[Congressional Record (Bound Edition), Volume 154 (2008), Part 16]
[Senate]
[Pages 22620-22632]
[From the U.S. Government Publishing Office, www.gpo.gov]




                             PATENT REFORM

  Mr. KYL. Mr. President, I rise today to comment on S. 3600, the 
Patent Reform Act of 2008. This bill is based on, but makes a number of 
changes to, S. 1145, a patent reform bill that was reported out of the 
Judiciary Committee in 2007 but that was never considered by the full 
Senate.
  S. 1145 proposed several salutary and uncontroversial reforms to the 
patent system, but also included provisions that would rewrite the 
formula for awarding damages in patent cases and that would create new 
administrative proceedings for challenging patents. These and other 
provisions of that bill would have made it much more expensive to hold 
and defend a patent, would have extended the time for recovering 
damages for infringement, and would have substantially reduced the 
amount that the patent holder would ultimately recover for 
infringement. The changes proposed by S. 1145 went so far that under 
that bill's regime, it may have proved cheaper in many cases to 
infringe a patent and suffer the attenuated and reduced consequences of 
doing so, rather than to pay a license to the holder of the patent. 
Once such a line is crossed, the incentive to invest in research and 
development and the commercialization of new technology in this country 
would be greatly reduced. Such a change would do enormous harm to the 
U.S. economy in the medium-to-long term. Reputable economists estimate 
that historically, between 35 and 40 percent of U.S. productivity 
growth has been the result of innovation.
  My bill makes substantial changes to those sections of S. 1145 that 
address damages, post grant review, venue and interlocutory appeals, 
applicant quality submissions, and inequitable conduct. This bill will 
not be considered in this Congress. I nevertheless thought that it 
would be useful to propose alternative approaches to these issues now, 
to allow Senators and interested parties the time to consider these 
alternatives as we prepare for the patent reform debate in the next 
Congress. I hope that my colleagues will work with me in a bipartisan 
and deliberative manner to construct a bill that will be considered in 
the next Congress. With those thoughts in mind, allow me to describe 
the significant changes that this bill makes to S. 1145.
  I believe that S. 1145 goes too far in restricting a patent owner's 
right to recover reasonable royalty damages. On the other hand, I also 
believe that there is room for improvement in current law. Some unsound 
practices have crept into U.S. patent damages litigation. My staff and 
I spent several months at the end of last year and the beginning of 
this year discussing the current state of patent damages litigation 
with a number of seasoned practitioners and even some professional 
damages experts. I sought out people with deep experience in the field 
who had not been retained to lobby on pending legislation.
  A substantial number of the experts with whom I spoke said that there 
is nothing wrong with current damages litigation and that Congress 
should not change the law. Others, however, identified a number of 
unsound practices that they believe have led to inflated damages awards 
in a significant number of cases. Different attorneys and experts 
repeatedly identified the same valuation methods and criteria as being 
unsound, subject to manipulation, and leading to damages awards that 
are far out of proportion to an invention's economic contribution to 
the infringing product. Examples of problematic methodologies that were 
identified to me include the so-called rule

[[Page 22621]]

of thumb, under which an infringed patent is presumptively entitled to 
40 percent or some other standard portion of all of the profits on a 
product, the use of the average license paid for patents in an industry 
as a starting point for calculating the value of a particular patent, 
and a formula attributed to IBM whereby every high-technology patent is 
entitled to 1 percent of the revenues on a product. A number of experts 
also criticized the use of comparables, whereby the value of a patent 
is calculated by reference to the license paid for a supposedly 
comparable patent.
  The views of those experts who were critical of current damages law 
find some support in the macro evidence. Data collected by 
PricewaterhouseCoopers and FTI Consulting indicate that the majority of 
the largest patent-damages awards and settlements of all time have been 
entered only since 2002. Also, the inflation adjusted value of awards 
entered since 2000 is more than 50 percent higher than it was during 
the early 1990s. And it also appears that jury awards tend to be about 
ten times higher than the average damages award entered by a judge, and 
that results vary markedly by jurisdiction. These facts suggest that 
the problems that sometimes lead to inflated damages awards are to some 
extent systemic.
  The task of reforming substantive damages standards presents a very 
difficult legislative question. Damages calculation is an inherently 
fact-intensive inquiry and requires legal flexibility so that the best 
evidence of a patent's value may always be considered. Any proposed 
changes to the law must be evaluated in light of the kaleidoscope of 
factual scenarios presented by the calculation of damages for different 
types of patents.
  I have largely given up on the idea of developing a unified field 
theory of damages law that solves all problems at once. I also oppose 
proposals to require a prior-art subtraction in every case. Most 
measures of a reasonable royalty, such as established royalties, costs 
of design-arounds, comparisons to noninfringing alternatives, or cost 
savings produced by use of the patented invention, already effectively 
deduct the value of prior art out of their estimate of the patented 
invention's value. To mandate prior-art subtraction when using such 
measures would be to double count that deduction, effectively 
subtracting the prior art twice and undervaluing the invention.
  And for reasons mostly explained in my minority views to the 
committee report for S. 1145, S. Rep. 110-259 at pages 64-65, I also 
disagree with the argument that defendants should be allowed to revisit 
validity questions, such as a patent's novelty or nonobviousness, 
during the damages phase of litigation. To those comments I would 
simply add that, if Congress were to desire that patents be defined 
more specifically and narrowly, then it would need to provide express 
guidance as to how to do so. Simply using adjectival phrases such as 
``specific contribution'' or ``inventive features'' will not suffice. 
These terms merely express a hope or objective. But legislation needs 
to be about means, not ends, particularly if it is intended to achieve 
its results by altering the practices and outcomes of litigation. I 
should also add that although I have consulted with many neutral 
experts in the field of patent damages, and many of those experts 
described to me what they believed to be serious problems with patent 
damages litigation, none of those experts told me that insufficiently 
specific claim construction is causing excessive damages awards. If 
overly broad claim constructions were a major source of problems with 
damages litigation, I undoubtedly would have come across at least one 
neutral expert who expressed that view.
  Discussions that I have had with several proponents of S. 1145 
indicated that they understand the principal evil of current damages 
litigation to be the award of damages as a percentage or portion of the 
full price of the infringing product. It also appears that some 
proponents of S. 1145 believe that a statutory instruction to define 
the invention more narrowly and clearly would prevent parties from 
seeking damages based on the entire value of the infringing product. 
The linkage between claim construction and the damages base is not 
clear to me. Even a concededly limited invention could be fairly valued 
by using the full product's price as the damages base, so long as the 
rate applied to that base was appropriately small.
  Many unjustified and excessive awards certainly do use the full value 
of the infringing product as the damages base. Indeed, awards that are 
derived from the rule of thumb almost always are based on the entire 
value of the infringing product, as is the typical industry averages 
award. Precluding or sharply limiting the use of net sales price as a 
damages base certainly would block the path to many of the bad outcomes 
that are produced by the use of these methodologies.
  The problem with a rule that bars the use of net sales price as the 
damages base when calculating a reasonable royalty is that in many 
industrial sectors, net sales price is routinely used as the damages 
base in voluntary licensing negotiations. It is favored as a damages 
base because it is an objective and readily verifiable datum. The 
parties to a licensing negotiation do not even argue about its use. 
Instead, they fight over the rate that will be applied to that base. 
Even if the net sales price of the product is very large and the 
economic contribution made by the patented invention is small, net 
sales price can still serve as the denominator of an appropriate 
royalty if the numerator is made small.
  Thus in these industries, the initials, NSP, appear frequently and 
repeatedly in licensing contracts. A legal rule that precluded use of 
net sales price as the damages base would effectively prevent 
participants in these industries from making the same royalty 
calculations in litigation that they would make in an arm's length 
transaction. Such an outcome would be deeply disruptive to the 
valuation of patents in these fields. Evidence and techniques whose use 
is endorsed by the market via their regular use in voluntary 
negotiations are likely to offer the best means of valuing a patent in 
litigation. After all, what is an object in commerce worth, other than 
what the market is willing to pay? We simply cannot enact a law that 
bars patentees from using in litigation the same damages calculation 
methods that they routinely employ in arm's length licensing 
negotiations.
  The bill that I have introduced today uses what I call an enhanced 
gatekeeper to address problems with damages awards. The bill 
strengthens judicial review of expert witness testimony, provides 
greater guidance to juries, and allows for sequencing of the damages 
and validity/infringement phases of a trial. The bill also codifies the 
principle that all relevant factors can be considered when assessing 
reasonable royalty damages, while adopting guidelines and rules that 
favor the use of an economic analysis of the value of an invention over 
rough or subjective methodologies such as the rule of thumb, industry 
averages, or the use of comparables. Allow me to provide a subsection-
by-subsection summary of the bill's revisions to section 284, the basic 
patent damages statute.
  Subsection (a) of the bill's proposed section 284 copies and 
recodifies all of current section 284, including its authorization of 
treble damages and its admonition that compensatory damages shall ``in 
no event be less than a reasonable royalty for the use made of the 
invention.''
  Subsection (b) codifies current Federal circuit precedent defining a 
reasonable royalty as the amount that the infringer and patent owner 
would have agreed to in a hypothetical negotiation at the time 
infringement began. It tracks the language of the Rite-Hite case, 56 
F.3d 1538 (Fed. Cir. 1995), and follow-on decisions. Some supporters of 
S. 1145 are critical of the hypothetical negotiation construct and 
believe that it leads to bad results. Not only is this test established 
law, however, but it is also inherent in the concept of a ``reasonable 
royalty.'' That standard requires the trier of fact to determine what 
would have been--i.e., what the parties would have agreed to. As long

