for a judge to learn. If that clarifies it—yes, that is what I mean Mr. Chairman.

As somebody who has a lot of patents, and my company has eve more, I am concerned about a lot of things related to this bill. Firs of all, I am an advocate of eliminating the ability of people to swea behind, infinitely, their invention and reduction to practice, be cause I have seen that abused. There is no question, though, tha a strict first-to-file is an extreme move in the other way. And would hope that as this goes on and I would like your comment: on it-that there is middle ground, that there is the ability to rec ognize that if you run to the Patent Office with a half-baked, halfcocked idea-which, by the way, those who can write those up the quickest win-versus those who want to not only reduce to practice, but they also want to reduce to a form, a patent application, need to have some reasonable middle-ground time.

That would be my first question, is what about that middle ground?

Mr. LEVIN. I think it's unnecessary. And the reason I would cite that it's unnecessary is we've got thousands of American corporations today that file for patents in Europe, in specific jurisdictions in Europe as well as the EPO, and in Japan and elsewhere around the globe who are filing on a first-to-file basis and nobody's complaining about it. I don't see a problem.

Mr. BERMAN. Would the gentleman yield just on this point?
Mr. ISSA. Certainly.

Mr. BERMAN. It isn't first to file

Mr. LEVIN. It's first inventor to file.

Mr. BERMAN. First inventor to file. But your argument in favor of the change was you won't have to have litigation about who invented, but going to first inventor to file still leaves that issue open to litigation.

Mr. LEVIN. It does. But it doesn't-it removes a big piece of it because a big piece of it is who was first to invent. Now all you have to do is establish that you are an inventor.

Mr. ISSA. Reclaiming my time, I think the one thing that we have to recognize is yes, those American corporations do it. I was one of those American corporations. I have a number of patents abroad. But of course I always worried about my home market, and my home market gave me the ability to reduce it, to have it ready, and then I always filed in the U.S. first-what a surprise. And then, oh, by the way, you file during your quiet period or during your secret period, if you will, and within that 1 year. So I am not sure that under the current law, with two standards, that you can use no objections overseas as the panacea.

As to the question of elimination-and this particularly goes to Mr. Dudas-the current law allows you do file and, even if you are filing against a competitor and both of you are selling in the market, get all the way to the end and not know what dollars you are going to receive, whether you are going to be Panduit or what standard of is the infringement going to be analyzed as market share, is the infringement going to be analyzed as if you were exclusive and there were no non-infringing. All those issues are postgetting a decision, and then you go into that whole other phase. As a result, if you eliminate the ability to get treble damages, what

you have done is taken-and you put two levels of uncertainty into the argument. You have put the level of uncertainty of even whether you are going to get legal fees, and you have put the uncertainty as to where you can get to the end of the day and end up getting that famous 2 cents because they look and say, well, there were so many other noncompeting uses that we are not going to give you any of these tests that give you a reasonable loss of profits.

If you do away with one, aren't you in fact going to have to fix— and that is my question-fix the other so that there would at least be better certainty as to your award if you prevail, if you are going to take away the high end of treble? And I just as for leave for them to answer.

Mr. SMITH. Oh, okay. And without objection, the gentleman has another 2 minutes as well.

Mr. DUDAS. Can you premise your question again? I'm sorry, I lost you at the very beginning.

Mr. ISSA. Right now you start off and you file a lawsuit against a competitor-you are in the market, he is in the market, you believe that there is no non-infringing use, you know of none-but you go through the entire multi-year process. And even if he develops one during the period, he can diminish your claim to where you start off saying I am entitled to lost profits, he is doing $100 million worth of these, and that is $100 million times my profit, that is 33 EBITDA, I am entitled to this.

So you start off with this, hey, look, he is infringing $33 million a year of damages. You get to the end, and somebody might give you a reasonable royalty, based on some judge or jury-well, judge, basically, most of the time. He is going to give you a reasonable royalty of 2 cents, based on your invention and not lost profits, because during the time somebody developed a non-infringing, or they believe there is a non-infringing use. So you have a skew. You have from 2 cents a unit that ends up being one-tenth of your legal fees, to $33 million a year. That is very often, at least in my experience, the window you are dealing with.

When you say treble damages, at least the judge looks and says hell, this isn't enough of an award no matter how—and he says but it was willful, and he has the ability to triple it and provide you reimbursement for your legal fees.

It sounds like this legislation anticipates, and some of you are saying, let's take that away. And my question is, assume for a moment we are taking it away. Don't you have to give back something, or what you end up with is all of the downside, none of the upside. And patent infringement is about protecting real property. And so I would like your comments on that.

Mr. DUDAS. I'm sorry. I agree that—and actually I'll take it back one step. I think that there is a reason for willful damages. I think there's a reason for treble damages. I think the issue that has come up is the question of how it's being applied and what it's doing. Our patent system is about disclosure. If it's being applied in such a way that it's causing people not to get more information, not to become more informed, that that becomes a problem. So I would argue that although we should look at how it's being applied, that there is a basis for treble damages and willful infringement, and

if that is gone, there should be something to be looked at along those lines. But I think that it shouldn't be gone.

Mr. ISSA. Mr. Levin, you wanted to answer?

