small inventors who don't have the capacity or resources to out the arguments about, you know, who was first in the expe way that it has to be fought out today.

So first-to-file, in our view, would not favor the big guys. It w just be a simpler, more efficient way to resolve disputes abou ority.

Mr. BERMAN. I agree.

Mr. SMITH. Thank you. Mr. Berman. The gentleman from ginia. Mr. Goodlatte, is recognized for his questions.

Mr. GOODLATTE. Well, thank you, Mr. Chairman, and thank for these continuing hearings on this legislation, which I think erybody here on the Committee that is here today is very, very terested in and we applaud you for your leadership on it. An.. want to welcome all these panel members, particularly Secreta.

Dudas.

Mr. Secretary. I wonder if you could comment on whether or n a post-grant opposition proceeding would help ensure the quality patents.

Mr. DUDAS. I think a post-grant opposition proceeding would g a great length to ensure quality of patent applications. What yo hear today is people find that reexamination is too limited. It is to limited. Litigation is considered too costly, too lengthy, too uncer tain. Post-grant opposition allows you to go before the Office. You have the expertise there. It's something that's been in our Strategic Plan for almost 3 years now and has been widely accepted in the studies that have been done and the private-sector industry groups as well. I think post-grant opposition is probably the most important element for increasing quality for the system as a whole.

Mr. GOODLATTE. Mr. Myhrvold mentions in his testimony the problems that patent backlogs cost for inventors. I am wondering if, again, you would comment on this. How would this post-grant opposition proposal impact patent pendency? How could Congress help minimize the effect that proceeding might have on patent pendency, if you are going to tell me that it could slow it down? Mr. DUDAS. It wouldn't naturally slow it down. It could possibly slow down production because of the resources we put into that. The most important thing at that point, as we've said in our Strategic Plan all along, is for any new initiatives that we have in place, we will need to be able to have appropriate funding to go along with that. But there's not a natural policy reason why it would slow down pendency within the Office.

Mr. GOODLATTE. So you wouldn't predict that simply implementing that policy would have a resultant drag on the productivity of your Agency?

Mr. DUDAS. Not if it came with resources to fund

that's cor

77

4. i know. That is why I w...

VOLD Weil, you know, I've seen the ere referred to about first to st heat and passion in peripit, but i etter for toiks to have it the way nk this inequitadie conduct thing, and that's helpful to everyone nere-ail of these subjective deas, ny make it harmful for everybody tentiaily very, very good for every paler ing in the bill that specificday_wal patent holders over anyone else. But pala

ne.

GOODLATTE. Anybody else want to address that?

0 response.]

r. GOODLATTE. Okay, I have another one for you Dr M, hrved * would the proposals in the Committee Print of w 1 the pro dis in the Committee Print increase or decrea Litigation? Mr. MYHRVOLD. Well, I think the overall volume of liti ation ould go up if this injunction feature were implemented. And I plain briefly why. The first, as I previou ly maid 97 percent of ne cases settle. They settle because the partica have a modi ettle. If in fact there's no injunction at the end then at lea that that fraction of cases where it seems unlikely a large corporate litt gant has every interest in the world to keep the litigation godine So if 97 percent goes to 94 percent, that doubles the number of suits. So it doesn't have to happen very often to have a big impact In addition, there's two big additional responsibilities heaped on the court here The first is the determination of is it irreparable sell dub consider all evidence." Well, harm, is it not, why comercializing, who isn't commercializing? The bill says, you hung that means motions and der t testimony, and it's a lawsuit acked onto a lawsuit

The third area is actually the good pan to me because, if e is no injunction, that means Hot mud determine the lise terms and business model for all fans to Enday the court sn't do that. That's another that's going to have a PHOTmous nt of testimony, litigation, and expert witncode gamlated

t.

GOODLATTE. Anybody else want to address that point? Mr.

holomew?

Mr. SMITH. The gentleman is recognized for an addition

minute.

Mr. GOODLATTE. I thank the Chairman.

Mr. BARTHOLOMEW. The injunctive requirement as it was pr posed in the Committee Print does not abolish the right to injun tive relief. And as we interpret it, it primarily applies to a perm nent injunction rather than a preliminary injunction. First of a the injunctive relief is definitely available where working occur that is, where the patentee makes use of his invention. And w would favor extending that to allowing the patentee, such as small entity, to be able to or any entity, for that matter, to b able to work the invention through licensing to others that ma have manufacturing capacity or other expertise that the small enti ty does not have.

Further, in looking at the language of the Committee Print, i looks like that a totality of the circumstances test may apply to considering the working requirement. That is, the working requirement might be one factor in the overall determination on whether to grant or deny injunctive relief, but that other factors that relate to determining whether there is harm would also apply.

Thank you.

Mr. GOODLATTE. Thank you, Mr. Chairman.

Mr. SMITH. Thank you, Mr. Goodlatte.

The gentlewoman from California, Ms. Lofgren, is recognized for her questions.

Ms. LOFGREN. Thank you, Mr. Chairman. And thanks to all the panelists for your thoughtful testimony and also the more expansive written testimony.

This is, for me, a great process because we are hearing a series of knowledgeable people. And I think the Chairman has made clear, we have a working draft. It doesn't have anyone's name on it yet because we want to invite suggestions and end up with the best product that really supports innovation and is fair. So that is the spirit that I am going into this inquiry, and your comments help a great deal.

Dr. Levin, your comment regarding the reasonable belief issue, all of a sudden I realized I think you are right on that. That is just going to invite a lot more litigation. I personally think that is a very helpful observation.

