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We believe reform is needed to rein in these damages claims. The provision included in the committee print accomplishes this goal.

Third, BSA strongly supports the approach taken by the committee print to injunctions. That provision directs courts to do what the law already says: balance equities before issuing an injunction.

Today, the courts are interpreting this statutory requirement very narrowly. Essentially the only reason for not granting an injunction is national health emergency. This interpretation of the public interest risks turning equity into a needles eye that no case in our industry can thread.

We are mindful of the concerns of some groups that these solutions to litigation issues not disrupt monetary injunctive relief for appropriate cases.

We agree with this concern. Any solution must address the problem narrowly without creating unintended disruptions in other areas, and, of course, any solution must be consistent with international norms and obligations.

Before I close, because I have a little bit of time left, I'd like to address comments on-quickly on three provisions related to PTO processes or harmonization.

First, with respect to post-grant opposition, we support the proposed procedure, but we believe the issue of timing is critical. The current committee print includes a single 9-month window after issuance for initiating an opposition.

We do not believe this is sufficient to identify patents requiring challenge.

We suggest instead two windows, with the second window opening if and when a patentee has provided notice to a specific infringer.

Only a noticed party could use this second window.

Second, with respect to the wholesale redefinition of what constitutes prior art, much of this change is not required for harmonization with a worldwide first to file system. This new definition also injects uncertainty and diminishes the scope of what's considered prior art. We believe that could have unintended negative impact on patent quality.

Finally, the committee print includes a provision significantly reducing the effect

of a patent applicant's violating her duty of candor before the PTO. We question whether this provision is appropriate, especially in an era of increased emphasis on candor and full disclosure in dealing with governmental agencies and public institutions.

Thank you for the opportunity to provide input on this critical topic. We pledge our continued support and assistance. [The prepared statement of Mr. Lutton follows:]

PREPARED STATEMENT OF RICHARD J. LUTTON, JR. Mr. Chairman and members of the Subcommittee, my name is Richard Lutton and I am the chief patent counsel for Apple. I appear today representing the Business Software Alliance (BSA). BSA welcomes the opportunity to appear before you today on this important topic. We commend you for holding these hearings and for your commitment to improving our patent system.

The Committee print made available last week correctly addresses the two major areas where BSA thinks patent reform is now timely: improving the quality of patents issued by the Patent and Trademark Office and alleviating the disruptive effects that excessive patent litigation now poses. Overall, BSA supports the approach and the issues identified in the Committee print and we look forward to working with as you proceed with your efforts. As I will describe in greater detail in a moment, there are areas where further clarification or changes to the language would be positive, and there are some issues that are not in the print which we believe merit consideration.

The software and computer industry is a creative engine that powers innovation and growth. The industry's products and services give individuals and organizations the tools they need to operate intelligently, efficiently and productively. Indeed, over the past thirty years, software and computers have become critical to economic success, business competitiveness and personal quality of life. People worldwide rely on the software and computer industry's tools to communicate, to connect to the world, to get things done more efficiently in the workplace, and to more fully enjoy the arts, hobbies and leisure activities.

The members of the Business Software Alliance I have a significant stake in this Subcommittee's work regarding patent quality and improvement. BSA represents more than twenty-five software and computer companies with annual revenues well in excess of $300 billion. Together, we hold about 100,000 United States patents. Our members are both plaintiffs and defendants in patent suits. Many of our members have established licensing programs to encourage the licensed use of technology covered by our own patents and to respect the patent rights of others. Simply put, patents play an essential role in how information technology companies do research and how they develop and commercialize products and services.

BSA members believe that the patent system is fundamentally sound and works well for most innovators, whether they toil in their garage, experiment in a university laboratory, or work for a large corporation that provides goods and services to consumers. That said, we believe that a periodic review and recalibration of the patent law is not only a good idea, but also essential to ensuring that patents remain a vital part of technological process. The current patent system has given rise to too many low quality patents being issued, and a growing pattern of assertions of weak patents that threaten to damage productive companies and stifle innovation.

