PROTECTING THE SMALL INVENTOR'S RIGHTS

A small inventor, on the other hand, depends almost totally on the patent system to secure his ownership rights in the invention. A small change to patent law can, as an unintended consequence, have catastrophic effects on a small inventor who depends totally on his or her patent rights to survive. A small inventor does not have huge market share and other business assets to fall back on. Worse yet, the small inventor almost invariably winds up competing with large, well funded companies that have every possible advantage. Only the patent system stands tall as the protector of the basic rights of small inventors.

Changes to patent law must be scrutinized carefully to make sure that they do not tilt the playing field in a way that further disadvantages small inventors. They do the bulk of America's inventing and they deserve our support.

PROPOSED PATENT REFORM

I applaud the Subcommittee for its interest in patent reform and I have studied the Committee Print. There are a number of needed reforms that I agree with. In the interests of being concise I will focus here on the most important areas where I think your efforts can be improved, at least from my perspective.

First, I have to be frank and say I am disappointed that there isn't more focus on what I think is the most important aspect of patent quality-namely improving the quality of the patent examination process. Most of the committee print covers rules about patent disputes, and does not address the issues with getting patents examined in the first place. Patent quality starts in the Patent Office itself.

Anybody who is a big customer of the Patent Office, as I am, can tell you that they need some help. The backlog of patents has grown larger, and the waiting time to get a patent has grown with the backlog. Longer waiting is not a recipe for success in a world where the pace of technology is going faster, not slower. Looking ahead, the Patent Office must continue to hire and train new examiners, and keep up with the pace at which invention occurs. This job isn't getting any easier. Many of the proposals in the committee print are likely to increase the burden on the Patent Office. For example, the post-issuance oppositions with discovery will add process and personnel demands.

Simply put, the Patent Office needs adequate resources to do its job. Until the Patent Office is funded adequately to meet the demand for patents, America's inventors are going to be poorly served. I know that funding is a major occupation of Congress, which cuts across many issues including this one. However, without adequate resources, the Patent Office will be stuck in a situation where patent fees continue to rise, as they did last year, without the service improving. This amounts to a hidden tax on innovation. Is that really what serves America best as we enter the 21st Century?

In fairness, I can't complain about the resources without adding that I think the Patent Office does a good job within the constraints it has. Some critics of the patent system like to point to silly sounding patents, like a recent case mentioned in the press of a patent on a peanut butter and jelly sandwich. Or, critics will claim that the patent system is "out of control" and argue that there are many bad patents. These claims are misleading.

Though some bad patents are inevitable, the vast majority of all patents are sound and valid. No serious observer of the patent system has reached any other conclusion. As one example, when patents are re-examined by the Patent Office, the majority of the patents survive all or in part. This is also true in litigation resultsthere is no data on patents being found invalid en masse in the courts.

It is true that there are also some pretty frivolous sounding patents-indeed there are web sites that feature them, like www.patentlysilly.com. Looking at such a site it becomes obvious that the creativity of American inventors covers the full range from the sublime to the ridiculous, but that can leave the wrong impression. Most patents are both serious and valid.

Another area where misconceptions are bandied about is the topic of patent litigation. In a perfect world, property rights would always be respected, but here on Earth disputes are an inevitable reality. Many critics of the patent system wax hyperbolically about an "explosion" or "epidemic" in patent litigation. While it is true patent litigation has risen in recent years, these critics aren't telling the whole story. For example, the number of patent lawsuits each year is actually lower than the number of trademark lawsuits. Historically, copyright lawsuits used to outnumber patent suits, but in the late 1990s patent suits pulled ahead. However, in the last five years, copyright lawsuits have grown over twice as fast as patent suits and are set to overtake patent lawsuits, probably this year. Patent lawsuits are nei

ther more common, nor are they growing faster, than any other form of intellectual property litigation.

A more telling point is that the number of patents has also grown. It makes sense that with more patents, and more patent holders, there is more opportunity for them to get into disputes. If you divide the growth in patent lawsuits by the growth in patents you find that on a per patent basis there were fewer lawsuits in 2004 than there were in 1985. This is hardly the makings of an epidemic. Instead the growth of patent lawsuits reflects the growth of the use of patents, and the growth of technologically innovative companies that rely on patents.

Let me be clear that I agree it is a worthy goal to reduce patent litigation. Litigation saps resources that small inventors could put toward more productive pursuits, like new inventions. Reducing the likelihood of litigation, with the attendant cost, complexity and uncertainty is a worthy goal.