Mr. LEVIN. Well, this is more—you know, right now the area of damages is left pretty much at the discretion of the courts. And there are a variety of standards for awarding damages. And, you know, it's perfectly possible to make, you know, strong and credible cases that lost profits ought to be the basis for-and in many cases they are the basis for an award. Are you really objecting to the uncertainty, as opposed to the amounts?

Mr. ISSA. I'll be very brief. If you don't know whether you are going to get lost profits, and reasonable royalties can be very small, you have without treble damages you lose the ability for a judge to say, look, this was willful infringement and unless I can give him his legal fees and triple this 2 cents reasonable royalty, I can't bring any justice to this arrangement because we have gone on for 2 years and $2 million apiece, the guy has built his market on cheating on this guy, and I am going to provide an injunctive relief today, but unfortunately I am stuck with a standard of the industry royalty which I don't intend on giving you, but-and essentially you are getting a royalty charge as though I wanted to give you one, in many cases, at the end of a court trial.

Mr. LEVIN. Yeah, but I've seen many cases in which the argument for reasonable royalties is rejected in favor of lost profits.

Mr. ISSA. No, no, we are saying that if you don't bring the certainty in, then the fact is, by eliminating the 3-times, the judge has no ability to even balance what would seem to him to be an unreasonable reward, but one in which he cannot use lost profits. Remember, the lost profits are only good if there is a non-infringing alternative-if there isn't a non-infringing alternative. Once there is a non-infringing alternative, you are dropping down this list and the dollars drop way off. And like every other thing we have talked about here, there is always a claim and there is always an expert who says there is a non-infringing alternative. And no matter how crummy it is, they have to consider it as though the expert is telling the truth.

Mr. LEVIN. I see your point.

Mr. SMITH. Thank you, Mr. Issa.

Let me thank the witnesses for their testimony today. It has been most helpful, most informative. As you all know, we hope toward the end of May to have a piece of legislation that will be more final in its nature, and your testimony today has helped us move the ball along and get closer to that goal.

I would also like to thank everyone in the audience for their interest in the subject at hand. Really, this is the first effort, I think, at comprehensive patent reform in a number of years, as you heard several Members mention today. And we appreciate your participation and interest and listening as well.

With that, we stand adjourned.

[Whereupon, at 1:43 p.m., the Subcommittee was adjourned.]

APPENDIX

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA, AND RANKING MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

Mr. Chairman,

Thank you for scheduling this hearing on patent reform. In the past 4 years, my colleague from Virginia and I have introduced legislation on patent quality reforras multiple times. Most recently, in October, we introduced HR 5299, The Patent Quality Assistance Act, which attempted to address many of the problems that continue to exist in our patent system. The bill helped foster discussions among diverse industry groups, all of which now recognize the need for changes to the patent law. While there are many different views about how to amend the law, we all share a common goal-improving the quality of the patent system.

Our patent system was designed to promote continual innovation by providing strong protection for intellectual property. However, if we protect invalid patents, the system will have the opposite effect, that of hindering creative output. Furthermore, the introduction of poor quality patents into the marketplace actually increases the amount of litigation and has a negative effect on the economy.

The problem of low quality patents cuts across the entire spectrum of art units that the Patent Office examines, but the chief culprits are patents in the business methods and software area. The famed one click patent and the patent for a method allowing automobile purchasers to select options for cars over the internet, represent only a drop in a very large bucket of questionable quality patents.

The Patent Office has initiated what it calls a "second set of eyes review" in an effort to address the problem, but that is merely a stop gap measure. Without an assurance of sufficient funding every year, the PTO cannot maintain the staff it needs to administer the reviews or implement new quality initiatives. Therefore, funding for the PTO and an end to diversion of collected fees need to remain top priorities in any reform effort.

Furthermore, any legislative solution to the problem of patent quality must address deficiencies both at the front end of the process, the examination stage which takes place in the PTO, and at the back end, which takes place in the courtroom. Inventors should have confidence about the quality of the patents they receive before investing further in research and development, and equally secure in the knowledge that they can properly enforce that patent.

In this vein, I have a couple of concerns relating to the committee print. The print primarily describes reforms to litigation and remedy provisions. While many of the suggestions are worthwhile, I am concerned that we are merely treating the symptoms without enough emphasis on curing the underlying disease. Patent quality needs to remain a focus with an objective of minimizing litigation on numerous invalidity claims. For example, including a provision on allowing submissions of additional prior art to an examiner may be helpful in addressing this poor quality problem.

Furthermore, much of the print speaks to harmonization of U.S. patent law with patent law in the rest of the world, for example, shifting from a first to invent paradigm to one of first inventor to file. While this is a very important and necessary discussion, I am concerned that opposition to these provisions at this point will affect the ability to achieve other essential patent reform.

I am looking forward to hearing from today's witnesses to identify potential solutions to the problems created by questionable patent quality. Some of the suggestions for change, such as the injunction provision, may not be palatable to some of the witnesses. However, I throw out a challenge to those witnesses, help us craft a resolution to the problem the injunction provision was designed to address, that (183)

of the patent troll. While the structure of the discussion may be centered aroun the committee print, I hope that the witnesses here and at future hearings wil identify additional possibilities for resolving patent quality problems. I look forward to working with the Chairman in drafting effective patent legislation.