[[Page 22622]]

as the patent code requires a ``reasonable royalty,'' courts and juries 
will need to engage in a hypothetical inquiry as to how the invention 
reasonably would have been valued at the time of infringement. Indeed, 
it is not apparent by what other means the factfinder might approach 
the calculation of a reasonable royalty. And in any event, the source 
of occasional bad results in damages trials is not the mental framework 
used for approaching the question of a reasonable royalty, but rather 
the particular evidence and methods used to value some inventions. It 
would be a noteworthy omission to avoid mention of the hypothetical 
negotiation concept in a bill that regulates damages analysis to the 
degree that this one does. This subsection thus codifies the Federal 
circuit's jurisprudence on the hypothetical negotiation.
  Subsection (c) simply makes clear that, despite subsection (d), (e), 
and (f)'s codification and modification of several of the Georgia-
Pacific factors, the rest of the Georgia-Pacific factors--as well as 
any other appropriate factor--may be used as appropriate to calculate 
the amount of a reasonable royalty.
  Subsection (d) is probably the most important subsection in the 
bill's revised section 284. It bars the use of industry averages, rule-
of-thumb profit splits, and other standardized measures to value a 
patent except under particular circumstances. Standardized measures are 
defined as those methods that, like rule of thumb and industry 
averages, do not gauge the particular benefits and advantages of the 
use of a patent. Instead, they are relatively crude, cookie-cutter 
measures that purport to value all patents--or at least all patents in 
a class--in the same way, without regard to a particular patent's 
economic value. These back-of-the envelope methods are occasionally 
used in arm's-length, voluntary licensing negotiations, as are things 
such as gut instinct and intuition. But they are rough methods that can 
produce wildly inaccurate results. Subsection (d) disfavors their use.
  This subsection restricts the use of Georgia-Pacific factor 12, which 
largely describes the rule of thumb. Subsection (d)'s general rule 
cites the rule of thumb and industry averages as important and 
illustrative examples of standardized measures. But it also expressly 
applies to other methods that are ``not based on the particular 
benefits and advantages'' of an invention, to ensure that variations on 
these examples and other methods that consist of the same evil also are 
brought within the scope of subsection (d)'s main rule.
  An example of a standardized measure other than profit splits and 
industry averages that is also currently in use and that also falls 
within subsection (d)'s scope is the so-called IBM 1-percent-up-to-5 
formula. This formula apparently was used by IBM in the past to license 
its own portfolio of patents. Under this methodology, each patent 
receives 1 percent of the revenues on a product until a 5 percent 
ceiling is reached, at which point the whole portfolio of patents is 
made available to the licensee.
  I have heard more than one representative of a high-technology 
company describe the use of this formula in litigation against his 
company. Apparently, there exists a stable of plaintiff-side damages 
expert witnesses who will testify that this formula is appropriate for 
and is customarily used to calculate the value of any patent in the 
computer or information-technologies sectors. These experts start at 1 
percent and then adjust that number based on the other Georgia-Pacific 
factors, supposedly to account for the particular aspects of the patent 
in suit, though these adjustments almost always seem to push the number 
higher.
  Obviously, 1 percent of revenues or even profits is a grossly 
inflated value for many high-technology patents. It is not uncommon for 
high-technology products to be covered by thousands of different 
patents, which are of greatly differing value. Not every one of those 
patents can be worth 1 percent of revenues. Some patents inevitably 
will be for features that are trivial, that are irrelevant to 
consumers, or that could be reproduced by unpatented, off-the-shelf 
noninfringing substitutes. One percent of the sales revenue from, for 
example, a laptop computer is an enormous sum of money. Many patents 
are worth nothing near that, and any methodology that starts at that 
number is likely to produce a grossly inflated result in a large number 
of cases.
  It bears also mentioning some of those common methodologies that 
clearly are not standardized measures. In addition to established 
royalties, which are afforded an express exemption from this subsection 
by paragraph (2), there are the methods of calculating the costs of 
designing around a patent, drawing comparisons to the experience of 
noninfringing alternatives, or calculating the costs savings produced 
by use of the invention. All of these factors gauge the benefits and 
advantages of the use of the invention and therefore are outside the 
scope of subsection (d).
  Paragraph (1) of subsection (d) allows parties to use a standardized 
measure, such as a rule-of-thumb profit split, if that party can show 
that the patented invention is the primary reason why consumers buy the 
infringing product. If the patented invention is the primary reason why 
people buy the product, then the patent effectively is the reason for 
the commercial success of the product, and its owner is entitled to a 
substantial share of the profits, minus business risk, marketing, and 
other contributions made by the infringer.
  Some have advocated a lower standard than ``primary reason'' for 
allowing use of profit splits and other standardized measures--for 
example, using a ``substantial basis'' standard. I rejected the use of 
a lower standard because a profit split should basically award to the 
patent owner all of the profits on the product minus those attributable 
to business risk. Thus the test for allowing such profit splits must be 
one that only one patent will meet per product, since the bulk of the 
profits can only be awarded once. If the test were ``substantial 
basis,'' for example, multiple patents could meet the standard and 
multiple patent owners could demand all of the profits minus business 
risk on the product.
  Paragraph (2) of subsection (d) makes established royalties an 
express exception to the bar on standardized measures. In earlier 
drafts, I did not include this exception in the bill because I thought 
it obvious that an established royalty is based on the benefits and 
advantages of the use of the invention and is thus outside the scope of 
the subsection (d) rule. Some parties who reviewed those earlier 
drafts, however, found the bill ambiguous on this point, and in any 
event the lack of an exception would have forced parties to litigate 
the question whether an established royalty was, in fact, based on the 
benefits and advantages of the use of the patent. Since established 
royalties are widely considered to be the gold standard for valuing a 
patent, we should avoid making it harder to use this method. It is thus 
expressly placed outside the scope of subsection (d)'s restrictions by 
paragraph (2).
  Paragraph (3) of subsection (d) allows industry averages to continue 
to be used to confirm that results produced by other, independently 
allowable methods fall within a reasonable range. The paragraph speaks 
of ``independently'' allowable methods in order to make clear that an 
industry average cannot be used to confirm an estimate produced solely 
by reference to a ``comparable'' patent. Subsection (e) requires that 
comparables only be used in conjunction with or to confirm other 
methods, and thus under this bill comparables are not a method whose 
use is allowed ``independently'' of other methods.
  A brief explanation is in order as to why this bill regards industry 
averages as a potentially unreliable metric and restricts their use. An 
industry average often will reflect a broad range of licensing rates 
within a technological sector. Even a licensed patent whose value is 
included in the calculation of such a range may fall at a far end of 
that range, producing highly inaccurate results if that average is used 
as a starting point for calculating the

[[Page 22623]]

value of that patent. Moreover, many existing patents, though valid and 
infringed by a product, disclose trivial inventions that add little to 
the value of the product. But the types of patents that typically are 
licensed--and that therefore would be a source of available data for 
calculating an industry average--are the ones that are substantial and 
valuable. Trivial patents don't get licensed, and their value does not 
enter into industry average calculations. Thus particularly in the case 
of a minor patent that has never been and likely never would be 
licensed, an industry average would provide an inflated estimate of the 
patent's value. This is because the industry average is not the average 
licensing rate of all patents in a field, but merely the average of 
those that have been licensed and for which data is publicly available.
  Paragraph (4) of subsection (d) creates a safety valve that allows 
parties to use standardized measures if no other method is reasonably 
available to calculate a reasonable royalty, and the standardized 
method is otherwise shown to be appropriate for the patent. Over the 
course of drafting this bill, I have consulted with a number of experts 
with broad experience in patent damages calculation. Only a few 
believed that they had ever seen a case where use of a standardized 
measure was necessary--that is, where a more precise economic analysis 
was not feasible. I thus anticipate that this safety valve may almost 
never need to be used, but I nevertheless include it in the bill, 
because it is impossible to say with certainty that no situation will 
ever arise in the future where parties will be unable to calculate a 
reasonable royalty without use of the rule of thumb or other 
standardized measures. Suffice to say that if one party to a suit 
presents appropriate evidence of a patent's value and that evidence 
falls outside the scope of subsection (d) or within one of the other 
exceptions, then that method is ``reasonably available'' and paragraph 
(4) could not be invoked.
  A word about the need for substantive standards: some critics of S. 
1145 have made the argument to me that any problems with damages 
litigation can be cured through procedural reforms, and that changes to 
substantive legal standards such as those in subsections (d) through 
(f) are unnecessary. These parties also have made the related, though 
different argument that to the extent that litigants are using 
unreliable evidence or methodologies, this problem should be addressed 
through cross examination and advocacy.
  Though I share these critics' displeasure with S. 1145, I do not 
think that problems such as the overuse of rule of thumb and industry 
averages will be completely solved through purely procedural reforms. 
The most likely mechanism for excluding these methodologies would be 
rule 702. But the use of some of these methods for valuing patents is 
endorsed by multiple experts. These methods, while ultimately unsound, 
represent a significant minority view that is backed by some published 
commentary, albeit sometimes only commentary in journals that are 
exclusively written by, subscribed to, and read by plaintiff-side 
damages expert witnesses. In such circumstances, it is no sure thing 
that a party will be able to exclude under Daubert the testimony of an 
expert employing these methodologies. These metrics are sufficiently 
entrenched that the only way to ensure that the courts will disallow 
them when their use is not appropriate is for Congress to tell the 
courts to disallow them.
  As to the second point, it is true that it is the lawyer's duty to 
identify the flaws in the other side's arguments and to debunk unsound 
theories. But the reality is that because of the limited expertise and 
experience of many jurors and the limited time allowed to argue a case 
at trial, often the trier of fact will not divine the truth of the 
matter. And some unsound damages methodologies are particularly likely 
to be appealing to those untutored in the field. An industry average 
analysis, for example, employs the one statistical concept that is 
understood by virtually everyone, and this method's use may amount to 
no more than a simple back-of-the-envelope calculation that requires 
only one expert to give you the industry average licensing rate and 
another to calculate the gross revenues on the product. When a complex 
economic analysis that focuses on noninfringing alternatives to the 
patented invention or the costs of a design-around is forced to compete 
for the jury's favor with a simple average-rate-times-sales 
calculation, many jurors may find the simpler and readily 
understandable method more intuitively appealing, even if it is less 
accurate. And of course, when two different and even slightly complex 
damages calculations are presented to a jury, there always exists a 
risk that the jury will resolve the dispute by splitting the difference 
between the two methods. In a high-value case where the patent owner 
uses an unsound method that produces a wildly inflated number, the risk 
that the jury will pick the wrong method or even split the difference 
may easily be unacceptable from a business perspective.
  In the end, it is the premise of the rules of evidence that some 
types of evidence are so unsound, so prejudicial, or so likely to 
produce an unjust result that we do not require the other side's lawyer 
to debunk this evidence, but rather we require the judge to bar it from 
the courtroom altogether. If we find that particular methodologies 
routinely produce inaccurate and unjust results, it is appropriate that 
we amend the law to directly restrict the use of those methodologies.
  Subsection (e) restricts and regulates the use of licenses paid for 
supposedly comparable patents as a means of calculating the value of 
the patent in suit. The use of comparables is authorized by Georgia-
Pacific factor two and can generate probative evidence of a patent's 
value. Nevertheless, such use is regulated and restricted by this 
subsection. Comparables are a valuation method that is often abused, 
both to overvalue and to undervalue patents. When an infringer is sued 
for infringing an important patent, he often will cite as evidence of a 
reasonable royalty the license paid for a patent that is in the same 
field but that is much less valuable than the patent in suit. 
Similarly, a plaintiff patent owner asserting a trivial patent may cite 
as ``comparable'' other patents in the same field that are much more 
valuable than the plaintiff's patent. The fact that another patent is 
licensed in the same industry should not alone be enough to allow its 
use as a comparable in litigation.
  Comparability is a subjective test. By definition, every patent is 
unique and no two patents are truly comparable. Subsection (e) thus 
requires that comparables be used only in conjunction with or to 
confirm the results of other evidence, and that they only be drawn from 
the same or an analogous technological field. I chose the latter term 
rather than ``same industry'' because the term ``industry'' is too 
broad. Parties might define ``industry'' so expansively that every 
patent in the universe would fall into one of only two or three 
``industries.''
  Paragraph (2) of subsection (e) sets out guideposts for determining 
whether a patent is economically comparable to another patent. It 
suggests requiring a showing that the supposed comparable is of similar 
significance to the licensed product as the patent in suit is to the 
infringing product, and that the licensed and infringing products have 
a similar profit margin. Obviously, a patent that makes only a trivial 
contribution to a product cannot accurately be valued by reference to a 
comparable that makes a critical and valuable contribution to its 
licensed product, or vice versa. And similarity in the profitability of 
the licensed and infringing products will also generally be important 
to establishing the economic comparability of two patents. As an 
economic reality, when the profits on a product are high, the 
manufacturer will be more generous with the royalties that he pays for 
the patented inventions that are used by the product. This economic 
reality is undergirded by the fact that it will typically be the 
patented inventions used by a product that make that product unique in 
the

