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



 
                   IMPLEMENTATION OF THE LEAHY-SMITH 
                          AMERICA INVENTS ACT

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

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 16, 2012

                               __________

                           Serial No. 112-128

                               __________

         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

           Richard Hertling, Staff Director and Chief Counsel
       Perry Apelbaum, Minority Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              

                              MAY 16, 2012

                                                                   Page

                           OPENING STATEMENTS

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Committee on the Judiciary.......     1

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................     2

The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Member, Committee on the Judiciary..     5

The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Member, Committee on the 
  Judiciary......................................................     6

                               WITNESSES

The Honorable David J. Kappos, Under Secretary of Commerce for 
  Intellectual Property, Director of the United States Patent and 
  Trademark Office, United States Department of Commerce
  Oral Testimony.................................................    10
  Prepared Statement.............................................    13
  Response to Questions for the Record...........................   187

Robert A. Armitage, Senior Vice President and General Counsel, 
  Eli Lilly and Company
  Oral Testimony.................................................    34
  Prepared Statement.............................................    36
  Response to Questions for the Record...........................   193

Eliot D. Williams, Partner, Baker Botts L.L.P., on behalf of the 
  Financial Services Roundtable (FSR), the American Bankers 
  Association (ABA), the American Insurance Association (AIA), 
  the Independent Community Bankers of America (ICBA), the 
  National Association of Federal Credit Unions (NAFCU), and the 
  Credit Union National Association (CUNA)
  Oral Testimony.................................................    92
  Prepared Statement.............................................    95
  Response to Questions for the Record...........................   200

Carl Horton, Chief Intellectual Property Counsel, General 
  Electric, on behalf of the Coalition for 21st Century Patent 
  Reform
  Oral Testimony.................................................   103
  Prepared Statement.............................................   105
  Response to Questions for the Record...........................   204

Kevin H. Rhodes, President and Chief Intellectual Property 
  Counsel, 3M Innovative Properties Company, on behalf of the 
  Intellectual Property Owners Association (IPO)
  Oral Testimony.................................................   121
  Prepared Statement.............................................   123
  Response to Questions for the Record...........................   208

Richard Brandon, Associate General Counsel, University of 
  Michigan, on behalf of the Association of American Universities 
  (AAU)
  Oral Testimony.................................................   144
  Prepared Statement.............................................   146
  Response to Questions for the Record...........................   213

Timothy A. Molino, Director of Government Relations, Business 
  Software Alliance (BSA)
  Oral Testimony.................................................   153
  Prepared Statement.............................................   174

          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.....................     4

Material submitted by the Honorable Melvin L. Watt, a 
  Representative in Congress from the State of North Carolina, 
  and Member, Committee on the Judiciary.........................     7

Material Submitted by Timothy A. Molino, Director of Government 
  Relations, Business Software Alliance (BSA)....................   154

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Bob Goodlatte, a 
  Representative in Congress from the State of Virginia, and 
  Member, Committee on the Judiciary.............................   185

Prepared Statement of the Honorable Melvin L. Watt, a 
  Representative in Congress from the State of North Carolina, 
  and Member, Committee on the Judiciary.........................   186

Financial Services Roundtable Submissions........................   215

List of companies affected by H.R. 1249, the ``America Invents 
  Act''..........................................................   241

Joint Prepared Statement of IEEE-USA and NSBA....................   242


         IMPLEMENTATION OF THE LEAHY-SMITH AMERICA INVENTS ACT

                              ----------                              


                        WEDNESDAY, MAY 16, 2012

                          House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Committee met, pursuant to call, at 10:09 a.m., in room 
2141, Rayburn House Office Building, the Honorable Lamar Smith 
(Chairman of the Committee) presiding.
    Present: Representatives Smith, Sensenbrenner, Coble, 
Gallegly, Goodlatte, Issa, Franks, Griffin, Gowdy, Conyers, 
Scott, Watt, Lofgren, Waters, Quigley, and Deutch.
    Staff Present: (Majority) Blaine Merritt, Counsel; Travis 
Norton, Counsel; (Minority) Jason Everett, Counsel; and 
Norberto Salinas, Counsel.
    Mr. Smith. The Judiciary Committee will come to order.
    Without objection, the Chair is authorized to declare 
recesses of the Committee at any time.
    And we welcome everyone here today. I am going to recognize 
myself for an opening statement, then the Ranking Member, and 
then the Chairman and Ranking Member of the Intellectual 
Property Subcommittee as well.
    The America Invents Act took 6 years to negotiate and 
represents the most comprehensive change to American patent law 
in 175 years. The new law improves our patent system and 
demonstrates that Congress can successfully work on a 
bipartisan and bicameral basis.
    While the America Invents Act is a noteworthy achievement, 
it is a complex statute that the Patent and Trademark Office 
labors to implement. Today's hearing allows us to receive 
updates from PTO Director Kappos and representatives of a broad 
cross-section of patent owners and users affected by the law.
    The America Invents Act directs the PTO to initiate a 
number of rulemakings on a variety of subjects and to publish 
studies on other important patent issues. Is PTO making 
satisfactory progress on these projects? Is the agency 
complying with congressional intent? And does the law need some 
tweaks?
    The America Invents Act matters because technological 
innovation from our intellectual property is linked to three-
quarters of America's economic growth, and American IP 
industries account for over one-half of all U.S. exports and 
more than a third of our GDP. These industries also provide 
millions of Americans with well-paying jobs. Our patent laws, 
which provide a time-limited monopoly to inventors in exchange 
for their creative talent, helps create this prosperity.
    The Commerce Department released a report in April that 
further documents the importance of IP to the American economy. 
The report focuses on those industries that produce or use 
significant amounts of IP and rely most intensively on these 
rights. The updated figures are stunning. There are 75 
industries that qualify as being ``IP-intensive.'' Direct 
employment in these industries exceeds 27 million jobs, with 
indirect activities associated with these industries providing 
another 13 million jobs. This means that 40 million jobs in the 
American economy, about 28 percent of all jobs, are linked to 
our IP system. So you don't have to be Thomas Edison to 
understand why Congress should be concerned about maintaining 
the health of our IP sector.
    Senator Leahy and I decided to pursue patent reform 6 years 
ago because our system hadn't been comprehensively updated for 
60 years. During this time, we have seen tremendous 
technological advancements, with the transition from computers 
the size of a closet to the use of wireless technology in the 
palm of your hand. But we cannot protect the technologies of 
today with the tools of the past.
    The old patent system was outdated and was dragged down by 
frivolous lawsuits and uncertainty regarding patent ownership. 
Unwarranted lawsuits that typically cost millions of dollars to 
defend prevent legitimate inventors and companies from creating 
products and generating jobs. And while America's innovators 
are forced to spend time and resources to defend their patents, 
our competitors are busy developing new products that expand 
their businesses and grow their economies. The more time we 
waste on frivolous litigation, the less time we have for 
innovation.
    American inventors have led the world in innovation and new 
technologies for centuries, from Benjamin Franklin to the 
Wright brothers to Steve Jobs. But if we want to foster future 
creativity, we must do more to encourage today's inventors. 
That is what the patent reform bill is all about. It fixes 
modern-day patent problems and liberates modern-day inventors.
    While we didn't succeed in making every stakeholder 100 
percent happy, the goal was more realistic: to make most of the 
stakeholders content most of the time. And I hope that is the 
case with the members of our two witness panels today.
    That concludes my opening statement, and the gentleman from 
Michigan, the Ranking Member of the Judiciary Committee, Mr. 
Conyers, is recognized for his.
    Mr. Conyers. Thank you, Chairman Smith. I can safely say I 
agree with everything you said.
    Mr. Smith. Good to hear that.
    Mr. Conyers. But it still makes my opening statement 
important because I want to create a few distinctions and add 
to--I hope that you can say the same thing about mine when I 
finish.
    Mr. Smith. I am sure I will.
    Mr. Conyers. Well, this is an unusual hearing because the 
law that we are having a hearing on was signed by the President 
last September. And so the hearing is about how we implement 
the provisions in a law that we have already agreed on.
    We have had at least four hearings. Chief Kappos has been 
before us about three times. We have been working on patent 
reform for 6 years. And we are required to come here again this 
morning because of the different times that the implementation 
of particular provisions go into effect. And, of course, my 
principal concerns have been the fee diversion elimination and 
the ending of a 700,000 backlog of applications that already 
exist.
    So I begin by congratulating the Director for selecting 
Detroit as the first branch PTO office. I plan to be there in 
July in Detroit. And a great name, for one of the first major 
African American inventors, Elijah McCoy. I hope it is going to 
be on the 19th, but I am not sure if that is definite yet. But 
whenever it is going to open, the office is eagerly awaiting 
our opening and a considerable number of employment 
opportunities that go along with it.
    Now, the concerns are these: Would the benefit go to large 
multinationals at the expense of independent inventors and 
thereby diminish job creation in the country? The provisions in 
the bill regarding retroactivity with regard to business method 
patents and false marking cases are all my concern. And it 
seemed that stripping the legal rights of private parties 
involved in pending litigation was not good.
    And now that the bill is law, our focus should be on how it 
can be improved. Twenty provisions that require implementation; 
seven are in effect. Notices of rulemaking have been issued for 
nine others. And so there is a lot of work left for the Patent 
and Trademark Office. In particular, the proposed rules for an 
inventor's oath and declaration, pre-issuance submissions, 
supplemental examination, and inter-parties review are all to 
be considered, with other things, in the hearing that we have 
this morning.
    Another area is how we deal with the universities, who 
provide immeasurable, if not one of the most important, 
contributions to the patent system. And one of the most 
important things that we can do is clarify the intent of the 
grace period. I want to find out how we can ensure that 
universities receive proper protection under the law, as well 
as why the grace period is so important to them.
    And so I have shared this concern, that such a provision 
can be--some definitions can be overinclusive and allows 
covered business method patents to include anything used in the 
provision of financial services. So I am very nervous about the 
retroactive discussion that we will hear this morning. But I 
remind you that the section 18 has been referenced by our 
recognized constitutional experts, Epstein and Massey, and have 
observed that this provision really boils down to special 
interest legislation.
    And so I am happy to be here. Critical that any revisions 
to the act must consider the interests of all the parties and 
not harm the small inventors.
    Thank you, Mr. Chairman. I will put my statement in the 
record, what remains of it.
    Mr. Smith. Without objection. Thank you, Mr. Conyers.
    [The prepared statement of Mr. Conyers follows:]

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
 in Congress from the State of Michigan, and Ranking Member, Committee 
                            on the Judiciary

    Today's hearing gives us an opportunity to study the implementation 
of the America Invents Act--the most significant reform to the Patent 
Act since 1952--which was signed into law by President Obama on 
September 16, 2011.
    The Judiciary Committee has been working on patent reform for more 
than over six years, under both parties.
    Over the course of these efforts, my principal priorities have been 
to prohibit patent ``fee diversion'' and eliminate the Patent and 
Trademark Office's 700,000 plus application backlog.
    I have concerns about whether sufficient progress has been made and 
whether the America Invents Act adequately addresses my concerns.
    To begin with, I want to congratulate Director Kappos for running 
the PTO in a transparent and open manner and for his leadership in 
implementing the Act, which I understand has been going smoothly.
    In addition, Director Kappos has made an excellent choice in 
opening the first PTO satellite office in the Detroit business 
district. His decision has sent a strong signal to businesses, 
innovators, and educators all over the Nation and the world that 
Detroit is a top notch technology destination.
    The Elijah J. McCoy Detroit Satellite office, which is scheduled to 
open in July, will create more than 100 high technology jobs, according 
to the PTO.
    Equally important, the opening of this satellite office will help 
facilitate patent filings by thousands of Detroit area businesses.
    I look forward to working with the PTO and the Commerce Department 
to ensure that the opening of this office becomes a model for others to 
emulate.
    Second, when we debated the Act on the floor, I had serious 
concerns as to whether it would benefit large multinationals at the 
expense of independent inventors and innovation, and thereby harm job 
creation in our Nation. For this reason, I opposed the bill.
    But, now that the bill is law, our focus should be on how it can be 
improved and whether further action is needed.
    Of the 20 provisions requiring implementation, only 7 provisions 
are in effect. Notices of Proposed Rulemaking have been issued for 9 
provisions and regulations for the remaining 4 provisions are under 
development. That leaves a lot of work to be done by the PTO.
    In particular, the PTO's proposed rules for an inventor's oath and 
declaration, pre-issuance submissions, supplemental examination, inter 
partes review, post-grant review, covered business method review, and 
derivation should be considered as part of today's hearing.
    A third area that we should examine today is how the Act's 
implementation affects various constituencies.
    For example, we must make sure universities are adequately 
protected during implementation. Universities provide immeasurable 
value to the patent system and deserve to be protected.
    Accordingly, I will be particularly interested to hear from the 
representative from the University of Michigan today about how we can 
ensure that universities will receive proper protection under the law.
    And, with respect to section 18 of the bill, which deals with 
transitional business method patents, I want to know how this provision 
is being implemented.
    We have received reports from several entities about ways to 
improve this section under the proposed rules.
    Specifically, they cite the definition of technological invention 
for the transition program for covered business method patents.
    I understand their concern to be that the definition is over-
inclusive because it allows covered business method patents to include 
anything used in the provision of financial services.
    I have shared similar concerns in that this provision could provide 
large banks a special, new bailout at the expense of small inventors 
and the American taxpayer. Even worse, this provision would do so on a 
retroactive basis.
    Several constitutional law experts, including Richard Epstein and 
Jonathan Massey, have observed that this provision ``is special 
interest legislation, pure and simple.''
    They concluded that the provision would constitute an 
unconstitutional taking of property, which would force the federal 
government--that is, you and me and American taxpayers--to pay just 
compensation to the patent holders.
    It is critical that any revisions to the Act must consider the 
interest of all parties and not harm small inventors.
    It is also important to keep in mind that the Act has been in 
effect less than a year and that, therefore, it is premature to make 
any changes at this time.
    The PTO's America Invents Act Implementation Team has been reaching 
out to interested parties across the United States in order to generate 
a dialogue about the PTO's proposed rules recently released for public 
comment.
    Yet, the most important goal, as the Act is implemented, must be to 
protect small inventors, which was my fundamental concern with the bill 
when it was considered in Congress last year.
                               __________

