universities are not equipped to eliminate by the kinds of due diligence performed by companies and investors.

TOWARD A BETTER PATENT SYSTEM

Our committee proposed seven steps to ensure the vitality and improve the functioning of the patent system:

1) Preserve an open-ended, unitary, flexible patent system. The system should remain open to new technologies, and the features that allow somewhat different treatment of different technologies should be preserved without formalizing different standards, for example, in statutes that would be exceedingly difficult to draft appropriately and equally difficult to change if found to be inappropriate. Among the tailoring mechanisms that should be exploited is the USPTO's development of examination guidelines for new or newly patented technologies. In developing such guidelines, the office should seek advice from a wide variety of sources and maintain a public record of the submissions. The results should then be part of the record of any appeal to a court, so that they can inform judicial decisions.

This information could be of particular value to the Court of Appeals for the Federal Circuit, which is in most instances the final arbiter of patent law. To keep this court well informed about relevant legal and economic scholarship, it should encourage the submission of amicus briefs and arrange for temporary exchanges of members with other courts. Appointments to the Federal Circuit should include people familiar with innovation from a variety of perspectives, including management, finance, and economic history, as well as nonpatent areas of law that bear on innovation.

2) Reinvigorate the nonobviousness standard. The requirement that to qualify for a patent an invention cannot be obvious to a person of ordinary skill in the art should be assiduously observed. In an area such as business methods, where the common general knowledge of practitioners is not fully described in published literature likely to be consulted by patent examiners, another method of determining the state of knowledge needs to be employed. Given that patent applications are examined ex parte between the applicant and the examiner, it would be difficult to bring in other expert opinion at that stage. Nevertheless, the open review procedure I will describe next provides a means of obtaining expert participation if a patent is challenged.

Gene sequence patents present a particular problem because of a Federal Circuit ruling making it difficult to apply the obviousness test in this field. This is unwise in its own right and is also inconsistent with patent practice in other countries.

3) Institute an "Open Review" procedure. Congress should pass legislation creating a procedure for third parties to challenge patents after their issuance in a proceeding before administrative patent judges of the USPTO. The grounds for a challenge could be any of the statutory standards-novelty, utility, nonobviousness, disclosure, or enablement or the case law proscription on patenting abstract ideas and natural phenomena. The time, cost, and other characteristics of this proceeding should make it an attractive alternative to litigation to resolve questions of patent validity. For example, federal district courts could more productively focus their attention on patent infringement issues if they were able to refer validity questions to an Open Review proceeding. The result should be much earlier, less expensive, and less protracted resolution of validity issues than we have with litigation and of a greater variety of validity issues than we have with re-examination even if it were used.

4) Strengthen USPTO resources. To improve its performance, the USPTO needs additional resources to hire and train additional examiners and implement a robust electronic processing capability. Further, the USPTO should create a strong multidisciplinary analytical capability to assess management practices and proposed changes, provide an early warning of new technologies being proposed for patenting, and conduct reliable, consistent, reputable quality reviews that address office-wide as well as individual examiner performance. The current USPTO budget is not adequate to accomplish these objectives, let alone to finance an efficient Open Review system.

5) Modify or remove the subjective elements of litigation. Among the factors that increase the cost and reduce the predictability of patent infringement litigation are issues unique to U.S. patent jurisprudence that depend on the assessment of a party's state of mind at the time of the alleged infringement or the time of patent application. These include whether someone "willfully" infringed a patent, whether a patent application included the "best mode" for implementing an invention, and whether a patent attorney engaged in "inequitable conduct" by intentionally failing to disclose all prior art when applying for a patent. Investigating these questions requires

time-consuming, expensive, and ultimately subjective pretrial discovery. The committee believes that significantly modifying or eliminating these rules would increase the predictability of patent dispute outcomes without substantially affecting the principles that these aspects of the enforcement system were meant to promote. 6) Harmonize the U.S., European, and Japanese patent examination systems. The United States, Europe, and Japan should further harmonize patent examination procedures and standards to reduce redundancy in search and examination and eventually achieve mutual recognition of applications granted or denied. The committee recommends that the United States should conform to practice elsewhere by adopting the first inventor to file system, dropping the "best mode" requirement, and eliminating the current exception to the rule of publication of an application after 18 months. The committee also recommends that the United States seek to have other jurisdictions adopt the practice of a grace period for filing an application. These objectives should be pursued on a trilateral or even bilateral basis if multilateral negotiations do not progress.