BSA members approach patent reform from a pragmatic, problem-solving perspective. Our attention is focused on those areas of the law and practice that present specific challenges for our companies' day-to-day businesses. Thus, we believe that reform must address both the administrative system responsible for the issuance of patents and the litigation system responsible for enforcing patents.

1. PATENTS IN THE SOFTWARE AND COMPUTER INDUSTRY

As we enter the 21st Century, intellectual property is an ever more critical source of economic value to society, individuals, companies and governments. While copyrights have been and will remain a principal way that technology companies protect their intellectual property, I will limit my comments today to patents. The increased importance of patents

to technology companies has resulted from a mix of legal and marketplace developments.

The 1981 Supreme Court decision, Diamond v. Diehr, marked a turning point in the patentability of computer-implemented inventions. In that case, the Supreme Court held that a machine that transforms materials physically under the control of a computer program was patentable. The Court's decision clarified earlier rulings that had been interpreted to suggest that software programs would rarely qualify for patentability. Subsequent decisions from lower courts have further clarified the law in this area. As a result, U.S. patent applications from inventors in the software sector have steadily increased.

Equally important are marketplace trends. For example, in today's diverse technology marketplace, heterogeneity has become an important element of technology and network effectiveness. Unlike the early days of computing when consumers tended to purchase all their hardware and software from only a single firm, consumers now often build systems to meet their specific needs based on products sourced from different suppliers. The ability of these different systems to work together is essential. In this context, patents enable technology companies to integrate systems and meet consumer's needs while ensuring a return for their inventions.

Finally, changes made by Congress, especially the creation of the Court of Appeals for the Federal Circuit in the early 1980's, have brought generally greater impor

1 BSA members include Adobe, Apple, Autodesk, Avid, Bentley Systems, Borland, Cadence Design Systems, Cisco Systems, CNC Software/Mastercam, Dell, Entrust, HP, IBM, Intel, Internet Security Systems, Macromedia, McAfee, Microsoft, PTC, RSA Security, SAP, SolidWorks, Sybase, Symantec, UGS and VERITAS Software.

tance to patents and more consistent respect for the property right granted by a patent.

Today, patents are a key part of virtually every technology company's intellectual property portfolio. The reasons are simple:

• Patents provide critical protection for distinctive technologies that may have

been difficult to innovate but could easily be replicated without the protec

tions of a patent. • Patents ensure that technology companies have the opportunity to be com

pensated for their contributions to advances in their field of technology. • At the same time, and reflecting the way in which our industry often oper

ates, patent protection enables technology developers to license or otherwise share key technologies with customers, partners and even competitors, while

still preventing third parties from “free-riding” on their innovation. • Patents can encourage cross-fertilization of technology through cross-licens

ing. • Collectively, patents provide a repository of accumulated knowledge that al

lows new generations of innovators to learn from the state of the art and, in some cases, design new solutions that further advance that body of knowledge.

2. REFORM IS TIMELY

While patents are critical tools for the technology industry, there are aspects of the patent system that present on-going challenges for our industry.

First, prior art (which is the totality of previously known technologies against which a new invention is measured to ensure that it merits a patent) is not as well documented for the computing field as it is in some other areas. In part this is because, for many years, patents were not readily available for software. It is also attributable to the nature of large-scale commercial software and computing-millions of lines of software code or billions of transistors or other components that may require significant effort to identify or understand. This makes the task of the patent examiner difficult: she must determine the patentability of software inventions without always having a complete understanding of what is already known in the art. The result can be poor quality patents.

Second, the software and computer industry, like many high_technology industries, is a field with an extremely high concentration of patents. For example, there may be as many as 200 patents that are relevant to a single multifunction computer program; for example, the Federal Trade Commission recently received testimony stating that there are more than 90,000 patents that relate generally to microprocessors.2 This concentration of patents within a technologic field presents specific challenges not only for the software industry, but also for biotechnology and other sectors.