    Mr. Smith. I am going to introduce the Chairman and Ranking 
Member of the Intellectual Property Subcommittee, but I first 
want to say, in the case of Mr. Goodlatte and Mr. Watt, that 
both played very, very influential roles in the development of 
the bill and its enactment. And all of us were at the signing 
ceremony, as well, very appropriately.
    The gentleman from Virginia, Mr. Goodlatte, the Chairman of 
the Intellectual Property Subcommittee, is recognized for an 
opening statement.
    Mr. Goodlatte. Well, thank you, Mr. Chairman. And I 
appreciate your holding this hearing on the implementation of 
the--I prefer to call it the Smith-Leahy America Invents Act.
    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. But as the Members who drafted and worked to 
enact this law, our primary purpose today is to ensure that the 
hard-fought reforms in the AIA are implemented by the PTO in 
keeping with congressional intent.
    It needs to be made crystal-clear that the rulemakings and 
the regulations promulgated by the PTO should move us forward 
toward greater certainty and not be allowed to maintain the 
status quo. As we implement these changes in the patent system, 
we need to ensure that the new post-grant review and other 
proceedings provide simple, cost-effective methods for raising 
challenges to potential PTO prosecution mistakes and that they 
provide less expensive alternatives to Federal court 
litigation. If implemented correctly, these proceedings will 
increase certainty with regard to patent rights and thus spur 
more investment in new ideas.
    The PTO also needs to continue working to ensure that our 
patent system not only expeditiously reviews patent 
applications but issues high-quality patents that obviate the 
need for subsequent challenges and that can be enforced through 
the courts and administrative proceedings. This means we need 
to focus simultaneously on patent quality and patent quantity.
    A significant focus of the AIA was to reduce the problem of 
overpatenting, particularly by so-called patent trolls--the 
situation where weak or frivolous applications have been 
developed through creative or predictive lawyering, rather 
than, as Abraham Lincoln put it, through the fire of genius. 
The strength of our system relies on granting strong patents 
that are truly novel and are nonobvious inventions, those that 
are the result of true innovations and not the product of legal 
gamesmanship.
    As the PTO reviews the volume of applications and works 
through the backlog, the bar needs to be set higher and quality 
controls need to start on the front end rather than relying 
with the courts.
    A positive example from the AIA is the work being done to 
implement a transitional program to correct the egregious 
errors made in the granting of a wide range of business method 
patents. This program will provide the PTO with a fast, precise 
vehicle to review low-quality business method patents, which 
the Supreme Court has acknowledged are often abstract and 
overly broad. This program has the potential of making our 
Nation's patent portfolio stronger, and if it is successfully 
implemented, we may want to consider making it permanent in the 
future and expanding its applicability to other 
nontechnological patents.
    One area I plan to continue to watch is PTO fees. The fee 
authority Congress gave the PTO is finite for a reason. We 
sunset this authority so that the PTO would be mindful that it 
would need to come back to Congress to make the case that they 
have exercised this authority wisely. We will continue to 
monitor fees and make sure the PTO is enacting reforms to 
achieve maximum agency efficiency before it resorts to fee 
increases in the future.
    The issues that we discuss in today's hearing will require 
ongoing vigilance as we work to implement the AIA. We look 
forward to working with the PTO, American innovators and 
industry to help identify specific concerns and issues so that 
we can ensure that the bill is implemented in line with 
congressional intent and promotes U.S. economic growth and job 
creation.
    I look forward to hearing from all of our witnesses on the 
implementation of the AIA and ensuring that the U.S. patent 
system helps to promote U.S. manufacturing, technology, and 
innovation. And I particularly look forward to hearing from and 
continuing to work with our Director, Mr. Kappos.
    Thank you, Mr. Chairman.
    Mr. Smith. All right. Thank you, Mr. Goodlatte.
    Mr. Smith. The gentleman from North Carolina, Mr. Watt, is 
recognized.
    Mr. Watt. Thank you, Mr. Chairman.
    And this is not part of my opening statement, but Ranking 
Member Conyers made reference to the fact that they are opening 
an office in Detroit that is going to be named in honor of 
Elijah McCoy, an African American inventor. And it triggered my 
recollection that during Black History Month I had done a 
presentation on the floor of the House about African American 
inventors. And they have a long, elaborate history that is 
given very little attention to. So I thought it might be a good 
time for me to ask unanimous consent to insert a copy of the 
comments that I made on the floor of the House into the 
Judiciary Committee's record so that they will be memorialized 
here in our Committee also.
    Mr. Smith. Without objection, so ordered.
    [The information referred to follows:]

    
    
    
    
                               __________

    Mr. Watt. Thank you.
    The Leahy-Smith America Invents Act was a monumental 
achievement and the first significant legislative overhaul of 
the patent system in over 50 years. After several cycles of 
congressional consideration, the patent reform bill was made 
possible in large part by the sheer doggedness of many of 
today's witnesses and the industries they represent, as well as 
the leadership of the Administration and Director Kappos and 
Members of this Committee and our Senate counterpart.
    The key reforms incorporated in the America Invents Act, as 
part of Obama administration's commitment to promote 
innovation, stimulate job growth, and enhance America's global 
competitiveness, are far too numerous to recite in the time I 
have. However, I do want to acknowledge one that unified 
virtually all Members of this Committee, and that is full 
funding for the Patent and Trademark Office.
    Earlier this month, the House passed the CJS appropriations 
bill, which included $2.93 billion for the Patent and Trademark 
Office for fiscal year 2013. That represents a 9.5 percent 
increase over the 2012 appropriation. This amount reflects a 
spending level equal to the estimated fees the Patent and 
Trademark Office will collect and is consistent with the 
gentlemen's agreement in the America Invents Act.
    Despite the unfortunately large number of negative things 
in the CJS appropriations bill that made it impossible for me 
to vote for it, the record should be clear that I have never 
deviated from my views that the PTO should and must have access 
to all the fees it collects to provide the efficient and 
quality services our innovators deserve.
    The increasingly uncertain plight of most annual 
appropriations bills highlights the uncertainty, if not the 
folly, of the deal that was struck on the anti-fee diversion 
provision in the America Invents Act. I can only hope that we 
will not allow rank politics to hijack or hold hostage the 
policy objectives we all agree are in the best interests of our 
country. This is an ongoing concern and leads me to wonder to 
what extent the PTO or its users' fears about the 
precariousness of full funding has or will influence or 
negatively impact implementation of the vision and provisions 
of the America Invents Act.
    But we are not here to reiterate the shortcomings of the 
America Invents Act. Rather, we are here to obtain an update on 
its implementation. Of the 20 provisions in the law requiring 
the PTO to establish new procedures or adjust current ones, the 
agency has fully implemented 7. Of the remaining provisions 
that require PTO action, nine have been addressed in recent 
notices of proposed rulemaking and await public comment, while 
only four remain under development.
    The PTO is on schedule with each of these provisions and, 
by all accounts, has conducted a fair, inclusive, and 
transparent process. Unless we hear something compelling to the 
contrary from our second panel today, I believe Director Kappos 
and his staff are clearly to be commended for their 
accomplishments to date.
    While the development, evaluation, and implementation of 
the procedures and processes to carry out the mandate of the 
America Invents Act ultimately rests with the PTO, I look 
forward to hearing from the witnesses today on the various 
approaches they recommend to the agency to meet its challenges 
and about any legislative recommendations they may have.
    Mr. Chairman, I thank you for calling this hearing and 
assembling an impressive panel of witnesses. And I yield back 
the balance of my time.
    Mr. Smith. Thank you, Mr. Watt.
    We have two distinguished panels of witnesses today. And I 
will first introduce Director Kappos, and he will proceed with 
his testimony. After Members have an opportunity to ask him 
questions, we will proceed to our second panel of witnesses.
    The Honorable David Kappos is the Under Secretary of 
Commerce for Intellectual Property and Director of the United 
States Patent and Trademark Office. In this role, he advises 
the President, the Secretary of Commerce, and the 
Administration on intellectual property matters.
    Before joining the PTO, Mr. Kappos led the intellectual 
property law department at IBM. He has served on the Board of 
Directors at the American Intellectual Property Law 
Association, the American Intellectual Property Owners 
Association, and the International Intellectual Property 
Society. He has held various other leadership positions in 
intellectual property law associations in Asia and the United 
States and has spoken on intellectual property topics around 
the world.
    Mr. Kappos received his Bachelor of Science Degree in 
electrical and computer engineering from the University of 
California--Davis in 1983, and his law degree from the 
University of California--Berkeley in 1990.
    Without Director Kappos' steady hand, expertise, and 
support, we would not have enacted the America Invents Act. He 
and his staff did an outstanding job of providing us with 
advice, briefings, and drafting assistance. We can all thank 
him for his work at PTO.
    Director Kappos, we look forward to your testimony, and if 
you will please proceed.

TESTIMONY OF THE HONORABLE DAVID J. KAPPOS, UNDER SECRETARY OF 
  COMMERCE FOR INTELLECTUAL PROPERTY, DIRECTOR OF THE UNITED 
STATES PATENT AND TRADEMARK OFFICE, UNITED STATES DEPARTMENT OF 
                            COMMERCE

