical products. We saw it even
    with counterfeit brake pads on cars.
        We worked together with 21 Senate cosponsors, Republicans
    and Democrats, our House counterparts. We moved that bill from
    introduction in July to the President's desk in October. It was
    probably about the fastest moving bill in the Congress last
    year.
        This year, we are working to make additional progress by
    modernizing the United States patent system. Last week, I
    joined with Senator Hatch and, in the House, Chairman Conyers
    and Mr. Smith to reintroduce the bipartisan, bicameral Patent
    Reform Act of 2009, S. 515. This Committee was able to report
    patent reform legislation in the last Congress, and the House
    passed a companion bill. I think this year we need to enact it
    to help our economy.
        It has been over 50 years since significant reforms were
    made to the Nation's patent system, and today's hearing is the
    eighth this Committee has held on patent reform since 2005. But
    we have seen a number of positive movements. Recent decisions
    by the United States Supreme Court and the Federal Circuit have
    moved the law in the direction of our legislation and reflect
    the growing sense that questionable patents are too easily
    obtained and are too difficult to challenge. Senator Specter
    has made constructive suggestions about a ``gatekeeping'' role
    for the court in damage calculations. There is much work to be
    done, but I am optimistic that if we continue to work together,
    we will find the right language. We may be closer to reaching
    consensus on language than ever before.
        The Patent Reform Act of 2009 promotes innovation and will
    improve our economy. We will work with the administration to
    help pull the economy out of the recession. But while you do
    that, it means that we in Congress have to do what we can.
    Certainly in the area of intellectual property, anything we can
    do of a positive nature helps.
        Senator Specter.

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

        Senator Specter. Thank you, Mr. Chairman, and I join you in
    welcoming this distinguished array of witnesses to help us shed
    some light on this very important subject.
        I congratulate Chairman Leahy and former Chairman Hatch on
    their leadership on this very important subject. The Chairman
    correctly notes the tremendous importance of intellectual
    property, innovation, a very important item on our balance of
    trade and on the productivity in the United States. And I do
    agree that it would be highly desirable to legislate in this
    field and to modernize the patent laws.
        We worked at it very hard last year and could not come to a
    conclusion essentially on the question of damages. There has
    been an ongoing controversy, really summarized with the high-
    tech and entertainment industry arguing that the entire market
    value methodology is undesirable. There ought to be
    apportionment of damages, and traditional manufacturing and
    pharmaceuticals are in the other direction.
        We have a case that is now pending, as you all know, in the
    Court of Appeals for the Federal Circuit captioned Alcatel-
    Lucent v. Gateway, which is going to take up the scope of
    entire market value. We have been struggling with that
    difference of view, and it is of critical importance that
    whatever we do legislatively, we get it right. And if it takes
    a little more time, we are going to have to spend the time.
        Chairman Leahy and Senator Hatch and I spent a lot of time
    in his hideaway last year going over these matters, trying to
    find the magic words. And we did not find them. And in the
    absence of finding them, the conclusion was that we did not
    move ahead.
        If we make a mistake and create litigation for a protracted
    period of time, that is obviously undesirable. No one wants
    that to happen. So we are struggling with it, and we look to
    this panel, you six witnesses, to give us some special insights
    to show us which way to go.
        Thank you, Mr. Chairman.
        Chairman Leahy. Thank you very much.
        Our first witness--unless, Orrin, you want to say anything.
    Go ahead.

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

        Senator Hatch. Well, thank you, Mr. Chairman and former
    Chairman Specter. I appreciate both of you, and I appreciate
    the leadership you have provided on this bill.
        You know, we have been working on patent reform now for
    three Congresses, and this is the Committee's seventh hearing
    on patent reform. And I believe Senator Leahy and Senator
    Specter have covered the materials. I will not take any more
    time.
        I just am personally appreciative because I think we really
    do need to reform the patent laws, and we want to get it right,
    no question about it. And there are many, many different points
    of view on this. But I just want to tell you how much I have
    appreciated working with both of you on this, and others as
    well on the Committee.
        Thanks, Mr. Chairman.
        Chairman Leahy. Well, I think that work demonstrates it is
    not a Republican or Democratic bill. We are going to have to do
    something. We cannot be in the 21st century with a 50-year-old
    system, and we will bring it up-to-date.
        Steve Appleton is the Chairman and CEO of Micron
    Technology. He joined Micro in 1983 and became Chairman and CEO
    in 1994. In addition to his work with Micron, Mr. Appleton
    serves on the Board of Directors for the Semiconductor Industry
    Association and National Semiconductor, Inc. He received his
    Bachelor's degree as well as an honorary doctorate from Boise
    State University.
        Mr. Appleton, good to see you again. Thank you for being
    here. Go ahead.

       STATEMENT OF STEVEN R. APPLETON, CHAIRMAN AND CEO, MICRON
                     TECHNOLOGY, INC., BOISE, IDAHO

        Mr. Appleton. Chairman Leahy, Ranking Member Specter, and
    members of the Committee, thank you for allowing me to testify
    today, and thank you, Senator Hatch, for the special invitation
    to appear.
        I am here today on behalf of Micron Technology and also on
    behalf of the Coalition for Patent Fairness. The coalition
    includes a broad range of companies and trade associations in
    various industries. Before I say anything else, I want to
    emphasize the need for patent reform is urgent, and we strongly
    support Senate bill 515.
        Let me begin by telling you a little bit about Micron. From
    a three-person startup in 1978, Micron has become one of the
    world's largest and most innovative providers of advanced
    semiconductor memory solutions. We are a global company with
    headquarters in Boise, Idaho. In the U.S., we have large
    manufacturing facilities in Utah, Virginia, and Idaho, and
    design centers and sales offices throughout the country.
    Although there were at one time 11 major U.S. memory
    manufacturers, today Micron is the sole remaining company.
        Micron produces leading-edge memory chips, including D-RAM
    and NAM memory, as well as imaging chips that are used in
    almost every digital device in the world. In more recognizable
    terms, these products range from the jump drive to the memory
    card in your digital still camera, to the main memory in your
    computer, to the actual camera in your cell phone.
        As one of the most innovative companies in the world,
    Micron is a significant stakeholder in the patent system.
    Micron holds over 18,000 U.S. patents, and independent studies
    have ranked our portfolio as one of the strongest. In fact, to
    give you a sense of our creative talent, of the top ten patent
    holders throughout the world that are still living--throughout
    the world that are still living--three of those inventors work
    at Micron.
        So to emphasize again, Micron is clearly in support of a
    strong patent system. But, unfortunately, the current patent
    system is now becoming a hindrance to innovation. Micron and
    other technology companies, regardless of size, are the victims
    of a growing wave of patent litigation. The reality is that the
    laws relating to patent enforcement have not kept up with the
    highly complex advances in technology that have emerged in the
    last couple of decades. Congress could not possibly have
    envisioned today's high-tech products and systems when they
    last revised the Patent Act in the 1950s.
        Technology products can be very complex. I am holding up a
    one-gigabit memory chip that you can hardly probably see. It is
    about the size of my fingernail. On this chip we can store over
    1 billion bits of information. There are thousands of patents
    that relate to this one memory device.
        Now, let's use the BlackBerry or another smartphone, as
    another example. The BlackBerry has a memory chip similar to
    the one I showed. It also has a display, keyboard, software, a
    camera, and other significant chips. Each of these components
    and functions are covered by hundreds or thousands of patents.
        The difficulty is that the current patent litigation system
    too easily allows damages to be assessed on the value of the
    whole product rather than the contribution of the patent. If we
    assume thousands of patents relate to this device, the
    resulting damages under current law would result in an amount
    that would exceed the total amount of revenue derived from the
    product. And to add insult to injury, nearly all of the patent
    claims brought against our technology companies are filed by
    plaintiffs who do not make or sell any of the products they are
    attacking, and in many cases, using patents they purchased from
    some third-party entity. We often refer to those companies as
    ``patent trolls'' or I think what is known as more politically
    correct, ``non-practicing entities.''
        The increase in patent litigation costs are largely a
    result of the proliferation of the non-practicing entity
    business model. Balance needs to be restored by requiring that
    damages are based on the value of the investor's contribution
    to the product. Although there are a number of other concerns
    with the current patent system, in consideration of time
    limitations I want to point out the impact it has on jobs.
        Our ability to innovate is being hindered more each day by
    these patent lawsuits. Last year alone, Micron spent over $30
    million defending against unnecessary patent lawsuits. That
    amount could have been spent instead on nearly 450 well-paying
    jobs at our company. A study being released today by
    distinguished economist Everett Ehrlich shows that in the
    technology sector alone, 100,000 jobs would be created over 5
    years if Congress fixes the damages standard. If we do nothing,
    he concludes that our economy could lose as many as 150,000
    jobs over the same period.
        The fact is our outdated patent system is slowing
    development of new products and services and the new jobs they
    would create. The longer we wait to address these widely
    acknowledged problems, the more we will drain the innovation
    potential of industry and deprive our economy of the resulting
    job creation and growth. It is time for Congress to pass the
    Patent Reform Act of 2009.
        Thank you.
        [The prepared statement of Mr. Appleton appears as a
    submission for the record.]
        Chairman Leahy. Thank you very much.
        Our next witness is Philip Johnson. He is the Chief
    Intellectual Property Counsel for Johnson & Johnson. He advises
    top company management on patent matters related to its 200-
    plus operating companies worldwide. Is that correct, 200?
        Prior to joining Johnson & Johnson in 2000, Mr. Johnson
    spent 27 years in private law practice, and he has testified
    both before the House and Senate Judiciary Committees on this
    issue. He received his Bachelor's from Bucknell and his law
    degree from Harvard.
        Mr. Johnson, go ahead, please.

