lenged in court. However, declaratory judgment jurisdiction rests upon the constitutional requirement of an actual case or controversy, a standard that Congress cannot readily legislate around. I would encourage the Subcommittee to achieve the same policy goal by pursuing the opposite tack: unless the patentee makes a charge of infringement sufficient to invoke declaratory judgment jurisdiction, then there can be no liability for willful infringement.

Additional Reforms. I encourage the Subcommittee to continue thinking creatively about solutions to our patent quality problem. I believe that the extent of current patent quality problems, as well as the increasingly difficult circumstances the USPTO appears likely to find itself in the future, merit the establishment of an Office of Patent Quality Review. This office could develop measures of patent quality, both in terms of the examination process and issued patents. I believe that such an office should not exist within the USPTO or the Department of Commerce, but rather the Federal Trade Commission, an agency with experience and expertise in competition law and consumer affairs.

Thank you for the opportunity to testify today.

Mr. SMITH. Thank you, Professor Thomas. Thank you all for your comments today, as well as for your compliment of the Committee's work.

Let me address my first question to you all and ask you to really set priorities for us, because we are trying to decide which of these items to translate into legislation and we need some help with setting those kinds of priorities.

So what is the single most important action that the Subcommittee could take to improve patent quality, or maybe it is avoiding some action. But I am hoping it is affirmative and you all have recommendations as to which of these ideas that we have discussed today would be the most important to you.

And Mr. Van Horn, I would like to start with you.

Mr. VAN HORN. Thank you, Mr. Chairman. Well, I think the Subcommittee has taken the first and essential step toward solving this problem; that is, by enacting or hopefully enacting legislation that would prohibit fee diversion. This has many important ramifications for the PTO, primarily in their ability to hire, train, and effectively supervise patent examiners in their examination task.

To the extent they have to take shortcuts because of a lack of budget in these critical areas is ultimately going to lead to a decrease in the patent quality and the effectiveness of the job done by the patent examiner.

I think, secondly, that particular lack of resources also has an impact on the tools available for patent examination, and I refer primarily to the ability to automate the system and provide some relief to the significant administrative burdens that the office now has and applicants now have of chasing around missing papers and missing files. This is a significant detraction from the essential tasks of patent examination.

Mr. SMITH. Thank you. By the way, we all on the Committee feel strongly about the issue of fee diversion. We have yet to convince some of our friends on the Appropriations Committee that that is the right way to go, but we are working on it.

Mr. Kesslen.

Mr. KESSLEN. As I said before, I am here today on behalf of the Financial Services Roundtable, and I think if you polled the CEOS of the various financial service companies, they would like the fifth and sixth approach in your proposed bill, dealing with injunctive relief and frivolous claims.

The threat, the gun that is put to our head to settle or else, the threat that the wheels of commerce can come to a halt. There is a current litigation within our firm today that if we ultimately lose could really hurt the economy, and this is a company that doesn't make or sell anything competitive. It merely has a paper patent. So to be able to look at the irreparable harm, not only at the preliminary injunction state, but really at the permanent injunction state, which is really where we are focused at, and looking at some of the claims that came in just yesterday and last Thursday, two more of those 37-cent type letters came into our organization, which starts the churning of our money for a claim that may or may not have any merit. So that is our focus.

Mr. SMITH. Mr. Kesslen, you anticipated my second question, which I will get to in a minute. But thank you. Mr. Simon.

Mr. SIMON. Thank you, Mr. Chairman. Obviously for us the most important issue is reforming the law and injunction. And after that, I would say the willful infringement issue followed by strengthening reexamination. We believe those are the three areas that there should be focus.

We strongly by the way, disagree that requiring applicants to do a search will yield anything. People are just going to submit the results of their search. There will be stacks of paper this high coming into the Patent Office, because nobody under rule 56 is going to take the chance of having withheld the wrong document. Mr. SMITH. Thank you. Professor Thomas.

Mr. THOMAS. I believe that ultimately the best hope is going to be to recruit members of the public to act as private patent examiners, assisting the office in the examination duties. Competitors often have the knowledge that they can bring to bear to either invalidate a patent or narrow its claims, and they often have the incentives. One concern this Committee may have is those incentives. The trouble with challenging a patent is that it has a lot of spillover effects. If one of us in this room owns a patent and we are all acting in the same industry, which one of us is going to be incented to challenge that patent? If I challenge the patent to defeat your patent, everyone else gets the benefit.