    Mr. Kappos. Well, thank you. Good morning, Chairman Smith, 
Ranking Member----
    Mr. Smith. Make sure your mic is on. And maybe move it a 
little bit closer.
    Mr. Kappos. Chairman Smith, Ranking Member Conyers, and 
Members of the Committee, thank you for this opportunity to 
discuss the USPTO's ongoing efforts to implement the Smith-
Leahy America Invents Act.
    Mr. Chairman, before I do, I would like to again thank you 
and your colleagues on this Committee for your efforts over 
several Congresses that led to enactment of this historic 
legislation. We would not be here today but for your tireless 
efforts on behalf of America's innovators. Thank you, thank 
you, thank you.
    Mr. Chairman, I am pleased to report that the AIA 
implementation efforts are indeed proceeding on schedule. We 
have implemented seven provisions of the AIA, all within the 
time frames prescribed by the act. We have published proposed 
rules for nine additional provisions, and we are on schedule to 
implement all of them on time. While our stakeholders have 
differing views on some of our proposals, most all of them have 
commented quite favorably on our transparent, thorough 
implementation process and the extent of our public outreach.
    Our AIA implementation team continues to review hundreds of 
comments received from individuals and IP organizations and IP 
practitioners and other government entities and academic 
institutions. And our ultimate goal, of course, remains to 
produce rules consistent with the language and intent of the 
AIA that will best serve the needs of America's entire 
innovation community.
    We will respond to the comments in our final rules, to be 
issued on or before August 16th of this year. The rules will 
then become effective on September 16, 2012, providing us with 
a window of time of a month or more to educate our patent 
examiners and the public regarding the final rules in advance 
of their implementation.
    In early February of this year, we published proposed fees 
as authorized by the AIA for our patent services and received 
substantial feedback and recommendations from the public. We 
also look forward to receiving a report from our Patent Public 
Advisory Committee before we begin the rulemaking process 
relative to our fees.
    Our stakeholders are already benefiting from the AIA. We 
launched the accelerated examination program known as Track One 
that provides for patent application processing in less than 12 
months and offers small businesses a discount. Since its 
inception, we have received more than 3,500 Track One 
applications already, completed first examinations on them in 
an average of less than 90 days.
    Needless to say, Mr. Chairman, our satellite office program 
has drawn quite a bit of interest. We are on schedule to open 
the first satellite office, the Elijah J. McCoy Satellite 
Office in Detroit, Michigan, in July. And we are in the process 
of reviewing and analyzing the more than 600 comments and 
suggestions we received in response to our Federal Register 
notice. We expect to announce the locations of additional 
offices this summer.
    While we are pleased with the progress we are making to 
implement the AIA, we are also concurrently working to improve 
the patent examination process and move important innovations 
more quickly into the marketplace. And my written statement 
details a number of those efforts.
    With adoption of the AIA, Congress has enabled the USPTO to 
promote a new vision of an IP world in which national and 
regional patent systems are coordinated to create an optimal 
environment for technological innovation globally. Passage of 
the AIA has provided an opportunity to restart long-stalled 
discussions with our foreign counterparts toward substantive 
harmonization that will help U.S. businesses succeed in the 
global business environment.
    And a critical part of these discussions is adoption by 
other countries of a modern grace period. The grace period has 
been adopted in many patent systems throughout the world, and 
it is recognized as a global best practice. We look forward to 
continuing these discussions.
    It is clear that policies supporting a high-quality IP 
system are making a difference in our Nation's economic 
recovery now. The recent IP jobs report, ``Industries in 
Focus,'' shows that America's core strength continues to lie in 
our ability to innovate. Sensible government policies 
encouraging that spirit of innovation can demonstrably 
contribute to job creation and economic wellbeing. The end 
result: 40 million jobs in IP-intensive industries, 
representing 35 percent of U.S. GDP.
    Mr. Chairman, we look forward to working with you and the 
entire Committee to ensure that the innovation-advancing, job-
creating, deficit-neutral work conducted by the USPTO continues 
to best serve America's innovators. We appreciate your 
continued support for the employees and operations of the 
USPTO.
    Mr. Smith. Thank you, Director Kappos.
    [The prepared statement of Mr. Kappos follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Smith. As you know, the goal of the act was to enable 
the Patent and Trademark Office to approve better patents more 
quickly. And it sounds like you are well on your way to helping 
us accomplish that goal. You have mentioned, as we all know, 
the backlog, 3-year wait, and you have some of those patents 
speeded up to the process of 90 days, it sounds like. So all I 
can do is thank you for the progress you have made, and I hope 
we can continue to make that progress.
    My first question goes to the patent fees, and I know you 
have proposed some increases. I think they have generally been 
well accepted and are appreciated because they know what the 
money is going to be spent for. But if you could tell us a 
little bit more of what you have in mind with the patent fees 
and also specifically how you might use that additional 
revenue.
    Mr. Kappos. Sure. Thank you for the question.
    Yes, we have proposed in our initial February document 
substantial increases in fees. We have received great input 
relative to some of those fees that could be recalibrated in 
the lower direction, and we are inclined to do that. In fact, 
we are working on approaches that will take some of those fees 
that the American innovation community was concerned about down 
somewhat. We believe we can do that and still stay on track to 
meet our strategic plan goals by 2015, getting our backlog and 
pendency under control in that time frame.
    Now, we are also very cognizant of what we need to spend 
that money for, and that is to improve our IT system--continue 
improving our IT system, to continue hiring patent examiners 
and board judges so that we can keep increasing the quality of 
our output. As you said, Mr. Chairman, higher-quality patents 
issued more quickly, we have to do both of those. And that is 
what the fee increases are aimed at.
    We inherited a large backlog. When we started, we had over 
750,000 patent applications awaiting examination and no money 
in the agency with which to conduct that work. We are going to 
get that backlog under control, and we are making some 
progress. We have it down to 640,000 now. We are headed toward 
about 600,000 by the end of this financial year, and we will 
just keep it going down.
    So in order to do all that work, it requires more 
examiners. And in order to hire those additional examiners, it 
requires funds. So, in effect, we are putting fees together 
that enable us to get the resources in place to overcome an 
unfunded mandate, a backlog that just did not have any money 
matched against it. You have to get that money to do that work.
    Mr. Smith. Do you have any specific goals as far as the 
backlog goes or as far as the average time to secure a patent 
goes? I mean, do you have a goal of trying to get to 1 year or 
2 years and reduce the average of 3 years by any certain period 
of time?
    Mr. Kappos. Yes, absolutely, we have extremely specific 
goals. We will take the backlog down to an appropriate 
inventory level of about 330,000 applications. That represents 
the right workload so every examiner has a good docket but not 
too much. We can do that by about the end of 2015. All of this 
is in our strategic plan.
    And when we hit that level, it will mean that, on average, 
we will be processing a first office action, so we will be 
doing the first substantive review of every application about 
10 months after filing, and we will be completing review on 
every application about 20 months after filing. And our 
community informs us that those are optimal processing times, 
balancing the need to have adequate information against the 
need to go as fast as possible.
    Mr. Smith. Okay. That is great news.
    Another question is this. We live in a world economy. 
Information is transmitted literally at the speed of light. Are 
we doing everything we can, and in what ways does the act 
enable us, to protect American patents overseas?
    Mr. Kappos. Yes, well, thanks.
    The AIA, as I mentioned somewhat in my statement, has 
proven to be transformative, in terms of repositioning America 
at the forefront of the global patent system and enabling us 
to, again, take leadership and work with our overseas trading 
parties for them to put in place 21st-century patent systems 
that are much more similar to what we have done under the AIA.
    So U.S. patent protection, as important as it is, is no 
longer completely adequate for many innovators, many American 
innovators. They need global protection. They need protection 
in Europe, they need protection in China, they need protection 
in Korea and Japan and other parts of Asia. And to do that, 
they are incredibly hampered by patent systems that are totally 
misaligned.
    The AIA creates a new gold standard for patent systems that 
has been the U.S. system. We now are in a position to work with 
our trading parties overseas, and we are doing that 
aggressively, to get them to update and improve their patent 
systems to make it easier for American innovators and 
innovators everywhere to take an idea, file a patent 
application here, essentially file about the same application 
and get the same level of protection where they need it 
overseas.
    Mr. Smith. Okay. Thank you, Director Kappos.
    The gentleman from Michigan, Mr. Conyers, is recognized.
    Mr. Conyers. Thank you, Chairman Smith.
    Under Secretary David Kappos, you have been in your office 
since August 2009. At the present time, it takes almost 3 
years, 2 months short of 3 years--if a person filed an 
application today, they would be waiting 33.9 months before a 
final resolution.
    Now, I am here to help you about what can you do. How about 
some new technology in applying this? And what if we were to 
give you lots more patent examiners and anything you might have 
to add to how we speed this time up? It is too long. An 
independent inventor can't hang in here for 3 years waiting for 
the office to do what it should be doing much, much sooner.
    Mr. Kappos. Well, thank you, Ranking Member Conyers. I 
appreciate the question.
    Indeed, the numbers have gone down slightly from 34 months. 
We are now in the 32-month range for final pendency, so we have 
made a little more progress. I fully agree with you that 32 
months remains too long. We do have some additional, however, 
good news coming on the horizon, which is that our forward-
looking pendency numbers for our first action--this is first 
time we look at an application--are now down to about the 16-
month range, which means that for applications being filed 
today, the review time is getting much, much shorter.
    That is a byproduct of the fact that, as you say, we are 
doing a lot of work on our IT, we are doing a lot of work with 
hiring examiners, including in Detroit, where we have already 
hired examiners, and we are easily going to meet and surpass 
our hiring goals of extremely qualified people, experienced IT 
professionals, who we will be able to put to work within a few 
weeks of joining the USPTO, have them examining applications 
right there in Detroit, in addition to several panels of board 
judges, extremely highly qualified folks, already hired, 
already being trained, ready to go as we open that office in 
just less than a couple of months.
    So I fully agree, we have more work to do. Putting more 
examiners in place is clearly part of the equation. We are 
working on it. Thank you so much for your focus on funding and 
stewarding this agency, which has enabled us to engineer this 
transformation. We keep running our play with hiring more 
people and working on IT and working on efficiencies, all of 
which we are doing. But you are right, we can get this under 
control, and we can take these numbers down further.
    Mr. Conyers. I feel a little better. And that is the only 
question I am going to ask you, because this is where we have 
to put our focus and direct attention as much as we can.
    Thank you, Chairman Smith.
    Mr. Smith. All right. Thank you, Mr. Conyers.
    The gentleman from Wisconsin, Mr. Sensenbrenner, is 
recognized for his questions.
    Mr. Sensenbrenner. Thank you, Mr. Chairman.
    Director Kappos, let me say that the Congress unloaded upon 
you one very, very big job when the AIA was passed. And I think 
that you have done an extremely good job in meeting the 
mandates and changing the procedures in your office as directed 
by Congress.
    I opposed the AIA. I made no secret of that. And what we 
are talking about in part here is legislation that seems to be 
kind of secret, in terms of making technical corrections to the 
AIA. And the fact that we have a roomful of witnesses in 
something that is supposed to be technical and nonsubstantive 
in nature, to me, raises a very red flag.
    So I am directing these comments less to you, Mr. Director, 
and more to the two senior Members that are seated to my left. 
First of all, don't play ``I have a secret'' with the changes 
that you are proposing. Bring the bill draft around, seek input 
from people who opposed your law rather than supported it.
    Second, keep it technical and only keep it technical. 
Otherwise, we are going to go through the same fight that we 
had for 6 years in getting the AIA passed, where some people 
will be winners and exceedingly happy and some people will be 
losers and even more mad than they were before. We have to 
bridge that gap. And how this technical corrections bill is 
done will go a long way to determining whether the gap gets 
bridged or whether the gap gets wider. You know, the fact that 
we are talking about technical corrections I think should be an 
admission that the bill was not properly drafted in the 
beginning, because now we are going to have to fix a few parts 
of it.
    Now, in terms of substantive and nontechnical issues that 
are being considered, let me talk about a couple of things. 
First of all, changes in the language that could have raised 
estoppel from the post-grant review process isn't technical. 
That is very substantive. And I think that this should be 
considered separately and not in something that is supposed to 
be noncontroversial.
    Also, I think substantive issues would be the expansion of 
the prior-use rights to create a new right that extends to 
commercial products and changes to the first-to-file provisions 
to address concerns about unanticipated limitations of the 
university grace period. These are substantive issues as well.
    So let's keep it technical. It does have a chance to get 
through this Congress and will help make Director Kappos' job 
of implementing this big assignment that we have given him much 
easier. Let's debate the substantive things in separate 
legislation. Some may pass, some may not pass, some will be 
modified.
    But, in sum, don't play ``I have a secret'' with this, as 
happened in the past with this and other types of legislation. 
Because when you don't expose massive legislation to the full 
light of day and have a full debate on it, there will be 
mistakes that will require technical corrections.
    Strike one on you folks. Let's not have strike two or 
strike three. Thank you.
    Mr. Smith. Thank you, Mr. Sensenbrenner.
    The gentleman from North Carolina, Mr. Watt, is recognized.
    Mr. Watt. Thank you, Mr. Chairman.
    Since Mr. Sensenbrenner spoke about the people to his left 
and the only Member of his side of the House who is left at the 
present is the Chairman, I hope he is not talking about the 
other people to his left down here. Because if there is a bill 
that is either substantive or technical, we haven't seen it 
either. So I would join him in requesting that it be a 
transparent discussion of all of these issues if we are talking 
about making changes.
    But I just wanted to make sure, since he was talking about 
people to his left, and the only person I saw to his left that 
was on his side of the aisle who might have some of control 
over this would be his own Chairman----
    Mr. Smith. Would the gentleman yield?
    Mr. Watt. He is putting up his thumb to suggest that it 
might be----
    Mr. Smith. Before we make this too personal and before you 
act too quickly to join the gentleman from Wisconsin, let me 
assure you that there is no technical bill and everybody will 
be----
    Mr. Watt. That is what I thought, too, but----
    Mr. Smith [continuing]. Made aware of it when there is.
    Mr. Watt.--I thought maybe Mr. Sensenbrenner knew something 
that we didn't know. But I wasn't aware of a bill either. So, 
anyway, let me get on to the questions I wanted to ask.
    Director Kappos, the PTO published a notice on April 20 
seeking public comment on whether the procedures it employs to 
screen patent applications for national security implications 
should also be used to consider, quote, ``economic security 
implications.'' The request, which the notice indicates 
emanated from the Appropriations Committee, is based on the 
concern that a loss of competitive advantage during the time 
between required publication of a patent application and the 
time the patent is granted--that is the time that the Ranking 
Member was expressing concern about--undermines domestic 
development, future innovations, and contingent economic 
expansion because of worldwide access to the applications.
    I wonder if you could comment conceptually on whether the 
notion of an economic security evaluation is compatible with 
the goals of the AIA or our various treaty obligations. What 
are your thoughts about that?
    Mr. Kappos. Well, thank you for the question, Congressman 
Watt.
    And the answer is that an economic security test would be a 
new kind of a test. We don't have anything like that that we 
currently employ. We have national security tests that are 
actually executed by the various national security-related 
agencies, DOD and others. USPTO does not, itself, conduct those 
kinds of tests.
    There would indeed be challenges relative to the AIA. An 
economic security test is not, on its face, compatible with the 
AIA, so something would need to be done about that. There would 
be challenges relative to treaty obligations that we have, and 
those would have to be worked out if we did decide to go down 
the road.
    But the USPTO felt it was important to act on the concerns 
of the CJS Appropriations Committee that also oversees us. And 
we were asked to seek input, and so we are trying to do that in 
as balanced a way as we can.
    Mr. Watt. All right.
    Director, based on recent press accounts, technology 
companies seem to be engaged in a so-called patent arms race. 
Tech companies are spending a lot of money to buy patent 
portfolios and suing to block technologies in every conceivable 
venue. And on Monday a Federal appeals court ruled that Apple 
can move ahead with its case to block some Samsung tablets over 
patent infringement claims. That is according to Reuters.
    Over the course of this Congress, we frequently heard 
representatives of the tech community argue that copyright 
infringement suits brought against tech companies by content 
owners stifle innovation. By that logic, it would seem the rash 
of patent cases brought by tech companies against tech 
companies might stifle technological innovation.
    Can you give us your take on this? And does litigation to 
protect intellectual property rights stifle innovation? Is 
there any reason to think that copyright litigation against 
tech companies stifles technological innovation any more or 
less than patent litigation?
    Mr. Kappos. Well, the answer is, no, I don't think there is 
any reason to believe that either copyright or patent lawsuits 
of the kind that we are seeing in the so-called smartphone wars 
are a sign of stifling technological innovation. In fact, much 
to the contrary.
    First of all, we have seen this movie before. We have seen 
this movie many times before. We saw it when Boulton and Watt 
got in their fights in the 18th century in England over the 
patents that started out----
    Mr. Watt. That is W-A-T-T?
    Mr. Kappos. Well, we saw it again with them too. We saw it 
when the sewing machine was invented. Then we saw it when the 
telegraph was invented. And we are seeing the same dichotomy, 
we are seeing the same series of events play out.
    It starts with fundamental technological innovation that is 
transformative in nature. Then others come along and want to do 
incremental innovation on top of it. The original innovators--
let's say, the Apples of the world as an example, companies 
that everyone would say have made transformative changes in our 
lives--have intellectual property positions resulting from 
massive investments. They seek to enforce those positions, 
level the playing field in some way, and you have a dustup like 
we are seeing right now.
    I do not believe that it is a sign that there is anything 
at all wrong with the innovation environment in the U.S. In 
fact, I think it is a byproduct of a very healthy overall 
innovation environment. These things happen. They sort 
themselves out over time. It is a strength of our system that 
we have strong and balanced intellectual property rights that 
let folks play their hands out the way that they are.
    And the last thing I will say is, I don't think that it is 
in any way a sign that there is some fundamental problem with 
patents at all across the board. It would be one thing if we 
were talking about noninnovators involved in these patent wars, 
but we are talking about some of the most innovative companies 
on the planet that have done tremendous research, have sought 
to protect their research, and are now protecting their rights 
that go along with it.
    So I actually just see this as a, you know, market reaction 
to a market development in a very competitive space, by the 
way. The smartphone space is characterized by extremely sharp 
drops in costs over time, extremely strong increases in 
performance, multiple changes in market leads, with different 
companies leading at different points in time. It is a 
tremendously competitive marketplace. And so I think what is 
going on here is just the natural ebb and flow of technology 
development.
    Mr. Watt. Thank you, Mr. Chairman. I yield back.
    Mr. Smith. Thank you, Mr. Watt.
    The other gentleman from North Carolina, Mr. Coble, is 
recognized.
    Mr. Coble. Thank you, Mr. Chairman.
    Director Kappos, refresh my memory. First to file was to 
take effect 18 months after enactment?
    Mr. Kappos. Correct.
    Mr. Coble. Which would be, I guess, March.
    Mr. Kappos. March next year.
    Mr. Coble. Do you anticipate any transition problems?
    Mr. Kappos. No, we don't. We are in the middle of the 
transition actually already. We are in the period where 
applicants need to decide whether they file under the old grace 
period and the old first-to-invent rules or under the new grace 
period and the new first-inventor-to-file rules.
    We are preparing our NPRM, our notice of proposed 
rulemaking, right now. We intend to conduct roundtable 
discussions and get great public input on it. We will be right 
on time with implementing it.
    There has been speculation about whether there will be a 
big bubble of patent applications filed before or after. I 
really don't think there will be. There will be several things 
that will be interacting, including fee changes, including just 
the needs of the marketplace. And I think that the transition 
will be quite manageable.
    Mr. Coble. Thank you, sir.
    Mr. Kappos, a recent hearing was conducted regarding 
international patent issues. And in the wake of the passage of 
the AIA, how are your talks going with our European and 
Japanese allies and others toward patent harmonization, 
including adoption of the 1-year grace period, A? And, B, what 
have been the most obvious stumbling blocks that you 
encountered?
    Mr. Kappos. Well, Mr. Coble, thank you very much for that 
question.
    The answer is that we are making actually quite 
considerable progress with our trading parties overseas on 
