[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                   PRIOR USER RIGHTS: STRENGTHENING 

                   U.S. MANUFACTURING AND INNOVATION

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



                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                         INTELLECTUAL PROPERTY,

                     COMPETITION, AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 1, 2012

                               __________

                           Serial No. 112-78

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov





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                       COMMITTEE ON THE JUDICIARY

                      LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina         JERROLD NADLER, New York
ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT, 
BOB GOODLATTE, Virginia                  Virginia
DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana                  MAXINE WATERS, California
J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona                  Georgia
LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
TED POE, Texas                       JUDY CHU, California
JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania             JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada

      Sean McLaughlin, Majority Chief of Staff and General Counsel
       Perry Apelbaum, Minority Staff Director and Chief Counsel
                                 ------                                

  Subcommittee on Intellectual Property, Competition, and the Internet

                   BOB GOODLATTE, Virginia, Chairman

                   BEN QUAYLE, Arizona, Vice-Chairman

F. JAMES SENSENBRENNER, Jr.,         MELVIN L. WATT, North Carolina
Wisconsin                            JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
STEVE CHABOT, Ohio                   JUDY CHU, California
DARRELL E. ISSA, California          TED DEUTCH, Florida
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
JIM JORDAN, Ohio                     JERROLD NADLER, New York
TED POE, Texas                       ZOE LOFGREN, California
JASON CHAFFETZ, Utah                 SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas                MAXINE WATERS, California
TOM MARINO, Pennsylvania             HENRY C. ``HANK'' JOHNSON, Jr.,
SANDY ADAMS, Florida                   Georgia
MARK AMODEI, Nevada

                     Blaine Merritt, Chief Counsel

                   Stephanie Moore, Minority Counsel



                            C O N T E N T S

                              ----------                              

                            FEBRUARY 1, 2012

                                                                   Page

                           OPENING STATEMENTS

The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Subcommittee on 
  Intellectual Property, Competition, and the Internet...........     1
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Ranking Member, Subcommittee 
  on Intellectual Property, Competition, and the Internet........     3
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, Ranking Member, Committee on the 
  Judiciary, and Member, Subcommittee on Intellectual Property, 
  Competition, and the Internet..................................     4

                               WITNESSES

David J. Kappos, Under Secretary of Commerce for Intellectual 
  Property, and Director, U.S. Patent and Trademark Office 
  (USPTO)
  Oral Testimony.................................................     7
  Prepared Statement.............................................     9
Robert A. Armitage, Senior Vice President and General Counsel, 
  Eli Lilly and Company
  Oral Testimony.................................................    22
  Prepared Statement.............................................    25
Dan Lang, Vice President, Intellectual Property, Cisco Systems 
  Inc.
  Oral Testimony.................................................    48
  Prepared Statement.............................................    50
John C. Vaughn, Executive Vice President, Association of American 
  Universities
  Oral Testimony.................................................    56
  Prepared Statement.............................................    59
Dennis Crouch, Associate Professor of Law, University of Missouri 
  School of Law
  Oral Testimony.................................................    65
  Prepared Statement.............................................    67

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, and 
  Ranking Member, Committee on the Judiciary, and Member, 
  Subcommittee on Intellectual Property, Competition, and the 
  Internet.......................................................     4


                   PRIOR USER RIGHTS: STRENGTHENING 
                   U.S. MANUFACTURING AND INNOVATION

                              ----------                              


                      WEDNESDAY, FEBRUARY 1, 2012

              House of Representatives,    
         Subcommittee on Intellectual Property,    
                     Competition, and the Internet,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 10:08 a.m., in 
room 2141, Rayburn Office Building, the Honorable Bob Goodlatte 
(Chairman of the Subcommittee) presiding.
    Present: Representatives Goodlatte, Quayle, Sensenbrenner, 
Coble, Chabot, Issa, Jordan, Adams, Watt, Conyers, Chu, 
Sanchez, Lofgren, Waters, and Johnson.
    Staff present: (Majority) Vishal Amin, Counsel; Olivia Lee, 
Clerk; and (Minority) Stephanie Moore, Subcommittee Chief 
Counsel.
    Mr. Goodlatte. Good morning. This hearing of the 
Subcommittee on Intellectual Property, Competition, and the 
Internet, and on the subject of Prior User Rights: 
Strengthening U.S. Manufacturing and Innovation will come to 
order, and I have an opening statement.
    Today we are holding a hearing on the prior user defense. 
This provision was included as an integral part of the Leahy-
Smith America Invents Act, and the move to a first inventor to 
file system.
    The AIA was the first patent reform bill in over 60 years, 
and the most substantial reform of U.S. patent law since the 
1836 Patent Act. This legislation brought together individuals 
and businesses that represent the full spectrum of the American 
economy--from individual inventors to businesses and job 
creators of all sizes from the technology, pharmaceutical, 
manufacturing, biotech, consumer goods, finance, defense and 
retail sectors.
    The prior user rights provision was developed to ensure 
that it created a strong right for those who first commercially 
use inventions, protecting the rights of early inventors, and 
giving manufacturers a powerful incentive to build new 
factories in the United States to keep and bring jobs back 
home. The provision helps to ensure that factories are able to 
continue using manufacturing processes without the fear of 
costly litigation. This ensures that the first inventor of a 
new process or product used in manufacturing can continue to do 
so.
    The AIA's prior user defense protects American 
manufacturers from having to patent the hundreds of thousands 
of processes they use in their facilities. Further, prior user 
rights are an important part of the switch to a first inventor 
to file system. For many manufacturers, the patent system 
presents a Catch-22. If they patent a process, they disclose it 
to the world, foreign manufacturers will learn of it, and in 
many cases use it in secret without paying licensing fees. The 
patents issued on manufacturing processes are very difficult to 
police and oftentimes patenting the idea simply means giving 
the invention away to foreign competitors. On the other hand, 
if the U.S. manufacturer does not patent the process, then 
under the pre-AIA patent system, a later party can get a patent 
and force the manufacturer to stop using a process that they 
independently invented and used. Due to this litigation threat, 
it has been easier for a factory owner to idle or shut down 
parts of a plant and move operations and jobs overseas rather 
than risk their livelihood through an interference proceeding 
before the USPTO.
    It is important to note that under the AIA, interference 
proceedings have been eliminated for patents that will be 
issued under the first inventor to file system. A less costly 
derivation proceeding will be used to settle such disputes 
within the USPTO.
    Post-AIA, the factory owner who has been commercially 
utilizing an innovation can continue doing so even if a 
subsequent patent is issued. The AIA's prior user rights 
provision results in an equitable outcome whereby a factory 
stays open, jobs stay here, and the subsequent patent owner 
gets to keep their patent albeit within a limited carve-out to 
the prior user.
    Currently, nearly every foreign country that has adopted a 
first inventor to file system recognizes prior user rights. We 
are here today to look at the recently issued AIA report on 
prior user rights, and also to examine whether we need to 
improve the prior user defense going forward.
    In particular, two key areas have stood out for further 
discussion.
    This includes reducing the 1-year trigger for the prior 
user defense that requires that action be taken 1 year prior to 
the earlier of either the effective filing date of the claimed 
invention or the date of public disclosure to qualify.
    And second, modifying the prior user defense to account for 
the situation where a company has taken substantial steps 
toward commercialization.
    As part of the AIA, an interagency report on prior user 
rights was mandated. When we were first drafting the bill, we 
slotted the report to take 1 year to finish, but after talking 
with Director Kappos, he was confident that it could be done in 
a quarter of the time.
    So we wrote in a 4-month deadline for the report starting 
the day H.R. 1249 was signed into law. I am pleased to see that 
the report has arrived on time and under budget.
    Well, at least I can confirm that the report arrived on 
time, though I am sure that Director Kappos will be able to 
confirm that it came in under budget. I look forward to hearing 
from all of our witnesses on the findings of the report, and 
also engage in a discussion on how we can improve the prior 
user rights defense going forward to promote U.S. manufacturing 
technology and innovation.
    It is now my pleasure to recognize the Ranking Member of 
the Subcommittee, the gentlemen from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. If I can get my 
microphone to cooperate I will make an opening statement also.
    I thank the Chairman for convening this hearing. American 
intellectual property whether in the form of patents, 
copyrights, trademarks or trade secrets should be shielded from 
theft, piracy and infringement. Constructing an effective 
shield is vital to the U.S. economy and consumers, and is the 
challenge of policymakers and the law.
    For that reason, I supported the inclusion of a robust 
prior user rights defense in the America Invents Act with a 
carefully crafted consensus carve-out for universities. Prior 
user rights appropriately recognize and reward commercial 
ingenuity by allowing manufacturers to continue using 
innovations that benefit the public, that were created before a 
patent application was filed by another party.
    It is not always feasible or desirable for every true 
invention to receive patent protection. Such a requirement 
could stymie progress and delay marketing and manufacturing of 
products that improve the quality of life for our citizens.
    Moreover, because the patent system is premised upon 
disclosure--a policy that incentivizes businesses to reveal all 
new technologies in order to avoid legal liability would have 
the perverse effect of allowing foreign markets to capitalize 
on American intellectual investments.
    By affording cover for a restricted category of undisclosed 
innovations, however, the prior user rights provision 
represents a fair balance between trade secrets and patented 
inventions within the marketplace. It protects all businesses, 
big and small, and levels the playing field for U.S. industries 
against foreign competitors who enjoy prior user rights in 
their home country.
    The conversion to a first to file system also mandated by 
the America Invents Act could not effectively promote and 
reward American innovation without the fundamental prior user 
rights defense. Absent an effective prior user rights defense 
the race to the Patent Office under the first to file system 
would likely have led to lower quality defensive patent 
applications covering trade secrets from multiple industries.
    Moreover, a robust prior user rights defense was essential 
to harmonize U.S. adoption of the first to file system with 
similar systems throughout the rest of the world. The U.S. 
Patent and Trademark Office report on the prior user right 
defense concludes that the provisions in the America Invents 
Act, ``need not be altered at this time'', and ``should be 
maintained with no change''.
    However, some have raised concerns both about the amount of 
progress toward commercialization and about the 1-year 
durational requirement necessary to trigger the defense. They 
maintain that the current standard is not on par with what is 
practiced in other countries, and consequently puts our private 
sector industries at a disadvantage from foreign competition.
    I am anxious to hear the views of our witnesses about these 
concerns. There is clearly unfinished business for our Nation 
to secure the intellectual property rights of our inventors and 
creative communities from threats of infringement and deceptive 
practices, especially from abroad.
    But I am also mindful of the painstaking process that led 
to the compromises embodied in the America Invents Act.
    I look forward to hearing from the witnesses about whether 
additional legislative action is necessary or desirable to 
reinforce the global competitiveness of American companies and 
whether that action can be undertaken without betraying the 
good faith concessions made by our Nation's university 
associations on the prior user rights defense.
    It seems to me that the conclusion of the U.S. Patent and 
Trademark Office that Congress should make no changes at this 
time sets a high bar to demonstrate otherwise.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Mr. Goodlatte. I thank the gentleman.
    The Chair is pleased to recognize the Ranking Member of the 
full Committee, the gentleman from Michigan, Mr. Conyers.
    Mr. Conyers. Thanks, Chairman Goodlatte and Mr. Watt.
    I don't want to take the time to all of us say the same 
thing three times, so I will put my statement in the record 
with this recommendation.
    I think that we might want to find a way to resolve these 
differences before 2015. And so all I am doing is suggesting 
that in a year from now, we look at what has actually been 
happening. The President signed the bill a few months ago so I 
think about a year from now we will be able to look at this 
more critically. I think we are moving in the right direction. 
I supported the major bill signed September 16, and I think 
that our leader here of the intellectual property trademark 
office--and by the way, I am glad that there is one coming to 
Detroit, which we are looking forward to help develop and I 
hope that it will be useful. But I commend the Under Secretary 
Kappos, and also join in welcoming him to the hearing and I 
will put the rest of my statement in the record.
    [The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
 in Congress from the State of Michigan, Ranking Member, Committee on 
   the Judiciary, and Member, Subcommittee on Intellectual Property, 
                     Competition, and the Internet
    Today's hearing focuses on the prior user rights defense provision 
included in the Leahy-Smith America Invents Act (AIA), which President 
Obama signed on September 16, 2011.
    I recognize the sensitivities that surrounded the prior user rights 
debate and do not believe we should wait until 2015 to reevaluate the 
economic impacts of the prior user rights defense as the United States 
Patent and Trademark Office report recommends. That is too long to 
wait.
    We want to be fair and contemplate all of the concerns that are 
raised by technology companies as well as consider concerns raised by 
the higher education community with respect to prior user rights.
    Nonetheless, I recognize that the bill was enacted last September, 
so I recommend that a year from now we come back and look at this issue 
to see what has developed. At that point, we should have additional 
evidence about whether this issue warrants more hearings or more 
reports.
    There are several critical issues that we should consider during 
this hearing. First, there is the fundamental inquiry as to whether 
this provision can be modified to boost innovation and aid the 
manufacturing sector.
    The prior user rights defense permits someone who had been making 
or using an invention to continue to do so after the invention has been 
patented by another.
    Before enactment of the AIA, the prior user defense was applicable 
only to business method patents, which made it a limited defense. This 
defense was created in response to the 1998 Federal Circuit decision in 
State Street Bank & Trust Co. v. Signature Financial Group.
    In the State Street decision, the Federal Circuit explicitly held 
that business method patents were patentable.
    The AIA enlarged the prior user rights defense to patent 
infringement to safeguard third parties who can establish that they 
were commercially using an invention at least one year before the 
filing date of a patent application in regard to such invention. The 
AIA extends the prior user rights defense to all patents, not simply 
business method patents.
    The prior user rights provision in the AIA was drafted to establish 
a powerful defense for those who first commercially use inventions, and 
to provide manufacturers an incentive to build new factories in the 
United States.
    A prior user right defense has been used by many countries and is 
used as a counterpart in many first-to-file systems.
    Another concern is whether the prior user rights provision 
adequately protects universities. As many of you will recall, 
university associations and their memberships raised serious concerns 
about this provision during the debate on AIA.
    Over the six years that we debated patent reform, the higher 
education community voiced substantial concerns about the increase of 
prior user rights to be used as a defense against infringement for all 
patents.
    At the same time, numerous organizations in the private sector 
argued that there was a need for broad prior use defense, especially if 
the U.S. moved from a first-to-invent to a first-to-file system for 
determining patent priority.
    AIA included a prior user rights provision to address the concerns 
of the higher education community.
    The Act's defense provision has been drafted to maintain a high 
burden of proof and shield universities and technology transfer 
organizations from its enforcement.
    Supporters of the prior user language in the Act argue that 
university concerns have been addressed because all university patents 
are exempt from the assertion of a prior use defense, except those that 
result from research that could not have been conducted with federal 
funds.
    In apparent response to all of these concerns, section 3 of the AIA 
required the United States Patent and Trademark Office to study and 
report to Congress on prior user rights.
    In light of the fact that this report was just issued last month, 
today's hearing provides a timely opportunity to consider the results 
and recommendations of this report.
    The report was developed in consultation with the office of the 
United States Trade Representative, the Justice Department, and the 
State Department.
    It reflects critical input that the USPTO received from a public 
hearing that it conducted and from interested parties who shared their 
opinions about this provision.
    The study compares the operation of prior user rights in other 
industrialized countries with the law in the United States. 
Specifically, the report examines the effects of prior user rights on 
innovation, startups, and venture capital. The report also looks at the 
legal issues that arise with trade secret law and the impact of 
switching to a first-to-file patent system.
    According to the USPTO report, the ``prior user right defense under 
the AIA should be maintained with no change at the present time because 
there is no substantial evidence that it will have a negative impact on 
innovation, venture funding, small businesses, universities, or 
independent inventors.''
    Additionally, the report suggests that the ``USPTO should 
reevaluate the economic impacts of prior user rights as part of its 
2015 report to Congress on the implementation of the AIA, when better 
evidence as to these impacts might be available.''
    The report concludes that the AIA strikes the right balance by 
limiting the prior user rights defense to those parties that can prove 
commercial use at least one year prior to the filing date of the patent 
application by clear and convincing evidence.
    We heard many arguments against expanding prior user rights that 
included the need for public disclosure in the patent system. There was 
also an argument that the patentee receive a limited monopoly in return 
for disclosing new knowledge to the public.
    Supporters of broader prior user rights argue that in complex 
products and manufacturing processes, which contain hundreds or 
thousands of patented components, it may not make sense to patent every 
component or process.
    Supporters also argued that prior user rights are essential to 
ensure that those who have invented and used a technology but choose 
not to disclose that technology are provided a defense against someone 
who later patents the technology.
    I expect to hear that some of the changes that can be made to the 
prior user language can include changing the requirement of commercial 
use one year before filing of the patent application or publication of 
the invention.
    In addition, there are those who argue that ``commercial use'' 
should be modified to explicitly include substantial preparation for 
the actual internal commercial use or arms length commercial transfer 
of a useful end result.
    While we consider if the language of prior user rights should be 
improved, I would like to note one thing about the AIA that I am 
particularly pleased was included. The AIA requires the USPTO to 
establish 3 satellite offices within 3 years of the Act's enactment, 
which is September, 2014.
    I am particularly pleased that the very first PTO satellite office 
will be in Detroit this summer as the Elijah J. McCoy United States 
Patent and Trademark Office, located on 300 River Drive.
    The USPTO estimates that this satellite office will create more 
than 100 high technology jobs.
    This is a positive development and I look forward to working with 
the USPTO and the Commerce Department to make sure the office opening 
is successful.
    We all invested a significant amount of effort over the years in 
working on patent reform legislation.
    Our patent system has been immensely successful at promoting the 
advancement of the useful arts and sciences. Our Nation's economic 
future is dependent on our ability to innovate and efficiently and 
effectively protect the products of that innovation.
    I look forward to hearing from our witnesses whether there are 
particular ways that the prior user rights defense language can be 
improved.
                               __________

