PREPARED STATEMENT OF JACK HAKEN, VICE PRESIDENT, INTELLECTUAL PROPERTY & STANDARDS, U.S. PHILIPS CORPORATION Mr. Chairman and members of the subcommittee, I'm Jack Haken, Vice President for Intellectual Property and Standards of U.S. Philips Corporation. I appreciate this opportunity to express our views on a topic of vital interest to Philips, namely preserving the current patent protection against infringing exports that is provided by Section 271(f) in Title 35 of the United States Code. As I will explain in my testimony, we are opposed to the amendment proposed in Section 10 of the Committee Print. Philips is a manufacturer of electronic and electrical products and is one of the largest users of the patent systems in the United States and other industrialized countries. Last year we filed U.S. patent applications for about three thousand new inventions. Scientists and engineers at our U.S. laboratories have made pioneering advances that revolutionized and revitalized the electronics industry with innovations that led to high definition television, optical CD and DVD recording, digital cellular telephones, medical imaging and digital rights management. In 2004 Philips reported income from licensing our patented inventions that was well in excess of five hundred million dollars. Section 271(f) is particularly important to our industry because it allows us to protect our intellectual property rights when American based companies export specialized components and parts kits for assembly in countries that do not have useful patent enforcement systems: in particular China, Taiwan, Korea and India. As background, I would like to speak briefly about two major changes that have affected the electronics hardware industry during the past decade and which make Section 271(f) so important to us. The first change is a well-recognized shift of high volume electronics manufacturing from the United Sates to overseas contract facilities. America is no longer a competitive site for manufacturing this equipment, but we remain a primary source of new ideas, technology and essential components that we export to the manufacturers. Royalties on exports of patented technology are a significant reason that our domestic research establishment remains vital. The second change is, perhaps, not as visible as the first; in 1990 almost all consumer electronic devices were implemented in separate specialized sets as combinations of hardware circuit elements. For example, televisions, VCR's and telephone answering machines were produced and marketed in separate boxes and often via different selling channels. Today those same product functions are usually implemented in software and we are moving toward a small number of common multiuse hardware platforms. Software programs on personal computers and PDA's now provide audio and video recorder functionality. Cameras and music players are furnished as software features in cellular telephones and television players will soon follow. In this context, the boundary between hardware and software becomes fuzzy. Software and firmware code effectively reconfigures the hardware circuits to perform particular player or display functions that were formerly achieved in fixed circuitry. The interchangeability of electronic hardware and software has also softened the boundaries between our traditional marketing and sales channels. Today we find that the traditional electronics manufacturers, major software houses and PC integrators are direct competitors for the same consumer electronics product space. Section 271(f) was enacted by Congress to plug a 1972 judicially-created loophole that had allowed American companies to avoid liability for patent infringement by unassembled kits of parts or essential components of patented combinations which they exported for assembly overseas. In March 2005 the United States Court of Appeals for the Federal Circuit confirmed that software code that Microsoft had exported to overseas manufacturers for incorporation onto the disk memories of computer systems was a "component" within the meaning of section 271(f). Judge Rader found that Microsoft's software "morphed" into hardware in the computer systems and that there was no indication of Congressional intent that the statute would distinguish between hardware and software or tangible and intangible components. Judge Rader also found that any attempt to single-out the software industry as exempt from Section 271(f) would run afoul of the United States' treaty obligations under the TRIPS Agreement. 1 The proposed text for Section 271(f)(3) is confusing inasmuch as it is unclear whether the phrase "under this section" is intended to only apply to subsection 271(f) or to all of section 271 (e.g. Whether the carve-out for intangible components will also change the scope of domestic contributory infringement under section 271(c)). For purposes of this testimony, we assume that the changes are intended to affect only to subsection 271(f). If the proposal is carried-over into later drafts, we suggest that the ambiguity be clarified. Let me cite some examples of Philips' patent licensing programs that would have been negatively affected if proposed section 271(f)(3) had been law when we obtained our relevant patents: 1) Optical Recording-Philips invented the technology that enabled development of the CD and DVD industries. We have patents in our portfolio that cover apparatus and methods that format and index data on these discs. When we started licensing these patents, the patented technology was implemented as hardware circuits in disc drives and recorder sets. Today the same technology is being implemented as PC software that is internationally marketed and distributed over the Internet and as firmware that is stored in semiconductor memory chips. We have great concern that any requirement that limited export patent protection to "tangible" items that are "combined physically" would impact our ability to bring infringement actions against exporters who utilize the Internet to distribute original and upgrade software to manufacturers and users in developing countries where local intellectual property law enforcement is of little worth. 