harmonization. The Japanese already have a good grace period. 
It is not exactly the same as ours, but it doesn't need to be 
exactly the same as ours. They need to extend theirs to 1 year, 
but I believe that we can work with them on that. The Republic 
of Korea, South Korea, recently put in place an excellent grace 
period based on our free trade agreement with them. And that 
has been implemented, so they are clearly in good condition. 
Other countries have good grace periods also.
    The main issue is working with the Europeans on that point. 
And, indeed, we are working hard with them. They are, I think, 
taking a very honest and appropriate look. We now have study 
groups consisting of USPTO employees working with employees of 
various European offices--the German office, the U.K. Office, 
the Dutch office, the French office. The European Patent Office 
is involved also. And we are working through the details of 
what would be an approach to the grace period that I would hope 
will inspire the European movement.
    Mr. Coble. Thank you, sir.
    One final question, Mr. Kappos. Can you provide us with an 
update on the selection process for further PTO satellite 
offices?
    Mr. Kappos. Right. So, sure. We are working on that. As I 
mentioned, we open the Elijah J. McCoy office just in a couple 
months, I think probably even a little less than that now, in 
July.
    We are mandated by the legislation to identify two 
additional offices. We plan to do that by this summer. We are 
working through a process that I think Congress did a good job 
of outlining for us. It is very objective. It looks at factors, 
including the ability to attract and retain examiners in the 
area; the ability to interact with an applicant community, with 
an IP community in the area; and the ability, importantly, to 
increase the economic vitality of the area generally.
    So we have criteria under those basic requirements. They 
are very objective in nature--how many patent practitioners 
there are, how many university graduates there are in the 
technological fields, cost of living, cost of housing, other 
objective factors. We have a gigantic matrix of all of that 
information, and we are sifting through it now on a very 
objective basis to try and identify good candidates.
    Mr. Coble. Thank you. Thank you for being with us, Mr. 
Kappos.
    I yield back, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Coble.
    The gentleman from Virginia, Mr. Scott, is recognized.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Kappos, are there any provisions of the law that you 
will not be able to implement on time?
    Mr. Kappos. No. We will succeed in implementing all of them 
on time.
    Mr. Scott. And are there any other initiatives that the PTO 
has implemented to improve the patent process?
    Mr. Kappos. Yes, Congressman Scott. Thank you for that 
question. It could be a very long answer, so I will give just a 
few examples.
    We are very intent on improving--continuing to improve the 
quality of our work while also improving the efficiency of our 
work so we can get more workflow through the agency. To do 
that, you have to have get examiners who have the time and the 
tools and the processes available to them to do a great job.
    So we have given examiners more time, right? Quality more 
important than quantity, at the end of the day. We have 
actually given our examiners across the board more time. And, 
not surprisingly, quality went up when we did that.
    We have given our examiners much better training and much 
better performance systems to incent them to engage with 
applicants to understand applications deeply the first time 
through and to get them done, whether ``done'' means granting a 
patent or finally rejecting an application. And it is showing 
progress. We are going to hit somewhere in the neighborhood of 
170,000 hours of examiner interviews this year, which is an 
all-time world record for our agency. It compares with under 
100,000 hours just a couple of years ago. So we are increasing 
the amount of time examiners spend understanding applications 
by wide, wide margins.
    Our IT tools are finally starting to come on line and 
relieve some of the burdens of examiners. We have our universal 
laptops almost completely deployed, and I think 99 percent of 
the agency is done. So our examiners finally have a good 
platform to work on. Not surprisingly, it is causing our IT 
systems to have less down time than they did, so examiners are 
becoming more productive.
    Our new Patents End-to-End system is coming up. Our CRU, 
Central Examination Unit, is already using PE2E. It is 
transformative for the examiners who use it. They are just 
blown away by the quality. We are gradually bringing function 
on. We are going to get the whole CRU over here in the next 
several months. Then we are going to start bringing the corps 
of over 7,000 examiners on. That is another step to function up 
in efficiency of the agency.
    And the last thing I will mention is, at the same time you 
are doing all of that, you have to give examiners the 
substantive tools, in terms of the guidelines and procedures 
internally, so that they can do a great job. So we are 
responding very quickly to case law that is coming out of the 
Supreme Court, the Federal circuit, and the accumulation of 
everything those courts are doing. We put out new rules within 
24 hours after the Supreme Court's Prometheus decision to keep 
our examiners going but to keep them very current.
    We put out for the first time in the history of the agency 
guidelines to improve the quality of our examiners' work 
relative especially to software-related patent applications, 
applications that use broad functional language. We have had 
that in place for nearly a year now. We have tested it. It has 
indeed increased our examiners' use of what is called 112 
rejections and objections, which is exactly what we wanted to 
have happen. Very pleased with the ability of our agency now to 
put in place these new tools, IT, new processes, substance, new 
management systems, getting examiners to work with applicants. 
So at the same time then increasing the quality and the 
effectiveness of the work we are doing.
    Mr. Smith. Thank you, Mr. Watt--Sorry, Mr. Scott, excuse 
me.
    The gentlewoman from California, Ms. Lofgren, is 
recognized.
    Ms. Lofgren. Thank you, Mr. Chairman; and thank you, 
Director, for being here.
    Just a comment. Something like a quarter of the patents in 
the United States come from the Silicon Valley. And I know that 
there has been a strong interest in the Valley for a next 
office, and I am hoping that you will consider that 
overwhelming fact as you consider these various offices.
    A small comment on the patent thicket and kind of the 
patent wars that are developing. I understand your point that 
you made to Mr. Watt, but it is certainly not just the cell 
phone wars. It is also the social network wars. And recently an 
independent analysis suggested that in the infringement 
litigation currently under way, for example, between Yahoo and 
Facebook that there were over 30,000 patents implicated in that 
litigation. And it seems to me if you are a software engineer 
and there is potentially 30,000 patents implicated, I mean, 
there is no point in even looking in terms of infringement.
    I think there is a problem, and I think we are not going to 
solve it here today, but I think it bears examination, and 
especially for the engineers involved in the Valley. And I am 
hoping to have some discussion among the parties. Because that 
kind of litigation--everybody has to do it, both as a sword and 
a shield. But from a 30,000-foot level it is draining a lot of 
money from innovation that I think is a problem.
    I want to talk about the inter partes situation. Some have 
suggested that the PTO will be accepting too many re-exams, 
even though the AIA raised the acceptance threshold; and some 
have suggested that you should have voluminous initial 
disclosures, which I have some questions about. And I am 
wondering what your thoughts would be, what the Office would do 
and what would the costs be for the Office if the patent claims 
scope were similar to a Markman hearing, as opposed to what I 
think most of us envisioned when the bill was crafted. You 
know, I just don't know how we would pay for that, but maybe 
that is a misconcern on my part.
    I am also interested in the costs for a company defending 
itself against an invalid patent in district court. How would 
that compare if we were to go to a more voluminous filing as 
some have suggested? And your comments on that would be very 
welcome, as well as any other in that as the process is 
developed.
    Mr. Kappos. Well, thanks for the questions and comments, 
Congresswoman Lofgren. And I will tell you I am concerned about 
patent wars, also, despite my previous comments. While I think 
they are a reflection of marketplace reality, they involve 
creative companies on both sides. You mentioned the Yahoo-
Facebook suit.
    Ms. Lofgren. Yes, and I am not taking one side over the 
other. I am just noting that, for business reasons, companies 
are buying up and using as a sword and a shield these gigantic 
portfolios that are weighing down the sites.
    Mr. Kappos. But I think the AIA provides us with an 
opportunity to help sort those things out much more cost-
effectively.
    The second part of your question, in a suit that involves 
however many patents between litigants, if we can reassess the 
patentability of those inventions quickly and cost-effectively 
through post-grant opposition and inter partes review at the 
PTO, that is where the action is and that is where parties can 
then quickly and effectively assess their relative positions 
and resolve those suits without having to spend extreme amounts 
of money.
    So that is the first part of the question.
    Now I will be out in your home State and my home State, 
California, later this week--no, actually, first of next week 
talking about these various issues with judges and with members 
of the IP community there specifically to learn more about this 
and to make sure we are doing everything we can at the PTO as 
we implement the AIA.
    So relative to the second part of your question and 
voluminous disclosures in these post-grant processes, I am 
concerned, also. One thing I will tell you is I do not believe 
that the USPTO will be living up to the mandate of the AIA if 
we implement it just like a district court process. That is it 
not what you intended. I do not believe that is what the 
Congress intended. I do not believe that is what is reflected 
in either the statute or the legislative history, and I do not 
believe we can proceed that way.
    Parties who want to spend millions of dollars on voluminous 
extensive document discovery with lawyers fighting with each 
other inexorably and then dumping millions of documents on 
dispute resolvers need to go to district courts to do that. 
That is what district court discovery looks like.
    You put in a process for us that you want us to get done in 
a year. That is going to require a lot more oversight and a lot 
more proactive involvement and a lot less voluminous 
disclosures by parties.
    One of the smartphone lawsuits--there was a report just 
last week on one of the parties that filed a document that was 
over a thousand pages and the judge looked at the document and 
reactively said, I am not even going to read this thing. The 
situation's out of control.
    What we are trying to create in the PTO is a system that 
proactively prevents those kinds of abuses and wastes from 
happening by having our ALJs reasonably involved all along the 
way, just like the district courts are starting to do with 
magistrates who are getting more involved in litigation all 
along the way. It is a best practice being recognized in the 
district court. We want to do the same thing with our 
procedures so that our folks are involved helping to guide the 
parties in a streamlined, cost-effective, fast way and not get 
into this situation with voluminous uncontrolled disclosures 
that will run up costs just like in district courts, waste 
millions of dollars, not behave in a manner that is consistent 
with your statute, and create a process that we will never be 
able to administer at the PTO.
    So I am very alert to your concern. We are trying to 
balance all of these issues with parties on the one hand who 
want wide-open, district-court-like processes in the USPTO and, 
on the other hand, get these processes completed in a 
reasonable amount of time.
    Ms. Lofgren. If I could, Mr. Chairman, I am wondering if 
you could tell us what percentage of accepted inter partes 
exams today result in a change to the claims?
    Mr. Kappos. Well, I am doing this from memory, but today my 
recollection is that a high percentage of the cases that are 
accepted actually do result in a change of claims. A number 
like 85 percent is sticking in my mind. But it may be slightly 
more or less. But it is a high number. I believe that actually 
is a testament to the strength of the process that when we 
accept one of these into review it is one that we really do 
need to look at.
    Ms. Lofgren. I yield back, Mr. Chairman. Thank you very 
much.
    Mr. Smith. Thank you, Ms. Lofgren.
    The gentlewoman from California, Ms. Waters, is recognized.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to thank Mr. Kappos for his presence here 
today.
    There is one part of the bill that I continue to have 
concerns about. Mr. Kappos, as you may recall, I sponsored an 
amendment on the floor to the America Invents Act with 
Congressman Schock to extract Section 18 from the bill. This 
section created an additional review process for financial 
services related business method patents. According to an April 
13th, 2011, article published in the Huffington Post entitled: 
One observer claimed the banks were using patent reform to seek 
special consideration exemptions.
    Many of the major banks have been using patented business 
methods without permission of the patent owners or payment to 
them. The financial industry has persuaded this Administration 
and the Senate and the House Judiciary leaders to retroactively 
change patent office rules in a way that makes it impossible 
for patent owners to enforce their constitutional rights 
against the banks' infringement. In effect, the Congress is 
voiding issued patents on behalf of the banks.
    I was struck by the information that we were presented 
with, particularly a case by a man named Mr. Claudio Ballard. I 
never met this gentleman, but he explained to us that he had 
founded something called Data Treasury Corporation and that he 
had really created the technology that removed paper checks 
from the payment process and replaced them with electronic 
digital images. And he explained that the financial services 
industry took extraordinary steps to try and invalidate his 
inventions.
    They took him to court, and he won in court. They came to 
the Congress in 2008. The Congress did not see fit at that 
point to do anything to invalidate these inventions. They even 
went to the Federal Court, and the Federal Court supported 
them, and I think your office supported them. But they were 
able to use the power and influence of the financial services 
industry to insert this Section 18.
    And so now you have the responsibility, I suppose, for 
determining whether or not these inventions are valid, this 
transitional review proceeding that you have the responsibility 
for. And you could literally invalidate patents retroactively.
    Have you taken a look at Section 18 and determined how you 
will be implementing this? And what input have you had coming 
to you, comments in this process, the regulatory process? Could 
you help me with that?
    Mr. Kappos. Sure. Yes, we have looked at that section 
carefully; and indeed we put out proposed rules on it. We have 
gotten comments from the intellectual property community on the 
proposed rules, and we are currently in the process of drafting 
the final rules to implement the covered business method 
procedure.
    Now we benefit from the fact, relative to the transitional 
CBM, that there is a lot of legislative history. A lot was said 
on the floor of both Chambers. And so our job is to implement 
the legislation that Congress passed. We are implementing it 
right along the lines of the law and the legislative history 
that explained the intent.
    Ms. Waters. So I guess what I am asking is, do you have the 
authority and the flexibility to make a determination about 
whether or not these patents in the financial services industry 
that are being challenged are legitimate challenges? And do you 
have the authority to retroactively invalidate patents in this 
area?
    Mr. Kappos. Well, yes, I think we do in the sense of 
retroactivity. The CBM provision 18 is no different from inter 
partes re-examination nor post-grant opposition or even 
supplemental examination or ex parte reexamination that we 
already have and have been executing for years in the sense 
that it charges the PTO with taking a second look at a patent 
that we have granted and potentially determining that some or 
all of the claims were unpatentable. So it is retroactive in 
the sense that we are always looking at patents that we 
previously granted. Congress has given us the authority and the 
obligation to do all of that.
    Ms. Waters. Well, I recognize that in Section 18. And let 
me just say that what draws my interest to all of this is we 
encourage innovation, we encourage creativity, and we have 
encouraged the average American citizen with an idea to pursue 
it. It seems to me that there is gross unfairness in the way 
that this gentleman and others have been treated by the 
financial services industry. They have a lot of power, they 
have a lot of money, and they have a lot of clout. And it seems 
to me this issue is costing these companies a lot of money 
going into court, winning; coming into your office, winning; 
and all of a sudden, because they were able to get this in this 
legislation, this Section 18, they have to continue to pay 
lawyer's fees and use their precious resources to try and fight 
against basic unfairness.
    And I just want to put that on your mind and let you know 
that some of us would encourage you: Just do the right thing.
    Mr. Smith. Thank you, Ms. Waters.
    The gentleman from Illinois, Mr. Quigley, is recognized.
    Mr. Quigley. Thank you, Mr. Chairman.
    Welcome.
    The enhanced transitional review program, as you know, is 
tasked with reviewing business method patents that have been 
characterized as being of poor quality, specifically patents 
that were issued during a time period when the patent office 
lacked access to the most relevant prior art to assist 
examiners as they reviewed business methods.
    You know, on one hand, these smaller institutions that 
support something like this, they struggle to defend themselves 
against lawsuits. Some of these are pretty small, community 
bankers and so forth. So a lot of them settle to avoid an 
extraordinary cost of litigation.
    On the other hand, while this new process will help, these 
institutions would have a difficult time paying large fees to 
get a patent reviewed under the business method patent review 
program unless the fees were scaled, I guess. Is that your 
intention? Is that your understanding, the intention of PTO to 
scale the fees to help smaller institutions?
    Mr. Kappos. Well, if I recall right, we are permitted by 
Congress to scale fees in a lot of areas, and we are. We are 
going to be for the first time offering micro-entity fee 
discounts of 75 percent in addition to small-entity discounts 
of 50 percent.
    But if I recall right, Congress did not give us the 
authority to scale the fees to a micro level for those post-
grant processes. Well, my understanding was that the overall 
view was that as you get into processes like that, like the 
covered business method review process, you are really almost 
always in a position where the PTO is by far the least-cost 
alternative, because your other alternative is going into 
district court. So the cost in USPTO our fees are going to be 
circa a few tens of thousands of dollars. You have got the 
lawyers' fees on top of that. But compared with going into 
district court and spending millions of dollars to get the same 
thing done.
    Mr. Quigley. And I appreciate that you say that is your 
understanding.
    Mr. Chairman, can I ask you if you know or someone else 
knows what your understanding was of whether Congress was 
giving the PTO the authority to micro target?
    I see by the shaking heads it appears no.
    Mr. Smith. I think the answer is no, having consulted with 
staff, but we can look into it further for you.
    Mr. Quigley. I would appreciate it, sir, if you and your 
staff could, Mr. Chairman.
    Thank you, and I yield back.
    Mr. Smith. The gentleman yields back.
    There are no other Members here for questions so, Director 
Kappos, thank you for your testimony today, very much 
appreciated.
    We will now go to our second panel of witnesses, and as 
soon as they are seated I will introduce them.
    Our first witness is Bob Armitage, Senior Vice President 
and General Counsel for Eli Lilly and Company. Before joining 
Lilly in 1999, Mr. Armitage worked as Upjohn's Chief IP counsel 
and practiced law for Vinson & Elkins in Washington, D.C. He is 
also an Adjunct Professor of Law at George Washington 
University.
    Mr. Armitage earned a degree in physics and mathematics 
from Albion College as well as a Master's degree in physics and 
a law degree from the University of Michigan. He was a major 
stakeholder participant in the negotiations of the American 
Invents Act and is the author of an article on the new patent 
law that was recently published in the AIPLA Quarterly Journal. 
I have a copy here, and the article I think is 110 pages long. 
So--and I have heard it is well written and look forward to 
reading it.
    Our next witness is Eliot Williams, a Partner in Baker 
Botts' New York office, who will testify on behalf of the 
Financial Services Roundtable, the American Bankers 
Association, the American Insurance Association, the 
Independent Community Bankers of America, and the National 
Association of Federal Credit Unions.
    Mr. Williams practices in all areas of intellectual 
property law, with a focus on patent and trade secret 
litigation. Mr. Williams frequently speaks on IP issues and is 
an Adjunct Assistant Professor at Brooklyn Law School where he 
teaches patent litigation. He earned a B.S. in electrical 
engineering from Texas A&M University and his law degree from 
New York University.
    Our next witness is Carl Horton, Chief IP Counsel for 
General Electric, who will testify on behalf of the Coalition 
for 21st Century Patent Reform. He also served as an IP counsel 
for GE's Healthcare and Distribution and Control Businesses.
    Before joining GE, Mr. Horton practiced IP law for 4 years 
in Alexandria, Virginia, for Burns, Doane, Swecker & Mathis. He 
received a chemical engineering degree from the University of 
Utah and a law degree from George Washington University.
    Our next witness is Kevin Rhodes, President and Chief IP 
Counsel at 3M Innovative Properties Company in St. Paul, 
Minnesota, who will testify on behalf of the Intellectual 
Properties Owners Association. Mr. Rhodes manages the IP assets 
of 3M and its worldwide affiliates.
    Before joining 3M in 2001, Mr. Rhodes was a partner at 
Kirkland & Ellis in Chicago, where he specialized in IP 
litigation. He earned his undergraduate degree in chemistry 
from Grinnell College and his law degree from Northwestern.
    Our next witness is Richard Brandon, Associate General 
Counsel for the University of Michigan. His practice focuses on 
patent, technology transfer, and research legal issues. Prior 
to joining the university, Mr. Brandon practiced IP law in 
Chicago for a number of years. He has experience in domestic 
and foreign patent prosecution, licensing, and other technology 
and IP-related issues.
    Mr. Brandon received concurrent bachelor degrees in 
Chemistry and Spanish from Wayne State University and his law 
degree from the University of Michigan.
    Our final witness is Timothy Molino, Director of Government 
Relations for the Business Software Alliance. Prior to joining 
BSA, Mr. Molino served as Chief Counsel for Senator Amy 
Klobuchar and worked for the Antitrust, Competition Policy, and 
Consumer Rights Subcommittee. He was responsible for advising 
the Senator on a variety of tech and IP issues.
    Mr. Molino also practiced IP law in Washington with two 
firms: Bingham McCutchen and Burns, Doane, Swecker & Mathis. He 
earned his undergraduate degree from the University of Mary 
Washington and his law degree from Washington and Lee 
University.
    We welcome our witnesses today. Please limit your testimony 
to 5 minutes. And, Mr. Armitage, we will start with you.