    Mr. Goodlatte. I thank the gentleman.
    Without objection, all their opening statements will be 
made a part of the record.
    And we have two very distinguished panels of witnesses 
today. Each of the witnesses' written statements will be 
entered into the record in its entirety, and I ask each witness 
to summarize their testimony in 5 minutes or less.
    To help you stay in that time, there is a timing light on 
your table. When the light switches from green to yellow, you 
have 1 minute to conclude your testimony. When the light turns 
red, it signals that the witness' 5 minutes have expired.
    Before I introduce our witnesses, I would like them to 
stand and be sworn. We will do this one panel at a time. We 
don't need to wait for the next panel, to swear them.
    [Witness sworn.]
    Mr. Goodlatte. Thank you very much and welcome.
    Our first witness is the Honorable David Kappos, Under 
Secretary and Director of the U.S. Patent and Trademark Office. 
Director Kappos served in this role since August 2009, advising 
the President, the Secretary of Commerce and the administration 
on intellectual property matters.
    Before joining the U.S. Patent and Trademark Office, 
Director Kappos served as Vice President and Assistant General 
Counsel for Intellectual Property at IBM, where he managed 
worldwide intellectual property operations.
    Director Kappos received his Bachelor of Science degree in 
electrical and computer engineering from the University of 
California, Davis, and his law degree from the University of 
California, Berkeley. Welcome.

 TESTIMONY OF DAVID J. KAPPOS, UNDER SECRETARY OF COMMERCE FOR 
INTELLECTUAL PROPERTY, AND DIRECTOR, U.S. PATENT AND TRADEMARK 
                         OFFICE (USPTO)

    Mr. Kappos. Well, good morning, Chairman Goodlatte, Ranking 
Member Watt and Members of the Subcommittee. Thank you for this 
opportunity to discuss the issue of prior user rights, and the 
prior user rights defense and the report the USPTO prepared 
pursuant to the Leahy-Smith America Invents Act.
    As you are well aware, the AIA represents the most 
significant and necessary modernization of our Patent laws in 
many decades. Mr. Chairman, you and the Members of the 
Judiciary Committee deserve special praise and our special 
thanks for your tireless and successful efforts over multiple 
Congresses toward enactment of the AIA.
    We at the USPTO are in your debt, and we have already taken 
a number of steps necessary to implement the new law including 
issuing proposed rules and completing two of the seven studies 
required by the AIA to evaluate specific provisions of the 
legislation.
    Among the many important components of the AIA is the 
expansion of the prior user rights defense to infringement to 
apply to all classes of patents. The prior user defense 
protects third parties who can demonstrate that they 
commercially used an invention for at least a year prior to the 
filing date of the patent application relative to that 
invention.
    As I have said in previous testimony before this 
Subcommittee, I believe that expanding the prior user defense 
is pro-manufacturer, pro-small business and, on balance, good 
policy.
    Section 3(m) of the AIA directed the USPTO to prepare a 
report on specific issues regarding the defense including the 
operation of the prior user rights in industrialized countries, 
impact on innovation in small business, impact on trade secret 
law, and the relationship with the first inventor to file 
patent system. In preparing the report, we conducted our own 
research, we held a public hearing, and solicited comments from 
stakeholders. We also obtained input from USTR, the Department 
of Justice, and the Department of State.
    Most of the comments we received supported the AIA's prior 
user rights defense provision, though several did express 
concerns.
    While a few comments took a view that prior user rights may 
have the consequence of promoting secrecy over disclosure, the 
vast majority of comments noted that the ability to maintain 
trade secrets is vital to American competitiveness and job 
growth, and that a limited prior user rights defense is an 
appropriate complement to a first to file system.
    In summary, Mr. Chairman, we found that the AIA strikes the 
right balance by limiting the prior user rights defense to 
those parties who can prove by clear and convincing evidence 
commercial use at least 1 year prior to the filing date of the 
patent application. We believe that patent owners' rights will 
not be unjustly impaired and that the defense will not have a 
negative impact on small business or independent inventors.
    Further, we believe that the defense is constitutional and 
can legally coexist with trade secret law.
    Lastly, the defense is a proper fit with a first inventor 
to file system and represents a significant step toward patent 
law harmonization with our trading partners.
    Based on our findings, Mr. Chairman, we made a number of 
recommendations including the need of the USPTO to reevaluate 
the economic impacts of prior user rights as part of our report 
on AIA implementation in 2015, although we would be happy to do 
it even sooner if that is requested by the Committee.
    While our recent report recommends that no legislative 
alteration of the provisions is necessary at this time, we 
believe that stakeholder concerns should be carefully and 
continuously reviewed and possibly addressed in future 
legislation. Such changes could indeed strengthen the defense 
for U.S. manufacturers while still protecting the vital 
interests of our university community.
    Mr. Chairman, again thank you for this opportunity to share 
our views on this important issue. And thank you for your 
continued strong support of the employees and operations of the 
USPTO.
    [The prepared statement of Mr. Kappos follows:]
    
    
    
    
    
    
    