7) Consider enacting a narrowly drawn exception from infringement liability for some research activities. Here we do not propose specific legislative language, but we do suggest some principles for Congress to consider in drafting a narrow research exception that would preserve the intent of the patent system and avoid some disruptions to fundamental research.

In making these recommendations, our committee was mindful that although the patent law is designed to be uniform across all applications, its practical effects vary across technologies, industries, and classes of inventors. There is a tendency in discourse on the patent system to identify problems and solutions to them from the perspective of one field, sector, or class. Although the committee did not attempt to deal with the specifics of every affected field, the diversity of the membership enabled us to consider each of the proposed changes from the perspective of very different sectors. Similarly, we examined very closely the claims made to us that one class of inventors-usually individuals and very small businesses-would be disadvantaged by some change in the patent system. Some of the committee's recommendations-universal publication of applications, Open Review, and shifting to a first-inventor-to-file system-have in the past been opposed on those grounds. The committee reviewed very carefully, for example, how small entities currently fare in interference proceedings, examination, and re-examination. We also studied how European opposition proceedings affect small businesses. We concluded they enjoy little protection and in fact are often at a disadvantage in the procedures we propose to change. In short, we believe that our recommendations, on balance, would be as beneficial to small businesses and individual inventors as to the economy as a whole.

I appreciate the opportunity afforded by the committee to testify on our conclusions and would be happy to answer any questions.

Mr. SMITH. Thank you, President Levin.
Dr. Myhrvold.

TESTIMONY OF NATHAN P. MYHRVOLD, CHIEF EXECUTIVE
OFFICER, INTELLECTUAL VENTURES

Mr. MYHRVOLD. Thank you, Mr. Chairman, Members of the Committee, both thank you for having me here and for turning your attention to a very important topic of patent reform.

My perspectives today are going to be based a little bit on who I am. I started off as an academic physicist. I started my own company and became a start-up entrepreneur in California in 1983. Microsoft acquired my company and so I became a corporate executive, Microsoft's chief technology officer, for 14 years. Five years ago, I left Microsoft and started Intellectual Ventures, dedicated to the idea of invention and helping inventors. Finally, I'm an inventor myself, so I understand the Patent Office from that perspective. Now, invention is critical to America; I don't need to remind you of that. One point I think is very important, though, is that the small inventor is critical to America. Forty-five percent of America's patent holders are classified as small entities by the Patent Office. That means they're individuals, they're universities, or

they're small businesses. This cuts across every field of technology no matter how exotic, no matter how cutting-edge. In fact, look at semiconductors, look at nanotech, look at computers. You'll find in those areas that individuals and universities together often have more patents than the biggest companies in the world. It's a diffuse group; it's also a vulnerable group, because they depend on patent law very critically, much more so than the big guys do. So as we approach patent reform, it's very important that we keep them in mind. An unintended consequence of shifting in one area can make the playing field not level for the little guy.

I've studied the Committee Print. There's a lot that I would commend the Committee on and I would agree with. Actually, Chairman Smith summed up a whole series of things. I won't repeat them all. I also want to echo my colleagues' remarks that when you add something like post-grant opposition-I think it's a good move-you've got to make sure that it's funded and resourced. We can't heap more new things on the Patent Office while they still have such a backlog of the work they're supposed to ordinarily be doing.

I've also studied the Committee Print in other ways and, to be frank, there are some things I don't agree with that I think would be harmful. Most important of those, I think, are the rule changes regarding injunctions. Now, patents are designed to give ownership of inventions to inventors, and that ownership isn't conditional on whether they make it or not. That's what our system is. It's perfectly honorable to be an inventor in a university or a small entity that doesn't actually manufacture, in fact licenses to others.