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

    Mr. Armitage. Thank you, Chairman Smith and Ranking Member 
Conyers.
    It was exactly 8 months ago today that the Leahy-Smith 
America Invents Act became law. This achievement was largely 
attributable to the bipartisan persistence of this Committee 
and its Senate counterpart over what seemed like a short 6-year 
period to see a comprehensive patent reform bill through to 
enactment.
    The new law positions the United States as the global 
leader in efforts to improve the world's patent systems through 
greater international cooperation and harmonization. On a host 
of issues the AIA implements what the U.S. patent communities 
agreed would be the best patent practices for a globally 
harmonized patent system. This was done so that our law might 
serve as the mold and model for the rest of the world.
    As the United States Patent and Trademark Office moves to 
implement our new law, the devil in such an implementation 
sometimes lies in its most obscure details. This makes today's 
hearing, with the aim of focusing on several of those details, 
of the utmost importance to the country. Thus, I am pleased to 
be able to offer the views of Eli Lilly and Company on the AIA 
implementation efforts thus far. Let me begin by offering a few 
words on the process that the USPTO has followed in bringing 
the AIA to life.
    If there were a single word for that process, it would be 
transparency. If you were to grant me two words to describe the 
Office's efforts, they would be transparency and candor. The 
USPTO has reached out to the patent community to understand 
both the ``what'' and the ``why'' of the sometimes quite 
diverse viewpoints being expressed on these implementation 
issues. Let me therefore publicly thank those in the Office who 
are leading this effort. They have shown an uncommon dedication 
and focus on seeing their mission to a successful conclusion. 
The Nation could hardly be better served by those now leading 
this effort, beginning with Director Kappos.
    With the limited time available for my opening remarks, let 
me highlight just a few points from a written statement.
    First, the USPTO efforts to implement the new fee-setting 
authority indicate that Congress was fully justified in giving 
to the Office this fee-setting responsibility. Lilly wants the 
Office to be run frugally and efficiently and for the Office to 
use its financial resources to invest for the long term in ways 
that will make it more efficient and more effective and that 
hold the promise that the fees of the future might indeed even 
be lower.
    In the aggregate, we see the plan to invest $2.93 billion 
of user fee collections next year as a well-justified target, 
set at the right level for the investments the Office is making 
in the future of this country's patent system. That, of course, 
assumes, as we have heard today, that those fees are not just 
collected but also available to the Office for their use.
    Second, with respect to the new supplemental examination 
procedure, the Office, at least in Lilly's view, has not fully 
embraced this procedure, nor has it sought to optimize its 
potential for increasing the reliability and quality of issued 
patents. The Office could indeed improve the quality and 
usefulness of the information coming before patent examiners 
during the original examination of a patent by facilitating 
more ready access to supplemental examination, and to do so it 
must greatly simplify the requirements that now appear in its 
proposed rules.
    Third, I would like to commend the Office for its response 
to the criticism of its proposed rules implementing assignee 
filing and the so-called inventor's oath provision of the AIA. 
It is clear from recent actions of the Office that the final 
rules will proceed to fully implement the assignee filing 
provisions of the AIA, and hopefully this augurs well for the 
Office's final rules as they relate to the inventor's oath.
    Fourth, Kevin Rhodes, appearing today on behalf of IPO, has 
submitted testimony for the record that provides a detailed 
road map for crafting rules on the new post-issuance procedures 
in the AIA. This road map was created on a cooperative basis by 
the ABA, IPO, and AIPLA.
    Lilly's hope is that the views in Kevin's submission will 
become the detailed blueprint for the Office's final rules. And 
indeed, just to underscore what Director Kappos has said, it is 
very important that those rules be crafted so that the post-
grant review procedures are efficient and economical, providing 
discovery that is fair and needed but not trying to duplicate 
district court litigation.
    Let me end with just one final observation. Congress in 
passing patent reform of the U.S. laws undertook a task that 
hadn't been successfully undertaken since 1836. It is a 
remarkable achievement. It deserves implementation efforts 
commensurate with that achievement.
    To date, I would contend that the Office has shown itself 
to be up to the task of securing a remarkable implementation of 
this remarkable new law. The proof, however, of my contention 
will come in the pudding of the final rules and examination 
guidelines, rules yet to be finalized and examining guidelines 
yet to be proposed.
    Thank you.
    [The prepared statement of Mr. Armitage follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


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    Mr. Smith. Thank you, Mr. Armitage.
    Mr. Williams.