    
                               __________

    Mr. Goodlatte. Thank you, Director, and I will start the 
questioning.
    Say a U.S. company is taking substantial steps toward 
commercializing a product and shares an unpatented trade secret 
with a subcontractor in a foreign country who is involved in 
that process. For example, that subcontractor might be in 
China.
    Now what if the subcontractor then shares that information 
with a third company who then files for patent protection in 
China, establishing a priority date, and later files in the 
United States. What type of protection would the U.S. company 
have apart from a derivation proceeding at the PTO?
    Mr. Kappos. Well, that is a good question--a bit of a law 
school hypothetical there. If I follow everything, the 
derivation proceedings would be the first line of defense. It 
could be a challenging situation for the U.S. manufacturer.
    Another line of defense could be, of course, prior user 
rights as the obvious tool, and this hypothetical is an example 
of why prior user rights can be very effective to protect U.S. 
manufacturing.
    The other possible defense I can think of is the claim that 
the Chinese party wasn't an inventor because they copied the 
invention from the U.S. provider, but that defense would 
probably be raised in a derivation proceeding.
    Mr. Goodlatte. In fast moving sectors like the technology 
and pharmaceutical industries, would it make sense for the 
prior user rights defense to take into account the issue of 
substantial commercial preparation?
    Mr. Kappos. Well, that is a great question. It has been 
raised already, I think, in some of the floor statements.
    Other countries do uniformly take substantial preparations 
into account. In fact, one of the things we pointed out in our 
report was that the U.S. approach in AIA is unique in not 
taking substantial preparations into account. That being said, 
as I think Ranking Member Watt commented, there was a very 
delicate balance that was struck, and we need to be cognizant 
of the needs of the university community in this regard, and 
make sure we are protecting that important channel for 
breakthrough inventions to enter the manufacturing marketplace.
    And it was that sense of balance that caused us to say, 
look, we certainly recognize that substantial preparation is a 
good rubric to use, and would be beneficial to many U.S. 
industries, probably including pharmaceutical and others.
    But a balance was struck, and it was indeed a delicate one.
    Mr. Goodlatte. So you are not prepared to tell us to take 
that next step yet? Is that what your answer is?
    Mr. Kappos. Yes. I wouldn't be confident saying that it is 
clearly necessary at this point.
    Mr. Goodlatte. In your testimony you mention that the 1-
year threshold for using the prior user defense in the AIA is 
significantly more restrictive than the approach used in any 
other country. Do you think that the threshold should be 
reduced or eliminated altogether?
    Mr. Kappos. Well, that question goes hand in hand with the 
substantial preparation question. The approach that is used in 
every other country is no 1-year trigger, but a substantial 
preparation test.
    If a change were to be made, probably those two changes 
would go together. It certainly would be harmonizing, but then 
again it could have a deleterious effect on the university 
community, and we are cognizant of the issues there.
    Mr. Goodlatte. Now, to the point that was raised by the 
Ranking Member of the full Committee, Mr. Conyers, and you 
mentioned it in your testimony as well, regarding the 2015 
report. The USPTO's report on prior user rights concluded that 
the prior user defense under the AIA should be maintained with 
no changes and the USPTO should reevaluate the economic impacts 
of prior user rights when it submits another AIA required 
report due in 2015 on implementation of the AIA.
    Would the 2015 report reflect on more and better evidence 
than we have currently about the impact of the prior user 
rights included in the just passed AIA?
    I think this is sort of a balancing argument that the 
sooner you do it, the happier some people might be, but the 
longer you wait, maybe you will be basing it on better 
information. What is your comment on that?
    Mr. Kappos. Well, that is exactly right, Mr. Chairman. We 
could do a report in another year. The challenge will be that 
it is going to take some time to build up data. We really need 
to get data on the impact that the new U.S. system has on the 
U.S. intellectual property marketplace and on our manufacturing 
sector.
    And it will really only be a few years into the legislation 
that we will be able to say with some confidence that we have 
that data.
    Now, we can certainly go out and start collecting data more 
quickly, come in with an interim report if that is helpful, and 
still do reporting in 2015 as another option.
    Mr. Goodlatte. Thank you.
    The Chair recognizes the gentleman from North Carolina, Mr. 
Watt?
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Kappos, I think the Chair has asked in at least one of 
the questions, and that is on the timing of this. Whether this 
report may have been required too early in the process before 
there was really any evidence built up to base a reliable 
conclusion on.
    And, I suppose the real answer, you will continue to study 
this until 2015--that is what I--and give another report at 
that time?
    Mr. Kappos. Yes.
    Mr. Watt. Okay.
    The second question that one of the witnesses on the next 
panel has raised is whether the U.S. Patent and Trademark 
Office is really the appropriate body to be answering this 
question.
    He says that the problem is that under U.S. law the U.S. 
Patent and Trademark Office has no role in patent infringement 
analysis, patent litigation or regulation of start-up ventures. 
The agency has no expertise in this area and yet is being asked 
to determine the general impact of the law.
    A superior body may be the Federal Trade Commission, the 
courts and the community of U.S. innovators. How do you respond 
to that?
    Mr. Kappos. Well, I would respectfully disagree with that 
point of view. I think, first of all, the United States Patent 
and Trademark Office is the Administration's advisor on 
intellectual property issues, intellectual property policy 
issues.
    We of course did, as I mentioned, consult with USTR, the 
Department of Justice, the Department of State. We conducted a 
hearing. We took public comments. We got several dozen public 
comments.
    So the USPTO is acting in large measure as a channel, as a 
collector and aggregator, and an ``analyzer'', if you will, of 
exactly the kind of evidence that the comment calls for.
    We also do have expertise in the area that enables us to 
prepare the kind of report we did, including reaching out 
overseas, accumulating information going back many years from 
what other jurisdictions are doing, and putting together views 
of the entire Administration.
    Mr. Watt. So, how consistent are we with the rest of the 
world? It seems to me that, the more I thought about this after 
we passed the law and reflecting on the sharing, is that we 
could be more aggressive in--than we were in the statute on 
prior user rights to take into account a shorter period, 
possibly a whole series of things that one of the witnesses has 
raised on the second panel.
    What would it take to get us consistent with the rest of 
the world?
    Mr. Kappos. Well, okay. A couple of points. One, we are 
generally consistent with the new approach that is in the AIA. 
So, at a high level, we are much more harmonized than we were 
before.
    The places where we are now not harmonized include the 1-
year provision that has been mentioned already. The defense has 
the 1-year look back. The fact that we are not using a 
substantial preparation kind of a test, and the language in the 
provision that at one point seems to relate to processes, but 
then goes back and articulates articles of manufacture and 
products, compositions as well, which in my view is somewhat 
confusing language and could frankly on a technical level stand 
to be cleaned up.
    Mr. Watt. All right. I think that addresses the concerns or 
questions I have. I am not sure that necessarily answers all of 
them, but this is--we don't have hearings to get answers to all 
the questions, just to get different perspectives on them.
    And I will be anxious to hear the witnesses on the second 
panel give their perspectives on some of the same issues. So, 
thank you.
    And I yield back, Mr. Chairman.
    Mr. Goodlatte. I thank the gentleman.
    The gentleman from Arizona, Mr. Quayle, is recognized for 5 
minutes.
    Mr. Quayle. Thank you, Mr. Chairman.
    Director Kappos, how has switching from the first to invent 
system to the first inventor to file system with the inclusion 
of prior user rights helped to decrease the backlog at the PTO?
    Mr. Kappos. Well, the switch from first to invent to first 
inventor to file I believe will be quite helpful relative to 
the backlog--not really an issue that intersects with prior 
user rights which come about after patents are issued, 
generally years down the line.
    But just to briefly respond to the core of the question. 
The switch to the first inventor to file system enables our 
examiners to have a much more objective view of prior art. In 
other words, pick up a document and know by looking at the face 
of the document whether it can be used in examination under the 
new system.
    As opposed to the current system where they really don't 
know if many documents can be used in examining a patent 
application, which hampers them and causes us to be less 
efficient than we otherwise could be. Having to impose 
rejections that then later are not sustainable in view of the 
fact that the date on a prior art document frequently does not 
determine whether it can be used as prior art currently.
    And that is what gets fixed. Under first inventor to file 
will enable us to move through the examination process more 
effectively.
    Mr. Quayle. Okay. And we have all heard about the issue of 
over-patenting, and the ongoing tension between the volume of 
patents that are being granted and their quality. Though the 
AIA was designed to help go a long way toward improving this 
situation, how do you envision the prior rights defense being 
used in litigation to defend against weak or overly broad 
``paper patents''--you know, those types of patents that were 
basically invented in a law firm rather than in a lab?
    Mr. Kappos. Well, I think the prior user rights will be 
very helpful relative to that kind of scenario without 
commenting on over-patenting or under-patenting. Prior user 
rights are all about manufacturing and incenting innovators to 
manufacture here in the U.S., enabling them to go on and 
manufacture without having a cloud brought on later by a late 
filed patent right.
    So, prior user rights relative to areas that are heavily 
affected by patents, where there is a large quantity of patents 
over a specific technology, will help manufacturers to be able 
to make rational decisions about what inventions they file 
patent applications on and where they stop filing patent 
applications with the assurance that they will still be able to 
manufacture their products and won't have someone coming in 
with a paper patent or any other kind of patent later on and 
shutting them down.
    Mr. Quayle. Okay, thanks.
    I want to go back to what the Chairman was talking about in 
terms of the 1-year approach and the possible switch to the 
substantial preparation test that you were mentioning. And I 
was just wondering if that actually leads to more subjective 
rulings on this?
    Because the 1-year is very hard and fast whereas the 
substantial preparation leads to more subjectivity and could 
possibly lead to more uncertainty or at least less certainty. 
How do you envision the substantial preparation test 
alleviating those concerns?
    Mr. Kappos. Well, I would say you are making a fair point 
that there is some subjectivity in a substantial preparation 
test. It would have to be defined and then ultimately there 
would be some litigation, no doubt, over what level of 
preparation is substantial.
    Mr. Quayle. Okay. Thank you very much.
    Thank you, Mr. Chairman. I yield back.
    Mr. Goodlatte. The gentlewoman from California, Ms. Chu, is 
recognized for 5 minutes.
    Ms. Chu. Thank you, Mr. Chair. Mr. Chair, thank you for 
having a hearing today.
    I raised the issue of prior user rights during two of our 
hearings last year, and I am glad that there is some interest 
on the part of the Committee on examining the issue further. 
Many commentators in the patent community have interpreted the 
PTO's report as supporting expansion of prior user rights.
    Would you agree with this characterization? And, if so, how 
should such an expansion be pursued?
    Mr. Kappos. Well, thanks for the question. So, our report 
supports the expansion that Congress made in the AIA. We state, 
I think it is fair to say quite clearly, that the law does not 
need to be expanded further at the present time.
    Ms. Chu. Do you see any need for the future? In the long 
term?
    Mr. Kappos. Well, we do see a few issues that have been 
raised that need to be followed carefully.
    As I mentioned, the fact that substantial preparation is 
not included, the 1-year look back period, and since some 
language that is less than clear defining or distinguishing 
between processes and products and articles of manufacture--
those three items certainly should be watched closely, and 
could be the subject of appropriate legislation in the future.
    Ms. Chu. Okay. I would also like to ask about your 
statements regarding the impact of prior user rights on 
manufacturing jobs. In your testimony, you stated that a prior 
user rights defense is pro-manufacturing and pro-jobs as it 
rewards businesses that put new technology promptly into 
commercial use.
    Could you further explain the statement, and discuss the 
role that that prior user's rights defense plays in preserving 
manufacturing jobs.
    Mr. Kappos. Well, sure. I would be happy to. I will give 
two scenarios, if that is okay.
    The first one is simply a U.S. innovator that puts a new 
product on the marketplace, goes through the work of 
establishing a manufacturing line, all of the effort and 
investment associated with that, and then is years later 
accused of infringing a patent based on a patent application 
that was filed much later than that manufacturer went into 
production. It is an inequity, I believe, in the system for an 
early inventor to be presented with a later patent, and very 
economically inefficient to take the risk of having to shut 
down a manufacturing line and potentially put out of work all 
of the Americans who are working on that line.
    And that leads to the second example--our trading partners 
have prior user rights, which means that their nationals in 
their countries are protected against third parties, including 
Americans, coming in and accusing their nationals of patent 
infringement for manufacturing in their countries.
    So the system that we had before AIA was, in my view, 
substantially inequitable to our country and quite risky 
because it presented the situation where an inventor, an 
innovator, including an American one, was incentivized to 
establish their manufacturing line overseas where they would 
get the benefit of prior user protection and not in the U.S. 
because they would have the risk here of having to shut down a 
manufacturing line later on. Fortunately, that has been 
substantially corrected by the AIA.
    Ms. Chu. And I would like to also ask about the impact of 
prior user rights on innovation. Your report indicated on page 
31 that the public commented the Federal Register was not 
consistent concerning the innovation impacts of allowing a 
prior user defense.
    What were some of the factors that the PTO considered when 
trying to ascertain the impact of the prior user defense on 
innovation rates?
    Mr. Kappos. Well, we were looking for comments from the 
public including examples, if there were any. And the U.S., of 
course, had a prior user right from 1836 until 1952. We weren't 
able to find any evidence during that period of time including 
during expansions like the advent of electricity and the 
pharmaceutical industry as well as many other breakthrough 
innovations in U.S. industries that were created, some of which 
rely more on trade secrets, some of which rely more on patents, 
all of which seemed to thrive during that period of 
unprecedented growth.
    So you take that economic history, you take the fact that 
we received quite a few comments and testimony with no evidence 
submitted that would indicate that there was a negative effect 
on innovation, so we are just simply not able to say that there 
is any evidence of any problem in prior user rights.
    Ms. Chu. Thank you.
    I yield back.
    Mr. Goodlatte. I thank the gentlewoman.
    The Chair now recognizes the gentleman from California, Mr. 
Issa, for 5 minutes.
    Mr. Issa. I thank the Chairman.
    Good to see you again. I think you are bringing us a very 
good point that ultimately all of us who supported patent 
reform have been concerned about. We were asked to work on 
essentially harmonization. If I hear you correctly, and review 
the record correctly, we missed harmonization in this one area, 
didn't we, by having a disparity in prior user rights between 
much of the world and ourselves?
    Mr. Kappos. Well, I would say we made a lot of progress 
toward harmonization, but in the ways we have discussed here 
this morning, we didn't completely harmonize prior user rights.
    If it is okay, Mr. Issa----
    Mr. Issa. Of course.
    Mr. Kappos. One other comment I would make in that regard 
is that the exception of universities and tech transfer offices 
associated with universities is another area in which we did 
not harmonize our prior user rights provision.
    I believe we did exactly the right thing, and I would 
recommend we not try to harmonize with any other country in 
that regard.
    I believe that the excepting of universities and their 
breakthrough innovations is 21st century practice--21st century 
best practice--and I think the U.S. has leapfrogged the rest of 
the world in that regard.
    So, yes we want to harmonize, but only on best practices, 
and that particular one is one where I would not advise 
harmonizing.
    Mr. Issa. So, as we consider legislation that might, if you 
will, correct or bring about a small change here--substantial 
but still technical change.
    I wanted to follow up with one area--trade secrets. 
Ultimately, how do we, in your opinion, take someone who has 
reduced to practice something, has not gone to the Patent 
Office, but is keeping it secret versus--or choosing not to 
bring it to market--versus somebody who is reducing to practice 
and simply doesn't run to the Patent Office?
    How do we make sure that we get it right, that we are not 
encouraging, if you will, public disclosure to be withheld 
because they are going to maintain their prior rights.
    If somebody today figures out how to make the Coca-Cola 
secret recipe, it is not patentable. If somebody were to, if 
you will, know that they had something but not want the world 
to know, not want the clock to tick, but then as soon as there 
is a patent granted says, ``Hey, I have been doing this for 5 
years.'' How do we balance that act if we bring new 
legislation?
    Mr. Kappos. Right. So that is a great question. That is 
really the question at the crux of the balance between a trade 
secret regime and a patent regime, and prior user rights are 
designed to relieve some of that tension.
    Mr. Issa. And if someone patents out from underneath me, it 
wasn't a trade secret, I was just about to disclose it, I am 
sure.
    Mr. Kappos. Well, there is that. That is right.
    I would also say, though, that there are so many incentives 
to file patent applications that the USPTO has discovered well 
over a half a million times last year--a 5-percent growth rate 
in patent filings.
    So, folks know how to file patent applications. There are 
lots of great incentives to file them, and there are lots of 
risks built into the system for those who retain trade secrets 
and don't disclose their inventions.
    As you point out, Mr. Issa, the challenge for the folks at 
Coke is if someone is able to reverse-engineer their trade 
secret, they are out of luck forever, right? And if you get a 
patent, on the other hand, you have at least got some ability 
to have----
    Mr. Issa. But they have enjoyed a century by keeping it a 
secret. How do we make sure that no one enjoys the ability to 
deny somebody else exclusivity when in fact they did discover 
it?
    Let's just say two entities discover it, roughly the same 
time. A year later, a patent is filed by one. The other has 
taken no action. We would generally say that is a prior use, 
depending upon how far along they were.
    But let's say it is 3 years or 4 years, where do we divine 
the difference of somebody simply not intending to give we the 
public what the patent law was intended to. You know, we 
reimburse them, but we reimburse them with this exclusivity for 
a reason. And that reason is we get the benefit in those twenty 
or so years down the road.
    How do we make sure we get that balance because I want to 
see the legislation tweaked, but I want to make sure that we 
don't induce people to have it both ways.
    Mr. Kappos. Right. Well, key to that balance is ensuring 
that there is a manufacturing requirement. This gets back to 
the question of substantial preparations.
    What you certainly don't want is to incent people to create 
inventions, retain them indefinitely as trade secrets, do 
nothing with them, and then later still have lots of options 
open including a prior user kind of option.
    And the way you do that is to have some time limit. Right 
now, the AIA has the 1-year time limit. Could it be a little 
bit shorter? Well, we have discussed that. You know, it could, 
but that is a very close question relative to the needs of the 
universities.
    I certainly would not recommend making it any longer. I 
think then you do tend to shift the balance in a direction that 
incentivizes people to sit on their rights, hold secrets, not 
disclose them, not enrich the corpus of knowledge, and then 
knowing that they can later still in effect have their cake and 
eat it too.
    Mr. Issa. I thank you, Mr. Chairman. Thank you for the 
indulgence of the time. I yield back.
    Mr. Goodlatte. I thank the gentleman.
    The gentlewoman from California, Ms. Sanchez, is recognized 
for 5 minutes.
    Ms. Sanchez. Thank you, Mr. Chairman.
    Director Kappos, in your written testimony you stated that 
a prior use right defense is good for small business, and you 
just detailed earlier how it might be beneficial to 
manufacturing, but I am wondering if you can go into more 
detail about why, for example, small businesses, small 
businessman in my district, should be happy that this was 
included in AIA, and does that particularly, or I should say, 
specifically apply to manufacturing or other areas as well?
    Mr. Kappos. Right. Well, that is a great question.
    And I think it does. So for small businesses in my home 
state of California, where my entire family still lives, and 
all other states in the U.S.--one thing about small businesses 
is they all want to get bigger. They all share that in common. 
And the way you do that is--the way you grow as a small 
business is you have to put product or service out in the 
marketplace. You either do that through licensing someone to 
manufacture for you or you do it by developing manufacturing 
capability yourself.
    We want to promote both of those kinds of activities. For a 
small business, which has hard decisions to make about patent 
filings, typically will be able to afford some level of patent 
protection, but will have to decide at some point, do I file a 
patent on that next incremental innovation? Or do I just stop 
it, and spend my incremental resources going out into the 
marketplace and manufacturing?
    Those are the firms that are the most vulnerable to the 
situation where someone later comes in with a patent and stops 
them from growing, stops them from hiring more people, stops 
them from manufacturing. They don't have the resources to file 
for potentially the hundreds or thousands of patents that cover 
the entire manufacturing process, but they are totally 
dependent on the entire process step to step, or step by step 
to the end, to get their product into the marketplace.
    So, the prior user right, while I believe beneficial to 
manufacturers generally, is extremely helpful to growing small 
businesses that are trying to put product into the marketplace.
    Ms. Sanchez. Great. Thank you for that answer.
    The only other question I have for you is, how do you 
expect--or how often would you expect or can you even predict 
that the prior use defense might be invoked prospectively?
    Mr. Kappos. Yes. So, that is another great question. And we 
point out in our study that it is not heavily used in other 
countries that have it. We surveyed quite a few countries in 
Europe, Asia, you know, further north in North America here, in 
Canada. It is a lightly used defense.
    That being said, I believe that the prior user rights 
defense remains an important defense. The fact that it is 
lightly used does not mean it is unimportant, first of all. And 
the reason I say that is because where it is used, it is in 
those critical situations where you have Americans' jobs at 
stake on a manufacturing line that otherwise could get shut 
down. You want a fail-safe defense like that for those 
situations.
    The second point I would make is that the prior user 
defense is also used in a pre-litigation context, and it is 
harder to study those situations because they don't frequently 
get reported.
    But it comes up, my experience, I would say regularly, 
perhaps not frequently, but regularly in contexts of licensing 
patents in patent portfolios between companies of various sizes 
where you will find either as a manufacturer or as a patentee 
that someone else has a piece of property out there or has a 
manufacturing line, a product in the marketplace such that the 
prior user right will cause you as the manufacturer to 
correspond with the patentee saying, ``Look, you know, you 
shouldn't bother with me because I had this thing in the 
marketplace.''
    And that winds up being a litigation that never happened. 
Therefore, a report that never occurred, wasted resources that 
never had to be wasted, and all upside for our economy. Happens 
on both sides of the equations. Patentees benefit from that and 
manufacturers do, too, all without going into a litigation 
context.
    And I believe that it is that part of the iceberg, if you 
will, the consensual negotiations in an effort that is not 
wasted, that is an important part of prior user rights.
    Ms. Sanchez. Great. Thank you for being so thorough with 
your answers, and I appreciate your testimony today.
    I yield back.
    Mr. Goodlatte. Well, Director Kappos, I think that 
concludes our questions, and this has been very helpful. We 
appreciate your taking the time to come be with us and share 
your thoughts on where we stand on this issue.
    And we also appreciate your ongoing hard work to implement 
the new patent reform laws and to improve our patent system.
    Mr. Kappos. Chairman Goodlatte and Ranking Member Watt, 
thank you very much.
    Mr. Goodlatte. Thank you.
    We will now move to our second distinguished panel of 
witnesses. Each of the witnesses' written statements will be 
entered into the record in its entirety, and I ask that each 
witness summarize their testimony in 5 minutes or less.
    To help you stay within that time, there is a timing light 
on your table. When the light switches from green to yellow, 
you will have 1 minute to conclude your testimony. When the 
light turns red, it signals that the witness' 5 minutes have 
expired.
    As is the custom of this Committee, before I introduce the 
witnesses I would like them to stand and be sworn.
    [Witnesses sworn.]
    Mr. Goodlatte. Thank you very much, and please be seated.
    Our first witness is Mr. Robert Armitage. Mr. Armitage 
serves as the Senior Vice President and General Counsel of Eli 
Lilly and Company.
    Prior to this, he served as Chief Intellectual Property 
Counsel of the Upjohn Company, and was a partner in the 
Washington, D.C. office of Vinson and Elkins, LLP.
    Mr. Armitage served as a past president of the Intellectual 
Property Law Association, and the Association of Corporate 
Patent Counsel.
    Mr. Armitage received his bachelor's degree in physics and 
mathematics from Albion College, and his master's degree and 
law degree from the University of Michigan.
    Our second witness is Mr. Dan Lang. Mr. Lang serves as Vice 
President of Intellectual Property and Deputy General Counsel 
at Cisco Systems.
    Prior to this, he was a partner at the law firm of Ritter, 
Lang and Kaplan, and an associate at Townsend, Townsend and 
Crew.
    Mr. Lang earned his master's degree in electrical 
engineering from Stanford University, and his law degree from 
the University of California at Berkeley.
    Our third witness, Mr. John Vaughn. Dr. Vaughn serves as 
Executive Vice President of the Association of American 
Universities. He supervises all of the Association's policy and 
analysis work, and is responsible for areas of intellectual 
property, information technology, research libraries and 
scholarly communication, and international education.
    Dr. Vaughn received his BA in psychology from Eastern 
Washington State College, and he received a Ph.D. in 
experimental psychology from the University of Minnesota. He 
was also awarded an NIH post-doctoral traineeship, and served 
as a post-doctoral fellow at Duke University.
    Our fourth and final witness is Dennis Crouch. Professor 
Crouch is Associate Professor of Law at the University of 
Missouri School of Law.
    Prior to joining the MU Law faculty, he was a patent 
attorney at McDonnell, Boehnen, Hulbert and Berghoff, LLP, and 
taught at Boston University Law School. Prior to law school, he 
worked as a research fellow at NASA's Glenn Research Center, 
and as a Peace Corps volunteer in Ghana.
    Professor Crouch is the founder of Patently-O, one of the 
Nation's most widely read patent law blogs. Professor Crouch 
received his B.Sc. in mechanical engineering from Princeton 
University, and his J.D. from the University of Chicago Law 
School.
    Welcome to you all, and we will begin with Mr. Armitage.
    You may want to turn on your microphone there.