INJUNCTIVE RELIEF FOR PATENT INFRINGEMENT SHOULD NOT BE REDUCED

As a result, I cannot agree with one of the most extreme features of the Committee Print, regarding changes in permanent injunctions. This feature will greatly increase the volume, cost and complexity of patent litigation. It will also harm the small inventor.

The Committee Print changes the way permanent injunctions are granted, reversing principles, practices and legal precedents that date back to the very origin of the Patent Office. Patents are designed to give ownership of inventions to the inventor for a limited period of time. They are property rights. When a court finds that those rights are infringed, and another party is determined to trespass upon those rights, the court may decide to issue an injunction.

The Committee Print weakens and threatens to eliminate the injunctive relief due to the patent holder. It introduces an untested and potentially volatile new condition of "irreparable harm" into the injunction process. To put this in perspective, the Committee Print says, in effect, that it is okay to take the property of the patent holder as long as it won't irreparably harm them. This is tantamount to saying it is okay for a squatter to camp on your lawn as long as the harm to you isn't "irreparable". This flies in the face of the most concepts of property. Furthermore, the test of harm includes the extent to which the patentee makes use of the invention.

The latter point is quite telling. This feature of the Committee Print amounts to tilting the playing field toward large product companies and away from the small business, university and independent inventor.

It is important to note that this proposal to curtail overall injunctive relief for patent owners is not confined to preliminary injunctions, which are an altogether different body of law. It makes sense to consider issues like irreparable harm when considering whether to take the extraordinary step of issuing an injunction before trial. This is already common practice in many aspects of the law, including patent law. No change needs to be made here.

The permanent injunctions remedies for patent owners that the Committee Print threatens to minimize-and, in large part, eliminate—are an entirely different animal than a preliminary injunction. Permanent injunctions occur only after a court has fully tried the case. In practice, this usually includes multiple rounds of appeal which occur over many years, so it is not an emergency rush to judgment. Before a permanent injunction is granted, the court will have carefully and definitively answered the question of infringement. In addition, current law and surrounding case law already give the court leeway to decide whether an injunction is appropriate. Given the protracted legal maneuvering that precedes them, it's not like these injunctions sneak up on you. A defendant typically has many years notice. That time can be used to design around the patent in question. This is commonly done in the technology industry. A design-around renders an injunction moot, because the products no longer infringe. Innovative product companies frequently have the option to avoid injunctions through engineering rather than legal proceedings.

Injunctions come down to an issue of property. The infringer will, by definition, be found to have trespassed on the patent's holder's property, and the injunction is the eviction notice. No other part of property law holds that a lawful property owner must show that he or she is "irreparably harmed" before they can evict a squatter or trespasser.

What motivates this unprecedented taking of private property rights? Proponents of this approach make several arguments, none of which hold water on closer examination.

The first argument is based on a misconception that the patent system exists to cut a special break for companies that manufacture products. The fact is that the patent system exists to protect and encourage inventions, not products.

Products are protected by ordinary commercial law, and the economic incentive to create and sell products is immediate and obvious-the profits that flow from product sales. In sharp contrast, there is no economic incentive for an inventor if others can take and use his invention without justice. The patent system exists to address this by acknowledging the constitutionally guaranteed exclusive rights that inventors have in their inventions. This "exclusive right" is meaningless if in most circumstances inventors cannot have ownership in their inventions, including the right to exclude others.

The public good served by the Patent Office is to stimulate inventors to come up with new technology that can change our world, and see it enter the public domain after a period of time. This point is so important it bears repeating the patent system exists to protect and stimulate inventions, not products.

Discriminating against patent holders on the basis of whether or not they produce a product disenfranchises some of America's most creative and prolific inventors. This broad group includes: university professors and research scientists, who often make great breakthroughs without having the facilities or resources to manufacture the products commercially; individual inventors who are in the same situation; and, finally small businesses who may commercialize some of their inventions but frequently invent more than they are able to productize simultaneously.

There is nothing dishonorable in an inventor licensing his or her inventions to companies that are in a better position to commercialize the technology. This time honored practice has been around as long as the patent system has. Thomas Edison, Nicola Tesla and other great 19th Century inventors all licensed their inventions out to companies to build them.

The tradition continues to this day. If you use a digital cellular phone, the chances are high that Qualcomm licensed its CDMA technology to the cell phone's manufacturer. DVD players rely on video compression patent technology licensed from a consortium of inventors ranging from Sony to Columbia University, while licenses to patents on inventions from Ray Dolby and his company increase our enjoyment of music. Within the technology industry companies like IBM, Lucent, Texas Instruments, Sony, Philips, Thomson and many others derive significant revenues from patent licensing activities.

