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companies participate through their chief executive officer and other senior executives nominated by the CEO. Roundtable member companies account directly million jobs.
BITS (www.bitsinfo.org) was created in 1996 to foster the growth and development of electronic financial services and e-commerce for the benefit of financial institutions and their customers. BITS provides intellectual capital and addresses emerging issues where financial services, technology and commerce intersect. BITS's Board of Directors is made up of the Chairmen and CEOs of twenty of the largest U.S. financial services companies, as well as representatives of the American Bankers Association and the Independent Community Bankers of America.
I was pleased to accept your invitation to testify as the current chairman of the Roundtable Patent and Intellectual Property Working Group and the BITS Patent Issues Working Group (the Working Group).
Mr. Chairman, patent attorneys in financial institutions are a well-kept secret. We work quietly behind the scenes to protect our companies' individual intellectual capital from assault. In recent years, we have been kept busy fighting frivolous patent claims-often at significant expense to our companies--and we are concerned that this is a problem that is not going to go away unless Congress does something about it.
For this reason, our Working Group is grateful for his hearing and the opportunity to comment on steps that should be taken to modernize the patent laws.
Banks, broker-dealers and insurance companies, like other businesses in the United States, are threatened by a large and growing number of frivolous claims of patent infringement. Pending claims of infringement are a serious problem, but they are only the tip of the iceberg. Patent applications that involve financial services in some way have been filed in large numbers since 1997. Because it takes at least four years to get applications for patents of this type processed through the USPTO, the number of these patents now being issued is growing. We believe that this will lead to an increasing number of frivolous claims filed against financial firms in coming years.
There are steps that Congress can and should take to provide financial firms and other businesses additional safeguards against these frivolous claims, without impairing the important protections afforded to intellectual property under the patent law. We recommend four initial measures, which are discussed below:
• Improve the prior user rights defense;
• Create an opposition proceeding. I would like to provide you some additional detail regarding each of these meas
IMPROVE THE PRIOR USER RIGHTS DEFENSE We believe that the prior user rights defense under 35 U.S.C. 273 is an important protection for financial institutions especially due to the recent growth in patent litigation. But in its current form, the prior user rights defense does not go far enough. It is too easy for a patent owner to circumvent the defense by claiming their invention is different from a pre-existing business method because it is, instead, a system or apparatus. The prior user rights defense should be modified to apply equally to any products or services covered by a patent. We also believe the level of proof required to successfully assert the prior user rights defense should be reduced from the “clear and convincing” standard to a “preponderance of the evidence” standard.
MODIFY THE STANDARD FOR INJUNCTIVE RELIEF In many countries, including Canada and most European countries, injunctive relief is not available for paper patents that have not been worked. That is, if the owner of a patent does not use the patent within a specified period of time, the owner loses the ability to obtain injunctive relief. This is appropriate because the patent law is intended to encourage and reward inventors and innovators by ensuring they receive the fruits of their efforts. It is not intended to enable them to prevent the use of new ideas by anyone at all.
We believe a better and more equitable approach is to allow courts to grant an injunction on a patent only if the patentee is likely to suffer immediate and irreparable harm that cannot be remedied by the payment of money damages alone. If an inventor can demonstrate a likelihood of irreparable harm, injunctive relief ought to be available. But if that isn't the case, then for the good of society, they should not be allowed to stand in the way of utilization of their invention. Of course, the inventor should be entitled to license fees and thus be rewarded for their efforts. The result will be the payment of reasonable royalties, rather than disproportionately costly settlements in the face of threatened injunctive relief.
CLARIFY THE DAMAGES RULES
We believe that the patent law is subject to abuse by patent holders who go fishing for infringers. This is sometimes referred to as the “37-cent notice” issue. By simply sending a letter, at the cost of nothing more than a 37-cent stamp, a patent holder can set in motion a very costly process for the alleged infringer. The recipient of the letter has to undertake an investigation, incurring the cost of personnel time and legal counsel, both of which can be substantial. Failure to conduct the necessary due diligence could later subject the alleged infringer to treble damages. The accusing patent holder incurs no risk or cost, other than the cost of a stamp.