  TESTIMONY OF ROBERT A. ARMITAGE, SENIOR VICE PRESIDENT AND 
             GENERAL COUNSEL, ELI LILLY AND COMPANY

    Mr. Armitage. Thank you. Chairman Goodlatte, Ranking Member 
Watt----
    Mr. Goodlatte. Pull it closer to you as well.
    Mr. Armitage. Okay.
    Mr. Goodlatte. There you go.
    Mr. Armitage. I appreciate the opportunity to appear before 
the Subcommittee today to offer testimony on the provisions of 
the America Invents Act that address the so-called prior user 
defense.
    The Subcommittee has before it already an excellent 
analysis of all aspects of this issue in the report prepared by 
the USPTO. My belief in a nutshell is that the Director's 
testimony you have just heard and the USPTO's report says 
almost everything that needs to be said about that issue.
    That will not stop me, however, from using the remainder of 
my 5 minutes. This is an issue where the Members of the 
Subcommittee are well versed already given the work that led to 
the enactment of the America Invents Act.
    One point that at least in my view can't be underscored 
enough is the magnificent bipartisan efforts by Members of this 
Subcommittee that led H.R. 1249 to becoming our Nation's new 
patent law.
    Indeed, I would be remiss today if I didn't specifically 
cite your work, Mr. Chairman, and the work of Ranking Member 
Watt, and the work of your respective staffs in putting 
together the provisions of this bill that made it the first 
21st century patent law anywhere in the world, something we can 
be proud of as a country.
    Let me move on to the prior user right defense. My own 
experience as a practicing patent attorney has taught me that a 
strong patent system is one that carefully balances the scope 
of protection afforded to worthy inventions, and also takes 
account of the residual rights that ought to remain in the 
public domain. An effective patent system both provides rights 
to patent holders and limits the reach of those rights.
    One of the balancing points in an effective patent system 
is a prior user defense. It arises in the very rare 
circumstance where someone has commercialized an invention 
domestically without taking out a patent, and a competitor in 
that very same field has created the very same technology 
independently, and then subsequently sought a patent on the 
already commercialized technology.
    In that case, who should have superior rights under the 
patent law? Should it be the prior domestic user, the 
commercializer who has created the new technology being able to 
trump the patent owner who subsequently then was able to share 
a patent?
    I think in those rare circumstances, Congress has provided 
a clear-cut answer in almost every situation that arises under 
the law. Someone who is a prior commercializer of new 
technology almost always creates prior art that prevents a 
subsequently sought patent from being secured or if it is 
secured from being found valid in the court.
    They are only, therefore, the rarest of circumstances where 
prior commercialization in the United States does not 
invalidate a subsequently sought patent. And that is when the 
new technology that has been developed is maintained and used 
as a trade secret.
    And in this situation, Congress has said to the patent 
owner, yes, you can have a valid patent, but there's a proviso. 
Where the patented invention has been previously 
commercialized, the person who invested in that prior 
commercialization in this country, who created manufacturing 
facilities in this country, who hired workers in this country, 
is given the ability to continue to undertake those commercial 
activities.
    In other words, it is that balance that is always needed in 
an effective patent system if it is an effective one between 
patent owner rights and the rights of the public to continue to 
practice an invention. And indeed, I suspect that most 
Americans, if asked to examine these provisions in the America 
Invents Act, would say Congress chose to tilt the balance in 
favor of the patent owner to be able to bar any one of 300 
million Americans from practicing the patented invention save 
for one person who was already in prior commercial use of the 
invention.
    Moreover, I think that what Congress did in the America 
Invents Act actually makes the trade secret system we have in 
this country and the patent system both operate with optimal 
effectiveness.
    My written testimony suggests three areas where this 
statute might be improved. I think you have already discussed 
those in the panel you had earlier with Director Kappos. My 
hope is that there can be a consensus developed on the 
desirability of further improvements to the America Invents 
Act, and in fact, it was the willingness to compromise and find 
consensus that led to the enactment of the law after a 6-year 
legislative effort.
    We have at the table with me today, two individuals who 
were right at the forefront of forging compromise and 
consensus: Dave Lang and John Vaughn. And, frankly, without 
them and the productive engagement of the American Association 
of Universities and Cisco, the entities they represent here 
today, there would have been no America Invents Act.
    Thus I am eager to hear their views on how we might work 
together to take this great achievement in reforming U.S. 
patent law, and make it an even greater one.
    Thank you.
    [The prepared statement of Mr. Armitage follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Goodlatte. Thank you, Mr. Armitage.
    Mr. Lang, welcome.

            TESTIMONY OF DAN LANG, VICE PRESIDENT, 
           INTELLECTUAL PROPERTY, CISCO SYSTEMS INC.