THE COMMITTEE PRINT INCREASES THE NUMBER, COMPLEXITY AND

EXPENSE OF LAWSUITS

A primary justification advanced for the injunction proposal is that successful and innovative companies need this legislation to beat back a rising tide of nuisance lawsuits originating from greedy trial lawyers and unscrupulous patent holders. I can sympathize with this because when I was Microsoft, I frequently had to deal with patent lawsuits in my role as Chief Technology Officer. Microsoft has the dubious distinction of having been named as a defendant in patent lawsuits 52 times in the last five years, making it the second most "popular" defendant in the country. So, while I can understand the frustration that my colleagues in large technology companies have, the reality is that the impact of these lawsuits is exaggerated. Some horror stories exist, but they are rare. The magnitude of the supposed problem is not borne out by the statistics.

I was curious, so I did a study counting the total number of lawsuits filed against technology companies by entities that do not produce products. The total of all these lawsuits over the last five years was just over 2% of all patent lawsuits. Furthermore, fully half of those lawsuits are from one very litigious company. Those horror stories aren't about an epidemic, or a situation that is out of control-it is actually a very minor phenomenon. I also counted the number of patent lawsuits in which a large technology company was the plaintiff the result is 1.6%. Large technology companies generate nearly as many lawsuits as the entities that have no products. These numbers put some perspective on the problem. On one hand, we have the potential to harm tens of thousands of small inventors. On the other hand we have the supposed benefit-to reduce the total number of lawsuits by perhaps one percent. It seems clear that the cure is far worse than the disease.

This is particularly true because the proposal in the Committee Print won't decrease litigation at all. In fact, it will dramatically increase the number of patent lawsuits, as well as their complexity and cost. Ironically, this proposal, which is often described as being yet another much needed and important reform against the excesses of trial lawyers, is in fact the trial lawyers' full employment act.

First there is the volume of the lawsuits. Today, about 97% of the patent lawsuits that are filed settle prior to a trial. The entire viability of the court system depends on this high settlement rate. Even a small change would overwhelm the courts with vastly more trials. Yet under the proposal, large companies will have no reason to

settle. Their principal motive in settling a patent suit before trial is to avoid the possibility of an injunction should the company be found to be infringing, and to god enhanced damages should their unauthorized use of property be found to be willful. Without these threats, companies being sued will adopt the best strategy for their shareholders: refuse to settle and use the advantage of their deep pockets to rag lawsuits out to the bitter end, secure in the knowledge that no injunction can et in their way.

The complexity of the litigation also increases substantially, because now several new issues have been added to the already complex decision making process of the courts. In addition to determining infringement, the courts must also try an entirely fferent set of facts. The Committee Print directs that the court "shall consider and weigh evidence that establishes or negates any equitable factor relevant to a determination of the existence of irreparable harm, including the extent to which the patentee makes use of the invention”.

In simple terms, this is a second lawsuit tacked onto the original lawsuit, complicating the already difficult patent litigation with an entirely new set of issues. Provisions like "consider and weigh evidence" mean a whole new area for motions, discovery and argument in court. As it stands, patent lawsuits can take five to seven years, and in some cases even longer. This new process will add substantially to this timetable.

This isn't the only new complexity thrown at the courts. By reducing or eliminating the right to an injunction, the courts are for the first time put in the position of determining the terms and conditions under which technology is licensed on a broad scale. Instead of the marketplace, courts will now be the primary determinant of licensing terms.

This also greatly adds to the complexity of the litigation. Under current patent law, the court may determine damages for past usage, but the court explicitly does not interfere in the market for future use of the patents. Instead, the court determines whether the property of the patent holder is being used-if it is, then the court issues an injunction and the two parties must work out for themselves what to do. In many cases there is no future use, because the infringer will use the many years that it took for the case to wind its way through the courts to redesign their product. In other cases the infringer and patent holder decide to settle based on their unfettered negotiations, which take into account the full panoply of market factors and competitive alternatives available in the modern economy.

Instead, under the proposal in the Committee Print, the court would have to set future licensing terms. Economists have a name for this scheme-it is called compulsory licensing. Numerous studies have shown that it is a poor way to run a patent system. It is also out of keeping with the key principles of the American economy and Constitution of the United States.

The decision-making process inherent in this huge new responsibility will weigh heavily on the courts. Current courts already expend a lot of time and energy determining past damages. Adding the future, which might stretch for a decade or more depending on the life of the patents, greatly raises the stakes. Higher stakes generally means more arguing on yet another issue--what should the future damages be? One thing seems certain: this proposal would be a boon for expert witnesses and the trial lawyers who deploy them.