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

        Mr. Johnson. Thank you, Chairman Leahy, Ranking Member
    Specter, and distinguished members of the Committee. I am
    appearing here today on behalf of Johnson & Johnson and also
    the 21st Century Coalition for Patent Reform, a coalition of
    nearly 50 companies who are actively competing in 19 different
    industry sectors.
        We agree with the Committee and with you, Mr. Chairman,
    that patent reform is all about jobs. Within Johnson & Johnson,
    we conservatively estimate that the jobs of about 60,000 of our
    118,000 employees depend upon our patents. We estimate that
    over their 20-year lives, each of our patents preserves and
    protects well over 100 job-years.
        During the past 3 years, Johnson & Johnson companies have
    invested an average of $7.5 billion a year in R&D, or $15
    million on average for each patent granted. These R&D
    expenditures resulted in well-paying jobs for thousands of
    people throughout the United States.
        We want to preserve and enhance the patent system's
    incentives to invest heavily in R&D so we can keep these jobs
    and hopefully create many, many more. But to do so in this
    challenging economic environment, we need to make it clear to
    inventors and to investors alike that the promise of the patent
    system will be kept. They need to know it will protect the
    deserving inventions that come out of R&D and that the
    resulting U.S. patents will serve as a solid foundation upon
    which to build future businesses. To accomplish these goals, we
    need to strengthen, not weaken, the value of American patents.
        We can do this by improving the quality of the original
    patent examination so that the patents issued by our Patent
    Office are readily and reliably enforceable against those who
    do not respect them. This should be accomplished by harmonizing
    our patent system with the rest of the world and by giving our
    Patent Office a reliable source of adequate funding to get the
    job done right. S. 515 goes a long way toward accomplishing
    these goals.
        But we should not stop there. A balance should be struck
    between the public's interest in questioning a patent's
    validity and the public's desire to induce continued investment
    in the patented technology. A system that overly favors
    continuing third-party patent challenges destroys the quiet
    title that is needed to stimulate further investment.
        Our coalition believes that S. 515 comes close to striking
    the proper balance. It allows an initial period for post-grant
    opposition, followed by life-of-the-patent re-examinations. But
    contrary to how S. 515 is now written, our coalition believes
    that such re-examinations should be limited, as they are now in
    the current law, to questions based upon prior patents in
    printed publications. Allegations of prior use or sale are ill-
    suited for re-examination as patentees will not have the
    discovery and testimonial tools needed to fairly defend against
    such belatedly raised claims.
        When it comes to patent damages, it makes no sense to base
    reasonable royalty awards on less than all of the patented
    invention and less than the patentee has shown was infringed.
    During the original examination, opposition, re-examination,
    and then the validity and infringement phases of the trial, all
    of the elements of the patent's claims are deemed essential.
    Having thus proven entitlement to protection on the entirety of
    what is claimed, there is no justification for awarding damages
    on anything less.
        Valuation of what the invention contributes, however, is
    quite a different matter. Here the question is what a license
    to use the invention, as the infringer has, was worth. This is
    best addressed, as the law does now, by discerning what a
    willing licensee would have paid for a license and what a
    willing patentee would have accepted at the time just before
    the infringement began. Where the licensor is a non-practicing
    entity with no other competitive interest in the field,
    application of the well-established Georgia Pacific factors
    will normally include consideration of the value of using the
    invention by comparing it to not using the invention, or to
    using its closest non-infringing substitute. Such a business-
    based approach is far preferable to any mechanistic approach,
    especially one that would systemically undervalue reasonable
    royalty damages by subtracting out prior-art elements.
        The 21st Century Coalition appreciates the invitation to
    provide our views and looks forward to working with the
    Committee to improve S. 515 so it will easily and quickly be
    enacted.
        Thank you very much.
        [The prepared statement of Mr. Johnson appears as a
    submission for the record.]
        Chairman Leahy. Thank you.
        Our next witness is David Kappos, who is Vice President and
    Assistant General Counsel for Intellectual Property Law and
    Strategy at the IBM Corporation. Among his many
    responsibilities at IBM, he manages its patent and trademark
    portfolios, is responsible for protecting and licensing IBM's
    intellectual property worldwide. He received his Bachelor's
    degree from the University of California-Davis; his law degree
    from the University of California-Berkeley.
        Please go ahead.

      STATEMENT OF DAVID J. KAPPOS, VICE PRESIDENT AND ASSISTANT
       GENERAL COUNSEL, INTELLECTUAL PROPERTY LAW AND STRATEGY,
     INTERNATIONAL BUSINESS MACHINES CORPORATION, ARMONK, NEW YORK

        Mr. Kappos. Well, good morning, Chairman Leahy, Ranking
    Member Specter, and members of the Judiciary Committee. My name
    is Dave Kappos. I am IBM's chief intellectual property lawyer.
    I am grateful for the opportunity to testify before this
    Committee in support of patent reform.
        Patent reform is urgently needed. It is achievable, and
    failure to act will harm our Nation's economy at a time we can
    ill afford it.
        IBM invests more than $6 billion a year in research and
    development and generates about $100 billion in revenue
    annually providing products and services to our customers. We
    have been the leading assignee of issued patents in the United
    States for 16 consecutive years, and we earn about $1 billion
    annually in intellectual property-related income. IBM is,
    therefore, uniquely positioned to promote a balanced patent
    system that will benefit patentees in all industries and
    producers and the public. IBM is not a member of any of the
    coalitions formed to advocate on behalf of particular
    industries; rather, IBM believes these interests are
    reconcilable and meaningful compromise can be achieved so that
    the patent system will meet the needs of innovators in all
    industries, most importantly serve the best interests of the
    American public.
        The nature of innovation has changed. Today we benefit from
    inventions made possible through highly collaborative and
    interconnected technologies. Many of the products consumers
    demand are complex, including contributions from multiple
    innovations, and incorporate hundreds or thousands of patented
    inventions. At the same time, many new innovations require
    investments of unprecedented size to achieve a new single
    product protected by a single patent. For the United States to
    remain competitive, our patent system must accommodate all of
    these innovation models, yet our patent laws have not been
    significantly updated for over 50 years.
        While progress has been made in recent years through
    judicial reform in areas such as obviousness, injunctions,
    willfulness, most recently venue, in patent litigation, much
    remains to be done to restore the balance of our patent system.
        The problem of poor-quality patents persists. Uncertain
    patent rights create speculation and lead to excessive
    litigation. IBM supports S. 515's approach to improving patent
    quality, enabling prompt challenge of questionable patents
    without resorting to litigation and without subjecting
    patentees to undue periods of uncertainty.
        A particular point of contention remains the appropriate
    standard for reasonable royalty damages determinations. As with
    other issues that have been resolved, despite competing
    interests, IBM believes this issue is reconcilable and a
    balanced solution can be achieved. In IBM's experience, the
    current legal standard for determining reasonable royalty
    damages does not provide the certainty needed for modern
    business to operate effectively. As a result, the precious time
    of skilled scientists and engineers is too often spent
    defending against costly and time-consuming litigation instead
    of creating innovations that drive economic growth.
        In reforming the law in this area, we must, nevertheless,
    be mindful of the fundamental importance of ensuring that
    patentees are appropriately compensated, or the patent system
    will fail to provide the incentive innovators require. IBM
    believes the Supreme Court provided critical guidance in its
    recent unanimous Quanta decision. In addressing the related
    issue of patent exhaustion, the Court focused on the essential
    features of the invention to determine if the patentee had
    received full compensation. An approach using the Quanta
    standard as a starting point will provide the guidance needed
    to properly compensate the inventor by focusing the damages
    inquiry appropriately.
        For the United States to maintain innovation leadership,
    our patent system must be in the future what it has been in the
    past: the best in the world. The need to act is urgent. The
    goal is achievable, and failure to act will harm our Nation's
    interests. We urge passage of the Patent Reform Act of 2009.
        Thank you.
        [The prepared statement of Mr. Kappos appears as a
    submission for the record.]
        Chairman Leahy. Thank you very much.
        Senator Coburn had to leave for something else. He asked if
    I would put his statement and his questions in the record. Of
    course, that will be done. His statement will be in the record,
    and his questions will be provided to the witnesses.
        The next witness is Taraneh Maghame. She is Vice President
    for Patent Policy and Government Relations at the San Jose-
    based Tessera Incorporated. At Tessera, she is responsible for
    advising company management on various intellectual property
    and patent issues, as well as handling the government relations
    activities related to intellectual property law and policy.
    Prior to joining Tessera, she served as senior counsel at
    Hewlett-Packard, managed intellectual property litigation at
    Compaq Computer Corporation, worked in private practice. Ms.
    Maghame received her law degree from the Georgetown University
    Law Center. With full, open disclosure, so did I.
        Please go ahead.