    Mr. Lang. Chairman Goodlatte, Ranking Member Watt, Members 
of the Subcommittee. Thank you for the opportunity to testify 
today.
    I am Dan Lang, and I am Vice President of Intellectual 
Property, and Deputy General Counsel at Cisco Systems, where I 
am responsible for Cisco's patent strategy. I am here on behalf 
of not only Cisco, but also the Coalition for Patent Fairness, 
which includes the technology companies that employ hundreds of 
thousands of Americans, invest billions in U.S. research and 
development, and own tens of thousands of U.S. patents and 
patent applications.
    I have come to testify today on an aspect of patent law 
that is very important to U.S. competitiveness and jobs--the 
prior user rights of inventors that develop technology that is 
then later patented by someone else.
    As I will explain, I am going to ask you to consider small, 
but critical, changes to prior user rights law. Last year, 
Congress passed the America Invents Act, the AIA. It was the 
biggest change to our Nation's patent laws in the last 175 
years.
    One great indication of Congress' accomplishment in the AIA 
and the leadership of Chairman Smith, Chairman Goodlatte and 
Ranking Member Watt in bringing it to fruition, is that Mr. 
Armitage and I are here together singing from the same hymnal 
in supporting the same clarifications to the law.
    One significant change in the AIA was a shift from a first 
to invent system, which awards a patent to the first to invent, 
to a first to file system which awards a patent to the first 
inventor to file. This is a positive step, which simplifies the 
patent system, and brings the U.S. into greater harmony with 
our peers.
    But with a first to file system comes the possibility that 
an American company may develop technology and then be subject 
to claims of patent infringement by a patent holder, quite 
possibly a foreign competitor who filed for a patent on the 
same technology even if the American company invented it first, 
but had not yet patented it or otherwise publicized it.
    A robust prior user rights system is therefore necessary to 
protect American businesses who invent first, but do not file 
patent applications and instead rely on trade secret 
protection. Many of us, particularly manufacturers both in 
traditional industries and new ones like Greentech, frequently 
rely on trade secret protection because we do not want to rely 
on patent enforcement in foreign countries to protect critical 
innovations, and we do not want to directly tip-off competitors 
as to technologies we are developing, which publication of 
patents would do.
    But also we may not file for certain patents because there 
are numerous innovations in every product, and the money we 
spend on filing for patents on every conceivable invention is 
then not available to spend on research and development and 
hiring employees.
    Because we should not and cannot file for a patent on every 
invention, we need prior user rights to protect us from the 
opportunistic players, including foreign ones, who will spend 
money to figure out which innovations we are already working 
on, and file patents to harass us.
    We know that these concerns are not theoretical. A recent 
study showed that the prior user rights defense would have been 
raised in 90 patent infringement cases between January 1, 2005 
and October 15, 2011. Virtually all of our foreign competitors 
enjoy prior user rights in their home jurisdictions.
    The recent USPTO report on prior user rights very clearly 
explains the need for them, as did Chairman Smith in the 
discussions leading to the enactment of the AIA. I fully agree 
with Chairman Smith and the USPTO, and give credit to this 
Subcommittee for including broader prior user rights in the 
AIA.
    Today, I am asking you to consider three technical changes 
to the prior user rights provisions of the AIA to ensure that 
they both provide the needed protections to American companies 
and to make them comparable to the provisions that our foreign 
competitors enjoy abroad.
    First, I want to make it very clear that prior user rights 
protect all statutory subject matter, including both products 
and processes. The PTO report on prior user rights explains 
that commercial use of any subject matter can give rise to a 
prior user right. I agree with the PTO's understanding of the 
AIA here, and recommend that a modification be made to avoid 
any unintentional confusion that might make the prior user 
rights protection available to American companies narrower than 
that available to our foreign competitors.
    Second, I am asking you to consider that the prior user 
rights language be modified to clarify the inclusion of 
substantial preparation of technology as a form of commercial 
use. This is especially important for those of us who spend 
years and millions of dollars to develop products for market. 
This protection is already available to our foreign 
competitors. Modified language would be very useful to clarify 
this important point.
    Third, I am asking you to consider that the prior user 
rights language be modified to eliminate the requirement in the 
AIA that prior use take place at least a full year prior to the 
patent application's filing. This limitation puts my company 
and other American companies at a disadvantage compared to our 
foreign competitors that are not subject to it. The PTO report 
points out that this limitation is, ``significantly more 
restrictive than that for any other prior user right system''. 
Taking this restriction out will help put American businesses 
on par with foreign ones.
    To conclude, these three suggested modifications would help 
assure an adequately robust system of prior user rights to 
protect American industry and jobs.
    Thank you for inviting me to testify today. I have also 
provided a written statement that I ask be put into the record 
of today's hearing, and I will of course be happy to take any 
questions.
    [The prepared statement of Mr. Lang follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Goodlatte. Thank you, Mr. Lang. Dr. Vaughn, welcome.

    TESTIMONY OF JOHN C. VAUGHN, EXECUTIVE VICE PRESIDENT, 
              ASSOCIATION OF AMERICAN UNIVERSITIES

    Mr. Vaughn. Thank you, Chairman Goodlatte, Ranking Member 
Watt and Members of the Subcommittee. I appreciate this 
opportunity to present the views of the higher education 
community on prior user rights and their impact on U.S. 
manufacturing and innovation.
    The proposed expansion of prior user rights defense was one 
of the most contentious issues debated over the course of the 
more than 6-year effort at patent reform of U.S. patent law.
    The higher education community was strongly opposed to that 
proposal. Private sector groups argued just as strongly for the 
need for an expanded prior user defense. To explain the 
concerns of the higher education community about prior user 
rights, I would like to make a few brief comments about the 
nature of university research.
    Universities are the major performer of the Nation's basic 
research--56 percent of it in 2008. The 1980 Bayh-Dole Act, 
which allowed universities and small businesses to retain 
patent and licensing rights to the results of federally funded 
research, greatly enhanced the ability of universities to 
contribute to the Nation's innovative capacity and economic 
competitiveness by transferring their discoveries into the 
commercial sector for development.
    A couple of anchor points illustrated by those impacts--in 
1985, 500 patents were granted to the top 200 research 
institutions. In 2009, university research led to the issuance 
of 3,147 patents, 596 new companies and 658 new commercial 
products. Given the productivity and promise of university 
research, both the Federal Government and universities are now 
focusing on ways to increase the breadth and pace of university 
research commercialization.
    One of the key obstacles to increasing commercialization is 
the so-called ``Valley of Death''--the gap between early-stage 
university inventions and their successful commercial 
development into products and processes that benefit the 
Nation.
    This has led to a growing recognition of the importance of 
proof of concept programs that support the next stage of 
concept development, market analysis and attendant activities 
often needed to move promising but early-stage university 
inventions into the commercial market.
    The important point here is that the early-stage, high-risk 
nature of university inventions that calls for developing proof 
of concept programs to expand and accelerate commercialization 
is the same aspect of university inventions that calls for 
avoiding overly expansive prior user rights policies that could 
move commercialization in the opposite direction by increasing 
uncertainty and weakening patents, crippling the ability of 
universities to license those patents for development.
    We believe that the AIA prior user rights provisions have 
struck an effective balance between the needs and interests of 
the private sector for an expanded prior use defense, and the 
necessity for universities to preserve an environment in which 
they can license their inventions effectively into the 
commercial sector.
    The key provisions of the AIA prior user rights scheme for 
universities are the following: most important is the exemption 
of university patents from the assertion of a prior user rights 
defense. This provision will free early-stage, high-risk 
university patents from the added risk of prior user immunity 
from patent rights, which would create a disincentive for 
companies to license university patents.
    The 1-year separation of commercial use from a later patent 
filing or disclosure qualifying for the grace period reduces 
the risk particularly that university licensees, most of which 
are start-up companies and small businesses, will be developing 
new technologies in a market that includes substantial trade 
secret products or processes immune from the patent rights of 
that company. Reducing that risk encourages investment in such 
new technologies at a sensitive, early stage.
    The USPTO's thorough, thoughtful report on prior user 
rights defense recommends that the AIA prior user rights 
defense should be maintained with no change at the present 
time, but that USPTO should reevaluate the economic impacts of 
prior user rights as part of its 2015 report to Congress. We 
agree with those recommendations.
    Thank you.
    [The prepared statement of Mr. Vaughn follows:]
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Goodlatte. Thank you, Mr. Vaughn. Professor Crouch, 
welcome.