[[Page 22624]]

marketplace and allow it to earn higher profits. Even if two patents 
are the principal patent on products in the same field, if one patent's 
product has a 2-percent profit margin and the other's has a 20-percent 
profit margin, that first patent evidently is doing less to distinguish 
that product in its market and to generate consumer demand--and thus 
has a lower economic value.
  A thorough analysis of comparability, of course, likely will depend 
in a given case on many factors beyond those listed here. Subparagraphs 
(A) and (B) are simply guideposts that describe two factors that are 
likely to be relevant to comparability. The bill only provides that 
these two factors may be considered. It does not preclude consideration 
of other factors, nor does it require that these two factors be 
considered in every case. A party asserting the propriety of a 
comparable may be able to show that one or even both of these factors 
are not appropriate to establishing economic comparability in a given 
case.
  Subsection (f) bars parties from arguing that damages should be based 
on the wealth or profitability of the defendant as of the time of 
trial. Some lawyers have been known, after making their case for an 
inflated royalty calculation, to emphasize how insignificant even that 
inflated request is in light of the total revenues of the defendant 
infringer. Such arguments do not assist the jury in gauging a 
reasonable royalty. Rather, they serve to reduce the jury's sense of 
responsibility to limit a reasonable royalty to the actual value of the 
use made of the invention. This subsection does not bar all 
consideration of the financial condition of the infringer. It may be 
appropriate to consider the infringer's finances at the time of 
infringement especially if there is some evidence that such information 
is considered when licensing patents in the relevant industry. But in 
no case should a court allow such information to be presented when the 
evident purpose of doing is to tell the jury that the defendant has 
deep pockets and will not be burdened by an inflated award.
  Subsection (g) gives either party a presumptive right to demand that 
validity and infringement be decided before the jury hears arguments 
about damages. Currently, some plaintiffs will force a premature debate 
over damages in order to color the jury's view of validity and 
infringement. For example, in some cases, the same defense witness who 
testifies as to validity and infringement will also know facts relevant 
to the patent's value. This may allow the plaintiff's lawyer to 
question that witness about damages, forcing the defendant to begin 
arguing about the amount of his liability before the jury has even 
heard all the arguments as to whether the patent is valid and 
infringed. A defendant who is already arguing about what a patent is 
worth will tend to look as if he has already conceded that he owes 
something, and that the dispute is simply over the amount.
  This tension also exists even when all validity and infringement 
arguments are presented before damages are argued. Current law 
routinely allows the defendant to be forced to argue in the alternative 
to be made to argue in one breath that he is not liable and in the next 
that if he is liable, then this is the amount for which he is liable. A 
presumptive right to have one issue resolved before the other is 
addressed would cure this tension. This subsection allows only 
sequencing of the trial, not full bifurcation. It does not require the 
use of a second jury, and allows all pretrial activity, including that 
related to damages, to be completed before the validity and 
infringement case is presented and decided. The jury would decide 
validity and infringement and then proceed immediately to hear the 
damages case, if still needed.
  Subsection (h) requires an expert to provide to the opposing party 
his written testimony and the data and other information on which his 
conclusions and methods are based, and to also provide the written 
testimony to the court. This subsection supplements current law, 
codifying and enforcing the better interpretation of what is currently 
required by the rules of procedure. It is necessary because those 
current rules are sometimes not fully enforced, and experts sometimes 
are allowed to testify, for example, as to what is customary in an 
industry without providing the facts and figures or evidence of actual 
events that are the basis for the expert's view that something is 
customary. Rule 702 exists to ensure that expert witnesses are not 
simply allowed to argue from authority. It allows opposing counsel to 
challenge the expert's methods as unsound, but that right becomes 
illusory if the expert is allowed to testify without ever disclosing an 
objective foundation for his conclusions. Requiring the expert's 
written testimony to also be provided to the judge should allow the 
judge to prepare himself to consider motions regarding the relevance 
and admissibility of the expert's testimony.
  Subsection (i) codifies and reinforces current law allowing a party 
to seek summary judgment or JMOL on damages issues. It also requires a 
court to instruct the jury only on those issues supported by 
substantial evidence, a requirement which, when appropriate motions 
have been made, should prevent the court from simply reading the 
laundry list of all 15 Georgia-Pacific factors to the jury. The court's 
identification of those factors for which there is substantial evidence 
not only will provide better guidance to the jury, but should also 
clarify the record and give form to the factfinder's decision, thereby 
providing a better foundation for an appeal.
  Section 299A creates a patent-specific and expanded Daubert rule. 
First, it makes Rule 702 specific to the Federal circuit and patent 
law. Currently, rule 702 is regarded by the Federal circuit as a 
procedural rule, and thus in each case the Federal Circuit simply 
follows the Daubert jurisprudence of the regional circuit whence the 
district court decision came. Since the regional courts of appeals do 
not hear patent cases, this system retards the development of a rule 
702 jurisprudence that thoroughly considers some of the unique issues 
presented by patent law and particularly patent-damages law. The 
current situation also requires the district courts to look only to 
rule 702 precedent that is based only on nonpatent cases. By embedding 
rule 702 in the patent code, section 299A will force the development of 
more consistent and thorough jurisprudence regarding what kinds of 
reasonable royalty damages calculation methodologies are reliable and 
what kinds are not. Like subsection (h) above, this section supplements 
rather than replaces current law.
  Section 299A also codifies the four indicia of reliability that were 
announced in the original Daubert v. Merrell Dow Pharmaceuticals 
decision, 509 U.S. 579 (1993), as well as two other indicia that are 
not described in Daubert. These two additional reliability indicia, at 
paragraphs (5) and (6), are based on standards announced in court of 
appeals decisions that apply Daubert. These decisions are discussed in 
footnote 30 of section 6266 of Wright and Miller's Federal Practice and 
Procedure. The first new factor, whether a theory or technique has been 
employed independently of litigation, should be useful in flushing out 
methodologies that exist only in litigation expert witness' testimony 
and are never employed in actual licensing negotiations. Use of this 
reliability indicator should inject more honesty into the hypothetical 
negotiation. It should force parties to use methodologies that actually 
would have been used had the infringer and claimant negotiated a 
license, rather than metrics that are only ever employed in an expert's 
imaginary parallel universe.
  The second new reliability indicator, whether the expert has 
accounted for readily available alternative theories, should exclude 
the expert who ignores precise and objective metrics of value in favor 
of subjective and manipulable methodologies that allow him to produce 
the result that happens to most favor his client. If there is clear 
evidence, for example, of the market price of a noninfringing 
alternative to the infringing product, of the costs of noninfringing 
substitutes for the invention or the costs of a design-around,