Some critics of the patent system ask "why aren't monetary damages enough? Why are injunctions needed?" There are several answers. Corporations fear injunctions, and that's what brings them to the settlement table, yielding a 97% settlement rate. Determining commercial use and setting license fees will greatly complicate the litigation process. But perhaps the most important reason is that this compulsory licensing proposal will inject court mandated control over future licensing rather than allowing the parties to work out a market-oriented solution.

THE PROPOSED CHANGES WOULD GUT PROTECTION FOR
COMPUTER-RELATED INVENTIONS

The injunction proposal is the topic in the Committee Print that I feel most strongly about. However, there are several other areas that deserve some comment. The Committee Print has an innocuous-seeming amendment to Section 271(f) of title 35 in the patent code. Unfortunately, this amendment would dramatically strip the rights of patent holders and would deal a serious blow to small inventors working in what is otherwise one of the most exciting and dynamic areas of the American economy.

Section 271(f) is in plain terms a law designed to prevent patent holders from being cheated by unscrupulous exporters. Patent law holds that export of a patented invention outside the United States is a use of the invention, just as much as sale

inside the country would be. Both export and domestic sale are on the same ba Section 271(f) was intended to close a loophole and prevent a company from exp ing components rather than an entire invention. It has worked well in that purp and substantial case law has developed around it.

Incredibly, the amendment proposed in the Committee Print creates a gapi loophole for software, or any invention that includes software. It requires that a "component” under 271(f) be a tangible item-thus exempting software altogethe It additionally requires that the tangible item "is itself combined physically wi other components to create the combination that is alleged to infringe

Translating this to plain English, it means that a software company could explo the loophole created by this provision to export software without it counting as a export. Software would not qualify as a "tangible item", particularly if it was ex ported by transmission over the Internet or another computer network which_thes days is the dominant way software is shipped and sold. Software composed of mul tiple software components-as virtually all software is these days-would also no count. Most software companies have the majority of their revenue come from out side the US, so this provision would at a single stroke cut the licensing revenues due a valid software patent holder by a factor of two or more.

Software is not the only beneficiary of the loophole created by this provision. Any invention that combines software and hardware could also be able to use the loophole by simply exporting the hardware physically, then downloading software to it. Literally millions of inventions, ranging from aircraft navigation systems to videogames and toys would suddenly have their exports made immune from justice. What justification can there be to strip America's inventors of the revenue from these exports? It is hard for me to imagine how, at the onset of the 21st Century, anyone could pretend that only "tangible items" have value when the Internet has become a ubiquitous channel for commerce, and software is a multi-hundred billion dollar market.

THE PROPOSED CHANGES WOULD REWARD WILLFUL PATENT INFRINGERS

The topic of willful infringement is clearly an area of patent law where reform is needed. The current willfulness standard should be clearly reviewed. However, I cannot support the Committee Print which goes too far in reducing the conditions under which a company can be found liable for willfulness.

Note that willfulness goes hand in hand with the injunction issue. If large corporations know that they don't have to worry either about an injunction or about an increased financial penalty due to a finding of willfulness, then they can infringe at will. At worst, a court will make them pay a license fee, but even that is not certain because the court might not make such a finding. Even if a court eventually rules against them, the infringer can delay for many years. The best strategy for a large company is simply to infringe widely, and refuse any negotiation with the patent holder.

This creates an incentive for exactly the kind of behavior the patent system is supposed to oppose. This is another example of a reform that, as an unintended consequence, would increase the volume of patent litigation by motivating companies to infringe. Small inventors would be adversely affected because their only means to bring such deliberate infringers to heel is to resort to expensive litigation they can ill afford.

POST-GRANT OPPOSITION PROCEDURE WILL REQUIRE GREATER

PATENT OFFICE RESOURCES

Post-grant opposition to a patent is a concept that has been proposed in various forms for many years. The value of post-grant opposition is that it gives the marketplace the opportunity to be heard and to help the Patent Office. However, this is appropriate only if done for a limited time after issuance, with a strict time limit on the opposition proceedings, and with conditions that would prevent it from being used to manipulate the system. Otherwise this would become yet another protracted and expensive dispute mechanism which would disadvantage small inventors. It could also be yet another full employment act for lawyers. The Committee Print proposes a nine month limit from time of patent issuance. This is a reasonable compromise.

However, I would caution the Subcommittee that any post-grant opposition of this sort will greatly increase the workload for the Patent Office, and will therefore require additional resources. It does not seem reasonable to ask the Patent Office to take on additional duties knowing that they lack the necessary financial resources to do so. Frankly, the Patent Office backlog is too long as it is, and if post-grant opposition takes resources away to make the backlog worse, this would be a net neg