So incenting, or providing some sort of a reward for patent challenges behind the benefit to the entire industry may be a productive approach.

Mr. SMITH. Thank you, Professor Thomas. We have asked you all to address six ideas. The fifth and sixth ideas both directly or indirectly involve the shakedown sites, Mr. Kesslen, that you referred to, and what we have done is we have actually broken down how all stand individually on all six ideas. On the fifth idea, preliminary injunctions and patent challenges, Mr. Van Horn, you oppose that. Professor Thomas wanted clarification.

On the sixth, declaratory relief and offers to license, that was opposed by Mr. Van Horn and Professor Thomas as well, I think. What I really wanted to ask you all who oppose these two ideas is, if you oppose them, what other actions would you recommend to discourage the use or the threat of the shakedown suits?

And, Mr. Van-my time is up. If you can give me a brief answer. Mr. Van Horn.

Mr. VAN HORN. Well, at least in my experience, which is very small in terms of patent litigation, it is one person's frivolous suit is another person's constitutional right to protection of his or her property.

We have not yet developed an alternative solution if this is a problem. But we do think that the proposals relative to a preliminary injunction could have a very damaging effect on small businesses, and independent inventors. It would set an unfortunate precedent for the global protection of intellectual property, and we believe at least raises an issue about compliance with our obligations under international agreements such as GATT-TRIPS.

Mr. SMITH. Thank you. Professor Thomas, what would you recommend to reduce shakedown suits or frivolous lawsuits?

Mr. THOMAS. The requirement for a preliminary injunction, prior to the creation of the Federal Circuit, was generally that the patent had to be previously enforced and held not invalid by a prior tribunal. So returning to that state of affairs is at least some possibility. Another is to require some sort of Patent Office review to make sure that the patent is valid before it is enforced.

I believe that those are possible mechanisms to achieve that goal. Mr. SMITH. Thank you, Professor Thomas. The gentleman from California, Mr. Berman, is recognized for his questions.

Mr. BERMAN. Thank you, Mr. Chairman, and we thank all of the panelists for sharing their thoughts about this.

Professor Thomas I have had the benefit of meeting with, and my staff meeting with to hear a number of his very interesting views on how to make this system better.

In this particular round, rather I would like to just ask a broader question. Many of the patent quality issues came up in the context of this recent trend toward patenting business methods. And while these, of different alternatives here, don't distinguish between business methods and other patents, I am curious about how all of you react to this trend. There was a New Yorker magazine piece recently that talks about the sort of the birth of modern newspapers, a publisher named Benjamin Day.

He decided instead of trying to get the subscribers and the purchasers of the newspapers to pay the costs, they would sell advertising and reduce the price of the paper from 5 cents to 1 cent in 1833. He didn't patent that idea. He also decided to change the method of distribution, and he sold them to newsboys in lots of hundreds to hawk on the street.

Pretty soon, this newspaper, the New York Sun, was just sweeping the field with the none of these new methods of publishing and selling newspapers were patented. Other papers mimicked them. Pretty soon there was competition. This paper got the advantages of being the originator of the idea and did very well for a very long time, then other papers imitated and they had more competition, and that was sort of how American business worked in new methods. No one patented the moving assembly line or the mail order catalog or the decentralized corporation or the frequent flier mile.

But a recent court decision, and all of a sudden everything is changed. Now people are running around and getting patents on all kinds of business methods and ways of doing business. And the last

paragraph of the article: Americans have traditionally been cheery about intellectual property rights, and quotes Thomas Jefferson on the balance here. We have managed to strike a balance between the need to encourage innovation and the need to foster competition, as Benjamin Day, that publisher I mentioned, and Henry Ford, Sam Walton might attest, American corporations have thrived on innovative ideas and new business methods without owning them for two centuries.

Now this balance has been upset. The scope of patents have been extended. Copyrights have been extended. Trademarks have been subjected to bizarre interpretations. Celebrities are even claiming exclusive ownership of their first names, Spike Lee and Viacom's cable channel.