[[Page 22625]]

or of the cost savings produced by use of the invention, an expert 
witness should not be allowed to ignore that evidence. He must consider 
that evidence or at least provide a persuasive account as to why it 
should not be considered. One common sign of a bad or biased expert 
witness is his disregard of readily available alternative theories or 
techniques. Paragraph (6) will help to ensure that Federal courts 
exercise their gatekeeper role and bar such witnesses from misleading 
the jury.
  Finally, subsection (c) of proposed section 299A requires district 
courts and circuit courts to explain their Daubert determinations, 
which should facilitate appeal of those decisions.
  Section 5 of the bill authorizes the creation of post grant review 
proceedings for challenging the validity of patents. It allows both 
first- and second-window review of a patent, with procedural 
restrictions that will limit the time and expense of these proceedings 
and protect patent owners. The bill uses a procedural model that is 
favored by PTO and is calculated to allow quick resolution of 
petitions. Importantly, the bill also imposes procedural limits on when 
a second-window proceeding may be sought after civil litigation has 
commenced, and restricts duplicative or second and successive 
proceedings, preventing infringers from using post grant review as a 
litigation or delaying tactic.
  Section 5(a) of the bill repeals the procedures for inter partes 
reexam effective 1 year after the date of enactment of the bill, while 
allowing requests for reexam that are filed before that effective date 
to continue to be considered by the office. Director-initiated reexam 
is also repealed, out of concern that in the future political pressure 
may be brought to bear on PTO to attack patents that are a nuisance to 
politically important businesses.
  The bill's proposed section 321 authorizes two types of post grant 
review proceedings, a first-period proceeding in which any invalidity 
argument can be presented, and a second-period proceeding that is 
limited to considering arguments of novelty and nonobviousness that are 
based on patents or printed publications. The first-window proceeding 
must be brought within 9 months after the patent is issued. The second 
window is open for the life of the patent after the 9-month window has 
lapsed or after any first-period proceeding has concluded.
  The bill uses an oppositional model, which is favored by PTO as 
allowing speedier adjudication of claims. Under a reexam system, the 
burden is always on PTO to show that a claim is not patentable. Every 
time that new information is presented, PTO must reassess whether its 
burden has been met. This model has proven unworkable in inter partes 
reexam, in which multiple parties can present information to PTO at 
various stages of the proceeding, and which system has experienced 
interminable delays. Under an oppositional system, by contrast, the 
burden is always on the petitioner to show that a claim is not 
patentable. Both parties present their evidence to the PTO, which then 
simply decides whether the petitioner has met his burden.
  If we expect post grant review proceedings to be completed within 
particular deadlines, I think that it is obligatory that we consult 
with the agency that is expected to administer the proceedings. In this 
case, PTO has expressed a strong preference for an oppositional model, 
and it believes that it can comply with reasonable deadlines if that 
model is adopted. The bill's use of an oppositional system thus allows 
proposed section 329(b)(1) to mandate that post grant review 
proceedings be completed within one year after they are instituted, 
with a possible 6-month extension for good cause shown or in the event 
of second-window joinder.
  Section 5 also imposes a number of procedural limitations on post 
grant review proceedings. Proposed section 321 applies a standing 
requirement that petitioners must have a substantial economic interest 
adverse to the patent. This is a relatively low threshold that simply 
requires a showing that some substantial economic activity of the 
petitioner's is hindered by the express or implied threat of the 
patent's monopoly. Nevertheless, the requirement does give patentees a 
measure of control over when they might be forced to defend themselves 
in a post grant review proceeding.
  Proposed section 322 includes a number of provisions that are 
designed to limit the use of post grant review proceedings as a 
delaying tactic and to mitigate these proceedings' negative impact on 
efforts to enforce a patent. Subsection (a) provides presumptive 
immunity from post grant review proceedings to a patent that is 
enforced in court within three months of its issue. A patent asserted 
in court this early in its life likely is already the subject of a 
well-developed commercial dispute. A delay in resolution of the case 
under these circumstances probably would do unjustified and irreparable 
harm to one or another party's market share. Such disputes should be 
resolved as soon as possible, which means hearing all of the case in 
the one forum capable of hearing all claims, the district court.
  Paragraph (1) of subsection (b) bars a party that has filed a 
declaratory-judgment action challenging the validity of a patent from 
also challenging the patent in a post grant review proceeding. And 
paragraph (2) requires a defendant in an infringement action who seeks 
to open a second-window proceeding to do so within 3 months after his 
answer to the complaint is due. I think that this is a better rule than 
one requiring that a petition for a second-window proceeding be filed 
before an infringement action is filed. Such a restriction might cause 
parties who think that they may be sued but who are not otherwise 
inclined to seek post grant review to file defensive petitions for 
second-period review, lest they later be sued and lose the right to 
request post grant review.
  Subsection (c) of section 322 bars a party that has already sought a 
post grant review proceeding against a patent from subsequently seeking 
another post grant review or a reexam with regard to the same patent.
  Subsection (d) of section 322 estops a party that has brought a post 
grant review proceeding against a patent from raising in any subsequent 
PTO or ITC proceeding or civil action any claim against that patent 
that it did raise in a post grant proceeding or that it could have 
raised in a second-window proceeding.
  A word about privity: subsections (b)(2) and (d) of section 322 bar 
second-window proceedings from being instituted or claims from being 
raised if particular proceedings or claims were pursued by privies to 
the party now seeking to start proceedings or raise claims. The concept 
of privity, of course, is borrowed from the common law of judgments. 
The doctrine's practical and equitable nature is emphasized in a recent 
California Court of Appeals decision, California Physicians' Service v. 
Aoki Diabetes Research Institute, 163 Cal.App.4th 1506 (Cal. App. 
2008), which notes, at page 1521, citations omitted, that:

       The word ``privy'' has acquired an expanded meaning. The 
     courts, in the interest of justice and to prevent expensive 
     litigation, are striving to give effect to judgments by 
     extending ``privies'' beyond the classical description. The 
     emphasis is not on a concept of identity of parties, but on 
     the practical situation. Privity is essentially a shorthand 
     statement that collateral estoppel is to be applied in a 
     given case; there is no universally applicable definition of 
     privity. The concept refers to a relationship between the 
     party to be estopped and the unsuccessful party in the prior 
     litigation which is sufficiently close so as to justify 
     application of the doctrine of collateral estoppel.

  It bears noting that not all parties in privity with a would-be 
petitioner for other purposes or by way of various contracts would also 
be in privity with the petitioner for purposes of estoppel--that is, 
for purposes of section 322. This limitation on estoppel privity is 
usefully highlighted in a decision of the Federal circuit, 
International Nutrition Co. v. Horphag Research, Ltd., 220 F.3d 1325 
(Fed. Cir. 2000), which notes, at page 1329, that:

       One situation in which parties have frequently been held to 
     be in privity is when they hold successive interests in the 
     same property. See, e.g., Litchfield v. Crane, 123 U.S. 549, 
     551, 8 S.Ct. 210, 31 L.Ed. 199 (1887) (defining privity to 
     include a ``mutual or successive relationship to the same 
     rights of

[[Page 22626]]

     property''). Thus, a judgment with respect to a particular 
     property interest may be binding on a third party based on a 
     transfer of the property in issue to the third party after 
     judgment. See Restatement (Second) of Judgments Sec. 43 
     (1982) (``A judgment in an action that determines interests 
     in real or personal property . . . [h]as preclusive effects 
     upon a person who succeeds to the interest of a party to the 
     same extent as upon the party himself.''). A corollary of 
     that principle, however, is that when one party is a 
     successor in interest to another with respect to particular 
     property, the parties are in privity only with respect to an 
     adjudication of rights in the property that was transferred; 
     they are not in privity for other purposes, such as an 
     adjudication of rights in other property that was never 
     transferred between the two. See 18 Wright et al., supra, 
     Sec. 4462. Put another way, the transfer of a particular 
     piece of property does not have the effect of limiting rights 
     of the transferee that are unrelated to the transferred 
     property. See Munoz v. County of Imperial, 667 F.2d 811, 816 
     (9th Cir.1982) (concluding that non-parties were not in 
     privity with a party to litigation because ``[t]he right 
     which the [third parties] seek to litigate is not one which 
     they obtained through contractual relations with [a party to 
     the previous litigation]. It is a completely independent 
     right[.]'').