Now, the injunction change, I feel, would really disadvantage the small inventor. It would significantly erode some of their rights. Ironically, it's been proposed as a trial-or as reform to reduce litigation. I'm afraid it would have exactly the opposite effect, increasing the number of litigations and the size and complexity of each litigation. My written testimony explains why.

So we have to be very careful that while we try to reform litigation we don't accidentally create the Trial Lawyers Full Employment Act. If you look around the world, you compare our system to others, you find America has the strongest rights for inventors of any place in the world. There's a bunch of other countries that are very, right up on a par with us. I agree about international harmonization; that's an important thing. So the first rank of countries are very high. If you look at this injunction provision, you can also find countries that have that kind of law, and those typically aren't first-world nations. Those are countries like the Philippines, Peru, or Rwanda. Having strong rights for inventors is a very important thing. We've got to make sure that, going into the 21st century, we have the best possible incentive for all of America's inventors.

One other brief-I've got too many things, actually, to list here. My written testimony covers them. There is, to me, a very surprising loophole for software- or Internet-related things, nontangible items in the Committee Print which would dramatically reduce any royalties due legitimate patent holders for any of these nontangible items. I think the 21st century isn't a time when we

should take an act like that. Clearly the Internet and software and other very intangible things are important to us.

Going forward, the committee has a challenging and interesting task to balance all of these different factors. I will make myself available both during the questions now and at any point in the future to help out in that important process.

Thank you.

[The prepared statement of Mr. Myhrvold follows:]

PREPARED STATEMENT OF NATHAN P. MYHRVOLD

Mr. Chairman and members of the Subcommittee, my name is Nathan Myhrvold. I am very pleased to have been asked to share my views as a scientist and inventor on the patent system with the Subcommittee. My personal history is very relevant to my remarks today, so permit me to introduce myself.

BACKGROUND

As long as I can remember I have been fascinated with science and technology. I pursued science in school, earning a bachelor's degree in mathematics, and master's degree in geophysics and space physics, both from UCLA. I continued exploring other disciplines, getting another master's degree in mathematical economics and a PhD in mathematical physics from Princeton University. I would have finished school much earlier if I had focused on one topic, but to be honest I never met a kind of science I didn't like. This obsession with schooling might have consumed half my life, but for the fact that I started early, entering college at 14, and completing my PhD by age 23.

After Princeton I was hired by Cambridge University in England, working directly for Professor Stephen Hawking. My research area was quantum field theory in curved space time, perhaps one of the most obscure and esoteric scientific disciplines. At that point in my life I would have told you that I'd be an academic researcher. But life has a way of throwing us curve balls. I took a three month leave of absence from working with Hawking to go to the San Francisco Bay Area to help some friends from graduate school on a software project. Before I knew it I was caught up in entrepreneurial fever.

The year was 1984, and the software industry was still tiny. I became the CEO of Dynamical Systems, a software start up with less than a dozen full time employees. After two years of struggling to keep our heads above water, we were acquired by Microsoft. I spent the next 14 years as a Microsoft employee, reporting directly to Bill Gates as Microsoft's first Chief Technology Officer. I could scarcely believe that I went from esoteric theories in physics to what would become the largest software company in the world.

At Microsoft I championed the development of new technology. Microsoft had zero patents and just two patent applications at the time I joined the company. I advocated increases in R&D spending, and patent filing, greatly increasing each of these. In 1991 I convinced the Microsoft board of directors to start Microsoft Research, the first major industrial research lab to be started in more than a generation. Laboratories like Bell Laboratories, GE Research Labs, Xerox PARC, and IBM Research, have made a tremendous contribution to America's preeminence in science and technology. Unfortunately, these institutions were founded 30 to 100 years ago, and there aren't many recent examples. Very few of the new giants of technology have bothered to invest in research and create similar research organizations. Microsoft Research now employs over 700 researchers in seven laboratories, and is ranked as one of the leading research institutions in the world.