     STATEMENT OF TARANEH MAGHAME, VICE PRESIDENT, TESSERA, INC.,
                          SAN JOSE, CALIFORNIA

        Ms. Maghame. Thank you, Chairman Leahy, Senator Specter,
    and members of the Committee.
        Tessera is like thousands of other small to mid-sized
    companies across the United States whose technologies help make
    consumer products faster, better, and cheaper. Based on San
    Jose, with offices in Charlotte, North Carolina, it is a
    publicly traded corporation with more than 400 employees,
    nearly 300 of which are engaged in research and development.
    Since our founding in 1990 by three former IBM technologists,
    our core mission has been to develop innovative technologies,
    especially in the field of semiconductor packaging.
        Last year, we spent 461.6 million in R&D. If you have a
    cell phone that fits in your pocket, like the one that Mr.
    Appleton was showing you, then you are using Tessera
    technology.
        In short, Tessera is in the business of innovation and, by
    licensing its innovations, has made them widely available to
    millions of consumers. None of this would have been possible
    without a strong patent system to protect our inventions and
    reward our innovators. We hold over 900 U.S. patents or patent
    applications. Maintaining a strong system is essential to our
    continued success.
        The R&D and licensing model that has made Tessera
    successful is not unique in our country. In fact, small
    companies generate most of America's innovation and employ more
    than 80 percent of its workers. Many of these would not exist
    but for a strong patent system and cannot survive without such
    a system.
        Tessera supports improvements to our patent system,
    provided the changes strengthen the system and do not diminish
    the value of patents. We oppose legislation that, while well
    intended by its supporters, will diminish the value or
    enforceability of valid patents.
        I would like to make three points about the damages section
    of the bill.
        First, the chief argument we hear for the changes in
    damages law is that Congress needs to stop frivolous lawsuits
    that are based on bad patents. But bear in mind that damages
    are awarded only after a patent holder proves in court that a
    patent is valid and infringed. That is, it is the opposite of a
    bad patent. Thus, the lawsuits in which patent holders get to
    this point are in almost all cases by definition non-frivolous.
    The proposed change does not cure the purported disease.
        Second, we are told that Congress should step in because
    runaway juries are making extraordinarily large damages
    awards--an assertion that is supported by anecdotes rather than
    any serious data. Patent cases make up about 1 percent of the
    cases filed in our Federal courts; 95 percent of the cases are
    resolved before trial. According to data gathered by Professor
    Janicke of the University of Houston, the median damages award
    over the past 4 years in cases where an award is actually made
    after trial has been $5 million. If all patent infringement
    cases resolved at trial are taken into account, this number
    drops to $2 million--not an insignificant amount, but clearly
    not indicative of runaway juries.
        The third and most troubling topic is the impact of the
    bill on the American economy. It is troubling that in this time
    of grave economic uncertainty, Congress is looking to change
    the basic economic structure of our patent system, which today
    supports a highly beneficial component of the U.S. economy. As
    noted in the recent book entitled ``The Invisible Edge,''
    thanks to America's high-performance innovation economy
    protected by our patent system, the lion's share of the world's
    economic value generated by IP now flows to American companies
    and workers. American IP provides one of the strongest
    surpluses in our balance of trade accounts.
        For example, in 2007, America's IP exports--that is,
    royalties and license fees we receive from other countries--
    amounted to $62 billion. The simple fact is that weakening our
    patent laws would cause a massive and irreversible transfer of
    wealth from U.S. to foreign manufacturers.
        It is vital to understand that the interests of the U.S.
    economy are increasingly different from the interests of the
    world's largest global companies. Unlike giant multinationals,
    which can innovate anywhere in the world, the U.S. economy
    needs local innovation to thrive. And American innovation, far
    more often than not, occurs at small companies.
        Many of the concerns that led some giant multinational
    companies to call for a weakening of patent protections have
    been addressed by the Supreme Court and the Federal Circuit in
    recent years. In several key decisions, the balance of power
    between patent holders and patent users has shifted. Standards
    of patentability and patent rights and remedies have been
    tightened and narrowed.
        The recent court decisions embody comprehensive patent
    reforms. We urge Congress to allow the judicial reforms to
    ripen and not to rush legislation before the full import of
    these decisions is understood.
        In closing, Tessera, along with the Innovation Alliance, of
    which it is a founding member, looks forward to continuing to
    work with Congress to achieve reform that improves the quality,
    efficiency, and procedural predictability of the U.S. Patent
    Office. Our Nation's economic recovery and continued global
    competitiveness depend upon a strong and predictable PTO.
        In our effort to provide constructive comment on this
    issue, we have made proposals to improve the Patent Office,
    including measures to enhance patent quality by devoting
    greater examination resources to complex applications and to
    improve the current inter partes re-examination system. We also
    believe that PTO should be empowered to forgive educational
    loans carried by its professionals in exchange for 5 years or
    more of service in order to improve retention rates. Investment
    in the PTO is an investment in America's economic future.
        Thank you.
        [The prepared statement of Ms. Maghame appears as a
    submission for the record.]
        Chairman Leahy. Thank you very much.
        Our next witness is Herbert Wamsley. He is the Executive
    Director of the Intellectual Property Owners Association based
    here in Washington. He has held this position since 1983. He is
    also the editor of the IPO Daily News, a publication that
    summarizes every precedential patent and trademark opinion of
    the U.S. Court of Appeals for the Federal Circuit. Prior to his
    work with the IPO, he served for 18 years in the U.S. Patent
    and Trademark Office in a number of positions, including Chief
    of Staff to the Director, and was Director of Trademark
    Examining. He also received his law degree from the Georgetown
    University Law Center.
        Good to have you here.

         STATEMENT OF HERBERT C. WAMSLEY, EXECUTIVE DIRECTOR,
       INTELLECTUAL PROPERTY OWNERS ASSOCIATION, WASHINGTON, D.C.

        Mr. Wamsley. Thank you, Mr. Chairman. I appreciate the
    opportunity to be here today to speak on behalf of the
    Intellectual Property Owners Association, or IPO. Our members
    include companies and industries ranging from information
    technology to consumer products to pharmaceuticals and
    biotechnology. We are proud to say that all four of the
    companies on the panel today--Micron, Johnson & Johnson, IBM
    Corporation, and Tessera--are members of our association. Now
    if we can just get them to agree.
        [Laughter.]
        Chairman Leahy. Please let me know when that happens. It
    would make my and Senator Hatch's life a lot easier.
        Mr. Wamsley. We congratulate the Chairman on introducing S.
    515 to continue this critically important effort.
        I want to say that information technology, pharmaceuticals,
    biotechnology are among the most important industries in
    America, and these are the industries that we often think of as
    the cutting edge, most sophisticated technologies. They are
    very important members of our association.
        I do want to put in a word for some other industries. I for
    one am tired of hearing that American jobs and the older
    manufacturing technologies such as automobiles, aircraft,
    trains, and consumer products, to name a few, are gone forever.
        Last week, the AFL-CIO Executive Council had this to say
    about the automobile industry: ``The automobile industry
    accounts for fully one-quarter of all American manufacturing
    jobs and output. The industry represents a complex integration
    of advanced manufacturing processes, technologies, and
    materials, and is a critical driver of innovation across every
    manufacturing subsector.''
        In last week's statement, the AFL-CIO also put in a strong
    plug for the American patent system. America must have an
    automobile industry and an aircraft industry and a train
    industry. We were the world leaders in these industries for 100
    years, and there is no reason to give up that leadership.
        Mr. Chairman, the way to create jobs in these industries is
    so obvious--so obvious--world leading innovation. The patent
    system, made more effective through legislation along the lines
    of S. 515, can help these traditional manufacturing industries
    as well as the high-tech, pharmaceutical, and biotech to leap
    forward in innovation, leading to more jobs in U.S. industry
    and new strength in the economy.
        IPO strongly supports patent reform and a majority of the
    provisions in the bill. I will comment very briefly on several
    sections of the bill.
        First of all, we need to keep in mind that two major
    developments have occurred since Congress began working on
    patent reform. The courts have rendered decisions that have
    altered the patent system significantly, and we need to review
    the legislation in light of that.
        Second, the budgets in patent departments of many U.S.
    companies have been slashed drastically, and we believe
    companies will file fewer patent applications this year. And
    that needs to be kept in mind.
        IPO members are divided over the hotly debated issue of
    patent damages. We support the first-to-file rule, first-
    inventor-to-file rule. We have supported the reform of the law
    of willful infringement and treble damages. It needs to be
    reviewed in light of the court's subsequent decision in the
    Seagate case. We generally support establishing a new procedure
    for a post-grant review in the PTO that can be requested within
    12 months.
        We think S. 515 is going in the right direction. We have
    some concern about one provision on the post-grant review and
    inter partes reexamination having to do with public use and on
    sale.
        We have supported changes in the venue statute. We would to
    see a simpler approach. And, again, there has been recent case
    law on the subject that should be reviewed.
        We do not favor the section on interlocutory appeals. We do
    not favor giving the USPTO Director authority to set by rule
    the user fees established by statute. We support adding a
    provision to the bill on inequitable conduct, and we understand
    that this topic will receive further consideration from the
    Committee.
        And, finally, we favor the section in the previous bill
    that was designed to prohibit permanently the diversion of PTO
    user fees to unrelated Government programs and urge reinsertion
    in the bill of that section, which included extensive annual
    reporting and notification requirements to the Appropriations
    Committee.
        Thank you.
        [The prepared statement of Mr. Wamsley appears as a
    submission for the record.]
        Chairman Leahy. Thank you very much.
        Mark Lemley is the William H. Neukom Professor of Law at
    Stanford Law School. And just as an aside, Bill Neukom is a
    friend and in past incarnation testified before this Committee
    on different occasions.
        Mr. Lemley teaches intellectual property, computer, and
    Internet law, patent law, and antitrust. An experienced
    litigator, he has written extensively on these subjects. He has
    been before Congress at least a half a dozen times before this.
    He has received numerous accolades, including being named
    California Lawyers Attorney of the Year in 2005, one of the 100
    Most Influential Lawyers in the Nation by the National Law
    Journal in 2006. Professor Lemley received his Bachelor's
    degree from Stanford University and his law degree from the
    University of California at Berkeley.
        Good to have you back here with us. Please go ahead.