  Proposed section 327 also imposes important limits on post grant 
review proceedings. Its requirements are designed to protect both 
patent owners and the PTO. Section 327 establishes a substantial 
evidentiary threshold for bringing any post grant review proceeding, 
and it imposes a further elevated threshold against the bringing of a 
second-period proceeding for a patent that already has become the 
subject of such a proceeding. Subsection (a) requires that any petition 
present evidence that, if unrebutted, would show that a claim in the 
patent is unpatentable. This threshold is designed, among other things, 
to force a petitioner to present all of his best evidence against a 
patent up front. His petition itself must present a full affirmative 
case. It thus reinforces the front-loaded nature of an oppositional 
system, which is critical to the efficient resolution of proceedings by 
PTO. This threshold is considerably higher than ``significant new 
question of patentability,'' and thus, particularly in combination with 
the mandates of section 329(c), should provide the PTO with sufficient 
discretion to protect itself against being overwhelmed by a deluge of 
petitions.
  Subsection (b) of section 327 is designed to allow parties to use 
first-window proceedings to resolve important legal questions early in 
the life of such controversies. Currently, for example, if there is 
debate over whether a particular subject matter or thing is really 
patentable, parties who disagree with PTO's conclusion that it is 
patentable must wait until a patent is granted and an infringement 
dispute arises before the question can be tested in court. In such a 
situation, subsection (b) would allow parties with an economic interest 
in the matter to raise the question early in its life. If PTO is wrong 
and such a thing cannot be patented, subsection (b) creates an avenue 
by which the question can be conclusively resolved by the Federal 
circuit before a large number of improper patents are granted and 
allowed to unjustifiably disrupt an industry. Obviously, subsection (a) 
alone would not be enough to test the view that PTO has reached an 
incorrect conclusion on an important legal question, because subsection 
(a) requires the petitioner to persuade PTO that a claim appears to be 
unpatentable, and PTO is unlikely to be so persuaded if it has already 
decided the underlying legal question in favor of patentability. 
Subsection (a) is directed only at individual instances of error that 
PTO itself appreciates, while subsection (b) allows PTO to reconsider 
an important legal question and to effectively certify it for Federal 
circuit resolution when it appears that the question is worthy of early 
conclusive resolution.
  Subsection (c) of section 327 applies a successive-petition bar of 
sorts to second or successive petitions for second-period review. It is 
a rare patent that should be twice subjected to second-window 
proceedings. Nevertheless, Congress ought not preclude such review 
entirely. It is possible, for example, that a second-period proceeding 
may be resolved in a way that suggests that there was some collusion 
between the petitioner and the patent owner. And PTO may over time 
identify other circumstances in which even a second or third second-
period proceeding is appropriate. Subsection (c) requires that such 
latter circumstances be exceptional, however.
  Lengthy and duplicative proceedings are one of the worst evils of 
other systems of administrative review of patents. During the pendency 
of such proceedings, a patent owner is effectively prevented from 
enforcing his patent. Subsection (c) should ensure that second or 
successive second-period proceedings are few and far between.
  It would be desirable that, when the Director grants petitions, he 
identify for the parties those issues that he found to be sufficiently 
established and those that were not. Such a practice would help to 
expedite proceedings in many cases, as it would limit the issues, and 
it would also give the patent owner a sense of what issues are 
important to the board and where he ought to focus his amendments. 
Ultimately, though, I decided against requiring such practice in the 
text of the bill. If a mandate were in the statute, it would create 
problems for the board in the rare but inevitable case where the board 
initially identifies one issue as the basis for granting the petition, 
but it later becomes apparent that a different issue is really the 
central issue in the case. It is better that these proceedings not 
become as formal as is certiorari practice in the Supreme Court. 
Nevertheless, it would be helpful to the process and to the parties if 
the board were to adopt a practice in the ordinary case of identifying 
the issues that formed the basis of its grant of the petition.
  A few words about joinder: section 325 mandates that multiple first-
period proceedings be consolidated, and allows multiple second-period 
proceedings to be so joined. There is no provision in the bill for 
successive first-period proceedings, so any additional first-period 
petition that is worthy of being instituted must be joined with the 
first one. The threshold imposed by section 327, in combination with 
the mandates of section 329(c), gives the Director the discretion to 
reject additional first-period petitions that do not add anything new 
to the case. This section is not intended to make first-period review 
operate like a notice-and-comment proceeding, in which everyone gets 
his say and the agency may be buried under an avalanche of repetitive 
comments.
  In the case of both first and second-period proceedings, additional 
petitions can be joined only if, among other things, they are properly 
filed. The words ``properly filed'' are a term of art that is also 
employed in section 2244 of title 28 and that has been given content no 
less than three times during this decade by the U.S. Supreme Court, see 
Artuz v. Bennett, 531 U.S. 4 (2000), Pace v. DiGuglielmo, 544 U.S. 408, 
and Allen v. Siebert, 128 S.Ct. 2 (2007). The gist of these decisions 
is that a petition is properly filed when it is delivered and accepted 
in compliance with applicable rules governing filings, though 
particular claims within filings be barred on other procedural grounds, 
and that time deadlines for filing petitions must be complied with in 
all cases.
  Where possible, I have sought to make the intended operation of these 
provisions clear and evident on their face, but the interaction between 
sections 325(b), 327, and 329(b)(2) requires some explanation. Under 
329(b)(2), a request to join a second-period proceeding must be made 
within a time period to be set by the Director. If the request is so 
made, the additional second-period petition may be joined to a pending 
proceeding at the discretion of the Director if he has determined that 
the additional petition satisfies the threshold set in section 327(a). 
If the 329(b)(2) deadline is not met, however, the additional second-
period petition can still be joined to a pending proceeding at the 
discretion of the Director if he determines that the additional 
petition satisfies the threshold set in section 327(c). Section 325(b) 
requires that a petition be procedurally in order if it is to be 
considered for joinder, but there is no time deadline that applies to 
petitions for second-period proceedings, other than that they not be

[[Page 22627]]

filed before first-period proceedings are concluded. The deadline set 
pursuant to 329(b)(2) applies only to the motion for joinder, not to 
the filing of the additional petition itself, and 327(c) expressly 
contemplates that successive petitions will be filed outside the 
329(b)(2) deadline for seeking joinder. Thus a procedurally proper 
successive petition for second-period review may be joined to a pending 
proceeding at the discretion of the Director, even if the 329(b)(2) 
deadline has not been met, so long as the Director determines that the 
petition satisfies the threshold set in section 327(c).
  This is by design. Such a rule encourages petitioners to seek timely 
joinder to a pending second-period proceeding, but gives the Director 
discretion to join petitions that meet the successive petition bar even 
if the request for joinder is untimely. Since an additional petition 
that satisfies 327(c) would be entitled to its own successive 
proceeding in any event, it makes sense to allow the Director to join 
that petition to the pending proceeding, even though joinder was not 
timely sought.
  Section 325(c) gives the PTO broad discretion to consolidate, stay, 
or terminate any PTO proceeding involving a patent if that patent is 
the subject of a postgrant review proceeding. It is anticipated, for 
example, that if a second-period proceeding is instituted and reexam is 
sought, the Director would be inclined to stay the postgrant review 
during exhaustion of the reexam. On the other hand, if a postgrant 
review is near completion, the Director may consolidate or terminate 
any other PTO proceeding that is initiated with regard to that patent.
  Section 329(a)(5) prescribes discovery standards for first-window 
proceedings, and section 329(b)(3) sets standards for second-period 
discovery. The standard for allowing second-period discovery is more 
limited, out of recognition of the fact that the issues that can be 
raised in that proceeding are few and thus the need for discovery is 
less. Also, because a second-period proceeding can be instituted long 
after the patent has issued, it is more burdensome for the patent 
owner. Limiting second-window discovery limits that burden. 
Subparagraph (A) of section 329(b)(3) thus allows depositions of 
witnesses submitting statements, and subparagraph (B) allows further 
discovery as necessary in the interest of justice. This latter standard 
restricts additional discovery to particular limited situations, such 
as minor discovery that PTO finds to be routinely useful, or to 
discovery that is justified by the special circumstances of the case. 
Given the time deadlines imposed on these proceedings, it is 
anticipated that, regardless of the standards imposed in section 329, 
PTO will be conservative in its grants of discovery.
  Let me comment on two arguments and concerns with regard to second-
period review that are not addressed in the text of this bill. First, 
many parties have made the case to me that any postgrant review of a 
patent should be limited to a first window that can only be opened 
within a limited period of time after the grant of a patent. There are 
strong arguments to be made for this view. Any type of second-period 
proceeding, whether an opposition or inter partes reexam, invariably 
interferes with and delays litigation. There is simply no avoiding this 
result. District judges, many of whom do not enjoy adjudicating patent 
cases, almost always will stay litigation when a second window has been 
opened and has the potential to terminate the patent.
  I have decided, however, that it would be too radical a step to try 
to repeal inter partes reexam and not offer any other type of second-
period review in its place. As a political and legislative reality, 
this decision was made in 1999 and probably cannot be undone. To 
address some of the concerns about a second window, this bill limits 
such review to the issues that can be raised in inter partes reexam, 
and includes provisions that are designed to preclude the kinds of 
tactical and abusive uses of second-period proceedings that are 
currently seen in inter partes reexam. Though it does not attempt to 
put the second-period genie back in the bottle, the bill should be an 
improvement over current law's inter partes reexam. I would welcome a 
debate about the desirability of second-window review during the next 
Congress.
  Second, a number of parties have expressed concern to me about the 
current could-have-raised estoppel standard, which I have carried over 
to second-period proceedings in section 322(d)(2). It is arguable that 
applying could-have-raised estoppel to the second window does not 
actually protect the interests that it is designed to vindicate. This 
estoppel standard's main purpose appears to be to force a party to 
bring all of his claims in one forum--everything that he ``could have 
raised''--and therefore to eliminate the need to press any claims in 
other fora. In this bill, however, the issues that can be raised in the 
second window are so sharply limited that the goal of flushing out all 
claims is unattainable. Only 102 and 103 arguments based on patents and 
printed publications can be raised in the second window. Accused 
infringers inevitably will have other challenges and defenses that they 
will want to bring, and those arguments can only be raised in district 
court. Regardless of the estoppel standard that is applied, the patent 
owner will almost always be forced to fight in two fora, and the 
intended goal of could-have-raised estoppel will remain beyond reach.
  The real reforms in this bill that would protect patent owners from 
abusive and duplicative proceedings are the various restrictions 
imposed in section 327 and in subsections (a), (b), and (c) of section 
322. These provisions, I think, would be more useful and valuable to 
patent owners than could-have-raised estoppel. I welcome a broader 
debate on this issue. At the very least, it would be helpful to me to 
more clearly understand the interests that proponents and opponents 
believe are protected or injured by could-have-raised estoppel.
  Section 8 of the bill addresses venue. It adopts an activities-based 
test for determining whether a particular district is an appropriate 
locale for a patent-infringement suit. Under section 8's proposed 
amendments to 28 U.S.C. section 1400, some significant activity 
involving either the patent or the infringing product must take place 
in the district in order for venue to be proper there. This section 
aims to limit patent litigation to districts with some reasonable 
connection to the patent, but without generating substantial 
preliminary litigation over venue. Of course, any change to the venue 
statute will result in a period of litigation over the new statute's 
meaning. To the extent possible, section 8 uses terms of art that have 
a settled meaning in the venue context.
  Paragraph (2) and subparagraphs (B) and (C) of paragraph (6) refer to 
acts of infringement and to a product or process that embodies an 
invention, events or facts whose existence likely will be the subject 
of the litigation. I considered whether the word ``allegedly'' should 
be added before ``infringement'' or ``embodies,'' since those facts 
will not yet have been proven at the time when venue is being 
determined. Current section 1400(b), however, refers simply to ``acts 
of infringement.'' I am unaware of any courts that, when applying the 
current law, have required the plaintiff to demonstrate that 
infringement has in fact occurred before allowing themselves to be 
persuaded that venue is proper. I would expect courts and litigants to 
also use common sense when applying paragraphs (2) and (6), and to not 
construe the language to require that the merits of the case be 
litigated before a threshold question may be determined.
  Paragraph (4) refers to the place where an invention was conceived. 
This can, of course, be more than one place and can involve 
collaborative activities.
  Paragraphs (5) and (6)(A) refer to ``research and development.'' 
Other patent venue reforms that have been proposed in this Congress 
have referred to research or development, treating the two words as if 
they were separate concepts. In most circumstances, however, research 
and development are treated as one thing and no effort is made to 
distinguish research from development. Although theoretical 
distinctions are