I am curious about the panelists' reactions to all of this, and are we going too far in allowing people to claim ownership of new ways of doing business, as opposed to the kinds of inventions that historically have been subject to patents?

I am curious if any of you have any reactions to that.

Mr. KESSLEN. Yes, I do, concerning the State Street case which came out of the financial services industry. Obviously we have been very focused on this issue.

I think as an organization we thought long and hard about business method patents, and our fundamental challenge with it, as much as we would like to get rid of them, because it would get rid of a class of patents that would impact us as an industry, I am not sure from a practical perspective it is really possible.

I think the problems that business method patents are facing are no different than the Patent Office faced when some of the genetic engineering happened, and then you went to software. I think they are getting up to speed in getting the kind of prior art they need. They are not there yet. They don't have to staff to deal with it, which I think is their biggest challenge. But I think when you will look at the types of claims that are hitting our organization, a smart patent attorney can couch any one of these methods of doing business as software. There is always a piece of hardware or a piece of software connected. So from a definitional perspective, I think it is going to be quite a challenge, and that is why I would prefer to focus more on the quality issues and some of the other things we have talked about today.

And I think on top of that, I believe that-I forget which situation of TRIPPS, but I think you would violate the TRIPPS with regard to treating different technologies or different patents differently. So I think that is another problem.

Mr. BERMAN. Any other thoughts here?

Mr. SIMON. Yes, Congressman Berman. If you look at how the courts struggled with the definition of what in computers and software should or should not be patentable and eventually basically said it should be treated like anything else, you run into a real definitional problem. It is real hard to define things in a manner that an attorney won't be able to get around and make it patentable anyway.

I think the real focus has to be on what can we do to improve the quality of those patents as opposed to trying to somehow legislatively by some definition change it. The courts struggled with this

issue for about 15 or 20 years, were never able to solve it. I have written numerous academic articles where people are trying to come up with proposals on solving it, and every single one of them I think we can get around.

Mr. BERMAN. So both of you essentially are saying don't try to make that distinction in the law, instead deal with some of these discrete issues involving quality and process and make the system better?

Mr. KESSLEN. That is correct.

Mr. SMITH. Thank you, Mr. Berman. The gentleman from Florida, Mr. Keller, is recognized for his questions.

Mr. KELLER. Thank you, Mr. Chairman. Let me begin with Mr. Simon and Mr. Kesslen. The gist of what I have learned from listening to you guys is you are concerned about frivolous patent infringement claims against your employer, and I have tried a lot of cases over the years before I came here, but not complex intellectual property law cases, so I am hoping you can walk me through this. Give me an example, Mr. Simon, if you were explaining this say to a sixth grade class. What would be a classic example of a frivolous claim that would force you to incur a lot of defenses in defending it?

Mr. SIMON. I will give you a real one-Techsearch case. In that case, somebody had gone into court, bought a patent in bankruptcy for $50,000, turned around and sued us. It had a few words that were somewhat similar to the words that we used to describe our processors. They therefore claimed, as you will find in any industry, people tend to use the same words. But they then claimed therefore that all of our processors infringed.

I had looked at this. We had an opportunity to actually take a license to this patent earlier on. We took it, looked at it, said, well, if you hold the patent upside down, read it backwards maybe you can make an argument, that is about it. But we will win on summary judgment.

Mr. KELLER. Right.

Mr. SIMON. It turned out I was right. We did win on summary judgment. It cost me $3 million to win on summary judgment. I could have gotten the license for several hundred thousand.

Mr. KELLER. Three million. That is not even the trial or anything, just summary judgment, just the discovery?

Mr. SIMON. Yes. To give you an idea, our typical patent case, we are spending between 10- and $15 million in the years before trial. Trial, it goes up from there.

Mr. KELLER. The guys who try these cases for you and do the discovery, are those people that specialize in patent law who pass that special bar, or these are just regular litigators you are paying? Mr. SIMON. These are regular litigators who have a proven track record in high technology cases. It is very unique.

Mr. KELLER. Kind of a subspecialty. What would a typical partner in a law firm specializing in this go for? Is that a $400 kind of a lawyer?

Mr. SIMON. I wish. $400 is getting to be associate rates. In large firms we are talking 6-, 7-, $800, sometimes even a thousand dollars an hour.

Mr. KELLER. In what city?