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

        Mr. Lemley. Thank you, Mr. Chairman.
        Unlike the rest of the economy these days, it seems, patent
    litigation is still a booming business. As data from the
    Stanford IP Litigation Clearinghouse shows, patent owners sued
    more defendants in 2007 and 2008 than ever before, even though
    the total number of suits remained constant. Patent plaintiffs
    won the highest median damages awards ever in 2007. Further,
    research using clearinghouse data demonstrates the majority of
    the most litigated patents--the ones that are litigated over
    and over again--are owned by entities that do not make any
    product but that simply enforce patents.
        Now, there is nothing inherently wrong with either the
    growth in patent lawsuits or in patent enforcement by non-
    practicing entities. But a number of the patent rules have
    given those plaintiffs unfair advantages in litigation,
    allowing them to enforce dubious patents in favorable
    jurisdictions, and to use the rules of patent remedies to
    obtain more money than their inventions were actually worth.
    Many of those problems resulted from troublesome judicial
    decisions interpreting the Patent Act, not from the Patent Act
    itself.
        Since Congress began debating patent reform 4 years ago,
    the courts have acted to fix a number of these problems--
    problems that were the focus of initial congressional reform.
    In the eBay case, the Supreme Court solved the damages problem
    in one fell swoop for us, creating a rule that allows industry-
    specific and case-specific application. In the KSR case, the
    Supreme Court ratcheted up the standard for obviousness, making
    it easier to weed out bad patents. In the MedImmune case, the
    Court expanded the use of declaratory judgment jurisdiction,
    and that, coupled with the Volkswagen case in the Fifth Circuit
    and the TS Tech case in the Federal Circuit have made the
    problem of forum shopping less significant. It has not gone
    away, but it is at least more possible for patent defendants to
    file in other jurisdictions, and it is easier for courts to
    transfer cases out of jurisdictions where there is little or no
    relationship between the parties in the lawsuit. Finally, in
    the Seagate case, the Court effectively solved the problem of
    abuse and overuse of willfulness.
        I think other areas are likely being solved. Inequitable
    conduct is an example. While there have been cases in which the
    courts have applied an overbroad rule of inequitable conduct,
    Federal Circuit decisions in the last year or two--most
    notably, the Star Scientific v. R.J. Reynolds case--have drawn
    an increasingly careful line on inequitable conduct, making it
    clear both that the law properly does punish people who mislead
    the Patent Office, but also that it is not appropriate to
    punish people for statements that might be read to be
    misleading in the absence of actual proof.
        The biggest remaining problem to solve, I think, is
    damages. The problem is, as has been identified by a number of
    witnesses in this panel, that courts do not apportion damages
    based on the contribution of the patentee to the defendant's
    technology. Instead, the legal rules that we have, the
    multifactor Georgia Pacific test, are open to manipulation. And
    they are dependent on the way you draft your patent claims.
        It should not be the rule that you get more money for the
    invention of an intermittent windshield wiper if you claim a
    car with an intermittent windshield wiper on it than if you
    just claim the intermittent windshield wiper. That makes no
    sense. It is true that one has a car and one does not, but you
    did not invent the car. All you invented was the intermittent
    windshield wiper, and so your contribution, the value you add
    to the technology, is the value of that windshield wiper. But
    to get that right, courts have to have an ability to figure out
    not just what it is you contributed, but what it is that other
    people contributed to the success of the defendant's product.
        The right rule I think is not a rule that weakens patent
    damages inherently. It is not a rule that strips away anything
    that the patentees contributed. The right rule is a rule that
    makes sure that patentees get paid, but that what they get paid
    is, in fact, proportional to what they contributed to the
    product.
        We have got a number of problems in the court system that
    allow the damages calculations to go awry. One is the
    application of the entire market value rule in reasonable
    royalty cases. That rulemakes sense in the context of lost
    profits. If my theory is if you had not infringed, I would have
    sold this product, well, then I would have made all the sales
    and I would have sold the whole car. But if I am not selling a
    product, then it does not make sense to say that the entire
    market value of that product comes from my technology, however
    important it might be. And doing so leads to a windfall,
    because once you give 100 percent of the profits from the
    product to patent owner number one, patent owner number two
    comes along and says, well, all right, I did not invent the
    intermittent windshield wiper, but I added a feature to the
    tires, or I added a feature to the engine, and you have got to
    pay them, too.
        So a patent damages rule for reasonable royalty cases that
    makes sense, that avoids giving a windfall to patentees, I
    think has to be one that figures out what it is the patentee
    actually contributed. It is not subtraction of concept. It is
    not stripping away anything from the patentee. It is asking
    what did they give us that we did not have before and
    compensating them on that basis.
        Now, I have a number of other views about particular
    provisions in the bill. I have indicated some in my written
    testimony. I think first to file, post-grant opposition are
    good ideas. I, like Herb, am concerned about interlocutory
    appeal because of the delay and the possibility that we will
    lose settlements of patent cases that we currently have. But
    rather than go into those in detail, I think I would probably
    rather reserve time and let the Senators ask questions.
        Thank you.
        [The prepared statement of Mr. Lemley appears as a
    submission for the record.]
        Chairman Leahy. Thank you very much.
        Mr. Appleton, when Senator Hatch and I introduced the
    Patent Reform Act last week, I said the Patent Reform Act is
    about jobs, about innovation; it is also about consumers. You
    discuss preliminary findings indicating modernizing our patent
    system would create 100,000 jobs. Would you like to elaborate
    on that, please?
        Mr. Appleton. Sure. I think, by the way, the study will be
    available and probably more appropriate for specific detail for
    other companies in some of that analysis. But if you take
    Micron as an example, as I noted, we had spent just last year
    alone about $30 million in patent litigation. And in some ways,
    my perspective is that it is almost one of wealth
    redistribution as opposed to wealth creation. And, by the way,
    I will note, you know--you had noted earlier--I do not remember
    if it was Senator Specter or yourself, but I am still trying to
    figure out when you transition from a traditional manufacturer
    to a modern manufacturer, because my entire career has been in
    manufacturing, which is now 27 years, and we invest billions
    per year, and we employ lots of people. In fact, 30 minutes
    from here, we have a big site, in Manassas. And I do not know
    if we are traditional manufacturer anymore or a modern
    manufacturer, but we make lots of product in this country. For
    us, we invest in both research and development and we invest in
    manufacturing sites. And when we have to divert dollars to
    litigation that we think is not appropriate, we cannot take
    those dollars and reinvest them into R&D. And a good example is
    we were in litigation with Rambus for 10 years, and there was a
    ruling in Delaware recently that their document destruction was
    so great around all of their patents and how they acquired the
    knowledge, et cetera, that the judge ruled that it just simply
    not enforceable. Those patents were not even enforceable by
    virtue of the conduct around getting those patents. But yet we
    spent money for 10 years on this litigation, and we did not
    have that money available to reinvest in R&D. In our particular
    case, that $30 million alone would have been another 450 to 500
    jobs for us.
        Chairman Leahy. Thank you. I get the point.
        Mr. Kappos, we have opponents of the Patent Reform Act say
    that companies relying on patents would be harmed by the
    legislation, so let me ask you this: IBM continues to receive
    more patents than any other company. I think nearly 400 patents
    were issued to IBM inventors in Vermont. To put that in
    perspective, we have a population of 660,000 people. So what do
    you think patent reform would do to the value of your company?
    Would it decrease the value, as some opponents say, or would it
    increase the value?
        Mr. Kappos. Thank you for that question, Senator Leahy.
    Unquestionably for IBM, patent reform will increase the value
    of our company in a number of ways.
        Number one, we are an innovation company. We are a
    technology company at our core. We have inventors making
    inventions and filing patent applications in every single State
    represented in this Committee, and many of them. We are fully
    dependent on the patent system, both to commercialize products
    in the U.S. and all over the world. We are fully dependent on
    the patent system in order to license our technologies also.
        We believe that there is a tremendous opportunity in S. 515
    to increase the value of our company by enabling us, number
    one, to make more innovative products and services, to get more
    value from the patent system, and then, last, to avoid the
    costly waste that we have to make currently on defending
    abusive litigation.
        And just one more comment on that, if I can. In addition to
    what Mr. Appleton mentioned, abusive litigation costs us
    tremendously in employee time. In every State represented in
    this Committee today, we have employees who are spending their
    time not inventing and not innovating, but defending
    litigation, helping outside counsel, and it is just a waste of
    our time.
        Chairman Leahy. And your company depends on R&D, you
    mentioned. How much do you spend each year on R&D?
        Mr. Kappos. About $6 billion.
        Chairman Leahy. And, Professor Lemley, let me ask you, also
    following up on that, you argued in reading your testimony that
    the current patent rules give plaintiffs unfair advantage in
    litigation, including allowing them to obtain more money than
    their inventions are actually worth. You used some examples.
        Do you want to elaborate a little bit on those rules that
    give that unfair advantage and what courts should be doing if
    they wanted to measure the actual value of an invention?
        Mr. Lemley. Certainly. I think part of the reason that
    courts have been reluctant to do it, despite the fact that one
    of the 15 Georgia Pacific factors says you could look at this
    information if you wanted to, is that it is hard, and neither
    judges nor, of course, patent owners particularly want this
    information into the court. So if you have a 3-week jury trial,
    the jury is focused for 3 weeks on the inventor, on the
    inventor's story, on the contribution the inventor makes to
    that product. But the jury never hears about the other
    contributions to that product. They do not hear about other
    patents that might have to be licensed. And as a result, it is
    quite easy for a plaintiff's lawyer to get up and say: Look,
    the defendant's product is a car. Look, the defendant's product
    is Microsoft Windows. All I want is 1 percent. That does not
    sound unreasonable. And, indeed, it does not sound unreasonable
    unless there are 7,000 different patents that have to be added
    together at 1 percent each, as turns out to be the case with 3G
    wireless cell phone technology, for example.
        So allowing in information about the defendant's
    contributions, allowing in information about other patents to
    try to figure out what the appropriate measure or balance of
    the patent damages is I think would be a big step in the right
    direction.
        Chairman Leahy. Thank you.
        Senator Specter.
        Senator Specter. Thank you, Mr. Chairman.
        The critical factors, it seems to me, if we are to succeed
    with legislation, is the issue of the damages. I think we can
    handle inequitable conduct and venue and second window and the
    other issues that are presented if we could come to grips and
    agreement on the damage formulation.
        There have been a number of terms used. ``Essential
    features'' is a comment which was made by Mr. Kappos. Other
    comments or definitions, ``innovatable features.'' Another is
    ``specific contribution over prior art.'' And I would like you
    today to run the gauntlet here and ask you what language you
    would suggest, and I would ask you beyond your testimony today
    to think about it and communicate with the Committee, me
    personally, with what language you would like to have.