TESTIMONY OF ELIOT D. WILLIAMS, PARTNER, BAKER BOTTS L.L.P., ON 
BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE (FSR), THE AMERICAN 
 BANKERS ASSOCIATION (ABA), THE AMERICAN INSURANCE ASSOCIATION 
(AIA), THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA), THE 
NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU), AND THE 
            CREDIT UNION NATIONAL ASSOCIATION (CUNA)

    Mr. Williams. Thank you, Mr. Chairman. Thank you for the 
opportunity to testify today regarding implementation of the 
newly renamed Smith-Leahy America Invents Act.
    I am going to focus my comments on Section 18, which relate 
to the transitional program for review of business method 
patents, which attracted some interest from Members of the 
Committee, today.
    We would first like to begin by thanking the Chairman and 
the other Members of the Committee and the Members of the 
Intellectual Property Subcommittee for their leadership on this 
important program, and we would like to thank Director Kappos 
and his as team at the Patent Office for the commendable job 
they have done in their initial rounds of rulemaking.
    While we are largely supportive of those proposed rules, we 
do have some suggestions for slight alterations that will 
properly carry out the congressional intent of the underlying 
program. I will touch on a few of those recommendations in my 
oral testimony today and refer the Members of the Committee to 
my written statement for some further discussions of additional 
recommendations.
    Let me preface the recommendations with a few words about 
the importance of the transitional business method review 
program.
    The program offers a less costly and more efficient 
administrative alternative to patent litigation so that 
companies acting in good faith do not have to spend the 
millions of dollars it can often cost to litigate a business 
method patent of questionable validity in Federal court.
    Unlike the traditional patent application process where the 
patent office hears only from the patent applicant, the 
transitional business method review program permits full 
participation by a party charged with infringement. This allows 
the patent office to obtain the most pertinent prior art known 
to that accused infringer, which can be especially important in 
the case of business method patents, because the most pertinent 
prior art is most often found in nontraditional locations, such 
as marketing literature, prior sales, et cetera, and therefore 
may be difficult for the patent office to uncover without the 
assistance and involvement of industry participants.
    Notably, the business method review program is only 
available after the patent office determines, after reviewing 
the materials and arguments submitted by the accused infringer 
in the request, that it is more likely than not that at least 
one claim of the challenged patent is invalid. This relatively 
high threshold provides ample protection to patentees against 
improper use of the program, and the program should therefore 
be implemented so that there are no technical loopholes that 
would permit a questionable patent to escape review.
    With these guideposts in mind, we offer the following more 
specific comments:
    First, we believe the burden should be on the patentee to 
show that the technological invention exception applies. In 
close cases, the Office should err in favor of permitting 
review of a patent under challenge. Proposed rules should 
therefore be clarified to put the ultimate burden of persuasion 
on the patentee to show that the patent escapes review under 
the program because it qualifies as a technological invention.
    We believe the economy will be benefited by erring on the 
side of including patents within the program so that these 
potentially invalid patents do not escape review. Notably 
during the House's legislative hearing on impending H.R. 1249, 
Director Kappos testified that it is more costly to the U.S. 
Economy when the threshold for determining whether to 
reevaluate a patent is set too high, because this can cause 
invalid patents to escape review in the Patent Office.
    Moreover, the legislative history of the AIA shows that the 
Act's authors, including the Chairman, intended the 
implementing regulations to be drafted so that the business 
method program would apply as broadly as possible. Similarly, 
Senator Schumer, one of the sponsors of the provision in the 
Senate in his comments to the PTO has cautioned that the term 
``technological invention'' should not provide a haven for 
clever lawyers to draft patent claims that would escape review 
under the program.
    The regulations that implement the review program should be 
simple and should err in favor of permitting review. The use of 
overly complicated or inflexible standards risks the exact kind 
of damage to the economy that Director Kappos previously 
testified about when he cautioned against setting thresholds 
for review too high. And in particular the complex test for 
eligibility under the program will risk keeping improperly 
granted patents on the books, which is contrary to the intent 
of this important program.
    The second point we would like to address has to do with 
the definition of ``charged with infringement.'' In particular, 
we believe there should be no requirement that a patentee use 
any magic words in its correspondence with potential targets, 
such as ``litigation'' or ``infringement'', before an accused 
infringer can invoke the program to test the patent's validity. 
Instead, we believe the Patent Office should apply a test 
similar to that used in the District courts to decide if 
declaratory judgment is present. And we believe this will make 
it most likely that patents that are of particularly 
questionable validity will make it into the program without 
clever lawyering avoiding such a review.
    Finally, we note that the business method proposed rules 
seem to prevent the use of the business method program for the 
first 9 months of first-to-invent patents--in other words, the 
patents which are currently on the books--which we believe is 
an incorrect reading of the statute. The proposed rule 
effectively insulates these first-to-invent business method 
programs from review during the first 9 months of their term, 
which is again inconsistent with the exact text of the AIA. So 
we encourage the PTO to look at that proposed rule again.
    In conclusion, we do want to thank the Chairman and the 
Members of the Committee again for the opportunity to testify. 
We are very excited about the transitional business method 
review program and look forward to working with the Patent 
Office and Members of the Committee to ensure it is implemented 
properly.
    Thank you.
    [The prepared statement of Mr. Williams follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


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    Mr. Smith. Thank you, Mr. Williams.
    Mr. Horton.

TESTIMONY OF CARL HORTON, CHIEF INTELLECTUAL PROPERTY COUNSEL, 
 GENERAL ELECTRIC, ON BEHALF OF THE COALITION FOR 21st CENTURY 
                         PATENT REFORM

    Mr. Horton. Mr. Chairman, Members of the Committee, I 
appreciate the opportunity to testify today in my capacity as 
chair of the Coalition for 21st Century Patent Reform, or the 
21C as we are known, a diverse group of nearly 50 innovative 
companies in 18 different industry sectors that employ millions 
of Americans in well-paying jobs.
    Let me begin by expressing my sincere gratitude and 
appreciation to all Members of Congress, and especially Members 
of this Committee, for your leadership in passing the Leahy-
Smith/Smith-Leahy America Invents Act. It represents a 
tremendous step forward for the patent laws of the United 
States that will continue to pay dividends for years to come.
    Let me also thank the staff of the Office, and particularly 
Director Kappos, for all their efforts to implement provisions 
of the AIA in a manner that is timely, transparent, and 
collaborative with the user community.
    The 21C was intimately involved in the discussions leading 
up to the passage of the AIA. Armed with this knowledge and 
experience, we have critically reviewed each of the various 
rules issued by the Office to ensure that they faithfully 
adhere to congressional intent. For the most part, such rules 
have remained true to the provisions of the AIA. Consequently, 
I will address only those provisions where additional changes 
would yield the greatest benefits or where the rules have 
strayed farthest from what was intended when the AIA was 
passed.
    Collectively the new post-grant review, PGR, and inter 
partes review, IPR, proceedings work to form the key 
cornerstone of the AIA. The PGR and IPR proceedings were to 
provide a fast, fair, and cost-effective manner to challenge 
patents of excessive scope or questionable validity. However, 
as currently drafted, these proceedings are not nearly as 
streamlined as they might be, and they also lack procedural 
safeguards that would better balance the proceedings between 
patent owners and patent challengers.
    Both PGR and IPR proceedings could be dramatically improved 
if requests were comprehensive at the outset, containing all 
information on which petitioners intend to rely, and patentees 
were permitted to respond with all information explaining why a 
petition should be denied, thereby providing the Office with a 
full and complete record on which to base its decision to 
institute such proceedings.
    Once instituted, IPR and PGR proceedings should be further 
streamlined by using proven best practices such as automatic 
protective orders, clearly articulating the appropriate scope 
and limitations on discovery, restricting the length and 
breadth of witness questioning, and eliminating any and all 
unnecessary motion practice that would do little more than 
inflate legal fees.
    Finally, claims should be interpreted consistently with 
other adjudicative proceedings, lest patentees face one claim 
scope for validity and a conflicting claim scope for purposes 
of infringement.
    Despite the global economic uncertainties and cost 
pressures facing our companies, the 21C supported the Office 
and the goals in its strategic plan by approving the 15 percent 
surcharge levied in conjunction with the AIA. However, the 15 
percent surcharge is already having a significant adverse 
impact on the number of patent applications that applicants can 
afford to file, issue, and maintain. Further fee increases 
could have even greater detrimental consequences on applicants.
    The AIA should in no way act as a deterrent to R&D, nor 
should it inhibit a company's ability to protect the fruits of 
such innovation. We are committed to working with the Office to 
simplify processes to eliminate fee increases so that 
applicants can secure rights to all innovations that have the 
potential to fuel future U.S. economic growth and recovery.
    One such opportunity for cost savings is the arcane 
practice of signing an oath or declaration when inventors have 
already assigned such rights to their employer. The current 
U.S. practice and, unfortunately, the draft rules proposed by 
the Office are tedious and time consuming. By requiring only an 
express statement by applicants that they have obtained the 
requisite right to file the patent application, the U.S. could 
dramatically simplify current practices to coincide with global 
best practices, as was intended.
    Section 18 of the AIA likewise has the potential to divert 
precious resources within the Office if the proceedings are 
made overly complex or unduly ambiguous. In its attempt to 
define technological inventions that do not qualify for 
business method challenges, the Office has conflated the issues 
of both novelty and nonobviousness together with the definition 
of technological feature, as well as requiring the 
technological feature to solve a technological problem with a 
technological solution.
    Finally, the supplemental examination provisions permit 
patentees an opportunity to ask the Office to consider or 
correct information possibly relevant to patentability before 
seeking to enforce their patents. The draft supplemental 
examination rules impose overly burdensome and unnecessary 
requirements such as detailed statements from applicants for 
each item of information submitted. The Office's draft rules 
would also deny applicants access to the benefits of this 
procedure if it determines the request did not comply with all 
of the formal requirements set forth, including the formal of 
the papers filed. We believe some relaxation of these 
requirements is in order.
    Thank you for the opportunity to present our Coalition's 
views on the implementation of the AIA. I would be pleased to 
answer any questions.
    [The prepared statement of Mr. Horton follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Smith. Thank you, Mr. Horton.
    Mr. Rhodes.

TESTIMONY OF KEVIN H. RHODES, PRESIDENT AND CHIEF INTELLECTUAL 
 PROPERTY COUNSEL, 3M INNOVATIVE PROPERTIES COMPANY, ON BEHALF 
     OF THE INTELLECTUAL PROPERTY OWNERS ASSOCIATION (IPO)

    Mr. Rhodes. Chairman Smith and Members of the Committee, 
thank you for the opportunity to testify today. I am speaking 
on behalf of IPO, the Intellectual Property Owners Association, 
which is a trade association of more than 200 companies and 
more than 12,000 individuals representing all industries and 
all fields of technology.
    I will echo what the previous panelists have said, thanking 
the Committee for its work in guiding through the enactment of 
the Smith-Leahy America Invents Act and for all the efforts 
that went into that. And, also, I will join in commending 
Director Kappos and the patent office for their excellent 
progress to date in promulgating and implementing regulations 
for the Act.
    I offer my testimony today in a constructive and not 
critical spirit. I will focus my remarks on the proposed rules 
to implement the new post-grant review and inter partes review 
proceedings.
    IPO is concerned that the proposed rules for these reviews 
do not yet fully implement the full intent and the promise of 
the Act, and IPO is not alone in those views. A cross-
organization committee of experienced practitioners that was 
appointed by IPO, APLA, and the IP law section of the American 
Bar Association joined together and submitted detailed comments 
asking for specific changes to the proposed rules.
    My written testimony that I have submitted lays out nine of 
those recommendations that all three of these leading IP 
organizations have endorsed and that they believe are the most 
critical to effective implementation of the new review 
proceedings. I will summarize a few of those recommendations 
today.
    Before I get into specifics, however, I would like to 
respond to a point that was made during the prior testimony. I 
do not believe that it is accurate to characterize the rules 
that all three of the IP organizations have recommended as 
being a version of litigation-type discovery. The discovery 
that we have proposed and the initial disclosures that go along 
with those are much more limited, restricted only to the issues 
on which review has been granted. They are not simultaneous 
discovery as in district court litigation. They are sequential. 
So no party to a review will need to take and defend discovery 
at the same time. And they really do implement some of the best 
practices in district courts around the country as how to make 
sure there is a full and complete disclosure of information at 
the outset of proceedings.
    District courts around the country, including the Eastern 
District of Texas and the Northern District of California, have 
adopted patent disclosure rules that really do promote the 
streamlined, efficient, and fair adjudication of patent 
infringement lawsuits, and that is what we are trying to 
replicate in our proposed rules that the three organizations 
have endorsed.
    As far as a summary of a few of the specifics, first, the 
rules should ensure that that the PTO bases its decision 
whether to institute a review on as complete a record as 
possible. The petition seeking review should disclose all of 
the petitioner's invalidity arguments and supporting 
information, and the patent owner should be permitted in its 
preliminary response to provide any evidence showing why the 
review should not be instituted.
    A review should be ordered only when the PTO determines, 
after considering all of the evidence presented, that the 
statutory evidentiary threshold has been met as well as the 
other factors that the Act allows the director and the board to 
consider in deciding whether to institute a review.
    Second, the reviews need to proceed without the extensive 
motion practice that the current proposed rules contemplate. 
Clear default rules mandating and limiting what must be 
disclosed and filed and when that must be done and what can be 
discovered are needed to ensure the rules can operate with 
minimal oversight from administrative patent judges and with 
minimal burdens on participants in terms of preparing for and 
participating in motion practice and other interactions with 
the board.
    Third, with respect to discovery, as mentioned, the rules 
should clearly set forth the scope and procedures of discovery 
to promote predictability, consistency, fairness, and due 
process for all parties. Both petitioners and patent owners 
alike should make initial disclosures so that the case is 
presented at the outset and the discovery can be narrowed from 
there, and that should take place without having to continually 
seek motions from the board on items of discovery that should 
be routine in nearly every review.
    Finally, with respect to claim construction, I will echo 
what Mr. Horton said. In IPR and PGR proceedings, claims should 
be construed using the same procedures as used in litigation. 
These are by nature, and as indicated in the House report on 
the bill, adjudicatory in nature; and if we apply a different 
claim construction in these proceedings as in litigation, the 
patent holder is not only going to face dual standards but it 
is going to operate to the disadvantage of the patent holder in 
each setting.
    In the PTO review, the claim would be given its broadest 
reasonable construction, a broad claim making it easier to 
invalidate with prior art. To turn around in litigation that 
might be occurring at the same time, the patent holder will 
face a claim construed under the Markman procedures, presumably 
narrower, thereby more difficult to prove infringement. I don't 
think it was the intent of the Act to tip the scales against 
patent owners in that manner.
    Thank you. I will be happy to answer questions.
    [The prepared statement of Mr. Rhodes follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________

    Mr. Smith. Thank you, Mr. Rhodes.
    Mr. Brandon.