2) Speech and Image Coding-Philips invented important methods and apparatus for speech and image coding which we license to manufacturers of cellular telephone, digital cameras and set-top boxes. Large scale production of these products has quickly moved from the United States to other countries that have immature intellectual property enforcement systems like Taiwan, Mainland China and Korea, but American companies are, and are likely to remain, the developers and providers of the application and operating system software that controls the hardware and implements the coding methods. The software is often exported to manufacturers either as source code, master object code copies or as firmware on semiconductor memory chips. Upgrade software is regularly distributed over the Internet and over cable television networks. Again we have great concern that any requirement that limited export patent protection to "tangible" items that are "combined physically" would impact our ability to bring infringement actions against exporters who distribute this original and upgrade software. 3) Medical Imaging-Philips is one of the world's largest manufacturers of medical imaging equipment. Almost ten thousand of our United States employees work on medical products. Much of this equipment is computerbased; the processes that enable our CT, MRI and ultrasound scanners and our patient monitoring systems are executed and controlled by software. New examination techniques and upgrades are distributed and installed using data formats which arguably intangible and would arguably be excluded from export patent protection if Section 271(f) were amended as proposed in Section 10 of the Committee Print. 4) Digital Personal Video Recorders (PVR's)—Philips manufactured the first Tivo brand personal video recorders and the technology has already changed the television viewing habits of the American public. Philips' patented video compression technology enables these machines to pack recorded video signals onto hard disk drives. Today the same functionality and methods are implemented in PC software that is bundled with operating systems and distributed over the Internet. 5) Digital Rights Management-Philips holds a significant minority interest in InterTrust Technologies Corp. InterTrust owns and licenses a large portfolio of patents for digital rights management technology that enables the owners of copyrighted music, video works, books and other proprietary data to regulate and collect royalties when their properties are distributed on electronic media and/or over the Internet. In 2004 Philips reported a gain of over one hundred million dollars from the patent licensing activities of InterTrust. Components of many of these patented DRM systems are necessarily distributed at the same time and over the same media or channel with the creative materials that they manage and protect. However we have great concerns that future inventions in this area will not meet the "tangible" and "combined physically" limitations of proposed section 271(f)(3) and would thus not receive adequate export patent protection. 6) Travel Route Planning-Scientists at our Briarcliff Manor, New York laboratories invented and developed patented systems that are used to plan travel routes in car navigation systems and on Internet mapping web sites. The same methods have application to robotic movement and to managing escapes from disaster areas. Here again, we see infringing products and upgrades being distributed and exported on electronic media and over the Internet and again fear the loss of our enforcement rights if section 271(f) protection is reduced. Some of the other witnesses at this hearing may tell you that the carve-out in proposed Section 271(f)(3) is directed at business method patents and is necessary to prevent their abuse, but the language in Section 10 of the Committee Print is much broader than necessary for that purpose and will create a loophole that will allow software and firmware houses to avoid liability for patent infringement of U.S. patents by exporting their wares as "intangible" e-mail signals and files on master disks with full knowledge that they will be converted to tangible, physical form when received by their overseas customers. At best, the language of Section 271(f)(3) constitutes discrimination which favors the software industry over traditional hardware manufacturers, at worst it will tend to drive the remainder of U.S. electronic hardware manufacturing overseas to countries that do not offer strong IP protection. The software industry could achieve cost savings by moving its development and production facilities overseas, but it has chosen to