        Now, I heard your testimony, Mr. Appleton. You would like
    to have some apportionment. What language would you offer?
        Mr. Appleton. Well, as probably one of the only non-
    attorneys sitting at this table here, I am not sure that I am
    the best person for the technical language in the bill. But,
    conceptually----
        Senator Specter. Well, we are starting with you.
        Mr. Appleton. Yes.
        Senator Specter. We will judge whether you are the best
    person.
        [Laughter.]
        Mr. Appleton. That is what my mother always told me as
    well.
        The simple concept that the inventor is due the value that
    they actually contribute to the product is a good concept. And
    whether you define it as apportionment or whether it gets
    defined as a percentage of the value----
        Senator Specter. You have answered the question: value
    actually contributed.
        Mr. Johnson.
        Mr. Johnson. I would say that in the simplest form, where
    you do not have competing considerations where the damages are
    involving taking sales, either by proof of lost profits or the
    like, that what you are looking at is indeed the value
    contributed by the invention, but that is the entirety of the
    invention as compared to its closest non-infringing substitute.
        Senator Specter. Value contributed by the invention.
        Mr. Johnson. Compared to its closest non-infringing
    substitute.
        Senator Specter. Well, that would permit some apportionment
    then.
        Mr. Johnson. Well, not exactly apportionment. In the
    example that was given by Professor Lemley about the windshield
    wiper, there is not only----
        Senator Specter. Something less than the entire car.
        Mr. Johnson. Well, the entire car is improved. It is a
    better car because it has an improved windshield wiper.
        Senator Specter. So you want the damages for the entire
    car?
        Mr. Johnson. I want the damages for the value that the car
    has increased because it includes a windshield wiper----
        Senator Specter. OK, value increased.
        Mr. Johnson. Yes.
        Senator Specter. Mr. Kappos? And pardon me for
    interrupting, but I have got four more witnesses.
        Mr. Kappos. OK. I will be quick. I would comment first that
    this is a multi-part problem with a multi-part solution.
    Gatekeeping, as is in the proposed legislation, is clearly part
    of the solution and it is very positive. I do not believe there
    are any particular magic words that are perfect, but I do
    believe that the essential features concept that was
    articulated in the Quanta case is very powerful.
        Senator Specter. You are sticking with essential features.
    OK.
        Ms. Maghame.
        Ms. Maghame. We do not agree with the essential features
    language. I think it causes a whole slew of other problems to
    try to use that language. We believe that the gatekeeper
    approach, not necessarily as it is worded currently in the
    bill, but one which allows the judge to give better guidance
    with respect to what factors should be used in determining
    reasonable royalty, because all of these concerns that have
    been raised----
        Senator Specter. So you like the gatekeeper concept.
        Ms. Maghame. Gatekeeper concept, more direction from the
    judge, correct.
        Senator Specter. Mr. Wamsley, I had to step out during your
    testimony. I am sorry to have missed it. But give us the kernel
    of the magic words.
        Mr. Wamsley. Well, Senator Specter, while you were out of
    the room, I claimed all these people as my members and
    explained that they do not agree. So I am in kind of a bad
    place here.
        But, you know, I would say while I do not think there is a
    magic phrase, and I am a little skeptical of my good friend Mr.
    Kappos finding the language ``essential features'' in the
    Quanta case, I think that to get the language worked out here,
    we are going to have to elaborate on what--maybe right in the
    statutory language--on what the invention is. We are going to
    have to define the invention, because some people talk about--
    --
        Senator Specter. What the invention is, you have to define
    the invention. Well, you have restated my question. Now, how
    about the answer?
        Mr. Wamsley. Well, the question I would ask then is----
        Senator Specter. No, no. No questions. Answers.
        [Laughter.]
        Mr. Wamsley. I am answering the question with a question.
    We have to decide whether we're talking about the claimed
    invention. We have in the U.S. Patent and Trademark Office and
    in the patent possessive a multi-billion-dollar industry in
    America grappling with the claimed invention. But when we get
    to determining patent damages, it seems we get away from the
    claimed invention, and we're trying to define the invention in
    a different way, and I think we need to try to come up with a
    definition----
        Senator Specter. I have got one more witness. I have to
    read that over to understand what you said.
        Mr. Chairman, I ask you to direct the witness, Mr. Wamsley,
    to answer----
        [Laughter.]
        Chairman Leahy. I think the Senator from Pennsylvania is
    probably the best cross-examiner around here. He can handle
    that OK.
        Senator Specter. Mr. Lemley.
        Mr. Lemley. Two specific answers with statutory language.
    ``Value actually contributed'' I think is a good standard, but
    the other thing I think that needs to be done is to make it
    clear that the ``entire market value'' rule applies only in
    lost profits and not reasonable royalty cases.
        Senator Specter. Well, thank you all. There is a lot of
    talent in this room besides the people at the witness table. I
    would exclude those of us on the dais. But there is a lot of
    talent, and I would ask that question to everybody here. There
    are a lot of high-priced lawyers and specialists in this room,
    and if you have a suggestion on the language, this Committee
    would be very appreciative.
        Thank you, Mr. Chairman.
        Chairman Leahy. Thank you, Senator Specter.
        Senator Feinstein.
        Senator Feinstein. Thank you very much, Mr. Chairman.
        Mr. Chairman, I want to say to you that I held some
    meetings with the patent attorneys involving the different
    groups. My State is very much affected by this bill. There are
    conflicting interests that are major and strong, and, you know,
    everybody is so genteel here, but I will tell you, they were
    like tigers coming out of a cage. And the differences were very
    crisp and very pronounced.
        This was, I think, almost 2007. We tried to solve some of
    the issues, and I sent out a page and a half of draft language
    on damages. Not one high-tech company responded. It was sent
    out in April 2007. Intel agreed with it. Amgen, their lawyer,
    agreed. University of California, the provost, agreed. The 21st
    Century Coalition agreed. The CEO of Nektar Therapeutics. But
    high-tech seems to feel that they're going to get whatever they
    want out of this bill.
        For my vote, we have to take care of the universities. I
    have got great universities in my State. Their patents are
    extraordinarily important to them. I have great biotech. Their
    patents are extremely important to them. And I have great high-
    tech, but no one element of this, in my view, should rule the
    roost.
        I think there needs to be some amendments to this bill. I
    would like to send this--the language that was sent out April
    7, 2007--I would like to send it out again. I would very much
    appreciate it if people could do me the courtesy of at least
    responding and not ignoring it. And there is language on
    damages, on inequitable conduct, and post-grant review. You
    know, if you do not like it, please say so. If you like it--oh,
    and venue as well.
        But I must tell you, as somebody who likes to solve
    problems, I feel very concerned because what appears publicly
    is not what you hear behind the scenes when these groups come
    in and these companies come in one by one by one, or you get
    their counsel. Mr. Johnson was present at one meeting. I mean,
    wasn't it--it was quite novel.
        Mr. Johnson. Yes, it was, Senator.
        Senator Feinstein. This is a very serious matter from my
    point of view, and, candidly, I am not going to vote for a bill
    unless there can be reconciliation between the various
    interests. And that is where I am on it, and I will leave you
    with that. But if I have a minute, let me ask a question.
        On damages, in the most simple terms, high-tech was worried
    about patent trolls and abusive lawsuits; biotech/pharma, the
    universities, and small inventors were worried about rules that
    would limit the value of their patents. So my question of you:
    Does anybody here have a middle ground that could treat these
    different industries and business models fairly on how judges
    and juries calculate damages?
        My suggestion was to require the judge to serve as the
    gatekeeper, meaning that he has to determine which of the
    Georgia Pacific factors go to the jury, and leave all of the
    Georgia Pacific factors for him to choose from.
        So I would like to go right down the line and have some
    comments on this, and I hope it would be publicly what you say
    to people privately. Mr. Appleton, do you want to start?
        Mr. Appleton. Thank you, Senator. I think that, first of
    all, the intent--and I think people get very emotional about
    this because they care a lot about it. Obviously, it is a
    passionate subject. And as you so noted, there is the
    individual contributor and trying to get fair compensation for
    their invention, and there is the company that has products
    that have thousands of patents that are applicable to it, and
    therein lies some of the difficulty.
        We have never been opposed to the individual getting fair
    compensation for their patent, and I think that the Chairman so
    noted that in our particular case, it is the value of the
    contribution that is the most important thing to measure. And
    however we get at a measurement of that I think will be far
    superior to what happens today.
        Senator Feinstein. So you would agree with the gatekeeper
    concept and the Georgia Pacific factors all being before the
    judge and allowing him to select those that are most applicable
    to the case at issue.
        Mr. Appleton. We believe the gatekeeper concept can work.
        Senator Feinstein. OK. Mr. Johnson.
        Mr. Johnson. We strongly supported development of the
    gatekeeper and think that if there is substantial evidence, the
    judge should allow the Georgia Pacific factor that is supported
    by substantial evidence to go to the jury upon motion of a
    party, they should exclude those factors where there is not
    substantial evidence or where the theory is not cognizable at
    law.
        Senator Feinstein. So use the term ``substantial
    evidence.''
        Mr. Johnson. Yes. I think the difference there is that the
    judge should not sit and decide for the jury how they should
    decide the case. But he should be sure that the evidence--if it
    is substantial and in keeping with cognizable law--should go to
    the jury on that basis.
        Senator Feinstein. Could we just quickly go down?
        Chairman Leahy. Quickly.
        Senator Feinstein. Quickly. Mr. Kappos, quickly.
        Mr. Kappos. OK, sure. Thank you. So I would comment that
    the gatekeeper concept is a positive one. No question about
    that. It will be helpful.
        As I mentioned before, I believe that an approach that keys
    off of the Quanta decision is good because it does enable focus
    on the economic value contributed by the invention. So take
    those words, we are actually not so far apart. I have heard
    several other people say ``economic value.''
        Senator Feinstein. Ms. Maghame.
        Ms. Maghame. Yes, we support that position, and we do not
    believe that additional language like ``economic value'' should
    be added. We think everything is covered in the factors. We
    just need to make sure that there is significant evidence,
    substantial evidence, as Mr. Johnson said, to support the
    factors that go to the jury.
        Senator Feinstein. Thank you.
        Mr. Wamsley.
        Mr. Wamsley. Yes, I agree there is support among a lot of
    the industry, and maybe all of the industries, on the
    gatekeeper concept. So I think that is a good starting point.
        When we get beyond that to ``essential features'' or
    ``claimed invention,'' as I was saying to Senator Specter, I do
    not have the answer.
        Senator Feinstein. Mr. Lemley.
        Mr. Lemley. I believe it is an important step, but I think
    it is only a partial step. I think it needs to be coupled with
    more specific language on how one does apportionment and
    coupled with restrictions on the entire market value rule.
        Senator Feinstein. Thank you.
        Thank you very much, Mr. Chairman.
        Chairman Leahy. Senator Hatch.
        Senator Hatch. Well, thank you, Mr. Chairman, and I
    appreciate the work that you are doing on this and all other
    members of the Committee as well. And we appreciate this
    illustrious panel for coming and sharing your thoughts with us
    here today.
        Mr. Wamsley, since you represent a pretty large swath of
    inventors and intellectual property owners, let me just ask you