[[Page 22628]]

possible, they become very difficult to apply to actual practical 
situations. Thus section 8 treats research and development as a unified 
concept.
  Paragraphs (5) and (6)(A) also refer to ``significant'' research and 
development. This bill uses the word ``significant,'' rather than the 
word ``substantial,'' which is a word that has been used in other 
legislative proposals made in this Congress. Having reviewed judicial 
constructions of both terms, it appears to me that ``significant'' 
means something like ``legitimate,'' and that the significance of an 
activity can be evaluated on the face of that activity, without 
reference to the whole of which it is a portion. The word 
``substantial,'' on the other hand, appears to measure an activity in 
light of the whole of which it is a part. Arguably, one cannot know 
whether particular research-and-development activity is substantial 
without knowing all of the research-and-development activity that has 
taken place with regard to the patent in suit. Using the word 
``substantial'' here or elsewhere in this section likely would in many 
cases require discovery to determine just what is the whole of which 
the activity in question is alleged to be a substantial part. Since the 
last thing that I would want to be responsible for is a patent law that 
made discovery and a 2-day evidentiary hearing a routine feature of 
establishing venue in patent litigation, my bill uses the word 
``significant'' rather than ``substantial.''
  Paragraph (7) allows venue at the place where a nonprofit 
organization managing inventions for colleges and universities, 
including the patent in suit, is principally based. These organizations 
manage inventions by, among other things, helping the schools to 
commercialize them. Whether such an organization acts on behalf of a 
university should not be construed to turn on whether there is an 
agency relationship between the organization and school. Even an 
independent contractor acts on behalf of the party that has retained 
it.
  A few words about interlocutory appeals: I expressed skepticism in 
the committee report to S. 1145 about requiring the Federal circuit to 
accept interlocutory appeals of claim constructions. I noted that such 
a rule risked allowing a district judge who is insufficiently 
enthusiastic about his duty to decide patent cases to rid himself of a 
case by certifying an interlocutory appeal to the Federal circuit, in 
the hope that the case would go away and never come back. Not only 
would such an event waste the Federal circuit's resources, it would 
also force that circuit to decide a claim construction on the basis of 
what may be an inadequate evidentiary record. And no matter how thin 
that record may be, once the claim construction was before the Federal 
circuit and that court were forced to decide it, whatever came back to 
the district court would be the law of the case. The Federal circuit's 
claim construction could not be changed by the district court on 
remand, no matter how obvious it later became in light of a more 
complete record that the Federal circuit had gotten it wrong.
  I have heard from more than one patent lawyer that claim construction 
often is a rolling process. Even when a court holds a Markman hearing 
and attempts to definitively construe a patent early in a trial, 
frequently new information comes forward over the course of the trial 
that sheds new light on claim terms, or it becomes clear that different 
claim terms constitute the heart of the dispute and must be construed. 
An interlocutory appeal would prove to be a large waste of time if it 
later became clear that different claim terms formed the heart of the 
dispute. And such an appeal could prove to be an utter disaster if the 
Federal circuit were forced to construe the key claim terms without 
having all of the necessary information before it and, as a result, 
that court misconstrued those claims. Because of the great risk of such 
undesirable outcomes, and the delay that interlocutory appeals would 
inject into trials, I have not included a proposal to require 
interlocutory appeals in this bill.
  Section 10 of the bill addresses applicant quality submissions. PTO 
believes that all applicants for a patent should be required to conduct 
a search of prior art and a patentability analysis before they submit 
their patent application. Such a requirement not only would improve the 
quality of applications, it would also persuade many would-be 
applicants not to file in the first place, since they would discover 
that their invention already is disclosed in the prior art.
  PTO presents a strong case that the patent system currently is 
buckling under the volume of applications, and that if present trends 
continue, in 10 years the system could be brought to the point of 
collapse. Today, many applications provide little useful information to 
examiners and are filed without any awareness of the prior art. Some 
have suggested that PTO simply needs to hire and retain more examiners, 
but there are natural limits to PTO's ability to hire, train, and 
assimilate new examiners into the culture of PTO. Already PTO is hiring 
a significant percentage of every year's graduating class in particular 
fields of engineering. If something does not change, Congress may find 
it necessary to mandate across-the-board search-and patentability 
requirements in the future.
  PTO urged the adoption of search-and-patentability requirements 
during this Congress. The ability of such proposals to secure 
acceptance from the relevant interests ultimately foundered, however, 
on our inability to answer several key questions about how such a 
system would function and how much it would cost. The types of searches 
that PTO performs, for example, are rather specialized. Many patent 
applicants would want to hire a search firm to conduct such searches 
rather than learn how to conduct PTO searches themselves. Currently, 
however, no market exists for such services and no firms exist that 
offer to conduct searches that would meet PTO's specifications. It is 
thus impossible at the moment to say with certainty how much patent 
applicants can expect to pay to have a private firm conduct a search 
that meets PTO's requirements.
  It also is unclear exactly what kind of patentability analysis PTO 
might want. It will probably be necessary for PTO to launch such a 
system and to adjust it over a period of years before PTO itself 
discovers what kinds of requirements produce information that is useful 
to the Office.
  And finally and most importantly, under the current system, in which 
statements made by the applicant during prosecution are used to 
construe the claims of the patent in district court, any requirement 
that the applicant make additional statements about patentability 
during prosecution would prove to be very expensive to the applicant. 
Under the current litigation regime, applicants who can afford to do so 
would be wise to hire expensive patent lawyers to think through how 
every statement made to PTO during a patentability analysis might later 
affect claim construction in an infringement suit. In other words, a 
patentability analysis requirement likely would result in heavy legal 
costs for patent applicants.
  Rather than mandate that all applicants submit a search report and a 
patentability analysis, section 10 of the bill authorizes PTO to offer 
incentives to parties who do so, and it makes the prosecution record of 
a patent that is secured through such a program inadmissible to 
construe patent claims in later proceedings. This last requirement is 
both an essential prerequisite to the palatability of a voluntary 
search-and-patentability program, and is also expected to be a powerful 
draw to applicants to participate in the program. By effectively 
providing immunity in later litigation against all information that is 
in the file wrapper of the patent's prosecution history, this provision 
allows applicants to speak freely with examiners, without having to 
constantly think through--or rather, have their lawyers think through--
how each statement might later affect claim scope in subsequent 
litigation. I also anticipate that the prospect of being able to assert 
a patent based solely on its claims, without having to litigate over 
the meaning of every action and statement in the prosecution

[[Page 22629]]

record, will be a strong inducement to many patent applicants to try to 
comply with the PTO's voluntary search-and-patentability program.
  Proposed section 123(b) also authorizes PTO to issue regulations 
identifying material submitted in an attempt to comply with the search-
and-patentability program that also shall receive file-wrapper 
immunity. Such regulations should encourage applicants to try PTO's 
system who might otherwise be deterred by fear that if they try to 
comply with PTO's program and abort the attempt or are unsuccessful and 
later secure the same patent by the conventional route, the possibly 
substantial record produced during the failed attempt will later be 
used in litigation to limit claim scope. And of course, even ultimately 
successful users of the search-and-patentability program who are not 
confident that they will complete the program likely would, in the 
absence of the immunity tendered by such regulations, engage in the 
very type of defensive and overlawyered discussions with the examiner 
that the prospect of file-wrapper immunity is designed to prevent.
  Proposed section 123(a) authorizes PTO to offer various other 
incentives to parties who participate in a search-and-patentability 
program. Subsection 10(b) of the bill is intended to preclude a 
negative implication that because the bill authorizes PTO to offer such 
incentives, PTO must currently lack the authority to offer incentives 
to applicants who submit additional information. I should also note 
that PTO may continue to offer incentives to applicants under existing 
pilots and programs without issuing regulations.
  Section 10 of the bill is designed to allow a substantial trial run 
of a search-and-patentability program. It is my hope that if the 
incentives offered are powerful enough and if PTO's search-and-
patentability demands are reasonable, eventually a major portion of all 
patent applicants will choose to prosecute their patents under such a 
system. A well-functioning and heavily used search-and-patentability 
program not only would help PTO to process its backlog of applications, 
it also would answer some of the questions that we were unable to 
answer this year, such as how much would private prior-art searches 
cost, and will file-wrapper immunity operate as intended in court?
  I hope that the gathering patent-application storm that PTO perceives 
will be diverted by the program authorized in this section and by the 
reforms to the inequitable-conduct doctrine in section 11 of the bill, 
both of which should encourage applicants to be more frank with PTO and 
to provide information that is more useful to the Office. If present 
filing trends continue for another decade, however, and Congress is 
forced to consider applying search- and patentability-analysis 
requirements across the board to all applications, it likely will have 
proven useful to have had a substantial trial run of a search-and-
patentability program.
  Section 11 of the bill addresses the doctrine of inequitable conduct. 
Under current law, this doctrine allows an accused infringer to have an 
entire patent declared unenforceable if he can demonstrate that when 
the patent was prosecuted, the patent applicant intended to deceive the 
examiner by misrepresenting information that the court deems material 
under one of a variety of tests, such as whether the information would 
be important to a reasonable patent examiner in deciding whether to 
allow the application. See, e.g., Digital Control, Inc. v. Charles 
Machine Works, 437 F.3d 1309, 1313-14 (Fed. Cir. 2006). This doctrine, 
which is applied in the course of infringement litigation, is a court-
made doctrine that is designed to force patent applicants to be 
forthcoming and to not mislead the PTO when prosecuting their patents. 
In practice, however, the doctrine does not fulfill this purpose and 
instead generates a variety of undesirable consequences.
  There are two aspects of the current inequitable conduct doctrine 
that I find particularly troubling. The first is that it is asserted in 
a majority of all patent lawsuits. As much as one might think ill of 
the ethics of particular industries, it is simply inconceivable that 
fraud and other misconduct infects anything close to half of all of the 
patents issued in this country.
  One explanation that a number of lawyers have given to me for the 
high rate at which inequitable conduct is asserted in litigation is 
that the doctrine gives the accused infringer an opportunity to examine 
the inventor--often in the jury's presence--and to paint him as 
deceptive and dishonest. Even the most upright and honest inventor can 
be made to look sly and shifty under aggressive examination as to why 
exactly he chose not disclose particular facts or documents to the PTO. 
And thus even an infringer who has no reasonable hope of prevailing on 
an inequitable-conduct claim will assert the doctrine simply because it 
offers an opportunity to cast the inventor and his work in a negative 
light. This tactic tends to increase the odds that the jury will find 
the invention obvious and to decrease the jury's estimate of the 
damages to which the inventor is entitled.
  The doctrine also carries high transaction costs. It typically is 
grounds for exhaustive discovery of the inventor's files and for 
depositions directed at his state of mind at the time of the 
prosecution--for questioning him as to what did he know and when did he 
know it, and what was his motive for not disclosing particular pieces 
of information. The doctrine adds substantially to the expense of 
litigation.
  The other aspect of the current doctrine that I find problematic is 
that it applies a draconian penalty to instances of misconduct whose 
materiality often appears to be doubtful. Jon W. Dudas, the Under 
Secretary of Commerce for Intellectual Property and Director of the 
United States Patent and Trademark Office, commented on this aspect of 
the doctrine in his testimony before the Judiciary Committee on June 6, 
2007:

       Under existing case law, courts must hold all of a patent's 
     claims invalid if they find inequitable conduct in any aspect 
     of prosecuting a patent application even if the claims are 
     completely valid and/or the inequitable conduct was 
     irrelevant to prosecution of the claims. Thus, the only 
     remedy available is complete loss of the patent. Inequitable 
     conduct can be found if the applicant deliberately withholds 
     or inaccurately represents information material to patent 
     prosecution. Anything the court deems that a reasonable 
     examiner would find important can be material and the 
     evidence necessary to show intent varies according to the 
     nature of the omission. Accordingly, the inequitable conduct 
     standard is uncertain and the potential penalties severe. For 
     example, any misstatement in an affidavit, or even a failure 
     to disclose a possible source of bias, has been held to be 
     capable of rendering all claims of the patent unenforceable.

  Because inequitable conduct is a court-enforced doctrine, the 
assessment of what is material--of what would have been important to a 
reasonable patent examiner--is made by a U.S. district judge. But 
district judges very rarely have any firsthand knowledge of the patent-
prosecution process or the workings of the PTO and are not in a 
position to accurately assess what information actually would have been 
important to a reasonable examiner.
  The Federal courts' sometimes hair-trigger assessments of materiality 
are a substantial injustice to those patent owners who lose the right 
to enforce what is an otherwise perfectly valid patent. This injustice 
can be particularly acute when the current owner of the patent is a 
good-faith purchaser who is not even alleged to have engaged in any 
type of misconduct himself.
  Judicial enforcement of the doctrine of inequitable conduct also has 
led to consequences that are of a more general concern. The doctrine's 
severe penalty, combined with the unpredictability of its application, 
has led applicants to adopt extreme tactics that are designed to 
eliminate the risk that their patent will ever be held unenforceable on 
the ground of inequitable conduct. These tactics, while perhaps 
effective at minimizing such risk, are inconsistent with sound 
prosecution practice. They constitute the exact opposite of providing 
PTO with the information that it needs in order to be able to assess 
whether a claimed invention is patentable, and they make it harder for 
PTO to do its job. Under Secretary Dudas commented on this phenomenon

[[Page 22630]]

in his June 6, 2007 Judiciary Committee testimony:

       In some other cases, applicants or their attorneys fear 
     that the legal doctrines of inequitable conduct and 
     unenforceability may unfairly punish them with draconian 
     penalties for innocently omitting information. The theory is 
     that, if one does provide information, it must be perfect. 
     Otherwise, the consequence may be loss of the patent and/or 
     disciplinary action (for the applicant's attorney). By way of 
     contrast, failure to share or disclose information has 
     absolutely no adverse legal consequence.

                           *   *   *   *   *

       While the risk of an inequitable conduct finding is low, it 
     is frequently alleged. When alleged, inequitable conduct 
     assertions add substantially to litigation costs and 
     malpractice claims. The ``all or nothing'' result of an 
     inequitable conduct finding understandably has a perverse 
     effect on the actions of applicants and their attorneys with 
     respect to ``risking'' a proper search in the first place. As 
     a result, the doctrine results in counterproductive behavior 
     before the USPTO. It discourages many applicants from 
     conducting a search and leads others to be indiscriminate in 
     the information they submit. In a review two years ago, we 
     found that over 50 percent of submitted applications 
     contained either no information disclosure statement or that 
     such submissions included more than 20 references.

  The Under Secretary's testimony is consistent with what has been 
described to me by a number of attorneys and patent applicants. The 
current state of inequitable conduct enforcement leads applicants to 
adopt one of two tactics: either they flood the Office with prior-art 
references but offer no explanation of how the invention is 
distinguished from that prior art or which prior art is most relevant, 
since by providing the reference they cannot be accused of concealing 
it, and by providing no explanation they cannot be accused of 
misleading the Office or mischaracterizing the information, or 
applicants provide no information at all with their applications, since 
providing some information would inevitably mean not supplying other 
information in the universe of existing information and thus could open 
the applicant to charges of having concealed something in that universe 
of information not provided. Both tactics impede the PTO's examination 
of patent applications.
  Professor John F. Duffy of George Washington University Law School 
has made a persuasive case that inequitable conduct that occurs during 
patent prosecution should be addressed in proceedings before the PTO 
itself. He notes that the 1940s decisions that are viewed as giving the 
Supreme Court's imprimatur to judicial enforcement of the doctrine are 
much more limited in their rulings than the expansive approach to 
inequitable conduct that has been developed by the Federal circuit. He 
also points out that the patent system's use of civil litigation to 
enforce good conduct in dealings with an agency is unique to the patent 
system. In the case of every other Federal administrative agency, the 
agency itself polices misconduct and fraud committed in agency 
proceedings.
  Professor Duffy also notes that in other administrative contexts, the 
Federal courts themselves have predicted that judicial supervision of 
agency proceedings would produce the very consequences that judicial 
intervention has produced in the PTO. Though Buckman Co. v. Plaintiffs' 
Legal Committee, 531 U.S. 341, 351 (2001), is a case about the FDA, it 
might as well be describing the impact of the inequitable-conduct 
doctrine on patent prosecutions:

       [F]raud-on-the-[agency] claims inevitably conflict with the 
     [agency's] responsibility to police fraud consistently with 
     the Administration's judgment and objectives. As a practical 
     matter, complying with the [agency's] detailed regulatory 
     regime in the shadow of [the courts' varying fraud standards] 
     will dramatically increase the burdens facing potential 
     applicants *  *  *.
       Conversely, fraud-on-the-[agency] claims would also cause 
     applicants to fear that their disclosures to the [agency], 
     although deemed appropriate by the Administration, will later 
     be judged insufficient in *  *  * court. Applicants would 
     then have an incentive to submit a deluge of information that 
     the Administration neither wants nor needs, resulting in 
     additional burdens on the [agency's] evaluation of an 
     application. As a result, the [agency certification] process 
     could encounter delays, which would, in turn, impede 
     competition * * * and delay [innovation].

  Section 11 of the bill that I have introduced proposes a new approach 
to addressing misconduct in proceedings before the PTO. It effectively 
shifts enforcement of the doctrine of inequitable conduct from civil 
litigation to administrative proceedings before the PTO. Under the 
procedures authorized in proposed sections 298 and 299, PTO will 
reissue patents if needed to remove any invalid claims, will assess the 
culpability of any misconduct, and will impose sanctions on any parties 
that have engaged in inequitable or fraudulent conduct before the 
Office.
  I believe that the administrative framework proposed in section 11 is 
consistent with the principles outlined in the Supreme Court cases that 
the Federal circuit relies on as the basis for its own inequitable 
conduct jurisprudence, Precision Instrument Manufacturing Co. v. 
Automotive Maintenance Machinery Co., 324 U.S. 806 (1945), and Hazel-
Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238 (1944). Section 
298 would require district courts to order patents that are infected by 
fraud to go into reissue proceedings, where invalid claims would be 
removed. Limiting patents to their proper scope serves important public 
interests. As the court noted in Precision Instrument, at pages 815 to 
816, citations omitted:

       The possession and assertion of patent rights are issues of 
     great moment to the public. As recognized by the 
     Constitution, [a patent] is a special privilege designed to 
     serve the public purpose of promoting the ``Progress of 
     Science and useful Arts.'' At the same time, a patent is an 
     exception to the general rule against monopolies and to the 
     right to access to a free and open market. The far-reaching 
     social and economic consequences of a patent, therefore, give 
     the public a paramount interest in seeing that patent 
     monopolies spring from backgrounds free from fraud or other 
     inequitable conduct and that such monopolies are kept within 
     their legitimate scope.