I retired from Microsoft in 2000, and founded Intellectual Ventures, a company dedicated to investing in innovation and creativity in the form of invention. The venture capital community exists to help entrepreneurs start and finance new companies at Intellectual Ventures we help and finance inventors to invent. This includes both full time employees, as well as working with inventors who are university professors, academic researchers, small businesses that cannot afford to patent without help, as well as independent inventors. I meet frequently with inventors from all ranks, and have attached a recent speech on invention given at Princeton University. Our company provides both business expertise and financing to these inventors, and provides inventors with a healthy share of the profits in their inventions.

My business career as a corporate executive has focused on managing innovation and using patents as a business asset. However, I am also an inventor with 17

issued US patents. I'm working on increasing that number; for the last couple years I have filed over a dozen patent applications a year which are still pending in the Patent Office. So, in addition to using patents in business, I am also a customer of the Patent Office and have seen the details of the patent process up close.

Given my varied career, I have seen the patent system from the perspectives of pure academic research, a giant technology company, and finally that of a small business. Each perspective offers different views on the patent system. The Subcommittee will hear from people in many of these directly through the process of these hearings. What I can offer is the views of someone who has experienced all of them.

PATENTS: PROTECTING INVENTIONS

The patent system is a fundamental foundation of America's innovation based economy. Like any other part of the free enterprise system, the patent system offers economic incentive by allowing private ownership. In a way, this is no different than real estate, or other private assets. Private ownership of valuable assets is the basis for the American economy.

The process of invention requires large amounts of the inventor's time, energy and money. In order to create incentive for that expenditure, the inventor gets ownership in the invention for a limited time, after which it passes into the public domain. This system has been a primary driver behind the tide of innovation that has kept America number one in the world for at least the last century. The system that encouraged and sustained great inventors like Thomas Edison, Ålexander Graham Bell and the Wright brothers is a critical component of America's 21st Century goals to lead the world in computing, biotechnology, nanotechnology and dozens of other exciting fields.

SMALL INVENTORS: AMERICA'S ECONOMIC ENGINE

The leading component of America's invention output is driven by individual inventors, academic institutions, and small and medium businesses. The Subcommittee has heard testimony from large technology companies, and their trade associations. These firms are important inventors, and they frequently lead the list in terms of sheer number of patents. However what is much less well known is the substantial role that the little guy plays.

According to US Patent Office records, 45% of American patent holders are classified as "small entities" which includes small businesses, universities and individuals.

This pattern is repeated if you look in particular technology areas. I have done empirical research to understand the nature of the invention process, and found some remarkable results. It is not surprising that the entities that hold the most patents on computer processors include corporations like Intel and IBM. However, if you add them up, universities, individuals and small businesses in aggregate have substantially more processor patents than Intel or IBM-indeed more than the two combined. The same pattern is found in every technology field where I have looked. Small inventors have more operating system patents than Microsoft, more networking patents than Cisco and more wireless patents than Qualcomm.

The typical pattern in a technology field is that the top company (or even the sum of the top five or ten companies) has only a small fraction of the patents in that field-often no more than 10% of the patents. Most invention is not done by the largest companies in the field. Invention occurs across the whole spectrum of the economy-from technology giants all the way down to the lone inventor in the garage. Those lone inventors aren't just working on low-tech areas—no matter how technical a field, a huge number of patents are held by private individuals. Critics of the patent system sometimes talk derisively about the "myth of the small inventor", ignoring their contribution. Well, I am here to tell you that small inventors are not only alive and well, but they actually contribute more inventions than the biggest corporations do.

I think that it is very important for the Subcommittee to appreciate the role that small inventors play when considering reforms to the patent system. This is because small inventors depend on the patent system far more than big companies do. The patent system is the only means for the small inventor to get a fair shake, and any semblance of a level playing field.

A large company has financial resources that a small inventor can only dream of. They also have the ability to extract value from their patents a variety of ways. Indeed many large companies use their patents only on a defensive basis-that is a polite way to say that they use their patents to maintain their dominant market positions, rather than actively use them as revenue generators in their own right.