    this question, because it is a matter of great concern. I am
    aware that the USPTO is currently experiencing serious
    financial difficulties. USPTO has collection projections that
    are extremely sobering.
        Under the worst scenarios, the agency projects a loss of up
    to $130 million in lost collections for fiscal year 2009. I
    recognize the importance of getting patent applications
    examined and granted, which in turn produce high-paying, high-
    quality jobs.
        Where is the wisdom of having an omnibus bill that takes
    close to $12 million worth of fees from the agency's fees, mind
    you, that are paid by the applicant and should go directly to
    the expeditious prosecution of the application? Not only are we
    not willing to once and for all end fee diversion, but now we
    are trying to take more money from the agency when they have
    got a serious financial situation on their hands.
        I would just like your viewpoint on that.
        Mr. Wamsley. Well, we support the proposal for a revolving
    fund that has been made in the past to try to put a lockbox
    around the fees.
        I do not have the latest number from the Patent Office, but
    with the declining income they have right now, it may be that
    Congress will have to look at a fee increase. We would be
    concerned about the effect of a fee increase on our members
    during this time, but it is something that should be
    considered. But we believe that is a decision that should be
    made by the Congress if there is a fee increase. That is the
    way it works now. The main fees are set by statute.
        But, in any event, the Patent and Trademark Office needs to
    have access to every penny of its user fees.
        Senator Hatch. Thank you. This is a particularly
    distinguished panel. I wish I had time to ask all of you
    questions.
        Mr. Johnson and Mr. Kappos, you both have strong opinions
    about how we should address the damages provision. Mr. Johnson,
    you stated that the recent Supreme Court decision in Quanta is
    not the answer, if I understand what you said, because the case
    deals with the doctrine of patent exhaustion. Mr. Kappos, you
    recognize the Quanta case deals with patent exhaustion, but
    state that it provides critical guidance needed to properly
    compensate the inventor by focusing the damages inquiry
    appropriately.
        Now, Mr. Johnson, why can't the Quanta case be used as a
    starting point, as Mr. Kappos suggested? I understand that you
    believe Congress should wait for the Federal Circuit to issue
    an opinion in the Lucent case. Obviously, if the law were
    clearer, there would not be any need for a delay. But I believe
    the legislative body should be providing clear direction on
    what the law is, especially when the underlying law is not
    clear.
        So I would like your best advice on this, both of you.
        Mr. Johnson. Senator, the problem with using an essential
    features approach is that it results in a subtraction from what
    is claimed, what the Patent Office has granted as the
    definition of the invention. After the definition of the
    invention as approved by the Patent Office has survived all of
    the post-grant challenges and has been used in the test for
    validity and has, in fact, been used to prove infringement,
    essential features elements would award damages only on a
    portion of what was proved.
        Now, you might ask Mr. Kappos, if I could suggest, would he
    be happy if the plaintiffs in his cases were able to prove
    infringement against him by showing only that he used the
    essential features? Usually not. And the lack of parallelism
    makes it very unfair to patent owners because they are held to
    a higher standard to prove liability, and then instead of
    getting what they are entitled to, it would be taken away by
    parsing the invention down to something less.
        That is not to say they should be overcompensated, but it
    is to say that redefining the patent claim to be something
    smaller than it is is not the right methodology to use.
        I think on the broader concept, there is much more
    agreement, but that broader concept does not--the right way to
    do it is not to redefine the invention.
        Senator Hatch. OK. Thank you.
        Mr. Chairman, could I just ask a question of Mr. Appleton?
        Chairman Leahy. Of course.
        Senator Hatch. It will be a short question.
        Mr. Appleton, I appreciated your comments about the post-
    grant review provision and that you accept the current approach
    as a reasonable compromise. But could you tell me why you
    preferred what you called the ``stronger post-grant review
    provision'' that we had in the prior bill last year or last
    Congress?
        Mr. Appleton. I am having a little bit of trouble hearing
    you, Senator.
        Senator Hatch. Sorry. This microphone is not working well,
    but I was wondering--you know, you have agreed to the post-
    grant review. You have said you can accept that. But could you
    tell me why you thought the prior post-grant review language
    was better that we had in the last bill?
        Mr. Appleton. Well, I would have to go back and recall the
    last bill to think about it. I think predominantly it had
    stronger language about the process of the post-grant review,
    and we think that it would have, I think, a more in-depth
    process of looking at that post-grant review, and as a result
    be a more robust process.
        Senator Hatch. Sure, OK.
        Thank you, Mr. Chairman. I appreciate it.
        Chairman Leahy. Thank you very much, Senator Hatch.
        Senator Klobuchar.
        Senator Klobuchar. Thank you very much, Mr. Chairman. Thank
    you to all the witnesses. I come from Minnesota, a State that
    cares about our patent system. We gave the world everything
    from the pacemaker to the Post-it Note. And so like Senator
    Feinstein, we have many different interests in our State when
    it comes to this.
        One of the questions, as I listened to all this, we have
    not really discussed the fact that we are in something of an
    economic crisis here, and I was just wondering if the changing
    economy has changed any of your positions, if it has the
    potential of bringing people closer together on this issue, and
    just your view of the effect of the economy on this issue.
    Maybe, Mr. Appleton and Mr. Johnson, you want to answer that
    question.
        Mr. Appleton. Thank you, Senator, and we have a design
    center, by the way, in Minneapolis as well.
        I think what the current economy has done more than
    anything else, it has brought focus----
        Senator Klobuchar. If you have designed something that
    begins with a P, I will bring it up with pacemaker.
        [Laughter.]
        Mr. Appleton. I think that the current economy has more
    than anything else brought focus to the dollars that are spent
    around our companies, and in particular, the dollars that we
    now spend on patent litigation as opposed to being able to
    spend those in a manufacturing plant or on R&D.
        As we try to readjust for the economics of the company--in
    other words, we are all trying to restructure to deal with
    falling demand and a tough environment--what becomes more
    apparent is that the dollars that are attributed to this issue
    are rising in comparison to the rest of our expenditures. And
    that is how it gets highlighted.
        Senator Klobuchar. Mr. Johnson.
        Mr. Johnson. I think it has made a tremendous difference in
    how we look at it because it highlights the fact that the
    patent system drives jobs. It is important to look at the
    efficiency of the system, the cost of litigation and the like.
    But that is dwarfed by the amount of private capital that the
    patent system can attract to generate new jobs.
        We had experience like this back in the 1970s when we were
    in a malaise, and Congress passed several pieces of
    legislation, including the ones establishing the Federal
    Circuit, and the result of that was that business realized
    patents were going to be valuable. They invested a tremendous
    amount of additional capital in R&D, and we had a sustained
    period of prosperity. We can do the same now and we need to do
    the same now because markets are shrinking, it is riskier than
    ever. What we need to do is step forward and tell American
    business that they can count on investing in R&D because their
    investments will be protected and lead to fairer returns in the
    long run.
        Senator Klobuchar. And are you concerned that any of these
    changes could lead to more foreign companies coming in and
    infringing?
        Mr. Johnson. Absolutely. Some of the damages provisions
    that have been proposed have been cited in some articles
    published in China and India where they look forward to growth
    in jobs because they think it will be easier to come in and
    copy our patented American technology. And that concerns me
    greatly because, much as we would like the global economy to
    grow, we really would like the American economy to grow. We
    think that is critical for everyone.
        Senator Klobuchar. Mr. Lemley, you talked about some of the
    court decisions, like the Volkswagen case with the venue issue,
    and I just wanted a response from maybe you, Mr. Appleton, or
    someone, if you think that Mr. Lemley pointed out that he felt
    that that helped to resolve some of those issues related to
    that. Do you think that that is true? Or do we need to do more?
        Mr. Appleton. OK. Can you be more specific in your
    question?
        Senator Klobuchar. Well, Mr. Lemley pointed out a court
    decision, a recent court decision, that talked about how it
    placed some limitations--maybe you want to describe it more--on
    the forum issue, which made it more difficult for people to
    bring cases in a certain area, and they had to show more
    connection to the area. Is that right?
        Mr. Lemley. Yes, the cases in question are a Fifth Circuit
    en banc case called Volkswagen and then a Federal Circuit case
    called TS Tech, both of which make it clear that courts in the
    Fifth (Couple,) most notably the Eastern District of Texas, the
    largest patent forum, have an obligation to transfer cases out
    to other jurisdictions if there is no strong connection to the
    forum.
        Senator Klobuchar. And I was unfair to ask you, the non-
    lawyer, this very legal question. I really did not mean to set
    you up.
        I can see that Mr. Kappos wants to answer as well.
        Mr. Kappos. I would be glad to help with that. Our
    observation coming off of the Volkswagen case and the Federal
    Circuit cases and district court cases that are going on on top
    of it is that does point the venue statute in the right
    direction, interpretation of venue. And we think that law can
    further develop by court decisions in a positive direction,
    reducing the need for legislation in that area.
        Senator Klobuchar. That is good. And I guess just along
    those lines, my last question would be of you, Mr. Wamsley. You
    know, you are in a difficult position with such dynamic members
    with differing points of view, and I appreciate your
    association's willingness to work with this Committee to try to
    find some potential consensus language. Have you seen
    instances--I am trying to get us there with the forum issue,
    but have you seen instances where your members have been able
    to agree on some of these things that should lead you to
    believe that we could try to develop the kind of consensus that
    Senator Feinstein was referring to?
        Mr. Wamsley. On a note of optimism, Senator, I believe that
    damages at this point still seems to be the intractable issue.
    And I believe that every one of these other issues can be
    worked out. Some of them, I believe with a little more
    discussion, there will be a consensus that we still need the
    provision in the bill. A couple of the issues, possibly venue
    would be one, in light of the recent court cases, we don't need
    anymore.
        But as you can see, until we can find the answer on
    damages, we cannot get all these others to fall in line. But I
    think they can.
        Senator Klobuchar. I understand. And, again, where I am
    coming from here is just the economic difficulties we are
    facing right now. The more that we can do to try to put
    American interests first here and to try to make sure that we
    do everything we can to try to come up with a consensus that
    would help our business community as a whole and American
    innovation would be a good thing. So thank you to all of you.
        Chairman Leahy. Thank you.
        Senator Kyl.
        Senator Kyl. Thank you, Mr. Chairman. I think all of us
    share Senator Klobuchar's concerns, and I would also associate
    myself with Senator Feinstein's comments. My objective, like
    Senator Feinstein's, is not to take sides, but to try to get a
    rational and equitable result that is good for American
    industry.
        As most of you know, I introduced my own legislation to try
    to bridge some of the differences, and I think Mr. Wamsley is
    correct that a lot of it boils down to the question of damages.
    That is the intractable, very difficult situation.
        I also wanted to comment that I think most of us share
    Senator Hatch's view that we have to find a good source of
    funding for the Patent Office in order to protect all of our
    industry.
        My question, first of all, is actually for Mr. Kappos and