   TESTIMONY OF RICHARD BRANDON, ASSOCIATE GENERAL COUNSEL, 
    UNIVERSITY OF MICHIGAN, ON BEHALF OF THE ASSOCIATION OF 
                  AMERICAN UNIVERSITIES (AAU)

    Mr. Brandon. Thank you for the opportunity to speak today 
about the America Invents Act.
    I am Rick Brandon, associate general counsel for the 
University of Michigan. I am here today to speak on behalf of 
the Association of American Universities, which includes 59 of 
the Nation's leading public and private research universities.
    AAU was the lead negotiator on behalf of the universities 
for a consortium of six higher education associations to ensure 
that universities----
    Mr. Watt. Mr. Chairman, I am still having a little trouble 
hearing. Could you pull the mic a little bit closer?
    Mr. Brandon. Is that better?
    Mr. Watt. That is much better.
    Mr. Brandon. We wanted to make sure that universities' 
voices were heard during debate on the AIA. We very much 
appreciate how both the majority and minority Members of this 
group worked with us to craft the ultimate legislation.
    Let me begin by commending the U.S. Patent and Trademark 
Office for its work to implement the new patent law. As 
indicated by Director Kappos, the USPTO has provided ample 
opportunity for input from the public. Indeed, the Office has 
been conducting major outreach across the Nation, as you 
already heard about today, appearing at a variety of forums and 
answering the myriad of questions the new law has generated, in 
many cases involving universities.
    Let me also acknowledge how excited we are in the State of 
Michigan about the opening of the new Detroit satellite office, 
which you heard a bunch about today already.
    Universities play a key role in the U.S. Patent system, and 
the discoveries made on my campus and others throughout the 
country will lead to new cures for diseases, new technologies, 
and ultimately to the creation of new jobs and industries to 
keep our Nation competitive and our national security strong.
    Thanks to the effective work of this Committee, the USPTO, 
and their staffs, the product of the patent reform effort will 
hopefully be an improved system that is more harmonious with 
that of other countries and will stimulate the economy and 
simplify the patent process to the benefit of all sectors, 
including universities.
    As USPTO moves through its numerous rulemakings and 
proceeding, it is important that the carefully crafted promises 
that enabled passage of the AIA remain intact, allowing the 
USPTO to implement the bill as passed. We believe that any 
deviations from the compact embodied in the AIA be considered 
only with the agreement of all the affected parties.
    Two possible amendments to the AIA have arisen since its 
passage that are not strictly technical, one clarifying the 
grace period for inventors, which is a particularly important 
issue for university researchers, and the other calling for a 
proposed further expansion of prior user rights, which in our 
view is even more substantive.
    Universities view these two issues differently. Let me 
start by clarifying the intent of the grace period.
    We believed that the grace period language in the AIA as 
passed would preclude obvious variants of a published invention 
from being considered as prior art during the 1-year grace 
period following an inventor's disclosure. We now understand 
that this interpretation is being called into question, and we 
are discussing possibly amending language that would establish 
unequivocally that such obvious variants would not constitute 
patent-defeating prior art.
    Simply put, we are seeking a grace period amendment that 
would accomplish no more or less to implement the original 
intent of the grace period language that was introduced in 
2005, which we believe was the intent of this Committee when it 
passed the Act last year. Indeed, a widely stated goal of this 
legislation was maintaining a strong grace period that would 
permit university researchers to continue to discuss and 
publish their research results in advance of actually filing a 
patent application.
    In contrast, some groups are now seeking further expansion 
of prior user rights, calling for adding provisions that were 
explicitly discussed at the end of the patent reform process 
and omitted from the compromise agreement that was a major 
factor in passage of the Act. That agreement involved 
universities reversing their long-standing opposition to any 
expansion of prior user rights. We understood at the time of 
the compromise that all parties had entered into a binding 
agreement, and we concur with the recent USPTO report that 
itself concludes that further expansion of prior user rights is 
not warranted at this time and that this issue can be revisited 
when the PTO conducts a mandated study of prior user rights and 
other issues in 2015.
    Nevertheless, in the interest of sound public policy, we 
have been negotiating with other groups to see if it is 
possible to reach agreement on language that would expand the 
prior user rights while effectively addressing the concerns of 
universities. To date, we have not found such language, and we 
would be strongly opposed to any effort to amend the AIA to 
expand prior user rights without broader agreement by 
universities and all affected parties.
    In conclusion, universities wish to thank the Members of 
this Committee for their effective work and diligence in 
helping to negotiate this landmark legislation. We believe that 
the PTO has done an excellent job of implementing the new law. 
We urge that, absent broad agreement, any technical corrections 
being considered be just that, technical in nature and not 
designed to make major changes to the Act that was just signed 
8 months ago today.
    Thank you for your attention. I look forward to any 
questions.
    [The prepared statement of Mr. Brandon follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
    Mr. Smith. Thank you, Mr. Brandon.
    Mr. Molino.

    TESTIMONY OF TIMOTHY A. MOLINO, DIRECTOR OF GOVERNMENT 
          RELATIONS, BUSINESS SOFTWARE ALLIANCE (BSA)

    Mr. Molino. Chairman Smith and other distinguished Members 
of the Committee, thank you for the opportunity to testify at 
this very important hearing.
    Intellectual property rights are the cornerstone of 
innovation, giving innovators confidence that it is worth the 
risk to invest and developing and commercializing new ideas. 
Patents are an indispensable part of these protections.
    The Business Software Alliance is the leading advocate for 
the software industry. BSA members have worked closely with 
this Committee for many years to modernize the patent system. 
Because of this Committee's leadership, patent reform became a 
reality last year. The Business Software Alliance believes the 
America Invents Act is a substantial step forward in bringing 
our patent system into the 21st century.
    Current efforts by the Patent and Trademark Office to 
implement the American Invents Act follows this Committee's 
goal of making the U.S. patent regime the best and most 
efficient patent system in the world. We support the PTO's 
proposed rules with some clarifying changes, because they will 
enhance the patent system and promote innovation in computers 
and software.
    The PTO is being very open and transparent during the 
drafting of the proposed rules under Secretary Kappos, and the 
entire PTO team deserve a great deal of credit for their hard 
work in implementing this ground breaking law. BSA submitted 
comments to the PTO on the Office's proposed rules. Our 
suggestions aim to strike a balance between intellectual 
property owners and those seeking to challenge an application 
of issued patent, and I ask that BSA's comments be made a part 
of the record in this hearing.
    [The information referred to follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    


                               __________
                               
                               
                               
                               
                               
                               
                               
                               
                               
                               
                               
                               
                               
                               
                               __________

    Mr. Molino. BSA believes there are three areas in which the 
proposed rules can be improved. These are the transitional 
program for covered business method patents, inter partes 
review, and post-grant review. The purpose of these programs is 
to remove low-quality patents. Removing low-quality patents 
from the system will instill greater certainty and confidence.
    With respect to the transitional program for covered 
business method patents, which focuses on patents in the 
financial services sector, BSA believes that the PTO should 
better define which patents will potentially be subject for 
review under this program. The PTO's proposed definition of the 
technological invention exception provides that eligibility for 
review will be determined on a case-by-case basis using two 
criteria: where the claimed subject matter as a whole recites a 
technological feature that is novel and whether it is unobvious 
over the prior art and solves a technological problem using a 
technological solution.
    We believe that using only these criteria will potentially 
allow the definition of covered business method patents to 
include anything used in the provision of financial services, 
including patents covering general purpose servers, email 
clients, and basic spreadsheet applications. As a result, it 
could be interpreted to cover a significant number of general 
software and computing technology patents that have little or 
nothing to do with business methods.
    The availability of method patents benefits a vast variety 
of industries. Broad inclusion of these patents in the 
transitional program would be an unfortunate and unintended 
consequence of the proposed definition. This could produce 
effects beyond financial services and create unwelcome 
uncertainty, chill innovation, and reduce investment in 
bringing new technologies to American consumers and creating 
jobs here in America.
    At the same time, we recognize the financial industry's 
strong interest in this area. Thus, it is important that the 
PTO strike the right balance in determining which patents fall 
under this program and which do not.
    BSA has suggested a four-factor balancing test to determine 
whether a patent should be reviewed under this program. It 
provides safeguards against the inclusion of general software 
and technology patents, while providing context so the patents 
directed to financial services or products are not excluded, 
looking at their technological contributions in isolation. By 
adopting this test, the PTO would provide clarity as to which 
patents fall under this program and which do not.
    BSA's other suggestions relate to the procedures for inter 
parte review and post-grant review. We support the direction of 
the proposed rules, but we believe minor changes to the time 
line, scope of discovery, page limits, and process for 
resolving claim disputes can be made to more properly apportion 
respective burdens on the petitioner and patent owner. Our 
suggestions would also allow for more efficient administration 
by the PTO.
    Finally, BSA supports the PTO's fee changes with a few 
considerations. Some of the fee increases, especially in 
traditional preparation and prosecution categories, may cause 
BSA members to reassess their patent strategies. Therefore, BSA 
believes the PTO should continue to review the fee increases to 
ensure that the prices that are charged are appropriate. On 
that note, we believe the fees set by the PTO for inter parte 
review and post-grant review, while high, are reasonable in 
view of the substantial work required from the Patent Trial and 
Appeals Board.
    Again, the Business Software Alliance appreciates this 
opportunity to testify. I look forward to answering your 
questions.
    [The prepared statement of Mr. Molino follows:]

    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Smith. Thank you, Mr. Molino.
    Let me recognize myself for questions and begin with Mr. 
Armitage, if I may.
    Mr. Armitage, my question for you is what technical fixes 
would you recommend that we consider for the American Invents 
Act?
    Mr. Armitage. Let me start with what I consider to be the 
most obvious, and I will call it a technical fix, although I 
realize there may be some controversy on that issue.
    During the legislative process, in effect almost through 
the last day of the 6-year process, the estoppel and post-grant 
review against later judicial proceedings was ``issues raised'' 
in one form or another, not ``issues raised or could have been 
raised.'' Due to what I think everyone would acknowledge was an 
error in the legislative process, that estoppel includes issues 
that could have reasonably been raised, which may have the 
effect of essentially nullifying the provision unless that 
error can be corrected. So, to the exclusion of anything else 
that needs to be done, I would urge that correction to be done.
    Mr. Smith. Thank you, Mr. Armitage.
    Mr. Williams, what else can we do either with the America 
Invents Act or what else can the Patent and Trademark Office do 
to discourage patent trolls?
    Mr. Williams. Wow.
    Mr. Smith. That is a softball over home plate.
    Mr. Williams. Yes, well, I think, obviously, the business 
method review program is an excellent start. As you know, Mr. 
Chairman, those patents are ones that are sort of special in 
the sense they are seem to be litigated far more frequently 
than patents in general. And so to the extent there is a single 
classification of patents where the patent troll or non 
practicing entity companies become more involved, it seems to 
be those are the ones.
    So having an effective and cost-effective way to review 
those patents again, to give them a closer look using the best 
prior art is a good step in the right direction. And to do that 
in a way where companies who are acting in good faith don't 
have to spend millions of dollars in District court litigation 
going through discovery that may or may not be relevant to the 
ultimate issues in the case on validity I think is definitely a 
step in the right direction. So I think that is the main point 
that I would say.
    And the second point in terms of technical amendments or 
changes to the Act--and I think this goes to a question from 
Mr. Quigley earlier during the discussion with Director 
Kappos--the fee structure is one that we do think is important 
to look at closely. We are supportive of, obviously, the patent 
office charging fees necessary to make these review programs 
work effectively and so that those are funded. But we would 
encourage the Committee and the members of the staff as well as 
the PTO to look closely at whether those fees could be staged 
or maybe reduced for small entities if they want to bring these 
types of reviews.
    Mr. Smith. Thank you, Mr. Williams.
    Mr. Horton, actually that has led to my next question to 
you. How do you think the increase in fees are being received 
or will be received from what you heard Mr. Kappos say?
    Mr. Horton. You know, as I indicated in my oral testimony, 
I think it is a mixed blessing. I think we all generally 
support the patent office, particularly given their heroic 
efforts with the AIA, to try to get their hands around patent 
quality and just to do a stellar job of doing what we hoped 
they were always able to do but were lacking the funds to do 
so. That is why we supported the 15 percent fee increase 
associated with the bill.
    However, that being said, my employer forces me daily to be 
cognizant of the realities of the economy that we are facing, 
and we are starting feel the impact of the fee increase 
already. I fear subsequent increases could cause even more 
pressure points to come to bear.
    We took a quick look at some of the fees. If I look at just 
the filing and issue fees associated with our portfolio, if I 
say 3,000 patents is roughly what we file on an annual basis, 
we would be looking at about a $3.5 million increase on our 
filings and search fees at the PTO.*
    It gets even worse if we try to maintain a portfolio over 
the life of those patents, which for us being a long-cycle 
business can be the full 20 years. The maintenance fees go up 
to about around $5 million at the first maintenance fee payment 
for 10,000 patents, another $5 million at the second 
maintenance fee payment for only 7,000 patents, and about $16 
million at the third maintenance fee payment of 5-6,000 
patents. That is $26 million in aggregate cost on a budget, 
granted the size of GE, which is north of $100 million, but 
still is no small fee increase for us to swallow to try to 
maintain our protection.*
---------------------------------------------------------------------------
    *Mr. Horton amended this portion of his response to read as 
follows:

