[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

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         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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20402-0001


                       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

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                    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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