Dr. Myhrvold, your comments and testimony, because it is somewhat at odds with the rest of the panelists, does draw attention. In your written testimony, on page 11, you talk and draw our attention to what you describe as a gaping loophole for software on 271(f). Can you expound on what your concern is there?

Mr. MYHRVOLD. Okay. Section 271(f) of the law covers what-basically; I'm going to simplify it because both I'm not a lawyer and we want to treat this at a high level. It covers infringement on exports. If you have a patent, you're owed a royalty, it's considered an infringement, you're owed a royalty on both sales in the U.S. and exports. 271(f) covers what happens-a definition of this export thing, broadly. And the Committee Print introduces a very short amendment. It says a component, under this term, shall be a tangible item, and it shall be combined with other components. Now, what that means is that any intangible thing is now not considered

:infringement for export under 271(f). Practically speaking, what is means is all export of all software products would not be covred.

So that means if you're a valid patent holder, you have a royalty greement with a software company, you wouldn't get paid for all their exports, which for most software companies in the United States is more than half their income. Not just software. Actually, because it says "tangible item," anything involving Internet protocols or any other sort of tangible purely electronic commerce, or an nvention that has as a piece of it-you know, an airplane navigation system, including the airplane, but if the software was downloaded across the Internet, then it wouldn't apply.

And so my issue here is we can't define the only valuable items as tangible.

Ms. LOFGREN. President Levin or other panelists, do you concur or do you disagree with that?

Mr. LEVIN. I really hadn't focused on this provision and it wasn't something we covered in our report, so I would leave it to others to determine.

Mr. DUDAS. This is something that we were looking at. I can't give you a firm position. I can tell you it's also something that's being reviewed in the courts and that's one of the things we're looking at.

Ms. LOFGREN. I wonder if it would be fair to ask each of you to take a look at it and share whatever thoughts you might have subsequent to this hearing. I don't know what I think about it. I just was interested by the testimony and wanted to pursue it.

On the whole issue of the permanent injunctions, Dr. Myhrvold, obviously you are talking about the small inventor, but a lot of the disputes aren't between the small guy and the big guy, they are between the big guy and the big guy. And some of what, in terms of— there is no way to really do a survey of what is happening in the 97 percent of litigation that has been settled, because it has been settled and oftentimes it is a confidential settlement. So it is very difficult. Ultimately, we are relying on anecdotes, which is not a good practice, but it is the only thing we can do because it is all we have.

So just as a matter of law and principle, how do you-if you were designing this, how would you allow a court to establish the equities where you have, for example, a product that has perhaps a multiplicity of patented materials owned by or licensed by a variety of individuals and corporations, challenged by someone who has a small component, who has the ability, really, to extort a huge amount of money for what is really a small part, versus all the other owners of intellectual property there. I mean, I am not saying there shouldn't be a remedy, but if-how would you-what tools would you give a court to draw-if you were God? [Laughter.]

Mr. SMITH. Without objection, the gentlewoman is recognized for an additional minute. Perhaps more.

Mr. MYHRVOLD. So I can be God, but only for an additional minute.

Ms. LOFGREN. Only for 60 seconds. So don't waste it.

Mr. MYHRVOLD. You know, it's a great question. I'm going to have to get back to you in detail. I think, you know, to-I think

actually statistical studies could be done, particularly because rea ly what's important here aren't the cases that settle, it's the cas that actually go and injunctions are filed-how often does this a tually occur. I think that data could be forthcoming. I don't perso ally have it.

It's a difficult issue. Today courts do have discretion and court will often exercise it. And so the whole question here is do we know that the judiciary is abusing or not properly on those things or not Ms. LOFGREN. Well, it is not a matter of abuse but it is how you set the standard both in statute but also in the law as applied and interpreted by the judicial branch.

Mr. MYHRVOLD. You know, for example, I'd be really interested to find out how often does this case occur. You're absolutely right. A lot of patent disputes are one big company suing another big company and all their suppliers. So maybe this is a much smaller case, or much larger case, than we're talking about.

Ms. LOFGREN. Thank you, Mr. Chairman.

Mr. SMITH. Thank you, Ms. Lofgren.

The gentleman from Virginia, Mr. Boucher, is recognized for his questions.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman, and I want to commend you at the outset for calling the Committee's attention to a very clear need, and that is to improve patent quality through the passage of legislation. And I want to commend you for putting before the Committee a very constructive draft of a new law, which contains many features that I find to be attractive. And I am glad to hear our panelists today point to some of those very constructive features.

Mr. Berman and I have been for the last 4 years having discussions about approaches that we could take in order to improve patent quality. Four years ago, we drafted a bill, introduced it. It contains a number of the concepts that are now reflected in the bill introduced by Chairman Smith, or the bill circulated by Chairman Smith. There are a number of things that we looked at at that time that, however, are not reflected in this draft. Let me just point to one of those in particular and get your opinion about whether we are right about this, whether Mr. Berman and I were right in proposing this.

The overall goal here is to improve patent quality. That inevitably means we need to bring more pertinent information to the attention of the patent examiner and to the post-grant proceeding, to the Patent Office generally, so that mistakes can be corrected before the patent leaves the Office. One of the things that I think would really help to improve the quality of the initial patent exam would be a clear opportunity, with well-defined parameters, for third parties to make submissions of prior art that they happen to have within their possession. And Mr. Berman and I had recommended that.

Now, that clear procedure is not contained within the draft we are currently considering. So the first question I have is what is your opinion of having a clearly defined procedure that would encourage submissions of prior art by third parties? And if you have suggestions for the parameters of such a process, please share that with us also. Mr. Dudas?