  We took a quick look at some of the fees. If I look at just the 
filing and issue fees associated with our portfolio, if I say 3,000 
patents is roughly what we file on an annual basis, we would be looking 
at about a $1.8 million annual increase on our filing and exam fees at 
the PTO.
  It gets even worse if we try to maintain a portfolio over the life of 
those patents, which for us, being a long-cycle business, can be a full 
20 years. The maintenance fees go up by about around $2 million at the 
first maintenance fee payment for 10,000 patents, another $3 million at 
the second maintenance fee payment for about 4,000 patents, and about 
$12 million at the third maintenance fee payment for 4,300 patents. 
That is $17 million in aggregate cost on a budget, granted the size of 
GE, which is north of $100 million, but still is no small fee increase 
for GE to absorb in order to maintain our protection.
    Mr. Smith. Thank you, Mr. Horton.
    Mr. Rhodes, last question is for you. The America Invents 
Act permits the PTO, in fact, encourages the PTO to establish 
regulations that prioritize examination for products, 
processes, or technologies. Do you think that IPO member 
companies will take advantage of some of these provisions?
    Mr. Rhodes. Thank you for the question, Mr. Chairman.
    I think that certainly with as diverse a membership as IPO 
we have companies that will be interested in various aspects of 
those programs. The green program that was announced, I know 
that we at 3M had some patent applications that we submitted 
into those.
    I think, more generally speaking, though, with such a 
diverse membership we are concerned when certain technologies 
or certain patent holders are put to the front of the line and 
prioritized among others who would have equally beneficial 
inventions. There is no denying that we want to encourage some 
of the subject matter of the inventions that are being 
prioritized, but we just don't know what is in some of the rest 
of the backlog as well. So that does create some concern.
    I distinguish that, however, from the accelerated 
examination that we certainly support. If you are willing to 
pay more to accelerate examination, I think that program is a 
tremendous success.
    Mr. Smith. Thank you, Mr. Rhodes.
    That concludes my questions; and the gentleman from North 
Carolina, Mr. Watt, is recognized for his.
    Mr. Watt. Thank you, Mr. Chairman.
    I thank the witnesses for being here.
    I think all of you were here when I asked Director Kappos 
about this economic impact analysis that the Appropriations 
Committee suggested that he try to incorporate in the analysis. 
And I don't want to leave the impression that I am not 
sensitive to the domestic economic impact. I am sensitive to 
that. I just do not know how, consistent with what we have 
tried to achieve in the patent reform bill and consistent with 
our treaty obligations internationally, how you can put that 
together and into the same analysis.
    So I am wondering if you all have any ideas about how, 
consistent with our treaty obligations, we can address the 
foreign economic impact that patent publication may facilitate 
and how all of this may be made more compatible. Any of you 
have any ideas on that?
    That is a softball question again, I thought.
    Mr. Armitage. Could I speak to that question?
    Mr. Watt. Yes, sir.
    Mr. Armitage. Because I think the gist of the proposal here 
was that if you did the economic impact analysis you could 
elect not to have your patent application published at 18 
months, or in fact it just simply may not be published at 18 
months. It seems like that is simply taking the patent law in 
the wrong direction. There was some justification perhaps for 
not publishing all patent applications promptly under our old 
regime. But our new regime basically guarantees someone once 
they file an application, and once that application is 
published, that no one can come later and get a patent that is 
either the same as what was originally filed or obvious in view 
of what was originally filed. It is a categorical guarantee 
that if anyone gets a patent, you do. It worked different with 
a first-to-invent system.
    So with the burdensome nature actually having to do the 
analysis and then with the fact that if you do it you are just 
perpetuating secrecy when sunshine would be a far better 
policy, I would strongly urge the Office as they move forward 
with this analysis to look at this as not only something we 
want to do but something we would not want our trading partners 
to do. That is, keep things secret, where we would also be 
better off globally knowing who was going to get patent rights 
and who wasn't.
    Mr. Watt. Any other comments on that?
    I mean, as sensitive as I am to the economic impact of 
this, I don't know you give it the same level of credibility, I 
guess, as national security, which might justify some level of 
secrecy. But I am open to any other discussion about that you 
might have.
    Mr. Horton. I might add to what Mr. Armitage has said. The 
fact is that now, for the first time in a long time, the U.S. 
has regained its leadership position on patent harmonization 
and IP protection discussions globally. That is huge. Because 
where we really struggle I think for adequate protection for 
all the intellectual property that is generated in the U.S. is 
in other countries where those laws we find to be--and the 
enforcement of those laws is inadequate. By regaining that 
leadership position, by harmonizing with some of our major 
trading partners, I think it puts us in a much better position 
to try and advocate for broader, better, stronger protection 
internationally that will give us the kind of rights that we 
benefit from here in the U.S. in many of the areas where our 
growth is also happening pretty quickly. So I think they have 
done a great job, by the way, of taking this and making it work 
internationally.
    Mr. Watt. Now, I shouldn't lose sight of the fact that this 
is being done at the request of the Appropriations Committee, 
and there is a connection to the second question that I want to 
ask. They have got to do what the Appropriations Committee ask 
them to do, which is put out a rule and evaluate the 
implications of this economic impact. Otherwise, there is a 
fear that the appropriators will take the money that they are 
collecting and not give it back to them.
    I raised the question in my opening statement about the 
impact that this kind of gentleman's agreement could 
potentially have going forward with the appropriators. I guess 
the question is, if the money is collected--you talked about 
your concerns about fees, but if the money is being collected 
and applied to something other than the workings of the PTO 
office, I assume you all would be even more concerned about the 
increase in fees.
    So I am raising this kind of to put it on the record so 
that maybe the appropriators will understand that these two 
things are connected to each other. And in this area our 
objective is to get an appropriate Patent and Trademark Office 
operation, not to collect more fees for the benefit of solving 
our budget deficit, I suppose.
    I won't ask you all to comment about that. I mean, I assume 
everybody on the panel basically agrees with the general notion 
that I have expressed without alienating the appropriators.
    Mr. Armitage. Billions for the Office, not one cent for 
diversion.
    Mr. Watt. That is probably a good summary in capsule.
    With that, Mr. Chairman, I will yield back.
    Mr. Smith. Thank you, Mr. Watt.
    Let me thank our witnesses for their testimony today. We do 
have a number of questions in writing to submit to you all. A 
number of Members have to be on the House floor--have had to be 
on the House floor for the last hour or so, so we have a number 
of questions from them we would like you to respond to them in 
the next week or 10 days, if you could.
    So thank you again for your testimony, very, very helpful. 
And we do expect to proceed with a bill that will make some 
tweaks, and we look forward to your continuing input in that 
regard.
    Without objection, all Members will have 5 legislative days 
to submit additional written questions for the witnesses or 
additional materials for the record, and this hearing is 
adjourned.
    [Whereupon, at 12:15 p.m., the Committee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
   Congress from the State of Virginia, and Member, Committee on the 
                               Judiciary

    Today we are holding a hearing on the implementation of the Leahy-
Smith America Invents Act. 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.
    But as the Members who drafted and worked to enact this law, our 
primary purpose today is to ensure that the hard fought reforms in the 
AIA are implemented by the PTO in keeping with Congressional intent. It 
needs to be made crystal clear that the rulemakings and regulations 
promulgated by the PTO should move us forward toward greater certainty 
and not be allowed to maintain the status quo.
    As we implement these changes in the patent system, we need to 
ensure that the new post grant review and other proceedings provide 
simple, cost-effective methods for raising challenges to potential PTO 
prosecution mistakes and that they provide less expensive alternatives 
to federal court litigation. If implemented correctly, these 
proceedings will increase certainty with regard to patent rights and 
thus spur more investment in new ideas.
    The PTO also needs to continue working to ensure that our patent 
system not only expeditiously reviews patent applications, but issues 
high quality patents that obviate the need for subsequent challenges 
and that can be enforced through the courts and administrative 
proceedings. This means we need to focus simultaneously on patent 
quality and patent quantity.
    A significant focus of the AIA was to reduce the problem of 
overpatenting, particularly by so-called ``patent trolls,'' the 
situation where weak or frivolous applications have been developed 
through creative or predictive lawyering, rather than as President 
Abraham Lincoln put it, through the ``fire of genius.'' The strength of 
our system relies on granting strong patents that are truly novel and 
non-obvious inventions--those that are the result of true innovations 
and not the product of legal gamesmanship.
    As the PTO reviews the volume of applications and works through the 
backlog, the bar needs to be set higher, and quality control needs to 
start on the front end rather than relying with the courts.
    A positive example from the AIA is the work being done to implement 
a transitional program to correct the egregious errors made in the 
granting of a wide range of business method patents. This program will 
provide the PTO with a fast, precise vehicle to review low-quality 
business method patents, which the Supreme Court has acknowledged are 
often abstract and overly broad. This program has the potential of 
making our nation's patent portfolio stronger and if it is successfully 
implemented, we may want to consider making it permanent in the future 
and expanding its applicability to other non-technological patents.
    One area I plan to continue to watch is PTO fees. The fee authority 
Congress gave the PTO is finite for a reason. We sunset this authority 
so that the PTO would be mindful that it would need to come back to 
Congress to make the case that they have exercised this authority 
wisely. We will continue to monitor fees and make sure the PTO is 
enacting reforms to achieve maximum agency efficiency before it resorts 
to fee increases in the future.
    The issues that we discuss in today's hearing will require ongoing 
vigilance as we work to implement the AIA. We look forward to working 
with the USPTO, American innovators and industry to help identify 
specific concerns and issues, so that we can ensure that the bill is 
implemented in line with Congressional intent and promotes U.S. 
economic growth and job creation.
    I look forward to hearing from all of our witnesses on the 
implementation of the AIA and ensuring that the U.S. patent system 
helps to promote U.S. manufacturing, technology and innovation.

                                

Prepared Statement of the Honorable Melvin L. Watt, a Representative in 
Congress from the State of North Carolina, and Member, Committee on the 
                               Judiciary

    The Leahy-Smith America Invents Act was a monumental achievement 
and the first significant legislative overhaul of the patent system in 
over 50 years. After several cycles of congressional consideration, the 
patent reform bill was made possible in large part by the sheer 
doggedness of many of today's witnesses and the industries they 
represent, as well as the leadership of the Administration and Director 
Kappos and members of this Committee and our Senate counterparts.
    The key reforms incorporated in the America Invents Act as part of 
the Obama Administration's commitment to promote innovation, stimulate 
job growth and enhance America's global competitiveness, are far too 
numerous to recite in the time I have. However, I want to acknowledge 
one that unified virtually all members of this committee--full funding 
for the PTO.
    Earlier this month the House passed the CJS appropriations bill 
which included $2.93 billion for the PTO for fiscal year 2013, a 9.5 
percent increase over 2012. This amount reflects a spending level equal 
to the estimated fees the PTO will collect and is consistent with the 
``gentleman's agreement'' in the AIA. Despite the unfortunately large 
number of negative provisions in the CJS appropriations bill that made 
it impossible for me to support, the record should be clear that have 
never deviated from my view that the PTO should and must have access to 
all of the fees its collects to provide the efficient and quality 
services our innovators deserve. The increasingly indeterminate plight 
of most annual appropriations bills highlights the uncertainty, if not 
the folly, of the deal that was struck on the anti-fee diversion 
provision in the AIA. I can only hope that we will not allow rank 
politics to highjack or hold hostage the policy objectives we all agree 
are the best for our country.
    This is an ongoing concern and leads me to wonder to what extent 
the PTO or its users fears about the precariousness of full funding has 
or will influence or negatively affect implementation of the vision and 
provisions of the America Invents Act.
    But we are not here to re-litigate the shortcomings of the America 
Invents Act. Rather we are here to obtain an update on its 
implementation. Of the 20 provisions in the law requiring the PTO to 
establish new procedures or adjust current ones, the agency has fully 
implemented 7. Of the remaining provisions that require PTO action, 9 
have been addressed in recent Notices of Proposed Rulemaking and await 
public comment, while only 4 remain under development. The PTO is on 
schedule with each of these provisions and, by all accounts, has 
conducted a fair, inclusive and transparent process. Unless we hear 
something compelling to the contrary from our second panel today, 
Director Kappos and his staff are clearly to be commended for their 
accomplishments to date.
    While the development, evaluation and implementation of the 
procedures and processes to carry out the mandate of the America 
Invents Act ultimately rests with the PTO, I look forward to hearing 
from the witnesses today on the various approaches they recommend to 
the agency to meet its challenge.
    Mr. Chairman, I thank you for calling this hearing and assembling 
an impressive panel of witnesses and yield back.

                                















                                
















                                










                                










                                












                                






                                


















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