We believe that the patent law should be modified to provide that enhanced patent infringement damages may not be awarded: (1) on the basis of the mere knowledge of a patent or its contents by the defendant prior to suit, or (2) for any infringement occurring prior to the defendant's receipt of written notice from the plaintiff of a charge of infringement, which identifies the specific patent, claims, and alleged infringing products or services at issue and which is sufficient to give the defendant an objectively reasonable apprehension of suit on the patent. Notwithstanding those limits, we believe that a patent infringer should be subject to payment of enhanced damages if: (a) the infringer deliberately copied the patented subject matter; or (b) the patent was asserted against the infringer in a previous U.S. judicial proceeding, and the subsequent infringement is not more than colorably different from the conduct asserted to be infringing in the previous proceeding.
We also believe that the current marking statute inappropriately measures damages that can be awarded to holders of paper patents under which no articles are manufactured or patents possessing only method claims. The holders of these patents whether or not the infringer knew of the existence of the patent may sue an alleged infringer and collect the full base amount of monetary damages. By contrast, the holder of a product patent may be denied monetary damages for infringement occurring prior to the lawsuit, if the product had not been marked. It would be fair and appropriate to treat holders of patents covering intangibles in a similar manner by starting the clock for actual damages for paper and process patents based upon the same standard as enhanced damages set forth above.
CREATE AN OPPOSITION PROCEEDING The USPTO has proposed a post-grant review of patent claims in their 21st Century Strategic Plan that was released in 2002. We strongly support this concept. The procedure, as proposed, would allow the public to petition the USPTO to cancel one or more claims in a patent within one year of issuance, and would allow anyone who is threatened with a patent infringement action to petition the USPTO for review within four months. Under this proposed procedure, the patentability of issued claims would be reviewed by Administrative Patent Judges of the Board of Appeals of the USPTO. To be fair, we believe these proceedings should include a readily available, reasonably prompt and cost effective way to determine patentability without imposing unreasonable burdens on patentees. This procedure would enable companies to manage the risk of claims against them based on bad patents, without incurring the high cost of litigation or facing the need to settle to avoid that cost.
CONCLUSION BITS and The Financial Services Roundtable are strong believers in the US patent process as fundamental to a healthy US economy and robust free enterprise system. With increases in both patent requests and claims of infringement, there is a need for Congressional debate and frank discussion with members of the financial services industry and the patent community at large. Given the importance of the patent process, the USPTO should be fully funded and given adequate resources to perform its duties. Current efforts to craft legislation are to be commended, especially where the focus is on improvements to the patent process. Concepts such as opposition proceedings and reexamination improvements are constructive. Because of increases in frivolous claims of patent infringement, consideration should also be given to appropriate defenses and other tools for litigation risk management. Among those we recommend for consideration and implementation are: modifying the prior user rights defense; modifying the standard for injunctive relief; and addressing the notice issue. Numerous other improvements of the patent process can be imagined and the financial services industry will continue to make suggestions along with other businesses that are more traditional participants in the patent process.
Mr. SMITH. Thank you, Mr. Kesslen.
STATEMENT OF DAVID M. SIMON, CHIEF PATENT COUNSEL,
INTEL CORPORATION Mr. SIMON. Thank you, Mr. Chairman. I would like to extend my thanks for being asked to testify here. We would particularly like to recognize the efforts of this Committee on behalf of improving patent quality and also initiate the Patent Office under Judge Rogan's leadership to improve patent quality through procedural implementations and providing better resources and support for patent examiners, who we feel are badly overworked.
There are a number of issues that arise that lead to patent quality, and patent quality is very important to the semiconductor and IT industry. We are both some of the largest customers of the Patent Office in terms of filings, and also it is important for us that not only we have strong patent protection, but we not be harassed by poorly examined and invalid patents.
There are a number of documented issues and various studies in my written testimony that I refer to, explaining some of the procedural issues and lack of resources and how that impacts the Patent Office.