    TESTIMONY OF DENNIS CROUCH, ASSOCIATE PROFESSOR OF LAW, 
              UNIVERSITY OF MISSOURI SCHOOL OF LAW

    Mr. Crouch. Thank you, Chairman Goodlatte and Ranking 
Member Watt. Thank you for inviting me here today to testify.
    I was here last year in the ramp up to the passage of the 
AIA, and we have moved a great distance. I also want to take 
just a moment to thank your Committee for all of your hard work 
on intellectual property in general, and for both preserving 
the rights of innovators as well as the rights of users.
    At the same time, I think we should congratulate Director 
Kappos and his entire staff for all of their efforts in putting 
the AIA into place. I receive about two dozen emails each day 
from patent attorneys around the country, and I continue to be 
surprised and amazed at the good feeling that continues to be 
exhibited toward Director Kappos because of his responsiveness 
to the patent community.
    Now the biggest change that has occurred at the Patent 
Office in the past 6 months since the passage of AIA is that 
the Patent Office now has more funding. And what they are doing 
with that funding is addressing the tremendous backlog of cases 
that continue to be pending at the Patent Office. And I know 
this is the field of this hearing, but I just hope that you 
will continue that funding as we move forward.
    Now, I want to speak for a moment about prior user rights 
as what we might call a protectionist measure. On balance, 
prior user rights--what they do is take rights away from the 
patent holder, and give them to manufacturers and 
commercializers, right? And our rights go to U.S. manufacturers 
and U.S. commercializers.
    Because of the U.S. territorial limitation, the folks that 
receive rights are typically in the U.S. while the patentees 
losing rights could come from any country around the world.
    Now, important in this analysis, and I think important in 
the politics of why this was passed is the realization that now 
for the first time in history, more U.S. patents are being 
applied for by foreign entities than by American entities. And 
this changes the calculus, and I believe this signals what is a 
growing shift in our perspective on the balance between rights 
of users and rights of innovators.
    Now, Dr. Vaughn has spoken about a major caveat here of 
universities, and universities sit in a unique position in our 
system because they are typically not manufacturers, right? And 
so, they are just patent holders in this system, and so this--
all right, so the law was created, and from this front I agree 
with both Mr. Vaughn and Director Kappos that without the 
particular exception for universities the law that was passed 
would uniformly hurt universities more than most other U.S. 
entities.
    Now the main point of my testimony that is--the main point 
of my written testimony parallels much of Mr. Armitage's 
statements. And that is that prior user rights as drafted in 
the AIA are in reality unlikely to have any substantial impact 
on innovation.
    And the way we know this comes directly from the USPTO 
report where the USPTO looked through the decades of the 
European experience and found no impact. They looked through 
the first half of the century in our system, and found no 
impact. They looked through the past decade where we had prior 
user rights for business method patents, and found no impact. 
Right?
    And this leaves me to a nice conclusion that prior user 
rights, as we have them now, right, are not creating a problem. 
They are unlikely to shift our innovative environment, right, 
and as Director Kappos mentioned and Mr. Armitage mentioned, 
prior user rights have the benefit of, in those rare cases 
where they come into play, having an important equitable result 
that we see is fair. I think I will conclude my remarks.
    Thank you.
    [The prepared statement of Mr. Crouch follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Goodlatte. Thank you very much, and we will now move to 
our questions for the panel.
    The gentleman from North Carolina, Ranking Member Mr. Watt, 
is recognized for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman.
    And I thank the witnesses again for being here.
    Let me see if I can clarify one thing between Mr. Lang and 
Mr. Vaughn to see whether there is a difference or not. Mr. 
Lang seems to suggest that we need to do three technical 
modifications. I am not sure that they are necessarily 
technical modifications.
    One is clarifying that all innovations are covered under 
prior user rights. I think that already exists. Do you agree 
that that already exists, Dr. Vaughn?
    Mr. Vaughn. Mr. Lang said that the language was somewhat 
confusing, and that is probably why I wouldn't give a crisp 
answer. I think it was intended to circumscribe subject matter 
so that prior user rights would not cover all subject matter, 
but focus on processes or products used in processes. I believe 
that----
    Mr. Watt. Do you agree that needs to be clarified, or do 
you think we ought to leave it?
    Mr. Vaughn. Universities would be comfortable with a 
narrower definition, but I think this is something really that 
ought to be discussed further.
    Mr. Watt. But I think Mr. Lang is talking about a broader 
definition. Am I misinterpreting what you are saying, Mr. Lang?
    Mr. Lang. No, I don't believe so, Ranking Member Watt. In 
fact, what we are seeking is a clarification that the language 
does not indeed include all subject matter.
    Mr. Watt. It includes all subject matter, and the 
universities would have some concerns with that?
    Mr. Vaughn. Our preference would be to have the focus on 
process. This was one of the issues debated a great deal in the 
compromise, and, I must confess, I think where we came out is 
in a somewhat murky area, and clarifying that would be 
worthwhile.
    Mr. Watt. It would create war again, huh?
    Mr. Vaughn. No, no. no. I don't think so. [Laughter.]
    Mr. Watt. Substantial preparation, which is not obviously 
included under the current prior user language in the AIA, and 
the 1-year requirement, which is included, which Mr. Lang wants 
shortened, I assume you would have some concerns about that?
    Mr. Vaughn. I think that is an area where we would have 
concern. The substantial preparation strikes us as a much more 
open-ended standard. As Director Kappos said earlier this 
morning, you likely would need litigation to try to clarify 
that, and one of the major thrusts of AIA was to try to reduce 
litigation.
    So that, I think, would give us some concern, and we--
having the 1-year look back was a very important part of the 
compromise for us.
    Mr. Watt. Okay, then there is at least substantively some 
disagreement on these two points between Mr. Lang and Mr. 
Vaughn. Let me see if I might be able to narrow the 
differences.
    Mr. Lang, how soon do you think we should attempt to make 
the suggested technical changes that you have suggested? Maybe 
that would give us more comfort here.
    Mr. Lang. My recommendation is that these changes be made 
as soon as possible.
    Mr. Watt. Which is before 2015? Or should we await the 
report in 2015? Do you think we are doing ourselves a 
substantial injustice by waiting until 2015 to reopen this 
again?
    Mr. Lang. Yes. I believe that we should not wait until 
2015. And the reasons are that we see these changes as actually 
part of the implementation of the AIA. In fact, the statutory 
provision to have such a report, and the language in the 
legislative history and also spoken by Chairman Smith that 
already foresaw the need for carefully looking at the scope and 
provisions of the prior user rights provisions, that this is 
therefore something that was already contemplated to face now.
    Mr. Watt. Mr. Armitage is smiling. It sounds like he has 
been in the trenches between the two interests that are 
debating this before, so let me get his opinion on this touchy 
subject.
    Mr. Armitage. If your desire is to split the difference, I 
am probably the wrong person to ask that question. This is the 
20th anniversary of my first appearance before this 
Subcommittee testifying on the issue of prior user rights, and 
frankly I thought in 1992 it was time to have the features of a 
prior user right law in our patent law in the way Mr. Lang has 
described them.
    Mr. Watt. So you are biased here?
    Mr. Armitage. I am quite biased, but I did give the same 
testimony in 1995 and 2006 so I don't lack consistency on the 
issue.
    Mr. Watt. Okay. All right. Well, given the fact that it 
took us 6 years to get to an agreement that got the AIA passed, 
I guess my parting words should be to Mr. Lang and Dr. Vaughn--
it seems to me that if we are going to make any technical 
modifications of the kind that you suggested, it might be 
necessary for the two of you all to reach some kind of 
agreement about this.
    So, otherwise we will be stuck in place. The default, 
generally for Congress I have found, is to do nothing, and I 
have found that is even more true for the Senate, by the way, 
than it is the House. But that is a subject of another day.
    But, maybe I should suggest as my parting comment that 
maybe the two of you ought to talk some more about this and see 
if you can reach some kind of agreement about it. Otherwise, I 
think we are stuck, kind of where we were leading to the 
passage of what we now have in the law.
    I yield back, Mr. Chairman.
    Mr. Goodlatte. I thank the gentleman.
    I will recognize myself. Mr. Armitage, from a business 
perspective, what is the greatest benefit of the prior user 
rights defense?
    Mr. Armitage. To be perfectly honest, I think the greatest 
benefit of the prior user right defense is it helps guarantee 
integrity in the patent system. I think, as I pointed out in my 
testimony--written submission testimony, one of the issues that 
you face in any competitive environment is not all competitors 
at all times have the highest level of integrity.
    Right now, almost every country who manufactures things in 
the United States has a global workforce. We know that there 
are some of our competitors who in fact hire our employees not 
for the right reasons, but to do a bit of industrial espionage. 
And one of the things that you need to worry about in a patent 
system, particularly the one we will have under the AIA, is 
that if we have built a plant around some key trade secret 
technology, and by some nefarious means, one of our competitors 
knows exactly what we are doing in our plant, and can start 
out----
    Mr. Goodlatte. By that you mean a plant here in the United 
States?
    Mr. Armitage. A plant here in the United States.
    Mr. Goodlatte. So the provision makes it more likely that 
your company in the future will be able to continue to 
manufacture in the United States without the threat of 
frivolous litigation?
    Mr. Armitage. There is no way to defend ourselves 
efficiently or effectively without a prior domestic commercial 
use defense, such as in the AIA. And you are basically giving a 
1-year grace period.
    Mr. Goodlatte. Got you.
    I got a bunch of other questions here.
    Mr. Lang, Cisco is a company that operates around the 
globe. You work with and sometimes share proprietary 
information with subcontractors and local partners. Is there 
still a fear of trade secrets finding their way into patents 
sought by your foreign competitors?
    Mr. Lang. Yes, absolutely. And that is a key reason why a 
robust prior user rights system to us is important as a means 
of competitiveness against foreign companies, of which we have 
some very important ones.
    And, under the previous first to invent system, we had the 
notion in the law that if we were the first to invent, and we 
brought a product to market without abandoning, suppressing or 
concealing it that what we had done would serve as prior art. 
Not only as the defense for us, but to invalidate the patent.
    Whereas under a system that is first to file, which we have 
moved to now, without prior user rights, the work that the--the 
trade secrets that we give up can then be used as a basis for 
other people's patents that will then be used to attack us.
    Mr. Goodlatte. And, again, it makes it more likely that 
your company in the future will continue to be able to 
manufacture in the United States without the threat of 
frivolous litigation?
    Mr. Lang. Yes. And it extends even beyond manufacturing to 
the fact that we are a very large U.S. innovator that invests 
over five billion dollars in research and development.
    Mr. Goodlatte. And continue to do that research and 
development in the United States.
    Mr. Lang. Yes.
    Mr. Goodlatte. Okay.
    Mr. Lang. Some of it is spent in the U.S., and we have many 
significant foreign competitors that we need this provision 
for.
    Mr. Goodlatte. And Dr. Vaughn, your organization represents 
universities, which increasingly seek to commercialize their 
discoveries through the creation of start-up companies. How 
will the proposed changes affect the challenging and risky 
environment that university-based start-up companies typically 
face as they seek to translate university discoveries into 
products, companies and jobs?
    Mr. Vaughn. Well, I think that our concern about prior user 
rights at the outset was a preference for the public disclosure 
of patents and the possibly chilling effect of being able to 
license those if there was a broad set of products developed by 
trade secret that would be immune from the assertion of patent 
rights.
    But we think that the compromise that we reached, which we 
pursued both because we wanted the bill passed and because we 
came to realize the importance of trade secret protection 
through prior user rights, sets the right balance.
    The proposed changes that Mr. Lang has recommended, we are 
concerned that those would then move this compromise back to 
the area, bringing in certain factors in a prior user rights 
scheme that would in fact make it more difficult for us to 
license our patents.
    They are early-stage, high-risk; they are going into often 
undercapitalized start-up companies. If those companies trying 
to raise additional capital have to deal with the specter of a 
market that they may not be able to manage by the assertion of 
patent rights, the ability to exclude by virtue of these immune 
trade secret products, that is going to greatly complicate our 
ability to license.
    Mr. Goodlatte. I have another question for you. It is clear 
the universities are a hotbed of invention and innovation in 
America. When universities license their inventions, how do 
they determine who to license to? Is it simply a business 
decision, or do universities carefully look at who can best 
help take the innovation to the next level?
    Mr. Vaughn. It is very much the latter, Chairman Goodlatte. 
The universities see as their mission taking the basic research 
that taxpayers have funded, and moving that into the commercial 
sector for the benefit of the Nation as a whole.
    So, we have developed some very sophisticated technology 
transfer offices. They are working constantly with industry, 
seeking those companies that can develop the promise of this 
basic research and turn it into useful products.
    Mr. Goodlatte. And one more, for Mr. Armitage.
    How would you compare U.S. prior user rights under the AIA 
relative to our key trading partners? Is it superior, roughly 
equivalent, inferior? What is your view?
    Mr. Armitage. If we made the three changes that Mr. Lang 
talked about in his testimony, we would be at a par with what I 
think the best of the best of foreign country prior user right 
provisions provide. Right now, I think as the PTO report 
clearly lays out, we are behind where other countries are in 
terms of, I believe, striking the right balance.
    Mr. Goodlatte. Thank you.
    The Chair recognizes the gentlewomen from California, Ms. 
Chu, for 5 minutes.
    Ms. Chu. Thank you, Mr. Chair.
    Mr. Lang, you argue pretty forcefully for the expansion of 
the prior user rights defense to include substantial 
preparation. Could you offer specific real world examples, and 
why is it so important to your business?
    Mr. Lang. Certainly. So, at Cisco we and our peer companies 
in the CPF, we develop many complicated products, and they 
begin with an idea, but between the idea and coming to the 
marketplace, come many steps of the design, development, 
building prototypes, testing them, and finally bringing them to 
market.
    We want to make it absolutely clear that all of these 
steps, the substantial preparation for, are counted as part of 
commercial use. And we seek this change to the language, and 
the other changes we seek do not affect what we see as the 
basic compromise inherent in the prior user rights legislation 
that brought the universities on board, which was to actually 
carve university-based inventions out of the prior user rights 
language.
    Ms. Chu. While some might argue that the lack of 
substantial preparation standard would create a greater burden 
on manufacturers because it might be their manufacturing 
process itself that makes up their ``secret sauce'', at a time 
when American manufacturers are struggling with the world 
economy, it would seem to me that our patent system must give 
them equal protections.
    Do you believe the--that U.S. manufacturers are harmed vis-
?-vis their foreign competitors without the substantial 
preparation standard?
    Mr. Lang. I fully agree with that, and at Cisco we face 
significant competition overseas. And, we see that going 
through the PTO report and its excellent analysis of prior user 
rights provisions around the globe in key industrial countries 
that virtually all of those provisions contain substantial 
preparation or something akin to it to protect the steps that I 
outlined in design and development to make sure that that 
activity counts as commercial use and is not then later 
attacked by harassing patents.
    Ms. Chu. Okay. Thank you.
    And I wanted to pursue the questions that were previously 
asked about the impact that any expansion of prior user rights 
would have on the universities. I know this was a big issue 
that last time this Committee had a hearing on intellectual 
property, and I asked the witnesses whether there was any sort 
of compromise that could be reached between those supporting 
prior user rights and those with concerns, which was mainly the 
universities.
    And ultimately this Committee adopted the compromise that 
gave the university carve-out.
    So I would like the opinion of the panel on this, 
particularly Mr. Lang, and then Dr. Vaughn.
    Mr. Lang, would the expansion of prior user rights create 
any new or additional risk for universities, specifically the 
substantial preparation standard?
    Mr. Lang. We do not see any additional risk or damage to 
university interests from the modifications that we are asking 
for, and that is in large part because the compromise that was 
set carves out university inventions from the effect of prior 
user rights. Nothing that we are asking for affects that carve-
out.
    Ms. Chu. Dr. Vaughn, your organization did support this 
compromise, the university carve-out, and given the broader 
stakeholder ideas that the prior user right defense needs to be 
expanded, do you think that this compromise carve-out will 
continue to work for your community?
    Mr. Vaughn. Well, Congresswoman Chu, I would describe the 
compromise differently from Mr. Lang. There was an earlier 
version of the provision, which had solely a university carve-
out, and as I indicated, that is the most important provision, 
but it wasn't until several other factors were added that the 
university community was comfortable making a change from a 
total opposition to prior user expansion to a compromise that 
included a year look back, commercial use instead of 
substantial preparation--those were parts--they were heavily 