remain in the United States and has flourished here, in no small part because the copyright, trade secret and judicial processes in the United States provides strong and effective protection for the intellectual property content of software products. There is no justification for letting them enjoy the benefit of our strong IP system for their own products while, at the same time, they are allowed to avoid exposure to other companies' patents when those same products are exported. Thank you. 203 LETTER FROM RYAN M. FOUNTAIN, ATTORNEY AT LAW, MISHAWAKA, INDIANA TO BLAINE MERRITT, CHIEF COUNSEL, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY, COMMITTEE ON THE JUDICIARY RYAN M. FOUNTAIN 420 LINCOLN WAY WEST TELEFAX (574) 256-5137 April 27, 2005 Blaine Merritt House Subcommittee on Courts, the Internet and Intellectual Property Re: Patent Reform Legislation Dear Mr. Merritt: It is my understanding that tomorrow the Committee will continue hearings on certain proposals to reform the U.S. Patent laws. I strongly urge the Committee not to adopt a "first to file system" and not to abandon the "best mode" requirement. I would ask you to make these objections known to the Committee and part of the record in its proceedings. By way of background, I have been a practicing patent attorney for 23 years. I represent a wide range of clients, from multi billion dollar corporations to individual inventors just starting out. I have both written and prosecuted hundreds of patent applications before the United States and foreign patent offices and litigated them extensively in various federal courts. A First to File Race is Detrimental for the United States Going to a first to file system would create a serious disadvantage for most smaller businesses and individual inventors starting out to create a business. It would effectively reduce the one year grace period provided to test market the invention that is presently created by 35 U.S.C. §102(b). It would force the business to choose whether or not to spend money on a patent application with less assurance of the value of the patent application than is presently available. For example, at present the costs of a patent application are a significant expense for these types of business, typically about $10,000 (and with last year's changes in the fee structure of the USPTO, this cost has been going up). Most businesses without an inhouse patent staff to write the application will wait for a time to see if the sales of products using the invention are sufficiently immediate as to justify that expense. For an individual inventor, it may take all his resources to just create a prototype of the invention and he or she will not have extra money for a patent application until the invention is marketed. A first to file system creates a race to the Patent Office. This race increases the economic pressures on small businesses and individual inventors to spend money sooner and less wisely than they would need to under the present system. The net result, of course, is that many of these businesses would not file patent applications and would not be able to protect inventions, since the expenditure cannot be as readily justified as it can today. Obviously, taking away the potential for a patent tends to discourage the creation of new inventions. Our founding fathers recognized this in the Constitutional mandate for the patent system ("to promote science and the useful arts"). In the long term, the loss of creative incentive in this country would severely hurt the public and decrease our overall quality of life, presently the best in the world. A first to file system is also not in the public administrative interest in that it would urge filing of patent applications prematurely on inventions the need more development or are not really of any market interest, i.e. so called "paper patents." The USPTO does not need to spend its limited resources on those. Proponents of a first to file system are typically large businesses with an in-house patent staff in industries which are prone to development of the same technologies simultaneously among competitors. However, those same businesses, such as pharmaceutical, semi-conductor and aerospace manufacturers, almost always have inhouse patent procedures in place to identify and record the date of invention so as to be able to prove patent priority under the current law. Thus, the conflicts that a "race to the Patent Office" would solve are easily dealt with under the existing interference practice. The mere fact that there are patent interferences is insufficient reason to change the entire complexion of the US patent system. Compare, for example the very large number of patent applications filed each year (typically over 100,000) with the number of patent applications that end up in interference proceedings (typically less than 500). That would truly be the tail wagging the dog. The existing patent system is the result of over 200 years of legislative work to balance the long term technological development of our country with the business realities. Our nation was and will continue to be built on the initiative and growth of small businesses. The Fords, Microsofts and Boeings of tomorrow are starting out today, and they still need our help. Patent law "harmonization" across international borders has been urged to justify changes in our laws like a First to File Rule. However, many of those other nations that 2 |