But the issue that I would most like to focus on here today is on the injunction issue and the permanent injunction issue in terms of patent litigation. If you look at the comparative allowance rates between the United States Patent Office and European and Japanese patent offices, who are generally considered among the leading patent offices, studies show that on average the United States Patent Office approves over 90 percent of all applications eventually for allowance.
Compare that with the European and Japanese patent offices that do it at about 65 percent. If one assumes, not necessarily this is right, but if one assumes that this 25 percent differential means that 25 percent of the patents filed and issued by the United States Patent Office should not have been issued, that would end up leading us, based on last year's issuances from the U.S. Patent Office about 40,000 patents that should not have been granted. And even if this is high by an order of magnitude, that still leaves 4,000 patents that should not have been granted.
This is a severe problem, and it is being doubled by the recession, because what we have found is there is a growing market for the punching of patents from distressed or bankrupt companies.
We at Intel are aware of a number of bankruptcy sales where we have observed law firms actually marching in on their own to buy patents and offering millions of dollars to buy patents. Their sole purpose, obviously, is to sue on their own real behalf on those patents and make money.
Similarly, there are some financial investors who have also gotten into this business, and we are finding that is constantly deluging us with claims and lawsuits. We believe this is a very serious problem that needs to be addressed.
For example, a few years ago we found ourselves faced with a company who had bought a patent for $50,000, sued us on that patent asking for $8 billion, that is B with a billion, of damages plus the permanent injunction. The permanent injunction would have done them absolutely no good. They weren't in the semiconductor business. They had nobody in their company who was a semiconductor engineer or computer designer. They were in this purely for the money, and they were using the threat of that injunction as a way to harass us.
Their business model, suing people on patents that they bought from distressed companies, is enhanced from a number of aspects. First of all, there is a huge amount of uncertainty in patent litigation. Recent studies, as provided for in my written testimony, show that over 50 percent of all patent decisions in the courts that are appealed are reversed, at least in part. Claim interpretation remains a huge area of doubt, notwithstanding the Markman hearing process that has been implemented. And then, if you lose the case, you are faced with the issue of permanent injunction being against you. And even if you want to go up on appeal, if it is a big product, you can't. You can't afford to have your plants sit there idly, particularly in our industry where our plants frequently cost 2 to $3 billion for each new plant, to sit there idly while you are waiting for the court of appeals and you are enjoined.
So it is simply a matter of this issue really needs to be fundamentally addressed. In addition, I would like to point out that rather than repeat what my colleague, Mr. Kesslen, has said, we strongly agree with the comments that he made.
And one other issue on broadening reexamination, I disagree with Mr. Van Horn and the AIPLA. We think that reexamination should be strengthened, and we do agree that the res judicata effect that got imported into section 315(c) should be removed.
Thank you, Mr. Chairman.
PREPARED STATEMENT OF DAVID M. SIMON
Let me thank the Subcommittee for holding these hearings. Patents are important to high technology for protecting intellectual property—the key to the United States' growth over the last twenty years. For the IT and semiconductor industries, strong protection of patents is essential in fostering continued innovation and investment; U.S. companies are investing billions in research and development to develop cutting-edge products—these products help the U.S. remain the most competitive country in the world.
Intel commends Chairman Smith and Ranking Minority Member Berman along with the rest of the committee members for their support of a vital patent system. Intel also applauds the on-going initiatives from the United States Patent & Trademark Office under Judge Rogan's leadership to improve patent quality,
In addition to the on-going work to improve the Patent Office, Intel believes that important legislative work remains to be done with regards to patent quality. Improvidently granted patents result from well documented deficiencies in the U.S. Patent & Trademark Office including low pay for patent examiners, inadequate resources for the examiners and the test required by the Federal Circuit to determine if an application is patentable.1 One commentator concluded that roughly half of all
See, e.g., Robert B. Merges, As Many as Six Impossible Patents Before Breakfast, 14 Berkeley Technology Law Journal 577 (1999).
issued, litigated patents are invalid.2 While that estimate may appear high initially, statistical analysis shows that over 90% of all U.S. patent applications are ultimately approved and result in a patent. Contrast the U.S.'s shockingly high approval rate with the European and Japanese patent offices' approval rates of about 65%.3 Surely, applicants for American patents are not that much more discriminating than their counterparts for foreign patents in selecting ideas that merit a patent application. This differential in the approval rates between the U.S. and foreign Patent Offices leads one to the conclusion that perhaps 40,000 improvidently granted patents issue each year.