discussed provisions, and were part of the compromise.
    And, I do think if there is a need to reevaluate those, 
that can be something that would be put in the 2015 report, but 
the compromise that we agreed to had those provisions and those 
were important parts of it.
    Ms. Chu. And other panelists, Mr. Crouch and Mr. Armitage?
    Mr. Crouch. You know, one thing we have been discussing 
here, right, is this potential fraud where someone finds a 
trade secret that a U.S. manufacturer has, takes it abroad and 
then applies for a U.S. patent, and then comes back and goes 
after the U.S. manufacturer, right?. And that is kind of the 
fraud that Bob Armitage described.
    If we add the language of substantial step, right? Or 
something akin to that, I worry about fraud going the other way 
in that we have someone that who is now claiming prior user 
rights where they say, look, 10 years ago, I started down this 
substantial step, and I kept it a trade secret this whole time, 
and here, I will go back to my file room and discover it, 
right?
    And they produce papers to discover it, but I think there 
is a real risk of fraud there, and certainly with the patent 
system and any system where you have this ability to back-date 
materials, we have experienced fraud.
    And it is a struggle for the courts to deal with that, and 
so I would hope that if we--any compromise that we come to, 
that something that needs to be considered is the potential for 
fraud in both directions.
    Mr. Armitage. I think one of the difficulties this 
Subcommittee will have is everyone on this panel is absolutely 
correct. We need a patent system that if we make changes to it, 
doesn't provide an opportunity, much less an incentive, for 
fraud. We, in the America Invents Act, had a carefully crafted 
compromise, and the provisions currently in the law and prior 
user right reflect that compromise. We know from Dan Lang's 
testimony that we don't have a prior user right provision that 
is as effective as exists in foreign countries. That's a 
competitive disadvantage, and at some point that needs to be 
addressed.
    So I guess the real question for the Committee is when.
    Ms. Chu. Thank you.
    I yield back.
    Mr. Goodlatte. I am going to follow up on the question of 
the Ranking Member and say, are you better off now than you 
were before this bill, but you would like to still get to a 
better place, or--I know you want more, and I know some people 
were a little hesitant about that, so----
    Mr. Armitage. If you own a patent today in the United 
States, and you are in the business of getting more patents, it 
is part of your business model, you are much better off with 
the America Invents Act. It is a remarkable patent reform law.
    Mr. Goodlatte. Including in the area of prior user rights 
defense?
    Mr. Armitage. Including in the area of prior user rights.
    Mr. Goodlatte. Thank you.
    I now recognize the gentlewoman from California, Ms. 
Sanchez, for 5 minutes.
    Ms. Sanchez. Thank you, Mr. Chairman.
    Mr. Armitage, can you speak as to how the prior user rights 
provision in AIA compares to that of our major trading 
partners, and how do you think that might impact our trade with 
them?
    Mr. Armitage. You know, I had a chance to read the actual 
prior user rights statutes in several countries--Korea, 
Germany, Japan and China, maybe Mexico, one or two others. They 
are very simple provisions.
    Fundamentally, what they say is, if you have made 
substantial preparations for commercialization, or you have 
commercialized your invention, then nobody can touch those 
operations if they seek their patents even a day after you have 
completed those substantial preparations.
    What we have done in our law are three things, and Dan has 
explained them.
    We have a subject matter limitation, and only some kinds of 
patents are under the prior user right law.
    Second, we have a 1-year holdback.
    Three, we require actual commencement of commercial 
operations.
    Even if you spent a billion or two billion dollars building 
a plant, and you can't operate it until Monday, if the patent's 
filed on Friday, you get no benefit of our prior user rights 
statute.
    Ms. Sanchez. Thank you for making that clarification.
    I don't have any more questions. I will yield back to the 
Chair.
    Mr. Goodlatte. I thank the gentlewoman.
    And the gentleman from Georgia, Mr. Johnson, is recognized 
for 5 minutes.
    Mr. Johnson. Thank you, Mr. Chairman for holding this very 
important hearing.
    I would ask Mr. Armitage, and also Mr. Lang--I will note 
that in both your testimonies, you both suggest some changes to 
the prior user rights defense to bring the U.S. in line with 
other countries like Germany, Japan and South Korea. Mainly, 
the three changes are relating to protecting all forms of 
invention, providing the defense, not only to products that are 
in commercial use, but also to protect substantial preparations 
for commercial use, and eliminating the 1-year holdback 
requirement.
    How do you respond to the university community that has 
concerns about these changes?
    Mr. Lang. Well, I would go back to my earlier comment that 
a part of the compromise--and you know, we just heard from Dr. 
Vaughn on the other significant elements of the compromise--but 
an important part of the compromise was carving the 
universities out and university-based inventions out of prior 
user rights, so we believe that their interests will be 
unaffected.
    Also, we see this as very important, the competitive 
differentiation versus our peers around the globe, that these 
American companies are affected by the disparate impact of U.S. 
prior user rights law on U.S. companies as opposed to the prior 
user rights statutes around the world, you know as we have 
outlined and as we have catalogued and their impact on foreign 
companies and the protections that foreign companies enjoy 
under those statutes.
    And I would also add that as far as small, innovative 
businesses, I mean, the PTO report that is, you know, very 
thoughtful in its economic analysis and did not find any 
negative impact on innovation of prior user rights, and we 
believe that the changes and the modifications that we are 
proposing will not disturb that.
    As a part of the PTO report process there were public 
comments submitted by a range of companies including companies 
that are small businesses and the Greentech industry--a company 
that is a space exploration start-up, and they were very 
consistent with and supportive of our view of prior user 
rights, and how they should proceed.
    So we believe that the changes that we are advocating are 
very positive for American innovation over a range of 
industries and businesses, and we believe that they will make 
American industry and American manufacturing more competitive 
with those around the world.
    And we believe that that will be accomplished in a way that 
encourages and does not discourage innovation.
    Mr. Johnson. Thank you.
    Mr. Armitage, you have pretty forcefully made the case of 
us modifying the law so as to include substantial preparation 
as a protective vehicle for establishing prior use.
    Is there anything else you would like to say about that?
    Mr. Armitage. Just one comment, perhaps, about the ``valley 
of death''. And this was the comment that there are small 
venture start-up companies that may be hurt by the prior user 
rights.
    The way I look at it, companies like Cisco and Lilly 
actually are the ones who acquire these companies, and invest 
in these companies. And for us, those companies that are start-
up ventures--that even those companies that depend on a strong 
patent system because we are really buying patent rights--prior 
user rights actually make those investments more valuable to 
us, make them more valuable to the small ventures themselves 
because they eliminate the possibility that we may have someone 
on the verge of commercialization where we want to buy the 
technology, bring it to market.
    We don't have to worry that some belatedly filed patent is 
going to come in and sit on top of the actual way they have 
tried to commercialize that technology, and require us to get 
into patent litigation or engage in third-party licenses in 
order to commercialize.
    If you believe in a strong patent system, a good prior user 
right is a good way of making that patent system work more 
effectively with a trade secret system that's essential to I 
think almost anybody who commercializes technology.
    Mr. Johnson. Okay, thank you.
    Professor Crouch, do you have anything you would like to 
contribute?
    Mr. Crouch. Dovetailing with what Mr. Armitage mentioned, I 
think there is one minor area where the U.S. rights are broader 
than many other countries and that is that we allow for an 
increase in volume. That is, if the original prior 
commercialization was at a small volume that entity can 
continue to sell the same product, and increase the volume, 
right? And I think, in my estimation that is also a good 
provision for many start-up companies who have the idea of 
starting off small, and eventually growing into a larger 
company, right?
    Or perhaps have the way out of getting bought out by Lilly 
or Cisco where those companies want to rely on the prior use 
defense, and can only do so if we have this volumetric 
flexibility.
    Mr. Johnson. Dr. Vaughn?
    Mr. Vaughn. Bob discussed a circumstance where a small, 
start-up company is acquired by a bigger company like Cisco or 
Lilly, but there may be many circumstances where a start-up 
company wants to launch an independent and self-sustained 
venture, and we are concerned that an expansion of prior user 
rights, which would be affected by the proposed changes that 
are in discussion here, going from commercial use to 
substantial preparation, eliminating the 1-year look back, 
could run a risk of creating trade secrets that otherwise 
wouldn't have been created--that are built in anticipation of a 
forthcoming patent that is closer in temporal proximity, 
creating a market situation where the start-up is now going to 
have an inability to assert its patents and a situation that 
wouldn't occur if commercial use had to be required a year 
before.
    Mr. Johnson. Would substantial preparation?
    Mr. Vaughn. Substantial preparation--the problem there is 
both that it is--it makes--it is a vaguer standard and as I 
mentioned earlier, and Director Kappos had indicated, because 
of that vagueness, you have a much higher likelihood of getting 
into litigation, of the problems of discovery.
    Professor Crouch mentioned the difficulty of back-dating 
and opening up the possibility of fraud so we are concerned 
that getting into vaguer circumstances, bringing the prospect 
of prior user rights closer to a patenting activity can create 
a climate where start-ups are going to have more difficulty 
raising capital for independent development and as a matter of 
process just to go back to the point that we went, I think, as 
a community in good faith a long way from flat-out opposition 
to prior user rights to having the substantial expanded 
provisions we have.
    If that needs to be reexamined, I think we should take the 
time, get the evidence, and do it with care.
    Mr. Johnson. Mr. Lang?
    Mr. Lang. If I might add, I mean, we see substantial 
preparation as not some extra new defense that was never 
previously available under the law, but rather in a sense a 
partial restoration of protections that we enjoyed in the first 
to invent regime, and that the development process that I 
outlined previously, if it were followed, we would have been 
entitled to a date of conception as a date of prior art that 
would actually invalidate the patent.
    And in seeking substantial preparation as a clear example 
of commercial use that would entitle us to a prior user right 
we are wishing to protect that work that we do as against a 
patent that would be later filed on our own work, and would be 
used to disrupt our activity.
    A patent that would be generated by somebody who is out 
there in the marketplace could be a foreign entity who is 
looking at our--analyzing our external moves and guessing what 
we might be working on internally, able to devote their 
resources to filing patents and patent applications and then 
able to harass us with those, even though it is our work that 
started first, and that work needs to be counted in substantial 
preparation.
    Mr. Goodlatte. The time of the gentleman has expired.
    The gentlewomen from California, Ms. Waters, is recognized 
for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to thank all of our panelists that are here 
today.
    Mr. Lang, are you speaking on behalf of the Coalition for 
Patent Fairness?
    Mr. Lang. Yes, I am.
    Ms. Waters. And, that includes Adobe, Apple, Cisco, Dell, 
Google, Intel, Intuit, Micron, Oracle and RIM--all of those 
companies?
    Mr. Lang. I do not--I believe that it includes all of those 
companies with the exception of Apple as of today.
    Ms. Waters. I see. I am sure you are aware of the article 
that is causing so much discussion that appeared in the New 
York Times entitled, ``How the U.S. Lost Out on the iPhone 
Work''. In that conversation, the President--well, in a 
conversation with some of the representatives of these 
industries, and particularly to Apple, I think, the President 
asked Steve Jobs about what it would take for Apple and 
presumably other tech companies to repatriate manufacturing 
jobs back in the U.S. And the answer was that those jobs are 
not coming back to the United States.
    As you know, most of the Members of Congress wish to have 
our companies in a position of profitability. We want our 
companies to make money, but we want our companies to hire the 
people in this country. We know all of the arguments about how 
it is not economically feasible to do that anymore, so as we 
talk about the competition that you face and why it is 
important for us to expand user rights, etc., you want us to 
help make you more profitable, but what does that do in terms 
of answering this question of whether or not you are going 
invest more in job creation?
    When I take a look at Cisco, Cisco will double its 
manufacturing in China. That was what John Chambers said, the 
CEO. The company will inject 350 million into start-up 
investments and provide up to 400 million in customer 
financing--the Cisco Systems Capital China. It will also open 
another 300 of its networking academies to train 100,000 
students on networking technology as part of an MOU--that is a 
memorandum of understanding--with the Ministry of Education 
under which will also donate 6 million in networking equipment.
    Now, I can remember some years ago having this discussion 
with Cisco about training, and simply, in South Central Los 
Angeles, because when you were in the bubble a lot was going on 
in Silicon Valley and those areas a lot of jobs were being 
created, and we thought that perhaps it made good sense that if 
our universities were not turning out the kind of people that 
you needed to do the jobs, that perhaps Cisco and other 
companies like Cisco, could have these academies, or right on 
their own campuses to help train and develop young people to be 
involved in this new technology--that was not thought of as 
something that could or should be done.
    But I see it has been done abroad. What can you say about 
that? Do you think jobs have gone forever? What are you and 
your cohorts willing to do about bringing jobs back to the 
United States, and how can we help you to be more profitable 
even though Apple was number one in the country--made more 
money than anybody, including the core manufacturers, etc.?
    So I kind of asked you a lot, but I would just like to hear 
what you think about that, Mr. Lang.
    Mr. Lang. Sure. Thank you, Congresswoman Waters. So, Cisco 
is a vigorous U.S. competitor in a foreign marketplace, and I 
am here as the patent expert, but Cisco, of course, has an 
interest in a vigorous U.S. economy that is going to help bring 
us to full employment.
    The issue that we are talking about today is prior user 
rights, which is one of many policies that affect employment in 
the United States. And we--you touched on some of our 
investments in China. We have a--obviously, like many of our 
peers in the IT industry, we have a global----
    Ms. Waters. Could you talk specifically about the training 
that you do in China?
    Mr. Lang. I am sorry?
    Ms. Waters. The training that you do in China. The money 
that you are investing in training Chinese to do the work that 
you need.
    Mr. Lang. Yes, I am not actually familiar with our specific 
training investments in China. I know that we operate a program 
of Cisco network academies, which exist in the United States, 
as well as other countries of the world.
    In the United States, I will say--well, globally, we spend 
five billion dollars on R&D and 80 percent of that is in the 
United States.
    And also, we employ 30,000 people in the United States. The 
United States is very significant, you know -
    Ms. Waters. How many do you employ offshore?
    Mr. Lang. Excuse me?
    Ms. Waters. How many people do you employ offshore?
    Mr. Lang. I don't know the exact number.
    Ms. Waters. You know, domestically, it is about 30,000.
    Mr. Lang. Yes.
    Ms. Waters. You think it is more offshore, collective, 
totally offshore?
    Mr. Lang. I am not sure sitting here, no.
    Ms. Waters. You are not sure of that number?
    Mr. Lang. I do not have that number.
    Ms. Waters. Do you think that as we talk about--let's go 
back to the question the President asked. Do you think that--
what can be done to get these jobs back to this country?
    Mr. Lang. Well, again, I have come to--as the patent 
expert, to testify on prior user rights. However, I know that 
our company has advocated a number of issues including prior 
user rights, and changes to the patent law, but also issues 
concerning taxation, education, etc. And, I think that there is 
a variety of policies that could be followed to encourage 
employment.
    Ms. Waters. Do you think it is legitimate for us ask you 
the question if you want us to help make you more competitive, 
more profitable, is it not reasonable for us to ask when will 
we see the results of that with more investment in this 
country?
    Mr. Lang. Yes, that is a reasonable question to ask. The 
reason that we are here advocating for prior user rights or 
under prior user rights is a part of that discussion--an 
important part in our view in terms of strengthening and 
balancing our patent laws to encourage innovation in the United 
States.
    Ms. Waters. Well, if I may say that many of us would love 
to support you in expanding the user rights and other kinds of 
things to make you more competitive, but there must be a direct 
relationship to job expansion and creation in the United 
States.
    And, I suppose, if we are going to continue this discussion 
that at some point if you can relate to that and you can 
identify how what we do will help you to be more competitive 
and more profitable, we certainly will jump over all kinds of 
hurdles in order to be of assistance and supportive.
    With that, I yield back the balance of my time.
    Mr. Goodlatte. I thank the gentlewoman.
    I have an additional question for the panel and I know that 
the Ranking Member does as well. We will see if anyone else 
does after we do those.
    And I will address this to all of you, starting with Mr. 
Armitage. Could the university exemption provide an opportunity 
for gamesmanship whereby companies could arrange in advance of 
an invention an agreement to assign that invention to a 
university, and take back an exclusive license right at a very 
low cost and avoid applicability of the prior user right?
    Mr. Armitage. You know, I think that is a theoretical 
possibility someone could try doing that. I think in the real 