    Mr. Lemley since you have endorsed the essential features
    standard. One of the benefits of using case law is the
    precedential value of the application of articulated law in the
    cases to specific facts, and this is a very fact-intensive kind
    of dispute that we are involved in here. So I am concerned,
    since there has been an acknowledgment that the Quanta computer
    case had nothing to do with valuation of a patent or damages,
    calculation of damages, that it is easily used for this
    purpose.
        Are there any cases--I would address that, first of all, to
    the two of you. Are there any cases in either the Federal
    Circuit or other Federal circuits or the district courts or the
    Supreme Court that use the essential features test to calculate
    damages in patent infringement cases? Do you know of any?
        Mr. Kappos. Sure. I would be glad to help with that
    question.
        First of all, I would say that the Quanta case in the
    exhaustion doctrine does actually deal with valuation of a
    patent. It is all about determining whether the patent holder
    has been paid his or her due for the patent, which is
    fundamentally a question of valuation.
        Going beyond Quanta, though, you only have to look within
    the last few days for a Federal Circuit case, the Nortron
    decision out of the Federal Circuit, that involves assessing
    whether a person who was alleged to be an inventor actually was
    an inventor. And in that case, the Federal Circuit again looked
    at the claim and the portions of the claim that the inventor
    claimed to have invented and whether those were central to the
    invention or not, and judged that the person was not an actual
    inventor.
        I do not believe the words ``essential features'' were used
    in that case, but that is application of the essential features
    doctrine very clearly without using those precise words.
        If you go back in time, there are many Supreme Court cases,
    Federal Circuit cases, and other cases that use the essential
    features doctrine. This is not a new doctrine. It is well known
    in the law.
        Senator Kyl. If I could, I asked my staff to see if they
    could find any, and I have got a pretty good staff, and they
    could not. So I would appreciate your citations for the record,
    if you would, please. You said there are many cases that use
    the essential features doctrine for calculating damages. My
    staff could find none. So if you have those citations, it would
    be useful. Would you please provide them to us?
        Mr. Kappos. Sure. We would be happy to do that.
        Senator Kyl. Are there any other comments on that point?
        [No response.]
        Senator Kyl. Let me just ask how it would relate to the
    Georgia Pacific list that does have a substantial amount of
    case law, applying it to different fact patterns. If you had an
    essential features doctrine set forth in the statutory law, if
    we were to adopt that as a baseline standard for valuing a
    patent, how would it affect the use of the Georgia Pacific
    factors? And I would just ask maybe starting with Mr. Johnson
    and then down through Mr. Kappos.
        Mr. Johnson. Well, it would not be good for the application
    of Georgia Pacific at all. One of the problems in talking about
    this, as you point out, is it is factually very complex. And it
    is easy to think about a simple example, but in the real world
    there are not simple examples. And the beauty of the Georgia
    Pacific approach is it takes into account the business
    realities that we face out in a complex world. If you start
    pulling out one factor and try to write some type of statutory
    language, you might handle the particular problem that you have
    in mind but create a myriad of other problems, which right now
    are being handled very well by the case law.
        Senator Kyl. Are you saying there would be essentially a
    conflict between the factors set forth in the Georgia Pacific
    case if you were to also overlay that with an essential
    features method for calculating----
        Mr. Johnson. Absolutely.
        Senator Kyl. Would that be correct, Mr. Kappos?
        Mr. Kappos. Well, let me take a different view of that. I
    do not think that application of essential features does
    violence to Georgia Pacific at all. I think essential features
    runs across a number of the factors in the Georgia Pacific
    case, including the famous apportionment factor that has been
    much debated, but not only that factor.
        Senator Kyl. Mr. Wamsley, what do you think?
        Mr. Wamsley. Well, I think essential features--obviously,
    we have a disagreement. Going back to whether it is the claimed
    invention, which is the definition in the patent document,
    often a very technical definition, or whether it is parts of
    that claimed invention that are essential features, I do not
    think the Georgia Pacific case really addresses that, and I do
    not have the answer.
        As far as going beyond the gatekeeper language, there has
    been some talk about trying to codify the 15 features of the
    Georgia Pacific case by actually putting them in the statute
    then perhaps grafting something else onto it. But that is so
    complex that I do not think that is a promising approach.
        Senator Kyl. Mr. Chairman, the time flies when you are
    having fun. If any of the other witnesses had a comment on
    that, that would be fine with me.
        Chairman Leahy. Please go ahead. I am trying to be very
    flexible with time on this subject.
        Senator Kyl. Sure. Thank you.
        Mr. Lemley, you did not have a chance yet.
        Mr. Lemley. If I may, Senator, I am not sure whether
    essential features is the right answer or not. I will say that
    I think the Georgia Pacific factors as something that is simply
    handed to the jury does not work. It does not work because if
    you give the jury a 15-factor test with no explanation of the
    factors, which is the way it normally works, the jury has the
    freedom to do essentially whatever it wants.
        So more specific guidance I think both in the form of a
    gatekeeper role, but also in the form of the language that
    Senator Specter elicited from most of us, the value actually
    contributed, would be substantially----
        Senator Kyl. The more traditional guidance I think--I mean,
    I think everybody is unanimous with respect to that.
        Mr. Lemley. Absolutely. And then I agree with you, Senator,
    that allowing that sort of general language to then be
    articulated in court decisions is the right way to go.
        Senator Kyl. Thank you, Mr. Chairman. I will not indulge my
    colleagues with--but I did have some other questions for the
    record, and, in particular, I skipped over you, Ms. Maghame,
    but you are the only witness that represents a small startup
    company, and I really wanted to get your views on how all of
    this would affect you. I will ask those questions for the
    record unless the Chairman would let you give me a 30-second
    answer.
        Chairman Leahy. You have got a question. I want to submit
    my further questions for the record, but if you want to ask
    one, go ahead.
        Senator Kyl. Well, just if you had a thought as to how
    applying an essential features kind of damage calculation would
    have on small startup companies like the ones that you
    represent?
        Ms. Maghame. Well, I do not see that essential features
    language to be any different than what we have seen in the
    bills before in terms of prior art subtraction, inventive
    contribution. I think it causes all the same problems, and I
    think essential features does not add anything to the Georgia
    Pacific calculation that can be done using the factors that are
    supported by the evidence, as we discussed in the concept of
    the gatekeeper language.
        Basically what it would do is it would, as I mentioned in
    my opening statement, diminish the value of patents by
    artificially reducing the damages that would be awarded.
        Senator Kyl. Mr. Chairman, I thank you for holding this
    hearing, and I want to thank each of the panelists. And I would
    like to submit some questions to you. I appreciate that what we
    derive from all of this is that these are very complex and
    difficult questions, that there has to be some room for
    agreement here, and that we need to work together to try to
    find that with the good work and advice of the experts you have
    assembled here.
        Thank you.
        Chairman Leahy. Thank you, and you know we have talked
    about Georgia Pacific. I think at a Federal Trade Commission
    hearing on patent reforms we heard from a professor at the
    University of Houston questioned why we are allowing the court
    to use the 15-factor Georgia Pacific test. He said that may be
    why we are getting such erratic results. Senator Klobuchar was
    here earlier, but a University of Minnesota Law School
    professor also said it is time to update that.
        I think, Mr. Appleton, you wanted to add something further
    on the question of valuing patents, putting an economic value.
    Am I correct?
        Mr. Appleton. Yes, I think just to emphasize, I think
    clearly the damages, as already noted by Mr. Wamsley, is the
    significant issue for us.
        You know, with respect to Senator Feinstein's asking
    earlier about the gatekeeper language and does that work, our
    coalition, I think for the record, historically has been
    opposed to prior language, but predominantly because it did not
    have enough guidance or parameters around contribution of the
    patent to whatever the product was. And, you know, we still
    feel that way. Whether you call them a gatekeeper or whether it
    is a judge or some other entity making those decisions, clearly
    we think something can work so long as there was sufficient
    guidance around that it needed to be in relationship to the
    contribution of the patent to the value of the product.
        Chairman Leahy. Mr. Appleton, you also said in your
    testimony that nearly 90 percent--and tell me if I am reporting
    this correctly. With the increase in the number of licensing
    demands and lawsuits against technology companies, 90 percent
    of those demands are coming from non-practicing entities. Is
    that correct?
        Mr. Appleton. Yes, that is correct.
        Chairman Leahy. And our patent law and patent system was
    put together long before anybody thought up a business model
    based on patent infringements from those types of entities. Is
    that not correct?
        Mr. Appleton. Yes, that is correct.
        Chairman Leahy. Is it time to update?
        Mr. Appleton. That is correct. We need to update, and I
    think in concert with what Mr. Lemley said, that often in this
    case, the majority in our particular case of the patent
    litigation come from companies that do not make our products,
    have never made our products, and have often been using patents
    that they have acquired with which to go after patent
    litigation.
        Chairman Leahy. I will withhold my time. Senator Whitehouse
    has rejoined the panel.
        Did you have questions, Senator?
        Senator Whitehouse. Very briefly.
        Chairman Leahy. Then I know Senator Feinstein will have
    questions following you.
        Senator Whitehouse. First of all, let me thank you,
    Chairman, for holding this hearing. This is a very important
    piece of legislation of those who have lived through it. You
    have lived through it longer than I have, but over the past 2
    years, we certainly saw a lot of heavy slugging being done, and
    I am glad we are taking it up again under your leadership.
        I would like to ask Mr. Appleton and Mr. Kappos if you
    could describe what you think this bill would do in terms of
    the atmosphere for innovation in the tech sector and if there
    is any way you are capable of quantifying that, even if it is a
    little or a lot, versus the hard number. I would appreciate
    kind of a scaling answer to the question as well as the
    description of what the sort of atmospheric change would be.
        Mr. Appleton. Thank you, Senator. As I had noted earlier, I
    apologize, in your absence, we I think from two different
    perspectives and others on the panel have responded in this
    way:
        First of all, we had noted that last year alone we had
    spent over $30 million on just patent litigation, and I would
    note that I am a member of the High-Tech CEO Council which is
    comprised of the eight leading American technology companies,
    and that includes IBM and Motorola, Intel, HP. And,
    collectively, when we looked at this data, last year alone, the
    ten of us combined spent over $300 million on patent
    litigation. Clearly, those dollars do not go into manufacturing
    jobs. We are a large manufacturer in the United States. They do
    not go into research and development. And I would note that
    probably over 95 percent of all of our research and development
    by Micron is done here in the United States. But those dollars
    are simply not available. They are going to attorneys and
    litigation.
        Senator Whitehouse. Is that your litigation expense number?
        Mr. Appleton. That is just our litigation expense number.
        Now, in addition to that, when we do the calculations on
    the jobs that would be created if just we had those dollars, we
    would have created another 450 to 500 jobs by having those