Our key concern is that these improvidently granted patents become powerful tools for abuse. This abuse seriously undermines the continued vitality of the high tech industry as legitimate companies are threatened with a permanent injunction on improvidently granted patents.
Lawyers and their financial backers have been buying these improvidently granted patents from distressed companies for the sole purpose of suing legitimate businesses. Patents can be sold like any other form of property and an active market has formed in recent years where patents can be bought or sold-frequently for less than the prosecution costs of the original patent. Intel often finds law firms and financial backers of litigation bidding against each other to buy these patents so that they can then form businesses solely for the purpose of suing legitimate companies. These lawsuits, in which the plaintiff invariably seeks a permanent injunction, sty. mie competition and clog the courts with useless cases brought solely to enrich these lawyers and their financial backers. These patent system bottom feeders have now become so common that Intel has coined a term to describe them: “patent trolls.”
Several problems contribute to making this “patent troll” business model a simple and effective source of illegitimate profit irrespective of the quality of the patent. For example, if the troll can claim that the patent covers $5 billion in annual revenue, that troll will ask for a royalty fee of a few percentage points of revenue; e.g., $150 million per year. While that may seem to be an absurd amount to pay to someone who bought a patent out of bankruptcy for less than one hundred thousand dollars, the troll will threaten the legitimate business with a permanent injunction at the end of the patent case, threatening the halt of the sale of a critical product or closing down a production facility. Even if the chance of the troll winning is low, the troll's costs are modest, normally a few million dollars at most. In contrast, the legitimate business the troll targeted faces potential financial ruin if it can no longer sell a key product. Intel recently faced such a troll who wanted $8 billion and a permanent injunction after purchasing the patent for $50,000.4
The uncertainties in patent litigation also facilitate the patent troll's inappropriate business model. These patent trolls have the presumption of validity on their side. It is difficult to convince a jury of patent invalidity in light of the heightened evidentiary standard for invalidity of clear and convincing evidence. Adding to the troll's weapons are the uncertainties regarding how the patent claims will be interpreted by the court. One recent study showed that over one half of all appealed patent decisions by the district courts are reversed at least in part.5 Other studies show that district court interpretations of the claims are found to be in error about onehalf of the time. 6
This unpredictable legal environment has encouraged legitimate companies threatened by patent trolls to pay large settlements as trial nears rather than risking that their entire businesses will be shut down by a permanent injunction. Legitimate businesses cannot wait for the appeal process to rectify the wrong decision because it may be two years before the appeals court reverses the district court's decision. Waiting two years without product being sold and factories lying idle pending the outcome of the appeal is simply not acceptable to any business.
A recent case involving the Blackberry PDA highlights our concerns. The lawyer for the patent troll NTP had the temerity to be quoted as saying:
2 John R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q.J. 185 (1998).
3 Cecil D. Quillen, Jr. & Ogden H. Webster, Continuing Patent Applications and the Performance of the U.S. Patent Office 11 Federal Bar Journal (No. 1) 1, 3 (2000).
4 Top Ten Defense Cases of 2000: In the shadow of the Valley, San Francisco Daily Journal April 18, 2001 http://www.weil.com/WGM/quotables.nsf/e49ad7e458c039878525691a00716053/ 6098de882426067085256a33005879eb?OpenDocument
6 Cecil D. Quillen, The U.S. Patent System: Is it Broke? And Who Can Fix It? http:// www.ftc.gov /os/comments/intelpropertycomments/quillenattachments/isitbrokewhocanfixit.pdf at pg. 6.
Ray K. Harris & Sandra Etherton, Software Protection: Patents http://www.lawhost.com/ lawjournal/99winter / patents5.html