Finally, software and computers are examples of “system” products—they compri thousands, even hundreds of thousands, of individually functioni components and features all assembled in a package for a customer. Because many of these features could be the subjects of a patent, it is often the case that thousands of patents may be relevant to a particular computer or software product. This phenomenon-sometimes referred to as “co-location of patents”—means that any single patent covering a computer or piece of software accounts for only a small fraction of the intellectual property value of the entire system. Yet, too often, patent holders seek to recover large percentages of the revenue generated by these complex systems in exchange for only a single or small group of patents.

In combination, these issues make our industry susceptible to the problems of poor quality patents and the uncertainties of litigation. We approach reform from this perspective.

3. QUALITY PATENTS

BSA strongly supports the Committee for making improving patent quality one of its key focal points. The Committee print clearly shows that you understand this problem, and the legislative changes set out in the print would go a long way towards making this situation better. Poor quality patents, as detailed in recent studies by the National Academy of Sciences and the Federal Trade Commission, hamper competition and harm innovation. A questionable patent may lead competitors to forego research and development in a particular area, fearful of the risks that may be involved. Poor quality patents may also require innovators to license unnecessarily thousands of patents.

2 See To Promote Innovation: The Proper Balance Of Competition and Patent Law Policy, Report by the Federal Trade Commission, section II.B., available at http://www.ftc.gov/reports/ index.htm.

BSA believes Congress should focus on four key areas that will facilitate the issuance of higher quality patents: (1) enhanced post-issuance processes to provide a second chance to intercept

bad patents; (2) curtailment of abusive continuation practices that lead to endless chains of

patents with ever-broader claims; (3) better support for receiving prior art, and better processes for building a

contemporaneous record that reflects the extent of the examination by the

patent examiner; and (4) adequate PTO training and funding. Post-Issuance Processes

BSA commends the Subcommittee for including within its Committee print specific and meaningful ways to improve the post issuance process.

Currently, the primary way to challenge the validity of an issued patent is through litigation, a costly and difficult approach. BSA supports the proposal in the Committee print to create a meaningful and balanced opposition procedure enabling third parties to challenge issued patents. Such a process would permit the Patent and Trademark Office to take a careful look at any challenged patent in the context of an adversarial proceeding likely to bring out the strongest arguments in favor of, and against, continued existence of the patent. This process augments a patent's initial examination and provides a second, more granular filter through which a patent may pass if it is to be used against an alleged infringer.

BSA recommends a number of areas where the language in the Committee print can be improved. Most importantly, the timeframe for initiating an opposition should be sufficiently long to permit the relevant public to identify and assess the patent at issue. The single, nine month window proposed in the Committee print is too short. In many industries, a single window will not permit accurate assessment of the validity and impact of a newly issued patent on products. We recommend instead two windows. The first window should be two years from issuance. The second window should be open for a period of one year after a patent owner sends notice of infringement. This second window is essential to allow companies to challenge a patent when, and if, it is asserted even if a prior search would never have revealed a threat from that patent.

In addition, under current law, the inter partes reexamination process is so restricted as to severely limit its usefulness. In fact, since the inception of this process, the Patent and Trademark Office has received fewer than one hundred requests for inter partes reexamination. BSA supports the Committee print provision relaxing the current law's estoppel provisions and expanding its scope to include patents filed before 1999, as well as those filed later. Abuses of Continuation Practice