world it has virtually no prospect of succeeding.
    Mr. Goodlatte. Why do you say that?
    Mr. Armitage. Well, first of all, understanding how 
universities operate. They're really not in the business of 
doing contract research to reverse-engineer somebody else's 
trade secret so they can file patent applications so they can 
license back the technology. We do this, and we want to be in a 
business of manufacturing a product. We may have to engineer 
everything that is needed to be known to how to manufacture.
    We may be reverse-engineering somebody else's trade 
secrets, but I doubt that any university in John's membership 
wants to be used as that kind of reverse-engineering factory, 
to be honest.
    Mr. Goodlatte. What if the company comes to the university 
without disclosing that as their objective, but says, hey, we 
got a great idea. We want to make this arrangement with you?
    Mr. Armitage. So, let me give you an example. We perform 
the same reaction ten thousand times to figure out the optimal 
temperature, number of reagents, type of reagents and create 
trade secret technology about how best to do that. I know of no 
one in a university who would want to take on that kind of 
dull, mundane research to optimize the way we mix chemical A 
and B at this temperature, this concentration, for this long 
for the sole purpose of filing a patent application that they 
could license back to us. That just isn't the innovative, 
cutting edge thing that any professor I have ever been in 
contact with would consider doing for money or otherwise.
    Mr. Goodlatte. Mr. Lang?
    Mr. Lang. Yes. If I might just spend a few seconds 
addressing one of Congresswoman Water's questions about 
networking academies. We, in fact, operate over 100 networking 
academies in California that include 13,000-plus students.
    Now to get to the question of the potential for 
gamesmanship in the university carve-out. I agree with Mr. 
Armitage that the universities represented by Dr. Vaughn would 
not willingly enter such arrangements to exploit the carve-out, 
and we are not here to suggest changes to the carve-out which 
we realize was an important part of the compromise that was 
shaped last year in prior user rights.
    That being said, I do not underestimate the creativity of 
my colleagues in the legal profession to find loopholes and try 
to exploit them, and it could be that if that problem arises we 
will need to address that issue in due course.
    Mr. Goodlatte. Or as a part of any changes that you are 
recommending to us today to make sure that that doesn't happen 
as a result moving forward?
    Mr. Lang. Like if there is a--we are not proposing--we are 
proposing three modifications to be done as soon as possible.
    This other category I would suggest is something that may 
need further exploration.
    Mr. Goodlatte. We just have to take into account that as we 
enhance prior user rights defense, we have to take these things 
into account ahead of time rather than after the fact, and find 
that somebody has been creative and therefore we have got to go 
back and close. We need to know whether that's a likely problem 
or not.
    Dr. Vaughn?
    Mr. Vaughn. I think it is an intriguing and disconcerting 
issue that you raise. And as Bob said, it probably is a 
technical possibility. It is so at variance with the mission of 
universities that I can assure you that when we are in the 
process of implementing this, and it goes to the earlier 
question you asked about what kinds of industries do we want to 
work with, we really have a public mission of paying back the 
taxpayers that funded so much of our research to benefit the 
Nation.
    And I can just assure you that as a matter of policy and 
procedure our institutions would assiduously avoid any kind of 
arrangement like that which just goes--runs totally counter to 
our public mission.
    Mr. Goodlatte. So you would have to be fooled into doing 
it, if it were to happen. It certainly wouldn't be an objective 
of the university.
    Mr. Vaughn. Absolutely not.
    Mr. Goodlatte. It might be an objective of the----
    Mr. Vaughn. And I think our technology transfer and general 
counsels are smart enough. It would be very hard to fool them.
    Mr. Goodlatte. Good.
    Professor Crouch?
    Mr. Crouch. I agree with all that is said, and I think that 
we have--in the law as it now stands we have protections 
against that in terms of first the good faith element and in 
addition the restriction on deriving your inventions from 
someone else that are already there in the prior use statute.
    Now, what is true though, is that since universities aren't 
subject to this prior use that does make them marginally more 
attractive for people to invest in, right? Especially if you 
are going to invest in the area of research where you think 
somebody else might also be doing competitive research. And so, 
if you bring a university on board, then you are at a 
competitive edge especially when you have a patent race going 
on.
    And so that's not fraud, but it is--but it does shift the 
landscape in favor of working with universities, and that is 
really the point of why this was put in and that is why 
universities wanted this provision in there.
    Mr. Goodlatte. Thank you.
    Mr. Watt?
    Mr. Watt. So, here is my situation. I am somewhat 
sympathetic to the three suggestions that Mr. Lang has 
suggested, but I also am politically aware that in order for 
anything of that kind to move forward at least on any kind of 
quick timeframe or modestly quick timeframe, there would have 
to be a very broad agreement, and that agreement would have to 
bring the universities along and be palatable to them.
    So, let me ask this question, and I am just kind of talking 
off the top of my head. I am looking for sources of compromise 
here as I generally am to try to make something happen. 
Substantial preparation is about substantial preparation for 
commercialization, I am correct about that, am I not?
    It seems to me that in a university context, substantial 
preparation could be really advantageous to universities 
because they are doing a bunch of substantial preparation not 
necessarily initially in preparation for commercialization, but 
they are putting a lot of time and effort and preparation into 
whatever the venture is even before they get to thinking about 
commercializing it, I presume.
    So what would you think of a compromise that as far as 
universities are concerned might define substantial preparation 
as a little bit more generous than just substantial preparation 
for commercialization. Would that be something that might be 
the starting point of something that might lead to a 
compromise?
    Dr. Vaughn, Mr. Lang, Mr. Armitage, Professor Crouch? That 
is the only question I have.
    Mr. Vaughn. It is, I understand, your question, Congressman 
Watt, that the substantial preparation might also include 
activities by the university in the course of their 
commercialization.
    Mr. Watt. Or non-commercialization.
    Mr. Vaughn. Yes, right. I think the concept of substantial 
preparation for commercialization here provides, applies 
strictly to the private sector, that is it would apply to 
universities if we were manufacturing things, but we don't.
    So, we create discoveries through taxpayer-funded basic 
research. Our job is to move those early discoveries into the 
commercial sector so that they can develop them and the 
substantial preparation that prior user rights is being 
discussed is all in the commercial sector.
    But in the interest of, I think, your broader goal of can 
we try to reach an agreement where we have a difference, I 
would just say two things.
    In terms of process, we did have a compromise that was very 
difficult to achieve, that universities moved a long way to 
support, which involved not only the exemption of university 
research--university discoveries from the assertion of prior 
user rights university patents, but also the 1-year look back 
and commercial use, not substantial preparation.
    But universities are--the members of AAU and beyond work so 
closely with Cisco, with Lilly, with these companies, we are 
allies in so many things. I think we cannot and should not 
ignore their concerns.
    I have stated that I think the right process is to leave 
this compromise in place. Let the PTO examine with better 
evidence in 2015 the impacts of this. If there is a need to do 
something further, I do think we should move with caution. I 
would assert that there is no country in the world that has a 
more robust university industry, technology transfer, 
commercialization process than this country.
    The impact of Bayh-Dole has been enormous. Other countries 
are trying to build that, but I think our universities are more 
productive in commercialization than any other country, and 
when I hear from our campus experts a concern about too broad 
an expansion of prior user rights, we need to listen to them 
carefully, but we also need to listen to our allies in the 
commercial sector.
    So I think if there are problems, we should be open to 
discussing those, but doing it cautiously over time. But that 
could move us to the compromise--to the agreement that you are 
seeking.
    Mr. Watt. Anybody else want to add to that, or should I 
just go away and let you all work on it?
    Mr. Armitage. Well, as Chairman Goodlatte knows, when we 
were doing the AIA up until the last minute there were things 
that needed further work. I think your work and the work of 
your staff on supplemental examination was something that 
looked like there was no way to bridge the gap.
    At the eleventh hour we finally found a way to do that. We 
have a compromise here, I think, that was a good, sound 
compromise.
    On the other hand, if someone asks this panel to come and 
say is this the way the law should be for all time, in all good 
conscience, I cannot say yes. My view is that we need to 
continue to look at this and find ways to be competitive with 
the rest of the world on this provision. I heard very clearly 
that there may be a potential for fraud or abuse with a 
substantial preparation standard that is too loose. It seems to 
me that is a very productive area, where as on other issues, we 
find the right concepts. We find the right words to make sure 
it can't be abused by anyone.
    I think it is much more difficult to compromise on the 
issue of the 1 year. We already have built into the prior user 
rights statute full protection for anybody who publishes on an 
invention, not just files a patent application on it so that it 
has protections that exist nowhere else in the world for the 
patent owner.
    So I don't know how to compromise on the 1 year, but I 
think that maybe on the other aspect we could get our heads 
together and do something quite constructive.
    Mr. Watt. Go ahead.
    Mr. Lang. Now, I will add that the--to reinforce Mr. 
Armitage's point that the existing prior user rights statute 
already incorporates many aspects of compromise that we are not 
seeking to disturb the publication as being an effective date 
of comparison against the prior commercial use, things like 
restrictions on transfer of the right and the university carve 
out itself.
    That being said, I think that our intention here is clear 
to be able to get to a prior user rights regime that is an 
improvement over the present one in the bill in the sense it 
leaves us at no competitive disadvantage compared to our 
foreign peers, and if there are other ways of accomplishing 
that on the specific three points I mentioned. Although the 1 
year is difficult to understand how there would be an 
alternative if there are other ways of accomplishing those and 
leaving us in a position where we are in a similar position 
protected by a prior user rights regime in the U.S. comparable 
to that our foreign competitors enjoy, we are certainly willing 
to explore those.
    Mr. Crouch. Yes, I think the problem is the universities 
have patents, but they are not benefitting from the prior use 
exception because they are not commercializing.
    And I think one way to shortcut through that is potentially 
just to give them the right to transfer, or the ability to 
transfer a prior user right to whoever the spinoff company that 
they handover the technology to. So if they made steps in their 
innovation, and steps toward commercialization, if then at that 
point when they hand that off to a commercial venture that that 
new commercial venture both gets the patent rights and gets 
whatever prior user rights are available then I think that 
potentially draws them back into a parallel scenario as other 
manufacturing entities.
    Mr. Watt. Well, I thought that might be close to what I was 
suggesting, but okay, I am not going to ask anymore questions.
    I yield back, Mr. Chairman.
    Mr. Goodlatte. I thank the gentleman.
    Does this prompt any questions from Mr. Johnson or Ms. 
Waters?
    Mr. Johnson. Yes, I do. I am just sitting here thinking. 
This university carve-out benefits universities and I was 
thinking about how the private sector has come into our 
universities or actually our institutions of higher education, 
I believe, is how we referred to our universities--come in 
endowed, various activities and placed requirements for the use 
of the endowment, hiring decisions, editorial control as the 
price, or is there compensation, if you will, for making the 
endowment or the investment in an institution of higher 
education?
    And that would seem to offer a unique opportunity for say, 
an energy-related business, to endow a professorship or a 
school of X with funding to produce a certain process and then 
they could perhaps benefit from not being subject to the prior 
use defense.
    And I am also thinking in terms of higher--institution of 
higher education. When we think of that we think about Harvard, 
Yale, Spelman, Morehouse, Howard, Clark Atlanta University, the 
University of Pennsylvania, University of Connecticut, UCLA, 
those kinds of institutions, but yet you have no other 
institutions of higher learning. You have private, for-profit 
institutions of higher learning--I wonder if they benefit also 
from the prior use carve-out, and I wonder whether or not the 
carve-out under those kinds of circumstances could be used to 
perpetuate fraud, or some kind of an abuse of the patent 
system.
    It's very intriguing, this issue, as I sit and listen to 
more of it. Anybody have any comments about what I said?
    Mr. Vaughn. There is sort of a two-part question there, 
and, first of all, the research universities that conduct both 
education and research have an enormous number of very 
productive relationships with industry. You mentioned 
endowments. Universities love to try to build their endowments 
from donors, sometimes from industry. They all have fairly 
formal, circumscribed conditions under which they will accept 
gifts. Universities would love to have open-ended donations. 
There are often conditions put on, but----
    Mr. Johnson. Let's say a gift is conditioned upon the 
denial, the scientific denial of global warming.
    Mr. Vaughn. Any respectable university would refuse that 
gift flat-out.
    Mr. Johnson. Well, I mean there are a lot of--I could name 
names in terms of the funders of these endowments, and also the 
universities that accept them and conform their actions 
therewith. Private, non-profit standard type universities, 
right here in Washington, D.C., in fact. I am thinking of one 
with a name that is very--that brings back a--that has a 
historic connotation to it. You know, you would never think 
they would be corrupted intellectually, but it appears that 
that they may. I am not going to call the name, but they have 
fallen victim to this phenomenon.
    Then also on top of that, you have the non-profit--I mean 
for-profit--institutions of higher education, some of which 
even advertise on TV, and they may not have the kind of 
standards in terms of enrollment, education requirements, 
prerequisites. They may just be a place that accepts federally 
guaranteed student loans, and churns out people who are not 
equipped to deal in our current marketplace. These are my 
concerns.
    Mr. Goodlatte. I am going to interrupt. The gentleman's 
time has expired, and this is a discussion that we--could go on 
for quite some time. But I am going to allow him to discuss 
that with you at the conclusion----
    Mr. Vaughn. Can I just make one quick comment on that?
    Mr. Goodlatte. Very quickly.
    Mr. Vaughn. With respect to the prior user rights and the 
university exemption, the legislation as written clearly limits 
it to not-for-profit. No for-profit institutions will qualify 
for it.
    Mr. Goodlatte. Ms. Waters? Did you have some questions you 
would like to add?
    Ms. Waters. Well, not really. I would just like to wrap 
this up by saying that--to Mr. Lang, that U.S. innovation 
policy includes patent law, antitrust, tax and immigration. I 
don't see it separately. So, I, you know, in raising these 
questions, I would raise it with representatives because I 
think that representatives from any of these companies should 
understand that when we talk about jobs and jobs creation and 
our U.S. innovation policy, we are talking about all of these 
things not just patent law. Not just antitrust, but tax and 
immigration also.
    And I am familiar with the academies in the United States, 
and how they work in our elementary schools. And what I am 
talking about in China is very different. It is the training of 
people for jobs now, similar to what was described in the New 
York article with the dormitories and the tea and biscuit and 
hundreds of thousands of employees available around the clock. 
I am really talking about that kind of atmosphere, and whether 
or not the training that you do there is training for those 
kinds of jobs.
    And I will just leave that for the time being, but the 
reason I mention it is because exportation of jobs offshore for 
cheap labor is increasingly a highlighted issue in this 
country, and it is going to become even more so.
    And so I think it needs to be thought about always as you 
enter into these discussions about how we are helpful or not 
helpful in making our companies more competitive and why we are 
doing that, and what are the results of that.
    So, I would like you to just keep that on the radar screen, 
and advise the company that this came up in the discussion as 
with the universities.
    When I talked about doing whatever is necessary to support 
our companies, I certainly wasn't talking about that to the 
exclusion of our universities. I think you have a very 
important role to play, and I think that Congressman Mel Watt 
got you to the point in the discussion where not only did you 
talk about how well you know each other, and how you worked 
together and how you helped to forge the compromise that is in 
law now.
    And you can continue to work, but when you raise, 
Professor, the idea of the transfer of prior user rights onto 
the companies I think that is very attractive so, I am hopeful 
that whatever happens, it will not be to the exclusion 
certainly of the university.
    So I thank you, Mr. Chairman, for the additional time, and 
I yield back.
    Mr. Goodlatte. I thank the gentlewoman.
    And I would like to thank the witnesses for their testimony 
today.
    Without objection, all Members will have 5 legislative days 
to submit to the Chair additional written questions for the 
witnesses, which we can forward and ask the witnesses to 
respond as promptly as they can so that their answers may be 
made a part of the record.
    Without objection, all Members will have 5 legislative days 
to submit any additional materials for inclusion in the record.
    And with that, I again thank the witnesses, and declare the 
hearing adjourned.
    [Whereupon, at 12:26 p.m., the Subcommittee was adjourned.]

                                 
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