  Proposed section 299 would authorize procedures whereby the PTO can 
receive and assess complaints about misconduct committed by parties to 
its matters or proceedings, assess the materiality of the misconduct 
and the mens rea of the malfeasant, and levy appropriate sanctions, 
including civil fines and, in severe cases, unenforceability of the 
patent. This section is animated by the principles expressed in 
Precision Instrument, at page 818, where the court emphasized that:

       Those who have applications pending with the Patent Office 
     or who are parties to Patent Office proceedings have an 
     uncompromising duty to report to it all facts concerning 
     possible fraud or inequitableness underlying the applications 
     in issue. * * * Public interest demands that all facts 
     relevant to such matters be submitted formally or informally 
     to the Patent Office, which can then pass upon the 
     sufficiency of the evidence.

  A few provisions of proposed section 299 deserve some commentary and 
explanation. Subsection (a) authorizes the PTO to issue regulations 
accepting complaints from any source. It is anticipated, based on 
preliminary discussions with the Office, that the PTO will accept 
complaints from a broad range of parties, including those that are 
third parties to any commercial disputes involving the patent. The 
scope of such regulations, however, ultimately remains within the 
Office's discretion, and PTO may later decide to limit who may file a 
complaint should it discover that allegations of misconduct that 
originate from particular types of sources are burdensomely voluminous 
or otherwise unproductive.
  Though any person may file an allegation of misconduct under section 
299, that section only allows such complaints to be filed against 
individual and entities that are parties to matters or proceedings 
before the Office. This limitation excludes examiners and other PTO 
personnel. Prosecutions occasionally become contentious, particularly 
when examiners fail to appreciate an inventor's revolutionary genius. 
If section 299 were not limited to complaints against parties, we would 
run the risk that such proceedings might come to be regarded by a 
subset of applicants as their final means of appealing an examiner's 
rejection.
  Section 299 is not limited, however, to entertaining complaints 
against applicants and patentees. A party that engages in intentionally 
deceptive and

[[Page 22631]]

material misconduct while challenging a patent during a postgrant 
review proceeding, or even while requesting such a proceeding, also may 
be sanctioned pursuant to section 299.
  Some parties have criticized the fact that the proceedings authorized 
by section 299 will be prosecuted by the PTO alone, without the 
participation of parties adverse to the patent. PTO prefers it this 
way. If misconduct has resulted in the grant of claims that are 
invalid, that patent can still be challenged in court if its owner 
attempts to enforce it. And to the extent that alleged misconduct has 
not resulted in the grant of claims that are invalid, the interests 
principally affected by any misconduct are those of PTO. The primary 
injury in such a case is to PTO's interest in ensuring that parties are 
honest and forthcoming in their dealings with the Office and its 
general interest in the integrity of its proceedings. In such 
circumstances, it is appropriate that PTO control the prosecution of 
the misconduct.
  Subsection (b)(3)(C) of section 299 permits PTO to sanction a patent 
owner by rendering his patent unenforceable. That penalty, however, is 
reserved by subparagraph (C) for particularly egregious misconduct that 
was committed by the current beneficial owner of the patent.
  This elevated standard is consistent with the standards for 
unenforceability set in Precision Instrument and Hazel-Atlas Glass, the 
foundational Supreme Court cases of the modern inequitable-conduct 
doctrine. In Precision Instrument, an applicant ``gave false dates as 
to the conception, disclosure, drawing, description and reduction to 
practice of his invention.'' When his fraud was discovered by the other 
party to an interference proceeding, the applicant colluded with that 
other party to assign the false application to the party. The Supreme 
Court held the patent unenforceable, concluding that ``[t]he history of 
the patents and contracts in issue is steeped in perjury and 
undisclosed knowledge of perjury'' and that ``inequitable conduct 
impregnated [the patentee's] entire cause of action.'' Pages 809, 816, 
and 819. Similarly, in Hazel-Atlas Glass, the court rendered a patent 
unenforceable upon ``conclusive proof'' of a ``deliberately planned and 
carefully executed scheme to defraud not only the Patent Office but the 
Circuit Court of Appeals.'' The court also emphasized in that case that 
``no equities have intervened through transfer of the fraudulently 
procured patent or judgment to an innocent purchaser.'' Pages 245 and 
246.
  I should also comment on a few other significant changes that this 
bill makes to S. 1145. My bill's proposed section 102(a)(1) amends the 
novelty condition of patentability by eliminating public use and the 
on-sale bar as independent bases of invalidity and instead imposes a 
uniform test of whether art has been made available to the public. By 
eliminating confidential sales and other secret activities as grounds 
for invalidity and imposing a general standard of public availability, 
this change will make the patent system simpler and more transparent. 
Whether a patent is valid or not will be determined exclusively on the 
basis of information that is available to the public. As a result, at 
the outset of any dispute over a patent, the patentee and potential 
infringer can develop a full and complete understanding of the 
information that will determine the novelty and nonobviousness of the 
claimed invention. This change not only will provide greater certainty 
and predictability--it should also substantially reduce the need for 
discovery in patent litigation, since defendants will no longer need to 
uncover evidence of private sales or offers for sale or other nonpublic 
information in order to determine whether the patent is valid.
  It bears mention that the extent of what is deemed to be publicly 
available is defined in important respects by the doctrine of 
inherency. Under that doctrine, once a product is sold on the market, 
any invention that is necessarily present or inherent to the product 
and that would be recognized as such by a person skilled in the art is 
itself deemed to be publicly available. Such an invention becomes 
publicly available art and cannot be patented. See generally Rosco, 
Inc. v. Mirror Lite Co., 304 F.3d 1373, 1380-81 (Fed. Cir. 2002).
  To address the possible concern that a uniform available-to-the-
public standard might allow secret commercialization of a product 
followed by belated patenting, I should note that a manufacturer who 
embarked on such a course would run the risk that, under the first-to-
file system, someone else might patent the invention out from under 
him. Perhaps for this reason, among others, industrialized countries 
that currently employ this standard do not appear to have experienced 
significant problems with manufacturers attempting secret 
commercialization and late patenting of their products.
  The bill also includes other provisions that would make the patent 
system more objective and transparent. Section 3(c) eliminates current 
law's best-mode requirement, and section 15 strikes several provisions 
of title 35 that require inquiry into a patentee's subjective intent. 
Any useful information that might be supplied by describing a patent's 
best mode generally also will be provided while satisfying the written 
description and enablement requirements. And because the best-mode 
requirement turns on the patentee's subjective intent, rather than on 
objective facts, it often becomes grounds for deposition of the 
inventor and other discovery. Eliminating that requirement will make 
patent litigation less burdensome.
  My bill also strikes S. 1145's elimination of the exception to the 
18-month publication requirement. Small-patent-owners' groups have 
persuaded me that the current exception should be preserved. That 
exception, although used only about 40,000 times annually, is invoked 
heavily by small-business applicants. These smaller applicants believe 
that the opt-out of 18-month publication allows them to preserve the 
market advantage generated by their ingenuity, and prevents their 
inventions' being appropriated in foreign countries, in the event that 
their application is not granted or is only granted on a second 
attempt. Under Secretary Jon Dudas, in his June 6, 2007, Judiciary 
Committee testimony, also expressed doubt about the wisdom of 
eliminating the current exception. He noted that serious concerns had 
been expressed ``by independent inventors and small entities that large 
entities and foreign interests may misappropriate their inventions upon 
disclosure and prior to issuance of a patent.''
  Sections 12 and 13 of the bill are carried over from S. 1145 as 
reported by the Judiciary Committee. I have included additions to those 
sections that I understand that their supporters had intended to adopt 
and have also made an addition of my own to section 12. The new 
subsection (c) in that section converts various day-based deadlines in 
title 35 into month-based deadlines. Month-based deadlines are easier 
to calculate. The use of months should make it easier to avoid the type 
of ministerial mistake that apparently is the cause for section 12. It 
should also save the patent system hundreds of billable hours over the 
years.
  Section 2(b) of the bill includes a minor modification to the CREATE 
Act, Public Law 108-453. This change more closely aligns the text of 
that act to the PTO's current and uncontested interpretation of that 
act with regard to who must own the prior art that is regarded as 
jointly owned by the parties to a joint research agreement pursuant to 
the CREATE Act.
  And last, but certainly not least, section 14 of the bill consists of 
the Coburn amendment, which would create a revolving fund for PTO fees. 
Under that amendment, all fees paid by patent and trademark applicants 
and owners to the PTO would remain in the PTO and could not be diverted 
to unrelated Government programs.
  According to Senator Coburn, the fees collected by PTO are more than 
adequate to pay for the costs of all patent examinations and other PTO 
proceedings. But PTO is not allowed to keep those fees. Instead, the 
fees are deposited into the U.S. Treasury, and PTO's operations are 
funded by a congressional appropriation. It is that appropriation that 
effectively determines

[[Page 22632]]

on an annual basis what portion of the fees that PTO has collected it 
will be allowed to keep and use.
  Since 1992, Congress has diverted over $750 million in PTO fees to 
other governmental programs. As recently as 2004, over $100 million was 
diverted from the PTO.
  Fee diversion unquestionably has a negative impact on the patent 
system. In recent years, it has hampered PTO's ability to hire an 
adequate number of examiners. Multiple studies and multiple witnesses 
at congressional hearings have concluded that fee diversion contributes 
to the growing backlog and lengthening pendency of patent applications. 
It currently takes nearly 3 years to get a patent, and 786,000 
applications are pending. That means that large numbers of businesses, 
universities, and other inventors are waiting to learn if they will 
receive a patent for their invention.
  Because of recent public outcry over lengthy patent-application 
pendency periods, the administration and Congress have abstained from 
diverting PTO fees since 2004. As a result, PTO has been able to hire a 
record number of new examiners and begin to address its backlog of 
applications. Unless the Coburn amendment is enacted into law, however, 
Congress and the administration could easily begin diverting PTO fees 
again in future years. Certainly, any bill that aspires to deserve the 
title ``Patent Reform Act'' should include a revolving-fund provision.
  I thank all of the individuals who have assisted my attempts to 
understand and find answers to the difficult questions posed by efforts 
to improve the patent system, and I look forward to next year's 
congressional debate on patent reform legislation.

                          ____________________