    dollars available for us to invest in our manufacturing or R&D
    operations. And that number gets very large, according to other
    studies. In fact, I had noted earlier there was a study that
    was released today that goes to that issue, and we would be
    happy to submit that as well for your review.
        Senator Whitehouse. Thank you.
        Mr. Kappos.
        Mr. Kappos. Yes, thank you, Senator Whitehouse. I would
    just add to that that I believe that for IBM the atmosphere for
    innovation will be clearly improved by S. 515. It will leave us
    with more opportunity to innovate, more opportunity to create
    and capture that innovation. By adding clarity to the patent
    system, it will increase the value of patents in aggregate, not
    decrease the value of patents. And by increasing the value by
    having clarity around the system, it will make it possible for
    us to capture more value out of innovation and not less value
    out of it. So I think that there is a win all around.
        Now, relative to quantifying numbers of jobs, that is, of
    course, a very hard thing to do. I think Mr. Appleton already
    provided the best data I know of, which is measured in many
    thousands of jobs across the country.
        Then the last thing I would comment on that I noticed for
    IBM is the time that employees spend supporting wasteful
    litigation, much of which could be liberated. In addition to
    all the litigation time that Mr. Appleton mentioned, if we can
    get our employees innovating, creating inventions, rather than
    spending time assisting lawyers in defending litigation, we
    will be a long ways ahead.
        Senator Whitehouse. And in the context of international
    competition, how does that play out?
        Mr. Kappos. In the case of IBM, we do the vast majority of
    our innovating right here in the U.S., essentially across all
    50 States, many thousands of inventions, I think probably more
    than represented by all the other companies on this dais
    combined. And in doing that, the vast majority of it is in the
    U.S., so that the value of additional innovation for us largely
    comes right back into this country.
        Senator Whitehouse. And that would confer an advantage to
    U.S.-based companies in international competition, correct?
        Mr. Kappos. Absolutely.
        Senator Whitehouse. Thank you, Chairman.
        Chairman Leahy. Thank you very much, Senator Whitehouse.
        Senator Feinstein, you said you had one more question you
    wanted to ask?
        Senator Feinstein. I do, Mr. Chairman.
        Chairman Leahy. Please go ahead.
        I am just reading the 15 Georgia Pacific factors. I
    actually think they are pretty good, and I think it is you, Mr.
    Johnson, I am going back to something you said in 2007 about an
    inhaler for--what was it?----
        Mr. Johnson. I believe it was an insulin inhaler.
        Senator Feinstein. Okay. That just by changing a few
    molecules, you can aerosolize insulin, which then means that
    somebody does not have to make injections perhaps several times
    a day. Now, that is an enormous advance for insulin users for
    diabetes.
        If you compare that with the windshield wiper, the
    intermittent windshield wiper, I mean, maybe that is a huge
    thing. I do not think it is. But I understand the high-tech
    concern that somebody comes along and over-emphasizes the value
    of their little addition, and it differs from your industry's
    concerns because it is the health and welfare of people, and
    very often the slightest change makes a major difference.
        So it seems to me, as I look at these Georgia Pacific
    factors--which I actually think we should codify. I think they
    are excellent. Then it is sort of set, and maybe give the judge
    the choice. But there clearly ought to be one factor that
    points out the relative differences that can happen,
    particularly in medicines, which increase greatly their value
    as opposed to something that is part of a microchip and
    relatively minor.
        I would love to have some commentary on that. Maybe I am
    all wet, but that is the way I look at it.
        Mr. Johnson. Senator, the fact that a small change can have
    a major difference is not limited to biotechnology or
    medicines. A small change can have a dramatic effect in all
    fields. It can also have a very minor effect in all fields. It
    depends on the invention, and it depends on the setting.
        You are absolutely right. You gave us two very good
    examples. But, for example, a small change in semiconductors
    that perhaps increased their speed by 10 times could, in fact,
    have a very big financial impact.
        So it seems to me that the best thing to do is to look at
    the economic impact of that change. It may, indeed, not be very
    large in the windshield wiper added to the car, and, in fact,
    in real life, the amount of damages awarded were less than $1
    per car. They were----
        Senator Feinstein. Let me just quickly--because I got your
    point and it is a good point. So you would say that number six
    of the Georgia Pacific factors is adequate?
        Mr. Johnson. I am sorry. I do not have them memorized by
    number.
        Senator Feinstein. ``The effective selling the patented
    specialty in promoting sales of other products . . .; the
    existing value of the invention to the licensor as a generator
    of sales of his non-patented items; and the extent of such
    derivative or convoyed sales.''
        Mr. Johnson. Yes, I believe----
        Senator Feinstein. Is that sufficient?
        Mr. Johnson. I believe that that is one of the factors that
    should be considered. Yes, I agree with you, the Georgia--
    depending on the competitive setting, one or more of the
    Georgia Pacific factors need to be considered, and I think
    normally it is more than one.
        Senator Feinstein. I see a couple of others. So you all
    feel that is adequate?
        Ms. Maghame. If I may, Senator?
        Senator Feinstein. Please.
        Ms. Maghame. I was just looking at the factors, and I think
    even number 9, the utility and advantage of the property, and a
    number of other factors, which is exactly why we have been
    advocating for the flexibility that you are talking about and
    we totally agree with; because I think the key here is--two
    points I would like to make.
        First of all, when we are talking about determining the
    contribution, we also need to be conscious of the fact that
    there is a royalty rate that is associated. Whether you take
    the entire market value or the value of some component, you
    still need to use a percentage of that, and that is why I have
    an issue with the premise of----
        Senator Feinstein. Just quickly, because others want to----
        Ms. Maghame. Sure.
        Senator Feinstein. Would you give the judge the ability to
    decide which factors to submit to the jury?
        Ms. Maghame. Yes, because those factors need to be
    supported.
        Senator Feinstein. Would everybody agree with that or not?
    Everybody looks nonplussed.
        Mr. Johnson. If supported by substantial evidence, I think
    they should go to the jury.
        Senator Feinstein. If supported by substantial--and who
    would determine the substantial----
        Mr. Johnson. Well, in the typical case, you would have an
    expert or a party propound their damages contentions, and then
    it would be subject to a motion to keep one or more of the
    contentions from going to the jury. The judge would look at the
    contentions, see if they are supported by substantial evidence;
    and if they are not, the judge would exclude those from going
    to the jury.
        Senator Feinstein. Thank you.
        Thank you, Mr. Chairman.
        Chairman Leahy. Thank you.
        Senator Cardin, did you have any questions?
        Senator Cardin. No, Mr. Chairman. I just really want to
    thank you for conducting this hearing. This is an extremely
    important subject, and you have been extremely patient in
    allowing for the record to continue to develop. And I am
    hopeful that we can move legislation, and I hope that we get it
    right. And I think today's hearing will help us achieve those
    goals.
        Chairman Leahy. Thank you. I have talked with both
    Republicans and Democrats in the Senate, and I think there is a
    consensus we will move legislation this year, the earlier the
    better. I have also talked with the White House with the broad
    outlines of what we are talking about, and I am convinced the
    President will sign it. I do not think we can continue with a
    50-year-old system. There are a number of good things in it,
    but a lot has to be brought into this century. Along with that
    are ways to find out how the office can also pay for itself and
    do this.
        So we will keep the record open if anybody wishes to add--
    Ms. Maghame?
        Ms. Maghame. If I may, can I make one point?
        Chairman Leahy. You wish to add. You do not want to wait
    for the record. Go ahead.
        Ms. Maghame. One point I would like to make because I think
    it is so critical on the jobs issue. That has been kind of our
    focus in this hard economic time. I am interested to see the
    study that Mr. Appleton refers to that they have commissioned,
    but would hope that other studies that have come out recently
    also be taken into account in terms of what an apportionment-
    based system of damages could do in terms of loss of
    manufacturing jobs.
        Chairman Leahy. I understand that, but I also understand
    that we are going to--I wear another hat, and that is as
    Chairman of the Foreign Operations Subcommittee on
    Appropriations. And I am adding money and pushing hard for the
    Department of State to have more experts in our embassies
    around the world on intellectual property matters. We have
    agricultural attaches, we have our intelligence people, our
    military attaches, we have others--all important. But I think
    if we are going to continue our ability to compete with the
    rest of the world, we have also got to be able to take steps on
    intellectual property and enforcing our own laws abroad, but
    also getting our trading partners to understand that it is in
    their best interests to have a system that actually works to
    enforce not only our patents but for us to enforce theirs.
        At a time of a worldwide economic crisis--and it is--there
    is a tendency, I believe, for countries and for leaders in the
    countries to develop short-term protectionism. In my mind, that
    is the worst thing we could possibly do, certainly for the
    largest economic engine in the world, in the United States.
    Protectionism can come in many different ways. It can come,
    among other things, by other countries using their courts and
    their patent forums to block us because they feel we are not
    being consistent, or can at least make that claim. At the same
    time, we have got to be able to say not only are we consistent
    in what we do, but we expect the same from the people we trade
    with.
        That is not something that is going to be settled today by
    any means, but we have to have a very clear law in our country.
    We have got to have something where it is inventors who are
    protected and not just litigators. And it has got to be done in
    such a way that we continue to innovate. But then we have got
    to be able to protect our innovations worldwide, as other
    countries can be expected to protect theirs.
        We have a number of countries that will enforce their own
    intellectual property laws when it suits them, and not
    otherwise. I think of one major trading partner who made a big
    thing of having bootlegged--whether it is movies or recordings
    or computer programming, they make a big thing of having--out
    in front of the factory, having road graders go and crush all
    this to say, ``See how we are enforcing,'' while the 18-
    wheelers are in the back of the place loading up with their
    latest shipment of the exact same bootlegged equipment. That
    has got to stop. In the long term, it is in their best
    interests to stop it. It is all ours to do it.
        I realize that is not the subject of what we are doing
    here, but I just want--you know, it is--to ensure we will get--
    there will be new patent legislation with these hearings and
    why I appreciate so much all of you testifying, is that we know
    that there are differing views of what should be in there. But
    ultimately there has to be just one piece of legislation, and
    we are trying every way we can to hear all of you. But then we
    have got to make sure that overseas our patents are also
    protected, our patents and our copyrights and our trademarks
    are all protected, because every one of you has represented and
    spoken and worked with people whose patents are not just used
    here in the United States, they are used worldwide. And we have
    a lot of inventors in my State. We have a lot of companies that
    are heavily involved--in fact, I think on a per capita basis we
    export more than any State in the Union. But I know how much
    they are frustrated by countries that do not uphold our patents
    and try to point to loopholes in our patent laws. We will close
    those loopholes, but then they are going to have to do the
    same.
        We stand in recess.
        [Whereupon, at 11:55 a.m., the Committee was adjourned.]
        [Questions and answers and submissions for the record
    follow.]

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