BSA supports the changes in the Committee print aimed at ending abuses of continuation practices. Currently, a patent applicant may file follow-on patent applications with broader and broader claims long after the publication or issuance of its original patent application. Through these mechanisms, some applicants keep their applications pending for extended periods while monitoring the developments in the relevant market. By modifying their claims to cover other companies' products, often after those other companies have invested significant funds in their products, such applicants can abuse the system.3 In some cases, the patentees seek to obtain patent protection for ideas that never occurred to the applicant before seeing them in the marketplace. While this practice is currently permitted and even sanctioned by the courts, a reform curtailing the ability to broaden claims beyond the scope of the broadest claim previously published or issued would roll back significantly the invitation to abuse created by the current system. Availability and Consideration of Prior Art

An important step toward better patent quality would be to improve the availability of prior art in the examination process. This issue is not now addressed in

3 See generally Mark A. Lemley and Kimberly A. Moore, Ending Abuse of Patent Continuations, 84 Boston University Law Review 63 (2004), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=462404

he Committee print, and we urge you to consider its addition as you proceed with four work.

Under current law, members of the public with relevant prior art information have limited options to submit that information to the examiner. The prior art may pe submitted, but without comment on the relevance of what may be hundreds of pages of carefully developed disclosure. The result is that patents are often granted on the basis of incomplete prior art information as an examiner has only 17 hours, on average, to examine a patent. To address this issue, BSA believes Congress should establish a mechanism for the public to submit prior art and other information relevant to patentability, together with commentary on that art and information. Adequate Training and Funding.

Underlying any attempt to improve the quality of patent examination must be a commitment to adequate funding for the Patent and Trademark Office. The Committee print does not address directly this persistent issue, but we are aware of and appreciate the Subcommittee's commitment on this matter. Adequate funding is inextricably tied in with permanently ending the practice of diverting patent fees to programs outside the scope of the core PTO mission. Allowing the Patent and Trademark Office to retain the fees that it generates would help ensure that the PTO is able to provide high-quality examinations and to fund further improvements.

4. REDUCE THE DISRUPTIONS CAUSED BY LITIGATION BSA is extremely grateful to see that the Committee print recognizes the disruple tive effects that bad litigation practices can have on the patent system as a whole.

BSA supports the approach you have taken in the print with respect to monetary and injunctive remedies. This is an area of utmost concern to all technology companies.

The reform provisions identified in the Committee print focus on abuses of the current patent system that cannot be fixed by only quality-enhancing changes. Congress must act directly to address the most onerous sources of uncertainty in the civil litigation system.

Today, hundreds of patent infringement cases are pending against hardware and software companies, and these companies spend hundreds of millions of dollars each year defending themselves in these cases. This is not to say that all of these cases are without merit, but that is too often the case.

BSA commends you and strongly supports the Committee print for its approach to these issues. BSA believes there are five key areas where changes are needed: (1) making clear that a patentee is entitled to claim damages only on the pro

portion of the allegedly infringing product attributable to the patent, and not including all the other features and elements that may be also contained

within a multi-faceted product or system; (2) recalibrating the standard for an award of punitive damages for willful in

fringement to focus on truly reprehensible conduct; (3) clarifying and reiterating the current black letter statutory requirement

that the issuance of an injunction is permissive and should be based on

“principles of equity;" (4) reducing the burden of proving a patent invalid to a “preponderance of the

evidence” in cases where the Patent and Trademark Office did not consider

the allegedly invalidating prior art; and (5) clarifying section 271(f) of the existing patent statute to avoid discouraging

research and development work done inside the United States. Apportionment of Patent Value in a Complex System or Product

BSA strongly supports the Committee print's proposals to ensure damages reflect the actual harm. Today, when a small component of a multi-faceted system or product is alleged to infringe a patent, the damage claim often seeks some portion of the value of the product as a whole rather than being limited to only the value of the infringing feature or functionality. This often leads to unduly inflated verdicts or settlement demands.

BSA supports the Committee print's approach to provide courts with a statutory basis for requiring that patentees (and their expert witnesses) present damages calculations based on the proportional value of a patented invention alone, rather than on the cumulative value of all features included with a larger product. The provision included in the Committee print accomplishes this goal.

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